UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 1-2207
------
TRIARC COMPANIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 38-0471180
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 451-3000
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
There were 28,859,184 shares of the registrant's Class A Common Stock and
63,746,932 shares of the registrant's Class B Common Stock outstanding as of
April 30, 2007.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, April 1,
2006 (A) 2007
------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 148,152 $ 148,437
Restricted cash equivalents....................................................... 9,059 18,878
Short-term investments not pledged as collateral.................................. 113,950 98,002
Short-term investments pledged as collateral...................................... 8,168 7,443
Investment settlements receivable................................................. 16,599 2,132
Accounts and notes receivable..................................................... 43,422 27,701
Inventories....................................................................... 10,019 8,736
Deferred income tax benefit....................................................... 18,414 23,541
Prepaid expenses and other current assets......................................... 23,987 25,294
----------- -----------
Total current assets.......................................................... 391,770 360,164
Investments............................................................................ 60,197 45,789
Properties............................................................................. 488,484 492,637
Goodwill .............................................................................. 521,055 521,451
Other intangible assets................................................................ 70,923 70,489
Deferred costs and other assets........................................................ 28,020 29,428
----------- -----------
$ 1,560,449 $ 1,519,958
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.....................................................................$ 4,564 $ 3,567
Current portion of long-term debt................................................. 18,118 16,744
Accounts payable.................................................................. 48,595 42,374
Accrued expenses and other current liabilities.................................... 150,045 103,763
Current liabilities relating to discontinued operations........................... 9,254 9,333
Deferred compensation payable to related parties.................................. -- 36,858
----------- -----------
Total current liabilities...................................................... 230,576 212,639
Long-term debt......................................................................... 701,916 706,490
Deferred compensation payable to related parties....................................... 35,679 --
Deferred income........................................................................ 11,563 21,092
Deferred income taxes.................................................................. 15,532 18,831
Minority interests in consolidated subsidiaries........................................ 14,225 13,188
Other liabilities...................................................................... 73,145 82,303
Stockholders' equity:
Class A common stock.............................................................. 2,955 2,955
Class B common stock.............................................................. 6,366 6,378
Additional paid-in capital........................................................ 311,609 289,193
Retained earnings................................................................. 185,726 182,461
Common stock held in treasury..................................................... (43,695) (20,540)
Accumulated other comprehensive income............................................ 14,852 4,968
----------- -----------
Total stockholders' equity..................................................... 477,813 465,415
----------- -----------
$ 1,560,449 $ 1,519,958
=========== ===========
------------
(A) Derived, reclassified and restated from the audited consolidated financial
statements as of December 31, 2006.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------------
April 2, April 1,
2006 2007
---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales.........................................................................$ 258,842 $ 266,498
Royalties and franchise and related fees ......................................... 18,388 19,670
Asset management and related fees ................................................ 14,796 15,878
----------- -----------
292,026 302,046
----------- -----------
Costs and expenses:
Cost of sales, excluding depreciation and amortization............................ 192,384 194,972
Cost of services, excluding depreciation and amortization......................... 5,520 6,890
Advertising and promotions........................................................ 20,068 17,729
General and administrative, excluding depreciation and amortization............... 60,150 57,583
Depreciation and amortization, excluding amortization of deferred financing costs. 13,361 15,985
Facilities relocation and corporate restructuring................................. 803 403
----------- -----------
292,286 293,562
----------- -----------
Operating profit (loss)..................................................... (260) 8,484
Interest expense....................................................................... (27,376) (15,389)
Loss on early extinguishments of debt.................................................. (12,544) --
Investment income, net................................................................. 20,950 23,148
Gain (loss) on sale of unconsolidated business......................................... 2,256 (3)
Other income, net...................................................................... 1,737 1,610
----------- -----------
Income (loss) from continuing operations before income taxes and
minority interests....................................................... (15,237) 17,850
Benefit from (provision for) income taxes.............................................. 5,637 (7,443)
Minority interests in income of consolidated subsidiaries.............................. (3,090) (3,197)
----------- -----------
Income (loss) from continuing operations.................................... (12,690) 7,210
----------- -----------
Loss from discontinued operations, net of income taxes:
Loss from operations.............................................................. (76) --
Loss on disposal.................................................................. -- (149)
----------- -----------
Loss from discontinued operations........................................... (76) (149)
----------- -----------
Net income (loss).......................................................$ (12,766) $ 7,061
=========== ===========
Basic and diluted income (loss) from continuing operations and net income (loss)
per share:
Class A common stock..............................................................$ (.16) $ .07
Class B common stock.............................................................. (.16) .08
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
---------------------------
April 2, April 1,
2006 2007
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss)...................................................................$ (12,766) $ 7,061
Adjustments to reconcile net income (loss) to net cash used in continuing operating
activities:
Operating investment adjustments, net (see below).............................. (722,556) (14,385)
Payment of withholding taxes related to share-based compensation............... (1,761) (2,721)
Deferred income tax (benefit) provision........................................ (7,028) 6,994
Unfavorable lease liability recognized......................................... (1,040) (1,089)
Equity in undistributed earnings of investees.................................. (669) (862)
Deferred asset management fees recognized...................................... (391) (34)
Depreciation and amortization of properties.................................... 11,344 13,380
Amortization of other intangible assets and certain other items................ 2,017 2,605
Amortization of deferred financing costs and original issue discount........... 617 475
Write-off of previously unamortized deferred financing costs................... 3,850 --
Receipt of deferred vendor incentive, net of amount recognized................. 14,040 8,840
Minority interests in income of consolidated subsidiaries...................... 3,090 3,197
Share-based compensation provision............................................. 3,849 2,829
Straight-line rent accrual..................................................... 1,507 1,664
Deferred compensation provision................................................ 1,083 1,179
Loss from discontinued operations.............................................. 76 149
(Gain) loss on sale of unconsolidated business................................. (2,256) 3
Charge for common stock issued to induce effective conversions of convertible
notes........................................................................ 3,719 --
Other, net..................................................................... (156) 626
Changes in operating assets and liabilities:
Decrease in accounts and notes receivables................................. 8,637 16,282
Decrease in inventories.................................................... 2,083 1,313
(Increase) decrease in prepaid expenses and other current assets........... 2,854 (1,005)
Decrease in accounts payable and accrued expenses and other current
liabilities.............................................................. (22,120) (49,255)
------------- -----------
Net cash used in continuing operating activities (A).................... (711,977) (2,754)
------------ -----------
Cash flows from continuing investing activities:
Investment activities, net (see below).............................................. 779,691 35,486
Capital expenditures................................................................ (14,564) (16,515)
Cost of business acquisition, less cash acquired.................................... -- (838)
Proceeds from dispositions of assets................................................ 4,249 197
Payments to lessees for leasing rights.............................................. (315) (967)
Other, net.......................................................................... (231) (243)
------------ -----------
Net cash provided by continuing investing activities.................... 768,830 17,120
------------ -----------
Cash flows from continuing financing activities:
Dividends paid .................................................................... (20,659) (8,001)
Repayments of long-term debt and notes payable...................................... (5,167) (6,653)
Net contributions from (distributions to) minority interests in consolidated
subsidiaries...................................................................... 2,985 (4,236)
Proceeds from issuance of long-term debt and, in 2006, a note payable............... 4,095 4,140
Proceeds from exercises of stock options............................................ 2,482 676
------------ -----------
Net cash used in continuing financing activities........................ (16,264) (14,074)
------------ -----------
Net cash provided by continuing operations.............................................. 40,589 292
Net cash used in discontinued operations:
Operating activities................................................................ (124) (7)
Investing activities................................................................ (6) --
------------ -----------
(130) (7)
------------ -----------
Net increase in cash and cash equivalents............................................... 40,459 285
Cash and cash equivalents at beginning of period........................................ 202,840 148,152
------------ -----------
Cash and cash equivalents at end of period..............................................$ 243,299 $ 148,437
============ ===========
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended
-----------------------------
April 2, April 1,
2006 2007
---- ----
(In Thousands)
(Unaudited)
Detail of cash flows related to investments:
Operating investment adjustments, net:
Cost of trading securities purchased.............................................$ (1,807,227) $ (230)
Proceeds from sales of trading securities and net settlements of trading
derivatives.................................................................... 1,086,926 6,019
Net recognized (gains) losses from trading securities, derivatives and short
positions in securities........................................................ 2,014 (6,279)
Other net recognized gains, net of other than temporary losses................... (4,927) (14,124)
Other............................................................................ 658 229
------------ -----------
$ (722,556) $ (14,385)
============ ===========
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments....................................................................$ 104,384 $ 76,461
Cost of available-for-sale securities and other investments purchased............ (31,838) (31,156)
Increase in restricted cash collateralizing securities obligations .............. (333,743) (9,819)
Proceeds from securities sold short.............................................. 1,564,135 --
Payments to cover short positions in securities.................................. (1,042,564) --
Proceeds from sales of repurchase agreements, net................................ 519,317 --
------------ -----------
$ 779,691 $ 35,486
============ ===========
---------------
(A) Net cash used in continuing operating activities for the three months ended
April 2, 2006 reflects the significant net purchases of trading securities
and net settlements of trading derivatives, which were principally funded
by net proceeds from securities sold short and net proceeds from sales of
repurchase agreements. All of these purchases and sales were principally
transacted through an investment fund, Deerfield Opportunities Fund, LLC
(the "Opportunities Fund"), which employed leverage in its trading
activities and which, through September 29, 2006, was consolidated in these
condensed consolidated financial statements. Triarc Companies, Inc.
(collectively with its subsidiaries, the "Company") effectively redeemed
its investment in the Opportunities Fund, which in turn had liquidated
substantially all of its investment positions, effective September 29,
2006. Accordingly, the Company does not have any cash flows associated with
the Opportunities Fund for the three months ended April 1, 2007. Under
accounting principles generally accepted in the United States of America,
the net purchases of trading securities and the net settlements of trading
derivatives must be reported in continuing operating activities, while the
net proceeds from securities sold short and the net sales of repurchase
agreements are reported in continuing investing activities.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
April 1, 2007
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the
"Financial Statements") of Triarc Companies, Inc. ("Triarc" and, together with
its subsidiaries, the "Company") have been prepared in accordance with Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC") and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States of America ("GAAP"). In the opinion of the Company, however,
the Financial Statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations and cash flows as of and for the three-month
periods set forth in the following paragraph. The results of operations for the
three-month period ended April 1, 2007 are not necessarily indicative of the
results to be expected for the full 2007 fiscal year. In that regard, certain
events and transactions described in Note 13, among other matters, will impact
the results for the full 2007 fiscal year. These Financial Statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 (the "Form 10-K").
The Company reports on a fiscal year basis consisting of 52 or 53 weeks
ending on the Sunday closest to December 31. However, Deerfield & Company LLC
("Deerfield"), in which the Company owns a 63.6% capital interest (see Note 13),
Deerfield Opportunities Fund, LLC (the "Opportunities Fund"), in which the
Company owned a 73.7% capital interest prior to the effective redemption of its
investment on September 29, 2006, and DM Fund, LLC (the "DM Fund"), in which the
Company owned a 67% capital interest prior to the redemption of its investment
on December 31, 2006, report or reported on a calendar year basis ending on
December 31. The Company's first quarter of fiscal 2006 commenced on January 2,
2006 and ended on April 2, 2006, except that Deerfield, the Opportunities Fund
and DM Fund are included on a calendar quarter basis. The Company's first
quarter of fiscal 2007 commenced on January 1, 2007 and ended on April 1, 2007,
except that Deerfield is included on a calendar quarter basis. The period from
January 2, 2006 to April 2, 2006 is referred to herein as the three-month period
ended April 2, 2006 and the period from January 1, 2007 to April 1, 2007 is
referred to herein as the three-month period ended April 1, 2007. Each quarter
contained 13 weeks. The effect of including Deerfield, the Opportunities Fund
and the DM Fund, as applicable, in the Financial Statements on a calendar
quarter basis, instead of the Company's fiscal quarter basis, was not material
to the Company's condensed consolidated financial position or results of
operations. All references to quarters and quarter-end(s) herein relate to
fiscal quarters rather than calendar quarters, except with respect to Deerfield,
the Opportunities Fund and DM Fund as disclosed above.
The Company's consolidated financial statements include the accounts of
Triarc and its subsidiaries, including the Opportunities Fund through the
Company's effective redemption of its investment on September 29, 2006 and the
DM Fund through the Company's redemption of its investment on December 31, 2006.
The Company no longer consolidates the accounts of the Opportunities Fund and
the DM Fund subsequent to September 29, 2006 and December 31, 2006,
respectively.
Certain amounts included in the accompanying prior quarter's condensed
consolidated financial statements have been reclassified either to report the
results of operations and cash flows of two restaurants closed during the fourth
quarter of 2006 as discontinued operations (see Note 7) or to conform with the
current quarter's presentation. In addition, the Financial Statements have been
restated, as applicable, for the adoption of FASB Staff Position No. AUG-AIR-1,
"Accounting for Planned Major Maintenance Activities" (see Note 2).
The effect of this restatement, as well as the restatement for the adoption
of FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" effective January 1, 2007 (see Note
2), is reflected in the following summary of the changes in retained earnings
from December 31, 2006 through April 1, 2007 (in thousands):
Balance as reported at December 31, 2006...........................................................$ 182,555
Cumulative effect of change in accounting for planned major aircraft maintenance activities.. 3,171
----------
Balance as adjusted at December 31, 2006........................................................... 185,726
Cumulative effect of change in accounting for uncertainty in income taxes.................... (2,275)
----------
Balance as adjusted at January 1, 2007............................................................. 183,451
Net income................................................................................... 7,061
Cash dividends............................................................................... (8,001)
Accrued dividends on nonvested restricted stock.............................................. (50)
----------
Balance at April 1, 2007...........................................................................$ 182,461
==========
(2) Changes in Accounting Principles
Effective January 1, 2007, the Company adopted the provisions of FASB Staff
Position No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities"
("FSP AIR-1"). As a result, the Company now accounts for scheduled major
aircraft maintenance overhauls in accordance with the direct expensing method
under which the actual cost of such overhauls is recognized as expense in the
period it is incurred. Previously, the Company accounted for scheduled major
maintenance activities in accordance with the accrue-in-advance method, under
which the estimated cost of such overhauls was recognized as expense in periods
through the scheduled date of the respective overhaul with any difference
between estimated and actual cost recorded in results from operations at the
time of the actual overhaul. In accordance with FSP AIR-1, the Company accounted
for the adoption of the direct expensing method retroactively with the
cumulative effect of the change in accounting method as of January 2, 2006 of
$2,774,000 increasing retained earnings as of that date, which is the beginning
of the earliest period presented. The effect of this adoption on the Company's
accompanying condensed consolidated balance sheet as of December 31, 2006 is to
reverse accruals for aircraft overhaul maintenance aggregating $4,955,000 and
related income tax benefits of $1,784,000, with the net difference of $3,171,000
increasing retained earnings as of that date. The Company's consolidated results
of operations for the three-month period ended April 2, 2006 have been restated
reflecting a decrease in pretax loss of $217,000, or $139,000 net of income
taxes, representing an effect of less than $.01 on loss per share. The $217,000
was reported as a reduction of "General and administrative, excluding
depreciation and amortization" expense in the accompanying condensed
consolidated statement of operations for the three-month period ended April 2,
2006.
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). As a result, the Company
now measures income tax uncertainties in accordance with a two-step process of
evaluating a tax position. The Company first determines if it is more likely
than not that a tax position will be sustained upon examination based on the
technical merits of the position. A tax position that meets the
more-likely-than-not recognition threshold is then measured as the largest
amount that has a greater than fifty percent likelihood of being realized upon
ultimate settlement. In accordance with this method, as of January 1, 2007 the
Company recognized an increase in its reserves for uncertain income tax
positions of $4,820,000 and an increase in its liability for interest and
penalties related to uncertain income tax positions of $734,000, both partially
offset by an increase in its deferred income tax benefit of $3,200,000 and a
reduction in the tax related liabilities of discontinued operations of $79,000,
with the net effect of $2,275,000 accounted for as a decrease to the January 1,
2007 balance of retained earnings.
In conjunction with the adoption of FIN 48, the Company recognized $486,000
of interest related to uncertain income tax positions during the three months
ended April 1, 2007 included in "Interest expense" in the accompanying condensed
consolidated statement of operations. The Company has approximately $1,956,000
and $2,442,000 of accrued interest and penalties at January 1, 2007 and April 1,
2007, respectively.
The statute of limitations for examination by the Internal Revenue Services
(the "IRS") of the Company's Federal income tax return for the year ended
December 29, 2002 expired during 2006 and years prior thereto are no longer
subject to examination. The Company's Federal income tax returns for years
subsequent to December 29, 2002 are not currently under examination by the IRS
although some of its state income tax returns are currently under examination.
At January 1, 2007 and April 1, 2007, the Company had $13,157,000 and
$13,625,000, respectively, of reserves for uncertain income tax positions
related to continuing operations, all of which would affect the Company's
effective income tax rate if they were not utilized. The Company does not
currently anticipate that total reserves for uncertain income tax positions will
significantly change due to the settlement of income tax audits and the
expiration of statute of limitations for examining the Company's income tax
returns prior to April 2, 2008.
(3) Comprehensive Loss
The following is a summary of the components of comprehensive loss, net of
income taxes and minority interests (in thousands):
Three Months Ended
-----------------------------
April 2, April 1,
2006 2007
---- ----
Net income (loss) .............................................................$ (12,766) $ 7,061
Net unrealized gains (losses), including reclassification of prior period
unrealized losses (gains), on available-for-sale securities (see below)...... 1,910 (9,003)
Net unrealized gains (losses) on cash flow hedges (see below).................. 1,824 (928)
Net change in currency translation adjustment.................................. 49 47
---------- ----------
Comprehensive loss.......................................................$ (8,983) $ (2,823)
========== ==========
The following is a summary of the components of the net unrealized gains
(losses) on available-for-sale securities included in other comprehensive loss
(in thousands):
Three Months Ended
-----------------------------
April 2, April 1,
2006 2007
---- ----
Unrealized holding gains arising during the period............................$ 3,977 $ 1,779
Reclassifications of prior period unrealized holding (gains) losses into
net income or loss......................................................... 148 (16,221)
Equity in change in unrealized holding gains and losses arising during the
period...................................................................... (1,161) 357
--------- ---------
2,964 (14,085)
Income tax (provision) benefit................................................ (1,078) 5,068
Minority interests in change in unrealized holding gains and losses of a
consolidated subsidiary..................................................... 24 14
---------- ----------
$ 1,910 $ (9,003)
========== ==========
The following is a summary of the components of the net unrealized gains
(losses) on cash flow hedges included in other comprehensive loss (in
thousands):
Three Months Ended
-----------------------------
April 2, April 1,
2006 2007
---- ----
Unrealized holding gains (losses) arising during the period...................$ 2,024 $ (183)
Reclassifications of prior period unrealized holding gains into net income
or loss..................................................................... (88) (521)
Equity in change in unrealized holding gains and losses arising during the
period...................................................................... 968 (779)
---------- ----------
2,904 (1,483)
Income tax (provision) benefit................................................ (1,080) 555
---------- ----------
$ 1,824 $ (928)
========== ==========
(4) Income (Loss) Per Share
Basic income (loss) per share has been computed by dividing the allocated
income or loss for the Company's class A common stock (the "Class A Common
Stock" or "Class A Common Shares") and the Company's class B common stock (the
"Class B Common Stock" or "Class B Common Shares") by the weighted average
number of shares of each class. Both factors are presented in the tables below.
