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 April 2, 2006
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
There were 27,705,003 shares of the registrant's Class A Common Stock and
60,344,908 shares of the registrant's Class B Common Stock outstanding as of
April 28, 2006.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 1, April 2,
2006 (A) 2006
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(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 202,840 $ 243,299
Restricted cash equivalents....................................................... 344,060 677,803
Short-term investments pledged as collateral...................................... 541,143 1,076,105
Other short-term investments...................................................... 230,176 598,823
Investment settlements receivable................................................. 236,060 1,264,765
Accounts and notes receivables.................................................... 47,919 39,056
Inventories....................................................................... 11,101 8,938
Deferred income tax benefit....................................................... 21,706 20,210
Prepaid expenses and other current assets......................................... 20,281 17,369
----------- -----------
Total current assets.......................................................... 1,655,286 3,946,368
Investments............................................................................ 85,086 84,959
Properties............................................................................. 443,857 449,601
Goodwill .............................................................................. 518,328 516,237
Other intangible assets................................................................ 75,696 75,523
Deferred costs and other assets........................................................ 31,236 30,023
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$ 2,809,489 $ 5,102,711
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.....................................................................$ 8,036 $ 6,588
Current portion of long-term debt................................................. 19,049 19,019
Accounts payable.................................................................. 64,450 53,918
Investment settlements payable.................................................... 124,199 941,366
Securities sold under agreements to repurchase.................................... 522,931 1,042,492
Other liability positions related to short-term investments....................... 457,165 1,436,630
Accrued expenses and other current liabilities.................................... 152,580 139,084
Current liabilities relating to discontinued operations........................... 10,449 10,425
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Total current liabilities...................................................... 1,358,859 3,649,522
Long-term debt......................................................................... 894,527 733,900
Deferred compensation payable to related parties....................................... 33,959 35,042
Deferred income taxes.................................................................. 9,423 3,361
Minority interests in consolidated subsidiaries........................................ 43,426 49,540
Other liabilities and deferred income.................................................. 73,725 90,098
Stockholders' equity:
Class A common stock.............................................................. 2,955 2,955
Class B common stock.............................................................. 5,910 6,038
Additional paid-in capital........................................................ 264,770 320,156
Retained earnings................................................................. 259,285 225,721
Common stock held in treasury..................................................... (130,179) (22,337)
Unearned compensation............................................................. (12,103) --
Accumulated other comprehensive income............................................ 5,451 9,234
Note receivable from non-executive officer........................................ (519) (519)
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Total stockholders' equity..................................................... 395,570 541,248
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$ 2,809,489 $ 5,102,711
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(A) Derived and reclassified from the audited consolidated financial
statements as of January 1, 2006.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (A)
Three Months Ended
-------------------------------
April 3, April 2,
2005 2006
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(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales.........................................................................$ 51,190 $ 258,959
Royalties and franchise and related fees ......................................... 23,579 18,388
Asset management and related fees ................................................ 12,928 14,796
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87,697 292,143
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Costs and expenses:
Cost of sales, excluding depreciation and amortization............................ 39,189 192,574
Cost of services, excluding depreciation and amortization......................... 4,149 5,520
Advertising and selling........................................................... 4,583 20,102
General and administrative, excluding depreciation and amortization............... 33,814 60,367
Depreciation and amortization, excluding amortization of deferred financing costs. 5,526 13,381
Facilities relocation and corporate restructuring................................. -- 803
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87,261 292,747
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Operating profit (loss)..................................................... 436 (604)
Interest expense....................................................................... (10,253) (27,376)
Insurance expense related to long-term debt............................................ (904) --
Loss on early extinguishment of debt................................................... -- (12,544)
Investment income, net................................................................. 9,100 20,950
Gain on sale of unconsolidated business................................................ 9,608 2,256
Other income (expense), net............................................................ (370) 1,737
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Income (loss) before income taxes and minority interests.................... 7,617 (15,581)
Benefit from (provision for) income taxes.............................................. (2,513) 5,766
Minority interests in income of consolidated subsidiaries.............................. (2,425) (3,090)
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Net income (loss)...........................................................$ 2,679 $ (12,905)
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Basic and diluted income (loss) per share of Class A common stock and
Class B common stock..............................................................$ .04 $ (.16)
=========== ===========
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(A) The results of operations for the three months ended April 2, 2006
reflect the acquisition of RTM Restaurant Group on July 25, 2005. See
Note 3 for a discussion of the effect of this acquisition.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
---------------------------
April 3, April 2,
2005 2006
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(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss)....................................................................$ 2,679 $ (12,905)
Adjustments to reconcile net income (loss) to net cash used in continuing
operating activities:
Operating investment adjustments, net (see below).............................. (356,608) (722,556)
Deferred income tax provision (benefit)........................................ 4 (7,028)
Gain on sale of unconsolidated business........................................ (9,608) (2,256)
Payment of withholding taxes related to stock compensation..................... -- (1,907)
Unfavorable lease liability recognized......................................... (290) (1,040)
Excess tax benefits from share-based payment arrangements...................... -- (812)
Equity in undistributed earnings of investees.................................. (705) (669)
Amortization of non-cash deferred asset management fees........................ (727) (391)
Receipt of deferred vendor incentive........................................... -- 14,040
Depreciation and amortization of properties.................................... 3,985 11,364
Amortization of other intangible assets and certain other items................ 1,541 2,017
Amortization of deferred financing costs and original issue discount........... 637 617
Write-off of unamortized deferred financing costs.............................. -- 3,850
Stock-based compensation provision............................................. 397 3,849
Non-cash charge for stock issued to induce effective conversion of
convertible notes............................................................ -- 3,719
Minority interests in income of consolidated subsidiaries...................... 2,425 3,090
Straight-line rent accrual..................................................... 171 1,512
Deferred compensation provision................................................ 463 1,083
Other, net..................................................................... 333 (289)
Changes in operating assets and liabilities:
Decrease in accounts and notes receivables................................. 7,667 8,639
Decrease in inventories.................................................... 97 2,085
(Increase) decrease in prepaid expenses and other current assets........... (294) 2,854
Decrease in accounts payable and accrued expenses and other current
liabilities.............................................................. (21,889) (22,069)
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Net cash used in continuing operating activities (A).................... (369,722) (713,203)
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Cash flows from continuing investing activities:
Investment activities, net (see below)............................................... 361,389 779,691
Proceeds from dispositions of assets................................................. 4 4,249
Collections of notes receivable...................................................... 5,000 58
Capital expenditures................................................................. (1,588) (14,570)
Cost of business acquisitions........................................................ (2,556) --
Other, net........................................................................... 55 (289)
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Net cash provided by continuing investing activities.................... 362,304 769,139
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Cash flows from continuing financing activities:
Dividends paid ..................................................................... (4,684) (20,659)
Repayments of long-term debt and notes payable....................................... (16,268) (5,167)
Proceeds from issuance of a note payable and long-term debt.......................... 1,425 4,095
Net contributions from (distributions to) minority interests in consolidated
subsidiaries....................................................................... (986) 2,985
Proceeds from exercises of stock options............................................. 785 2,482
Excess tax benefits from share-based payment arrangements............................ -- 812
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Net cash used in continuing financing activities........................ (19,728) (15,452)
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Net cash provided by (used in) continuing operations.................................... (27,146) 40,484
Net cash used in discontinued operations - operating activities......................... (261) (25)
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Net increase (decrease) in cash and cash equivalents.................................... (27,407) 40,459
Cash and cash equivalents at beginning of period........................................ 367,992 202,840
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Cash and cash equivalents at end of period..............................................$ 340,585 $ 243,299
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TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended
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April 3, April 2,
2005 2006
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(In Thousands)
(Unaudited)
Detail of cash flows related to investments:
Operating investment adjustments, net:
Cost of trading securities purchased.............................................$ (1,039,424) $(1,807,227)
Proceeds from sales of trading securities and net settlements of trading
derivatives.................................................................... 685,723 1,086,926
Net recognized (gains) losses from trading securities, derivatives and short
positions in securities....................................................... (2,167) 2,014
Other net recognized gains, net of other than temporary losses................... (637) (4,927)
Other............................................................................ (103) 658
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$ (356,608) $ (722,556)
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Investing investment activities, net:
Proceeds from securities sold short..............................................$ 113,530 $ 1,564,135
Payments to cover short positions in securities.................................. (971) (1,042,564)
Net proceeds from sales of repurchase agreements................................. 254,136 519,317
Proceeds from sales and maturities of available-for-sale securities and
other investments.............................................................. 43,464 104,384
Cost of available-for-sale securities and other investments purchased............ (32,002) (31,838)
Increase in restricted cash collateralizing securities obligations .............. (16,768) (333,743)
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$ 361,389 $ 779,691
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(A) Net cash used in continuing operating activities reflects the significant
net purchases of trading securities and net settlements of trading
derivatives, which were principally funded by proceeds from net sales of
repurchase agreements and the net proceeds from securities sold short.
These purchases and sales were principally transacted through an investment
fund, Deerfield Opportunities Fund, LLC, which employs leverage in its
trading activities and which we consolidate in our condensed consolidated
financial statements. Under accounting principles generally accepted in the
United States of America, the net purchases of trading securities and the
net settlements of trading derivatives must be reported in continuing
operating activities, while the net sales of repurchase agreements and the
net proceeds from securities sold short are reported in continuing
investing activities.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
April 2, 2006
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the
"Financial Statements") of Triarc Companies, Inc. ("Triarc" and, together with
its subsidiaries, the "Company") have been prepared in accordance with Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC") and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States of America ("GAAP"). In the opinion of the Company, however,
the Financial Statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations and cash flows as of and for the three-month
periods set forth in the following paragraph. The results of operations for the
three-month period ended April 2, 2006 are not necessarily indicative of the
results to be expected for the full year. These Financial Statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended January 1, 2006 (the "Form 10-K").
The Company reports on a fiscal year consisting of 52 or 53 weeks ending on
the Sunday closest to December 31. However, Deerfield & Company LLC
("Deerfield"), in which the Company owns a 63.6% capital interest, Deerfield
Opportunities Fund, LLC (the "Opportunities Fund"), in which the Company owns an
aggregate 73.6% capital interest, and DM Fund, LLC (the "DM Fund") which
commenced on March 1, 2005 and in which the Company owns a 93.3% capital
interest, report on a calendar year ending on December 31. The Company's first
quarter of fiscal 2005 commenced on January 3, 2005 and ended on April 3, 2005,
except that Deerfield, the Opportunities Fund and DM Fund are included on a
calendar quarter basis. The Company's first quarter of fiscal 2006 commenced on
January 2, 2006 and ended on April 2, 2006 except that Deerfield, the
Opportunities Fund and the DM Fund are included on a calendar quarter basis. The
period from January 3, 2005 to April 3, 2005 is referred to herein as the
three-month period ended April 3, 2005 and the period from January 2, 2006 to
April 2, 2006 is referred to herein as the three-month period ended April 2,
2006. Each quarter contained 13 weeks. The effect of including Deerfield, the
Opportunities Fund and the DM Fund in the Company's Financial Statements on a
calendar quarter basis, instead of the Company's fiscal quarter basis, was not
material. All references to quarters and quarter-end(s) herein relate to fiscal
quarters rather than calendar quarters, except with respect to Deerfield, the
Opportunities Fund and DM Fund.
Certain amounts included in the accompanying prior quarter's condensed
consolidated financial statements have been reclassified to conform with the
current quarter's presentation.
(2) Share-Based Compensation
The Company maintains several equity plans (the "Equity Plans") which
collectively provide or provided for the grant of stock options, tandem stock
appreciation rights, restricted shares of the Company's common stock and
restricted share units to certain officers, other key employees, non-employee
directors and consultants, including shares of the Company's common stock
granted in lieu of annual retainer or meeting attendance fees to non-employee
directors. In addition to stock options granted under the Equity Plans, the
Company also granted stock options to replace those held by certain employees of
a business acquired in July 2005 (the "Replacement Options"). The Company has
also granted equity instruments in three of its subsidiaries to key employees.
Except for the Replacement Options, all of the Company's outstanding
nonvested stock options were granted at exercise prices equal to the market
price of the Company's common stock on the date of grant, have maximum
contractual terms of ten years and principally vest ratably over three years.
The Replacement Options were issued at exercise prices both below and above the
market price of the Company's common stock on the date of issuance in accordance
with the terms of the related business acquisition agreement. The Company's
outstanding stock options are exercisable for either (1) a package (the "Package
Options") of one share of the Company's class A common stock (the "Class A
Common Stock" or "Class A Common Shares") and two shares of the Company's class
B common stock, series 1 (the "Class B Common Stock" or "Class B Common
Shares"), (2) one share of Class A Common Stock (the "Class A Options") or (3)
one share of Class B Common Stock (the "Class B Options"). The Company's
outstanding restricted shares under the Equity Plans consist of contingently
issuable performance-based restricted shares of Class A Common Stock and Class B
Common Stock (the "Restricted Shares") which vest ratably over three years or,
to the extent not previously vested, on March 14, 2010 only if the Company's
Class B Common Stock meets certain market price targets as of each respective
vesting anniversary. The Company has no outstanding tandem stock appreciation
rights or restricted share units. The equity instruments granted in three of the
Company's subsidiaries consist of (1) certain minority interests in any profits
of Deerfield commencing with their grant on August 20, 2004, which required no
payment by the grantees and, depending on the grantee, vest either ratably in
each of the three years ended August 20, 2007, 2008 and 2009 or 100% on August
20, 2007 and (2) equity interests in two subsidiaries which hold the Company's
respective interests in Deerfield and Jurlique International Pty Ltd., an
Australian cost method investee, each of which consist of a capital portion
reflecting the subscription price paid by each grantee which is not subject to
vesting and a profits interest portion commencing with their grant on November
10, 2005 which vests ratably over a three-year period commencing retroactively
as of February 15, 2005.
Effective January 2, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123(R)"), which revised SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). As a result, the Company now measures the cost of
employee services received in exchange for an award of equity instruments,
including grants of employee stock options and restricted stock, based on the
fair value of the award at the date of grant rather than its intrinsic value,
which the Company previously used. The Company has elected the modified
prospective application method permitted under SFAS 123(R) whereby amortization
of the fair value of all nonvested grants as of January 2, 2006, as determined
under the previous pro forma disclosure provisions of SFAS 123, is included in
the Company's results of operations commencing January 2, 2006, and prior
periods are not restated. As required under SFAS 123(R), the Company has
reversed the "Unearned compensation" component of "Stockholders' equity" against
"Additional paid-in capital" as of January 2, 2006 and is now incrementally
increasing "Additional paid-in capital" to the extent of share-based
compensation costs recognized during the period. Any new employee stock
compensation grants or grants modified, repurchased or cancelled on or after
January 2, 2006, of which there were none during the three-month period ended
April 2, 2006, will be valued in accordance with SFAS 123(R). Under SFAS 123(R),
the Company has yet to choose (1) a fair value method from among several types
of acceptable fair value models, including the Black-Scholes-Merton option
pricing model (the "Black-Scholes Model"), for purposes of determining the fair
value of any future grants and (2) the method of recognizing compensation costs
for any future grants with graded vesting.
Total share-based compensation expense and related income tax benefit and
minority interests recognized in the Company's condensed consolidated statements
of operations were as follows (in thousands):
Three Months Ended
-------------------------------
April 3, April 2,
2005 2006
---- ----
Share-based compensation expense recognized in "General and administrative,
excluding depreciation and amortization" expenses...............................$ 397 $ 3,849
Income tax benefit................................................................ (87) (911)
Minority interests................................................................ (59) (62)
----------- ------------
Share-based compensation expense, net of related income taxes and
minority interests...........................................................$ 251 $ 2,876
=========== ============
A summary of the effect of adopting SFAS 123(R) on selected reported items
for the three-month period ended April 2, 2006 and what those items would have
been under the intrinsic value method previously used by the Company is as
follows (in thousands except per share amounts):
Three Months Ended April 2, 2006
--------------------------------------------------
Under
Intrinsic
As Reported Value Method Difference
------------ ------------- ----------
Loss before income taxes and minority interests....................$ (15,581) $ (16,942) $ 1,361(a)
Net loss...........................................................$ (12,905) $ (13,781) $ 876
Net cash used in continuing operating activities...................$ (713,203) $ (712,391) $ (812)
Net cash used in continuing financing activities...................$ (15,452) $ (16,264) $ 812
Basic and diluted loss per share of Class A Common Stock and
Class B Common Stock.............................................$ (.16) $ (.17) $ .01
- --------------
(a) Total share-based compensation expense would have been greater under the
intrinsic value method compared with the fair value method reflected in the
"As Reported" column principally due to the differing effect of the
contingently issuable Restricted Stock under the two methods.
