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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 March 28, 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 22,952,546 shares of the registrant's Class A Common Stock and
40,674,347 shares of the registrant's Class B Common Stock outstanding as of
April 30, 2004.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 28, March 28,
2003 (A) 2004
------------ ----------
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 560,510 $ 480,894
Short-term investments ...................................................... 173,127 236,048
Receivables ................................................................. 13,070 14,799
Inventories ................................................................. 2,416 2,362
Deferred income tax benefit ................................................. 11,284 10,978
Prepaid expenses, restricted cash and other current assets .................. 12,575 4,555
---------- ----------
Total current assets ..................................................... 772,982 749,636
Restricted cash equivalents .................................................... 32,467 32,462
Investments .................................................................... 37,363 38,608
Properties ..................................................................... 106,231 104,245
Goodwill ....................................................................... 64,153 64,153
Other intangible assets ........................................................ 8,115 7,892
Deferred costs and other assets ................................................ 21,654 20,152
---------- ----------
$1,042,965 $1,017,148
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 35,637 $ 36,181
Accounts payable ............................................................ 16,314 11,771
Accrued expenses and other current liabilities .............................. 86,462 72,494
Current liabilities relating to discontinued operations ..................... 24,004 23,787
---------- ----------
Total current liabilities ................................................ 162,417 144,233
Long-term debt ................................................................. 483,280 474,132
Deferred compensation payable to related parties ............................... 29,144 30,029
Deferred income taxes .......................................................... 48,697 48,125
Other liabilities, deferred income and minority interests in a consolidated
subsidiary .................................................................. 31,821 31,480
Stockholders' equity:
Class A common stock ........................................................ 2,955 2,955
Class B common stock ........................................................ 5,910 5,910
Additional paid-in capital .................................................. 129,572 131,645
Retained earnings ........................................................... 341,642 334,148
Common stock held in treasury ............................................... (203,168) (198,277)
Deferred compensation payable in common stock ............................... 10,160 11,684
Accumulated other comprehensive income ...................................... 535 1,084
---------- ----------
Total stockholders' equity ............................................... 287,606 289,149
---------- ----------
$1,042,965 $1,017,148
========== ==========
(A) Derived from the audited consolidated financial statements as of December
28, 2003.
See accompanying notes to condensed consolidated financial statements.
2
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
---------------------
March 30, March 28,
2003 2004
--------- ---------
(In Thousands Except
Per Share Amounts)
(Unaudited)
Revenues:
Net sales ................................................................. $48,497 $46,724
Royalties and franchise and related fees .................................. 21,237 22,467
------- -------
69,734 69,191
------- -------
Costs and expenses:
Cost of sales, excluding depreciation and amortization .................... 36,255 37,385
Advertising and selling ................................................... 3,100 4,167
General and administrative ................................................ 23,380 24,310
Depreciation and amortization, excluding amortization of deferred
financing costs ........................................................ 3,383 3,351
------- -------
66,118 69,213
------- -------
Operating profit (loss) ............................................. 3,616 (22)
Interest expense ............................................................. (8,458) (9,634)
Insurance expense related to long-term debt .................................. (1,092) (991)
Investment income, net ....................................................... 3,141 6,524
Costs related to proposed business acquisition not consummated ............... -- (753)
Other income, net ............................................................ 557 729
------- -------
Loss before income taxes ............................................ (2,236) (4,147)
Benefit from income taxes .................................................... 262 991
------- -------
Net loss ............................................................ $(1,974) $(3,156)
======= =======
Basic and diluted loss per share:
Class A common stock ................................................... $ (.03) $ (.05)
======= =======
Class B common stock ................................................... $ (.03) $ (.05)
======= =======
See accompanying notes to condensed consolidated financial statements.
3
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
---------------------
March 30, March 28,
2003 2004
--------- ---------
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net loss ......................................................................... $ (1,974) $ (3,156)
Adjustments to reconcile net loss to net cash used in continuing operating
activities:
Operating investment adjustments, net (see below) .......................... (6,766) 13,815
Depreciation and amortization of properties ................................ 3,059 3,030
Amortization of other intangible assets and certain other items ............ 324 321
Amortization of deferred financing costs and original issue discount ....... 451 651
Deferred compensation provision ............................................ 789 885
Equity in earnings of investee ............................................. (577) (580)
Deferred income tax benefit ................................................ (219) (572)
Unfavorable lease liability recognized ..................................... (385) (438)
Deferred vendor incentive recognized ....................................... (458) (386)
Increase in deferred franchise fee revenues ................................ 792 172
Collection of litigation settlement receivable ............................. 1,667 --
Other, net ................................................................. 328 290
Changes in operating assets and liabilities:
Increase in receivables ................................................. (192) (1,766)
Decrease in inventories ................................................. 127 54
(Increase) decrease in prepaid expenses and other current assets ........ (231) 753
Decrease in accounts payable and accrued expenses and other current
liabilities .......................................................... (17,208) (14,077)
-------- --------
Net cash used in continuing operating activities ..................... (20,473) (1,004)
-------- --------
Cash flows from continuing investing activities:
Investment activities, net (see below) ........................................... 35,492 (70,090)
Capital expenditures ............................................................. (721) (1,052)
Other, net ....................................................................... (66) (35)
-------- --------
Net cash provided by (used in) continuing investing activities ....... 34,705 (71,177)
-------- --------
Cash flows from continuing financing activities:
Repayments of long-term debt ..................................................... (8,296) (8,605)
Dividends paid ................................................................... -- (4,338)
Repurchases of common stock for treasury ......................................... -- (1,381)
Exercises of stock options ....................................................... 1,692 7,083
Transfers from restricted cash equivalents collateralizing long-term debt ........ 53 23
-------- --------
Net cash used in continuing financing activities ..................... (6,551) (7,218)
-------- --------
Net cash provided by (used in) continuing operations ................................ 7,681 (79,399)
Net cash provided by (used in) discontinued operations .............................. 3,324 (217)
-------- --------
Net increase (decrease) in cash and cash equivalents ................................ 11,005 (79,616)
Cash and cash equivalents at beginning of period .................................... 456,388 560,510
-------- --------
Cash and cash equivalents at end of period .......................................... $467,393 $480,894
======== ========
Detail of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities ..................................... $ 5,919 $100,912
Cost of trading securities purchased .......................................... (12,014) (84,634)
Net recognized losses (gains) from trading securities and short positions in
securities ................................................................. (49) 443
Other net recognized gains, including other than temporary losses ............. (729) (2,242)
Net (accretion of discount) amortization of premium on debt securities ........ 107 (664)
-------- --------
$ (6,766) $ 13,815
======== ========
4
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended
---------------------
March 30, March 28,
2003 2004
--------- ---------
(In Thousands)
(Unaudited)
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments.................................................................. $ 47,943 $ 43,718
Cost of available-for-sale securities and other investments purchased .......... (17,759) (119,632)
Proceeds of securities sold short .............................................. 9,886 7,100
Payments to cover short positions in securities ................................ (5,530) (8,543)
Decrease in restricted cash collateralizing obligations for short positions
in securities ............................................................... 952 7,267
-------- ---------
$ 35,492 $ (70,090)
======== =========
See accompanying notes to condensed consolidated financial statements.
