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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 27, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to_________________
Commission file number: 1-2207
TRIARC COMPANIES, INC.
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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)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
There were 23,242,255 shares of the registrant's Class A Common
Stock and 5,997,622 shares of the registrant's Class B Common Stock outstanding
as of October 30, 1998.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 28, SEPTEMBER 27,
1997 (A) 1998
-------- ----
(IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................$ 129,480 $ 164,041
Short-term investments............................................... 46,165 86,844
Receivables, net..................................................... 77,882 96,645
Inventories.......................................................... 57,394 71,340
Deferred income tax benefit ......................................... 38,120 40,447
Prepaid expenses and other current assets ........................... 6,718 4,669
------------ ------------
Total current assets............................................... 355,759 463,986
Investments.............................................................. 31,449 7,355
Properties, net.......................................................... 33,833 31,554
Unamortized costs in excess of net assets of acquired companies.......... 279,225 271,017
Trademarks............................................................... 269,201 261,215
Deferred costs and other assets.......................................... 35,406 41,472
------------ ------------
$ 1,004,873 $ 1,076,599
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................$ 14,182 $ 19,986
Accounts payable..................................................... 63,237 74,825
Accrued expenses..................................................... 148,254 152,080
----------- ------------
Total current liabilities.......................................... 225,673 246,891
Long-term debt........................................................... 604,830 693,460
Deferred income taxes.................................................... 92,577 99,677
Deferred income and other liabilities.................................... 37,805 30,025
Stockholders' equity (deficit):
Common stock......................................................... 3,555 3,555
Additional paid-in capital........................................... 204,291 204,925
Accumulated deficit.................................................. (115,440) (100,924)
Treasury stock....................................................... (45,456) (94,776)
Other .............................................................. (2,962) (6,234)
------------ ------------
Total stockholders' equity ........................................ 43,988 6,546
------------ ------------
$ 1,004,873 $ 1,076,599
============ ============
(A) Derived from the audited consolidated financial statements as of December 28, 1997
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27,
1997 1998 1997 1998
---- ---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Revenues:
Net sales................................................$ 240,621 $ 227,052 $ 608,423 $ 594,439
Royalties, franchise fees and other revenues............. 17,941 19,979 47,582 57,536
----------- ----------- ----------- -----------
258,562 247,031 656,005 651,975
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales............................................ 132,594 123,178 356,636 317,597
Advertising, selling and distribution.................... 61,362 56,536 145,009 166,811
General and administrative............................... 41,072 38,550 106,170 106,070
Acquisition related ..................................... -- -- 32,440 --
Facilities relocation and corporate restructuring ....... -- -- 7,350 --
----------- ----------- ----------- -----------
235,028 218,264 647,605 590,478
----------- ----------- ----------- -----------
Operating profit....................................... 23,534 28,767 8,400 61,497
Interest expense............................................ (19,989) (17,731) (52,220) (52,150)
Investment income (loss), net............................... 6,428 (3,907) 10,927 11,195
Gain on sale of businesses, net............................. 2,603 1,636 261 6,487
Other income (expense), net................................. (1,144) (1,999) 3,572 (1,677)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and minority interests................. 11,432 6,766 (29,060) 25,352
(Provision for) benefit from income taxes................... (3,079) (4,514) 6,973 (13,436)
Minority interests in (income) loss of consolidated
subsidiary............................................... 1,948 -- (1,223) --
----------- ----------- ----------- -----------
Income (loss) from continuing operations............... 10,301 2,252 (23,310) 11,916
Income from discontinued operations......................... 639 -- 1,904 2,600
----------- ----------- ----------- -----------
Income (loss) before extraordinary charges............. 10,940 2,252 (21,406) 14,516
Extraordinary charges....................................... -- -- (2,954) --
----------- ----------- ----------- -----------
Net income (loss)......................................$ 10,940 $ 2,252 $ (24,360) $ 14,516
=========== =========== =========== ===========
Basic income (loss) per share:
Income (loss) from continuing operations...............$ .34 $ .07 $ (.78) $ .39
Income from discontinued operations.................... .02 -- .07 .08
Extraordinary charges.................................. -- -- (.10) --
----------- ----------- ----------- -----------
Net income (loss)......................................$ .36 $ .07 $ (.81) $ .47
=========== =========== =========== ===========
Diluted income (loss) per share:
Income (loss) from continuing operations...............$ .33 $ .07 $ (.78) $ .37
Income from discontinued operations.................... .02 -- .07 .08
Extraordinary charges.................................. -- -- (.10) --
----------- ----------- ----------- -----------
Net income (loss)......................................$ .35 $ .07 $ (.81) $ .45
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1997 1998
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(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)........................................................................$ (24,360) $ 14,516
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Amortization of costs in excess of net assets of acquired companies,
trademarks and certain other items................................................ 15,038 18,501
Depreciation and amortization of properties......................................... 12,899 8,303
Amortization of original issue discount and deferred financing costs ............... 3,617 7,616
Deferred income tax provision (benefit)............................................. (8,568) 11,369
Equity in (earnings) loss of affiliates............................................. (816) 4,655
Provision for doubtful accounts..................................................... 2,940 2,399
Payment resulting from Federal income tax examination............................... -- (8,460)
Gain on sale of businesses, net..................................................... (261) (6,487)
Net provision (payments) for acquisition related costs.............................. 29,245 (5,943)
Recognized net unrealized losses on investments and, in 1998, securities
sold short........................................................................ -- 6,668
Net realized gains on investments and, in 1998, securities sold short .............. (4,653) (8,950)
Income from discontinued operations ................................................ (1,904) (2,600)
Write-off of unamortized deferred financing costs................................... 4,839 --
Minority interests in income of consolidated subsidiary............................. 1,223 --
Other, net.......................................................................... 3,487 (3,652)
Changes in operating assets and liabilities:
Decrease (increase) in receivables............................................. 4,381 (21,268)
Increase in inventories........................................................ (7,443) (13,946)
Decrease in prepaid expenses and other current assets.......................... 7,736 2,049
Increase in accounts payable and accrued expenses ............................. 4,464 8,621
--------- ---------
Net cash provided by operating activities.................................. 41,864 13,391
--------- ---------
Cash flows from investing activities:
Cost of investments including, in 1998, payments to cover short positions in
securities ........................................................................... (44,512) (151,376)
Proceeds from sale of investment in Select Beverages, Inc................................ -- 28,342
Proceeds from sales of other investments and, in 1998, securities sold short............. 40,933 124,830
Capital expenditures..................................................................... (10,137) (9,651)
Purchase of ownership interests in aircraft.............................................. -- (3,754)
Acquisition of Snapple Beverage Corp..................................................... (321,063) --
Other business acquisitions.............................................................. (7,568) (3,000)
Distributions received from propane partnership.......................................... -- 2,916
Proceeds from sales of properties........................................................ 3,299 1,318
Other .................................................................................. 612 (87)
--------- ---------
Net cash used in investing activities...................................... (338,436) (10,462)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt............................................................. 335,112 100,163
Repayments of long-term debt............................................................. (105,471) (17,676)
Repurchase of common stock for treasury.................................................. -- (53,226)
Deferred financing costs................................................................. (11,200) (3,906)
Proceeds from stock option issuances..................................................... 1,686 3,312
Distributions paid on propane partnership common units................................... (10,554) --
--------- ---------
Net cash provided by financing activities.................................. 209,573 28,667
--------- ---------
Net cash provided by (used in) continuing operations......................................... (86,999) 31,596
Net cash provided by (used in) discontinued operations....................................... (642) 2,965
--------- ---------
Net increase (decrease) in cash and cash equivalents......................................... (87,641) 34,561
Cash and cash equivalents at beginning of period............................................. 154,190 129,480
--------- ---------
Cash and cash equivalents at end of period...................................................$ 66,549 $ 164,041
========= =========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Triarc Companies, Inc. ("Triarc" and, together with its subsidiaries, the
"Company") have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC") and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. In the opinion of the
Company, however, the accompanying condensed consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position as of December 28,
1997 and September 27, 1998, its results of operations for the three-month and
nine-month periods ended September 28, 1997 and September 27, 1998 and its cash
flows for the nine-month periods ended September 28, 1997 and September 27, 1998
(see below). This information should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 28, 1997 (the
"Form 10-K"). Certain statements in these notes to condensed consolidated
financial statements constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. See Part II - "Other Information".
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, the Company's first nine months
of 1997 commenced on January 1, 1997 and ended on September 28, 1997, with its
third quarter commencing on June 30, 1997, and the Company's first nine months
of 1998 commenced on December 29, 1997 and ended on September 27, 1998, with its
third quarter commencing on June 29, 1998. For the purposes of these
consolidated financial statements, the periods (i) from January 1, 1997 to
September 28, 1997 and June 30, 1997 to September 28, 1997 are referred to below
as the nine-month and three-month periods ended September 28, 1997,
respectively, and (ii) from December 29, 1997 to September 27, 1998 and June 29,
1998 to September 27, 1998 are referred to below as the nine-month and
three-month periods ended September 27, 1998, respectively.
The Company owns a combined 42.7% interest in National Propane Partners,
L.P. and a subpartnership (collectively, the "Partnership"). As discussed
further in Notes 3 and 7 to the consolidated financial statements in the Form
10-K, effective December 28, 1997 the Company no longer consolidates the
Partnership (the "Deconsolidation"). Since December 28, 1997 the Company's 42.7%
interest in the Partnership is accounted for under the equity method of
accounting in accordance with the Deconsolidation.
Certain amounts included in the prior comparable periods' condensed
consolidated financial statements have been reclassified (i) to reflect the
results of C.H. Patrick & Co., Inc. ("C.H. Patrick"), which was sold on December
23, 1997, as a discontinued operation and (ii) to conform with the current
periods' presentation.
(2) SIGNIFICANT 1997 TRANSACTIONS
In addition to the sale of C.H. Patrick discussed above, which is reported
as a discontinued operation, the Company consummated the following significant
transactions in 1997. On May 22, 1997 Triarc acquired (the "Snapple
Acquisition") Snapple Beverage Corp. ("Snapple"), a producer and seller of
premium beverages, from The Quaker Oats Company for $311,915,000 consisting of
cash of $300,126,000 (net of post-closing adjustments), $9,260,000 of fees and
expenses and $2,529,000 of deferred purchase price (such purchase price was
estimated at $321,063,000 as of September 28, 1997 as reported in the
accompanying consolidated statement of cash flows for the nine-month period then
ended). The purchase price for the Snapple Acquisition was funded from (i)
$75,000,000 of cash and cash equivalents on hand and (ii) $250,000,000 of
borrowings by Snapple on May 22, 1997. On November 25, 1997 the Company acquired
(the "Stewart's Acquisition") Cable Car Beverage Corporation ("Cable Car"), a
marketer of premium soft drinks in the United States and Canada, primarily under
the Stewart's(R) brand. Pursuant to the Stewart's Acquisition, Triarc issued (i)
1,566,858 shares of its Class A common stock (the "Class A Common Stock") with a
value of $37,409,000 as of November 25, 1997 in exchange for all of the
outstanding stock of Cable Car and (ii) options to acquire 154,931 shares of
Class A Common Stock with a value of $2,788,000 as of November 25, 1997 in
exchange for all of the outstanding stock options of Cable Car. On May 5, 1997
certain subsidiaries of the Company sold to an affiliate of RTM, Inc. (together
with such affiliate, "RTM"), the largest franchisee in the Arby's system, all of
the 355 then company-owned Arby's restaurants (the "RTM Sale"). The sales price
consisted of cash and a promissory note (discounted value) aggregating
$3,471,000 and the assumption by RTM of an aggregate $69,637,000 of mortgage and
equipment notes payable and capitalized lease obligations. On July 18, 1997 the
Company completed the sale (the "C&C Sale") of its rights to the C&C beverage
line of mixers, colas and flavors, including the C&C trademark and equipment
related to the operation of the C&C beverage line, to Kelco Sales & Marketing
Inc. for $750,000 in cash and an $8,650,000 note with a discounted value of
$6,003,000 consisting of $3,623,000 relating to the C&C Sale and $2,380,000
relating to future revenues. See Note 3 to the consolidated financial statements
in the Form 10-K for a further discussion of the transactions described above.
