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 October 1, 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 27,913,475 shares of the registrant's Class A Common Stock and
61,002,156 shares of the registrant's Class B Common Stock outstanding as of
October 31, 2006.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 1, October 1,
2006 (A) 2006
------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 202,840 $ 222,433
Restricted cash equivalents....................................................... 344,060 11,193
Short-term investments pledged as collateral...................................... 556,492 9,722
Other short-term investments...................................................... 214,827 102,072
Investment settlements receivable................................................. 236,060 16,063
Accounts and notes receivable..................................................... 47,919 29,398
Inventories....................................................................... 11,101 8,192
Deferred income tax benefit....................................................... 21,706 17,945
Prepaid expenses and other current assets......................................... 20,281 22,626
----------- -----------
Total current assets........................................................... 1,655,286 439,644
Investments............................................................................ 85,086 70,006
Properties............................................................................. 443,857 472,053
Goodwill .............................................................................. 518,328 525,945
Other intangible assets................................................................ 75,696 73,389
Deferred costs and other assets........................................................ 31,236 28,447
----------- -----------
$ 2,809,489 $ 1,609,484
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.....................................................................$ 8,036 $ 5,148
Current portion of long-term debt................................................. 19,049 22,579
Accounts payable.................................................................. 64,450 50,115
Investment settlements payable.................................................... 124,199 --
Securities sold under agreements to repurchase.................................... 522,931 --
Other liability positions related to short-term investments....................... 457,165 6,308
Accrued expenses and other current liabilities.................................... 152,580 137,688
Current liabilities relating to discontinued operations........................... 10,449 10,403
----------- -----------
Total current liabilities...................................................... 1,358,859 232,241
Long-term debt......................................................................... 894,527 696,607
Deferred compensation payable to related parties....................................... 33,959 33,685
Deferred income........................................................................ 5,415 15,046
Deferred income taxes.................................................................. 9,423 2,987
Minority interests in consolidated subsidiaries........................................ 43,426 14,807
Other liabilities...................................................................... 68,310 82,413
Stockholders' equity:
Class A common stock.............................................................. 2,955 2,955
Class B common stock.............................................................. 5,910 6,067
Additional paid-in capital........................................................ 264,770 331,211
Retained earnings................................................................. 259,285 200,931
Common stock held in treasury..................................................... (130,179) (20,810)
Accumulated other comprehensive income............................................ 5,451 11,344
Unearned compensation............................................................. (12,103) --
Note receivable from non-executive officer........................................ (519) --
----------- -----------
Total stockholders' equity..................................................... 395,570 531,698
----------- -----------
$ 2,809,489 $ 1,609,484
=========== ===========
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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
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales.......................................................$206,139 $ 272,708 $ 312,318 $ 802,434
Royalties and franchise and related fees ....................... 21,020 21,403 71,546 61,025
Asset management and related fees .............................. 13,197 17,766 37,912 48,390
-------- --------- --------- ---------
240,356 311,877 421,776 911,849
-------- --------- --------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization.......... 148,162 197,889 228,389 584,838
Cost of services, excluding depreciation and amortization....... 4,610 7,313 13,373 18,743
Advertising and selling......................................... 15,150 19,882 24,160 59,865
General and administrative, excluding depreciation and
amortization.................................................. 50,113 55,871 119,301 174,801
Depreciation and amortization, excluding amortization of
deferred financing costs...................................... 10,043 16,299 21,110 44,431
Facilities relocation and corporate restructuring............... 6,414 2,165 6,414 3,743
Loss on settlement of unfavorable franchise rights.............. 17,024 -- 17,024 658
-------- --------- --------- ---------
251,516 299,419 429,771 887,079
-------- --------- --------- ---------
Operating profit (loss)................................... (11,160) 12,458 (7,995) 24,770
Interest expense..................................................... (22,081) (34,426) (44,818) (100,048)
Insurance expense related to long-term debt.......................... (531) -- (2,294) --
Loss on early extinguishment of debt................................. (35,790) (194) (35,790) (13,671)
Investment income, net............................................... 13,600 23,021 30,276 74,767
Gain on sale of unconsolidated businesses............................ 325 3 12,989 2,259
Other income, net.................................................... 1,025 318 2,138 5,754
-------- --------- --------- ---------
Income (loss) from continuing operations before income
taxes and minority interests........................... (54,612) 1,180 (45,494) (6,169)
Benefit from income taxes............................................ 14,657 344 11,647 3,578
Minority interests in income of consolidated subsidiaries............ (2,525) (976) (6,006) (6,674)
-------- --------- --------- ---------
Income (loss) from continuing operations.................. (42,480) 548 (39,853) (9,265)
Gain on disposal of discontinued operations.......................... -- -- 471 --
-------- --------- --------- ---------
Net income (loss).........................................$(42,480) $ 548 $ (39,382) $ (9,265)
======== ========= ========= =========
Basic and diluted income (loss) per share of Class A common stock
and Class B common stock:
Continuing operations.....................................$ (.58) $ .01 $ (.59) $ (.11)
Discontinued operations................................... -- -- .01 --
-------- --------- --------- ---------
Net income (loss).........................................$ (.58) $ .01 $ (.58) $ (.11)
======== ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-----------------------------
October 2, October 1,
2005 2006
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net loss.............................................................................$ (39,382) $ (9,265)
Adjustments to reconcile net loss to net cash provided by (used in) continuing
operating activities:
Operating investment adjustments, net (see below)................................. (489,796) 563,706
Depreciation and amortization of properties....................................... 15,226 37,367
Amortization of other intangible assets and certain other items................... 5,884 7,064
Amortization of deferred financing costs and original issue discount.............. 2,129 1,633
Write-off of unamortized deferred financing costs on early extinguishment
of debt......................................................................... 4,751 4,903
Share-based compensation provision................................................ 5,510 10,803
Receipt of deferred vendor incentive, net of amount recognized.................... -- 8,573
Minority interests in income of consolidated subsidiaries......................... 6,006 6,674
Straight-line rent accrual........................................................ 1,985 4,557
Charge for stock issued to induce effective conversion of convertible notes....... -- 3,719
Deferred income tax benefit....................................................... (13,072) (5,395)
Unfavorable lease liability recognized............................................ (1,048) (3,651)
Gain on sale of unconsolidated businesses......................................... (12,989) (2,259)
Equity in undistributed earnings of investees..................................... (1,629) (2,078)
Payment of withholding taxes related to stock compensation........................ -- (1,907)
Excess tax benefits from share-based payment arrangements......................... -- (1,424)
Deferred asset management fees recognized......................................... (2,621) (1,400)
Deferred compensation provision (reversal)........................................ 1,625 (274)
Gain on disposal of discontinued operations....................................... (471) --
Other, net........................................................................ 1,919 (2,521)
Changes in operating assets and liabilities:
Decrease in accounts and notes receivables.................................... 11,061 18,058
Decrease in inventories....................................................... 1,138 2,872
Increase in prepaid expenses and other current assets......................... (5,364) (1,002)
Increase (decrease) in accounts payable and accrued expenses and other
current liabilities......................................................... 1,219 (23,073)
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Net cash provided by (used in) continuing operating activities (A)....... (507,919) 615,680
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Cash flows from continuing investing activities:
Investment activities, net (see below)............................................... 456,021 (420,820)
Capital expenditures................................................................. (13,813) (53,276)
Cost of business acquisitions, less cash acquired and equity consideration........... (201,146) (1,824)
Proceeds from dispositions of assets................................................. 799 7,003
Collections of notes receivable...................................................... 5,000 841
Transfer from restricted cash equivalents collateralizing long-term debt............. 30,547 --
Other, net........................................................................... 1,573 (945)
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Net cash provided by (used in) continuing investing activities.......... 278,981 (469,021)
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Cash flows from continuing financing activities:
Proceeds from issuance of term loan in connection with the RTM Acquisition........... 620,000 --
Proceeds from issuance of other long term debt and notes payable..................... 5,629 15,946
Repayments of long-term debt in connection with the RTM Acquisition.................. (480,355) --
Repayments of other long-term debt and notes payable................................. (33,386) (66,646)
Dividends paid ..................................................................... (15,935) (49,089)
Net contributions from (distributions to) minority interests in consolidated
subsidiaries....................................................................... 20,863 (34,696)
Proceeds from exercises of stock options............................................. 2,941 6,041
Excess tax benefits from share-based payment arrangements............................ -- 1,424
Deferred financing costs............................................................. (13,262) --
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Net cash provided by (used in) continuing financing activities........... 106,495 (127,020)
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Net cash provided by (used in) continuing operations.................................... (122,443) 19,639
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Net cash provided by (used in) discontinued operations:
Operating activities................................................................. (310) (46)
Investing activities................................................................. 473 --
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163 (46)
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Net increase (decrease) in cash and cash equivalents.................................... (122,280) 19,593
Cash and cash equivalents at beginning of period........................................ 367,992 202,840
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Cash and cash equivalents at end of period..............................................$ 245,712 $ 222,433
============ ===========
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended
-------------------------------
October 2, October 1,
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..............................................$ (1,958,726) $(6,831,622)
Proceeds from sales of trading securities and net settlements of trading
derivatives..................................................................... 1,470,495 7,399,884
Net recognized losses from trading securities, derivatives and short positions
in securities................................................................... 2,288 3,034
Other net recognized gains, net of other than temporary losses.................... (4,257) (7,766)
Other............................................................................. 404 176
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$ (489,796) $ 563,706
============ ===========
Investing investment activities, net:
Proceeds from securities sold short...............................................$ 1,621,880 $ 8,624,893
Payments to cover short positions in securities................................... (1,197,999) (8,938,649)
Proceeds from sales of (payments under) repurchase agreements, net................ 481,320 (521,356)
Proceeds from sales and maturities of available-for-sale securities and other
investments..................................................................... 92,120 157,804
Cost of available-for-sale securities and other investments purchased............. (113,075) (76,379)
(Increase) decrease in restricted cash collateralizing securities obligations .... (428,225) 332,867
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$ 456,021 $ (420,820)
============ ===========
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(A) Net cash used in continuing operating activities for the nine months ended
October 2, 2005 reflects the significant net purchases of trading
securities and net settlements of trading derivatives, which were
principally funded by net proceeds from securities sold short and net
proceeds from sales of repurchase agreements. Net cash provided by
continuing operating activities for the nine months ended October 1, 2006
reflects the significant net sales of trading securities and net
settlements of trading derivatives, the proceeds from which were
principally used to cover short positions in securities and make payments
under repurchase agreements. All of these purchases and sales were
principally transacted through an investment fund, Deerfield Opportunities
Fund, LLC (the "Opportunities Fund"), which employed leverage in its
trading activities and which, through September 29, 2006, was consolidated
in these condensed consolidated financial statements. Triarc Companies,
Inc. (the "Company") effectively redeemed its investment in the
Opportunities Fund, which in turn had liquidated substantially all of its
investment positions, effective September 29, 2006. Accordingly, the
Company no longer consolidates the cash flows of the Opportunities Fund
subsequent to September 29, 2006. Under accounting principles generally
accepted in the United States of America, the net sales (purchases) of
trading securities and the net settlements of trading derivatives must be
reported in continuing operating activities, while the net proceeds from
(payments to cover) securities sold short and the net sales of (payments
under) repurchase agreements 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
October 1, 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 and results of operations as of and for the three-month and nine-month
periods and its cash flows for the nine-month periods, set forth in the
following paragraph. The results of operations for the three-month and
nine-month periods ended October 1, 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 owned a
73.7% capital interest prior to the effective redemption of its investment in
the Opportunities Fund effective September 29, 2006, and DM Fund, LLC (the "DM
Fund") which commenced on March 1, 2005 and in which the Company owns a 69.8%
capital interest, report on a calendar year ending on December 31. The Company's
first nine months of fiscal 2005 commenced on January 3, 2005 and ended on
October 2, 2005, with its third quarter commencing on July 4, 2005. The
Company's first nine months of fiscal 2006 commenced on January 2, 2006 and
ended on October 1, 2006, with its third quarter commencing on July 3, 2006.
However, Deerfield, the Opportunities Fund through the Company's effective
redemption date and the DM Fund are included on a calendar-period basis. The
periods from July 4, 2005 to October 2, 2005 and January 3, 2005 to October 2,
2005 are referred to herein as the three-month and nine-month periods ended
October 2, 2005, respectively. The periods from July 3, 2006 to October 1, 2006
and January 2, 2006 to October 1, 2006 are referred to herein as the three-month
and nine-month periods ended October 1, 2006, respectively. Each quarter
contained 13 weeks and each nine-month period contained 39 weeks. The effect of
including Deerfield, the Opportunities Fund through the Company's effective
redemption date and the DM Fund in the Financial Statements on a calendar-period
basis, instead of the Company's fiscal-period basis, was not material to the
Company's consolidated financial position or results of operations. All
references to quarters, nine-month periods, quarter-end(s) and nine-month period
end(s) herein relate to fiscal periods rather than calendar periods, except with
respect to Deerfield, the Opportunities Fund and the DM Fund.
The Company's consolidated financial statements include the accounts of
Triarc and its subsidiaries, including the Opportunities Fund through the
Company's effective redemption date on September 29, 2006 and the DM Fund. The
Company no longer consolidates the accounts of the Opportunities Fund subsequent
to September 29, 2006. The amount that had not been received from the
Opportunities Fund as of October 1, 2006, aggregating $15,702,000, is classified
within "Investment settlements receivable" in the accompanying condensed
consolidated balance sheet. The Company has notified the investment manager for
the DM Fund of its intent to withdraw its entire investment in the DM Fund by
December 29, 2006. Accordingly, assuming this withdrawal is consummated, the
Company will no longer consolidate the accounts of the DM Fund subsequent to
December 29, 2006.
Certain amounts included in the accompanying prior periods' condensed
consolidated financial statements have been reclassified to conform with the
current periods' presentation.
(2) Business Acquisitions
RTM Restaurant Group
On July 25, 2005, the Company completed the acquisition (the "RTM
Acquisition") of substantially all of the equity interests or the assets of the
entities comprising the RTM Restaurant Group ("RTM"), as disclosed in more
detail in Note 3 to the Company's consolidated financial statements contained in
the Form 10-K. The purchase price for RTM remains subject to a post-closing
purchase price adjustment. RTM was the largest franchisee of Arby's restaurants
with 775 Arby's in 22 states as of the date of acquisition.
The allocation of the purchase price of RTM, which remains subject to the
resolution of a purchase price adjustment, if any, to the assets acquired and
the liabilities assumed at the date of the RTM Acquisition was finalized during
the nine-month period ended October 1, 2006 and is summarized as follows (in
thousands):
Current assets............................................................................$ 41,732
Properties................................................................................ 318,152
Goodwill.................................................................................. 408,550
Other intangible assets................................................................... 44,443
Deferred costs and other assets........................................................... 5,500
Note receivable from non-executive officer of a subsidiary of the Company reported
as a reduction of stockholders' equity prior to its settlement.......................... 519
----------
Total assets acquired............................................................... 818,896
----------
Current liabilities, including current portion of long-term debt of $52,379............... 139,213
Long-term debt............................................................................ 249,777
Deferred income taxes..................................................................... 38,942
Other liabilities......................................................................... 39,314
----------
Total liabilities assumed........................................................... 467,246
----------
Net assets acquired...........................................................$ 351,650
==========
A reconciliation of the change in goodwill from the preliminary allocation
of the purchase price of RTM to the consolidated financial statements in the
Form 10-K to the allocation set forth in the preceding table is summarized as
follows (in thousands):
Goodwill related to the RTM Acquisition in estimated preliminary allocation of
purchase price at January 1, 2006.......................................................$ 397,814
Adjustments to estimated cost of RTM from a decrease in estimated expenses................ (44)
Changes to fair values of assets acquired and liabilities assumed, principally as a
result of revisions to a preliminary estimated appraisal:
Decrease in current assets......................................................... 316
Increase in properties............................................................. (3,325)
Increase in other intangible assets................................................ (823)
Increase in deferred costs and other assets........................................ (4)
Decrease in current liabilities.................................................... (1,273)
Increase in long-term debt......................................................... 5,307
Decrease in deferred income taxes.................................................. (931)
Increase in other liabilities...................................................... 11,513
----------
Goodwill related to the RTM Acquisition in final allocation of purchase
price at October 1, 2006.....................................................$ 408,550
==========
The results of operations and cash flows of RTM have been included in the
accompanying consolidated statements of operations and cash flows for the full
three-month and nine-month periods ended October 1, 2006, and are included in
the three-month and nine-month periods ended October 2, 2005 following the July
25, 2005 acquisition date.