5
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 28, 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 March 28, 2004 and its results of
operations and cash flows for the three-month periods ended March 30, 2003 and
March 28, 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. The Company's first quarter of fiscal 2003
commenced on December 30, 2002 and ended on March 30, 2003 and the Company's
first quarter of fiscal 2004 commenced on December 29, 2003 and ended on March
28, 2004. The period from December 30, 2002 to March 30, 2003 is referred to
herein as the three-month period ended March 30, 2003 and the period from
December 29, 2003 to March 28, 2004 is referred to herein as the three-month
period ended March 28, 2004. Each quarter contained 13 weeks. All references to
years and quarters relate to fiscal periods rather than calendar periods.
Loss per share amounts in the accompanying condensed consolidated financial
statements and notes thereto for the three-month period ended March 30, 2003
have been retroactively adjusted for the effect of a stock distribution (the
"Stock Distribution") during the third quarter of 2003 of two shares of the
Company's class B common stock, series 1 (the "Class B Common Stock" or "Class B
Common Shares") for each share of the Company's class A common stock (the "Class
A Common Stock" or "Class A Common Shares") as if the Stock Distribution had
occurred at the beginning of 2003 as described in more detail in Note 4 to the
consolidated financial statements contained in the Form 10-K. Certain amounts
included in the accompanying prior quarter's condensed consolidated statement of
cash flows have been reclassified to conform with the current quarter's
presentation.
(2) 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
and/or Class B Common Stock, 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.
6
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
March 28, 2004
(Unaudited)
A summary of the effect on net loss and loss per share in each quarter
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
---------------------
March 30, March 28,
2003 2004
--------- ---------
Net loss, as reported........................................................ $(1,974) $(3,156)
Recognition of total stock-based employee compensation expense determined
under the fair value method, net of related income taxes ................. (1,270) (518)
------- -------
Net loss, as adjusted........................................................ $(3,244) $(3,674)
======= =======
Basic and diluted loss per share of Class A Common Stock and Class B
Common Stock:
As reported ........................................................... $ (.03) $ (.05)
As adjusted ........................................................... (.05) (.06)
The fair value of these stock options granted under the Equity Plans on the
date of grant was estimated using the Black-Scholes option pricing model (the
"Black-Scholes Model") with the weighted average assumptions set forth below for
options granted during the three-month period ended March 28, 2004:
Three Months Ended
March 28, 2004
------------------
Class A Class B
Options Options
------- -------
Risk-free interest rate................................... 3.23% 3.71%
Expected option life in years............................. 7 7
Expected volatility....................................... 20.4% 33.0%
Dividend yield............................................ 2.41% 2.61%
During the three-month period ended March 28, 2004, the Company granted
15,000 stock options each exercisable for one share of Class A Common Stock and
180,000 stock options each exercisable for one share of Class B Common Stock
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 values of each of these
stock options, using the Black-Scholes Model with the assumptions set forth
above, were $2.22 and $3.42, respectively. There were no stock options granted
during the three-month period ended March 30, 2003.
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.
(3) Income Taxes
As previously disclosed in Note 13 to the consolidated financial statements
contained in the Form 10-K, the Internal Revenue Service has commenced an
examination of the Company's Federal income tax returns for the years ended
December 31, 2000 and December 30, 2001. The Company has not received any
notices of proposed adjustments. However, should any income taxes or interest be
assessed as a result of this examination or any state examination for periods
through the October 25, 2000 date of the sale of the Company's former beverage
businesses (see Note 5), the
7
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
March 28, 2004
(Unaudited)
purchaser has agreed to pay up to $4,984,000 of any resulting income taxes or
associated interest relating to the operations of those former beverage
businesses. Management of the Company believes that adequate aggregate
provisions have been made in prior periods for any liabilities, including
interest, that may result from the completion of this examination.
(4) Comprehensive Loss
The following is a summary of the components of comprehensive loss, net of
income taxes (in thousands):
Three Months Ended
---------------------
March 30, March 28,
2003 2004
--------- ---------
Net loss ........................................................ $(1,974) $(3,156)
Unrealized gains on available-for-sale securities (see below) ... 69 552
Net change in currency translation adjustment ................... 6 (3)
------- -------
Comprehensive loss .............................................. $(1,899) $(2,607)
======= =======
The following is a summary of the components of the unrealized gains on
available-for-sale securities included in other comprehensive loss (in
thousands):
Three Months Ended
---------------------
March 30, March 28,
2003 2004
--------- ---------
Increase (decrease) in net unrealized appreciation or depreciation of
available-for-sale securities during the quarter ..................... $(19) $ 262
Plus reclassification of prior period net depreciation included
in net loss .......................................................... 135 598
---- -----
116 860
Equity in change in unrealized gain on a retained interest .............. (7) (2)
Equity in change in unrealized gain on available-for-sale securities .... 2 --
Income tax provision .................................................... (42) (306)
---- -----
$ 69 $ 552
==== =====
(5) Discontinued Operations
Prior to 2002 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 interest in a partnership and 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.
Current liabilities relating to the discontinued operations consisted of
the following (in thousands):
December 28, March 28,
2003 2004
------------ ---------
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations ......................................................... $22,460 $22,283
Liabilities relating to the SEPSCO and the Propane Discontinued Operations ......... 1,544 1,504
------- -------
$24,004 $23,787
======= =======
8
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
March 28, 2004
(Unaudited)
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.
