UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 29, 2002March 30, 2003
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 20,347,93920,947,333 shares of the registrant's Class A Common Stock
outstanding as of the close of business on October 31, 2002.
- --------------------------------------------------------------------------------April 30, 2003.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, March 30,
September 29,
20012002 (A) 20022003
-------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 506,461457,472 $ 444,238467,525
Short-term investments............................................................ 153,401 190,869
Receivables....................................................................... 14,969 13,696175,161 157,429
Receivables ..................................................................... 12,967 11,499
Inventories....................................................................... 2,274 2,147
Deferred income tax benefit....................................................... 11,495 12,05715,934 15,848
Prepaid expenses.................................................................. 3,435 1,920expenses and other current assets......................................... 6,471 6,702
---------- ----------
Total current assets........................................................... 689,761 662,780670,279 661,150
Restricted cash equivalents............................................................ 32,506 32,48432,476 32,470
Investments............................................................................ 42,074 37,75534,717 30,610
Properties............................................................................. 60,989 56,558115,224 112,874
Goodwill .............................................................................. 17,922 17,92290,689 90,689
Other intangible assets................................................................ 5,472 5,0808,291 8,301
Deferred costs and other assets........................................................ 19,685 18,70816,604 16,791
---------- ----------
$ 868,409968,280 $ 831,287952,885
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................$ 24,76834,422 $ 25,92538,037
Accounts payable.................................................................. 2,941 3,80018,998 15,936
Accrued expenses.................................................................. 73,453 64,75973,338 66,334
Net current liabilities relating to discontinued operations....................... 31,962 32,31933,083 35,209
---------- ----------
Total current liabilities...................................................... 133,124 126,803159,841 155,516
Long-term debt......................................................................... 288,955 269,710352,700 340,917
Deferred compensation payable to related parties....................................... 24,356 24,83725,706 26,495
Deferred income taxes.................................................................. 69,606 66,629
Deferred60,967 60,704
Other liabilities, deferred income other liabilities and minority interests in a consolidated subsidiary. 19,971 19,44736,324 36,562
Stockholders' equity:
Common stock...................................................................... 2,955 2,955
Additional paid-in capital........................................................ 129,608 131,549131,708 132,186
Retained earnings................................................................. 359,652 348,540360,995 359,021
Common stock held in treasury..................................................... (160,639) (158,907)(162,084) (160,714)
Accumulated other comprehensive income (deficit).................................. 821 (276)deficit........................................... (832) (757)
---------- ----------
Total stockholders' equity..................................................... 332,397 323,861332,742 332,691
---------- ----------
$ 868,409968,280 $ 831,287952,885
========== ==========
(A) Derived from the audited consolidated financial statements as of
December 30, 2001.29, 2002.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
--------------------------- ----------------------------
September--------------------------------
March 31, March 30,
September 29, September 30, September 29,
2001 2002 2001 2002
---- ----2003
---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues, investment income (loss) and other income
(expense):Revenues:
Net sales..........................................................................$ -- $ 48,497
Royalties and franchise and related fees................$ 24,042 $ 25,671 $ 67,931 $ 72,889
Investment income (loss), net........................... 5,906 (441) 29,229 706
Other income (expense), net............................. 320 427 9,501 (1,019)fees (A)....................................... 22,381 21,237
---------- ---------
--------- -------- ---------
Total revenues, investment income (loss) and
other income (expense)............................. 30,268 25,657 106,661 72,576
--------- --------- --------22,381 69,734
---------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization............................. -- 36,255
Advertising and selling............................................................ 45 3,100
General and administrative.............................. 21,141 20,150 58,175 58,987administrative......................................................... 19,461 23,380
Depreciation and amortization, excluding amortization of deferred financing costs.......................... 1,554 1,605 4,719 4,860costs.. 1,581 3,383
---------- ---------
21,087 66,118
---------- ---------
Operating profit............................................................. 1,294 3,616
Interest expense........................................ 7,122 6,839 23,485 20,002expense........................................................................ (6,360) (8,458)
Insurance expense related to long-term debt............. 1,184 1,109 3,624 3,414
Costs of proposed business acquisitions not consummated. 481 2,100 572 2,232debt............................................. (1,175) (1,092)
Investment income, net.................................................................. 6,062 3,141
Other income (expense), net............................................................. (570) 557
---------- ---------
--------- -------- ---------
Total costs and expenses............................. 31,482 31,803 90,575 89,495
--------- --------- -------- ---------
Income (loss) from continuing operationsLoss before income taxes and minority interests ... (1,214) (6,146) 16,086 (16,919)
Benefittaxes..................................................... (749) (2,236)
(Provision for) benefit from (provision for) income taxes................... (554) 2,582 (8,686) 3,552
Minority interests in loss of a consolidated subsidiary..... -- 1,009 -- 2,255
--------- --------- -------- ---------
Income (loss) from continuing operations......... (1,768) (2,555) 7,400 (11,112)
Discontinued operations:
Gain on disposal, net of income taxes................... -- -- 38,517 --
--------- --------- --------taxes............................................... (297) 262
---------- ---------
Net income (loss)................................loss.....................................................................$ (1,768)(1,046) $ (2,555) $ 45,917 $ (11,112)(1,974)
========== =========
========= ======== =========
Basic income (loss)Loss per share:
Continuing operations............................Basic........................................................................$ (.08)(.05) $ (.12) (.10)
========== =========
Diluted......................................................................$ .34(.05) $ (.54)
Discontinued operations.......................... -- -- 1.75 --
--------- --------- -------- ---------
Net income (loss)................................$ (.08) $ (.12) $ 2.09 $ (.54)
========= ========= ======== =========
Diluted income (loss) per share:
Continuing operations............................$ (.08) $ (.12) $ .32 $ (.54)
Discontinued operations.......................... -- -- 1.66 --
--------- --------- -------- ---------
Net income (loss)................................$ (.08) $ (.12) $ 1.98 $ (.54)
========= ========= ========(.10)
========== =========
(A) Includes royalties from Sybra, Inc. of $1,736,000 for the three months
ended March 31, 2002 whereas the royalties from Sybra, Inc. of
$1,677,000 for the three months ended March 30, 2003 were eliminated
in consolidation.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NineThree Months Ended
----------------------------------
September------------------------------
March 31, March 30,
September 29,
2001 2002 2003
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss)....................................................................loss..............................................................................$ 45,917(1,046) $ (11,112)(1,974)
Adjustments to reconcile net income (loss)loss to net cash provided byused in continuing operating activities:
Operating investment adjustments, net (see below)............................... (5,412) 7,954
Depreciation and amortization of properties..................................... 3,058 4,203
Amortization of goodwill ....................................................... 632 --properties.................................... 1,416 3,059
Amortization of other intangible assets and certain other items................. 1,029 657items................ 165 324
Amortization of deferred financing costs and original issue discount............ 1,570 1,432discount........... 486 451
Collection (recognition) of litigation settlement receivable.................... (3,333)receivable................................. 1,667 1,667
Deferred compensation provision ............................................... 924 789
Operating investment adjustments, net (see below).............................. 778 (6,766)
Equity in losses (earnings) of investees, net.............................................. 201 487
Deferred compensation provision ................................................ 1,089 481net.................................. 739 (577)
Deferred income tax benefit..................................................... (2,978) (2,977)
Minority interests in loss of a consolidated subsidiary......................... -- (2,255)
Income from discontinued operations............................................. (38,517) --benefit.................................................... (992) (219)
Other, net...................................................................... 795 1,420net..................................................................... (681) 277
Changes in operating assets and liabilities:
Increase in receivables.................................................... (38) (192)
Decrease (increase) in receivables........................................... (371) 1,138
Decrease (increase)inventories.................................................... -- 127
Increase in prepaid expenses...................................... (1,214) 1,515expenses and other current assets...................... (496) (231)
Decrease in accounts payable and accrued expenses............................ (1,369) (4,266)expenses.......................... (14,982) (17,208)
---------- ----------
Net cash provided byused in continuing operating activities...................... 1,097 344activities........................ (12,060) (20,473)
---------- ----------
Cash flows from continuing investing activities:
Investment activities, net (see below)............................................... 7,860 (45,791)
Purchase of fractional interest in corporate aircraft................................ -- (1,200)................................................ (44,719) 34,540
Capital expenditures................................................................. (25,158) (30)
Other................................................................................ (6) (400)expenditures.................................................................. (23) (721)
Other................................................................................. 497 (66)
---------- ----------
Net cash used inprovided by (used in) continuing investing activities.......................... (17,304) (47,421)activities.......... (44,245) 33,753
---------- ----------
Cash flows from continuing financing activities:
Proceeds from long-term debt......................................................... 22,590 --
Repayments of long-term debt......................................................... (12,335) (18,090)
Repurchasesdebt.......................................................... (5,932) (8,296)
Exercises of common stock for treasury............................................. (49,576) (3,147)
Proceedsoptions............................................................ 1,851 1,692
Transfers from stock option exercises................................................. 4,785 5,439
Release of restricted cash equivalents collateralizing long-term debt................ 1,068 295
Deferred financing costs............................................................. (625) --equivalents............................................ 124 53
---------- ----------
Net cash used in continuing financing activities.......................... (34,093) (15,503)activities........................ (3,957) (6,551)
---------- ----------
Net cash used in continuing operations.................................................. (50,300) (62,580)
Net cash provided by (used in) continuing operations.................................... (60,262) 6,729
Net cash provided by discontinued operations.................................. (182,765) 357operations............................................ 290 3,324
---------- ----------
Net decreaseincrease (decrease) in cash and cash equivalents............................................... (233,065) (62,223)equivalents.................................... (59,972) 10,053
Cash and cash equivalents at beginning of period........................................ 596,135 506,461 457,472
---------- ----------
Cash and cash equivalents at end of period..............................................$ 363,070446,489 $ 444,238467,525
========== ==========
Details of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities..........................................securities........................................$ 55,99214,855 $ 37,1225,919
Cost of trading securities purchased............................................... (52,097) (38,853)purchased............................................. (11,523) (12,014)
Net recognized losses (gains) losses from trading securities and short positions in
securities...................................................................... (417) 612securities..................................................................... 40 (49)
Other net recognized (gains) losses,gains, including a reduction for other than temporary
losses, and equity in investment limited partnerships................................... (2,121) 8,619partnerships.......................... (2,621) (729)
Net amortization of premium (accretion of discount) on debt securities............. (6,769) 454securities................................... 27 107
---------- ----------
$ (5,412)778 $ 7,954(6,766)
========== ==========
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments....................................................................$ 106,94328,373 $ 47,83647,943
Cost of available-for-sale securities and other investments purchased.............. (95,027) (98,035)purchased............ (70,405) (17,759)
Proceeds of securities sold short.................................................. 17,481 31,254short................................................ 6,414 9,886
Payments to cover short positions in securities.................................... (21,537) (26,846)securities.................................. (9,101) (5,530)
---------- ----------
$ 7,860(44,719) $ (45,791)34,540
========== ==========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 29, 2002March 30, 2003
(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 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, and, in 2001, the adjustment to the gain on disposal of discontinued
operations (see Note 5), necessary to present fairly the Company's financial
position as of December 30, 2001 and September 29, 2002 and March 30, 2003 and its results of
operations for the three and nine-month periods ended September 30, 2001 and
September 29, 2002 and its cash flows for the nine-monththree-month periods ended SeptemberMarch 31, 2002 and
March 30, 2001 and September 29, 20022003 (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 30, 200129, 2002
(the "Form 10-K").
The Company reports on a fiscal year basis consisting of 52 or 53 weeks
ending on the Sunday closest to December 31. The Company's first nine-month
period of fiscal 2001 commenced on January 1, 2001 and ended on September 30,
2001, with its third quarter of 2001 commencing on July 2, 2001. The Company's
first nine-month period of fiscal 2002
commenced on December 31, 2001 and ended on September 29,March 31, 2002 with its thirdand the Company's
first quarter of 2003 commenced on December 30, 2002 commencingand ended on July 1,
2002.March 30,
2003. The periodsperiod from July 2,December 31, 2001 to September 30, 2001 and January 1, 2001 to
September 30, 2001 areMarch 31, 2002 is referred to herein
as the three-month period ended March 31, 2002 and nine-month
periods ended Septemberthe period from December 30, 2001, respectively. The periods from July 1,
2002 to September 29, 2002 and December 31, 2001 to September 29, 2002 areMarch 30, 2003 is referred to herein as the three-month and nine-month periodsperiod ended
September 29, 2002,
respectively.March 30, 2003. Each quarter contained 13 weeks and each nine-month period
contained 39 weeks.
Certain amounts included in the accompanying prior periods' condensed
consolidated financial statements of operations and statement of cash flows have been reclassified to conform with the
current periods'quarter's presentation.
(2) Significant Accounting Policies Update
Effective DecemberStock-Based Compensation
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 common stock 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. However, no
stock-based employee compensation expense determined under the intrinsic value
method has been recognized in the reported net loss during the three-month
periods ended March 31, 2001,2002 and March 30, 2003.
A summary of the effect on net loss and net 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 31, March 30,
2002 2003
---- ----
Net loss, as reported.............................................................$ (1,046) $ (1,974)
Recognition of total stock-based employee compensation expense determined
under the fair value method, net of related income taxes........................ (1,471) (1,270)
---------- ----------
Net loss, as adjusted.............................................................$ (2,517) $ (3,244)
========== ==========
Loss per share:
Basic and diluted, as reported..................................................$ (.05) $ (.10)
Basic and diluted, as adjusted.................................................. (.12) (.16)
See Note 14 to the consolidated financial statements contained in the Form 10-K
for disclosure of the adjustments, methods and significant assumptions used to
estimate the fair values of stock options reflected in the table above. The
significant assumptions remain unchanged since there were no stock options
granted by the Company adopted Statementduring the three-month periods ended March 31, 2002 and
March 30, 2003.
(3) Acquisition of Financial
Accounting StandardsSybra
On December 27, 2002, the Company completed the acquisition (the "Sybra
Acquisition") of all of the voting equity interests of Sybra, Inc. ("SFAS"Sybra")
No. 142from I.C.H. Corporation ("SFAS 142"ICH"), "Goodwill and Other
Intangible Assets," and SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets," issued by the Financial Accounting
Standards Board.
Under SFAS 142, costs as disclosed in excess of net assets of acquired companies
("Goodwill"), relatingmore detail in Note 3 to the
Company's restaurant franchisingconsolidated financial statements contained in the Form 10-K. Sybra
owned and operated 239 Arby's restaurants in nine states as of March 30, 2003
and, prior to the Sybra Acquisition, was the second largest franchisee of Arby's
restaurants.
The allocation of the purchase price of Sybra to the assets acquired and
the liabilities assumed at the date of the Sybra Acquisition is set forth in
Note 3 to the consolidated financial statements contained in the Form 10-K. This
allocation of the purchase price of Sybra is on a preliminary basis and remains
subject to finalization.
Sybra's results of operations and aggregating $17,922,000 ascash flows have been included in the
accompanying condensed consolidated statements of Decemberoperations and cash flows for
the quarter ended March 30, 20012003 but have not been included for the quarter
ended March 31, 2002. However, royalties and September 29, 2002,franchise and related fee revenues
from Sybra, which are no longer amortized effectiveincluded in the accompanying condensed
consolidated statements of operations and cash flows for the quarter ended March
30, 2003, were included for the quarter ended March 31, 2002.
