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 30, 2001
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
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TRIARC COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 38-0471180
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
(212) 451-3000
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(Registrant's telephone number, including area code)
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(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.
Yes (X) No ( )
There were 20,376,692 shares of the registrant's Class A Common Stock
outstanding as of the close of business on October 31, 2001.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2000 (A) 2001
-------- ----
(In thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................................$ 596,135 $ 363,070
Short-term investments............................................................... 314,017 265,079
Receivables.......................................................................... 14,565 16,679
Deferred income tax benefit ......................................................... 9,659 11,457
Prepaid expenses .................................................................... 677 1,891
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Total current assets............................................................... 935,053 658,176
Restricted cash equivalents.............................................................. 32,684 32,539
Investments.............................................................................. 11,595 44,957
Properties .............................................................................. 40,097 62,183
Unamortized costs in excess of net assets of acquired companies.......................... 18,764 18,133
Other intangible assets.................................................................. 6,070 5,603
Deferred costs and other assets.......................................................... 23,161 22,571
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$ 1,067,424 $ 844,162
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................................$ 17,017 $ 23,817
Accounts payable..................................................................... 11,923 3,360
Accrued expenses..................................................................... 65,365 64,621
Net current liabilities relating to discontinued operations.......................... 244,429 23,147
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Total current liabilities.......................................................... 338,734 114,945
Long-term debt........................................................................... 291,718 295,175
Deferred compensation payable to related parties......................................... 22,500 23,589
Deferred income taxes.................................................................... 69,922 66,944
Deferred income and other liabilities.................................................... 18,397 18,498
Forward purchase obligation for common stock............................................. 43,843 --
Stockholders' equity:
Common stock......................................................................... 3,555 3,555
Additional paid-in capital........................................................... 211,967 212,602
Retained earnings.................................................................... 350,561 396,478
Common stock held in treasury........................................................ (242,772) (287,105)
Common stock to be acquired.......................................................... (43,843) --
Accumulated other comprehensive income (deficit)..................................... 2,842 (519)
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Total stockholders' equity ........................................................ 282,310 325,011
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$ 1,067,424 $ 844,162
============= ============
(A) Derived from the audited consolidated financial statements as of December 31, 2000
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, September 30, October 1, September 30,
2000 2001 2000 2001
---- ---- ---- ----
(In thousands except per share amounts)
(Unaudited)
Revenues, investment income and other income (expense):
Royalties and franchise fees................................$ 22,468 $ 23,914 $ 62,975 $ 67,487
Investment income, net...................................... 6,973 5,906 28,045 29,229
Other income (expense), net................................. 197 (33) 603 9,373
----------- ---------- ---------- ----------
Total revenues, investment income and
other income ......................................... 29,638 29,787 91,623 106,089
----------- ---------- ---------- ----------
Costs and expenses:
General and administrative.................................. 16,842 21,141 52,900 58,175
Depreciation and amortization, excluding amortization
of deferred financing costs.............................. 1,352 1,554 4,066 4,719
Interest expense ........................................... 521 7,122 1,764 23,485
Insurance expense related to long-term debt................. -- 1,184 -- 3,624
----------- ---------- ---------- ----------
Total costs and expenses................................. 18,715 31,001 58,730 90,003
----------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes............................. 10,923 (1,214) 32,893 16,086
Provision for income taxes...................................... (4,218) (554) (13,605) (8,686)
----------- ---------- ---------- ----------
Income (loss) from continuing operations........... 6,705 (1,768) 19,288 7,400
----------- ---------- ---------- ----------
Income (loss) from discontinued operations, net of income taxes:
Loss from operations........................................ (3,337) -- (8,610) --
Gain on disposal............................................ -- -- -- 38,517
----------- ---------- ---------- ----------
Total income (loss) from discontinued operations......... (3,337) -- (8,610) 38,517
----------- ---------- ---------- ----------
Net income (loss)..................................$ 3,368 $ (1,768) $ 10,678 $ 45,917
=========== ========== ========== ==========
Basic income (loss) per share:
Continuing operations..............................$ .29 $ (.08) $ .82 $ .34
Discontinued operations............................ (.14) -- (.37) 1.75
----------- ---------- ---------- ----------
Net income (loss)..................................$ .15 $ (.08) $ .45 $ 2.09
=========== ========== ========== ==========
Diluted income (loss) per share:
Continuing operations..............................$ .28 $ (.08) $ .78 $ .32
Discontinued operations............................ (.14) -- (.35) 1.66
----------- ---------- ---------- ----------
Net income (loss)..................................$ .14 $ (.08) $ .43 $ 1.98
=========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-----------------
October 1, September 30,
2000 2001
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(In thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income.................................................................................$ 10,678 $ 45,917
Adjustments to reconcile net income to net cash provided by continuing
operating activities:
Depreciation and amortization of properties .......................................... 2,623 3,058
Amortization of costs in excess of net assets of acquired companies,
other intangible assets and certain other items .................................... 1,443 1,661
Amortization of deferred financing costs and original issue discount ................. 5 1,570
Deferred compensation provision ...................................................... -- 1,089
Operating investment adjustments, net (see below) .................................... (10,130) (5,412)
Litigation settlement receivable ..................................................... -- (3,333)
Deferred income tax provision (benefit) .............................................. 13,605 (2,978)
(Income) loss from discontinued operations ........................................... 8,610 (38,517)
Other, net ........................................................................... 3,439 2,064
Changes in operating assets and liabilities:
Decrease (increase) in receivables ................................................. 1,654 (371)
Decrease (increase) in prepaid expenses ............................................ 63 (1,214)
Increase (decrease) in accounts payable and accrued expenses ...................... 2,809 (1,369)
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Net cash provided by continuing operating activities ............................ 34,799 2,165
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Cash flows from continuing investing activities:
Investment activities, net (see below)..................................................... 45,614 7,860
Capital expenditures ...................................................................... (10,421) (25,158)
Other ..................................................................................... 1,400 (6)
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Net cash provided by (used in) continuing investing activities .................. 36,593 (17,304)
---------- ---------
Cash flows from continuing financing activities:
Proceeds from long-term debt .............................................................. -- 22,590
Repayments of long-term debt .............................................................. (3,535) (12,335)
Repurchases of common stock for treasury .................................................. (42,373) (49,576)
Proceeds from stock option exercises ...................................................... 6,218 4,785
Deferred financing costs .................................................................. -- (625)
----------- ------
Net cash used in continuing financing activities ................................ (39,690) (35,161)
---------- ---------
Net cash provided by (used in) continuing operations .......................................... 31,702 (50,300)
Net cash used in discontinued operations ...................................................... (47,361) (182,765)
---------- ---------
Net decrease in cash and cash equivalents ..................................................... (15,659) (233,065)
Cash and cash equivalents at beginning of period .............................................. 127,843 596,135
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Cash and cash equivalents at end of period ....................................................$ 112,184 $ 363,070
========== =========
Detail of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities ...............................................$ 53,350 $ 55,992
Cost of trading securities purchased .................................................... (42,829) (52,097)
Net recognized losses from trading securities ........................................... 3,302 2,689
Net recognized gains from transactions in other than trading securities, equity
in investment limited partnerships and gains on transactions in short positions
in securities ........................................................................ (23,952) (5,227)
Accretion of discount on debt securities ................................................ (1) (6,769)
---------- ---------
$ (10,130) $ (5,412)
========== =========
Investing investment activities, net:
Proceeds from sales of available-for-sale securities and other investments ..............$ 115,505 $ 106,943
Cost of available-for-sale securities and other investments purchased ................... (64,479) (95,027)
Proceeds from securities sold short ..................................................... 35,543 17,481
Payments to cover short positions in securities ......................................... (40,955) (21,537)
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$ 45,614 $ 7,860
========== =========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(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
generally accepted accounting principles. In the opinion of the Company,
however, the accompanying condensed consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments and the
adjustment to the gain on disposal of discontinued operations recognized during
the Company's second quarter ended July 1, 2001 (see Note 2), necessary to
present fairly the Company's financial position as of December 31, 2000 and
September 30, 2001, its results of operations for the three and nine-month
periods ended October 1, 2000 and September 30, 2001 and its cash flows for the
nine-month periods ended October 1, 2000 and September 30, 2001 (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 31, 2000 (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. In accordance therewith, the
Company's first nine months of 2000 commenced on January 3, 2000 and ended
October 1, 2000, with its third quarter commencing on July 3, 2000, and the
Company's first nine months of 2001 commenced on January 1, 2001 and ended
September 30, 2001, with its third quarter commencing on July 2, 2001. For
purposes of these condensed consolidated financial statements, the periods (1)
from July 3, 2000 to October 1, 2000 and January 3, 2000 to October 1, 2000 are
referred to herein as the three-month and nine-month periods ended October 1,
2000, respectively, and (2) from July 2, 2001 to September 30, 2001 and January
1, 2001 to September 30, 2001 are referred to herein as the three-month and
nine-month periods ended September 30, 2001, respectively.
Certain amounts included in the prior periods' condensed consolidated
financial statements have been reclassified to conform with the current periods'
presentation.
(2) Discontinued Operations
On October 25, 2000, the Company completed the sale (the "Snapple Beverage
Sale") of Snapple Beverage Group, Inc. ("Snapple Beverage Group"), the parent
company of Snapple Beverage Corp. ("Snapple"), Mistic Brands, Inc. ("Mistic")
and Stewart's Beverages, Inc. ("Stewart's"), and Royal Crown Company, Inc.
("Royal Crown") to affiliates of Cadbury Schweppes plc (collectively,
"Cadbury"). Snapple Beverage Group represented the operations of the Company's
former premium beverage business and Royal Crown represented the operations of
the Company's former soft drink concentrate business. The consideration paid to
the Company consisted of (1) cash, which is subject to further post-closing
adjustments, and (2) the assumption of debt and related accrued interest. The
assumed debt and accrued interest consisted of (1) $300,000,000 of 10 1/4%
senior subordinated notes due 2009 co-issued by Triarc Consumer Products Group,
LLC ("TCPG"), the former parent company of Snapple Beverage Group and Royal
Crown and a subsidiary of Triarc, and Snapple Beverage Group, (2) $119,130,000,
net of unamortized original issue discount of $240,870,000, of Triarc's zero
coupon convertible subordinated debentures due 2018 (the "Debentures") and (3)
$5,982,000 of accrued interest. Of the cash proceeds, $426,594,000 was utilized
to repay outstanding obligations under a senior bank credit facility maintained
by Snapple, Mistic, Stewart's, Royal Crown and RC/Arby's Corporation, the former
parent company of Royal Crown and a subsidiary of TCPG.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(Unaudited)
The loss from discontinued operations for the three and nine-month periods
ended October 1, 2000 resulted entirely from the net loss from operations of the
sold beverage businesses which consisted of the following (in thousands):
Three Months Nine Months
Ended Ended
October 1, 2000 October 1, 2000
--------------- ---------------
Revenues, interest income and other income....$ 221,544 $ 638,168
Income (loss) before income taxes............. 941 (4,784)
Provision for income taxes.................... (4,278) (3,826)
Net loss...................................... (3,337) (8,610)
The income from discontinued operations for the nine months ended September
30, 2001 resulted entirely from adjustments to the previously recognized
estimated gain on disposal of the Snapple Beverage Group and Royal Crown during
the Company's second quarter ended July 1, 2001. These estimated net adjustments
resulted from the realization of $200,000,000 of proceeds from Cadbury for the
Company's election to treat certain portions of the Snapple Beverage Sale as an
asset sale in lieu of a stock sale under the provisions of section 338(h)(10) of
the United States Internal Revenue Code, net of estimated income taxes,
partially offset by additional accruals relating to the Snapple Beverage Sale.