(6) 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
---------------------
March 30, March 28,
2003 2004
--------- ---------
Service cost (consisting entirely of plan expenses) ... $ 21 $ 22
Interest cost ......................................... 62 61
Expected return on the plans' assets .................. (66) (71)
Amortization of unrecognized net loss ................. 17 8
---- ----
Net periodic pension cost .......................... $ 34 $ 20
==== ====
The Company currently expects to contribute an aggregate $264,000 to its
two defined benefit plans for all of 2004, of which $33,000 was contributed
during the three-month period ended March 28, 2004.
(7) Loss Per Share
Net loss for any period, including the three-month periods ended March 30,
2003 and March 28, 2004, is allocated equally among each share of Class A Common
Stock and Class B Common Stock. Basic loss per share has been computed by
dividing the allocated loss for the Class A Common Shares and Class B Common
Shares by the weighted average number of shares of each class adjusted for the
Stock Distribution. The weighted average number of Class A Common Shares for the
three-month periods ended March 30, 2003 and March 28, 2004 are 20,413,000 and
19,992,000, respectively. The weighted average number of Class B Common Shares
adjusted for the Stock Distribution for the three-month periods ended March 30,
2003 and March 28, 2004 are 40,826,000 and 40,154,000, respectively. The
weighted average number of shares for the three-month period ended March 28,
2004 include the weighted average 376,000 shares of Class A Common Stock and
753,000 shares of Class B Common Stock held in deferred compensation trusts
which are not reported as outstanding shares for financial statement purposes
(see Note 8).
Diluted loss per share for the three-month periods ended March 30, 2003 and
March 28, 2004 is 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 each of these
periods 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 March 28, 2004 that could
dilute basic income per share for periods subsequent to March 28, 2004 are (1)
outstanding stock options which are exercisable into 7,117,000 shares and
14,587,000 shares of the Company's Class A Common Stock and Class B Common
Stock, respectively, and (2) $175,000,000 of 5% 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.
9
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
March 28, 2004
(Unaudited)
(8) 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 $789,000 and $885,000 was recognized
in the three-month periods ended March 30, 2003 and March 28, 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 $453,000 and $744,000
during the three-month periods ended during March 30, 2003 and March 28, 2004,
respectively. Such net investment income during the three-month periods ended
March 30, 2003 and March 28, 2004 consisted of $452,000 and $828,000,
respectively, of realized gains from the sale of certain cost-method investments
in the Deferred Compensation Trusts, which included increases in value of
$297,000 and $777,000 prior to the three-month periods ended March 30, 2003 and
March 28, 2004, respectively, and $1,000 and $2,000, respectively, of interest
income less $86,000 of investment fees during the three-month period ended March
28, 2004. Recognized gains and interest income are included in "Investment
income, net" and deferred compensation expense is included in "General and
administrative" in the accompanying condensed consolidated statements of
operations. As of March 28, 2004, the obligation to the Executives is
$30,029,000 reported as "Deferred compensation payable to related parties" in
the accompanying condensed consolidated balance sheets. As of March 28, 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, $1,750,000 included in "Cash and cash equivalents" and
$495,000 included in "Receivables" 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.
In February 2004 the Executives exercised an aggregate 125,000 options each
to purchase one share of Class A Common Stock and two shares of Class B Common
Stock (the "Package Options") under the Company's Equity Plans and paid the
exercise price 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. These exercises resulted in
aggregate deferred gains to the Executives of $1,524,000, represented by an
additional 45,915 shares of Class A Common Stock and 91,815 shares of Class B
Common Stock based on the market price at the date of exercise. Such shares are
being held in two additional deferred compensation trusts (the "Additional
Deferred Compensation Trusts"). 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. The resulting obligation of $1,524,000 is
included in the "Deferred compensation payable in common stock" component of
"Stockholders' equity" in the accompanying condensed consolidated balance sheet
as of March 28, 2004.
On April 20, 2004 the Executives exercised an aggregate 2,725,000 Package
Options and paid the exercise price utilizing shares of the Company's Class B
Common Stock the Executives already owned for more than six months. These
exercises resulted in aggregate deferred gains to the Executives of $31,869,000,
represented by an additional 1,001,535 shares of Class A Common Stock and
2,003,072 shares of Class B Common Stock based on the market price at the date
of exercise. Such shares are being held in the Additional Deferred Compensation
Trusts referred to in the preceding paragraph. The Company will report the
resulting obligation of $31,869,000 in the "Deferred compensation payable in
common stock" component of "Stockholders' equity" for the quarter ending June
27, 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.
10
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
March 28, 2004
(Unaudited)
(9) 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 March 28, 2004, the work at the site has
been substantially completed. Adams submitted its contamination assessment
report to the FDEP in March 2004 and has recommended that no additional
assessment and/or remedial action be required and that the property be monitored
in accordance with an approved natural attenuation monitoring plan. The FDEP has
agreed to a monitoring plan, subject to a reevaluation of the need for
additional assessment at the end of two monitoring events. Based on an original
cost estimate of approximately $1,000,000 for completion of the work plan
developed by Adams' environmental consultant, and after taking into
consideration various legal defenses available to the Company, including Adams,
Adams has provided for its estimate of its liability for this matter, including
related legal and consulting fees prior to 2003.
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 March 28, 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 $2,000,000 as of March 28,
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.
(10) Subsequent Event
The Company intends to form jointly with Deerfield & Company LLC
("Deerfield") an investment adviser to manage the assets of Triarc Deerfield
Investment Corporation ("Triarc Deerfield"), a newly-formed business development
company that on April 19, 2004 filed a registration statement, which has not yet
become effective, with the Securities and Exchange Commission relating to a
proposed $750,000,000 initial offering of its common stock. Deerfield, through
its subsidiary Deerfield Capital Management LLC, is a registered investment
adviser. Additionally, the Company is engaged in negotiations with certain
owners of Deerfield concerning the possible acquisition by the Company of a
controlling interest in Deerfield and an additional capital commitment by the
Company. Together, the purchase price and capital commitment are currently
expected to aggregate approximately $185,000,000.
There can be no assurance that the initial public offering of common stock
of Triarc Deerfield will be completed, that the owners of Deerfield will enter
into a definitive agreement with the Company to sell a controlling interest in
Deerfield to the Company or that such an acquisition will be completed.
11
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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 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 5."