Due to the significant effects of the above transactions, the following
supplemental pro forma condensed consolidated summary operating data (the "Pro
Forma Data") of the Company for the nine months ended September 28, 1997 is
presented for comparative purposes. Such Pro Forma Data has been prepared by
adjusting the historical data as set forth in the accompanying consolidated
statement of operations for such period to give effect to the Snapple
Acquisition and related transactions, the Stewart's Acquisition, the RTM Sale
and the C&C Sale, as if all of such transactions had been consummated on January
1, 1997. Such Pro Forma Data is presented for comparative purposes only and does
not purport to be indicative of the Company's actual results of operations had
such transactions actually been consummated on January 1, 1997 or of the
Company's future results of operations and is as follows (in thousands except
per share amounts):
AS PRO
REPORTED FORMA
-------- -----
Revenues.......................................$ 656,005 $ 770,944
Operating profit............................... 8,400 12,588
Loss from continuing operations................ (23,310) (25,063)
Loss from continuing operations per share...... (.78) (.80)
(3) COMPREHENSIVE INCOME (LOSS)
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130
("SFAS 130") "Reporting Comprehensive Income". SFAS 130 requires the disclosure
of comprehensive income which is defined as the change in stockholders' equity
during a period exclusive of stockholder investments and distributions to
stockholders. For the Company, in addition to net income (loss), comprehensive
income (loss) includes any changes in (i) unrealized gain or loss on
"available-for-sale" marketable securities and (ii) currency translation
adjustment. The following is a summary of the components of comprehensive income
(loss) (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ------------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27,
1997 1998 1997 1998
---- ---- ---- ----
Net income (loss) ................................$ 10,940 $ 2,252 $ (24,360) $ 14,516
Unrealized gain or loss on "available-for-sale"
marketable securities......................... (2,627) (3,517) (62) (4,221)
Currency translation adjustment................... (64) 31 (6) 19
---------- --------- ---------- ----------
Comprehensive income (loss)...................$ 8,249 $ (1,234) $ (24,428) $ 10,314
========== ========= ========== ==========
(4) INVENTORIES
The following is a summary of the components of inventories (in thousands):
DECEMBER 28, SEPTEMBER 27,
1997 1998
---- ----
Raw materials................................$ 22,573 $ 26,505
Work in process.............................. 214 308
Finished goods............................... 34,607 44,527
---------- ----------
$ 57,394 $ 71,340
========== ==========
(5) LONG-TERM DEBT AND STOCKHOLDERS' EQUITY
On February 9, 1998 the Company sold (the "Offering") zero coupon
convertible subordinated debentures due 2018 (the "Debentures") with an
aggregate principal amount at maturity of $360,000,000 to Morgan Stanley & Co.
Incorporated ("Morgan Stanley") as the initial purchaser for an offering to
"qualified institutional buyers". The Debentures were issued at a discount of
72.177% from principal resulting in proceeds to the Company of $100,163,000
before placement fees and other related fees and expenses aggregating
approximately $4,000,000. The issue price represents an annual yield to maturity
of 6.5%. The Debentures are convertible into Class A Common Stock at a
conversion rate of 9.465 shares per $1,000 principal amount at maturity, which
represents an initial conversion price of approximately $29.40 per share of
Class A Common Stock. The conversion price will increase over the life of the
Debentures at an annual rate of 6.5% and currently the conversion of all of the
Debentures into Class A Common Stock would result in the issuance of
approximately 3,407,000 shares of Class A Common Stock. The Debentures are
redeemable by the Company commencing February 9, 2003 at the original issue
price plus accrued original issue discount to the date of any such redemption
and, under certain defined circumstances, the Debentures can be put to the
Company at any time at not more than the original issue price plus accrued
original issue discount to the date of any such put. In June 1998 a shelf
registration statement covering resales by holders of the Debentures (and the
Class A Common Stock issuable upon any conversion of the Debentures) was
declared effective by the SEC.
The Company used a portion of the proceeds from the sale of the Debentures
to purchase 1,000,000 shares of Class A Common Stock for treasury for
$25,563,000 from Morgan Stanley (the "Equity Repurchase"). The balance of the
net proceeds from the sale of Debentures are being used by Triarc for general
corporate purposes, which include or may include investments, working capital
requirements, additional treasury stock repurchases, repayment or refinancing of
indebtedness and acquisitions.
The following pro forma information of the Company for the nine months
ended September 27, 1998 has been prepared by adjusting the historical
information reflected in the accompanying consolidated statement of operations
for such period to reflect the effects of the Offering and the Equity Repurchase
(which affects only the weighted average number of common shares and income from
continuing operations per share) prior to the February 9, 1998 Offering date as
if such transactions had been consummated on December 29, 1997. Such pro forma
information does not reflect any incremental interest income or any other
benefit of the excess proceeds of the Offering (in thousands except per share
amounts):
AS PRO
REPORTED FORMA
-------- -----
Interest expense....................................$ 52,150 $ 52,920
Income from continuing operations................... 11,916 11,423
Diluted income from continuing operations
per share....................................... .37 .36
Weighted average number of common shares used
for calculation of diluted income from
continuing operations per share................. 32,148 31,994
The Company has a note payable to the Partnership (the "Partnership Note")
with an original principal amount of $40,700,000 which according to its terms
was due in eight equal installments commencing 2003 through 2010. Effective June
30, 1998 the Partnership Note was amended to, among other things, permit the
Company, at its option, to prepay up to $10,000,000 (the "Partnership Note
Prepayments") of the principal of the Partnership Note at any time through
February 14, 1999. On August 7, 1998 the Company prepaid $7,000,000 of the
Partnership Note in order to (i) retroactively cure the Partnership's
noncompliance as of June 30, 1998 with restrictive covenants contained in its
bank facility agreement and (ii) permit the Partnership to pay on August 14,
1998 its normal quarterly distribution on its common units representing limited
partner units with a proportionate amount for the Company's general partners'
interest with respect to its second quarter of 1998. Additionally, on September
30, 1998 the Company prepaid the remaining permitted $3,000,000. As such, the
Company has classified such $3,000,000 as "Current portion of long-term debt" as
of September 27, 1998 in the accompanying condensed consolidated balance sheet.
The remaining principal amount of the Partnership Note of $30,700,000 after the
aggregate $10,000,000 Partnership Note Prepayments is due $175,000 in 2004 and
six equal annual installments of $5,087,500 commencing in 2005 through 2010.
(6) SALE OF SELECT BEVERAGES
On May 1, 1998 the Company sold its 20% interest in Select Beverages, Inc.
("Select") acquired as part of the Snapple Acquisition for $28,342,000, subject
to certain post-closing adjustments. The Company recognized a pre-tax gain on
the sale of Select during the nine months ended September 27, 1998 of $4,702,000
(including an additional $803,000 of adjustments to the originally estimated
gain in the third quarter of 1998) representing the excess of the net sales
price over the Company's carrying value of the investment in Select and related
post-closing adjustments and expenses. Such gain was included in "Gain (loss) on
sale of businesses" in the accompanying consolidated statements of operations
for the three and nine-month periods ended September 27, 1998.
(7) INCOME TAXES
The Internal Revenue Service (the "IRS") has completed its examination of
the Company's Federal income tax returns for the tax years from 1989 through
1992 and, in connection therewith, the Company paid $5,298,000, including
interest, during 1997 and paid an additional $8,460,000, including interest,
during the nine-month period ended September 27, 1998. The Company is contesting
at the appellate division of the IRS the remaining proposed adjustments of
approximately $43,000,000, the tax effect of which has not yet been determined.
The IRS has recently commenced its examination of the Company's Federal income
tax returns for the tax year ended April 30, 1993 and eight-month transition
period ended December 31, 1993. The Company believes that adequate aggregate
provisions have been made principally in years prior to 1997 for any tax
liabilities, including interest, that may result from the resolution of the
contested adjustments and the recently commenced examination.
(8) INCOME (LOSS) PER SHARE
The weighted average number of common shares outstanding used in the
calculations of basic income (loss) per share (i) for the three and nine-month
periods ended September 28, 1997 were 30,016,000 and 29,959,000, respectively,
and (ii) for the three and nine-month periods ended September 27, 1998 were
30,362,000 and 30,681,000, respectively. The shares used in the calculations of
diluted income (loss) per share (i) for the three and nine-month periods ended
September 28, 1997 were 30,949,000 and 29,959,000, respectively, and (ii) for
the three and nine-month periods ended September 27, 1998 were 31,131,000 and
32,148,000, respectively. The shares for diluted earnings per share for the
three-month period ended September 28, 1997 include the effect (933,000 shares)
of dilutive stock options. The shares used in the calculations of basic and
diluted income (loss) per share are the same for the nine-month period ended
September 28, 1997 since all potentially dilutive securities (stock options)
would have had an antidilutive effect. The shares for diluted earnings per share
for the three and nine-month periods ended September 27, 1998 also include the
effects (769,000 and 1,467,000 shares, respectively) of dilutive stock options
but exclude any effect of the assumed conversion of the Debentures since the
effect thereof would have been antidilutive.
(9) TRANSACTIONS WITH RELATED PARTIES
The Company continues to lease aircraft owned by Triangle Aircraft
Services Corporation ("TASCO"), a company owned by the Chairman and Chief
Executive Officer and the President and Chief Operating Officer of the Company
(the "Executives"), for annual rent of $3,310,000 as of January 1, 1998. In
connection with such lease and the amortization over a five-year period of a
$2,500,000 May 1997 payment made by the Company to TASCO for (i) an option to
continue the lease for an additional five years effective September 30, 1997 and
(ii) the agreement by TASCO to replace one of the aircraft covered under the
lease, the Company had rent expense of $2,889,000 for the nine-month period
ended September 27, 1998. Pursuant to this arrangement, the Company also pays
the operating expenses of the aircraft directly to third parties.
(10) LEGAL AND ENVIRONMENTAL MATTERS
The Company is involved in litigation, claims and environmental matters
incidental to its businesses. The Company has reserves for such legal and
environmental matters aggregating approximately $3,962,000 as of September 27,
1998. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information and given the Company's aforementioned
reserves, the Company does not believe that such legal and environmental matters
will have a material adverse effect on its consolidated financial position or
results of operations. See Note 11 for discussion of additional litigation
related to a proposed transaction.
