Wendy's 2013 Annual Report Download - page 17

The Company’s Image Activation program may not positively affect sales at company-owned and participating
franchised restaurants or improve our results of operations.
Throughout 2014, Wendy’s plans to reimage approximately 200 existing company-owned restaurants and open
approximately 15 new company-owned restaurants under its Image Activation program, with plans for significantly
more new and reimaged Company and franchisee restaurants in 2015 and beyond. Wendy’s also expects that
franchisees will reimage between 150 and 200 restaurants and build approximately 45 new Image Activation
restaurants in 2014.
Wendy’s has an incentive program for franchisees that commence Image Activation restaurant remodels or open
newly constructed Image Activation design restaurants during 2014 and for franchisees that open newly constructed
Image Activation design restaurants during 2015. The incentive program provides reductions in royalty payments for
up to the first three years after the completion of construction. In addition, the program includes cash incentives for
new and remodeled restaurants in the Image Activation design during 2014. These incentives could result in
additional expense and/or a reduction of royalties or other revenues received from franchisees in the future. Wendy’s
also had an incentive program for franchisees’ participation in Wendy’s Image Activation program during 2013.
The Company’s Image Activation program may not positively affect sales at company-owned restaurants or
improve results of operations. There can be no assurance that sales at participating franchised restaurants will achieve
or maintain projected levels or that after giving effect to the incentives provided to franchisees the Company’s results
of operations will improve.
Further, it is possible that Wendy’s may provide other financial incentives to franchisees to participate in the
Image Activation program. These incentives could also result in additional expense and/or a reduction of royalties or
other revenues received from franchisees in the future. If Wendy’s provides incentives to franchisees related to
financing of the Image Activation program, Wendy’s may incur costs related to loan guarantees, interest rate subsidies
and/or costs related to collectability of loans.
In addition, most of the Wendy’s system consists of franchised restaurants. Many of our franchisees will need to
borrow funds in order to participate in the Image Activation program. Other than the incentive programs described
above, Wendy’s generally does not provide franchisees with financing but it is actively developing third-party
financing sources for franchisees. If our franchisees are unable to obtain financing at commercially reasonable rates, or
not at all, they may be unwilling or unable to invest in the reimaging of their existing restaurants and our future
growth and results of operations could be adversely affected.
Our financial results are affected by the operating results of franchisees.
As of December 29, 2013, approximately 82% of the Wendy’s system were franchise restaurants. We receive
revenue in the form of royalties, which are generally based on a percentage of sales at franchised restaurants, rent and
fees from franchisees. Accordingly, a substantial portion of our financial results is to a large extent dependent upon
the operational and financial success of our franchisees. If sales trends or economic conditions worsen for franchisees,
their financial results may worsen and our royalty, rent and other fee revenues may decline. In addition, accounts
receivable and related allowance for doubtful accounts may increase. When company-owned restaurants are sold, one
of our subsidiaries is often required to remain responsible for lease payments for these restaurants to the extent that
the purchasing franchisees default on their leases. During periods of declining sales and profitability of franchisees, the
incidence of franchisee defaults for these lease payments increases and we are then required to make those payments
and seek recourse against the franchisee or agree to repayment terms. Additionally, if franchisees fail to renew their
franchise agreements, or if we decide to restructure franchise agreements in order to induce franchisees to renew these
agreements, then our royalty revenues may decrease. Further, we may decide from time to time to acquire restaurants
from franchisees that experience significant financial hardship, which may reduce our cash and cash equivalents.
The system optimization initiative involves risks that could adversely affect our business and financial results.
In July 2013, the Company announced a system optimization initiative, as part of its brand transformation,
which includes a plan to sell approximately 425 company-owned restaurants to franchisees by the end of the first
quarter of 2014. There are a number of risks associated with the system optimization initiative, including the
difficulty in predicting the ultimate costs associated with the sale of restaurants, employee termination costs, the
timing of payments made and received, the results of negotiations with landlords, the impact of the sale of restaurants
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