The following supplemental pro forma consolidated summary operating data
(the "As Adjusted Data") of the Company for the three-month and nine-month
periods ended October 2, 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 as if it had been consummated as of
January 3, 2005 (in thousands except per share amounts):
Three Months Ended Nine Months Ended
October 2, 2005 October 2, 2005
--------------------------- ----------------------------
As Reported As Adjusted As Reported As Adjusted
----------- ----------- ----------- -----------
Revenues................................................$ 240,356 $ 285,163 $ 421,776 $ 839,718
Operating profit (loss)................................. (11,160) (8,396) (7,995) 14,674
Loss from continuing operations......................... (42,480) (40,767) (39,853) (35,099)
Net loss................................................ (42,480) (40,767) (39,382) (34,628)
Basic and diluted loss per share of Class A common
stock and Class B common stock:
Continuing operations............................... (.58) (.54) (.59) (.47)
Net loss............................................ (.58) (.54) (.58) (.46)
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 actually been consummated as of January 3, 2005 or of the
Company's future results of operations.
Other Restaurant Acquisitions
During the nine months ended October 1, 2006, the Company completed the
acquisitions of the operating assets, net of liabilities assumed, of ten
restaurants in two separate transactions. The total estimated consideration for
the acquisitions was $4,297,000 consisting of (1) $2,428,000 of cash (excluding
$7,000 of cash acquired and including $34,000 for post-closing adjustments), (2)
the assumption of $1,808,000 of debt and (3) $61,000 of related estimated
expenses. The total consideration for the acquisitions represents $658,000 for
the settlement loss from unfavorable franchise rights and $3,639,000 for the
aggregate purchase prices. 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 allocation of the
purchase price of the Indiana Restaurants, which remains preliminary and subject
to finalization, was adjusted during the nine-month period ended October 1, 2006
resulting in a decrease of $114,000 in goodwill. Due to the relative
insignificance of these acquisitions, disclosures of pro forma results of
operations and purchase price allocations have not been presented.
(3) 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 based on the Company's common stock to certain officers,
other key employees, non-employee directors and consultants and 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 RTM in July 2005 (the "Replacement Options"). The Company
has also granted certain other equity instruments to key employees as described
below.
The Company's outstanding nonvested stock options have maximum contractual
terms of ten years, principally vest ratably over three years and, except for
the Replacement Options, were granted at exercise prices equal to the market
price of the Company's common stock on the date of grant. 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 RTM 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 date. The Company has
no outstanding tandem stock appreciation rights or restricted share units. The
equity instruments (the "Equity Interests") granted to certain key employees
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 employees
and, depending on the employee, vest either (a) ratably in each of the
twelve-month periods ended August 20, 2007, 2008 and 2009 or upon a sale of
Deerfield or (b) 100% on August 20, 2007 or upon a sale of Deerfield 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 employee 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,
the method the Company previously used. The Company is using the modified
prospective application method under SFAS 123(R) and has elected not to use
retrospective application. Thus, 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, except as adjusted for estimated forfeitures,
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"
with an equal offsetting reduction of "Additional paid-in capital" as of January
2, 2006 and is now increasing "Additional paid-in capital" for share-based
compensation costs recognized during the period. Additionally, effective with
the adoption of SFAS 123(R), the Company recognizes share-based compensation
expense net of estimated forfeitures, determined based on historical experience.
Previously, forfeitures were recognized as incurred for purposes of the
presentation under the previous pro forma disclosure provisions of SFAS 123, as
subsequently set forth in this footnote. Employee stock compensation grants or
grants modified, repurchased or cancelled on or after January 2, 2006 are valued
in accordance with SFAS 123(R). Under SFAS 123(R), the Company has chosen (1)
the Black-Scholes-Merton option pricing model (the "Black-Scholes Model") for
purposes of determining the fair value of stock options granted commencing
January 2, 2006 and (2) to continue recognizing compensation costs ratably over
the requisite service period for each separately vesting portion of the award.
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 Nine Months Ended
----------------------- ----------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Share-based compensation expense recognized in "General
and administrative, excluding depreciation and
amortization" expenses........................................$ 2,833 $ 3,295 $ 5,510 $ 10,803
Income tax benefit.............................................. (969) (891) (1,821) (2,861)
Minority interests.............................................. (59) (61) (178) (186)
-------- -------- -------- --------
Share-based compensation expense, net of related income
taxes and minority interests................................$ 1,805 $ 2,343 $ 3,511 $ 7,756
======== ======== ======== ========
A summary of the effect of adopting SFAS 123(R) on selected reported items
for the three and nine-month periods ended October 1, 2006, the amounts those
items would have been under the intrinsic value method previously used by the
Company and the differences is as follows (in thousands except per share
amounts):
Three Months Ended October 1, 2006 Nine Months Ended October 1, 2006
--------------------------------------- --------------------------------------
Under Under
Intrinsic Intrinsic
As Reported Value Method Difference As Reported Value Method Difference
----------- ------------ ---------- ----------- ------------ ----------
Income (loss) from continuing
operations before income
taxes and minority interests..$ 1,180 $ 2,787 $ 1,607 $ (6,169) $ (3,659) $ 2,510
Net income (loss)...............$ 548 $ 1,550 $ 1,002 $ (9,265) $ (7,755) $ 1,510
Basic and diluted income (loss)
per share of Class A Common
Stock and Class B Common
Stock.........................$ .01 $ .02 $ .01 $ (.11) $ (.09) $ .02
Net cash provided by continuing
operating activities.......... $ 615,680 $ 617,104 $ 1,424
Net cash used in continuing
financing activities.......... $(127,020) $ (128,444) $ (1,424)
As of October 1, 2006, there was $10,855,000 of total unrecognized
compensation cost related to nonvested share-based compensation grants which is
expected to be amortized over a weighted-average period of 1.3 years.
A summary of the Company's outstanding stock options as of and for the
nine-month period ended October 1, 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
Exercised ................................... (92,668) $ 24.51 $ 2,184
----------- =========
Outstanding at October 1, 2006............... 2,456,035 $ 23.35 4.1 $ 57,665
=========== =========
Exercisable at October 1, 2006............... 2,456,035 $ 23.35 4.1 $ 57,665
=========== =========
Class A Options
---------------
Outstanding at January 2, 2006............... 1,299,943 $ 16.55
Granted ..................................... 32,000 $ 17.21
-----------
Outstanding at October 1, 2006............... 1,331,943 $ 16.56 3.2 $ 285
=========== =========
Exercisable at October 1, 2006............... 1,278,443 $ 16.56 3.0 $ 268
=========== =========
Class B Options
---------------
Outstanding at January 2, 2006............... 9,387,617 $ 13.96
Granted ..................................... 1,496,100 $ 16.56
Exercised ................................... (321,362) $ 11.85 $ 1,297
=========
Forfeited.................................... (184,534) $ 13.56
-----------
Outstanding at October 1, 2006............... 10,377,821 $ 14.41 7.1 $ 9,366
=========== =========
Exercisable at October 1, 2006............... 8,369,433 $ 14.28 6.7 $ 7,112
=========== =========
- --------------
(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 October 1, 2006 or, if exercised, the exercise dates, exceeds the
exercise prices of the respective options which, for outstanding options,
represents only those expected to vest.
The weighted-average grant date fair values of the Class A Options and
Class B Options granted during the nine-month period ended October 1, 2006, at
exercise prices equal to the market price of the stock on the grant dates, were
$4.78 and $4.90, respectively, calculated under the Black-Scholes Model with the
weighted-average assumptions set forth as follows:
Class A Class B
Options Options
------- -------
Risk-free interest rate................................................................. 5.04% 4.96%
Expected option life in years........................................................... 8.4 7.4
Expected volatility..................................................................... 20.7% 27.4%
Expected dividend yield................................................................. 2.08% 2.44%
The risk-free interest rate represents the U.S. Treasury zero-coupon bond
yield approximating the expected option life of stock options granted during the
period. The expected option life represents the period of time that the stock
options granted during the period are expected to be outstanding based on the
Company's historical exercise trends for similar grants. The expected volatility
is based on the historical market price volatility of the Company's Class A
Common Stock and Class B Common Stock for Class A Options and Class B Options,
respectively, granted during the period. The expected dividend yield represents
the Company's annualized average yield for regular quarterly dividends declared
prior to the respective stock option grant dates.
A summary of the Company's nonvested Restricted Shares as of and for the
nine-month period ended October 1, 2006 is as follows:
Class A Common Stock Class B Common Stock
------------------------- ------------------------
Grant Date Grant Date
Shares Fair Value Shares Fair Value
------ ---------- ------ ----------
Nonvested at January 2, 2006.................. 149,155 $ 15.59 729,920 $ 14.75
Vested ....................................... (49,718) $ 15.59 (243,305) $ 14.75
Forfeited..................................... -- (994) $ 14.75
---------- --------
Nonvested at October 1, 2006.................. 99,437 $ 15.59 485,621 $ 14.75
========== ========
The total fair value of Restricted Shares and Equity Interests which vested
during the nine-month period ended October 1, 2006 was $4,936,000 and
$3,633,000, respectively, as of the respective vesting dates.
The accompanying condensed consolidated statements of operations for the
three and nine-month periods ended October 2, 2005 were not restated since the
Company elected not to use retrospective application under SFAS 123(R). A
summary of the effect on net loss and net loss per share for the three and nine
months ended October 2, 2005 as if the Company had applied the fair value
recognition provisions of SFAS 123 to share-based compensation for all
outstanding and nonvested stock options (calculated using the Black-Scholes
Model), Restricted Shares and Equity Interests is as follows (in thousands
except per share data):
Three Months Nine Months
Ended Ended
October 2, October 2,
2005 2005
---- ----
Net loss, as reported....................................................................$ (42,480) $ (39,382)
Reversal of share-based compensation expense determined under
the intrinsic value method included in reported net loss,
net of related income taxes and minority interests..................................... 1,805 3,511
Recognition of share-based compensation expense determined under
the fair value method, net of related income taxes and minority interests.............. (4,025) (9,752)
-------- ---------
Net loss, as adjusted....................................................................$ (44,700) $ (45,623)
========= =========
Basic and diluted net loss per share of Class A Common Stock and Class B
Common Stock:
As reported.........................................................................$ (.58) $ (.58)
As adjusted......................................................................... (.61) (.67)
During the nine-month period ended October 2, 2005, the Company granted
43,000 Class A Options and 4,599,000 Class B Options under the Equity Plans at
exercise prices equal to the market price of the stock on the grant dates. In
addition, in connection with the RTM Acquisition, the Company granted 774,000
Class B Options at exercise prices ranging from $4.49 to $15.59 per share. The
weighted average grant date fair values of all of these Class A Options and
Class B Options were $3.19 and $4.10, respectively, calculated under the
Black-Scholes Model with the weighted average assumptions set forth as follows:
Class A Class B
Options Options
------- -------
Risk-free interest rate................................................................. 3.99% 3.87%
Expected option life in years........................................................... 7 7
Expected volatility..................................................................... 17.7% 28.1%
Expected dividend yield................................................................. 2.21% 2.62%
The Black-Scholes Model has limitations on its effectiveness including that
it was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable and that the model
requires the use of highly subjective assumptions including expected stock price
volatility. The Company's stock-option awards to employees have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimates.
(4) Comprehensive Income (Loss)
The following is a summary of the components of comprehensive income
(loss), net of income taxes and minority interests (in thousands):
Three Months Ended Nine Months Ended
--------------------------- ------------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Net income (loss) ........................................$ (42,480) $ 548 $ (39,382) $ (9,265)
Net change in unrealized gains and losses on available-
for-sale securities (see below)......................... 1,665 2,868 (210) 5,649
Net change in unrealized gains and losses on cash flow
hedges (see below)...................................... 1,248 (2,750) 1,275 223
Net change in currency translation adjustment............. 24 11 37 21
--------- -------- --------- ----------
Comprehensive income (loss)..........................$ (39,543) $ 677 $ (38,280) $ (3,372)
========= ======== ========= ==========
The following is a summary of the components of the net change in
unrealized gains and losses on available-for-sale securities included in
comprehensive income (loss) (in thousands):
Three Months Ended Nine Months Ended
--------------------------- ------------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Unrealized holding gains arising during the period........$ 4,490 $ 2,695 $ 3,897 $ 8,064
Reclassifications of prior period unrealized holding
gains into net income or loss........................... (596) (1,537) (2,650) (150)
Equity in change in unrealized holding gains (losses)
arising during the period............................... (1,334) 2,622 (1,589) 123
--------- -------- --------- ----------
2,560 3,780 (342) 8,037
Income tax (provision) benefit............................ (937) (1,607) 95 (3,177)
Minority interests in decrease in unrealized holding
gains of a consolidated subsidiary...................... 42 695 37 789
--------- -------- --------- ----------
$ 1,665 $ 2,868 $ (210) $ 5,649
========= ======== ========= ==========
The following is a summary of the components of the net change in
unrealized gains and losses on cash flow hedges included in comprehensive income
(loss) (in thousands):
Three Months Ended Nine Months Ended
--------------------------- ------------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Unrealized holding gains (losses) arising during the
period..................................................$ 1,114 $ (1,943) $ 1,114 $ 1,552
Reclassifications of prior period unrealized holding
gains into net income or loss........................... -- (557) -- (961)
Equity in change in unrealized holding gains (losses)
arising during the period............................... 886 (1,910) 928 (215)
--------- -------- --------- ----------
2,000 (4,410) 2,042 376
Income tax (provision) benefit............................ (752) 1,660 (767) (153)
--------- -------- --------- ----------
$ 1,248 $ (2,750) $ 1,275 $ 223
========= ======== ========= ==========
(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. The net loss for the three-month and
nine-month periods ended October 2, 2005 and the nine-month period ended October
1, 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. Net income
for the three-month period ended October 1, 2006 was allocated between the Class
A Common Stock and Class B Common Stock based on the actual dividend payment
ratio. The weighted average number of shares for the three-month and nine-month
periods ended October 1, 2005 includes the weighted average effect of the shares
that were held in two deferred compensation trusts, which were released in
December 2005 and which prior thereto were not reported as outstanding shares in
the Company's balance sheets.
Diluted loss per share for the three-month and nine-month periods ended
October 2, 2005 and the nine-month period ended October 1, 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 loss from continuing operations and,
therefore, the effect of all potentially dilutive securities on the loss from
continuing operations per share would have been antidilutive. Diluted income per
share for the three-month period ended October 1, 2006 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 of the Company's Class B Common Stock as of
October 1, 2006, both 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. The reported diluted and basic income per
share are the same for the three-month period ended October 1, 2006 since the
difference is less than one cent.
During the nine months ended October 1, 2006, an aggregate of $167,380,000
of the Convertible Notes were converted or effectively converted into 4,184,000
and 8,369,000 shares of the Company's Class A Common Stock and Class B Common
Stock, respectively. The weighted average effect of these shares is included in
the basic income (loss) per share calculations for the three-month and
nine-month periods ended October 1, 2006 from the dates of their issuance.