The following unaudited supplemental pro forma condensed consolidated
summary operating data (the "As Adjusted Data") of the Company for the quarter
ended March 31, 2002 has been prepared by adjusting the historical data as set
forth in the accompanying condensed consolidated statement of operations to give
effect to the Sybra Acquisition as if it had been consummated on December 31, 2001. SFAS 142 requires that Goodwill be
tested for impairment at least annually by applying a fair value-based test. The
Company has determined that there was no impairment of Goodwill upon adoption of
SFAS 142. Further, the Company has determined that all of its other intangible
assets, principally trademarks, have finite useful lives and, accordingly, will
continue to be amortized.
The following sets forth information on other intangible assets subject to
amortization (in thousands):
September 29, 2002
--------------------------------
Accumulated
Cost Amortization Net
---- ------------ ---
Trademarks..................................................................$ 7,776 $ 2,919 $ 4,857
Computer software and distribution rights................................... 414 191 223
-------- -------- --------
$ 8,190 $ 3,110 $ 5,080
======== ======== ========
Aggregate amortization expense:
Actual:
Three months ended September 29, 2002..........$ 173
Nine months ended September 29, 2002........... 520
Estimate for fiscal year:
2002...........................................$ 689
2003........................................... 677
2004........................................... 558
2005........................................... 558
2006........................................... 558
The following is a reconciliation of reported net income (loss) and income
(loss) per share adjusted on a pro forma basis for the reversal of Goodwill
amortization, net of tax, as though SFAS 142 had been in effect as of January 1,
2001 (in thousands except per share amounts):
Three Months Ended September 30, 2001 Nine Months Ended September 30, 2001
------------------------------------- ------------------------------------
As Reported Adjustment Pro Forma As Reported Adjustment Pro FormaAdjusted
----------- ---------- --------- ----------- ---------- ---------
Revenues......................................................................$ 22,381 $71,116
Operating profit (loss)....................................................... 1,294 (2,595)
Net income (loss)..............$ (1,768) $ 208 $ (1,560) $ 45,917 $ 623 $ 46,540
Net income (loss)loss...................................................................... (1,046) (5,467)
Loss per share:
Basic....................... (.08) .01 (.07) 2.09 .03 2.12
Diluted ................... (.08) .01 (.07) 1.98 .03 2.01Basic....................................................................... (.05) (.27)
Diluted..................................................................... (.05) (.27)
Under SFAS 144, the Company continuesThe As Adjusted Data is presented for comparative purposes only and does
not purport to review certain long-lived assets
other than Goodwill for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
review indicates an asset may not be recoverable, an impairment loss is
recognized for the excessindicative of the carrying amount over the fair value of an asset
to be held and used or over the fair value less cost to sell of an asset to be
disposed. The Company has determined that for the nine months ended September
29, 2002 all of its long-lived assets that required testing for impairment were
recoverable and did not require the recognition of any associated impairment
loss. Accordingly, the adoption of SFAS 144 had no effect on the Company's consolidated financial position oractual results of operations forhad
the three and
nine-month periods ended September 29, 2002.
(3) Pending ProposedSybra Acquisition The Company has submitted a proposal to acquire the second largest
franchisee of Arby's restaurants, Sybra, Inc. and its affiliate, Sybra of
Connecticut, Inc. (collectively, "Sybra"), which are subsidiaries of I.C.H.
Corporation ("ICH"). Sybra owns and operates 239 Arby's restaurants. ICH and
Sybra had filed for protection under chapter 11 of the United States Bankruptcy
Codeactually been consummated on February 5, 2002 in order to restructure their financial obligations.
The Company has filed a proposed chapter 11 plan of reorganization for ICH/Sybra
which, as amended most recently on October 23, 2002, provides for the Company's
purchase of Sybra in exchange for $8,000,000 to be paid to ICH's general
unsecured creditors and the Company's agreement to pay certain other amounts
(the "Obligations") which, based on estimates prepared by ICH/Sybra, are not
expected to be substantial. In addition, the Company will invest $14,500,000,
less the amount necessary to fund the Obligations, in Sybra, which amount will
be used to pay Sybra's unsecured creditors and to fund working capital
requirements. Furthermore, the Company will make available to, or obtain for,
Sybra a $5,000,000 financing facility for each of three years following the
acquisition (up to $15,000,000 in the aggregate) to fund any operating
shortfalls of Sybra. Sybra will remain exclusively liable for its long-term debt
and capital lease obligations which aggregated approximately $104,000,000 as of December 31, 2001 the most recent date for which this information is available.
ICH/Sybra filed its own chapter 11 plan of reorganization which, as amended most
recently on October 17, 2002, proposes the acquisition of Sybra by an affiliate
of RTM, Inc., the largest franchisee of Arby's restaurants. The bankruptcy court
presiding over the ICH/Sybra chapter 11 cases set a hearing for November 25,
2002 to consider approvalor of the
competing chapter 11 plans. At this time, it is
not possible to determine the outcomeCompany's future results of the hearing and, as a result, the
Company's efforts to acquire Sybra.
operations.
(4) Comprehensive Income (Loss)Loss
The following is a summary of the components of comprehensive income
(loss),loss, net of
income taxes (in thousands):
Three Months Ended
Nine Months Ended
--------------------------- ---------------------------
September------------------------------
March 31, March 30,
September 29, September 30, September 29,
2001 2002 2001 2002
---- ----2003
---- ----
Net income (loss).......................................loss......................................................................$ (1,768)(1,046) $ (2,555) $ 45,917 $ (11,112)(1,974)
Net change in unrealized holding gains or losses on available-for-sale
securities (see below)............. (2,600) 47 (3,365) (1,062)...................................................... (2,984) 69
Net change in currency translation adjustment........... (28) (9) 4 (35)
---------- ---------adjustment................................. 3 6
---------- ----------
Comprehensive income (loss).............................loss............................................................$ (4,396)(4,027) $ (2,517) $ 42,556 $ (12,209)
========== =========(1,899)
========== ==========
The following is a summary of the components of the net change in the
unrealized holding gains or losses on available-for-sale securities included in
other comprehensive income (loss)loss (in thousands):
Three Months Ended
Nine Months Ended
----------------------------- ----------------------------
September------------------------------
March 31, March 30,
September 29, September 30, September 29,
2001 2002 2001 20022003
---- ----
---- ----
Net change in unrealized appreciation or depreciation of available-for-sale
securities during the period....period................................................$ (3,975)(2,718) $ (336) $ (3,488) $ (336)(19)
(Less) plus reclassification of prior period net (appreciation) depreciation
included in net income
or loss............................................... (36) 422 (1,428) (1,334)
---------- ---------loss....................................................... (1,966) 135
---------- ----------
(4,011) 86 (4,916) (1,670)
Change(4,684) 116
Equity in equitychange in unrealized gain on a retained interest..............................................interest.................... 78 (7)
Equity in change in unrealized gain on available-for-sale securities.......... -- (11) (245) 462
Income tax (provision) benefit.......................... 1,411 (28) 1,796 562
---------- ---------benefit................................................ 1,622 (42)
---------- ----------
$ (2,600)(2,984) $ 47 $ (3,365) $ (1,062)
========== =========69
========== ==========
(5) Discontinued Operations
In 2000Prior to 2002 the Company sold (the "Snapple Beverage Sale") the stock of
the companies comprising its former premium beverage and soft drink concentrate
business segments (the "Beverage Discontinued Operations") to affiliates of
Cadbury Schweppes plc ("Cadbury"). Further, prior to 20012002 the Company sold 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. The Beverage
Discontinued Operations and the SEPSCO Discontinued Operations have been
accounted for as discontinued operations since their respective dates of sale.
The consideration paid to the Company in the Snapple Beverage Sale
consisted of (1) cash, which is subject to further post-closing adjustment as
described below and (2) the assumption by Cadbury of debt and related accrued
interest. The Snapple Beverage Sale purchase and sale agreement provides for a
post-closing adjustment, the amount of which is in dispute. Cadbury has stated
that it currently believes that it is entitled to receive from the Company a
post-closing adjustment of $23,189,000 andplus interest at 7.19% from the October
25, 2000 sale date while the Company, on the other hand, has stated that it
currently believes that it is entitled to receive from Cadbury ano post-closing adjustment of $773,000, in each case plus interest at 7.19% from
October 25, 2000.is required. The Company is
in arbitration with Cadbury to determine the amount of the post-closing
adjustment.adjustment, if any. The Company currently expects the arbitration process to be
completed in the first quarter ofno later than December 29, 2003.
Net current liabilities relating to discontinued operations consisted of
the following (in thousands):
December 29, March 30,
September 29,
2001 2002 2003
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Operations.................................................................Discontinued Operations....................................................$ 29,06730,316 $ 29,50432,453 (a)
Net liabilities of SEPSCO Discontinued Operations (net of assets held
for sale of $234)... 2,895 2,815.......................................................... 2,767 2,756
----------- -----------
$ 31,96233,083 $ 32,31935,209
=========== ===========
(a) Increase is principally due to the collection of state income tax
receivables of $3,422,000 less related federal income taxes of
$1,198,000.
(6) Income (Loss)Loss Per Share
Basic income (loss)loss per share for the three-month periods ended March 31, 2002 and
March 30, 2003 has been computed by dividing net income or loss by the weighted average
number of common shares outstanding of 21,206,00020,422,000 and 20,507,000 for the three-month periods ended September 30, 2001 and
September 29, 2002, respectively, and 21,921,000 and 20,471,000 for the
nine-month periods ended September 30, 2001 and September 29, 2002,20,413,000, respectively.
Diluted loss per share for the three-month periods ended September
30, 2001 and September 29,March 31, 2002 and
the nine-month period ended September 29,
2002March 30, 2003 is the same as the basic loss per share since the Company
reported a net loss
from continuing operations and, therefore, the effect of all potentially dilutive
securities on the loss from continuing operationsper share would have been antidilutive. DilutedThe only
remaining Company securities as of March 30, 2003 that could dilute basic income
per share for periods subsequent to March 30, 2003 are the nine-month period ended September
30, 2001 has been computed by dividing the income by an aggregate 23,150,000
shares which include the 1,229,000 potential common share effect of dilutive9,185,088 outstanding
stock options computed using the treasury stock method. The shares for diluted
income per share for the nine-month period ended September 30, 2001 exclude any
effect of (1) a written call option on the Company's common stock in conjunction
with the assumption of the Company's zero coupon convertible debentures by
Cadbury and (2) a forward purchase obligation for common stock whereby the
Company repurchased 1,999,207 shares of its former class B common stock on
August 10, 2001, since the effect of each of these on income from continuing
operations per share in that period would have been antidilutive.options.
(7) Transactions with Related Parties
ThePrior to 2002 the Company leased a helicopter until April 4, 2002 from a subsidiaryprovided incentive compensation of Triangle Aircraft Services Corporation ("TASCO"), a company owned by$22,500,000 to
the Chairman and Chief Executive Officer and the President and Chief Operating
Officer of the Company (the "Executives") under a dry lease which was scheduled
to expire in September 2002. Annual rent for the helicopter was $382,000 from
October 1, 2000 through September 30, 2001, and increased to $392,000 as of
October 1, 2001 as a result of an annual cost of living adjustment. In
connection with the dry lease, the Company had rent expense of $286,000 and
$98,000 included in "General and administrative" in the accompanying condensed
consolidated statements of operations for the nine-month periods ended September
30, 2001 and September 29, 2002, respectively. The Company terminated its lease
effective April 1, 2002 and, in consideration for $150,000, was released from
all of its remaining obligations under the lease, including a then remaining
rental obligation of $196,000. The Company recorded the $150,000 during the
three-month period ended June 30, 2002 when the lease was terminated and it is
included in "General and administrative" for the nine-month period ended
September 29, 2002.
Effective March 1, 2001 the Company received a $5,000,000 interest-bearing
note (the "Executives' Note") from the Executives as part of a settlement of a
class action lawsuit receivable in three equal installments due March 31, 2001,
2002 and 2003. The Company recorded the $5,000,000 during the three-month period
ended April 1, 2001 as a reduction of compensation expense included in "General
and administrative" in the accompanying condensed consolidated statement of
operations for the nine-month period ended September 30, 2001, since the
settlement effectively represented an adjustment of prior period compensation
expense. The Executives' Note bore interest initially at 6% per annum and, in
accordance with its terms, was adjusted on April 2, 2001 to 4.92% per annum and
was again adjusted on April 1, 2002 to 1.75%. The Company recorded interest
income on the Executives' Note of $107,000 and $56,000 for the nine-month
periods ended September 30, 2001 and September 29, 2002, respectively. In March
of 2001 and 2002 the Company collected the first and second installments
aggregating $3,333,000 on the Executives' Note. The Company also collected
related interest of $25,000 and $163,000 during the nine-month periods ended
September 30, 2001 and September 29, 2002, respectively. The remaining balance
of the Executives' Note of $1,667,000 is included in "Receivables" in the
accompanying condensed consolidated balance sheet as of September 29, 2002.
Triarc recorded incentive compensation of $22,500,000 during 2000 to the
Executives which was invested in two deferred
compensation trusts (the "Deferred Compensation Trusts") for their benefit on January 23, 2001. Thebenefit.
Deferred compensation expense of $924,000 and $789,000 was recognized in the
three-month periods ended March 31, 2002 and March 30, 2003, respectively, for
the increase in the fair value of the investments in the Deferred Compensation
Trusts for the
nine-month periods ended September 30, 2001 and September 29, 2002 resulted in
deferred compensation expense of $1,089,000 and $481,000, respectively, included
in "General and administrative."Trusts. Under accounting principles generally accepted in the United States of
America, the Company recognized investment income of
$171,000 on the investments in the Deferred Compensation Trusts during the
nine-month period ended September 30, 2001 but was not able to recognize any investment income on
the increaseunrealized increases in value of the investments in the Deferred Compensation
Trusts during the nine-monththree-month periods ended March 31, 2002 and March 30, 2003.
However, during the three-month period ended September 29, 2002. ThisMarch 30, 2003, the Company sold
one of the investments in the Deferred Compensation Trusts and recognized a
previously unrealized gain of $452,000, which included increases in value prior
to the 2003 first quarter. The cumulative disparity between compensation expense
and recognized investment income recognized will reverse in future periods as either (1)
theadditional 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 reduction of
deferred compensation expense without any offsetting losses recognized in
investment income. Recognized gains are included in "Investment income, net" and
deferred compensation expense is included in "General and administrative" in the
accompanying condensed consolidated statements of operations. The related obligation to
the Executives is reported as "Deferred compensation payable to related parties"
and the
investments in the Deferred Compensation Trusts are reported in "Investments" in the accompanying condensed consolidated balance sheets.sheet as of March 30, 2003.
The assets in the Deferred Compensation Trusts which are reflected in the
accompanying condensed consolidated balance sheet as of March 30, 2003 consisted
of $18,171,000 included in "Investments," $4,459,000 included in "Cash and cash
equivalents" and $495,000 included in "Receivables."
The Company received a $5,000,000 interest-bearing note (the "Executives'
Note") from the Executives prior to 2002 as part of a settlement of a class
action lawsuit receivable in three equal installments. The Executives' Note bore
interest at 4.92% during the twelve-month period ended March 31, 2002 and at
1.75% thereafter through maturity. The Company recorded interest income on the
Executives' Note of $40,000 and $7,000 for the three-month periods ended March
31, 2002 and March 30, 2003, respectively. In March of 2002 and 2003 the Company
collected the second and third installments aggregating $3,334,000 on the
Executives' Notes. The Company also collected related interest of $163,000 and
$29,000 during the three-month periods ended March 31, 2002 and March 30, 2003.