The net loss for the three-month period ended April 2, 2006 was allocated
equally among each share of Class A Common Stock and Class B Common Stock,
resulting in the same loss per share for each class. Net income for the
three-month period ended April 1, 2007 was allocated between the Class A Common
Stock and Class B Common Stock based on the actual dividend payment ratio.
Diluted loss per share for the three-month period ended April 2, 2006 was
the same as basic loss per share for each share of the Class A Common Stock and
Class B Common Stock since the Company reported a loss from continuing
operations and, therefore, the effect of all potentially dilutive securities on
the loss from continuing operations per share would have been antidilutive.
Diluted income per share for the three-month period ended April 1, 2007 has been
computed by dividing the allocated income for the Class A Common Stock and Class
B Common Stock by the weighted average number of shares of each class plus the
potential common share effects on each class of (1) dilutive stock options and
nonvested Class B Common Shares which vest over three years (the "Nonvested
Shares"), both computed using the treasury stock method, and (2) contingently
issuable performance-based restricted shares of Class A Common Stock and Class B
Common Stock (the "Restricted Shares") for which vesting is dependent upon the
Company's Class B Common Stock meeting certain market price targets and that
would have been issuable based on the market price of the Company's Class B
Common Stock as of April 1, 2007, both as presented in the table below. The
shares used to calculate diluted income per share exclude any effect of the
Company's 5% convertible notes due 2023 (the "Convertible Notes") which would
have been antidilutive since the after-tax interest on the Convertible Notes per
share of Class A Common Stock and Class B Common Stock obtainable on conversion
exceeds the reported basic income from continuing operations per share. The
basic and diluted loss from discontinued operations per share for the
three-month periods ended April 2, 2006 and April 1, 2007 was less than $.01
and, therefore, such effect is not presented on the face of the condensed
consolidated statements of operations. In addition, the reported diluted and
basic income per share are the same for each respective class of common stock
for the three-month period ended April 1, 2007 since the difference is less than
$.01.
During the three months ended April 2, 2006, $165,776,000 of the
Convertible Notes were effectively converted into 4,144,000 and 8,289,000 shares
of the Company's Class A Common Stock and Class B Common Stock, respectively, as
disclosed in Note 6. The weighted average effect of these shares is included in
all income or loss per share calculations presented from the dates of their
issuance.
The only Company securities as of April 1, 2007 that could dilute basic
income per share for periods subsequent to April 1, 2007 are (1) outstanding
stock options which can be exercised into 462,000 shares and 4,139,000 shares of
the Company's Class A Common Stock and Class B Common Stock, respectively, (2)
67,000 Nonvested Shares of the Company's Class B Common Stock, (3) 50,000 and
243,000 contingently issuable Restricted Shares of the Company's Class A Common
Stock and Class B Common Stock, respectively, and (4) $2,100,000 of remaining
Convertible Notes which are convertible into 52,000 shares and 105,000 shares of
the Company's Class A Common Stock and Class B Common Stock, respectively.
Income (loss) per share has been computed by allocating the income or loss
as follows (in thousands):
Three Months Ended
----------------------
April 2, April 1,
2006 2007
---- ----
Class A Common Stock:
Continuing operations..........................................................$ (4,003) $ 2,074
Discontinued operations........................................................ (24) (43)
---------- ----------
Net income (loss) .............................................................$ (4,027) $ 2,031
========== ==========
Class B Common Stock:
Continuing operations..........................................................$ (8,687) $ 5,136
Discontinued operations........................................................ (52) (106)
---------- ----------
Net income (loss) .............................................................$ (8,739) $ 5,030
========== ==========
The number of shares used to calculate basic and diluted income (loss) per
share were as follows (in thousands):
Three Months Ended
------------------------
April 2, April 1,
2006 2007
---- ----
Class A Common Stock:
Basic weighted average shares outstanding......................................... 25,968 28,760
Dilutive effect of stock options............................................. -- 185
Contingently issuable Restricted Shares...................................... -- 89
---------- ----------
Diluted shares.................................................................... 25,968 29,034
========== ==========
Class B Common Stock:
Basic weighted average shares outstanding......................................... 56,344 63,288
Dilutive effect of stock options............................................. -- 1,093
Contingently issuable Restricted Shares...................................... -- 435
Dilutive effect of Nonvested Shares.......................................... -- 4
---------- ----------
Diluted shares.................................................................... 56,344 64,820
========== ==========
(5) Facilities Relocation and Corporate Restructuring
The facilities relocation charges for the three-month periods ended April
2, 2006 and April 1, 2007 incurred and recognized by the restaurant business
segment of $803,000 and $403,000, respectively, principally related to the
Company combining its existing restaurant operations with those of the RTM
Restaurant Group ("RTM"), following the acquisition of RTM in July 2005,
including relocating the corporate office of the restaurant group from Ft.
Lauderdale, Florida to new offices in Atlanta, Georgia. The Company incurred and
recognized additional facilities relocation and corporate restructuring charges
during the remainder of fiscal 2006 as described in more detail in Note 18 to
the consolidated financial statements contained in the Form 10-K.
The components of the facilities relocation and corporate restructuring
charges and an analysis of activity in the facilities relocation and corporate
restructuring accrual during the three-month periods ended April 2, 2006 and
April 1, 2007 are as follows (in thousands):
Three Months Ended
April 2, 2006
--------------------------------------------------------
Balance Balance
January 1, Other April 2,
2006 Provision Payments Adjustments 2006
---- --------- -------- ----------- ----
Restaurant Business Segment:
Cash obligations:
Severance and retention incentive compensation...$ 3,812 $ 803 $ (1,547) $ 4 $ 3,072
Employee relocation costs........................ 1,544 -- (568) (5) 971
Office relocation costs.......................... 260 -- (40) -- 220
Lease termination costs.......................... 774 -- (135) -- 639
--------- ---------- ----------- --------- ---------
Total restaurant business segment............. 6,390 803 (2,290) (1) 4,902
General Corporate:
Cash obligations:
Lease termination costs.......................... 1,535 -- (243) (128) 1,164
--------- ---------- ---------- --------- ---------
$ 7,925 $ 803 $ (2,533) $ (129) $ 6,066
========= ========== ========== ========= =========
Three Months Ended
April 1, 2007
--------------------------------------------------------
Total
Balance Balance Expected and
December 31, April 1, Incurred
2006 Provision (a) Payments 2007 to Date
---- ------------- -------- ---- -------
Restaurant Business Segment:
Cash obligations:
Severance and retention incentive compensation...$ 340 $ -- $ (117) $ 223 $ 5,174
Employee relocation costs........................ 134 403 (2) 535 4,297
Office relocation costs.......................... 45 -- (8) 37 1,463
Lease termination costs.......................... 302 -- (132) 170 819
--------- ---------- ---------- --------- ---------
821 403 (259) 965 11,753
--------- ---------- ---------- --------- ---------
Non-cash charges (b):
Compensation expense from modified
stock awards.................................. -- -- -- -- 612
Loss on fixed assets............................. -- -- -- -- 107
--------- ---------- ---------- --------- ---------
-- -- -- -- 719
--------- ---------- ---------- --------- ---------
Total restaurant business segment......... 821 403 (259) 965 12,472
General Corporate:
Cash obligations:
Lease termination costs.......................... -- -- -- -- 4,712
--------- ---------- ---------- --------- ---------
$ 821 $ 403 $ (259) $ 965 $ 17,184
========= ========== ========== ========= =========
-----------------
(a) Reflects change in estimate of total cost to be incurred.
(b) During the three-month period ended April 2, 2006, the Company did not
incur any non-cash facilities relocation and corporate restructuring
charges.
As discussed in Note 13, we expect to incur additional facilities
relocation and corporate restructuring charges during the remaining nine months
of 2007 as a result of the Company's decision to close its New York headquarters
and combine its corporate operations with its restaurant operations in Atlanta,
Georgia and entering into contractual settlements with the Chairman and Chief
Executive Officer and the President and Chief Operating Officer of the Company
(the "Executives"), and the termination of senior officers and others. Although
the Company has not yet finalized the amount of charges it will incur under
existing employment agreements and severance arrangements, the Company currently
estimates such costs to be $50,214,000 with respect to the Company's Chairman
and Chief Executive Officer, $25,107,000 with respect to the to the Company's
President and Chief Operating Officer and approximately $15,000,000 with respect
to other senior members of the Company's New York-based management team. There
will be additional facilities relocation and corporate restructuring charges,
the amount of which has not yet been determined.
(6) Loss on Early Extinguishments of Debt
In February 2006, an aggregate of $165,776,000 principal amount of the
Company's Convertible Notes were effectively converted into an aggregate of
4,144,000 Class A Common Shares and 8,289,000 Class B Common Shares (the
"Convertible Notes Conversion"). In order to induce such effective conversion,
the Company paid negotiated inducement premiums aggregating $8,694,000 to the
converting noteholders consisting of cash of $4,975,000 and 226,000 Class B
Common Shares with an aggregate fair value of $3,719,000 based on the closing
market price of the Company's Class B Common Stock on the dates of the effective
conversions in lieu of cash to certain of those noteholders. In connection with
the Convertible Notes Conversion, the Company recorded a loss on early
extinguishments of debt of $12,544,000 in the three-month period ended April 2,
2006 consisting of the premiums aggregating $8,694,000 and the write-off of
$3,850,000 of related previously unamortized deferred financing costs.
(7) Discontinued Operations
During the fourth quarter of 2006, the Company closed two restaurants (the
"Restaurant Discontinued Operations") which were opened in 2005 and 2006, and
which were reported within the Company's restaurant segment. These two
restaurants have been accounted for as discontinued operations in 2006 through
their respective dates of closing since (1) their results of operations and cash
flows have been eliminated from the Company's ongoing operations as a result of
the closings and (2) the Company does not have any significant continuing
involvement in the operations of the restaurants after their closings. The
accompanying condensed consolidated statements of operations and cash flows have
been reclassified to report the results of operations and cash flows of the two
closed restaurants as discontinued operations for the three-month period ended
April 2, 2006.
Prior to 2006 the Company sold (1) the stock of the companies comprising
the Company's former premium beverage and soft drink concentrate business
segments (collectively, the "Beverage Discontinued Operations") and (2) the
stock or the principal assets of the companies comprising the former utility and
municipal services and refrigeration business segments (the "SEPSCO Discontinued
Operations"). The Beverage and SEPSCO Discontinued Operations have also been
accounted for as discontinued operations by the Company.
During the three months ended April 1, 2007, the Company recorded
additional loss on disposal of the Restaurant Discontinued Operations relating
to finalizing the leasing arrangements for the two closed restaurants.
The loss from discontinued operations consisted of the following (in
thousands):
Three Months Ended
-----------------------------
April 2, April 1
2006 2007
---- ----
Net sales....................................................................$ 117 $ --
=========== ===========
Loss from operations before benefit from income taxes........................ (127) --
Benefit from income taxes.................................................... 51 --
----------- -----------
(76) --
----------- -----------
Loss on disposal of business before benefit from income taxes................ -- (247)
Benefit from income taxes.................................................... -- 98
----------- -----------
-- (149)
----------- -----------
$ (76) $ (149)
=========== ===========
Certain of the Company's state income tax returns that relate to
discontinued operations are currently under examination. The Company has
received notices of proposed tax adjustments aggregating $6,352,000 in
connection with certain of these state income tax returns. However, the Company
has disputed these notices.
Current liabilities remaining to be liquidated relating to the discontinued
operations result from certain obligations not transferred to the respective
buyers and consisted of the following (in thousands):
December 31, April 1
2006 2007
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations....................................................$ 8,496 $ 8,416
Liabilities relating to the SEPSCO Discontinued Operations................... 556 549
Liabilities relating to the Restaurant Discontinued Operations............... 202 368
----------- -----------
$ 9,254 $ 9,333
=========== ===========
The Company expects that the liquidation of these remaining liabilities
associated with all of these discontinued operations as of April 1, 2007 will
not have any material adverse impact on its condensed consolidated financial
position or results of operations. To the extent any estimated amounts included
in the current liabilities relating to discontinued operations are determined to
be in excess of the requirement to liquidate the associated liability, any such
excess will be released at that time as a component of gain or loss on disposal
of discontinued operations.
(8) Retirement Benefit Plans
The Company maintains two defined benefit plans, the benefits under which
were frozen in 1992 and for which the Company has no unrecognized prior service
cost. The components of the net periodic pension cost incurred by the Company
with respect to these plans are as follows (in thousands):
Three Months Ended
----------------------------
April 2, April 1,
2006 2007
---- ----
Service cost (consisting entirely of plan administrative expenses)................$ 24 $ 22
Interest cost..................................................................... 54 55
Expected return on the plans' assets.............................................. (66) (58)
Amortization of unrecognized net loss............................................. 12 7
---------- ----------
Net periodic pension cost.................................................$ 24 $ 26
========== ==========
(9) Transactions with Related Parties
Prior to 2006 the Company provided aggregate incentive compensation of
$22,500,000 to the Executives which was invested in two deferred compensation
trusts (the "Deferred Compensation Trusts") for their benefit. Deferred
compensation expense of $1,083,000 and $1,179,000 was recognized in the
three-month periods ended April 2, 2006 and April 1, 2007, respectively, for net
increases in the fair value of the investments in the Deferred Compensation
Trusts. Under GAAP, the Company recognizes investment income for any interest or
dividend income on investments in the Deferred Compensation Trusts, realized
gains on sales of investments in the Deferred Compensation Trusts and investment
losses for any unrealized losses deemed to be other than temporary, but is
unable to recognize any investment income for unrealized net increases in the
fair value of those investments in the Deferred Compensation Trusts that are
accounted for under the cost method of accounting. Accordingly, the Company
recognized net investment income from investments in the Deferred Compensation
Trusts of $52,000 and $90,000 in the three-month periods ended April 2, 2006 and
April 1, 2007, respectively. The net investment income during the three-month
periods ended April 2, 2006 and April 1, 2007 consisted of interest income of
$62,000 and $99,000, respectively, less investment management fees of $10,000
and $9,000, respectively. Interest income and investment management fees are
included in "Investment income, net" and deferred compensation expense is
included in "General and administrative, excluding depreciation and
amortization" expense in the accompanying condensed consolidated statements of
operations. As of December 31, 2006 and April 1, 2007, the obligation to the
Executives related to the Deferred Compensation Trusts was $35,679,000 and
$36,858,000, respectively, and is reported as noncurrent and current "Deferred
compensation payable to related parties," respectively, in the accompanying
condensed consolidated balance sheets. Such obligation, which is payable on or
about June 29, 2007 upon the resignation of the Executives (see Note 13), can be
settled either by payment of cash or the transfer of investments held in the
Deferred Compensation Trusts. As of December 31, 2006 and April 1, 2007, the
assets in the Deferred Compensation Trusts consisted of $13,409,000 included in
"Investments" and $16,805,000 included in "Short-term investments not pledged as
collateral," respectively, which does not reflect the unrealized net increase in
the fair value of the investments, $1,884,000 and $9,316,000, respectively,
included in "Cash and cash equivalents" and $11,077,000 and $315,000,
respectively, included in "Investment settlements receivable" in the
accompanying condensed consolidated balance sheets. The cumulative disparity of
$10,422,000 between (1) deferred compensation expense and net recognized
investment income and (2) the obligation to the Executives and the carrying
value of the assets in the Deferred Compensation Trusts will reverse in future
periods as either (1) additional investments in the Deferred Compensation Trusts
are sold and previously unrealized gains are recognized without any offsetting
increase in compensation expense or (2) the fair values of the investments in
the Deferred Compensation Trusts decrease, other than with respect to recognized
losses deemed to be other than temporary, resulting in the recognition of a
reversal of compensation expense without any offsetting losses recognized in
investment income. To the extent that the Company utilizes the investments in
the Deferred Compensation Trusts to settle the related liability to the
Executives, the cumulative disparity will reverse and will be recognized as a
component of the Company's income (loss) from continuing operations before
income taxes and minority interests.
As disclosed in Note 28 to the consolidated financial statements contained
in the Form 10-K, on November 1, 2005 the Executives and the Company's Vice
Chairman (collectively, the "Principals") started a series of equity investment
funds (the "Equity Funds") that are separate and distinct from the Company and
that are being managed by the Principals and other senior executives of the
Company (the "Employees") through a management company (the "Management
Company") formed by the Principals. During the three months ended April 1, 2007,
the Principals and the Employees continued to receive their regular compensation
from the Company and the Company made available the services of the Principals
and the Employees, as well as certain support services, to the Management
Company. However, see Note 13 regarding changes to these arrangements effective
June 30, 2007. The Company is being reimbursed by the Management Company for the
allocable cost of these services. Such allocated costs for the three-month
periods ended April 2, 2006 and April 1, 2007 amounted to $700,000 and
$1,054,000, respectively, and have been recognized as reductions of "General and
administrative, excluding depreciation and amortization" expense in the
accompanying condensed consolidated statements of operations. The Company was
due $10,000 and $1,229,000 as of December 31, 2006 and April 1, 2007,
respectively, relating to these services which are included in "Accounts and
notes receivable" in the accompanying condensed consolidated balance sheets. The
Company has reduced its incentive compensation expense during the three months
ended April 1, 2007 by $1,850,000 representing the Company's current estimate of
the Management Company's allocable portion of one quarter of the estimated
incentive compensation to be awarded to the Employees for 2007. A special
committee comprised of independent members of the Company's board of directors
has reviewed and considered these arrangements.
In December 2005, the Company invested $75,000,000 in an account (the
"Equities Account") which is managed by the Management Company and co-invests on
a parallel basis with the Equity Funds and had a carrying value of $100,518,000
as of April 1, 2007. See Note 13 for further information regarding the Equities
Account.
On April 30, 2007, the Company entered into a series of agreements with the
Executives and the Management Company in connection with the Company's decision
to close its New York headquarters and combine its corporate operations with its
restaurant operations in Atlanta, Georgia. See Note 13 below for a discussion of
these agreements.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 28 to the
consolidated financial statements contained in the Form 10-K.
(10) Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc.