Net current liabilities relating to the discontinued businesses consisted
of the following (in thousands):
December 31, September 30,
2000 2001
---- ----
Accrued expenses, including accrued income taxes, of the discontinued
operations of Snapple Beverage Group and Royal Crown..............................$ 241,401 $ 20,180
Net liabilities of certain discontinued operations of SEPSCO, LLC, a
subsidiary of the Company (net of assets held for sale of $234)................... 3,028 2,967
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$ 244,429 $ 23,147
============= ============
(3) Comprehensive Income (Loss)
The following is a summary of the components of comprehensive income
(loss), net of income taxes (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, September 30, October 1, September 30,
2000 2001 2000 2001
---- ---- ---- ----
Net income (loss).......................................................$ 3,368 $ (1,768) $ 10,678 $ 45,917
--------- --------- -------- --------
Net change in unrealized gains and/or losses on
available-for-sale securities:
Change in net unrealized appreciation and/or depreciation
of available-for-sale securities............................... 1,071 (2,576) 1,416 (2,277)
Less reclassification adjustments for prior period
appreciation of securities sold during the period.............. (669) (24) (6,374) (929)
--------- --------- -------- --------
402 (2,600) (4,958) (3,206)
Equity in the decrease in unrealized gain on a retained
interest ............................................................ (16) -- (54) (159)
--------- --------- -------- --------
386 (2,600) (5,012) (3,365)
Net change in currency translation adjustment........................... 3 (28) (106) 4
--------- --------- -------- --------
389 (2,628) (5,118) (3,361)
--------- --------- -------- --------
Comprehensive income (loss).............................................$ 3,757 $ (4,396) $ 5,560 $ 42,556
========= ========= ======== ========
(4) Income (Loss) Per Share
Basic income (loss) per share for the three-month and nine-month periods
ended October 1, 2000 and September 30, 2001 has been computed by dividing the
income or loss by the weighted average number of common shares outstanding of
22,867,000, 23,542,000, 21,206,000 and 21,921,000, respectively. Diluted income
(loss) per share for the three and nine-month periods ended October 1, 2000 and
the nine-month period ended September 30, 2001 has been computed by dividing the
income or loss by an aggregate 24,292,000, 24,841,000 and 23,150,000 shares,
respectively. Diluted loss per share for the three-month period ended September
30, 2001 is the same as the basic loss per share since the Company reported a
loss from continuing operations and, therefore, the effect of all potentially
dilutive securities on the loss from continuing operations would have been
antidilutive. The shares used for diluted income (loss) per share consist of the
weighted average number of common shares outstanding and potential common shares
reflecting (1) the 1,425,000, 1,057,000 and 1,229,000 share effects of dilutive
stock options for the three and nine-month periods ended October 1, 2000 and the
nine-month period ended September 30, 2001, respectively, computed using the
treasury stock method and (2) the 242,000 share effect for the nine-month period
ended October 1, 2000 of a forward purchase obligation for common stock (the
"Forward Purchase Obligation") under which the Company repurchased 1,999,207
shares of its Class B common stock (the "Class B Shares") for $42,343,000 on
August 10, 2000 and repurchased the remaining 1,999,207 Class B Shares for
$43,843,000 on August 10, 2001. The shares for diluted income (loss) per share
exclude any effect of (1) the assumed conversion of the Debentures through the
date of their assumption by Cadbury and (2) a written call option on the
Company's common stock, which commenced following the assumption of the
Debentures by Cadbury, since the effect of each of these on income (loss) from
continuing operations per share would have been antidilutive. In addition, the
shares for diluted income (loss) per share for the three-month period ended
October 1, 2000 and the three and nine-month periods ended September 30, 2001
exclude any effect of the Forward Purchase Obligation since the effect on income
(loss) from continuing operations per share in those periods would have been
antidilutive.
(5) Derivative Instruments
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," issued by the Financial Accounting
Standards Board. SFAS 133, as amended by Statements of Financial Accounting
Standards Nos. 137 and 138, provides a comprehensive standard for the
recognition and measurement of derivatives and hedging activities. The standard
requires derivatives to be recorded on the balance sheet at fair value and
establishes more restrictive criteria for hedge accounting. The only derivatives
the Company had as of September 30, 2001 that are affected by SFAS 133 are (1)
an interest rate swap agreement in connection with a bank term loan (see below)
and (2) the conversion components of the Company's short-term investments in
convertible debt securities, which had an aggregate carrying value of $1,738,000
as of September 30, 2001. In addition, the Company enters into put and call
options on equity and debt securities. The Company enters into convertible debt
and put and call derivatives as part of its overall investment portfolio
strategy. This strategy includes balancing the relative proportion of its
investments in cash equivalents with their relative stability and risk-minimized
returns with opportunities to avail the Company of higher, but more
risk-inherent, returns associated with other investments, including convertible
debt securities and put and call options. Since these investment-related
derivatives are stated at fair value with the corresponding changes in fair
value recorded in results of operations, the requirement of SFAS 133 to state
the conversion component of the Company's investments in convertible debt
securities and the put and call options at fair value had no impact on the
Company's consolidated financial position or results of operations for the three
and nine-month periods ended September 30, 2001. The interest rate swap
agreement commenced August 1, 2001 in connection with the Company entering into
a seven-year secured bank term loan in July 2001 which has an outstanding
principal balance of $22,321,000 as of September 30, 2001. The bank term loan
bears interest at variable rates, at the Company's option, at the prime rate or
the one-month London Interbank Offered Rate ("LIBOR") plus 1.85%. The swap
agreement effectively establishes a fixed interest rate on such variable-rate
debt, but with an embedded written call option whereby the swap agreement will
no longer be in effect if, and for as long as, the one-month LIBOR is at or
above a specified rate. On the initial date of the swap agreement, the fair
market value of the interest rate swap agreement and the embedded written call
option netted to zero but, as interest rates either increase or decrease, the
fair market values of the interest rate swap agreement and written call option
will move in the same direction but not necessarily by the same amount. As of
September 30, 2001, the net fair market value of the swap agreement and embedded
written call option had changed to a payable position of $476,000, resulting in
a $476,000 charge included in "Interest expense" in the accompanying condensed
consolidated statements of operations for the three and nine-month periods ended
September 30, 2001 with a corresponding liability in "Deferred income and other
liabilities" in the accompanying condensed consolidated balance sheet as of
September 30, 2001. The Company will continue to record a charge or credit to
its results of operations in subsequent periods for any increase or decrease in
the net fair market values of the interest rate swap agreement and the embedded
written call option. The Company historically has not had transactions to which
hedge accounting applied and did not have any during the nine-month period ended
September 30, 2001. Accordingly, the more restrictive criteria for hedge
accounting in SFAS 133 had no effect on the Company's consolidated financial
position or results of operations during the three and nine-month periods ended
September 30, 2001.
(6) Transactions with Related Parties
The Company maintains several equity plans (the "Equity Plans") which
collectively provide or provided for, among other items, the grant of stock
options to certain officers, key employees, consultants and non-employee
directors. During December 2000, certain of the Company's officers and a
director exercised stock options under the Equity Plans and the Company
repurchased the 1,045,834 shares of its Class A common stock received by these
individuals upon such exercises on the respective exercise dates. Shares
repurchased from two officers of the Company on December 29, 2000 for an
aggregate cost of $7,429,000 were not settled until January 2 and 3, 2001 and
are included in "Accounts payable" in the accompanying condensed consolidated
balance sheet as of December 31, 2000.
On June 25, 1997 a class action lawsuit was filed which asserted, among
other things, claims relating to certain awards of compensation to the Chairman
and Chief Executive Officer and the President and Chief Operating Officer of the
Company (the "Executives") in 1994 through 1997. In August 2000 the parties to
the lawsuit entered into a settlement agreement whereby (1) the case would be
dismissed with prejudice, (2) the Company would receive an interest-bearing note
(the "Executives' Note") from the Executives, in the aggregate amount of
$5,000,000, receivable in three equal installments due March 31, 2001, 2002 and
2003 and (3) the Executives would surrender an aggregate of 775,000 stock
options awarded to them in 1994. On January 30, 2001, the court entered an order
and final judgment approving the settlement in full, which became effective
March 1, 2001. 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 represents an adjustment of prior period compensation
expense. The Executives' Note bore interest initially at 6% per annum. The
interest rate was adjusted on April 2, 2001 to 4.92% per annum and will be
adjusted on April 1, 2002 by the difference, if any, between the one-month LIBOR
on such date and one-month LIBOR on March 30, 2000 of 6.1325%. In accordance
therewith, the Company recorded interest income on the Executives' Note of
$107,000 for the nine-month period ended September 30, 2001. On March 30, 2001,
the Company collected the first installment of $1,667,000 on the Executives'
Note and subsequent thereto, collected $25,000 of related interest.
In connection with the consummation of the Snapple Beverage Sale and the
issuance of $290,000,000 principal amount of insured securitization notes during
2000, Triarc recorded incentive compensation of $22,500,000 during 2000 to the
Executives which was invested in two deferred compensation trusts (the "Trusts")
for their benefit in January 2001. Thereafter, the deferred compensation payable
is adjusted for any increase or decrease in the fair value of the investments in
the Trusts resulting in deferred compensation expense of $59,000 and $1,089,000
included in "General and administrative" in the accompanying condensed
consolidated statements of operations for the three and nine-month periods ended
September 30, 2001, respectively, and a deferred compensation payable of
$23,589,000 as of September 30, 2001. Under generally accepted accounting
principles in the United States of America we were only able to recognize
investment income of $172,000 on the investments in the Trusts resulting in a
$917,000 difference in the recognition of deferred compensation expense and the
related investment income. This difference will reverse in future periods as
either (1) the 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. The related obligation is
reported as "Deferred compensation payable to related parties" and the
investments in the Trusts, initially made in January 2001, are reported as
"Investments" in the accompanying condensed consolidated balance sheets.
