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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 29, 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
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 451-3000
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(X) Yes ( ) No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
(X) Yes ( ) No
There were 20,347,939 shares of the registrant's Class A Common Stock
outstanding as of the close of business on October 31, 2002.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, September 29,
2001 (A) 2002
-------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 506,461 $ 444,238
Short-term investments............................................................ 153,401 190,869
Receivables....................................................................... 14,969 13,696
Deferred income tax benefit....................................................... 11,495 12,057
Prepaid expenses.................................................................. 3,435 1,920
---------- ----------
Total current assets........................................................... 689,761 662,780
Restricted cash equivalents............................................................ 32,506 32,484
Investments............................................................................ 42,074 37,755
Properties............................................................................. 60,989 56,558
Goodwill .............................................................................. 17,922 17,922
Other intangible assets................................................................ 5,472 5,080
Deferred costs and other assets........................................................ 19,685 18,708
---------- ----------
$ 868,409 $ 831,287
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................$ 24,768 $ 25,925
Accounts payable.................................................................. 2,941 3,800
Accrued expenses.................................................................. 73,453 64,759
Net current liabilities relating to discontinued operations....................... 31,962 32,319
---------- ----------
Total current liabilities...................................................... 133,124 126,803
Long-term debt......................................................................... 288,955 269,710
Deferred compensation payable to related parties....................................... 24,356 24,837
Deferred income taxes.................................................................. 69,606 66,629
Deferred income, other liabilities and minority interests in a consolidated subsidiary. 19,971 19,447
Stockholders' equity:
Common stock...................................................................... 2,955 2,955
Additional paid-in capital........................................................ 129,608 131,549
Retained earnings................................................................. 359,652 348,540
Common stock held in treasury..................................................... (160,639) (158,907)
Accumulated other comprehensive income (deficit).................................. 821 (276)
---------- ----------
Total stockholders' equity..................................................... 332,397 323,861
---------- ----------
$ 868,409 $ 831,287
========== ==========
(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 Nine Months Ended
--------------------------- ----------------------------
September 30, September 29, September 30, September 29,
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................$ 24,042 $ 25,671 $ 67,931 $ 72,889
Investment income (loss), net........................... 5,906 (441) 29,229 706
Other income (expense), net............................. 320 427 9,501 (1,019)
--------- --------- -------- ---------
Total revenues, investment income (loss) and
other income (expense)............................. 30,268 25,657 106,661 72,576
--------- --------- -------- ---------
Costs and expenses:
General and administrative.............................. 21,141 20,150 58,175 58,987
Depreciation and amortization, excluding amortization
of deferred financing costs.......................... 1,554 1,605 4,719 4,860
Interest expense........................................ 7,122 6,839 23,485 20,002
Insurance expense related to long-term debt............. 1,184 1,109 3,624 3,414
Costs of proposed business acquisitions not consummated. 481 2,100 572 2,232
--------- --------- -------- ---------
Total costs and expenses............................. 31,482 31,803 90,575 89,495
--------- --------- -------- ---------
Income (loss) from continuing operations
before income taxes and minority interests ... (1,214) (6,146) 16,086 (16,919)
Benefit from (provision for) income taxes................... (554) 2,582 (8,686) 3,552
Minority interests in loss of a consolidated subsidiary..... -- 1,009 -- 2,255
--------- --------- -------- ---------
Income (loss) from continuing operations......... (1,768) (2,555) 7,400 (11,112)
Discontinued operations:
Gain on disposal, net of income taxes................... -- -- 38,517 --
--------- --------- -------- ---------
Net income (loss)................................$ (1,768) $ (2,555) $ 45,917 $ (11,112)
========= ========= ======== =========
Basic income (loss) per share:
Continuing operations............................$ (.08) $ (.12) $ .34 $ (.54)
Discontinued operations.......................... -- -- 1.75 --
--------- --------- -------- ---------
Net income (loss)................................$ (.08) $ (.12) $ 2.09 $ (.54)
========= ========= ======== =========
Diluted income (loss) per share:
Continuing operations............................$ (.08) $ (.12) $ .32 $ (.54)
Discontinued operations.......................... -- -- 1.66 --
--------- --------- -------- ---------
Net income (loss)................................$ (.08) $ (.12) $ 1.98 $ (.54)
========= ========= ======== =========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
----------------------------------
September 30, September 29,
2001 2002
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss)....................................................................$ 45,917 $ (11,112)
Adjustments to reconcile net income (loss) to net cash provided by continuing
operating activities:
Operating investment adjustments, net (see below)............................... (5,412) 7,954
Depreciation and amortization of properties..................................... 3,058 4,203
Amortization of goodwill ....................................................... 632 --
Amortization of other intangible assets and certain other items................. 1,029 657
Amortization of deferred financing costs and original issue discount............ 1,570 1,432
Collection (recognition) of litigation settlement receivable.................... (3,333) 1,667
Equity in losses of investees, net.............................................. 201 487
Deferred compensation provision ................................................ 1,089 481
Deferred income tax benefit..................................................... (2,978) (2,977)
Minority interests in loss of a consolidated subsidiary......................... -- (2,255)
Income from discontinued operations............................................. (38,517) --
Other, net...................................................................... 795 1,420
