WEN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 30, 2003, for Triarc Companies, Inc. (parent of Wendy's Co). The Company operates primarily in the franchising and operation of Arby's restaurants. A material event during this period was the acquisition of Sybra, Inc. on December 27, 2002, which added 239 Arby's restaurants to the Company's portfolio. Consequently, the 2003 results include Sybra's operating revenues and expenses, whereas the prior year's results included only royalty fees from Sybra.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Composition: Total revenues increased significantly due to the inclusion of Sybra's net sales ($48.5 million). However, royalty revenue decreased by 5% ($1.2 million) because royalties from Sybra are now eliminated in consolidation. Same-store sales for franchised restaurants declined 2% due to weather, economic conditions, and industry price discounting.
• Expenses: General and administrative expenses rose 20% ($3.9 million) and depreciation/amortization increased 114% ($1.8 million), both primarily driven by the Sybra acquisition. Interest expense increased 33% ($2.1 million) due to Sybra's debt.
• Profitability: Despite a 179% increase in operating profit, the Net Loss widened to $2.0 million from $1.0 million. This was driven by higher interest expenses and a 48% drop in net investment income (from $6.1 million to $3.1 million) due to lower interest rates and reduced recognized gains.
• Cash Flow: Operating activities used $20.5 million in cash, compared to $12.1 million in the prior year. This usage was largely due to funding Sybra's negative working capital and annual incentive compensation payments. Investing activities provided $33.8 million, primarily from net sales of securities.

Guidance, Outlook, and Risks

• Outlook: Management expects positive cash flows from continuing operating activities for the remainder of 2003, excluding discretionary trading security purchases. However, the full year 2003 is still expected to show a net use of cash due to the Q1 working capital funding for Sybra.
• Capital Allocation: The Company has $641.1 million in cash, equivalents, and investments. It maintains a stock repurchase program authorized for up to $50 million through January 2004, though no shares were repurchased in Q1 2003.
• Debt Obligations: Scheduled long-term debt repayments for the remainder of 2003 are estimated at $25.7 million. The Company is in compliance with all debt covenants.
• Legal & Contingencies:
  • Snapple Dispute: The Company is in arbitration regarding a post-closing adjustment for the sale of its beverage business. The purchaser claims $23.2 million plus interest; the Company believes no adjustment is required.
  • Environmental: A vacant property owned by a subsidiary faces remediation costs estimated at $1.0 million, which has been reserved.
  • Guarantees: The Company guarantees up to $5.0 million of revolving credit for Encore Capital Group (reduced from $15.0 million in April 2003) and holds various other guarantees related to sold restaurant assets.

Investor Verification Checklist

• Sybra Integration: Verify the impact of Sybra's negative working capital on future cash flows and the timeline for Sybra to become cash-flow positive.
• Investment Portfolio: Review the unrealized losses on available-for-sale securities (which increased to $2.4 million by April 30, 2003) and the risk of "other than temporary" impairment charges.
• Snapple Arbitration: Monitor the status of the arbitration regarding the $23.2 million post-closing adjustment dispute, with a resolution expected by December 2003.
• Debt Covenants: Confirm continued compliance with debt service coverage ratios, particularly given the increased debt load from the Sybra acquisition.
• Same-Store Sales: Track the trend of same-store sales for franchised restaurants, which have declined for two consecutive quarters.