Wendy's International (WEN)

Asset Management (Deerfield)

Overview

       Deerfield Capital Management LLC (“DCM”) is a Chicago-based asset manager that offers clients a variety of investment products focused on fixed income securities and related financial instruments. DCM is a Delaware limited liability company that is wholly owned by Deerfield & Company LLC (“D&C”), an Illinois limited liability company. We own an approximate 64% capital interest, a profits interest of at least 52% and approximately 94% of the outstanding voting interests in D&C, which we acquired in July 2004. DCM (together with its predecessor companies) has acted as an asset manager since 1993 and has been registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser since 1997. As of January 1, 2006, Deerfield had approximately $12.3 billion of assets under management.

Investment Management Services and Products

       DCM's current focus is on managing investments in fixed income instruments such as government securities, corporate bonds, bank loans and asset-backed securities. DCM manages these investments for various types of clients, including collateralized debt obligation vehicles (“CDOs”), private investment funds (usually referred to as “hedge” funds), the REIT, a structured loan fund, and managed accounts (separate, non-pooled accounts established by clients). Except for the managed accounts, these clients are collective investment vehicles that pool the capital contributions of multiple investors, which are typically U.S. and non-U.S. high net worth individuals and financial institutions, such as insurance companies, employee benefits plans and “funds of funds” (investment funds that in turn allocate their assets to a variety of other investment funds). Because the REIT's shares are publicly-traded, its investors include retail investors, and DCM might in the future manage other publicly-traded investment products that are available to such investors. DCM is organized into distinct portfolio management teams, each of which focuses on a different category of investments. For example, CDOs that invest in bank loans are managed by DCM's bank loan team. The portfolio management teams are supported by various other groups within DCM, such as risk management, systems, accounting, operations and legal. DCM enters into an investment management agreement with each client, pursuant to which the client grants DCM discretion to purchase and sell securities and other financial instruments without the client's prior authorization of the transaction.

Investment Strategies

       The various investment strategies that DCM uses to manage client accounts are developed internally by DCM and include fundamental credit research (such as for the CDOs) and arbitrage trading techniques (such as for some of the hedge funds). Arbitrage trading generally involves seeking to generate trading profits from changes in the price relationships between related financial instruments rather than from “directional” price movements in particular instruments. Arbitrage trading typically involves the use of substantial leverage, through borrowing of funds, to increase the size of the market position being taken and therefore the potential return on the investment. DCM intends to expand its asset management activities by offering new trading strategies and investment products, which may require the hiring of additional portfolio management and support personnel. The investment accounts managed by DCM are generally considered “alternative” as distinguished from “traditional” fixed income programs.

Assets Under Management

       As of January 1, 2006, the total assets under management by DCM were approximately $12.3 billion, consisting of approximately $10.4 billion in 22 CDOs and a structured loan fund, $947.2 million in four hedge funds, $762.4 million in the REIT, and $226 million in four managed accounts.

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       Of the 22 CDOs, eight (representing approximately $2.6 billion in assets under management) are invested mainly in bank loans, five (representing approximately $3.3 billion in assets under management) are invested mainly in investment grade corporate bonds, and nine (representing approximately $4.3 billion in assets under management) are invested mainly in asset-backed securities (such as mortgage-backed securities). The structured loan fund (representing approximately $208 million in assets under management) is invested mainly in bank loans. Of the four hedge funds, DCM manages one fund (representing approximately $613.9 million in assets under management) mainly pursuant to arbitrage strategies, one fund (representing approximately $191.1 million in assets under management) mainly pursuant to a “flight to quality” strategy, one fund (representing approximately $136.6 million in assets under management) mainly pursuant to opportunistic fixed income strategies, and one fund (representing approximately $5.6 million in assets under management) mainly pursuant to global macro strategies. The arbitrage and flight to quality strategy hedge funds invest mainly in government securities and related instruments, such as interest rate swaps and futures contracts. The opportunistic fund invests in various fixed income instruments, such as bank loans, credit default swaps and corporate bonds. The global macro fund invests in various instruments, such as options, currencies, fixed income instruments and futures contracts.