The Company leases a helicopter from a subsidiary of Triangle Aircraft
Services Corporation ("TASCO"), a company owned by the Executives, under a dry
lease which, subject to renewal, expires in 2002. Annual rent for the helicopter
was $369,000 from January 19, 2000 through September 30, 2000, and increased to
$382,000 and $392,000 as of October 1, 2000 and October 1, 2001, respectively,
as a result of annual cost of living adjustments. In connection with such lease,
the Company had rent expense of $277,000 and $286,000 for the nine-month periods
ended October 1, 2000 and September 30, 2001, respectively. Pursuant to this dry
lease, the Company pays the operating expenses, including repairs and
maintenance, of the helicopter directly to third parties. Through January 19,
2000 the Company also leased an airplane from TASCO pursuant to the dry lease
under which the Company is leasing the helicopter. On that date the Company
acquired the airplane through its acquisition of 280 Holdings, LLC, a then
subsidiary of TASCO. Rental expense attributable to the airplane, including
amortization of a $2,500,000 option entered into in 1997 relating to the lease,
for the period from January 3, 2000 to January 19, 2000 amounted to $202,000. On
January 19, 2000 the Company received $1,200,000 from TASCO representing the
return of substantially all of the remaining unamortized amount paid for this
option.
In July 2001, in accordance with the terms of the Company's co-investment
and corporate opportunity policy as adopted and approved by the audit committee
of the Company's board of directors, the Company and certain of its senior
executives co-invested $3,000,000 in K12 Inc. ("K12") resulting in the Company
owning 3.5%, the senior executives owning 1.0% and unaffiliated parties owning
95.5% of K12. The Company advanced the funds for the purchases by the senior
executives and transferred such ownership at the Company's cost to the senior
executives for cash aggregating $222,000 and notes due the Company aggregating
$444,000, of which one-half, or $222,000, are non-recourse notes. Such notes
bear interest (6.75% at September 30, 2001) at the prime rate adjusted annually
in July. The Company accounts for its investment in K12 in accordance with the
cost method.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 22 to the
consolidated financial statements contained in the Form 10-K.
(7) Legal Matters
The Company is involved in stockholder litigation, other litigation and
claims and environmental matters incidental to its businesses. The Company has
reserves for such legal matters aggregating $1,400,000 as of September 30, 2001.
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 and given the Company's aforementioned reserves,
the Company does not believe that such legal matters will have a material
adverse effect on its consolidated financial position or results of operations.
In addition, in connection with the Snapple Beverage Sale, the purchase and
sale agreement provides for a post-closing adjustment, the amount of which is in
dispute. Cadbury has stated that it believes that it is entitled to receive from
the Company a post-closing adjustment of $27,605,000 and the Company, on the
other hand, has stated that it believes that it is entitled to receive from
Cadbury a post-closing adjustment of $5,586,000, in each case plus interest from
the October 25, 2000 closing date. In accordance with the terms of the purchase
and sale agreement, the Company and Cadbury have selected an arbitrator for the
purpose of determining the amount of the post-closing adjustment. However, the
arbitration process has not yet commenced. The Company currently expects such
post-closing adjustment process to be completed in the first half of 2002.
(8) Subsequent Events
On October 25, 2001 the Company increased its total authorized capital
stock to 300,000,000 shares, consisting of (1) the presently authorized
100,000,000 shares of Class A common stock, (2) 100,000,000 shares of a new
Class B common stock and (3) an increase to 100,000,000 shares from the
previously authorized 25,000,000 shares of preferred stock. In connection
therewith, the previously authorized 25,000,000 shares of the former Class B
Shares were eliminated and effectively canceled. The authorized preferred stock
previously included 5,982,866 shares designated as redeemable preferred stock
until such shares were retired on August 20, 2001. As a result, all of the
authorized 100,000,000 shares of preferred stock are undesignated.
As a result of the effective cancellation of the former Class B Shares, the
Company will record an entry during the fourth quarter of 2001 within
stockholders' equity which will reduce "Common stock" by $600,000, "Additional
paid-in capital" by $83,211,000, "Retained earnings" by $43,324,000 and "Common
stock held in treasury" by $127,135,000.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" 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 the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 of Triarc
Companies, Inc. The recent trends affecting our restaurant franchising business
are described in Item 7 of our Form 10-K as supplemented below in our discussion
of royalties and franchise fees.
Certain statements under this caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Private Securities Litigation Reform Act. Such
forward-looking statements involve risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. For these statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Reform Act. See "Special Note Regarding Forward-Looking Statements and
Projections" in "Part II - Other Information" preceding "Item 1."
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. Our first nine months of fiscal 2000 commenced on
January 3, 2000 and ended October 1, 2000 and our third quarter of 2000
commenced on July 3, 2000. Our first nine months of fiscal 2001 commenced on
January 1, 2001 and ended September 30, 2001 and our third quarter commenced on
July 2, 2001. When we refer to the nine months ended October 1, 2000 or the
first nine months of 2000, and the three months ended October 1, 2000, or the
third quarter of 2000, we mean the periods from January 3, 2000 to October 1,
2000 and July 3, 2000 to October 1, 2000, respectively. When we refer to the
nine months ended September 30, 2001 or the first nine months of 2001, and the
three months ended September 30, 2001, or the third quarter of 2001, we mean the
periods from January 1, 2001 to September 30, 2001 and July 2, 2001 to September
30, 2001, respectively.
As disclosed in more detail in Note 2 to the accompanying condensed
consolidated financial statements, on October 25, 2000 we completed the sale,
which we refer to as the Snapple Beverage Sale, of Snapple Beverage Group, Inc.,
the parent company of Snapple Beverage Corp., Mistic Brands, Inc. and Stewart's
Beverages, Inc., and Royal Crown Company, Inc. to affiliates of Cadbury
Schweppes plc (collectively referred to herein as Cadbury). Our former premium
beverage business consisted of Snapple Beverage Group and our former soft drink
concentrate business consisted of Royal Crown Company. These beverage businesses
have been accounted for as discontinued operations in the accompanying condensed
consolidated financial statements.
Results of Operations
Nine Months Ended September 30, 2001 Compared with Nine Months Ended October 1,
2000
Royalties and Franchise Fees
Our royalties and franchise fees, which are generated entirely from our
restaurant franchising business, increased $4.5 million, or 7%, to $67.5 million
for the nine months ended September 30, 2001 from $63.0 million for the nine
months ended October 1, 2000 reflecting a $4.6 million, or 7%, increase in
royalty revenue partially offset by a $0.1 million, or 4%, decrease in franchise
fee revenue. The increase in royalty revenue resulted from an average net
increase of 75, or 2%, franchised restaurants and a 1.3% increase in same-store
sales of franchised restaurants. The slight decrease in franchise fee revenue
was principally due to the opening of 20 fewer franchised restaurants in the
first nine months of 2001 compared with the first nine months of 2000
substantially offset by an increase in revenues recognized from forfeited
deposits from expired contracts for new franchised restaurants and a decrease in
franchise fee credits earned by franchisees under our remodeling incentive
program. While we anticipate a continued combined increase in royalties and
franchise fees for the fourth quarter of 2001 compared with the fourth quarter
of 2000, such increase is projected to be at a lower rate than the 7% increase
in combined royalties and franchise fees experienced for the first nine months
of the year. Although we project an increase in the number of franchised
restaurants during the fourth quarter of 2001, we currently expect the average
net increase of franchised restaurants for the fourth quarter will be less than
the average net increase of 75 referred to above for the first nine months of
the year. As a result, we expect (1) royalties will be higher for the fourth
quarter of 2001 compared with the fourth quarter of 2000, although increasing at
a lesser rate than the 7% increase in royalty revenues referred to above for the
first nine months of the year, and (2) franchise fees will be lower for the
fourth quarter of 2001 compared with the fourth quarter of 2000.
Our royalties and franchise fees have no associated cost of sales.
Investment Income, Net
Investment income, net, increased $1.2 million, or 4%, to $29.2 million for
the nine months ended September 30, 2001 from $28.0 million for the nine months
ended October 1, 2000. This increase reflects (1) an $18.9 million increase in
interest income on cash equivalents and short-term investments to $26.0 million
in the first nine months of 2001 from $7.1 million in the first nine months of
2000, (2) a $0.3 million increase in dividend income to $1.3 million in the
first nine months of 2001 compared with $1.0 million in the first nine months of
2000, (3) a $0.2 million decrease in the provision for unrealized losses on
investments deemed to be other than temporary to $1.4 million in the first nine
months of 2001 compared with $1.6 million in the first nine months of 2000 and
(4) a $0.1 million decrease in investment management and performance fees to
$0.6 million in the first nine months of 2001 compared with $0.7 million in the
first nine months of 2000. These increases were partially offset by (1) a $16.4
million decrease in recognized net gains, realized or unrealized as applicable,
on our investments to $4.3 million in the first nine months of 2001 from $20.7
million in the first nine months of 2000, of which $10.3 million was
attributable to our gain on the sale of one common stock investment during the
first quarter of 2000 and $4.3 million was attributable to our gain on the sale
of one common stock investment during the third quarter of 2000, neither of
which recurred in the first nine months of 2001 and (2) a $1.9 million decrease
in our net equity in the income or losses of investment limited partnerships and
similar investment entities accounted for under the equity method to a loss of
$0.4 million in the first nine months of 2001 compared with income of $1.5
million in the first nine months of 2000 primarily due to a reduction of our
ownership in one of these investments as of April 2, 2000 resulting in it being
accounted for under the cost method rather than the equity method of accounting
in the first nine months of 2001. The increased interest income is due to higher
average amounts of cash equivalents and short-term investments in the first nine
months of 2001 compared with the first nine months of 2000 as a result of the
cash provided from the Snapple Beverage Sale and the $277.0 million of proceeds,
net of $13.0 million of expenses, from our issuance of 7.44% insured
non-recourse securitization notes, which we refer to as the Securitization
Notes, on November 21, 2000. However, we currently anticipate interest income
will be lower for the fourth quarter of 2001 compared with the fourth quarter of
2000 principally due to anticipated lower yields in the 2001 quarter, including
the maturity on December 6, 2001 of $175.0 million of United States government
agency debt securities, which yield 6.2% and which have maturities of twelve
months when acquired, while current yields on similar securities are only
approximately 2%. The recognized net gains on our securities and the provision
for other than temporary losses on our securities may not recur in future
periods.