The only Company securities as of October 1, 2006 that could dilute basic
income per share for periods subsequent to October 1, 2006 are (1) outstanding
stock options which can be exercised into 3,788,000 and 15,290,000 shares of the
Company's Class A Common Stock and Class B Common Stock, respectively, (2)
99,000 and 486,000 contingently issuable Restricted Shares of Class A Common
Stock and Class B Common Stock, respectively, and (3) $7,620,000 of Convertible
Notes which are convertible into 191,000 and 381,000 shares of the Company's
Class A Common Stock and Class B Common Stock, respectively.
Income (loss) per share has been computed by allocating the net income or
loss as follows (in thousands):
Three Months Ended Nine Months Ended
--------------------------- ------------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Class A Common Stock:
Continuing operations.................................$ (13,798) $ 159 $ (13,887) $ (2,921)
Discontinued operations............................... -- -- 164 --
--------- --------- --------- ---------
Net income (loss).....................................$ (13,798) $ 159 $ (13,723) $ (2,921)
========= ========= ========= =========
Class B Common Stock:
Continuing operations.................................$ (28,682) $ 389 $ (25,966) $ (6,344)
Discontinued operations............................... -- -- 307 --
--------- --------- --------- ---------
Net income (loss).....................................$ (28,682) $ 389 $ (25,659) $ (6,344)
========= ========= ========= =========
The number of shares used to calculate basic and diluted income (loss) per
share were as follows (in thousands):
Three Months Ended Nine Months Ended
--------------------------- ------------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Class A Common Stock:
Weighted average shares
Outstanding........................................ 22,091 27,672 22,053 27,087
Held in deferred compensation trusts............... 1,695 -- 1,695 --
--------- --------- --------- --------
Basic shares............................................ 23,786 27,672 23,748 27,087
Dilutive effect of stock options................... -- 957 -- --
Contingently issuable Restricted Shares............ -- 87 -- --
--------- --------- --------- --------
Diluted shares.......................................... 23,786 28,716 23,748 27,087
========= ========= ========= ========
Class B Common Stock:
Weighted average shares
Outstanding........................................ 46,052 60,184 41,012 58,822
Held in deferred compensation trusts............... 3,390 -- 3,390 --
--------- --------- --------- --------
Basic shares............................................ 49,442 60,184 44,402 58,822
Dilutive effect of stock options................... -- 2,246 -- --
Contingently issuable Restricted Shares............ -- 427 -- --
--------- --------- --------- --------
Diluted shares.......................................... 49,442 62,857 44,402 58,822
========= ========= ========= ========
(6) Facilities Relocation and Corporate Restructuring
The facilities relocation charge for the three-month period ended October
2, 2005 incurred and recognized by the restaurant business segment of $6,414,000
principally related to the Company combining its existing restaurant operations
with those of RTM following the RTM Acquisition, including relocating the
corporate office of the restaurant group from Ft. Lauderdale, Florida to new
offices in Atlanta, Georgia. These charges consisted of severance and employee
retention incentives, employee relocation costs and office relocation expenses.
The Company incurred and recognized additional facilities relocation and
corporate restructuring charges during its fourth quarter ended January 1, 2006
as described in more detail in Note 17 to the consolidated financial statements
contained in the 10-K. In addition, during the nine-month period ended October
1, 2006, the Company's restaurant business segment recognized $578,000 of
additional net charges related to combining our existing restaurant operations
with those of RTM as described above. The Company's general corporate segment
recognized an additional $3,165,000 associated with the Company's decision not
to relocate Triarc's corporate offices from New York City to a leased office
facility in Rye Brook, New York. This charge principally resulted from a lease
termination fee the Company incurred to be released from the Rye Brook lease
during the 2006 third quarter.
The components of facilities relocation and corporate restructuring charges
and an analysis of activity in the facilities relocation and corporate
restructuring accruals during the nine-month period ended October 2, 2005, which
occurred entirely during the third quarter of 2005, and during the nine-month
period ended October 1, 2006 are as follows (in thousands):
Nine Months Ended October 2, 2005
-----------------------------------------------------
Balance Balance
January 3, October 2,
2005 Provisions Payments 2005
---- ---------- -------- ----
Restaurant Business Segment:
Cash obligations:
Severance and retention incentive
compensation.....................$ -- $ 2,379 $ (27) $ 2,352
Employee relocation costs........... -- 3,689 -- 3,689
Office relocation costs............. -- 346 (346) --
----------- --------- ---------- ----------
$ -- $ 6,414 $ (373) $ 6,041
=========== ========= ========== ==========
Nine Months Ended October 1, 2006
-------------------------------------------------------------------------
Total Expected
Balance Balance and
January 1, Provisions October 1, Incurred
2006 (Reductions) Payments 2006 to Date
---- ------------ -------- ---- -------
Restaurant Business Segment:
Cash obligations:
Severance and retention incentive
compensation......................$ 3,812 $ 668 (a) $ (3,602) $ 878 $ 5,202 (a)
Employee relocation costs........... 1,544 (136)(a) (837) 571 4,244 (a)
Office relocation costs............. 260 (33)(a) (124) 103 1,521 (a)
Lease termination costs............. 774 79 (a) (430) 423 853 (a)
---------- --------- ---------- ---------- -----------
6,390 578 (4,993) 1,975 11,820
---------- --------- ---------- ---------- -----------
Non-cash charges:
Compensation expense from
modified stock awards............. -- -- -- -- 612
Loss on fixed assets................ -- -- -- -- 107
---------- --------- ---------- ---------- -----------
-- -- -- -- 719
---------- --------- ---------- ---------- -----------
Total restaurant business
segment........................ 6,390 578 (4,993) 1,975 12,539
General Corporate:
Cash obligations:
Duplicative rent.................... 1,535 3,165 (a) (4,700) -- 4,712 (a)
---------- --------- ---------- ---------- -----------
$ 7,925 $ 3,743 $ (9,693) $ 1,975 $ 17,251
=========== ========= ========== ========== ===========
- ----------------
(a) Reflects change in estimate of total cost to be incurred.
(7) Loss on Early Extinguishment of Debt
The Company recorded a loss on early extinguishment of debt aggregating
$35,790,000 in the three-month and nine-month periods ended October 2, 2005
related to debt refinanced in connection with the RTM Acquisition. The Company
recorded losses on early extinguishment of debt aggregating $194,000 and
$13,671,000 in the three-month and nine-month periods ended October 1, 2006,
respectively, consisting of (1) $74,000 and $12,652,000, respectively, related
to conversions of the Company's Convertible Notes and (2) $120,000 and
$1,019,000, respectively, related to prepayments of term loans (the "Term
Loans") under the Company's senior secured term loan facility.
The loss on early extinguishment of debt in the three-month and nine-month
periods ended October 2, 2005 consisted of prepayment penalties of $27,439,000,
the write-off of $4,751,000 of previously unamortized deferred financing costs,
accelerated insurance payments of $3,504,000 related to extinguished debt and
$96,000 of fees and other expenses.
During the nine months ended October 1, 2006, an aggregate of $167,380,000
principal amount of the Company's Convertible Notes were converted or
effectively converted into an aggregate of 4,184,000 Class A Common Shares and
8,369,000 Class B Common Shares. In order to induce the effective conversions,
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 these conversions and effective conversions of the
Convertible Notes, the Company recorded a loss on early extinguishment of debt
of $12,652,000 in the nine-month period ended October 1, 2006 consisting of the
premiums aggregating $8,694,000, the write-off of $3,884,000 of related
previously unamortized deferred financing costs and $74,000 of legal fees
related to the conversions.
In June and September 2006, the Company prepaid $45,000,000 and $6,000,000
principal amount of the Term Loans, respectively. In connection with these
prepayments, the Company recorded losses on early extinguishment of debt of
$120,000 and $1,019,000 during the three-month and nine-month periods ended
October 1, 2006, respectively, representing the write-off of related previously
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.
During the three-month period ended July 3, 2005, the Company recorded an
additional gain on the disposal of the SEPSCO Discontinued Operations of
$471,000, net of $254,000 of income taxes, resulting from the gain on sale of a
former refrigeration property that had been held for sale and the reversal of a
related reserve for potential environmental liabilities associated with the
property that were assumed by the purchaser.
Current liabilities relating to the discontinued operations consisted of
the following (in thousands):
January 1, October 1,
2006 2006
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations......................................................$ 9,400 $ 9,395
Liabilities relating to the SEPSCO and Propane Discontinued Operations......... 1,049 1,008
--------- ---------
$ 10,449 $ 10,403
========= =========
The Company expects that the liquidation of these remaining current
liabilities associated with all of these discontinued operations as of October
1, 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 Nine Months Ended
------------------------- ------------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Service cost (consisting entirely of plan administrative
expenses)...............................................$ 23 $ 24 $ 70 $ 71
Interest cost............................................. 59 54 177 163
Expected return on the plans' assets...................... (70) (66) (210) (197)
Amortization of unrecognized net loss..................... 13 12 38 36
---------- --------- -------- ---------
Net periodic pension cost.........................$ 25 $ 24 $ 75 $ 73
========== ========= ======== =========
(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 $1,595,000 and a reversal of deferred
compensation expense of $(274,000) were recognized in the nine-month periods
ended October 2, 2005 and October 1, 2006, respectively, for increases
(decreases) 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, realized
gains on sales of investments in the Deferred Compensation Trusts and investment
losses for any unrealized losses deemed to be other than temporary, 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 losses from investments in the Deferred
Compensation Trusts of $183,000 and $1,943,000 in the nine-month periods ended
October 2, 2005 and October 1, 2006, respectively. The net investment loss
during the nine-month period ended October 2, 2005 consisted of investment
management fees of $270,000, less interest income of $87,000. The net investment
loss during the nine-month period ended October 1, 2006 consisted of an
impairment charge of $2,093,000 related to an investment fund within the
Deferred Compensation Trusts which experienced a significant decline in market
value which the Company deemed to be other than temporary and management fees of
$27,000, less interest income of $176,000 and a $1,000 adjustment to the
realized gain from the sale of a cost-method investment in the Deferred
Compensation Trusts. The other than temporary loss, interest income, investment
management fees and the adjustment to the realized gain 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
October 1, 2006, the obligation to the Executives related to the Deferred
Compensation Trusts was $33,685,000 reported as "Deferred compensation payable
to related parties" in the accompanying condensed consolidated balance sheet. As
of October 1, 2006, the assets in the Deferred Compensation Trusts consisted of
$24,066,000 included in "Investments," which does not reflect the net unrealized
increase in the fair value of the investments but does reflect the other than
temporary loss noted above and $1,353,000 included in "Cash and cash
equivalents" in the accompanying condensed consolidated balance sheet. The
cumulative disparity between (1) deferred compensation expense and net
recognized investment income, including other than temporary losses, 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, other than with respect to recognized losses
deemed to be other than temporary, resulting in the recognition of a reversal of
compensation expense without any offsetting losses recognized in investment
income.
As disclosed in more detail in the Form 10-K, the Company had provided
certain of its management officers and employees, including its executive
officers, the opportunity to co-invest with the Company in certain investments
and made related loans to management prior to 2003. During the three months
ended October 1, 2006, $444,000 principal amount of promissory notes related to
an investment in K12 Inc. by executive officers matured and were repaid to the
Company along with related accrued interest of $28,000.
As disclosed in the Form 10-K, on November 1, 2005, the Executives and the
Company's Vice Chairman (collectively, the "Principals") started a series of
equity investment funds that are separate and distinct from the Company and that
are being managed by the Principals and other senior officers of the Company
(the "Employees") through a management company (the "Management Company") formed
by the Principals. The Principals and the Employees continue to serve as
officers of, and receive their compensation from, the Company. The Company is
making available the services of the Principals and the Employees, as well as
certain support services, to the Management Company. The length of time that
these services will be provided has not yet been determined. The Company is
being reimbursed by the Management Company for the allocable cost of these
services. Such allocated costs for the three-month and nine-month periods ended
October 1, 2006 amounted to $1,059,000 and $2,827,000, respectively, and have
been recognized as reductions of "General and administrative, excluding
depreciation and amortization" expenses in the accompanying condensed
consolidated statements of operations. Amounts due from the Management Company
to the Company amounted to $775,000 and $1,080,000 as of January 1, 2006 and
October 1, 2006, respectively, and are included in "Accounts and notes
receivable" in the accompanying condensed consolidated balance sheets. A special
committee comprised of independent members of the Company's board of directors
has reviewed and considered these arrangements.
In March 2006, the Company sold nine of its restaurants to a former officer
of its restaurant segment for a cash sale price of $3,400,000, which resulted in
a pretax gain of $608,000 recognized as a reduction of "Depreciation and
amortization, excluding amortization of deferred financing costs," net of the
write-off of, among other assets and liabilities, allocated goodwill of
$2,091,000. The Company believes that such sale price represented the then fair
value of the nine restaurants.
The Company had a note receivable of $519,000 from a selling stockholder of
RTM who became a non-executive officer of a subsidiary of the Company as a
result of the RTM Acquisition. The principal amount of the note was reported as
the "Note receivable from non-executive officer" component of "Stockholders'
equity" in the Company's consolidated balance sheet as of January 1, 2006. The
note, along with $41,000 of accrued interest, was repaid by the officer in June
2006. The Company recorded $21,000 of interest income on this note during the
nine months ended October 1, 2006.
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 were 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 continues to expect to have additional
conversations with, the FDEP in order to attempt to resolve this matter. Based
on provisions made prior to 2005 of $1,667,000 for all of these costs 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 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. In March
2006, the court awarded the plaintiffs $75,000 in fees and expenses, but in
April 2006 the defendants appealed. In June 2006, the parties entered into an
agreement pursuant to which, among other things, the Company paid $76,000 for
the fees and expenses, including interest, and the defendants withdrew their
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 $1,600,000 as of October 1,
2006. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information, including legal defenses available to Triarc
and/or its subsidiaries, and given the aforementioned reserves, the Company does
not believe that the outcome of such legal and environmental matters will have a
material adverse effect on its condensed consolidated financial position or
results of operations.
(12) Business Segments
The Company manages and internally reports its operations as two business
segments: (1) the operation and franchising of restaurants ("Restaurants") and
(2) asset management ("Asset Management"). Restaurants include RTM effective
with the RTM Acquisition on July 25, 2005. The Company evaluates segment
performance and allocates resources based on each segment's earnings before
interest, taxes, depreciation and amortization ("EBITDA"). EBITDA has been
computed as operating profit plus depreciation and amortization, excluding
amortization of deferred financing costs ("Depreciation and Amortization").
Operating profit (loss) has been computed as revenues less operating expenses.
In computing EBITDA and operating profit (loss), interest expense and
non-operating income and expenses have not been considered. Identifiable assets
by segment are those assets used in the Company's operations of each segment.
General corporate assets consist primarily of cash and cash equivalents,
restricted cash equivalents, short-term investments, investment settlements
receivable, non-current investments and properties.