("Adams"), an inactive subsidiary of the Company, was listed by the United
States Environmental Protection Agency on the Comprehensive Environmental
Response, Compensation and Liability Information System ("CERCLIS") list of
known or suspected contaminated sites. The CERCLIS listing appears to have been
based on an allegation that a former tenant of Adams conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970s. The
business operations of Adams were sold in December 1992. In February 2003, Adams
and the Florida Department of Environmental Protection (the "FDEP") agreed to a
consent order that provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the FDEP approved the work plan submitted by Adams'
environmental consultant and during 2004 the work under that plan was completed.
Adams submitted its contamination assessment report to the FDEP in March 2004.
In August 2004, the FDEP agreed to a monitoring plan consisting of two sampling
events which occurred in January and June 2005 and the results were submitted to
the FDEP for its review. In November 2005, Adams received a letter from the FDEP
identifying certain open issues with respect to the property. The letter did not
specify whether any further actions are required to be taken by Adams. Adams
sought clarification from the FDEP in order to attempt to resolve this matter.
On May 1, 2007, the FDEP sent a letter clarifying their prior correspondence and
reiterated the open issues identified in their November 2005 letter. In
addition, the FDEP offered Adams the option of voluntarily taking part in a
recently adopted state program that could lessen site clean up standards, should
such a clean up be required after a mandatory further study and site assessment
report. The Company, its consultants and outside counsel are presently reviewing
these new options and no decision has been made on a course of action based on
the FDEP's offer. Nonetheless, based on provisions made prior to 2006 of
$1,667,000 for all of these costs and after taking into consideration various
legal defenses available to the Company, including Adams, Adams has provided for
its estimate of its remaining liability for completion of this matter.
In addition to the environmental matter described above, the Company is
involved in other litigation and claims incidental to its current and prior
businesses. Triarc and its subsidiaries have reserves for all of their legal and
environmental matters aggregating $1,000,000 as of April 1, 2007. Although the
outcome of such matters cannot be predicted with certainty and some of these
matters may be disposed of unfavorably to the Company, based on currently
available information, including legal defenses available to Triarc and/or its
subsidiaries, and given the aforementioned reserves, the Company does not
believe that the outcome of such legal and environmental matters will have a
material adverse effect on its condensed consolidated financial position or
results of operations.
(11) Commitments and Contingencies
As disclosed in Note 27 to the consolidated financial statements contained
in the Form 10-K, the Company has employment agreements and severance
arrangements with the Executives, its senior officers and other corporate
employees. As discussed in Note 13 below, on April 30, 2007, the Company
announced that in light of the pending Deerfield sale, it is closing its New
York headquarters and entered into contractual settlements evidencing the
termination of the employment agreements and providing for the resignation of
its Chairman and Chief Executive Officer and its President and Chief Operating
Officer. Under the terms of the contractual settlements, the Company's Chairman
and Chief Executive Officer will receive a payment of $50,214,000 and the
President and Chief Operating Officer will receive a payment of $25,107,000,
both subject to applicable withholding taxes. In addition, these actions will
also result in the termination of certain of its senior officers as well as
result in severance obligations for other corporate employees. Although the
Company has not yet determined the amount of additional charges it will incur
under these other agreements and arrangements, the Company currently estimates
the amount to be approximately $15,000,000.
Two of Deerfield's executives in the aggregate currently hold approximately
one-third of the capital interests and profit interests in Deerfield. Those
executives have rights under certain circumstances to require the Company to
acquire a substantial portion of their interests in Deerfield commencing in
2007. To the extent that the Company is required to purchase a portion of those
executives' interests in Deerfield prior to or concurrent with the closing of
the sale of Deerfield, the Company would be obligated to pay those executives in
cash for their interests. However, upon the sale of Deerfield to Deerfield
Triarc Capital Corp. (the "REIT"), a real estate investment trust managed by
Deerfield, the Company would receive a combination of cash and shares issued by
the REIT for such interests (see Note 13).
The agreement and plan of merger, pursuant to which the Company acquired
RTM on July 25, 2005, provides for a post-closing purchase price adjustment, the
amount of which is in dispute. The sellers of RTM, which include certain current
officers of a subsidiary of the Company and a current director of the Company,
have proposed an adjustment of $2,175,000, plus interest from the July 25, 2005
RTM acquisition date, while the Company, on the other hand, disagrees with such
adjustment. The Company is in discussions with the sellers of RTM to determine
the amount of the post-closing adjustment, if any. If the Company is unable to
resolve this matter informally with the sellers, the Company expects this matter
will be settled through an arbitration process. Should this process result in a
purchase price adjustment, the Company would record the adjustment as additional
goodwill.
(12) Business Segments
The Company manages and internally reports its operations as two business
segments: (1) the operation and franchising of restaurants ("Restaurants") and
(2) asset management ("Asset Management") (see Note 13 regarding the pending
sale of the Asset Management segment). The Company evaluates segment performance
and allocates resources based on each segment's earnings before interest, taxes,
depreciation and amortization ("EBITDA"). EBITDA has been computed as operating
profit plus depreciation and amortization, excluding amortization of deferred
financing costs ("Depreciation and Amortization"). Operating profit (loss) has
been computed as revenues less operating expenses. In computing EBITDA and
operating profit (loss), interest expense and non-operating income and expenses
have not been considered. Identifiable assets by segment are those assets used
in the Company's operations of each segment. General corporate assets consist
primarily of cash and cash equivalents, restricted cash equivalents, short-term
investments, investment settlements receivable, non-current investments and
properties.
The following is a summary of the Company's segment information (in
thousands):
Three Months Ended
-------------------------
April 2, April 1,
2006 2007
---- ----
Revenues:
Restaurants.......................................................................$ 277,230 $ 286,168
Asset Management.................................................................. 14,796 15,878
----------- -----------
Consolidated revenues........................................................$ 292,026 $ 302,046
=========== ===========
EBITDA:
Restaurants.......................................................................$ 29,947 $ 36,402
Asset Management.................................................................. 2,108 2,932
General corporate................................................................. (18,954) (14,865)
----------- -----------
Consolidated EBITDA.......................................................... 13,101 24,469
----------- -----------
Less Depreciation and Amortization:
Restaurants....................................................................... 10,793 13,635
Asset Management.................................................................. 1,483 1,251
General corporate................................................................. 1,085 1,099
----------- -----------
Consolidated Depreciation and Amortization................................... 13,361 15,985
----------- -----------
Operating profit (loss):
Restaurants....................................................................... 19,154 22,767
Asset Management.................................................................. 625 1,681
General corporate................................................................. (20,039) (15,964)
----------- -----------
Consolidated operating profit (loss)......................................... (260) 8,484
Interest expense...................................................................... (27,376) (15,389)
Loss on early extinguishments of debt................................................. (12,544) --
Investment income, net................................................................ 20,950 23,148
Gain (loss) on sale of unconsolidated business........................................ 2,256 (3)
Other income, net..................................................................... 1,737 1,610
----------- -----------
Consolidated income (loss) from continuing operations before income taxes
and minority interests....................................................$ (15,237) $ 17,850
=========== ===========
December 31, April 1,
2006 2007
---- ----
Identifiable assets:
Restaurants.........................................................................$ 1,079,509 $ 1,095,095
Asset Management.................................................................... 183,733 133,567
General corporate................................................................... 297,207 291,296
----------- -----------
Consolidated total assets....................................................$ 1,560,449 $ 1,519,958
=========== ===========
(13) Subsequent Events - Corporate Restructuring
On April 19, 2007, the Company entered into a definitive agreement whereby
the REIT will acquire Deerfield (the "Pending Deerfield Sale"). At April 1,
2007, the Company owned 2.5% of the REIT and accounts for its investment in the
REIT in accordance with the equity method. The total consideration to be
received by the Company and the other members of Deerfield is approximately
$300,000,000, consisting principally of $145,000,000 in cash, 9,635,192 shares
of the REIT, which had a market value based upon the average of the closing
prices of the REIT common stock for the ten trading days prior to April 19, 2007
(the "REIT Average Stock Price") of approximately $145,000,000, the distribution
of 309,038 shares of the REIT currently owned by Deerfield to the selling
members, which had a market value based upon the REIT Average Stock Price of
approximately $5,000,000 and cash distributions from Deerfield to the selling
members. The consideration to be received by the Company and other members of
Deerfield is subject to adjustment under certain circumstances, including a
deduction for any amount outstanding under the revolving note of Deerfield,
which is $2,000,000 as of April 1, 2007. The Company expects to receive a
minimum consideration of approximately $170,000,000 before expenses and amounts
to be held in escrow for its capital interest of 63.6% and its profits interest
of at least 52.3% in Deerfield. The total consideration that the Company will
receive, including the number of shares it will receive in the REIT, is
dependent upon Triarc's profits interest in Deerfield at the time of closing. A
portion of the consideration, in the form of approximately 2,500,000 shares of
the REIT issuable in the transaction, will be deposited into an escrow account
to be used to satisfy any indemnification claims related to Deerfield. The
Pending Deerfield Sale is subject to customary closing conditions, including a
financing by the REIT for the cash portion of the purchase price, approval by
the REIT stockholders and a registration statement covering resale of the REIT
shares to be received by the Company being declared effective by the SEC.
Subsequent to the closing of the transaction and assuming the Company receives
the minimum consideration of approximately $170,000,000, including all of the
shares held in escrow, the Company expects that it will own approximately 12% of
the REIT.
The results of operations of Deerfield have been included in the
accompanying condensed consolidated financial statements for the three-month
periods ended April 2, 2006 and April 1, 2007 and will continue to be reported
in the Company's results of operations through the date of the Pending Deerfield
Sale. The Company does not anticipate that Deerfield will be reported as a
discontinued operation since the Company will have significant continuing
involvement in the operations of Deerfield after the sale through (1) the
significant number of REIT shares that it will own subsequent to the sale and
(2) the Company's contingent gain relating to a portion of any proceeds received
from the sale or disposition involving certain investment intellectual property
that Deerfield has been developing, after the closing. The sale is currently
expected to close in the third quarter of 2007.
Summary financial data for Deerfield as of and for the three months ended
April 1, 2007 is as follows (in thousands):
Total assets..............................$ 132,635
Revenues.................................. 15,878
Operating profit.......................... 2,105
Income from continuing operations before
income taxes and minority interests..... 2,207
On April 30, 2007, the Company announced that in light of the Pending
Deerfield Sale, it is closing its New York headquarters and combining its
corporate operations with its restaurant operations in Atlanta, Georgia, which
is expected to occur by the end of 2007. The Company expects to transfer
substantially all of its senior executive responsibilities to the Arby's
Restaurant Group's executive team in Atlanta effective June 30, 2007.
Accordingly, to facilitate this transition, the Company entered into contractual
settlements (the "Contractual Settlements") with the Executives evidencing the
termination of their employment agreements and providing for their resignation
as executive officers as of June 29, 2007 (the "Separation Date"). Under the
terms of the Contractual Settlements, the Company's Chairman and Chief Executive
Officer will receive a payment of $50,214,000 and the Company's President and
Chief Operating Officer will receive a payment of $25,107,000, both subject to
applicable withholding taxes. The Company has agreed to fund these payment
obligations, net of applicable withholding taxes, in additional trusts and the
payment of amounts in the trusts will be made to the Executives after six months
following the Separation Date. Under the terms of the Contractual Settlements,
the Executives are not entitled to accrue any further compensation, incentive
compensation or other payments after June 29, 2007 other than payment of amounts
accrued and vested in the Deferred Compensation Trusts, which become payable to
the Executives on or about the Separation Date.
In addition, it is expected that on or about June 29, 2007 substantially
all other senior members of the Company's New York-based management team will no
longer serve as senior officers or employees of the Company. Final compensation
arrangements for these executives have not yet been determined. Substantially
all of the remaining New York headquarters employees are expected to leave the
Company by year-end. Although the Company has not yet finalized the amount of
additional charges it will incur under existing employment agreements and
severance arrangements, the Company currently estimates such costs to be
approximately $15,000,000.
As part of the agreement with the Executives and in connection with the
corporate restructuring, the Company has entered into a two-year transition
services agreement ("Services Agreement") with the Management Company beginning
June 30, 2007 pursuant to which the Management Company will provide the Company
with a range of professional and strategic services. Under the Services
Agreement, the Company will pay the Management Company $3,000,000 per quarter
for the first year of services and $1,750,000 per quarter for the second year of
services.
The Company has entered into an agreement under which the Management
Company will continue to manage the Equities Account until at least December 31,
2010 and, beginning January 1, 2008, the Company will pay management and
incentive fees to the Management Company in an amount customary for other
unaffiliated third party investors with similarly sized investments. The Company
also expects to sublease certain office facilities and sell certain assets
located in New York to the Management Company.
All of these agreements with the Executives and the Management Company were
negotiated and approved by a special committee of independent members of the
Company's board of directors. The special committee was advised by independent
outside counsel and worked with the compensation committee and the performance
compensation subcommittee of the Company's board of directors and its
independent outside counsel and independent compensation consultant.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Triarc Companies, Inc., which we refer to as Triarc,
and its subsidiaries should be read in conjunction with our accompanying
condensed consolidated financial statements included elsewhere herein and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the fiscal year ended December
31, 2006, which we refer to as the Form 10-K. Item 7 of our Form 10-K describes
the application of our critical accounting policies. There have been no
significant changes as of April 1, 2007 pertaining to that topic. Certain
statements we make under this Item 2 constitute "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. See "Special Note
Regarding Forward-Looking Statements and Projections" in "Part II - Other
Information" preceding "Item 1."
Introduction and Executive Overview
We currently operate in two business segments. We operate in the restaurant
business through our Company-owned and franchised Arby's restaurants and in the
asset management business through our 63.6% capital interest in Deerfield &
Company LLC, which we refer to as Deerfield. However, in April 2007 we entered
into a definitive agreement to sell our entire interest in Deerfield, which we
refer to as the Pending Deerfield Sale, as discussed in more detail under
"Liquidity and Capital Resources - Corporate Restructuring."
In our restaurant business, we derive revenues in the form of sales by our
Company-owned restaurants and from royalties and franchise and related fees.
While over 70% of our existing Arby's royalty agreements and all of our new
domestic royalty agreements provide for royalties of 4% of franchise revenues,
our average royalty rate was 3.6% for the three months ended April 1, 2007. In
our asset management business, we derive revenues in the form of asset
management and related fees from our management of (1) collateralized debt
obligation vehicles, which we refer to as CDOs, and (2) investment funds and
private investment accounts, which we refer to as Funds, including Deerfield
Triarc Capital Corp., a real estate investment trust, which we refer to as the
REIT.
We derive investment income principally from the investment of our excess
cash. In that regard, in December 2005 we invested $75.0 million in an account,
which we refer to as the Equities Account, which is managed by a management
company, which we refer to as the Management Company, formed by our Chairman and
Chief Executive Officer and President and Chief Operating Officer, whom we refer
to as the Executives, and our Vice Chairman, all of whom we refer to as the
Principals. The Equities Account is invested principally in the equity
securities, directly or through derivative instruments, of a limited number of
publicly-traded companies and cash equivalents and had a fair value of $100.5
million as of April 1, 2007. We had also invested in several funds managed by
Deerfield, including Deerfield Opportunities Fund, LLC, which we refer to as the
Opportunities Fund, and DM Fund LLC, which we refer to as the DM Fund. Prior to
2006, we invested $100.0 million in the Opportunities Fund and later transferred
$4.8 million of that amount to the DM Fund. We redeemed our investments in the
Opportunities Fund and the DM Fund effective September 29, 2006 and December 31,
2006, respectively. The Opportunities Fund through September 29, 2006 and the DM
Fund through December 31, 2006, were accounted for as consolidated subsidiaries
of ours, with minority interests to the extent of participation by investors
other than us. The Opportunities Fund was a multi-strategy hedge fund that
principally invested in various fixed income securities and their derivatives
and employed substantial leverage in its trading activities which significantly
impacted our consolidated financial position, results of operations and cash
flows. We also have an investment in the REIT which is managed by Deerfield.
When we refer to Deerfield, we mean only Deerfield & Company, LLC and not the
Opportunities Fund, the DM Fund or the REIT.
Our goal is to enhance the value of our Company by increasing the revenues
of the Arby's restaurant business and, until the Pending Deerfield Sale is
completed, Deerfield's asset management business. We are continuing to focus on
growing the number of restaurants in the Arby's system, adding new menu
offerings and implementing operational initiatives targeted at improving service
levels and convenience. We continue to grow Deerfield's assets under management
by utilizing the value of its historically profitable investment advisory brand
and increasing the types of assets under management, thereby increasing
Deerfield's asset management fee revenues.
We are currently pursuing a corporate restructuring involving the Pending
Deerfield Sale and the potential disposition of other non-restaurant net assets.
See "Liquidity and Capital Resources - Corporate Restructuring" for a detailed
discussion of the corporate restructuring and certain impacts thereof on our
results of operations and our liquidity and capital resources.
In recent periods our restaurant business has experienced the following
trends:
o Growing U.S. adult population, our principal customer demographic;
o Addition of selected higher-priced quality items to menus, which appeal
more to adult tastes;
o Increased consumer preference for premium sandwiches with perceived higher
levels of freshness, quality and customization along with increased
competition in the premium sandwich category which has constrained the
pricing of these products;
o Increased price competition, as evidenced by (1) value menu concepts, which
offer comparatively lower prices on some menu items, (2) combination meal
concepts, which offer a complete meal at an aggregate price lower than the
price of the individual food and beverage items, (3) the use of coupons and
other price discounting and (4) many recent product promotions focused on
the lower price of certain menu items;
o Increased competition among quick service restaurant competitors and other
businesses for available development sites, higher development costs
associated with those sites and higher borrowing costs in the lending
markets typically used to finance new unit development;
o Increased availability to consumers of new product choices, including
additional healthy products focused on freshness driven by a greater
consumer awareness of nutritional issues as well as new products that tend
to include larger portion sizes and more ingredients, and a wider variety
of snack products and non-carbonated beverages;
o Competitive pressures from operators outside the quick service restaurant
industry, such as the deli sections and in-store cafes of several major
grocery store chains, convenience stores and casual dining outlets offering
prepared food purchases;
o Generally higher fuel prices, although fluctuating significantly in recent
months, which cause a decrease in many consumers' discretionary income,
increase our utility costs and are likely to increase the cost of
commodities we purchase following the expiration in the second quarter of
2007 of most of our current distribution contracts which contain limits on
distribution cost increases;
o Extended hours of operation by many quick service restaurants including
both breakfast and late night hours;
o Federal, state and local legislative activity, such as minimum wage
increases, mandated health and welfare benefits and restrictions on the use
in prepared foods of certain unhealthy fatty acids, commonly referred to as
trans fats, which could continue to result in increased wages and related
fringe benefits, including health care and other insurance costs, higher
packaging costs and higher food costs;
o Competitive pressures from an increasing number of franchise opportunities
seeking to attract qualified franchisees; and
o Economically weak conditions in the Michigan and Ohio regions where a
disproportionate number of our Company-owned restaurants are located.