Other Income (Expense), Net
Other income, net, increased $8.8 million to $9.4 million for the nine
months ended September 30, 2001 from $0.6 million for the nine months ended
October 1, 2000. This increase was due to (1) $8.3 million of interest income
related to our election to treat certain portions of the Snapple Beverage Sale
as an asset sale for income tax purposes, as explained more fully below under
"Discontinued Operations," recognized in the second quarter of 2001 representing
interest for the period beginning 45 days after the October 25, 2000 date of the
sale through the date of payment of the proceeds on June 14, 2001, (2) a $1.3
million decrease to $0.2 million in the first nine months of 2001 from $1.5
million in the first nine months of 2000 in our equity in the losses of
investees other than investment limited partnerships and similar investment
entities, principally due to a $1.6 million equity loss from the write-down of
certain assets by an investee recognized in the second quarter of 2000 which did
not recur in the first nine months of 2001 and (3) a $0.8 million reduction in
the first nine months of 2001 in the fair value of a liability for a written
call option on our Class A common stock effectively established on October 25,
2000 in connection with the assumption by Cadbury in the Snapple Beverage Sale
of our zero coupon convertible subordinated debentures due 2018, which we refer
to as the Debentures. Although the Debentures were assumed by Cadbury, they
remain convertible into our Class A common stock and as such we have recorded
the liability for such conversion at fair value and the reduction in the fair
value of the liability was recognized in other income. The increases discussed
above were partially offset by (1) the non-recurring collection in the second
quarter of 2000 of $0.9 million of a receivable from a former affiliate which
was written off in years prior to 2000 due to the former affiliate filing for
bankruptcy protection, (2) $0.5 million of costs written off during the third
quarter of 2001 for a proposed acquisition of an interest in a business not
consummated and (3) other net decreases of $0.2 million.
General and Administrative
Our general and administrative expenses increased $5.3 million, or 10%, to
$58.2 million for the nine months ended September 30, 2001 from $52.9 million
for the nine months ended October 1, 2000. This increase principally reflects
(1) higher incentive compensation costs of $5.7 million from $5.1 million in the
first nine months of 2000 to $10.8 million in the first nine months of 2001
under our executive bonus plan due to the effect on the bonus calculation of the
positive impact on our capitalization resulting from the Snapple Beverage Sale
and the achievement of certain performance thresholds in the first nine months
of 2001, (2) $1.1 million of compensation expense recognized in the first nine
months of 2001 representing the increase in the fair value of investments in two
deferred compensation trusts, which we refer to as the Trusts, invested in
January 2001 for the benefit of our Chairman and Chief Executive Officer and
President and Chief Operating Officer, whom we refer to as the Executives, which
is explained more fully below under "Income from Continuing Operations," (3)
increases of $1.7 million in other compensation, including severance costs, and
related benefit costs and (4) a $1.5 million reduction of insurance expense
recognized in the second quarter of 2000 which did not recur in the first nine
months of 2001 relating to the favorable settlement of insurance claims by the
purchaser of a former insurance subsidiary that we sold in 1998 resulting in the
collection of a $1.5 million note receivable that we received as a portion of
the sales proceeds which was fully reserved at the time of sale. Such increases
were partially offset by (1) a $5.0 million reduction in compensation expense
related to a note receivable from the Executives that we received in the first
quarter of 2001 in connection with the settlement effective March 1, 2001 of a
class action shareholder lawsuit which asserted claims relating to certain
compensation awards to the Executives and (2) provisions of $1.2 million in the
first nine months of 2000 which did not recur in the first nine months of 2001
for costs to support a change in distributors for a majority of franchisees in
our restaurant franchising business for food and other products.
The $1.5 million gain in 2000 from realization of the note receivable
discussed above was included as a reduction of general and administrative
expenses since the gain effectively represented an adjustment of prior period
insurance reserves. The $5.0 million gain from the settlement of the class
action shareholder lawsuit discussed above was included as a reduction of
general and administrative expenses since the gain effectively represents an
adjustment of prior period compensation expense.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $0.6 million, or 16%, to $4.7 million for the nine
months ended September 30, 2001 from $4.1 million for the nine months ended
October 1, 2000. This increase reflects (1) a $0.4 million increase in
amortization related to leasehold improvements completed in 2001 and (2) an
increase of $0.3 million due to the accelerated amortization in the first
quarter of 2001 of our costs related to the purchase of fractional interests in
aircrafts, net of estimated redemption value, under timeshare agreements
resulting from the anticipated early termination of the agreements, both less a
net decrease of $0.1 million in other items.
Interest Expense
Interest expense increased $21.7 million to $23.5 million for the nine
months ended September 30, 2001 from $1.8 million for the nine months ended
October 1, 2000. This increase is primarily attributable to (1) interest of
$15.8 million in the first nine months of 2001 on our Securitization Notes
issued on November 21, 2000 and $1.6 million of amortization of related deferred
financing costs, (2) interest of $3.1 million for the period from March 15, 2001
through June 14, 2001 on the estimated income tax liability paid with the filing
of our election on June 14, 2001 to treat certain portions of the Snapple
Beverage Sale as an asset sale for income tax purposes as discussed more fully
below under "Discontinued Operations" and (3) interest of $0.7 million in
connection with a term loan with an outstanding principal balance of $22.3
million as of September 30, 2001 and related interest rate swap agreement used
to finance the purchase of an aircraft during the third quarter of 2001.
Insurance Expense Related to Long-Term Debt
The insurance expense related to long-term debt of $3.6 million for the
nine months ended September 30, 2001 related to insuring the payment of
principal and interest on the Securitization Notes. There was no similar charge
in the first nine months of 2000.
Income Taxes
The provision for income taxes represented effective rates of 54% for the
nine months ended September 30, 2001 and 41% for the nine months ended October
1, 2000. The effective rate is higher in the first nine months of 2001
principally due to (1) the effect of higher non-deductible compensation costs,
(2) the differing impact of the mix of pretax income or loss among the
consolidated entities since we file state tax returns on an individual company
basis and (3) the non-deductible amortization of costs in excess of net assets
of acquired companies, which we refer to as Goodwill. The effect of
non-deductible compensation costs and Goodwill amortization is greater in the
first nine months of 2001 due to lower projected 2001 full-year pretax income
compared with the then projected 2000 full-year pretax income as of the end of
the first nine months of 2000, excluding for both periods the projected pretax
income related to the discontinued beverage businesses.
Income from Continuing Operations
Our income from continuing operations decreased $11.9 million, or 62%, to
$7.4 million for the nine months ended September 30, 2001 from $19.3 million for
the nine months ended October 1, 2000 due to the after-tax effect of the
variances explained in the captions above.
As disclosed above, we recognized $1.1 million of compensation expense in
the first nine months of 2001 for the increase in the fair value of the
investments in the Trusts. However, under generally accepted accounting
principles in the United States of America we were only able to recognize
investment income of $0.2 million on the investments in the Trusts resulting in
a $0.9 million difference in the recognition of deferred compensation expense
and the related investment income. This difference will reverse in future
periods as either (1) the 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.
Discontinued Operations
Income (loss) from discontinued operations was income of $38.5 million for
the nine months ended September 30, 2001 compared with a loss of $8.6 million
for the nine months ended October 1, 2000. The 2001 income resulted entirely
from adjustments to the previously recognized estimated gain on disposal of our
beverage businesses. These net adjustments result from the realization of $200.0
million of proceeds from Cadbury for our electing to treat certain portions of
the Snapple Beverage 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 Snapple Beverage Sale. The 2000 loss resulted entirely from the net loss
from operations of our discontinued beverage businesses during that period, as
discussed in further detail below.
Revenues, interest income and other income of the beverage businesses were
$638.2 million in the first nine months of 2000. Revenues, interest income and
other income of the premium beverage business reflected (1) strong demand for
newer product introductions such as Snapple Elements(TM), a product platform of
herbally enhanced drinks, introduced in April 1999, and Mistic Zotics(TM)
introduced in April 2000 and (2) the positive effect of an increased focus by
two premium beverage distributors on sales of our products as a result of our
ownership of these distributors from February 25, 1999 and January 2, 2000,
respectively, through the date of the Snapple Beverage Sale on October 25, 2000.
Revenues, interest income and other income of the soft drink concentrate
business reflected higher average selling prices resulting from (1) price
increases for most domestic concentrates effective November 1999 and (2) a shift
of our private label sales to sales of higher-priced flavor concentrates from
sales of lower-priced cola concentrates.
The beverage businesses generated a pretax loss of $4.8 million in the
first nine months of 2000 principally reflecting the negative impact of
operating costs and expenses associated with the acquisition of the two premium
beverage distributors referred to above and interest expense related to
additional borrowings and the effect of an increasing interest rate environment
on the beverage business' variable-rate debt. The beverage businesses had a
provision for income taxes of $3.8 million despite a loss before income taxes
for the nine months ended October 1, 2000 principally due to the amortization of
non-deductible Goodwill and the differing impact of the mix of pretax loss or
income among the consolidated entities since we file state income tax returns on
an individual company basis.
Three Months Ended September 30, 2001 Compared with Three Months Ended
October 1, 2000
Royalties and Franchise Fees
Our royalties and franchise fees, which are generated entirely from our
restaurant franchising business, increased $1.4 million, or 6%, to $23.9 million
for the three months ended September 30, 2001 from $22.5 million for the three
months ended October 1, 2000 reflecting a $1.9 million, or 9%, increase in
royalty revenue partially offset by a $0.5 million, or 48%, decrease in
franchise fee revenue. The increase in royalty revenue resulted from an average
net increase of 61, or 1.9%, franchised restaurants and a 1.6% increase in
same-store sales of franchised restaurants. The decrease in franchise fee
revenue was principally due to the opening of 25 fewer franchised restaurants in
the third quarter of 2001 compared with the third quarter of 2000 partially
offset by an increase in revenues recognized from forfeited deposits from
expired contracts for new franchised restaurants and a decrease in franchise fee
credits earned by franchisees under our remodeling incentive program. While we
anticipate a continued combined increase in royalties and franchise fees for the
fourth quarter of 2001 compared with the fourth quarter of 2000, such increase
is projected to be at a lower rate than the 6% increase experienced in the third
quarter of 2001. We expect royalties will be higher and franchise fees will be
lower for the fourth quarter of 2001 compared with the fourth quarter of 2000,
both as previously discussed in more detail in the comparison of the nine-month
periods.
Our royalties and franchise fees have no associated cost of sales.