We currently operate solely in the restaurant business through our
franchised and Company-owned Arby's restaurants. We derive our revenues in the
form of royalties and franchise and related fees and from sales by our
Company-owned restaurants. While approximately 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 3.4% for the three
months ended March 28, 2004. We also derive investment income from our
investments.
We intend to enhance the value of our company by increasing the revenues
of the Arby's restaurant business. In April 2004, we began adding new Arby's
menu items such as salads and low carbohydrate offerings and we are continuing
to focus on growing the number of restaurants in the Arby's system and
implementing new operational initiatives targeted at service levels and
convenience.
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 business
acquisitions, repurchases of our common shares and investments. In recent
periods we evaluated a number of business acquisition opportunities 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 that regard, we intend to form an investment adviser jointly
with a company for which we are negotiating to acquire a controlling interest,
as discussed further in that section.
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 restaurant competitors 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 as a
result of a greater consumer awareness on nutrition;
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 and offer an opportunity to recover some
of the dollar margins lost in the discounting of other menu items;
o Increases in beef prices 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.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. Our first quarter of fiscal 2003 commenced on
December 30, 2002 and ended on March 30, 2003, and our first quarter of fiscal
2004 commenced on December 29, 2003 and ended on March 28, 2004. When we refer
to the "three months ended March 30, 2003," or the "2003 first quarter," we mean
the period from December 30, 2002 to March 30, 2003, and when we refer to the
"three months ended March 28, 2004," or the "2004 first quarter," we mean the
period from December 29, 2003 to March 28, 2004. Each quarter contained 13
weeks. 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 remaining nine months of fiscal 2004 will contain one more week than the
comparable period of fiscal 2003. All references to years and quarters relate to
fiscal periods rather than calendar periods.
12
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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 2003 first quarter and
the 2004 first quarter. We consider certain percentage changes between these
quarters 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
--------------------- Change
March 30, March 28, ----------------
2003 2004 Amount Percent
--------- --------- ------ -------
(In Millions Except Percents)
Revenues:
Net sales ..................................................... $48.5 $46.7 $(1.8) (4)%
Royalties and franchise and related fees ...................... 21.2 22.5 1.3 6 %
----- ----- -----
69.7 69.2 (0.5) (1)%
----- ----- -----
Costs and expenses:
Cost of sales, excluding depreciation and amortization ........ 36.2 37.3 1.1 3 %
Advertising and selling ....................................... 3.1 4.2 1.1 35 %
General and administrative .................................... 23.4 24.3 0.9 4 %
Depreciation and amortization, excluding amortization of
deferred financing costs ................................... 3.4 3.4 -- --
----- ----- -----
66.1 69.2 3.1 5 %
----- ----- -----
Operating profit ........................................ 3.6 -- (3.6) (100)%
Interest expense ................................................. (8.5) (9.6) (1.1) (13)%
Insurance expense related to long-term debt ...................... (1.1) (1.0) 0.1 9 %
Investment income, net ........................................... 3.1 6.5 3.4 110 %
Costs related to proposed business acquisition not consummated ... -- (0.8) (0.8) n/m
Other income, net ................................................ 0.6 0.7 0.1 17 %
----- ----- -----
Loss before income taxes ................................ (2.3) (4.2) (1.9) (83)%
Benefit from income taxes ........................................ 0.3 1.0 0.7 n/m
----- ----- -----
Net loss ................................................ $(2.0) $(3.2) $(1.2) (60)%
===== ===== =====
Three Months Ended March 28, 2004 Compared with Three Months Ended March 30,
2003
Net Sales
Our net sales, which were generated entirely from Company-owned Arby's
restaurants, decreased $1.8 million, or 4%, to $46.7 million for the three
months ended March 28, 2004 from $48.5 million for the three months ended March
30, 2003. This decrease reflects (1) a $1.4 million decrease due to a 3% decline
in same-store sales of Company-owned restaurants and (2) a $0.4 million decrease
due to the closing of three underperforming Company-owned restaurants since
March 30, 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 decline in same-store sales principally resulted from unfavorable
performance in our restaurants in the Michigan region, an area where
approximately one-third of our Company-owned restaurants are located which has
been particularly impacted by high unemployment. Outside of the Michigan region,
our same-store sales for the 2004 first quarter were approximately flat compared
with the 2003 first quarter. Same-store sales in the 2004 first quarter also
reflect increased price promotions compared with the 2003 first quarter,
although we are unable to determine if the incremental effect on sales volume
of the price promotions was sufficient to exceed or offset the unfavorable
effect on pricing.
We expect that same-store sales of Company-owned restaurants for the
remainder, as well as for the full year, of 2004 will exceed the comparable
periods of 2003. We expect that this sales growth will result from the
introduction of new salads and low carbohydrate menu offerings which commenced
in April 2004, new operational initiatives targeted at service levels and
convenience and an increased focus on remodeling of restaurants with solid sales
growth potential. We intend to support the introduction of our new menu
offerings with national cable television and local advertising as well as
various price promotions. Further, the same-store sales comparisons during the
remainder of 2004 will be favorably impacted by the weak
13
TRIARC COMPANIES, INC. AND SUBSIDIARIES
same-store sales performance of the comparable period of 2003. We presently
expect to open only one new Company-owned restaurant during the remainder of
2004 and will continue to evaluate whether to close any underperforming
restaurants. Specifically, we have eleven restaurants where the leases for the
facilities reach an expiration or renewal option date during the remainder of
2004 and we will review the performance of each of these restaurants in
connection with the decision to extend or renew these leases. However, we
currently anticipate the extension or renewal of most of these leases.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from franchised restaurants, increased $1.3 million, or 6%, to $22.5 million for
the three months ended March 28, 2004 from $21.2 million for the three months
ended March 30, 2003, reflecting a $1.1 million, or 5%, increase in royalties
and a $0.2 million increase in franchise and related fees. The increase in
royalties resulted from the royalties from the 126 restaurants opened since
March 30, 2003, with generally higher than average sales volumes, replacing the
royalties from the 73 generally underperforming restaurants closed since March
30, 2003. The increase in franchise and related fees includes a $0.1 million
increase due to the opening of 5 additional franchised restaurants in the three
months ended March 28, 2004 compared with the three months ended March 30, 2003.
