UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 26, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 1-2207
TRIARC COMPANIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-0471180
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 451-3000
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(X) Yes ( ) No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
(X) Yes ( ) No
There were 23,232,306 the registrant's Class A Common Stock and 41,231,083
the registrant's Class B Common Stock outstanding as of October 29, 2004.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 28, September 26,
2003 (A) 2004
------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 560,510 $ 419,087
Short-term investments............................................................ 173,127 167,948
Receivables ..................................................................... 13,070 28,081
Inventories....................................................................... 2,416 2,327
Deferred income tax benefit....................................................... 11,284 11,153
Prepaid expenses, restricted cash and other current assets........................ 12,575 5,323
----------- -----------
Total current assets........................................................... 772,982 633,919
Restricted cash equivalents............................................................ 32,467 32,866
Investments............................................................................ 37,363 66,073
Properties............................................................................. 106,231 104,450
Goodwill .............................................................................. 64,153 123,773
Asset management contracts............................................................. - 26,615
Other intangible assets................................................................ 8,115 9,193
Deferred costs and other assets........................................................ 21,654 20,031
----------- -----------
$ 1,042,965 $ 1,016,920
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.....................................................................$ - $ 16,610
Current portion of long-term debt................................................. 35,637 36,774
Accounts payable.................................................................. 16,314 13,405
Accrued expenses and other current liabilities.................................... 86,462 80,341
Current liabilities relating to discontinued operations........................... 24,004 15,499
----------- -----------
Total current liabilities...................................................... 162,417 162,629
Long-term debt......................................................................... 483,280 455,942
Deferred compensation payable to related parties....................................... 29,144 31,233
Deferred income taxes.................................................................. 48,697 25,796
Other liabilities, deferred income and minority interests in consolidated
subsidiaries......................................................................... 31,821 33,772
Stockholders' equity:
Class A common stock.............................................................. 2,955 2,955
Class B common stock.............................................................. 5,910 5,910
Additional paid-in capital........................................................ 129,572 133,361
Retained earnings................................................................. 341,642 345,691
Common stock held in treasury..................................................... (203,168) (223,464)
Deferred compensation payable in common stock..................................... 10,160 43,553
Accumulated other comprehensive income............................................ 535 754
Unearned compensation............................................................. - (1,212)
----------- -----------
Total stockholders' equity..................................................... 287,606 307,548
----------- -----------
$ 1,042,965 $ 1,016,920
=========== ===========
(A) Derived from the audited consolidated financial statements as of December
28, 2003.
See accompanying notes to condensed consolidated
financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales..................................................$ 51,093 $ 52,324 $150,988 $ 151,709
Royalties and franchise and related fees................... 23,542 26,721 68,181 73,992
Asset management and related fees.......................... - 6,915 - 6,915
--------- --------- -------- ---------
74,635 85,960 219,169 232,616
--------- --------- -------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization..... 38,295 40,902 112,139 119,891
Cost of services, excluding depreciation and amortization.. - 2,042 - 2,042
Advertising and selling.................................... 4,412 3,971 11,555 12,767
General and administrative, excluding depreciation and
amortization............................................. 23,402 28,713 70,681 77,495
Depreciation and amortization, excluding amortization
of deferred financing costs.............................. 3,379 4,804 10,176 11,619
--------- --------- -------- ---------
69,488 80,432 204,551 223,814
--------- --------- -------- ---------
Operating profit.................................... 5,147 5,528 14,618 8,802
Interest expense........................................... (10,032) (5,017) (27,857) (23,655)
Insurance expense related to long-term debt................ (1,025) (934) (3,163) (2,883)
Investment income (loss), net.............................. 4,014 (3,730) 10,884 7,439
Gain (costs) related to proposed business acquisitions not
consummated.............................................. 2,994 (26) 2,064 (793)
Other income, net.......................................... 449 373 1,424 1,901
--------- --------- -------- ---------
Income (loss) from continuing operations
before income taxes and minority interests...... 1,547 (3,806) (2,030) (9,189)
(Provision for) benefit from income taxes...................... (1,052) 15,618 (985) 16,559
Minority interests in (income) loss of consolidated
subsidiaries................................................. - (663) 112 (653)
--------- --------- -------- ---------
Income (loss) from continuing operations............ 495 11,149 (2,903) 6,717
Gain on disposal of discontinued operations.................... - 10,823 - 10,823
--------- --------- -------- ---------
Net income (loss)...................................$ 495 $ 21,972 $ (2,903) $ 17,540
========= ========= ======== =========
Basic income (loss) per share:
Class A common stock:
Continuing operations...............................$ .01 $ .16 $ (.05) $ .10
Discontinued operations............................. - .16 - .16
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .32 $ (.05) $ .26
========= ========= ======== =========
Class B common stock:
Continuing operations...............................$ .01 $ .18 $ (.05) $ .11
Discontinued operations............................. - .18 - .18
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .36 $ (.05) $ .29
========= ========= ======== =========
Diluted income (loss) per share:
Class A common stock:
Continuing operations...............................$ .01 $ .16 $ (.05) $ .09
Discontinued operations............................. - .15 - .15
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .31 $ (.05) $ .24
========= ========= ======== =========
Class B common stock:
Continuing operations...............................$ .01 $ .17 $ (.05) $ .10
Discontinued operations............................. - .17 - .17
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .34 $ (.05) $ .27
========= ========= ======== =========
See accompanying notes to condensed consolidated
financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
--------------------------------
September 28, September 26,
2003 2004
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss).......................................................................$ (2,903) $ 17,540
Adjustments to reconcile net income (loss) to net cash provided by (used in)
continuing operating activities:
Operating investment adjustments, net (see below).............................. (17,647) 51,808
Depreciation and amortization of properties.................................... 9,203 9,833
Amortization of other intangible assets and certain other items................ 973 1,786
Amortization of deferred financing costs and original issue discount........... 1,666 1,954
Deferred compensation provision ............................................... 2,740 1,240
Release of income tax and related interest accruals ........................... - (18,934)
Deferred income tax benefit.................................................... (658) (3,455)
Equity in earnings of investee................................................. (1,025) (1,724)
Unfavorable lease liability recognized......................................... (1,131) (1,208)
Deferred vendor incentive recognized........................................... (1,420) (438)
Minority interests in income (loss) of consolidated subsidiaries............... (112) 653
Collection of non-current receivables.......................................... 1,667 378
Gain on disposal of discontinued operations.................................... - (10,823)
Other, net..................................................................... 606 1,437
Changes in operating assets and liabilities:
Increase in receivables.................................................... (485) (1,292)
(Increase) decrease in inventories......................................... (104) 89
Decrease in prepaid expenses and other current assets...................... 1,100 56
Decrease in accounts payable and accrued expenses and other current
liabilities.............................................................. (5,046) (2,572)
------------ -----------
Net cash provided by (used in) continuing operating activities.......... (12,576) 46,328
------------ -----------
Cash flows from continuing investing activities:
Investment activities, net (see below)............................................. 1,635 (57,352)
Capital expenditures............................................................... (3,465) (7,892)
Cost (adjustment to cost in 2003) of business acquisitions less cash acquired...... (200) (93,768)
Other, net......................................................................... (62) (302)
------------ -----------
Net cash used in continuing investing activities........................ (2,092) (159,314)
------------ -----------
Cash flows from continuing financing activities:
Repayments of notes and long-term debt............................................. (34,717) (26,666)
Issuance of long-term debt......................................................... 175,000 -
Dividends paid ................................................................... (4,238) (13,491)
Repurchases of common stock for treasury........................................... (41,700) (1,381)
Exercises of stock options......................................................... 10,422 13,354
Transfers from restricted cash equivalents collateralizing long-term debt.......... 127 65
Deferred financing costs........................................................... (6,525) -
Class B common stock distribution costs............................................ (910) -
------------ -----------
Net cash provided by (used in) continuing financing activities.......... 97,459 (28,119)
------------ -----------
Net cash provided by (used in) continuing operations.................................... 82,791 (141,105)
Net cash provided by (used in) discontinued operations.................................. 4,767 (318)
------------ -----------
Net increase (decrease) in cash and cash equivalents.................................... 87,558 (141,423)
Cash and cash equivalents at beginning of period........................................ 456,388 560,510
------------ -----------
Cash and cash equivalents at end of period..............................................$ 543,946 $ 419,087
============ ===========
Detail of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities........................................$ 206,465 $ 161,913
Cost of trading securities purchased............................................. (220,724) (114,394)
Net recognized (gains) losses from trading securities and short positions in
securities..................................................................... (372) 832
Other net recognized (gains) losses, net of other than temporary losses ......... (3,042) 5,267
Net (accretion of discount) amortization of premium on debt securities........... 26 (1,810)
------------ -----------
$ (17,647) $ 51,808
============= ===========
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments....................................................................$ 128,006 $ 171,587
Cost of available-for-sale securities and other investments purchased............ (129,610) (217,252)
Proceeds of securities sold short................................................ 28,777 19,539
Payments to cover short positions in securities.................................. (21,720) (38,493)
(Increase) decrease in restricted cash collateralizing obligations for short
positions in securities....................................................... (3,818) 7,267
------------ -----------
$ 1,635 $ (57,352)
============ ===========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 26, 2004
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Triarc Companies, Inc. ("Triarc" and, together with its subsidiaries, the
"Company") have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC") and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America. In the opinion of the Company, however, the accompanying condensed
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of December 28, 2003 and September 26, 2004, its results
of operations for the three-month and nine-month periods ended September 28,
2003 and September 26, 2004 and its cash flows for the nine-month periods ended
September 28, 2003 and September 26, 2004 (see below). This information should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 2003 (the "Form 10-K").
The Company reports on a fiscal year consisting of 52 or 53 weeks ending on
the Sunday closest to December 31. However, Deerfield & Company LLC
("Deerfield"), in which the Company acquired a 63.6% capital interest on July
22, 2004 (see Note 3), reports on a calendar year ending on December 31. The
Company's first nine-month period of fiscal 2003 commenced on December 30, 2002
and ended on September 28, 2003, with its third quarter commencing on June 30,
2003. The Company's first nine-month period of fiscal 2004 commenced on December
29, 2003 and ended on September 26, 2004, with its third quarter commencing on
June 28, 2004, except that for each of these periods, Deerfield is included
commencing July 23, 2004 through its quarter end of September 30, 2004. The
periods from June 30, 2003 to September 28, 2003 and December 30, 2002 to
September 28, 2003 are referred to herein as the three-month and nine-month
periods ended September 28, 2003, respectively. The periods from June 28, 2004
to September 26, 2004 and December 29, 2003 to September 26, 2004 are referred
herein as the three-month and nine-month periods ended September 26, 2004,
respectively. Each quarter contained 13 weeks and each nine-month period
contained 39 weeks. The effect of including Deerfield in the Company's condensed
consolidated financial statements through Deerfield's quarter end of September
30, 2004 instead of the Company's quarter end of September 26, 2004 was not
material.
(2) Significant Accounting Policies
Stock Based Compensation
The Company maintains several equity plans (the "Equity Plans") which
collectively provide or provided for the grant of stock options, tandem stock
appreciation rights and restricted shares of the Company's common stock to
certain officers, other key employees, non-employee directors and consultants
and shares of the Company's common stock pursuant to automatic grants in lieu of
annual retainer or meeting attendance fees to non-employee directors.
The Company measures compensation costs for its employee stock-based
compensation under the intrinsic value method rather than the fair value method.
Accordingly, compensation cost for the Company's stock options is measured as
the excess, if any, of the market price of the Company's class A common stock
(the "Class A Common Stock" or "Class A Common Shares") and/or class B common
stock, series 1 (the "Class B Common Stock" or "Class B Common Shares"), as
applicable, at the date of grant, or at any subsequent measurement date as a
result of certain types of modifications to the terms of its stock options, over
the amount an employee must pay to acquire the stock. Such amounts are amortized
as compensation expense over the vesting period of the related stock options.
Any compensation cost is recognized as expense only to the extent it exceeds
compensation expense previously recognized for such stock options.
A summary of the effect on net income (loss) and net income (loss) per
share in each period presented as if the fair value method had been applied to
all outstanding and unvested stock options that were granted commencing January
1, 1995 is as follows (in thousands except per share data):
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Net income (loss), as reported.........................$ 495 $ 21,972 $ (2,903) $ 17,540
Reversal of stock-based employee compensation expense
determined under the intrinsic value method included
in reported net income or loss, net of related income
taxes................................................ 110 - 159 157
Recognition of total stock-based employee compensation
expense determined under the fair value method, net
of related income taxes.............................. (1,297) (609) (3,980) (1,786)
---------- ---------- --------- -----------
Net income (loss), as adjusted.........................$ (692) $ 21,363 $ (6,724) $ 15,911
========== ========== ========= ===========
Net income (loss) per share:
Class A Common Stock:
Basic, as reported................................$ .01 $ .32 $ (.05) $ .26
Basic, as adjusted................................ (.01) .31 (.11) .24
Diluted, as reported.............................. .01 .31 (.05) .24
Diluted, as adjusted.............................. (.01) .30 (.11) .22
Class B Common Stock:
Basic, as reported................................$ .01 $ .36 $ (.05) $ .29
Basic, as adjusted................................ (.01) .35 (.11) .27
Diluted, as reported.............................. .01 .34 (.05) .27
Diluted, as adjusted.............................. (.01) .33 (.11) .25
Stock options granted prior to a stock distribution (the "Stock
Distribution") during the third quarter of 2003 of two shares of the Company's
Class B Common Stock for each share of the Company's Class A Common Stock, as
adjusted for the Stock Distribution, are each exercisable for one share of Class
A Common Stock and two shares of Class B Common Stock (the "Package Options").
Stock options granted subsequent to the Stock Distribution are exercisable for
one share of Class A Common Stock (the "Class A Options") or one share of Class
B Common Stock (the "Class B Options"). The fair value of these stock options
granted under the Equity Plans on the dates of grant were estimated using the
Black-Scholes option pricing model (the "Black-Scholes Model") with the
following weighted average assumptions for options granted during the nine-month
periods ended September 28, 2003 and September 26, 2004:
Nine Months Ended
-------------------------------------------
September 28, 2003 September 26, 2004
------------------ ---------------------
Package Class A Class B
Options Options Options
------- ------- -------
Risk-free interest rate....................................... 2.90 % 3.96 % 3.87 %
Expected option life in years................................. 7 7 7
Expected volatility........................................... 17.5 % 19.6 % 32.7 %
Dividend yield................................................ None(a) 2.41 % 2.63 %
- ------------------
(a) The grants of Package Options occurred prior to the commencement in the
third quarter of 2003 of the payment of quarterly cash dividends.
The Black-Scholes Model has limitations on its effectiveness including that
it was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable and that the model
requires the use of highly subjective assumptions including expected stock price
volatility. The Company's stock-based awards to employees have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate.
Therefore, in the opinion of the Company, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards to
employees.
During the nine-month period ended September 28, 2003, the Company granted
24,000 Package Options and during the nine-month period ended September 26,
2004, the Company granted 43,000 Class A Options and 239,000 Class B Options
under the Equity Plans at exercise prices equal to the market price of the stock
on the grant dates. The weighted average grant date fair value of each of these
stock options, using the Black-Scholes Model with the assumptions set forth
above, were $7.56, $2.23 and $3.33, respectively.
Update to Significant Accounting Policies
As a result of the acquisition of a 63.6% capital interest in Deerfield, an
alternative asset manager, the Company has adopted certain new accounting
policies. The following disclosure is supplemental to Note 1, "Summary of
Significant Accounting Policies," in the Form 10-K.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
Deerfield with minority interests commencing July 23, 2004.
Short-Term Investments
Deerfield holds investments in preferred shares of several collateralized
debt obligation instruments ("CDOs") for which it is the collateral manager.
Such investments are considered financial assets subject to prepayment and are
therefore accounted for similar to debt securities and are classified as
"available-for-sale" securities. Interest income is accreted on the preferred
shares over the respective lives of the CDOs using the effective yield method.