Investment Income, Net
Investment income, net, decreased $1.1 million, or 15%, to $5.9 million for
the three months ended September 30, 2001 from $7.0 million for the three months
ended October 1, 2000. This decrease reflects (1) a $3.9 million decrease in
recognized net gains, realized or unrealized as applicable, on our investments
to $0.3 million in the third quarter of 2001 from $4.2 million in the third
quarter of 2000, primarily attributable to our $4.3 million gain on the sale of
one common stock investment during the 2000 third quarter which did not recur in
the 2001 third quarter, (2) a $1.0 million provision for unrealized losses on
investments deemed to be other than temporary in the third quarter of 2001 which
did not occur in the third quarter of 2000 and (3) a $0.9 million decrease in
our net equity in the income or losses of investment limited partnerships and
similar investment entities accounted for under the equity method to a loss of
$0.4 million in the third quarter of 2001 compared with income of $0.5 million
in the third quarter of 2000. These decreases were partially offset by (1) a
$4.3 million increase in interest income on cash equivalents and short-term
investments to $6.6 million in the third quarter of 2001 from $2.3 million in
the third quarter of 2000, (2) a $0.2 million increase in dividend income to
$0.5 million in the third quarter of 2001 compared with $0.3 million in the
third quarter of 2000 and (3) a $0.2 million decrease in investment management
and performance fees incurred by the Company to $0.1 million in the third
quarter of 2001 compared with $0.3 million in the third quarter of 2000. The
increased interest income is due to higher average amounts of cash equivalents
and short-term investments in the third quarter of 2001 compared with the third
quarter of 2000 as a result of the cash provided from the Snapple Beverage Sale
and the proceeds from our issuance of the Securitization Notes on November 21,
2000. However, we currently anticipate interest income will be lower for the
fourth quarter of 2001 compared with the fourth quarter of 2000 principally due
to anticipated lower yields in the 2001 quarter, including the maturity on
December 6, 2001 of $175.0 million of United States government agency debt
securities, which yield 6.2% and which have maturities of twelve months when
acquired, while current yields on similar securities are only approximately 2%.
The recognized net gains on our securities and the provision for other than
temporary losses on our securities may not recur in future periods.
Other Income (Expense), Net
Other income, net, decreased $0.2 million to less than $0.1 million for the
three months ended September 30, 2001 from income of $0.2 million for the three
months ended October 1, 2000. This decrease was due to $0.5 million of costs
written off during the third quarter of 2001 for a proposed acquisition of an
interest in a business not consummated partially offset by a $0.3 million
reduction in the third quarter of 2001 in the fair value of the written call
option on our Class A common stock effectively established on October 25, 2000
in connection with the assumption by Cadbury in the Snapple Beverage Sale of our
Debentures, as previously discussed in more detail in the comparison of the
nine-month periods.
General and Administrative
Our general and administrative expenses increased $4.3 million, or 26%, to
$21.1 million for the three months ended September 30, 2001 from $16.8 million
for the three months ended October 1, 2000. This increase principally reflects
(1) higher incentive compensation costs of $3.1 million from $0.7 million in the
third quarter of 2000 to $3.8 million in the third quarter of 2001 under our
executive bonus plan due to the effect on the bonus calculation of the positive
impact on our capitalization resulting from the Snapple Beverage Sale and the
effect in the third quarter of 2001 of the achievement of certain performance
thresholds in the first nine months of 2001 and (2) increases of $1.1 million in
other compensation and related benefit costs. Such increases were partially
offset by a provision of $0.7 million in the third quarter of 2000 which did not
recur in the third quarter of 2001 for costs to support a change in distributors
for a majority of franchisees in our restaurant franchising business for food
and other products.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $0.2 million, or 15%, to $1.6 million for the three
months ended September 30, 2001 from $1.4 million for the three months ended
October 1, 2000. This increase is principally due to amortization related to
leasehold improvements completed in 2001.
Interest Expense
Interest expense increased $6.6 million to $7.1 million for the three
months ended September 30, 2001 from $0.5 million for the three months ended
October 1, 2000. This increase is primarily attributable to (1) interest of $5.2
million in the third quarter of 2001 on our Securitization Notes issued on
November 21, 2000 and $0.5 million of amortization of related deferred financing
costs and (2) interest of $0.7 million in connection with a term loan with an
outstanding principal balance of $22.3 million as of September 30, 2001 and
related interest rate swap agreement used to finance the purchase of an aircraft
during the third quarter of 2001.
Insurance Expense Related to Long-Term Debt
The insurance expense related to long-term debt of $1.2 million for the
three months ended September 30, 2001 related to insuring the payment of
principal and interest on the Securitization Notes. There was no similar charge
in the third quarter of 2000.
Income Taxes
The Company had a provision for income taxes for the three months ended
September 30, 2001 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
projected full-year pretax income from continuing operations. The Company's
provision for income taxes for the three months ended October 1, 2000
represented an effective rate of 39% which differs from the 35% statutory rate
principally due to the effect of the amortization of non-deductible Goodwill
partially offset by the effect of a year-to-date decrease in the then estimated
full-year 2000 effective tax rate from 43% to 41% reflecting an increase in the
then projected full-year pretax income from continuing operations.
Income (Loss) from Continuing Operations
Our income (loss) from continuing operations decreased $8.5 million to a
loss of $1.8 million for the three months ended September 30, 2001 from income
of $6.7 million for the three months ended October 1, 2000 due to the after-tax
effect of the variances explained in the captions above.
Discontinued Operations
The loss from discontinued operations of $3.3 million for the three months
ended October 1, 2000 resulted entirely from the net loss from operations of our
discontinued beverage businesses during that period, as discussed in further
detail below.
Revenues, interest income and other income of the beverage businesses were
$221.5 million in the third quarter of 2000. Sales volume of the premium
beverage business was adversely affected by the rainy and cooler summer weather
experienced in its major Northeast premium beverage markets in the third quarter
of 2000. This was partially offset by (1) strong demand for newer products such
as Snapple Elements(TM) and Mistic Zotics(TM), which were introduced in April
1999 and April 2000, respectively, and (2) the positive effect of an increased
focus by a premium beverage distributor on sales of our products as a result of
our ownership of this distributor from January 2, 2000 through the date of the
Snapple Beverage Sale on October 25, 2000. Revenues, interest income and other
income of the soft drink concentrate business reflected strong demand for
branded concentrate in our international markets and price increases for most
domestic concentrates effective November 1999.
The beverage businesses generated pretax income of $0.9 million in the
third quarter of 2000 reflecting the historical seasonality of the beverage
businesses whereby the third quarter reflects the effects of the peak summer
months. Such income was generated despite the negative impact of operating costs
and expenses associated with the acquisition of the premium beverage distributor
referred to above and interest expense related to additional borrowings and the
effect of an increasing interest rate environment on the beverage business'
variable-rate debt. The beverage businesses had a provision for income taxes of
$4.2 million for the three months ended October 1, 2000 representing an
effective rate which is significantly higher than the United States Federal
statutory income tax rate of 35% principally due to (1) the amortization of
non-deductible Goodwill, (2) the differing impact of the mix of pretax loss or
income among the consolidated entities since we file state income tax returns on
an individual company basis and (3) the effect on the quarter of a catch-up
adjustment for a year-to-date increase in the estimated full-year effective tax
rate due to the decrease in the then projected 2000 full-year pretax income of
the discontinued beverage businesses as of the end of the third quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Continuing Operations
Our consolidated operating activities from continuing operations provided
cash and cash equivalents, which we refer to in this discussion as cash, of $2.2
million during the nine months ended September 30, 2001 reflecting (1) income
from continuing operations of $7.4 million and (2) net non-cash charges of $6.5
million, principally depreciation and amortization. These sources were partially
offset by (1) operating investment adjustments of $5.4 million, (2) a note
receivable from litigation settlement included in pretax income, net of payment
received, of $3.3 million and (3) cash used by changes in operating assets and
liabilities of $3.0 million.
The cash used by changes in operating assets and liabilities of $3.0
million reflects a decrease in accounts payable and accrued expenses of $1.4
million, an increase in prepaid expenses of $1.2 million and an increase in
receivables of $0.4 million. The decrease in accounts payable and accrued
expenses is primarily due to (1) a $7.4 million payment for common shares
repurchased from two of our officers, other than the Executives, which had been
issued upon exercise of stock options, (2) $2.9 million of related withholding
taxes and (3) a $1.4 million reduction in accrued compensation and related
benefits principally due to the payment of previously accrued incentive
compensation less current year provisions, all partially offset by a $9.6
million increase in accrued income taxes principally due to our provision for
income taxes currently payable, which excludes our benefit from deferred income
taxes, net of related tax payments. The increase in prepaid expenses is
primarily due to prepaid advertising costs related to our Arby's national cable
television advertising campaign.
We expect continued positive cash flows from operations during the
remainder of 2001.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$543.2 million at September 30, 2001, reflecting a current ratio, which equals
current assets divided by current liabilities, of 5.7:1. Working capital
decreased $53.1 million from $596.3 million at December 31, 2000 principally due
to repurchases of $49.6 million of our common stock discussed below under
"Treasury Stock Purchases."
Our total capitalization at September 30, 2001 was $644.0 million
consisting of stockholders' equity of $325.0 million and $319.0 million of
long-term debt, including current portion. Our total capitalization increased
$9.2 million from $634.8 million at December 31, 2000 principally due to (1) net
income of $45.9 million, (2) net borrowings of long-term debt of $10.3 million
and (3) proceeds of $4.8 million from stock option exercises, partially offset
by (1) repurchases of $49.6 million of our common stock discussed below under
"Treasury Stock Purchases" and (2) adjustments of $3.4 million in deriving
comprehensive income from net income.
Securitization Notes
We have outstanding, through our ownership of Arby's Franchise Trust,
Securitization Notes with a remaining principal balance of $278.0 million as of
September 30, 2001 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 $4.0 million during the
fourth quarter of 2001 with increasing annual payments to $37.4 million in 2011
in accordance with a targeted principal payment schedule. Available funds to
Arby's Franchise Trust to pay principal on the Securitization Notes are
franchise fees, royalties and other payments received by Arby's Franchise Trust
under all domestic and Canadian Arby's restaurant franchising agreements after
payment of (1) operating expenses of Arby's Franchise Trust, (2) servicing fees
payable to our subsidiary, Arby's, Inc., and one of its subsidiaries to cover
the costs of administering the franchise license agreements, (3) insurance
premiums related to insuring the payment of principal and interest on the
Securitization Notes and (4) interest on the Securitization Notes. Any remaining
cash is available for distribution by Arby's Franchise Trust to its parent as
long as Arby's Franchise Trust meets the minimum debt service coverage ratio, as
defined under the Indenture. That requirement is currently 1.3:1, subject to
increases to a maximum of 1.7:1, based upon 75% of our highest
previously-reported ratio. The debt service coverage ratio is based on the
preceding four calendar months of activity and was 1.8:1, our highest
previously-reported ratio, for the four months ended September 30, 2001, 75% of
which is 1.3:1. The Securitization Notes are subject to mandatory redemption if
the Arby's Franchise Trust debt service coverage ratio is less than 1.2:1, until
such time as the ratio exceeds 1.2:1 for six consecutive months. The
Securitization Notes are redeemable by us at an amount equal to the total of
remaining principal, accrued interest and the excess, if any, of the discounted
value of the remaining principal and interest payments over the outstanding
principal amount of the Securitization Notes.
