WEN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 26, 2004, for Triarc Companies, Inc. (Triarc). The Company operates in two primary segments: the restaurant business (primarily Arby's) and, following a major acquisition, the asset management business. On July 22, 2004, Triarc acquired a 63.6% capital interest in Deerfield & Company LLC, an alternative asset manager, for approximately $94.8 million. Deerfield's results are included in the consolidated financial statements from July 23, 2004, through September 30, 2004.

Key Financial Metrics

Note: Net income for the three and nine-month periods includes a significant non-recurring gain of $10.82 million from the disposal of discontinued operations due to the release of income tax reserves.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15% ($11.3 million) in the third quarter and 6% ($13.4 million) for the nine months compared to the prior year periods. This growth was driven by a 14% increase in royalties and franchise fees and the addition of $6.9 million in asset management fees from Deerfield.
• Operating Profit Decline (Nine Months): While operating profit increased 8% in the quarter, it decreased 40% ($5.8 million) for the nine-month period. This decline is attributed to higher general and administrative expenses (including Deerfield integration costs and environmental insurance), increased depreciation, and a loss on investment activities, partially offset by the Deerfield acquisition.
• Investment Losses: Investment income turned into a net loss of $3.73 million for the quarter and $7.44 million for the nine months, compared to gains in the prior year. This was primarily due to $3.7 million in "other than temporary" impairment charges on debt securities and realized losses on the sale of available-for-sale securities.
• Tax Benefit: The Company recorded a significant income tax benefit of $15.62 million for the quarter and $16.56 million for the nine months, largely due to the release of $14.6 million in income tax reserves following the finalization of an IRS examination.

Guidance, Outlook, and Risks

Management Commentary and Outlook:

• Restaurant Segment: Management expects same-store sales for Company-owned and franchised restaurants in the fourth quarter of 2004 to exceed the weak performance of the comparable 2003 period, driven by new menu items (salads, wraps) and operational initiatives. Gross margins are expected to remain relatively unchanged in the quarter but may improve later in the year due to pricing adjustments and efficiency initiatives.
• Asset Management: Triarc plans to grow Deerfield's asset management portfolio to increase fee revenues. The Company committed $100 million to seed a new multi-strategy hedge fund managed by Deerfield, funded in October 2004.
• Capital Allocation: The Company holds significant liquidity ($647.5 million in cash, equivalents, and investments) and continues to evaluate strategic opportunities, including business acquisitions and share repurchases. A stock repurchase program authorizing up to $48.6 million remains active through January 2005.

• Investment Risk: The Company faces market risk from its investment portfolio, including interest rate risk and equity price risk. It recognized significant impairment charges on higher-yielding, risk-inherent debt securities.
• Commodity Costs: The restaurant business faces pressure from increased costs for beef and other commodities, which impacted gross margins.
• Legal and Environmental: The Company maintains reserves of $1.8 million for legal and environmental matters, including a remediation project at a former subsidiary site (Adams Packing) and a stayed class-action lawsuit regarding a 1999 tender offer.

Investor Verification Checklist

• Quality of Earnings: Verify the sustainability of the $21.97 million net income by excluding the $10.82 million one-time gain from discontinued operations and the $14.6 million tax reserve release.
• Investment Portfolio Health: Review the details of the $6.5 million in "other than temporary" impairment charges recognized in the nine-month period and the remaining unrealized losses on available-for-sale securities.
• Deerfield Integration: Assess the preliminary purchase price allocation for the Deerfield acquisition, specifically the $59.6 million goodwill and the amortization schedule for intangible assets.
• Liquidity Utilization: Monitor the deployment of the $100 million hedge fund seed capital and the status of the $48.6 million stock repurchase authorization.
• Restaurant Margins: Track the impact of rising beef costs and price discounting on the Company-owned restaurant gross margins, which declined to 22% in the quarter.