We experience the effects of these trends directly to the extent they
affect the operations of our Company-owned restaurants and indirectly to the
extent they affect sales by our franchisees and, accordingly, the royalties and
franchise fees we receive from them.
In recent periods, our asset management business has experienced the
following trends:
o Growth in the hedge fund market as investors appear to have increased their
investment allocations to hedge funds, with particular interest recently in
hedge strategies that focus on specific areas of growth in domestic and
foreign economies such as oil, commodities, interest rates, equities and
other specific areas, although such growth has moderated somewhat recently
reflecting the recent performance of certain funds and the competitive
market;
o Increased demand for securities, partly due to an increase in the number of
hedge funds, resulting in higher purchase prices of certain securities and,
during periods of asset liquidation by those hedge funds, potentially lower
sales prices, which can negatively impact our returns;
o Short-term interest rates have increased more significantly than long-term
interest rates, representing a flatter yield curve, resulting in higher
funding costs for our securities purchases, which can negatively impact our
margins within our managed funds, potentially lowering our asset management
fees and assets under management;
o Increased merger and acquisition activity, resulting in additional risks
and opportunities in the credit markets; and
o Higher default rates in the subprime mortgage market that have increased
the risk of losses and volatility of interest rate spreads in that market
sector and which may negatively impact the management fees from some of our
asset-backed CDO portfolios and/or the fair value of some of our CDO
investments.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. However, Deerfield, the Opportunities Fund and
the DM Fund report or reported on a calendar year ending on December 31. Our
first quarter of fiscal 2006 commenced on January 2, 2006 and ended on April 2,
2006, except that Deerfield, the Opportunities Fund and DM Fund are included for
the calendar quarter. Our first quarter of fiscal 2007 commenced on January 1,
2007 and ended on April 1, 2007, except that Deerfield is included for the
calendar quarter. When we refer to the "three months ended April 2, 2006," or
the "2006 first quarter," we mean the period from January 2, 2006 to April 2,
2006, and when we refer to the "three months ended April 1, 2007," or the "2007
first quarter," we mean the period from January 1, 2007 to April 1, 2007. Each
quarter contained 13 weeks. All references to years and quarters relate to
fiscal periods rather than calendar periods, except for Deerfield, the
Opportunities Fund and the DM Fund.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount and percent of the change between the 2006 first quarter and
the 2007 first quarter. We consider certain percentage changes between these
quarters to be not measurable, or not meaningful, and we refer to these as
"n/m." The percentage changes used in the following discussion have been rounded
to the nearest whole percent.
Three Months Ended
------------------------ Change
April 2, April 1, -------------------
2006 2007 Amount Percent
---- ---- ------ -------
(In Millions Except Percents)
Revenues:
Net sales.....................................................$ 258.8 $ 266.5 $ 7.7 3 %
Royalties and franchise and related fees...................... 18.4 19.7 1.3 7 %
Asset management and related fees............................. 14.8 15.9 1.1 7 %
---------- ---------- ----------
292.0 302.1 10.1 3 %
---------- ---------- ----------
Costs and expenses:
Cost of sales, excluding depreciation and amortization........ 192.4 195.0 2.6 1 %
Cost of services, excluding depreciation and amortization..... 5.5 6.9 1.4 25 %
Advertising and promotions.................................... 20.1 17.7 (2.4) (12)%
General and administrative, excluding depreciation and
amortization................................................ 60.1 57.6 (2.5) (4)%
Depreciation and amortization, excluding amortization of
deferred financing costs ................................... 13.4 16.0 2.6 19 %
Facilities relocation and corporate restructuring............. 0.8 0.4 (0.4) (50)%
---------- ---------- ----------
292.3 293.6 1.3 -- %
---------- ---------- ----------
Operating profit (loss)................................... (0.3) 8.5 8.8 n/m
Interest expense ................................................ (27.4) (15.4) 12.0 44 %
Loss on early extinguishments of debt............................ (12.5) -- 12.5 100 %
Investment income, net........................................... 21.0 23.1 2.1 10 %
Gain on sale of unconsolidated business.......................... 2.3 -- (2.3) (100)%
Other income, net................................................ 1.7 1.6 (0.1) (6)%
---------- ---------- ----------
Income (loss) from continuing operations before income
taxes and minority interests............................ (15.2) 17.8 33.0 n/m
Benefit from (provision for) income taxes........................ 5.6 (7.4) (13.0) n/m
Minority interests in income of consolidated subsidiaries........ (3.1) (3.2) (0.1) (3)%
---------- ---------- ----------
Income (loss) from continuing operations.................. (12.7) 7.2 19.9 n/m
---------- ---------- ----------
Loss from discontinued operations, net of income taxes:
Loss from operations.......................................... (0.1) -- 0.1 100 %
Loss on disposal.............................................. -- (0.1) (0.1) n/m
---------- ---------- ----------
Loss from discontinued operations......................... (0.1) (0.1) -- -- %
---------- ---------- ----------
Net income (loss).......................................$ (12.8) $ 7.1 $ 19.9 n/m
========== ========== ==========
Three Months Ended April 1, 2007 Compared with Three Months Ended April 2, 2006
Net Sales
Our net sales, which were generated entirely from the Company-owned
restaurants, increased $7.7 million, or 3%, to $266.5 million for the three
months ended April 1, 2007 from $258.8 million for the three months ended April
2, 2006, due to a $12.5 million increase in net sales from the 44 net
Company-owned restaurants we added since April 2, 2006, consisting of 48 new
restaurants opened, with generally higher than average sales volumes, and 17
restaurants we acquired from franchisees since April 2, 2006 as compared with 14
underperforming restaurants we closed and 7 restaurants we sold to franchisees
since April 2, 2006. This increase was partially offset by a $4.8 million, or
2%, decrease in same-store sales of our Company-owned restaurants in the 2007
first quarter as compared with the 2006 first quarter. When we refer to
same-store sales, we mean only sales of those restaurants which were open during
the same months in both of the comparable periods. Same-store sales of our
Company-owned restaurants in the 2007 first quarter were negatively impacted by
(1) poor weather conditions which decreased our customer traffic in the northern
and central sections of the United States in the 2007 first quarter and (2) the
disproportionate number of Company-owned restaurants in the economically-weaker
Michigan and Ohio regions which continue to underperform the system and the
prior year's comparable period. These factors were partially offset by (1)
incremental sales in the 2007 first quarter from some of our limited time
product offerings, (2) the effect of selective price increases that were
implemented in November 2006 and (3) increased sales volume from our value
oriented menu offerings which were introduced mainly in the second half of 2006.
We currently anticipate positive same-store sales growth for the remainder
of 2007, despite the weak economy in Michigan and Ohio, driven by the
anticipated performance of various initiatives such as (1) a value oriented menu
program which offers a flexible combination of selected menu items for a
discounted price, (2) the continued use of limited time menu items, (3) the full
period effect of the selective price increases mentioned above and (4) new
product introductions. In addition to the anticipated positive effect of
same-store sales growth, net sales should also be positively impacted by an
increase in Company-owned restaurants. We presently plan to open approximately
35 new Company-owned restaurants during the remainder of 2007. We continually
review the performance of any underperforming Company-owned restaurants and
evaluate whether to close those restaurants, particularly in connection with the
decision to renew or extend their leases. Specifically, we have 44 restaurant
leases that are scheduled for renewal or expiration during the remainder of
2007. We currently anticipate the renewal or extension of approximately 34 of
those leases.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $1.3 million, or 7%, to $19.7 million
for the three months ended April 1, 2007 from $18.4 million for the three months
ended April 2, 2006. This increase reflects a $1.6 million net increase in
royalties from the 95 franchised restaurants opened since April 2, 2006, with
generally higher than average sales volumes, and the 7 restaurants we sold to
franchisees since April 2, 2006 replacing the royalties from the 30 generally
underperforming franchised restaurants closed and the elimination of royalties
from 17 restaurants we acquired from franchisees since April 2, 2006. This
increase was partially offset by (1) a $0.2 million decline in royalties due to
a 1% decrease in same-store sales of the franchised restaurants in the 2007
first quarter as compared with the 2006 first quarter and (2) a $0.1 million
decrease in franchise and related fees. The decrease in same-store sales of the
franchised restaurants reflects the negative effect of the poor weather
conditions discussed above under "Net Sales" partially offset by the positive
effects of (1) local marketing initiatives principally implemented by our
franchisees shortly after the 2006 first quarter, including more effective local
television advertising and increased couponing, similar to those which we were
already using for Company-owned restaurants throughout the 2006 first quarter
and (2) the selective price increases implemented in November 2006.
We expect that our royalties and franchise and related fees will increase
during the remainder of 2007 as compared with the same period in 2006 due to
anticipated positive same-store sales growth of franchised restaurants from the
expected performance of the various initiatives described above under "Net
Sales" and the positive effect of net new restaurant openings by our
franchisees.
Asset Management and Related Fees
Our asset management and related fees, which were generated entirely from
the management of CDOs and Funds by Deerfield, increased $1.1 million, or 7%, to
$15.9 million for the three months ended April 1, 2007 from $14.8 million for
the three months ended April 2, 2006. This increase principally reflects a $1.3
million net increase in fees from the net addition of 2 CDOs and 2 Funds, which
we added principally in the second half of 2006.
Our asset management and related fees will cease upon the completion of the
Pending Deerfield Sale.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization resulted
entirely from the Company-owned restaurants. Cost of sales increased $2.6
million, or 1%, to $195.0 million, resulting in a gross margin of 27%, for the
three months ended April 1, 2007, from $192.4 million, resulting in a gross
margin of 26%, for the three months ended April 2, 2006. We define gross margin
as the difference between net sales and cost of sales divided by net sales. The
increase in cost of sales is primarily attributable to the effect of the 44 net
Company-owned restaurants added since April 2, 2006 partially offset by the
effect of the 1% increase in our overall gross margin. The gross margin
improvement is primarily due to (1) our continuing implementation of the more
effective operational procedures of the 775 Arby's restaurants we acquired from
RTM Restaurant Group in July 2005, which we refer to as the RTM Acquisition, at
the restaurants we owned prior to the RTM Acquisition, (2) decreased beverage
costs partially due to increased rebates received in the 2007 first quarter from
a new beverage supplier we were in the process of converting to during the 2006
first quarter, (3) the effect of the selective price increases we implemented in
November 2006, (4) decreased repairs and maintenance expense partially as a
result of incremental costs in the 2006 first quarter related to the conversion
to a new beverage supplier and (5) decreases in our cost of beef. These positive
factors were partially offset by the effect of increased price discounting
associated with our value oriented menu offerings which began mainly in the
second half of 2006.
We anticipate that our gross margin for the remainder of 2007 will be
relatively consistent with the 2007 first quarter as a result of the positive
effects of (1) our continuing implementation of the more efficient operational
procedures of RTM throughout our other Company-owned restaurants, (2) the full
period effect on our net sales of the selective price increases that were
implemented in November 2006 and (3) cost savings from certain new commodity
supply contracts negotiated by our purchasing cooperative, all of which will be
substantially offset by the effects of (1) our continued use of value oriented
menu offerings and (2) anticipated cost increases as new distribution contracts
reflecting the effects of higher fuel costs are entered into in the second
quarter of 2007.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, which
resulted entirely from the management of CDOs and Funds by Deerfield, increased
$1.4 million, or 25%, to $6.9 million for the three months ended April 1, 2007
from $5.5 million for the three months ended April 2, 2006 principally due to
the hiring of additional personnel to support our current and anticipated growth
in assets under management and increased incentive compensation levels of
existing personnel.
Our cost of services will cease upon the completion of the Pending
Deerfield Sale since our royalties and franchise and related fees have no
associated cost of services.
Advertising and Promotions
Our advertising and promotions expenses consist of third party costs for
local and national television, radio, direct mail and outdoor advertising as
well as point of purchase materials and local restaurant marketing. These
expenses decreased $2.4 million, or 12%, principally due to the timing of our
major advertising campaign for the month of April which commenced at the
beginning of our second quarter in 2007 but started at the end of our first
quarter in 2006.
We expect that our advertising and promotions expenses for the remainder of
2007 will be higher than the comparable period of 2006 due to the timing of the
April advertising campaign as well as the net increase in Company-owned
restaurants.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization decreased $2.5 million, principally due to (1) a $1.9 million
reduction in incentive compensation discussed below and (2) a $1.0 million
decrease in share-based compensation primarily due to the effect of some of our
employee share-based awards becoming fully vested prior to April 1, 2007, both
partially offset by a $0.8 million increase in salaries in our restaurant
segment attributable to an increase in headcount throughout 2006 due to the
strengthening of the infrastructure of that segment following the RTM
Acquisition. We reduced our incentive compensation expense in the 2007 first
quarter by $1.9 million, representing our current estimate of the portion
allocable to the Management Company. This allocable portion represents one
quarter of the estimated incentive compensation to be awarded for 2007 to the
Principals and other of our senior executive officers who manage a series of
equity funds that are separate and distinct from us through the Management
Company. There was no similar allocation reported in the 2006 first quarter.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $2.6 million, principally reflecting increases of (1)
$1.1 million related to the 44 net restaurants added since April 2, 2006, (2)
$0.8 million related to losses on disposals of properties included in
depreciation and amortization and (3) depreciation on fixed asset additions to
existing restaurants.
Facilities Relocation and Corporate Restructuring
The charge of $0.4 million in the 2007 first quarter consisted of
additional employee relocation costs whereas the charge of $0.8 million in the
2006 first quarter consisted of additional severance and retention incentive
compensation, both related to combining our then existing restaurant operations
with those of RTM following the RTM Acquisition and relocating the corporate
office of the restaurant group from Fort Lauderdale, Florida to new offices in
Atlanta, Georgia.
As discussed in "Liquidity and Capital Resources - Corporate
Restructuring," we expect to incur additional facilities relocation and
corporate restructuring charges during the remaining nine months of 2007 as a
result of our decision to close our New York headquarters and combine our
corporate operations with our restaurant operations in Atlanta, Georgia and
entering into contractual settlements with the Executives and the termination of
senior officers and others. Although we have not yet finalized the amount of
charges we will incur under existing employment agreements and severance
arrangements, we currently estimate such costs to be $50.2 million with respect
to our Chairman and Chief Executive Officer, $25.1 million with respect to our
President and Chief Operating Officer and approximately $15.0 million with
respect to other senior members of our New York-based management team. There
will be additional facilities relocation and corporate restructuring charges,
the amount of which has not yet been determined.
Interest Expense
Interest expense decreased $12.0 million, principally reflecting a $12.1
million decrease in interest expense on debt securities sold with an obligation
to purchase or under agreements to repurchase due to the effective redemption of
our investment in the Opportunities Fund as of September 29, 2006, which we
refer to as the Redemption. As a result of the Redemption we no longer
consolidate the Opportunities Fund subsequent to September 29, 2006.
Accordingly, interest expense and related net investment income are no longer
affected by the significant leverage associated with the Opportunities Fund
after September 29, 2006.
Loss on Early Extinguishments of Debt
The loss on early extinguishments of debt of $12.5 million in the 2006
first quarter resulted from the effective conversion of an aggregate $165.8
million of our 5% convertible notes due 2023, which we refer to as the
Convertible Notes, into our class A and class B common stock and consisted of
$8.7 million of negotiated inducement premiums that we paid in cash and shares
of our class B common stock and the write-off of $3.8 million of related
previously unamortized deferred financing costs.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Three Months Ended
------------------------
April 2, April 1,
2006 2007 Change
---- ---- ------
(In Millions)
Recognized net gains..........................................$ 2.9 $ 21.1 $ 18.2
Interest income............................................... 18.0 2.5 (15.5)
Other than temporary unrealized losses........................ -- (0.7) (0.7)
Distributions, including dividends............................ 0.2 0.3 0.1
Other ........................................................ (0.1) (0.1) --
------- ------ -------
$ 21.0 $ 23.1 $ 2.1
======= ====== =======
Our recognized net gains included (1) realized gains and losses on sales of
our available-for-sale securities and our investments accounted for under the
cost method of accounting and (2) realized and unrealized gains and losses on
changes in the fair values of our trading securities, including derivatives,
and, in the first quarter of 2006, securities sold short with an obligation to
purchase. The $18.2 million increase in our recognized net gains is principally
due to an increase in gains realized on sales of our available-for-sale
securities, including a $12.8 million gain on one specific security we sold in
the 2007 first quarter, and unrealized gains on put and call option combinations
and a total return swap, each on equity securities. All of these recognized
gains and losses may vary significantly in future periods depending upon changes
in the value of our investments and, for available-for-sale securities, the
timing of the sales of our investments. Our interest income decreased $15.5
million due to lower average outstanding balances of our interest-bearing
investments principally as a result of the Redemption whereby our net investment
income and interest expense are no longer affected by the significant leverage
associated with the Opportunities Fund after September 29, 2006. Our other than
temporary unrealized losses of $0.7 million in the 2007 first quarter reflected
the recognition of impairment charges related to the decline in the market
values of three of our available-for-sale investments in CDOs. Any other than
temporary unrealized losses are dependant upon the underlying economics and/or
volatility in the value of our investments in available-for-sale securities and
cost method investments and may or may not recur in future periods.
As of April 1, 2007, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $9.6 million and $(1.9) million, respectively, included in
"Accumulated other comprehensive income." We evaluated the unrealized losses to
determine whether these losses were other than temporary and concluded that they
were not. Should either (1) we decide to sell any of these investments with
unrealized losses or (2) any of the unrealized losses continue such that we
believe they have become other than temporary, we would recognize the losses on
the related investments at that time.
Gain on Sale of Unconsolidated Business
The gain on sale of unconsolidated business of $2.3 million in the 2006
first quarter related to our investment in Encore Capital Group, Inc., an equity
investee of ours which we refer to as Encore, principally due to cash sales of a
portion of our investment in Encore, which did not recur in the 2007 first
quarter.
In April 2007, we entered into an agreement to sell a substantial portion
of our remaining investment in Encore for cash proceeds of $8.6 million. This
sale, which closed on May 10, 2007, will result in our realizing an approximate
$2.5 million gain on sale of unconsolidated business in the second quarter of
2007. Upon completion of the sale, we will own less than 1% of Encore and will
no longer have representation on Encore's board of directors and, as a result,
will no longer have the ability to exercise significant influence over operating
and financial policies of Encore. Accordingly, following the sale we will no
longer account for our remaining investment in Encore under the equity method.