Changes in operating assets and liabilities:
Decrease (increase) in receivables........................................... (371) 1,138
Decrease (increase) in prepaid expenses...................................... (1,214) 1,515
Decrease in accounts payable and accrued expenses............................ (1,369) (4,266)
---------- ----------
Net cash provided by continuing operating activities...................... 1,097 344
---------- ----------
Cash flows from continuing investing activities:
Investment activities, net (see below)............................................... 7,860 (45,791)
Purchase of fractional interest in corporate aircraft................................ -- (1,200)
Capital expenditures................................................................. (25,158) (30)
Other................................................................................ (6) (400)
---------- ----------
Net cash used in continuing investing activities.......................... (17,304) (47,421)
---------- ----------
Cash flows from continuing financing activities:
Proceeds from long-term debt......................................................... 22,590 --
Repayments of long-term debt......................................................... (12,335) (18,090)
Repurchases of common stock for treasury............................................. (49,576) (3,147)
Proceeds from stock option exercises................................................. 4,785 5,439
Release of restricted cash equivalents collateralizing long-term debt................ 1,068 295
Deferred financing costs............................................................. (625) --
---------- ----------
Net cash used in continuing financing activities.......................... (34,093) (15,503)
---------- ----------
Net cash used in continuing operations.................................................. (50,300) (62,580)
Net cash provided by (used in) discontinued operations.................................. (182,765) 357
---------- ----------
Net decrease in cash and cash equivalents............................................... (233,065) (62,223)
Cash and cash equivalents at beginning of period........................................ 596,135 506,461
---------- ----------
Cash and cash equivalents at end of period..............................................$ 363,070 $ 444,238
========== ==========
Details of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities..........................................$ 55,992 $ 37,122
Cost of trading securities purchased............................................... (52,097) (38,853)
Net recognized (gains) losses from trading securities and short positions in
securities...................................................................... (417) 612
Other net recognized (gains) losses, including other than temporary losses,
and equity in investment limited partnerships................................... (2,121) 8,619
Net amortization of premium (accretion of discount) on debt securities............. (6,769) 454
---------- ----------
$ (5,412) $ 7,954
========== ==========
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments.................................................................... $ 106,943 $ 47,836
Cost of available-for-sale securities and other investments purchased.............. (95,027) (98,035)
Proceeds of securities sold short.................................................. 17,481 31,254
Payments to cover short positions in securities.................................... (21,537) (26,846)
---------- ----------
$ 7,860 $ (45,791)
========== ==========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 29, 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 5), necessary to present fairly the Company's financial
position as of December 30, 2001 and September 29, 2002, its results of
operations for the three and nine-month periods ended September 30, 2001 and
September 29, 2002 and its cash flows for the nine-month periods ended September
30, 2001 and September 29, 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 nine-month
period of fiscal 2001 commenced on January 1, 2001 and ended on September 30,
2001, with its third quarter of 2001 commencing on July 2, 2001. The Company's
first nine-month period of fiscal 2002 commenced on December 31, 2001 and ended
on September 29, 2002, with its third quarter of 2002 commencing on July 1,
2002. The periods from July 2, 2001 to September 30, 2001 and January 1, 2001 to
September 30, 2001 are referred to herein as the three-month and nine-month
periods ended September 30, 2001, respectively. The periods from July 1, 2002 to
September 29, 2002 and December 31, 2001 to September 29, 2002 are referred to
herein as the three-month and nine-month periods ended September 29, 2002,
respectively. Each quarter contained 13 weeks and each nine-month period
contained 39 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 $17,922,000 as of December 30, 2001 and September 29, 2002, are no
longer amortized effective December 31, 2001. SFAS 142 requires that Goodwill be
tested for impairment at least annually by applying a fair value-based test. The
Company has determined that there was no impairment of Goodwill upon adoption of
SFAS 142. Further, the Company has determined that all of its other intangible
assets, principally trademarks, have finite useful lives and, accordingly, will
continue to be amortized.
The following sets forth information on other intangible assets subject to
amortization (in thousands):
September 29, 2002
--------------------------------
Accumulated
Cost Amortization Net
---- ------------ ---
Trademarks..................................................................$ 7,776 $ 2,919 $ 4,857
Computer software and distribution rights................................... 414 191 223
-------- -------- --------
$ 8,190 $ 3,110 $ 5,080
======== ======== ========
Aggregate amortization expense:
Actual:
Three months ended September 29, 2002..........$ 173
Nine months ended September 29, 2002........... 520
Estimate for fiscal year:
2002...........................................$ 689
2003........................................... 677
2004........................................... 558
2005........................................... 558
2006........................................... 558
The following is a reconciliation of reported net income (loss) and income
(loss) 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 September 30, 2001 Nine Months Ended September 30, 2001
------------------------------------- ------------------------------------
As Reported Adjustment Pro Forma As Reported Adjustment Pro Forma
----------- ---------- --------- ----------- ---------- ---------
Net income (loss)..............$ (1,768) $ 208 $ (1,560) $ 45,917 $ 623 $ 46,540
Net income (loss) per share:
Basic....................... (.08) .01 (.07) 2.09 .03 2.12
Diluted ................... (.08) .01 (.07) 1.98 .03 2.01
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 nine months ended September
29, 2002 all of its long-lived assets that required testing for impairment were
recoverable and did not require the recognition of any associated impairment
loss. Accordingly, the adoption of SFAS 144 had no effect on the Company's
consolidated financial position or results of operations for the three and
nine-month periods ended September 29, 2002.