The following is a summary of the Company's segment information (in
thousands):
Three Months Ended Nine Months Ended
--------------------------- -------------------------
October 2, October 1, October 2, October 1,
2005 2006 2005 2006
---- ---- ---- ----
Revenues:
Restaurants.........................................$ 227,159 $ 294,111 $ 383,864 $ 863,459
Asset Management.................................... 13,197 17,766 37,912 48,390
----------- ----------- ----------- -----------
Consolidated revenues..........................$ 240,356 $ 311,877 $ 421,776 $ 911,849
=========== =========== =========== ===========
EBITDA:
Restaurants.........................................$ 12,919 $ 39,236 $ 52,414 $ 108,101
Asset Management.................................... 2,576 3,760 8,144 8,964
General corporate................................... (16,612) (14,239) (47,443) (47,864)
----------- ----------- ----------- -----------
Consolidated EBITDA............................ (1,117) 28,757 13,115 69,201
----------- ----------- ----------- -----------
Less Depreciation and Amortization:
Restaurants......................................... 7,686 13,508 13,175 36,572
Asset Management.................................... 1,089 1,698 3,706 4,629
General corporate................................... 1,268 1,093 4,229 3,230
----------- ----------- ----------- -----------
Consolidated Depreciation and Amortization..... 10,043 16,299 21,110 44,431
----------- ----------- ----------- -----------
Operating profit (loss):
Restaurants......................................... 5,233 25,728 39,239 71,529
Asset Management.................................... 1,487 2,062 4,438 4,335
General corporate................................... (17,880) (15,332) (51,672) (51,094)
----------- ----------- ----------- -----------
Consolidated operating profit (loss)........... (11,160) 12,458 (7,995) 24,770
Interest expense........................................ (22,081) (34,426) (44,818) (100,048)
Insurance expense related to long-term debt............. (531) -- (2,294) --
Loss on early extinguishment of debt.................... (35,790) (194) (35,790) (13,671)
Investment income, net.................................. 13,600 23,021 30,276 74,767
Gain on sale of unconsolidated businesses............... 325 3 12,989 2,259
Other income, net....................................... 1,025 318 2,138 5,754
----------- ----------- ----------- -----------
Consolidated income (loss) from continuing
operations before income taxes and
minority interests..........................$ (54,612) $ 1,180 $ (45,494) $ (6,169)
=========== =========== =========== ===========
January 1, October 1,
2006 2006
---- ----
Identifiable assets:
Restaurants........................................................................$ 1,044,199 $ 1,062,573
Asset Management................................................................... 149,247 166,455
General corporate.................................................................. 1,616,043 380,456
----------- -----------
Consolidated total assets.....................................................$ 2,809,489 $ 1,609,484
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 our accompanying
condensed consolidated financial statements included elsewhere herein 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, which we refer to as the Form 10-K. Item 7 of our Form 10-K describes
the application of our critical accounting policies. There have been no
significant changes as of October 1, 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."
Introduction and Executive Overview
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 and nine-month periods ended October 1,
2006 and are included in our consolidated results for the three-month and
nine-month periods ended October 2, 2005 to the extent those results of
operations and cash flows are subsequent to the July 25, 2005 acquisition date.
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 65% 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 nine months ended October 1, 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, which we refer to as the
REIT, and we may expand the types of investments that we offer and manage.
We derive investment income principally from the investment of our excess
cash. In that regard, Deerfield has managed a portion of our excess cash through
investments in (1) a multi-strategy hedge fund, Deerfield Opportunities Fund,
LLC, which we refer to as the Opportunities Fund, and (2) DM Fund LLC, which we
refer to as the DM Fund, which are or were managed by Deerfield. As of September
29, 2006, we effectively redeemed our investment in the Opportunities Fund. The
DM Fund is currently, and the Opportunities Fund was through September 29, 2006,
accounted for as consolidated subsidiaries of ours, with minority interests to
the extent of participation by investors other than us (see below under
"Consolidation of Opportunities Fund and DM Fund"). We also have an investment
in the REIT which is managed by Deerfield. When we refer to Deerfield, we mean
only Deerfield & Company, LLC and not the Opportunities Fund, the DM Fund or the
REIT. We have notified the investment manager for the DM Fund of our intent to
withdraw our entire investment in this fund by December 29, 2006. Accordingly,
assuming this redemption is consummated, we will no longer consolidate the
accounts of the DM Fund subsequent to December 29, 2006.
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 continue 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
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 repurchases of our common stock, investments and
special cash dividends to our shareholders.
However, we are continuing to explore a possible corporate restructuring
involving our asset management business and other non-restaurant net assets. See
"Liquidity and Capital Resources - Potential Corporate Restructuring" for a
detailed discussion of the potential corporate restructuring and certain
potential impacts thereof on our results of operations and our liquidity and
capital resources.
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 prices 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 recent increases in
the cost of borrowing alternatives in the lending markets typically
used to finance new unit development;
o Increased availability to consumers of new product choices, including
additional healthy products focused on freshness driven by a greater
consumer awareness of nutritional issues as well as new products that
tend to include larger portion sizes and more ingredients, and 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, increase our utility costs and may increase the
cost of commodities we purchase following the expiration and
replacement in 2007 of our current distribution contracts which
contain limits on distribution cost increases;
o Extended hours of operation by many quick service restaurants
including both breakfast and late night hours;
o Legislative activity on the federal, state and local levels, which
could result in higher wages and related fringe benefits, including
health care and other insurance costs, higher packaging costs and
higher food costs;
o Competitive pressures from an increasing number of franchise
opportunities seeking to attract qualified franchisees; and
o Economically weak conditions in the Michigan and Ohio regions where a
disproportionate number of our Company-owned restaurants are located.
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, although such growth has
moderated somewhat recently reflecting the recent performance of
certain funds and the competitive market;
o Increased demand for securities, partly due to an increase in the
number of hedge funds, resulting in higher purchase prices of certain
securities and, during periods of asset liquidation by those hedge
funds, potentially lower sales prices, which can negatively impact our
returns;
o Short-term interest rates have increased relative to long-term
interest rates, 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 assets under management; 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
the DM Fund, which commenced on March 1, 2005, report on a calendar year ending
on December 31. Our first nine-month period of fiscal 2005 commenced on January
3, 2005 and ended on October 2, 2005, with our third quarter commencing on July
4, 2005. Our first nine-month period of fiscal 2006 commenced on January 2, 2006
and ended on October 1, 2006, with our third quarter commencing on July 3, 2006.
However, Deerfield, the Opportunities Fund through our effective redemption on
September 29, 2006 and the DM Fund are included on a calendar-period basis. When
we refer to the "three months ended October 2, 2005," or the "2005 third
quarter," and the "nine months ended October 2, 2005," or the "first nine months
of 2005," we mean the periods from July 4, 2005 to October 2, 2005 and January
3, 2005 to October 2, 2005, respectively. When we refer to the "three months
ended October 1, 2006," or the "2006 third quarter," and the "nine months ended
October 1, 2006" or the "first nine months of 2006" we mean the periods from
July 3, 2006 to October 1, 2006 and January 2, 2006 to October 1, 2006,
respectively. Each quarter contained 13 weeks and each nine-month period
contained 39 weeks. All references to years, first nine months and quarters
relate to fiscal periods rather than calendar periods, except for Deerfield, the
Opportunities Fund and the DM Fund.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount of the change (1) between the 2005 third quarter and the
2006 third quarter and (2) between the first nine months of 2005 and the first
nine months of 2006.
Three Months Ended Nine Months Ended
--------------------- ---------------------
October 2, October 1, October 2, October 1,
2005 2006 Change 2005 2006 Change
---- ---- ------ ---- ---- ------
(In Millions)
Revenues:
Net sales.........................................$ 206.1 $ 272.7 $ 66.6 $ 312.3 $ 802.4 $ 490.1
Royalties and franchise and related fees.......... 21.0 21.4 0.4 71.6 61.0 (10.6)
Asset management and related fees................. 13.2 17.8 4.6 37.9 48.4 10.5
--------- --------- -------- --------- --------- --------
240.3 311.9 71.6 421.8 911.8 490.0
--------- --------- -------- --------- --------- --------
Costs and expenses:
Cost of sales, excluding depreciation and
amortization.................................... 148.2 197.9 49.7 228.4 584.8 356.4
Cost of services, excluding depreciation and
amortization.................................... 4.6 7.3 2.7 13.4 18.7 5.3
Advertising and selling........................... 15.1 19.9 4.8 24.2 59.9 35.7
General and administrative, excluding depreciation
and amortization................................ 50.1 55.9 5.8 119.3 174.8 55.5
Depreciation and amortization, excluding
amortization of deferred financing costs ....... 10.0 16.3 6.3 21.1 44.4 23.3
Facilities relocation and corporate
restructuring................................... 6.4 2.1 (4.3) 6.4 3.7 (2.7)
Loss on settlement of unfavorable franchise
rights.......................................... 17.0 -- (17.0) 17.0 0.7 (16.3)
--------- --------- -------- --------- --------- --------
251.4 299.4 48.0 429.8 887.0 457.2
--------- --------- -------- --------- --------- --------
Operating profit (loss)....................... (11.1) 12.5 23.6 (8.0) 24.8 32.8
Interest expense .................................... (22.1) (34.4) (12.3) (44.8) (100.0) (55.2)
Insurance expense related to long-term debt.......... (0.5) -- 0.5 (2.3) -- 2.3
Loss on early extinguishment of debt................. (35.8) (0.2) 35.6 (35.8) (13.7) 22.1
Investment income, net............................... 13.6 23.0 9.4 30.3 74.8 44.5
Gain on sale of unconsolidated businesses............ 0.3 -- (0.3) 13.0 2.3 (10.7)
Other income, net.................................... 1.0 0.3 (0.7) 2.1 5.7 3.6
--------- --------- -------- --------- --------- --------
Income (loss) from continuing operations
before income taxes and minority interests.. (54.6) 1.2 55.8 (45.5) (6.1) 39.4
Benefit from income taxes............................ 14.6 0.3 (14.3) 11.6 3.5 (8.1)
Minority interests in income of consolidated
subsidiaries...................................... (2.5) (1.0) 1.5 (6.0) (6.7) (0.7)
--------- --------- -------- --------- --------- --------
Income (loss) from continuing operations...... (42.5) 0.5 43.0 (39.9) (9.3) 30.6
Gain on disposal of discontinued operations.......... -- -- -- 0.5 -- (0.5)
--------- --------- -------- --------- --------- --------
Net income (loss).............................$ (42.5) $ 0.5 $ 43.0 $ (39.4) $ (9.3) $ 30.1
========= ========= ======== ========= ========= ========
Three Months Ended October 1, 2006 Compared with Three Months Ended
October 2, 2005
Net Sales
Our net sales, which were generated entirely from the Company-owned
restaurants, increased $66.6 million to $272.7 million for the three months
ended October 1, 2006 from $206.1 million for the three months ended October 2,
2005, primarily due to the effect of including RTM in our results for the full
2006 third quarter but only for the portion of the 2005 third quarter following
the July 25, 2005 acquisition date. In addition, net sales were favorably
affected by 29 net Company-owned restaurants added since October 2, 2005.
In the 2006 third quarter, same-store sales of our Company-owned
restaurants increased 2%. 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. Same-store sales of our Company-owned restaurants were
positively impacted by (1) our recent marketing initiatives, including value
oriented menu offerings, new menu boards and new promotions, (2) the continued
sales of Arby's Chicken Naturals(TM), a line of menu offerings made with 100
percent all natural chicken, launched in March 2006 and (3) more effective and
targeted local marketing campaigns. Same-store sales growth of our Company-owned
restaurants was less than the 6% same-store sales growth of our franchised
restaurants principally due to (1) the introduction throughout 2006 of local
marketing initiatives, including more effective local television advertising and
increased couponing, by our franchisees similar to those initiatives which we
were already using for Company-owned restaurants in the comparable period of
2005 and (2) the disproportionate number of Company-owned restaurants in the
economically-weaker Michigan and Ohio regions which continue to underperform the
system.
We currently expect positive same-store sales growth for the remainder of
2006 of both Company-owned and franchised restaurants, despite the weak economy
in Michigan and Ohio, driven by the anticipated performance of various
initiatives such as (1) value oriented promotions primarily on some of our roast
beef sandwiches and limited time menu offerings with discounted prices on
certain premium and limited time menu items, (2) planned additions of other new
limited time menu items and (3) the continued sales of Arby's Chicken
Naturals(TM). We presently plan to open 18 new Company-owned restaurants during
the remainder of 2006. We continually review the performance of any
underperforming Company-owned restaurants and evaluate whether to close those
restaurants, particularly in connection with the decision to renew or extend
their leases. Specifically, we have 14 restaurant leases that are or were
scheduled for renewal or expiration during the fourth quarter of 2006, of which
three have not already been renewed or extended. We currently anticipate the
renewal of one of those leases and the closure of the other two restaurants.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $0.4 million to $21.4 million for the
three months ended October 1, 2006 from $21.0 million for the three months ended
October 2, 2005. Aside from the effect on our royalties of the RTM Acquisition,
royalties and franchise and related fees increased $2.3 million in the 2006
third quarter, reflecting (1) a $1.1 million improvement in royalties due to a
6% increase in same-store sales of the franchised restaurants in the 2006 third
quarter compared with negative same-store sales performance in the 2005 third
quarter, (2) a $0.9 million net increase in royalties from the 95 restaurants
opened since October 2, 2005, with generally higher than average sales volumes,
and the 17 restaurants sold to franchisees since October 2, 2005 replacing the
royalties from the 45 generally underperforming restaurants closed since October
2, 2005 and the elimination of royalties from 25 restaurants we acquired from
franchisees since October 2, 2005 and (3) a $0.3 million increase in franchise
and related fees. The increase in same-store sales of the franchised restaurants
were positively impacted by the factors affecting same-store sales of our
Company-owned restaurants and the additional factors affecting the franschised
restaurants discussed above under "Net Sales." We recognized $1.9 million of
royalties and franchise and related fees from RTM in the 2005 third quarter for
the period prior to the RTM Acquisition which did not recur in the 2006 third
quarter since royalties and related franchise fees from RTM are eliminated in
consolidation subsequent to the RTM Acquisition.
We expect that our royalties and franchise and related fees will increase
during the fourth quarter of 2006 as compared with the same period in 2005 due
to anticipated positive same-store sales growth of franchised restaurants for
the fourth quarter of 2006 from the expected performance of the various
initiatives described above under "Net Sales."
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 $4.6 million, or 35%,
to $17.8 million for the three months ended October 1, 2006 from $13.2 million
for the three months ended October 2, 2005. This increase reflects (1) $2.3
million in fees from new CDOs and Funds, (2) a $1.3 million increase in
incentive fees from the REIT due to improved performance and (3) a $1.0 million
increase reflecting higher assets under management and improved performance of
previously existing CDOs and Funds other than the REIT.
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 $49.7
million to $197.9 million for the three months ended October 1, 2006, resulting
in a gross margin of 27%, from $148.2 million for the three months ended October
2, 2005, resulting in a gross margin of 28%. We define gross margin as the
difference between net sales and cost of sales divided by net sales. The
increase in cost of sales is primarily attributable to the full period effect in
the 2006 third quarter of the restaurants acquired in the RTM Acquisition and
the effect of the 29 net restaurants added since October 2, 2005. The 1%
decrease in our gross margin principally reflects the effect of increased price
discounting associated with our value oriented menu offerings and increases in
utility and payroll costs. These negative factors were partially offset by the
positive effect of our continuing implementation of the more effective
operational procedures of the RTM restaurants at the restaurants we owned prior
to the RTM Acquisition, increased beverage rebates resulting from an agreement
for Pepsi beverage products effective January 1, 2006 as well as decreases in
the cost of roast beef.
We currently anticipate our gross margin for the fourth quarter of 2006 to
be relatively consistent with the third quarter of 2006 due to a combination of
the positive and negative factors discussed above.
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
$2.7 million, or 59%, to $7.3 million for the three months ended October 1, 2006
from $4.6 million for the three months ended October 2, 2005 principally due to
the hiring of additional personnel to support our current and anticipated growth
in assets under management and increased incentive compensation levels.
Our royalties and franchise and related fees have no associated cost of
services.
Advertising and Selling
Our advertising and selling expenses increased $4.8 million principally due
to advertising expenses attributable to the full period effect in the 2006 third
quarter of the restaurants acquired in the RTM Acquisition. However, advertising
and selling expenses as a percentage of net sales were unchanged at 7.3% for
each of the quarters.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization increased $5.8 million, reflecting a $9.5 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 and incentive compensation, 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 employee share-based compensation
resulting from the adoption of Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment," which we refer to as SFAS 123(R),
which we adopted effective January 2, 2006 (see discussion in following
paragraph). These increases were partially offset by a $1.0 million charitable
contribution in the 2005 third quarter in connection with the RTM Acquisition to
the Arby's Foundation, Inc., which did not recur in the 2006 third quarter.