As of April 2, 2006, there was $11,656,000 of total unrecognized
compensation cost related to nonvested share-based compensation grants which is
expected to be amortized over a weighted-average period of 1.4 years.
A summary of the Company's outstanding stock options as of and for the
three-month period ended April 2, 2006 is as follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value (a)
Options Price Term (In Years) (In Thousands)
------- ----- -------------- -------------
Package Options
---------------
Outstanding at January 2, 2006............... 2,548,703 $ 23.39
Granted ..................................... --
Exercised ................................... (62,768) $ 25.41 $ 1,449
=========
Forfeited.................................... --
-----------
Outstanding at April 2, 2006................. 2,485,935 $ 23.34 4.6 $ 74,205
=========== =========
Exercisable at April 2, 2006................. 2,485,935 $ 23.34 4.6 $ 74,205
=========== =========
Class A Options
---------------
Outstanding at January 2, 2006............... 1,299,943 $ 16.55
Granted ..................................... --
Exercised ................................... --
Forfeited.................................... --
-----------
Outstanding at April 2, 2006................. 1,299,943 $ 16.55 3.6 $ 2,184
=========== =========
Exercisable at April 2, 2006................. 1,242,943 $ 16.64 3.3 $ 1,976
=========== =========
Class B Options
---------------
Outstanding at January 2, 2006............... 9,387,617 $ 13.96
Granted ..................................... --
Exercised ................................... (73,863) $ 12.01 $ 282
=========
Forfeited.................................... (81,668) $ 12.01
-----------
Outstanding at April 2, 2006................. 9,232,086 $ 14.00 7.4 $ 32,128
=========== =========
Exercisable at April 2, 2006................. 8,148,011 $ 14.29 7.2 $ 25,992
=========== =========
- --------------
(a) Intrinsic value for purposes of this table represents the amount by which
the fair value of the underlying stock based on the respective market
prices at April 2, 2006 or, if exercised, the exercise dates exceeds the
exercise prices of the respective options.
The Company received $785,000 and $2,482,000 of cash proceeds from
exercises of stock options during the three-month periods ended April 3, 2005
and April 2, 2006, respectively. The actual tax benefit realized for the tax
deductions from options exercised during those periods was $178,000 and
$630,000, respectively.
A summary of the Company's nonvested Restricted Shares as of and for the
three-month period ended April 2, 2006 is as follows:
Class A Common Stock Class B Common Stock
------------------------- -----------------------
Grant Date Grant Date
Nonvested Restricted Shares Shares Fair Value Shares Fair Value
--------------------------- ------ ---------- ------ ----------
Nonvested at January 2, 2006.................. 149,155 $ 15.59 729,920 $ 14.75
Granted....................................... -- --
Vested ....................................... (49,718) $ 15.59 (243,305) $ 14.75
Forfeited..................................... -- --
---------- --------
Nonvested at April 2, 2006.................... 99,437 $ 15.59 486,615 $ 14.75
========== ========
The total fair value of Restricted Shares and grants of subsidiary equity
interests which vested during the three-month period ended April 2, 2006 was
$4,936,000 and $3,633,000, respectively, as of the respective vesting dates.
In accordance with the modified prospective application method under SFAS
123(R), the accompanying condensed consolidated statement of operations for the
three-month period ended April 3, 2005 was not restated. A summary of the effect
on net income and net income per share for the three months ended April 3, 2005
as if the Company had applied the fair value recognition provisions of SFAS 123
to stock-based compensation for all outstanding and nonvested stock options
(calculated using the Black-Scholes Model), Restricted Shares and grants of
subsidiary equity instruments is as follows (in thousands except per share
data):
Three Months
Ended April 3,
2005
----
Net income, as reported............................................................$ 2,679
Reversal of stock-based compensation expense determined under
the intrinsic value method included in reported net income,
net of related income taxes and minority interests............................... 251
Recognition of stock-based compensation expense determined under
the fair value method, net of related income taxes and minority interests........ (1,972)
---------
Net income, as adjusted............................................................$ 958
=========
Net income per share:
Class A Common Stock:
Basic, as reported............................................................$ .04
Basic, as adjusted............................................................ .01
Diluted, as reported.......................................................... .04
Diluted, as adjusted.......................................................... .01
Class B Common Stock:
Basic, as reported............................................................$ .04
Basic, as adjusted............................................................ .02
Diluted, as reported.......................................................... .04
Diluted, as adjusted.......................................................... .01
During the three-month period ended April 3, 2005, the Company granted
4,473,000 Class B Options under the Equity Plans at exercise prices equal to the
market price of the stock on the grant dates. The weighted-average grant date
fair value of these stock options was $3.98 using the Black-Scholes Model with
the assumptions set forth as follows:
Risk-free interest rate..................................................... 3.86%
Expected option life in years............................................... 7
Expected volatility......................................................... 28.1%
Dividend yield.............................................................. 2.63%
The Black-Scholes Model has limitations on its effectiveness including that
it was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable and that the model
requires the use of highly subjective assumptions including expected stock price
volatility. The Company's stock-option awards to employees have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimates.
(3) Business Acquisition
Acquisition of RTM Restaurant Group
On July 25, 2005, the Company completed the acquisition (the "RTM
Acquisition") of substantially all of the equity interests or the assets of the
entities comprising the RTM Restaurant Group ("RTM"), as disclosed in more
detail in Note 3 to the Company's consolidated financial statements contained in
the Form 10-K. RTM was the largest franchisee of Arby's restaurants with 775
Arby's in 22 states as of the date of acquisition.
On December 22, 2005, the Company completed the acquisition of the
operating assets, net of liabilities assumed, of 15 restaurants (the "Indiana
Restaurants") in the Indianapolis and South Bend, Indiana markets from entities
controlled by a franchisee (the "Indiana Restaurant Acquisition") as disclosed
in more detail in Note 3 to the Company's consolidated financial statements
contained in the Form 10-K. The total consideration in connection with the
Indiana Restaurant Acquisition of $4,619,000 increased $47,000 from the
estimated amount disclosed in the Form 10-K reflecting the finalization of a
payment by the Company for a post-closing adjustment.
The results of operations and cash flows of RTM and the Indiana Restaurants
have been included in the accompanying consolidated statements of operations and
cash flows for the three-month period ended April 2, 2006, but are not included
in the three-month period ended April 3, 2005.
The preliminary allocations of the purchase prices of RTM and the Indiana
Restaurants to the assets acquired and liabilities assumed included in Note 3 to
the consolidated financial statements contained in the Form 10-K remain subject
to finalization but changed during the three-month period ended April 2, 2006
only by the effect of the $47,000 increase in the purchase price of the Indiana
Restaurant Acquisition noted above.
The following supplemental pro forma condensed consolidated summary
operating data (the "As Adjusted Data") of the Company for the three-month
period ended April 3, 2005 has been prepared by adjusting the historical data as
set forth in the accompanying condensed consolidated statement of operations to
give effect to the RTM Acquisition and the Indiana Restaurant Acquisition as if
they had been consummated as of January 3, 2005 (in thousands except per share
amounts):
Three Months Ended
April 3, 2005
-------------------------------
As Reported As Adjusted
------------ -----------
Revenues.....................................................................$ 87,697 $ 285,522
Operating profit............................................................. 436 10,562
Net income................................................................... 2,679 4,803
Basic income per share:
Class A Common Stock....................................................... .04 .06
Class B Common Stock....................................................... .04 .07
Diluted income per share:
Class A Common Stock....................................................... .04 .06
Class B Common Stock....................................................... .04 .06
This As Adjusted Data is presented for comparative purposes only and does
not purport to be indicative of the Company's actual results of operations had
the RTM Acquisition and the Indiana Restaurant Acquisition actually been
consummated as of January 3, 2005 or of the Company's future results of
operations.
(4) Comprehensive Income (Loss)
The following is a summary of the components of comprehensive income
(loss), net of income taxes and minority interests (in thousands):
Three Months Ended
-----------------------------
April 3, April 2,
2005 2006
---- ----
Net income (loss) ............................................................$ 2,679 $ (12,905)
Net change in unrealized gains and losses on available-for-sale
securities (see below)...................................................... (677) 1,910
Net change in unrealized gains on cash flow hedges (see below)................ 416 1,824
Net change in currency translation adjustment................................. 19 49
---------- ----------
Comprehensive income (loss)..............................................$ 2,437 $ (9,122)
========== ==========
The following is a summary of the components of the net change in
unrealized gains and losses on available-for-sale securities included in other
comprehensive income (loss) (in thousands):
Three Months Ended
-----------------------------
April 3, April 2,
2005 2006
---- ----
Unrealized holding gains arising during the period............................$ 1,394 $ 3,977
Reclassifications of prior period net unrealized holding (gains) losses into
net income or loss......................................................... (1,006) 148
Equity in change in unrealized holding losses arising during the period....... (1,363) (1,161)
---------- ----------
(975) 2,964
Income tax benefit (provision)................................................ 375 (1,078)
Minority interests in (increase) decrease in unrealized holding gains of a
consolidated subsidiary..................................................... (77) 24
---------- ----------
$ (677) $ 1,910
========== ==========
The following is a summary of the components of the net change in
unrealized gains on cash flow hedges included in comprehensive income (loss) (in
thousands):
Three Months Ended
-----------------------------
April 3, April 2,
2005 2006
---- ----
Unrealized holding gains arising during the period............................$ -- $ 2,024
Reclassifications of prior period unrealized holding gains into net loss...... -- (88)
Equity in change in unrealized holding gains arising during the period........ 649 968
---------- ----------
649 2,904
Income tax provision.......................................................... (233) (1,080)
---------- ----------
$ 416 $ 1,824
========== ==========
(5) Income (Loss) Per Share
Basic income (loss) per share has been computed by dividing the allocated
income or loss for the Company's Class A Common Stock and the Company's Class B
Common Stock by the weighted average number of shares of each class. Both
factors are presented in the tables below. Net income for the three-month period
ended April 3, 2005 was allocated between the Class A Common Stock and Class B
Common Stock based on the actual dividend payment ratio. The net loss for the
three-month period ended April 2, 2006 was allocated equally among each share of
Class A Common Stock and Class B Common Stock, resulting in the same loss per
share for each class. The weighted average number of shares for the three-month
period ended April 3, 2005 includes the weighted average effect of the shares
that were held in two deferred compensation trusts, which were released in
December 2005.
Diluted income per share for the three-month period ended April 3, 2005 has
been computed by dividing the allocated income for the Class A Common Stock and
Class B Common Stock by the weighted average number of shares of each class plus
the potential common share effects on each class of (1) dilutive stock options,
computed using the treasury stock method and (2) contingently issuable
performance-based Restricted Shares of Class A and Class B Common Stock that
would have been issuable based on the market price as of April 3, 2005, as
presented in the table below. The shares used to calculate diluted income per
share exclude any effect of the Company's 5% convertible notes due 2023 (the
"Convertible Notes") which would have been antidilutive since the after-tax
interest on the Convertible Notes per share of Class A Common Stock and Class B
Common Stock obtainable on conversion exceeds the reported basic income per
share. Diluted loss per share for the three-month period ended April 2, 2006 was
the same as basic loss per share for each share of the Class A Common Stock and
Class B Common Stock since the Company reported a net loss and, therefore, the
effect of all potentially dilutive securities on the loss per share would have
been antidilutive.
In February 2006, $165,776,000 of the Convertible Notes were effectively
converted into 4,144,000 and 8,289,000 shares of the Company's Class A Common
Stock and Class B Common Stock, respectively, as disclosed in Note 7. The
weighted average effect of these shares is included in the basic loss per share
calculation for the three-month period ended April 2, 2006.
The only Company securities as of April 2, 2006 that could dilute basic
income per share for periods subsequent to April 2, 2006 are (1) outstanding
stock options which can be exercised into 3,786,000 shares and 14,204,000 shares
of the Company's Class A Common Stock and Class B Common Stock, respectively,
(2) 99,000 and 487,000 contingently issuable Restricted Shares of the Company's
Class A Common Stock and Class B Common Stock, respectively, and (3) $9,244,000
of Convertible Notes which are convertible into 231,000 shares and 461,000
shares of the Company's Class A Common Stock and Class B Common Stock,
respectively.
Income (loss) per share has been computed by allocating the net income or
loss as follows (in thousands):
Three Months Ended
-------------------------
April 3, April 2,
2005 2006
---- ----
Class A Common Stock..............................................................$ 882 $ (4,071)
Class B Common Stock..............................................................$ 1,797 $ (8,834)
The number of shares used to calculate basic and diluted income (loss) per
share were as follows (in thousands):
Three Months Ended
------------------------
April 3, April 2,
2005 2006
---- ----
Class A Common Stock:
Weighted average shares
Outstanding.................................................................. 22,014 25,968
Held in deferred compensation trusts......................................... 1,695 --
---------- ----------
Basic shares...................................................................... 23,709 25,968
Dilutive effect of stock options............................................. 1,124 --
Contingently issuable Restricted Shares...................................... 18 --
---------- ----------
Diluted shares.................................................................... 24,851 25,968
========== ==========
Class B Common Stock:
Weighted average shares
Outstanding.................................................................. 38,454 56,344
Held in deferred compensation trusts......................................... 3,390 --
---------- ----------
Basic shares...................................................................... 41,844 56,344
Dilutive effect of stock options............................................. 2,445 --
Contingently issuable Restricted Shares...................................... 86 --
---------- ----------
Diluted shares.................................................................... 44,375 56,344
========== ==========
(6) Facilities Relocation and Corporate Restructuring
As described in more detail in Note 17 to the financial statements
contained in the Form 10-K, the Company recognized facilities relocation and
corporate restructuring charges during the second half of fiscal 2005 consisting
of charges related to the Company's restaurant business segment of $11,961,000
and to general corporate charges of $1,547,000. An analysis of activity in the
facilities relocation and corporate restructuring charges and the related
accruals during the quarter ended April 2, 2006 is as follows (in thousands):
Balance Balance Total
January 1, Other April 2, Incurred
2006 Provision Payments Adjustments 2006 to Date (a)
---- --------- -------- ----------- ---- ----------
Restaurant Business Segment:
Cash obligations:
Severance and retention incentive
compensation..................... $ 3,812 $ 803 $ (1,547) $ 4 $ 3,072 $ 5,337
Employee relocation costs........... 1,544 -- (568) (5) 971 4,380
Office relocation costs............. 260 -- (40) -- 220 1,554
Lease termination costs............. 774 -- (135) -- 639 774
--------- ---------- ---------- ---------- --------- ---------
6,390 803 (2,290) (1) 4,902 12,045
--------- ---------- ---------- ---------- --------- ---------
Non-cash charges:
Compensation expense from
modified stock awards............ -- -- -- -- -- 612
Loss on fixed assets................ -- -- -- -- -- 107
--------- ---------- ---------- ---------- --------- ---------
-- -- -- -- -- 719
--------- ---------- ---------- ---------- --------- ---------
6,390 803 (2,290) (1) 4,902 12,764
General Corporate:
Cash obligations:
Duplicative rent.................... 1,535 -- (243) (128) 1,164 1,547
--------- ---------- ---------- ---------- --------- ---------
$ 7,925 $ 803 $ (2,533) $ (129) $ 6,066 $ 14,311
========= ========== ========== ========== ========= =========
- --------------
(a) No additional facilities relocation and corporate restructuring costs are
presently expected to be incurred.
(7) Loss on Early Extinguishment of Debt
In February 2006, an aggregate of $165,776,000 principal amount of the
Company's Convertible Notes were effectively converted into an aggregate of
4,144,000 Class A Common Shares and 8,289,000 Class B Common Shares (the
"Convertible Notes Conversion"). In order to induce such effective conversion,
the Company paid negotiated premiums aggregating $8,694,000 to the converting
noteholders consisting of cash of $4,975,000 and 226,000 Class B Common Shares
with an aggregate fair value of $3,719,000 based on the closing market price of
the Company's Class B Common Stock on the dates of the effective conversions in
lieu of cash to certain of those noteholders. In addition, the Company issued an
additional 46,000 Class B Common Shares to those noteholders who agreed to
receive such shares in lieu of a cash payment for accrued and unpaid interest.
In connection with the Convertible Notes Conversion, the Company recorded a loss
on early extinguishment of debt of $12,544,000 in the three-month period ended
April 2, 2006 consisting of the premiums aggregating $8,694,000 and the
write-off of $3,850,000 of related unamortized deferred financing costs.
(8) Discontinued Operations
Prior to 2005 the Company sold (1) the stock of the companies comprising
the Company's former premium beverage and soft drink concentrate business
segments (collectively, the "Beverage Discontinued Operations"), (2) the stock
or the principal assets of the companies comprising the former utility and
municipal services and refrigeration business segments (the "SEPSCO Discontinued
Operations") of SEPSCO, LLC, a subsidiary of the Company, and (3) substantially
all of its interest in a partnership and subpartnership comprising the Company's
former propane business segment (the "Propane Discontinued Operations"). The
Beverage, SEPSCO and Propane Discontinued Operations have been accounted for as
discontinued operations by the Company. There remain certain obligations not
transferred to the buyers of these discontinued businesses to be liquidated.