Obligations under the Securitization Notes are insured by a financial
guarantee company and are collateralized by assets of Arby's Franchise Trust
with a total book value of $46.7 million as of September 30, 2001 consisting of
cash and cash equivalents, including a cash equivalent reserve account of $30.6
million, and royalty receivables.
The Indenture contains various covenants with respect to Arby's Franchise
Trust which (1) require periodic financial reporting, (2) require meeting the
debt service coverage ratio test and (3) restrict, among other matters, (a) the
incurrence of indebtedness, (b) asset dispositions and (c) the payment of
distributions. We were in compliance with all of these covenants as of September
30, 2001. As of September 30, 2001 Arby's Franchise Trust had $2.8 million
available for the payment of distributions indirectly to Arby's which, in turn,
would be available to Arby's to pay management service fees or Federal income
tax liabilities to Triarc or, to the extent of any excess, make distributions to
Triarc through the parent of Arby's.
Other Long-Term Debt
We have a secured bank term loan payable through 2008 with an outstanding
principal amount of $22.3 million as of September 30, 2001, of which $0.8
million is due during the fourth quarter of 2001. The bank term loan bears
interest, at our option, at the prime rate (6.0% at September 30, 2001) or the
one-month London Interbank Offered Rate, which we refer to as LIBOR (2.63% at
September 30, 2001), plus 1.85%. We also entered into an interest rate swap
agreement on this variable-rate loan whereby we will effectively pay a fixed
rate of 6.8% as long as the one-month LIBOR is less than 6.5%, but with an
embedded written call option whereby the swap agreement will no longer be in
effect if, and for as long as, the one-month LIBOR is at or above 6.5%.
We have an 8.95% secured promissory note payable through 2006 in an
outstanding principal amount of $15.4 million as of September 30, 2001, of which
$0.4 million is due during the fourth quarter of 2001.
Our total scheduled long-term debt repayments during the fourth quarter of
2001 are $5.3 million consisting principally of the $4.0 million due under the
Securitization Notes, $0.8 million due on the secured bank term loan and $0.4
million due on the 8.95% secured promissory note.
Guarantees and Commitments
In July 1999 we sold through our wholly-owned subsidiary, National Propane
Corporation, 41.7% of our remaining 42.7% interest in our former propane
business to Columbia Energy Group, retaining a 1% special limited partner
interest in AmeriGas Eagle Propane, L.P., (formerly National Propane, L.P. and
Columbia Propane, L.P.). National Propane Corporation, whose principal asset
following the sale of the propane business is a $30.0 million intercompany note
receivable from Triarc, agreed that while it remains a special limited partner
of AmeriGas Eagle Propane, L.P., it would indemnify the purchaser of AmeriGas
Eagle Propane, L.P. for any payments the purchaser makes related to the
purchaser's obligations under certain of the debt of AmeriGas Eagle Propane,
L.P., aggregating approximately $138.0 million as of September 30, 2001, if
AmeriGas Eagle Propane, L.P. is unable to repay or refinance such debt, but only
after recourse by the purchaser to the assets of AmeriGas Eagle Propane, L.P.
Under the purchase agreement, either the purchaser or National Propane
Corporation may require AmeriGas Eagle Propane, L.P. to repurchase the special
limited partner interest. In August 2001, AmeriGas Propane, L.P. purchased all
of the interests in AmeriGas Eagle Propane, L.P. that were held by Columbia
Energy Group. National Propane Corporation still retains its special limited
partner interest, although such interest has been diluted to less than 1% as a
result of capital contributions by AmeriGas Propane, L.P. We believe that it is
unlikely that we will be called upon to make any payments under this indemnity.
Arby's sold all of its company-owned restaurants in 1997. The purchaser of
the restaurants assumed certain operating and capitalized lease payments
(approximately $75.0 million as of September 30, 2001, assuming the purchaser
has made all scheduled payments through that date) for which Arby's remains
contingently liable if the purchaser does not make the required payments. In
connection with such sale, Triarc guaranteed the repayment of mortgage and
equipment notes payable to FFCA Mortgage Corporation that were assumed by the
purchaser (approximately $45.0 million as of September 30, 2001, assuming the
purchaser has made all scheduled repayments through that date). Triarc is also a
guarantor of $0.5 million (as of September 30, 2001) of mortgage and equipment
notes for which one of our subsidiaries is co-obligor with the purchaser of the
restaurants. The purchaser is primarily responsible for repaying such notes.
In January 2000 we entered into an agreement to guarantee $10.0 million
principal amount of senior notes issued by MCM Capital Group, Inc., which we
refer to as MCM, an 8.4% equity investee of ours, to a major financial
institution. In consideration for the guarantee, we received a fee of $0.2
million and warrants to purchase 100,000 shares of MCM common stock at $.01 per
share with an estimated fair value on the date of grant of $0.3 million. The
$10.0 million guaranteed amount has been reduced to $6.7 million as of September
30, 2001 and will be further reduced by (1) any repayments of the notes, (2) any
purchases of the notes by us and (3) the amount of certain investment banking or
financial advisory services fees paid to the financial institution or its
affiliates or, under certain circumstances, other financial institutions, either
by us, MCM or another significant stockholder of MCM or any of their affiliates.
Certain of our present and former officers, including entities controlled by
them, collectively owned approximately 18.9% of MCM as of September 30, 2001.
These present and former officers are not parties to this note guaranty and
could indirectly benefit from it.
In addition to the note guaranty, we and certain other stockholders of MCM,
including our present and former officers referred to above, on a joint and
several basis, have entered into agreements to guarantee up to $15.0 million of
revolving credit borrowings of a subsidiary of MCM, of which we would be
responsible for approximately $1.8 million assuming the full $15.0 million was
borrowed and all of the parties to the guarantees of the revolving credit
borrowings and certain related agreements fully perform thereunder. We have been
advised that as of September 30, 2001, MCM had $14.5 million of outstanding
revolving credit borrowings. At September 30, 2001 we had $15.6 million of
highly liquid United States government debt securities in a custodial account at
the financial institution providing the revolving credit facility. Such
securities under the guarantees of the revolving credit borrowings are subject
to set off under certain circumstances if the parties to these guarantees of the
revolving credit borrowings and related agreements fail to perform their
obligations thereunder. MCM has encountered cash flow and liquidity
difficulties. We currently believe that it is possible, but not probable, that
we will be required to make payments under the note guaranty and/or the bank
guarantees.
In addition to the guarantees described above, we and our present and
former officers who invested in MCM prior to its initial public offering and
certain of its other stockholders, through CTW Funding, LLC, which we refer to
as CTW, a limited liability company, made available to MCM a $2.0 million
revolving credit facility which, as extended, is available through December 31,
2001 to meet working capital requirements. We own an 8.7% interest in CTW and,
should any borrowings under this revolving credit facility occur, all members of
CTW would be required to fund the borrowings in accordance with their percentage
interests. In return, CTW has cumulatively received warrants to purchase an
aggregate of 250,000 shares of MCM common stock at $.01 per share through
September 30, 2001, of which warrants to purchase 50,000 shares of its common
stock relate to the extension of this revolving credit facility from September
30, 2001 to December 31, 2001. Any borrowings under the MCM revolving credit
facility would bear interest at 12% and be due on December 31, 2001; however,
through September 30, 2001 there have been no borrowings under this revolving
credit facility.
Capital Expenditures
Cash capital expenditures amounted to $25.2 million during the nine months
ended September 30, 2001. We expect that cash capital expenditures will
approximate $0.2 million for the remainder of 2001 for which there were no
outstanding commitments as of September 30, 2001.
Our cash capital expenditures during the nine months ended September 30,
2001 included the purchase of an aircraft for $23.9 million, including $0.3
million of improvements made to the aircraft during the third quarter of 2001.
This aircraft purchase was substantially financed by a secured bank term loan
described above under "Other Long-Term Debt." We gave notice of our intent to
surrender existing fractional interests in other aircraft during the third
quarter of 2001 and expect to receive cash payments equal to the appraised value
of those interests during the fourth quarter of 2001, which we estimate to be
$3.0 million.
Acquisitions and Investments
As of September 30, 2001, we have $666.2 million of cash, cash equivalents
and investments, including $45.0 million of investments classified as
non-current and net of $7.0 million of short-term investments sold with an
obligation for us to purchase included in "Accrued expenses" in our accompanying
condensed consolidated balance sheet. The non-current investments include $22.7
million of investments in the Trusts designated to satisfy the deferred
compensation payable to related parties. We are presently evaluating our options
for the use of our significant cash and investment position, including business
acquisitions, repurchases of Triarc common shares (see "Treasury Stock
Purchases" below) and investments.
Income Taxes
During the nine months ended September 30, 2001, we paid $381.0 million of
estimated income taxes attributable to the Snapple Beverage Sale and a related
tax agreement with Cadbury. Under this related tax agreement, both we and
Cadbury jointly elected to treat certain portions of the Snapple Beverage 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. We received $200.0
million of proceeds from Cadbury during the second quarter of 2001 for making
this election. The $381.0 million of tax payments, net of the $200.0 million of
proceeds from Cadbury, are reflected in net cash used in discontinued operations
in the accompanying condensed consolidated statement of cash flows for the nine
months ended September 30, 2001.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant, to repurchase up to $50.0 million of our Class A common stock under a
stock repurchase program that ends on January 18, 2002, under which we
repurchased 86,000 shares for a total cost of $2.1 million through September 30,
2001. We cannot assure you that we will repurchase any additional shares under
the remaining $47.9 million authorized under this program. Additionally, our
management was authorized to repurchase our Class A common stock under a $30.0
million stock repurchase program that expired on May 25, 2001. Under the $30.0
million stock repurchase program, we repurchased 1,045,834 shares for a total
cost of $25.9 million during 2000 and an additional 150,600 shares for a total
cost of $3.7 million during the first quarter of 2001.