Aside from the increase attributable to our restaurant segment, general and
administrative expenses decreased $3.7 million primarily due to (1) the $2.3
million effect of a change in deferred compensation expense from expense of $0.9
million in the 2005 third quarter to a $1.4 million reversal of expense in the
2006 third quarter, (2) a $1.1 million allocation of our expenses to a
management company formed by our Chairman and Chief Executive Officer and
President and Chief Operating Officer, whom we refer to as the Executives, and
our Vice Chairman, for the allocable cost of services provided by us to the
management company in the 2006 third quarter (3) $1.1 million of rent expense
recognized in the 2005 third quarter related to a new corporate office facility
for which we had entered into a lease and had access but did not occupy in the
2005 third quarter and (4) a $0.3 million decrease in employee share-based
compensation resulting from the adoption of SFAS 123(R). These decreases were
partially offset by a $1.5 million increase in salaries and incentive
compensation costs. The deferred compensation expense (reversal) represents the
increase (decrease) in the fair value of investments in two deferred
compensation trusts which we refer to as the Deferred Compensation Trusts, for
the benefit of the Executives, as explained in more detail below under "Loss
from Continuing Operations Before Income Taxes and Minority Interests" in the
comparison of the nine-month periods. The change from the 2005 third quarter
reflected the effect of a $2.1 million impairment charge related to a
significant decline in value of one of the investments in the Deferred
Compensation Trusts recognized in the 2006 third quarter with a corresponding
equal reduction of "Investment income, net."
As indicated above, effective January 2, 2006 we adopted 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, the method we previously used. We are using the modified
prospective application method under SFAS 123(R) and have elected not to use
retrospective application. Thus, 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, except as adjusted for estimated forfeitures,
is included in our results of operations commencing January 2, 2006, and prior
periods are not restated. Employee stock compensation grants or grants modified,
repurchased or cancelled on or after January 2, 2006 are valued in accordance
with SFAS 123(R). Had we used the fair value alternative under SFAS 123 during
the 2005 third quarter, our pretax compensation expense using the
Black-Scholes-Merton option pricing model would have been $3.5 million higher,
or $2.2 million after taxes and minority interests, determined from the pro
forma disclosure in Note 3 to our accompanying condensed consolidated financial
statements. The adoption of SFAS 123(R) increased the amount of compensation
expense we recognized in our 2006 third quarter from what we would have
recognized under the intrinsic value method by $1.6 million due to the differing
accounting for stock-based compensation under the two methods. As of October 1,
2006, there was $10.9 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 1.3 years. The adoption of SFAS 123(R) may also
materially affect our share-based compensation expense in future periods as a
result of any share-based compensation grants subsequent to October 1, 2006.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $6.3 million principally due to (1) the full period
effect in the 2006 third quarter of the RTM Acquisition and (2) $2.2 million of
asset impairment charges in the 2006 third quarter principally related to two
underperforming restaurants.
Facilities Relocation and Corporate Restructuring
Our facilities relocation and corporate restructuring charges decreased
$4.3 million. The charges of $6.4 million in the 2005 third quarter relate to
combining our existing restaurant operations with those of RTM following the RTM
Acquisition, including relocating the corporate office of the restaurant group
to Atlanta, Georgia. The charges consisted of severance and employee retention
incentives, employee relocation costs and office relocation costs. The charge of
$2.1 million in the 2006 third quarter was recognized as a general corporate
expense and related to our decision not to move our corporate offices to a
leased office facility in Rye Brook, New York. This charge principally resulted
from a lease termination fee we incurred to be released from the Rye Brook lease
during the 2006 third quarter.
Loss on Settlement of Unfavorable Franchise Rights
During the three months ended October 2, 2005, we recognized a loss on
settlement of unfavorable franchise rights of $17.0 million in connection with
the RTM Acquisition. This charge, which did not recur in the 2006 third quarter,
was recognized in accordance with accounting principles generally accepted in
the United States of America that require any preexisting business relationship
between the parties to a business combination be evaluated and accounted for
separately. Under this accounting guidance, the franchise agreements acquired in
the RTM Acquisition with royalty rates below the current 4% royalty rate that we
receive on new franchise agreements were required to be valued and recognized as
an expense and excluded from the purchase price paid for RTM. The amount of the
settlement loss represents the estimated amount of royalties by which the
royalty rate is unfavorable over the remaining life of the franchise agreements.
Interest Expense
Interest expense increased $12.3 million reflecting (1) a $13.2 million
increase in interest expense on debt securities sold with an obligation to
purchase or under agreements to repurchase in connection with the significant
increase in the use of leverage in the Opportunities Fund prior to our effective
redemption of the Opportunities Fund as of September 29, 2006 (see below) and
(2) a $0.8 million net increase in interest expense reflecting the higher
average debt of our restaurant segment following the July 25, 2005 borrowing of
term loans, which we refer to as the Term Loans, a portion of which were used to
refinance higher interest rate debt of our restaurant segment in connection with
the RTM Acquisition, which we refer as the Refinancing. These increases were
partially offset by a $2.3 million decrease in interest expense related to our
5% convertible notes due 2023, which we refer to as the Convertible Notes, due
to the conversion or effective conversion of an aggregate $167.4 million
principal amount of the Convertible Notes into shares of our class A and class B
common stock almost entirely in February 2006, as discussed in more detail below
under "Liquidity and Capital Resources - Convertible Notes."
As of September 29, 2006, we effectively redeemed our investment in the
Opportunities Fund, which we refer to as the Redemption, and no longer
consolidate the Opportunities Fund subsequent to that date. As a result,
interest expense on debt securities sold with an obligation to purchase or under
agreements to repurchase, which relates entirely to this fund, and related net
investment income, will not recur after September 29, 2006, substantially
reducing interest expense. Interest expense and net investment income,
associated with the Opportunities Fund were $19.3 million and $20.3 million,
respectively, for the three months ended October 1, 2006.
Insurance Expense Related to Long-Term Debt
Insurance expense related to long-term debt of $0.5 million in the 2005
third quarter did not recur in the 2006 third quarter due to its settlement upon
the repayment of the related debt as part of the Refinancing.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt of $35.8 million in the three
months ended October 2, 2005 resulted from the Refinancing and consisted of
$27.4 million of prepayment penalties, $4.8 million of write-offs of previously
unamortized deferred financing costs, $3.5 million of accelerated insurance
payments related to extinguished debt and $0.1 million of fees and other
expenses. The loss on early extinguishment of debt of $0.2 million in the three
months ended October 1, 2006, consisted of (1) $0.1 million of legal fees
related to conversions of our Convertible Notes as discussed in more detail
below under "Liquidity and Capital Resources - Convertible Notes," and (2) a
$0.1 million write-off of previously unamortized deferred financing costs in
connection with a September 2006 prepayment of $6.0 million of Term Loans.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Three Months Ended
--------------------------
October 2, October 1,
2005 2006 Change
---- ---- ------
(In Millions)
Interest income..............................................$ 11.5 $ 22.4 $ 10.9
Other than temporary unrealized losses....................... (0.2) (2.8) (2.6)
Recognized net gains......................................... 2.0 3.3 1.3
Distributions, including dividends........................... 0.5 0.3 (0.2)
Other........................................................ (0.2) (0.2) --
------- ------ ------
$ 13.6 $ 23.0 $ 9.4
======= ====== ======
Interest income increased $10.9 million principally due to higher average
outstanding balances of our interest-bearing investments due to the use of
leverage in the Opportunities Fund. Average rates on our investments increased
from 3.9% in the 2005 third quarter to 5.6% in the 2006 third quarter. 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 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 other than temporary
unrealized losses increased $2.6 million reflecting the recognition in the 2006
third quarter of a $2.1 million impairment charge related to the significant
decline in the market value of one of the investments in the Deferred
Compensation Trusts and a $0.5 million increase in other impairment charges
principally reflecting the declines in market value of two available-for-sale
securities. The $2.1 million impairment charge related to the Deferred
Compensation Trusts had a corresponding equal reduction of "General and
administrative, excluding depreciation and amortization." 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. 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, including derivatives, and our
securities sold short with an obligation to purchase. The $1.3 million increase
in our recognized net gains was principally due to an increase in realized net
gains on our available-for-sale securities during the 2006 third quarter. 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.
As a result of the Redemption effective September 29, 2006, both net
investment income, and interest expense after September 29, 2006 will be lower
as discussed above under "Interest Expense." Investment income, net and interest
expense associated with the Opportunities Fund were $20.3 million and $19.3
million, respectively, for the three months ended October 1, 2006.
As of October 1, 2006, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $19.2 and $(2.2) million, respectively, included in accumulated
other comprehensive income. We evaluated the unrealized losses to determine
whether these losses were other than temporary and concluded that they were not.
Should either (1) we decide to sell any of these investments with unrealized
losses or (2) any of the unrealized losses continue such that we believe they
have become other than temporary, we would recognize the losses on the related
investments at that time.
Other Income, Net
Other income, net decreased $0.7 million reflecting a charge of $1.5
million in the 2006 third quarter for costs recognized related to a strategic
business alternative that was not pursued, partially offset by the full period
effects in the 2006 third quarter of (1) $0.5 million of increased rental income
on restaurants leased to franchisees and (2) $0.2 million of increased interest
income on notes receivable acquired in the RTM Acquisition.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests improved $55.8 million to income of $1.2 million for the
three months ended October 1, 2006 from a loss of $54.6 million for the three
months ended October 2, 2005 attributed to a decrease in the loss on early
extinguishment of debt of $35.6 million and the loss on settlement of
unfavorable franchise rights of $17.0 million recognized in the 2005 third
quarter, both in connection with the RTM Acquisition, as well as the effect of
the other variances discussed in the captions above.
Benefit From Income Taxes
The benefit from income taxes for the three months ended October 2, 2005
represented an effective rate of 27%. This effective benefit rate was lower than
the Federal statutory rate of 35% due principally to (1) the $15.4 million of
the loss on settlement of unfavorable franchise rights discussed above that was
not tax deductible, (2) the effect of non-deductible expenses and (3) 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 effects were partially offset by
the effect of minority interests in income of consolidated subsidiaries which
were not taxable to us but which are not deducted from the pretax loss used to
calculate the effective tax rate. We had a benefit from income taxes for the
three months ended October 1, 2006 despite pretax income due to the catch-up
effect of a year-to-date increase in the estimated full-year 2006 effective tax
rate from 44% to 58% since we recorded an income tax benefit for both the nine
months ended October 1, 2006 and six months ended July 2, 2006 due to reporting
a loss from continuing operations before income taxes and minority interests in
both of these periods. The effective tax rate increased due to reducing our
estimated full-year 2006 pretax income as of October 1, 2006 compared with the
estimate as of July 2, 2006 and the effect of non-deductible expenses on our
full-year effective tax rate.
Minority Interests in Income of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries decreased
$1.5 million, reflecting a decrease of $1.1 million due to the participation of
investors other than us in lower income of the Opportunities Fund and the DM
Fund and a $0.5 million decrease in the minority interests related to Deerfield.
The decrease in the minority interests related to Deerfield reflected $1.0
million of costs related to a strategic business alternative that was not
pursued, partially offset by the effect of increased income of Deerfield
applicable to the minority interests. The costs related to the strategic
business alternative were incurred on behalf of and allocated to the minority
shareholders of Deerfield and, accordingly, are reflected as a reduction of
minority interests in income of consolidated subsidiaries.
Net Income (Loss)
Our net income improved $43.0 million to income of $0.5 million in the 2006
third quarter from a loss of $42.5 million in the 2005 third quarter attributed
to the after-tax effects of $21.7 million from the decrease in the loss in early
extinguishment of debt and $16.4 million from the loss on settlement of
unfavorable franchise rights, both in connection with the RTM Acquisition, as
well as the after tax effects of the other variances discussed in the captions
above.
Nine Months Ended October 1, 2006 Compared with Nine Months Ended
October 2, 2005
Net Sales
Our net sales, which were generated entirely from the Company-owned
restaurants, increased $490.1 million to $802.4 million for the nine months
ended October 1, 2006 from $312.3 million for the nine months ended October 2,
2005, primarily due to the effect of including RTM in our results for the full
2006 nine-month period but only for the portion of the 2005 period following the
July 25, 2005 acquisition date. In addition, net sales were favorably affected
by 29 net Company-owned restaurants added since October 2, 2005.
In the first nine months of 2006 same-store sales of our Company-owned
restaurants increased one percent. 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. Same-store sales of our Company-owned restaurants
were positively impacted by (1) our recent marketing initiatives, including new
menu boards, value oriented menu offerings and new promotions, (2) the launch of
Arby's Chicken Naturals(TM) in March 2006 and (3) more effective and targeted
local marketing campaigns. 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 sales beginning in the second half of 2005,
although the effect moderated in the 2006 third quarter. Same-store sales growth
of our Company-owned restaurants was less than the 5% same-store sales growth of
franchised restaurants principally due to (1) the introduction throughout 2006
of local marketing initiatives, including more effective local television
advertising and increased couponing, by our franchisees similar to those
initiatives which we were already using for Company-owned restaurants in the
comparable period of 2005 and (2) the disproportionate number of Company-owned
restaurants in the economically-weaker Michigan and Ohio regions which continue
to underperform the system.
As discussed in the comparison of the three-month periods, we currently
expect positive same-store sales growth for the remainder of 2006 of both
Company-owned and franchised restaurants.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, decreased $10.6 million to $61.0 million for
the nine months ended October 1, 2006 from $71.6 million for the nine months
ended October 2, 2005, reflecting $16.3 million of royalties and franchise and
related fees from RTM recognized in the first nine months of 2005 for the period
prior to the RTM Acquisition whereas royalties and franchise and related fees
from RTM are eliminated in consolidation in the first nine months of 2006. Aside
from the effect of the RTM Acquisition, royalties and franchise and related fees
increased $5.7 million in the first nine months of 2006 reflecting (1) a $2.9
million improvement in royalties due to a 5% increase in same-store sales of the
franchised restaurants in the 2006 nine-month period compared with the same
period in 2005, (2) a $2.1 million net increase in royalties from the 95
restaurants opened since October 2, 2005, with generally higher than average
sales volumes, and the 17 restaurants sold to franchisees replacing the
royalties from the 45 generally underperforming restaurants closed since October
2, 2005 and the elimination of royalties from 25 restaurants we acquired from
franchisees since October 2, 2005 and (3) a $0.7 million increase in franchise
and related fees. The increase in same-store sales of the franchised restaurants
reflects the factors affecting same-store sales of our Company-owned restaurants
as well as the additional factors affecting the franchised retaurants discussed
above under "Net Sales."
As discussed in the comparison of the three-month periods, we expect that
our royalties and franchise and related fees will increase during the fourth
quarter of 2006 as compared with the same period in 2005.
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 $10.5 million, or 28%,
to $48.4 million for the 2006 first nine months from $37.9 million for the 2005
first nine months. This increase reflects (1) a $4.8 million increase in
management and incentive fees from the REIT principally reflecting the full
period effect in 2006 of a $363.5 million increase in assets under management
for the REIT resulting from an initial public stock offering in June 2005, (2)
$4.0 million in fees from new CDOs and Funds and (3) a $2.1 million increase
reflecting higher assets under management and improved performance of previously
existing CDOs and Funds other than the REIT. Assets under management for the
REIT were $763.8 million as of October 1, 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 $356.4
million to $584.8 million for the nine months ended October 1, 2006 from $228.4
million for the nine months ended October 2, 2005, resulting in a gross margin
of 27% for each of those nine-month periods. The increase in cost of sales is
primarily attributable to the full period effect in the 2006 nine-month period
of the restaurants acquired in the RTM Acquisition and the effect of the 29 net
restaurants added since October 2, 2005. The gross margin for these restaurants
was significantly higher than that of the restaurants we owned prior to the RTM
Acquisition principally due to RTM's more effective operational procedures as
well as higher average unit sales volumes which result in more favorable cost
leverage. Our overall gross margin was positively affected by (1) higher gross
margins at the restaurants acquired in the RTM Acquisition for the full period
in 2006, (2) our continuing implementation of the more effective RTM operational
procedures at the restaurants we owned prior to the RTM Acquisition, (3)
increased beverage rebates resulting from the agreement for Pepsi beverage
products effective January 1, 2006 and (4) decreases in the cost of roast beef.