(3) Pending Proposed Acquisition
The Company has submitted a proposal to acquire the second largest
franchisee of Arby's restaurants, Sybra, Inc. and its affiliate, Sybra of
Connecticut, Inc. (collectively, "Sybra"), which are subsidiaries of I.C.H.
Corporation ("ICH"). Sybra owns and operates 239 Arby's restaurants. ICH and
Sybra had filed for protection under chapter 11 of the United States Bankruptcy
Code on February 5, 2002 in order to restructure their financial obligations.
The Company has filed a proposed chapter 11 plan of reorganization for ICH/Sybra
which, as amended most recently on October 23, 2002, provides for the Company's
purchase of Sybra in exchange for $8,000,000 to be paid to ICH's general
unsecured creditors and the Company's agreement to pay certain other amounts
(the "Obligations") which, based on estimates prepared by ICH/Sybra, are not
expected to be substantial. In addition, the Company will invest $14,500,000,
less the amount necessary to fund the Obligations, in Sybra, which amount will
be used to pay Sybra's unsecured creditors and to fund working capital
requirements. Furthermore, the Company will make available to, or obtain for,
Sybra a $5,000,000 financing facility for each of three years following the
acquisition (up to $15,000,000 in the aggregate) to fund any operating
shortfalls of Sybra. Sybra will remain exclusively liable for its long-term debt
and capital lease obligations which aggregated approximately $104,000,000 as of
December 31, 2001, the most recent date for which this information is available.
ICH/Sybra filed its own chapter 11 plan of reorganization which, as amended most
recently on October 17, 2002, proposes the acquisition of Sybra by an affiliate
of RTM, Inc., the largest franchisee of Arby's restaurants. The bankruptcy court
presiding over the ICH/Sybra chapter 11 cases set a hearing for November 25,
2002 to consider approval of the competing chapter 11 plans. At this time, it is
not possible to determine the outcome of the hearing and, as a result, the
Company's efforts to acquire Sybra.
(4) Comprehensive Income (Loss)
The following is a summary of the components of comprehensive income
(loss), net of income taxes (in thousands):
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 30, September 29, September 30, September 29,
2001 2002 2001 2002
---- ---- ---- ----
Net income (loss).......................................$ (1,768) $ (2,555) $ 45,917 $ (11,112)
Net change in unrealized holding gains or losses on
available-for-sale securities (see below)............. (2,600) 47 (3,365) (1,062)
Net change in currency translation adjustment........... (28) (9) 4 (35)
---------- --------- ---------- ----------
Comprehensive income (loss).............................$ (4,396) $ (2,517) $ 42,556 $ (12,209)
========== ========= ========== ==========
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 Nine Months Ended
----------------------------- ----------------------------
September 30, September 29, September 30, September 29,
2001 2002 2001 2002
---- ---- ---- ----
Net change in unrealized appreciation or depreciation
of available-for-sale securities during the period....$ (3,975) $ (336) $ (3,488) $ (336)
(Less) plus reclassification of prior period net
(appreciation) depreciation included in net income
or loss............................................... (36) 422 (1,428) (1,334)
---------- --------- ---------- ----------
(4,011) 86 (4,916) (1,670)
Change in equity in unrealized gain on a retained
interest.............................................. -- (11) (245) 46
Income tax (provision) benefit.......................... 1,411 (28) 1,796 562
---------- --------- ---------- ----------
$ (2,600) $ 47 $ (3,365) $ (1,062)
========== ========= ========== ==========
(5) 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
currently believes that it is entitled to receive from the Company a
post-closing adjustment of $23,189,000 and the Company, on the other hand, has
stated that it currently believes that it is entitled to receive from Cadbury a
post-closing adjustment of $773,000, in each case plus interest at 7.19% from
October 25, 2000. The Company is in arbitration with Cadbury to determine the
amount of the post-closing adjustment. The Company expects the arbitration
process to be completed in the first quarter of 2003.
Net current liabilities relating to discontinued operations consisted of
the following (in thousands):
December 30, September 29,
2001 2002
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Operations.................................................................$ 29,067 $ 29,504
Net liabilities of SEPSCO Operations (net of assets held for sale of $234)... 2,895 2,815
----------- -----------
$ 31,962 $ 32,319
=========== ===========
(6) Income (Loss) Per Share
Basic income (loss) per share has been computed by dividing net income or
loss by the weighted average number of common shares outstanding of 21,206,000
and 20,507,000 for the three-month periods ended September 30, 2001 and
September 29, 2002, respectively, and 21,921,000 and 20,471,000 for the
nine-month periods ended September 30, 2001 and September 29, 2002,
respectively. Diluted loss per share for the three-month periods ended September
30, 2001 and September 29, 2002 and the nine-month period ended September 29,
2002 is the same as the basic loss per share since the Company reported a loss
from continuing operations and, therefore, the effect of all potentially
dilutive securities on the loss from continuing operations would have been
antidilutive. Diluted income per share for the nine-month period ended September
30, 2001 has been computed by dividing the income by an aggregate 23,150,000
shares which include the 1,229,000 potential common share effect of dilutive
stock options computed using the treasury stock method. The shares for diluted
income per share for the nine-month period ended September 30, 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 from continuing
operations per share in that period would have been antidilutive.