(11) SUBSEQUENT EVENTS
On October 12, 1998 the Company announced that its Board of Directors has
formed a Special Committee to evaluate a proposal (the "Proposal") it has
received from the Executives for the acquisition by an entity to be formed by
them of all of the outstanding shares of Triarc's Class A Common Stock (other
than 5,983,000 shares owned by an affiliate of the Executives) for $18.00 per
share payable in cash and securities (the "Proposed Transaction"). The Proposal
is subject to (i) the execution and delivert of a definitive agreement, (ii) the
receipt of a fairness opinion from the financial advisor to the Special
Committee of the Board, (iii) the receipt of satisfactory financing for the
transaction, (iv) approval of the Proposed Transaction by the Special Committee
of the Board, the full Board of Directors and the Company's stockholders and (v)
the expiration of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. There can be no assurance that a definitive
agreement will be executed and delivered or that the Proposed Transaction will
be consummated.
Subsequent to the receipt of the Proposal, a series of purported class
action lawsuits have been filed challenging the Proposed Transaction. Each of
the pending lawsuits names the Company and the members of its Board of Directors
as defendants. The complaints allege, among other things, that the Proposed
Transaction would constitute a breach of the directors' fiduciary duties and
that the proposed consideration to be paid for the shares of Class A Common
Stock is unfair and demand, in addition to damages and costs, that the Proposed
Transaction be enjoined. To date, none of the defendants has responded to the
complaints. The Company does not believe that the outcome of these actions will
have a material adverse effect on its consolidated financial position or results
of operations.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report on Form 10-K for the fiscal year ended December 28, 1997 (the
"Form 10-K") of Triarc Companies, Inc. ("Triarc" or, collectively with its
subsidiaries, the "Company"). The recent trends affecting the Company's beverage
and restaurant segments are described therein. Certain statements under this
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve risks, uncertainties and other factors which
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. For these statements,
the Company claims the protection of the safe harbor for forward-looking
statements contained in the Reform Act. See "Part II - Other Information".
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, the Company's first nine months
of 1997 commenced on January 1, 1997 and ended on September 28, 1997, with its
third quarter commencing on June 30, 1997, and the Company's first nine months
of 1998 commenced on December 29, 1997 and ended on September 27, 1998, with its
third quarter commencing on June 29, 1998. For the purposes of this management's
discussion and analysis, the periods (i) from January 1, 1997 to September 28,
1997 and June 30, 1997 to September 28, 1997 are referred to below as the
nine-month and three-month (or 1997 third quarter) periods ended September 28,
1997, respectively, and (ii) from December 29, 1997 to September 27, 1998 and
June 29, 1998 to September 27, 1998 are referred to below as the nine-month and
three-month (or 1998 third quarter) periods ended September 27, 1998,
respectively.
The discussion below reflects the operations of C.H. Patrick & Co., Inc.
("C.H. Patrick") as discontinued operations as the result of the sale of C.H.
Patrick on December 23, 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
28, 1997
Revenues decreased $4.0 million to $652.0 million in the nine months ended
September 27, 1998 principally reflecting (i) $118.0 million of nonrecurring
reported sales in the 1997 period of the propane segment due to the
deconsolidation of National Propane Partners, L.P. (the "Partnership"), the
Company's 42.7%-owned investment representing its propane business, effective
December 28, 1997 (the "Deconsolidation" - see Note 1 to the accompanying
condensed consolidated financial statements and Notes 3 and 7 to the
consolidated financial statements in the Form 10-K for further discussion) and
(ii) $74.2 million of nonrecurring sales in the 1997 period for the then
company-owned Arby's restaurants, all 355 of which were sold on May 5, 1997 (the
"RTM Sale") to an affiliate of RTM, Inc. (together with such affiliate, "RTM"),
the largest franchisee in the Arby's system. The decrease in revenues as a
result of these factors was partially offset by aggregate sales of $188.1
million in the 1998 period associated with (i) revenues through May 22, 1998
from Snapple Beverage Corp. ("Snapple"), a producer and seller of premium
beverages acquired by the Company from The Quaker Oats Company on May 22, 1997
(the "Snapple Acquisition"), and (ii) revenues from Cable Car Beverage
Corporation ("Cable Car"), a marketer of premium soft drinks acquired by the
Company on November 25, 1997 (the "Stewart's Acquisition" and, collectively with
the Snapple Acquisition, the "Beverage Acquisitions"). Aside from the effects of
these transactions, revenues were essentially unchanged. A discussion of the
changes in revenues by segment is as follows:
Beverages - Aside from the effects of the Beverage Acquisitions,
revenues decreased $9.3 million (2.2%) in the nine months ended
September 27, 1998 due to a decrease in Royal Crown Company,
Inc. ("Royal Crown"), the Company's soft drink concentrate
company ($14.5 million or 12.8%), partially offset by an
increase in premium beverages ($5.2 million or 1.7%). Such
decrease in Royal Crown sales was due to decreases in sales of
concentrate ($8.1 million or 7.7%) and finished goods ($6.4
million or 81.6%). The decrease in sales of concentrate reflects
a $10.1 million decline in branded sales primarily due to
domestic volume declines, partially offset by a $2.0 million
volume increase in private label sales. The domestic volume
decline in branded sales reflects competitive pricing pressures
in the beverage industry and occurred despite the resulting
shift in sales of the C&C beverage line, the rights to which
were sold in July 1997 (the "C&C Sale"), to concentrate from
finished goods. The Company now sells concentrate to the
purchaser of the C&C beverage line rather than finished goods.
The decrease in sales of finished goods was principally due to
the absence in the 1998 period of sales of the C&C beverage
line. The increase in premium beverage sales was due to an
increase in sales of finished goods ($6.9 million) partially
offset by a decrease in sales of concentrate ($1.7 million). The
increase in sales of finished goods principally reflects net
higher volume ($12.4 million), principally due to new product
introductions as well as increases in teas, diet teas and other
diet beverages, partially offset by lower average selling prices
($5.5 million) principally due to a change in Snapple's
distribution in Canada from a company-owned operation with
higher selling prices to an independent distributor with lower
selling prices. The decrease in sales of concentrate resulted
from reduced purchases by an international customer.
Restaurants - Aside from the effect on sales of the RTM Sale,
revenues increased $9.4 million (19.8%) to $57.0 million due to
incremental royalties of $3.2 million during the 1998 period
from the 355 restaurants sold to RTM and, with respect to
restaurants other than those sold to RTM in the RTM Sale, (i) a
2.8% increase in same-store sales of franchised restaurants and
(ii) an average net increase of 47 (1.6%) franchised
restaurants.
Gross profit (total revenues less cost of sales) increased $35.0 million to
$334.4 million in the nine months ended September 27, 1998 reflecting the gross
profit in the 1998 period associated with (i) the full period effect of Snapple
and (ii) the effect of Cable Car, partially offset by the effects of the
Deconsolidation and the RTM Sale. Aside from the effects of these transactions,
gross profit decreased $3.7 million reflecting lower aggregate gross margins
(gross profit divided by total revenues) principally due to an overall shift in
beverage revenue mix and lower beverage gross margins, both as discussed below.
A discussion of the changes in gross margins by segment which, aside from the
effects of the transactions noted above, decreased slightly in the aggregate to
55% from 56%, is as follows:
Beverages - Aside from the effects in the 1998 period of (i) the
full period effect of the Snapple Acquisition and (ii) the
Stewart's Acquisition, gross margins decreased to 49% from 51%
reflecting the higher proportion in the 1998 period of
lower-margin premium beverage sales, which margins decreased to
40% from 41%, and a decrease in Royal Crown's gross margins to
76% from 77%. Such decrease in premium beverage gross margins
was principally due to the effects of (i) changes in product mix
and (ii) the aforementioned change in Snapple's Canadian
distribution, both substantially offset by the effect of the
lower cost of flavors raw materials in the 1998 period. Royal
Crown's gross margins decreased as the effect of the shift in
product mix to higher-margin concentrate sales was more than
offset by the effect of a nonrecurring 1997 period reduction to
cost of sales of $2.9 million resulting from the guarantee to
the Company of certain minimum gross profit levels on sales to
the Company's private label customer. The Company has no similar
guarantee of minimum gross profit levels in 1998.
Restaurants - Aside from the effects of the RTM Sale, gross
margins are 100% due to the fact that royalties and franchise
fees (with no associated cost of sales) now constitute the total
revenues of the segment.
Advertising, selling and distribution expenses increased $21.8 million to
$166.8 million in the nine months ended September 27, 1998 reflecting the 1998
expenses associated with (i) the full period effect of Snapple and (ii) the
effect of Cable Car, partially offset by (a) a decrease in the expenses of the
restaurant segment principally due to the cessation of local restaurant
advertising and marketing expenses resulting from the RTM Sale, (b) a decrease
in the expenses of the beverage segment exclusive of Snapple prior to May 22 of
each year and Cable Car principally due to (i) less costly promotional programs
in premium beverages in the 1998 period, (ii) lower bottler promotional
reimbursements resulting from the decline in branded concentrate sales volume
and (iii) planned reductions in connection with the aforementioned decrease in
sales of C&C products and (c) the effect of the Deconsolidation.
General and administrative expenses were essentially unchanged at $106.1
million for the nine months ended September 27, 1998 as increases due to (i) the
1998 full period effect of the expenses of Snapple, (ii) the 1998 expenses of
Cable Car and (iii) provisions in the 1998 third quarter for the anticipated
settlement of a lawsuit with Arby's Mexican master franchisee and a severance
arrangement under the last of Triarc's 1993 executive employment agreements,
were fully offset by decreases principally reflecting (i) the effect of the
Deconsolidation, (ii) reduced restaurant segment spending levels related to
administrative support, principally payroll, no longer required for the sold
restaurants as a result of the RTM Sale and other cost reduction measures and
(iii) nonrecurring costs in the 1997 period in connection with the integration
of the Snapple business following its acquisition.
The nonrecurring acquisition related costs of $32.4 million in the nine
months ended September 28, 1997 were associated with the Snapple Acquisition and
were substantially of the general nature and magnitude as the acquisition
related costs set forth in Note 13 to the consolidated financial statements in
the Form 10-K.
The nonrecurring facilities relocation and corporate restructuring charge
of $7.4 million in the nine months ended September 28, 1997 principally
consisted of employee severance and related termination costs and employee
relocation associated with restructuring the restaurant segment in connection
with the RTM Sale and, to a lesser extent, costs associated with the relocation
of Royal Crown's headquarters, which was centralized in the headquarters of
Triarc Beverage Holdings Corp. ("TBHC"), a wholly-owned subsidiary of the
Company and the parent of Snapple and Mistic Brands, Inc. ("Mistic"), a
wholly-owned subsidiary of the Company.
Interest expense was essentially unchanged at $52.2 million for the nine
months ended September 27, 1998 as the effect of higher average levels of debt
due to increases from (i) the full period effect in 1998 of borrowings by
Snapple in connection with the May 22, 1997 Snapple Acquisition ($215.5 million
outstanding as of September 27, 1998) and (ii) the February 9, 1998 issuance by
Triarc of zero coupon convertible subordinated debentures due 2018 (the
"Debentures") ($104.3 million net of unamortized original issue discount
outstanding as of September 27, 1998) were fully offset by (i) the full period
effect in 1998 of the assumption by RTM in connection with the RTM Sale of $69.6
million of mortgage and equipment notes payable and capitalized lease
obligations and (ii) a net $7.0 million decrease in interest expense as a result
of the Deconsolidation of the Partnership.