Revenue Recognition
Asset management and related fees consist of the following types of
revenues generated by Deerfield in its capacity as the trading manager for
various investment funds and private investment accounts (collectively, the
"Funds") and as the collateral manager for various CDOs: (1) management fees,
(2) incentive fees and (3) other related fees. Management fees are recognized as
revenue when the management services have been performed for the period and all
contingencies have been resolved, including the generation of sufficient cash
flows by the CDOs to pay the fees under the terms of the related management
agreements. Incentive fees are based upon the performance of the Funds and CDOs
and are recognized as revenues when the amounts become fixed and determinable
upon the close of a performance period for the Funds or the achievement of
performance targets for the CDOs. Other related fees primarily include
structuring and warehousing fees earned by Deerfield for services provided to
CDOs and are recognized as revenues upon the rendering of such services and the
closing of the respective CDO.
(3) Business Acquisition
On July 22, 2004 the Company completed the acquisition of a 63.6% capital
interest in Deerfield (the "Deerfield Acquisition") for an aggregate cost of
$94,782,000, consisting of payments of $86,532,000 to selling owners and
estimated expenses of $8,250,000, including expenses reimbursed to a selling
owner. Deerfield, through its wholly-owned subsidiary Deerfield Capital
Management LLC, is an alternative asset manager offering a diverse range of
fixed income and credit-related strategies to institutional investors. Deerfield
currently provides asset management services for CDOs and Funds but may expand
its services into other types of investments. As of September 26, 2004,
Deerfield has over $8 billion of assets under management, consisting principally
of CDOs and, to a much lesser extent, Funds. Deerfield represents a business
segment of the Company (see Note 12).
The following table (1) summarizes on a preliminary basis the allocation of
the purchase price of Deerfield to the assets acquired and liabilities assumed
in the Deerfield Acquisition and remains subject to finalization due to the
recent date of the acquisition and (2) provides a reconciliation to "Cost of
business acquisitions less cash acquired" in the accompanying condensed
consolidated statement of cash flows (in thousands):
As of
July 22, 2004
-------------
Current assets.........................................................................$ 30,877
Restricted cash equivalents............................................................ 400
Investments............................................................................ 49
Properties............................................................................. 739
Goodwill............................................................................... 59,620
Asset management contracts............................................................. 27,199
Other intangible assets................................................................ 1,394
Other assets........................................................................... 590
----------
Total assets acquired............................................................ 120,868
----------
Current liabilities.................................................................... 24,039
Deferred income and minority interests in Deerfield.................................... 2,047
----------
Total liabilities assumed........................................................ 26,086
----------
Net assets acquired........................................................ 94,782
Less cash acquired..................................................................... 1,014
----------
Cost of business acquisitions less cash acquired.......................................$ 93,768
==========
The Deerfield Acquisition resulted in $59,620,000 of goodwill, which will
be fully deductible for income tax purposes and was assigned entirely to the
Company's new asset management business segment. Such goodwill reflects the
substantial value of Deerfield's historically profitable investment advisory
brand and the Company's expectation of being able to grow Deerfield's asset
management portfolio thereby increasing its asset management fee revenues. All
of the acquired identifiable intangible assets, aggregating $28,593,000, are
amortizable and principally include (1) asset management contracts for Funds of
$14,946,000, (2) asset management contracts for CDOs of $12,253,000, (3) asset
management computer software systems of $890,000 and (4) non-compete agreements
of $413,000. Each of those amounts represents the Company's 63.6% interest in
the fair value of the respective intangible asset, as determined in accordance
with a preliminary independent appraisal. The acquired identifiable intangible
assets have a weighted average amortization period of approximately 11 years,
reflecting a weighted average of approximately 12 years for the asset management
contracts and approximately 4 years for the other intangible assets.
Deerfield's results of operations, less applicable minority interests, and
cash flows subsequent to the July 22, 2004 date of the Deerfield Acquisition
through September 30, 2004 have been included in the accompanying condensed
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended September 26, 2004.
The following supplemental pro forma condensed consolidated summary
operating data (the "As Adjusted Data") of the Company for each of the periods
presented herein has been prepared by adjusting the historical data as set forth
in the accompanying condensed consolidated statements of operations to give
effect to the Deerfield Acquisition as if it had been consummated as of the
beginning of each respective period (in thousands except per share amounts):
Three Months Ended
-------------------------------------------------------
September 28, 2003 September 26, 2004
-------------------------- -------------------------
As Reported As Adjusted As Reported As Adjusted
----------- ----------- ----------- -----------
Revenues...............................................$ 74,635 $ 81,367 $ 85,960 $ 87,476
Operating profit....................................... 5,147 5,192 5,528 4,605
Income from continuing operations...................... 495 154 11,149 10,695
Net income............................................. 495 154 21,972 21,518
Basic income per share:
Class A Common Stock:
Continuing operations............................. .01 - .16 .15
Net income........................................ .01 - .32 .31
Class B Common Stock:
Continuing operations............................. .01 - .18 .17
Net income........................................ .01 - .36 .35
Diluted income per share:
Class A Common Stock:
Continuing operations............................. .01 - .16 .15
Net income........................................ .01 - .31 .30
Class B Common Stock:
Continuing operations............................. .01 - .17 .17
Net income........................................ .01 - .34 .33
Nine Months Ended
-------------------------------------------------------
September 28, 2003 September 26, 2004
-------------------------- -------------------------
As Reported As Adjusted As Reported As Adjusted
----------- ----------- ----------- -----------
Revenues...............................................$ 219,169 $ 241,097 $ 232,616 $ 260,135
Operating profit....................................... 14,618 15,332 8,802 15,990
Income (loss) from continuing operations............... (2,903) (3,475) 6,717 8,902
Net income (loss)...................................... (2,903) (3,475) 17,540 19,725
Basic income (loss) per share:
Class A Common Stock:
Continuing operations.......................... (.05) (.06) .10 .13
Net income (loss)................................. (.05 (.06) .26 .29
Class B Common Stock:
Continuing operations............................ (.05) (.06) .11 .15
Net income (loss)................................ (.05) (.06) .29 .33
Diluted income (loss) per share:
Class A Common Stock:
Continuing operations.......................... (.05) (.06) .09 .12
Net income (loss)................................ (.05) (.06) .24 .28
Class B Common Stock:
Continuing operations............................ (.05) (.06) .10 .14
Net income (loss)................................. (.05) (.06) .27 .31
This As Adjusted Data is presented for comparative purposes only and does
not purport to be indicative of the Company's actual results of operations had
the Deerfield Acquisition actually been consummated as of the beginning of each
of the respective periods presented above or of the Company's future results of
operations.
Deerfield granted membership interests in future profits effective August
20, 2004 (the "Profit Interests") to certain of its key personnel, which
effectively increased the minority interests in any profits of Deerfield
subsequent to August 19, 2004 by 2.1% to 38.5% from 36.4%. The estimated fair
value at the date of grant of the Profit Interests, in accordance with an
independent appraisal, was $2,050,000, which resulted in aggregate unearned
compensation of $1,260,000, net of minority interests, being charged to the
"Unearned compensation" component of "Stockholders equity" with an equal
offsetting increase in "Additional paid-in capital." The vesting of Profit
Interests varies by employee either vesting ratably in each of the three years
ended August 20, 2007, 2008, and 2009 or 100% on August 20, 2007. Accordingly,
this unearned compensation is being amortized as compensation expense as earned
over periods of three or five years.
The Company owns 63.6% of the capital interests and 61.5% of the Profit
Interests in Deerfield. The remaining economic interests in Deerfield are owned
by executives of Deerfield or their affiliates. Commencing July 22, 2009, the
Company will have certain rights to acquire the economic interests of Deerfield
owned by two of its executives, which aggregate 35.5% of the capital interests
and 34.3% of the Profit Interests. In addition, commencing July 22, 2007, those
two executives will have certain rights to require the Company to acquire their
economic interests. In each case, the rights are generally exercisable at a
price equal to the then current fair market value of those interests.
In connection with the Deerfield Acquisition, the Company also committed to
invest $100,000,000 to seed a new multi-strategy hedge fund to be managed by
Deerfield. Such fund was established and the $100,000,000 was funded in October
2004. The fund will initially be accounted for as a consolidated subsidiary of
the Company, with minority interests to the extent of third-party investor
participation, commencing in the quarter ending January 2, 2005.
(4) Comprehensive Income (Loss)
The following is a summary of the components of comprehensive income
(loss), net of income taxes and minority interests (in thousands):
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Net income (loss).......................................$ 495 $ 21,972 $ (2,903) $ 17,540
Unrealized gains (losses) on available-for sale
securities (see below)................................ (202) 1,053 (1,105) 207
Net change in currency translation adjustment........... (4) 21 8 12
---------- ---------- --------- ----------
Comprehensive income (loss).............................$ 289 $ 23,046 $ (4,000) $ 17,759
========== ========== ========= ==========
The following is a summary of the components of the unrealized gains or
losses on available-for-sale securities included in other comprehensive income
(loss) (in thousands):
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Unrealized holding gains (losses) arising during the
period................................................$ (311) $ 604 $ (1,835) $ 415
Reclassification of prior period net unrealized holding
(gains) losses included in net income or loss......... (7) 1,006 105 (118)
---------- ---------- --------- ------------
(318) 1,610 (1,730) 297
Equity in change in unrealized gain on a retained
interest.............................................. (4) - (20) (2)
Equity in change in unrealized gain on available-for-
sale securities....................................... 3 (2) - (1)
Income tax benefit (provision).......................... 117 (599) 645 (131)
Minority interests in a consolidated subsidiary......... - 44 - 44
---------- ---------- --------- ------------
$ (202) $ 1,053 $ (1,105) $ 207
========== ========== ========= ============
(5) Income (Loss) Per Share
Basic income (loss) per share has been computed by dividing the allocated
income or loss for the Company's Class A Common Stock and the Company's Class B
Common Stock by the weighted average number of shares of each class. Both
factors are presented in the table below. Income for the three-month period
ended September 28, 2003 and the three and nine-month periods ended September
26, 2004 was allocated between the Class A Common Shares and Class B Common
Shares based on the actual dividend payment ratio to the extent of any dividends
paid during the period with any excess allocated giving effect to the current
minimum stated dividend participation rate of 110% for the Class B Common Shares
compared with the Class A Common Shares. Losses for the nine-month period ended
September 28, 2003 were allocated equally among each share of Class A Common
Stock and Class B Common Stock, resulting in the same loss per share for each
class. The weighted average number of shares includes the effect of the shares
held in the additional deferred compensation trusts which are not reported as
outstanding shares for financial statement purposes (see Note 10).
Diluted income per share for the three-month period ended September 28,
2003 and the three and nine-month periods ended September 26, 2004 has been
computed by dividing the allocated income for the Class A Common Shares and
Class B Common Shares by the weighted average number of shares of each class
plus the potential common share effects on each class of dilutive stock options,
computed using the treasury stock method, as presented in the table below. The
shares used to calculate diluted income per share for those periods exclude any
effect of the Company's $175,000,000 of 5% convertible notes (the "Convertible
Notes") which would have been antidilutive. Diluted loss per share for the
nine-month period ended September 28, 2003 was the same as basic loss per share
for each of the Class A and Class B Common Shares since the Company reported a
net loss for this period and, therefore, the effect of all potentially dilutive
securities on the loss per share would have been antidilutive.
The only remaining Company securities as of September 26, 2004 that could
dilute basic income per share for periods subsequent to September 26, 2004 are
(1) outstanding stock options which are exercisable into 4,116,000 shares and
8,590,000 shares of the Company's Class A Common Stock and Class B Common Stock,
respectively, and (2) the Convertible Notes which are convertible into 4,375,000
shares and 8,750,000 shares of the Company's Class A Common Stock and Class B
Common Stock, respectively.
Income (loss) per share has been computed by allocating the income or loss
as follows (in thousands):
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Class A Common Shares:
Continuing operations...............................$ 150 $ 3,728 $ (968) $ 2,149
Discontinued operations............................. - 3,666 - 3,539
----------- --------- ---------- ----------
Net income (loss)...................................$ 150 $ 7,394 $ (968) $ 5,688
=========== ========= ========== ==========
Class B Common Shares:
Continuing operations...............................$ 345 $ 7,421 $ (1,935) $ 4,568
Discontinued operations............................. - 7,157 - 7,284
----------- --------- ---------- ----------
Net income (loss)...................................$ 345 $ 14,578 $ (1,935) $ 11,852
=========== ========= ========== ==========
The number of shares used to calculate basic and diluted loss per share
were as follows (in thousands):
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Class A Shares:
Weighted average shares
Outstanding.................................... 19,267 21,736 19,862 20,834
Held in deferred compensation trusts........... 361 1,408 210 984
----------- --------- ---------- ----------
Basic shares........................................ 19,628 23,144 20,072 21,818
Dilutive effect of stock options............... 1,585 851 - 1,240
----------- --------- ---------- ----------
Diluted shares...................................... 21,213 23,995 20,072 23,058
=========== ========= ========== ==========
Class B Shares:
Weighted average shares
Outstanding.................................... 38,534 38,241 39,724 38,662
Held in deferred compensation trusts........... 722 2,816 420 1,967
----------- --------- ---------- ----------
Basic shares........................................ 39,256 41,057 40,144 40,629
Dilutive effect of stock options............... 3,170 1,703 - 2,479
----------- --------- ---------- ----------
Diluted shares...................................... 42,426 42,760 40,144 43,108
=========== ========= ========== ==========
(6) Capital Stock
In June 2004 the Company increased its authorized shares of Class B Common
Stock from 100,000,000 shares to 150,000,000 shares.
(7) Income Taxes
During the quarter ended September 26, 2004, the Internal Revenue Service
(the "IRS") finalized its examination of the Company's Federal income tax
returns for the years ended December 31, 2000 and December 30, 2001 without
asserting any additional income tax liability. Also during the quarter ended
September 26, 2004, a state income tax examination was finalized and the statute
of limitations for examinations of certain state income tax returns expired. In
connection with these matters, the Company determined that it had income tax
reserves and related interest accruals that were no longer required and released
(1) $25,415,000 of income tax reserves, of which $14,592,000 increased the
"Benefit from income taxes" and $10,823,000 was reported as the "Gain on
disposal of discontinued operations" (see Note 8), and (2) $4,342,000 of related
interest accruals as a reduction of "Interest expense" in the accompanying
condensed consolidated statements of operations for the three-month and
nine-month periods ended September 26, 2004. The Company's Federal income tax
returns subsequent to December 30, 2001 are not currently under examination by
the IRS although certain state income tax returns are currently under
examination. However, management of the Company believes that adequate aggregate
provisions have been made in prior periods for any liabilities, including
interest, that may result from any such examination(s).
(8) Discontinued Operations
Prior to 2003 the Company sold (1) the stock of the companies comprising
the Company's former premium beverage and soft drink concentrate business
segments (the "Beverage Discontinued Operations"), (2) the stock or the
principal assets of the companies comprising the former utility and municipal
services and refrigeration business segments (the "SEPSCO Discontinued
Operations") of SEPSCO, LLC, a subsidiary of the Company, and (3) substantially
all of its interests in a partnership and a subpartnership comprising the
Company's former propane business segment (the "Propane Discontinued
Operations"). There remain certain obligations not transferred to the buyers of
the Beverage, SEPSCO and Propane Discontinued Operations to be liquidated. The
Beverage, SEPSCO and Propane Discontinued Operations have been accounted for as
discontinued operations by the Company.
During the three-month period ended September 26, 2004, the Company
recorded additional gain on the disposal of the Beverage Discontinued Operations
of $10,823,000 resulting from the release of income tax reserves related to the
discontinued operations which were no longer required upon the finalization of
the examination of the Company's Federal income tax returns for the years ended
December 31, 2000 and December 30, 2001 and the expiration of the statute of
limitations with respect to examining certain of the Company's state income tax
returns.
Current liabilities relating to the discontinued operations consisted of
the following (in thousands):
December 28, September 26,
2003 2004
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations.........................................................$ 22,460 $ 14,095
Liabilities relating to the SEPSCO and the Propane Discontinued Operations........ 1,544 1,404
------------ -----------
$ 24,004 $ 15,499
============ ===========
The Company expects that the liquidation of these remaining liabilities
associated with all of these discontinued operations will not have any material
adverse impact on its financial position or results of operations. To the extent
any estimated amounts included in the current liabilities relating to the
discontinued operations are determined to be in excess of the requirement to
liquidate the associated liability, any such excess will be released at that
time as a component of gain or loss on disposal of discontinued operations.
(9) Retirement Benefit Plans
The Company maintains two defined benefit plans, the benefits under which
were frozen in 1992. After recognizing a curtailment gain upon freezing the
benefits, the Company has no unrecognized prior service cost related to these
plans. The measurement date used by the Company in determining the components of
pension expense is December 31.
