WEN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended April 3, 2005, for Triarc Companies, Inc. (Triarc). The company operates in two primary segments: the restaurant business (Arby's) and asset management (Deerfield & Company, LLC). The reporting period includes the results of the Deerfield acquisition, completed in July 2004, which is not present in the comparable prior-year period. Triarc reports on a 52-53 week fiscal year ending the Sunday closest to December 31.

Key Financial Metrics

Note: Cash flow from continuing operating activities was negative $375.5 million in Q1 2005, primarily due to net purchases of trading securities and settlements of derivatives related to the Deerfield Opportunities Fund, which are classified as operating activities under GAAP despite being funded by investing activities.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 27% to $87.7 million, driven by a new asset management segment contributing $12.9 million and a 10% increase in restaurant net sales.
• Profitability Turnaround: The company moved from a net loss of $3.2 million in Q1 2004 to a net income of $2.7 million in Q1 2005. This was significantly aided by a $9.6 million gain on the sale of a portion of the investment in Encore Capital Group, Inc.
• Segment Performance:
  • Restaurants: Same-store sales for company-owned restaurants grew 9%, while franchised restaurants grew 3%. Gross margin improved to 23% from 20% due to operational efficiencies and lower beef costs.
  • Asset Management: This segment, absent in the prior year, generated $12.9 million in fees and $3.9 million in EBITDA.
• Expense Increases: General and administrative expenses rose 39% to $33.8 million, largely due to the inclusion of Deerfield expenses ($4.9 million) and increased employee compensation.

Guidance, Outlook, and Risks

• Outlook: Management expects same-store sales growth for company-owned restaurants to continue in 2005, though at a lower rate than Q1 due to reduced couponing. Gross margins are expected to remain at 23%. Franchised restaurant same-store sales are projected to grow at a similar 3% rate.
• Capital Allocation: Triarc holds significant liquidity ($618.3 million in cash and investments) and is evaluating strategic opportunities, including business acquisitions and stock repurchases. The company is currently negotiating to acquire RTM Restaurant Group, its largest franchisee.
• Accounting Changes: Triarc must adopt SFAS 123(R) regarding share-based payment by the first quarter of fiscal 2006, which is expected to materially increase compensation expense.
• Risks:
  • Market Risk: Significant exposure to interest rate, equity price, and foreign currency risks, particularly through the Deerfield Opportunities Fund which employs leverage.
  • Legal/Environmental: Ongoing environmental remediation at a former Adams Packing site (liability reserved at $1.7 million) and a stayed class-action lawsuit regarding a 1999 tender offer.
  • Competition: Intense competition in the quick-service restaurant sector and the hedge fund industry.

Investor Verification Checklist

• Deerfield Integration: Verify the sustainability of asset management fee revenues and the impact of minority interests on consolidated net income.
• Investment Volatility: Assess the risk profile of the Deerfield Opportunities Fund, specifically the use of leverage and the classification of trading activities in operating cash flows.
• One-Time Gains: Confirm the extent to which the $9.6 million gain on the sale of the Encore Capital Group investment drove the current quarter's profitability.
• RTM Acquisition: Monitor the status of negotiations to acquire RTM Restaurant Group and the potential financial impact of combining operations.
• Stock-Based Compensation: Review the projected impact of the upcoming adoption of SFAS 123(R) on future earnings per share.