As disclosed in more detail in Note 2423 ("Note 24"23") to the consolidated
financial statements contained in the Form 10-K regarding related party
transactions, the Company has provided a numbercertain of its management officers and
employees, including its executive officers, the opportunity to co-invest with
the Company in certain investments and made related loans to management.management prior to
2002. The Company did not enter into any new co-investments or makesubsequent to 2001
and the co-investment policy no longer permits any co-investment
loans to management officers or employees duringnew loans. During the nine-month periodquarter
ended SeptemberDecember 29, 2002, and management has notified the Company's board of directors
that the Company does not intend to make any further co-investment loans.
Moreover, under recently enacted Federal legislation,provided an allowance of $176,000 for the
Company is not
permitted to make any new loans to its executive officers. Duringuncollectible non-recourse portion of the year ended
December 30, 2001, the Company wrote off $219,000 of non-recourse notes and
$14,000 of related accrued interest owed by management in connection
with their investmentco-investments in 280 KPE Holdings,EBT Holding Company, LLC ("280 KPE"EBT") due to the
worthlessness of the underlying investments heldinvestment owned by 280 KPE.EBT. Such non-recourse notes were
subsequently forgiven duringin March 2002.2003. During the nine monthsthree-month period ended September 29, 2002,March
30, 2003, the Company collected the remaining $216,000$176,000 of the recourse portion
of the notes and $18,000 of related
accrued interest owed by management in connection with their co-investment in
280 KPE. During that period the Company also collected $90,000 of notes and
$3,000 of related accrued interest in connection with co-investments inrespect to EBT
Holding Company LLC and $50,000 of notes and $2,000 of related accrued interest
in connection with a co-investment in 280 BT Holdings LLC ("280 BT"). In
addition, in September 2002, a former officer of the Company surrendered 1.5% of
his 2.5% co-investment interest in 280 BT to the Company in settlement of a
$50,000 non-recourse loan made to him in connection with that co-investment and
$2,000 of related accrued interest, resulting in an increase in the Company's
ownership percentage to 57.4% from 55.9%. Such settlement resulted in a pretax
gain to the Company of $48,000 consisting of a reduction of the minority
interests in 280 BT of $100,000 as a result of the Company now owning the 1.5%
surrendered interest less the $52,000 charge for the extinguishment of the
$50,000 non-recourse note plus related accrued interest. This gain is before the
recognition of additional losses deemed to be other than temporary in
investments owned by 280 BT during the three-month period ended September 29,
2002. The reduction of the minority interests was included as a credit to
"Minority interests in loss of a consolidated subsidiary" and the charge for the
extinguishment of the note was included in "General and administrative" in the
accompanying condensed consolidated statements of operations for the three and
nine-month periods ended September 29, 2002. Under
the Company's co-investment policy, as of September 29, 2002March 30, 2003 the Company had in
total $2,347,000 principal
amount$1,994,000 of remaining co-investment notes receivable from management, of
which $1,174,000
were non-recourse.$997,000 was non-recourse, less a $393,000 remaining allowance for the
uncollectible non-recourse portion of the notes which was also provided during
the quarter ended December 29, 2002. These notes, net of the related allowance,
are included in "Deferred costs and other assets" in the accompanying condensed
consolidated balance sheets.
Also as disclosed in Note 24, the Company has an investment in Scientia
Health Group Limited ("Scientia") through its current 57.4% ownership of 280 BT
(see previous paragraph). In July 2002, the executive chairman of the board of
Scientia resigned and in October 2002 pled guilty to certain charges in an
indictment by a Federal grand jury. The Company is monitoring the effect this
resignation and guilty plea has had and may continue to have on the value, as
disclosed below, of the Company's investment. 280 BT invested $5,000,000 in
Scientia in November 2001, of which $2,500,000 was originally invested by the
Company. Management originally invested $2,475,000 under the Company's
co-investment policy; such amount includes co-investment loans by the Company to
a number of members of management which as of September 29, 2002 aggregate
$1,550,000 outstanding, of which $775,000 are non-recourse. These notes are
included in the total $2,347,000 aggregate principal amount of co-investment
notes receivable as of September 29, 2002 referred to in the paragraph above.
The Company accounts for 280 BT as a consolidated subsidiary and includes 280
BT's total investment in Scientia in "Investments" in the accompanying condensed
consolidated balance sheets and also reports related minority interests in
"Deferred income, other liabilities and minority interests in a consolidated
subsidiary." As of September 29, 2002, the carrying value of the investment in
Scientia was the gross amount of $2,419,000, effectively reduced by minority
interests of $1,031,000. The gross carrying value represents the original cost
less adjustments aggregating $2,581,000 for unrealized losses in investments
made by Scientia that were deemed to be other than temporary, effectively
reduced by minority interests of $1,107,000. One of the Executives serves on
Scientia's board of directors.
As of December 30, 2001, the Company owned 8.4% and certain of its present
and former officers, including entities controlled by them, owned 19.3% of the
common stock of Encore Capital Group, Inc. ("Encore"), which was formerly MCM
Capital Group, Inc. During the nine-month period ended September 29, 2002,
certain existing stockholders of Encore made an aggregate $5,000,000 investment
in newly-issued convertible preferred stock of Encore, of which the Company
invested $873,000 and some of those present and former officers referred to
above invested $1,627,000. The Company's investment in the common stock of
Encore is accounted for in accordance with the equity method while the
investment in the preferred stock of Encore is accounted for in accordance with
the cost method. The Company had $744,000 of cumulative unrecorded equity in
losses of Encore as of December 30, 2001 since the Company had previously
reduced its investment in Encore to zero. The Company recognized the $744,000 in
connection with its $873,000 additional investment during the three-month period
ended March 31, 2002 as a charge to "Other income (expense), net" in the
accompanying condensed consolidated statement of operations for the nine-month
period ended September 29, 2002. The Company also recognized $266,000 of its
equity in earnings of Encore during the nine-month period ended September 29,
2002. Concurrently with the $5,000,000 investment, a financial institution which
holds senior notes of Encore forgave obligations thereunder aggregating
$5,323,000. Encore recorded an increase in its additional paid-in capital of
$4,665,000 for the forgiveness of this debt during its first quarter of 2002,
representing the $5,323,000 less $658,000 of related unamortized debt discount
and deferred loan costs. The Company recorded its equity of $393,000 in such
amount as an increase in "Additional paid-in capital" during the nine-month
period ended September 29, 2002.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 2423 to the
consolidated financial statements contained in the Form 10-K.
(8) Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc.
("Adams"), a non-operatingan 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 1970s.1970's. The
business operations of Adams were sold in December 1992. In October 2001, an
environmental consultant engaged byFebruary 2003, Adams
and the Florida Department of Environmental Protection (the "FDEP") conducted, agreed to a
preliminary investigationconsent order that provides for development of the site,
including soil and groundwater sampling. A final report by the environmental
consultant received in April 2002 identified contamination of the soil and
groundwater at the site and indicated that the environmental consultant believed
that further unspecified action is warranted at the site. Adams has engaged its
own environmental consultant that, under the supervision of the FDEP, has
conducted a work plan for further
investigation of the site that was intended to develop
additional information on the extent and nature of the soil and groundwater
contamination and the appropriatelimited remediation for that contamination. Adams'
environmental consultant has submitted to the FDEP a summary of the results of
this investigation with a proposal for remediation and monitoring of the identified
contamination. TheSubsequent to March 30, 2003, the FDEP has responded by requesting certain
additional investigative and remedial work. Adams currently intends to negotiate
aapproved the work plan
thatsubmitted by Adams' environmental consultant and work is acceptableexpected to begin at
the FDEP and is not materially more costly
than Adams' original proposal which is estimated to cost approximately
$1,000,000.site in the near future. Based on thea preliminary cost estimate and Adams' intent to
negotiate aof
approximately $1,000,000 for completion of the work plan that does not materially exceed that estimate,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. Such provision was made primarily during the three-month periodquarter ended June
30, 2002 principally as a
reduction of gain on sale of businesses in "Other income (expense), net" in the
accompanying condensed consolidated statement of operations for the nine-month
period ended September 29, 2002 since the provision represents an adjustment to
the previously recorded gain on the sale of Adams.
As disclosed more fully in the Form 10-K, on March 23, 1999 a stockholder2002.
In October 1998, various class action lawsuits were filed a complaint against the Company and the Executives on behalf of persons
who held Triarc class A common stockthe
Company's stockholders. Each of these actions names the Company, the Executives
and members of the Company's board of directors as defendants. On March 26,
1999, certain plaintiffs in these actions filed an amended complaint which
as amended, allegedalleges that the Company's tender offer statement filed with the Securities and
Exchange Commission in 1999, pursuant to which the Company repurchased 3,805,015
shares of its class A common stock for $18.25 per share, was materially false
and misleading. OnThe amended complaint seeks, among other items, damages in an
unspecified amount. In October 17, 20022000, the plaintiffs agreed to stay this action
pending determination of a similar stockholder action which was subsequently
dismissed by the court presiding over this
matter. The stockholderin October 2002 and is no longer being appealed. Through March 30,
2003, no further action has until November 25, 2002occurred with respect to file a notice of appeal.these class action
lawsuits.
In addition to the environmental matter and stockholder lawsuit described
above, the Company is involved in other litigation and claims incidental to its
business. Triarc and its subsidiaries have reserves for all of their legal and
environmental matters aggregating $2,800,000$2,600,000 as of September 29, 2002.March 30, 2003. 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 its legal and environmental matters will have a
material adverse effect on its consolidated financial position or results of
operations.
(9) Subsequent Events
As disclosed in more detail in Note 23, the Company and certain of its
officers, including entities controlled by them, have invested in Encore Capital
Group, Inc. ("Encore"), an investment accounted for by the Company under the
equity method. The Company and other stockholders of Encore, including the
present and former officers of the Company who have invested in Encore prior to
an initial public offering by Encore of its common stock in July 1999, on a
joint and several basis, had entered into guarantees (the "Bank Guarantees")
and/or certain related agreements to guarantee up to $15,000,000 of revolving
credit borrowings of a subsidiary of Encore. The $15,000,000 revolving credit
line had been scheduled to expire in April 2003. As of Encore's first quarter
ended March 31, 2003, Encore had $1,864,000 of outstanding revolving credit
borrowings. In April 2003, the maturity date for any revolving credit borrowings
was extended until April 15, 2004 but the maximum amount available was reduced
from $15,000,000 to $5,000,000. This effectively reduced the Bank Guarantees to
$5,000,000, of which the Company would be responsible for approximately $600,000
assuming the full $5,000,000 was borrowed and all of the parties, besides the
Company, to the Bank Guarantees and the related agreements fully perform
thereunder. In connection therewith, at March 30, 2003 the Company had
$15,019,000 in an interest-bearing bank custodial account at the financial
institution providing the revolving credit line which was subject to set off
under certain circumstances if the parties to the Bank Guarantees and related
agreements failed to perform their obligations thereunder. The interest-bearing
bank account is included in "Cash and cash equivalents" in the accompanying
condensed consolidated balance sheets. However, such funds were subsequently
withdrawn following the April 2003 extension of the revolving credit line. In
addition, the Company continues to guarantee the obligations under the senior
notes of Encore as disclosed in more detail in Note 23.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
We currently operate in one business, franchising and operating Arby's
restaurants.
On December 27, 2002, we completed the acquisition of Sybra, Inc. in a
transaction we refer to as the Sybra Acquisition. Sybra owned and operated 239
Arby's restaurants in nine states as of March 30, 2003 and, prior to the Sybra
Acquisition, was the second largest franchisee of Arby's restaurants. As a
result of the Sybra Acquisition, our consolidated results of operations and cash
flows for our 2003 first quarter include Sybra's results and cash flows but do
not include royalties and franchise and related fees from Sybra which are
eliminated in consolidation. Our consolidated results of operations and cash
flows for our 2002 first quarter, however, include royalties and franchise and
related fees from Sybra but do not include Sybra's results and cash flows.
Presentation of Financial Information
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 30, 2001.29, 2002. Item 7 of our
Form 10-K describes the recent trends affecting our restaurant franchising
business,
contractual obligations and the application of our critical accounting policies and estimates.policies.
Certain statements we make under this Item 2 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- - Other Information" preceding "Item 1."
As discussed in more detail below under "Liquidity and Capital Resources -
Acquisitions and Investments," we have submitted a proposal to acquire the
second largest franchisee of Arby's restaurants. The forward-looking statements
we make in this Item 2 exclude any effects that this proposed acquisition, if
consummated, would have on our post-acquisition results of operations and cash
flows.
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. Our first nine-month period of fiscal 2001
commenced on January 1, 2001 and ended on September 30, 2001, with our third
quarter of 2001 commencing on July 2, 2001. Our first nine-month period of fiscal 2002 commenced on
December 31, 2001 and ended on September 29,March 31, 2002 withand our thirdfirst quarter of fiscal
2003 commenced on December 30, 2002 commencingand ended on July 1, 2002.March 30, 2003. When we refer
to the "three months ended September 30, 2001,"March 31, 2002" or the "2001 third"2002 first quarter," and the
"nine months ended September 30, 2001," or the "first nine months of 2001," we mean
the periodsperiod from July 2,December 31, 2001 to September 30, 2001March 31, 2002 and January 1, 2001 to
September 30, 2001, respectively. Whenwhen we refer to the
"three months ended September 29, 2002,"March 30, 2003" or the "2002 third"2003 first quarter," and the "nine months ended
September 29, 2002," or the "first nine months of 2002," we mean the
periodsperiod from July 1,December 30, 2002 to September 29, 2002 and December 31, 2001 to September 29,
2002, respectively.March 30, 2003. Each quarter contained 13 weeks and each nine-month period
contained 39
weeks.
Certain amounts presented in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the three and nine-month
periodsmonths ended September 30, 2001March
31, 2002 have been reclassified to conform with the current periods'quarter's
presentation.
Results of Operations
Set forthPresented below is a table that summarizes and compares our results of operations for (1) the three months ended September 30, 2001 and
September 29,
2002 and (2) the nine months ended September 30, 2001 and September 29, 2002,
and providescompares the amount and percent of the change between those respective
periods.the 2002 first quarter and
the 2003 first quarter. We consider certain percentage changes between periodsthese
quarters to be not measurable or not meaningful, and we refer to these as "n/m."
The percentagespercentage changes used in the following discussion have been rounded to the
nearest whole percentage.percent.
