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 June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 1-2207
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TRIARC COMPANIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 38-0471180
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
(212) 451-3000
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(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
There were 20,507,131 shares of the registrant's Class A Common Stock
outstanding as of the close of business on July 31, 2002.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, June 30,
2001 (A) 2002
-------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 506,461 $ 447,193
Short-term investments............................................................ 153,401 185,916
Receivables....................................................................... 14,969 16,433
Deferred income tax benefit....................................................... 11,495 12,086
Prepaid expenses.................................................................. 3,435 3,404
---------- ----------
Total current assets........................................................... 689,761 665,032
Restricted cash equivalents............................................................ 32,506 32,485
Investments............................................................................ 42,074 39,621
Properties............................................................................. 60,989 57,919
Goodwill .............................................................................. 17,922 17,922
Other intangible assets................................................................ 5,472 5,253
Deferred costs and other assets........................................................ 19,685 20,844
---------- ----------
$ 868,409 $ 839,076
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................$ 24,768 $ 25,538
Accounts payable.................................................................. 2,941 6,257
Accrued expenses.................................................................. 73,453 59,277
Net current liabilities relating to discontinued operations....................... 31,962 32,404
---------- ----------
Total current liabilities...................................................... 133,124 123,476
Long-term debt......................................................................... 288,955 276,225
Deferred compensation payable to related parties....................................... 24,356 24,983
Deferred income taxes.................................................................. 69,606 67,621
Deferred income, other liabilities and minority interests in a consolidated subsidiary. 19,971 19,611
Stockholders' equity:
Common stock...................................................................... 2,955 2,955
Additional paid-in capital........................................................ 129,608 131,077
Retained earnings................................................................. 359,652 351,095
Common stock held in treasury..................................................... (160,639) (157,653)
Accumulated other comprehensive income (deficit).................................. 821 (314)
---------- ----------
Total stockholders' equity..................................................... 332,397 327,160
---------- ----------
$ 868,409 $ 839,076
========== ==========
(A) Derived from the audited consolidated financial statements as of December 30, 2001.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------------ ------------------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
---- ---- ---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues, investment income (loss) and other income
(expense):
Royalties and franchise and related fees................$ 23,030 $ 24,837 $ 43,889 $ 47,218
Investment income (loss), net........................... 8,066 (4,915) 23,323 1,147
Other income (expense), net............................. 8,529 (1,008) 9,090 (1,578)
--------- --------- -------- ---------
Total revenues, investment income (loss) and
other income (expense)............................. 39,625 18,914 76,302 46,787
--------- --------- -------- ---------
Costs and expenses:
General and administrative.............................. 24,300 19,331 37,034 38,837
Depreciation and amortization, excluding amortization
of deferred financing costs.......................... 1,411 1,674 3,165 3,255
Interest expense........................................ 9,815 6,803 16,363 13,163
Insurance expense related to long-term debt............. 1,199 1,130 2,440 2,305
--------- --------- -------- ---------
Total costs and expenses............................. 36,725 28,938 59,002 57,560
--------- --------- -------- ---------
Income (loss) from continuing operations
before income taxes and minority interests ... 2,900 (10,024) 17,300 (10,773)
Benefit from (provision for) income taxes................... (1,940) 1,267 (8,132) 970
Minority interests in loss of a consolidated subsidiary..... -- 1,246 -- 1,246
--------- --------- -------- ---------
Income (loss) from continuing operations......... 960 (7,511) 9,168 (8,557)
Discontinued operations:
Gain on disposal, net of income taxes................... 38,517 -- 38,517 --
--------- --------- -------- ---------
Net income (loss)................................$ 39,477 $ (7,511) $ 47,685 $ (8,557)
========= ========= ======== =========
Basic income (loss) per share:
Continuing operations............................$ .04 $ (.37) $ .41 $ (.42)
Discontinued operations.......................... 1.73 -- 1.73 --
--------- --------- -------- ---------
Net income (loss)................................$ 1.77 $ (.37) $ 2.14 $ (.42)
========= ========= ======== =========
Diluted income (loss) per share:
Continuing operations............................$ .04 $ (.37) $ .39 $ (.42)
Discontinued operations.......................... 1.64 -- 1.64 --
--------- --------- -------- ---------
Net income (loss)................................$ 1.68 $ (.37) $ 2.03 $ (.42)
========= ========= ======== =========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
------------------------------
July 1, June 30,
2001 2002
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss)....................................................................$ 47,685 $ (8,557)
Adjustments to reconcile net income (loss) to net cash used in continuing
operating activities:
Operating investment adjustments, net (see below)............................... (5,677) 5,767
Depreciation and amortization of properties..................................... 1,882 2,834
Amortization of goodwill ....................................................... 421 --
Amortization of other intangible assets and certain other items................. 862 421
Amortization of deferred financing costs and original issue discount............ 1,071 964
Collection (recognition) of litigation settlement receivable.................... (3,333) 1,667
Equity in losses of investees, net.............................................. 111 705
Deferred compensation provision ................................................ 1,030 627
Deferred income tax benefit..................................................... (1,986) (1,985)
Minority interests in loss of a consolidated subsidiary......................... -- (1,246)
Income from discontinued operations............................................. (38,517) --
Other, net...................................................................... 169 475
Changes in operating assets and liabilities:
Decrease in receivables...................................................... 285 164
Decrease (increase) in prepaid expenses...................................... (1,505) 31
Decrease in accounts payable and accrued expenses............................ (9,442) (9,400)
---------- ----------
Net cash used in continuing operating activities.......................... (6,944) (7,533)
---------- ----------
Cash flows from continuing investing activities:
Investment activities, net (see below)............................................... 8,163 (42,397)
Purchase of fractional interest in corporate aircraft................................ -- (1,200)
Capital expenditures and, in 2001, deposit for purchase of corporate aircraft........ (3,379) (23)
Other................................................................................ (128) (78)
---------- ----------
Net cash provided by (used in) continuing investing activities............ 4,656 (43,698)
---------- ----------
Cash flows from continuing financing activities:
Repayments of long-term debt......................................................... (7,966) (11,962)
Proceeds from stock option exercises................................................. 2,959 3,273
Repurchases of common stock for treasury............................................. (3,703) --
Other................................................................................ 250 210
---------- ----------
Net cash used in continuing financing activities.......................... (8,460) (8,479)
---------- ----------
Net cash used in continuing operations.................................................. (10,748) (59,710)
Net cash provided by (used in) discontinued operations.................................. (182,522) 442
---------- ----------
Net decrease in cash and cash equivalents............................................... (193,270) (59,268)
Cash and cash equivalents at beginning of period........................................ 596,135 506,461
---------- ----------
Cash and cash equivalents at end of period..............................................$ 402,865 $ 447,193
========== ==========
Details of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities..........................................$ 49,515 $ 25,531
Cost of trading securities purchased............................................... (46,334) (25,601)
Net recognized losses from trading securities...................................... 550 5,163
Net recognized (gains) losses, including other than temporary losses, in other
than trading securities and short positions in securities and equity in
investment limited partnerships.................................................. (4,245) 427
Net amortization of premium (accretion of discount) on debt securities............. (5,163) 247
---------- ----------
$ (5,677) $ 5,767
========== ==========
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments......................................................................$ 100,120 $ 37,008
Cost of available-for-sale securities and other investments purchased.............. (88,400) (81,667)
Proceeds of securities sold short.................................................. 12,984 18,842
Payments to cover short positions in securities.................................... (16,541) (16,580)
---------- ----------
$ 8,163 $ (42,397)
========== ==========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2002
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Triarc Companies, Inc. ("Triarc" and, together with its subsidiaries, the
"Company") have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America. In the
opinion of the Company, however, the accompanying condensed consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments and, in 2001, the adjustment to the gain on disposal of discontinued
operations (see Note 4), necessary to present fairly the Company's financial
position as of December 30, 2001 and June 30, 2002, its results of operations
for the three and six-month periods ended July 1, 2001 and June 30, 2002 and its
cash flows for the six-month periods ended July 1, 2001 and June 30, 2002 (see
below). This information should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 30, 2001 (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. The Company's first half of fiscal
2001 commenced on January 1, 2001 and ended on July 1, 2001, with its second
quarter of 2001 commencing on April 2, 2001. The Company's first half of fiscal
2002 commenced on December 31, 2001 and ended on June 30, 2002, with its second
quarter of 2002 commencing on April 1, 2002. The periods from April 2, 2001 to
July 1, 2001 and January 1, 2001 to July 1, 2001 are referred to herein as the
three-month and six-month periods ended July 1, 2001, respectively. The periods
from April 1, 2002 to June 30, 2002 and December 31, 2001 to June 30, 2002 are
referred to herein as the three-month and six-month periods ended June 30, 2002,
respectively. Each quarter contained 13 weeks and each half contained 26 weeks.
Certain amounts included in the accompanying prior periods' condensed
consolidated statements of operations and statement of cash flows have been
reclassified to conform with the current periods' presentation.
