Wendy's 2008 Annual Report Download - page 46

Other than Temporary Losses and Equity in Losses of DFR
On March 18, 2008, in response to unanticipated credit and liquidity events in the first quarter of 2008,
DFR announced that it was repositioning its investment portfolio to focus on agency-only residential
mortgage-backed securities and away from its principal investing segment to its asset management segment
with its fee-based revenue streams. In addition, it stated that during the first quarter of 2008, its portfolio was
adversely impacted by deterioration of the global credit markets and, as a result, it sold $2,800.0 million of its
agency and $1,300.0 million of its AAA-rated non-agency mortgage-backed securities and reduced the net
notional amount of interest rate swaps used to hedge a portion of its mortgage-backed securities by $4,200.0
million, all at a net after-tax loss of $294.3 million to DFR.
Based on the events described above and their negative effect on the market price of DFR common stock,
we concluded that the fair value and, therefore, the carrying value of our investment in the 9.8 million
common shares were impaired. As a result, as of March 11, 2008, we recorded an other than temporary loss
which is included in “Other than temporary losses on investments,” of $67.6 million (without tax benefit as
described below) which included $11.1 million of pre-tax unrealized holding losses previously recorded as of
December 30, 2007 which were included in “Accumulated other comprehensive income (loss)”, a component of
stockholder’s equity. These common shares were considered available-for-sale securities due to the limited
period they were to be held as of March 11, 2008 (the “Determination Date”) before the dividend distribution
of the shares to our stockholders. We also recorded an additional impairment charge from March 11, 2008
through the March 29, 2008 record date of the dividend of $0.5 million. As a result of the dividend, the
income tax loss that resulted from the decline in value of our investment of $68.1 million is not deductible for
income tax purposes and no income tax benefit was recorded related to this loss.
Additionally, from December 31, 2007 through the Determination Date, we recorded approximately $0.8
million of equity in net losses of DFR which are included in “Other expense, net” related to our investment in
the 0.2 million common shares of DFR discussed above which were accounted for using the Equity Method
through the Determination Date.
DFR Notes
The dislocation in the mortgage sector and continuing weakness in the broader financial market has
adversely impacted, and may continue to adversely impact, DFR’s cash flows. DFR reported operating losses for
the first nine months of 2008. Updated financial information from DFR for the year ended December 31, 2008
will not be available until the filing of DFR’s Form 10-K expected to be filed on March 16, 2009.
We have received timely and full cash payment of all four quarterly interest payments due on the DFR
Notes to date. Additionally, in October 2008 we received a $1.1 million dividend payment on the convertible
preferred stock which we previously held. Based on the Deerfield Sale agreement, payment of a dividend by
DFR on this preferred stock was dependent on DFR’s board of directors declaring and paying a dividend on
DFR’s common stock. The first dividend to be declared on their common stock following the date of the
Deerfield Sale was declared by DFR and recognized by us in our 2008 third quarter and paid in October 2008.
Certain expenses totaling $6.2 million related to the Deerfield Sale, which were a liability of the Company and
for which we had an equal offsetting receivable from DFR as of December 30, 2007, were paid by DFR during
the first half of 2008. Accordingly, we did not record any allowance for doubtful collection on these notes prior
to the fourth quarter of 2008.
Due to significant financial weakness in the credit markets, current publicly available information of
DFR, and our ongoing assessment of the likelihood of full repayment of the principal amount of the DFR
Notes, we recorded an allowance for doubtful collectability of $21.2 million on the DFR Notes in the fourth
quarter of 2008. This charge is included in “Other than temporary losses on investments.”
Other
In early 2008, we completed the transition that was announced in April 2007 whereby we closed our
New York headquarters and combined our corporate operations with our restaurant operations in Atlanta,
Georgia (the “Corporate Restructuring”). To facilitate this transition, we had entered into contractual
settlements (the “Contractual Settlements”) with our Chairman, who was also our then Chief Executive Officer,
and our Vice Chairman, who was our then President and Chief Operating Officer, (collectively, the “Former
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