Three Months Ended
Nine Months Ended
------------------------------------------------- Change
--------------------------- Change
SeptemberMarch 31, March 30, September 29, --------------- September 30, September 29, -----------------
2001-------------------
2002 2003 Amount Percent 2001 2002 Amount Percent
---- ---- ------ -------
---- ---- ------ -------
(In Millions Except Percents)
Revenues, investment income (loss) and
other income (expense):Revenues:
Net sales...................................................$ -- $ 48.5 $ 48.5 n/m
Royalties and franchise and related fees ..................................$ 24.1 $ 25.7 $ 1.6 7 (a)................ 22.4 21.2 (1.2) (5)%
$ 68.0 $ 72.9 $ 4.9 7 %
Investment income (loss), net ........... 5.9 (0.4) (6.3) (107)% 29.2 0.7 (28.5) (98)%
Other income (expense), net ............ 0.3 0.4 0.1 33 % 9.5 (1.0) (10.5) (111)%
------ ------- ------ ------- ------- ------
Total revenues, investment income
(loss) and other income (expense).. 30.3 25.7 (4.6) (15)% 106.7 72.6 (34.1) (32)%
------ ------- ------ ------- ------- ---------------- --------- --------
22.4 69.7 47.3 n/m
---------- --------- --------
Costs and expenses:
Cost of sales, excluding depreciation and amortization ..... -- 36.2 36.2 n/m
Advertising and selling..................................... -- 3.1 3.1 n/m
General and administrative .............. 21.2 20.2 (1.0) (5)% 58.2 59.0 0.8 1................................. 19.5 23.4 3.9 20 %
Depreciation and amortization, excluding amortization of
deferred financing costs ....................... 1.5................................. 1.6 0.1 3 % 4.7 4.9 0.2 3 %3.4 1.8 114%
---------- --------- --------
21.1 66.1 45.0 n/m
---------- --------- --------
Operating profit ....................................... 1.3 3.6 2.3 179%
Interest expense ........................ 7.1 6.8 (0.3) (4)% 23.5 20.0 (3.5) (15).............................................. (6.4) (8.5) (2.1) (33)%
Insurance expense related to long-term debt...................................debt.................... (1.1) (1.1) -- -- %
Investment income, net......................................... 6.1 3.1 (3.0) (48)%
Other income (expense), net.................................... (0.6) 0.6 1.2 1.1 (0.1) (6)% 3.6 3.4 (0.2) (6)%
Costs of proposed business acquisitions
not consummated........................ 0.5 2.1 1.6 n/m
0.6 2.2 1.6 n/m
------ ------- ------- ------- ------- ------
Total costs and expenses ............ 31.5 31.8 0.3 1 % 90.6 89.5 (1.1) (1)%
------ ------- ------- ------- ------- ------
Income (loss) from continuing
operations---------- --------- --------
Loss before income taxes
and minority interests........... (1.2) (6.1) (4.9)taxes................................ (0.7) (2.3) (1.6) n/m
16.1 (16.9) (33.0)(Provision for) benefit from income taxes...................... (0.3) 0.3 0.6 n/m
Benefit from (provision for) income taxes .. (0.6) 2.5 3.1---------- --------- --------
Net loss................................................$ (1.0) $ (2.0) $ (1.0) n/m
(8.7) 3.5 12.2 n/m
Minority interests in loss of a
consolidated subsidiary................... -- 1.0 1.0 n/m -- 2.3 2.3 n/m
------ ------- ------- ------- ------- ------
Income (loss) from continuing
operations....................... (1.8) (2.6) (0.8) n/m 7.4 (11.1) (18.5) n/m
Discontinued operations..................... -- -- -- n/m 38.5 -- (38.5) n/m
------ ------- ------- ------- ------- ------
Net income (loss)....................$ (1.8) $ (2.6) $ (0.8) n/m $ 45.9 $ (11.1) $(57.0) n/m
====== ======= ======= ======= ======= ================ ========= ========
Three Months Ended September 29,(a) Includes royalties from Sybra, Inc. of $1.7 million for the 2002 Compared with Three Months Ended
Septemberfirst
quarter whereas the royalties from Sybra, Inc. of $1.7 million for the
2003 first quarter were eliminated in consolidation.
Net Sales
Our net sales of $48.5 million for the three months ended March 30, 20012003
resulted entirely from our operation of the Arby's restaurants acquired in the
Sybra Acquisition.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which arewere generated entirely
from our restaurant franchising business, increased $1.6operations, were reduced by $1.2 million, or 7%5%,
to $25.7$21.2 million for the three months ended September 29, 2002March 30, 2003 from $24.1$22.4 million
for the three months ended September 30, 2001 reflecting a $1.5March 31, 2002. This reduction reflects that we no
longer include royalties from the restaurants we acquired in the Sybra
Acquisition whereas we included $1.7 million or 7%,
increaseof royalties from Sybra in the 2002
first quarter. Aside from the effect of the Sybra Acquisition, royalties and a $0.1 million, or 11%, increase in
franchise and related fees. Thefees increased $0.5 million in the 2003 first quarter
compared with the 2002 first quarter entirely due to an increase in royalties.
This increase in royalties consisted of (1) a $0.9 million
improvement due to an under 5% increase in same-store sales of franchised
restaurants and (2) a $0.6$0.8 million improvement resulting
from the royalties from 114the 115 restaurants opened since September 30, 2001,March 31, 2002, with
generally higher than average sales volumes, replacing the royalties from the 7356
generally underperforming restaurants closed since September 30, 2001. The increase in
franchise and related fees was principallyMarch 31, 2002, partially
offset by a $0.3 million decrease due to a decrease in franchise fee
credits earned by franchisees under our remodeling incentive program in the 2002
third quarter compared with the 2001 third quarter. We currently anticipate a
continued combined increase in royalties and franchise and related fees for the
2002 fourth quarter compared with the 2001 fourth quarter but at a much lower
rate than the 7% increase experienced during the 2002 third quarter due to
anticipated lower forfeited deposits and a currently anticipated modest to no
increase2% decline in same-store sales of
franchised restaurants reflecting our current
estimateduring the 2003 first quarter compared with the 2002
first quarter.
The 2% decline in the same-store sales of franchised restaurants in the
2003 first quarter followed a weak beginning of3% decline in the 2002 fourth quarter. Forfeited depositsWe believe
these declines were affected by the adverse effects of worse weather conditions,
price discounting in the 2001 fourth quarter reflectedquick service restaurant industry, the terminationgenerally
sluggish economy and strong same-store sales comparisons of a significant numberthe prior years'
comparable quarters. We are continuing Arby's national cable television
advertising and introducing new operational, product and marketing initiatives
which we expect will favorably impact the trend of commitments to open new franchisedsame-store sales during the
balance of 2003.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization, of $36.2
million for the three months ended March 30, 2003 resulted entirely from our
operation of the Arby's restaurants by one of our franchisees and we
do not expect terminations to recur at the same levelacquired in the 2002 fourth
quarter.Sybra Acquisition.
Our royalties and franchise fees have no associated cost of sales.
Advertising and Selling
Our advertising and selling expenses of $3.1 million for the three months
ended March 30, 2003 resulted entirely from our operation of the Arby's
restaurants acquired in the Sybra Acquisition.
General and Administrative
Our general and administrative expenses increased $3.9 million, principally
as a result of the Sybra Acquisition.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $1.8 million for the three months ended March 30,
2003 entirely due to depreciation and amortization of Sybra.
Interest Expense
Interest expense increased $2.1 million reflecting $2.4 million of interest
expense of Sybra. Aside from the effect of the Sybra Acquisition, interest
expense decreased $0.3 million, or 4%, due to lower outstanding balances of our
7.44% insured non-recourse securitization notes, which we refer to as the
Securitization Notes.
Investment Income, (Loss), Net
The following table summarizes and compares the major components of
investment income, (loss), net:
Three Months Ended
-----------------------------
September------------------------
March 31, March 30,
September 29,
2001 2002 2003 Change
---- ---- ------
(In Millions)
Interest income................................................$ 6.6 $ 2.8 $ (3.8)
Other than temporary unrealized losses......................... (1.0) (2.9) (1.9)
Recognized net gains (losses) ................................. 0.3 (0.5) (0.8)gains.........................................$ 2.5 $ 1.0 $ (1.5)
Interest income.............................................. 2.9 2.0 (0.9)
Distributions, including dividends........................... 0.7 0.4 (0.3)
Equity in lossesthe earnings of investment limited partnerships
and similar investment entities.............................. (0.4)partnerships.... 0.2 -- (0.2)
0.2
Distributions, including dividends............................. 0.5 0.5 --
Investment management and performance fees.....................Other........................................................ (0.2) (0.3) (0.1)
(0.1) --
-------- --------------- --------
$ 5.96.1 $ (0.4)3.1 $ (6.3)(3.0)
======== =============== ========
The decrease in the interest income is principally due to lower average
interest rates on our cash equivalents and interest-bearing short-term
investments. Average rates on our interest-bearing investments declined from
above 4% in the 2001 third quarter to below 2% in the 2002 third quarter
principally due to the general decline in the money market and short-term
interest rate environment. We currently have significant investments in cash
equivalents and we anticipate interest income will continue to be significantly
lower in the 2002 fourth quarter compared with the 2001 fourth quarter, assuming
interest rates as of September 29, 2002 do not increase significantly. Our
provision for unrealized losses on our available-for-sale and other cost basis
investments deemed to be other than temporary resulted from declines in the
underlying economics of specific marketable equity securities and other
investments and/or volatility in capital markets.
Our recognized net gains (losses) and other than temporary unrealized losses are dependent upon market
fluctuationsthe underlying economics and/or
volatility in the value of our investments in available-for-sale securities and
cost basis investments and/or the timing of the sales of those investments.
Accordingly, our recognized net gains (losses)investments and our other than temporary
unrealized losses presented in the above table
may not recur in future periods.periods (see further discussion below). The decrease in
interest income is due to a decline in average rates on our interest-bearing
investments from 1.9% in the 2002 first quarter to 1.4% in the 2003 first
quarter principally due to the general decline in the money market and
short-term interest rate environment.
As of September 29, 2002,March 30, 2003, we had pretax unrealized holding gains and losses(losses)
on available-for-sale marketable securities of $1.2$1.3 million and $1.3$(1.0) million,
respectively, included in accumulated other comprehensive deficit. Should either
(1) we decide to sell any of these investments or (2) any of the unrealized
losses continue such that we believe they have become other than temporary, we
would recognize the gains or losses on the related investments at that time. As
of April 30, 2003, the unrealized holding losses of $1.0 million had increased
to $2.4 million. In addition, through 280 BT Holdings LLC, a 57.4%-owned
consolidated subsidiary, we hold a $2.4$1.7 million cost basis investment before related minority interests of
$1.0 million, in
Scientia Health Group Limited, an entity which we refer to as Scientia,
whose executive chairman of the board resigned in July 2002 and pled
guilty in October 2002 to certain charges in an indictment by a Federal grand
jury. The $2.4 million investment representsrepresenting original cost less adjustments made in 2002 subsequent to the first
quarter for unrealized losses in investments made by Scientia that were deemed
to be other than temporary, including $2.2 million during the 2002 third quarter.temporary. Such amounts haveamount has been effectively reduced by minority
interests of $1.0 million and
$0.9 million, respectively. We are monitoring the effect this resignation and
guilty plea has had and may continue to have on the value of our investment,
which could possibly result in the recognition of an additional other than
temporary loss in future periods.$0.7 million. In addition, as of September 29, 2002March 30, 2003 we have
$0.8 million of non-recourse notes
receivable from management officers and employees relating to a portion of their
investments in 280 BT Holdings.Holdings of which $0.8 million is non-recourse, less an
allowance of $0.4 million for uncollectible amounts. If the value of 280 BT Holding's investments shouldScientia
declines further decline and, accordingly, we recognize additional other than temporary
losses, we couldwould also recognize
lossesprovide additional allowances relating to the non-recourse
notes receivable in "General and administrative" expenses.
Other Income (Expense), Net
The following table summarizes and compares the major components of other
income, net:
Three Months Ended
-----------------------------
September 30, September 29,
2001 2002 Change
---- ---- ------
(In Millions)
Equity in earnings (losses) of investees, other than investment
limited partnerships and similar investment entities.........$ (0.1) $ 0.2 $ 0.3
Reduction in the fair value of the liability for a written
call option on our stock..................................... 0.3 -- (0.3)
Other interest income.......................................... 0.1 0.1 --
Other.......................................................... -- 0.1 0.1
-------- --------- --------
$ 0.3 $ 0.4 $ 0.1
======== ========= ========
Other income (expense), net, was relatively unchanged. The $0.3increased $1.2 million principally due to a
$1.3 million improvement in equity in earnings (losses) of investees, other than investment limited
partnerships and similar investment entities, is principally due to the
recognition of equity in earnings of Encore Capital Group,
Inc. (formerly MCM
Capital Group, Inc.), an 8.4% common equity investee of ours which we refer to as Encore, duringfrom equity in losses of $0.7 million in the
2002 third quarter. No suchfirst quarter to equity in earnings orof $0.6 million in the 2003 first
quarter. The equity in losses of Encore were recorded in the 2001 third2002 first quarter becausereflected
previously unrecorded losses that were recognized upon our investment of our having$0.9
million in newly-issued convertible preferred stock of Encore. The equity in
these losses had not been recognized prior to the 2002 first quarter since we
had previously reduced our investment in Encore to zero.
The written call option on
our stock effectively arose upon the assumption of our zero coupon convertible
debentures by the purchaser of our former beverage businesses which remain
convertible into our class A common stock. The purchaser of our former beverage
businesses is requiredLoss Before Income Taxes
Our loss before income taxes increased $1.6 million to take all actions reasonably necessary to call these
debentures for redemption in February 2003.
General and Administrative
Our general and administrative expenses decreased $1.0 million, or 5%,
principally due to (1) a $1.8 million decrease in incentive compensation costs,
(2) a $0.5 million decrease in the provision for uncollectible non-recourse
notes receivable from management officers and employees in accordance with their
terms relating to entities in which we and our officers and employees
co-invested and (3) a $0.4 million decrease in expenses, excluding related
depreciation and amortization, resulting from the termination in December 2001
of fractional interests in two airplanes under timeshare agreements. The $1.8
million decrease in incentive compensation is principally due to the effect in
the 2001 third quarter, which did not recur in the 2002 third quarter, under our
executive bonus plan from the positive impact on our capitalization from the
sale of our former beverage businesses. These decreases were partially offset by
(1) a $1.0 million increase in advertising expense related to an Arby's national
cable television advertising campaign and (2) a $0.8 million increase in
charitable contributions.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $0.1 million, or 3%, reflecting a $0.3 million
increase attributable to the full quarter effect on depreciation in the 2002
third quarter of an airplane that was placed in service in September 2001. This
increase was substantially offset by $0.2 million of goodwill amortization in
the 2001 third quarter which ceased effective December 31, 2001 in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." The end of goodwill amortization under Statement 142 will
positively impact the 2002 fourth quarter by $0.2 million. The termination of
the aircraft timeshare agreements in December 2001 disclosed above under
"General and administrative" did not have any effect on the change in
depreciation and amortization since all remaining amortization had been recorded
in the 2001 first quarter.
Interest Expense
Interest expense decreased $0.3 million, or 4%, to $6.8$2.3 million for the
three months ended September 29, 2002March 30, 2003 from $7.1$0.7 million for the three months ended
September 30, 2001 principally due to lower outstanding balances of our
7.44% insured non-recourse securitization notes, which we refer to as the
Securitization Notes, since the end of the 2001 third quarter.
Costs of Proposed Business Acquisitions Not Consummated
The $2.1 million of costs of a proposed business acquisition not
consummated in theMarch 31, 2002 third quarter were for a business acquisition proposal
we submitted in July 2002 which was not accepted. The $0.5 million of costs in
the 2001 third quarter were for other less significant proposed business
acquisitions not consummated.
Loss From Continuing Operations Before Income Taxes and Minority Interests
Our loss from continuing operations before income taxes and minority
interests increased $4.9 million to $6.1 million for the three months ended
September 29, 2002 from $1.2 million for the three months ended September 30,
2001 due to the effect of the variances explained in the captions
above.