(2) Significant Accounting Policies Update
Effective December 31, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," and SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets," issued by the Financial Accounting
Standards Board.
Under SFAS 142, costs in excess of net assets of acquired companies
("Goodwill"), relating to the Company's restaurant franchising operations and
aggregating $17,922,000 as of December 30, 2001 and June 30, 2002, are no longer
amortized effective December 31, 2001. SFAS 142 requires that Goodwill be tested
for impairment at least annually by applying a fair value-based test. The
Company has determined that there was no impairment of Goodwill upon adoption of
SFAS 142. Further, the Company has determined that all of its other intangible
assets, principally trademarks, have finite useful lives and, accordingly, will
continue to be amortized.
The following sets forth information on other intangible assets subject to
amortization (in thousands):
June 30, 2002
-------------------------------------
Accumulated
Cost Amortization Net
---- ------------ ---
Trademarks..................................................................$ 7,776 $ 2,781 $ 4,995
Computer software and distribution rights................................... 414 156 258
-------- -------- ---------
$ 8,190 $ 2,937 $ 5,253
======== ======== ========
Aggregate amortization expense:
Actual:
Three months ended June 30, 2002..........$ 193
Six months ended June 30, 2002............ 347
Estimate for fiscal year:
2002......................................$ 689
2003...................................... 677
2004...................................... 558
2005...................................... 558
2006...................................... 558
The following is a reconciliation of reported net income and income per
share adjusted on a pro forma basis for the reversal of Goodwill amortization,
net of tax, as though SFAS 142 had been in effect as of January 1, 2001 (in
thousands except per share amounts):
Three Months Ended July 1, 2001 Six Months Ended July 1, 2001
----------------------------------- -----------------------------------
As Reported Adjustment Pro Forma As Reported Adjustment Pro Forma
----------- ---------- --------- ----------- ---------- ---------
Net income.....................$ 39,477 $ 207 $ 39,684 $ 47,685 $ 415 $ 48,100
Net income per share:
Basic....................... 1.77 .01 1.78 2.14 .02 2.16
Diluted..................... 1.68 .01 1.69 2.03 .02 2.05
Under SFAS 144, the Company continues to review certain long-lived assets
other than Goodwill for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
review indicates an asset may not be recoverable, an impairment loss is
recognized for the excess of the carrying amount over the fair value of an asset
to be held and used or over the fair value less cost to sell of an asset to be
disposed. The Company has determined that for the six months ended June 30, 2002
none of its long-lived assets required testing for impairment. Accordingly, the
adoption of SFAS 144 had no effect on the Company's consolidated financial
position or results of operations for the three and six-month periods ended June
30, 2002.
(3) Comprehensive Income (Loss)
The following is a summary of the components of comprehensive income
(loss), net of income taxes (in thousands):
Three Months Ended Six Months Ended
------------------------ -------------------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Net income (loss)........................................$ 39,477 $ (7,511) $ 47,685 $ (8,557)
Net change in unrealized holding gains or losses on
available-for-sale securities (see below).............. 663 1,875 (765) (1,109)
Net change in currency translation adjustment............ 21 (29) 32 (26)
--------- -------- --------- ---------
Comprehensive income (loss)..............................$ 40,161 $ (5,665) $ 46,952 $ (9,692)
========= ======== ========= =========
The following is a summary of the components of the net change in the
unrealized holding gains or losses on available-for-sale securities included in
other comprehensive income (loss) (in thousands):
Three Months Ended Six Months Ended
------------------------ -------------------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Net change in unrealized appreciation or depreciation
of available-for-sale securities during the period.....$ 1,095 $ (86) $ 462 $ (422)
(Less) plus reclassification of prior period net
(appreciation) depreciation included in net
income or loss......................................... (78) 3,014 (1,367) (1,334)
--------- -------- --------- ---------
1,017 2,928 (905) (1,756)
Change in equity in unrealized gain on a retained
interest............................................... -- (21) (245) 57
Income tax (provision) benefit........................... (354) (1,032) 385 590
--------- -------- --------- ---------
$ 663 $ 1,875 $ (765) $ (1,109)
========= ======== ========= =========
(4) Discontinued Operations
In 2000 the Company sold (the "Snapple Beverage Sale") the stock of the
companies comprising its former premium beverage and soft drink concentrate
business segments (the "Beverage Operations") to affiliates of Cadbury Schweppes
plc ("Cadbury"). Further, prior to 2001 the Company sold the stock or the
principal assets of the companies comprising the former utility and municipal
services and refrigeration business segments (the "SEPSCO Operations") of
SEPSCO, LLC, a subsidiary of the Company. The Beverage Operations and the SEPSCO
Operations have been accounted for as discontinued operations since their
respective dates of sale.
The consideration paid to the Company in the Snapple Beverage Sale
consisted of (1) cash, which is subject to further post-closing adjustment as
described below and (2) the assumption by Cadbury of debt and related accrued
interest. The Snapple Beverage Sale agreement provides for a post-closing
adjustment, the amount of which is in dispute. Cadbury has stated that it
believes that it is entitled to receive from the Company a post-closing
adjustment of $27,605,000 and the Company, on the other hand, has stated that it
believes that it is entitled to receive from Cadbury a post-closing adjustment
of $5,586,000, in each case plus interest at 7.19% from October 25, 2000. The
Company is in arbitration with Cadbury to determine the amount of the
post-closing adjustment. The Company expects the arbitration process to be
completed in the fourth quarter of 2002.
Net current liabilities relating to discontinued operations consisted of
the following (in thousands):
December 30, June 30,
2001 2002
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Operations.................................................................$ 29,067 $ 29,576
Net liabilities of SEPSCO Operations (net of assets held for sale of $234)... 2,895 2,828
----------- -----------
$ 31,962 $ 32,404
=========== ===========
(5) Income (Loss) Per Share
Basic income (loss) per share for the three-month and six-month periods
ended July 1, 2001 and June 30, 2002 has been computed by dividing net income or
loss by the weighted average number of common shares outstanding of 22,299,000,
22,278,000, 20,486,000 and 20,454,000, respectively. Diluted loss per share for
the three and six-month periods ended June 30, 2002 is the same as the basic
loss per share since the Company reported a net loss and, therefore, the effect
of all potentially dilutive securities on the net loss would have been
antidilutive. Diluted income per share for the three and six-month periods ended
July 1, 2001 has been computed by dividing the income by an aggregate 23,504,000
and 23,519,000 shares, respectively, which include the 1,205,000 and 1,241,000
potential common share effect, respectively, of dilutive stock options computed
using the treasury stock method. The shares for diluted income per share for the
three and six-month periods ended July 1, 2001 exclude any effect of (1) a
written call option on the Company's common stock in conjunction with the
assumption of the Company's zero coupon convertible debentures by Cadbury and
(2) a forward purchase obligation for common stock whereby the Company
repurchased 1,999,207 shares of its former class B common stock on August 10,
2001, since the effect of each of these on income per share would have been
antidilutive.
(6) Transactions with Related Parties
The Company leased a helicopter until April 4, 2002 from a subsidiary of
Triangle Aircraft Services Corporation ("TASCO"), a company owned by the
Chairman and Chief Executive Officer and the President and Chief Operating
Officer of the Company (the "Executives") under a dry lease which was scheduled
to expire in September 2002. Annual rent for the helicopter was $382,000 from
October 1, 2000 through September 30, 2001, and increased to $392,000 as of
October 1, 2001 as a result of an annual cost of living adjustment. In
connection with the dry lease, the Company had rent expense of $191,000 and
$98,000 included in "General and administrative" in the accompanying condensed
consolidated statements of operations for the six-month periods ended July 1,
2001 and June 30, 2002, respectively. The Company terminated its lease effective
April 1, 2002 and, in consideration for $150,000, was released from all of its
remaining obligations under the lease, including a then remaining rental
obligation of $196,000. The $150,000 of consideration paid was charged to
"General and administrative" during the three-month period ended June 30, 2002
when the lease was terminated.
Effective March 1, 2001 the Company received a $5,000,000 interest-bearing
note (the "Executives' Note") from the Executives as part of a settlement of a
class action lawsuit receivable in three equal installments due March 31, 2001,
2002 and 2003. The Company recorded the $5,000,000 during the three-month period
ended April 1,2001 as a reduction of compensation expense included in "General
and administrative" in the accompanying condensed consolidated statement of
operations for the six-month period ended July 1, 2001, since the settlement
effectively represented an adjustment of prior period compensation expense. The
Executives' Note bore interest initially at 6% per annum and, in accordance with
its terms, was adjusted on April 2, 2001 to 4.92% per annum and was again
adjusted on April 1, 2002 to 1.75%. The Company recorded interest income on the
Executives' Note of $66,000 and $48,000 for the six-month periods ended July 1,
2001 and June 30, 2002, respectively. In March 2001 and March 2002 the Company
collected the first and second installments aggregating $3,333,000 on the
Executives' Note. The Company also collected related interest of $25,000 and
$163,000 during the six-month periods ended July 1, 2001 and June 30, 2002,
respectively. The remaining balance of the Executives' Note of $1,667,000 is
included in "Receivables" in the accompanying condensed consolidated balance
sheet as of June 30, 2002.
