Wendy's International (WEN)

Changes in food and supply costs could harm ARG’s results of operations.

ARG’s profitability depends in part on its ability to anticipate and react to changes in food and supply costs. Any increase in food prices, especially that of beef or chicken, could harm ARG’s operating results. While fuel price increases have increased the costs of transportation and distribution generally, ARG’s commodity prices have largely been unaffected by these distribution cost increases in 2006 due to purchase contracts for commodities, which are managed by ARCOP, that have allowed only limited increases for distribution costs. As these contracts expire and are replaced in 2007, ARG expects to experience more variability in its commodity prices. In addition, ARG is susceptible to increases in food costs as a result of other factors beyond its control, such as weather conditions, food safety concerns, product recalls and government regulations. For example, increased demand for ethanol as a fuel alternative has increased the cost of corn, which is also used as feed in the production of beef and chicken. Therefore, increases in the cost of corn could increase ARG’s food costs and harm its operating results. ARG cannot predict whether it will be able to anticipate and react to changing food costs by adjusting its purchasing practices and menu prices, and a failure to do so could adversely affect ARG’s operating results. In addition, ARG may not seek to or be able to pass along price increases to its customers.