These positive effects were offset by (1) the effect of increased price
discounting principally in the 2006 third quarter associated with our value
oriented menu offerings and (2) increases in utility and payroll costs.
As discussed in the comparison of the three-month periods, we currently
anticipate our gross margin for the fourth quarter of 2006 to be relatively
consistent with that of the third quarter of 2006 due to a combination of the
positive and negative factors discussed above.
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
$5.3 million, or 40%, to $18.7 million for the 2006 first nine months from $13.4
million for the 2005 first nine months principally due to the hiring of
additional personnel to support our current and anticipated growth in assets
under management and increased incentive compensation levels.
Our royalties and franchise and related fees have no associated cost of
services.
Advertising and Selling
Our advertising and selling expenses increased $35.7 million principally
due to advertising expenses attributable to the full period effect in the first
nine months of 2006 of the restaurants acquired in the RTM Acquisition. However,
advertising and selling expenses as a percentage of net sales decreased slightly
from 7.7% to 7.5%.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization increased $55.5 million, reflecting a $53.8 million increase in
general and administrative expenses of our restaurant segment principally
relating to RTM. Factors affecting this increase are discussed in more detail in
the comparison of the three-month periods. Aside from the increase attributable
to our restaurant segment, general and administrative expenses increased $1.7
million primarily due to (1) a $4.8 million increase in salaries and incentive
compensation costs and (2) a $2.4 million increase in employee share-based
compensation resulting from the adoption of SFAS 123(R). These increases were
partially offset by (1) a $2.8 million allocation of our expenses to a
management company formed by the Executives and our Vice Chairman, for the
allocable cost of services provided by us to the management company during the
2006 first nine months, (2) the $1.9 million effect of a change in deferred
compensation expense from expense of $1.6 million in the 2005 first nine months
to a $0.3 million reversal of expense in the 2006 first nine months, reflecting
the effect of a $2.1 million impairment charge related to a significant decline
in value of one of the investments in the Deferred Compensation Trusts
recognized in the 2006 first nine months and (3) $1.1 million of rent expense
recognized in the third quarter of 2005 related to a new corporate office
facility for which we had entered into a lease and had access but did not yet
occupy in the 2005 third quarter. The deferred compensation expense (reversal)
represents the increase (decrease) in the fair value of investments in two
Deferred Compensation Trusts, as explained in more detail below under "Loss from
Continuing Operations Before Income Taxes and Minority Interests." The $2.1
million reduction from the impairment charge related to the investment in the
Deferred Compensation Trusts had a corresponding equal reduction of "Investment
income, net."
Effective January 2, 2006, we adopted SFAS 123(R) which revised SFAS 123,
as discussed in the comparison of the three-month periods. Had we used the fair
value alternative under SFAS 123 during the 2005 first nine months, our pretax
compensation expense using the Black-Scholes-Merton option pricing model would
have been $9.9 million higher, or $6.2 million after taxes and minority
interests, determined from the pro forma disclosure in Note 3 to our
accompanying condensed consolidated financial statements. The adoption of SFAS
123(R) increased the amount of compensation expense we recognized in our 2006
first nine months from what we would have recognized under the intrinsic value
method by $2.5 million due to the differing accounting for stock-based
compensation under the two methods. As of October 1, 2006, there was $10.9
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 1.3 years. The adoption of SFAS 123(R) may also materially affect our
share-based compensation expense in future periods as a result of any
share-based compensation grants subsequent to October 1, 2006.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $23.3 million, principally due to (1) the full period
effect in the first nine months of 2006 of the RTM Acquisition and (2) $2.2
million of asset impairment charges recorded in the 2006 third quarter
principally related to two underperforming restaurants.
Facilities Relocation and Corporate Restructuring
Our facilities relocation and corporate restructuring charges decreased
$2.7 million. The charges of $6.4 million in the 2005 first nine months of our
restaurant segment are described above in the comparison of the three-month
periods. The charges of $3.7 million in the 2006 nine months consisted of $3.1
million recognized as a general corporate expense and related to our decision
not to move our corporate offices to a leased facility in Rye Brook, New York
and $0.6 million of additional net charges recognized by our restaurant segment
relating to combining our existing restaurant operations with those of RTM as
described above in the comparison of the three-month periods.
Loss on Settlement of Unfavorable Franchise Rights
During the nine months ended October 2, 2005 and October 1, 2006, we
recognized a loss on settlement of unfavorable franchise rights of $17.0 million
and $0.7 million, respectively, in connection with the RTM Acquisition in July
2005 and the acquisition of nine restaurants in April 2006. These losses were
recognized in accordance with accounting principles generally accepted in the
United States of America as discussed in more detail in the comparison of the
three-month periods.
Interest Expense
Interest expense increased $55.2 million reflecting (1) a $43.7 million
increase in interest expense on debt securities sold with an obligation to
purchase or under agreements to repurchase in connection with the significant
increase in the use of leverage in the Opportunities Fund prior to the
Redemption as of September 29, 2006 (see below), (2) an $11.0 million net
increase in interest expense reflecting the higher average debt of our
restaurant segment following the July 25, 2005 borrowing of Term Loans, a
portion of which were used to refinance higher interest rate debt in connection
with the Refinancing as discussed in more detail in the comparison of the
three-month periods, and (3) $5.8 million of interest expense, including $0.2
million in the three months ended October 1, 2006, principally relating to the
full period effect in the first nine months of 2006 of sales-leaseback and
capitalized lease obligations of RTM which were acquired but which were not
refinanced. These increases were partially offset by a $6.0 million decrease in
interest expense due to the conversion or effective conversion of our
Convertible Notes discussed above in the comparison of the three-month periods.
As discussed in more detail in the comparison of the three-month periods,
our future interest expense and related net investment income will be reduced
after September 29, 2006 as a result of the Redemption. Interest expense and
investment income, net associated with the Opportunities Fund were $54.8 million
and $62.2 million, respectively, for the 2006 first nine months.
On June 30, 2006 and September 29, 2006, we made prepayments from excess
cash of $45.0 million and $6.0 million principal amount of Term Loans,
respectively, which we refer to as the Term Loans Prepayments, which effective
as of the respective repayment dates have or will reduce(d) our interest expense
for the Term Loans.
Insurance Expense Related to Long-Term Debt
Insurance expense related to long-term debt of $2.3 million in the 2005
first nine months did not recur in the 2006 first nine months due to its
settlement upon the repayment of the related debt as part of the Refinancing.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt of $35.8 million in the nine
months ended October 2, 2005 resulted from the Refinancing and is discussed in
more detail in the comparison of the three-month periods. The loss on early
extinguishment of debt of $13.7 million in the nine months ended October 1,
2006, consisted of (1) $12.7 million which resulted from the conversion or
effective conversion of an aggregate $167.4 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, the
write-off of $3.9 million of related previously unamortized deferred financing
costs and $0.1 million of legal fees related to the conversions and (2) a $1.0
million write-off of previously unamortized deferred financing costs in
connection with the Term Loans Prepayments.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Nine Months Ended
--------------------------
October 2, October 1,
2005 2006 Change
---- ---- ------
(In Millions)
Interest income..............................................$ 27.3 $ 69.7 $ 42.4
Recognized net gains......................................... 2.6 7.7 5.1
Other than temporary unrealized losses....................... (0.5) (2.9) (2.4)
Distributions, including dividends........................... 1.5 1.0 (0.5)
Other........................................................ (0.6) (0.7) (0.1)
------- ------ -------
$ 30.3 $ 74.8 $ 44.5
======= ====== =======
Interest income increased $42.4 million principally due to higher average
outstanding balances of our interest-bearing investments due to the use of
leverage in the Opportunities Fund. Average rates on our investments increased
from 3.7% in the 2005 first nine months to 4.6% in the 2006 first nine months.
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 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, as
discussed in more detail in the comparison of the three-month periods, increased
$5.1 million principally due to an increase in realized gains on sales of
available-for-sale securities and the gain on sale of a cost method investment.
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. Our other than temporary
unrealized losses increased $2.4 million principally reflecting the recognition
of a $2.1 million impairment charge related to the significant decline in the
market value of one of the investments in the Deferred Compensation Trusts. The
$2.1 million impairment charge related to the Deferred Compensation Trusts had a
corresponding equal reduction of "General and administrative, excluding
depreciation and amortization." Any other than temporary unrealized losses are
dependant 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.
As discussed in more detail in the comparison of the three-month periods,
our future net investment income, and interest expense will be reduced after
September 29, 2006 as a result of the Redemption. Investment income, net and
interest expense associated with the Opportunities Fund were $62.2 million and
$54.8 million, respectively, for the 2006 first nine months.
As of October 1, 2006, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $19.2 and $(2.2) million, respectively, included in accumulated
other comprehensive income. We evaluated the unrealized losses to determine
whether these losses were other than temporary and concluded that they were not.
Should either (1) we decide to sell any of these investments with unrealized
losses or (2) any of the unrealized losses continue such that we believe they
have become other than temporary, we would recognize the losses on the related
investments at that time.
Gain on Sale of Unconsolidated Businesses
The gain on sale of unconsolidated businesses decreased $10.7 million to
$2.3 million for the 2006 first nine months from $13.0 million for the 2005
first nine months. These gains principally relate to our investment in Encore
Capital Group, an equity investee of ours which we refer to as Encore and, to a
much lesser extent, the REIT, principally due to cash sales of a portion of our
investment in Encore.
Other Income, Net
Other income, net increased $3.6 million, principally due to (1) $2.2
million of the full period effect in the first nine months of 2006 of rental
income on restaurants leased to franchisees, (2) $1.7 million of gains
recognized in the 2006 second quarter due to a sale of a portion of our
investment in Jurlique International Pty Ltd., an Australian Company, (3) $1.5
million of costs recognized in the 2005 first nine months 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 nine months and (4) $0.6
million of the full period effect in the first nine months of 2006 of increased
interest income on notes receivable acquired in the RTM Acquisition. These
increases were partially offset by (1) $1.5 million of costs recognized in the
2006 first nine months related to a strategic business alternative that was not
pursued, (2) a $0.3 million decrease from the foreign currency transaction and
derivatives related to Jurlique from gains of $0.2 million in the 2005 first
nine months to losses of $0.1 million in the 2006 first nine months and (3) a
$0.3 million recovery in 2005 upon collection of a fully reserved non-trade note
receivable of Sybra which predated our December 2002 acquisition of Sybra and
which did not recur in the 2006 first nine months.
Loss From Continuing Operations Before Income Taxes and Minority Interests
Our loss from continuing operations before income taxes and minority
interests decreased $39.4 million to $6.1 million for the nine months ended
October 1, 2006 from $45.5 million for the nine months ended October 2, 2005
attributed to a $22.1 million decrease in the loss on early extinguishment of
debt and a $16.3 million decrease in the loss on settlement of unfavorable
franchise rights, both in connection with the RTM Acquisition, as well as the
effect of the other variances discussed in the captions above.
As discussed above, we recognized deferred compensation expense of $1.6
million in the 2005 first nine months and a reversal of $0.3 million in the 2006
first nine months, within general and administrative expenses, for increases and
decreases in the fair value of investments in the Deferred Compensation Trusts.
The reversal of compensation expense in the 2006 first nine months reflects the
effect of a $2.1 million impairment charge related to the significant decline in
the value of one of the 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, realized gains on sales of investments in
the Deferred Compensation Trusts and investment losses for any unrealized losses
deemed to be other than temporary, 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. Accordingly, we recognized net investment losses
from investments in the Deferred Compensation Trusts of $0.2 million in the 2005
first nine months and a net investment loss of $1.9 million in the 2006 first
nine months principally consisting of an other than temporary loss related to an
investment fund within the Deferred Compensation Trusts which experienced a
significant decline in market value, interest income and investment management
fee expense. The cumulative disparity between deferred compensation expense and
net recognized investment income, including other than temporary losses, 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, other than with
respect to recognized losses deemed to be other than temporary, resulting in the
recognition of a reversal of compensation expense without any offsetting losses
recognized in investment income.
Benefit From Income Taxes
The benefit from income taxes for the nine months ended October 2, 2005 and
October 1, 2006 represented effective tax rates of 26% and 58%, respectively.
The effective benefit rate in the 2005 first nine months was lower than the
United States Federal statutory rate of 35% due to the same effects as for the
three months ended October 2, 2005 discussed above in the comparison of the
three-month periods. The effective benefit rate in the 2006 first nine months
reflects an annual effective rate which was based on forecasted pretax income
for the 2006 full year despite the loss from continuing operations before income
taxes and minority interests for the nine months ended October 1, 2006. The
effects of (1) non-deductible 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
basis, have impacted the rate higher than the Federal statutory rate of 35% and
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 rates have impacted the rate lower.
The effective rate is higher in 2006 due to significantly higher forecasted
non-deductible expenses for the 2006 full year.
Minority Interests in Income of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries increased
$0.7 million, principally reflecting an increase of $1.1 million due to the
increased participation of investors other than us in increased income of the
Opportunities Fund. The increased participation of investors other than us
principally affected the first half of 2006 as compared with the first half of
2005. This increase was partially offset by a $0.3 million decrease in the
minority interests related to Deerfield. The decrease in the minority interests
related to Deerfield reflected $1.0 million of costs related to a strategic
business alternative that was not pursued, largely offset by the effect of
increased income of Deerfield applicable to the minority interests. The costs
related to the strategic business alternative were incurred on behalf of and
allocated to the minority shareholders of Deerfield and, accordingly, are
reflected as a reduction of minority interests in income of consolidated
subsidiaries.
Net Loss
Our net loss decreased $30.1 million to $9.3 million in the 2006 first nine
months from $39.4 million in the 2005 first nine months attributed to the
decreases in the after tax effects of $13.5 million from the loss on early
extinguishment of debt and $15.7 million from the loss on settlement of
unfavorable franchise rights, both in connection with the RTM Acquisition, 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 provided
cash and cash equivalents, which we refer to in this discussion as cash, of
$615.7 million during the nine months ended October 1, 2006 principally
reflecting operating investment adjustments of $563.7 million.
The net operating investment adjustments principally reflect proceeds from
net sales of trading securities and net settlements of trading derivatives,
which were principally used to cover securities sold short and make net payments
under repurchase agreements. Under accounting principles generally accepted in
the United States of America, the net sales 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 amounts to cover securities sold short and net payments under 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 $3.1 million
principally reflects a $23.1 million decrease in accounts payable and accrued
expenses and other current liabilities partially offset by an $18.1 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 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 provided by continuing operating activities were principally comprised of
non-cash adjustments for depreciation and amortization of $46.1 million, a
stock-based compensation provision of $10.8 million, a receipt of a deferred
vendor incentive payment, net of amount recognized, of $8.6 million, minority
interests in income of consolidated subsidiaries of $6.7 million and write-offs
of unamortized deferred financing costs of $4.9 million, all partially offset by
a deferred income tax benefit of $5.4 million.
Excluding the effect of the net sales of trading securities and net
settlements of trading derivatives, which represent the liquidation of
discretionary investments of excess cash, our continuing operating activities
provided cash of $47.4 million in the nine months ended October 1, 2006. We
expect positive cash flows from continuing operating activities for the fourth
quarter of 2006, excluding the effect, if any, of net sales or purchases of
trading securities since we expect improved operating results before net
non-cash charges during the 2006 fourth quarter.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$207.4 million at October 1, 2006, reflecting a current ratio, which equals
current assets divided by current liabilities, of 1.9:1. Working capital at
October 1, 2006 decreased $89.0 million from $296.4 million at January 1, 2006,
primarily resulting from (1) the Term Loans Prepayments of $51.0 million and (2)
dividend payments of $49.1 million, both partially offset by proceeds from
issuance of long term debt of $15.9 million.