Triarc recorded incentive compensation of $22,500,000 during 2000 to the
Executives which was invested in two deferred compensation trusts (the "Deferred
Compensation Trusts") for their benefit on January 23, 2001. The increase in the
fair value of the investments in the Deferred Compensation Trusts for the
six-month periods ended July 1, 2001 and June 30, 2002 resulted in deferred
compensation expense of $1,030,000 and $627,000, respectively, included in
"General and administrative." For the three-month period ended July 1, 2001 the
increase in fair value resulted in deferred compensation expense of $877,000.
For the three-month period ended June 30, 2002 the decrease in fair value
resulted in a reversal of expense of $297,000. Under accounting principles
generally accepted in the United States of America, the Company recognized
investment income of $171,000 on the investments in the Deferred Compensation
Trusts during the six-month period ended July 1, 2001 but was not able to
recognize any investment income on the increase in value of the investments in
the Deferred Compensation Trusts during the six-month period ended June 30,
2002. This disparity between compensation expense and investment income
recognized will reverse in future periods as either (1) the investments in the
Deferred Compensation Trusts are sold and previously unrealized gains are
recognized without any offsetting increase in compensation expense or (2) the
fair values of the investments in the Deferred Compensation Trusts decrease
resulting in the recognition of a reduction of deferred compensation expense
without any offsetting losses recognized in investment income. The related
obligation is reported as "Deferred compensation payable to related parties" and
the investments in the Deferred Compensation Trusts are reported in
"Investments" in the accompanying condensed consolidated balance sheets.
As disclosed in more detail in the related party footnote (Note 24) to the
consolidated financial statements contained in the Form 10-K, the Company has
provided a number of its management officers and employees, including its
executive officers, the opportunity to co-invest with the Company in certain
investments and made related loans to management. The Company did not enter into
any new co-investments or make any co-investment loans to management officers or
employees during the six-month period ended June 30, 2002 and management has
notified the Company's board of directors that the Company does not intend to
make any further co-investment loans. Moreover, under recently enacted Federal
legislation, the Company is not permitted to make any new loans to its executive
officers. During March 2002 the Company collected the remaining $216,000 of
recourse notes and $18,000 of related accrued interest owed by management in
connection with their co-investment in 280 KPE Holdings, LLC ("280 KPE") and
also collected $45,000 of notes in connection with another co-investment. During
the year ended December 30, 2001, the Company wrote off $219,000 of non-recourse
notes and $14,000 of related accrued interest owed by management in connection
with their investment in 280 KPE due to the worthlessness of the underlying
investments held by 280 KPE. Such non-recourse notes were forgiven during March
2002. Under this policy, as of June 30, 2002 the Company had in total $2,492,000
principal amount of co-investment notes receivable from management, of which
$1,246,000 were non-recourse. These notes are included in "Deferred costs and
other assets" in the accompanying condensed consolidated balance sheets.
Also as disclosed in the related party footnote (Note 24) to the
consolidated financial statements contained in the Form 10-K, the Company has an
investment in Scientia Health Group Limited ("Scientia") through its 55.9%
ownership of 280 BT Holdings LLC ("280 BT"). One of the Executives has been
designated to serve on Scientia's board of directors. In July 2002, the
executive chairman of the board of Scientia resigned and in August 2002 was
indicted by a Federal grand jury. The Company is monitoring the effect, if any,
this resignation and indictment will have on the value, as disclosed below, of
the Company's investment. 280 BT invested $5,000,000 in Scientia in November
2001, of which $2,500,000 was invested by the Company. Management invested
$2,475,000 under the Company's co-investment policy; such amount includes
co-investment loans by the Company to a number of members of management
aggregating $1,650,000 as of June 30, 2002, of which $825,000 are non-recourse.
These notes are included in the total $2,492,000 aggregate principal amount of
co-investment notes receivable as of June 30, 2002 referred to in the paragraph
above. The Company accounts for 280 BT as a consolidated subsidiary and includes
280 BT's total investment in Scientia in "Investments" in the accompanying
condensed consolidated balance sheets and also reports related minority
interests in "Deferred income, other liabilities and minority interests in a
consolidated subsidiary." As of June 30, 2002, the carrying value of the
investment in Scientia was the gross amount of $4,552,000, representing cost
less an unrealized loss in an investment made by Scientia that was deemed to be
other than temporary, effectively reduced by minority interests of $2,007,000.
As of December 30, 2001, the Company owned 8.4% and certain of its present
and former officers, including entities controlled by them, owned 19.3% of the
common stock of Encore Capital Group, Inc. ("Encore"), which was formerly MCM
Capital Group, Inc. During the six-month period ended June 30, 2002, certain
existing stockholders of Encore made an aggregate $5,000,000 investment in
newly-issued convertible preferred stock of Encore, of which the Company
invested $873,000 and some of those present and former officers referred to
above invested $1,627,000. The Company had $744,000 of cumulative unrecorded
equity in losses of Encore as of December 30, 2001 since the Company had
previously reduced its investment in Encore to zero. The Company recognized the
$744,000 in connection with its $873,000 additional investment during the
three-month period ended March 31, 2002 as a charge to "Other income (expense),
net" in the accompanying condensed consolidated statement of operations for the
six-month period ended June 30, 2002. The Company also recognized $48,000 of
equity in earnings of Encore during the six-month period ended June 30, 2002.
Concurrently with the $5,000,000 investment, a financial institution which holds
senior notes of Encore forgave obligations thereunder aggregating $5,323,000.
Encore recorded an increase in its additional paid-in capital of $4,665,000 for
the forgiveness of this debt during its first quarter of 2002, representing the
$5,323,000 less $658,000 of related unamortized debt discount and deferred loan
costs. The Company recorded its equity of $393,000 in such amount as an increase
in "Additional paid-in capital" during the six-month period ended June 30, 2002.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 24 to the
consolidated financial statements contained in the Form 10-K.
(7) Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc.
("Adams"), a non-operating 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 October 2001, an
environmental consultant engaged by the Florida Department of Environmental
Protection (the "FDEP") conducted a preliminary investigation of the site,
including soil and groundwater sampling. A final report by the environmental
consultant received in April 2002 identified contamination of the soil and
groundwater at the site and indicated that the environmental consultant believed
that further unspecified action is warranted at the site. Adams has engaged an
environmental consultant that is currently conducting further investigation of
the site pursuant to an agreement with the FDEP. The investigation by Adams'
environmental consultant is intended to determine the extent of the soil and
groundwater contamination and the appropriate remediation for that
contamination. This investigation is currently at an early stage and the nature
and extent of the remediation that will ultimately be required cannot be
determined with exact certainty. However, based on a preliminary cost estimate
developed by the environmental consultant and after taking into consideration
various legal defenses available to the Company, including Adams, Adams has
provided for its estimate of its liability for this matter which is included in
the aggregate reserves for all legal and environmental matters set forth below.
As disclosed more fully in the Form 10-K, on March 23, 1999 a stockholder
filed a complaint against the Company and the Executives on behalf of persons
who held Triarc class A common stock which, as amended, alleges that the
Company's tender offer statement filed with the Securities and Exchange
Commission, pursuant to which the Company repurchased 3,805,015 shares of its
class A common stock for $18.25 per share, was materially false and misleading.
The Company and the Executives have moved for summary judgment dismissing the
action and the plaintiff has moved to certify a class. The court is scheduled to
hear argument on the motions on August 26, 2002.
In addition to the environmental matter and stockholder lawsuit described
above, the Company is involved in other litigation and claims incidental to its
business. Triarc and its subsidiaries have reserves for all of its legal and
environmental matters aggregating $3,000,000 as of June 30, 2002. 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 its legal and environmental matters will have a material adverse
effect on its consolidated financial position or results of operations.
(8) Subsequent Events
On July 17, 2002, the Company submitted a revised bid to acquire Sybra,
Inc. and its affiliate, Sybra of Connecticut, Inc. (collectively, "Sybra"),
subsidiaries of I.C.H. Corporation ("ICH"). Previously on May 1, 2002, the
Company announced that it had submitted its original bid to acquire Sybra. Sybra
and ICH filed for protection under chapter 11 of the United States Bankruptcy
Code on February 5, 2002 in order to restructure their financial obligations.