(7) 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 $286,000 and
$98,000 included in "General and administrative" in the accompanying condensed
consolidated statements of operations for the nine-month periods ended September
30, 2001 and September 29, 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 Company recorded the $150,000 during the
three-month period ended June 30, 2002 when the lease was terminated and it is
included in "General and administrative" for the nine-month period ended
September 29, 2002.
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 nine-month period ended September 30, 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 $107,000 and $56,000 for the nine-month
periods ended September 30, 2001 and September 29, 2002, respectively. In March
of 2001 and 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 nine-month periods ended
September 30, 2001 and September 29, 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 September 29, 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
nine-month periods ended September 30, 2001 and September 29, 2002 resulted in
deferred compensation expense of $1,089,000 and $481,000, respectively, included
in "General and administrative." 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
nine-month period ended September 30, 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 nine-month period ended September 29, 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 Note 24 ("Note 24") to the consolidated
financial statements contained in the Form 10-K regarding related party
transactions, 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 nine-month period ended
September 29, 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 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 Holdings, LLC ("280 KPE") due to the worthlessness of the
underlying investments held by 280 KPE. Such non-recourse notes were forgiven
during March 2002. During the nine months ended September 29, 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. During that period the Company also collected $90,000 of notes and
$3,000 of related accrued interest in connection with co-investments in EBT
Holding Company LLC and $50,000 of notes and $2,000 of related accrued interest
in connection with a co-investment in 280 BT Holdings LLC ("280 BT"). In
addition, in September 2002, a former officer of the Company surrendered 1.5% of
his 2.5% co-investment interest in 280 BT to the Company in settlement of a
$50,000 non-recourse loan made to him in connection with that co-investment and
$2,000 of related accrued interest, resulting in an increase in the Company's
ownership percentage to 57.4% from 55.9%. Such settlement resulted in a pretax
gain to the Company of $48,000 consisting of a reduction of the minority
interests in 280 BT of $100,000 as a result of the Company now owning the 1.5%
surrendered interest less the $52,000 charge for the extinguishment of the
$50,000 non-recourse note plus related accrued interest. This gain is before the
recognition of additional losses deemed to be other than temporary in
investments owned by 280 BT during the three-month period ended September 29,
2002. The reduction of the minority interests was included as a credit to
"Minority interests in loss of a consolidated subsidiary" and the charge for the
extinguishment of the note was included in "General and administrative" in the
accompanying condensed consolidated statements of operations for the three and
nine-month periods ended September 29, 2002. Under the Company's co-investment
policy, as of September 29, 2002 the Company had in total $2,347,000 principal
amount of co-investment notes receivable from management, of which $1,174,000
were non-recourse. These notes are included in "Deferred costs and other assets"
in the accompanying condensed consolidated balance sheets.
Also as disclosed in Note 24, the Company has an investment in Scientia
Health Group Limited ("Scientia") through its current 57.4% ownership of 280 BT
(see previous paragraph). In July 2002, the executive chairman of the board of
Scientia resigned and in October 2002 pled guilty to certain charges in an
indictment by a Federal grand jury. The Company is monitoring the effect this
resignation and guilty plea has had and may continue to 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 originally invested by the
Company. Management originally 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 which as of September 29, 2002 aggregate
$1,550,000 outstanding, of which $775,000 are non-recourse. These notes are
included in the total $2,347,000 aggregate principal amount of co-investment
notes receivable as of September 29, 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 September 29, 2002, the carrying value of the investment in
Scientia was the gross amount of $2,419,000, effectively reduced by minority
interests of $1,031,000. The gross carrying value represents the original cost
less adjustments aggregating $2,581,000 for unrealized losses in investments
made by Scientia that were deemed to be other than temporary, effectively
reduced by minority interests of $1,107,000. One of the Executives serves on
Scientia's board of directors.
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 nine-month period ended September 29, 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's investment in the common stock of
Encore is accounted for in accordance with the equity method while the
investment in the preferred stock of Encore is accounted for in accordance with
the cost method. 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 nine-month
period ended September 29, 2002. The Company also recognized $266,000 of its
equity in earnings of Encore during the nine-month period ended September 29,
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 nine-month
period ended September 29, 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.
(8) 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 its
own environmental consultant that, under the supervision of the FDEP, has
conducted a further investigation of the site that was intended to develop
additional information on the extent and nature of the soil and groundwater
contamination and the appropriate remediation for that contamination. Adams'
environmental consultant has submitted to the FDEP a summary of the results of
this investigation with a proposal for remediation and monitoring of the
identified contamination. The FDEP has responded by requesting certain
additional investigative and remedial work. Adams currently intends to negotiate
a work plan that is acceptable to the FDEP and is not materially more costly
than Adams' original proposal which is estimated to cost approximately
$1,000,000. Based on the preliminary cost estimate and Adams' intent to
negotiate a work plan that does not materially exceed that estimate, 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, including related legal and consulting fees. Such provision was made
primarily during the three-month period ended June 30, 2002 principally as a
reduction of gain on sale of businesses in "Other income (expense), net" in the
accompanying condensed consolidated statement of operations for the nine-month
period ended September 29, 2002 since the provision represents an adjustment to
the previously recorded gain on the sale of Adams.
