Wendy's 2008 Annual Report Download - page 79

Foreign Currency Risk
Our objective in managing our exposure to foreign currency fluctuations is to limit the impact of these
fluctuations on earnings and cash flows. As of December 28, 2008, our primary exposures to foreign currency
risk are primarily related to fluctuations in the Canadian dollar relative to the U.S. dollar for our Canadian
operations. Exposure outside of North America is limited to the effect of rate fluctuations on royalties paid by
franchisees. To a more limited extent, we have exposure to foreign currency risk relating to our investments in
certain investment limited partnerships and similar investment entities that hold foreign securities and a total
return swap with respect to a foreign equity security. We monitor these exposures and periodically determine
our need for the use of strategies intended to lessen or limit our exposure to these fluctuations. We have
exposure to (1) our investment in a joint venture with Tim Hortons, Inc. (“THI”), (2) investments in a
Canadian foreign subsidiary, and (3) export revenues and related receivables denominated in foreign currencies
which are subject to foreign currency fluctuations. Wendy’s is a partner in a Canadian restaurant real estate
joint venture with THI (“TimWen”). Wendy’s 50% share of TimWen is accounted for using the Equity
Method. Our foreign subsidiary exposures relate to restaurants and administrative operations in Canada. The
exposure to Canadian dollar exchange rates on the Company’s cash flows primarily includes imports paid for by
Canadian operations in U.S. dollars and payments from the Company’s Canadian operations to the Company’s
U.S. operations in U.S. dollars, and to a lesser extent royalties paid by Canadian franchisees. Revenues from
foreign operations for the year ended December 28, 2008 represented 7% of our total franchise revenues and
3% of our total revenues. For the year ended December 30, 2007, the same percentages were 4% and less than
1%, respectively. Accordingly, an immediate 10% change in foreign currency exchange rates versus the United
States dollar from their levels at December 28, 2008 and December 30, 2007 would not have a material effect
on our consolidated financial position or results of operations.
Credit Risk
Our credit risk as of December 28, 2008 includes the Series A senior secured notes of Deerfield Capital
Corp. (“DFR”) due in December 2012 (the “DFR Notes”), which we received in late fiscal 2007 in connection
with the sale of our majority capital interest in Deerfield & Company, LLC (“Deerfield”), which is discussed in
more detail below, and, to a lesser extent, our investments in the Equities Account that are managed by the
Management Company.
On December 21, 2007, the Company received, as a part of the proceeds of its sale of Deerfield (the
“Deerfield Sale”), $47.9 million principal amount of DFR Notes with an estimated fair value of $46.2 million
at the date of the Deerfield Sale. The DFR Notes bear interest at the three-month LIBOR (1.47% at December
24, 2008) plus a factor, initially 5% through December 31, 2009, increasing 0.5% each quarter from January
1, 2010 through June 30, 2011 and 0.25% each quarter from July 1, 2011 through their maturity. The DFR
Notes are secured by certain equity interests of DFR and certain of its subsidiaries.
The fair value of the DFR Notes was based on the present value of the probability weighted average of
expected cash flows from the DFR Notes. The Company believed that this value approximated the fair value of
the DFR Notes as of December 27, 2007 due to the close proximity to the Deerfield Sale date. We have
received timely payment of all four quarterly interest payments due on the DFR Notes to date. Additionally,
on October 15, 2008 we received a $1.1 million dividend on the convertible preferred stock which we
previously held. Accordingly, we did not record valuation reserves on these notes prior to the fourth quarter of
2008.
The current dislocation in the sub-prime mortgage sector and continuing weakness in the broader credit
markets has adversely impacted, and may continue to adversely impact, DFR’s cash flows. Due to the
significant continuing weakness in the credit markets and at DFR based upon current publicly available
information, and our ongoing assessment of the likelihood of full repayment of the principal amount of the
DFR Notes, Company management determined that the probability of collectability of the full principal
amount of the DFR Notes was not likely and recorded an allowance for doubtful accounts on the DFR Notes of
$21.2 million as of December 28, 2008. The DFR Notes, net of unamortized discount and allowance for
doubtful accounts, amounted to $25.3 and $46.2 million at December 28, 2008 and December 30, 2007,
respectively, are included in “Notes receivable”.
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