Investment income, net increased $0.3 million to $11.2 million in the nine
months ended September 27, 1998 principally reflecting (i) a $3.9 million
increase in net realized gains on the sales of short-term investments in the
1998 period to $8.6 million, (ii) $2.6 million of realized and unrealized gains
in the 1998 period on securities sold short, which together with the
aforementioned 1998 realized gains may not recur in future periods, and (iii) a
$2.6 million increase in interest income principally reflecting higher levels of
commercial paper from the investment therein of a portion of the net proceeds
from the issuance of the Debentures. Such increases were substantially offset by
an $8.7 million provision in the 1998 third quarter for unrealized losses on
short-term investments and other investments deemed to be other than temporary
due to recent global economic conditions and/or volatility in capital and
lending markets experienced in such quarter. After such provision for unrealized
losses deemed to be other than temporary, the aggregate market value of the
Company's investments as of September 27, 1998 is $10.8 million less than
adjusted cost; such unrealized loss has been deemed to be temporary. Should such
economic and market conditions continue or worsen, further provisions for other
than temporary unrealized losses on short-term investments and other investments
may be necessary in future periods.
Gain on sale of businesses of $6.5 million in the nine months ended
September 27, 1998 consists of (i) a pre-tax $4.7 million gain from the May 1998
sale of the Company's 20% interest in Select Beverages, Inc. ("Select"), (ii) a
$1.6 million gain from the receipt by Triarc of distributions from the
Partnership in excess of its 42.7% equity in the earnings of the Partnership
("Excess Distributions") and (iii) the recognition of $0.2 million of deferred
gain from the C&C Sale. Gain on sale of businesses of $0.3 million in the nine
months ended September 28, 1997 consists of (i) a $2.1 million gain from the
receipt by Triarc of Excess Distributions and (ii) a $0.5 million gain on the
C&C Sale, both recognized in the third quarter of 1997 and partially offset by
the then estimated $2.3 million loss on the RTM Sale recognized in the 1997
first half.
Other income, net amounted to expense of $1.7 million in the nine months
ended September 27, 1998 compared with income of $3.6 million in the comparable
1997 period. Such deterioration of $5.3 million was principally due to (a) $4.7
million of equity in the losses of affiliates, principally the Partnership
(recognized as a result of the Deconsolidation) and Select (acquired in
connection with the Snapple Acquisition), recorded in the 1998 period compared
with $0.8 million of equity in income in the 1997 period and (b) nonrecurring
income in the 1997 first half, most significantly (i) a reversal of $1.9 million
of legal fees incurred prior to 1997 as a result of a cash settlement received
from Victor Posner ("Posner"), the former Chairman and Chief Executive Officer
of the Company, and an affiliate of Posner and (ii) a $0.9 million gain on lease
termination for a portion of the space no longer required in the current
headquarters of Arby's, Inc. (d/b/a Triarc Restaurant Group - "TRG") and former
headquarters of Royal Crown due to staff reductions as a result of the RTM Sale
and the relocation of the Royal Crown headquarters, both partially offset by a
$2.4 million charge related to a joint venture investment settlement recorded in
the 1997 third quarter.
The Company's (provision for) and benefit from income taxes for the nine
months ended September 27, 1998 and September 28, 1997 represented effective
rates of 53% and 24%, respectively. Such rate is higher in the 1998 period
principally due to the differing impact on the respective effective rates of the
amortization of nondeductible costs in excess of net assets of acquired
companies ("Goodwill") in a period with pre-tax income (1998) compared with a
period with a pre-tax loss (1997).
The minority interests in net income of a consolidated subsidiary (the
Partnership) of $1.2 million in the nine months ended September 28, 1997
represent the limited partners' 57.3% interests in the net income of the
Partnership. As a result of the Deconsolidation, effective in 1998 minority
interests are effectively netted against the equity in the loss of the
Partnership included in "Other income (expense), net."
Income from discontinued operations increased $0.7 million to $2.6 million
in the nine months ended September 27, 1998. The 1998 amount represents a first
quarter adjustment to amounts provided in prior years for the estimated loss on
disposal of certain discontinued operations of Southeastern Public Service
Company, a subsidiary of the Company. The amount in the 1997 period represents
the net income of C.H. Patrick which, as noted above, was sold in December 1997.
The extraordinary charges in the 1997 period result from (i) the May 1997
assumption by RTM of mortgage and equipment notes payable in connection with the
RTM Sale and (ii) the refinancing of the bank facility of Mistic and were
comprised of the write-off of $4.9 million of previously unamortized deferred
financing costs less the related income tax benefit of $1.9 million.
THREE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
28, 1997
Revenues decreased $11.5 million to $247.0 million in the three months
ended September 27, 1998 reflecting $29.3 million of nonrecurring reported sales
in the 1997 third quarter of the propane segment due to the Deconsolidation
partially offset by sales of $8.2 million in the 1998 third quarter associated
with Cable Car. Aside from the effects of these transactions, revenues increased
$9.6 million. A discussion of such change by segment is as follows:
Beverages - Aside from the effect of the acquisition of Cable Car,
revenues increased $7.9 million (3.7%) in the three months ended
September 27, 1998 due to an increase in premium beverages ($9.8
million or 5.5%) partially offset by a decrease in Royal Crown ($1.9
million or 5.9%). The increase in premium beverage sales was due to
increases in sales of finished goods principally reflecting (i) net
higher volume ($6.3 million) primarily resulting from the effects of
new product introductions and (ii) higher average selling prices
($3.5 million) due to changes in product mix also reflecting new
product introductions partially offset by the aforementioned effect
of the change in Snapple's distribution in Canada. Such decrease in
Royal Crown sales was due to decreases in sales of concentrate ($1.0
million or 3.2%) and finished goods ($0.9 million or 98.8%). The
decrease in sales of concentrate reflected a $3.0 million decline in
branded sales primarily due to domestic volume declines reflecting
competitive pricing pressures in the beverage industry and occurred
despite the resulting shift in sales of the C&C beverage line to
concentrate from finished goods previously discussed, partially
offset by a $2.0 million volume increase in private label sales. The
decrease in sales of finished goods was principally due to the full
period effect in the 1998 quarter of the absence of sales of the C&C
beverage line as a result of the C&C Sale.
Restaurants - Revenues (comprised entirely of royalties and franchise
fees) increased $1.7 million (9.6%) to $19.7 million due to (i) a
3.5% increase in same-store sales of franchised restaurants and (ii)
an average net increase of 61 (2.0%) franchised restaurants.
Gross profit decreased $2.1 million to $123.9 million in the three months
ended September 27, 1998 reflecting the effect of the Deconsolidation partially
offset by the gross profit in the 1998 third quarter associated with Cable Car.
Aside from these effects, gross profit decreased $0.4 million as the effect of
the higher overall sales volume discussed above was more than offset by lower
overall gross margins reflecting an overall shift in beverage revenue mix and
lower beverage gross margins, both as discussed below. A discussion of the
changes in gross margins by segment, which aside from the effects of the
transactions noted above, decreased in the aggregate to 51% from 53%, is as
follows:
Beverages - Aside from the effect in the 1998 third quarter of the
Stewart's Acquisition, gross margins decreased to 46% from 49%
reflecting the higher proportion in the 1998 quarter of lower- margin
premium beverage sales, which margins decreased to 41% from 43% and a
decrease in Royal Crown's gross margins to 77% from 83%. The decrease
in premium beverage gross margins was principally due to the effects
of (i) changes in product mix and (ii) the aforementioned change in
Snapple's Canadian distribution, both partially offset by the effect
of lower cost of flavors raw materials in the 1998 quarter. Royal
Crown's gross margins decreased primarily due to the effect of a
nonrecurring reduction to cost of sales of $1.9 million in the 1997
third quarter resulting from the previously discussed guarantee to
the Company of certain minimum gross profit levels on sales to the
Company's private label customer.
Restaurants - Restuarant gross margins are 100% in both periods due
to the fact that royalties and franchise fees (with no associated
cost of sales) now constitute the total revenues of the segment.
Advertising, selling and distribution expenses decreased $4.8 million to
$56.5 million in the three months ended September 27, 1998 reflecting (i) a
decrease in the expenses of the beverage segment exclusive of Cable Car
principally due to (a) lower bottler promotional reimbursements resulting from
the decline in branded concentrate sales volume and (b) less costly promotional
programs in premium beverages in the 1998 quarter and (ii) the effect of the
Deconsolidation, partially offset by the 1998 third quarter expenses associated
with Cable Car.
General and administrative expenses decreased $2.5 million to $38.6 million
in the three months ended September 27, 1998 principally due to (i) the effect
of the Deconsolidation and (ii) nonrecurring costs in the 1997 third quarter in
connection with the integration of the Snapple business following its
acquisition, both partially offset by the higher expenses resulting from (i) the
provisions in the 1998 third quarter for the anticipated settlement of a
franchisee lawsuit and the executive severance agreement, both as described
above in the nine-month discussion, and (ii) the 1998 third quarter expenses of
Cable Car.
Interest expense decreased $2.3 million to $17.7 million in the three
months ended September 27, 1998 reflecting a net $2.5 million decrease as a
result of the Deconsolidation of the Partnership slightly offset by higher
overall average levels of debt.
Investment income (loss), net amounted to a loss of $3.9 million for the
three months ended September 27, 1998 compared with income of $6.4 million in
the 1997 quarter. Such deterioration of $10.3 million principally reflected (i)
the aforementioned $8.7 million charge for other than temporary losses and (ii)
a $5.1 million decline in net realized gain or loss on sales of short-term
investments in the 1998 third quarter to a loss of $0.5 million, both partially
offset by (i) $2.4 million of realized and unrealized gains in the 1998 third
quarter from securities sold short and (ii) a $1.1 million increase in interest
income principally reflecting higher levels of investment in commercial paper
from a portion of the net proceeds from the issuance of the Debentures.
Gain on sale of businesses of $1.6 million in the 1998 third quarter
reflects (i) a $0.8 million adjustment to the estimated gain from the sale of
the Company's interest in Select and (ii) the recognition of an additional $0.8
million of gain from the receipt by Triarc of Excess Distributions in prior
quarters from the Partnership. Gain on sale of businesses of $2.6 million in the
three months ended September 28, 1997 consists of a $2.1 million gain from the
receipt by Triarc of Excess Distributions from the Partnership and a $0.5
million gain on the C&C Sale.
Other expense, net increased $0.9 million to $2.0 million in the three
months ended September 27, 1998 principally due to $2.9 million of equity in the
losses of affiliates, principally the Partnership (recognized as a result of the
Deconsolidation), recorded in the 1998 third quarter compared with $0.8 million
of equity in income in the 1997 third quarter, partially offset by the
aforementioned $2.4 million charge related to a joint venture investment
settlement recorded in the 1997 third quarter.