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, alleged 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.
On October 17, 2002 this action was dismissed by the court presiding over this
matter. The stockholder has until November 25, 2002 to file a notice of appeal.
In addition to the environmental matter and stockholder lawsuit described
above, the Company is involved in other litigation and claims incidental to its
business. Triarc and its subsidiaries have reserves for all of their legal and
environmental matters aggregating $2,800,000 as of September 29, 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 the outcome of its legal and environmental matters will have a
material adverse effect on its consolidated financial position or results of
operations.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" 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."
As discussed in more detail below under "Liquidity and Capital Resources -
Acquisitions and Investments," we have submitted a proposal to acquire the
second largest franchisee of Arby's restaurants. The forward-looking statements
we make in this Item 2 exclude any effects that this proposed acquisition, if
consummated, would have on our post-acquisition results of operations and cash
flows.
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. Our first nine-month period of fiscal 2001
commenced on January 1, 2001 and ended on September 30, 2001, with our third
quarter of 2001 commencing on July 2, 2001. Our first nine-month period of
fiscal 2002 commenced on December 31, 2001 and ended on September 29, 2002, with
our third quarter of 2002 commencing on July 1, 2002. When we refer to the
"three months ended September 30, 2001," or the "2001 third quarter," and the
"nine months ended September 30, 2001," or the "first nine months of 2001," we
mean the periods from July 2, 2001 to September 30, 2001 and January 1, 2001 to
September 30, 2001, respectively. When we refer to the "three months ended
September 29, 2002," or the "2002 third quarter," and the "nine months ended
September 29, 2002," or the "first nine months of 2002," we mean the periods
from July 1, 2002 to September 29, 2002 and December 31, 2001 to September 29,
2002, respectively. Each quarter contained 13 weeks and each nine-month period
contained 39 weeks.
Certain amounts presented in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the three and nine-month
periods ended September 30, 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 three months ended September 30, 2001 and September 29,
2002 and (2) the nine months ended September 30, 2001 and September 29, 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." The percentages
used in the following discussion have been rounded to the nearest whole
percentage.
Three Months Ended Nine Months Ended
--------------------------- Change --------------------------- Change
September 30, September 29, --------------- September 30, September 29, -----------------
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 ..................................$ 24.1 $ 25.7 $ 1.6 7 % $ 68.0 $ 72.9 $ 4.9 7 %
Investment income (loss), net ........... 5.9 (0.4) (6.3) (107)% 29.2 0.7 (28.5) (98)%
Other income (expense), net ............ 0.3 0.4 0.1 33 % 9.5 (1.0) (10.5) (111)%
------ ------- ------ ------- ------- ------
Total revenues, investment income
(loss) and other income (expense).. 30.3 25.7 (4.6) (15)% 106.7 72.6 (34.1) (32)%
------ ------- ------ ------- ------- ------
Costs and expenses:
General and administrative .............. 21.2 20.2 (1.0) (5)% 58.2 59.0 0.8 1 %
Depreciation and amortization,
excluding amortization of deferred
financing costs ....................... 1.5 1.6 0.1 3 % 4.7 4.9 0.2 3 %
Interest expense ........................ 7.1 6.8 (0.3) (4)% 23.5 20.0 (3.5) (15)%
Insurance expense related to long-term
debt................................... 1.2 1.1 (0.1) (6)% 3.6 3.4 (0.2) (6)%
Costs of proposed business acquisitions
not consummated........................ 0.5 2.1 1.6 n/m 0.6 2.2 1.6 n/m
------ ------- ------- ------- ------- ------
Total costs and expenses ............ 31.5 31.8 0.3 1 % 90.6 89.5 (1.1) (1)%
------ ------- ------- ------- ------- ------
Income (loss) from continuing
operations before income taxes
and minority interests........... (1.2) (6.1) (4.9) n/m 16.1 (16.9) (33.0) n/m
Benefit from (provision for) income taxes .. (0.6) 2.5 3.1 n/m (8.7) 3.5 12.2 n/m
Minority interests in loss of a
consolidated subsidiary................... -- 1.0 1.0 n/m -- 2.3 2.3 n/m
------ ------- ------- ------- ------- ------
Income (loss) from continuing
operations....................... (1.8) (2.6) (0.8) n/m 7.4 (11.1) (18.5) n/m
Discontinued operations..................... -- -- -- n/m 38.5 -- (38.5) n/m
------ ------- ------- ------- ------- ------
Net income (loss)....................$ (1.8) $ (2.6) $ (0.8) n/m $ 45.9 $ (11.1) $(57.0) n/m
====== ======= ======= ======= ======= ======
Three Months Ended September 29, 2002 Compared with Three Months Ended
September 30, 2001
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which are generated entirely
from our restaurant franchising business, increased $1.6 million, or 7%, to
$25.7 million for the three months ended September 29, 2002 from $24.1 million
for the three months ended September 30, 2001 reflecting a $1.5 million, or 7%,
increase in royalties and a $0.1 million, or 11%, increase in franchise and
related fees. The increase in royalties consisted of (1) a $0.9 million
improvement due to an under 5% increase in same-store sales of franchised
restaurants and (2) a $0.6 million improvement resulting from the royalties from
114 restaurants opened since September 30, 2001, with generally higher than
average sales volumes, replacing the royalties from the 73 generally
underperforming restaurants closed since September 30, 2001. The increase in
franchise and related fees was principally due to a decrease in franchise fee
credits earned by franchisees under our remodeling incentive program in the 2002
third quarter compared with the 2001 third quarter. We currently anticipate a
continued combined increase in royalties and franchise and related fees for the
2002 fourth quarter compared with the 2001 fourth quarter but at a much lower
rate than the 7% increase experienced during the 2002 third quarter due to
anticipated lower forfeited deposits and a currently anticipated modest to no
increase in same-store sales of franchised restaurants reflecting our current
estimate of a weak beginning of the 2002 fourth quarter. Forfeited deposits in
the 2001 fourth quarter reflected the termination of a significant number of
commitments to open new franchised restaurants by one of our franchisees and we
do not expect terminations to recur at the same level in the 2002 fourth
quarter.