Our total capitalization at October 1, 2006 was $1,256.0 million,
consisting of stockholders' equity of $531.7 million, long-term debt of $719.2
million, including current portion, and notes payable of $5.1 million. Our total
capitalization at October 1, 2006 decreased $61.2 million from $1,317.2 million
at January 1, 2006 principally reflecting net repayments of long-term debt and
notes payable of $50.7 million and dividends of $49.1 million, partially offset
by (1) the stock-based compensation provision of $10.3 million credited to
"Additional paid-in capital" and (2) non-cash increases in capitalized lease
obligations of $12.6 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 the Term Loans with a remaining principal balance
of $561.3 million as of October 1, 2006, of which $1.5 million is due in the
2006 fourth quarter, and a senior secured revolving credit facility of $100.0
million. There were no borrowings under the revolving credit facility as of
October 1, 2006. However, the availability under the facility as of October 1,
2006 was $95.0 million, which is net of a reduction of $5.0 million for
outstanding letters of credit.
Convertible Notes
We had outstanding at October 1, 2006, $7.6 million of Convertible Notes
which do not have any scheduled principal repayments prior to 2023 and are
convertible into 191,000 shares of our class A common stock and 381,000 shares
of our class B common stock. Subsequent to October 1, 2006, the outstanding
Convertible Notes were reduced to $2.1 million as a result of additional
effective conversions discussed below. 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.
During the nine months ended October 1, 2006, an aggregate of $167.4
million principal amount of the Convertible Notes were converted or effectively
converted into an aggregate of 4,184,000 shares of our class A common stock and
8,369,000 shares of our class B common stock, which we refer to as the
Convertible Notes Conversions. In order to induce the effective conversions, 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. Subsequent to October 1, 2006, an
additional $5.5 million principal amount of Convertible Notes were effectively
converted into an aggregate 138,000 shares of our class A common stock and
276,000 shares of our class B common stock. In order to induce these effective
conversions, we paid negotiated premiums aggregating $0.3 million to the
converting noteholders consisting of 18,000 shares of our class B common stock
in lieu of cash.
Sale-Leaseback Obligations
We have outstanding $75.4 million of sale-leaseback obligations as of
October 1, 2006, which relate to our restaurant segment and are due through
2026, of which $0.4 million is due in the 2006 fourth quarter.
Capitalized Lease Obligations
We have outstanding $58.0 million of capitalized lease obligations as of
October 1, 2006, which relate to our restaurant segment and extend through 2036,
of which $0.2 million is due in the 2006 fourth quarter.
Other Long-Term Debt
We have outstanding a secured bank term loan payable through 2008 in the
amount of $6.2 million as of October 1, 2006, of which $0.8 million is due in
the 2006 fourth quarter, and a secured promissory note payable due in the 2006
fourth quarter in the amount of $5.4 million as of October 1, 2006. We also have
outstanding $1.3 million of leasehold notes as of October 1, 2006, which are due
through 2014, of which $0.1 million is due in the 2006 fourth quarter.
Notes Payable
We have outstanding $5.1 million of non-recourse notes payable as of
October 1, 2006 which relate to our asset management segment and are secured by
our short-term investments in preferred shares of CDOs with a carrying value of
$9.7 million as of October 1, 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 $95.0 million available for borrowing under our restaurant
segment's $100.0 million revolving credit facility as of October 1, 2006, which
is net of the reduction of $5.0 million for outstanding letters of credit noted
above. In addition, on July 1, 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, of which
$25.6 million was available on October 1, 2006. This agreement ends on December
31, 2006; however, we have an option to, and we presently intend 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, of which $4.0
million was outstanding and $6.0 million was available as of October 1, 2006.
Debt Repayments and Covenants
Our total scheduled long-term debt and notes payable repayments during the
2006 fourth quarter are $9.7 million consisting of $5.4 million under our
secured promissory note, $1.5 million under our Term Loans, $1.3 million
expected to be paid under our notes payable, $0.8 million under our secured bank
term loan, $0.4 million relating to sale-leaseback obligations, $0.2 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
believe we were in compliance with all of these covenants as of October 1, 2006.
In June and September 2006, we made the Term Loans Prepayments aggregating $51.0
million. We may make additional prepayments of Term Loans during the remainder
of 2006 under certain circumstances, including if those prepayments would be
necessary for continued compliance with the covenants of the Credit Agreement.
As of October 1, 2006 there was $25.1 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 October 1, 2006 we were not in compliance with the original
reporting requirements under a substantial number of these leases. 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 changes to our contractual obligations as of October
1, 2006 since January 1, 2006, as disclosed in Item 7 of our Form 10-K, resulted
from (1) the Convertible Notes Conversions and (2) the Term Loans Prepayments.
Our expected payments of long-term debt in the periods after 2010 decreased by
$218.4 million due to the Convertible Notes Conversions and the Term Loans
Prepayments. Those expected payments decreased by an additional $5.5 million as
a result of the effective conversion of Convertible Notes that occurred
subsequent to October 1, 2006 as discussed above under "Convertible Notes."
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 October 1, 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 October 1,
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 October 1, 2006,
associated with the sale and other tax basis differences, prior to 2005, of our
propane business if National Propane required the repurchase. As of October 1,
2006, we have net operating loss tax carryforwards sufficient to offset these
deferred taxes.
Prior to the RTM Acquisition, RTM guaranteed the lease obligations of 24
restaurants then operated by affiliates of RTM not acquired by us. As of October
1, 2006, 23 of the guarantees are still in place, but these restaurants are no
longer operated by affiliates of RTM. The RTM selling stockholders have
indemnified us with respect to the guarantee of the remaining lease obligations.
In addition, the purchasers of 23 additional 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. We refer to all of these
obligations as the Lease Guarantees. These lease obligations, which extend
through 2025 including all then existing extension or renewal option periods,
could aggregate a maximum of approximately $39.0 million as of October 1, 2006,
assuming all scheduled lease payments have been made by the respective tenants
through October 1, 2006. The estimated fair value of the Lease Guarantees was
$1.5 million as of the date of the RTM Acquisition, as determined in accordance
with an 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 October 1,
2006 with respect to the Lease Guarantees.
Capital Expenditures
Cash capital expenditures amounted to $53.3 million during the first nine
months of 2006. We expect that cash capital expenditures will be approximately
$25.0 million during the 2006 fourth quarter principally relating to (1) the
opening of an estimated 18 new Company-owned restaurants, (2) remodeling some of
our existing restaurants and (3) maintenance capital expenditures for our
Company-owned restaurants. We have $15.9 million of outstanding commitments for
these capital expenditures as of October 1, 2006.
Dividends
On March 15, 2006, June 15, 2006 and September 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 $22.8 million. In addition, on March 1,
2006 and July 14, 2006 we paid special cash dividends of $0.15 per share on our
class A common stock and class B common stock, aggregating $26.3 million. 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. On November 9, 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 December 1, 2006 and payable
on December 15, 2006. Our board of directors has determined that until December
31, 2006 regular quarterly cash dividends paid on each share of class B common
stock will be at least 110% 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
December 31, 2006. After December 31, 2006 holders of the class B common stock
are entitled to receive regularly quarterly cash dividends, on a per share
basis, equal to those paid, if any, on the class A 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. Our total
cash requirement for the regular and special cash dividends for the 2006 fourth
quarter, based on the number of class A and class B common shares outstanding as
of October 31, 2006, would be $21.1 million.
Investments and Acquisitions
As of October 1, 2006, we had $396.6 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 $5.2 million invested
in the DM Fund which is managed by Deerfield and consolidated by us. As
discussed above under "Introduction and Executive Overview," we intend to
withdraw our entire investment from this fund on December 29, 2006. We continue
to evaluate strategic opportunities for the use of our significant cash and
investment position, including a potential corporate restructuring as discussed
below under "Potential Corporate Restructuring," repurchases of Triarc common
stock (see "Treasury Stock Purchases" below), the payment of the remaining
special cash dividend during the 2006 fourth quarter 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,
2007 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 first nine months of 2006 and we
cannot assure you that we will repurchase any shares under this program in the
future.
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 2006
fourth quarter, 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) regular and special cash dividends
aggregating approximately $21.1 million, (3) cash capital expenditures of
approximately $25.0 million, (4) scheduled debt principal repayments aggregating
$9.7 million, (5) prepayments under our Credit Agreement, if any, and (6) 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 $95.0 million is
currently available, (4) the sale-leaseback financing agreement with CNL of
which $25.6 million is currently available, (5) borrowings under our asset
management segment's revolving credit note agreement of which $6.0 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.
Potential Corporate Restructuring
We are continuing to explore a possible corporate restructuring that is
expected to involve the disposition of our asset management operations, whether
through a sale of our ownership interest in our asset management business, a
spin-off of our ownership interest in our asset management business to our
stockholders or such other means as our board of directors may conclude would be
in the best interests of our stockholders. 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, as discussed in more detail above
under "Dividends." Options for our other remaining non-restaurant net assets are
also under review and could include the allocation of these net assets between
our asset management and restaurant businesses and/or additional special
dividends or distributions to our shareholders.
If we proceed with a restructuring, various arrangements relating to the
separation of the affected businesses would be necessary, the terms of which
would depend on the nature of the restructuring. We also have employment
agreements and severance arrangements with certain of our executive officers and
corporate employees. A restructuring could also entail significant severance or
contractual settlement payments under these agreements and arrangements. In the
case of certain of our executive officers, any payments will be subject to
negotiation and approval by a special committee comprised of independent members
of our board of directors. There can be no assurance that the corporate
restructuring will occur or of the form, terms or timing of such restructuring
if it does occur. The Board of Directors has not reached any definitive
conclusions concerning the scope, benefits or timing of the corporate
restructuring.
Consolidation of Opportunities Fund and DM Fund
We consolidate the DM Fund since we currently have a majority voting
interest of 69.8%. As of September 29, 2006, we effectively redeemed our
investment in the Opportunities Fund and, accordingly, we no longer consolidate
the accounts of this fund subsequent to that date. The Company had a receivable
of $15.7 million as of September 29, 2006 for the redemption proceeds not
received as of that date, of which $13.7 million has been subsequently received.
Furthermore, we have notified the investment manager for the DM Fund of our
intent to withdraw our entire investment by December 29, 2006. Accordingly,
assuming this withdrawal is consummated, we will no longer consolidate the
accounts of the DM Fund subsequent to December 29, 2006. Prior to the effective
redemption of the Opportunities Fund, the effect of the consolidation of the
Opportunities Fund on our consolidated financial position, results of operations
and cash flows was significantly impacted by the substantial leverage used in
its investment strategy. Following our effective redemption and the related
deconsolidation of the Opportunities Fund, this impact will no longer occur.
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 were 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 continues to expect to have
additional conversations with, the Florida DEP in order to attempt to resolve
this matter. Based on provisions made prior to 2005 of $1.7 million for all of
these costs 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 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. In March 2006,
the court awarded the plaintiffs $75,000 in fees and expenses, but in April 2006
the defendants appealed. In June 2006, the parties entered into an agreement
pursuant to which, among other things, we paid $76,000 for the fees and
expenses, including interest, and the defendants withdrew their 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 $1.6 million as of October 1, 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. Although we hold preferred
shares of several CDOs, which represent beneficial interests in securitized
financial assets that we classify as available-for-sale securities, we do not
believe that any of these interests represent freestanding or embedded
derivatives which would be required to be accounted for as derivatives under the
provisions of SFAS 155. Accordingly, we currently do not believe that the
adoption of SFAS 155 will have any effect on our consolidated financial position
or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," which we refer to as Interpretation 48.
Interpretation 48 clarifies how uncertainties in income taxes should be
reflected in financial statements in accordance with SFAS 109, "Accounting for
Income Taxes." Interpretation 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of
potential tax benefits associated with tax positions taken or expected to be
taken in income tax returns. Interpretation 48 prescribes a two-step process of
evaluating a tax position, whereby an entity first determines if it is more
likely than not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. A tax position that meets the
more-likely-than-not recognition threshold is then measured for purposes of
financial statement recognition as the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement.
Interpretation 48 has disclosure requirements which include a rollforward of tax
benefits taken that do not qualify for financial statement recognition, the
amount of unrecognized tax benefits that, if recognized, would impact the
effective tax rate, the total amounts and financial statement classifications of
interest and penalties recognized in the balance sheet and statement of
operations and a description of tax years that remain subject to examination by
major tax jurisdictions. For positions for which it is reasonably possible that
the total amounts of unrecognized tax benefits will significantly increase or
decrease within twelve months of the reporting date, an entity should disclose
the nature of the uncertainty, the nature of the event that could occur in the
next twelve months that would cause the change and an estimate of the range of
the reasonably possible change or a statement that an estimate of the range
cannot be made. All disclosures required by Interpretation 48 must be included
in each interim financial statement in the year of adoption. Interpretation 48
is effective commencing with our first fiscal quarter of 2007. The provisions of
Interpretation 48 are complex and we are in the initial stages of estimating the
effects that adopting Interpretation 48 will have on our consolidated financial
position and results of operations. As described above, we will be required to
provide additional financial statement disclosures upon adoption of
Interpretation 48.
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1,
"Accounting for Planned Major Maintenance Activities" which we refer to as FSP
AIR-1. FSP AIR-1 prohibits the use of the previously acceptable
accrue-in-advance method of accounting for scheduled major maintenance
activities, which is the method we currently use for scheduled major maintenance
overhauls of corporate aircraft. Under the accrue-in-advance method, the
estimated cost of such an overhaul is amortized to the date of the next overhaul
with any difference between estimated and actual cost charged or credited to
income upon completion of the overhaul. FSP AIR-1 requires that we use either
(1) a direct expensing method, under which the costs of overhauls are charged to
operations as incurred, or (2) a deferral method, under which the actual cost of
each overhaul is capitalized and amortized until the next overhaul. We must
apply FSP AIR-1 no later than our first fiscal quarter of 2007. It requires
retrospective application to all financial statements presented, unless it is
impracticable to do so, with a cumulative effect of the change in accounting
reflected as of the beginning of the first period presented. Since FSP AIR-1 was
only recently issued, we are still evaluating which of the two acceptable
methods we will adopt. Under either method we adopt, we will be required to
restate our consolidated statements of operations and balance sheets for all
prior periods presented for the difference between the accrue-in-advance method
and either the direct expensing method or the deferral method of accounting for
scheduled major airplane maintenance overhauls. For the nine months ended
October 1, 2006 we have expensed $0.6 million of costs related to scheduled
major maintenance overhauls under the accrue-in-advance method.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, which we refer to as SAB 108. SAB 108 indicates
that we evaluate the materiality of any identified financial statement error by
quantifying the effects of the unadjusted error on each financial statement and
related financial statement disclosure. Prior year misstatements should be
considered in quantifying misstatements in current year financial statements.
Accordingly, the impact of correcting all misstatements, including both the
carryover and reversing effects of prior year misstatements, on the current year
financial statements must be considered. This would be accomplished by
quantifying an error under both an income statement and balance sheet approach.
Thus, financial statements would require adjustment when either approach results
in a misstatement that is material, after considering all relevant quantitative
and qualitative factors. SAB 108 is effective commencing with our 2006 fiscal
year end. It permits us to report the cumulative effect, if material, of the
initial application as an adjustment to beginning retained earnings for our 2006
fiscal year as an alternative to restating prior years' financial statements.