Pursuant to a contract entered into in August 1999, on August 10, 2001 we
repurchased the remaining 1,999,207 shares of our former Class B common stock
held by affiliates of Victor Posner, our former Chairman and Chief Executive
Officer, for $43.8 million. This repurchase was at a negotiated fixed price of
$21.93 per share based on the fair market value of our Class A common stock at
the time the transaction was negotiated.
Cash Requirements
As of September 30, 2001, our consolidated cash requirements for continuing
operations for the fourth quarter of 2001, exclusive of operating cash flow
requirements, consist principally of (1) a maximum $47.9 million of payments for
repurchases, if any, of our Class A common stock for treasury under our current
stock repurchase program, (2) scheduled debt principal repayments aggregating
$5.3 million, (3) capital expenditures of approximately $0.2 million and (4) the
cost of business acquisitions, if any. We anticipate meeting all of these
requirements through (1) an aggregate $621.2 million of existing cash and cash
equivalents and short-term investments, net of $7.0 million of short-term
investments sold with an obligation for us to purchase and (2) cash flows from
operations.
Legal Matters
We are involved in stockholder litigation, other litigation and claims and
environmental matters incidental to our businesses. We have reserves for all of
such legal matters aggregating $1.4 million as of September 30, 2001. Although
the outcome of such matters cannot be predicted with certainty and some of these
may be disposed of unfavorably to us, based on currently available information
and given our aforementioned reserves, we do not believe that such legal matters
will have a material adverse effect on our consolidated financial position or
results of operations.
In addition, in connection with the Snapple Beverage Sale, the purchase and
sale agreement provides for a post-closing adjustment, the amount of which is in
dispute. Cadbury has stated that it believes that it is entitled to receive from
us a post-closing adjustment of $27.6 million and we, on the other hand, have
stated that we believe that we are entitled to receive from Cadbury a
post-closing adjustment of $5.6 million, in each case plus interest from the
October 25, 2000 closing date. In accordance with the terms of the purchase and
sale agreement, we and Cadbury have selected an arbitrator for the purpose of
determining the amount of the post-closing adjustment. However, the arbitration
process has not yet begun. We currently expect the post-closing adjustment
process to be completed in the first half of 2002.
Seasonality
Our continuing operations are not significantly impacted by seasonality,
however our restaurant franchising royalty revenues are somewhat higher in our
fourth quarter and somewhat lower in our first quarter.
Recently Issued Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations." Statement 141
addresses financial accounting and reporting for business combinations initiated
after June 30, 2001 and supersedes Accounting Principles Board Opinion No. 16,
"Business Combinations." The most significant accounting differences from
Opinion 16 are that Statement 141 requires that all business combinations be
accounted for under the purchase method, thereby eliminating the
pooling-of-interests method, and establishes new criteria for identifying
acquired intangibles separately from Goodwill with the expectation that more
intangibles will now be identified. Statement 141 also expands the disclosure
requirements of Opinion 16. As the provisions of Statement 141 apply
prospectively to business combinations initiated after June 30, 2001, its
adoption will not have any immediate effect on our consolidated financial
position or results of operations. Further, since we historically have not been
able to meet the criteria for pooling-of-interests accounting, the elimination
of that method will have no effect on us.
In June 2001 the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." Statement 142 addresses financial accounting and reporting for acquired
Goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets." Statement 142 adopts an aggregate approach
to Goodwill, compared with the transaction-based approach of Opinion 17, by
accounting for Goodwill on combined reporting units that include an acquired
entity. The more significant accounting provisions of Statement 142 are that (1)
Goodwill and other identified intangible assets that have indefinite useful
lives will no longer be amortized, (2) Goodwill and any other intangible asset
with an indefinite useful life will be tested for impairment at least annually
and (3) intangibles with finite useful lives will continue to be amortized.
Statement 142 also expands the required disclosures for Goodwill and other
intangible assets. The provisions of Statement 142 are effective starting with
the first quarter of our fiscal year 2002; however, any Goodwill and intangible
assets acquired after June 30, 2001 are subject immediately to the
nonamortization and amortization provisions of Statement 142. The carrying
amount of our Goodwill at September 30, 2001 was $18.1 million. Amortization of
Goodwill for the nine months ended September 30, 2001 was $0.6 million and is
expected to be $0.8 million for our full fiscal year 2001. Under the provisions
of Statement 142, we will continue to amortize existing Goodwill until the end
of fiscal 2001 but will no longer amortize Goodwill after our fiscal year 2001.
We will instead review the carrying amount of Goodwill at least annually for any
impairment and recognize an impairment loss if the carrying amount of Goodwill
is not recoverable and its carrying amount exceeds its fair value. We currently
do not believe that any of our existing Goodwill is presently impaired or will
require the recognition of an impairment loss upon the adoption of Statement
142. We currently believe that our intangible assets other than Goodwill,
principally trademarks, with a carrying amount of $5.6 million as of September
30, 2001, have finite useful lives and will not be affected by Statement 142.
Although we are still evaluating the effect of the implementation of Statement
142, based on the reasons set forth above, we do not expect that the adoption of
Statement 142 will have any material immediate effect on our consolidated
financial position or results of operations.
The Securities and Exchange Commission, in a letter dated August 16, 2001,
requested that the Financial Accounting Standards Board consider addressing
certain implementation issues relating to Statements 141 and 142. In response,
the staff of the Financial Accounting Standards Board has indicated its
intention to develop and publish comprehensive illustrations of the initial
application of Statements 141 and 142 no later than December 2001.
In June 2001 the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." Statement 143 addresses financial accounting 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 period 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 of our fiscal year 2003. We do not
believe that any of our tangible long-lived assets presently have material
associated retirement obligations and, accordingly, do not expect that Statement
143 will have any immediate effect upon adoption on our consolidated financial
position or results of operations.
In August 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Statement 144 supersedes Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions relating to the disposal of a business segment of
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." For
long-lived assets to be disposed of by sale, Statement 144, among other things,
establishes one accounting model for both continuing and discontinued operations
based on the framework established in Statement 121. Accordingly, discontinued
operations are no longer measured on a net realizable value basis and future
operating losses are no longer recognized before they occur. For long-lived
assets to be disposed of other than by sale, Statement 144 requires that any
such asset be considered held and used until its disposition. For long-lived
assets to be held and used, Statement 144 retains the general requirements of
Statement 121 but (1) removes Goodwill from its scope, thereby eliminating the
requirement of Statement 121 to allocate Goodwill to long-lived assets to be
tested for impairment and (2) provides for a probability-weighted cash flow
estimation approach to address situations in which either (a) alternative
courses of action to recover the carrying amount of a long-lived asset are under
consideration or (b) a range is estimated for the amount of possible future cash
flows. The provisions of Statement 144 are effective on a prospective basis
generally starting with the first quarter of our fiscal year 2002. We do not
believe that any of our long-lived assets presently require an impairment
provision under Statement 121 or the new provisions of Statement 144. In
addition, the provisions of Statement 144 with respect to discontinued
operations are prospective and, since we have no remaining long-lived assets
relating to discontinued operations, it will not impact the reporting of our
current discontinued operations. Accordingly, we do not expect that the adoption
of Statement 144 will have any effect on our consolidated financial position or
results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Certain statements under this caption "Quantitative and Qualitative
Disclosures about Market Risk" constitute "forward-looking statements" under the
Private Securities Litigation Reform Act. Such forward-looking statements
involve risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. For these statements, we claim the protection of the
safe harbor for forward-looking statements contained in the Reform Act. 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 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. As of September
30, 2001 our long-term debt consists of $296.7 million of fixed-rate debt and
$22.3 million of a variable-rate bank term loan. The fair market value of our
fixed-rate debt will increase if interest rates decrease. 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 earnings and cash flows. Historically, the cap
agreements were usually at significantly higher than market interest rates
prevailing at the time the cap agreements were entered into and were intended to
protect against very significant increases in short-term interest rates. As of
September 30, 2001, we had an interest rate swap agreement in connection with a
variable-rate bank term loan. The swap agreement effectively establishes a fixed
interest rate on this variable-rate debt, but with an embedded written call
option whereby the swap agreement will no longer be in effect if, and for as
long as, the one-month London Interbank Offered Rate, which we refer to as
LIBOR, is at or above a specified rate which was 3% higher than the one-month
LIBOR at the time the swap agreement was entered into. This swap agreement,
therefore, does not fully protect us from exposure to significant increases in
interest rates due to the written call option.
In addition to our fixed and variable-rate debt, our investment portfolio
includes debt securities that are subject to interest rate risk with maturities
which range from one to twenty-seven 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 such changes on 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 our investments. We have a management investment committee whose
duty it is to oversee our continuing compliance with the restrictions embodied
in our policies.
Foreign Currency Risk
Our objective in managing our exposure to foreign currency fluctuations is
to limit the impact of such fluctuations on earnings and cash flows. Our primary
exposure to foreign currency risk relates to our investments in certain
investment limited partnerships and similar investment entities that hold
foreign securities, including those of entities based in emerging market
countries and other countries which experience volatility in their capital and
lending markets. To a more limited extent, we have foreign currency exposure
when our investment managers buy or sell foreign currencies or financial
instruments denominated in foreign currencies for our account or the accounts of
investment limited partnerships and similar investment entities in which we have
invested. We monitor these exposures and periodically determine our need for the
use of strategies intended to lessen or limit our exposure to these
fluctuations. We also have a relatively limited amount of exposure to (1)
investments in foreign subsidiaries and (2) export revenues and related
receivables denominated in foreign currencies which are subject to foreign
currency fluctuations. Currently, our foreign subsidiary exposures primarily
relate to operations in Canada and our export revenue exposures primarily relate
to royalties in Canada. Foreign operations and foreign export revenues for the
nine months ended September 30, 2001 represented only 3% of our total royalties
and franchise fees and, accordingly, an immediate 10% change in foreign currency
exchange rates versus the United States dollar from their levels at September
30, 2001 would not have a material effect on our consolidated financial position
or results of operations.
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. As a result of the relatively low
levels of interest rates currently available on risk-minimized investments, 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 30, 2001, such investments consisted of the
following (in thousands):
Cash equivalents included in "Cash and cash equivalents"
on the accompanying condensed consolidated balance sheet.......$ 358,723
Short-term investments........................................... 265,079
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Total cash equivalents and short-term investments.......... 623,802
Restricted cash equivalents...................................... 32,539
Non-current investments.......................................... 44,957
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$ 701,298
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Our cash equivalents are short-term, highly liquid investments and consist
principally of United States government agency debt securities with maturities
of three months or less when acquired and stable value money market funds. Our
short-term investments include $181.2 million of United States government agency
debt securities with maturities of twelve months when acquired. These cash
equivalents and United States government agency debt securities with maturities
of twelve months when acquired are highly liquid investments and combined
constitute over 86% of our total cash equivalents and short-term investments
shown above.