Same-store sales of franchised restaurants during the 2004 first quarter
were approximately flat compared with the weak same-store sales performance of
the 2003 first quarter. The Arby's national cable advertising campaign in the
2004 first quarter was three weeks in duration and featured an existing product
promotion, whereas the advertising campaign in the 2003 first quarter was four
weeks in duration and featured a new product promotion. We expect to experience
positive same-store sales growth during the remainder of 2004 due to the
introduction of new salads and low carbohydrate menu offerings, new operational
initiatives targeted at service levels and convenience and weak same-store sales
performance of the comparable period of 2003. We anticipate the effect on
royalties of the improvement in same-store sales will be slightly offset by a
decrease in franchise and related fees resulting principally from fewer
projected franchised restaurant openings during the remainder of 2004 compared
with the comparable 2003 period.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization, which resulted
entirely from the Company-owned Arby's restaurants, increased $1.1 million, or
3%, to $37.3 million, representing a gross margin of 20%, for the three months
ended March 28, 2004 from $36.2 million, representing a gross margin of 25%, for
the three months ended March 30, 2003. We define gross margin as the difference
between net sales and cost of sales divided by net sales. The increase in cost
of sales, excluding depreciation and amortization is principally a result of
increases in the cost of roast beef of approximately $0.8 million. The decrease
in gross margins, in addition to reflecting the higher roast beef costs, was
impacted by the increased price promotions previously referred to under "Net
Sales" above. Our Company-owned restaurants have experienced increases in the
cost of roast beef, the largest component of our menu offerings, resulting from
decreased supplies and increased demand which adversely affected our cost of
sales commencing during the second half of 2003. We expect these higher roast
beef costs will continue throughout 2004 and estimate that the increased costs
will adversely affect our cost of sales for the remainder of 2004 by between
approximately $1.2 million and $1.9 million. However, these increases should be
slightly offset by improved operating efficiencies that we anticipate commencing
during the 2004 fourth quarter from the planned implementation of new restaurant
systems and technology.
Our royalties and franchise fees have no associated cost of sales.
Advertising and Selling
Our advertising and selling expenses increased $1.1 million, or 35%,
principally due to the timing within each year of our contractual commitment as
the Arby's franchisor for advertising support. We contributed and expensed $0.8
million toward the Arby's national cable television advertising campaign in the
2004 first quarter, whereas we did not contribute to the similar advertising
campaign in the 2003 first quarter. We expect to contribute and expense $2.2
million during the remainder of the 2004 year compared with $3.1 million of
expense under our previous commitment during the comparable period of 2003.
14
TRIARC COMPANIES, INC. AND SUBSIDIARIES
General and Administrative
Our general and administrative expenses increased $0.9 million principally
reflecting $0.7 million of severance charges.
Interest Expense
Interest expense increased $1.1 million principally reflecting $2.4 million
of interest expense, including related amortization of deferred financing costs,
on the $175.0 million principal amount of our 5% convertible notes, which we
refer to as the Convertible Notes, issued on May 19, 2003. This increase was
partially offset principally by the effect on interest expense of lower
outstanding amounts of our other long-term debt including (1) $0.5 million
relating to our 7.44% insured non-recourse securitization notes, which we refer
to as the Securitization Notes, and (2) $0.4 million associated with the
leasehold, equipment and mortgage notes related to our Company-owned
restaurants.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Three Months Ended
-------------------------
March 30, March 28,
2003 2004 Change
--------- ------------- ------
(In Millions)
Interest income............................ $ 2.0 $ 4.1 $2.1
Recognized net gains....................... 1.0 1.8 0.8
Distributions, including dividends......... 0.4 0.7 0.3
Other ..................................... (0.3) (0.1) 0.2
----- ----- ----
$ 3.1 $ 6.5 $3.4
===== ===== ====
The increase in interest income is due to an increase in average rates on
our interest-bearing investments and, to a lesser extent, higher average amounts
of these investments. Average rates on our interest-bearing investments
increased from 1.4% in the 2003 first quarter to 2.5% in the 2004 first quarter
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. The average amount of our
interest-bearing investments increased principally due to the investment of a
portion of the net proceeds from the May 2003 issuance of the Convertible Notes.
Our recognized net gains 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. During the 2003 first
quarter and 2004 first quarter our recognized net gains included $0.5 million
and $0.8 million, respectively, of realized gains from the sale of certain
cost-method 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 "Loss Before Income
Taxes." These 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 March 28, 2004, we had pretax unrealized holding gains and (losses)
on available-for-sale marketable securities of $7.9 million and $(5.0) 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.
Costs Related to Proposed Business Acquisition Not Consummated
In the 2004 first quarter we expensed $0.8 million of costs related to a
proposed business acquisition that we decided not to pursue. There was no
similar charge in the 2003 first quarter.
15
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Loss Before Income Taxes
Our loss before income taxes increased $1.9 million to $4.2 million for the
three months ended March 28, 2004 from $2.3 million for the three months ended
March 30, 2003 due to the effect of the variances explained in the captions
above.
We recognized deferred compensation expense of $0.8 million in the 2003
first quarter and $0.9 million in the 2004 first quarter, within general and
administrative expenses, 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 are 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 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 first quarter and 2004 first quarter we recognized
investment income on the investments in the Deferred Compensation Trusts of $0.5
million and $0.7 million, respectively, consisting of the $0.5 million and $0.8
million of realized gains from the sale of certain cost-method investments in
the Deferred Compensation Trusts referred to above under "Investment Income,
Net," including increases in value of $0.3 million and $0.8 million,
respectively, prior to the respective quarters, less $0.1 million of investment
fees during the 2004 first quarter. 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.
Benefit From Income Taxes
The benefit from income taxes represented effective rates of 24% and 12%
for the three months ended March 28, 2004 and March 30, 2003, respectively. The
effective benefit rates are lower 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. The effective benefit rate is lower in
the 2003 first quarter than the 2004 first quarter due to the greater impact of
the above items on the lower pretax loss in the 2003 first quarter.
16
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Liquidity And Capital Resources
Cash Flows from Continuing Operating Activities
Our consolidated operating activities from continuing operations used cash
and cash equivalents, which we refer to in this discussion as cash, of $1.0
million during the three months ended March 28, 2004 reflecting (1) cash used by
changes in operating assets and liabilities of $15.0 million and (2) a net loss
of $3.2 million, both partially offset by (1) net operating investment
adjustments of $13.8 million and (2) net non-cash charges of $3.4 million.