Our royalties and franchise fees have no associated cost of sales.
Investment Income (Loss), Net
The following table summarizes and compares the major components of
investment income (loss), net:
Three Months Ended
-----------------------------
September 30, September 29,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income................................................$ 6.6 $ 2.8 $ (3.8)
Other than temporary unrealized losses......................... (1.0) (2.9) (1.9)
Recognized net gains (losses) ................................. 0.3 (0.5) (0.8)
Equity in losses of investment limited partnerships
and similar investment entities.............................. (0.4) (0.2) 0.2
Distributions, including dividends............................. 0.5 0.5 --
Investment management and performance fees..................... (0.1) (0.1) --
-------- --------- --------
$ 5.9 $ (0.4) $ (6.3)
======== ========= ========
The decrease in the interest income is principally due to lower average
interest rates on our cash equivalents and interest-bearing short-term
investments. Average rates on our interest-bearing investments declined from
above 4% in the 2001 third quarter to below 2% in the 2002 third quarter
principally due to the general decline in the money market and short-term
interest rate environment. We currently have significant investments in cash
equivalents and we anticipate interest income will continue to be significantly
lower in the 2002 fourth quarter compared with the 2001 fourth quarter, assuming
interest rates as of September 29, 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
(losses) 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 (losses) and our other than temporary
unrealized losses presented in the above table may not recur in future periods.
As of September 29, 2002, we had pretax unrealized holding gains and losses
on available-for-sale marketable securities of $1.2 million and $1.3 million,
respectively, included in accumulated other comprehensive deficit. 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 the gains or losses on the related investments at that time. In
addition, through 280 BT Holdings LLC, a 57.4%-owned consolidated subsidiary, we
hold a $2.4 million cost basis investment, before related minority interests of
$1.0 million, in Scientia Health Group Limited, an entity which we refer to as
Scientia, whose executive chairman of the board resigned in July 2002 and pled
guilty in October 2002 to certain charges in an indictment by a Federal grand
jury. The $2.4 million investment represents original cost less adjustments for
unrealized losses in investments made by Scientia that were deemed to be other
than temporary, including $2.2 million during the 2002 third quarter. Such
amounts have been effectively reduced by minority interests of $1.0 million and
$0.9 million, respectively. We are monitoring the effect this resignation and
guilty plea has had and may continue to have on the value of our investment,
which could possibly result in the recognition of an additional other than
temporary loss in future periods. In addition, as of September 29, 2002 we have
$0.8 million of non-recourse notes receivable from management officers and
employees relating to a portion of their investments in 280 BT Holdings. If the
value of 280 BT Holding's investments should further decline and, accordingly,
we recognize additional other than temporary losses, we could also recognize
losses relating to the non-recourse notes receivable in "General and
administrative" expenses.
Other Income, Net
The following table summarizes and compares the major components of other
income, net:
Three Months Ended
-----------------------------
September 30, September 29,
2001 2002 Change
---- ---- ------
(In Millions)
Equity in earnings (losses) of investees, other than investment
limited partnerships and similar investment entities.........$ (0.1) $ 0.2 $ 0.3
Reduction in the fair value of the liability for a written
call option on our stock..................................... 0.3 -- (0.3)
Other interest income.......................................... 0.1 0.1 --
Other.......................................................... -- 0.1 0.1
-------- --------- --------
$ 0.3 $ 0.4 $ 0.1
======== ========= ========
Other income, net was relatively unchanged. The $0.3 million improvement in
equity in earnings (losses) of investees, other than investment limited
partnerships and similar investment entities, is principally due to the
recognition of equity in earnings of Encore Capital Group, Inc. (formerly MCM
Capital Group, Inc.), an 8.4% common equity investee of ours which we refer to
as Encore, during the 2002 third quarter. No such equity in earnings or losses
of Encore were recorded in the 2001 third quarter because of our having
previously reduced our investment in Encore to zero. The written call option on
our stock effectively arose upon the assumption of our zero coupon convertible
debentures by the purchaser of our former beverage businesses which remain
convertible into our class A common stock. The purchaser of our former beverage
businesses is required to take all actions reasonably necessary to call these
debentures for redemption in February 2003.