Our investments at September 30, 2001 are classified in the following
general types or categories:
Investments at
Investments Fair Value or Carrying Value
--------------
Type at Cost Equity Amount Percentage
---- ------- ------ ------ ----------
(In thousands)
Cash equivalents ..........................................$ 358,723 $ 358,723 $ 358,723 51%
Restricted cash equivalents................................ 32,539 32,539 32,539 5
Company-owned securities accounted for as:
Trading securities.................................... 14,947 10,993 10,993 2
Available-for-sale securities......................... 234,509 234,080 234,080 33
Investments in investment limited partnerships and
similar investment entities accounted for at:
Cost.................................................. 48,654 59,923 48,654 7
Equity................................................ 8,250 8,286 8,286 1
Other non-current investments accounted for at:
Cost.................................................. 7,643 7,643 7,643 1
Equity................................................ 2,426 380 380 --
----------- ----------- ----------- ----------
Total cash equivalents and long
investment positions ...................................$ 707,691 $ 712,567 $ 701,298 100%
=========== =========== =========== ==========
Securities sold with an obligation for us to
purchase accounted for as trading securities............$ (10,020) $ (6,968) $ (6,968) N/A
=========== =========== =========== ==========
<page>
Our marketable securities are classified and accounted for either as
"available-for-sale" or "trading" and are reported at fair market value with the
related net unrealized gains or losses included in other comprehensive income or
deficit, net of income taxes, reported as a component of stockholders' equity 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. 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
other non-current investments in which we have significant influence over the
investee 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
such investees. We review all of our investments in which we have unrealized
losses for any unrealized losses deemed to be other than temporary. We recognize
an investment loss currently for any such other than temporary losses. The cost
of such investments as reflected in the table above represents original cost
less (1) unrealized losses that were deemed to be other than temporary and (2)
distributions in excess of any equity in the income of the investee.
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 30, 2001 for which an immediate
adverse market movement represents 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 in response to changes in market
conditions, these estimates are not necessarily indicative of the actual results
which may occur.
The following tables reflect the estimated effects on the market value of
our financial instruments as of September 30, 2001 based upon assumed immediate
adverse effects as noted below.
Trading Purposes:
Carrying Equity
Value Price Risk
----- ----------
(In thousands)
Equity securities ..............................$ 9,255 $ (926)
Debt securities................................. 1,738 (174)
Securities sold with an obligation
for us to purchase............................ (6,968) 697
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 do not
include any investments denominated in foreign currency and, accordingly, there
is no 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 30, 2001, with all other variables held
constant. For purposes of this analysis, our debt securities, which are entirely
convertible bonds, were assumed to primarily trade based upon the conversion
feature of the securities and be perfectly correlated with the assumed equity
index.
Other Than Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
(In thousands)
Cash equivalents ...................................$ 358,723 $ (442) $ -- $ --
Restricted cash equivalents......................... 32,539 (40) -- --
Available-for-sale government debt securities....... 185,595 (2,784) -- --
Available-for-sale corporate debt securities........ 20,365 (1,629) -- --
Available-for-sale debt mutual fund................. 7,831 (235) -- --
Available-for-sale equity securities ............... 20,289 -- (2,029) --
Other investments .................................. 64,963 (2,125) (3,299) (838)
Long-term debt...................................... 318,992 (15,544) -- --
Interest rate swap agreement in a
payable position.................................. 476 (593) -- --
Written call option for common stock................ 24 -- (85) --
The sensitivity analysis of financial instruments held for purposes other
than trading assumes an instantaneous change in market interest rates of one
percentage point from their levels at September 30, 2001 and an instantaneous
10% decrease in the equity markets in which we are invested from their levels at
September 30, 2001, both with all other variables held constant. Our cash
equivalents and restricted cash equivalents are short-term in nature with
maturities of three months or less when acquired and, for purposes of this
sensitivity analysis, have been assumed to each have an average maturity of 45
days. Our available-for-sale government debt securities are substantially
short-term United States government agency debt securities and, to a much lesser
extent, long-term collateralized mortgage obligations and, for purposes of this
sensitivity analysis, have been assumed to have a weighted average maturity of
1-1/2 years. For purposes of this sensitivity analysis our available-for-sale
corporate debt securities and our available-for-sale debt mutual fund are
assumed to have an average maturity of 8 years and 3 years, respectively. The
interest rate risk reflects, for each of these debt investments, the effect of
an assumed increase of one percentage point in market interest rates over the
average maturity of each of these investments. The interest rate risk presented
with respect to our long-term debt relates to only our fixed-rate debt and
represents the potential impact the indicated change has on the fair value of
such debt and not on our financial position or our results of operations. The
fair value of our variable-rate debt approximates the carrying value due to the
relatively frequent reset of the floating interest rate. However, as discussed
above under "Interest Rate Risk," 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. The analysis also assumes an
instantaneous 10% change in the foreign currency exchange rates versus the
United States dollar from their levels at September 30, 2001, with all other
variables held constant. We also have a written call option on our Class A
common stock effectively established in connection with the assumption of our
zero coupon convertible subordinated debentures due 2018, which we refer to as
the Debentures, by affiliates of Cadbury Schweppes plc (collectively referred to
herein as Cadbury) in connection with the October 2000 sale of our beverage
businesses. Although the Debentures were assumed by Cadbury, they remain
convertible into our Class A common stock. The equity risk presented with
respect to this written call option represents the potential impact an
instantaneous 10% increase in the price of our Class A common stock has on the
fair value of the written call option and on our financial position and results
of operations.
The sensitivity analysis of investments in investment limited partnerships
and similar investment entities accounted for at cost, which are held for
purposes other than trading, assumes (1) the investment mix for each such
investment between equity versus debt securities and securities denominated in
United States dollars versus foreign currencies was unchanged since December 31,
2000 since more current information was not available, except for each such
investment made during the nine months ended September 30, 2001 if more current
information was provided by the investment manager and (2) the decrease in the
equity markets and the change in foreign currency exchange rates was other than
temporary. Further, this analysis assumed no market risk for other investments,
other than investment limited partnerships and similar investment entities.
Part II. Other Information
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of
Triarc Companies, Inc. and its subsidiaries (collectively "Triarc" or the
"Company") and those statements preceded by, followed by, or that include the
words "may," "believes," "expects," "anticipates," or the negation thereof, or
similar expressions, 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 product and pricing pressures;
o Success of operating initiatives;
o The ability to attract and retain franchisees;
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) and in spending and demographic patterns;
o The business viability of key franchisees;
o Availability, location and terms of sites for restaurant development by
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 The performance by material suppliers of their obligations under their
supply agreements with franchisees;
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 raw materials, ingredients and supplies and
the potential impact on franchise royalties and franchisees' restaurant
level sales that could arise from interruptions in the distribution of
supplies of food and other products to franchisees;
o General economic, business and political conditions in the countries
and territories where franchisees operate;
o Changes in, or failure to comply with, government regulations,
including franchising laws, accounting standards, environmental laws
and taxation requirements;
o The costs, uncertainties and other effects of legal and administrative
proceedings;
o The impact of general economic conditions on consumer spending,
including a slowing consumer economy, the effects of the events of
September 11, 2001 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 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 31, 2000 (the "Form 10-K"), on September 14, 1999, William Pallot filed
a purported derivative action against our directors and other defendants, and
naming us as a nominal defendant, in the Supreme Court of the State of New York,
New York County. On October 31, 2000, the court granted the defendants' motion
to dismiss the complaint, and on November 13, 2000, Mr. Pallot served a notice
of appeal. The appeal is currently scheduled to be argued on November 20, 2001.
As discussed in our Form 10-K, on March 23, 1999, Norman Salsitz, one of
our shareholders, filed a purported class action against the Company, Nelson
Peltz and Peter W. May, asserting a claim under Section 14(e) of the Securities
Exchange Act of 1934 relating to the Company's Dutch Auction tender offer
commenced on March 10, 1999. Discovery in that case has concluded, and the
defendants have moved for summary judgment. The motion is pending. No trial date
has been set.
Item 4. Submission of Matters to a Vote of Security Holders
On October 25, 2001, Triarc held a Special Meeting of Stockholders at which
an amendment to the Company's Certificate of Incorporation was approved by the
affirmative vote of the holders of a majority of the outstanding shares of Class
A Common Stock. The amendment increases the total number of shares of capital
stock which the Company has authority to issue from 150 million to 300 million
(including an existing 100 million authorization of Class A common stock) by
increasing the total number of authorized shares of Preferred Stock from 25
million to 100 million shares and authorizing 100 million shares of new Class B
common stock. The amendment also eliminates the authorization of 25 million
shares of existing Class B Common Stock. The Certificate of Amendment to
Triarc's Certificate of Incorporation was filed with the Secretary of State of
Delaware on October 25, 2001 and is now in effect.
The voting on the above matter was as follows: 12,186,322 votes for,
4,550,501 votes against and 46,472 abstentions.
Item 5. Other Events
Sale of Beverage Businesses
On October 25, 2000, Triarc completed the sale of its beverage businesses
by selling all of the outstanding capital stock of Snapple Beverage Group, Inc.
and Royal Crown Company, Inc. to affiliates of Cadbury Schweppes plc
("Cadbury"). The purchase and sale agreement for the transaction provides for a
post-closing adjustment, the amount of which is in dispute. Cadbury has stated
that it believes that it is entitled to receive from Triarc a post-closing
adjustment of approximately $27.6 million and Triarc, on the other hand, has
stated that it believes that it is entitled to receive from Cadbury a
post-closing adjustment of approximately $5.6 million, in each case plus
interest from the closing date. In accordance with the terms of the purchase and
sale agreement, Triarc and Cadbury have selected an arbitrator for the purpose
of determining the amount of the post-closing adjustment. We currently expect
such post-closing adjustment process to be completed in the first half of 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 - Certificate of Incorporation 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 9, 2001 (SEC file
no. 1-2207).
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on August 14, 2001, 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: November 13, 2001 By: /S/ FRANCIS T. McCARRON
---------------------------
Francis T. McCarron
Senior Vice President and
Chief Financial Officer
(On behalf of the Company)
By: /S/ FRED H. SCHAEFER
------------------------
Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal accounting officer)
Exhibit Index
Exhibit
No. Description Page No.
- --------- ----------- --------
3.1 - Certificate of Incorporation 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 9, 2001 (SEC file no. 1-2207).