The cash used by changes in operating assets and liabilities of $15.0
million principally reflected (1) an $8.8 million reduction in accrued
compensation and related benefits principally due to the annual payment of
previously accrued incentive compensation and (2) a $4.5 million decrease in
accounts payable principally due to (a) the settlement of trading securities
purchased during late 2003, (b) the acceleration of payments to a major
distributor to obtain more favorable pricing terms and (c) seasonally lower
restaurant purchases in the first quarter of the year. The net operating
investment adjustments of $13.8 million principally reflected $16.3 million of
proceeds from sales of trading securities in excess of purchases partially
offset by $1.8 million of net recognized gains, principally on sales of
available-for-sale securities and cost-method investments. The net non-cash
charges of $3.4 million principally relate to depreciation and amortization of
$4.0 million.
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 $17.3 million in the 2004 first
quarter. We expect positive cash flows from continuing operating activities for
the remaining nine months of 2004, excluding the effect, if any, of net sales or
purchases of trading securities. We expect that (1) our operating results before
net non-cash charges will improve during the remainder of 2004 and (2) the
annual payment of incentive compensation impacting the cash used in operating
activities in the 2004 first quarter should not recur during the remainder of
2004 and, to a large extent, should reverse.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$605.4 million at March 28, 2004, reflecting a current ratio, which equals
current assets divided by current liabilities, of 5.2:1. Working capital
decreased $5.2 million from $610.6 million at December 28, 2003 principally due
to (1) long-term debt repayments of $8.6 million and (2) dividends paid of $4.3
million, both partially offset by proceeds from exercises of stock options of
$7.1 million.
Our total capitalization at March 28, 2004 was $799.4 million consisting of
stockholders' equity of $289.1 million and long-term debt of $510.3 million,
including current portion. Our total capitalization decreased $7.1 million from
$806.5 million at December 28, 2003 principally due to (1) the long-term debt
repayments of $8.6 million, (2) the dividends paid of $4.3 million and (3) the
net loss of $3.2 million, all partially offset by (1) the proceeds from stock
option exercises of $7.1 million and (2) the income tax benefit from exercises
of stock options of $1.4 million which is reported as an increase in "Additional
paid-in capital" in our accompanying condensed consolidated balance sheet.
Securitization Notes
We have outstanding, through our ownership of Arby's Franchise Trust,
Securitization Notes with a remaining principal balance of $228.7 million as of
March 28, 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 $16.9 million
during the remaining nine months 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 $76.5 million as of March 28, 2004.
The leasehold notes have a remaining principal balance of $68.6 million and are
due in equal monthly installments including interest through 2021, of which $4.0
million is due during the remaining nine months of 2004. The equipment notes
have a remaining principal balance of $4.7 million and are due in equal monthly
installments including interest through 2009, of
17
TRIARC COMPANIES, INC. AND SUBSIDIARIES
which $1.1 million is due during the remaining nine months of 2004. The mortgage
notes have a remaining principal balance of $3.2 million and are due in equal
monthly installments including interest through 2018, of which $0.1 million is
due during the remaining nine months of 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. We have a secured
bank term loan payable through 2008 with an outstanding principal amount of
$14.3 million as of March 28, 2003, of which $2.4 million is due during the
remaining nine months of 2004. We also have a secured promissory note payable
through 2006 with an outstanding principal amount of $11.0 million as of March
28, 2004, of which $1.5 million is due during the remaining nine months of 2004.
In addition, we have mortgage notes payable through 2016 related to restaurants
we sold in 1997 with outstanding principal amounts totaling $2.9 million as of
March 28, 2004, of which $0.1 million is due during the remaining nine months of
2004.
Revolving Credit Facilities
We did not have any revolving credit facilities as of March 28, 2004.
Debt Repayments and Covenants
Our total scheduled long-term debt repayments during the remaining nine
months of 2004 are $26.6 million consisting principally of the $16.9 million
expected to be paid under the Securitization Notes, $5.2 million under the
restaurant leasehold, equipment and mortgage notes, $2.4 million under the
secured bank term loan and $1.5 million under the secured promissory note.
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 March 28, 2004.
In accordance with the Securitization Indenture, as of March 28, 2004
Arby's Franchise Trust had no amounts available for the payment of
distributions. However, on April 20, 2004, $1.2 million relating to cash flows
for the calendar month of March 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.
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 the minimum fixed charge coverage ratio as of March 28, 2004.
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 March 28, 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 March 28, 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
18
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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 $38.6 million as of March 28, 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 $2.5 million during the
remaining nine months of 2004 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
$40.0 million as of March 28, 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 $57.0
million as of March 28, 2004, assuming the purchaser has made all scheduled
payments under those lease obligations through that date.
Capital Expenditures
Cash capital expenditures amounted to $1.1 million during the 2004 first
quarter. We expect that cash capital expenditures will be approximately $12.3
million for the remaining nine months of 2004, principally relating to
Company-owned restaurants for (1) remodel and maintenance capital expenditures,
(2) computer hardware required for the implementation of new restaurant systems
and technology and (3) a planned restaurant opening. There were $0.2 million of
outstanding commitments for capital expenditures as of March 28, 2004.
Computer Software Expenditures
In addition, we expect to make cash expenditures of approximately $0.9
million for the remaining nine months of 2004 for computer software, principally
relating to the new restaurant systems and technology. There were $0.3 million
of outstanding commitments for computer software as of March 28, 2004.
Acquisitions and Investments
As of March 28, 2004, we have $728.7 million of cash, cash equivalents and
investments, including $38.6 million of investments classified as non-current
and net of $26.9 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 $23.9 million of investments, at cost, in the
Deferred Compensation Trusts designated to satisfy deferred compensation. We
also had $32.5 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 business acquisitions, repurchases of Triarc common shares (see
"Treasury Stock Purchases" below) and investments.
In that regard, we intend to form jointly with Deerfield & Company LLC,
which we refer to as Deerfield, an investment adviser to manage the assets of
Triarc Deerfield Investment Corporation, which we refer to as Triarc Deerfield.
Triarc Deerfield is a newly-formed business development company that on April
19, 2004 filed a registration statement, which has not yet become effective,
with the Securities and Exchange Commission relating to a proposed $750.0
million initial offering of its common stock. Deerfield, through its subsidiary
Deerfield Capital Management LLC, is a registered investment adviser.