Current liabilities relating to the discontinued operations consisted of
the following (in thousands):
January 1, April 2,
2006 2006
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations....................................................$ 9,400 $ 9,396
Liabilities relating to the SEPSCO and Propane Discontinued Operations....... 1,049 1,029
----------- -----------
$ 10,449 $ 10,425
=========== ===========
The Company expects that the liquidation of these remaining liabilities
associated with all of these discontinued operations as of April 2, 2006 will
not have any material adverse impact on its consolidated financial position or
results of operations. To the extent any estimated amounts included in the
current liabilities relating to the discontinued operations are determined to be
in excess of the requirement to liquidate the associated liability, any such
excess will be released at that time as a component of gain or loss on disposal
of discontinued operations.
(9) Retirement Benefit Plans
The Company maintains two defined benefit plans, the benefits under which
were frozen in 1992. After recognizing a curtailment gain upon freezing the
benefits, the Company has no unrecognized prior service cost related to these
plans. The measurement date used by the Company in determining the components of
pension expense is December 31 based on an actuarial report with a one-year lag.
The components of the net periodic pension cost incurred by the Company
with respect to these plans are as follows (in thousands):
Three Months Ended
----------------------------
April 3, April 2,
2005 2006
---- ----
Service cost (consisting entirely of plan administrative expenses)................$ 24 $ 24
Interest cost..................................................................... 59 54
Expected return on the plans' assets.............................................. (70) (66)
Amortization of unrecognized net loss............................................. 12 12
---------- ----------
Net periodic pension cost.................................................$ 25 $ 24
========== ==========
(10) Transactions with Related Parties
Prior to 2005 the Company provided aggregate incentive compensation of
$22,500,000 to the Chairman and Chief Executive Officer and the President and
Chief Operating Officer of the Company (the "Executives") which was invested in
two deferred compensation trusts (the "Deferred Compensation Trusts") for their
benefit. Deferred compensation expense of $457,000 and $1,083,000 was recognized
in the three-month periods ended April 3, 2005 and April 2, 2006, respectively,
for increases in the fair value of the investments in the Deferred Compensation
Trusts. Under GAAP, the Company recognizes investment income for any interest or
dividend income on investments in the Deferred Compensation Trusts and realized
gains on sales of investments in the Deferred Compensation Trusts, but is unable
to recognize any investment income for unrealized increases in the fair value of
the investments in the Deferred Compensation Trusts because these investments
are accounted for under the cost method of accounting. Accordingly, the Company
recognized net investment income (loss) from investments in the Deferred
Compensation Trusts of $(60,000) and $52,000 in the three-month periods ended
April 3, 2005 and April 2, 2006, respectively. The net investment loss during
the three-month period ended April 3, 2005 consisted of investment management
fees of $89,000, less interest income of $29,000. The net investment income
during the three-month period ended April 2, 2006 consisted of interest income
of $62,000, less investment management fees of $10,000. Interest income and
investment management fees are included in "Investment income, net" and deferred
compensation expense is included in "General and administrative, excluding
depreciation and amortization" expenses in the accompanying condensed
consolidated statements of operations. As of April 2, 2006, the obligation to
the Executives related to the Deferred Compensation Trusts was $35,042,000
reflected as "Deferred compensation payable to related parties" in the
accompanying condensed consolidated balance sheet. As of April 2, 2006, the
assets in the Deferred Compensation Trusts consisted of $17,159,000 included in
"Investments," which does not reflect the unrealized increase in the fair value
of the investments, $9,607,000 included in "Cash and cash equivalents" and
$637,000 included in "Investment settlements receivable" in the accompanying
condensed consolidated balance sheet. The cumulative disparity between (1)
deferred compensation expense and net recognized investment income and (2) the
obligation to the Executives and the carrying value of the assets in the
Deferred Compensation Trusts will reverse in future periods as either (1)
additional investments in the Deferred Compensation Trusts are sold and
previously unrealized gains are recognized without any offsetting increase in
compensation expense or (2) the fair values of the investments in the Deferred
Compensation Trusts decrease resulting in the recognition of a reversal of
compensation expense without any offsetting losses recognized in investment
income.
In March 2006, the Company sold 9 of its restaurants to a former officer of
its restaurant segment for a cash sale price of $3,400,000, which resulted in a
gain of $608,000 recognized as an adjustment of "Depreciation and amortization,
excluding amortization of deferred financing costs," net of the write-off of
$2,091,000 of allocated goodwill. The Company believes that such sale price
represented the then fair value of the 9 restaurants.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 27 to the
consolidated financial statements contained in the Form 10-K.
(11) Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc.
("Adams"), an inactive subsidiary of the Company, was listed by the United
States Environmental Protection Agency on the Comprehensive Environmental
Response, Compensation and Liability Information System ("CERCLIS") list of
known or suspected contaminated sites. The CERCLIS listing appears to have been
based on an allegation that a former tenant of Adams conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970s. The
business operations of Adams were sold in December 1992. In February 2003, Adams
and the Florida Department of Environmental Protection (the "FDEP") agreed to a
consent order that provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the FDEP approved the work plan submitted by Adams'
environmental consultant and during 2004 the work under that plan was completed.
Adams submitted its contamination assessment report to the FDEP in March 2004.
In August 2004, the FDEP agreed to a monitoring plan consisting of two sampling
events which occurred in January and June 2005 and the results have been
submitted to the FDEP for its review. In November 2005, Adams received a letter
from the FDEP identifying certain open issues with respect to the property. The
letter did not specify whether any further actions are required to be taken by
Adams and Adams has sought clarification from, and expects to have additional
conversations with, the FDEP in order to attempt to resolve this matter. Based
on provisions for all of these costs made prior to 2005 of $1,667,000, and after
taking into consideration various legal defenses available to the Company,
including Adams, Adams has provided for its estimate of its remaining liability
for completion of this matter.
In 1998, a number of class action lawsuits were filed on behalf of the
Company's stockholders. Each of these actions named the Company, the Executives
and other members of the Company's then board of directors as defendants. In
1999, certain plaintiffs in these actions filed a consolidated amended complaint
alleging that the Company's tender offer statement filed with the SEC in 1999,
pursuant to which the Company repurchased 3,805,015 shares of its Class A Common
Stock, failed to disclose material information. The amended complaint sought,
among other relief, monetary damages in an unspecified amount. In 2000, the
plaintiffs agreed to stay this action pending determination of a related
stockholder action that was subsequently dismissed in October 2002 and is no
longer being appealed. In October 2005, the action was dismissed as moot, but in
December 2005 the plaintiffs filed a motion seeking reimbursement of $256,000 of
legal fees and expenses against which the defendants, including the Company,
filed their opposition on February 24, 2006. On March 29, 2006, the court
awarded the plaintiffs $75,000 in fees and expenses. On April 28, 2006,
defendants filed a notice of appeal.
In addition to the environmental matter and stockholder lawsuit described
above, the Company is involved in other litigation and claims incidental to its
current and prior businesses. Triarc and its subsidiaries have reserves for all
of their legal and environmental matters aggregating $1,400,000 as of April 2,
2006. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information, including legal defenses available to Triarc
and/or its subsidiaries, and given the aforementioned reserves, the Company does
not believe that the outcome of such legal and environmental matters will have a
material adverse effect on its condensed consolidated financial position or
results of operations.
(12) Business Segments
The Company manages and internally reports its operations as two business
segments: (1) the operation and franchising of restaurants ("Restaurants") and
(2) asset management ("Asset Management"). Restaurants include RTM effective
with the RTM Acquisition on July 25, 2005. The Company evaluates segment
performance and allocates resources based on each segment's earnings before
interest, taxes, depreciation and amortization ("EBITDA"). EBITDA has been
computed as operating profit plus depreciation and amortization, excluding
amortization of deferred financing costs ("Depreciation and Amortization").
Operating profit (loss) has been computed as revenues less operating expenses.
In computing EBITDA and operating profit, interest expense and non-operating
income and expenses have not been considered. Identifiable assets by segment are
those assets used in the Company's operations of each segment. General corporate
assets consist primarily of cash and cash equivalents, restricted cash and cash
equivalents, short-term investments, investment settlement receivables,
non-current investments and properties.
The following is a summary of the Company's segment information (in
thousands):
Three Months Ended
-------------------------
April 3, April 2,
2005 2006
---- ----
Revenues:
Restaurants.......................................................................$ 74,769 $ 277,347
Asset Management.................................................................. 12,928 14,796
----------- -----------
Consolidated revenues........................................................$ 87,697 $ 292,143
=========== ===========
EBITDA:
Restaurants.......................................................................$ 17,063 $ 29,840
Asset Management.................................................................. 3,923 2,108
General corporate................................................................. (15,024) (19,171)
----------- -----------
Consolidated EBITDA.......................................................... 5,962 12,777
----------- -----------
Less Depreciation and Amortization:
Restaurants....................................................................... 2,936 10,813
Asset Management.................................................................. 1,083 1,483
General corporate................................................................. 1,507 1,085
----------- -----------
Consolidated Depreciation and Amortization................................... 5,526 13,381
----------- -----------
Operating profit (loss):
Restaurants....................................................................... 14,127 19,027
Asset Management.................................................................. 2,840 625
General corporate................................................................. (16,531) (20,256)
----------- -----------
Consolidated operating profit (loss)......................................... 436 (604)
Interest expense...................................................................... (10,253) (27,376)
Insurance expense related to long-term debt........................................... (904) --
Loss on early extinguishment of debt.................................................. -- (12,544)
Investment income, net................................................................ 9,100 20,950
Gain on sale of unconsolidated business............................................... 9,608 2,256
Other income (expense), net........................................................... (370) 1,737
----------- -----------
Consolidated income (loss) before income taxes and minority interests........$ 7,617 $ (15,581)
=========== ===========
January 1, April 2,
2006 2006
---- ----
Identifiable assets:
Restaurants.........................................................................$ 1,044,199 $ 1,066,354
Asset Management.................................................................... 149,247 133,885
General corporate................................................................... 1,616,043 3,902,472
----------- -----------
Consolidated total assets....................................................$ 2,809,489 $ 5,102,711
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction and Executive Overview
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Triarc Companies, Inc., which we refer to as Triarc,
and its subsidiaries should be read in conjunction with the accompanying
condensed consolidated financial statements and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the fiscal year ended January 1, 2006. Item 7 of our
2005 Form 10-K describes the application of our critical accounting policies.
There have been no significant changes as of April 2, 2006 pertaining to that
topic. Certain statements we make under this Item 2 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- - Other Information" preceding "Item 1."
We currently operate in two business segments. We operate in the restaurant
business through our franchised and Company-owned Arby's restaurants and in the
asset management business through Deerfield & Company LLC, which we refer to as
Deerfield.
On July 25, 2005 we completed the acquisition of substantially all of the
equity interests or the assets of the entities comprising the RTM Restaurant
Group, Arby's largest franchisee with 775 Arby's restaurants in 22 states as of
that date, in a transaction we refer to as the RTM Acquisition. Commencing on
July 26, 2005, our consolidated results of operations and cash flows include
RTM's results of operations and cash flows but do not include royalties and
franchise and related fees from RTM, which are now eliminated in consolidation.
Accordingly, RTM's results of operations and cash flows are included in our
consolidated results for the three-month period ended April 2, 2006 but are not
included in our consolidated results for the three-month period ended April 3,
2005. We refer to the 797 RTM restaurants open as of April 2, 2006, including 22
net restaurants added by RTM since the RTM Acquisition, as the RTM Stores. We
refer to the other 232 restaurants that we own as of April 2, 2006 through our
subsidiary, Sybra, Inc., as the Sybra Stores.
In our restaurant business, we derive revenues in the form of royalties and
franchise and related fees and from sales by our Company-owned restaurants.
While over 60% of our existing Arby's royalty agreements and all of our new
domestic royalty agreements provide for royalties of 4% of franchise revenues,
our average royalty rate was 3.5% for the three months ended April 2, 2006. In
our asset management business, we derive revenues in the form of asset
management and related fees from our management of (1) collateralized debt
obligation vehicles, which we refer to as CDOs, and (2) investment funds and
private investment accounts, which we refer to as Funds, including Deerfield
Triarc Capital Corp., a real estate investment trust formed in December 2004,
which we refer to as the REIT, and we may expand the types of investments that
we offer and manage.
We derived investment income throughout the periods presented principally
from the investment of our excess cash. In that regard, in October 2004 we
invested $100.0 million to seed a multi-strategy hedge fund, Deerfield
Opportunities Fund, LLC, which we refer to as the Opportunities Fund, which is
managed by Deerfield and currently accounted for as a consolidated subsidiary of
ours, with minority interests to the extent of participation by investors other
than us (see below under "Consolidation of Opportunities Fund"). When we refer
to Deerfield or the effect of the Deerfield Acquisition, we mean only Deerfield
& Company, LLC and not the Opportunities Fund. The Opportunities Fund
principally invests in various fixed income securities and their derivatives, as
opportunities arise, and employs leverage in its trading activities, including
securities sold with an obligation to purchase or under agreements to
repurchase. In December 2004 we invested $15.0 million in the REIT. In March
2005 we withdrew $4.8 million of our investment from the Opportunities Fund to
seed another new fund, named DM Fund, LLC, managed by Deerfield and consolidated
by us with minority interests to the extent of participation by investors other
than us.
Our goal is to enhance the value of our Company by increasing the revenues
of the Arby's restaurant business and Deerfield's asset management business. We
are continuing to focus on growing the number of restaurants in the Arby's
system, adding new menu offerings and implementing operational initiatives
targeted at service levels and convenience. We plan to grow Deerfield's assets
under management by utilizing the value of its historically profitable
investment advisory brand and increasing the types of assets under management,
such as the REIT, thereby increasing Deerfield's asset management fee revenues.
As discussed below under "Liquidity and Capital Resources - Investments and
Acquisitions," we continue to evaluate our options for the use of our
significant cash and investment position, including business acquisitions,
repurchases of our common stock, investments and special cash dividends to our
shareholders. In recent years we evaluated a number of business acquisition
opportunities, including Deerfield and RTM, and we intend to continue our
disciplined search for potential business acquisitions that we believe have the
potential to create significant value to our shareholders.
We are continuing to explore the feasibility, as well as the risks and
opportunities, of a possible corporate restructuring that may involve the
spin-off to our shareholders or other disposition of our asset management
operations. We are also reviewing options for our other remaining non-restaurant
net assets, which could include the allocation of these net assets between our
two businesses and/or special dividends or distributions to our shareholders,
including the special cash dividends of $0.45 per share we have paid or
currently intend to pay in 2006 as discussed in more detail below under
"Liquidity and Capital Resources - Dividends." The goal of our restructuring
would be to enhance value to our shareholders by allowing them to hold shares in
industry-specific public companies thereby potentially unlocking the value of
our independently-managed businesses.
In recent periods our restaurant business has experienced the following
trends:
o Growing U.S. adult population, our principal customer demographic;
o Addition of selected higher-priced quality items to menus, which
appeal more to adult tastes;
o Increased consumer preference for premium sandwiches with perceived
higher levels of freshness, quality and customization along with
increased competition in the premium sandwich category which has
constrained the pricing of these products;
o Increased price competition, as evidenced by value menu concepts,
which offer comparatively lower prices on some menu items; combination
meal concepts, which offer a complete meal at an aggregate price lower
than the price of the individual food and beverage items; the use of
coupons and other price discounting and many recent product promotions
focused on the lower price of certain menu items;
o Increased competition among quick service restaurant competitors and
other retail food operators for available development sites, higher
development costs associated with those sites and increases in the
cost of borrowing alternatives, primarily over the last nine to twelve
months, in the lending markets typically used to finance new unit
development;
o Increased availability to consumers of new product choices, including
more healthy products focused on freshness driven by a greater
consumer awareness of nutritional issues as well as new "indulgent"
products that tend to include larger sizes and more flavorful
ingredients, as well as a wider variety of snack products and
non-carbonated beverages;
o Competitive pressures from operators outside the quick service
restaurant industry, such as the deli sections and in-store cafes of
several major grocery store chains, convenience stores and casual
dining outlets offering prepared food purchases;
o Higher fuel prices which cause a decrease in many consumers'
discretionary income;
o Extended hours of operation by many quick service restaurants
including both breakfast and late night hours;
o Legislative activity on both the federal and state level, which could
result in higher wages and related fringe benefits, including health
care and other insurance costs, and higher packaging costs; and
o Competitive pressures from an increasing number of franchise
opportunities seeking to attract qualified franchisees.
