Wendy's 2014 Annual Report Download - page 38

CitationAir Aircraft Lease Agreement
The Wendy’s Company, through a wholly-owned subsidiary, was party to a three-year aircraft management and
lease agreement, which expired in March 2014, with CitationAir, a subsidiary of Cessna Aircraft Company, pursuant
to which the Company leased a corporate aircraft to CitationAir to use as part of its Jet Card program fleet. The
Company entered into the lease agreement as a means of offsetting the cost of owning and operating the corporate
aircraft by receiving revenue from third parties’ use of such aircraft. Under the terms of the lease agreement, the
Company paid annual management and flight crew fees to CitationAir and reimbursed CitationAir for maintenance
costs and fuel usage related to the corporate aircraft. In return, CitationAir paid a negotiated fee to the Company
based on the number of hours that the corporate aircraft was used by Jet Card members. This fee was reduced based
on the number of hours that (1) the Company used other aircraft in the Jet Card program fleet and (2) Jet Card
members who are affiliated with the Company used the corporate aircraft or other aircraft in the Jet Card program
fleet. The Company’s participation in the aircraft management and lease agreement reduced the aggregate costs that
the Company would otherwise have incurred in connection with owning and operating the corporate aircraft. Under
the terms of the lease agreement, the Company’s directors had the opportunity to become Jet Card members and to
use aircraft in the Jet Card program fleet at the same negotiated fee paid by the Company as provided for under the
lease agreement. During the first quarter of 2014 and the years 2013 and 2012, the Former Executives and a director,
who was our former Vice Chairman, and members of their immediate families, used their Jet Card agreements for
business and personal travel on aircraft in the Jet Card program fleet. The Management Company paid CitationAir
directly, and the Company received credit from CitationAir for charges related to such travel of approximately
$0.4 million, $1.4 million and $1.2 million during 2014, 2013 and 2012, respectively.
TimWen lease and management fee payments
A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of
Wendy’s/Tim Hortons combo units in Canada. Wendy’s paid TimWen $6.3 million during 2014 and $6.9 million
during both 2013 and 2012 under such leases, which have been included in “Costs of sales.” Wendy’s subleases some
of the restaurant facilities to franchisees and they pay TimWen directly. During 2014, the Company began correctly
recording rental income and lease expense on a gross basis versus net to properly reflect Wendy’s subleasing of
restaurant facilities to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. The
Company’s previously reported rental income in “Franchise revenues” and lease expense in “Other operating expense,
net” for 2013 and 2012 were both understated by $7.5 million and $7.7 million, respectively. The effect of the
offsetting understatements on the consolidated statements of operations for 2013 and 2012 was not material to
franchise revenues or other operating expense, net and had no impact on operating profit or net income.
In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of
$0.2 million during 2014 and $0.3 million during both 2013 and 2012, which has been included as a reduction to
“General and administrative.”
Franchisee Incentive Programs
Franchise Image Activation Incentive Programs
In 2014, Wendy’s announced incentive programs for 2015, 2016 and 2017 for franchisees that commence
Image Activation restaurant remodels during those years. The incentive programs provide reductions in royalty
payments for one year or two years after the completion of construction depending on 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. The
Company recognized expense of $4.4 million and $9.2 million for cash incentives in “General and administrative”
during 2014 and 2013, respectively.
Franchisee Image Activation Financing Program
In addition to the Image Activation incentive programs described above, Wendy’s executed an agreement in
2013 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 has agreed to provide loans to franchisees to be used for the
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