Additionally, we are engaged in negotiations with certain owners of Deerfield
concerning the possible acquisition by us of a controlling interest in Deerfield
and an additional capital commitment by us. Together, the purchase price and
capital commitment are currently expected to aggregate approximately $185.0
million.
There can be no assurance that the initial public offering of common stock
of Triarc Deerfield will be completed, that the owners of Deerfield will enter
into a definitive agreement with us to sell a controlling interest in Deerfield
to us or that such an acquisition will be completed.
19
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Income Taxes
The Internal Revenue Service has commenced an examination of our Federal
income tax returns for the years ended December 31, 2000 and December 30, 2001.
We have not received any notices of proposed adjustments and, accordingly, the
amount of payments, if any, required as a result of this examination cannot be
determined. However, we do not currently believe any related tax payments will
be required during the remaining nine months of 2004. Moreover, should any
income taxes or interest be assessed as the result of this examination or any
state examination for periods through the October 25, 2000 date of the sale of
our former beverage businesses, the purchaser has agreed to pay up to $5.0
million of any resulting income taxes or associated interest relating to the
operations of those former beverage businesses.
Dividends
On March 16, 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 $4.3 million. On May 6, 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 June 3, 2004 and payable on
June 16, 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. If we pay quarterly cash dividends for the remainder of 2004 at the same
rate as declared and/or paid in our 2004 first two quarters, based on the number
of our class A and class B common shares outstanding as of April 30, 2004, our
total cash requirement for dividends would be $13.6 million for the remaining
nine months of 2004.
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 March 28, 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 March 28, 2004, our consolidated cash requirements for continuing
operations for the remaining nine months of 2004, exclusive of operating cash
flow requirements, consist principally of (1) an aggregate of approximately
$185.0 million in connection with the proposed acquisition of and additional
capital commitment to Deerfield, if consummated, and the cost of other business
acquisitions, if any, (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 $26.6 million, (4) regular quarterly cash dividends aggregating
approximately $13.6 million, (5) capital expenditures of approximately $12.3
million and (6) computer software expenditures of approximately $0.9 million. We
anticipate meeting all of these requirements through (1) the use of our
aggregate $690.1 million of existing cash and cash equivalents and short-term
investments, net of $26.9 million of short-term investments sold with an
obligation for us to purchase, (2) cash flows from continuing operating
activities to the extent not used for any net purchases of trading securities
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.
20
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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 March 28, 2004, the work at the site has been substantially
completed. Adams Packing submitted its contamination assessment report to the
Florida DEP in March 2004 and has recommended that no additional assessment
and/or remedial action be required and that the property be monitored in
accordance with an approved natural attenuation monitoring plan. The Florida DEP
has agreed to a monitoring plan, subject to a reevaluation of the need for
additional assessment at the end of two monitoring events. Based on an original
cost estimate of approximately $1.0 million for completion of the work plan
developed by Adams Packing's environmental consultant, and after taking into
consideration various legal defenses available to us, including Adams Packing,
Adams Packing has provided for its estimate of its liability for this matter,
including related legal and consulting fees prior to 2003.
In 1998, a number of class action lawsuits were filed on behalf of our
stockholders. Each of these actions named us, the Executives and the 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 March 28, 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 $2.0 million as of March 28, 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 lower in our first quarter.
Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board 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
21
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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.
22
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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 5."
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
the impact of interest rate changes on 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 2004 first
quarter. As of March 28, 2004, our long-term debt, including current portion,
aggregated $510.3 million and consisted of $496.0 million of fixed-rate debt,
including $1.6 million of capitalized leases, and $14.3 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 nearly thirty-one years. The fair market value of all of our
investments in 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
We had no significant changes in our management of, or our exposure to,
foreign currency fluctuations during the 2004 first quarter.
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
23
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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. 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.
We maintain investment portfolio holdings of various issuers, types and
maturities. As of March 28, 2004 these investments consisted of the following
(in thousands):
Cash equivalents included in "Cash and cash equivalents" on our
condensed consolidated balance sheet............................. $475,752
Short-term investments.............................................. 236,048
--------
Total cash equivalents and short-term investments................ 711,800
Restricted cash equivalents......................................... 32,462
Non-current investments............................................. 38,608
--------
$782,870
========
Securities sold with an obligation for us to purchase............... $(26,897)
========
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired and consisted principally of
cash in bank and mutual fund money market accounts, United States government
debt securities, interest-bearing brokerage and bank accounts with a stable
value and commercial paper of high credit-quality entities.
At March 28, 2004 our investments were classified in the following general
types or categories (in thousands):
Carrying Value
At Fair ------------------
Type At Cost Value (b) Amount Percent
---- --------- --------- -------- -------
Cash equivalents (a)............................. $475,752 $475,752 $475,752 61%
Restricted cash equivalents ..................... 32,462 32,462 32,462 4%
Securities accounted for as:
Trading securities ........................ 30,353 33,531 33,531 4%
Available-for-sale securities ............. 174,055 176,919 176,919 23%
Non-current investments held in deferred
compensation trusts accounted for at cost .... 22,196 28,052 22,196 3%
Assignments of commercial term loans ............ 8,001 8,020 8,001 1%
Other current and non-current investments in
investment limited partnerships and similar
investment entities accounted for at cost .... 23,638 40,493 23,638 3%
Other non-current investments accounted for at:
Cost ...................................... 3,756 3,756 3,756 --
Equity .................................... 900 30,784 6,615 1%
-------- -------- -------- ---
Total cash equivalents and long investment
positions..................................... $771,113 $829,769 $782,870 100%
======== ======== ======== ===
Securities sold with an obligation for us to
purchase...................................... $(23,423) $(26,897) $(26,897) N/A
======== ======== ========
- ----------
(a) Includes $1,750,000 of cash equivalents held in deferred compensation
trusts.
(b) 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 loss,
respectively. 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
24
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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
March 28, 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 March
28, 2004 based upon assumed immediate adverse effects as noted below (in
thousands):
Trading Purposes:
Carrying Equity Interest
Value Price Risk Rate Risk
-------- ---------- ---------
Equity securities........................ $29,028 $(2,903) $ --
Debt securities.......................... 4,503 -- (53)
The sensitivity analysis of financial instruments held at March 28, 2004
for trading purposes assumes (1) an instantaneous 10% decrease in the equity
markets in which we are invested and (2) an instantaneous increase in market
interest rates of one percentage point, each from their levels at March 28, 2004
and with all other variables held constant. The securities included in the
trading portfolio do not include any investments denominated in foreign currency
and, accordingly, there is no foreign currency risk.