The components of the net periodic pension cost incurred by the Company
with respect to these plans are as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Service cost (consisting entirely of plan expenses)......$ 21 $ 23 $ 63 $ 68
Interest cost............................................ 63 61 187 182
Expected return on the plans' assets..................... (67) (71) (199) (213)
Amortization of unrecognized net loss.................... 16 8 50 24
---------- --------- ---------- ----------
Net periodic pension cost................................$ 33 $ 21 $ 101 $ 61
========== ========= ========== ==========
The Company currently expects to contribute an aggregate $264,000 to its
two defined benefit plans for all of 2004, of which $203,000 was contributed
during the nine-month period ended September 26, 2004.
(10) Transactions with Related Parties
Prior to 2003 the Company provided incentive compensation of $22,500,000,
in the aggregate, to the Chairman and Chief Executive Officer and President and
Chief Operating Officer of the Company (the "Executives") which was invested in
two deferred compensation trusts (the "Deferred Compensation Trusts") for their
benefit. Deferred compensation expense of $2,740,000 and $1,239,000 was
recognized in the nine-month periods ended September 28, 2003 and September 26,
2004, respectively, for increases in the fair value of the investments in the
Deferred Compensation Trusts. Under accounting principles generally accepted in
the United States of America, the Company is permitted to recognize investment
income for any interest or dividend income on investments in the Deferred
Compensation Trusts and realized gains on sales of investments in the Deferred
Compensation Trusts, but is unable to recognize any investment income for
unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts because these investments are accounted for under the cost
method of accounting. Accordingly, the Company recognized net investment income
from investments in the Deferred Compensation Trusts of $592,000 and $563,000
during the nine-month periods ended September 28, 2003 and September 26, 2004,
respectively. Such net investment income during the nine-month periods ended
September 28, 2003 and September 26, 2004 consisted of realized gains from the
sale of certain cost-method investments in the Deferred Compensation Trusts of
$744,000 and $828,000, respectively, which included increases in value of
$513,000 and $777,000 prior to the nine-month periods ended September 28, 2003
and September 26, 2004, respectively, and interest income of $5,000 and $11,000,
respectively, less management fees of $157,000 and $276,000, respectively.
Recognized gains, interest income and investment fees are included in
"Investment income (loss), net" and deferred compensation expense is included in
"General and administrative, excluding depreciation and amortization" in the
accompanying condensed consolidated statements of operations. As of September
26, 2004, the obligation to the Executives related to the Deferred Compensation
Trusts is $30,383,000 and is included in "Deferred compensation payable to
related parties" in the accompanying condensed consolidated balance sheets. As
of September 26, 2004, the assets in the Deferred Compensation Trusts consisted
of $22,196,000 included in "Investments," which does not reflect the unrealized
increase in the fair value of the investments, and $1,861,000 included in "Cash
and cash equivalents" in the accompanying condensed consolidated balance sheet.
The cumulative disparity between (1) deferred compensation expense and net
recognized investment income and (2) the obligation to the Executives and the
carrying value of the assets in the Deferred Compensation Trusts will reverse in
future periods as either (1) additional investments in the Deferred Compensation
Trusts are sold and previously unrealized gains are recognized without any
offsetting increase in compensation expense or (2) the fair values of the
investments in the Deferred Compensation Trusts decrease resulting in the
recognition of a reversal of compensation expense without any offsetting losses
recognized in investment income.
During the nine months ended September 26, 2004, the Executives exercised
an aggregate 2,850,000 Package Options (see Note 2) under the Company's Equity
Plans and paid the exercise prices utilizing shares of the Company's Class B
Common Stock received by the Executives in connection with the Stock
Distribution and effectively owned by the Executives for more than six months at
the dates the options were exercised. These exercises resulted in aggregate
deferred gains to the Executives of $33,393,000, represented by an additional
1,047,450 Class A Common Shares and 2,094,887 shares of Class B Common Shares
based on the market prices at the date of exercise. Such shares are being held
in two additional deferred compensation trusts (the "Additional Deferred
Compensation Trusts"). The resulting obligation of $33,393,000 is included in
the "Deferred compensation payable in common stock" component of "Stockholders'
equity" in the accompanying condensed consolidated balance sheet as of September
26, 2004. The Executives had previously elected to defer the receipt of the
shares held in the Additional Deferred Compensation Trusts until no earlier than
January 2, 2005 and, during the 2004 second quarter, elected to further defer
the receipt of these shares until no earlier than January 2, 2008. The cash
equivalents funded from cumulative dividends paid on shares held by the
Additional Deferred Compensation Trusts of $850,000 are included in "Cash and
cash equivalents," and the related obligation is included in "Deferred
compensation payable to related parties" in the accompanying condensed
consolidated balance sheet as of September 26, 2004.
In accordance with an employment agreement with an executive of Deerfield
who is also a director of the Company, Deerfield incurred and paid $59,000 to an
entity of which the executive is the principal owner to reimburse operating
expenses for the usage of an airplane during the period from the July 22, 2004
date of the Deerfield Acquisition through Deerfield's quarter end of September
30, 2004.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 23 to the
consolidated financial statements contained in the Form 10-K.
(11) Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc.
("Adams"), an inactive subsidiary of the Company, was listed by the United
States Environmental Protection Agency on the Comprehensive Environmental
Response, Compensation and Liability Information System ("CERCLIS") list of
known or suspected contaminated sites. The CERCLIS listing appears to have been
based on an allegation that a former tenant of Adams conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970's. The
business operations of Adams were sold in December 1992. In February 2003, Adams
and the Florida Department of Environmental Protection (the "FDEP") agreed to a
consent order that provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the FDEP approved the work plan submitted by Adams'
environmental consultant and, as of September 26, 2004, the work at the site has
been completed. Adams submitted its contamination assessment report to the FDEP
in March 2004. In August 2004, the FDEP agreed to a monitoring plan consisting
of two sampling events after which it will reevaluate the need for additional
assessment or remediation. Based on provisions of $1,667,000 for those costs
made prior to 2003, and after taking into consideration various legal defenses
available to the Company, including Adams, Adams has provided for its estimate
of its remaining liability for completion of this matter.
In 1998, a number of class action lawsuits were filed on behalf of the
Company's stockholders. Each of these actions named the Company, the Executives
and other members of the Company's board of directors as defendants. In 1999,
certain plaintiffs in these actions filed a consolidated amended complaint
alleging that the Company's tender offer statement filed with the SEC in 1999,
pursuant to which the Company repurchased 3,805,015 shares of its Class A Common
Stock for $18.25 per share, failed to disclose material information. The amended
complaint seeks, among other relief, monetary damages in an unspecified amount.
In 2000, the plaintiffs agreed to stay this action pending determination of a
related stockholder action which was subsequently dismissed in October 2002 and
is no longer being appealed. Through September 26, 2004, no further action has
occurred with respect to the remaining class action lawsuit and such action
remains stayed.
In addition to the environmental matter and stockholder lawsuit described
above, the Company is involved in other litigation and claims incidental to its
current and prior businesses. Triarc and its subsidiaries have reserves for all
of their legal and environmental matters aggregating $1,800,000 as of September
26, 2004. Although the outcome of such matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to the
Company, based on currently available information, including legal defenses
available to Triarc and/or its subsidiaries, and given the aforementioned
reserves, the Company does not believe that the outcome of such legal and
environmental matters will have a material adverse effect on its consolidated
financial position or results of operations.
(12) Business Segments
As a result of the Deerfield Acquisition, the Company now manages and
internally reports its operations as two business segments: (1) the operation
and franchising of restaurants and (2) asset management (see Note 3). The
Company evaluates segment performance and allocates resources based on each
segment's earnings before interest, taxes, depreciation and amortization
("EBITDA"). Information concerning the segments in which the Company operates is
shown in the table below. EBITDA has been computed as operating profit plus
depreciation and amortization, excluding amortization of deferred financing
costs ("Depreciation and Amortization"). Operating profit has been computed as
revenues less operating expenses. In computing EBITDA and operating profit,
interest expense and non-operating income and expenses have not been considered.
Identifiable assets by segment are those assets that are used in the Company's
operations in each segment. General corporate assets consist primarily of cash
and cash equivalents, short-term and non-current investments and properties.
The following is a summary of the Company's segment information (in
thousands):
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Revenues:
Restaurants......................................$ 74,635 $ 79,045 $ 219,169 $ 225,701
Asset management................................. - 6,915 - 6,915
----------- ----------- ------------ ------------
Consolidated revenues............................$ 74,635 $ 85,960 $ 219,169 $ 232,616
=========== =========== ============ ============
EBITDA:
Restaurants......................................$ 18,689 $ 20,837 $ 57,106 $ 52,047
Asset management................................. - 964 - 964
General corporate................................ (10,163) (11,469) (32,312) (32,590)
----------- ----------- ------------ ------------
Consolidated EBITDA.............................. 8,526 10,332 24,794 20,421
----------- ----------- ------------ ------------
Less Depreciation and Amortization:
Restaurants...................................... 1,994 2,640 6,051 6,988
Asset management................................. - 836 - 836
General corporate................................ 1,385 1,328 4,125 3,795
----------- ----------- ------------ ------------
Consolidated Depreciation and Amortization....... 3,379 4,804 10,176 11,619
----------- --------- ------------ ------------
Operating profit:
Restaurants...................................... 16,695 18,197 51,055 45,059
Asset management................................. - 128 - 128
General corporate................................ (11,548) (12,797) (36,437) (36,385)
----------- ----------- ------------ ------------
Consolidated operating profit.................... 5,147 5,528 14,618 8,802
Interest expense..................................... (10,032) (5,017) (27,857) (23,655)
Insurance expense related to long-term debt.......... (1,025) (934) (3,163) (2,883)
Investment income (loss), net........................ 4,014 (3,730) 10,884 7,439
Gain (costs) related to proposed business
acquisitions not consummated....................... 2,994 (26) 2,064 (793)
Other income, net.................................... 449 373 1,424 1,901
----------- ----------- ------------ ------------
Consolidated income (loss) from continuing
operations before income taxes and minority
interests..........................................$ 1,547 $ (3,806) $ (2,030) $ (9,189)
=========== =========== ============ ============
December 28, September 26,
2003 2004
---- ----
Identifiable assets:
Restaurants......................................................................$ 209,167 $ 207,979
Asset management................................................................. - 123,918
General corporate................................................................ 833,798 685,023
------------ ------------
Consolidated total assets........................................................$ 1,042,965 $ 1,016,920
============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction and Executive Overview
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Triarc Companies, Inc., which we refer to as Triarc,
and its subsidiaries should be read in conjunction with the accompanying
condensed consolidated financial statements and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the fiscal year ended December 28, 2003. Item 7 of our
2003 Form 10-K describes our contractual obligations and the application of our
critical accounting policies. There have been no significant changes as of
September 26, 2004 pertaining to these topics. Certain statements we make under
this Item 2 constitute "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking
Statements and Projections" in "Part II - Other Information" preceding "Item 1."
On July 22, 2004 we completed the acquisition of a 63.6% capital interest
in Deerfield & Company LLC in a transaction we refer to as the Deerfield
Acquisition. Deerfield, through its wholly-owned subsidiary Deerfield Capital
Management LLC, is an alternative asset manager offering a diverse range of
fixed income and credit-related strategies to institutional investors. As of
September 26, 2004, Deerfield has over $8 billion of assets under management,
consisting of (1) collateralized debt obligation instruments, which we refer to
as CDOs, and (2) to a much lesser extent, fixed income and investment funds and
private investment accounts, which we refer to as Funds. Our consolidated
results of operations include Deerfield's results commencing July 23, 2004, with
applicable minority interests.
We operate in the restaurant business through our franchised and
Company-owned Arby's restaurants and, as a result of the Deerfield Acquisition,
in the asset management business. In our restaurant business, we derive revenues
in the form of royalties and franchise and related fees and from sales by our
Company-owned restaurants. While over 60% of our existing royalty agreements and
all of our new domestic royalty agreements provide for royalties of 4% of
franchise revenues, our average royalty rate was 3.5% for the nine months ended
September 26, 2004. In our asset management business, we derive revenues in the
form of asset management and related fees from our management of CDOs and Funds
and we may expand our services into other types of investments. We also derived
investment income or loss throughout the periods presented principally from the
investment of our excess cash.
We intend to enhance the value of our company by increasing the revenues of
the Arby's restaurant business and our newly acquired asset management business.
In April 2004, we began adding new Arby's menu items such as salads and wraps
and we are continuing to focus on growing the number of restaurants in the
Arby's system, adding new menu offerings and implementing new operational
initiatives targeted at service levels and convenience. We plan to grow
Deerfield's asset management portfolio by utilizing the value of its
historically profitable investment advisory brand, thereby increasing its asset
management fee revenues.
As discussed below under "Liquidity and Capital Resources - Acquisitions
and Investments," we continue to evaluate our options for the use of our
significant cash, cash equivalent and investment position, including additional
business acquisitions, repurchases of our common shares and investments. In
recent periods we evaluated a number of business acquisition opportunities,
including Deerfield, and we intend to continue our disciplined search for
potential business acquisitions that we believe have the potential to create
significant value to our stockholders.
In recent periods our restaurant business has experienced the following
trends:
o Continued growth of food consumed away from home as a percentage of total
food-related spending;
o Increases in the cost and overall difficulty of developing new units in
many areas of the country, primarily as a result of increased competition
among quick service restaurants and other retail food operators for
available development sites, higher development costs associated with those
sites and continued tightening in the lending markets typically used to
finance new unit development;
o Increased price competition in the quick service restaurant industry,
particularly as evidenced by the value menu concept which offers
comparatively lower prices on some menu items, the combination meals
concept which offers a combination meal at an aggregate price lower than
the individual food and beverage items, couponing and other price
discounting;
o The continuing proliferation of competitors in the higher end of the
sandwich category, many of whom are competing with Arby's in the offering
of higher-priced sandwiches with perceived higher levels of freshness,
quality and customization;
o Competition from new product choices, offering a variety of options which
include low calorie, low carbohydrate and/or low fat products as a result
of a greater consumer awareness of nutritional issues;
o Additional competitive pressures for prepared food purchases from operators
outside the quick service restaurant industry such as deli sections and
in-store cafes of several major grocery store chains, convenience stores
and casual dining outlets;
o The addition of selected higher-priced quality items to menus, which appeal
more to adult tastes;
o Increases in beef and other commodity costs resulting from reduced supplies
and increased demand; and
o Legislative activity on both the Federal and state level, which could
result in higher wages, fringe benefits, health care and other insurance
and packaging costs.
We experience the effects of these trends directly to the extent they
affect the operations of our Company-owned restaurants and indirectly to the
extent they affect sales by our franchisees and, accordingly, impact the
royalties and franchise fees we receive from them.
In recent periods, our asset management business has experienced the
following trends, including trends prior to our entrance into the asset
management business through the Deerfield Acquisition:
o Growth in the hedge fund market as investors appear to be increasing their
investment allocations to hedge funds;
o Increased competition in the hedge fund industry in the form of new hedge
funds offered by both new and established investment managers to meet the
increasing demand of hedge fund investors;
o Continued growth of the CDO market as it opens to individual investors, in
addition to the institutional investors which it has mainly served in the
past, with funds that offer more simplified income tax reporting for the
investor; and
o Increased competition in the fixed income investment markets resulting in
higher demand for and costs of investments purchased by CDOs resulting in
the need to continuously develop new investment strategies with the goal of
maintaining acceptable returns to investors.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. However, Deerfield reports on a calendar year
ending on December 31. Our first nine-month period of fiscal 2003 commenced on
December 30, 2002 and ended on September 28, 2003, with our third quarter
commencing on June 30, 2003. Our first nine-month period of fiscal 2004
commenced on December 29, 2003 and ended on September 26, 2004, with our third
quarter commencing on June 28, 2004, except that for each of these periods,
Deerfield is included from July 23, 2004 through its quarter end of September
30, 2004. When we refer to the "three months ended September 28, 2003," or the
"2003 third quarter," and the "nine months ended September 28, 2003," or the
"first nine months of 2003," we mean the periods from June 30, 2003 to September
28, 2003 and December 30, 2002 to September 28, 2003, respectively. When we
refer to the "three months ended September 26, 2004," or the "2004 third
quarter," and the "nine months ended September 26, 2004," or the "first nine
months of 2004," we mean the periods from June 28, 2004 to September 26, 2004
and December 29, 2003 to September 26, 2004, respectively. Each quarter
contained 13 weeks and each nine-month period contained 39 weeks. The effect of
including Deerfield in our results through Deerfield's quarter end of September
30, 2004 instead of our quarter end of September 26, 2004 was not material. Our
2004 fiscal year will end on January 2, 2005 and will contain 53 weeks compared
with 52 weeks in 2003. Accordingly, our results of operations for the fourth
quarter of fiscal 2004 will contain one more week than the comparable period of
fiscal 2003. All references to years, first nine months and quarters relate to
fiscal periods rather than calendar periods.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount and percent of the change between the (1) 2003 third quarter
and the 2004 third quarter and (2) the first nine months of 2003 and the first
nine months of 2004. We consider certain percentage changes between these
periods to be not measurable or not meaningful, and we refer to these as "n/m."