Other Income, Net
Other income, net was relatively unchanged between the first quarters of
2006 and 2007 with no significant changes in its individual components.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests improved $33.0 million to income of $17.8 million in the 2007
first quarter from a loss of $15.2 million in the 2006 first quarter. This
improvement is attributed principally to (1) the $12.8 million gain on sale of
one of our investments in the 2007 first quarter, (2) the $12.5 million loss on
early extinguishments of debt in the 2006 first quarter which did not recur in
the 2007 first quarter and (3) an $8.8 million improvement in operating profit
which, together with the effects of other variances, are discussed above.
We recognized deferred compensation expense of $1.1 million in the 2006
first quarter and $1.2 million in the 2007 first quarter, within general and
administrative expenses, for the net increases in the fair value of investments
in two deferred compensation trusts, which we refer to as the Deferred
Compensation Trusts, for the benefit of the Executives. Under accounting
principles generally accepted in the United States of America, we recognize
investment income for any interest or dividend income on investments in the
Deferred Compensation Trusts, realized gains on sales of investments in the
Deferred Compensation Trusts and investment losses for any unrealized losses
deemed to be other than temporary, but are unable to recognize any investment
income for unrealized net increases in the fair value of those investments in
the Deferred Compensation Trusts that are accounted for under the cost method of
accounting. Accordingly, we recognized net investment income from investments in
the Deferred Compensation Trusts of $0.1 million in each of the 2006 and 2007
first quarters consisting entirely of interest income. The cumulative disparity
of $10.4 million between (1) deferred compensation expense and net recognized
investment income and (2) the obligation to the Executives and the carrying
value of the assets in the Deferred Compensation Trusts will reverse in future
periods as either (1) additional investments in the Deferred Compensation Trusts
are sold and previously unrealized gains are recognized without any offsetting
increase in compensation expense or (2) the fair values of the investments in
the Deferred Compensation Trusts decrease, other than with respect to recognized
losses deemed to be other than temporary, resulting in the recognition of a
reversal of compensation expense without any offsetting losses recognized in
investment income. In connection with the corporate restructuring discussed
below under "Liquidity and Capital Resources - Corporate Restructuring," the
obligation to the Executives for the Deferred Compensation Trusts will be
payable on or about June 29, 2007. To the extent that we utilize the investments
in the Deferred Compensation Trusts to settle the related liability to the
Executives, the cumulative disparity will reverse during the remainder of 2007
and will be recognized as a component of our income (loss) from continuing
operations before income taxes and minority interests.
Upon completion of the Pending Deerfield Sale, which is currently expected
to occur in our 2007 third quarter, we expect to recognize a pretax gain on the
sale of Deerfield, the amount of which cannot presently be determined. See below
under "Liquidity and Capital Resources - Corporate Restructuring" for further
discussion of the Pending Deerfield Sale.
Benefit From (Provision For) Income Taxes
The benefit from income taxes represented an effective rate of 37% in the
2006 first quarter and the provision for income taxes represented an effective
rate of 42% in the 2007 first quarter. The respective rate in each of the 2006
and 2007 first quarters is higher than the United States Federal statutory rate
of 35% principally due to (1) the effect of non-deductible compensation and
other non-deductible expenses, (2) state income taxes, net of Federal income tax
benefit, due to the differing mix of pretax income or loss among the
consolidated subsidiaries which file state tax returns on an individual company
basis and (3) in the 2007 first quarter, an additional provision of $0.3 million
of net reserves for uncertain tax positions. These effects were partially offset
by the effect of minority interests in income of consolidated subsidiaries which
were not taxable to us but which are not deducted from the pretax income used to
calculate the effective tax rates. The effective benefit rate in the 2006 first
quarter is higher than the United States Federal statutory rate of 35%, despite
the effect of the previously discussed factors, since the rate was based on then
forecasted pretax income for the 2006 full year despite the loss from continuing
operations before income taxes and minority interests for the 2006 first
quarter.
Minority Interests in Income of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries increased
$0.1 million principally reflecting a correction in the 2007 first quarter of a
$1.9 million prior period understatement of minority interests in income of
consolidated subsidiaries which was not deemed to be material to our
consolidated financial statements. This increase was substantially offset by the
effect of $1.7 million of minority interests in the Opportunities Fund in the
2006 first quarter which did not recur in the 2007 first quarter as a result of
the Redemption in September 2006.
Minority interests in income of consolidated subsidiaries are expected to
become less significant following the completion of the Pending Deerfield Sale.
Loss From Discontinued Operations
The loss from discontinued operations consists of a $0.1 million loss from
operations in the 2006 first quarter and an additional $0.1 million loss on
disposal in the 2007 first quarter, both related to our closing two
underperforming restaurants in the fourth quarter of 2006. Our accompanying
condensed consolidated statement of operations for the three months ended April
2, 2006 has been reclassified to report the results of operations of the two
closed restaurants as discontinued operations.
Net Income (Loss)
Our net income (loss) improved $19.9 million to income of $7.1 million in
the 2007 first quarter from a loss of $12.8 million in the 2006 first quarter.
This improvement is attributed principally to the after tax and applicable
minority interest effects of certain significant improvements in the first
quarter of 2007 as compared with the first quarter of 2006, including (1) a $7.7
million effect from the gain on sale of one of our investments in the 2007 first
quarter, (2) a $7.6 million effect from the loss on early extinguishments of
debt in the 2006 first quarter which did not recur in the 2007 first quarter and
(3) a $5.3 million effect from higher operating profit which, together with the
after tax and minority interest effects of other variances, are discussed above.
Liquidity and Capital Resources
Cash Flows From Continuing Operating Activities
Our consolidated operating activities from continuing operations used cash
and cash equivalents, which we refer to in this discussion as cash, of $2.8
million during the three months ended April 1, 2007 principally reflecting (1)
cash used by changes in operating assets and liabilities of $32.7 million and
(2) net operating investment adjustments of $14.4 million, both substantially
offset by (1) depreciation and amortization of $16.5 million, (2) net income of
$7.1 million, (3) receipt of deferred vendor incentive, net of amount
recognized, of $8.8 million, (4) deferred income tax provision of $7.0 million,
(5) minority interests of $3.2 million and (6) a share-based compensation
provision of $2.8 million.
The cash used by changes in operating assets and liabilities of $32.7
million principally reflects a $49.3 million decrease in accounts payable and
accrued expenses and other current liabilities partially offset by a $16.3
million decrease in accounts and notes receivable. The decrease in accounts
payable and accrued expenses and other current liabilities was due to the annual
payment of previously accrued incentive compensation. The decrease in accounts
and notes receivable principally resulted from collections of asset management
incentive fees receivable that were recognized principally in the fourth quarter
of 2006. Our asset management revenues are higher in our fourth quarter as a
result of our revenue recognition accounting policy for incentive fees related
to the Funds which are based upon performance and are recognized when the
amounts become fixed and determinable upon the close of a performance period.
The net operating investment adjustments principally reflect $14.1 million of
other net recognized gains, net of other than temporary losses, including a
$12.8 million gain realized on one specific available-for-sale security we sold
in the 2007 first quarter.
We expect that our cash flows from continuing operating activities will use
cash during the remaining nine months of 2007 as a result of the severance and
contractual settlement payments in connection with a corporate restructuring as
discussed below under "Corporate Restructuring."
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$147.5 million at April 1, 2007, reflecting a current ratio, which equals
current assets divided by current liabilities, of 1.7:1. Working capital at
April 1, 2007 decreased $13.7 million from $161.2 million at December 31, 2006,
primarily resulting from dividend payments of $8.0 million and distributions to
minority interests related to Deerfield of $4.2 million.
Our total capitalization at April 1, 2007 was $1,192.2 million, consisting
of stockholders' equity of $465.4 million, long-term debt of $723.2 million,
including current portion, and notes payable of $3.6 million. Our total
capitalization at April 1, 2007 decreased $10.2 million from $1,202.4 million at
December 31, 2006 principally reflecting (1) the components of comprehensive
loss that bypass net income of $9.9 million principally reflecting the
reclassification of prior period unrealized holding gains into net income upon
our sales of available-for-sale securities and (2) dividends paid of $8.0
million, both partially offset by our net income of $7.1 million.
Credit Agreement
We have a credit agreement, which we refer to as the Credit Agreement, for
our restaurant segment. The Credit Agreement includes a senior secured term loan
facility, which we refer to as the Term Loan, with a remaining principal balance
of $558.1 million as of April 1, 2007 and a senior secured revolving credit
facility of $100.0 million, under which there were no borrowings as of April 1,
2007. However, the availability under the facility as of April 1, 2007 was $93.5
million, which is net of a reduction of $6.5 million for outstanding letters of
credit. The Term Loan has scheduled repayments of $4.6 million during the
remaining nine months of 2007. In addition, the Term Loan requires prepayments
of principal amounts resulting from excess cash flows of the restaurant segment
and from certain events, both as determined under the Credit Agreement. No
prepayments were required under the Term Loan during the 2007 first quarter and
we do not expect that any will be required during the remainder of 2007.
Sale-Leaseback Obligations
We have outstanding $90.5 million of sale-leaseback obligations as of April
1, 2007, which relate to our restaurant segment and are due through 2027, of
which $1.5 million is due during the remaining nine months of 2007.
Capitalized Lease Obligations
We have outstanding $64.7 million of capitalized lease obligations as of
April 1, 2007, which relate to our restaurant segment and extend through 2036,
of which $2.2 million is due during the remaining nine months of 2007.
Convertible Notes
We have outstanding at April 1, 2007, $2.1 million of Convertible Notes
which do not have any scheduled principal repayments prior to 2023 and are
convertible into 52,000 shares of our class A common stock and 105,000 shares of
our class B common stock. The Convertible Notes are redeemable at our option
commencing May 20, 2010 and at the option of the holders on May 15, 2010, 2015
and 2020 or upon the occurrence of a fundamental change, as defined, relating to
us, in each case at a price of 100% of the principal amount of the Convertible
Notes plus accrued interest.
Other Long-Term Debt
We have outstanding a secured bank term loan payable through 2008 in the
amount of $4.6 million as of April 1, 2007, of which $2.4 million is due during
the remaining nine months of 2007. We also have outstanding $2.0 million under a
revolving note as of April 1, 2007, which we refer to as the Revolving Note,
which is due in 2009 but which we expect to repay during the remaining nine
months of 2007. Additionally, we have outstanding $1.2 million of leasehold
notes as of April 1, 2007, which are due through 2018, of which $0.1 million is
due during the remaining nine months of 2007.
Notes Payable
We have outstanding $3.6 million of notes payable as of April 1, 2007 which
relate to our asset management segment and are secured by some of our short-term
investments in preferred shares of CDOs as of April 1, 2007. These notes are
non-recourse except in limited circumstances and have no stated maturities but
must be repaid from either a portion or all of the distributions we receive on,
or sales proceeds from, the respective preferred shares of CDOs, as well as a
portion of the asset management fees to be paid to us from the respective CDOs.
Revolving Credit Facilities
We have $93.5 million available for borrowing under our restaurant
segment's $100.0 million revolving credit facility as of April 1, 2007, which is
net of the reduction of $6.5 million for outstanding letters of credit noted
above. Our asset management segment has $8.0 million available under the
Revolving Note as of April 1, 2007 which, upon completion of the Pending
Deerfield Sale, would no longer be available. In addition, we have a $30.0
million conditional funding commitment, of which $25.3 million was available as
of April 1, 2007, from a real estate finance company for sale-leaseback
financing for development and operation of Arby's restaurants. This conditional
funding commitment ends on June 30, 2007 but we have the option to extend it for
an additional six months.
Debt Repayments and Covenants
Our total scheduled long-term debt and notes payable repayments during the
remaining nine months of 2007 are $14.9 million consisting of $4.6 million under
our Term Loan, $2.4 million under our secured bank term loan, $2.2 million
relating to capitalized leases, $2.1 million expected to be paid under our notes
payable, $2.0 million expected to be paid under our Revolving Note, $1.5 million
relating to sale-leaseback obligations and $0.1 million under our leasehold
notes.
Our Credit Agreement contains various covenants relating to our restaurant
segment, the most restrictive of which (1) require periodic financial reporting,
(2) require meeting certain leverage and interest coverage ratio tests and (3)
restrict, among other matters, (a) the incurrence of indebtedness, (b) certain
asset dispositions, (c) certain affiliate transactions, (d) certain investments,
(e) certain capital expenditures and (f) the payment of dividends indirectly to
Triarc. We were in compliance with all of these covenants as of April 1, 2007
and we expect to remain in compliance with all of these covenants during the
remainder of 2007. However, in an effort to ensure that we remain in compliance
with the Credit Agreement covenants in the first quarter of 2008, we are
currently renegotiating certain of these covenants, including the leverage and
interest coverage ratio tests, with our lenders under the Credit Agreement. We
may need to (1) satisfactorily complete the renegotiation of certain covenants
of the Credit Agreement, (2) make additional prepayments of the Term Loan and/or
(3) obtain a waiver from the administrative agent for the Credit Agreement.
There can be no assurance that we would be successful in renegotiating or
obtaining a waiver of the Credit Agreement covenants. If those actions are not
successful, or we choose not to pursue obtaining a waiver, then we currently
estimate that we would be required to make prepayments of approximately $48.0
million before March 30, 2008 in order to remain in compliance with all of the
covenants under the Credit Agreement through the end of the first quarter of
2008. As of April 1, 2007 there was $28.5 million available for the payment of
dividends indirectly to Triarc under the covenants of the Credit Agreement.
A significant number of the underlying leases for our sale-leaseback
obligations and our capitalized lease obligations, as well as our operating
leases, require or required periodic financial reporting of certain subsidiary
entities within our restaurant segment or of individual restaurants, which in
many cases has not been prepared or reported. We have negotiated waivers and
alternative covenants with our most significant lessors which substitute
consolidated financial reporting of our restaurant segment for that of
individual subsidiary entities and which modify restaurant level reporting
requirements for more than half of the affected leases. Nevertheless, as of
April 1, 2007, we were not in compliance, and remain not in compliance, with the
reporting requirements under those leases for which waivers and alternative
financial reporting covenants have not been negotiated. However, none of the
lessors has asserted that we are in default of any of those lease agreements. We
do not believe that this non-compliance will have a material adverse effect on
our condensed consolidated financial position or results of operations.
Contractual Obligations
There were no significant changes to our contractual obligations since
December 31, 2006, as disclosed in Item 7 of our 2006 Form 10-K. However, we are
currently unable to estimate the amount and timing of future cash tax payments
relating to the potential settlement of uncertain income tax positions, the
reserves for which have been determined in accordance with FASB Interpretation
No. 48, which we refer to as Interpretation 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109." We adopted
Interpretation 48 commencing with our 2007 first quarter. Our total reserves for
uncertain income tax positions relating to continuing operations as determined
under Interpretation 48 was $13.6 million as of April 1, 2007.
Guarantees and Commitments
Our wholly-owned subsidiary, National Propane Corporation, which we refer
to as National Propane, retains a less than 1% special limited partner interest
in our former propane business, now known as AmeriGas Eagle Propane, L.P., which
we refer to as AmeriGas Eagle. National Propane agreed that while it remains a
special limited partner of AmeriGas Eagle, National Propane would indemnify the
owner of AmeriGas Eagle for any payments the owner makes related to the owner's
obligations under certain of the debt of AmeriGas Eagle, aggregating
approximately $138.0 million as of April 1, 2007, if AmeriGas Eagle is unable to
repay or refinance such debt, but only after recourse by the owner to the assets
of AmeriGas Eagle. National Propane's principal asset is an intercompany note
receivable from Triarc in the amount of $50.0 million as of April 1, 2007. We
believe it is unlikely that we will be called upon to make any payments under
this indemnity. Prior to 2004 AmeriGas Propane, L.P., which we refer to as
AmeriGas Propane, purchased all of the interests in AmeriGas Eagle other than
National Propane's special limited partner interest. Either National Propane or
AmeriGas Propane may require AmeriGas Eagle to repurchase the special limited
partner interest. However, we believe it is unlikely that either party would
require repurchase prior to 2009 as either AmeriGas Propane would owe us tax
indemnification payments if AmeriGas Propane required the repurchase or we would
accelerate payment of deferred taxes of $35.9 million as of April 1, 2007,
including $34.5 million associated with the gain on sale of the propane business
and the remainder associated with other tax basis differences, prior to 2006, of
our propane business if National Propane required the repurchase. As of April 1,
2007, we have net operating loss tax carryforwards sufficient to offset the
remaining deferred taxes.
RTM guarantees the lease obligations of 23 RTM restaurants formerly
operated by affiliates of RTM as of April 1, 2007, which we refer to as the
Affiliate Lease Guarantees. The RTM selling stockholders have indemnified us
with respect to the guarantee of the remaining lease obligations. In addition,
RTM remains contingently liable for 21 leases for restaurants sold by RTM prior
to the RTM Acquisition if the respective purchasers do not make the required
lease payments. All of these lease obligations, which extend through 2025,
including all existing extension or renewal option periods, could aggregate a
maximum of approximately $38.0 million as of April 1, 2007, including
approximately $32.0 million under the Affiliate Lease Guarantees, assuming all
scheduled lease payments have been made by the respective tenants through April
1, 2007.
Two of Deerfield's executives in the aggregate currently hold approximately
one-third of the capital interests and profit interests in Deerfield. Those
executives have rights under certain circumstances to require us to acquire a
substantial portion of their interests in Deerfield commencing in 2007. To the
extent that we are required to purchase a portion of those executives' interests
in Deerfield prior to or concurrent with the closing of the sale of Deerfield,
we would be obligated to pay those executives in cash for their interests.
However, upon the sale of Deerfield to the REIT, we would receive a combination
of cash and shares issued by the REIT for those interests, as discussed below
under "Corporate Restructuring."
Capital Expenditures
Cash capital expenditures amounted to $16.5 million during the three months
ended April 1, 2007. We expect that cash capital expenditures will be
approximately $55.0 million and non-cash capital expenditures consisting of
capitalized leases will be approximately $20.0 million during the remaining nine
months of 2007 principally relating to (1) the opening of an estimated 35 new
Company-owned restaurants, (2) remodeling some of our existing restaurants and
(3) maintenance capital expenditures for our Company-owned restaurants. We have
$21.9 million of outstanding commitments for capital expenditures as of April 1,
2007, of which $14.9 million is expected to be paid during the remaining nine
months of 2007.