We experience the effects of these trends directly to the extent they
affect the operations of our Company-owned restaurants and indirectly to the
extent they affect sales by our franchisees and, accordingly, impact the
royalties and franchise fees we receive from them.
In recent periods, our asset management business has experienced the
following trends:
o Growth in the hedge fund market as investors appear to be increasing
their investment allocations to hedge funds, with particular interest
recently in hedge strategies that focus on specific areas of growth in
domestic and foreign economies such as oil, commodities, interest
rates, equities, and other specific areas;
o Increased competition in the hedge fund industry in the form of new
hedge funds offered by both new and established asset managers to meet
the increasing demand of hedge fund investors;
o Short-term interest rates that have risen over the last year while
long-term interest rates have increased to a much lesser extent,
representing a flatter yield curve, resulting in higher funding costs
for our securities purchases, which can negatively impact our margins
within our managed funds, potentially lowering our asset management
fees; and
o Increased merger and acquisition activity, resulting in additional
risks and opportunities in the credit markets.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. However, Deerfield, the Opportunities Fund and DM
Fund, LLC report on a calendar year ending on December 31. Our first quarter of
fiscal 2005 commenced on January 3, 2005 and ended on April 3, 2005, and our
first quarter of fiscal 2006 commenced on January 2, 2006 and ended on April 2,
2006. When we refer to the "three months ended April 3, 2005," or the "2005
first quarter," we mean the period from January 3, 2005 to April 3, 2005, and
when we refer to the "three months ended April 2, 2006," or the "2006 first
quarter," we mean the period from January 2, 2006 to April 2, 2006. Each quarter
contained 13 weeks. All references to years and quarters relate to fiscal
periods rather than calendar periods, except for Deerfield, the Opportunities
Fund and DM Fund, LLC.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount of the change between the 2005 first quarter and the 2006
first quarter.
Three Months Ended
------------------------
April 3, April 2,
2005 2006 Change
---- ---- ------
(In Millions)
Revenues:
Net sales.....................................................$ 51.2 $ 258.9 $ 207.7
Royalties and franchise and related fees...................... 23.6 18.4 (5.2)
Asset management and related fees............................. 12.9 14.8 1.9
---------- ---------- ----------
87.7 292.1 204.4
---------- ---------- ----------
Costs and expenses:
Cost of sales, excluding depreciation and amortization........ 39.2 192.6 153.4
Cost of services, excluding depreciation and amortization..... 4.2 5.5 1.3
Advertising and selling....................................... 4.6 20.1 15.5
General and administrative, excluding depreciation and
amortization................................................ 33.8 60.3 26.5
Depreciation and amortization, excluding amortization of
deferred financing costs ................................... 5.5 13.4 7.9
Facilities relocation and corporate restructuring............. -- 0.8 0.8
---------- ---------- ----------
87.3 292.7 205.4
---------- ---------- ----------
Operating profit (loss)................................... 0.4 (0.6) (1.0)
Interest expense ................................................ (10.2) (27.4) (17.2)
Insurance expense related to long-term debt...................... (0.9) -- 0.9
Loss on early extinguishment of debt............................. -- (12.5) (12.5)
Investment income, net........................................... 9.1 20.9 11.8
Gain on sale of unconsolidated business.......................... 9.6 2.3 (7.3)
Other income (expense), net...................................... (0.4) 1.7 2.1
---------- ---------- ----------
Income (loss) before income taxes and minority interests.. 7.6 (15.6) (23.2)
Benefit from (provision for) income taxes........................ (2.5) 5.8 8.3
Minority interests in income of consolidated subsidiaries........ (2.4) (3.1) (0.7)
---------- ---------- ----------
Net income (loss).........................................$ 2.7 $ (12.9) $ (15.6)
========== ========== ==========
Three Months Ended April 2, 2006 Compared with Three Months Ended April 3, 2005
Net Sales
Our net sales, which were generated entirely from the Company-owned
restaurants, increased $207.7 million to $258.9 million for the three months
ended April 2, 2006 from $51.2 million for the three months ended April 3, 2005,
reflecting $205.9 million of net sales attributable to the RTM Stores and a 2%
growth in same-store sales of the Sybra Stores in the 2006 first quarter as
compared with the 2005 first quarter. When we refer to same-store sales, we mean
only sales of those restaurants which were open during the same months in both
of the comparable periods. The increase in same-store sales of our Sybra Stores
reflected (1) the effect of recent marketing initiatives and (2) the launch of
Arby's Chicken Naturals(TM), a line of menu offerings made with 100 percent all
natural chicken breast, in March 2006. The positive effects of these factors
were partially offset by (1) continued underperformance of Company-owned
restaurants in the Michigan region and (2) the effect of higher fuel prices on
consumers' discretionary income which we believe has negatively impacted our
sales beginning in the second half of 2005. The RTM Stores had same-store sales
performance for the 2006 first quarter relatively consistent with, and driven by
essentially the same factors as, Sybra as discussed above.
The 2% growth in same-store sales of the Sybra Stores in the 2006 first
quarter compared with the 2005 first quarter is less than the 5% growth in
same-store sales of franchised restaurants discussed below under "Royalties and
Franchise and Related Fees" primarily due to the relatively stronger same-store
sales performance of the Sybra Stores in the 2005 first quarter reflecting the
increased use of couponing in that period.
Our net sales for the remainder of 2006 will be significantly higher than
in 2005 as a result of the RTM Acquisition. We expect continued positive
same-store sales growth of both Company-owned and franchised restaurants for the
remainder of 2006, driven by the anticipated performance of various initiatives
such as (1) the continued sales of Arby's Chicken Naturals, (2) value oriented
promotions primarily on some of our roast beef sandwiches and limited time
offers with discounted prices on certain premium and limited time menu items and
(3) planned additions of other new menu items. We presently plan to open 41 new
Company-owned restaurants during the remainder of 2006. We will evaluate whether
to close any underperforming Company-owned restaurants and continually review
the performance of each of those restaurants, particularly in connection with
the decision to renew or extend their leases. Specifically, we have 44
restaurants where the facilities leases either are scheduled for renewal or
expire during the remainder of 2006 and we currently anticipate the renewal or
extension of most of these leases.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, decreased $5.2 million to $18.4 million for the
three months ended April 2, 2006 from $23.6 million for the three months ended
April 3, 2005, reflecting $6.8 million of royalties and franchise and related
fees from RTM recognized in the 2005 first quarter, whereas royalties from RTM
are eliminated in consolidation subsequent to the RTM Acquisition. Aside from
the effect of the RTM Acquisition, royalties and franchise and related fees
increased $1.6 million in the 2006 first quarter, reflecting (1) a $0.8 million
increase in royalties due to a 5% increase in same-store sales of the franchised
restaurants in the 2006 first quarter as compared with the 2005 first quarter
and (2) a $0.6 million increase in royalties from the 82 restaurants opened
since April 3, 2005, with generally higher than average sales volumes, replacing
the royalties from the 50 generally underperforming restaurants closed since
April 3, 2005 and the elimination of royalties from 15 restaurants we acquired
from a franchisee in December 2005. The increase in same-store sales of the
franchised restaurants reflects (1) recent marketing initiatives and (2) the
launch of Arby's Chicken Naturals, both as mentioned above under "Net Sales."
Partially offsetting these positive factors was the effect of higher fuel prices
on consumers' discretionary income which we believe had a negative impact on our
franchisees' sales beginning in the second half of 2005. Franchise and related
fees, excluding those from RTM, were relatively unchanged between the quarters.
Our royalties and franchise and related fees will decrease significantly in
the second and third quarters of 2006 as compared with the same period of 2005
due to the elimination in consolidation of royalties and franchise and related
fees from RTM, which were $9.5 million in the comparable 2005 period preceding
the RTM Acquisition. We expect positive same-store sales growth of existing
franchised restaurants for 2006 due to the anticipated performance of the
various 2006 initiatives described above under "Net Sales." We believe that the
higher fuel prices will continue to temper the sales performance of our
franchisees.
Asset Management and Related Fees
Our asset management and related fees, which were generated entirely from
the management of CDOs and Funds by Deerfield, increased $1.9 million, or 15%,
to $14.8 million for the three months ended April 2, 2006 from $12.9 million for
the three months ended April 3, 2005 principally due to a $363.5 million
increase in assets under management for the REIT resulting from an initial
public stock offering in June 2005. Assets under management for the REIT were
$763.9 million as of April 2, 2006, upon which we receive a 1.75% per annum
management fee and a quarterly incentive fee if a specified rate of return is
met.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization resulted
entirely from the Company-owned restaurants. Cost of sales increased $153.4
million to $192.6 million for the three months ended April 2, 2006, resulting in
a gross margin of 26%, from $39.2 million for the three months ended April 3,
2005, resulting in a gross margin of 23%. Of this increase, $151.0 million is
attributable to the RTM Stores, which had a gross margin of 27%. Aside from the
effect of the RTM Acquisition, cost of sales increased $2.4 million, or 6%,
resulting in a gross margin of 22% in the first quarter of 2006 compared with
23% in the first quarter of 2005. We define gross margin as the difference
between net sales and cost of sales divided by net sales. The decrease of 1% in
gross margin of the Sybra Stores is primarily attributable to (1) increased
labor costs as a result of an increase in restaurant managers, increased
staffing levels during peak periods and to a lesser extent, minimum wage
increases in several states, (2) increased utility costs as a result of higher
gas and electric costs and (3) increased spending for repairs and maintenance,
partially as a result of costs related to the conversion to Pepsi beverage
products in the 2006 first quarter. These increases were partially offset by
reduced food and paper costs as a result of improved monitoring of variances in
the 2006 first quarter. The gross margin for the RTM Stores was significantly
higher than that of the Sybra Stores due to RTM's relatively more effective
operational efficiencies resulting from management and procedural advantages as
well as higher average unit sales volumes of the RTM Stores which result in more
favorable cost leverage.
We expect our overall gross margin for the remainder of 2006 will continue
to be favorably impacted as a result of the RTM Acquisition because of the
substantially higher gross margins of the RTM Stores compared with the Sybra
Stores and, to a lesser extent, operational efficiency improvements in the Sybra
Stores. As we continue to implement the more effective operating procedures of
RTM in the Sybra Stores, we anticipate that the operational efficiency of the
Sybra Stores will improve steadily over the next 9 to 15 months and achieve
gross margin performance closer to that of the RTM Stores.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, which
resulted entirely from the management of CDOs and Funds by Deerfield, increased
$1.3 million, or 31%, to $5.5 million for the three months ended April 2, 2006
from $4.2 million for the three months ended April 3, 2005 principally due to
the hiring of additional personnel to support our current and anticipated growth
in assets under management.
Our royalties and franchise and related fees have no associated cost of
services.
Advertising and Selling
Our advertising and selling expenses increased $15.5 million almost
entirely due to advertising expenses attributable to the RTM Stores.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization increased $26.5 million, reflecting a $20.0 million increase in
general and administrative expenses of our restaurant segment principally
relating to RTM. Such increase in our restaurant segment reflects (1) higher
employee related costs, including recruiting, as a result of increased headcount
due to the RTM Acquisition and the strengthening of its infrastructure, (2)
increased costs related to outside consultants that we utilized to assist with
the integration of RTM and a related ongoing computer systems implementation and
(3) increased corporate office rent and related occupancy costs. Aside from the
increase attributable to our restaurant segment, general and administrative
expenses increased $6.5 million primarily due to (1) a $3.1 million increase in
employee share-based compensation principally related to grants of shares of our
contingently issuable performance-based restricted class A and class B common
stock in March 2005 and grants of equity interests in two of our subsidiaries in
November 2005, (2) a $2.2 million increase in other employee compensation
principally reflecting higher incentive compensation and (3) a $0.6 million
increase in deferred compensation expense. Deferred compensation expense of $0.5
million in the 2005 first quarter and $1.1 million in the 2006 first quarter
represents the increase in the fair value of investments in two deferred
compensation trusts, which we refer to as the Deferred Compensation Trusts, for
the benefit of our Chairman and Chief Executive Officer and our President and
Chief Operating Officer, whom we refer to as the Executives, as explained in
more detail below under "Income (Loss) Before Income Taxes and Minority
Interests."
Effective January 2, 2006, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment," which we refer to as
SFAS 123(R), which revised Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," which we refer to as SFAS 123. As a
result, we now measure the cost of employee services received in exchange for an
award of equity instruments, including grants of employee stock options and
restricted stock, based on the fair value of the award at the date of grant
rather than its intrinsic value, which we previously used. We elected the
modified prospective application method permitted under SFAS 123(R) whereby
amortization of the fair value of all nonvested grants as of January 2, 2006, as
determined under the previous pro forma disclosure provisions of SFAS 123, is
included in our results of operations commencing January 2, 2006, and prior
periods are not restated. Any new employee stock compensation grants or grants
modified, repurchased or cancelled on or after January 2, 2006, of which there
were none during our 2006 first quarter, will be valued in accordance with SFAS
123(R). Had we used the fair value alternative under SFAS 123 during the 2005
first quarter, our pretax compensation expense using the Black-Scholes-Merton
option pricing model would have been $2.7 million higher, or $1.7 million after
taxes and minority interests as set forth in the pro forma disclosure in Note 2
to our accompanying condensed consolidated financial statements. As of April 2,
2006, there was $11.6 million of total unrecognized compensation cost related to
nonvested share-based compensation grants which is expected to be amortized over
a weighted-average period of 1.4 years. The adoption of SFAS 123(R) reduced the
amount of compensation expense we recognized in our 2006 first quarter from what
we would have recognized under the intrinsic value method by $1.4 million,
principally due to the differing effect of our contingently issuable restricted
stock under the two methods. However, our adoption of SFAS 123(R) could
materially increase our share-based compensation expense in future periods as a
result of future stock option grants.
We expect to incur charges of between $2.5 million and $3.0 million in our
2006 second quarter in connection with our replacement of the President and
Chief Executive Officer of our restaurant segment in April 2006, including
severance, accelerated vesting of stock options and relocation costs.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $7.9 million due to depreciation and amortization of
RTM.
Facilities Relocation and Corporate Restructuring
Our facilities relocation and corporate restructuring charges of $0.8
million in the 2006 first quarter consist of additional severance and employee
retention incentives in connection with combining our existing restaurant
operations with those of RTM following the RTM Acquisition and relocating the
corporate office of the restaurant group from Fort Lauderdale, Florida to new
offices in Atlanta, Georgia in late 2005.
Interest Expense
Interest expense increased $17.2 million reflecting (1) a $10.8 million
increase in interest expense on debt securities sold with an obligation to
purchase or under agreements to repurchase in connection with the use of
leverage in the Opportunities Fund, (2) a $5.3 million net increase in interest
expense relating to our term loan borrowings in connection with the RTM
Acquisition compared to the interest expense on the previous debt of our
restaurant segment which a portion of the term loan borrowings refinanced at a
lower interest rate in July 2005 and (3) $2.5 million of interest expense
relating to sales-leaseback and capitalized lease obligations of RTM which were
acquired but which were not refinanced and, to a much lesser extent, additional
obligations incurred by RTM for new restaurants opened subsequent to the RTM
Acquisition. These increases were partially offset by a $1.4 million decrease in
interest expense related to our 5% convertible notes due 2023, which we refer to
as the Convertible Notes, due to the effective conversion of an aggregate $165.8
million principal amount of the Convertible Notes into shares of our class A and
class B common stock in February 2006, as discussed in more detail below under
"Liquidity and Capital Resources - Convertible Notes."
Insurance Expense Related to Long-Term Debt
Insurance expense related to long-term debt decreased $0.9 million due to
its settlement upon the repayment of the related debt as part of the July 2005
refinancing of most of our restaurant segment's debt, including some of the debt
assumed in the RTM Acquisition.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt of $12.5 million in the 2006 first
quarter resulted from the effective conversion of an aggregate $165.8 million of
our Convertible Notes, as discussed in more detail below under "Liquidity and
Capital Resources - Convertible Notes," and consisted of $8.7 million of
negotiated inducement premiums that we paid in cash and shares of our class B
common stock and the write-off of $3.8 million of related unamortized deferred
financing costs.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Three Months Ended
------------------------
April 3, April 2,
2005 2006 Change
---- ---- ------
(In Millions)
Interest income.............................................$ 6.3 $ 18.0 $ 11.7
Recognized net gains........................................ 3.1 2.9 (0.2)
Other than temporary unrealized losses...................... (0.3) -- 0.3
Distributions, including dividends.......................... 0.2 0.2 --
Other....................................................... (0.2) (0.2) --
--------- -------- -------
$ 9.1 $ 20.9 $ 11.8
========= ======== ========
Interest income increased $11.7 million primarily due to higher average
outstanding balances of our interest-bearing investments and an increase in
average rates on those investments from 3.6% in the 2005 first quarter to 4.2%
in the 2006 first quarter. The higher average outstanding balance of our
interest-bearing investments was due to the use of leverage in the Opportunities
Fund. The increase in the average rates was principally due to our investing
through the Opportunities Fund in some higher yielding, but more risk-inherent,
debt securities with the objective of improving the overall return on our
interest-bearing investments and the general increase in the money market and
short-term interest rate environment. However, the average outstanding balances
of our interest-bearing investments, net of related leveraging liabilities,
decreased principally due to the liquidation of some of those investments to
provide cash principally for the RTM acquisition in July 2005. Our recognized
net gains include (1) realized gains and losses on sales of our
available-for-sale securities and our investments accounted for under the cost
method of accounting and (2) realized and unrealized gains and losses on changes
in the fair values of our trading securities and our securities sold short with
an obligation to purchase. All of these recognized gains and losses may vary
significantly in future periods depending upon the timing of the sales of our
investments, or the changes in the value of our investments, as applicable. Any
other than temporary unrealized losses are dependent upon the underlying
economics and/or volatility in the value of our investments in
available-for-sale securities and cost-method investments and may or may not
recur in future periods.