The Company's provision for income taxes for the three months ended
September 27, 1998 and September 28, 1997 represented effective rates of 67% and
27%, respectively. Such rate is higher in the 1998 third quarter principally due
to (i) the differing impact on the respective effective rates of the
amortization of Goodwill in a quarter with projected full-year pre-tax income
(1998) compared with a quarter with a projected full-year pre-tax loss (1997)
and (ii) the catch-up effect of a year-to-date increase in the estimated
full-year 1998 effective tax rate from 48% to 53%.
The minority interests in net loss of a consolidated subsidiary (the
Partnership) of $1.9 million in the three months ended September 28, 1997
represent the limited partners' 57.3% interests in the net loss of the
Partnership. As a result of the Deconsolidation and as previously discussed,
minority interests for the 1998 third quarter are included in "Other income
(expense), net".
Income from discontinued operations of $0.6 million in the three months
ended September 28, 1997 represents the net income of C.H. Patrick which, as
noted above, was sold in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash and cash equivalents
(collectively "cash") of $13.4 million during the nine months ended September
27, 1998 principally reflecting net income of $14.5 million and net non-cash
charges of $55.8 million partially offset by (i) cash used by changes in
operating assets and liabilities of $24.5 million, (ii) reclassifications to
investing activities and discontinued operations of $18.0 million, (iii) the
payment of previously accrued acquisition related costs of $5.9 million
associated with the Snapple Acquisition and (iv) the payment of $8.5 million in
connection with a Federal income tax settlement described below. The cash used
by changes in operating assets and liabilities of $24.5 million principally
reflects (i) an increase in receivables of $21.3 million principally due to a
seasonal increase in the beverage business and (ii) an increase in inventories
of $13.9 million reflecting a $20.1 million increase in premium beverage
inventories due to (a) an expanded product line, (b) the expectation that the
higher volumes experienced to date in 1998 would continue beyond the peak summer
selling season and (c) seasonality, partially offset by a $6.2 million decrease
in Royal Crown inventories reflecting a reduction of higher than normal year-end
inventory levels of aspartame reflecting purchases, and resulting inventory
build-ups, during the latter part of 1997 by Royal Crown in order to take
advantage of a 1997 promotional incentive. Such increases in receivables and
inventories were partially offset by an increase in accounts payable and accrued
expenses of $8.6 million principally due to the increase in premium beverage
inventories. The Company expects continued positive cash flows from operations
for the remainder of 1998 which should reflect the reversal following the peak
summer season of the seasonal increases in receivables and, to a lesser extent,
inventories during the first nine months of 1998.
Working capital (current assets less current liabilities) was $217.1
million at September 27, 1998, reflecting a current ratio (current assets
divided by current liabilities) of 1.9:1. Such amount represents an increase in
working capital of $87.0 million from December 28, 1997 principally reflecting
proceeds of $100.2 million from the sale of the Debentures less repurchases of
stock for treasury of $53.2 million, both described below, and proceeds of $28.3
million from the Company's sale of its 20% non-current investment in Select.
The Company maintains a credit agreement, as amended August 15, 1998 (the
"Credit Agreement"), entered into by Snapple, Mistic, TBHC and Cable Car
(collectively, the "Borrowers") consisting of a $300.0 million term facility of
which there were $287.3 million of term loans (the "Term Loans") outstanding as
of September 27, 1998 and an $80.0 million revolving credit line (the "Revolving
Credit Line") providing for revolving credit loans (the "Revolving Loans") by
the Borrowers of which there were no outstanding borrowings as of September 27,
1998. The borrowing base for Revolving Loans is the sum of 80% of eligible
accounts receivable and 50% of eligible inventory. As of September 27, 1998,
borrowing availability under the Revolving Credit Line was $63.9 million in
accordance with the limitations of such borrowing base. The Term Loans are due
in increasing annual amounts through 2004 with a final payment in 2005. The
Borrowers must also make mandatory prepayments (the "Cash Flow Prepayments") in
an amount, if any, equal to 75% of excess cash flow, as defined in the Credit
Agreement. The excess cash flow for the period May 22, 1997 through December 28,
1997 resulted in a required prepayment of $2.8 million which was made in May
1998. Such prepayment reduced each of the remaining annual amounts of principal
payments of the Term Loans by varying amounts in accordance with the Credit
Agreement including an insignificant reduction of the scheduled principal
payments during the fourth quarter of 1998. Scheduled principal payments on the
Term Loans aggregate $3.0 million during the remainder of 1998. In addition,
preliminary estimates indicate that Cash Flow Prepayments may be required for
the year ending January 3, 1999 and the Company may prepay some portion thereof
in the fourth quarter of 1998.
The $275.0 million aggregate principal amount of 9 3/4% senior secured
notes due 2000 (the "9 3/4% Senior Notes") of RC/Arby's Corporation ("RCAC")
mature on August 1, 2000 and do not require any amortization of the principal
amount thereof prior to such date. The 9 3/4% Senior Notes are, however,
redeemable at the option of RCAC at approximately 102.8% and 101.4% of principal
amount through July 31, 1999 and 2000, respectively. Triarc and RCAC are
currently evaluating refinancing alternatives with respect to the 9 3/4% Senior
Notes. No decision has been made to pursue any particular refinancing
alternative and there can be no assurance that any such refinancing will be
effected.
As of September 27, 1998 the Company has $4.2 million of notes payable to
FFCA Mortgage Corporation ("FFCA") which were not initially assumed by RTM in
connection with the RTM Sale. Such notes are repayable in monthly installments,
including interest, through 2016. Amounts due under these notes during the
remainder of 1998 are $0.1 million to be paid in cash.
The Company has a note payable to the Partnership (the "Partnership Note")
with an original principal amount of $40.7 million bearing interest at 13 1/2%
payable in cash. Effective June 30, 1998 the Partnership Note was amended to,
among other things, permit the Company, at its option, to prepay up to $10.0
million (the "Partnership Note Prepayments") of the principal of the Partnership
Note at any time through February 14, 1999. On August 7, 1998 the Company
prepaid $7.0 million of the Partnership Note in order to (i) retroactively cure
the Partnership's noncompliance as of June 30, 1998 with restrictive covenants
contained in its bank facility agreement and (ii) permit the Partnership to pay
in August 1998 its normal quarterly distribution with respect to the second
quarter of 1998 on its common units representing limited partner interests with
a proportionate amount for the Company's general partners' interest (see below).
Additionally, on September 30, 1998 the Company prepaid the remaining permitted
$3.0 million. The remaining principal amount of the Partnership Note of $30.7
million after the aggregate $10.0 million Partnership Note Prepayments is due
$0.2 million in 2004 and six equal annual installments of approximately $5.1
million commencing in 2005 through 2010 and, accordingly, does not require any
principal payments during the remainder of 1998.
On February 9, 1998 the Company sold the Debentures with an aggregate
principal amount at maturity of $360.0 million to Morgan Stanley & Co.
Incorporated ("Morgan Stanley") as the initial purchaser for an offering to
"qualified institutional buyers". The Debentures mature in 2018 without any
amortization of the principal amount required prior thereto. The Debentures were
issued at a discount of 72.177% from principal and resulted in proceeds to the
Company of $100.2 million, before placement fees and other related fees and
expenses aggregating approximately $4.0 million. The Company utilized $25.6
million of the net proceeds from the sale of the Debentures to purchase
1,000,000 shares for treasury and is using the remainder, which is principally
held in cash equivalents as of September 27, 1998, for general corporate
purposes, including investments, working capital requirements, additional
treasury stock repurchases, repayment or refinancing of indebtedness and
acquisitions. The Debentures are convertible into Class A common stock (the
"Class A Common Stock") at a conversion rate of 9.465 shares per $1,000
principal amount at maturity, which represents an initial conversion price of
approximately $29.40 per share of Class A Common Stock. The conversion price
will increase over the life of the Debentures at an annual rate of 6.5% and
currently the conversion of all of the Debentures into Class A Common Stock
would result in the issuance of 3,407,400 shares of Class A Common Stock. In
June 1998 a shelf registration statement covering resales by holders of the
Debentures (and the Class A Common Stock issuable upon any conversion of the
Debentures) was declared effective by the Securities and Exchange Commission.
Under the Company's various debt agreements, substantially all of Triarc's
and its subsidiaries' assets other than cash and short-term investments are
pledged as security. In addition, obligations under (i) the 9 3/4% Senior Notes
have been guaranteed by RCAC's wholly-owned subsidiaries, Royal Crown and TRG,
(ii) the $125.0 million of 8.54% first mortgage notes due June 30, 2010 of
National Propane, L.P., a subpartnership of the Partnership, and $13.0 million
outstanding under a bank credit facility maintained by National Propane, L.P.,
have been guaranteed by National Propane Corporation ("National Propane"), the
managing general partner of the Partnership and a subsidiary of the Company and
(iii) borrowings under loan agreements with FFCA consisting of (a) the mortgage
notes and equipment notes assumed by RTM in connection with the RTM Sale
(approximately $51.8 million as of September 27, 1998, assuming RTM has made all
scheduled payments through such date) and (b) the remaining $4.2 million of debt
retained by the Company, have been guaranteed by Triarc. As collateral for the
guarantees, all of the stock of Royal Crown, TRG and National Propane SGP, Inc.,
a subsidiary of National Propane and the holder of a 2% unsubordinated general
partner interest in the Partnership (see below), is pledged as well as National
Propane's 2% unsubordinated general partner interest in the Partnership.
Although Triarc has not guaranteed the obligations under the Credit Agreement,
all of the stock of Snapple, Mistic, TBHC and Cable Car is pledged as security
for payment of such obligations. Although the stock of National Propane is not
pledged in connection with any guarantee of debt obligations, the 75.7% of such
stock owned by Triarc directly is pledged as security for obligations under the
Partnership Note.
Consolidated capital expenditures amounted to $9.7 million for the nine
months ended September 27, 1998, including $4.6 million which RCAC was required
to reinvest in core business assets under the indenture pursuant to which the 9
3/4% Senior Notes were issued as a result of the C&C Sale and certain other
asset disposals in the latter half of 1997 in lieu of RCAC utilizing the net
proceeds to purchase 9 3/4% Senior Notes. In addition to capital expenditures,
the Company completed its purchases of two ownership interests in corporate
aircraft in the nine months ended September 27, 1998 for $3.7 million. The
Company expects that capital expenditures will approximate $2.5 million during
the remainder of 1998. As of September 27, 1998 there were approximately $0.7
million of outstanding commitments for such estimated capital expenditures.
In furtherance of the Company's growth strategy, the Company considers
selective business acquisitions, as appropriate, to grow strategically and
explores other alternatives to the extent it has available resources to do so.
In that connection, on August 27, 1998 the Company acquired from Paramark
Enterprises, Inc. ("Paramark", formerly known as T.J. Cinnamons, Inc.) all of
Paramark's franchise agreements for T.J. Cinnamons full concept bakeries as well
as Paramark's wholesale distribution rights for T.J. Cinnamons products, thereby
expanding the Company's existing T.J. Cinnamons operations. The purchase price
consisted of cash of $3.0 million, a $1.0 million promissory note payable in
equal monthly installments over 24 months and a contingent payment of up to $1.0
million dependent upon achieving certain specified sales targets during the full
1998 calendar year.