Sybra owns and operates 239 Arby's restaurants and is the second largest
franchisee of Arby's restaurants. Under the revised bid, the Company offered to
make a $14,500,000 investment in Sybra on terms to be agreed upon. In addition,
the Company offered to make approximately $3,500,000 available to be paid to
ICH's creditors. That bid expired unaccepted on July 26, 2002. On July 29, 2002,
Sybra notified the Company of its intention to proceed with a plan of
reorganization pursuant to which Sybra would be acquired by an entity controlled
by the Company's largest franchisee and Sybra's incumbent senior management. On
August 1, 2002, the Company filed a motion with the bankruptcy court seeking to
terminate the exclusive right of Sybra/ICH to propose a reorganization plan and
seeking the right to propose a competing plan of reorganization pursuant to
which Sybra would be acquired by the Company. On August 7, 2002, the Company
agreed with the official committee of unsecured creditors of ICH and Sybra that
any plan of reorganization offered by the Company or any further offer by the
Company to acquire Sybra would provide that the Company would make not less than
$4,500,000 available to be paid to ICH's non-insider general unsecured
creditors. Oral arguments on the Company's motion were heard on August 8, 2002,
at which time the court terminated ICH's and Sybra's exclusive right to file a
plan of reorganization. The court also set a deadline of September 13, 2002 for
the competing bidders to file their proposed plans and scheduled hearings on
October 7, 2002 to determine the adequacy of the disclosure statements for those
plans and November 12, 2002 to determine which of the competing plans is to be
approved. At this time, it is not possible to determine the outcome of the
Company's efforts to acquire Sybra.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Triarc Companies, Inc., which we refer to as Triarc,
and its subsidiaries should be read in conjunction with the accompanying
condensed consolidated financial statements and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the fiscal year ended December 30, 2001. Item 7 of our
Form 10-K describes the recent trends affecting our restaurant franchising
business and our critical accounting policies and estimates.
Certain statements we make under this Item 2 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- - Other Information" preceding "Item 1."
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. Our first half of fiscal 2001 commenced on
January 1, 2001 and ended on July 1, 2001, with our second quarter of 2001
commencing on April 2, 2001. Our first half of fiscal 2002 commenced on December
31, 2001 and ended on June 30, 2002, with our second quarter of 2002 commencing
on April 1, 2002. When we refer to the "six months ended July 1, 2001," or the
"2001 first half," and the "three months ended July 1, 2001," or the "2001
second quarter," we mean the periods from January 1, 2001 to July 1, 2001 and
April 2, 2001 to July 1, 2001, respectively. When we refer to the "six months
ended June 30, 2002," or the "2002 first half," and the "three months ended June
30, 2002," or the "2002 second quarter," we mean the periods from December 31,
2001 to June 30, 2002 and April 1, 2002 to June 30, 2002, respectively. Each
half contained 26 weeks and each quarter contained 13 weeks.
Certain amounts presented in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the three and six-month
periods ended July 1, 2001 have been reclassified to conform with the current
periods' presentation.
Results of Operations
Set forth below is a table that summarizes and compares our results of
operations for (1) the six months ended July 1, 2001 and June 30, 2002 and (2)
the three months ended July 1, 2001 and June 30, 2002, and provides the amount
and percent of the change between those respective periods. We consider certain
percentage changes between periods to be not measurable or not meaningful, and
we refer to these as "n/m."
Six Months Ended Three Months Ended
------------------ Change ------------------ Change
July 1, June 30, ----------------- July 1, June 30, ------------------
2001 2002 Amount Percent 2001 2002 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
(In Millions Except Percents)
Revenues, investment income (loss) and other income
(expense):
Royalties and franchise and related fees .........$ 43.9 $ 47.2 $ 3.3 8 % $ 23.0 $ 24.8 $ 1.8 8 %
Investment income (loss), net .................... 23.3 1.1 (22.2) (95)% 8.1 (4.9) (13.0) (161)%
Other income (expense), net ..................... 9.1 (1.5) (10.6) (117)% 8.5 (1.0) (9.5) (112)%
------ ------- ------- ------- ------- ------
Total revenues, investment income (loss) and
other income (expense) ...................... 76.3 46.8 (29.5) (39)% 39.6 18.9 (20.7) (52)%
------ ------- ------- ------- ------- ------
Costs and expenses:
General and administrative ....................... 37.0 38.8 1.8 5 % 24.3 19.3 (5.0) (20)%
Depreciation and amortization, excluding
amortization of deferred financing costs ....... 3.2 3.3 0.1 3 % 1.4 1.7 0.3 19 %
Interest expense ................................. 16.4 13.2 (3.2) (20)% 9.8 6.8 (3.0) (31)%
Insurance expense related to long-term debt ...... 2.4 2.3 (0.1) (6)% 1.2 1.1 (0.1) (6)%
------ ------- ------- ------- ------- ------
Total costs and expenses ....................... 59.0 57.6 (1.4) (2)% 36.7 28.9 (7.8) (21)%
------ ------- ------- ------- ------- ------
Income (loss) from continuing operations
before income taxes and minority interests.. 17.3 (10.8) (28.1) n/m 2.9 (10.0) (12.9) n/m
Benefit from (provision for) income taxes ........... (8.1) 1.0 9.1 n/m (1.9) 1.3 3.2 n/m
Minority interests in loss of a consolidated
subsidiary......................................... -- 1.2 1.2 n/m -- 1.2 1.2 n/m
------ ------- ------- ------- ------- ------
Income (loss) from continuing operations...... 9.2 (8.6) (17.8) n/m 1.0 (7.5) (8.5) n/m
Discontinued operations.............................. 38.5 -- (38.5) n/m 38.5 -- (38.5) n/m
------ ------- ------- ------- ------- ------
Net income (loss).............................$ 47.7 $ (8.6) $(56.3) n/m $ 39.5 $ (7.5) $(47.0) n/m
====== ======= ====== ======= ======= ======
Six Months Ended June 30, 2002 Compared with Six Months Ended July 1, 2001
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which are generated entirely
from our restaurant franchising business, increased $3.3 million, or 8%, to
$47.2 million for the six months ended June 30, 2002 from $43.9 million for the
six months ended July 1, 2001 reflecting a $3.8 million, or 9%, increase in
royalties partially offset by a $0.5 million, or 32%, decrease in franchise and
related fees. The increase in royalties consisted of (1) a $1.9 million
improvement resulting from the royalties from the 114 restaurants opened since
July 1, 2001, with generally higher than average sales volumes, replacing the
royalties from the 84 underperforming restaurants closed since July 1, 2001 and
(2) a $1.9 million improvement due to a 3.9% increase in same-store sales of
franchised restaurants. The decrease in franchise and related fees was
principally due to lower franchise fees primarily as a result of franchisees
opening 17 fewer restaurants in the 2002 first half compared with the 2001 first
half and, to a lesser extent, a decrease in fees from franchisees for training
and for transferring franchise agreements. We currently anticipate a continued
combined increase in royalties and franchise and related fees for the 2002
second half compared with the 2001 second half, but at a lower rate than the 8%
increase experienced during the 2002 first half. Forfeited deposits in the
fourth quarter of 2001 reflected the termination of a significant number of
commitments to open new franchised restaurants by one of our franchisees and we
do not expect terminations to recur at the same level in the 2002 second half.
Our royalties and franchise fees have no associated cost of sales.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Six Months Ended
----------------
July 1, June 30,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income...........................................$ 19.3 $ 5.7 $ (13.6)
Other than temporary unrealized losses.................... (0.4) (8.1) (7.7)
Recognized net gains...................................... 4.1 2.4 (1.7)
Distributions, including dividends........................ 0.8 1.2 0.4
Equity in the earnings of investment limited
partnerships and similar investment entities.......... -- 0.1 0.1
Investment management and performance fees................ (0.5) (0.2) 0.3
-------- ------ --------
$ 23.3 $ 1.1 $ (22.2)
======== ====== ========
Investment income, net decreased $22.2 million, principally due to (1) a
$13.6 million decrease in interest income on cash equivalents and short-term
investments, (2) a $7.7 million increase in the provision for unrealized losses
deemed to be other than temporary (before $1.2 million of minority interests in
this provision) and (3) a $1.7 million decrease in recognized net gains,
realized or unrealized as applicable, on our investments. The decrease in
interest income is due to lower average interest rates and, to a lesser extent,
lower average amounts of cash equivalents and interest-bearing short-term
investments during the 2002 first half compared with the 2001 first half.
Average rates on our interest-bearing investments declined from approximately 5%
in the 2001 first half to approximately 2% in the 2002 first half principally
due to the general decline in the money market and short-term interest rate
environment. The weighted average monthly balance of our interest-bearing
investments declined principally due to our payment in mid-March 2001 of $239.3
million of estimated income taxes related to the October 2000 sale of our former
beverage businesses. We currently have significant investments in cash
equivalents and we anticipate interest income will continue to be significantly
lower in the 2002 second half compared with the 2001 second half assuming
interest rates as of June 30, 2002 do not increase significantly. Our provision
for unrealized losses on our available-for-sale and other cost basis investments
deemed to be other than temporary resulted from declines in the underlying
economics of specific marketable equity securities and other investments and/or
volatility in capital markets. Our recognized net gains and other than temporary
unrealized losses are dependent upon market fluctuations in the value of our
investments in available-for-sale securities and cost basis investments and/or
the timing of the sales of those investments. Accordingly, our recognized net
gains and our other than temporary unrealized losses presented in the above
table may not recur in future periods.