Income Taxes
The benefit from income taxes represented an effective rate of 42% for the
three months ended September 29, 2002. This 42% effective rate reflects the
catch-up effect of a year-to-date increase in the estimated full-year 2002
effective tax benefit rate from 9% to 21% since we now estimate a higher
full-year pretax loss, which reduces the effect of nondeductible expenses on our
estimated effective tax rate. The higher projected loss is principally a result
of (1) the $2.9We recognized $0.9 million of other than temporary unrealized losses on investments
recognized in the 2002 third quarter and (2) the $2.1 million of costs expensed
in the 2002 third quarter in connection with a business acquisition proposal we
submitted in July 2002 which was not accepted, both as previously explained. For
the three months ended September 30, 2001 we had a provision for income taxes
despite a pretax loss from continuing operations principally as a result of the
catch-up effect of a year-to-date increase in the estimated full-year 2001
effective tax rate from 47% to 54% reflecting a decrease in then estimated
full-year pretax income from continuing operations.
Minority Interests in Loss of a Consolidated Subsidiary
The minority interests in loss of a consolidated subsidiary of $1.0 million
for the three months ended September 29, 2002 reflect provisions for unrealized
losses by 280 BT Holdings on its cost basis investments deemed to be other than
temporary.
Nine Months Ended September 29, 2002 Compared with Nine Months Ended
September 30, 2001
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which are generated entirely
from our restaurant franchising business, increased $4.9 million, or 7%, to
$72.9 million for the nine months ended September 29, 2002 from $68.0 million
for the nine months ended September 30, 2001 reflecting a $5.4 million, or 8%,
increase in royalties partially offset by a $0.5 million, or 20%, decrease in
franchise and related fees. The increase in royalties consisted of (1) a $3.0
million improvement due to a 4% increase in same-store sales of franchised
restaurants and (2) a $2.4 million improvement resulting from the royalties from
the 114 restaurants opened since September 30, 2001, with generally higher than
average sales volumes, replacing the royalties from the 73 generally
underperforming restaurants closed since September 30, 2001. The decrease in
franchise and related fees was principally due to lower franchise fees primarily
as a result of franchisees opening 17 fewer restaurants in the first nine months
of 2002 compared with the first nine months of 2001. We currently anticipate a
continued combined increase in royalties and franchise and related fees for the
2002 fourth quarter compared with the 2001 fourth quarter, but at a much lower
rate than the 7% increase experienced during the first nine months of 2002, as
previously explained in more detail in the comparison of the three-month
periods.
Our royalties and franchise fees have no associated cost of sales.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Nine Months Ended
-----------------------------
September 30, September 29,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income................................................$ 26.0 $ 8.5 $ (17.5)
Other than temporary unrealized losses......................... (1.4) (11.0) (9.6)
Recognized net gains........................................... 4.4 1.9 (2.5)
Distributions, including dividends............................. 1.3 1.7 0.4
Investment management and performance fees..................... (0.7) (0.3) 0.4
Equity in losses of investment limited partnerships
and similar investment entities.............................. (0.4) (0.1) 0.3
-------- --------- --------
$ 29.2 $ 0.7 $ (28.5)
======== ========= ========
The decrease in interest income is due to lower average interest rates and,
to a lesser extent, lower average amounts of cash equivalents and
interest-bearing short-term investments during the first nine months of 2002
compared with the first nine months of 2001. Average rates on our
interest-bearing investments declined from 5% in the first nine months of 2001
to above 2% in the first nine months of 2002 principally due to the general
decline in the money market and short-term interest rate environment. The
average amount of our interest-bearing investments declined principally due to
our payment in mid-March 2001 of $239.3 million of estimated income taxes
related to the October 2000 sale of our former beverage businesses. We currently
anticipate interest income will continue to be significantly lower in the 2002
fourth quarter compared with the 2001 fourth quarter, assuming interest rates as
of September 29, 2002 do not increase significantly. Our provision for
unrealized losses on our available-for-sale and other cost basis investments
deemed to be other than temporary resulted from declines in the underlying
economics of specific marketable equity securities and other investments and/or
volatility in capital markets. Our recognized net gains and other than temporary
unrealized losses presented in the above table may not recur in future periods,
as previously explained in more detail in the comparison of the three-month
periods.
As of September 29, 2002, we had pretax unrealized holding gains and losses
on available-for-sale marketable securities of $1.2 million and $1.3 million,
respectively, included in accumulated other comprehensive deficit. Should either
(1) we decide to sell any of these investments or (2) any of the unrealized
losses continue such that we believe they have become other than temporary, we
would recognize the gains or losses on the related investments at that time. In
addition, as explained in more detail in the comparison of the three-month
periods, we hold a $2.4 million cost basis investment, before related minority
interests of $1.0 million, in Scientia for which recognition of an additional
other than temporary loss could possibly be required in future periods. Also as
explained in more detail in the comparison of the three-month periods, the
recognition of an additional other than temporary loss by 280 BT Holdings could
result in losses relating to the non-recourse notes from management officers and
employees of up to a maximum of $0.8 million in "General and administrative"
expenses.
Other Income (Expense), Net
The following table summarizes and compares the major components of other
income (expense), net:
Nine Months Ended
-----------------------------
September 30, September 29,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income related to sale of beverage businesses.........$ 8.3 $ -- $ (8.3)
Reduction of gain related to business previously sold.......... -- (1.2) (1.2)
Reduction in the fair value of the liability for a written
call option on our stock..................................... 0.8 -- (0.8)
Equity in losses of investees, other than investment
limited partnerships and similar investment entities......... (0.2) (0.5) (0.3)
Other interest income.......................................... 0.4 0.3 (0.1)
Other.......................................................... 0.2 0.4 0.2
-------- --------- --------
$ 9.5 $ (1.0) $ (10.5)
======== ========= ========
Other income (expense), net decreased $10.5 million principally due to $8.3
million of interest income recorded in the 2001 second quarter which did not
recur in the first nine months of 2002 related to our election in June 2001 to
treat certain portions of the sale of our former beverage businesses as an asset
sale for income tax purposes, as explained in more detail below under
"Discontinued Operations." The $1.2 million reduction of gain related to a
business previously sold results from a charge for estimated environmental
clean-up and related costs. The written call option on our stock was previously
explained in the comparison of the three-month periods. The $0.3 million
increase in equity in losses of investees was principally due to the recognition in the 2002 first quarter of $0.7 million of our previously unrecorded equity in
losses of Encore upon our investment of $0.9and $0.8 million in
newly-issued convertible
preferred stockthe 2003 first quarter of Encore partially offset by $0.2 millioncompensation expense in equity in earnings
of Encore subsequent to the 2002 first quarter. The $0.7 million of cumulative
equity in losses of Encore had not been recorded previously as a result of our
having reduced our investment in Encore to zero.
General and Administrative
Our general and administrative
expenses increased $0.8 million, or 1%,
principally reflecting (1) an increase of $5.0 million due to a reduction in
compensation expense in the 2001 first quarter related to a note that we
received in the 2001 first quarter from our Chairman and Chief Executive Officer
and President and Chief Operating Officer, whom we refer to as the Executives,
in partial settlement of a class action shareholder lawsuit which asserted
claims relating to certain compensation awards to the Executives, (2) an
increase of $1.0 million in advertising expenses related to an Arby's national
cable television advertising campaign, (3) an increase of $1.0 million in
insurance costs principally reflecting higher rates and (4) an increase of $0.9
million in charitable contributions. The $5.0 million gain from the settlement
of the class action shareholder lawsuit was included as a reduction of general
and administrative expenses in the first nine months of 2001 since the gain
effectively represented an adjustment of prior period compensation expense.
These increases were partially offset by (1) a $4.8 million decrease in
incentive compensation costs, (2) a $0.9 million decrease in expenses, excluding
depreciation and amortization, due to the termination in December 2001 of
fractional interests in two airplanes under timeshare agreements, (3) a $0.6
million decrease in deferred compensation expense and (4) a $0.5 million
decrease in provision for uncollectible non-recourse notes receivable from
management officers and employees relating to entities in which we and our
officers and employees co-invested. The $4.8 million decrease in incentive
compensation was principally due to higher compensation in the first nine months
of 2001, which did not recur in the first nine months of 2002, under our
executive bonus plan reflecting the positive impact on our capitalization from
the sale of our former beverage businesses. Deferred compensation expense of
$0.5 million for the nine months ended September 29, 2002 and $1.1 million for
the nine months ended September 30, 2001 represents the increase in the fair value of investments in two deferred
compensation trusts, which we refer to as the Trusts, in which we invested prior
to 2002 for the benefit of our Chairman and Chief Executive Officer and
President and Chief Operating Officer, whom we refer to as the Executives as explained in more detail below
under "Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests."
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $0.2 million, or 3%, reflecting (1) $1.0 million
attributable to the full period effect of depreciation in the first nine months
of 2002 on an airplane that was placed in service in September 2001 and (2) a
$0.2 million increase related to amortization of leasehold improvements
completed during the 2001 second quarter. These increases were substantially
offset by (1) $0.5 million of accelerated amortization in the 2001 first quarter
resulting from the then anticipated early termination of fractional interests in
aircraft and (2) $0.6 million of goodwill amortization in the first nine months
of 2001 which ceased effective December 31, 2001, both as previously explained
in more detail in the comparison of the three-month periods.
Interest Expense
Interest expense decreased $3.5 million, or 15%, to $20.0 million for the
nine months ended September 29, 2002 from $23.5 million for the nine months
ended September 30, 2001. This decrease principally reflects (1) interest of
$3.1 million recorded in the 2001 first half on the estimated income tax
liability paid with the filing of our election in June 2001 to treat certain
portions of the sale of our former beverage businesses as an asset sale for
income tax purposes, as explained below under "Discontinued Operations" and (2)
a $1.0 million decrease in interest expense due to lower outstanding balances of
the Securitization Notes. These decreases were partially offset by a $0.8
million increase in interest expense due to the full period effect of an
outstanding term loan and related interest rate swap agreement used to finance
the purchase of an airplane in July 2001.
Costs of Proposed Business Acquisitions Not Consummated
The $2.2 million of costs of proposed business acquisitions not consummated
in the first nine months of 2002 were primarily for a business acquisition
proposal we submitted in July 2002 which was not accepted. The $0.6 million of
costs in the first nine months of 2001 were for other less significant proposed
business acquisitions not consummated.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests decreased $33.0 million to a loss of $16.9 million for the
nine months ended September 29, 2002 from income of $16.1 million for the nine
months ended September 30, 2001 due to the effect of the variances explained in
the captions above.
As disclosed above, we recognized $1.1 million in the first nine months of
2001 and $0.5 million in the first nine months of 2002 of deferred compensation
expense for the increase in the fair value of the investments in the Trusts.Executives. Under
accounting principles generally accepted in the United States of America, we
recognizedwere unable to recognize any investment income on unrealized increases in value
of $0.2 million on the investments in the Trusts during the 2002 first nine monthsquarter and the 2003
first quarter. However, during the 2003 first quarter, we sold one of 2001, but were not permitted to recognize any
investment income on the
investments in the Trusts duringand recognized a previously unrealized gain of $0.5
million, which included increases in value prior to the 2003 first nine months
of 2002. Thisquarter,
which is included in our investment income. The cumulative disparity between
compensation expense and recognized investment income
recognized will reverse in the future
periods as either (1) theadditional investments in the 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 Trusts
decrease resulting in the recognition of a reduction of deferred compensation
expense without any offsetting losses recognized in investment income.
Income Taxes
The benefit from and provision for income taxes represented effective rates
of 21% for the ninethree months ended September 29, 2002 and 54% for the nine months
ended SeptemberMarch 30, 2001, respectively. The effective benefit2003
represented a rate in the first
nine months of 2002 is12% which was lower than the United States Federal
statutory rate of 35% and the effective provision rate in the first nine months of 2001 was higher
than the 35% rate principally due to (1) the effect of non-deductible
compensation costs and (2) state income taxes, net of Federal income tax
benefit, due to the differing mix of pretax income or loss among the
consolidated entities which file state tax returns on an individual company
basis withbasis. We had a differing mix of
pretaxprovision for income or loss and (3) the effect in 2001 of non-deductible amortization
of goodwill.
Minority Interests in Loss of a Consolidated Subsidiary
The minority interests in loss of a consolidated subsidiary of $2.3 milliontaxes for the ninethree months ended September 29,March 31,
2002 reflect provisions for unrealized
losses by 280 BT Holdings as previously explained in more detail indespite a pretax loss principally due to the comparisonimpact of the three-month periods.
Discontinued Operations
The income from discontinued operations of $38.5 million for the nine
months ended September 30, 2001 resulted entirely from adjustments to the
previously recognized estimated gainsame items on disposal of our beverage businesses.
These net adjustments resulted from the realization of $200.0 million of
proceeds from the purchaser for our electing in June 2001 to treat certain
portions of the sale as an asset sale in lieu of a
stock sale under the
provisions of Section 338(h)(10) of the United States Internal Revenue Code, net
of estimated income taxes, partially offset by additional accruals relating to
the sale.lower pretax loss.
Liquidity And Capital Resources
Cash Flows from Continuing Operating Activities
Our consolidated operating activities from continuing operations providedused cash
and cash equivalents, which we refer to in this discussion as cash, of $0.3$20.5
million during the ninethree months ended September 29, 2002 despite a net loss of
$11.1 million due toMarch 30, 2003 reflecting (1) net operating investment adjustments of $7.9 million,
(2) net non-cash charges of $3.4 million and (3) collection of a litigation
settlement receivable of $1.7 million, all partially offset by cash used by
changes in operating assets and liabilities of $1.6 million.
The$17.5 million, (2) net operating
investment adjustments of $7.9$6.8 million consisted
principallyand (3) a net loss of $2.0 million, all
partially offset by (1) net recognized losses other than from trading securities and
short positions in securities. The non-cash charges of $3.4$4.1 million consisted
principally of depreciation and amortization less deferred income tax benefit
and minority interests in loss(2) the
collection of a consolidated subsidiary.litigation settlement receivable of $1.7 million.
The cash used by changes in operating assets and liabilities of $1.6$17.5
million reflectsreflected (1) a decrease$9.9 million reduction in accounts payableaccrued compensation and
accrued expenses of $4.2 million partially offset by
decreases in prepaid expenses of $1.5 million and receivables of $1.1 million.
The decrease in accounts payable and accrued expenses wasrelated benefits principally due to the annual payment of previously accrued
incentive compensation substantially offset
byand (2) an $8.3 million reduction of Sybra's accounts
payable and accrued expenses, other than accrued compensation and related
benefits, principally to satisfy a portion of Sybra's net negative working
capital assumed as contemplated as part of the accrualSybra Acquisition.
The net operating investment adjustments of incentive compensation costs for the first nine months$6.8 million principally
reflected $6.1 million of 2002.net purchases of trading securities in excess of
sales. The decrease in prepaid expenses wasnet non-cash charges of $4.1 million consisted principally due to a reduction in
prepaid advertising costs related to our Arby's national cable television
advertising campaign. The decrease in receivables was principally due to the
collection of past due amounts from franchisees.
We expect continued positive cash flows from operations during the fourth
quarter$3.8
million of 2002, excludingdepreciation and amortization.