The percentage changes used in the following discussion have been rounded to the
nearest whole percent.
Three Months Ended Nine Months Ended
-------------------------- Change --------------------------- Change
September 28,September 26,---------------September 28, September 26,--------------
2003 2004 Amount Percent 2003 2004 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
(In Millions Except Percents)
Revenues:
Net sales.................................$ 51.1 $ 52.3 $ 1.2 2 % $ 151.0 $ 151.7 $ 0.7 - %
Royalties and franchise and related
fees.................................... 23.5 26.7 3.2 14 % 68.2 74.0 5.8 9 %
Asset management and related fees......... - 6.9 6.9 n/m - 6.9 6.9 n/m
-------- ------- ------ ------- ------- -------
74.6 85.9 11.3 15 % 219.2 232.6 13.4 6 %
-------- ------- ------ ------- ------- -------
Costs and expenses:
Cost of sales, excluding depreciation
and amortization........................ 38.3 40.9 2.6 7 % 112.1 119.9 7.8 7 %
Cost of services, excluding depreciation
and amortization........................ - 2.0 2.0 n/m - 2.0 2.0 n/m
Advertising and selling................... 4.4 4.0 (0.4) (9)% 11.6 12.8 1.2 10 %
General and administrative, excluding
depreciation and amortization........... 23.4 28.7 5.3 23 % 70.7 77.5 6.8 10 %
Depreciation and amortization, excluding
amortization of deferred financing
costs................................... 3.4 4.8 1.4 41 % 10.2 11.6 1.4 14 %
-------- -------- ------ ------- ------- -------
69.5 80.4 10.9 16 % 204.6 223.8 19.2 9 %
-------- -------- ------ ------- ------- -------
Operating profit..................... 5.1 5.5 0.4 8 % 14.6 8.8 (5.8) (40)%
Interest expense ........................... (10.0) (5.0) 5.0 50 % (27.8) (23.6) 4.2 15 %
Insurance expense related to long-term
debt...................................... (1.0) (1.0) - - % (3.2) (2.9) 0.3 9 %
Investment income (loss), net............... 4.0 (3.7) (7.7) n/m 10.9 7.4 (3.5) (32)%
Gain (costs) related to proposed business
acquisitions not consummated............. 3.0 - (3.0) (100)% 2.1 (0.8) (2.9) n/m
Other income, net........................... 0.4 0.4 - - 1.4 1.9 0.5 36 %
-------- ------- ------ ------- ------- -------
Income (loss) from continuing
operations before income taxes and
minority interests................. 1.5 (3.8) (5.3) n/m (2.0) (9.2) (7.2) n/m
(Provision for) benefit from income taxes... (1.0) 15.6 16.6 n/m (1.0) 16.6 17.6 n/m
Minority interests in (income) loss of
consolidated subsidiaries................ - (0.7) (0.7) n/m 0.1 (0.7) (0.8) n/m
-------- ------- ------ ------- ------- -------
Income (loss) from continuing
operations......................... 0.5 11.1 10.6 n/m (2.9) 6.7 9.6 n/m
Gain on disposal of discontinued operations. - 10.8 10.8 n/m - 10.8 10.8 n/m
-------- ------- ------ ------- ------- -------
Net income (loss)....................$ 0.5 $ 21.9 $ 21.4 n/m $ (2.9) $ 17.5 $ 20.4 n/m
========= ======= ====== ======= ======= =======
Three Months Ended September 26, 2004 Compared with Three Months Ended September
28, 2003
Net Sales
Our net sales, which were generated entirely from the Company-owned Arby's
restaurants, increased $1.2 million, or 2%, to $52.3 million for the three
months ended September 26, 2004 from $51.1 million for the three months ended
September 28, 2003.
This increase reflects a $1.4 million improvement due to a 3% growth in
same-store sales of the Company-owned restaurants in the 2004 third quarter
compared with the weak same-store sales performance of the 2003 third quarter
slightly offset by a $0.2 million decrease due to the closing of two
underperforming Company-owned restaurants since September 28, 2003. When we
refer to same-store sales, we mean only sales of those restaurants which were
open during the same months in both of the comparable periods. The growth in
same-store sales resulted principally from new lines of salads and wraps and new
sandwich menu offerings introduced during the 2004 second and third quarters,
the effects of which were partially offset by less favorable performance in our
restaurants in the Michigan region, an area where approximately one-third of our
Company-owned restaurants are located and which has been particularly impacted
by high unemployment. The growth in same-store sales of Company-owned
restaurants of 3% was less than the 8% growth in same-store sales of franchised
restaurants discussed under "Royalties and Franchise and Related Fees" below.
Contributing factors to this difference include the (1) economic conditions in
the Michigan region, as previously discussed, and (2) weaker revenue performance
in the Dallas region as a result of lower advertising spending in the region for
our combined Company-owned and franchised restaurants than would have occurred
if that market were more fully penetrated.
We expect that same-store sales of the Company-owned restaurants for the
fourth quarter of 2004 will exceed the weak same-store sales of the comparable
period of 2003. We expect that this sales growth will result from (1) the
continued sales of the new lines of salads and wraps and new sandwich menu
offerings introduced during the 2004 second and third quarters, (2) the
introduction of new salad and wrap offerings during the 2004 fourth quarter and
(3) new operational initiatives targeted at service levels and convenience. We
presently expect to open one new Company-owned restaurant and close three
underperforming Company-owned restaurants during the fourth quarter of 2004.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $3.2 million, or 14%, to $26.7
million for the three months ended September 26, 2004 from $23.5 million for the
three months ended September 28, 2003, reflecting a $3.1 million, or 13%,
increase in royalties and a $0.1 million increase in franchise and related fees.
The increase in royalties consisted of (1) a $2.0 million improvement due to an
8% increase in same-store sales of the franchised restaurants in the 2004 third
quarter compared with the weak same-store sales performance of the 2003 third
quarter and (2) a $1.1 million improvement resulting from the royalties of the
114 restaurants opened since September 28, 2003, with generally higher than
average sales volumes, replacing the royalties from the 76 generally
underperforming restaurants closed since September 28, 2003.
We expect that same-store sales of the franchised restaurants during the
fourth quarter of 2004 will exceed the weak same-store sales of the comparable
period of 2003 due to the new lines of salads and wraps and new sandwich menu
offerings already introduced through the end of the 2004 third quarter, (2) the
introduction of additional new salad and wrap offerings during the fourth
quarter and (3) new operational initiatives targeted at service levels and
customer convenience.
Asset Management and Related Fees
Our asset management and related fees of $6.9 million for the three months
ended September 26, 2004 resulted entirely from the management of CDOs and Funds
acquired in the Deerfield Acquisition.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization, resulted
entirely from the Company-owned Arby's restaurants. Cost of sales increased $2.6
million, or 7%, to $40.9 million for the three months ended September 26, 2004,
representing a gross margin of 22%, from $38.3 million for the three months
ended September 28, 2003, representing a gross margin of 25%. We define gross
margin as the difference between net sales and cost of sales divided by net
sales. The decrease in gross margins is due principally to (1) the new menu
offerings which have relatively higher costs than our other products, (2)
increased price discounting of some of our other products primarily through
increased use of coupons and (3) higher roast beef costs, the largest component
of our menu offerings, as well as higher costs for other commodities, resulting
from overall decreased supplies and increased demand.
We currently anticipate that our gross margin for the fourth quarter of
2004 will be relatively unchanged compared with the 22% gross margin in both the
2004 third quarter and the 2003 fourth quarter.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, of $2.0
million for the three months ended September 26, 2004 resulted entirely from the
management of CDOs and Funds acquired in the Deerfield Acquisition.
Our royalties and franchise fees have no associated cost of services.
Advertising and Selling
Our advertising and selling expenses decreased $0.4 million, or 9%,
principally due to a $0.3 million decrease as a result of the timing within each
year of our contractual commitment as the Arby's franchisor for advertising
support. We contributed and expensed $0.7 million toward the Arby's national
cable television advertising campaign in the 2004 third quarter compared with
$1.0 million in the 2003 third quarter. However, our overall advertising costs
for this campaign for the full years 2004 and 2003 are anticipated to be
relatively unchanged.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization increased $5.3 million, primarily reflecting $3.9 million of
general and administrative expenses of Deerfield. Aside from the effect of the
Deerfield Acquisition, general and administrative expenses increased $1.4
million principally due to (1) a $1.5 million expense in the 2004 third quarter
for an environmental liability insurance policy covering unknown pre-existing
and future conditions on all of our currently-owned properties as well as
unknown pre-existing conditions on formerly-owned properties and (2) a $0.5
million increase in severance, recruiting and relocation costs attributable to
personnel changes, both partially offset by a $0.6 million decrease in deferred
compensation expense. Deferred compensation expense, which decreased from $0.8
million for the three months ended September 28, 2003 to $0.2 million for the
three months ended September 26, 2004, represents the increase in the fair value
of investments in two deferred compensation trusts, which we refer to as the
Deferred Compensation Trusts, for the benefit of our Chairman and Chief
Executive Officer and President and Chief Operating Officer, whom we refer to as
the Executives, as explained in more detail below under "Income (Loss) From
Continuing Operations Before Income Taxes and Minority Interests."
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $1.4 million, reflecting $0.8 million of depreciation
and amortization related to Deerfield. Aside from the effect of the Deerfield
Acquisition, depreciation and amortization increased $0.6 million principally
due to our implementation of new back office and point-of-sale restaurant
systems.
Interest Expense
Interest expense decreased $5.0 million principally due to (1) the release
in the 2004 third quarter of $4.3 million of interest accruals no longer
required upon the finalization by the Internal Revenue Service of its
examination of our Federal income tax returns for the years ended December 31,
2000 and December 30, 2001, which we refer to as the IRS Examination, and (2) a
$0.7 million decrease attributable to lower outstanding amounts of a majority of
our long-term debt in the 2004 third quarter.
Investment Income (Loss), Net
The following table summarizes and compares the major components of
investment income (loss), net:
Three Months Ended
-----------------------------
September 28, September 26,
2003 2004 Change
---- ---- ------
(In Millions)
Recognized net gains (losses)...............................$ 1.4 $ (4.0) $ (5.4)
Other than temporary unrealized losses ..................... - (3.7) (3.7)
Interest income............................................. 2.2 3.3 1.1
Distributions, including dividends.......................... 0.6 0.9 0.3
Other....................................................... (0.2) (0.2) -
--------- --------- ---------
$ 4.0 $ (3.7) $ (7.7)
========= ======== =========
Our recognized net gains (losses) include realized gains and losses on
sales of our available-for-sale securities and cost-basis investments and
unrealized gains and losses on changes in the fair values of our trading
securities and our securities sold short with an obligation to repurchase. Our
recognized net gains (losses) worsened $5.4 million principally due to losses
realized on the sales of two of our available-for-sale securities in the 2004
third quarter. These recognized gains and losses may vary significantly in
future periods depending upon the timing of the sales of our investments or the
changes in the value of our investments, as applicable. Our other than temporary
unrealized losses are dependent upon the underlying economics and/or volatility
in the value of our investments in available-for-sale securities and cost-basis
investments and may or may not recur in future periods. In the 2004 third
quarter, we recognized $3.7 million of other than temporary losses due to the
recognition of impairment charges based on declines in market values of some of
our higher yielding, but more risk-inherent, debt securities entered into with
the objective of improving the overall return on our interest-bearing
investments, as well as declines in two available-for-sale investments in large
public companies and a cost method investment. Interest income increased $1.1
million principally reflecting $0.6 million of interest income of Deerfield.
Aside from the effect of the Deerfield Acquisition, interest income increased
$0.5 million primarily due to an increase in average rates on our
interest-bearing investments from 1.3% in the 2003 third quarter to 1.9% in the
2004 third quarter principally due to the general increase in the money market
and short-term interest rate environment and, to a lesser extent, our investing
in some higher yielding, but more risk-inherent, debt securities. These factors
were partially offset by a lower average outstanding balance of our
interest-bearing investments in the 2004 third quarter because of the
liquidation of some of those investments to provide cash for the Deerfield
Acquisition.
As of September 26, 2004, we had pretax unrealized holding gains and
(losses) on available-for-sale marketable securities of $4.9 million and $(2.6)
million, respectively, included in accumulated other comprehensive income. We
presently believe that the unrealized losses are not other than temporary.
Should either (1) we decide to sell any of these investments with unrealized
losses or (2) any of the unrealized losses continue such that we believe they
have become other than temporary, we would recognize the losses on the related
investments at that time.
Gain (Costs) Related to Proposed Business Acquisitions Not Consummated
The $3.0 million gain related to proposed business acquisitions not
consummated in the three months ended September 28, 2003 represented a payment
received by us for the use of due diligence materials related to a proposed
business acquisition we had previously decided not to continue to pursue and did
not consummate. The costs incurred in connection with this proposed acquisition
were expensed before the 2003 third quarter since recovery of the costs was not
certain.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests decreased $5.3 million to a loss of $3.8 million for the
three months ended September 26, 2004 from income of $1.5 million for the three
months ended September 28, 2003 due to the effect of the variances explained in
the captions above.
As discussed above, we recognized deferred compensation expense of $0.8
million in the 2003 third quarter and $0.2 million in the 2004 third quarter,
within general and administrative expenses in the accompanying condensed
consolidated statements of operations, for the increases in the fair value of
investments in the Deferred Compensation Trusts. Under accounting principles
generally accepted in the United States of America, we recognize investment
income for any interest or dividend income on investments in the Deferred
Compensation Trusts and realized gains on sales of investments in the Deferred
Compensation Trusts, but are unable to recognize any investment income for
unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts because these investments are accounted for under the cost
method of accounting. During the 2003 third quarter, we recognized net
investment income from investments in the Deferred Compensation Trusts of $0.1
million consisting of a $0.2 million gain, which represented an increase in
value prior to that period, less $0.1 million of investment management fees.
During the 2004 third quarter, we recognized a net investment loss of $0.1
million consisting of investment fees. The cumulative disparity between deferred
compensation expense and net recognized investment income will reverse in future
periods as either (1) additional investments in the Deferred Compensation Trusts
are sold and previously unrealized gains are recognized without any offsetting
increase in compensation expense or (2) the fair values of the investments in
the Deferred Compensation Trusts decrease resulting in the recognition of a
reversal of compensation expense without any offsetting losses recognized in
investment income.
(Provision For) Benefit From Income Taxes
We had a benefit from income taxes for the three months ended September 26,
2004 which greatly exceeded our pretax loss due to the release of $14.6 million
of income tax reserves related to our continuing operations which were no longer
required upon the finalization of the IRS Examination and the finalization of a
state income tax examination and the expiration of the statute of limitations
for examinations of certain state income tax returns. Our provision for income
taxes for the three months ended September 28, 2003 represented an effective
rate of 68% which is substantially higher than the United States Federal
statutory rate of 35% due to (1) the effect of non-deductible compensation costs
and (2) state income taxes, net of Federal income tax benefit, due to the
differing mix of pretax income or loss among the consolidated entities which
file state tax returns on an individual company basis.
Minority Interests in (Income) Loss of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries of $0.7
million for the three-month period ended September 26, 2004 related to the
minority interests resulting from the Deerfield Acquisition.
Gain on Disposal of Discontinued Operations
During the three-month period ended September 26, 2004, we recorded an
additional gain on the disposal of our former beverage businesses of $10.8
million resulting from the release of income tax reserves related to those
discontinued operations which were no longer required upon the finalization of
the IRS Examination and the expiration of the statute of limitations for
examinations of certain state income tax returns.