Gain on Sale of Unconsolidated Business
The gain on sale of unconsolidated business decreased $7.3 million to $2.3
million for the 2006 first quarter from $9.6 million for the 2005 first quarter.
All of these gains relate to our investment in Encore Capital Group, Inc., an
equity investee of ours which we refer to as Encore, principally due to cash
sales of a portion of our investment in Encore during each of those periods.
Other Income (Expense), Net
Other income (expense), net improved $2.1 million, of which $0.9 million
relates to RTM principally for rental income on restaurants not operated by RTM.
Aside from the effect of the RTM Acquisition, other income (expense), net
improved $1.2 million principally due to $1.3 million of costs recognized in the
2005 first quarter related to our decision not to pursue a certain financing
alternative in connection with the RTM Acquisition which did not recur in the
2006 first quarter.
Income (Loss) Before Income Taxes and Minority Interests
Our income (loss) before income taxes and minority interests decreased
$23.2 million to a loss of $15.6 million for the three months ended April 2,
2006 from income of $7.6 million for the three months ended April 3, 2005
reflecting (1) the loss on early extinguishment of debt of $12.5 million and (2)
the decrease of $7.3 million in gain on sale of unconsolidated business, as well
as the effect of the other variances explained in the captions above.
As discussed above, we recognized deferred compensation expense of $0.5
million in the 2005 first quarter and $1.1 million in the 2006 first quarter,
within general and administrative expenses, for increases in the fair value of
investments in the Deferred Compensation Trusts. Under accounting principles
generally accepted in the United States of America, we recognize investment
income for any interest or dividend income on investments in the Deferred
Compensation Trusts and realized gains on sales of investments in the Deferred
Compensation Trusts, but are unable to recognize any investment income for
unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts because these investments are accounted for under the cost
method of accounting. We recognized net investment income (loss) from
investments in the Deferred Compensation Trusts of $(0.1) million in the 2005
first quarter and $0.1 million in the 2006 first quarter consisting of interest
income net of investment management fees. The cumulative disparity between
deferred compensation expense and net recognized investment income will reverse
in future periods as either (1) additional investments in the Deferred
Compensation Trusts are sold and previously unrealized gains are recognized
without any offsetting increase in compensation expense or (2) the fair values
of the investments in the Deferred Compensation Trusts decrease resulting in the
recognition of a reversal of compensation expense without any offsetting losses
recognized in investment income.
Benefit From (Provision For) Income Taxes
The benefit from income taxes represented an effective rate of 37% for the
three months ended April 2, 2006 and the provision for income taxes represented
an effective rate of 33% for the three months ended April 3, 2005. The effective
benefit rate in the 2006 first quarter reflects an annual effective rate which
was based on forecasted pretax income for the 2006 full year. It is higher than
the Federal statutory rate of 35% due to (1) the effect of non-deductible
compensation costs and other expenses and (2) state income taxes, net of Federal
income tax benefit, due to the differing mix of pretax income or loss among the
consolidated entities which file state tax returns on an individual company
basis. These increases are partially offset by the effect of minority interests
in income of consolidated subsidiaries which are not taxable to us but which are
not deducted from the forecasted pretax income used to calculate the effective
tax rate. The effective provision rate in the 2005 first quarter was lower than
the Federal statutory rate of 35% due to the effect of minority interests in
income of consolidated subsidiaries partially offset by (1) the effect of
non-deductible compensation costs and (2) state income taxes, net of Federal
income tax benefit, for the reasons discussed above.
Minority Interests in Income of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries increased
$0.7 million, reflecting an increase of $1.2 million due to the increased
participation of investors other than us in increased income of the
Opportunities Fund, partially offset by a $0.5 million decrease due to lower
income of Deerfield in the 2006 first quarter compared with the 2005 first
quarter.
Net Income (Loss)
Our net income (loss) declined $15.6 million to a net loss of $12.9 million
in the 2006 first quarter from net income of $2.7 million in the 2005 first
quarter principally reflecting (1) $8.0 million, net of tax effect, from the
loss on early extinguishment of debt and (2) $4.7 million, net of tax effect,
from the decrease in the gain on sale of unconsolidated business, as well as the
after tax effects of the other variances discussed in the captions above.
Liquidity and Capital Resources
Cash Flows From Continuing Operating Activities
Our consolidated operating activities from continuing operations used cash
and cash equivalents, which we refer to in this discussion as cash, of $713.2
million during the three months ended April 2, 2006 principally reflecting a net
loss of $12.9 million and net operating investment adjustments of $722.6
million.
The net operating investment adjustments principally reflect net purchases
of trading securities and net settlements of trading derivatives, which were
principally funded by proceeds from net proceeds from securities sold short and
net sales of repurchase agreements. Under accounting principles generally
accepted in the United States of America, the net purchases of trading
securities and the net settlements of trading derivatives must be reported in
continuing operating activities in the accompanying consolidated statements of
cash flows. However, net proceeds from securities sold short and net sales of
repurchase agreements are reported in continuing investing activities in the
accompanying consolidated statements of cash flows. The cash used by changes in
current assets and liabilities associated with operating activities of $8.5
million principally reflects a $22.1 million decrease in accounts payable and
accrued expenses and other current liabilities partially offset by an $8.6
million decrease in accounts and notes receivable. The decrease in accounts
payable and accrued expenses and other current liabilities was principally due
to the payment of a portion of previously accrued incentive compensation. The
decrease in accounts and notes receivable principally resulted from collections
of asset management incentive fees receivable. Other adjustments to reconcile
the net loss to the cash used in continuing operating activities were
principally comprised of non-cash adjustments for a receipt of deferred vendor
incentive payment of $14.0 million, depreciation and amortization of $14.0
million, write-off of unamortized deferred financing costs of $3.8 million, a
stock-based compensation provision of $3.8 million, stock issued to induce
effective conversion of the Convertible Notes of $3.7 million and minority
interests in income of consolidated subsidiaries of $3.1 million, all partially
offset by a deferred tax benefit of $7.0 million.
Excluding the effect of the net purchases of trading securities and net
settlements of trading derivatives, which represent the discretionary investment
of excess cash, our continuing operating activities provided cash of $7.1
million in the three months ended April 2, 2006. We expect positive cash flows
from continuing operating activities during the remaining nine months of 2006,
excluding the effect, if any, of net sales or purchases of trading securities.
We expect that our operating results before net non-cash charges will improve
during the remainder of 2006.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$296.8 million at April 2, 2006, reflecting a current ratio, which equals
current assets divided by current liabilities, of 1.1:1. This amount was
relatively unchanged from $296.4 million at January 1, 2006.
Our total capitalization at April 2, 2006 was $1,300.7 million, consisting
of stockholders' equity of $541.2 million, long-term debt of $752.9 million,
including current portion, and notes payable of $6.6 million. Our total
capitalization at April 2, 2006 decreased $16.5 million from $1,317.2 million at
January 1, 2006 principally due to dividend payments of $20.7 million.
Credit Agreement
In connection with the RTM Acquisition, we entered into a credit agreement,
which we refer to as the Credit Agreement, for our restaurant business segment.
The Credit Agreement includes a senior secured term loan facility, which we
refer to as the Term Loan, with a remaining principal balance of $615.4 million
as of April 2, 2006, of which $4.7 million is due in the remaining nine months
of 2006, and a senior secured revolving credit facility of $100.0 million. There
were no borrowings under the revolving credit facility as of April 2, 2006,
however, the availability under the facility was $89.0 million, which is net of
a reduction of $11.0 million for outstanding letters of credit.
Convertible Notes
We had outstanding at April 2, 2006, $9.2 million of Convertible Notes
which do not have any scheduled principal repayments prior to 2023 and are
convertible into 231,000 shares of our class A common stock and 461,000 shares
of our class B common stock. However, the Convertible Notes are redeemable at
our option commencing May 20, 2010 and at the option of the holders on May 15,
2010, 2015 and 2020 or upon the occurrence of a fundamental change, as defined,
relating to us, in each case at a price of 100% of the principal amount of the
Convertible Notes plus accrued interest.
In February 2006, an aggregate of $165.8 million principal amount of the
Convertible Notes were effectively converted, which we refer to as the
Convertible Notes Conversion, into an aggregate of 4,144,000 shares of our class
A common stock and 8,289,000 shares of our class B common stock. In order to
induce this conversion, we paid negotiated premiums aggregating $8.7 million to
the converting noteholders consisting of cash of $5.0 million and 226,000 shares
of our class B common stock with an aggregate fair value of $3.7 million based
on the closing market price of our class B common stock on the dates of the
effective conversions in lieu of cash to certain of those noteholders. In
connection with these transactions we recorded a pretax charge of $12.5 million,
consisting of the premiums aggregating $8.7 million and the write-off of $3.8
million of related unamortized deferred financing costs in our 2006 first
quarter.
Sale-Leaseback Obligations
We have outstanding $60.2 million of sale-leaseback obligations as of April
2, 2006, which relate principally to RTM and are due through 2026, of which $1.1
million is due in the remaining nine months of 2006.
Capitalized Lease Obligations
We have outstanding $52.4 million of capitalized lease obligations as of
April 2, 2006, which principally relate to RTM and extend through 2036, of which
$1.1 million is due in the remaining nine months of 2006.
Other Long-Term Debt
We have outstanding a secured bank term loan payable through 2008 in the
amount of $7.8 million as of April 2, 2006, of which $2.4 million is due in the
remaining nine months of 2006, and a secured promissory note payable due in the
remaining nine months of 2006 in the amount of $6.6 million as of April 2, 2006.
We also have outstanding $1.3 million of leasehold notes as of April 2, 2006,
which are due through 2014, of which $0.1 million is due in the remaining nine
months of 2006.
Notes Payable
We have outstanding $6.6 million of non-recourse notes payable as April 2,
2006 which relate to Deerfield and are secured by our short-term investments in
preferred shares of CDOs with a carrying value of $12.3 million as of April 2,
2006. These notes have no stated maturities but must be repaid from either a
portion or all of the distributions we receive on, or sales proceeds from, those
investments and a portion of the asset management fees to be paid to us from the
respective CDOs.
Revolving Credit Facilities
We have $89.0 million available for borrowing under our restaurant
segment's $100.0 million revolving credit facility as of April 2, 2006, which is
net of the reduction of $11.0 million for outstanding letters of credit noted
above. In addition, on February 28, 2006 we entered into a $30.0 million
agreement with CNL Restaurant Capital, LP, which we refer to as CNL for
sale-leaseback financing from CNL for development and operation of Arby's
restaurants. As of April 2, 2006, there was $28.8 million available under this
agreement with CNL of which we have used an additional $4.0 million through
April 30, 2006. This agreement ends on June 30, 2006; however, we have an option
to extend the agreement for an additional six months. In February 2006, our
asset management segment entered into a $10.0 million revolving note agreement,
under which there were no borrowings at April 2, 2006.
Debt Repayments and Covenants
Our total scheduled long-term debt and notes payable repayments during the
remaining nine months of 2006 are $19.6 million consisting of $6.6 million under
our secured promissory note, $4.7 million under our Term Loan, $3.6 million
expected to be paid under our notes payable, $2.4 million under our secured bank
term loan, $1.1 million relating to sale-leaseback obligations, $1.1 million
relating to capitalized leases and $0.1 million under our leasehold notes.
Our Credit Agreement contains various covenants relating to our restaurant
segment, the most restrictive of which (1) require periodic financial reporting,
(2) require meeting certain leverage and interest coverage ratio tests and (3)
restrict, among other matters, (a) the incurrence of indebtedness, (b) certain
asset dispositions, (c) certain affiliate transactions, (d) certain investments,
(e) certain capital expenditures and (f) the payment of dividends to Triarc. We
were in compliance with all of these covenants as of April 2, 2006. As of April
2, 2006 there was $13.1 million available for the payment of dividends
indirectly to Triarc under the covenants of the Credit Agreement.
A significant number of the underlying leases for our sale-leaseback
obligations, capitalized lease obligations and operating leases require periodic
financial reporting of certain subsidiary entities within our restaurant
business segment or of individual restaurants, which in many cases has not been
prepared or reported. We have negotiated alternative covenants with a number of
our most significant lessors which substitute consolidated financial reporting
of our restaurant segment for financial reporting of individual subsidiary
entities and which modify restaurant level reporting requirements. We are in the
process of negotiating similar alternative covenants with additional lessors.
Nevertheless, as of April 2, 2006 we were not in compliance with the original
reporting requirements under a substantial number of these leases and remain not
in compliance as of the date of this report on Form 10-Q. However, none of our
lessors has asserted that we are in default of any of these lease agreements and
we do not believe that this non-compliance will have a material adverse effect
on our consolidated financial position or results of operations.
Contractual Obligations
The only significant change to our contractual obligations since January 1,
2006, as disclosed in Item 7 of our 2005 Form 10-K, resulted from the
Convertible Notes Conversion in February 2006. Our expected payments of
long-term debt in the periods after 2010 decreased by $165.8 million due to the
Convertible Notes Conversion.
Guarantees and Commitments
Our wholly-owned subsidiary, National Propane Corporation, which we refer
to as National Propane, retains a less than 1% special limited partner interest
in our former propane business, now known as AmeriGas Eagle Propane, L.P., which
we refer to as AmeriGas Eagle. National Propane agreed that while it remains a
special limited partner of AmeriGas Eagle, National Propane would indemnify the
owner of AmeriGas Eagle for any payments the owner makes related to the owner's
obligations under certain of the debt of AmeriGas Eagle, aggregating
approximately $138.0 million as of April 2, 2006, if AmeriGas Eagle is unable to
repay or refinance such debt, but only after recourse by the owner to the assets
of AmeriGas Eagle. National Propane's principal asset is an intercompany note
receivable from Triarc in the amount of $50.0 million as of April 2, 2006. We
believe it is unlikely that we will be called upon to make any payments under
this indemnity. In 2001 AmeriGas Propane, L.P., which we refer to as AmeriGas
Propane, purchased all of the interests in AmeriGas Eagle other than National
Propane's special limited partner interest. Either National Propane or AmeriGas
Propane may require AmeriGas Eagle to repurchase the special limited partner
interest. However, we believe it is unlikely that either party would require
repurchase prior to 2009 as either AmeriGas Propane would owe us tax
indemnification payments if AmeriGas Propane required the repurchase or we would
accelerate payment of deferred taxes of $36.0 million as of April 2, 2006,
associated with the sale and other tax basis differences, prior to 2003, of our
propane business if National Propane required the repurchase. As of April 2,
2006, we have net operating loss tax carryforwards sufficient to offset these
deferred taxes.
Prior to the RTM Acquisition, RTM guaranteed the lease obligations, which
we refer to as the Affiliate Lease Guarantees, of 24 restaurants operated by
affiliates of RTM not acquired by us. The RTM selling stockholders have
indemnified us with respect to the guarantee of these lease obligations. In
addition, the purchasers of 23 restaurants sold in various transactions by RTM
prior to the RTM Acquisition assumed the associated lease obligations, although
RTM remains contingently liable if the respective purchasers do not make the
required lease payments which, collectively with the Affiliate Lease Guarantees,
we refer to as the Lease Guarantees. All those lease obligations, which extend
through 2025 including all then existing extension or renewal option periods,
could aggregate a maximum of approximately $41.0 million as of April 2, 2006,
including approximately $34.0 million under the Affiliate Lease Guarantees,
assuming all scheduled lease payments have been made by the respective tenants
through April 2, 2006. The estimated fair value of the Lease Guarantees was $1.4
million as of the date of the RTM Acquisition, as determined in accordance with
a preliminary independent appraisal based on the net present value of the
probability adjusted payments which may be required to be made by us. Such
amount is being amortized as other income based on the decline in the net
present value of those probability adjusted payments in excess of any actual
payments made over time. There remains an unamortized carrying amount of $1.2
million as of April 2, 2006 with respect to the Lease Guarantees.