The debt securities in our trading portfolio consisted entirely of United
States government debt securities each with a remaining maturity of fourteen
months. The interest rate risk with respect to these debt securities reflects
the effect of the assumed interest rate increase on the fair value of these
securities.
25
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Other Than Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
-------- --------- ---------- -------------
Cash equivalents...................................... $475,752 $ (189) $ -- $ --
Restricted cash equivalents .......................... 32,462 -- -- --
Available-for-sale United States government
and government agency debt securities ............. 13,986 (105) -- --
Available-for-sale commercial paper .................. 5,985 (18) -- --
Available-for-sale corporate debt securities, other
than commercial paper ............................. 81,916 (4,096) -- --
Available-for-sale asset-backed securities ........... 20,481 (2,458) -- --
Available-for-sale equity securities ................. 45,951 -- (4,595) --
Available-for-sale debt mutual fund .................. 8,600 (172) -- --
Assignments of commercial term loans ................. 8,001 (240) -- --
Other investments .................................... 56,205 (697) (4,193) (66)
Securities sold with an obligation to purchase ....... (26,897) -- 2,690 --
Long-term debt, excluding capitalized lease
obligations ....................................... 508,670 (23,163) -- --
Interest rate swap agreement in a payable
position .......................................... 846 (279) -- --
The sensitivity analysis of financial instruments held at March 28, 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 March 28, 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. 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 with interest rate risk
had a range of remaining maturities and were assumed to have weighted average
remaining maturities as of March 28, 2004 as follows:
Range Weighted Average
-------------------- ----------------
Cash equivalents (other than money market funds and interest-
bearing brokerage and bank accounts)............................... 3 days-85 days 45 days
United States government and government agency debt securities........ 4 1/4 months-1 year 9 months
Commercial paper...................................................... 32 days-5 1/3 months 3 2/3 months
Other corporate debt securities....................................... 2 1/4 years-10 years 5 years
Asset-backed securities............................................... 48 days-30 2/3 years 12 years
Debt mutual fund...................................................... 1 day-36 years 2 years
Assignments of commercial term loans.................................. 94 days-5 3/4 years 3 years
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, 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. Our cash equivalents included $322.8 million of money
market funds and interest-bearing brokerage and bank accounts which are designed
to maintain a stable value 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.
26
TRIARC COMPANIES, INC. AND SUBSIDIARIES
The interest rate risk presented with respect to our 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. However, we
have an interest rate swap agreement but with an embedded written call option on
our variable-rate debt. 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 generally 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.
27
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. No 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.
28
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;
29
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 availability, terms (including changes in interest rates) and
deployment of capital;
o changes in commodity (including beef), labor, supplies and other
operating costs and availability and cost of insurance;
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 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,
accounting standards, environmental laws, 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 adverse weather conditions;
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 publicly
release 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 5. Other Events
On April 19, 2004 we reported that we intend to form jointly with Deerfield
& Company LLC ("Deerfield") an investment advisor to manage the assets of Triarc
Deerfield Investment Corporation ("Triarc Deerfield"), a newly-formed business
development company that filed a registration statement with the Securities and
Exchange Commission on April 19, 2004 relating to a proposed $750,000,000
initial public offering of its common stock.
30
Deerfield, through its subsidiary Deerfield Capital Management LLC, is a
Chicago-based registered investment adviser that currently manages approximately
$8 billion in assets, principally comprised of collateralized debt obligation
(CDO) funds but also including other investment programs.
Additionally, we reported that we are engaged in negotiations with certain
owners of Deerfield concerning the possible acquisition by Triarc of a
controlling interest in Deerfield and an additional capital commitment by
Triarc. Together, the purchase price and the capital commitment are currently
expected to be in the aggregate amount of approximately $185 million. In any
such acquisition, senior management of Deerfield would retain a significant
ownership interest in Deerfield. Additionally, it is expected that subsequent
to any such acquisition Deerfield's senior management, including its Chairman
and Chief Executive Officer, Gregory Sachs, its President, Scott Roberts, and
its Chief Investment Officer, Jonathan Trutter, would remain in their current
roles, and that Deerfield's portfolio management teams would remain intact.
There can be no assurance that the initial public offering of common stock
of Triarc Deerfield will be completed, that the owners of Deerfield will enter
into a definitive agreement with Triarc to sell a controlling interest in
Deerfield or that such an acquisition will be completed. We do not anticipate
making any further announcement concerning the possible acquisition until a
definitive agreement is reached or negotiations are terminated.
A registration statement relating to the securities to be issued by Triarc
Deerfield has been filed with the Securities and Exchange Commission but has not
yet become effective and is not yet complete and is subject to change. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Quarterly Report on Form 10-Q
is not an offer to sell or the solicitation of an offer to buy nor shall there
be any sale of these securities in any State in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of any such State. Investors should consider the investment
objectives, risks, charges and expenses of Triarc Deerfield carefully before
investing. This and other information about Triarc Deerfield will be contained
in a prospectus that may be obtained, once available, from Triarc Deerfield. The
prospectus should be read carefully before investing.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
(b) Reports on Form 8-K
The Registrant furnished a report on Form 8-K on March 11, 2004, which
included information under Item 12 of such form.
The Registrant filed a report on Form 8-K on March 11, 2004, which included
information under Items 5 and 7 of such form.
The Registrant filed a report on Form 8-K on March 11, 2004, which included
information under Item 7 of such form.
The Registrant furnished a report on Form 8-K on February 17, 2004, which
included information under Item 9 of such form.
31
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: May 7, 2004 By: /s/ FRANCIS T. MCCARRON
--------------------------------
Francis T. McCarron
Senior Vice President and
Chief Financial Officer
(On behalf of the Company)
Date: May 7, 2004 By: /s/ FRED H. SCHAEFER
--------------------------------
Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
32
Exhibit Index
Exhibit
No. Description Page No.
- ------- ----------- --------
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.
33
STATEMENT OF DIFFERENCES
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The registered trademark symbol shall be expressed as.................. 'r'