Nine Months Ended September 26, 2004 Compared with Nine Months Ended September
28, 2003
Net Sales
Our net sales, which were generated entirely from the Company-owned Arby's
restaurants, increased slightly by $0.7 million, to $151.7 million for the nine
months ended September 26, 2004 from $151.0 million for the nine months ended
September 28, 2003.
This increase reflects a $1.7 million improvement due to a 1% growth in
same-store sales of the Company-owned restaurants during the nine months ended
September 26, 2004 compared with the weak same-store sales performance during
the nine months ended September 28, 2003, partially offset by a $1.0 million
decrease due to the closing of two underperforming Company-owned restaurants
since September 28, 2003. The increase in same-store sales reflected improvement
from the new lines of salads and wraps and new sandwich menu offerings
introduced beginning in the 2004 second and third quarters, the effects of which
were offset by unfavorable performance in our restaurants in the Michigan
region, an area where approximately one-third of our Company-owned restaurants
are located and which has been particularly impacted by high unemployment.
Same-store sales during the first nine months of 2004 also reflect increased
price promotions compared with the first nine months of 2003, although we are
unable to determine if the incremental effect on sales volume of the price
promotions was sufficient to exceed or partially offset the unfavorable effect
on pricing.
We expect that same-store sales of the Company-owned restaurants for the
fourth quarter of 2004 will exceed the weak same-store sales of the comparable
period of 2003, as explained in the comparison of the three-month periods.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $5.8 million, or 9%, to $74.0 million
for the nine months ended September 26, 2004 from $68.2 million for the nine
months ended September 28, 2003. This increase consisted of (1) a $3.2 million
improvement in royalties due to a 4% increase in same-store sales of the
franchised restaurants during the first nine months of 2004 compared with the
weak same-store sales performance during the first nine months of 2003 and (2) a
$2.6 million improvement in royalties from the 114 restaurants opened since
September 28, 2003, with generally higher than average sales volumes, replacing
the royalties from the 76 generally underperforming restaurants closed since
September 28, 2003.
We expect that same-store sales of the franchised restaurants during the
fourth quarter of 2004 will exceed the weak same-store sales of the comparable
period of 2003, as explained in the comparison of the three-month periods.
Asset Management and Related Fees
Our asset management and related fees of $6.9 million for the nine months
ended September 26, 2004 resulted entirely from the management of CDOs and Funds
acquired in the Deerfield Acquisition.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization, resulted
entirely from the Company-owned Arby's restaurants. Cost of sales increased $7.8
million, or 7%, to $119.9 million for the nine months ended September 26, 2004,
representing a gross margin of 21%, from $112.1 million for the nine months
ended September 28, 2003, representing a gross margin of 26%. The decrease in
gross margins is due principally to (1) the new menu offerings which have
relatively higher costs than our other products and for which we experienced
additional costs during the roll-out period in the 2004 second quarter, (2)
increased price discounting of some of our other products primarily through
increased use of coupons and (3) higher roast beef costs, the largest component
of our menu offerings, as well as higher costs for other commodities, resulting
from overall decreased supplies and increased demand.
We currently anticipate that our gross margin will improve in the 2004
fourth quarter compared with the 21% for the first nine months of 2004 due to
(1) initiatives to improve operating efficiencies that are being supported by
the on-going implementation of new back office and point-of-sale restaurant
systems which will be completed during the 2004 fourth quarter and (2) pricing
improvements from both price increases implemented in August 2004 for some of
our new and existing menu items and more limited price promotions.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, of $2.0
million for the nine months ended September 26, 2004 resulted entirely from the
management of CDOs and Funds acquired in the Deerfield Acquisition.
Our royalties and franchise fees have no associated cost of services.
Advertising and Selling
Our advertising and selling expenses increased $1.2 million, or 10%,
principally due to (1) a $0.7 million increase in advertising expenses of our
Company-owned restaurants primarily for the new menu offerings introduced in
April 2004 and (2) a $0.4 million recovery of a fully-reserved franchisee note
receivable in the 2003 second quarter which did not recur in the first nine
months of 2004.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization increased $6.8 million, reflecting $3.9 million of general and
administrative expenses of Deerfield. Aside from the effect of the Deerfield
Acquisition, general and administrative expenses increased $2.9 million
principally due to (1) a $2.4 million increase in severance, recruiting and
relocation costs attributable to personnel changes, (2) a $1.5 million expense
in the 2004 third quarter for an environmental liability insurance policy
covering unknown pre-existing and future conditions on all our currently-owned
properties as well as unknown pre-existing conditions on formerly-owned
properties and (3) a $0.6 million increase in professional fees as a result of
our compliance with the Sarbanes-Oxley Act of 2002, all partially offset by a
$1.6 million decrease in deferred compensation expense. Deferred compensation
expense, which decreased from $2.8 million for the nine months ended September
28, 2003 to $1.2 million for the nine months ended September 26, 2004,
represents the increase in the fair value of investments in the Deferred
Compensation Trusts, for the benefit of the Executives, as explained in more
detail below under "Income (Loss) From Continuing Operations Before Income Taxes
and Minority Interests."
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $1.4 million, reflecting $0.8 million of depreciation
and amortization related to Deerfield. Aside from the effect of the Deerfield
Acquisition, depreciation and amortization increased $0.6 million principally
due to our implementation of new back office and point-of-sale restaurant
systems.
Interest Expense
Interest expense decreased $4.2 million principally due to (1) the release
in the 2004 third quarter of $4.3 million of interest accruals no longer
required upon the finalization of the IRS Examination, (2) a $2.6 million
decrease attributable to lower outstanding amounts of a majority of our
long-term debt and (3) $0.8 million of interest expense in the first nine months
of 2003 which did not recur in the first nine months of 2004 relating to a
post-closing sales price adjustment settled in December 2003 in connection with
the October 2000 sale of our former beverage businesses. These decreases were
partially offset by a $3.6 million increase in interest expense, including
related amortization of deferred financing costs, due to the full period effect
in the first nine months of 2004 of the $175.0 million principal amount of our
5% convertible notes, which we refer to as the Convertible Notes, issued on May
19, 2003.
Investment Income (Loss), Net
The following table summarizes and compares the major components of
investment income, net:
Nine Months Ended
-----------------------------
September 28, September 26,
2003 2004 Change
---- ---- ------
(In Millions)
Other than temporary unrealized losses .....................$ (0.4) $ (6.5) $ (6.1)
Interest income............................................. 6.2 11.7 5.5
Recognized net gains........................................ 3.9 0.4 (3.5)
Distributions, including dividends.......................... 1.6 2.4 0.8
Other....................................................... (0.4) (0.6) (0.2)
--------- -------- ---------
$ 10.9 $ 7.4 $ (3.5)
========= ======== =========
Our other than temporary unrealized losses, as described in detail in the
comparison of the three-month periods, increased $6.1 million principally
reflecting the recognition of $6.5 million of impairment charges in the first
nine months of 2004 based on significant declines in the market values of some
of our higher yielding, but more risk-inherent, debt investments, two
available-for-sale investments in large public companies and a cost method
investment. Interest income increased $5.5 million partially reflecting $0.6
million of interest income of Deerfield. Aside from the effect of the Deerfield
Acquisition, interest income increased $4.9 million primarily due to an increase
in average rates on our interest-bearing investments from 1.3% in the first nine
months of 2003 to 2.4% in the first nine months of 2004 principally due to our
investing in some higher yielding, but more risk-inherent, debt securities with
the objective of improving the overall return on our interest-bearing
investments and the general increase in the money market and short-term interest
rate environment. These factors were partially offset by a lower average
outstanding balance of our interest-bearing investments in the 2004 third
quarter because of the liquidation of some of these investments to provide cash
for the Deerfield Acquisition. Our recognized net gains, also as described in
detail in the comparison of the three-month periods, decreased $3.5 million
principally due to losses realized on the sales of two of our available-for-sale
securities in the 2004 third quarter partially offset by lesser gains recognized
on the sale of other investments. In addition, during the first nine months of
2003 and 2004, our recognized net gains included $0.7 million and $0.8 million,
respectively, of realized gains from the sale of certain cost-related
investments in the Deferred Compensation Trusts, as explained in more detail
below under "Income Loss from Continuing Operations before income taxes and
minority interests." All of these recognized gains and losses may vary
significantly in future periods depending upon the timing of the sales of our
investments, including the investments in the Deferred Compensation Trusts, or
the changes in the value of our investments, as applicable.
As of September 26, 2004, we had pretax unrealized holding gains and
(losses) on available-for-sale marketable securities of $4.9 million and $(2.6)
million, respectively, included in accumulated other comprehensive income. We
presently believe that the unrealized losses are not other than temporary.
Should either (1) we decide to sell any of these investments with unrealized
losses or (2) any of the unrealized losses continue such that we believe they
have become other than temporary, we would recognize the losses on the related
investments at that time.
Gain (Costs) Related to Proposed Business Acquisitions Not Consummated
The $2.1 million gain related to proposed business acquisitions not
consummated in the nine months ended September 28, 2003 represented a payment
received by us for the use of due diligence materials related to a proposed
business acquisition we had previously decided not to continue to pursue and did
not consummate, net of our costs incurred in connection with this proposed
acquisition. The $0.8 million of costs for the nine months ended September 26,
2004 relate to a proposed business acquisition that we decided not to pursue and
did not consummate.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our loss from continuing operations before income taxes and minority
interests increased $7.2 million to $9.2 million for the nine months ended
September 26, 2004 from $2.0 million for the nine months ended September 28,
2003 due to the effect of the variances explained in the captions above.
As discussed above, we recognized deferred compensation expense of $2.8
million in the first nine months of 2003 and $1.2 million in the first nine
months of 2004, within general and administrative expenses in the accompanying
condensed consolidated statements of operations, for the increases in the fair
value of investments in the Deferred Compensation Trusts. Under accounting
principles generally accepted in the United States of America, we recognize
investment income for any interest or dividend income on investments in the
Deferred Compensation Trusts and realized gains on sales of investments in the
Deferred Compensation Trusts, but are unable to recognize any investment income
for unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts because these investments are accounted for under the cost
method of accounting. We recognized net investment income from investments in
the Deferred Compensation Trusts of $0.5 million during the first nine months of
each of 2003 and 2004 consisting of realized gains from the sale of certain
cost-method investments in the Deferred Compensation Trusts of $0.7 million and
$0.8 million, respectively, which included increases in value of $0.5 million
and $0.8 million, respectively, prior to the respective periods, less investment
management fees of $0.2 million and $0.3 million, respectively. The cumulative
disparity between deferred compensation expense and net recognized investment
income will reverse in future periods as either (1) additional investments in
the Deferred Compensation Trusts are sold and previously unrealized gains are
recognized without any offsetting increase in compensation expense or (2) the
fair values of the investments in the Deferred Compensation Trusts decrease
resulting in the recognition of a reversal of compensation expense without any
offsetting losses recognized in investment income.
(Provision For) Benefit From Income Taxes
We had a benefit from income taxes for the nine months ended September 26,
2004 which greatly exceeded our pretax loss due to the release of $14.6 million
of income tax reserves related to our continuing operations which were no longer
required upon the finalization of the IRS Examination and the finalization of a
state income tax examination and the expiration of the statute of limitations
for examinations of certain state income tax returns. We had a provision for
income taxes for the nine months ended September 28, 2003 despite a pretax loss
principally due to (1) the effect of non-deductible compensation costs and (2)
state income taxes, net of Federal income tax benefit, due to the differing mix
of pretax income or loss among the consolidated entities which file state tax
returns on an individual company basis.
Minority Interests in (Income) Loss of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries of $0.7
million for the nine-month period ended September 26, 2004 related to the
minority interests resulting from the Deerfield Acquisition.
Gain on Disposal of Discontinued Operations
During the nine-month period ended September 26, 2004, we recorded an
additional gain on the disposal of our former beverage businesses of $10.8
million resulting from the release of income tax reserves related to those
discontinued operations which were no longer required upon the finalization of
the IRS Examination and the expiration of the statute of limitations for
examinations of certain state income tax returns.
Liquidity And Capital Resources
Cash Flows from Continuing Operating Activities
Our consolidated operating activities from continuing operations provided
cash and cash equivalents, which we refer to in this discussion as cash, of
$46.3 million during the nine months ended September 26, 2004 reflecting (1) net
operating investment adjustments of $51.8 million and (2) income from continuing
operations of $6.7 million, both partially offset by (1) net non-cash
adjustments of $8.5 million and (2) cash used by changes in operating assets and
liabilities of $3.7 million.
The net operating investment adjustments of $51.8 million principally
reflected $47.5 million of proceeds from sales of trading securities in excess
of purchases. The net non-cash adjustments of $8.5 million principally related
to (1) income tax and related interest accruals of $18.9 million released upon
the finalization of the IRS Examination and a state income tax examination and
the expiration of the statute of limitations of certain state income tax returns
and (2) a deferred income tax benefit of $3.5 million, both partially offset by
depreciation and amortization of $13.6 million. The cash used by changes in
operating assets and liabilities of $3.7 million principally reflected (1) a
$2.3 million decrease in accounts payable principally due to (a) the settlement
of trading securities purchased during late 2003 and (b) the acceleration of
payments to a major distributor to obtain more favorable pricing terms and (2) a
$1.3 million increase in receivables principally due to an increase in asset
management fee receivables since the date of the Deerfield Acquisition.
Excluding the effect of the net sales of trading securities, which
represent cash provided from the discretionary sale of investments, our
continuing operating activities used cash of $1.2 million in the first nine
months of 2004. However, we expect positive cash flows from continuing operating
activities excluding the effect, if any, of net sales or purchases of trading
securities, for the 2004 fourth quarter.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$471.3 million at September 26, 2004, reflecting a current ratio, which equals
current assets divided by current liabilities, of 3.9:1. Working capital
decreased $139.3 million from $610.6 million at December 28, 2003 principally
due to (1) the $87.9 million cost of the Deerfield Acquisition net of working
capital acquired, (2) long-term debt repayments of $26.2 million, (3) our
purchase of a noncurrent investment in Jurlique International Pty Ltd., which we
refer to as Jurlique, for $25.6 million and (4) dividend payments of $13.5
million, all partially offset by proceeds from stock option exercises of $13.4
million.
Our total capitalization at September 26, 2004 was $816.8 million,
consisting of stockholders' equity of $307.5 million, long-term debt of $492.7
million, including current portion, and notes payable of $16.6 million. Our
total capitalization increased $10.3 million from $806.5 million at December 28,
2003 principally due to (1) net income of $17.5 million, (2) notes payable of
$16.6 million assumed in the Deerfield Acquisition, (3) the proceeds from stock
option exercises of $13.4 million and (4) the income tax benefit from stock
option exercises of $2.0 million, all partially offset by (1) long-term debt
repayments of $26.2 million and (2) dividend payments of $13.5 million.
Securitization Notes
We have outstanding, through our ownership of Arby's Franchise Trust, 7.44%
insured non-recourse securitization notes, which we refer to as the
Securitization Notes, with a remaining principal balance of $217.6 million as of
September 26, 2004, which are due no later than December 2020. However, based on
current projections and assuming the adequacy of available funds, as defined
under the indenture for the Securitization Notes, which we refer to as the
Securitization Indenture, we currently estimate that we will repay $5.7 million
during the fourth quarter of 2004 with increasing annual payments to $37.4
million in 2011 in accordance with a targeted principal payment schedule.
Restaurant Notes
We have outstanding, through our ownership of Sybra, Inc., leasehold notes,
equipment notes and mortgage notes relating to our Company-owned restaurants
with a total remaining principal balance of $73.1 million as of September 26,
2004.
Other Long-Term Debt
We have outstanding $175.0 million of 5% Convertible Notes due 2023 which
do not have any scheduled principal repayments prior to 2023. However, the
Convertible Notes are redeemable at our option commencing May 20, 2010 and at
the option of the holders on May 15, 2010, 2015 and 2020 or upon the occurrence
of a fundamental change, as defined, relating to us, in each case at a price of
100% of the principal amount of the Convertible Notes plus accrued interest. We
have a secured bank term loan payable through 2008 with an outstanding principal
amount of $12.6 million as of September 26, 2004. We also have a secured
promissory note payable through 2006 with an outstanding principal amount of
$10.0 million as of September 26, 2004. In addition, we have mortgage notes
payable through 2016 related to restaurants we sold in 1997 with outstanding
principal amounts totaling $2.8 million as of September 26, 2004.