Capital Expenditures
Cash capital expenditures amounted to $14.6 million during the three months
ended April 2, 2006. We expect that cash capital expenditures will be
approximately $51.7 million for the remaining nine months of 2006 principally
relating to (1) the opening of an estimated 41 new Company-owned restaurants,
(2) remodeling some of our existing restaurants, (3) maintenance capital
expenditures for our Company-owned restaurants and (4) leasehold improvements
for a recently leased corporate office facility of the asset management segment.
We have $11.9 million of outstanding commitments for these capital expenditures
as of April 2, 2006.
Dividends
On March 15, 2006, we paid regular quarterly cash dividends of $0.08 and
$0.09 per share on our class A and class B common stock, respectively,
aggregating $7.6 million. In addition, on March 1, 2006, we paid a special cash
dividend of $0.15 per share on our class A common stock and class B common
stock, aggregating $13.1 million. On May 11, 2006, we declared regular quarterly
cash dividends of $0.08 and $0.09 per share on our class A common stock and
class B common stock, respectively, to holders of record on June 1, 2006 and
payable on June 15, 2006. Also on May 11, 2006, we declared special cash
dividends of $0.15 per share on our class A common stock and class B common
stock to holders of record on June 30, 2006 and payable on July 14, 2006. We
also announced our intention to pay an additional special cash dividend in the
fourth quarter of 2006 of $0.15 per share on our class A common stock and class
B common stock. We currently intend to continue to declare and pay regular
quarterly cash dividends. However, there can be no assurance that any additional
dividends will be declared or paid in the future or of the amount or timing of
such dividends, if any. Until September 4, 2006, each share of class B common
stock is entitled to at least 110% of the regular quarterly cash dividend paid
on each share of class A common stock. After such date, each share of class B
common stock is entitled to at least 100% of the regular quarterly cash dividend
paid on each share of class A common stock. Our Board of Directors has not yet
made any determination of the relative amounts of any regular quarterly cash
dividends that will be paid on the class A common stock and class B common stock
after September 4, 2006. Based on the number of shares of our class A and class
B common stock outstanding as of April 28, 2006, if during the remainder of 2006
we pay (1) the regular quarterly cash and special cash dividends that were
declared on May 11, 2006, (2) regular quarterly cash dividends for the last two
quarters of 2006 at the same rates as paid in our 2006 first quarter and (3) an
additional installment of the special cash dividends at the same rate as we paid
in our 2006 first quarter, our total cash requirement for such dividends would
be $49.4 million.
Investments and Acquisitions
As of April 2, 2006, we had $493.6 million of cash and cash equivalents,
restricted cash equivalents, investments other than investments held in deferred
compensation trusts and receivables from sales of investments, net of
liabilities related to investments. This amount includes $95.2 million invested
in the Opportunities Fund and $4.8 million in DM Fund, LLC, which are both
managed by Deerfield and consolidated by us and which we have agreed not to
withdraw before October 4, 2006. We continue to evaluate strategic opportunities
for the use of our significant cash and investment position, including
additional business acquisitions, a potential corporate restructuring as
discussed above under "Introduction and Executive Overview," repurchases of
Triarc common stock (see "Treasury Stock Purchases" below), the payment of the
remaining two installments of the special cash dividends during the remaining
nine months of 2006 and investments.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant and to the extent legally permissible, to repurchase through June 30,
2006 up to a total of $50.0 million of our class A and class B common stock.
However, due to the previously announced potential corporate restructuring,
previously discussed above under "Introduction and Executive Overview," we
expect to be precluded from repurchasing shares at certain times. We did not
make any treasury stock purchases during the 2006 first quarter and we cannot
assure you that we will repurchase any shares under this program in the future.
On May 11, 2006, this $50.0 million authorization was extended through June 30,
2007.
Universal Shelf Registration Statement
In December 2003, the Securities and Exchange Commission declared effective
a Triarc universal shelf registration statement in connection with the possible
future offer and sale, from time to time, of up to $2.0 billion of our common
stock, preferred stock, debt securities and warrants to purchase any of these
types of securities. Unless otherwise described in the applicable prospectus
supplement relating to the offered securities, we anticipate using the net
proceeds of each offering for general corporate purposes, including financing of
acquisitions and capital expenditures, additions to working capital and
repayment of existing debt. We have not presently made any decision to issue any
specific securities under this universal shelf registration statement.
Cash Requirements
Our consolidated cash requirements for continuing operations for the
remaining nine months of 2006, exclusive of operating cash flow requirements,
consist principally of (1) a maximum of an aggregate $50.0 million of payments
for repurchases of our class A and class B common stock for treasury under our
current stock repurchase program, (2) cash capital expenditures of approximately
$51.7 million, (3) regular and special cash dividends aggregating approximately
$49.4 million, (4) scheduled debt principal repayments aggregating $19.6 million
and (5) the cost of business acquisitions, if any. We anticipate meeting all of
these requirements through (1) the use of our liquid net current assets, (2)
cash flows from continuing operating activities, if any, (3) borrowings under
our restaurant segment's revolving credit facility of which $89.0 million is
currently available, (4) the sale-leaseback financing agreement with CNL of
which $28.8 million is currently available, (5) borrowings under our asset
management segment's revolving credit note agreement of which $10.0 million is
currently available and (6) if necessary for any business acquisitions and if
market conditions permit, borrowings including proceeds from sales, if any, of
up to $2.0 billion of our securities under the universal shelf registration
statement.
Consolidation of Opportunities Fund
We consolidate the Opportunities Fund since we currently have a majority
voting interest of 73.6%. Our voting interest decreased from 76.4% at January 1,
2006 due to investments from third party investors during the 2006 first quarter
and we continue to market the Opportunities Fund to other investors. Further,
commencing in October 2006 we have the right to withdraw our investment in the
Opportunities Fund. Should either the sales of equity interests in the
Opportunities Fund or a withdrawal of funds by us result in us owning less than
a majority voting interest, we would no longer consolidate the Opportunities
Fund. However, no assurance can be given that this will occur. If this does
occur, we will account for our investment in the Opportunities Fund under the
equity method of accounting on a prospective basis from the date of
deconsolidation.
Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc., which
we refer to as Adams Packing, an inactive subsidiary of ours, was listed by the
United States Environmental Protection Agency on the Comprehensive Environmental
Response, Compensation and Liability Information System, which we refer to as
CERCLIS, list of known or suspected contaminated sites. The CERCLIS listing
appears to have been based on an allegation that a former tenant of Adams
Packing conducted drum recycling operations at the site from some time prior to
1971 until the late 1970's. The business operations of Adams Packing were sold
in December 1992. In February 2003, Adams Packing and the Florida Department of
Environmental Protection, which we refer to as the Florida DEP, agreed to a
consent order that provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the Florida DEP approved the work plan submitted by
Adams Packing's environmental consultant and during 2004 the work under that
plan was completed. Adams Packing submitted its contamination assessment report
to the Florida DEP in March 2004. In August 2004, the Florida DEP agreed to a
monitoring plan consisting of two sampling events which occurred in January and
June 2005 and the results have been submitted to the Florida DEP for its review.
In November 2005, Adams Packing received a letter from the Florida DEP
identifying certain open issues with respect to the property. The letter did not
specify whether any further actions are required to be taken by Adams Packing
and Adams Packing has sought clarification from, and expects to have additional
conversations with, the Florida DEP in order to attempt to resolve this matter.
Based on provisions for all of these costs made prior to 2005 of $1.7 million
and after taking into consideration various legal defenses available to us,
including Adams Packing, Adams Packing has provided for its estimate of its
remaining liability for completion of this matter.
In 1998, a number of class action lawsuits were filed on behalf of our
stockholders. Each of these actions named us, the Executives and other members
of our then board of directors as defendants. In 1999, certain plaintiffs in
these actions filed a consolidated amended complaint alleging that our tender
offer statement filed with the Securities and Exchange Commission in 1999,
pursuant to which we repurchased 3,805,015 shares of our class A common stock,
failed to disclose material information. The amended complaint sought, among
other relief, monetary damages in an unspecified amount. In 2000, the plaintiffs
agreed to stay this action pending determination of a related stockholder action
that was subsequently dismissed in October 2002 and is no longer being appealed.
In October 2005, the action was dismissed as moot, but in December 2005 the
plaintiffs filed a motion seeking reimbursement of $0.3 million of legal fees
and expenses against which the defendants, including us, filed their opposition
on February 24, 2006. On March 29, 2006, the court awarded the plaintiffs
$75,000 in fees and expenses. On April 28, 2006, defendants filed a notice of
appeal.
In addition to the environmental matter and stockholder lawsuit described
above, we are involved in other litigation and claims incidental to our current
and prior businesses. We and our subsidiaries have reserves for all of our legal
and environmental matters aggregating $1.4 million as of April 2, 2006. Although
the outcome of these matters cannot be predicted with certainty and some of
these matters may be disposed of unfavorably to us, based on currently available
information, including legal defenses available to us and/or our subsidiaries,
and given the aforementioned reserves, we do not believe that the outcome of
these legal and environmental matters will have a material adverse effect on our
consolidated financial position or results of operations.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant revenues are somewhat lower in our first quarter.
Further, while our asset management business is not directly affected by
seasonality, our asset management revenues are higher in our fourth quarter as a
result of our revenue recognition accounting policy for incentive fees related
to the Funds which are based upon performance and are recognized when the
amounts become fixed and determinable upon the close of a performance period.
Recently Issued Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board, which we refer
to as the FASB, issued Statement No. 155, "Accounting for Certain Hybrid
Financial Instruments," which we refer to as SFAS 155. SFAS 155 amends FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which we refer to as SFAS 133, and FASB Statement 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 155 resolves issues addressed in SFAS 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." SFAS 155 is effective commencing with our first
quarter of 2007 although early adoption is permitted. Since we do not currently
hold or plan to hold any financial instruments of the type to which SFAS 155
applies, we currently do not believe that the adoption of SFAS 155 will have any
effect on our consolidated financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This "Quantitative and Qualitative Disclosures about Market Risk" has been
presented in accordance with Item 305 of Regulation S-K promulgated by the
Securities and Exchange Commission and should be read in conjunction with "Item
7A. Quantitative and Qualitative Disclosures about Market Risk" in our annual
report on Form 10-K for the fiscal year ended January 1, 2006. Item 7A of our
Form 10-K describes in more detail our objectives in managing our interest rate
risk with respect to long-term debt, as referred to below, our commodity price
risk, our equity market risk and our foreign currency risk.
Certain statements we make under this Item 3 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- - Other Information" preceding "Item 1."
We are exposed to the impact of interest rate changes, changes in commodity
prices, changes in the market value of our investments and, to a lesser extent,
foreign currency fluctuations. In the normal course of business, we employ
established policies and procedures to manage our exposure to these changes
using financial instruments we deem appropriate. We had no significant changes
in our management of, or our exposure to, commodity price risk, equity market
risk or foreign currency risk during the three months ended April 2, 2006.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit
their impact on our earnings and cash flows. We have historically used interest
rate cap and/or interest rate swap agreements on a portion of our variable-rate
debt to limit our exposure to the effects of increases in short-term interest
rates on our earnings and cash flows. As of April 2, 2006 our notes payable and
long-term debt, including current portion, aggregated $759.5 million and
consisted of $623.2 million of variable-rate debt, $112.6 million of capitalized
lease and sale-leaseback obligations, $17.1 million of fixed-rate debt and $6.6
million of variable-rate notes payable. We continue to have three interest rate
swap agreements that fix the London Interbank Offered Rate (LIBOR) component of
the interest rate at 4.12%, 4.56% and 4.64% on $100.0 million, $50.0 million and
$55.0 million, respectively, of the $615.4 million outstanding principal amount
of our variable-rate senior secured term loan borrowings until September 30,
2008, October 30, 2008 and October 30, 2008, respectively. The interest rate
swap agreements related to the term loans were designated as cash flow hedges
and, accordingly, are recorded at fair value with changes in fair value recorded
through the accumulated other comprehensive income component of stockholders'
equity in our accompanying consolidated balance sheet to the extent of the
effectiveness of these hedges. Any ineffective portion of the change in fair
value of these hedges, of which there was none through April 2, 2006, would be
recorded in our results of operations. In addition, we continue to have an
interest rate swap agreement, with an embedded written call option, in
connection with our variable-rate bank loan of which $7.8 million principal
amount was outstanding as of April 2, 2006, which effectively establishes a
fixed interest rate on this debt so long as the one-month LIBOR is below 6.5%.
The fair value of our fixed-rate debt will increase if interest rates decrease.
The fair market value of our investments in fixed-rate debt securities will
decline if interest rates increase. See below for a discussion of how we manage
this risk.
Foreign Currency Risk
We had no significant changes in our management of, or our exposure to,
foreign currency fluctuations during the first quarter of 2006. However, on
April 26, 2006 we received a return of capital from our investment in Jurlique
International Pty Ltd., an Australian company which we refer to as Jurlique, and
sold a portion of our investment in Jurlique representing an aggregate $21.7
million reduction in the carrying value of the investment to $8.5 million. We
continue to have a put and call arrangement whereby we have limited the overall
foreign currency risk of holding this investment through July 5, 2007. In
connection with these April 2006 transactions, we terminated a portion of the
put and call arrangement so that the remaining notional amount approximated the
value of the remaining investment.
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 potentially higher, but more risk-inherent, returns from the
investment strategies of these managers. We also seek to identify alternative
investment strategies that may earn higher returns with attendant increased risk
profiles for a portion of our investment portfolio. We regularly 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 are continuing to adjust our asset allocation to increase the
portion of our investments that offers the opportunity for higher, but more risk
inherent, returns. In that regard, in October 2004 we invested $100.0 million to
seed a multi-strategy hedge fund, Deerfield Opportunities Fund, LLC, which we
refer to as the Opportunities Fund, which is managed by Deerfield and Company,
LLC, a subsidiary of ours which we refer to as Deerfield, and is currently
consolidated by us with minority interests to the extent of participation by
investors other than us. The Opportunities Fund invests principally in various
fixed income securities and their derivatives, as opportunities arise. Further,
the Opportunities Fund employs leverage in its trading activities, including
securities sold with an obligation to purchase or under agreements to repurchase
as well as the effective leverage represented by the notional amounts of its
various derivatives. The investments of the Opportunities Fund are subject to
interest rate risk and the inherent credit risk related to the underlying
creditworthiness of the various issuers. The Opportunities Fund uses hedging
strategies, including the derivatives it holds and other asset/liability
management strategies, to generally minimize its overall interest rate risk
while retaining an acceptable level of credit risk as part of its technical
trading strategies. The Opportunities Fund monitors its overall credit risk and
attempts to maintain an acceptable level of exposure through diversification of
credit positions by industry, credit rating and individual issuer
concentrations. In March 2005 we withdrew $4.8 million of our investment from
the Opportunities Fund to seed another new fund managed by Deerfield and
consolidated by us with minority interests. In December 2005 we invested $75.0
million in an account, which we refer to as the Equities Account, which is
managed by a management company formed by our Chairman and Chief Executive
Officer, our President and Chief Operating Officer and our Vice Chairman.
Although the Equities Account was invested principally in cash equivalents as of
April 2, 2006, we expect that it will be invested principally in the equity
securities of a limited number of publicly-traded companies in the future. As of
April 2, 2006, the derivatives held in our short-term investment portfolios,
principally through the Opportunities Fund and the Equities Account, consisted
of (1) bank loan total return swaps, (2) interest rate swaps, (3) futures
contracts relating to interest rates, foreign currencies, United States
government and foreign debt securities and a foreign stock market index, (4)
credit default swaps, (5) put and call option combinations on an equity
security, (6) stock options, (7) options on foreign currency contracts and
interest rate futures and (8) a foreign currency forward contract. We did not
designate any of these strategies as hedging instruments and, accordingly, all
of these derivative instruments were recorded at fair value with changes in fair
value recorded in our results of operations.
We maintain investment portfolio holdings of various issuers, types and
maturities. As of April 2, 2006 these investments were classified in our
condensed consolidated balance sheet as follows (in thousands):
Cash equivalents included in "Cash and cash equivalents"...................................$ 207,645
Short-term investments pledged as collateral............................................... 1,076,105
Other short-term investments............................................................... 598,823
Investment settlements receivable.......................................................... 1,264,765
Current and non-current restricted cash equivalents (a).................................... 680,142
Non-current investments.................................................................... 84,959
-------------
$ 3,912,439
=============
Certain liability positions related to investments:
Investment settlements payable..........................................................$ (941,366)
Securities sold under agreements to repurchase ......................................... (1,042,492)
Securities sold with an obligation to purchase included in "Other liability positions
related to short-term investments".................................................... (1,435,749)
Derivatives held in trading portfolios in liability positions included in "Other
liability positions related to short-term investments"................................ (881)
-------------
$ (3,420,488)
=============
- --------------
(a) Includes non-current restricted cash equivalents of $2,339,000 included in
"Deferred costs and other assets."