The Internal Revenue Service (the "IRS") has completed its examination of
the Company's Federal income tax returns for the tax years from 1989 through
1992 and, in connection therewith, the Company paid $5.3 million, including
interest, during 1997 and paid an additional $8.5 million, including interest,
during the nine months ended September 27, 1998. The Company is contesting at
the appellate division of the IRS the remaining proposed adjustments of
approximately $43.0 million, the tax effect of which has not yet been
determined. Accordingly, the amount and timing of any payments required as a
result of such examination cannot presently be determined. The IRS has recently
commenced its examination of the Company's Federal income tax returns for the
tax year ended April 30, 1993 and eight-month transition period ended December
31, 1993. The Company, however, does not expect the recently commenced
examination to result in any tax or interest payments during the remainder of
1998.
The Company has a stock repurchase program originally announced in October
1997 and amended in March 1998. The Company had repurchased 348,700 shares of
its Class A Common Stock at an aggregate cost of $8.9 million under this program
through July 28, 1998, of which 281,500 shares at an aggregate cost of $7.3
million were purchased from December 29, 1997 through July 28, 1998. On July 28,
1998 the program was further amended such that the Company is authorized, when
and if market conditions warrant, to repurchase from July 29, 1998 until July
27, 1999, up to an additional $50.0 million of its Class A Common Stock. The
Company repurchased an additional 1,295,750 shares of at an aggregate cost of
$20.3 million under this amended program through September 27, 1998. Subsequent
to September 27, 1998 the Company repurchased an additional 95,600 shares at an
aggregate cost of $1.5 million through October 30, 1998 under the current
program and is making no further share repurchases pending the outcome of the
Proposed Transaction described below. The Company has $28.2 million of
availability for future repurchases; however, there can be no assurance that the
Company will repurchase any additional shares of its Class A Common Stock under
this program. In addition to the stock repurchases since October 1997, in
February 1998 the Company used a portion of the proceeds from the sale of the
Debentures to purchase 1,000,000 shares of its Class A Common Stock for an
aggregate price of $25.6 million from Morgan Stanley.
The Company owns, through National Propane, 4.5 million subordinated units
(the "Subordinated Units") representing an approximate 38.7% subordinated
partnership interest in the Partnership. The Company also owns, through National
Propane and a subsidiary, an aggregate 4.0% unsubordinated general partners'
interest (the "Unsubordinated General Partners' Interest") in the Partnership
and a subpartnership. The Partnership distributes to its partners on a quarterly
basis all of its available cash ("Available Cash") as defined in its partnership
agreement, the main source of which would be cash flows from its operations, as
supplemented by any Partnership Note Prepayments. In connection therewith, the
Company received quarterly distributions on the Subordinated Units (the
"Subordinated Distributions") from the Partnership and quarterly distributions
on the Unsubordinated General Partners' Interest (the "General Partner
Distributions" and, collectively with the Subordinated Distributions, the
"Distributions") of $2.4 million and $0.2 million, respectively, in February
1998 with respect to the fourth quarter of 1997 and has received General Partner
Distributions of $0.1 million in each of May and August 1998 with respect to the
first two quarters of 1998. The General Partner Distribution with respect to the
third quarter of $0.1 million is payable November 13, 1998. No Subordinated
Distributions were paid or will be paid with respect to 1998 since (i)
subsequent to the distribution for the fourth quarter of 1997, the Company
agreed to forego any additional Subordinated Distributions in order to
facilitate the Partnership's compliance with debt covenant restrictions in its
bank facility agreement and (ii) subsequent to the distribution for the first
quarter of 1998, in accordance with amendments to its debt agreements effective
June 30, 1998, the Partnership agreed not to pay any additional Subordinated
Distributions with respect to the remaining three quarters of 1998. Thereafter,
the Company will not receive any Distributions until the Partnership (i) is able
to generate sufficient Available Cash through operations and (ii) maintains
compliance with the restrictions embodied in the covenants in its amended debt
agreements and, with respect to Subordinated Distributions, (i) achieves
compliance with the original restrictions embodied in the covenants in its bank
facility agreement and (ii) pays any dividend arrearages on the Partnership's
publicly traded common units in full, currently representing a $1.8 million
arrearage with respect to the distribution declared with respect to the third
quarter of 1998. Therefore, there can be no assurance that the Company will
receive any such future Distributions.
On May 1, 1998 the Company sold its 20% non-current investment in Select
for cash of $28.3 million.
As of September 27, 1998, the Company's cash requirements for the remainder
of 1998, exclusive of operating cash flow requirements, consist principally of
(i) debt principal repayments including (a) scheduled repayments currently
aggregating $3.3 million (including $3.0 million of scheduled repayments under
the Term Loans and $0.1 million under the FFCA notes) and (b) any prepayment of
Cash Flow Prepayments under the Credit Agreement, (ii) the $3.0 million
prepayment under the Partnership Note made on September 30, 1998, (iii)
estimated capital expenditures of $2.5 million, (iv) Federal income tax
payments, if any, related to the $43.0 million of contested proposed adjustments
from the IRS examination of the Company's 1989 through 1992 income tax returns,
(v) the treasury stock repurchases of $1.5 million subsequent to September 27,
1998 and through October 30, 1998 and any additional repurchases and (vi) the
cost of additional business acquisitions, if any. The Company anticipates
meeting all of such requirements through existing cash and cash equivalents and
short-term investments (aggregating $229.8 million, net of $21.0 million of
obligations for short-term investments sold short included in "Accrued expenses"
in the accompanying condensed consolidated balance sheet as of September 27,
1998), cash flows from operations and availability under the Revolving Credit
Line.
TRIARC
Triarc is a holding company whose ability to meet its cash requirements is
primarily dependent upon its (i) cash and cash equivalents and short-term
investments (aggregating $164.4 million, net of $21.0 million of obligations for
short-term investments sold short as of September 27, 1998), (ii) investment
income on its cash equivalents and short-term investments and (iii) cash flows
from its subsidiaries including loans, distributions and dividends (see
limitations below) and reimbursement by certain subsidiaries to Triarc in
connection with the (a) providing of certain management services and (b)
payments under tax-sharing agreements with certain subsidiaries.
Triarc's principal subsidiaries, other than CFC Holdings Corp. ("CFC
Holdings"), the parent of RCAC, and National Propane, are unable to pay any
dividends or make any loans or advances to Triarc during 1998 under the terms of
the various indentures and credit arrangements, except as follows. As permitted
under the Credit Agreement, a one-time dividend of $21.3 million was paid to
Triarc by TBHC during the third quarter of 1998. Additionally, a dividend of
$2.3 million was paid to Triarc by Cable Car during the third quarter of 1998
prior to Cable Car becoming a borrower under the Credit Agreement. While there
are no restrictions applicable to National Propane, National Propane is
dependent upon cash flows from the Partnership, principally quarterly
Distributions from the Partnership. As set forth above, National Propane
received $2.4 million and $0.2 million of Subordinated Distributions and General
Partner Distributions, respectively, in February 1998 and $0.1 million of
General Partner Distributions in each of May and August 1998 and will receive
$0.1 million of General Partner Distributions on November 13, 1998. Also as
discussed above, National Propane will not receive any additional Subordinated
Distributions for the remainder of 1998 and there can be no assurance that
National Propane will receive any such Subordinated Distributions in the
foreseeable future. While there are no restrictions applicable to CFC Holdings,
CFC Holdings is dependent upon cash flows from RCAC to pay dividends and, as of
September 27, 1998, RCAC was unable to pay any dividends or make any loans or
advances to CFC Holdings.
Triarc's indebtedness to consolidated subsidiaries aggregated $31.4 million
as of September 27, 1998. Such indebtedness consists of a $30.0 million demand
note payable to National Propane bearing interest at 13 1/2% payable in cash
(the "$30 Million Note") and a $1.4 million demand note due to Chesapeake
Insurance Company Limited ("Chesapeake Insurance"), a wholly-owned subsidiary of
the Company. While the $30 Million Note requires the payment of interest in
cash, Triarc currently expects to receive dividends from National Propane equal
to such cash interest. Triarc expects to pay $0.2 million of principal on the
note due to Chesapeake Insurance during the remainder of 1998; assuming no
further demand is made thereunder and none is anticipated. The $30 Million Note
requires no principal payments during the remainder of 1998, assuming no demand
is made thereunder, and none is anticipated. As described above, Triarc also has
indebtedness of $33.7 million under the Partnership Note which requires no
principal payments during the remainder of 1998 but under which Triarc prepaid
$3.0 million of principal on September 30, 1998.
Triarc's principal cash requirements for the remainder of 1998 are (i)
payments of general corporate expenses, (ii) the $3.0 million prepayment under
the Partnership Note, (iii) interest due on the Partnership Note, (iv)
additional payments, if any, related to the $43.0 million of proposed
adjustments from the IRS examination of the Company's 1989 through 1992 income
tax returns being contested, (v) the treasury stock repurchases of $1.5 million
through October 30, 1998 and any additional repurchases, and (vi) the cost of
business acquisitions, if any. Triarc expects to be able to meet all of such
cash requirements for the remainder of 1998 through existing cash and cash
equivalents and short-term investments.
LEGAL AND ENVIRONMENTAL MATTERS
The Company is involved in litigation, claims and environmental matters
incidental to its businesses. The Company has reserves for such legal and
environmental matters aggregating approximately $4.0 million as of September 27,
1998. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information and given the Company's aforementioned
reserves, the Company does not believe that such legal and environmental matters
will have a material adverse effect on its consolidated results of operations or
financial position. See below for discussion of additional litigation related to
a proposed transaction.
PROPOSED TRANSACTION
On October 12, 1998 the Company announced that its Board of Directors has
formed a Special Committee to evaluate a proposal (the "Proposal") it has
received from the Chairman and Chief Executive Officer and the President and
Chief Operating Officer of the Company (the "Executives") for the acquisition by
an entity to be formed by them of all of the outstanding shares of Triarc's
Class A Common Stock (other than 6.0 million shares owned by an affiliate of the
Executives) for $18.00 per share payable in cash and securities (the "Proposed
Transaction"). The Proposal is subject to (i) the execution and delivery of a
definitive agreement, (ii) the receipt of a fairness opinion from the financial
advisor to the Special Committee of the Board, (iii) the receipt of satisfactory
financing for the transaction, (iv) approval of the Proposed Transaction by the
Special Committee of the Board, the full Board of Directors and the Company's
stockholders and (v) the expiration of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. There can be no assurance
that a definitive agreement will be executed and delivered or that the Proposed
Transaction will be consummated.
Subsequent to the receipt of the Proposal, a series of purported class
action lawsuits have been filed challenging the Proposed Transaction. Each of
the pending lawsuits names the Company and the members of its Board of Directors
as defendants. The complaints allege, among other things, that the Proposed
Transaction would constitute a breach of the directors' fiduciary duties and
that the proposed consideration to be paid for the shares of Class A Common
Stock is unfair and demand, in addition to damages and costs, that the Proposed
Transaction be enjoined. To date, none of the defendants have responded to the
complaints. The Company does not believe that the outcome of these actions will
have a material adverse effect on its consolidated results of operations or
financial position.