Excluding the effect of any net purchases of trading securities, which
represent the discretionary investment of excess cash.cash and represented $6.1
million of the $20.5 million of cash used in operating activities in the 2003
first quarter, we expect positive cash flows from continuing operating
activities during the remaining nine months of 2003. This is due to our
expectation that the annual payment of incentive compensation impacting the
$17.5 million of cash used in the 2003 first quarter by changes in operating
assets and liabilities discussed above should not recur during the remainder of
2003 and, to an extent, should reverse. However, we continue to expect that our
continuing operating activities will require a net use of cash for the full year
2003 due to the $20.5 million used in the 2003 first quarter partially
reflecting the funding of a portion of Sybra's net negative working capital
assumed in the Sybra Acquisition.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$536.0$505.6 million at September 29, 2002,March 30, 2003, reflecting a current ratio, which equals
current assets divided by current liabilities, of 5.2:4.3:1. Working capital
decreased $20.6$4.8 million from $556.6$510.4 million at December 30, 200129, 2002 principally due
to the reclassification of $19.2 million of long-term debt to current.
Our total capitalization at September 29, 2002March 30, 2003 was $619.5$711.6 million consisting of
stockholders' equity of $323.9$332.7 million and $295.6$378.9 million of long-term debt,
including current portion. Our total capitalization decreased $26.6$8.2 million from
$646.1$719.8 million at December 30, 200129, 2002 principally due to (1) repayments of
long-term debt of $18.1$8.3 million and (2) aour net loss of $11.1$2.0 million, (3) repurchases of $3.1 million of our common stock discussed below under
"Treasury Stock Purchases" and (4) adjustments of $1.1 million in deriving
comprehensive loss from net loss, allboth
partially offset by proceeds of $5.4$1.7 million from stock option exercises.
Securitization Notes and Sybra Long-Term Debt
We have outstanding, through our ownership of Arby's Franchise Trust,
Securitization Notes with a remaining principal balance of $259.7$249.8 million as of
September 29, 2002March 30, 2003 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
Indenture, we currently estimate that we will repay $4.9$15.7 million during the
2002 fourth
quarterremaining nine months of 2003 with increasing annual payments to $37.4 million
in 2011 in accordance with a targeted principal payment schedule.
We have outstanding, through our ownership of Sybra, leasehold notes,
equipment notes and mortgage notes with total remaining principal balances of
$89.8 million as of March 30, 2003. The Securitization Notes were issued by our subsidiary Arby's Franchise
Trust,leasehold notes have a remaining
principal of $80.5 million and are generally due in equal monthly installments
including interest through 2021, of which we refer to as Arby's Trust.$4.4 million is due during the
remaining nine months of 2003. The indenture containsequipment notes have a remaining principal of
$6.0 million and are generally due in equal monthly installments including
interest through 2009, of which $1.0 million is due during the remaining nine
months of 2003. The mortgage notes have a remaining principal of $3.3 million
and are generally due in equal monthly installments including interest through
2018, of which $0.1 million is due during the remaining nine months of 2003.
The Indenture and the agreements for the leasehold notes and mortgage notes
contain various covenants, the most restrictive of which (1) require periodic
financial reporting, (2) require meeting acertain debt service coverage ratio
testtests and (3) restrict, among other matters, (a) the incurrence of indebtedness,
(b) certain asset dispositions and (c) the payment of distributions.distributions by Arby's
Franchise Trust wasand Sybra. Arby's Franchise Trust and Sybra were in compliance
with all of these covenants as of September 29, 2002.March 30, 2003.
As of September 29, 2002,March 30, 2003, Arby's Franchise Trust had no amounts available for
the indenture restrictedpayment of distributions. However, on April 21, 2003, $1.5 million relating
to cash flows for the calendar month of March 2003 became available for the
payment of distributions by Arby's Franchise Trust from paying any distributions through its parent to Arby's
which, in turn, would be available to Arby's to pay management service fees or
Federal income tax-sharingtax sharing payables to Triarc or, to the extent of any excess,
make distributions to Triarc through the parent of Arby's. On October 21, 2002, $2.5
million relatingTriarc. Sybra is not permitted to the cash flows for the calendar month of September became
available for the payment ofpay any distributions
by Arby's Franchise Trust.prior to December 27, 2004.
Other Long-Term Debt
We have a secured bank term loan payable through 2008 with an outstanding
principal amount of $19.1$17.5 million as of September 29, 2002.March 30, 2003, of which $2.4 million is
due during the remaining nine months of 2003. We also have an 8.95% secured
promissory note payable through 2006 with an outstanding principal amount of
$13.8$12.9 million as of September 29, 2002.March 30, 2003, of which $1.5 million is due during the
remaining nine months of 2003.
Our total scheduled long-term debt repayments during the 2002 fourth
quarterremaining nine
months of 2003 are $6.2$25.7 million consisting principally of the $4.9$15.7 million
expected to be paid under the Securitization Notes, $0.8$5.5 million due onunder Sybra's
leasehold, equipment and mortgage notes, $2.4 million under the secured bank
term loan and $0.4$1.5 million due onunder the 8.95% secured promissory note. GuarantiesIn addition,
in May 2003 we prepaid $3.2 million of capitalized lease obligations which is
included in current portion of long-term debt as of March 30, 2003.
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 Corporation, whose principal asset is a $30.0 million
intercompany note receivable from Triarc, agreed that while it remains a special limited partner of
AmeriGas Eagle, it would indemnify the owner of AmeriGas Eagle for any payments
the owner makes related to the owner's obligations under certain of the debt of
AmeriGas Eagle, aggregating approximately $138.0 million as of September 29, 2002,March 30, 2003,
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 30, 2003. 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 ourNational Propane's special limited
partner interest. Either National Propane Corporation or AmeriGas Propane may require
AmeriGas Eagle to repurchase the special limited partner interest. However, we
believe it is unlikely that either party would require repurchase prior to 2009
as either AmeriGas Propane would owe us tax indemnification payments if AmeriGas
Propane required the repurchase or we would accelerate payment of deferred
taxes, which would amount to $42.4 million as of March 30, 2003, associated with
our July 1999 sale of the propane business if National Propane required the
repurchase. In 1997 Arby'sthe event the interest is not repurchased prior to 2009, we
estimate our actual related taxes payable to be $3.0 million during the
remaining nine months of 2003 with further payments in 2004 through 2008
reducing the taxes payable in 2009 to approximately $36.0 million.
Triarc guarantees mortgage and equipment notes payable through 2015 of
approximately $41.0 million as of March 30, 2003 related to 355 restaurants sold
all of its 355 then company-owned restaurants.by us in 1997. The purchaser of the restaurants also assumed substantially all
of the associated operating and capitalized lease obligations (approximately $68.0 million as of
September 29, 2002, assuming the purchaser has madewhich extend through 2031, including all
scheduled payments
through that date under these lease obligations),then existing extension or renewal option periods, although Arby's remains
contingently liable if the purchaser does not make the required future lease
payments. In connection with such sale, Triarc guaranteed $54.7 million of
mortgage and equipment notes payable to FFCA Mortgage Corporation that were
assumed by the purchaser. OutstandingThose lease obligations under the mortgage and
equipment notes approximated $43.0total approximately $64.0 million as of September 29, 2002. Triarc is
also a guarantor of $0.5 million as of September 29, 2002 of mortgage and
equipment notes included in our long-term debt for which one of our subsidiaries
is co-obligor withMarch
30, 2003, assuming the purchaser of the restaurants.has made all scheduled payments through that
date under those lease obligations.
We guarantee aup to $6.7 million portion of senior notes that mature in January 2007
issued by Encore to a major financial institution. During the first nine months of 2002, theThe outstanding principal
amount of these notes was reduced from $10.0 million to
$7.2 million as the lender forgave $2.8 million of principal and $2.5 million of
related accrued interest upon an investment by certain existing stockholders,
including us, of $5.0 million in newly-issued convertible preferred stock of
Encore. Our portion of the preferred stock investment was $0.9 million and
certain of our present and former officers, including entities controlled by
them, invested an aggregate of $1.6 million.March 30, 2003. Our guarantee will
be reduced by (1) any repaymentrepayments of these senior notes, (2) any purchases of
these senior notes by us and (3) the amount of certain investment banking or
financial advisory services fees paid to the financial institution by us, Encore
or another significant stockholder of Encore or any of their affiliates. Some of
our present and former officers, including entities controlled by them, who
collectively owned 15.7% of Encore at the time of Encore's initial public
offering in July 1999, are not parties to this note guarantyguarantee and could
indirectly benefit from it.
In addition to the note guaranty,guarantee, we and certain other stockholders of Encore,
including our present and former officers referred to above who had invested in
Encore prior to its initial public offering, on a joint and several basis, havehad
entered into guaranties andguarantees and/or related agreements to guarantee up to $15.0
million of revolving credit borrowings of a subsidiary of Encore. WeAs of Encore's
first quarter ended March 31, 2003, Encore had $1.9 million of outstanding
revolving credit borrowings. The $15.0 million revolving credit line had been
scheduled to expire in April 2003. In April 2003, the maturity date for any
outstanding borrowings was extended until April 15, 2004, but the maximum amount
available was reduced from $15.0 million to $5.0 million. This effectively
reduced the guarantees to $5.0 million, of which we would be responsible for
approximately $1.8$0.6 million assuming the full $15.0$5.0 million was borrowed and all
of the parties, besides us, to the guaranties ofguarantees and the revolving
credit borrowings and certain related agreements fully
perform thereunder. As of
the end of Encore's 2002 third quarter on SeptemberIn connection therewith, at March 30, 2002, Encore had $7.5
million of outstanding revolving credit borrowings. At September 29, 20022003 we had a $15.0
million in an interest-bearing deposit in abank custodial account at the financial
institution providing the revolving credit facility. Under the guaranties of the
revolving credit borrowings, this deposit isline which was subject to set off
under certain circumstances if the parties to these guaranties of the revolving credit
borrowingsguarantees and related
agreements failfailed to perform their obligations thereunder. Encore has encountered cash flow and liquidity difficulties inThese funds were
subsequently withdrawn following the past.
However, Encore's capital was positively impacted byApril 2003 extension of the debt forgiveness and
capital investment discussed above. Encore has also returned to profitability,
reporting net income available to common stockholders for its nine-month period
ended September 30, 2002. While it is not currently possible to determine if
Encore may default on any of its obligations, we believe that it is possible,
but not probable, that we will be required to make payments under the note
guaranty and/or the bank guaranties.revolving
credit line.
Capital Expenditures
Cash capital expenditures amounted to less than $0.1$0.7 million during the nine months ended September 29, 2002.2003 first
quarter. We expect that cash capital expenditures will be less then $0.1approximately $3.0
million for the remainderremaining nine months of 20022003, principally for maintenance
capital expenditures for company-owned restaurants, for which there were no$0.1
million of outstanding commitments as of September 29, 2002. In addition, during the first
nine months of 2002, we purchased a fractional interest in the use of a
helicopter for $1.2 million in conjunction with the termination of a helicopter
lease.March 30, 2003.
Acquisitions and Investments
We have submitted a proposal to acquire the second largest franchisee of
Arby's restaurants, Sybra, Inc. and its affiliate, Sybra of Connecticut, Inc.,
which are subsidiaries of I.C.H. Corporation which we collectively refer to as
Sybra. Sybra owns and operates 239 Arby's restaurants. ICH and Sybra had filed
for protection under chapter 11 of the United States Bankruptcy Code on February
5, 2002 in order to restructure their financial obligations. We filed a proposed
chapter 11 plan of reorganization for ICH/Sybra which, as amended most recently
on October 23, 2002, provides for our purchase of Sybra in exchange for $8.0
million to be paid to ICH's general unsecured creditors and our agreement to pay
certain other amounts which, based on estimates prepared by ICH/Sybra, are not
expected to be substantial. In addition, we will invest $14.5 million, less the
amount necessary to fund the certain other amounts referred to above, in Sybra,
which amount will be used to pay Sybra's unsecured creditors and to fund working
capital requirements. Furthermore, we will make available to, or obtain for,
Sybra a $5.0 million financing facility for each of three years following the
acquisition (up to $15.0 million in the aggregate) to fund any operating
shortfalls of Sybra. Sybra will remain exclusively liable for its long-term debt
and capital lease obligations which aggregated approximately $104.0 million as
of December 31, 2001, the most recent date for which this information is
available. ICH/Sybra filed its own chapter 11 plan of reorganization which, as
amended most recently on October 17, 2002, proposes the acquisition of Sybra by
an affiliate of RTM, Inc., the largest franchisee of Arby's restaurants. The
bankruptcy court presiding over the ICH/Sybra chapter 11 cases set a hearing for
November 25, 2002 to consider approval of the competing chapter 11 plans. At
this time, it is not possible to determine the outcome of the hearing and, as a
result, our efforts to acquire Sybra.
As of September 29, 2002,March 30, 2003, we have $658.4$641.1 million of cash, cash equivalents and
investments, including $37.8$30.6 million of investments classified as non-current
and net of $14.4 million of short-term investmentssecurities sold with an obligation for us to
purchase included in "Accrued expenses" in our accompanying condensed
consolidated balance sheet. We also had $32.5 million of restricted cash
equivalents including $30.5 million held in a reserve account related to the
Securitization Notes. The cash equivalents and non-current investments include
$22.7$22.6 million of investments, at cost, in the Trusts designated to satisfy
the deferred compensation
awarded in December 2000 which is payable to related parties.compensation. We continue to evaluate strategic opportunities for the
use of our significant cash and investment position, including additional business
acquisitions, repurchases of Triarc common shares (see "Treasury Stock
Purchases" below) and investments.
Income Taxes
We areOur Federal income tax returns for years subsequent to 1993 have not currently under examinationbeen
examined by the Internal Revenue Service andService. However, should any income taxes or
interest be assessed as the result of any Federal or state examinations for
periods through the October 25, 2000 date of sale of our Federalformer beverage
businesses, the purchaser has agreed to pay up to $5.0 million of any resulting
income tax returns have not been examined for years subsequenttaxes or associated interest relating to 1993.the operations of the former
beverage businesses.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant and to the extent legally permissible, to repurchase up to $50.0 million
of our class A common stock under a
stock repurchase program that, as extended, ends onthrough January 18, 2003. Under this
program,2004. We did not repurchase any
shares during the 2003 first quarter and we repurchased 149,000 shares for a total cost of $3.5 million during
our fiscal year 2001 and 125,000 shares for a total cost of $3.1 million in our
first nine months of 2002. Additionally, we repurchased 164,500 shares for a
total cost of $3.9 million during our fiscal October month ended October 27,
2002. We cannot assure you that we will
repurchase any additional shares under
the remaining $39.5 million authorized under this program.
Discontinued Operations
The agreement relating to the October 25, 2000 sale of our former beverage
businesses provides for a post-closing adjustment, the amount of which is in
dispute. The purchaser has stated that it currently believes that it is entitled
to receive from us a post-closing adjustment of $23.2 million andplus interest at
7.19% from October 25, 2000 while we, on the other hand, have stated that we
currently believe that we are entitled to
receive from the purchaser ano post-closing adjustment of $0.8 million, in each
case plus interest at 7.19% from October 25, 2000.is required. We are in
arbitration with the purchaser to determine the amount of the post-closing
adjustment.adjustment, if any. We currently expect the arbitration process to be completed
in the first quarter ofno later than December 29, 2003.