As of June 30, 2002, we had pretax unrealized holding losses on
available-for-sale marketable securities of $0.9 million included in accumulated
other comprehensive deficit which we presently believe are not other than
temporary. However, should either (1) we decide to sell any of these investments
or (2) any of the unrealized losses continue such that we believe they have
become other than temporary, we would recognize losses on the related
investments at that time. In addition, through a 55.9%-owned consolidated
subsidiary, we hold a $4.6 million cost basis investment, before related
minority interests of $2.0 million, in a company whose executive chairman of the
board resigned in July 2002 and was indicted by a Federal grand jury in August
2002. We are monitoring the effect, if any, that this resignation and indictment
will have on the value of our investment, which could possibly result in the
recognition of an other than temporary loss in future periods.
Other Income (Expense), Net
The following table summarizes and compares the major components of other
income (expense), net:
Six Months Ended
----------------
July 1, June 30,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income related to sale of beverage businesses...$ 8.3 $ -- $ (8.3)
Reduction of gain related to business previously sold.... -- (1.2) (1.2)
Equity in losses of investees, other than investment
limited partnerships and similar investment entities... (0.1) (0.7) (0.6)
Reduction in the fair value of a written call option on
our stock.............................................. 0.5 -- (0.5)
Other interest income.................................... 0.1 0.2 0.1
Other.................................................... 0.3 0.2 (0.1)
------- ------ ------
$ 9.1 $ (1.5) $(10.6)
======= ====== ======
Other income (expense), net decreased $10.6 million principally due to $8.3
million of interest income recorded in the 2001 second quarter which did not
recur in the 2002 first half related to our election in June 2001 to treat
certain portions of the sale of our former beverage businesses as an asset sale
for income tax purposes, as explained in more detail below under "Discontinued
Operations." The $1.2 million reduction of gain related to business previously
sold results from a charge for estimated environmental clean-up and related
costs. The $0.6 million increase in equity in losses of investees was
principally due to the recognition in the 2002 first quarter of $0.7 million of
our previously unrecorded equity in losses of Encore Capital Group, Inc.
(formerly MCM Capital Group, Inc.), an 8.4% common equity investee of ours which
we refer to as Encore, upon our investment of $0.9 million in newly-issued
convertible preferred stock of Encore. The $0.7 million of cumulative equity in
losses of Encore had not been recorded as a result of our having previously
reduced our investment in Encore to zero. The written call option on our class A
common stock effectively arose upon the assumption of our zero coupon
convertible debentures by the purchaser of our former beverage businesses.
Although the debentures were assumed by the purchaser, they remain convertible
into our class A common stock and the reduction in the fair value of the
liability for the conversion option during the periods presented was recognized
in other income.
We incurred an estimated $1.8 million to $2.0 million of costs in
connection with our submission in July 2002 of a business acquisition proposal.
However, our proposal was not accepted. Accordingly, we will record a charge to
operations for these costs in the 2002 third quarter.
General and Administrative
Our general and administrative expenses increased $1.8 million, or 5%, to
$38.8 million for the six months ended June 30, 2002 from $37.0 million for the
six months ended July 1, 2001. This increase principally reflects a $5.0 million
reduction in compensation expense in the 2001 first quarter, which did not recur
in the 2002 first half, related to a note that we received in the 2001 first
quarter from our Chairman and Chief Executive Officer and President and Chief
Operating Officer, whom we refer to as the Executives, in partial settlement of
a class action shareholder lawsuit which asserted claims relating to certain
compensation awards to the Executives. This increase was partially offset by (1)
a $3.0 million decrease in incentive compensation costs and (2) a $0.4 million
decrease in deferred compensation expense. The $5.0 million gain from the
settlement of the class action shareholder lawsuit discussed above was included
as a reduction of general and administrative expenses in the 2001 first quarter
since the gain effectively represented an adjustment of prior period
compensation expense. The $3.0 million decrease in incentive compensation is
principally due to the non-recurring effect in the 2001 first half under our
executive bonus plan from the positive impact on our capitalization from the
sale of our former beverage businesses. Deferred compensation expense of $0.6
million for the six months ended June 30, 2002 and $1.0 million for the six
months ended July 1, 2001, represents the increase in the fair value of
investments in two deferred compensation trusts, which we refer to as the
Trusts, for the benefit of the Executives, as explained in more detail below
under "Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests."
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $0.1 million, or 3%, to $3.3 million for the six
months ended June 30, 2002. This increase reflects (1) $0.8 million of
depreciation in the 2002 first half which did not occur in the 2001 first half
related to the purchase of an airplane in July 2001 and (2) a $0.2 million
increase related to amortization of leasehold improvements completed during the
2001 second quarter. These increases were substantially offset by (1) $0.5
million of accelerated amortization in the 2001 first quarter resulting from the
then anticipated early termination of fractional interests in aircraft which did
not recur in the 2002 first half and (2) $0.4 million of goodwill amortization
in the first half of 2001 which ceased effective December 31, 2001 in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." The end of goodwill amortization under Statement 142 will
positively impact the 2002 second half by $0.4 million.
Interest Expense
Interest expense decreased $3.2 million, or 20%, to $13.2 million for the
six months ended June 30, 2002 from $16.4 million for the six months ended July
1, 2001. This decrease principally reflects interest of $3.1 million recorded in
the 2001 first half on the estimated income tax liability paid with the filing
of our election in June 2001 to treat certain portions of the sale of our former
beverage businesses as an asset sale for income tax purposes, as explained in
more detail below under "Discontinued Operations."
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests decreased $28.1 million to a loss of $10.8 million for the
six months ended June 30, 2002 from income of $17.3 million for the six months
ended July 1, 2001 due to the effect of the variances explained in the captions
above.
As disclosed above, we recognized $1.0 million in the 2001 first half and
$0.6 million in the 2002 first half of deferred compensation expense for the
increase in the fair value of the investments in the Trusts. Under accounting
principles generally accepted in the United States of America, we recognized
investment income of $0.2 million on the investments in the Trusts during the
2001 first half, but were unable to recognize any investment income on the
investments in the Trusts during the 2002 first half. This disparity between
compensation expense and investment income recognized will reverse in future
periods as either (1) the investments in the Trusts are sold and previously
unrealized gains are recognized without any offsetting increase in compensation
expense or (2) the fair values of the investments in the Trusts decrease
resulting in the recognition of a reduction of deferred compensation expense
without any offsetting losses recognized in investment income.
Income Taxes
The benefit from and provision for income taxes represented effective rates
of 9% for the six months ended June 30, 2002 and 47% for the six months ended
July 1, 2001, respectively. The effective benefit rate in the 2002 first half is
lower than the United States Federal statutory rate of 35% and the effective
provision rate in the 2001 first half was higher than the 35% rate principally
due to (1) the effect of non-deductible compensation costs, (2) state income
taxes of the consolidated entities which file state tax returns on an individual
company basis with a differing mix of pretax income or loss and (3) the effect
in 2001 of non-deductible amortization of goodwill.
Minority Interests in Loss of a Consolidated Subsidiary
The minority interests in loss of a consolidated subsidiary of $1.2 million
for the six months ended June 30, 2002 represent the 44.1% minority interests in
the net loss of 280 BT Holdings, LLC, a consolidated subsidiary. The losses of
280 BT Holdings were due to provisions for unrealized losses on its cost basis
investments deemed to be other than temporary, which did not occur in the 2001
first half.
Discontinued Operations
The income from discontinued operations of $38.5 million for the six months
ended July 1, 2001 resulted entirely from adjustments to the previously
recognized estimated gain on disposal of our beverage businesses. These net
adjustments resulted from the realization of $200.0 million of proceeds from the
purchaser for our electing in June 2001 to treat certain portions of the sale as
an asset sale in lieu of a stock sale under the provisions of Section 338(h)(10)
of the United States Internal Revenue Code, net of estimated income taxes,
partially offset by additional accruals relating to the sale.
Three Months Ended June 30, 2002 Compared with Three Months Ended July 1, 2001
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which are generated entirely
from our restaurant franchising business, increased $1.8 million, or 8%, to
$24.8 million for the three months ended June 30, 2002 from $23.0 million for
the three months ended July 1, 2001 reflecting a $2.0 million, or 9%, increase
in royalties partially offset by a $0.2 million, or 24%, decrease in franchise
and related fees. The increase in royalties consisted of (1) a $1.0 million
improvement resulting from the royalties from the 114 restaurants opened since
July 1, 2001, with generally higher than average sales volumes, replacing the
royalties from the 84 underperforming restaurants closed since July 1, 2001 and
(2) a $1.0 million improvement due to a 3.9% increase in same-store sales of
franchised restaurants. The decrease in franchise and related fees was
principally due to lower franchise fees primarily as a result of franchisees
opening 14 fewer restaurants in the 2002 second quarter compared with the 2001
second quarter partially offset by an increase in early franchise renewal fees.