YEAR 2000
The Company has undertaken a study of its functional application systems to
determine their compliance with year 2000 issues and, to the extent of
noncompliance, the required remediation. The Company's study consisted of an
eight-step methodology to: (1) obtain an awareness of the issues; (2) perform an
inventory of its software and hardware systems; (3) identify its systems and
computer programs with year 2000 exposure; (4) assess the impact on its
operations by each mission critical application; (5) consider solution
alternatives; (6) initiate remediation; (7) perform validation and confirmation
testing and (8) implement. The Company has completed steps one through five and
expects to complete steps six and seven in the first half of 1999 with final
implementation prior to January 1, 2000. Such study addressed both information
technology ("IT") and non-IT systems, including imbedded technology such as
micro controllers in telephone systems, production processes and delivery
systems. As a result of such study, the Company believes the majority of its
systems are presently year 2000 compliant, including all significant systems in
its restaurant segment. However, certain significant systems in the Company's
beverage segment, principally Royal Crown's order processing, inventory control
and production scheduling system, require remediation. If such remediation is
not completed on a timely basis, the most reasonably likely worst-case scenario
is that Royal Crown might experience a delay in production and/or fulfilling and
processing orders resulting in either lost sales or delayed cash receipts,
although the Company does not believe that such delay would be material due to
the relatively moderate number of bottlers and volume of orders that Royal Crown
typically handles. In such case, Royal Crown's contingency plan would be to
revert to a manual system in order to perform the required functions without any
significant disruption of business. To date, the expenses incurred by the
Company in order to become year 2000 compliant, including computer software and
hardware costs, have been $0.2 million and the current estimated cost to
complete such remediation is expected to be $1.8 million. Such costs are being
expensed as incurred, except for the direct purchase costs of software and
hardware, which are being capitalized. Commencing with the Company's 1999 fiscal
year, the software-related costs will be capitalized in accordance with the
provisions of Statement of Position ("SOP") 98-1 described below.
An assessment of the readiness of year 2000 compliance of third party
entities with which the Company has relationships, such as its suppliers,
banking institutions, customers, payroll processors and others ("third party
entities") is ongoing. The Company has inquired, or is in the process of
inquiring, of the significant aforementioned third party entities as to their
readiness with respect to year 2000 compliance and to date has received
indications that many of them are either compliant or in the process of
remediation. The Company is, however, subject to certain risks with respect to
these third party entities' potential year 2000 non-compliance. The Company
believes that these risks are primarily associated with its banks and major
suppliers, including its beverage copackers and bottlers and the food suppliers
and distributors to its restaurant franchisees. At present, the Company cannot
determine the impact on its results of operations in the event of year 2000
non-compliance by these third party entities. In the most reasonably likely
worst-case scenario, such year 2000 non-compliance might result in a disruption
of business and loss of revenues, including the effects of any lost customers,
in either the Company's beverage or restaurant segment or in both. The Company
will continue to monitor these third party entities to determine the impact on
the business of the Company and the actions the Company must take, if any, in
the event of non-compliance by any of these third party entities. The Company is
in the process of collecting additional information from third party entities
that disclosed that remediation is required and will begin detailed evaluations
of these third party entities, as well as those that could not satisfactorily
respond, by the first quarter of 1999 in order to develop its contingency plans
in conjunction therewith. The Company believes there are multiple vendors of the
goods and services it receives from its suppliers and thus the risk of
non-compliance with year 2000 by any of its suppliers is mitigated by this
factor. Also, no single customer accounts for more than 10% of the Company's
consolidated revenues, thus mitigating the adverse risk to the Company's
business if some customers are not year 2000 compliant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998 the Accounting Standards Executive Committee (the "AcSEC") of
the American Institute of Certified Public Accountants issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1, which is effective no later than for the Company's
fiscal year commencing January 4, 1999, provides accounting guidance on a
prospective basis for the costs of computer software developed or obtained for
internal use. The SOP requires that once the computer software capitalization
criteria have been met, costs of developing, upgrading and enhancing computer
software for internal use, including (i) external direct costs of materials and
services consumed in developing or obtaining such software and (ii) payroll and
payroll-related costs for employees who are directly associated with such
software project to the extent of their time spent directly on the project,
should be capitalized. The Company presently capitalizes the direct purchase
cost of internal-use computer software but does not capitalize either the
services consumed or the internal payroll costs incurred in the implementation
of such software. Since (i) the Company does not develop its own internal-use
software, (ii) the Company does not anticipate obtaining significant internal
use computer software, (iii) the Company currently capitalizes the direct
software purchase cost and (iv) SOP 98-1 is effective prospectively only, the
Company does not believe that the adoption of SOP 98-1 will have a material
impact on its consolidated financial position or results of operations.
In April 1998 the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 broadly defines start-up activities and requires
the costs of start-up activities and organization costs to be expensed as
incurred. Start-up activities include one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory, initiating a new process in an existing facility, or commencing some
new operation. The SOP is effective no later than for the Company's fiscal year
commencing January 4, 1999 and requires any existing deferred start-up or
organization costs as of the effective date to be expensed as the cumulative
effect of a change in accounting principle. Since the Company does not have any
significant deferred start-up or organization costs as of September 27, 1998,
the Company does not believe the adoption of SOP 98-5 will have a material
impact on its consolidated financial position or results of operations.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 provides a comprehensive standard
for the recognition and measurement of derivatives and hedging activities. The
standard requires all derivatives be recorded on the balance sheet at fair value
and establishes special accounting for three types of hedges. The accounting
treatment for each of these three types of hedges is unique but results in
including the offsetting changes in fair values or cash flows of both the hedge
and hedged item in results of operations in the same period. Changes in fair
value of derivatives that do not meet the criteria of one of the aforementioned
categories of hedges are included in results of operations. SFAS 133 is
effective for the Company's fiscal year beginning January 3, 2000. The
provisions of SFAS 133 are complex and the Company is only beginning its
evaluation of the implementation requirements of SFAS 133 and, accordingly, is
unable to determine at this time the impact it will have on the Company's
consolidated financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of
Triarc Companies, Inc. ("Triarc" or "the Company") and statements preceded by,
followed by or that include the words "may," "believes," "expects,"
"anticipates," or the negation thereof, or similar expressions, which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). All statements which address
operating performance, events or developments that are expected or anticipated
to occur in the future, including statements relating to volume and 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. Such forward-looking statements involve risks,
uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. Many
important factors could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein. Such factors include, but are not limited to, the
following: competition, including product and pricing pressures; success of
operating initiatives; the ability to attract and retain customers; development
and operating costs; advertising and promotional efforts; brand awareness; the
existence or absence of adverse publicity; market acceptance of new product
offerings; new product and concept development by competitors; changing trends
in consumer tastes; the success of multi-branding; availability, location and
terms of sites for restaurant development by franchisees; the ability of
franchisees to open new restaurants in accordance with their development
commitments; the performance by material customers of their obligations under
their purchase agreements; changes in business strategy or development plans;
quality of management; availability, terms and deployment of capital; business
abilities and judgment of personnel; availability of qualified personnel; labor
and employee benefit costs; availability and cost of raw materials and supplies;
unexpected costs associated with Year 2000 compliance or the business risk
associated with Year 2000 non-compliance by customers and/or suppliers; general
economic, business and political conditions in the countries and territories
where the Company operates, including the ability to form successful strategic
business alliances with local participants; changes in, or failure to comply
with, government regulations, including accounting standards, environmental laws
and taxation requirements; the costs, uncertainties and other effects of legal
and administrative proceedings; changes in wholesale propane prices; regional
weather conditions; competition from alternative energy sources and within the
propane industry; the impact of general economic conditions on consumer
spending; and other risks and uncertainties affecting the Company and its
competitors detailed in Triarc's 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 the control of the Company. The
Company will not undertake and specifically declines any obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
ITEM 1. LEGAL PROCEEDINGS
As reported in Triarc's Annual Report on Form 10-K for the fiscal year
ended December 28, 1997 (the "Form 10-K") and Triarc's Quarterly Report on Form
10-Q for the fiscal quarter ended June 28, 1998, on March 13, 1998, Gregg Katz,
Susan Zweig Katz and ZuZu of Orlando, LLC commenced an action against Arby's,
Inc. ("Arby's"), ZuZu, Inc. ("ZuZu"), ZuZu Franchising Corporation ("ZFC") and
Triarc in the Superior Court of Fulton County, Georgia. Plaintiffs are a ZuZu
franchisee and the owners/investors of the franchisee corporation. Plaintiffs
assert causes of action for, among other things, rescission of the development
and franchise agreements, fraud, fraudulent concealment, breach of the
development and franchise agreements, tortious interference with contract,
quantum meruit, breach of oral agreement, negligence and violation of several
Florida and Texas business opportunity and similar statutes. Plaintiffs seek
actual damages of not less than $600,000 and consequential, punitive and treble
damages in an unspecified amount, as well as attorneys' fees, costs and
expenses. Arby's has filed an answer and plaintiffs voluntarily dismissed Triarc
from the case. The court dismissed the case against ZuZu and ZFC on
jurisdictional grounds. The litigation is in the initial stages of discovery.
Arby's believes that Plaintiffs' claims against Arby's are without merit and
Arby's is vigorously defending this action.
As reported in the Form 10-K, on February 19, 1996, Arby's Restaurants S.A.
de C.V. ("AR"), the master franchisee of Arby's in Mexico, commenced an action
in the civil court of Mexico against Arby's for breach of contract. AR alleged
that a non-binding letter of intent dated November 9, 1994 between AR and Arby's
constituted a binding contract pursuant to which Arby's had obligated itself to
repurchase the master franchise rights from AR for US$2.85 million and that
Arby's had breached a master development agreement between AR and Arby's. Arby's
commenced an arbitration proceeding since the franchise and development
agreements each provided that all disputes arising thereunder were to be
resolved by arbitration. In September 1997, the arbitrator ruled that (i) the
November 9, 1994 letter of intent was not a binding contract and (ii) the master
development agreement was properly terminated. AR has challenged the
arbitrator's decision. In March 1998, the civil court of Mexico ruled that the
November 9, 1994 letter of intent was a binding contract and ordered Arby's to
pay AR US$2.85 million, plus interest and value added tax. In August 1998, an
appellate court affirmed that decision and Arby's filed an appeal in Mexican
federal court. In May 1997, AR commenced an action against Arby's in the United
States District Court for the Southern District of Florida alleging that (i)
Arby's had engaged in fraudulent negotiations with AR in 1994-1995, in order to
force AR to sell the master franchise rights for Mexico to Arby's cheaply and
(ii) Arby's had tortiously interfered with an alleged business opportunity that
AR had with a third party. Arby's has moved to dismiss that action. The parties
have agreed in principle to settle all the litigation in order to avoid the
expense of continuing litigation and expect to enter into an escrow agreement
pursuant to which Arby's would deposit US$1.65 million in escrow. Under the
terms of the proposed escrow agreement, the funds would be released to AR if by
February 28, 1999 a definitive settlement agreement has been executed by the
parties and, if necessary, approved by a Mexican court presiding over AR's
suspension of payments proceeding. If the definitive settlement agreement has
not been executed by February 28, 1999, the escrowed funds would be returned to
Arby's. During the pendency of the proposed escrow arrangement, the parties
would stay all proceedings in the U.S. and, to the extent possible, not pursue
the proceedings in Mexico.