Cash Requirements
As of September 29, 2002,March 30, 2003, our consolidated cash requirements for continuing
operations for the 2002 fourth quarter,remaining nine months of 2003, exclusive of operating cash
flow requirements, consist principally of (1) the cost of business acquisitions, if
any, including the potential acquisition of Sybra, (2) scheduled debt principal
repayments aggregating $6.2 million and (3) a maximum of $43.4$50.0 million of
payments for repurchases of our class A common stock for treasury under our
current stock repurchase program, (2) scheduled debt principal repayments and
capitalized lease prepayments aggregating $28.9 million, (3) capital
expenditures of approximately $3.0 million and (4) the cost of business
acquisitions, if any. Our consolidated cash requirements relating to
discontinued operations for 2003 consist principally of the post-closing
adjustment, if any, of up to $23.2 million related to the sale of our former
beverage businesses, excluding related accrued interest which $3.9 million of repurchases were madewill be included
in October 2002.operating cash flows. We anticipate meeting all of these requirements through
(1) anthe use of our aggregate $620.7$610.5 million of existing cash and cash
equivalents and short-term investments, net of $14.4 million of short-term
investments sold with an obligation for us to purchase and (2) cash flows from
continuing operating activities.
Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc., a
non-operatingan
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 1970s.1970's. The
business operations of Adams Packing were sold in December 1992. In October
2001, an environmental consultant engaged byFebruary
2003, Adams Packing and the Florida Department of Environmental Protection,
which we refer to as the Florida DEP, conductedagreed to a preliminary investigationconsent order that provides
for development of the site, including soil and groundwater sampling.
A final report by the environmental consultant received in April 2002 identified
contamination of the soil and groundwater at the site and indicated that the
environmental consultant believed that further unspecified action is warranted
at the site. Adams Packing has engaged its own environmental consultant that,
under the supervision of the Florida DEP, has conducted a work plan for further investigation of the site that was intended to develop additional information on the extent
and naturelimited
remediation of the soil and groundwater contamination andidentified contamination. Subsequent to March 30, 2003 the
appropriate
remediation for that contamination.Florida DEP approved the work plan submitted by Adams Packing's environmental
consultant has
submittedand work is expected to begin at the Florida DEP a summary ofsite in the results of this investigation with
a proposal for remediation and monitoring of the identified contamination. The
Florida DEP has responded by requesting certain additional investigative and
remedial work. Adams Packing currently intends to negotiate a work plan that is
acceptable to the Florida DEP and is not materially more costly than Adams
Packing's original proposal which is estimated to cost approximately $1.0
million.near future. Based
on thea preliminary cost estimate andof approximately $1.0 million for completion of
the work plan developed by Adams Packing's intent to
negotiate a work plan that does not materially exceed that estimate,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.
As discussed more fully in our Form 10-K, on March 23, 1999 a stockholderIn October 1998, various class action lawsuits were filed a complaint against us and the Executives on behalf of persons who held
our
class A common stockstockholders. Each of these actions names us, the Executives and members of our
board of directors as defendants. On March 26, 1999, certain plaintiffs in these
actions filed an amended complaint which as amended, alleges that our tender offer statement
filed with the Securities and Exchange Commission in 1999, pursuant to which we
repurchased 3.8 million3,805,015 shares of our class A common stock for $18.25 per share,
was materially false and misleading. OnThe amended complaint seeks, among other
items, damages in an unspecified amount. In October 17, 20022000, the plaintiffs agreed
to stay this action pending determination of a similar stockholder action which
was subsequently dismissed by the court presiding over this matter. The stockholderin October 2002 and is no longer being appealed.
Through March 30, 2003, no further action has until
November 25, 2002occurred with respect to file a notice of appeal.these
class action lawsuits.
In addition to the environmental matter and stockholder lawsuit described
above, we are involved in other litigation and claims incidental to our
business. We and our subsidiaries have reserves for all of theseour legal and
environmental matters aggregating $2.8$2.6 million as of September 29, 2002.March 30, 2003. 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 Triarcus and/or itsour 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 franchising royalty revenues are somewhat lower in our first quarter.
Recently Issued Accounting Pronouncements
In June 2001,January 2003, the Financial Accounting Standards Board issued
StatementInterpretation No. 46 "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Accounting StandardsStatements." Variable interest entities, which were formerly referred to as
special purpose entities, are generally entities that either (1) have equity
investors that do not provide significant financial resources for the entity to
sustain its activities or (2) have equity investors without voting rights. Under
Interpretation No. 143, "Accounting46 variable interest entities must be consolidated by the
primary beneficiary. The primary beneficiary is generally defined as having the
majority of the risks and rewards of ownership arising from the variable
interest entity. Interpretation No. 46 also requires certain disclosures if a
significant, but not majority, variable interest is held. Interpretation No. 46
already applies for Asset Retirement
Obligations." Statement 143 addresses financial accountingvariable interests in entities created or obtained after
January 31, 2003 and reporting for
legal obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. Statement 143 requires that the
discounted fair value of an asset retirement obligation be recorded as a
liability in the first fiscal period beginning after June 15, 2003
for variable interests in which it is incurred or as soon thereafter as a
reasonable estimate of fair value can be made, with a corresponding increase to
the carrying amount of the long-lived asset. The capitalized cost is depreciated
over the useful life of the related asset. The provisions of Statement 143 are
effective starting with the first quarter ofentities acquired before February 1, 2003. We do not believe that any of
our tangible long-lived assets presently have material associated retirement
obligations and, accordingly,Since we do
not expect thatpresently have interests in any variable interest entities, the adoptionapplication
of Statement
143Interpretation No. 46 will not have any immediate effect on our consolidated
financial position or results of operations.
In April 2002,2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission149, "Amendment of FASB Statements No. 4,
44,Statement 133 on
Derivative Instruments and 64, Amendment of FASB Statement No. 13, and Technical Corrections.Hedging Activities." Statement 145 most significantly rescinds149 amends and
clarifies accounting for derivative instruments, including certain embedded
derivative instruments, and for hedging activities under Statement 4, "Reporting Gains and
Losses from Extinguishment of Debt," which required that gains and losses from
extinguishment of debt that were included in the determination of net income be
aggregated and, if material, classified as an extraordinary item, net of related
tax effect. Under Statement 145, any gains and losses from extinguishment of
debt will be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Those criteria specify that extraordinary items must be both unusual in their
nature and infrequent in their occurrence.133. The
provisions of Statement 145 with
respect149 are generally effective for contracts entered into
or modified after June 30, 2003. Due to the rescissionrecent release of Statement 4 must be adopted no later than our
fiscal year beginning December 30, 2002 with early adoption encouraged149 we
have yet to determine the impact, if any, it will have on us. However, we have
historically not had transactions to which hedge accounting applied and require that prior periods presented be reclassified accordingly. Upon adoption
of Statement 145, we expect that any future period charges relating to the early
extinguishment of debt will not meet the criteria of extraordinary items under
Opinion 30 and, therefore, will be reported ashave
only a component of costs and expenses
on a pretax basis with any applicable income tax benefit included in our
provision for or benefit from income taxes. This change in classification would
not have any impact on our reported net income or loss. We reported an
extraordinary charge of $20.7 million, net of tax benefit of $12.3 million, for
the year ended December 31, 2000. We currently do not plan to early adopt this
statement; however should we decide to early adopt, we would be required to
reclassify the extraordinary charge for the 2000 fiscal year in our Form 10-K
for the year ending December 29, 2002 in accordance withfew derivative instruments. Since the provisions of Statement 145.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." Statement 146 replaces the previous accounting
guidance provided by Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," of the Emerging Issues Task Force of the
Financial Accounting Standards Board. Under Statement 146, costs associated with
exit or disposal activities will be recognized when they149
generally are incurred rather
than at the date of a commitment to an exit or disposal plan under Issue 94-3.
Examples of costs covered by Statement 146 include contract termination costs,
including leases, and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Statement 146 is to be applied prospectively, to exit or
disposal activities initiated after December 31, 2002. Since we do not presently
have any exit or disposal plans,expect that the adoption of
Statement 146149 will not have any immediate effect on our consolidated financial
position or results of operations.
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 30, 2001.29, 2002. Item 7A of our Form 10-K describes in more detail our
objectives in managing our "Interest Rate Risk" with respect to long-term debt
and our "Foreign Currency Risk," both as referred to below.
Certain statements we make under this Item 3 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- - Other Information" preceding "Item 1."
We are exposed to the impact of interest rate changes, changes in the
market value of our investments and, to a lesser extent, foreign currency
fluctuations.
Policies and procedures - In the normal course of business, we employ
established policies and procedures to manage our exposure to changes in
interest rates, changes in the market value of our investments and fluctuations
in the value of foreign currencies using financial instruments we deem
appropriate.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit
the impact of interest rate changes on earnings and cash flows. We generally use
interest rate caps 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 2003 first nine months of 2002.quarter. As of September 29, 2002,March
30, 2003, our long-term debt, including current portion, aggregated $295.6$378.9
million and consisted of $276.5$361.4 million of fixed-rate debt, including $5.6
million of capitalized leases, and $19.1$17.5 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
maturities which range from less than one
yearninety days to nearly thirty 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 suchthese 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. We
have established policies and procedures governing the type and relative
magnitude of investments we may make. We have a management investment committee
which generally supervises the investment of certain funds not currently required for the Company'sour
operations and the Company's Boardour board of Directors establishesdirectors has established certain investment
policies to be followed with respect to the investment of
such funds.
Foreign Currency Risk
We had no significant changes in our management of, or our exposure to,
foreign currency fluctuations during the 2003 first nine months of 2002.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 continue to evaluate whether to
adjust our asset allocations to increase the portion of our investments which
offer the opportunity for higher, but more risk-inherent, returns and lower the
portion of our risk-minimized investments. We periodically review the returns
from each of our investments and may maintain, liquidate or increase selected
investments based on this review and our assessment of potential future returns.
We maintain investment portfolio holdings of various issuers, types and
maturities. As of September 29, 2002 suchMarch 30, 2003 these investments consisted of the following
(in thousands):
Cash equivalents included in "Cash and cash equivalents" on
theon accompanying condensed consolidated balance sheet...............sheet.........$ 440,593463,247
Short-term investments............................................ 190,869investments......................................... 157,429
----------
Total cash equivalents and short-term investments............ 631,462investments........... 620,676
Restricted cash equivalents....................................... 32,484equivalents.................................... 32,470
Non-current investments........................................... 37,755investments........................................ 30,610
----------
$ 701,701683,756
==========
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired and consisted principally of
money market mutual funds, interest-bearing brokerage and bank accounts with a
stable value and commercial paper of high credit quality.credit-quality entities. Our
short-term investments included $79.7$62.5 million of United States government and
government agency debt securities with maturities ranging from ninethirteen months
to two years when acquired. This $79.7The $62.5 million together with our cash equivalents
arewere highly liquid investments andthat combined constitute over 82%constituted 85% of our total cash
equivalents and short-term investments shown above.
At September 29, 2002March 30, 2003 our investments are classified in the following general
types or categories (in thousands):
Carrying Value
At Fair -----------------------
Type At Cost Value or ----------------------
Type Cost Equity(b) Amount PercentagePercent
---- ----------- -------- ------ ------ -----------------
Cash equivalents.................................equivalents (a)............................$ 440,593463,247 $ 440,593463,247 $ 440,593 63%463,247 68%
Restricted cash equivalents...................... 32,484 32,484 32,484 5equivalents..................... 32,470 32,470 32,470 5%
Securities accounted for as:
Trading securities............................. 24,798 18,786 18,786 3securities......................... 21,486 19,446 19,446 3%
Available-for-sale securities.................. 152,412 152,260 152,260 22securities.............. 120,727 121,066 121,066 18%
Non-current investments held in deferred
compensation trusts accounted for at cost...... 22,671 24,836 22,671 3cost..... 18,171 21,540 18,171 2%
Other current and non-current investments in
investment limited partnerships and similar
investment entities accounted for at:
Cost........................................ 22,444 34,585 22,444 3
Equity...................................... 2,975 3,250 3,250 --at cost..... 23,213 37,546 23,213 3%
Other non-current investments accounted for at:
Cost........................................ 8,136 8,611 8,136 1
Equity...................................... 4,046 1,077 1,077Cost....................................... 4,891 6,972 4,891 1%
Equity..................................... 895 857 1,252 --
----------- ----------- ---------- ---------- ---------- -----------
Total cash equivalents and long investment
positions.....................................$ 710,559685,100 $ 716,482703,144 $ 701,701683,756 100%
=========== =========== ========== ========== ========== ===========
Securities sold with an obligation for us to
purchase accounted for as trading securities...securities..$ (17,856)(14,326) $ (14,440)(14,417) $ (14,440)(14,417) N/A
========== ===================== =========== ==========
(a) Includes $4,459,000 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 classified and accounted for either as
"available-for-sale" or "trading" and are reported at fair market value with the
resulting net unrealized holding gains or losses, net of income taxes, reported
as a separate component of comprehensive income or loss bypassing net incomeloss or included as
a component of net income or loss, respectively. Investment limited partnerships and
similar investment entities and other non-current investments in which we do not
have significant influence over the investee are accounted for at cost (see
below). Realized gains and losses on investment limited partnerships and similar
investment entities and other non-current investments recorded at cost are
reported as investment income or loss in the period in which the securities are
sold. Investment limited partnerships and similar
investment entities and otherOther non-current investments in which we have significant influence over
the investeesinvestee are 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 each of the investees. We review all of our investments in which we
have unrealized losses for any unrealized losses deemedwe deem to be other than
temporary. We recognize an investment loss currently for any resulting other
than temporary loss with a permanent reduction in the cost basis component of
the investment. The cost of investments reflected in the table above represents
original cost less 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 measure of market
risk exposure represents an estimate of the potential change in fair value of
our financial instruments. Market risk exposure is presented for each class of
financial instruments held by us at September 29, 2002March 30, 2003 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 table reflectstables reflect the estimated effects on the market value of
our financial instruments as of September 29, 2002March 30, 2003 based upon assumed immediate
adverse effects as noted below (in thousands).:
Trading Purposes:
Carrying Equity
Value Price Risk
----- ----------
Equity securities............................................................$ 18,10919,446 $ (1,811)
Debt securities.............................................................. 677 (68)(1,945)
Securities sold with an obligation to purchase............................... (14,440) 1,444(14,417) 1,442
The debt securities included in the trading portfolio are entirely
investments in convertible bonds which primarily trade on the conversion feature
of the securities rather than the stated interest rate and, as such, there is no
material interest rate risk since a change in interest rates of one percentage
point would not have a material impact on our consolidated financial position or
results of operations. The securities included in the trading portfolio
denominated in foreign currency total less than $1.0 million and, accordingly,
there is no significant foreign currency risk.
The sensitivity analysis of financial instruments held for trading purposes
assumes an instantaneous 10% decrease in the equity markets in which we are
invested from their levels at September 29, 2002March 30, 2003 with all other variables held
constant. For purposes of this analysis, our debtThe securities which are entirely
convertible bonds, were assumed to primarily trade based uponincluded in the conversion
feature of the securitiestrading portfolio do not include any
investments denominated in foreign currency and, be perfectly correlated with the assumed equity
index.accordingly, there is no
foreign currency risk.