Dividends
On March 15, 2007 we paid regular quarterly cash dividends of $0.08 and
$0.09 per share on our class A and class B common stock, respectively,
aggregating $8.0 million. On May 10, 2007, we declared regular quarterly cash
dividends of $0.08 and $0.09 per share on our class A common stock and class B
common stock, respectively, payable on June 15, 2007 to holders of record on
June 1, 2007. Our board of directors has determined that until June 30, 2007
regular quarterly cash dividends paid on each share of class B common stock will
be at least 110% of the regular quarterly cash dividends paid on each share of
class A common stock, but has not yet made any similar determination beyond that
date. Accordingly, after June 30, 2007, our class B common stock will be
entitled to participate at least equally on a per share basis with our class A
common stock in any cash dividends. We currently intend to continue to declare
and pay regular quarterly cash dividends; however, there can be no assurance
that any regular quarterly dividends will be declared or paid in the future or
of the amount or timing of such dividends, if any. If we pay regular quarterly
cash dividends for the last two quarters of 2007 at the same rates as to be paid
in our 2007 second quarter, our total cash requirement for dividends for the
remaining nine months of 2007 would be $24.1 million based on the number of our
class A and class B common shares outstanding at April 30, 2007.
Income Taxes
The statute of limitations for examination by the Internal Revenue Service,
which we refer to as the IRS, of our Federal income tax return for the year
ended December 29, 2002 expired during 2006. Our Federal income tax returns for
years subsequent to December 29, 2002 are not currently under examination by the
IRS although some of our state income tax returns are currently under
examination. We have received notices of proposed tax adjustments aggregating
$6.4 million in connection with certain of these state income tax returns.
However, we have disputed these notices and, accordingly, cannot determine the
ultimate amount of any resulting tax liability or any related interest and
penalties.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant and to the extent legally permissible, to repurchase through June 30,
2007 up to a total of $50.0 million of our class A and class B common stock. We
did not make any treasury stock purchases during the 2007 first quarter and we
cannot assure you that we will repurchase any shares under this program in the
future.
Universal Shelf Registration Statement
In December 2003, the Securities and Exchange Commission declared effective
a Triarc universal shelf registration statement in connection with the possible
future offer and sale, from time to time, of up to $2.0 billion of our common
stock, preferred stock, debt securities and warrants to purchase any of these
types of securities. Unless otherwise described in the applicable prospectus
supplement relating to any offered securities, we anticipate using the net
proceeds of each offering for general corporate purposes, including financing of
acquisitions and capital expenditures, additions to working capital and
repayment of existing debt. We have not presently made any decision to issue any
specific securities under this universal shelf registration statement.
Cash Requirements
Our consolidated cash requirements for continuing operations for the
remaining nine months of 2007 anticipate the use of cash for operating
activities, including the severance and contractual settlement payments in
connection with a corporate restructuring as discussed below under "Corporate
Restructuring." Our cash requirements other than operating cash flow
requirements, consist principally of (1) cash capital expenditures of
approximately $55.0 million, (2) a maximum of an aggregate $50.0 million of
payments for repurchases, if any, of our class A and class B common stock for
treasury under our current stock repurchase program, (3) regular quarterly cash
dividends aggregating approximately $24.1 million, (4) scheduled debt principal
repayments aggregating $14.9 million, (5) any prepayments under our Credit
Agreement and (6) any requirement to repurchase the minority interests in
Deerfield held by two of its executives. We anticipate meeting all of these
requirements, including the requirements for operations, through (1) the use of
our liquid net current assets, (2) borrowings under our restaurant segment's
revolving credit facility of which $93.5 million is currently available, (3) the
remaining $25.3 million available under the conditional funding commitment for
sale-leaseback financing from the real estate finance company, (4) proceeds from
the completion of the Pending Deerfield Sale as discussed in more detail below
under "Corporate Restructuring," (5) proceeds of $8.6 million to be received
from the sale of most of our remaining investment in Encore as discussed above
under "Results of Operations - Gain on Sale of Unconsolidated Business," (6)
borrowings under the Revolving Note prior to completion of the Pending Deerfield
Sale, of which $8.0 million is currently available, (7) proceeds from sales of
investments or borrowings against such investments and (8) proceeds from sales,
if any, of up to $2.0 billion of our securities under the universal shelf
registration statement.
Corporate Restructuring
On April 19, 2007, we entered into a definitive agreement whereby the REIT
will acquire Deerfield. At April 1, 2007, we owned 2.5% of the REIT and account
for our investment in the REIT in accordance with the equity method. The total
consideration to be received by us and the other members of Deerfield is
approximately $300.0 million, consisting principally of $145.0 million in cash,
9,635,192 shares of the REIT, which had a market value based upon the average of
the closing prices of the REIT common stock for the ten trading days prior to
April 19, 2007, which we refer to as the REIT Average Stock Price, of
approximately $145.0 million, the distribution of 309,038 shares of the REIT
currently owned by Deerfield to the selling members, which had a market value
based upon the REIT Average Stock Price of approximately $5.0 million and cash
distributions from Deerfield to the selling members. The consideration to be
received by us and the other members of Deerfield is subject to adjustment under
certain circumstances, including a deduction for any amount outstanding under
the revolving note of Deerfield, which is $2.0 million as of April 1, 2007. We
expect to receive a minimum consideration of approximately $170.0 million before
expenses and amounts to be held in escrow for our capital interest of 63.6% and
our profits interest of at least 52.3% in Deerfield. The total consideration
that we will receive, including the number of shares we will receive in the
REIT, is dependent upon our profits interest in Deerfield at the time of
closing. A portion of the consideration, in the form of approximately 2.5
million shares of the REIT issuable in the transaction, will be deposited into
an escrow account to be used to satisfy any indemnification claims related to
Deerfield. The Pending Deerfield Sale is subject to customary closing
conditions, including a financing by the REIT for the cash portion of the
purchase price, approval by the REIT stockholders and a registration statement
covering resale of the REIT shares to be received by us being declared effective
by the Securities and Exchange Commission. Subsequent to the closing of the
transaction and assuming we receive the minimum consideration of approximately
$170.0 million, including all of the shares held in escrow, we expect that we
will own approximately 12% of the REIT.
The results of operations of Deerfield have been included in the
accompanying condensed consolidated financial statements for the three-month
periods ended April 2, 2006 and April 1, 2007 and will continue to be reported
in our results of operations through the date of the Pending Deerfield Sale. We
do not anticipate that Deerfield will be reported as a discontinued operation
since we will have significant continuing involvement in the operations of
Deerfield after the sale through (1) the significant number of REIT shares that
we will own subsequent to the sale and (2) our contingent gain relating to a
portion of any proceeds received from the sale or disposition involving certain
investment intellectual property that Deerfield has been developing, after the
closing. The sale is currently expected to close in the third quarter of 2007.
Summary financial data for Deerfield as of and for the three months ended
April 1, 2007 is as follows (in thousands):
Total assets..............................$ 132,635
Revenues.................................. 15,878
Operating profit.......................... 2,105
Income from continuing operations before
income taxes and minority interests..... 2,207
On April 30, 2007, we announced that in light of the Pending Deerfield
Sale, we are closing our New York headquarters and combining our corporate
operations with our restaurant operations in Atlanta, Georgia, which is expected
to occur by the end of 2007. We expect to transfer substantially all our senior
executive responsibilities to the Arby's executive team in Atlanta effective
June 30, 2007. Accordingly, to facilitate this transition, we entered into
contractual settlements with the Executives evidencing the termination of their
employment agreements and providing for their resignations as executive officers
as of June 29, 2007. Under the terms of these contractual settlements, we will
pay our Chairman and Chief Executive Officer $50.2 million and we will pay our
President and Chief Operating Officer $25.1 million, both subject to applicable
withholding taxes. These payments will be made at the end of 2007, although we
have agreed to fund the payment obligations, net of applicable withholding
taxes, in trusts for the Executives in June 2007. Under the terms of the
contractual settlements, the Executives are not entitled to accrue any further
compensation, incentive compensation or other payments after June 29, 2007 other
than payment of amounts accrued and vested in the Deferred Compensation Trusts,
which become payable to the Executives on or about June 29, 2007. In addition,
we have entered into a two-year transition services agreement commencing June
30, 2007 under which we will pay to the Management Company $3.0 million per
quarter for the first year and $1.75 million per quarter for the second year. We
have also agreed to maintain the Equities Account until at least December 31,
2010 and, beginning in 2008, pay management and incentive fees to the Management
Company in an amount customary for other unaffiliated third party investors with
similarly sized investments. We also expect to sublease certain office
facilities and sell certain assets located in New York to the Management
Company. We will incur additional restructuring charges at our existing New York
headquarters, the amount of which is still being determined. Although the amount
of additional severance and retention payments to senior officers and others is
still being determined, we currently estimate the amount to be approximately
$15.0 million, which would be paid in the remainder of 2007 or in 2008.
Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc., which
we refer to as Adams Packing, an inactive subsidiary of ours, was listed by the
United States Environmental Protection Agency on the Comprehensive Environmental
Response, Compensation and Liability Information System, which we refer to as
CERCLIS, list of known or suspected contaminated sites. The CERCLIS listing
appears to have been based on an allegation that a former tenant of Adams
Packing conducted drum recycling operations at the site from some time prior to
1971 until the late 1970's. The business operations of Adams Packing were sold
in December 1992. In February 2003, Adams Packing and the Florida Department of
Environmental Protection, which we refer to as the Florida DEP, agreed to a
consent order that provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the Florida DEP approved the work plan submitted by
Adams Packing's environmental consultant and during 2004 the work under that
plan was completed. Adams Packing submitted its contamination assessment report
to the Florida DEP in March 2004. In August 2004, the Florida DEP agreed to a
monitoring plan consisting of two sampling events which occurred in January and
June 2005 and the results were submitted to the Florida DEP for its review. In
November 2005, Adams Packing received a letter from the Florida DEP identifying
certain open issues with respect to the property. The letter did not specify
whether any further actions are required to be taken by Adams Packing. Adams
Packing sought clarification from the Florida DEP in order to attempt to resolve
this matter. On May 1, 2007, the Florida DEP sent a letter clarifying their
prior correspondence and reiterated the open issues identified in their November
2005 letter. In addition, the Florida DEP offered Adams Packing the option of
voluntarily taking part in a recently adopted state program that could lessen
site clean up standards, should such a clean up be required after a mandatory
further study and site assessment report. We, our consultants and our outside
counsel are presently reviewing these new options and no decision has been made
on a course of action based on the Florida DEP's offer. Nonetheless, based on
provisions made prior to 2006 of $1.7 million for all of these costs and after
taking into consideration various legal defenses available to us, including
Adams Packing, Adams Packing has provided for its estimate of its remaining
liability for completion of this matter.
In addition to the environmental matter described above, we are involved in
other litigation and claims incidental to our current and prior businesses. We
and our subsidiaries have reserves for all of our legal and environmental
matters aggregating $1.0 million as of April 1, 2007. Although the outcome of
these matters cannot be predicted with certainty and some of these matters may
be disposed of unfavorably to us, based on currently available information,
including legal defenses available to us and/or our subsidiaries, and given the
aforementioned reserves, we do not believe that the outcome of these legal and
environmental matters will have a material adverse effect on our condensed
consolidated financial position or results of operations.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant revenues are somewhat lower in our first quarter.
Further, while our asset management business is not directly affected by
seasonality, our asset management revenues are higher in our fourth quarter as
discussed above under "Cash Flows from Continuing Operating Activities."
However, our asset management and related fees will cease upon completion of the
Pending Deerfield Sale as discussed above under "Corporate Restructuring."
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, which we refer
to as the FASB, issued Statement of Financial Accounting Standards No. 157,
"Fair Value Measurements," which we refer to as SFAS 157. SFAS 157 addresses
issues relating to the definition of fair value, the methods used to measure
fair value and expanded disclosures about fair value measurements. SFAS 157 does
not require any new fair value measurements. The definition of fair value in
SFAS 157 focuses on the price that would be received to sell an asset or paid to
transfer a liability, not the price that would be paid to acquire an asset or
received to assume a liability. The methods used to measure fair value should be
based on the assumptions that market participants would use in pricing an asset
or a liability. SFAS 157 expands disclosures about the use of fair value to
measure assets and liabilities in interim and annual periods subsequent to
adoption. SFAS 157 is, with some limited exceptions, to be applied prospectively
and is effective commencing with our first fiscal quarter of 2008, although
earlier application in our first fiscal quarter of 2007, which we did not elect,
was permitted. We do not believe that the adoption of SFAS 157 will result in
any change in the methods we use to measure the fair value of those financial
assets and liabilities we currently hold that require measurement at fair value.
We will, however be required to present the expanded fair value disclosures upon
adoption of SFAS 157.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115," which we refer
to as SFAS 159. SFAS 159 does not mandate but permits the measurement of many
financial instruments and certain other items at fair value providing reporting
entities the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS 159 will require the reporting of
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. SFAS 159 will also
require expanded disclosures related to its application. SFAS 159 is effective
commencing with our first fiscal quarter of 2008 although earlier application in
our first fiscal quarter of 2007, which we did not elect, was permitted. SFAS
159 was only recently issued and we have not yet evaluated whether we will elect
the fair value option for financial instruments and certain other items, nor
have we evaluated the effect any such election may have on our consolidated
financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This "Quantitative and Qualitative Disclosures about Market Risk" has been
presented in accordance with Item 305 of Regulation S-K promulgated by the
Securities and Exchange Commission and should be read in conjunction with "Item
7A. Quantitative and Qualitative Disclosures about Market Risk" in our annual
report on Form 10-K for the fiscal year ended December 31, 2006. Item 7A of our
Form 10-K describes in more detail our objectives in managing our interest rate
risk with respect to long-term debt, as referred to below, our commodity price
risk, our equity market risk and our foreign currency risk.
Certain statements we make under this Item 3 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- Other Information" preceding "Item 1."
We are exposed to the impact of interest rate changes, changes in commodity
prices, changes in the market value of our investments and, to a lesser extent,
foreign currency fluctuations. In the normal course of business, we employ
established policies and procedures to manage our exposure to these changes
using financial instruments we deem appropriate. We had no significant changes
in our management of, or our exposure to, commodity price risk, equity market
risk or foreign currency risk during three months ended April 1, 2007.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit
their impact on our earnings and cash flows. We have historically used interest
rate cap and/or interest rate swap agreements on a portion of our variable-rate
debt to limit our exposure to the effects of increases in short-term interest
rates on our earnings and cash flows. As of April 1, 2007 our notes payable and
long-term debt, including current portion, aggregated $726.8 million and
consisted of $564.7 million of variable-rate debt, $155.2 million of capitalized
lease and sale-leaseback obligations, $3.6 million of variable-rate notes
payable and $3.3 million of fixed-rate debt. We continue to have three interest
rate swap agreements that fix the London Interbank Offered Rate (LIBOR)
component of the interest rate at 4.12%, 4.56% and 4.64% on $100.0 million,
$50.0 million and $55.0 million, respectively, of the $558.1 million outstanding
principal amount of our variable-rate senior secured term loan borrowings until
September 30, 2008, October 30, 2008 and October 30, 2008, respectively. The
interest rate swap agreements related to the term loans were designated as cash
flow hedges and, accordingly, are recorded at fair value with changes in fair
value recorded through the accumulated other comprehensive income component of
stockholders' equity in our accompanying condensed consolidated balance sheet to
the extent of the effectiveness of these hedges. There was no ineffectiveness
from these hedges through April 1, 2007. If a hedge or portion thereof is
determined to be ineffective, any changes in fair value would be recognized in
our results of operations. In addition, we continue to have an interest rate
swap agreement, with an embedded written call option, in connection with our
variable-rate bank loan of which $4.6 million principal amount was outstanding
as of April 1, 2007, which effectively establishes a fixed interest rate on this
debt so long as the one-month LIBOR is below 6.5%. The fair value of our
fixed-rate debt will increase if interest rates decrease. The fair market value
of our investments in fixed-rate debt securities will decline if interest rates
increase. See below for a discussion of how we manage this risk.
Overall Market Risk
We balance our exposure to overall market risk by investing a portion of
our portfolio in cash and cash equivalents with relatively stable and
risk-minimized returns. We periodically interview and select asset managers to
avail ourselves of potentially higher, but more risk-inherent, returns from the
investment strategies of these managers. We also seek to identify alternative
investment strategies that may earn higher returns with attendant increased risk
profiles for a portion of our investment portfolio. We regularly review the
returns from each of our investments and may maintain, liquidate or increase
selected investments based on this review and our assessment of potential future
returns. In December 2005 we invested $75.0 million in an account, which we
refer to as the Equities Account, which is managed by a management company
formed by our Chairman and Chief Executive Officer, our President and Chief
Operating Officer and our Vice Chairman. The Equities Account was invested
principally in the equity securities, directly or through derivative
instruments, of a limited number of publicly-traded companies and cash
equivalents and had a fair value of $100.5 million as of April 1, 2007. As of
April 1, 2007, the derivatives held in our short-term investment portfolios,
principally in the Equities Account, consisted of (1) a total return swap on an
equity security, (2) put and call combinations on equity securities, (3) market
put options and (4) stock options. We did not designate any of these strategies
as hedging instruments and, accordingly, all of these derivative instruments
were recorded at fair value with changes in fair value recorded in our results
of operations.
We maintain investment holdings of various issuers, types and maturities.
As of April 1, 2007 these investments were classified in our condensed
consolidated balance sheet as follows (in thousands):
Cash equivalents included in "Cash and cash equivalents"...............................$ 131,957
Short-term investments not pledged as collateral....................................... 98,002
Short-term investments pledged as collateral........................................... 7,443
Investment settlements receivable...................................................... 2,132
Current and non-current restricted cash equivalents (a)................................ 21,217
Non-current investments................................................................ 45,789
--------------
$ 306,540
==============
-------------------
(a) Includes non-current restricted cash equivalents of $2,339,000, included in
"Deferred costs and other assets."
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired and consisted principally of
cash in mutual fund money market and bank money market accounts and cash in
interest-bearing brokerage and bank accounts with a stable value.
At April 1, 2007 our investments were classified in the following general
types or categories (in thousands):
Carrying Value
At Fair ----------------------
Type At Cost Value (c) Amount Percent
---- ------- --------- ------ -------
Cash equivalents (a)............................$ 131,957 $ 131,957 $ 131,957 43%
Investment settlements receivable............... 2,132 2,132 2,132 1%
Restricted cash equivalents..................... 21,217 21,217 21,217 7%
Investments accounted for as available-for-sale
securities (b)................................ 53,343 61,021 61,021 20%
Investments held in deferred compensation
trusts accounted for at cost.................. 16,805 27,227 16,805 5%
Other current and non-current investments in
investment limited partnerships and similar
investment entities accounted for at cost..... 24,097 39,265 24,097 8%
Other current and non-current investments
accounted for at:
Cost....................................... 14,386 17,880 14,386 5%
Equity..................................... 20,060 29,275 24,851 8%
Fair value ................................ 4,116 10,074 10,074 3%
------------ ------------ ------------ ----
Total cash equivalents and
investment positions..........................$ 288,113 $ 340,048 $ 306,540 100%
============ ============ ============ ====
-------------------
(a) Includes $9,316,000 of cash equivalents held in deferred compensation
trusts.