Advisory Fees

       DCM's revenue consists predominantly of investment advisory fees from the accounts it manages. DCM receives a periodic management fee from each account that generally is based on the net assets of the account. This fee ranges from approximately 0.10% to 0.50% per year of the net principal balance for CDOs, 1.5% per year of net assets for hedge funds, 1.75% per year of net assets for the REIT, 0.50% per year of net assets for the structured loan fund, and 0.16% to 0.30% per year of net assets for the managed accounts. DCM is also entitled to a performance fee from many of its accounts, generally based upon a percentage of the annual net profits generated by the account (in the case of the hedge funds) or the returns to certain investors (in the case of the CDOs). DCM also receives from certain CDOs a structuring fee, which is a one-time fee for DCM's services in assisting in structuring the CDO, payable upon formation of the CDO. DCM receives its advisory fees pursuant to investment management agreements entered into with its clients. The terms of these agreements vary, ranging from contracts that are continuous but terminable by the client to those that have terms ranging from one to three years subject to renewal upon expiration of the initial terms. In general, these agreements are terminable by the clients, in most cases only for cause but in some instances without cause.

Marketing

       DCM markets its CDO and REIT management services to institutions that organize and act as selling or placement agents for CDOs and REITs. DCM markets its hedge fund and separate account management services directly to existing and prospective investors in the hedge funds and separate accounts. DCM also markets its services through presentations to investment advisory consultants to pension plans and other institutional investors. DCM's asset management services are marketed privately rather than through general advertising or solicitation.

Competition

       The principal markets for DCM's asset management services are high net worth individual and institutional investors that wish to allocate a portion of their investment capital to alternative fixed income asset management strategies. DCM competes for such clients with numerous other asset managers, some of which (like DCM) concentrate on fixed income instruments and others that are more diversified. The factors considered by clients in choosing DCM or a competing asset management firm include the past performance of the accounts managed by the firm, the background and experience of its key portfolio management personnel, its reputation in the fixed income asset management industry, its advisory fees, and the structural features of the investment products (such as CDOs and hedge funds) that it offers. Some of DCM's competitors have greater portfolio management resources than DCM, have managed client accounts for longer periods of time or have other competitive advantages over DCM.

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Governmental Regulations

       DCM is registered with the U.S. Securities and Exchange Commission as an investment adviser and with the U.S. Commodity Futures Trading Commission as a commodity pool operator and commodity trading advisor. DCM is also a member of the National Futures Association, the self-regulatory organization for the U.S. commodity futures industry. In these capacities, DCM is subject to various regulatory requirements and restrictions with respect to its asset management activities (in addition to other laws), such as regulations relating to promotional materials, the custody of client funds, allocation of investment opportunities among client accounts, recordkeeping, supervision, the establishment of compliance procedures, investing in securities by DCM employees, conflicts of interest, the prevention of money laundering, and ethical standards. In addition, investment vehicles managed by DCM, such as hedge funds and the REIT, are subject to various securities and other laws.

       DCM currently plans to establish a United Kingdom-based subsidiary in order to expand DCM's overseas business. This subsidiary will likely be subject to significant regulation under the U.K. Financial Services and Markets Act of 2000.

       While DCM believes that it and the investment vehicles it manages are substantially in compliance with all applicable regulatory and other legal requirements, DCM and such investment vehicles may incur significant additional costs to comply with such requirements and any additional requirements that may be imposed in the future. However, we do not believe that any such cost increase would materially affect the Company's consolidated financial position or results of operations.

Other Services

       In connection with its management of client investment vehicles, DCM typically provides other services to those vehicles in addition to investment advice, such as selecting the brokerage firms and counterparties through which the vehicles conduct their investing and assisting the vehicles in obtaining the financing needed to leverage their investing. Also, DCM provides day-to-day administrative services to the REIT in addition to managing its investment portfolio.

Intellectual Property

       We have developed rights in the trademarks and trade names “Deerfield” and “Deerfield Capital Management”, which we consider to be material to our business. We periodically license the “Triarc” and “Deerfield” names on a non-exclusive basis to vehicles that we manage. Any such licenses will automatically terminate if we are terminated or withdraw as investment manager of such vehicles.