General and Administrative
Our general and administrative expenses decreased $1.0 million, or 5%,
principally due to (1) a $1.8 million decrease in incentive compensation costs,
(2) a $0.5 million decrease in the provision for uncollectible non-recourse
notes receivable from management officers and employees in accordance with their
terms relating to entities in which we and our officers and employees
co-invested and (3) a $0.4 million decrease in expenses, excluding related
depreciation and amortization, resulting from the termination in December 2001
of fractional interests in two airplanes under timeshare agreements. The $1.8
million decrease in incentive compensation is principally due to the effect in
the 2001 third quarter, which did not recur in the 2002 third quarter, under our
executive bonus plan from the positive impact on our capitalization from the
sale of our former beverage businesses. These decreases were partially offset by
(1) a $1.0 million increase in advertising expense related to an Arby's national
cable television advertising campaign and (2) a $0.8 million increase in
charitable contributions.
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%, reflecting a $0.3 million
increase attributable to the full quarter effect on depreciation in the 2002
third quarter of an airplane that was placed in service in September 2001. This
increase was substantially offset by $0.2 million of goodwill amortization in
the 2001 third 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 the 2002 fourth quarter by $0.2 million. The termination of
the aircraft timeshare agreements in December 2001 disclosed above under
"General and administrative" did not have any effect on the change in
depreciation and amortization since all remaining amortization had been recorded
in the 2001 first quarter.
Interest Expense
Interest expense decreased $0.3 million, or 4%, to $6.8 million for the
three months ended September 29, 2002 from $7.1 million for the three months
ended September 30, 2001 principally due to lower outstanding balances of our
7.44% insured non-recourse securitization notes, which we refer to as the
Securitization Notes, since the end of the 2001 third quarter.
Costs of Proposed Business Acquisitions Not Consummated
The $2.1 million of costs of a proposed business acquisition not
consummated in the 2002 third quarter were for a business acquisition proposal
we submitted in July 2002 which was not accepted. The $0.5 million of costs in
the 2001 third quarter were for other less significant proposed business
acquisitions not consummated.
Loss From Continuing Operations Before Income Taxes and Minority Interests
Our loss from continuing operations before income taxes and minority
interests increased $4.9 million to $6.1 million for the three months ended
September 29, 2002 from $1.2 million for the three months ended September 30,
2001 due to the effect of the variances explained in the captions above.
Income Taxes
The benefit from income taxes represented an effective rate of 42% for the
three months ended September 29, 2002. This 42% effective rate reflects the
catch-up effect of a year-to-date increase in the estimated full-year 2002
effective tax benefit rate from 9% to 21% since we now estimate a higher
full-year pretax loss, which reduces the effect of nondeductible expenses on our
estimated effective tax rate. The higher projected loss is principally a result
of (1) the $2.9 million of other than temporary unrealized losses on investments
recognized in the 2002 third quarter and (2) the $2.1 million of costs expensed
in the 2002 third quarter in connection with a business acquisition proposal we
submitted in July 2002 which was not accepted, both as previously explained. For
the three months ended September 30, 2001 we had a provision for income taxes
despite a pretax loss from continuing operations principally as a result of the
catch-up effect of a year-to-date increase in the estimated full-year 2001
effective tax rate from 47% to 54% reflecting a decrease in then estimated
full-year pretax income from continuing operations.
Minority Interests in Loss of a Consolidated Subsidiary
The minority interests in loss of a consolidated subsidiary of $1.0 million
for the three months ended September 29, 2002 reflect provisions for unrealized
losses by 280 BT Holdings on its cost basis investments deemed to be other than
temporary.
Nine Months Ended September 29, 2002 Compared with Nine Months Ended
September 30, 2001
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which are generated entirely
from our restaurant franchising business, increased $4.9 million, or 7%, to
$72.9 million for the nine months ended September 29, 2002 from $68.0 million
for the nine months ended September 30, 2001 reflecting a $5.4 million, or 8%,
increase in royalties partially offset by a $0.5 million, or 20%, decrease in
franchise and related fees. The increase in royalties consisted of (1) a $3.0
million improvement due to a 4% increase in same-store sales of franchised
restaurants and (2) a $2.4 million improvement resulting from the royalties from
the 114 restaurants opened since September 30, 2001, with generally higher than
average sales volumes, replacing the royalties from the 73 generally
underperforming restaurants closed since September 30, 2001. The decrease in
franchise and related fees was principally due to lower franchise fees primarily
as a result of franchisees opening 17 fewer restaurants in the first nine months
of 2002 compared with the first nine months of 2001. We currently anticipate a
continued combined increase in royalties and franchise and related fees for the
2002 fourth quarter compared with the 2001 fourth quarter, but at a much lower
rate than the 7% increase experienced during the first nine months of 2002, as
previously explained in more detail in the comparison of the three-month
periods.