(b) Fair value and carrying value include $7,443,000 of preferred shares of
collateralized debt obligation vehicles, which we refer to as CDOs, which,
if sold, would require us to use the proceeds to repay our related notes
payable of $3,567,000.
(c) There can be no assurance that we would be able to sell certain of these
investments at these amounts.
Our marketable securities are reported at fair market value and are
classified and accounted for either as "available-for-sale" or "trading" with
the resulting net unrealized holding gains or losses, net of income taxes,
reported either as a separate component of comprehensive income or loss
bypassing net income or net loss, or included as a component of net income or
net loss, respectively. At April 1, 2007, we held no trading securities. Our
investments in preferred shares of CDOs are accounted for similar to debt
securities and are classified as available-for-sale. Investment limited
partnerships and similar investment entities and other current and non-current
investments in which we do not have significant influence over the investees are
accounted for at cost. Derivative instruments are similar to trading securities
which are accounted for as described above. Realized gains and losses on
investment limited partnerships and similar investment entities and other
current and non-current investments recorded at cost are reported as investment
income or loss in the period in which the securities are sold. Investments in
which we have significant influence over the investees are accounted for in
accordance with the equity method of accounting under which our results of
operations include our share of the income or loss of the investees. Our
investments accounted for under the equity method consist of non-current
investments in two public companies, one of which is a real estate investment
trust managed by a subsidiary of ours. We also hold restricted stock and stock
options of the real estate investment trust that we manage, which we received as
share-based compensation, and which we refer to as the Restricted Investments.
Other than the vested portion of the restricted stock of the real estate
investment trust, which we accounted for in accordance with the equity method of
accounting, the Restricted Investments are accounted for at fair value. We
review all of our investments in which we have unrealized losses and recognize
investment losses currently for any unrealized losses we deem to be other than
temporary. The cost-basis component of investments reflected in the table above
represents original cost less a permanent reduction for any unrealized losses
that were deemed to be other than temporary.
Sensitivity Analysis
Our estimate of market risk exposure is presented below for each class of
financial instruments held by us at April 1, 2007 for which an immediate adverse
market movement causes a potential material impact on our financial position or
results of operations. As of April 1, 2007, we did not hold any market risk
sensitive instruments which were entered into for trading purposes, so the table
below reflects those entered into for purposes other than trading. We believe
that the adverse market movements described below represent the hypothetical
loss to future earnings and do not represent the maximum possible loss nor any
expected actual loss, even under adverse conditions, because actual adverse
fluctuations would likely differ. In addition, since our investment portfolio is
subject to change based on our portfolio management strategy as well as market
conditions, these estimates are not necessarily indicative of the actual results
which may occur.
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Cash equivalents........................................$ 131,957 $ -- $ -- $ --
Investment settlements receivable....................... 2,132 -- -- --
Restricted cash equivalents............................. 21,217 -- -- --
Available-for-sale equity securities.................... 47,050 -- (4,705) --
Available-for-sale preferred shares of CDOs............. 13,971 (1,266) -- (73)
Investment in Jurlique.................................. 8,504 -- (850) (603)
Investment derivatives in asset positions............... 8,056 -- (5,224) (396)
Other investments....................................... 73,653 (1,676) (4,776) (130)
Interest rate swaps in an asset position................ 1,858 (2,776) -- --
Foreign currency put and call arrangement in a net
liability position................................... (673) -- -- (1,034)
Notes payable and long-term debt, excluding
capitalized lease and sale-leaseback obligations..... (571,595) (23,673) -- --
The sensitivity analysis of financial instruments held at April 1, 2007
assumes (1) an instantaneous one percentage point adverse change in market
interest rates, (2) an instantaneous 10% adverse change in the equity markets in
which we are invested and (3) an instantaneous 10% adverse change in the foreign
currency exchange rates versus the United States dollar, each from their levels
at April 1, 2007 and with all other variables held constant. The equity price
risk reflects the impact of a 10% decrease in the carrying value of our equity
securities, including those in "Other investments" in the table above. The
sensitivity analysis also assumes that the decreases in the equity markets and
foreign exchange rates are other than temporary. We have not reduced the equity
price risk for available-for-sale investments and cost investments to the extent
of unrealized gains on certain of those investments, which would limit or
eliminate the effect of the indicated market risk on our results of operations
and, for cost investments, our financial position.
Our investments in debt securities and preferred shares of CDOs with
interest rate risk had a range of remaining maturities and, for purposes of this
analysis, were assumed to have weighted average remaining maturities as follows:
Range Weighted Average
----- ----------------
Restricted cash equivalents................................. 18 days 18 days
CDOs underlying preferred shares............................1 1/2 years - 14 3/4 years 4 1/2 years
Debt securities included in other investments (principally
held by investment limited partnerships and similar
investment entities)..................................... (a) 10 years
-------------------
(a) Information is not available for the underlying debt investments of these
entities.
The interest rate risk for each of these investments in debt securities and
the preferred shares of CDOs reflects the impact on our results of operations.
Assuming we reinvest in similar securities at the time these securities mature,
the effect of the interest rate risk of an increase of one percentage point
above the existing levels would continue beyond the maturities assumed. The
interest rate risk for our preferred shares of CDOs excludes those portions of
the CDOs for which the risk has been fully hedged. Our cash equivalents and
restricted cash equivalents included $132.0 million and $20.8 million,
respectively, as of April 1, 2007 of mutual fund money market and bank money
market accounts and/or interest-bearing brokerage and bank accounts which are
designed to maintain a stable value.
As of April 1, 2007, a majority of our debt was variable-rate debt and
therefore the interest rate risk presented with respect to our $568.3 million of
variable-rate notes payable and long-term debt, excluding capitalized lease and
sale-leaseback obligations, represents the potential impact an increase in
interest rates of one percentage point has on our results of operations. Our
variable-rate notes payable and long-term debt outstanding as of April 1, 2007
had a weighted average remaining maturity of approximately five years. However,
as discussed above under "Interest Rate Risk," we have four interest rate swap
agreements, one with an embedded written call option, on a portion of our
variable-rate debt. The interest rate risk of our variable-rate debt presented
in the table above excludes the $205.0 million for which we designated interest
rate swap agreements as cash flow hedges for the terms of the swap agreements.
As interest rates decrease, the fair market values of the interest rate swap
agreements and the written call option all decrease, but not necessarily by the
same amount in the case of the written call option and related interest rate
swap agreement. The interest rate risks presented with respect to the interest
rate swap agreements represent the potential impact the indicated change has on
the net fair value of the swap agreements and embedded written call option and
on our financial position and, with respect to the interest rate swap agreement
with the embedded written call option which was not designated as a cash flow
hedge, also our results of operations. We only have $3.3 million of fixed-rate
debt as of April 1, 2007, for which a potential impact of a decrease in interest
rates of one percentage point would have an immaterial impact on the fair value
of such debt and, accordingly, is not reflected in the table above.
The foreign currency risk presented for our investment in Jurlique as of
April 1, 2007 excludes the portion of risk that is hedged by the foreign
currency put and call arrangement. The foreign currency risk presented with
respect to the foreign currency put and call arrangement represents the
potential impact the indicated change has on the net fair value of such
financial instrument and on our financial position and results of operations and
has been determined by an independent broker/dealer. For investments held since
December 31, 2006 in investment limited partnerships and similar investment
entities, all of which are accounted for at cost, and other non-current
investments included in "Other investments" in the table above, the sensitivity
analysis assumes that the investment mix for each such investment between equity
versus debt securities and securities denominated in United States dollars
versus foreign currencies was unchanged since that date since more current
information was not readily available. To the extent such entities invest in
convertible bonds which trade primarily on the conversion feature of the
securities rather than on the stated interest rate, this analysis assumed equity
price risk but no interest rate risk. The foreign currency risk presented
excludes those investments where the investment manager has fully hedged the
risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chairman and Chief Executive
Officer and our Executive Vice President and Chief Financial Officer, carried
out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of the end of the period covered by this Quarterly Report. Based on that
evaluation, our Chairman and Chief Executive Officer and our Executive Vice
President and Chief Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act was recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission (the "SEC").
Change in Internal Control Over Financial Reporting
We acquired the RTM Restaurant Group ("RTM") in July 2005. Prior to our
acquisition, RTM was privately held and had no public reporting obligations with
the SEC. As previously reported, there had been certain deficiencies in RTM's
systems, procedures and internal control over financial reporting. During the
first quarter of 2007, we continued to remediate those deficiencies. In
addition, we are continuing the process of converting to new, more robust
accounting systems to be used by our restaurant business, which we currently
anticipate will be implemented during our fiscal second quarter of 2007.
There were no other changes in our internal control over financial
reporting made during our most recent fiscal quarter that materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system,
including the potential for human error and the circumvention or overriding of
the controls and procedures. Additionally, judgments in decision-making can be
faulty and breakdowns can occur because of simple error or mistake. An effective
control system can provide only reasonable, not absolute, assurance that the
control objectives of the system are adequately met. Accordingly, our
management, including our Chairman and Chief Executive Officer and our Executive
Vice President and Chief Financial Officer, does not expect that our control
system can prevent or detect all error or fraud. Finally, projections of any
evaluation or assessment of effectiveness of a control system to future periods
are subject to the risks that, over time, controls may become inadequate because
of changes in an entity's operating environment or deterioration in the degree
of compliance with policies or procedures.
Part II. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Quarterly Report on Form 10-Q and oral statements made from time to
time by representatives of the Company may contain or incorporate by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of
Triarc Companies, Inc. and its subsidiaries (collectively "Triarc" or the
"Company"), and those statements preceded by, followed by, or that include the
words "may," "believes," "plans," "expects," "anticipates," or the negation
thereof, or similar expressions, that constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). All statements that address operating performance, events or
developments that are expected or anticipated to occur in the future, including
statements relating to revenue growth, earnings per share growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Reform Act. Our forward-looking statements
are based on our expectations at the time such statements are made, speak only
as of the dates they are made and are susceptible to a number of risks,
uncertainties and other factors. Our actual results, performance and
achievements may differ materially from any future results, performance or
achievements expressed or implied by our forward-looking statements. For all of
our forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Reform Act. Many important factors
could affect our future results and could cause those results to differ
materially from those expressed in, or implied by the forward-looking statements
contained herein. Such factors, all of which are difficult or impossible to
predict accurately, and many of which are beyond our control, include, but are
not limited to, the following:
o competition, including pricing pressures and the potential impact of
competitors' new units on sales by Arby's(R) restaurants;
o consumers' perceptions of the relative quality, variety, affordability and
value of the food products we offer;
o success of operating initiatives;
o development costs, including real estate and construction costs;
o advertising and promotional efforts by us and our competitors;
o consumer awareness of the Arby's brand;
o the existence or absence of positive or adverse publicity;
o new product and concept development by us and our competitors, and market
acceptance of such new product offerings and concepts;
o changes in consumer tastes and preferences, including changes resulting
from concerns over nutritional or safety aspects of beef, poultry, french
fries or other foods or the effects of food-borne illnesses such as "mad
cow disease" and avian influenza or "bird flu";
o changes in spending patterns and demographic trends, such as the extent to
which consumers eat meals away from home;
o adverse economic conditions, including high unemployment rates, in
geographic regions that contain a high concentration of Arby's restaurants;
o the business and financial viability of key franchisees;
o the timely payment of franchisee obligations due to us;
o availability, location and terms of sites for restaurant development by us
and our franchisees;
o the ability of our franchisees to open new restaurants in accordance with
their development commitments, including the ability of franchisees to
finance restaurant development;
o delays in opening new restaurants or completing remodels;
o the timing and impact of acquisitions and dispositions of restaurants;
o our ability to successfully integrate acquired restaurant operations;
o anticipated or unanticipated restaurant closures by us and our franchisees;
o our ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate Arby's
restaurants successfully;
o changes in business strategy or development plans, and the willingness of
our franchisees to participate in our strategy;
o business abilities and judgment of our and our franchisees' management and
other personnel;
o availability of qualified restaurant personnel to us and to our
franchisees, and our and our franchisees' ability to retain such personnel;
o our ability, if necessary, to secure alternative distribution of supplies
of food, equipment and other products to Arby's restaurants at competitive
rates and in adequate amounts, and the potential financial impact of any
interruptions in such distribution;
o changes in commodity (including beef and chicken), labor, supply,
distribution and other operating costs;
o availability and cost of insurance;
o adverse weather conditions;
o significant reductions in our client assets under management (which would
reduce our advisory fee revenue), due to such factors as weak performance
of our investment products (either on an absolute basis or relative to our
competitors or other investment strategies), substantial illiquidity or
price volatility in the fixed income instruments that we trade, loss of key
portfolio management or other personnel (or lack of availability of
additional key personnel if needed for expansion), reduced investor demand
for the types of investment products we offer, and loss of investor
confidence due to adverse publicity, and non-renewal or early termination
of investment management agreements;
o increased competition from other asset managers offering products similar
to those we offer;
o pricing pressure on the advisory fees that we can charge for our investment
advisory services;
o difficulty in increasing assets under management, or efficiently managing
existing assets, due to market-related constraints on trading capacity,
inability to hire the necessary additional personnel or lack of potentially
profitable trading opportunities;
o our removal as investment manager of the real estate investment trust, one
or more of the collateral debt obligation vehicles (CDOs) or other accounts
we manage, or the reduction in our CDO management fees because of payment
defaults by issuers of the underlying collateral or the triggering of
certain structural protections built into CDOs;
o availability, terms (including changes in interest rates) and deployment of
capital;
o changes in legal or self-regulatory requirements, including franchising
laws, investment management regulations, accounting standards,
environmental laws, overtime rules, minimum wage rates and taxation rates;
o the costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
o the impact of general economic conditions on consumer spending or
securities investing, including a slower consumer economy and the effects
of war or terrorist activities; and
o other risks and uncertainties affecting us and our subsidiaries referred to
in our Annual Report on Form 10-K for the fiscal year ended December 31,
2006 (see especially "Item 1A. Risk Factors" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations")
and in our other current and periodic filings with the Securities and
Exchange Commission.
All future written and oral forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. New risks
and uncertainties arise from time to time, and it is impossible for us to
predict these events or how they may affect us. We assume no obligation to
update any forward-looking statements after the date of this Quarterly Report on
Form 10-Q as a result of new information, future events or developments, except
as required by federal securities laws. In addition, it is our policy generally
not to make any specific projections as to future earnings, and we do not
endorse any projections regarding future performance that may be made by third
parties.
Item 1. Legal Proceedings
As previously reported in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 (the "Form 10-K"), in 2001, a vacant property owned
by Adams Packing Association, Inc. (Adams Packing), an inactive subsidiary of
ours, was listed by the United States Environmental Protection Agency on the
Comprehensive Environmental Response, Compensation and Liability Information
System, which we refer to as CERCLIS, list of known or suspected contaminated
sites. The CERCLIS listing appears to have been based on an allegation that a
former tenant of Adams Packing conducted drum recycling operations at the site
from some time prior to 1971 until the late 1970s. The business operations of
Adams Packing were sold in December 1992. In February 2003, Adams Packing and
the Florida Department of Environmental Protection, which we refer to as the
Florida DEP, agreed to a consent order that provided for development of a work
plan for further investigation of the site and limited remediation of the
identified contamination. In May 2003, the Florida DEP approved the work plan
submitted by Adams Packing's environmental consultant and the work under that
plan has been completed. Adams Packing submitted its contamination assessment
report to the Florida DEP in March 2004. In August 2004, the Florida DEP agreed
to a monitoring plan consisting of two sampling events, which occurred in
January and June 2005, and the results were submitted to the Florida DEP for its
review. In November 2005, Adams Packing received a letter from the Florida DEP
identifying certain open issues with respect to the property. The letter did not
specify whether any further actions were required to be taken by Adams Packing.
Adams Packing sought clarification from the Florida DEP in order to attempt to
resolve the matter. On May 1, 2007, the Florida DEP sent a letter clarifying
their prior correspondence and reiterated the open issues identified in their
November 2005 letter. In addition, the Florida DEP offered Adams Packing the
option of voluntarily taking part in a recently adopted state program that could
lessen site clean up standards, should such a clean up be required after a
mandatory further study and site assessment report. Management, its consultants
and outside counsel are presently reviewing these new options and no decision
has been made on a course of action based on the Florida DEP's offer.
Nonetheless, based on provisions made prior to 2005 of approximately $1.7
million for costs associated with this matter, and after taking into
consideration various legal defenses available to us, including Adams Packing,
Adams Packing has provided for its estimate of its remaining liability for
completion of this matter. Accordingly, this matter is not expected to have a
material adverse effect on our consolidated financial position or results of
operations.
Item 1A. Risk Factors.
In addition to the information contained in this report, you should
carefully consider the risk factors disclosed in our Form 10-K, which could
materially affect our business, financial condition or future results. Except as
described in this report, there have been no material changes from the risk
factors previously disclosed in our Form 10-K.
The following risk factor has been updated since we filed our Form 10-K:
Our success depends substantially upon the continued retention of certain
key personnel.
We believe that over time our success has been dependent to a significant
extent upon the efforts and abilities of our and our subsidiaries' senior
management teams. Following the completion of the sale of Deerfield, our sole
operating business would be our restaurant business. We expect to close our New
York headquarters in 2007 and consolidate our corporate operations with our
Arby's operations, in Atlanta, GA, to focus on the restaurant business. To
facilitate this transition, in June 2007, we expect to transfer substantially
all of our senior executive responsibilities to the Arby's Restaurant Group
("ARG") executive team in Atlanta led by Roland Smith, Chief Executive Officer
of ARG, and other senior members of the ARG management team. Accordingly, we
have entered into contractual settlements with our Chairman and Chief Executive
Officer, Nelson Peltz, and our President and Chief Operating Officer, Peter W.
May, evidencing the termination of their employment agreements as of June 29,
2007, and their resignation from their positions as executive officers of Triarc
as of such date (however, they will remain significant stockholders and will
continue to serve on our Board). The employment agreements would otherwise have
terminated on April 30, 2012. In addition to Messrs. Peltz and May no longer
serving as senior officers of Triarc, it is expected that on or about June 29,
2007, nearly all of the other senior members of our current New York-based
management team as well as additional staff personnel will also be leaving
Triarc, with substantially all of the remaining employees expected to leave
Triarc by the end of fiscal 2007.