Notes Payable
We have outstanding $16.6 million of notes payable which relate to
Deerfield. Of these notes, $11.6 million are secured by several of Deerfield's
investments in CDOs originally financed by these notes which must be repaid from
distributions or sales proceeds from those investments and a portion of the
total asset management fees received from the respective CDOs. The remaining
$5.0 million represents a note payable which would be repaid or otherwise
satisfied under the same circumstances as a related note receivable, resulting
in no anticipated net use of cash.
Revolving Credit Facilities
We did not have any revolving credit facilities as of September 26, 2004.
Debt Repayments and Covenants
Our total scheduled long-term debt and note repayments during the 2004
fourth quarter are $10.1 million consisting principally of the $5.7 million
expected to be paid under the Securitization Notes, $1.7 million under the
restaurant leasehold, equipment and mortgage notes, $0.8 million under the
secured bank term loan, $0.5 million under the secured promissory note and $1.1
million expected to be paid under the notes payable.
The various note agreements and indentures contain various covenants, the
most restrictive of which (1) require periodic financial reporting, (2) require
meeting certain debt service coverage ratio tests and (3) restrict, among other
matters, (a) the incurrence of indebtedness by certain of our subsidiaries, (b)
certain asset dispositions and (c) the payment of distributions by Arby's
Franchise Trust and Sybra. We were in compliance with all of these covenants as
of September 26, 2004.
Sybra is required to maintain a fixed charge coverage ratio under the
agreements for the leasehold notes and mortgage notes and Sybra was in
compliance with this ratio as of September 26, 2004.
Distributions From Subsidiaries
In accordance with the Securitization Indenture, as of September 26, 2004
Arby's Franchise Trust had no amounts available for the payment of
distributions. However, on October 20, 2004, $2.7 million relating to cash flows
for the calendar month of September 2004 became available for the payment of
distributions by Arby's Franchise Trust through its parent to Arby's which, in
turn, would be available to Arby's to pay management service fees or Federal
income tax-sharing payables to Triarc or, to the extent of any excess, make
distributions to Triarc. Under the plan of reorganization of Sybra confirmed by
a United States Bankruptcy Court under which we acquired Sybra, we agreed that
Sybra would not pay any distributions prior to December 27, 2004. In connection
with the Deerfield Acquisition, we agreed that Deerfield would not pay any
distributions prior to March 1, 2005 and thereafter would pay quarterly tax
advance distributions and, so long as one of the selling owners, who is also an
executive of Deerfield and one of our directors, still retained a minority
interest, Deerfield would also pay annual distributions to the extent of its
excess available cash.
Guarantees and Commitments
Our wholly-owned subsidiary, National Propane Corporation, retains a less
than 1% special limited partner interest in our former propane business, now
known as AmeriGas Eagle Propane, L.P., which we refer to as AmeriGas Eagle.
National Propane agreed that while it remains a special limited partner of
AmeriGas Eagle, it would indemnify the owner of AmeriGas Eagle for any payments
the owner makes related to the owner's obligations under certain of the debt of
AmeriGas Eagle, aggregating approximately $138.0 million as of September 26,
2004, if AmeriGas Eagle is unable to repay or refinance such debt, but only
after recourse by the owner to the assets of AmeriGas Eagle. National Propane's
principal asset is an intercompany note receivable from Triarc in the amount of
$50.0 million as of September 26, 2004. We believe it is unlikely that we will
be called upon to make any payments under this indemnity. In August 2001,
AmeriGas Propane, L.P., which we refer to as AmeriGas Propane, purchased all of
the interests in AmeriGas Eagle other than National Propane's special limited
partner interest. Either National Propane or AmeriGas Propane may require
AmeriGas Eagle to repurchase the special limited partner interest. However, we
believe it is unlikely that either party would require repurchase prior to 2009
as either AmeriGas Propane would owe us tax indemnification payments if AmeriGas
Propane required the repurchase or we would accelerate payment of deferred
taxes, which would amount to $36.9 million as of September 26, 2004, associated
with our 1999 sale of the propane business if National Propane required the
repurchase. In the event the interest is not repurchased prior to 2009, we
estimate our actual related taxes payable to be $0.8 million during the 2004
fourth quarter with insignificant payments in 2005 through 2008 reducing the
taxes payable in 2009 to approximately $35.8 million.
Triarc guarantees mortgage notes payable through 2015 of approximately
$39.0 million as of September 26, 2004 related to 355 restaurants sold by us in
1997. The purchaser of the restaurants also assumed substantially all of the
associated lease obligations which extend through 2031, including all then
existing extension or renewal option periods, although Arby's remains
contingently liable if the purchaser does not make the required future lease
payments. Those lease obligations could total a maximum of approximately $54.0
million as of September 26, 2004, assuming the purchaser has made all scheduled
payments under those lease obligations through that date.
Capital Expenditures
Cash capital expenditures amounted to $7.9 million during the first nine
months of 2004. We expect that cash capital expenditures will be approximately
$4.4 million for the 2004 fourth quarter, principally relating to the
Company-owned restaurants for (1) remodel and maintenance capital expenditures,
(2) computer hardware required for the implementation of the new back office and
point-of-sale restaurant systems and (3) a planned restaurant opening. There
were $1.4 million of outstanding commitments for capital expenditures as of
September 26, 2004.
Computer Software Expenditures
Cash expenditures for computer software were $0.6 million in the first nine
months of 2004 and are included in "Other, net" under "Cash flows from
continuing investing activities" in the accompanying condensed consolidated
statement of cash flows. We expect to make cash expenditures of approximately
$0.4 million in the 2004 fourth quarter for computer software, principally
relating to the new restaurant systems. There were $0.3 million of outstanding
commitments for computer software as of September 26, 2004.
Acquisitions and Investments
On July 22, 2004 we completed the Deerfield Acquisition for an aggregate
cost of $94.8 million, consisting of payments of $86.5 million to selling owners
and estimated expenses of $8.3 million, including expenses reimbursed to a
selling owner, as discussed in more detail in the "Introduction" to this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In connection with the Deerfield Acquisition, we also committed to invest
$100.0 million to seed a new multi-strategy hedge fund to be managed by
Deerfield. That fund was established and the $100 million was funded in October
2004. The fund will initially be accounted for as a consolidated subsidiary of
ours, with minority interests to the extent of third-party investor
participation, commencing in the quarter ending January 2, 2005.
In addition, in July 2004 we acquired a 25% equity interest (14.3% general
voting interest) in Jurlique, a privately held Australian skin and beauty
products company, for $25.6 million, including estimated expenses of $0.4
million. We are accounting for Jurlique under the cost method of accounting
since our voting stock interest of 14.3% does not provide us the ability to
exercise significant influence over operating and financial policies of
Jurlique. We paid $13.3 million of the cost of the Jurlique acquisition,
including estimated expenses of $0.4 million, as of September 26, 2004 with the
remainder, including interest commencing March 23, 2005, payable in Australian
dollars in July 2005. We entered into a forward contract whereby we fixed the
exchange rate for the payment of this liability in order to limit the related
foreign currency risk. In addition, we entered into a put and call arrangement
on a portion of our total cost related to this investment whereby we have
limited the overall foreign currency risk of holding the investment through July
5, 2007.
As of September 26, 2004, we have $647.5 million of cash, cash equivalents
and investments, including $66.1 million of investments classified as
non-current and $1.9 million of receivables from the sale of securities which
had not settled as of September 26, 2004 and net of $7.5 million of securities
sold with an obligation for us to purchase included in "Accrued expenses and
other current liabilities" in our accompanying condensed consolidated balance
sheet. The cash equivalents and non-current investments include $24.9 million of
investments, at cost, in deferred compensation trusts. We also had $32.9 million
of restricted cash and cash equivalents including $30.5 million related to the
Securitization Notes. We continue to evaluate strategic opportunities for the
use of our significant cash and investment position, including additional
business acquisitions, repurchases of Triarc common shares (see "Treasury Stock
Purchases" below) and investments.
Income Taxes
During the quarter ended September 26, 2004, the Internal Revenue Service
finalized its examination of our Federal income tax returns for the years ended
December 31, 2000 and December 31, 2001 without any additional income tax
liability to us. Our Federal income tax returns subsequent to December 30, 2001
are not currently under examination by the Internal Revenue Service although
some of our state income tax returns are currently under examination. However,
we do not currently expect that any related tax payments will be required during
the 2004 fourth quarter.
Dividends
On March 16, 2004, June 16, 2004, and September 15, 2004 we paid regular
quarterly cash dividends of $0.065 and $0.075 per share on our class A and class
B common stock, respectively, aggregating $13.5 million. On November 4, 2004, we
declared regular quarterly cash dividends of $0.065 and $0.075 per share on our
class A and class B common stock, respectively, to holders of record on December
3, 2004 and payable on December 15, 2004. We currently intend to continue to
declare and pay quarterly cash dividends, however, there can be no assurance
that any dividends will be declared or paid in the future or of the amount or
timing of such dividends, if any. The cash dividends for the 2004 fourth
quarter, based on the number of our class A and class B common shares
outstanding as of October 29, 2004, would require total cash for dividends of
$4.6 million for the 2004 fourth quarter.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant and to the extent legally permissible, to repurchase through January 18,
2005 up to a total of $48.6 million of our class A and class B common stock as
of September 26, 2004. We paid $1.4 million during the 2004 first quarter to
settle the repurchase of 125,000 shares of our class A common stock through a
trade entered into prior to December 28, 2003. We cannot assure you that we will
repurchase any additional shares under this program.
Universal Shelf Registration Statement
In December 2003, the Securities and Exchange Commission declared effective
a Triarc universal shelf registration statement in connection with the possible
future offer and sale, from time to time, of up to $2.0 billion of our common
stock, preferred stock, debt securities and warrants to purchase any of these
types of securities. Unless otherwise described in the applicable prospectus
supplement relating to the offered securities, we anticipate using the net
proceeds of each offering for general corporate purposes, including financing of
acquisitions and capital expenditures, additions to working capital and
repayment of existing debt. We have not presently made any decision to issue any
specific securities under this universal shelf registration statement.
Cash Requirements
As of September 26, 2004, our consolidated cash requirements for continuing
operations for the 2004 fourth quarter, exclusive of operating cash flow
requirements, consist principally of (1) $100.0 million which was used in
October 2004 to seed our new multi-strategy hedge fund, (2) a maximum of an
aggregate $48.6 million of payments for repurchases of our class A and class B
common stock for treasury under our current stock repurchase program, (3)
scheduled debt principal repayments aggregating $10.1 million, (4) capital
expenditures of approximately $4.4 million, (5) regular quarterly cash dividends
aggregating approximately $4.6 million and (6) computer software expenditures of
approximately $0.4 million. We anticipate meeting all of these requirements
through (1) the use of our aggregate $581.4 million of existing cash and cash
equivalents, short-term investments and receivables from the sale of securities
which had not settled as of September 26, 2004, net of $7.5 million of
short-term investments sold with an obligation for us to purchase, (2) cash
flows from continuing operating activities and (3) if necessary for any business
acquisitions and if market conditions permit, proceeds from sales, if any, of up
to $2.0 billion of our securities under the universal shelf registration
statement.
Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc., an
inactive subsidiary of ours, was listed by the United States Environmental
Protection Agency on the Comprehensive Environmental Response, Compensation and
Liability Information System, which we refer to as CERCLIS, list of known or
suspected contaminated sites. The CERCLIS listing appears to have been based on
an allegation that a former tenant of Adams Packing conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970's. The
business operations of Adams Packing were sold in December 1992. In February
2003, Adams Packing and the Florida Department of Environmental Protection,
which we refer to as the Florida DEP, agreed to a consent order that provided
for development of a work plan for further investigation of the site and limited
remediation of the identified contamination. In May 2003, the Florida DEP
approved the work plan submitted by Adams Packing's environmental consultant
and, as of September 26, 2004, the work at the site has been completed. Adams
Packing submitted its contamination assessment report to the Florida DEP in
March 2004. In August 2004, the Florida DEP agreed to a monitoring plan
consisting of two sampling events after which it will reevaluate the need for
additional assessment or remediation. Based on provisions of $1.7 million for
these costs made prior to 2003, and after taking into consideration various
legal defenses available to us, including Adams Packing, Adams Packing has
provided for its estimate of its remaining liability for completion of this
matter.
In 1998, a number of class action lawsuits were filed on behalf of our
stockholders. Each of these actions named us, the Executives and other members
of our board of directors as defendants. In 1999, certain plaintiffs in these
actions filed a consolidated amended complaint alleging that our tender offer
statement filed with the Securities and Exchange Commission in 1999, pursuant to
which we repurchased 3,805,015 shares of our class A common stock for $18.25 per
share, failed to disclose material information. The amended complaint seeks,
among other relief, monetary damages in an unspecified amount. In 2000, the
plaintiffs agreed to stay this action pending determination of a related
stockholder action which was subsequently dismissed in October 2002 and is no
longer being appealed. Through September 26, 2004, no further action has
occurred with respect to the remaining class action lawsuit and such action
remains stayed.
In addition to the environmental matter and stockholder lawsuit described
above, we are involved in other litigation and claims incidental to our current
and prior businesses. We and our subsidiaries have reserves for all of our legal
and environmental matters aggregating $1.8 million as of September 26, 2004.
Although the outcome of these matters cannot be predicted with certainty and
some of these matters may be disposed of unfavorably to us, based on currently
available information, including legal defenses available to us and/or our
subsidiaries, and given the aforementioned reserves, we do not believe that the
outcome of these legal and environmental matters will have a material adverse
effect on our consolidated financial position or results of operations.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant revenues are somewhat higher in our fourth quarter and
somewhat lower in our first quarter. Further, while our asset management
business is not directly affected by seasonality, our asset management revenues
will be higher in our fourth quarter as a result of our revenue recognition
accounting policy for incentive fees related to the Funds which are based upon
performance and are recognized when the amounts become fixed and determinable
upon the close of a performance period.
Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement 150 is already effective for all financial instruments covered by the
statement, except for mandatorily redeemable non-controlling interests in
subsidiaries that would not be liabilities under Statement 150 for the
subsidiary itself, such as minority interests in a consolidated subsidiary or
partnership with a limited life. Financial Accounting Standards Board Staff
Position No. 150-3, "Effective Date, Disclosures and Transition for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests Under FASB Statement No. 150,"
deferred indefinitely the effective date for applying the provisions of
Statement 150 for these mandatorily redeemable noncontrolling interests in
subsidiaries described above. Statement 150 requires a financial instrument that
is within its scope which companies have historically presented in their
financial statements as either equity or between the liabilities section and the
equity section (sometimes referred to as mezzanine reporting) to be classified
as a liability. The deferred provisions of Statement 150 would have required
that mandatorily redeemable noncontrolling interests in subsidiaries be
initially valued at fair value and subsequently valued at the cash that would be
paid as if settlement occurred at the reporting date. Subsequent changes in the
values of these financial instruments would be recognized in earnings as
interest expense. If Statement 150 becomes effective with respect to the
mandatorily redeemable noncontrolling interests in subsidiaries, we will
evaluate at that time whether its application will have an effect on our
consolidated financial position or results of operations.
In September 2004, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 04-8 ("EITF 04-8"), "The Effect of Contingently
Convertible Debt on Diluted Earnings per Share." EITF 04-8 concludes that
contingently convertible debt instruments should be included in diluted earnings
per share computations, if dilutive, regardless of whether the contingent
conversion feature has been met. EITF 04-8 is expected to be applicable no later
than our 2005 first quarter ending April 3, 2005, with retroactive restatement
of diluted earnings per share of all comparative periods presented. We presently
have $175.0 million of 5% Convertible Notes outstanding which have contingent
conversion features. However, those Convertible Notes have not been dilutive in
the past, regardless of their contingent conversion features, because the
conversion price of $40 for every one share of our class A common stock and two
shares of our class B common stock has always been higher than the combined
market value of those shares, which was $33.78 as of September 26, 2004. In
addition, even if the combined market value of those shares was greater than
$40, the Convertible Notes would not be dilutive in periods where we had a loss
from continuing operations or where our basic income from continuing operations
per share was lower than the interest expense on the Convertible Notes, net of
related income taxes, per share of stock obtainable upon the conversion of those
notes. In recent periods our basic income from continuing operations per share
has exceeded that level only in the 2004 third quarter which, as previously
explained in the comparison of the three-month periods under "Results of
Operations," was due to factors we do not currently anticipate will recur.
