Wendy's 2010 Annual Report Download - page 23

Our success depends on franchisees’ participation in brand strategies.
Wendy’s and Arby’s franchisees are an integral part of our business. Each brand may be unable to successfully
implement brand strategies that it believes are necessary for further growth if franchisees do not participate in that
implementation. Our business and operating results could be adversely affected if a significant number of franchisees
do not participate in brand strategies.
Our financial results are affected by the operating results of franchisees.
As of January 2, 2011, approximately 79% of the Wendy’s system and 69% of the Arby’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, such as have been recently experienced by a significant number of Arby’s franchisees and a
minimal number of Wendy’s 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 equivalents.
As of January 2, 2011, there were approximately 350 Arby’s franchised restaurants with amounts payable to
Arby’s for royalties, rent and/or other fees that were at least 60 days past due. The financial condition of a number of
Arby’s franchisees was one of the factors that resulted in a net decrease of 44 and 31 in the number of franchised
restaurants for fiscal 2010 and 2009, respectively. During those periods 96 and 74 franchised Arby’s restaurants were
closed, respectively. The trend of declining sales at franchised Arby’s restaurants has resulted in decreases in royalties
and other franchise revenues. In addition, Arby’s franchisee accounts receivable and related allowance for doubtful
accounts have increased significantly, and may continue to grow as a result of the deteriorating financial condition of
some of our franchisees. Franchisees’ financial difficulties and the closure of franchised restaurants have also caused
reductions in the contributions to and extent of advertising programs. Continuation of these trends would affect our
revenues and may have a material adverse effect on our results of operations and financial condition.
In December 2009, and as amended in February and August 2010, AFA entered into a revolving loan
agreement with Arby’s. The terms of this agreement allow AFA to have revolving loans of up to $14.0 million
outstanding with an expiration date of March 2012 and bearing interest at 7.5% per annum. In February 2011, the
maximum principal amount was reduced to $11.0 million. As of January 2, 2011, the outstanding balance under this
agreement was $4.5 million and there were no amounts past due. Due to declining sales and profitability of Arby’s
franchisees, it is possible that our ability in the future to collect principal and interest payments from AFA could be
adversely affected.
Each brand may be unable to manage effectively the acquisition and disposition of restaurants, which could
adversely affect our business and financial results.
Each brand acquires restaurants from franchisees and in some cases “re-franchises” these restaurants by selling
them to new or existing franchisees. The success of these transactions is dependent upon the availability of sellers and
buyers, the availability of financing, and the brand’s ability to negotiate transactions on terms deemed acceptable. In
addition, the operations of restaurants that each brand acquires may not be integrated successfully, and the intended
benefits of such transactions may not be realized. Acquisitions of franchised restaurants pose various risks to brand
operations, including:
• diversion of management attention to the integration of acquired restaurant operations;
• increased operating expenses and the inability to achieve expected cost savings and operating efficiencies;
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