Although Messrs. Peltz and May will continue to be significant stockholders
and directors of the Company, and notwithstanding the transition services that
we will receive following June 29, 2007 pursuant to a transition services
agreement that we have entered into with Trian Fund Management, L.P., an
investment management firm that was founded in November 2005 by Messrs. Peltz,
May and Edward P. Garden, our Vice Chairman, the success of the Arby's business,
and if the sale of Deerfield & Co. LLC does not close, our asset management
business will depend to a significant extent upon the efforts and abilities of
ARG's senior management team. In addition, if the sale of our asset management
business, Deerfield & Company LLC, does not close, our success will be dependent
to a significant extent upon the efforts and abilities of the management teams
of both Deerfield and ARG. The failure by us to retain members of the ARG senior
management team, or the Deerfield senior management team if the Deerfield sale
is not completed, could adversely affect our ability to build on the efforts we
have undertaken to increase the efficiency and profitability of our businesses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of
shares of our common stock by us and our "affiliated purchasers" (as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) during
the first fiscal quarter of 2007:
Issuer Repurchases of Equity Securities
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
Total Number of Shares Approximate Dollar
Purchased As Part of Value of Shares That
Total Number of Average Price Paid Per Publicly Announced Plan May Yet Be Purchased
Period Shares Purchased Share (1) Under the Plan (1)
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
January 1, 2007 3,126 Class A(2) $21.85 (Class A) --- $50,000,000
through 116,873 Class B(2) $20.39 (Class B)
January 28, 2007
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
January 29, 2007 69,280 Class B(2) $19.24 ---
through $50,000,000
February 25, 2007
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
February 26, 2007
through 116,297 Class B(2) $17.29 --- $50,000,000
April 1, 2007
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
Total 3,126 Class A(2) $21.85 (Class A) ---
302,450 Class B(2) $18.93 (Class B) $50,000,000
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
(1) On May 11, 2006, we announced that our existing stock repurchase program,
which was originally approved by our board of directors on January 18, 2001,
had been extended until June 30, 2007 and that the amount available under
the program had been replenished to permit the purchase of up to $50 million
of our Class A Common Stock and Class B Common Stock, Series 1. During the
third fiscal quarter of 2005, we repurchased one share of Class A Common
Stock and two shares of Class B Common Stock, Series 1. No transactions were
effected under our stock repurchase program during the first fiscal quarter
of 2007.
(2) Reflects shares of Class A Common Stock or Class B Common Stock, Series 1,
tendered as payment of the exercise price of stock options or related
statutory minimum withholding taxes under the Company's Amended and Restated
Equity Participation Plans. The shares were valued at the closing prices of
the Class A Common Stock or Class B Common Stock, Series 1, on the
respective dates of exercise of the stock options.
Item 5. Other Information.
Sale of Deerfield & Company LLC
In connection with our corporate restructuring, on April 19, 2007 a
definitive agreement was entered into pursuant to which Deerfield Triarc Capital
Corp. ("DFR"), a diversified financial company that is externally managed by a
subsidiary of Deerfield & Company LLC ("Deerfield"), will acquire Deerfield, a
Chicago-based fixed income asset manager in which we own a controlling interest.
The total consideration to be received by us and other members of Deerfield
is approximately $300 million, consisting of $145 million in cash, approximately
9.6 million shares of DFR common stock (having a value as of April 19, 2007 of
approximately $145 million, based on the average of the closing prices of DFR
common stock over the 10 trading days prior to April 19, 2007), the distribution
of approximately 309,000 shares of DFR common stock currently owned by Deerfield
(having a value as of April 19, 2007 of approximately $4.6 million), and cash
distributions from Deerfield to the selling members of Deerfield. The
consideration to be received by us and the other members of Deerfield is subject
to adjustment under certain circumstances, including a deduction for any amount
outstanding under revolving note of Deerfield, the principal amount of which was
$2.0 million as of April 1, 2007. Of the 9.6 million shares of DFR common stock,
approximately 2.5 million shares will be deposited into an escrow account and
will be available to satisfy the post-closing indemnification and other payment
obligations of us and the other members of Deerfield.
Accordingly, we expect to receive a minimum of approximately $170 million,
before expenses and including any amounts held in escrow, in consideration for
our capital interest of approximately 64% and our profits interest of at least
52% in Deerfield. As a result of the transaction and assuming that we receive
the minimum consideration of approximately $170,000,000, including all shares
held in escrow, we expect to own approximately 12% of DFR's common stock.
The transaction, which is expected to close during the 2007 third quarter,
is subject to customary closing conditions, including, without limitation, the
receipt by DFR of financing for the cash portion of the purchase price and
related transaction costs, receipt of certain third party consents, a
registration statement for the DFR shares to be received being declared
effective by the Securities and Exchange Commission and other conditions set
forth in the definitive agreement, including the expiration or termination of
the applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. Deerfield has the right to terminate the definitive
agreement if DFR does not deliver by May 19, 2007 financing commitments for the
transaction in form and substance reasonably satisfactory to Deerfield. In
addition, the transaction is subject to approval by DFR stockholders
representing (1) a majority of the votes cast at a meeting to approve the
transaction and (2) a majority of the votes cast by stockholders not affiliated
with Deerfield. A stockholders' vote on the proposed transaction is expected to
be held during the 2007 third quarter. When the transaction closes, DFR will
discontinue the use of "Triarc" in its name.
Following completion of the sale of Deerfield, our sole operating business
would be our restaurant business. We expect to change our name to reflect our
new identity as a publicly traded restaurant company. We are also considering
financing opportunities to further our goal of significantly increasing value
through the acquisition of other restaurant companies. Arby's is the franchisor
of the Arby's restaurant system and the owner and operator of over 1,000 Arby's
restaurants. There are approximately 3,600 Arby's restaurants worldwide.
Corporate Restructuring
As noted above, following the completion of the sale of Deerfield, our sole
operating business would be our restaurant business. We expect to close our New
York headquarters in 2007, and combine our corporate operations with our
restaurant business in Atlanta, GA, to focus on our restaurant business. To
facilitate this transition, in June 2007, we expect to transfer substantially
all of our senior executive responsibilities to the Arby's Restaurant Group
("ARG") executive team in Atlanta.
Accordingly, we have entered into contractual settlements with our Chairman
and Chief Executive Officer, Nelson Peltz, and our President and Chief Operating
Officer, Peter W. May, evidencing the termination of their employment agreements
as of June 29, 2007, and their resignation from their positions as executive
officers of Triarc as of such date (however, they will remain large shareholders
and will continue to serve on our Board). The employment agreements would
otherwise have terminated on April 30, 2012. Under the terms of these
contractual settlements, we will pay Mr. Peltz approximately $50.2 million and
Mr. May approximately $25.1 million, subject to applicable taxes and
withholding.
As part of the agreement with Messrs. Peltz and May in connection with the
corporate restructuring, and in light of the departure of nearly all of the
senior members of our management team, we have entered into a transition
services agreement, commencing June 30, 2007, with Trian Fund Management, L.P.
("Trian Mgmt."), an investment management firm that was founded in November 2005
by Messrs. Peltz, May and Garden, pursuant to which Trian Mgmt. will provide us
with a range of professional and strategic services. Under the terms of this
agreement, we will pay Trian $3.0 million per quarter for the first year, and
$1.75 million for the second year. At the end of the second year, a review will
be conducted to determine whether any further services are required.
The contractual settlements and other related agreements with Peltz and May
were negotiated and approved by a Special Committee of independent members of
our Board of Directors consisting of the following directors: David E. Schwab II
(Chair), Joseph A. Levato (Vice Chair), Clive Chajet and Raymond S. Troubh (and,
as applicable, recommended by the Compensation Committee and Performance
Compensation Subcommittee). The Special Committee was advised by independent
outside counsel and worked with the Board's Compensation Committee and
Performance Compensation Subcommittee and its independent outside counsel and
independent compensation consultant.
Messrs. Peltz and May, who together beneficially own approximately 10.7
million shares of Class A Common Stock and 14.0 million shares of Class B Common
Stock, Series 1, constituting approximately 34.4% of Triarc's voting power, are
expected to continue to be large shareholders of Triarc. It is also anticipated
that Mr. Peltz will continue as non-executive Chairman of Triarc and Mr. May
will be non-executive Vice Chairman of Triarc.
Item 6. Exhibits.
2.1 Agreement and Plan of Merger, dated as of April 19, 2007, by and among
Deerfield Triarc Capital Corp., DFR Merger Company, LLC, Deerfield &
Company LLC and, solely for the purposes set forth therein, Triarc
Companies, Inc. (in such capacity, the Sellers' Representative),
incorporated herein by reference to Exhibit 2.1 to Triarc's Current
Report on Form 8-K dated April 24, 2007 (SEC file no. 1-2207).
3.1 Certificate of Incorporation of Triarc Companies, Inc., as currently in
effect, incorporated herein by reference to Exhibit 3.1 to Triarc's
Current Report on Form 8-K dated June 9, 2004 (SEC file no. 1-2207).
3.2 By-laws of Triarc Companies, Inc., as currently in effect, incorporated
herein by reference to Exhibit 3.1 to Triarc's Current Report on Form 8-K
dated November 5, 2004 (SEC file no. 1-2207).
3.3 Certificate of Designation of Class B Common Stock, Series 1, dated as of
August 11, 2003, incorporated herein by reference to Exhibit 3.3 to
Triarc's Current Report on Form 8-K dated August 11, 2003 (SEC file no.
1-2207).
10.1 Letter Agreement dated January 18, 2007 between Arby's Restaurant Group,
Inc. and Roland C. Smith, incorporated herein by reference to Exhibit
10.2 to Triarc's Current Report on Form 8-K dated February 1, 2007 (SEC
file no. 1-2207).
10.2 Letter Agreement dated as of March 23, 2007 between Roland C. Smith and
Arby's Restaurant Group, Inc. *
10.3 Amendment No. 1 to Employment Agreement dated as of December 18, 2006
between Triarc Companies, Inc. and Brian L. Schorr, incorporated herein
by reference to Exhibit 10.3 to Triarc's Current Report on Form 8-K dated
February 1, 2007 (SEC file no. 1-2207).
10.4 Amendment No. 1 to Letter Agreement dated as of January 29, 2007 between
Triarc Companies, Inc. and Francis T. McCarron, incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
February 1, 2007 (SEC file no. 1-2207).
10.5 Registration Rights Agreement, dated as of April 19, 2007, among
Deerfield Triarc Capital Corp., the parties identified as Stockholders on
the signature pages thereto and the other persons who may become parties
thereto from time to time in accordance therewith and Triarc Companies,
Inc., as the Sellers' Representative, incorporated herein by reference to
Exhibit 10.1 to Triarc's Current Report on Form 8-K dated April 24, 2007
(SEC file no. 1-2207).
10.6 Amended and Restated Amendment No. 1 to Employment Agreement between
Triarc Companies, Inc. and Brian L. Schorr, incorporated herein by
reference to Exhibit 10. 5 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.7 Services Agreement, dated as of April 30, 2007, by and among Triarc
Companies, Inc. and Trian Fund Management, L.P., incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.8 Amended and Restated Investment Management Agreement, dated as of April
30, 2007, between TCMG-MA, LLC and Trian Fund Management, L.P.,
incorporated herein by reference to Exhibit 10.2 to Triarc's Current
Report on Form 8-K dated April 30, 2007 (SEC file no. 1-2207).
10.9 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Nelson Peltz, incorporated herein by reference to
Exhibit 10.3 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
10.10 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Peter W. May, incorporated herein by reference to
Exhibit 10.4 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as
an exhibit to this report on Form 10-Q. *
-----------------------
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIARC COMPANIES, INC.
(Registrant)
Date: May 11, 2007 By: /s/FRANCIS T. MCCARRON
--------------------------------------
Francis T. McCarron
Executive Vice President and
Chief Financial Officer
(On behalf of the Company)
Date: May 11, 2007 By: /s/FRED H. SCHAEFER
-------------------------------------
Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Exhibit Index
-------------
Exhibit
No. Description
-------- -----------
2.1 Agreement and Plan of Merger, dated as of April 19, 2007, by and among
Deerfield Triarc Capital Corp., DFR Merger Company, LLC, Deerfield &
Company LLC and, solely for the purposes set forth therein, Triarc
Companies, Inc. (in such capacity, the Sellers' Representative),
incorporated herein by reference to Exhibit 2.1 to Triarc's Current
Report on Form 8-K dated April 24, 2007 (SEC file no. 1-2207).
3.1 Certificate of Incorporation of Triarc Companies, Inc., as currently in
effect, incorporated herein by reference to Exhibit 3.1 to Triarc's
Current Report on Form 8-K dated June 9, 2004 (SEC file no. 1-2207).
3.2 By-laws of Triarc Companies, Inc., as currently in effect, incorporated
herein by reference to Exhibit 3.1 to Triarc's Current Report on Form 8-K
dated November 5, 2004 (SEC file no. 1-2207).
3.3 Certificate of Designation of Class B Common Stock, Series 1, dated as of
August 11, 2003, incorporated herein by reference to Exhibit 3.3 to
Triarc's Current Report on Form 8-K dated August 11, 2003 (SEC file no.
1-2207).
10.1 Letter Agreement dated January 18, 2007 between Arby's Restaurant Group,
Inc. and Roland C. Smith, incorporated herein by reference to Exhibit
10.2 to Triarc's Current Report on Form 8-k dated February 1, 2007 (SEC
file no. 1-2207).
10.2 Letter Agreement dated as of March 23, 2007 between Roland C. Smith and
Arby's Restaurant Group, Inc.*
10.3 Amendment No. 1 to Employment Agreement dated as of December 18, 2006
between Triarc Companies, Inc. and Brian L. Schorr, incorporated herein
by reference to Exhibit 10.3 to Triarc's Current Report on Form 8-K dated
February 1, 2007 (SEC file no. 1-2207).
10.4 Amendment No. 1 to Letter Agreement dated as of January 29, 2007 between
Triarc Companies, Inc. and Francis T. McCarron, incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
February 1, 2007 (SEC file no. 1-2207).
10.5 Registration Rights Agreement, dated as of April 19, 2007, among
Deerfield Triarc Capital Corp., the parties identified as Stockholders on
the signature pages thereto and the other persons who may become parties
thereto from time to time in accordance therewith and Triarc Companies,
Inc., as the Sellers' Representative, incorporated herein by reference to
Exhibit 10.1 to Triarc's Current Report on Form 8-K dated April 24, 2007
(SEC file no. 1-2207).
10.6 Amended and Restated Amendment No. 1 to Employment Agreement between
Triarc Companies, Inc. and Brian L. Schorr, incorporated herein by
reference to Exhibit 10. 5 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.7 Services Agreement, dated as of April 30, 2007, by and among Triarc
Companies, Inc. and Trian Fund Management, L.P., incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.8 Amended and Restated Investment Management Agreement, dated as of April
30, 2007, between TCMG-MA, LLC and Trian Fund Management, L.P.,
incorporated herein by reference to Exhibit 10.2 to Triarc's Current
Report on Form 8-K dated April 30, 2007 (SEC file no. 1-2207).
10.9 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Nelson Peltz, incorporated herein by reference to
Exhibit 10.3 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
10.10 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Peter W. May, incorporated herein by reference to
Exhibit 10.4 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as
an exhibit to this report on Form 10-Q. *
-----------------------
* Filed herewith.
Exhibit 10.2
ARBY'S RESTAURANT GROUP, INC.
As of March 23, 2007
Mr. Roland C. Smith
580 Old Cobblestone Drive
Dunwoody, GA 30350
Dear Roland:
Reference is made to the Employment Agreement dated April 13, 2006, as
amended (the "Employment Agreement"), between you and Arby's Restaurant Group,
Inc. ("Arby's"). Capitalized terms used and not defined herein shall have the
meanings ascribed to them in the Employment Agreement.
Exhibit A to the Employment Agreement ("Exhibit A") provides for a grant of
100,000 restricted shares (the "Restricted Shares") of Triarc Companies, Inc.
Class B Common Stock, Series 1 ("Class B Common Stock"), 50% of which are to
have performance vesting targets and 50% of which are to have time vesting
targets. Pursuant to the Employment Agreement, such vesting targets were to be
agreed upon by the Arby's Board and you by March 25, 2007. If such vesting
targets were not set by such date, you would instead be entitled to receive
options to acquire shares of Class B Common Stock as provided in the Employment
Agreement.
This letter will confirm our agreement that the section in Exhibit A
entitled "Triarc Stock Options/Restricted Shares" is hereby amended and restated
in its entirety to read as follows:
"Initial grant of options for 220,000 shares of Triarc Class B
Common Stock, Series 1, and 100,000 restricted shares of Triarc
Class B Common Stock, Series 1, in connection with the
commencement of employment, subject to Triarc Performance
Compensation Subcommittee approval and, in the case of the grant
of 33,333 restricted shares, approval by the stockholders of
Triarc of an amendment to Triarc's 2002 Equity Participation Plan
(the "2002 Plan") to add an agreed upon criterion to the 2002
Plan that may be used in order for an award under the 2002 Plan
to qualify as "performance-based compensation" under Section
162(m) of the Internal Revenue Code of 1986, as amended. Options
will have a ten year term and will vest 1/3 per year on the day
before each of the three consecutive anniversary dates from date
of employment. 33.3% of the restricted shares (33,333 shares)
will have performance vesting targets and 66.7% of the restricted
shares (66,667 shares) will have time vesting targets, all to be
agreed upon by the Arby's Board (or a committee thereof) and
Executive, subject, if required, to approval thereof by Triarc's
Performance Compensation Subcommittee. Subsequent grants
consistent with executive compensation policies of Arby's."
Except as set forth above, the terms and provisions of the Employment
Agreement shall remain in full force and effect.
This amendment to the Employment Agreement shall be governed by the laws of
the State of Delaware, without regard to principles of conflicts of laws thereof
that would call for the application of substantive law of any jurisdiction other
than the State of Delaware. This amendment to the Employment Agreement may be
executed in counterparts, each of which shall be deemed to be an original and
all of which, taken together, shall constitute one and the same instrument.
ARBY'S RESTAURANT GROUP, INC.
By: /s/FRANCIS T. MCCARRON
----------------------------------------
Name: Francis T. McCarron
Title: Executive Vice President
Agreed and Accepted:
/s/ROLAND SMITH
---------------------------------
Roland Smith
EXHIBIT 31.1
CERTIFICATIONS
I, Nelson Peltz, the Chairman and Chief Executive Officer of Triarc
Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 11, 2007
/s/NELSON PELTZ
----------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Francis T. McCarron, the Executive Vice President and Chief Financial
Officer of Triarc Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 11, 2007
/s/FRANCIS T. MCCARRON
---------------------------------------
Francis T. McCarron
Executive Vice President and Chief Financial Officer
EXHIBIT 32.1
Certification Pursuant to
18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Triarc Companies, Inc., a Delaware corporation (the
"Company"), does hereby certify, to the best of such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended April 1, 2007 (the
"Form 10-Q") of the Company fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: May 11, 2007 /s/NELSON PELTZ
----------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
Dated: May 11, 2007 /s/FRANCIS T. MCCARRON
------------------------------------
Francis T. McCarron
Executive Vice President and Chief
Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Triarc Companies, Inc.
and will be retained by Triarc Companies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Form 10-Q or as a separate disclosure document.