WEN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 28, 2004, for Triarc Companies, Inc. (the parent company of Wendy's Co and Arby's). The Company operates solely in the restaurant business through franchised and Company-owned Arby's restaurants. The fiscal year consists of 52 or 53 weeks ending on the Sunday closest to December 31. The first quarter of fiscal 2004 contained 13 weeks.

Key Financial Metrics

Liquidity: The Company maintained a current ratio of 5.2:1. Total cash, cash equivalents, and investments stood at approximately $728.7 million as of March 28, 2004.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 1% to $69.2 million. Net sales from Company-owned restaurants fell 4% ($1.8 million) due to a 3% decline in same-store sales (impacted by high unemployment in Michigan) and the closure of three underperforming units.
• Franchise Growth: Royalties and franchise fees increased 6% ($1.3 million), driven by 126 new restaurant openings replacing 73 closed units.
• Margin Compression: Gross margin on net sales dropped from 25% to 20%. This was primarily caused by an $0.8 million increase in roast beef costs and increased price promotions.
• Operating Loss: The Company reported an operating loss of $22,000 compared to an operating profit of $3.6 million in the prior year. This shift was driven by higher costs of sales, a $1.1 million increase in advertising expenses, and $0.8 million in costs related to a proposed business acquisition that was not consummated.
• Investment Income: Net investment income surged 110% to $6.5 million, aided by higher interest rates on investments and recognized gains on securities sales.

Guidance, Outlook, and Risks

Outlook: Management expects same-store sales for Company-owned restaurants to exceed 2003 levels for the remainder of 2004, driven by new menu items (salads, low-carb offerings) and operational initiatives. However, higher roast beef costs are expected to adversely affect cost of sales by $1.2 million to $1.9 million for the rest of the year.

Strategic Initiatives: The Company is negotiating to acquire a controlling interest in Deerfield & Company LLC and form a joint investment adviser, with a total expected cost of approximately $185 million. They also maintain a stock repurchase program with up to $48.6 million remaining authorization.

Risks and Contingencies:

• Commodity Costs: Continued volatility in beef prices remains a significant risk to margins.
• Legal/Environmental: The Company has $2.0 million in reserves for legal and environmental matters, including a remediation project at a former subsidiary site (Adams Packing) which is substantially complete. An IRS examination of tax returns for 2000 and 2001 is ongoing, though no proposed adjustments have been received.
• Debt Covenants: The Company is in compliance with all debt covenants, including fixed charge coverage ratios.

Investor Verification Checklist

• Beef Cost Exposure: Verify the impact of rising roast beef costs on future gross margins and the effectiveness of price promotions in offsetting these costs.
• Deerfield Acquisition: Confirm the status of negotiations for the $185 million acquisition of Deerfield & Company LLC and the associated capital commitment.
• Investment Portfolio Risk: Review the composition of the $728.7 million investment portfolio, specifically the portion allocated to higher-yielding, risk-inherent debt securities and trading securities.
• Same-Store Sales Recovery: Monitor the performance of Company-owned restaurants outside the Michigan region to validate the expectation of sales growth for the remainder of 2004.
• Deferred Compensation: Note the accounting treatment of deferred compensation trusts for executives, which impacts reported compensation expense and investment income.