Since SAB 108 was only recently issued, we are currently unable to estimate the
effects, if any, that its adoption will have on our consolidated financial
position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," which we refer to as SFAS 157. The
changes to current practice resulting from the application of SFAS 157 relate to
the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. SFAS 157 does not require
any new fair value measurements. The definition of fair value in SFAS 157
focuses on the price that would be received to sell an asset or paid to transfer
a liability, not the price that would be paid to acquire an asset or received to
assume a liability. The methods used to measure fair value should be based on
the assumptions that market participants would use in pricing an asset or a
liability. SFAS 157 expands disclosures about the use of fair value to measure
assets and liabilities in interim and annual periods subsequent to initial
recognition. SFAS 157 is, with some limited exceptions, to be applied
prospectively and is effective commencing with our first fiscal quarter of 2008,
although earlier application in our first fiscal quarter of 2007 is permitted.
Currently some of our investments are assigned fair values based on their bid
price and some securities sold with an obligation to purchase are assigned fair
values based on their ask price. SFAS 157 requires us to use the most
representative fair value within the bid-ask spread if an asset's fair value is
based on bid and ask prices. To the extent that these investments are present in
our portfolio at the time of adoption of SFAS 157, our consolidated financial
position will be affected for any such investments classified as
available-for-sale securities and both our consolidated financial position and
results of operations will be affected for any such investments classified as
trading securities. We will also be required to present the expanded fair value
disclosures upon adoption of SFAS 157.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans," which we refer to as SFAS 158. SFAS 158 requires an
employer to recognize the full overfunded or underfunded status of a defined
benefit pension or other postretirement plan as an asset or liability,
respectively, in its balance sheet and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income. SFAS
158 also requires an employer to measure the funded status of a plan as of the
date of its year-end balance sheet. SFAS 158 requires footnote disclosure of
additional information about certain effects on net periodic benefit cost for
the next fiscal year that arise from delayed recognition of the gains or losses,
prior service costs or credits, and transition asset or obligation. The
requirement to measure the funded status of our defined benefit plans as of the
date of the fiscal year end balance sheet is effective with our 2008 fiscal year
end, although earlier fiscal year-end application is permitted. The other
requirements of SFAS 158 are effective with our 2006 fiscal year end. We already
reflect the full underfunded status of our defined benefit plans as a liability
in our consolidated balance sheets because the benefits under our defined
benefit plans were frozen in 1992 and, after realizing a curtailment gain upon
freezing the benefits, we have no unrecognized prior service cost related to
these plans. Therefore, we expect that the adoption of SFAS 158 will affect us
only with respect to the additional footnote disclosure requirements regarding
the effect of delayed recognition of gains and losses on net periodic benefit
cost for the following fiscal year.
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 nine months ended October 1, 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 October 1, 2006 our notes payable
and long-term debt, including current portion, aggregated $724.3 million and
consisted of $571.5 million of variable-rate debt, $133.4 million of capitalized
lease and sale-leaseback obligations, $14.3 million of fixed-rate debt and $5.1
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 $561.3 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 October 1, 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 $6.2 million principal
amount was outstanding as of October 1, 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 nine months 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 had previously adjusted our asset allocation to increase the portion
of our investments that offered the opportunity for higher, but more risk
inherent, returns. In that regard, at January 1, 2006 we had an investment in a
multi-strategy hedge fund, Deerfield Opportunities Fund, LLC, which we refer to
as the Opportunities Fund, which was managed by a subsidiary of ours and was
consolidated by us with minority interests to the extent of participation by
investors other than us. The Opportunities Fund invested principally in various
fixed income securities and their derivatives, as opportunities arose and
employed leverage in its trading activities. As a result of the effective
redemption on September 29, 2006 of our investment in the Opportunities Fund, we
no longer consolidate the accounts of this fund subsequent to that date, and
therefore no longer bear the associated risks as of October 1, 2006. In December
2005 we invested $75.0 million in an account, which we refer to as the Equities
Account, which is managed by a management company formed by our Chairman and
Chief Executive Officer, our President and Chief Operating Officer and our Vice
Chairman. The Equities Account was invested principally in the equity securities
of a limited number of publicly-traded companies and cash equivalents as of
October 1, 2006. As of October 1, 2006, the derivatives held in our short-term
investment portfolios consisted of (1) put and call option combinations on an
equity security, (2) options on foreign currency contracts and interest rate
futures, (3) stock options, (4) options on interest rate swaps, (5) futures
contracts relating to interest rates and United States government debt
securities and (6) interest rate swaps. We did not designate any of these
strategies as hedging instruments and, accordingly, all of these derivative
instruments were recorded at fair value with changes in fair value recorded in
our results of operations.
We maintain investment portfolio holdings of various issuers, types and
maturities. As of October 1, 2006 these investments were classified in our
condensed consolidated balance sheet as follows (in thousands):
Cash equivalents included in "Cash and cash equivalents"...................................$ 203,382
Short-term investments pledged as collateral............................................... 9,722
Other short-term investments............................................................... 102,072
Investment settlements receivable.......................................................... 16,063
Current and non-current restricted cash equivalents (a).................................... 13,132
Non-current investments.................................................................... 70,006
-------------
$ 414,377
=============
Certain liability positions related to investments:
Securities sold with an obligation to purchase included in "Other liability positions
related to short-term investments"....................................................$ (6,137)
Derivatives held in trading portfolios in liability positions included in "Other
liability positions related to short-term investments"................................ (171)
-------------
$ (6,308)
=============
- -----------------
(a) Includes non-current restricted cash equivalents of $1,939,000 included in
"Deferred costs and other assets."
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired. The cash equivalents included
in "Cash and cash equivalents" consisted principally of cash in mutual fund and
bank money market accounts, cash in interest-bearing brokerage and bank accounts
with a stable value, commercial paper of high credit-quality entities and
securities purchased under agreements to resell the following day collateralized
by United States government and government agency debt securities.
At October 1, 2006 our investments were classified in the following general
types or categories (in thousands):
At Fair Carrying Value
----------------------
Type At Cost Value (c) Amount Percent
---- ------- --------- ------ -------
Cash equivalents (a)............................$ 203,382 $ 203,382 $ 203,382 49%
Investment settlements receivable............... 16,063 16,063 16,063 4%
Restricted cash equivalents..................... 13,132 13,132 13,132 3%
Investments accounted for as:
Available-for-sale securities (b).......... 74,871 91,859 91,859 22%
Trading securities......................... 191 196 196 --%
Trading derivatives........................ 515 258 258 --%
Non-current investments held in deferred
compensation trusts accounted for at cost..... 24,066 32,332 24,066 6%
Other current and non-current investments in
investment limited partnerships and similar
investment entities accounted for at cost..... 24,724 36,280 24,724 6%
Other current and non-current investments
accounted for at:
Cost....................................... 13,974 15,565 13,974 3%
Equity..................................... 17,699 27,940 22,195 6%
Fair value ................................ 4,088 4,528 4,528 1%
------------ ------------ ------------ ----
Total cash equivalents and long
investment positions..........................$ 392,705 $ 441,535 $ 414,377 100%
============ ============ ============ ====
Certain liability positions related to investments:
Securities sold with an obligation to
purchase................................$ (2,793) $ (6,137) $ (6,137) N/A
Derivatives held in trading portfolios in
liability positions..................... (177) (171) (171) N/A
------------ ------------ ------------
$ (2,970) $ (6,308) $ (6,308)
============ ============ ============
- ----------------
(a) Includes $1,353,000 of cash equivalents held in deferred compensation
trusts.
(b) Includes $9,682,000 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
$5,148,000.
(c) There can be no assurance that we would be able to sell certain of
these investments at these amounts.
Our marketable securities are reported at fair market value and are
classified and accounted for either as "available-for-sale" or "trading" with
the resulting net unrealized holding gains or losses, net of income taxes,
reported either as a separate component of comprehensive income or loss
bypassing net income or net loss or included as a component of net income or net
loss, respectively. Our investments in preferred shares of CDOs are accounted
for similar to debt securities and are classified as available-for-sale.
Investment limited partnerships and similar investment entities and other
current and non-current investments in which we do not have significant
influence over the 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 of 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
October 1, 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
October 1, 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...................................$ 196 $ -- $ (20) $ --
Trading derivatives in asset positions.............. 258 (1,668) -- (311)
Trading derivatives in liability positions.......... (171) (1,222) (11) (3)
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 October 1, 2006, with all other variables held constant.
The interest rate risk with respect to our trading derivatives reflects the
effect of the assumed adverse interest rate change on the fair value of each of
those derivative positions and does not reflect any offsetting of hedged
positions. The adverse effects on the fair values of the respective derivatives
were determined based on market standard pricing models applicable to those
particular instruments. Those models consider variables such as volatility,
price of the underlying instrument, coupon rate and frequency of the underlying
instrument, strike price and expiration.
Other Than Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Cash equivalents.................................$ 203,382 $ (2) $ -- $ --
Investment settlements receivable................ 16,063 -- -- --
Restricted cash equivalents...................... 13,132 -- -- --
Available-for-sale equity securities............. 68,071 -- (6,807) --
Available-for-sale preferred shares of CDOs...... 14,729 (1,397) -- --
Available-for-sale debt mutual fund.............. 9,059 (136) -- --
Investment in Jurlique........................... 8,504 -- (850) (603)
Other investments................................ 80,983 (1,954) (6,696) (136)
Interest rate swaps in an asset position......... 2,569 (3,744) -- --
Foreign currency put and call arrangement in
a net liability position....................... (155) -- -- (659)
Securities sold with an obligation to purchase... (6,137) -- (614) --
Notes payable and long-term debt, excluding
capitalized lease and sale-leaseback
obligations.................................... (590,864) (25,594) -- --
The sensitivity analysis of financial instruments held at October 1, 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 October 1, 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 (a)...................................................... 10 days 10 days
CDOs underlying preferred shares.......................................... 2 years - 8 years 5 years
Debt mutual fund.......................................................... 1 day - 35 years 1 1/2 years
Debt securities included in other investments (principally
held by investment limited partnerships and similar
investment entities).................................................... (b) 10 years
- ------------------
(a) Excludes money market funds, interest-bearing brokerage and bank
accounts and securities purchased under agreements to resell the
following day which were assumed to have no interest rate risk.
(b) 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 $195.3 million and $13.1
million, respectively, as of October 1, 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.
As of October 1, 2006, a majority of our debt was variable-rate debt and
therefore the interest rate risk presented with respect to our $576.6 million of
variable-rate 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. Our
variable-rate notes payable and long-term debt outstanding as of October 1, 2006
had a weighted average remaining maturity of approximately 5 1/4 years. 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 have only $14.3 million of fixed-rate
debt as of October 1, 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.
The foreign currency risk presented for our investment in Jurlique as of
October 1, 2006 excludes the portion of risk that is hedged by the foreign
currency put and call arrangement. 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
and our Quarterly Reports on Form 10-Q for each of the three month periods ended
April 2, and July 2, 2006, that there were certain significant deficiencies in
RTM's systems, procedures and internal control over financial reporting.
Although we have made progress in the remediation of certain of those
deficiencies, significant 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
continued to perform supplemental procedures as part of the overall control
procedures and closing processes. Based on the additional procedures and 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 and nine months
ended October 1, 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, design and implementing 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 have made, and continue 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 and have discovered
additional deficiencies which we are also in the process of evaluating and
remediating. 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
As reported in our Quarterly Reports on Form 10-Q for the fiscal quarters
ended April 2, 2006 and July 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 changed. Additionally, certain accounting and
control procedures relating to our existing restaurant operations are now
integrated into those procedures being performed by RTM. To the extent
practicable, we have maintained the consistency of our accounting and control
procedures. We have continued to perform supplemental procedures with respect to
the accounting for our existing restaurant operations to the extent our controls
have been integrated into those procedures of RTM. We anticipate that the
ongoing remediation associated with the significant deficiencies noted above
will continue to 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. Our forward-looking statements
are based on our expectations at the time such statements are made, speak only
as of the dates they are made 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 our forward-looking statements. For all of
our forward-looking 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 our forward-looking statements, including
those contained herein. Such factors include, but are not limited to, the
following:
o competition, including pricing pressures and 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 successfully;
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, supply, distribution and
other operating costs;
o 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 (or lack of
availability of additional key personnel if needed for expansion),
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, inability to hire the necessary additional personnel 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"), and in our Quarterly Reports for
the fiscal quarters ended April 2, 2006 and July 2, 2006 (collectively, the
"Form 10-Qs") 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 alleged 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 requested class
certification and injunctive relief requiring RTM and such affiliates to comply
with the ADA in all of their restaurants. The complaint did not seek monetary
damages, but did seek attorneys' fees. Without admitting liability, RTM entered
into a settlement agreement with the plaintiffs on a class-wide basis, which was
approved by the court on August 10, 2006. The settlement 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 agreement also applies to restaurants subsequently acquired by RTM
and such affiliates. Arby's Restaurant Group, Inc. ("ARG") estimates that it
will spend approximately $1.0 million per year of capital expenditures to bring
the restaurants into compliance under the agreement and pay certain legal fees.
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. Except as
described in this report, there were no material changes from the risk factors
previously disclosed in our Form 10-K during the fiscal quarter ended October 1,
2006.
The following additional risk factor was identified during 2006:
Due to the concentration of Arby's restaurants in particular geographic
regions, ARG's business results could be impacted by the adverse economic
conditions prevailing in those regions regardless of the state of the national
economy as a whole.
As of October 1, 2006, ARG and Arby's franchisees operated Arby's
restaurants in 48 states, the District of Columbia and four foreign countries.
As of October 1, 2006, the six leading states by number of operating units were:
Ohio, with 286 restaurants; Michigan, with 188 restaurants; Indiana, with 175
restaurants; Florida, with 173 restaurants; Texas, with 155 restaurants; and
Georgia, with 153 restaurants. This geographic concentration can cause economic
conditions in particular areas of the country to have a disproportionate impact
on ARG's overall results of operations. ARG believes that the adverse economic
conditions in Ohio and Michigan, two states which have a significant number of
Arby's restaurants, have adversely impacted its results of operations. It is
possible that adverse economic conditions in those two states or in other states
or regions that contain a high concentration of Arby's restaurants could have a
material adverse impact on ARG's results of operations in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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. No transactions were
effected under our stock repurchase program and there were no other repurchases
of shares of our common stock by us or our "affiliated purchasers" (as defined
in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended)
during the third fiscal quarter of 2006.
Item 5. Other Information.
Potential Corporate Restructuring; Declaration of Special Dividend
We are continuing to explore a possible corporate restructuring that is
expected to involve the disposition of our asset management operations, whether
through a sale of our ownership interest in Deerfield, a spin-off of our
ownership interest in Deerfield to our stockholders or such means as our board
of directors may conclude would be in the best interests of our stockholders. 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, was 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 in the amount of $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.
If we proceed with a restructuring, various arrangements relating to the
separation of the affected businesses would be necessary, the terms of which
would depend on the nature of the restructuring. We also have employment
agreements and severance arrangements with certain of our executive officers and
corporate employees. A restructuring could also entail significant severance or
contractual settlement payments under these agreements and arrangements. In the
case of certain of our executive officers, any payments will be subject to
negotiation and approval by a special committee comprised of independent members
of our Board of Directors. 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, our 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).
10.1 Surrender and Release Agreement, dated as of September 19, 2006, by and
between 760-24 Westchester Avenue, LLC and 800-60 Westchester Avenue,
LLC, as Lessor, and Triarc Companies, Inc. as Lessee, incorporated herein
by reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
September 20, 2006 (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: November 13, 2006 By:/s/FRANCIS T. MCCARRON
-----------------------------
Francis T. McCarron
Executive Vice President and
Chief Financial Officer
(On behalf of the Company)
Date: November 13, 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).
10.1 Surrender and Release Agreement, dated as of September 19, 2006, by and
between 760-24 Westchester Avenue, LLC and 800-60 Westchester Avenue,
LLC, as Lessor, and Triarc Companies, Inc. as Lessee, incorporated herein
by reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
September 20, 2006 (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: November 13, 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: November 13, 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 October 1, 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: November 13, 2006 /s/NELSON PELTZ
------------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
Dated: November 13, 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.