Wendy's 2014 Annual Report Download - page 17

franchisees do not successfully operate restaurants in a manner consistent with required standards, royalty payments to
us will be adversely affected and the brand’s image and reputation could be harmed, which in turn could hurt our
business and operating results.
Our success depends on franchisees’ participation in brand strategies.
Wendy’s franchisees are an integral part of our business. Wendy’s may be unable to successfully implement the
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.
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 2015, the Company expects Wendy’s and its franchisees to reimage approximately 450 existing
company-owned and franchised restaurants and open approximately 80 new company-owned and franchised
restaurants under its Image Activation program, with plans for significantly more new and reimaged Company and
franchisee restaurants in 2016 and beyond.
Wendy’s has incentive programs for franchisees that commence Image Activation restaurant remodels during
2015, 2016 and 2017. The incentive programs provide reductions in royalty payments for one year or two years after
the completion of construction depending upon the type of remodel. Wendy’s also had incentive programs that
included reductions in royalty payments in 2014 as well as cash incentives for franchisees’ participation in Wendy’s
Image Activation program throughout 2014 and 2013. These incentives will result in a reduction of royalties or other
revenues received from franchisees during the periods covered.
In addition to the Image Activation incentive programs described above, Wendy’s executed an agreement to
partner with a third-party lender to establish a financing program for franchisees that participate in our Image
Activation program. Under the program, the lender is providing loans to franchisees to be used for the reimaging of
restaurants according to the guidelines and specifications under the Image Activation program. To support the
program, Wendy’s has provided to the lender a $6.0 million irrevocable stand-by letter of credit.
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 additional 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 continues to develop 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 28, 2014, approximately 85% 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
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