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired and consisted principally of
cash in mutual fund and bank money market accounts, cash in interest-bearing
brokerage and bank accounts with a stable value, securities purchased under
agreements to resell the following day collateralized by United States
government and government agency debt securities and United States government
debt securities.
At April 2, 2006 our investments were classified in the following general
types or categories (in thousands):
Carrying Value
At Fair -----------------------
Type At Cost Value (d) Amount Percent
---- ------- --------- ------ -------
Cash equivalents (a)............................$ 207,645 $ 207,645 $ 207,645 5%
Investment settlements receivable (b)........... 1,264,765 1,264,765 1,264,765 32%
Restricted cash equivalents..................... 680,142 680,142 680,142 17%
Investments accounted for as:
Available-for-sale securities (c).......... 61,354 74,554 74,554 2%
Trading securities......................... 1,594,537 1,580,648 1,580,648 40%
Trading derivatives........................ 207 1,640 1,640 --%
Non-current investments held in deferred
compensation trusts accounted for at cost..... 17,159 24,798 17,159 1%
Other current and non-current investments in
investment limited partnerships and similar
investment entities accounted for at cost..... 24,436 34,955 24,436 1%
Other current and non-current investments
accounted for at:
Cost....................................... 36,012 40,335 36,012 1%
Equity..................................... 16,111 29,719 20,969 1%
Fair value ................................ 4,364 4,469 4,469 --%
------------ ------------ ------------ -----
Total cash equivalents and long
investment positions..........................$ 3,906,732 $ 3,943,670 $ 3,912,439 100%
============ ============ ============ ====
Certain liability positions related to
investments:
Investment settlements payable (b).........$ (941,366) $ (941,366) $ (941,366) N/A
Securities sold under agreements to
repurchase.............................. (1,040,674) (1,042,492) (1,042,492) N/A
Securities sold with an obligation to
purchase................................ (1,441,768) (1,435,749) (1,435,749) N/A
Derivatives held in trading portfolios in
liability positions..................... (27) (881) (881) N/A
------------ ------------ ------------
$ (3,423,835) $ (3,420,488) $ (3,420,488)
============ ============ ============
- --------------
(a) Includes $9,607,000 of cash equivalents held in deferred compensation
trusts.
(b) Represents unsettled security trades as of April 2, 2006 principally in the
Opportunities Fund.
(c) Includes $12,277,000 of preferred shares of collateralized debt obligation
vehicles, which we refer to as CDOs, which, if sold, would require us to
use the proceeds to repay our related notes payable of $6,588,000.
(d) There can be no assurance that we would be able to sell certain of these
investments at these amounts.
Our marketable securities are reported at fair market value and are
classified and accounted for either as "available-for-sale" or "trading" with
the resulting net unrealized holding gains or losses, net of income taxes,
reported either as a separate component of comprehensive income or loss
bypassing net income or net loss or included as a component of net income or net
loss, respectively. Our investments in preferred shares of CDOs are accounted
for similar to debt securities and are classified as available-for-sale.
Investment limited partnerships and similar investment entities and other
current and non-current investments in which we do not have significant
influence over the investees are accounted for at cost. Derivative instruments
held in trading portfolios are similar to and classified as trading securities
which are accounted for as described above. Realized gains and losses on
investment limited partnerships and similar investment entities and other
current and non-current investments recorded at cost are reported as investment
income or loss in the period in which the securities are sold. Investments in
which we have significant influence over the investees 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 the investees. Our
investments accounted for under the equity method consist of non-current
investments in two public companies, one of which is a real estate investment
trust managed by a subsidiary of ours. We also hold restricted stock and stock
options in the real estate investment trust that we manage, which we received as
stock-based compensation and account for at fair value. We review all of our
investments in which we have unrealized losses and recognize investment losses
currently for any unrealized losses we deem to be other than temporary. The
cost-basis component of investments reflected in the table above represents
original cost less a permanent reduction for any unrealized losses that were
deemed to be other than temporary.
Sensitivity Analysis
For purposes of this disclosure, market risk sensitive instruments are
divided into two categories: instruments entered into for trading purposes and
instruments entered into for purposes other than trading. Our estimate of market
risk exposure is presented for each class of financial instruments held by us at
April 2, 2006 for which an immediate adverse market movement causes a potential
material impact on our financial position or results of operations. We believe
that the adverse market movements described below represent the hypothetical
loss to future earnings and do not represent the maximum possible loss nor any
expected actual loss, even under adverse conditions, because actual adverse
fluctuations would likely differ. In addition, since our investment portfolio is
subject to change based on our portfolio management strategy as well as market
conditions, these estimates are not necessarily indicative of the actual results
which may occur.
The following tables reflect the estimated market risk exposure as of April
2, 2006 based upon assumed immediate adverse effects as noted below (in
thousands):
Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Equity securities............................................... $ 7,281 $ -- $ (728) $ --
Debt securities................................................. 1,573,367 (54,224) -- --
Trading derivatives in asset positions.......................... 1,640 (1,827) -- (242)
Trading derivatives in liability positions...................... (881) (4,178) (59) (53)
The sensitivity analysis of financial instruments held for trading purposes
assumes (1) an instantaneous 10% adverse change in the equity markets in which
we are invested, (2) an instantaneous one percentage point adverse change in
market interest rates and (3) an instantaneous 10% adverse change in the foreign
currency exchange rates versus the United States dollar, each from their levels
at April 2, 2006, with all other variables held constant.
The interest rate risk with respect to our debt securities and trading
derivatives reflects the effect of the assumed adverse interest rate change on
the fair value of each of those securities or derivative positions and does not
reflect any offsetting of hedged positions. The adverse effects on the fair
values of the respective securities and derivatives were determined based on
market standard pricing models applicable to those particular instruments. Those
models consider variables such as coupon rate and frequency, maturity date(s),
yield and, in the case of derivatives, volatility, price of the underlying
instrument, strike price, expiration, prepayment assumptions and probability of
default.
Other Than Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Cash equivalents......................................$ 207,645 $ (3) $ -- $ --
Investment settlements receivable..................... 1,264,765 -- -- --
Restricted cash equivalents........................... 680,142 (474) -- --
Available-for-sale equity securities.................. 45,035 -- (4,504) --
Available-for-sale preferred shares of CDOs........... 20,671 (921) -- --
Available-for-sale debt mutual fund................... 8,848 (177) -- --
Investment in Jurlique................................ 30,164 -- (3,016) (1,696)
Other investments..................................... 72,881 (2,693) (6,174) (105)
Interest rate swaps in an asset position.............. 3,926 (4,683) -- --
Foreign currency put and call arrangement in a net
liability position.................................. (80) -- -- (971)
Investment settlements payable........................ (941,366) -- -- --
Securities sold under agreements to repurchase........ (1,042,492) (8) -- --
Securities sold with an obligation to purchase........ (1,435,749) (41,015) (545) --
Notes payable and long-term debt, excluding
capitalized lease and sale-leaseback obligations.... (646,879) (30,659) -- --
The sensitivity analysis of financial instruments held at April 2, 2006 for
purposes of other than trading assumes (1) an instantaneous one percentage point
adverse change in market interest rates, (2) an instantaneous 10% adverse change
in the equity markets in which we are invested and (3) an instantaneous 10%
adverse change in the foreign currency exchange rates versus the United States
dollar, each from their levels at April 2, 2006, with all other variables held
constant. The equity price risk reflects the impact of a 10% decrease in the
carrying value of our equity securities, including those in "Other investments"
in the table above. The sensitivity analysis also assumes that the decreases in
the equity markets and foreign exchange rates are other than temporary. We have
not reduced the equity price risk for available-for-sale investments and cost
investments to the extent of unrealized gains on certain of those investments,
which would limit or eliminate the effect of the indicated market risk on our
results of operations and, for cost investments, our financial position.
Our investments in debt securities and preferred shares of CDOs with
interest rate risk had a range of remaining maturities and, for purposes of this
analysis, were assumed to have weighted average remaining maturities as follows:
Range Weighted Average
----- ----------------
Cash equivalents (other than money market funds
and interest-bearing brokerage and bank accounts
and securities purchased under agreements to resell)................... 6 days - 13 days 10 days
Restricted cash equivalents............................................... 12 days - 45 days 45 days
CDOs underlying preferred shares.......................................... 1 1/3 years - 8 years 4 1/4 years
Debt mutual fund.......................................................... 1 day - 35 years 2 years
Debt securities included in other investments (principally
held by investment limited partnerships and similar
investment entities)................................................... (a) 10 years
(a) Information is not available for the underlying debt investments of these
entities.
The interest rate risk reflects, for each of these investments in debt
securities and the preferred shares of CDOs, the impact on our results of
operations. Assuming we reinvest in similar securities at the time these
securities mature, the effect of the interest rate risk of an increase of one
percentage point above the existing levels would continue beyond the maturities
assumed. The interest rate risk for our preferred shares of CDOs excludes those
portions of the CDOs for which the risk has been fully hedged. Our cash
equivalents and restricted cash equivalents included $197.8 million and $295.8
million, respectively, as of April 2, 2006 of mutual fund and bank money market
accounts and/or interest-bearing brokerage and bank accounts which are designed
to maintain a stable value and securities purchased under agreements to resell
the following day which, as a result, were assumed to have no interest rate
risk.
The interest rate risk presented with respect to our securities sold under
agreements to repurchase and securities sold with an obligation to repurchase,
which are all financial instruments held almost entirely by the Opportunities
Fund, represents the potential impact an adverse change in interest rates of one
percentage point would have on the fair value of those respective instruments
and on our financial position and results of operations. The securities sold
under agreements to repurchase, although bearing fixed rates, principally have
maturities of 28 days or less which significantly limit the effect of a change
in interest rates on the respective fair values of these instruments. As of
April 2, 2006, the securities sold with an obligation to repurchase represent
$1,430.3 million of fixed income securities, with a weighted-average remaining
maturity of approximately 12 years, and $5.4 million of equity securities. The
adverse effects on the fair value of the respective instruments were determined
based on market standard pricing models applicable to those particular
instruments which consider variables such as coupon rate and frequency, maturity
date(s), yield and prepayment assumptions.
As of April 2, 2006, a majority of our debt was variable-rate debt and
therefore the interest rate risk presented with respect to our notes payable and
long-term debt, excluding capitalized lease and sale-leaseback obligations,
represents the potential impact an increase in interest rates of one percentage
point has on our results of operations related to our $629.7 million of
variable-rate notes payable and long-term debt outstanding as of April 2, 2006,
which had a weighted average remaining maturity of approximately six years, and
not our fixed rate debt as discussed below. However, as discussed above under
"Interest Rate Risk," we have four interest rate swap agreements, one with an
embedded written call option, on a portion of our variable-rate debt. The
interest rate risk of our variable-rate debt presented in the table above
excludes the $205.0 million for which we designated interest rate swap
agreements as cash flow hedges for the terms of the swap agreements. As interest
rates decrease, the fair market values of the interest rate swap agreements and
the written call option all decrease, but not necessarily by the same amount in
the case of the written call option and related interest rate swap agreement.
The interest rate risks presented with respect to the interest rate swap
agreements represent the potential impact the indicated change has on the net
fair value of the swap agreements and embedded written call option and on our
financial position and, with respect to the interest rate swap agreement with
the embedded written call option which was not designated as a cash flow hedge,
also our results of operations. We only have $17.1 million of fixed-rate debt as
of April 2, 2006 for which a potential impact of a decrease in interest rates of
one percentage point would have an immaterial impact on the fair value of such
debt, and is not reflected in the table above since a majority of our debt is
now variable-rate debt for which interest rate risk is calculated based on the
potential effect on our results of operations.
The foreign currency risk presented for our investment in Jurlique as of
April 2, 2006 excludes the portion of risk that is hedged by the foreign
currency put and call arrangement and by the portion of Jurlique's operations
which are denominated in United States dollars. For investments held since
January 1, 2006 in investment limited partnerships and similar investment
entities, all of which are accounted for at cost, and other non-current
investments included in "Other investments" in the table above, the sensitivity
analysis assumes that the investment mix for each such investment between equity
versus debt securities and securities denominated in United States dollars
versus foreign currencies was unchanged since that date since more current
information was not readily available. The analysis also assumed that the
decrease in the equity markets and the change in foreign currency were other
than temporary with respect to these investments. To the extent such entities
invest in convertible bonds which trade primarily on the conversion feature of
the securities rather than on the stated interest rate, this analysis assumed
equity price risk but no interest rate risk. The foreign currency risk presented
excludes those investments where the investment manager has fully hedged the
risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chairman and Chief Executive
Officer and our Executive Vice President and Chief Financial Officer, carried
out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of the end of the period covered by this Quarterly Report. Based on that
evaluation, our Chairman and Chief Executive Officer and our Executive Vice
President and Chief Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act was recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission.
RTM Restaurant Group
We acquired the RTM Restaurant Group ("RTM") on July 25, 2005. Prior to our
acquisition, RTM was privately held and had no previous public reporting
obligations with the Securities and Exchange Commission. We previously reported
in Item 9A to our Annual Report on Form 10-K for the year ended January 1, 2006,
that there were certain significant deficiencies in RTM's systems, procedures
and internal control over financial reporting. Although we are in the process of
remediating those deficiencies, many of those deficiencies continued to exist
during the period covered by this Quarterly Report. To ensure that our financial
statements for the period covered by this Quarterly Report were materially
correct, we performed supplemental procedures in addition to the normal
recurring control procedures and closing processes. Based on the additional
procedures to supplement RTM's existing internal controls and procedures, as
well as the additional reviews and procedures performed by us at the parent
company (Triarc) level, we have concluded that our financial statements as of
and for the three months ended April 2, 2006 fairly present, in all material
respects, our financial condition, results of operations and cash flows.
Our process of remediating these deficiencies has included the hiring of
additional staff and the planning and designing of enhanced controls and
procedures. We are also in the process of documenting RTM's controls and
procedures in order to meet the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 and related regulations with respect to RTM. In that
process, we expect to make additional control improvements to remediate
deficiencies and enable completion of the required year-end 2006 assessment of
our internal control over financial reporting. In addition to these initiatives,
we are continuing the planning for the conversion to new, more robust accounting
systems to be used by our restaurant business, including RTM, which we currently
anticipate will be implemented in the first half of 2007. Since these
initiatives are ongoing, we cannot be certain that additional deficiencies will
not be discovered or that the existing deficiencies or our implementation of new
controls and procedures will not result in a delay in the filing of any future
periodic reports. Until our assessment is complete and related remediation is
effected, we will continue to perform supplemental procedures necessary to
ensure that our financial statements fairly present, in all material respects,
our financial condition, results of operations and cash flows.
Change in Internal Control Over Financial Reporting
During the three months ended April 2, 2006, we substantially completed the
combination of our existing restaurant operations with those of RTM and the
relocation of the corporate office of our restaurant group from Ft. Lauderdale,
FL to new offices in Atlanta, GA. In connection with these actions, certain of
the personnel performing the accounting procedures and executing the internal
control over financial reporting have changed. Additionally, certain accounting
and control procedures relating to our existing restaurant operations were
integrated into those procedures being performed by RTM. To the extent
practicable, we maintained the consistency of our accounting and control
procedures. We performed supplemental procedures with respect to the accounting
for our existing restaurant operations to the extent our controls were
integrated into those procedures of RTM. We anticipate that the ongoing
remediation associated with the significant deficiencies noted above will have a
material effect on our internal control over financial reporting. There were no
other changes in our internal control over financial reporting made during our
most recent fiscal quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system,
including the potential for human error and the circumvention or overriding of
the controls and procedures. Additionally, judgments in decision-making can be
faulty and breakdowns can occur because of simple error or mistake. An effective
control system can provide only reasonable, not absolute, assurance that the
control objectives of the system are adequately met. Accordingly, our
management, including our Chairman and Chief Executive Officer and our Executive
Vice President and Chief Financial Officer, does not expect that our control
system can prevent or detect all error or fraud. Finally, projections of any
evaluation or assessment of effectiveness of a control system to future periods
are subject to the risks that, over time, controls may become inadequate because
of changes in an entity's operating environment or deterioration in the degree
of compliance with policies or procedures.