As reported in the Form 10-K, the Company and Nelson Peltz, the
Company's Chairman and Chief Executive Officer, are parties to litigation in the
United States District Court for the Southern District of New York against
Harold Kelley, Daniel McCarthy, and Richard Kerger, three former court-appointed
directors of the Company. On August 21, 1998, Mr. Peltz moved for summary
judgment dismissing all of the claims asserted against him by the former
court-appointed directors. Also on August 21, 1998, the Company moved for leave
to amend the complaint to assert additional claims of breach of contract and
fraud against the former court-appointed directors. Both motions are currently
being briefed.
As reported in the Form 10-K, on June 25, 1997, Kamran Malekan and
Daniel Mannion commenced a purported class and derivative action against the
directors and certain former directors of the Company (and naming the Company as
a nominal defendant) in the Delaware Court of Chancery, New Castle County,
asserting claims relating to compensation paid by the Company to Messrs. Peltz
and May. The plaintiffs in that action and one related action filed a
consolidated amended complaint on December 15, 1997. On January 13, 1998, the
three former court-appointed directors filed a notice of removal to the federal
district court. Plaintiffs subsequently dismissed the claims against those
defendants voluntarily and moved to remand the action to Delaware chancery
court. Two other former directors of the Company (Messrs. Pallot and
Prendergast) opposed the plaintiffs' motion and moved to transfer the action to
the Southern District of New York. On September 30, 1998, the Delaware federal
court granted the plaintiffs' motion to remand the action to Delaware chancery
court, and denied the motion by Messrs. Pallot and Prendergast to transfer the
action to New York. Discovery has commenced in the action.
As reported in the Form 10-K, Ruth LeWinter and Calvin Shapiro have
commenced a purported class and derivative action against the directors and
certain former directors of the Company (and naming the Company as a nominal
defendant) in the United States District Court for the Southern District of New
York, asserting claims relating to compensation paid by the Company to Messrs.
Peltz and May. The three former court-appointed directors of the Company and
Messrs. Pallot and Prendergast have asserted certain cross-claims against Nelson
Peltz. On February 11, 1998, the five former directors moved for an order
specifically enforcing alleged indemnification agreements with the Company and
directing the Company to indemnify them in the action. On August 17, 1998, the
court denied the motion as to the three former court-appointed directors. With
respect to Messrs. Pallot and Prendergast, the court held that they had a right
to indemnification for costs incurred in defense of the action, but leaving for
future determination the amount of any such costs. All other motions in the
action are pending, and there has been no discovery to date.
The Company and each of its directors have been named defendants in a
series of purported class actions commenced in the Delaware Chancery Court, New
Castle County. The plaintiffs in the actions, which are substantially identical,
purport to assert claims on behalf of themselves and all other stockholders of
the Company as of October 12, 1998 and their successors in interest, other than
defendants, members of their immediate families, and any other person or entity
related to or affiliated with any of the defendants. The complaints allege that
the consideration offered to the Company's stockholders in connection with the
offer by Messrs. Peltz and May to acquire all of the outstanding shares of the
Company (other than the approximately 6 million shares owned by an affiliate of
Messrs. Peltz and May) (see "Item 5 - Other Information" below) is inadequate
and unfair, and that the defendants have breached their duties of loyalty and
other fiduciary duties to the Company's other shareholders in con- nection with
the proposed transaction. Plaintiffs seek, among other relief, pre- liminary and
permanent injunctive relief enjoining the proposed transaction; in the event the
proposed transaction is consummated, an order rescinding the transaction and/or
awarding rescissory damages; an accounting; and an award of costs,
disbursements, and attorney's fees to the plaintiffs. To date, none of the
defendants has responded to the complaints.
ITEM 5. OTHER INFORMATION
Offer to Acquire Triarc
- -----------------------
On October 12, 1998, the Company announced that its Board of Directors has
formed a Special Committee to evaluate a proposal it has received from Nelson
Peltz and Peter W. May, the Chairman and Chief Executive Officer and the
President and Chief Operating Officer, respectively, of the Company for the
acquisition by an entity to be formed by them of all of the outstanding shares
of the Company (other than the approximately 6 million shares owned by an
affiliate of Messrs. Peltz and May) for $18 per share payable in cash and
securities (the "Proposed Transaction"). The proposal is subject to, among other
things, (1) the execution and delivery of a definitive acquisition agreement,
(2) receipt of a fairness opinion from the financial adviser to the Special
Committee of the Board, (3) receipt of satisfactory financing for the
transaction, (4) approval of the Proposed Transaction by the Special Committee
of the Board, the full Board of Directors and the Company's stockholders and (5)
the expiration of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. There can be no assurance that a definitive
acquisition agreement will be executed and delivered or that the Proposed
Transaction will be consummated. The Special Committee is comprised of David E.
Schwab II (Chairman), former New York Governor Hugh L. Carey and Clive Chajet.
To assist the Special Committee in its evaluation and negotiation of the
proposal from Messrs. Peltz and May and in making its recommendation to the full
Board of Directors, the Special Committee has engaged Schulte Roth & Zabel LLP
to serve as its legal counsel and has selected SG Cowen Securities Corporation
to serve as its financial adviser. A series of purported class action suits have
been filed in the Delaware Chancery Court challenging the Proposed Transaction.
See "Item 1. Legal Proceedings" above. In connection with the proposal, the
Company has designated an affiliate of Messrs. Peltz and May as the contingent
transferee of its right of first refusal with respect to the outstanding shares
of the Company's Class B Common Stock in the event the Company determines not to
exercise such right of first refusal.
The securities proposed to be issued have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and may not be
offered or sold within the United States except pursuant to an exemption from
the Securities Act, or in a transaction not subject to the registration
requirements of the Securities Act. This Form 10-Q shall not constitute an offer
to sell or a solicitation of an offer to buy such securities.
Stock Repurchase Program
- ------------------------
On October 13, 1997, Triarc announced that its management was authorized,
when and if market conditions warranted, to purchase from time to time during
the twelve month period ending November 26, 1998 up to $20 million of its
outstanding Class A Common Stock. In March 1998 such amount was increased to $30
million. On July 28, 1998, Triarc announced that the stock repurchase program
had been increased, bringing the then total availability under the stock
repurchase program to $50 million. In addition, the term of the stock repurchase
program was extended until July 27, 1999. As of July 28, 1998, Triarc had
repurchased 348,700 shares of Class A Common Stock at an aggregate cost of
approximately $8.9 million under the then existing stock repurchase program. To
date, Triarc repurchased 1,391,350 shares of Class A Common Stock, at an
aggregate cost of approximately $21.8 million, under the $50 million stock
repurchase program. In light of the Proposed Acquisition (described above),
Triarc suspended repurchasing shares under the stock repurchase program. In
addition to the shares repurchased pursuant to the stock repurchase program, in
connection with the completion of the sale by Triarc in February 1998 of $360
million principal amount at maturity of Zero Coupon Convertible Subordinated
Debentures due 2018 (the "Debentures"), Triarc repurchased from the purchaser of
the Debentures one million shares of Triarc's Class A Common Stock for an
aggregate purchase price of approximately $25.6 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 - Triarc's by-laws, as currently in effect, incorporated herein
by reference to Exhibit 3.1 to Triarc's Current Report on Form
8-K dated November 5, 1998 (SEC file no. 1-2207).
4.1 - Second Amendment to Credit Agreement, dated as of August 15,
1998, amond Mistic Brands, Inc., Snapple Beverage Corp., Cable
Car Beverage Corporation, Triarc Beverage Holdings, Corp., the
financial institutions listed on the signature pages thereto
(collectively, the "Lenders"), DLJ Capital Funding, Inc., as
syndication agent for the Lenders, Morgan Stanley Senior
Funding, Inc., as documentation agent for the Lenders,
incorporated herein by reference to Exhibit 4.1 to Triarc's
Current Report on Form 8-K dated November 12, 1998 (SEC file
no. 1-2207).
10.1 - Letter Agreement dated July 23, 1998 between John L. Belsito
and Royal Crown Company, Inc., incorporated herein by reference
to Exhibit 10.1 to RC/Arby's Corporation's Current Report on
Form 8-K dated November 5, 1998 (SEC file no. 0-20286).
10.2 - Letter Agreement dated August 27, 1998 among John C. Carson,
Triarc and Royal Crown Company, Inc., incorporated herein by
reference to Exhibit 10.2 to RC/Arby's Corporation's Current
Report on Form 8-K dated November 5, 1998 (SEC file no. 0-20286).
10.3 Letter Agreement dated October 12, 1998 between Triarc and
Nelson Peltz and Peter W. May, incorporated herein by reference
to Exhibit 99.2 to Triarc's Current Report on Form 8-K dated
October 12, 1998 (SEC file no. 1-2207).
27.1 - Financial Data Schedule for the fiscal nine-month period
ended September 27, 1998 (and for the fiscal nine-month
period ended September 28, 1997 on a restated basis), submitted
to the Securities and Exchange Commission in electronic format.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on August 6, 1998 which
contained a press release issued by the Registrant with respect to its results
of operations for the fiscal quarter ended June 28, 1998 and with respect to its
previously announced stock repurchase program.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
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 11, 1998 By: JOHN L. BARNES, JR.
-------------------------
John L. Barnes, Jr.
Executive Vice President and
Chief Financial Officer
(On behalf of the Company)
By: FRED H. SCHAEFER
-------------------------
Fred H. Schaefer
Vice President and
Chief Accounting Officer
(Principal accounting officer)
Exhibit Index
Exhibit
No. Description Page No.
- ------- ----------- --------
3.1 Triarc's by-laws, as currently in effect,
incorporated herein by reference to Exhibit 3.1
to Triarc's Current Report on Form 8-K dated
November 5, 1998 (SEC file no. 1-2207).
4.1 Second Amendment to Credit Agreement, dated as
of August 15, 1998, amond Mistic Brands, Inc.,
Snapple Beverage Corp., Cable Car Beverage
Corporation, Triarc Beverage Holdings, Corp., the
financial institutions listed on the signature
pages thereto (collectively, the "Lenders"), DLJ
Capital Funding, Inc., as syndication agent for
the Lenders, Morgan Stanley Senior Funding, Inc.,
as documentation agent for the Lenders,
incorporated herein by reference to Exhibit 4.1
to Triarc's Current Report on Form 8-K dated
November 12, 1998 (SEC file no. 1-2207).
10.1 Letter Agreement dated July 23, 1998 between
John L. Belsito and Royal Crown Company, Inc.,
incorporated herein by reference to Exhibit 10.1
to RC/Arby's Corporation's Current Report on Form
8-K dated November 5, 1998 (SEC file no. 0-20286).
10.2 Letter Agreement dated August 27, 1998 among
John C. Carson, Triarc and Royal Crown Company,
Inc., incorporated herein by reference to
Exhibit 10.2 to RC/Arby's Corporation's Current
Report on Form 8-K dated November 5, 1998 (SEC file
no. 0-20286).
10.3 Letter Agreement dated October 12, 1998 between
Triarc and Nelson Peltz and Peter W. May,
incorporated herein by reference to Exhibit 99.2
to Triarc's Current Report on Form 8-K dated
October 12, 1998 (SEC file no. 1-2207).
27.1 Financial Data Schedule for the fiscal nine-month
period ended September 27, 1998 (and for the fiscal
nine-month period ended September 28, 1997 on a
restated basis), submitted to the Securities and
Exchange Commission in electronic format.