Wendy's 2011 Annual Report Download - page 86

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as
rent expense on a straight line basis (“Straight-Line Rent”) over the applicable lease terms. Lease terms are generally
initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. The term used
for Straight-Line Rent is calculated initially from the date we obtain possession of the leased premises through the
expected lease termination date. We expense rent from the possession date to the restaurant opening date. There is a
period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the
possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are
typically due under the terms of the lease; however, expense is recorded for that period on a straight-line basis
consistent with the Straight-Line Rent policy.
For leases that contain rent escalations, we record the rent payable during the lease term, as determined above,
on the straight-line basis over the term of the lease (including the Rent Holiday beginning upon possession of the
premises), and record the excess of the Straight-Line Rent over the minimum rents paid as a deferred lease liability
included in “Other liabilities.” Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”),
that require additional rental payments based upon restaurant sales volume. Contingent Rent is expensed each period
as the liability is incurred.
Favorable and unfavorable lease amounts, when we purchase restaurants, are recorded as components of “Other
intangible assets” and “Other liabilities,” respectively, and are amortized to “Cost of sales” both on a straight-line basis
over the remaining term of the leases. When the expected term of a lease is determined to be shorter than the original
amortization period, the favorable or unfavorable lease balance associated with the lease is adjusted to reflect the
revised lease term and a gain or loss recognized.
Management makes certain estimates and assumptions regarding each new lease agreement, lease renewal, and
lease amendment, including, but not limited to, property values, market rents, property lives, discount rates, and
probable term, all of which can impact (1) the classification and accounting for a lease as capital or operating, (2) the
Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent,
(3) the term over which leasehold improvements for each restaurant are amortized, and (4) the values and lives of
favorable and unfavorable leases. Different amounts of depreciation and amortization, interest and rent expense would
be reported if different estimates and assumptions were used.
Concentration of Risk
Wendy’s franchised restaurants are principally located throughout the U.S. and, to a lesser extent, in 27 foreign
countries and U.S. territories with the largest number in Canada. Company-owned restaurants are located in 30
states, with the largest number in Florida, Illinois, Pennsylvania, Massachusetts, Ohio, and Texas. Wendy’s
restaurants offer an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast
sandwiches, chicken nuggets, chili, side dishes, freshly prepared salads, soft drinks, milk, Frosty®desserts, floats and
kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited basis. Wendy’s bakery is a
producer of buns for Wendy’s restaurants, and to a lesser extent for outside parties.
Wendy’s had no customers which accounted for 10% or more of consolidated revenues in 2011, 2010 or 2009.
As of January 1, 2012, Wendy’s had one main in-line distributor of food, packaging and beverage products, excluding
produce and breads, that serviced approximately 67% of its company-owned and franchised restaurants and two
additional in-line distributors that, in the aggregate, serviced approximately 20% of its company-owned and
franchised restaurants. We believe that our vulnerability to risk concentrations related to significant vendors and
sources of its raw materials is mitigated as we believe that there are other vendors who would be able to service our
requirements. However, if a disruption of service from any of our main in-line distributors was to occur, we could
experience short-term increases in our costs while distribution channels were adjusted.
Because our restaurant operations are generally located throughout the U.S., and to a much lesser extent,
Canada and other foreign countries and U. S. territories, we believe the risk of geographic concentration is not
significant. We could also be adversely affected by changing consumer preferences resulting from concerns over
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