We currently anticipate a continued combined increase in royalties and franchise
and related fees for the 2002 second half compared with the 2001 second half but
at a lower rate than the 8% increase experienced during the 2002 second quarter,
as previously explained in more detail in the comparison of the six-month
periods.
Our royalties and franchise fees have no associated cost of sales.
Investment Income (Loss), Net
The following table summarizes and compares the major components of
investment income (loss), net:
Three Months Ended
------------------
July 1, June 30,
2001 2002 Change
---- ---- ------
(In Millions)
Other than temporary unrealized losses....................$ (0.4) $ (8.0) $ (7.6)
Interest income........................................... 7.4 2.8 (4.6)
Recognized net gains ..................................... 0.8 -- (0.8)
Equity in the earnings (losses) of investment limited
partnerships and similar investment entities.......... 0.1 (0.1) (0.2)
Distributions, including dividends........................ 0.4 0.5 0.1
Investment management and performance fees................ (0.2) (0.1) 0.1
-------- ------ ------
$ 8.1 $ (4.9) $(13.0)
======== ====== ======
Investment income (loss), net decreased $13.0 million principally due to
(1) a $7.6 million increase in the provision for unrealized losses deemed to be
other than temporary (before $1.2 million of minority interests in this
provision), (2) a $4.6 million decrease in interest income on cash equivalents
and short-term investments principally due to lower average interest rates and
(3) a $0.8 million decrease in recognized net gains, realized or unrealized as
applicable, on our investments. Average rates on our interest-bearing
investments declined from approximately 5% in the 2001 second quarter to
approximately 2% in the 2002 second quarter principally due to the general
decline in the money market and short-term interest rate environment. We
currently anticipate interest income will continue to be significantly lower for
the 2002 second half compared with the 2001 second half, as previously explained
in more detail in the comparison of the six-month periods. Our provision for
unrealized losses on our available-for-sale and other cost basis investments
deemed to be other than temporary resulted from declines in the underlying
economics of specific marketable equity securities and other investments and/or
volatility in capital markets. Our recognized net gains and our other than
temporary unrealized losses presented in the above table may not recur in future
periods, as previously explained in more detail in the comparison of the
six-month periods.
As of June 30, 2002, we had pretax unrealized holding losses on
available-for-sale marketable securities of $0.9 million included in accumulated
other comprehensive deficit which we presently believe are not other than
temporary. However, provisions for these unrealized losses may be required in
future periods, as previously explained in more detail in the comparison of the
six-month periods. In addition, as explained in more detail in the comparison of
the six-month periods, we hold a $4.6 million cost basis investment, before
related minority interests of $2.0 million, in a company whose executive
chairman of the board resigned in July 2002 and was indicted by a Federal grand
jury in August 2002 for which recognition of an other than temporary loss could
possibly be required in future periods.
Other Income (Expense), Net
The following table summarizes and compares the major components of other
income (expense), net:
Three Months Ended
------------------
July 1, June 30,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income related to sale of beverage businesses.......$ 8.3 $ -- $ (8.3)
Reduction of gain related to business previously sold........ -- (1.2) (1.2)
Other interest income........................................ 0.2 0.1 (0.1)
Equity in losses of investees, other than investment
limited partnerships and similar investment entities....... (0.1) -- 0.1
Reduction in the fair value of a written call option on
our stock.................................................. 0.1 0.1 --
-------- ------ ------
$ 8.5 $ (1.0) $ (9.5)
======== ====== ======
Other income (expense), net decreased $9.5 million principally due to the
$8.3 million of interest income recorded in the 2001 second quarter which did
not recur in the 2002 second quarter related to our election to treat certain
portions of the sale of our former beverage businesses as an asset sale for
income tax purposes, as previously explained in more detail in the comparison of
the six-month periods.
As previously explained in more detail in the comparison of the six-month
periods, we will record a charge to operations in the 2002 third quarter for the
estimated $1.8 million to $2.0 million of costs of a proposed business
acquisition not consummated.
General and Administrative
Our general and administrative expenses decreased $5.0 million, or 20%, to
$19.3 million for the three months ended June 30, 2002 from $24.3 million for
the three months ended July 1, 2001. This decrease principally reflects (1) a
$3.1 million decrease in incentive compensation costs and (2) a $1.2 million
decrease in deferred compensation expense. The $3.1 million decrease in
incentive compensation is principally due to the non-recurring effect in the
2001 second quarter under our executive bonus plan from the positive impact on
our capitalization and the achievement of certain performance thresholds in the
2001 second quarter, both from the sale of our former beverage businesses. The
deferred compensation expense, which decreased $1.2 million to a reversal of
expense of $0.3 million for the three months ended June 30, 2002 from an expense
of $0.9 million for the three months ended July 1, 2001, represents the net
decrease in the fair value of investments in the Trusts as previously explained
in more detail under "Income (Loss) from Continuing Operations before Income
Taxes and Minority Interests" in the comparison of the six-month periods.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $0.3 million, or 19%, to $1.7 million for the three
months ended June 30, 2002. This increase reflects $0.4 million of depreciation
in the 2002 second quarter which did not occur in the 2001 second quarter
related to the purchase of an airplane in July 2001 partially offset by $0.2
million of goodwill amortization in the 2001 second quarter which ceased
effective December 31, 2001 in accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." The end of goodwill
amortization under Statement 142 will positively impact each of the 2002 third
and fourth quarters by $0.2 million.
Interest Expense
Interest expense decreased $3.0 million, or 31%, to $6.8 million for the
three months ended June 30, 2002 from $9.8 million for the three months ended
July 1, 2001 principally due to interest of $3.1 million recorded in the 2001
second quarter on the estimated income tax liability resulting from our election
to treat certain portions of the sale of our former beverage businesses as an
asset sale for income tax purposes, as previously explained in more detail in
the comparison of the six-month periods.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests decreased $12.9 million to a loss of $10.0 million for the
three months ended June 30, 2002 from income of $2.9 million for the three
months ended July 1, 2001 due to the effect of the variances explained in the
captions above.
Income Taxes
The benefit from and provision for income taxes represented effective rates
of 13% for the three months ended June 30, 2002 and 67% for the three months
ended July 1, 2001, respectively. The effective benefit rate in the 2002 second
quarter is lower than the United States Federal statutory rate of 35% and the
effective provision rate in the 2001 first half was higher than the 35% rate
principally due to the factors affecting the year-to-date effective rates
previously explained in more detail in the comparison of the six-month periods.
In addition, the 2001 second quarter effective rate reflects the catch-up effect
of a year-to-date increase in the then estimated full-year 2001 effective tax
provision rate from 43% to 47%. The 2002 effective rate reflects the catch-up
effect of the ability to determine the estimated full-year 2002 effective tax
benefit rate of 9% from an actual tax provision of 40% in connection with the
2002 first quarter pretax loss. The change for the 2002 quarter reflects the
fact that as of the end of the of the first quarter we projected a full year tax
provision despite a full year pretax loss whereas we now project a full year tax
benefit due to a higher projected full year pretax loss. The higher projected
loss is principally a result of the significant other than temporary unrealized
losses in investments recognized in the 2002 second quarter as previously
explained.
Minority Interests in Loss of a Consolidated Subsidiary
The minority interests in loss of a consolidated subsidiary was $1.2
million for the three months ended June 30, 2002 compared with none for the
three months ended July 1, 2001 as previously explained in more detail in the
comparison of the six-month periods.
Discontinued Operations
The income from discontinued operations of $38.5 million for the three
months ended July 1, 2001 resulted entirely from adjustments to the previously
recognized estimated gain on disposal of our beverage businesses, as previously
explained in more detail in the comparison of the six-month periods.
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 $7.5
million during the six months ended June 30, 2002 reflecting (1) cash used by
changes in operating assets and liabilities of $9.2 million and (2) a net loss
of $8.6 million. These uses were partially offset by (1) net operating
investment adjustments of $5.8 million, (2) net non-cash charges of $2.8 million
and (3) collection of a litigation settlement receivable of $1.7 million.
The cash used by changes in operating assets and liabilities of $9.2
million reflects a $9.4 million decrease in accounts payable and accrued
expenses principally due to the annual payment of previously accrued incentive
compensation. The net operating investment adjustments of $5.8 million consisted
principally of net recognized losses from trading securities. The non-cash
charges of $2.8 million consisted principally of depreciation and amortization
less deferred income tax benefit and minority interests in loss of a
consolidated subsidiary.
Despite the $7.5 million of cash used in operating activities in the 2002
first half, we continue to expect positive cash flows from continuing operating
activities for the full 2002 fiscal year, excluding the effect of any net
purchases of trading securities which represent the discretionary investment of
excess cash.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$541.6 million at June 30, 2002, reflecting a current ratio, which equals
current assets divided by current liabilities, of 5.4:1. Working capital
decreased $15.0 million from $556.6 million at December 30, 2001 principally due
to the reclassification of $12.7 million of long-term debt to current.