Other Than Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Cash equivalents....................................$ 440,593463,247 $ (14)(27) $ -- $ --
Restricted cash equivalents......................... 32,48432,470 -- -- --
Available-for-sale United States government
and government agency debt securities............ 79,668 (598)62,523 (261) -- --
Available-for-sale corporate debt securities........ 15,172 (62)8,730 (20) -- --(174)
Available-for-sale asset-backed securities.......... 24,971 (1,935)23,602 (2,203) -- --
Available-for-sale equity securities................ 24,18017,814 -- (2,418)(1,781) --
Available-for-sale debt mutual fund................. 8,269 (165)8,397 (126) -- --
Other investments................................... 57,578 (1,566) (3,053) (155)47,527 (1,257) (2,844) (76)
Long-term debt...................................... 295,635 (13,539)debt, excluding capitalized lease
obligations...................................... 373,366 (16,247) -- --
Interest rate swap agreement in a payable position.. 1,262 (471)1,174 (410) -- --
The sensitivity analysis of financial instruments held at September 29,
2002March 30, 2003
for purposes of other than trading assumes (1) an instantaneous change in market
interest rates of one percentage point, and(2) an instantaneous 10% decrease in the
equity markets in which we are invested bothand (3) an instantaneous 10% decrease in
the foreign currency exchange rates versus the United States dollar, each from
their levels at March 30, 2003 and with all other variables held constant. The
sensitivity analysis also assumes that the decreases in the equity markets and
foreign exchange rates are other than temporary. For purposes of this analysis,
our debt investments arewere assumed to have average remaining maturities as set
forth below. CashOur cash equivalents consisted of $429.6$441.0 million of money market
funds and interest-bearing brokerage and bank accounts which are designed to
maintain a stable value and, as a result, arewere assumed to have no interest rate
risk and $11.0$22.2 million of commercial paper with maturities of three months or
less when acquired which arewere assumed to have an average remaining maturity of
45 days. RestrictedOur 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. Our United States government and government agency debt
securities consistconsisted of several securities with maturities ranging from ninethirteen
months to two years when acquired and arehad an average remaining maturity of five
months. Our corporate debt securities consisted of short-term commercial paper
and foreign corporate convertible debt and had an average remaining maturity of
85 days. Our asset-backed securities had expected maturities ranging from two
years to thirty years when acquired and had an average remaining maturity of
nine and one-third years. Our debt mutual fund had underlying investments with
an average duration of one and one-half years and, accordingly, was assumed to
have an average remaining maturity of nine months. Corporateone and one-half years. Our other
investments, principally investment limited partnerships and similar investment
entities, included debt securities consisted
almost entirely of short-term commercial paper and arefor which we assumed to have an
average maturity of 150 days. Asset-backed securities have expected maturities
ranging from less than two years to thirty years when acquired and are assumed
to have an average remaining
maturity of seven and three-quarters years. Our
debt mutual fund has underlying investments with an average duration of
approximately two years and, accordingly, is assumed to have an average maturity
of twoten years. The interest rate risk reflects, for each of these debt
investments, the impact on our results of operations. At the time these
securities mature and, assuming we reinvestedreinvest in similar securities, the effect of
the interest rate risk of one percentage point above their levels at September 29, 2002March 30,
2003 would continue beyond the maturities assumed.
The interest rate risk presented with respect to our long-term debt,
excluding capitalized lease obligations, relates only to only our fixed-rate debt and
represents the potential impact the indicated change has on the fair value of
suchthis 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 in investment limited partnerships and similar investment
entities accounted for at cost and other non-current investments which trade in
public markets or are convertible into securities which trade in public markets
included in "Other investments" in the table above, the sensitivity analysis
assumes (1) 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 December 30, 200129, 2002 since more current
information was not available and (2) the decrease
in the equity markets and the change in foreign currency rates were other than
temporary.available. To the extent such entities invest in convertible
bonds which trade primarily trade on the conversion feature of the securities rather
than on the stated interest rate, this analysis assumed equity price risk and no
interest rate risk. Further, this analysis assumed no market risk for other
investments, other than investment limited partnerships and similar investment
entities and other non-current investments which trade in public equity markets.
This
analysis also assumes an instantaneous 10% change in theThe foreign currency exchange rates versusrisk presented excludes those investments where the
United States dollar from their levels at September
29, 2002, with all other variables held constant.
We also have a written call option on our class A common stock which
effectively arose uponinvestment manager has fully hedged the assumption of our zero coupon convertible debentures
by the purchaser of our former beverage businesses which remain convertible into
our class A common stock. The purchaser of our former beverage businesses is
required to take all actions reasonably necessary to call these debentures for
redemption in February 2003. The fair value of this written call option is
insignificant as of September 29, 2002 and the associated equity risk is also
insignificant with respect to the potential impact of an instantaneous 10%
increase in the price of our class A common stock on the fair value of the
written call option and on our financial position and results of operations.risk.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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 within 90 days prior to the filing date of this quarterly report.
Based upon that evaluation, our Chairman and Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be included in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required. No significant changes were made
to our internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
PARTPart 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 which 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 franchiseesArby'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 and operating costs;
o Advertising and promotional efforts;
o Brand awareness;
o The existence or absence of positive or adverse publicity;
o Market acceptance of new product offerings;
o New product and concept development by competitors;
o Changing trends in consumer tastes and preferences (including
changes resulting from health or safety concerns with respect to
the consumption of beef, french fries or other foods)foods or the
effects of food-borne illnesses) and in spending and demographic
patterns;
o The business and financial viability of key franchisees;
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 and unanticipated restaurant closures by the Company and
its franchisees;
o The ability to identify, attract and retain potential franchisees
with sufficient experience and financial resources to develop and
operate Arby's restaurants;
o Changes in business strategy or development plans;
o Quality of the Company's and franchisees' management;
o Availability, terms and deployment of capital;
o Business abilities and judgment of the Company's and franchisees'
personnel;
o Availability of qualified personnel to the Company and to franchisees;
o Labor and employee benefit costs;
o Availability and cost of energy, raw materials, ingredients and
supplies and thesupplies;
o The potential impact on royalty revenues and
franchisees' restaurant level sales that could arise from interruptions in the distribution of
supplies of food and other products to Arby's restaurants could
have on sales at Company-owned restaurants and the royalties that
the Company receives from franchisees;
o GeneralAvailability and cost of workers' compensation and general liability
premiums and claims experience;
o Changes in national, regional and local economic, business andor
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 requirements;
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
other terrorist activities;
o Adverse weather conditions; and
o Other risks and uncertainties referred to in Triarc's Annual
Report on Form 10-K for the fiscal year ended December 30,
200129, 2002
(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 will not undertake and specifically decline any obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. In
addition, it is our policy generally not to make any specific projections as to
future earnings, and we do not endorse any projections regarding future
performance that may be made by third parties.
Item 1. Legal Proceedings
As discussed in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2001,29, 2002 (the "Form 10-K") and, in our Quarterly Reports on Form 10-Q
for the quarterly periods ended March 31, 2002 and June 30, 2002,2001 a vacant property owned by our
indirect subsidiary, Adams Packing Association, Inc., was listed by the U.S.
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 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 has engaged an environmental consultant that,
under the supervision ofand the Florida Department of Environmental Protection
(the
"FDEP"("FDEP"), has conducted agreed to a consent order that provides for development of a work plan
for further investigation of the site that was intended to
develop additional information on the extent and naturelimited remediation of the soil and
groundwater contamination andidentified
contamination. In May 2003, the appropriate remediation for that
contamination.FDEP approved the work plan submitted by Adams
Packing's environmental consultant has submittedand work is expected to begin at the FDEP a summary ofsite in
the results of this investigation with a proposal for
remediation and monitoring of the identified contamination. The FDEP has
responded by requesting certain additional investigative and remedial work.
Adams Packing currently intends to negotiate a work plan that is acceptable to
the FDEP and is not materially more costly than Adams Packing's original
proposal.near future. Based on a preliminary cost estimate of approximately $1.0
million for completion of the work plan, developed by Adams Packing's
environmental consultant, with respect to its
proposal, Adams Packing's current intent to negotiate a work plan the cost of
which does not materially exceed that amount and Adams Packing's current reserve levels, and after
taking into consideration various legal defenses available to us and/or Adams
Packing, the cost of further investigation and remediation at the site is not
expected to have a material adverse effect on our consolidated financial
position or results of operations.
As discussed in our Form 10-K, on March 23, 1999, Norman Salsitz, a
stockholder of Triarc, filed a complaint against the Company, Nelson Peltz and
Peter May in the United States District Court for the Southern District of New
York. On October 17, 2002, the Court entered orders granting the defendants'
motion for summary judgment and denying the plaintiff's motion for class
certification. The plaintiff has until November 25, 2002 to file a notice of
appeal.
Item 5. Other Events
Proposed Acquisition of Sybra, Inc.
As discussed in our Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 2002 and June 30, 2002, the Company is attempting to
acquire Sybra, Inc. and its affiliate, Sybra of Connecticut, Inc. (collectively,
"Sybra"), subsidiaries of I.C.H. Corporation ("ICH"). Sybra and ICH filed for
protection under chapter 11 of the United States Bankruptcy Code on February 5,
2002 in order to restructure their financial obligations. Sybra owns and
operates 239 Arby's restaurants and is the second largest franchisee of
Arby's(R) restaurants. On August 8, 2002, the Bankruptcy Court presiding over
the Sybra/ICH chapter 11 cases terminated ICH's and Sybra's exclusive right to
file a chapter 11 plan of reorganization, specifically authorizing the Company
to file its own chapter 11 plan for ICH/Sybra, which would provide for the
Company's purchase of 100% of the equity of Sybra from ICH. The Bankruptcy Court
set a deadline of September 13, 2002 for the Company and ICH/Sybra to file their
respective proposed chapter 11 plans and scheduled a hearing for October 7, 2002
to determine the adequacy of the disclosure statements for those plans. On
September 13, 2002, the Company filed its proposed chapter 11 plan for
ICH/Sybra, which plan was amended on October 17, 2002 and October 23, 2002. The
Company's amended chapter 11 plan provides for the Company's payment of $8.0
million in cash to ICH's general unsecured creditors and the Company's agreement
to pay certain other amounts to satisfy ICH's priority and administrative claim
obligations (the "Administrative/Priority Obligations", which amounts, based on
the estimates prepared by ICH/Sybra, are not expected to be substantial). In
addition, the Company will invest $14.5 million, less the amount necessary to
fund the Administrative/Priority Obligations, in Sybra, which amount will be
used to pay Sybra's unsecured creditors and to fund working capital needs.
Furthermore, the Company will make available to, or obtain for, Sybra a $5
million financing facility for each of three years following the acquisition (up
to $15 million in the aggregate) to fund any operating shortfalls of Sybra.
Sybra will remain exclusively liable for its long-term debt and capital lease
obligations (which aggregated approximately $104 million as of December 31,
2001). ICH/Sybra filed its own chapter 11 plan on September 13, 2002, which it
amended on October 4, 2002 and on October 17, 2002. On October 7, 2002, the
Bankruptcy Court determined that the disclosure statements for the competing
chapter 11 plans would be approved subject to certain disclosure modifications.
The Court then set a hearing for November 25, 2002 to consider approval of the
competing chapter 11 plans. Thus, the Company's proposed chapter 11 plan for
ICH/Sybra remains subject to approval of the Bankruptcy Court and the creditors
of ICH/Sybra. At this time, it is not possible to determine with certainty the
outcome of our efforts to acquire Sybra.
Stock Repurchase Program
------------------------
On January 18, 2001, our management was authorized, when and if market
conditions warrant, and to the extent legally permissible, to purchase from time
to time up to an aggregate of $50,000,000$50 million of our Class A Common Stock pursuant
to a $50,000,000$50 million stock repurchase program that was initially scheduled to end on January
18, 2002.2003. In December 2001,January 2003, the term of the stock repurchase program was extended
until January 18, 2003. During fiscal 2002,2004 and the amount available under the stock repurchase
program was replenished to permit the Company to repurchase a total of $50
million worth of our Class A Common Stock on or after January 18, 2003 (in
addition to the $10.5 million previously spent under the program). Triarc has
not repurchased 289,500any shares of Class A Common Stock pursuant to the stock
repurchase program at an average
cost of approximately $24.14 per share (including commissions) for an aggregate
cost of approximately $7,000,000. As of November 11, 2002, Triarc had
repurchased a total of 438,500since January 18, 2003. We cannot assure you that we will
repurchase any additional shares of Class A Common Stock pursuant to thethis stock repurchase program, at an average cost of approximately $23.89 per share
(including commissions), for an aggregate cost of approximately $10,473,700.
Sale of Beverage Business
As reported in our Form 10-K, on October 25, 2000, we completed the sale of
our beverage business by selling all the outstanding capital stock of Snapple
Beverage Group, Inc. and Royal Crown Company, Inc. to affiliates of Cadbury
Schweppes plc. The purchase and sale agreement for the transaction provided for
a post-closing adjustment, the amount of which is in dispute. Cadbury initially
stated that it believed that it was entitled to receive from us a post-closing
adjustment of approximately $27.6 million, and we initially stated, on the other
hand, that we believed that we were entitled to receive from Cadbury a
post-closing adjustment of approximately $5.6 million, in each case plus
interest from the closing date. An arbitrator was selected by Triarc and Cadbury
for the purpose of determining the amount of the post-closing adjustment. On
September 6, 2002 we filed a submission with the arbitrator in which we stated
that we believe that we are entitled to receive from Cadbury a post-closing
adjustment of approximately $0.8 million, plus interest from the closing date.
On October 21, 2002, Cadbury filed a submission with the arbitrator in which it
stated that it believes that it is entitled to receive from us a post-closing
adjustment of approximately $23.2 million, plus interest from the closing date.
We currently expect the post-closing adjustment process to be completed during
the first quarter of 2003.program.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 - By-laws of Triarc Companies, Inc. as currently in effect,
incorporated herein by reference to Exhibit 3.1 to Triarc's
Current Report on Form 8-K dated November 12, 2002 (SEC file no.
1-2207).
(b) Report on Form 8-K
The Registrant furnished a report on Form 8-K on August 13, 2002,March 27, 2003, which
included information under Item 9 of such form.
The Registrant filed a report on Form 8-K on March 27, 2003, which
included information under Item 7 of such form.
The Registrant furnished a report on Form 8-K on February 18, 2003, which
included information under Item 9 of such form.
The Registrant filed a report on Form 8-K on January 21, 2003, which
included information under Item 7 of such form.
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: NovemberMay 12, 20022003 By: /S/ FRANCIS T. MCCARRON
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Francis T. McCarron
Senior Vice President and
Chief Financial Officer
(On behalf of the Company)
Date: NovemberMay 12, 20022003 By: /S/ FRED H. SCHAEFER
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Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
CERTIFICATIONCERTIFICATIONS
I, Nelson Peltz, the Chairman and Chief Executive Officer of Triarc
Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: NovemberMay 12, 20022003
/S/ NELSON PELTZ
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Nelson Peltz
Chairman and Chief Executive Officer
CERTIFICATIONCERTIFICATIONS
I, Francis T. McCarron, the Senior Vice President and Chief Financial
Officer of Triarc Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: NovemberMay 12, 20022003
/S/ FRANCIS T. MCCARRON
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Francis T. McCarron
Senior Vice President and
Chief Financial Officer
Exhibit Index
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Exhibit
No. Description Page No.
- ---------- ----------- --------
3.1 - By-laws of Triarc Companies, Inc. as currently
in effect, incorporated herein by reference to
Exhibit 3.1 to Triarc?s Current Report on Form 8-K
dated November 12, 2002 (SEC file no. 1-2207).