Accordingly, we do not expect that our application of EITF 04-08 will have any
immediate effect on our computation of diluted earnings per share.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This "Quantitative and Qualitative Disclosures about Market Risk" should be
read in conjunction with "Item 7A. Quantitative and Qualitative Disclosures
about Market Risk" in our annual report on Form 10-K for the fiscal year ended
December 28, 2003. Item 7A of our Form 10-K describes in more detail our
objectives in managing our "Interest Rate Risk" with respect to long-term debt
and our "Foreign Currency Risk," both as referred to below.
Certain statements we make under this Item 3 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- - Other Information" preceding "Item 1."
We are exposed to the impact of interest rate changes, changes in the
market value of our investments and, to a lesser extent, foreign currency
fluctuations.
Policies and procedures - In the normal course of business, we employ
established policies and procedures to manage our exposure to changes in
interest rates, changes in the market value of our investments and fluctuations
in the value of foreign currencies using financial instruments we deem
appropriate.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit
their impact on our earnings and cash flows. We have historically used interest
rate cap and/or interest rate swap agreements on a portion of our variable-rate
debt to limit our exposure to the effects of increases in short-term interest
rates on our earnings and cash flows. We did not enter into any new interest
rate caps or swaps during the first nine months of 2004. As of September 26,
2004, our notes payable and long-term debt, including current portion,
aggregated $509.3 million and consisted of $480.1 million of fixed-rate debt,
including $1.2 million of capitalized leases, $16.6 million of variable-rate
notes payable and $12.6 million of a variable-rate bank loan. The fair market
value of our fixed-rate debt will increase if interest rates decrease. In
addition to our fixed-rate and variable-rate debt, our investment portfolio
includes debt securities that are subject to interest rate risk with remaining
maturities which range from less than ninety days to approximately thirty years.
The fair market value of all of our investments in fixed-rate debt securities
will decline if interest rates increase.
Equity Market Risk
Our objective in managing our exposure to changes in the market value of
our investments is to balance the risk of the impact of these changes on our
earnings and cash flows with our expectations for long-term investment returns.
Our primary exposure to equity price risk relates to our investments in equity
securities, equity derivatives, securities sold with an obligation for us to
purchase and investment limited partnerships and similar investment entities.
Our board of directors has established certain policies and procedures governing
the type and relative magnitude of investments we may make. We have a management
investment committee which supervises the investment of certain funds not
currently required for our operations but has delegated the discretionary
authority to our Chairman and Chief Executive Officer and President and Chief
Operating Officer to make certain investments. In addition, our board of
directors also delegated authority to these two officers to direct the
investment of a portion of our funds.
Foreign Currency Risk
Our exposure to foreign currency risk has increased during the third
quarter of 2004 as a result of our $25.6 million purchase of a 25% equity
interest (14.3% general voting interest) in Jurlique International Pty Ltd., an
Australian company, for which half the purchase price, plus interest commencing
March 23, 2005, is payable in Australian dollars in July 2005. We entered into a
forward contract whereby we fixed the exchange rate for the payment of this
liability in order to limit the related foreign currency risk. In addition, we
entered into a put and call arrangement on a portion of our total cost related
to this investment whereby we have limited the overall foreign currency risk of
holding the investment through July 5, 2007.
Overall Market Risk
We balance our exposure to overall market risk by investing a portion of
our portfolio in cash and cash equivalents with relatively stable and
risk-minimized returns. We periodically interview and select asset managers to
avail ourselves of higher, but more risk-inherent, returns from the investment
strategies of these managers. We also seek to identify alternative investment
strategies that may earn higher returns with attendant increased risk profiles
for a portion of our investment portfolio. We periodically review the returns
from each of our investments and may maintain, liquidate or increase selected
investments based on this review and our assessment of potential future returns.
In response to the continued low interest rate environment, we began in the
latter part of 2003 to invest in some higher yielding, but more risk inherent,
debt securities with the objective of improving the overall return on our
interest-bearing investments. During the first nine months of 2004, we
recognized unrealized losses deemed to be other than temporary of $5.2 million
based on declines in market value of some of these more risk-inherent debt
securities. However, we are continuing to adjust our asset allocation to
increase the portion of our investments which offer the opportunity for higher,
but more risk inherent, returns. In that regard, we committed to invest $100.0
million to seed a new multi-strategy hedge fund to be managed by a subsidiary of
Deerfield & Company, LLC, an alternative asset management company in which we
acquired a controlling interest in July 2004. As of September 26, 2004, the
$100.0 million was held by us temporarily in overnight reverse repurchase
agreements collateralized by United States government agency debt securities.
However, in October 2004 the hedge fund was established and the $100.0 million
was transferred to the fund. The fund invests in various fixed income securities
and their derivatives as opportunities arise. These include investments in bank
loans, credit instruments such as credit default swaps, and debt and equity
tranches of collateralized debt obligation instruments, which we refer to as
CDOs. Further, this fund may employ leverage. These investments will be subject
to market risks including interest rate risk and credit risk for investments in
credit derivatives. The fund will initially be accounted for as a consolidated
subsidiary of ours, with minority interests to the extent of third-party
investor participation, commencing in the quarter ending January 2, 2005.
We maintain investment portfolio holdings of various issuers, types and
maturities. As of September 26, 2004 these investments consisted of the
following (in thousands):
Cash equivalents included in "Cash and cash equivalents" on our
condensed consolidated balance sheet........................................................$ 412,892
Short-term investments......................................................................... 167,948
-------------
Total cash equivalents and short-term investments........................................... 580,840
Restricted cash equivalents.................................................................... 32,866
Non-current investments........................................................................ 66,073
-------------
$ 679,779
=============
Securities sold with an obligation for us to purchase..........................................$ (7,546)
=============
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired and consisted principally of
cash in a treasury mutual fund and bank money market accounts, overnight reverse
repurchase agreements collateralized by United States government agency debt
securities, interest-bearing brokerage and bank accounts with a stable value,
United States government debt securities and commercial paper of high
credit-quality entities.
At September 26, 2004 our investments were classified in the following
general types or categories (in thousands):
Carrying Value
At Fair --------------
Type At Cost Value (c) Amount Percent
---- ------- --------- ------ -------
Cash equivalents (a)............................$ 412,892 $ 412,892 $ 412,892 61%
Restricted cash equivalents..................... 32,866 32,866 32,866 5%
Securities accounted for as:
Trading securities......................... 317 60 60 -%
Available-for-sale securities (b).......... 138,919 141,235 141,235 21%
Non-current investments held in deferred
compensation trusts accounted for at cost..... 22,196 28,547 22,196 3%
Participation in commercial term loans.......... 3,650 3,650 3,650 1%
Other current and non-current investments in
investment limited partnerships, similar
investment entities and other investments
accounted for at cost......................... 28,602 45,078 28,602 4%
Other non-current investments accounted for at:
Cost....................................... 30,491 30,491 30,491 4%
Equity..................................... 900 37,634 7,787 1%
----------- ----------- ---------- -----
Total cash equivalents and long investment
positions.....................................$ 670,833 $ 732,453 $ 679,779 100%
=========== =========== ========== ====
Securities sold with an obligation for us to
purchase......................................$ (7,797) $ (7,546) $ (7,546) N/A
=========== =========== ==========
(a) Includes $2,711,000 of cash equivalents held in deferred compensation
trusts and does not include $1,935,000 (included in "Receivables" in
the accompanying condensed consolidated balance sheet as of September
26, 2004) of reinvestments from proceeds from the sale of securities
which had not settled as of September 26, 2004.
(b) Includes $14,331,000 of preferred shares of CDOs which, if sold, would
require us to use the proceeds to repay our related notes payable of
$11,610,000.
(c) There can be no assurance that we would be able to sell certain of
these investments at these amounts.
Our marketable securities are reported at fair market value and are
classified and accounted for either as "available-for-sale" or "trading" with
the resulting net unrealized holding gains or losses, net of income taxes,
reported either as a separate component of comprehensive income or loss
bypassing net income or net loss or included as a component of net income or net
loss, respectively. Our investments in preferred shares of CDOs are accounted
for similar to debt securities and are classified as available-for-sale.
Investment limited partnerships and similar investment entities and other
current and non-current investments in which we do not have significant
influence over the investee are accounted for at cost. Realized gains and losses
on investment limited partnerships and similar investment entities and other
current and non-current investments recorded at cost are reported as investment
income or loss in the period in which the securities are sold. A non-current
common stock investment in which we have significant influence over the investee
is accounted for in accordance with the equity method of accounting under which
our results of operations include our share of the income or loss of the
investee. We review all of our investments in which we have unrealized losses
and recognize investment losses currently for any unrealized losses we deem to
be other than temporary. The cost-basis component of investments reflected in
the table above represents original cost less a permanent reduction for any
unrealized losses that were deemed to be other than temporary.
Sensitivity Analysis
For purposes of this disclosure, market risk sensitive instruments are
divided into two categories: instruments entered into for trading purposes and
instruments entered into for purposes other than trading. Our estimate of market
risk exposure is presented for each class of financial instruments held by us at
September 26, 2004 for which an immediate adverse market movement causes a
potential material impact on our financial position or results of operations. We
believe that the rates of adverse market movements described below represent the
hypothetical loss to future earnings and do not represent the maximum possible
loss nor any expected actual loss, even under adverse conditions, because actual
adverse fluctuations would likely differ. In addition, since our investment
portfolio is subject to change based on our portfolio management strategy as
well as market conditions, these estimates are not necessarily indicative of the
actual results which may occur.
The following tables reflect the estimated market risk exposure as of
September 26, 2004 based upon assumed immediate adverse effects as noted below
(in thousands):
Trading Purposes:
Carrying Equity
Value Price Risk
----- ----------
Equity securities..........................................................$ 60 $ (6)
The sensitivity analysis of financial instruments held at September 26,
2004 for trading purposes assumes an instantaneous 10% decrease in the equity
markets in which we are invested from their levels at September 26, 2004 and
with all other variables held constant. The securities included in the trading
portfolio do not include any investments in debt securities or investments
denominated in foreign currency and, accordingly, there is no interest rate risk
or foreign currency risk.
Other Than Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Cash equivalents..................................$ 412,892 $ (64) $ -- $ --
Restricted cash equivalents....................... 32,866 -- -- --
Available-for-sale corporate debt securities,
other than commercial paper.................... 17,052 (682) -- --
Available-for-sale equity securities.............. 47,876 -- (4,788) --
Available-for-sale asset-backed securities........ 26,140 (2,091) -- --
Available-for-sale preferred shares of CDOs....... 18,512 (749) -- --
Available-for-sale United States government and
government agency debt securities.............. 15,928 (53) -- --
Available-for-sale debt mutual fund............... 8,616 (172) -- --
Available-for-sale commercial paper............... 7,111 (18) -- --
Participation in commercial term loans............ 3,650 -- (365) --
Other investments................................. 89,076 (685) (7,490) (1,307)
Foreign currency forward contract in an asset
position....................................... 243 -- -- (1,257)
Foreign currency put and call options in a net
asset position................................. 552 -- -- (1,088)
Securities sold with an obligation to purchase.... (7,546) -- (755)
Notes payable and long-term debt, excluding
capitalized lease obligations.................. 508,086 (21,144) -- --
Interest rate swap agreement in a payable
position....................................... 449 (231) -- --
The sensitivity analysis of financial instruments held at September 26,
2004 for purposes other than trading assumes (1) an instantaneous change in
market interest rates of one percentage point, (2) an instantaneous 10% decrease
in the equity markets in which we are invested and (3) an instantaneous 10%
decrease in the foreign currency exchange rates versus the United States dollar,
each from their levels at September 26, 2004 and with all other variables held
constant. The equity price risk reflects the impact of a 10% decrease in the
carrying value of our equity securities, including those in "Other investments"
in the table above. We have also assumed equity price risk for our participation
in commercial term loans since the loans are in default and we expect to receive
stock in exchange for our investment. The sensitivity analysis also assumes that
the decreases in the equity markets and foreign exchange rates are other than
temporary. We have not reduced the equity price risk for available-for-sale
investments and cost investments to the extent of unrealized gains on certain of
those investments, which would limit or eliminate the effect of the indicated
market risk on our results of operations and, for cost investments, our
financial position.
For purposes of this analysis, our debt investments and preferred shares of
CDOs with interest rate risk had a range of remaining maturities and were
assumed to have weighted average remaining maturities as of September 26, 2004
as follows:
Range Weighted Average
----- ----------------
Cash equivalents (other than money market funds, interest- bearing
brokerage and bank accounts, and overnight reverse
repurchase agreements)............................................ 2 days-88 days 81 days
Corporate debt securities, other than commercial paper.............. 8 months-6 years 4 years
Asset-backed securities............................................. 1 2/3 years-30 1/4 years 8 years
CDOs underlying preferred shares.................................... 3 years-9 2/3 years 7 years
United States government and government agency debt securities...... 4 days-11 months 4 months
Debt mutual fund.................................................... 1 day-36 years 2 years
Commercial paper.................................................... 10 days-7 1/2 months 3 months
Debt securities included in other investments (principally held by
investment limited partnerships and similar investment entities).. (a) 10 years
(a) Information is not available for the underlying debt investments of
these entities.
The interest rate risk reflects, for each of these debt investments and the
preferred shares of CDOs, the impact on our results of operations. Assuming we
reinvest in similar securities at the time these securities mature, the effect
of the interest rate risk of an increase of one percentage point above the
existing levels would continue beyond the maturities assumed. The interest rate
risk for our preferred shares of CDOs excludes those portions of the CDOs for
which the risk has been fully hedged. Our cash equivalents included $283.7
million of mutual fund and bank money market accounts and interest-bearing
brokerage and bank accounts which are designed to maintain a stable value and
$100.3 million of overnight reverse repurchase agreements which mature daily
and, as a result, were assumed to have no interest rate risk. Our restricted
cash equivalents were invested in money market funds and are assumed to have no
interest rate risk since those funds are designed to maintain a stable value.
The interest rate risk presented with respect to our notes payable and
long-term debt, excluding capitalized lease obligations, relates only to our
fixed-rate debt and represents the potential impact a decrease in interest rates
of one percentage point has on the fair value of this debt and not on our
financial position or our results of operations. The fair value of our
variable-rate debt approximates the carrying value since the floating interest
rate resets monthly or quarterly. However, we have an interest rate swap
agreement but with an embedded written call option on our variable-rate bank
loan. As interest rates decrease, the fair market values of the interest rate
swap agreement and the written call option both decrease, but not necessarily by
the same amount. The interest rate risk presented with respect to the interest
rate swap agreement represents the potential impact the indicated change has on
the net fair value of the swap agreement and embedded written call option and on
our financial position and results of operations.
For investments held since December 28, 2003 in investment limited
partnerships and similar investment entities, all of which are accounted for at
cost, and other non-current investments included in "Other investments" in the
table above, the sensitivity analysis assumes that the investment mix for each
such investment between equity versus debt securities and securities denominated
in United States dollars versus foreign currencies was unchanged since that date
since more current information was not readily available. To the extent such
entities invest in convertible bonds which trade primarily on the conversion
feature of the securities rather than on the stated interest rate, this analysis
assumed equity price risk but no interest rate risk. The foreign currency risk
presented excludes those investments where the investment manager has fully
hedged the risk. The foreign currency risk presented also excludes the portion
of risk associated with our investment in Jurlique, which is also included in
"Other investments," that is hedged by the foreign currency put and call options
and by the portion of Jurlique's operations which are denominated in United
States dollars. The foreign currency risk presented with respect to the foreign
currency forward contract and foreign currency put and call options represents
the potential impact the indicated change has on the net fair value of each of
these respective financial instruments and on our financial position and results
of operations and has been determined by an independent broker/dealer.
