Wendy's 2010 Annual Report Download - page 71

Wendy’s/Arby’s participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Program
(“CAP”). As part of CAP, tax years are audited on a contemporaneous basis so that all or most issues are
resolved prior to the filing of the tax return. As such, our December 28, 2008 and January 3, 2010 tax
returns, along with the Wendy’s pre-merger tax returns have been settled. Our U.S. Federal income tax
returns for 2007 and September 29, 2008 are not currently under examination. Certain of the Wendy’s/
Arby’s state income tax returns from its 1998 fiscal year and forward remain subject to examination. We
believe that adequate provisions have been made for any liabilities, including interest and penalties that
may result from the completion of these examinations.
• Allowance for doubtful accounts
The need for an allowance for doubtful accounts on receivables related to franchisee obligations consisting
primarily of royalties, franchise fees, and rents is reviewed on a specific franchisee basis based upon past
due balances and the financial strength of the franchisee. If average sales or the financial health of
franchisees were to deteriorate, it could result in an increase to the allowance for doubtful accounts related
to franchise receivables. In 2010, Wendy’s and Arby’s franchisee related accounts receivable and notes
receivable and estimated reserves for uncollectibility have increased significantly, and may continue to
increase, as a result of the deteriorating financial condition of some of our franchisees. For the year ended
January 2, 2011, the Companies recorded $9.7 million in provision for doubtful accounts, which related
to the Wendy’s and Arby’s franchisees.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Certain statements the Companies make under this Item 7A constitute “forward-looking statements” under the
Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and
Projections” in “Part I” preceding “Item 1.”
We are exposed to the impact of interest rate changes, changes in commodity prices, changes in the fair value of
our investments and foreign currency fluctuations primarily related to the Canadian dollar. In the normal course of
business, we employ established policies and procedures to manage our exposure to these changes using financial
instruments we deem appropriate.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit the impact on our earnings and cash
flows. Our policy is to maintain a target, over time and subject to market conditions, of between 50% and 75% of
“Long-term debt” as fixed rate debt. As of January 2, 2011, Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants long-
term debt, including current portion, aggregated $1,572.4 million and $1,559.7 million, respectively. Long-term debt
consisted of $868.6 million and $855.9 million of fixed-rate debt at Wendy’s/Arby’s and Wendy’s/Arby’s
Restaurants, respectively; and $495.2 million of variable interest rate debt and $208.6 million of capitalized lease and
sale-leaseback obligations for both companies. The Companies variable interest rate debt consists of $495.2 term loan
borrowings under a variable-rate senior secured term loan facility due through 2017 (the “Term Loan”). The interest
rate on the Term Loan is based on the Eurodollar rate, which has a floor of 1.50%, plus 3.50%, or a base rate, which
has a floor of 2.50%, plus 2.50%. Since the inception of the Term Loan, and as of January 2, 2011, we have elected
to use the Eurodollar Rate which resulted in an interest rate on the Term Loan of 5.00% as of January 2, 2011.
Consistent with our policy, we entered into several outstanding interest rate swap agreements (the “Interest
Rate Swaps”) during the third quarter of 2009 and the first quarter of 2010 with notional amounts totaling
$186.0 million and $39.0 million, respectively, that swap the fixed rate interest rates on the Wendy’s 6.20% senior
notes for floating rates. The Interest Rate Swaps are accounted for as fair value hedges. At January 2, 2011, the fair
value of our Interest Rate Swaps was $9.6 million and was included in “Deferred costs and other assets” and as an
adjustment to the carrying amount of the Wendy’s 6.20% senior notes. Our policies prohibit the use of derivative
instruments for trading purposes, and we have procedures in place to monitor and control their use. If any portion of
the hedge is determined to be ineffective, any changes in fair value would be recognized in our results of operations.
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