Wendy's 2009 Annual Report Download - page 68

purchasing contracts which established pricing arrangements, and historically have limited the variability of
these commodity costs but do not establish any firm purchase commitments by us or our franchisees, were
transferred to the purchasing cooperative in January 2010.
Equity Market Risk
Our objective in managing our exposure to changes in the market value of our investments is to balance
the risk of the impact of these changes on our earnings and cash flows with our expectations for long-term
investment returns.
Foreign Currency Risk
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 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 Canadian subsidiary exposures relate to its restaurants
and administrative operations. 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 January 3, 2010 represented 9% of
our total franchise revenues and 7% of our total revenues. For the year ended December 28, 2008, the same
percentages were 7% and 3%, respectively. Accordingly, an immediate 10% change in foreign currency
exchange rates versus the United States dollar from their levels at January 3, 2010 and December 28, 2008
would not have a material effect on our consolidated financial position or results of operations.
Credit Risk
Our credit risk as of January 3, 2010 includes the DFR Notes, which we received in late fiscal 2007 in
connection with the sale of our majority capital interest in Deerfield.
In 2007, the Company received, as a part of the proceeds of the Deerfield Sale, $48.0 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 (0.25% at January 3, 2010) 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.
Due to the significant weakness in the credit markets in 2008 and at DFR 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 in 2008. The DFR Notes, net of
unamortized discount and the valuation allowance, of $25.7 million and $25.3 million at January 3, 2010 and
December 28, 2008, respectively, are included in non-current “Notes receivable.”
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