Item 4. Controls and Procedures
Our management, including our Chairman and Chief Executive Officer and our
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this quarterly report. Based upon that evaluation,
our Chairman and Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of such period, our disclosure controls and procedures are
effective to ensure that information required to be included in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported as and when required. During the third quarter of 2004, our subsidiary
Sybra, Inc. began installing a new automated back office and point-of-sale
system in our company-owned Arby's restaurants that will automate certain
reporting and processing functions that were previously done manually. No other
change in our internal control over financial reporting was made during our most
recent fiscal quarter that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of
Triarc Companies, Inc. and its subsidiaries (collectively "Triarc" or the
"Company"), and those statements preceded by, followed by, or that include the
words "may," "believes," "expects," "anticipates," or the negation thereof, or
similar expressions, that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). All statements that address operating performance, events or developments
that are expected or anticipated to occur in the future, including statements
relating to revenue growth, earnings per share growth or statements expressing
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. These forward-looking statements are based
on our current expectations, speak only as of the date of this Form 10-Q and are
susceptible to a number of risks, uncertainties and other factors. Our actual
results, performance and achievements may differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. For those statements, we claim the protection of the
safe harbor for forward-looking statements contained in the Reform Act. Many
important factors could affect our future results and could cause those results
to differ materially from those expressed in the forward-looking statements
contained herein. Such factors include, but are not limited to, the following:
o competition, including pricing pressures, the potential impact of
competitors' new units on sales by Arby's(R) restaurants and
consumers' perceptions of the relative quality, variety and value of
the food products offered;
o success of operating initiatives;
o development costs;
o advertising and promotional efforts;
o brand awareness;
o the existence or absence of positive or adverse publicity;
o new product and concept development by the Company and its
competitors, and market acceptance of such new product offerings and
concepts;
o changes in consumer tastes and preferences, including changes
resulting from concerns over nutritional or safety aspects of beef,
poultry, french fries or other foods or the effects of food-borne
illnesses such as "mad cow disease" and avian influenza or "bird flu";
o changes in spending patterns and demographic trends;
o the business and financial viability of key franchisees;
o the timely payment of franchisee obligations due to the Company;
o availability, location and terms of sites for restaurant development
by the Company and its franchisees;
o the ability of franchisees to open new restaurants in accordance with
their development commitments, including the ability of franchisees to
finance restaurant development;
o delays in opening new restaurants or completing remodels;
o anticipated or unanticipated restaurant closures by the Company and
its franchisees;
o the ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Arby's restaurants;
o changes in business strategy or development plans, and the willingness
of franchisees to participate in the Company's strategy;
o business abilities and judgment of the Company's and franchisees'
management and other personnel;
o availability of qualified restaurant personnel to the Company and to
franchisees;
o the Company's ability, if necessary, to secure alternative
distribution of supplies of food, equipment and other products to
Arby's restaurants at competitive rates and in adequate amounts, and
the potential financial impact of any interruptions in such
distribution;
o adverse weather conditions;
o changes in commodity (including beef), labor, supplies and other
operating costs and availability and cost of insurance;
o significant reductions in the Company's client assets under management
(and thus in the Company's advisory fee revenue), due to such factors
as weak performance of the Company's investment products (either on an
absolute basis or relative to the Company's competitors), substantial
illiquidity or volatility in the fixed income markets and instruments
in which the Company trades, loss of key portfolio management
personnel, reduced investor demand for alternative fixed income
investment products, and loss of investor confidence due to adverse
publicity;
o increased competition from other alternative fixed income investment
managers;
o pricing pressure on the advisory fees that the Company can charge for
its investment advisory services;
o difficulty in increasing assets under management, or managing existing
assets, due to market-related constraints on trading capacity;
o the removal of the Company as investment manager of one or more of the
collateral debt obligations (CDOs) it manages, or the reduction in the
Company's CDO management fees because of payment defaults by issuers
of the underlying collateral;
o availability, terms (including changes in interest rates) and
deployment of capital;
o changes in national, regional and local economic, market, business or
political conditions in the countries and other territories in which
the Company and its franchisees operate;
o changes in government regulations, including franchising laws,
investment management regulations, accounting standards, environmental
laws, overtime rules, minimum wage rates and taxation rates;
o the costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
o the impact of general economic conditions on consumer spending,
including a slower consumer economy and the effects of war or
terrorist activities;
o our ability to identify appropriate acquisition targets in the future
and to successfully integrate any future acquisitions into our
existing operations; and
o other risks and uncertainties affecting the Company and its
subsidiaries referred to in our Annual Report on Form 10-K for the
fiscal year ended December 28, 2003 (see especially "Item 1.
Business--Risk Factors" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations") and in our
other current and periodic filings with the Securities and Exchange
Commission, all of which are difficult or impossible to predict
accurately and many of which are beyond our control.
We do not undertake and specifically decline any obligation to release
publicly the result of any revisions that may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. In
addition, it is our policy generally not to make any specific projections as to
future earnings, and we do not endorse any projections regarding future
performance that may be made by third parties.
Item 1. Legal Proceedings
In 2001, a vacant property owned by Adams Packing Association, Inc., an
inactive, indirect subsidiary of ours, was listed by the U.S. Environmental
Protection Agency on the Comprehensive Environmental Response, Compensation and
Liability Information System, which we refer to as CERCLIS, list of known or
suspected contaminated sites. The CERCLIS listing appears to have been based on
an allegation that a former tenant of Adams Packing conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970s. The
business operations of Adams Packing were sold in December 1992. In February
2003, Adams Packing and the Florida Department of Environmental Protection,
which we refer to as the Florida DEP, agreed to a consent order that provided
for development of a work plan for further investigation of the site and limited
remediation of the identified contamination. In May 2003, the Florida DEP
approved the work plan submitted by Adams Packing's environmental consultant
and, as of September 26, 2004, the work at the site has been completed. Adams
Packing submitted its contamination assessment report to the Florida DEP in late
March 2004. In August 2004, the Florida DEP agreed to a monitoring plan
consisting of two sampling events after which it will reevaluate the need, if
any, for additional assessment or remediation. The sampling events are currently
expected to occur in December 2004 and May 2005. To date, Adams Packing has
expended approximately $1.6 million with respect to the project. Based on a cost
estimate for completion of the sampling events developed by Adams Packing's
environmental consultant, and after taking into consideration various legal
defenses available to us, including Adams Packing, the remaining costs of the
remediation at the site are not expected to have a material adverse effect on
our consolidated financial position or results of operation. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Legal and Environmental Matters."
Item 2. Changes in Securities, Use of Proceeds And Issuer Purchases of Equity
Securities.
The following table provides information with respect to repurchases of
shares of our common stock by us and our "affiliated purchasers" (as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) during
the third fiscal quarter of 2004:
Issuer Repurchases of Equity Securities (1)
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
Total Number of Shares Approximate Dollar
Purchased As Part of Value of Shares That
Total Number of Average Price Paid Publicly Announced Plan May Yet Be Purchased
Period Shares Purchased (2) Per Share (2) (1) (2) Under the Plan (1)
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
June 28, 2004
through --- --- --- $48,618,750
July 25, 2004
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
July 26, 2004 7,011 Class A $9.61 (Class A)
through 10,974 Class B, $9.75 (Class B, --- $48,618,750
August 22, 2004 Series 1 Series 1)
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
August 23, 2004
through --- --- --- $48,618,750
September 26, 2004
- ------------------------------- ---------------------- --------------------- --------------------------- -------------------------
(1) On June 3, 2003, we announced that our existing stock repurchase program
had been extended until January 18, 2005 and that the amount available
under the program had been replenished to permit the purchase of up to $50
million of our Class A Common Stock. On August 11, 2003, we announced that
the stock repurchase program had been amended to permit us to use the $50
million to repurchase shares of our Class B Common Stock, Series 1. No
transactions were effected under our stock repurchase program during the
third fiscal quarter of 2004.
(2) Reflects an aggregate of 7,011 shares of Class A Common Stock and 10, 974
shares of Class B Common Stock, Series 1, tendered as payment of the
exercise price of employee stock options under the Company's 1993 Equity
Participation Plan. The shares were valued at the closing price of the
Class A Common Stock and Class B Common Stock, Series 1, on the date of
exercise of the employee stock options.
Item 5. Other Information.
Triarc and Deerfield & Company LLC ("Deerfield") previously formed an
investment adviser, TDM Advisors LLC ("TDM"), to manage the assets of Triarc
Deerfield Investment Corporation ("Triarc Deerfield"), a recently formed
business development company that, as previously announced, filed a registration
statement with the Securities and Exchange Commission relating to a proposed
$500 million initial public offering of its common stock (the "Offering"). As a
result of our acquisition of a majority interest in Deerfield, TDM is now a
wholly-owned subsidiary of Deerfield and an indirect subsidiary of Triarc. TDM
is currently the only stockholder of Triarc Deerfield. Triarc Deerfield has
decided not to pursue the proposed Offering due to market conditions and on
November 4, 2004 withdrew its registration statement with respect to the
proposed Offering. Deerfield is currently reviewing alternative options for
raising additional capital.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Purchase Agreement, dated as of June 26, 2004, by and among Triarc
Companies, Inc., Sachs Capital Management LLC, Deerfield Partners
Fund II LLC, Scott A. Roberts, Marvin Shrear and Gregory H. Sachs,
incorporated herein by reference to Exhibit 2.1 to Triarc's Current
Report on Form 8-K dated June 28, 2004 (SEC file no. 1-2207).
3.1 By-laws of Triarc Companies, Inc., as currently in effect,
incorporated herein by reference to Exhibit 3.1 to Triarc's Current
Report on Form 8-K dated November 5, 2004 (SEC file no. 1-2207).
10.1 Fourth Amended and Restated Operating Agreement of Deerfield & Company
LLC, dated as of June 26, 2004, incorporated herein by reference to
Exhibit 10.4 to Triarc's Current Report on Form 8-K dated June 28, 2004
(SEC file no. 1-2207).
10.2 Commitment Agreement, dated as of June 26, 2004, by and among Triarc
Companies, Inc., Sachs Capital Management LLC, Scott A. Roberts and
Deerfield Capital Management LLC, incorporated herein by reference to
Exhibit 10.5 to Triarc's Current Report on Form 8-K dated June 28, 2004
(SEC file no. 1-2207).
10.3 Employment Agreement, dated as of June 26, 2004, by and among Deerfield
& Company LLC, Deerfield Capital Management LLC and Gregory H. Sachs,
incorporated herein by reference to Exhibit 10.6 to Triarc's Current
Report on Form 8-K dated July 22, 2004 (SEC file no. 1-2207).
10.4 Supplement, dated as of July 14, 2004, to the Employment Agreement,
dated as of June 26, 2004, by and among Deerfield & Company LLC,
Deerfield Capital Management LLC and Gregory H. Sachs, incorporated
herein by reference to Exhibit 10.7 to Triarc's Current Report on Form
8-K dated July 22, 2004 (SEC file no. 1-2207).
10.5 First Amendment to Purchase Agreement, dated as of July 22, 2004, by
and among Triarc Companies, Inc., Sachs Capital Management LLC,
Deerfield Partners Fund II LLC, Scott A. Roberts, Marvin Shrear and
Gregory H. Sachs, incorporated herein by reference to Exhibit 10.8 to
Triarc's Current Report on Form 8-K dated July 22, 2004 (SEC file no.
1-2207).
10.6 First Supplement to Fourth Amended and Restated Operating Agreement of
Deerfield & Company LLC, dated as of July 22, 2004, incorporated herein
by reference to Exhibit 10.9 to Triarc's Current Report on Form 8-K
dated July 22, 2004 (SEC file no. 1-2207).
10.7 Second Supplement to Fourth Amended and Restated Operating Agreement of
Deerfield & Company LLC, dated as of August 16, 2004, incorporated
herein by reference to Exhibit 10.10 to Triarc's Amendment No.1 to
Current Report on Form 8-K/A dated October 5, 2004 (SEC file no.
1-2207).
10.8 Third Supplement to Fourth Amended and Restated Operating Agreement of
Deerfield & Company LLC, dated as of August 20, 2004, incorporated
herein by reference to Exhibit 10.11 to Triarc's Amendment No.1 to
Current Report on Form 8-K/A dated October 5, 2004 (SEC file no.
1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished as an exhibit to this report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIARC COMPANIES, INC.
(Registrant)
Date: November 5, 2004 By: /S/ FRANCIS T. McCARRON
---------------------------
Francis T. McCarron
Senior Vice President and
Chief Financial Officer
(On behalf of the Company)
Date: November 5, 2004 By: /S/ FRED H. SCHAEFER
---------------------------
Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Exhibit Index
Exhibit
No. Description
------- -----------
2.1 Purchase Agreement, dated as of June 26, 2004, by and among Triarc
Companies, Inc., Sachs Capital Management LLC, Deerfield Partners
Fund II LLC, Scott A. Roberts, Marvin Shrear and Gregory H. Sachs,
incorporated herein by reference to Exhibit 2.1 to Triarc's
Current Report on Form 8-K dated June 28, 2004 (SEC file no. 1-2207).
3.1 By-laws of Triarc Companies, Inc., as currently in effect,
incorporated herein by reference to Exhibit 3.1 to Triarc's Current
Report on Form 8-K dated November 5, 2004 (SEC file no. 1-2207).
10.1 Fourth Amended and Restated Operating Agreement of Deerfield & Company
LLC, dated as of June 26, 2004, incorporated herein by reference to
Exhibit 10.4 to Triarc's Current Report on Form 8-K dated June 28, 2004
(SEC file no. 1-2207).
10.2 Commitment Agreement, dated as of June 26, 2004, by and among Triarc
Companies, Inc., Sachs Capital Management LLC, Scott A. Roberts and
Deerfield Capital Management LLC, incorporated herein by reference to
Exhibit 10.5 to Triarc's Current Report on Form 8-K dated June 28, 2004
(SEC file no. 1-2207).
10.3 Employment Agreement, dated as of June 26, 2004, by and among Deerfield
& Company LLC, Deerfield Capital Management LLC and Gregory H. Sachs,
incorporated herein by reference to Exhibit 10.6 to Triarc's Current
Report on Form 8-K dated July 22, 2004 (SEC file no. 1-2207).
10.4 Supplement, dated as of July 14, 2004, to the Employment Agreement,
dated as of June 26, 2004, by and among Deerfield & Company LLC,
Deerfield Capital Management LLC and Gregory H. Sachs, incorporated
herein by reference to Exhibit 10.7 to Triarc's Current Report on Form
8-K dated July 22, 2004 (SEC file no. 1-2207).
10.5 First Amendment to Purchase Agreement, dated as of July 22, 2004, by
and among Triarc Companies, Inc., Sachs Capital Management LLC,
Deerfield Partners Fund II LLC, Scott A. Roberts, Marvin Shrear and
Gregory H. Sachs, incorporated herein by reference to Exhibit 10.8 to
Triarc's Current Report on Form 8-K dated July 22, 2004 (SEC file no.
1-2207).
10.6 First Supplement to Fourth Amended and Restated Operating Agreement of
Deerfield & Company LLC, dated as of July 22, 2004, incorporated herein
by reference to Exhibit 10.9 to Triarc's Current Report on Form 8-K
dated July 22, 2004 (SEC file no. 1-2207).
10.7 Second Supplement to Fourth Amended and Restated Operating Agreement of
Deerfield & Company LLC, dated as of August 16, 2004, incorporated
herein by reference to Exhibit 10.10 to Triarc's Amendment No.1 to
Current Report on Form 8-K/A dated October 5, 2004 (SEC file no.
1-2207).
10.8 Third Supplement to Fourth Amended and Restated Operating Agreement of
Deerfield & Company LLC, dated as of August 20, 2004, incorporated
herein by reference to Exhibit 10.11 to Triarc's Amendment No.1 to
Current Report on Form 8-K/A dated October 5, 2004 (SEC file no.
1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished as an exhibit to this report on Form 10-Q.
EXHIBIT 31.1
CERTIFICATIONS
I, Nelson Peltz, the Chairman and Chief Executive Officer of Triarc
Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 5, 2004
/S/ NELSON PELTZ
------------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Francis T. McCarron, the Senior Vice President and Chief Financial
Officer of Triarc Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 5, 2004
/S/ FRANCIS T. McCARRON
-------------------------------------------------
Francis T. McCarron
Senior Vice President and Chief Financial Officer
EXHIBIT 32.1
Certification Pursuant to
18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Triarc Companies, Inc., a Delaware corporation (the
"Company"), does hereby certify, to the best of such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 26, 2004
(the "Form 10-Q") of the Company fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: November 5, 2004 /S/ NELSON PELTZ
------------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
Dated: November 5, 2004 /S/ FRANCIS T. McCARRON
------------------------------------
Francis T. McCarron
Senior Vice President and Chief
Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Triarc Companies, Inc.
and will be retained by Triarc Companies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Form 10-Q or as a separate disclosure document.