Our total capitalization at June 30, 2002 was $628.9 million consisting of
stockholders' equity of $327.2 million and $301.7 million of long-term debt,
including current portion. Our total capitalization decreased $17.2 million from
$646.1 million at December 30, 2001 due to (1) repayments of long-term debt of
$12.0 million, (2) a net loss of $8.6 million and (3) adjustments of $1.1
million in deriving comprehensive loss from net loss, all partially offset by
proceeds of $3.3 million from stock option exercises.
Securitization Notes
We have outstanding Securitization Notes with a remaining principal balance
of $264.5 million as of June 30, 2002 which are due no later than December 2020.
However, based on current projections and assuming the adequacy of available
funds, as defined under the indenture for the Securitization Notes, we currently
estimate that we will repay $9.8 million during the second half of 2002 with
increasing annual payments to $37.4 million in 2011 in accordance with a
targeted principal payment schedule.
The Securitization Notes were issued by our subsidiary Arby's Franchise
Trust, which we refer to as Arby's Trust. The indenture contains various
covenants which (1) require periodic financial reporting, (2) require meeting a
debt service coverage ratio test and (3) restrict, among other matters, (a) the
incurrence of indebtedness, (b) asset dispositions and (c) the payment of
distributions. Arby's Trust was in compliance with all of these covenants as of
June 30, 2002. As of June 30, 2002, Arby's Trust had $2.2 million available for
the payment of distributions through its parent to Arby's which, in turn, would
be available to Arby's to pay management service fees or Federal income
tax-sharing payables to Triarc or, to the extent of any excess, make
distributions to Triarc through the parent of Arby's.
Other Long-Term Debt
We have a secured bank term loan payable through 2008 with an outstanding
principal amount of $19.9 million as of June 30, 2002. We also have an 8.95%
secured promissory note payable through 2006 with an outstanding principal
amount of $14.2 million as of June 30, 2002.
Our total scheduled long-term debt repayments during the remaining six
months of 2002 are $12.4 million consisting principally of the $9.8 million
expected to be paid under the Securitization Notes, $1.6 million due on the
secured bank term loan and $0.9 million due on the 8.95% secured promissory
note.
Guaranties and Commitments
Our wholly-owned subsidiary, National Propane Corporation, 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 Corporation, whose principal asset is a $30.0 million
intercompany note receivable from Triarc, agreed that while it remains a special
limited partner of AmeriGas Eagle, it 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 June 30, 2002, if AmeriGas Eagle is unable to repay or refinance such
debt, but only after recourse by the owner to the assets of AmeriGas Eagle. We
believe it is unlikely that we will be called upon to make any payments under
this indemnity. In August 2001, AmeriGas Propane, L.P., which we refer to as
AmeriGas Propane, purchased all of the interests in AmeriGas Eagle other than
our special limited partner interest. Either National Propane Corporation 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 associated with our July 1999 sale of the
propane business if National Propane required the repurchase.
In 1997 Arby's sold all of its 355 then company-owned restaurants. The
purchaser of the restaurants assumed substantially all of the associated
operating and capitalized lease obligations (approximately $69.0 million as of
June 30, 2002, assuming the purchaser has made all scheduled payments through
that date under such lease obligations), although Arby's remains contingently
liable if the purchaser does not make the required future lease payments. In
connection with such sale, Triarc guaranteed $54.7 million of mortgage and
equipment notes payable to FFCA Mortgage Corporation that were assumed by the
purchaser. Outstanding obligations under the mortgage and equipment notes
approximated $43.0 million as of June 30, 2002. Triarc is also a guarantor of
$0.5 million as of June 30, 2002 of mortgage and equipment notes included in our
long-term debt for which one of our subsidiaries is co-obligor with the
purchaser of the restaurants.
In January 2000 we guaranteed a $6.7 million portion of senior notes issued
by Encore to a major financial institution. During the 2002 first half, the
outstanding principal amount of these notes was reduced from $10.0 million to
$7.2 million as the lender forgave $2.8 million of principal and $2.5 million of
related accrued interest upon an investment by certain existing stockholders,
including us, of $5.0 million in newly-issued convertible preferred stock of
Encore. Our portion of the preferred stock investment was $0.9 million and
certain of our present and former officers, including entities controlled by
them, invested an aggregate of $1.6 million. Our guarantee will be reduced by
(1) any repayment of these senior notes, (2) any purchases of these senior notes
by us and (3) the amount of certain investment banking or financial advisory
services fees paid to the financial institution by us, Encore or another
significant stockholder of Encore or any of their affiliates. Some of our
present and former officers, including entities controlled by them, who
collectively owned 15.7% of Encore at the time of Encore's initial public
offering in July 1999 are not parties to this note guaranty and could indirectly
benefit from it.
In addition to the note guaranty, we and certain other stockholders of
Encore, including our present and former officers referred to above who had
invested in Encore prior to its initial public offering, on a joint and several
basis, have entered into guaranties and agreements to guarantee up to $15.0
million of revolving credit borrowings of a subsidiary of Encore. We would be
responsible for approximately $1.8 million assuming the full $15.0 million was
borrowed and all of the parties, besides us, to the guaranties of the revolving
credit borrowings and certain related agreements fully perform thereunder. We
are informed that as of June 30, 2002, Encore had $8.3 million of outstanding
revolving credit borrowings. At June 30, 2002 we had a $15.1 million
interest-bearing deposit in a custodial account at the financial institution
providing the revolving credit facility. Under the guaranties of the revolving
credit borrowings, this deposit is subject to set off under certain
circumstances if the parties to these guaranties of the revolving credit
borrowings and related agreements fail to perform their obligations thereunder.
Encore has encountered cash flow and liquidity difficulties in the past.
However, Encore's capital was positively impacted by the debt forgiveness and
capital investment discussed above. Encore has also returned to profitability,
reporting net income available to common stockholders in its 2002 first quarter,
representing Encore's most recent results publicly available at this time. While
it is not currently possible to determine if Encore may default on any of its
obligations, we believe that it is possible, but not probable, that we will be
required to make payments under the note guaranty and/or the bank guaranties.
Capital Expenditures
Cash capital expenditures amounted to less than $0.1 million during the six
months ended June 30, 2002. We expect that cash capital expenditures will
approximate $0.2 million for the remaining six months of 2002 for which there
were no outstanding commitments as of June 30, 2002. In addition, during the
2002 second quarter, we purchased a fractional interest in the use of a
helicopter for $1.2 million in conjunction with the termination of a lease of a
helicopter.
Acquisitions and Investments
On July 17, 2002, we submitted a revised bid to acquire Sybra, Inc. and its
affiliate, Sybra of Connecticut, Inc., subsidiaries of I.C.H. Corporation which
we collectively refer to as Sybra. Previously on May 1, 2002, we announced that
we had submitted our original bid to acquire Sybra. Sybra and ICH filed for
protection under chapter 11 of the United States Bankruptcy Code on February 5,
2002 in order to restructure their financial obligations. Sybra owns and
operates 239 Arby's restaurants and is the second largest franchisee of Arby's
restaurants. Under the revised bid, we offered to make a $14.5 million
investment in Sybra on terms to be agreed upon. In addition, we offered to make
approximately $3.5 million available to be paid to ICH's creditors. That bid
expired unaccepted on July 26, 2002. On July 29, 2002, Sybra notified us of its
intention to proceed with a plan of reorganization pursuant to which Sybra would
be acquired by an entity controlled by our largest franchisee and Sybra's
incumbent senior management. On August 1, 2002, we filed a motion with the
bankruptcy court seeking to terminate the exclusive right of Sybra/ICH to
propose a reorganization plan and seeking the right to propose a competing plan
of reorganization pursuant to which Sybra would be acquired by us. On August 7,
2002, we agreed with the official committee of unsecured creditors of ICH and
Sybra that any plan of reorganization offered by us or any further offer by us
to acquire Sybra would provide that we would make not less than $4.5 million
available to be paid to ICH's non-insider general unsecured creditors. Oral
arguments on our motion were heard on August 8, 2002, at which time the court
terminated ICH's and Sybra's exclusive right to file a plan of reorganization.
The court also set a deadline of September 13, 2002 for the competing bidders to
file their proposed plans and scheduled hearings on October 7, 2002 to determine
the adequacy of the disclosure statements for those plans and November 12, 2002
to determine which of the competing plans is to be approved. At this time, it is
not possible to determine the outcome of our efforts to acquire Sybra.
As of June 30, 2002, we have $658.2 million of cash, cash equivalents and
investments, including $39.6 million of investments classified as non-current
and net of $14.6 million of short-term investments sold with an obligation for
us to purchase included in "Accrued expenses" in our accompanying condensed
consolidated balance sheet. We also had $32.5 million of restricted cash
equivalents including $30.5 million held in a reserve account related to the
Securitization Notes. The non-current investments include $22.7 million of
investments in the Trusts designated to satisfy the deferred compensation
payable to related parties. We continue to evaluate strategic opportunities for
the use of our significant cash and investment position, including additional
business acquisitions, repurchases of Triarc common shares (see "Treasury Stock
Purchases" below) and investments.