Part II. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Quarterly Report on Form 10-Q and oral statements made from time to
time by representatives of the Company may contain or incorporate 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," "plans," "expects," "anticipates," or the negation
thereof, or similar expressions, that constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). All statements that address operating performance, events or
developments that are expected or anticipated to occur in the future, including
statements relating to revenue growth, earnings per share growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Reform Act. These forward-looking
statements are based on our current expectations, speak only as of the date of
this Form 10-Q and are susceptible to a number of risks, uncertainties and other
factors. Our actual results, performance and achievements may differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. For those statements, we claim the protection
of the safe harbor for forward-looking statements contained in the Reform Act.
Many important factors could affect our future results and could cause those
results to differ materially from those expressed in the forward-looking
statements contained herein. Such factors include, but are not limited to, the
following:
o competition, including pricing pressures, the potential impact of
competitors' new units on sales by Arby's(R) restaurants;
o consumers' perceptions of the relative quality, variety and value of
the food products we offer;
o success of operating initiatives;
o development costs;
o advertising and promotional efforts;
o brand awareness;
o the existence or absence of positive or adverse publicity;
o new product and concept development by us and our competitors, and
market acceptance of such new product offerings and concepts;
o changes in consumer tastes and preferences, including changes
resulting from concerns over nutritional or safety aspects of beef,
poultry, french fries or other foods or the effects of food-borne
illnesses such as "mad cow disease" and avian influenza or "bird flu";
o changes in spending patterns and demographic trends;
o adverse economic conditions, including high unemployment rates, in
geographic regions that contain a high concentration of Arby's
restaurants;
o the business and financial viability of key franchisees;
o the timely payment of franchisee obligations due to us;
o availability, location and terms of sites for restaurant development
by us and our franchisees;
o the ability of our franchisees to open new restaurants in accordance
with their development commitments, including the ability of
franchisees to finance restaurant development;
o delays in opening new restaurants or completing remodels;
o the timing and impact of acquisitions and dispositions of restaurants;
o our ability to successfully integrate acquired restaurant operations;
o anticipated or unanticipated restaurant closures by us and our
franchisees;
o our ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Arby's restaurants;
o changes in business strategy or development plans, and the willingness
of our franchisees to participate in our strategy;
o business abilities and judgment of our and our franchisees' management
and other personnel;
o availability of qualified restaurant personnel to us and to our
franchisees;
o our ability, if necessary, to secure alternative distribution of
supplies of food, equipment and other products to Arby's restaurants
at competitive rates and in adequate amounts, and the potential
financial impact of any interruptions in such distribution;
o changes in commodity (including beef), labor, supplies and other
operating costs and availability and cost of insurance;
o adverse weather conditions;
o significant reductions in our client assets under management (which
would reduce our advisory fee revenue), due to such factors as weak
performance of our investment products (either on an absolute basis or
relative to our competitors or other investment strategies),
substantial illiquidity or price volatility in the fixed income
instruments that we trade, loss of key portfolio management or other
personnel, reduced investor demand for the types of investment
products we offer, and loss of investor confidence due to adverse
publicity;
o increased competition from other asset managers offering similar types
of products to those we offer;
o pricing pressure on the advisory fees that we can charge for our
investment advisory services;
o difficulty in increasing assets under management, or efficiently
managing existing assets, due to market-related constraints on trading
capacity or lack of potentially profitable trading opportunities;
o our removal as investment manager of one or more of the collateral
debt obligation vehicles (CDOs) or other accounts we manage, or the
reduction in our CDO management fees because of payment defaults by
issuers of the underlying collateral or the triggering of certain
structural protections built into CDOs;
o availability, terms (including changes in interest rates) and
deployment of capital;
o changes in legal or self-regulatory requirements, including
franchising laws, investment management regulations, accounting
standards, environmental laws, overtime rules, minimum wage rates and
taxation rates;
o the costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
o the impact of general economic conditions on consumer spending or
securities investing, including a slower consumer economy and the
effects of war or terrorist activities;
o the payment of the future installment of the special cash dividends
referred to in Item 5 below and elsewhere in this Form 10-Q (including
the amount or timing thereof) and any other future dividends, are
subject to applicable law and will be made at the discretion of our
Board based on such factors as our earnings, financial condition, cash
requirements and other factors, including whether such future
installment of the special cash dividends would result in a material
adjustment to the conversion price of our 5% Convertible Notes due
2023; and
o other risks and uncertainties affecting us and our subsidiaries
referred to in our Annual Report on Form 10-K for the fiscal year
ended January 1, 2006 (see especially "Item 1A. Risk Factors" and
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations") and in our other current and periodic
filings with the Securities and Exchange Commission, all of which are
difficult or impossible to predict accurately and many of which are
beyond our control.
All future written and oral forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. New risks
and uncertainties arise from time to time, and it is impossible for us to
predict these events or how they may affect us. We assume no obligation to
update any forward-looking statements after the date of this Quarterly Report on
Form 10-Q as a result of new information, future events or developments, except
as required by federal securities laws. 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 previously reported in our Annual Report on Form 10-K for the fiscal
year ended January 1, 2006 (the "Form 10-K"), in 1998 a number of class action
lawsuits were filed on behalf of our stockholders in the Court of Chancery of
the State of Delaware in and for New Castle County. Each of these actions named
Triarc, Messrs. Nelson Peltz, our Chairman and Chief Executive Officer and a
director of Triarc, and Peter W. May, our President and Chief Operating Officer
and a director of Triarc, and the other then directors of Triarc as defendants.
In 1999, certain plaintiffs in these actions filed a consolidated amended
complaint alleging that our tender offer statement filed with the Securities and
Exchange Commission in 1999, pursuant to which we repurchased 3,805,015 shares
of our Class A Common Stock, failed to disclose material information. The
amended complaint sought, among other relief, monetary damages in an unspecified
amount. In 2000, the plaintiffs agreed to stay this action pending determination
of a related stockholder action that was subsequently dismissed in October 2002
and is no longer being appealed. On October 24, 2005, plaintiffs filed a motion
asking the court to dismiss the action as moot, but to retain jurisdiction for
the limited purpose of considering a subsequent application by plaintiffs for
legal fees and expenses. The plaintiffs' motion to dismiss the action as moot
was granted on October 27, 2005. On December 13, 2005, plaintiffs filed a motion
seeking $250,000 in fees and $6,225 for reimbursement of expenses. On February
24, 2006, defendants filed papers in opposition to plaintiffs' motion. On March
29, 2006, the court entered an order awarding plaintiffs $75,000 in fees and
expenses. On April 28, 2006, defendants filed a notice of appeal. The Company is
endeavoring to reach a consensual resolution of the matter.
As previously reported in our Form 10-K, in November 2002, Access Now, Inc.
and Edward Resnick, later replaced by Christ Soter Tavantzis, on their own
behalf and on the behalf of all those similarly situated, brought an action in
the United States District Court for the Southern District of Florida against
RTM Operating Company (RTM), which became a subsidiary of ours following our
acquisition of the RTM Restaurant Group in July 2005. The complaint alleges that
the approximately 775 Arby's restaurants owned by RTM and its affiliates failed
to comply with Title III of the Americans with Disabilities Act (the "ADA"). The
plaintiffs are requesting class certification and injunctive relief requiring
RTM and such affiliates to comply with the ADA in all of its restaurants. The
complaint does not seek monetary damages, but does seek attorneys' fees. Without
admitting liability, RTM entered into an agreement with the plaintiffs on a
class-wide basis, which is subject to court approval. The proposed agreement
calls for the restaurants owned by RTM and certain of its affiliates to be
brought into ADA compliance over an eight year period at a rate of approximately
100 restaurants per year. The proposed agreement would also apply to restaurants
subsequently acquired by RTM and such affiliates. ARG estimates that it will
spend approximately $1.0 million per year of capital expenditures to bring the
restaurants into compliance under the proposed agreement and pay certain legal
fees. The proposed settlement was submitted to the court for approval on August
13, 2004. On April 7, 2005 the court held a fairness hearing on the matter.
Prior to the fairness hearing, the parties jointly amended the proposed
settlement agreement to clarify certain provisions and to add new provisions
regarding policies, training programs and invoicing requirements. By orders
dated January 30, 2006 and April 7, 2006, the court granted the parties leave to
make the amendments and set a fairness hearing regarding the amendments for June
14, 2006. The court has not yet ruled on the proposed settlement.
Item 1A. Risk Factors.
In addition to the information contained in this report, you should
carefully consider the risk factors disclosed in our Form 10-K, which could
materially affect our business, financial condition or future results. There
were no material changes from the risk factors previously disclosed in our Form
10-K during the fiscal quarter ended April 2, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of
shares of our common stock by us and our "affiliated purchasers" (as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) during
the first fiscal quarter of 2006:
Issuer Repurchases of Equity Securities
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
Total Number of Shares Approximate Dollar
Purchased As Part of Value of Shares That
Total Number of Average Price Paid Per Publicly Announced Plan May Yet Be Purchased
Period Shares Purchased Share (1) Under the Plan (1)
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
January 2, 2006 --- --- --- $50,000,000
through
January 31, 2006
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
February 1, 2006 --- --- ---
through $50,000,000
February 28, 2006
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
March 1, 2006
through 15,944 Class A(2) $15.59 - Class A --- $50,000,000
April 2, 2006 88,685 Class B(2) $14.75 - Class B
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
Total 15,944 Class A(2) $15.59 - Class A ---
88,685 Class B(2) $14.75 - Class B $50,000,000
- -------------------------- ---------------------- --------------------------- -------------------------- -------------------------
(1) On May 11, 2006, we announced that our existing stock repurchase program,
which was originally approved by our board of directors on January 18,
2001, had been extended until June 30, 2007 and that the amount available
under the program had been replenished to permit the purchase of up to $50
million of our Class A Common Stock and Class B Common Stock, Series 1.
During the third fiscal quarter of 2005, we repurchased one share of Class
A Common Stock and two shares of Class B Common Stock, Series 1. No
transactions were effected under our stock repurchase program during the
first fiscal quarter of 2006.
(2) Reflects an aggregate of 15,944 shares of Class A Common Stock and 88,685
shares of Class B Common Stock tendered as payment of tax withholding
obligations in respect of the vesting of shares of restricted stock issued
to employees under the Company's Amended and Restated 2002 Equity
Participation Plan. The price paid for such shares was the respective
closing prices of the Class A Common Stock and Class B Common Stock on
March 14, 2006, the vesting date for such shares of restricted stock.
Repurchase of 5% Convertible Notes due 2023; Right to Convert Notes During 2006
Second Fiscal Quarter
As previously reported in our Form 10-K, on February 10, 2006, we completed
the repurchases of an aggregate of $165,776,000 of the $175,000,000 principal
amount of 5% Convertible Notes due 2023 (the "Notes") that we issued in May
2003. In connection with such repurchases, we also paid accrued and unpaid
interest through the applicable date of repurchase and related premiums. In
exchange for such Notes, the accrued and unpaid interest and related premiums,
we issued an aggregate of 4,144,400 shares of our Class A Common Stock and
8,561,093 shares of our Class B Common Stock, and made aggregate cash payments
to the selling noteholders of $6,095,984 (the "Exchanges"). Upon the
satisfaction of the conditions set forth in the indenture governing the Notes
(the "Indenture"), the Notes that were repurchased would have been convertible
into 4,144,400 shares of our Class A Common Stock and 8,288,800 shares of our
Class B Common Stock (assuming the current conversion rate). The shares of our
Class A Common Stock and Class B Common Stock were issued in reliance upon the
exemption from registration provided under Section 3(a)(9) of the Securities Act
of 1933, as amended. We recorded a pre-tax charge of approximately $12.5 million
during the fiscal quarter ended April 2, 2006, including a non-cash write-off of
approximately $3.85 million of unamortized deferred financing costs, with
respect to the Exchanges.
Additionally, as previously reported in our Form 10-K, the trustee under
the Indenture has determined that holders of the Notes are entitled to convert
their Notes during the fiscal quarter that began on April 3, 2006 and ends on
July 2, 2006 because the combined closing sale price of one share of our Class A
Common Stock and two shares of our Class B Common Stock exceeded 120% of the
current conversion price of $40 for at least 20 trading days in the 30-trading
day period ending on March 31, 2006, the last trading day of the fiscal quarter
ending April 2, 2006. At the current conversion price, each $1,000 principal
amount of Notes is convertible into 25 shares of our Class A Common Stock,
subject to our right to elect to pay the holder cash in lieu of delivery of all
or any portion of these shares of Class A Common Stock and, upon conversion of
each $1,000 principal amount of Notes, the holder is also entitled to receive 50
shares of our Class B Common Stock.
Item 5. Other Information.
Potential Corporate Restructuring; Declaration of Special Dividend
As previously reported in our Form 10-K, we are continuing to explore the
feasibility, as well as the risks and opportunities, of a possible corporate
restructuring that may involve the spin-off to our stockholders or other
disposition of our ownership interest in Deerfield, our alternative asset
management business. In connection with the potential restructuring, on January
26, 2006, in addition to our regular quarterly dividends, we announced our
intention to declare and pay during 2006 special cash dividends aggregating
$0.45 per share on each outstanding share of our Class A Common Stock and Class
B Common Stock, Series 1, the first installment of which, in the amount of $0.15
per share, was paid on March 1, 2006 and the second installment of which, in the
amount of $0.15 per share, will be paid on July 14, 2006 to holders of record on
June 30, 2006. Although it is currently contemplated that the third and final
installment of such special cash dividends aggregating $0.15 per share on each
outstanding share of our Class A Common Stock and Class B Common Stock will be
paid in the fourth fiscal quarter of 2006, the declaration and payment of such
additional special cash dividends is subject to applicable law, will be made at
the discretion of our Board of Directors and will be based on such factors as
our earnings, financial condition, cash requirements and other factors,
including whether such future installments of the special dividends will result
in a material adjustment to the conversion price of the Notes. Accordingly,
there can be no assurance that such third and final installment of such
additional special cash dividends will be declared or paid, or of the amount or
timing of such dividends, if any. Options for our other remaining non-restaurant
assets are also under review and could include the allocation of our remaining
cash, cash equivalents, short-term and other investments between our two
businesses (Arby's and Deerfield) and/or additional special dividends or
distributions to shareholders. There can be no assurance that the corporate
restructuring will occur or the form, terms or timing of such restructuring if
it does occur. Other than as described herein, as of the date hereof, the Board
of Directors has not reached any definitive conclusions concerning the scope,
benefits or timing of the corporate restructuring.
Item 6. 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 June 9, 2004 (SEC file no. 1-2207).
3.2 By-laws of Triarc Companies, Inc., as currently in effect, incorporated
herein by reference to Exhibit 3.1 to Triarc's Current Report on Form 8-K
dated November 5, 2004 (SEC file no. 1-2207).
3.3 Certificate of Designation of Class B Common Stock, Series 1, dated as of
August 11, 2003, incorporated herein by reference to Exhibit 3.3 to
Triarc's Current Report on Form 8-K dated August 11, 2003 (SEC file no.
1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an
exhibit to this report on Form 10-Q. *
- -----------------------
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIARC COMPANIES, INC.
(Registrant)
Date: May 12, 2006 By: /s/ FRANCIS T. MCCARRON
-------------------------------------
Francis T. McCarron
Executive Vice President and
Chief Financial Officer
(On behalf of the Company)
Date: May 12, 2006 By: /s/ FRED H. SCHAEFER
---------------------------------
Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Exhibit Index
-------------
Exhibit
No. Description
- ------- -----------
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 June 9, 2004 (SEC file no. 1-2207).
3.2 By-laws of Triarc Companies, Inc., as currently in effect, incorporated
herein by reference to Exhibit 3.1 to Triarc's Current Report on Form 8-K
dated November 5, 2004 (SEC file no. 1-2207).
3.3 Certificate of Designation of Class B Common Stock, Series 1, dated as of
August 11, 2003, incorporated herein by reference to Exhibit 3.3 to
Triarc's Current Report on Form 8-K dated August 11, 2003 (SEC file no.
1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an
exhibit to this report on Form 10-Q. *
- -----------------------
* Filed herewith.
EXHIBIT 31.1
CERTIFICATIONS
I, Nelson Peltz, the Chairman and Chief Executive Officer of Triarc
Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2006
/s/ NELSON PELTZ
-------------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Francis T. McCarron, the Executive Vice President and Chief Financial
Officer of Triarc Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2006 /s/ FRANCIS T. MCCARRON
----------------------------------
Francis T. McCarron
Executive Vice President and
Chief Financial Officer
EXHIBIT 32.1
Certification Pursuant to
18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Triarc Companies, Inc., a Delaware corporation (the
"Company"), does hereby certify, to the best of such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended April 2, 2006 (the
"Form 10-Q") of the Company fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: May 12, 2006 /s/ NELSON PELTZ
-------------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
Dated: May 12, 2006 /s/ FRANCIS T. MCCARRON
--------------------------------------
Francis T. McCarron
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Triarc Companies, Inc.
and will be retained by Triarc Companies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Form 10-Q or as a separate disclosure document.