Income Taxes
We are not currently under examination by the Internal Revenue Service and
our Federal income tax returns have not been examined for years subsequent to
1993.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant, to repurchase up to $50.0 million of our class A common stock under a
stock repurchase program that, as extended, ends on January 18, 2003. Under this
program, we repurchased 149,000 shares for a total cost of $3.5 million during
our fiscal year 2001. We did not repurchase any shares during the 2002 first
half. However, we repurchased 125,000 shares for a total cost of $3.1 million
during July 2002. We cannot assure you that we will repurchase any additional
shares under the remaining $43.4 million authorized under this program.
Discontinued Operations
The agreement relating to the October 25, 2000 sale of our former beverage
businesses provides for a post-closing adjustment, the amount of which is in
dispute. The purchaser has stated that it believes that it is entitled to
receive from us a post-closing adjustment of $27.6 million and we, on the other
hand, have stated that we believe that we are entitled to receive from the
purchaser a post-closing adjustment of $5.6 million, in each case plus interest
at 7.19% from October 25, 2000. We are in arbitration with the purchaser to
determine the amount of the post-closing adjustment. We expect the arbitration
process to be completed in the fourth quarter of 2002.
Cash Requirements
As of June 30, 2002, our consolidated cash requirements for continuing
operations for the remaining six months of 2002, exclusive of operating cash
flow requirements, consist principally of (1) the cost of business acquisitions,
if any, including the potential acquisition of Sybra, (2) scheduled debt
principal repayments aggregating $12.4 million, (3) a maximum of $46.5 million
of payments for repurchases of our class A common stock for treasury under our
current stock repurchase program, of which $3.1 million of repurchases were made
in July 2002 and (4) capital expenditures of approximately $0.2 million. Our
consolidated cash requirements relating to discontinued operations for the
second half of 2002 consist principally of the post-closing adjustment, if any,
of up to $27.6 million plus related accrued interest in connection with the sale
of our former beverage businesses. We anticipate meeting all of these
requirements through (1) an aggregate $618.6 million of existing cash and cash
equivalents and short-term investments, net of $14.6 million of short-term
investments sold with an obligation for us to purchase, and (2) cash flows from
continuing operating activities.
Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc., a
non-operating subsidiary of ours, 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 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 October 2001, an environmental
consultant engaged by the Florida Department of Environmental Protection
conducted a preliminary investigation of the site, including soil and
groundwater sampling. A final report by the environmental consultant received in
April 2002 identified contamination of the soil and groundwater at the site and
indicated that the environmental consultant believed that further unspecified
action is warranted at the site. Adams Packing has engaged an environmental
consultant that is currently conducting further investigation of the site
pursuant to an agreement with the Florida Department of Environmental
Protection. The investigation by Adams Packing's environmental consultant is
intended to determine the extent of the soil and groundwater contamination and
the appropriate remediation for that contamination. This investigation is
currently at an early stage and the nature and extent of the remediation that
will ultimately be required cannot be determined with exact certainty. However,
based on a preliminary cost estimate developed by the environmental consultant
and after taking into consideration various legal defenses available to us,
including Adams Packing, Adams Packing has provided for its estimate of its
liability for this matter which is included in the total reserves for legal and
environmental matters set forth below.
As discussed more fully in our Form 10-K, on March 23, 1999 a stockholder
filed a complaint against us and the Executives on behalf of persons who held
our class A common stock which, as amended, alleges that our tender offer
statement filed with the Securities and Exchange Commission, pursuant to which
we repurchased 3.8 million shares of our class A common stock for $18.25 per
share, was materially false and misleading. We and the Executives have moved for
summary judgment dismissing the action and the plaintiff has moved to certify a
class. The court is scheduled to hear argument on the motions on August 26,
2002.
In addition to the environmental matter and stockholder lawsuit described
above, we are involved in other litigation and claims incidental to our
business. We and our subsidiaries have reserves for all of these legal and
environmental matters aggregating $3.0 million as of June 30, 2002. 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 Triarc and/or its
subsidiaries, and given the aforementioned reserves, we do not believe that
these legal and environmental matters will have a material adverse effect on our
consolidated financial position or results of operations.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant franchising royalty revenues are somewhat higher in our
fourth quarter and somewhat lower in our first quarter.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." Statement 143 addresses financial accounting and reporting for
legal obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. Statement 143 requires that the
discounted fair value of an asset retirement obligation be recorded as a
liability in the period in which it is incurred or as soon thereafter as a
reasonable estimate of fair value can be made, with a corresponding increase to
the carrying amount of the long-lived asset. The capitalized cost is depreciated
over the useful life of the related asset. The provisions of Statement 143 are
effective starting with the first quarter of 2003. We do not believe that any of
our tangible long-lived assets presently have material associated retirement
obligations and, accordingly, we do not expect that the adoption of Statement
143 will have any immediate effect on our consolidated financial position or
results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Statement 145 most significantly rescinds Statement 4, "Reporting Gains and
Losses from Extinguishment of Debt," which required that gains and losses from
extinguishment of debt that were included in the determination of net income be
aggregated and, if material, classified as an extraordinary item, net of related
tax effect. Under Statement 145, any gains and losses from extinguishment of
debt will be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Those criteria specify that extraordinary items must be both unusual in their
nature and infrequent in their occurrence. The provisions of Statement 145 with
respect to the rescission of Statement 4 must be adopted no later than our
fiscal year beginning December 30, 2002 with early adoption encouraged and
require that prior periods presented be reclassified accordingly. Upon adoption
of Statement 145, we expect that any future period charges relating to the early
extinguishment of debt will not meet the criteria of extraordinary items under
Opinion 30 and therefore will be reported as a component of costs and expenses
on a pretax basis with any applicable income tax benefit included in our
provision for or benefit from income taxes. This change in classification would
not have any impact on our reported net income or loss. We reported an
extraordinary charge of $20.7 million, net of tax benefit of $12.3 million, for
the year ended December 31, 2000. We currently do not plan to early adopt this
statement; however should we decide to early adopt, we would be required to
reclassify the extraordinary charge for the 2000 fiscal year in our Form 10-K
for the year ended December 29, 2002 in accordance with the provisions of
Statement 145.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." Statement 146 replaces the previous accounting
guidance provided by Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," of the Emerging Issues Task Force of the
Financial Accounting Standards Board. Under Statement 146, costs associated with
exit or disposal activities will be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan under Issue 94-3.
Examples of costs covered by Statement 146 include contract termination costs,
including leases, and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Statement 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Statement 146 was only
recently issued and we have not yet evaluated the potential impact it will have
on us. However, since it is to be applied prospectively to activities initiated
after December 31, 2002, it will not have any immediate effect on our
consolidated financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This "Quantitative and Qualitative Disclosures about Market Risk" 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 30, 2001. 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
and our "Foreign Currency Risk," both as referred to below.
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 the
market value of our investments and, to a lesser extent, foreign currency
fluctuations.
Policies and procedures - In the normal course of business, we employ
established policies and procedures to manage our exposure to changes in
interest rates, changes in the market value of our investments and fluctuations
in the value of foreign currencies using financial instruments we deem
appropriate.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit
the impact of interest rate changes on earnings and cash flows. We generally use
interest rate caps or interest rate swap agreements on a portion of our
variable-rate debt to limit our exposure to the effects of increases in
short-term interest rates on earnings and cash flows. We did not enter into any
new interest rate caps or swaps during the 2002 first half. As of June 30, 2002,
our long-term debt, including current portion, aggregated $301.7 million and
consisted of $281.8 million of fixed-rate debt and $19.9 million of a
variable-rate bank loan. The fair market value of our fixed-rate debt will
increase if interest rates decrease. In addition to our fixed-rate and
variable-rate debt, our investment portfolio includes debt securities that are
subject to interest rate risk with maturities which range from less than one
year to nearly thirty years. The fair market value of all of our investments in
debt securities will decline if interest rates increase.
Equity Market Risk
Our objective in managing our exposure to changes in the market value of
our investments is to balance the risk of the impact of such changes on earnings
and cash flows with our expectations for long-term investment returns. Our
primary exposure to equity price risk relates to our investments in equity
securities, equity derivatives, securities sold with an obligation for us to
purchase and investment limited partnerships and similar investment entities. We
have established policies and procedures governing the type and relative
magnitude of investments we may make. We have a management investment committee
whose duty it is to supervise the investment of funds not currently required for
the Company's operations and the Company's Board of Directors establishes
certain investment policies to be followed by the management investment
committee.
Foreign Currency Risk
We had no significant changes in our management of, or our exposure to,
foreign currency fluctuations during the 2002 first half.
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