Our royalties and franchise fees have no associated cost of sales.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Nine Months Ended
-----------------------------
September 30, September 29,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income................................................$ 26.0 $ 8.5 $ (17.5)
Other than temporary unrealized losses......................... (1.4) (11.0) (9.6)
Recognized net gains........................................... 4.4 1.9 (2.5)
Distributions, including dividends............................. 1.3 1.7 0.4
Investment management and performance fees..................... (0.7) (0.3) 0.4
Equity in losses of investment limited partnerships
and similar investment entities.............................. (0.4) (0.1) 0.3
-------- --------- --------
$ 29.2 $ 0.7 $ (28.5)
======== ========= ========
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 first nine months of 2002
compared with the first nine months of 2001. Average rates on our
interest-bearing investments declined from 5% in the first nine months of 2001
to above 2% in the first nine months of 2002 principally due to the general
decline in the money market and short-term interest rate environment. The
average amount 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
anticipate interest income will continue to be significantly lower in the 2002
fourth quarter compared with the 2001 fourth quarter, assuming interest rates as
of September 29, 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 presented in the above table may not recur in future periods,
as previously explained in more detail in the comparison of the three-month
periods.
As of September 29, 2002, we had pretax unrealized holding gains and losses
on available-for-sale marketable securities of $1.2 million and $1.3 million,
respectively, included in accumulated other comprehensive deficit. 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 the gains or losses on the related investments at that time. In
addition, as explained in more detail in the comparison of the three-month
periods, we hold a $2.4 million cost basis investment, before related minority
interests of $1.0 million, in Scientia for which recognition of an additional
other than temporary loss could possibly be required in future periods. Also as
explained in more detail in the comparison of the three-month periods, the
recognition of an additional other than temporary loss by 280 BT Holdings could
result in losses relating to the non-recourse notes from management officers and
employees of up to a maximum of $0.8 million in "General and administrative"
expenses.
Other Income (Expense), Net
The following table summarizes and compares the major components of other
income (expense), net:
Nine Months Ended
-----------------------------
September 30, September 29,
2001 2002 Change
---- ---- ------
(In Millions)
Interest income related to sale of beverage businesses.........$ 8.3 $ -- $ (8.3)
Reduction of gain related to business previously sold.......... -- (1.2) (1.2)
Reduction in the fair value of the liability for a written
call option on our stock..................................... 0.8 -- (0.8)
Equity in losses of investees, other than investment
limited partnerships and similar investment entities......... (0.2) (0.5) (0.3)
Other interest income.......................................... 0.4 0.3 (0.1)
Other.......................................................... 0.2 0.4 0.2
-------- --------- --------
$ 9.5 $ (1.0) $ (10.5)
======== ========= ========
Other income (expense), net decreased $10.5 million principally due to $8.3
million of interest income recorded in the 2001 second quarter which did not
recur in the first nine months of 2002 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 a
business previously sold results from a charge for estimated environmental
clean-up and related costs. The written call option on our stock was previously
explained in the comparison of the three-month periods. The $0.3 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 upon our investment of $0.9 million in newly-issued convertible
preferred stock of Encore partially offset by $0.2 million in equity in earnings
of Encore subsequent to the 2002 first quarter. The $0.7 million of cumulative
equity in losses of Encore had not been recorded previously as a result of our
having reduced our investment in Encore to zero.
General and Administrative
Our general and administrative expenses increased $0.8 million, or 1%,
principally reflecting (1) an increase of $5.0 million due to a reduction in
compensation expense in the 2001 first quarter 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, (2) an
increase of $1.0 million in advertising expenses related to an Arby's national
cable television advertising campaign, (3) an increase of $1.0 million in
insurance costs principally reflecting higher rates and (4) an increase of $0.9
million in charitable contributions. The $5.0 million gain from the settlement
of the class action shareholder lawsuit was included as a reduction of general
and administrative expenses in the first nine months of 2001 since the gain
effectively represented an adjustment of prior period compensation expense.
These increases were partially offset by (1) a $4.8 million decrease in
incentive compensation costs, (2) a $0.9 million decrease in expenses, excluding
depreciation and amortization, due to the termination in December 2001 of
fractional interests in two airplanes under timeshare agreements, (3) a $0.6
million decrease in deferred compensation expense and (4) a $0.5 million
decrease in provision for uncollectible non-recourse notes receivable from
management officers and employees relating to entities in which we and our
officers and employees co-invested. The $4.8 million decrease in incentive
compensation was principally due to higher compensation in the first nine months
of 2001, which did not recur in the first nine months of 2002, under our
executive bonus plan reflecting the positive impact on our capitalization from
the sale of our former beverage businesses. Deferred compensation expense of
$0.5 million for the nine months ended September 29, 2002 and $1.1 million for
the nine months ended September 30, 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 $0.2 million, or 3%, reflecting (1) $1.0 million
attributable to the full period effect of depreciation in the first nine months
of 2002 on an airplane that was placed in service in September 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 and (2) $0.6 million of goodwill amortization in the first nine months
of 2001 which ceased effective December 31, 2001, both as previously explained
in more detail in the comparison of the three-month periods.
Interest Expense
Interest expense decreased $3.5 million, or 15%, to $20.0 million for the
nine months ended September 29, 2002 from $23.5 million for the nine months
ended September 30, 2001. This decrease principally reflects (1) 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 below under "Discontinued Operations" and (2)
a $1.0 million decrease in interest expense due to lower outstanding balances of
the Securitization Notes. These decreases were partially offset by a $0.8
million increase in interest expense due to the full period effect of an
outstanding term loan and related interest rate swap agreement used to finance
the purchase of an airplane in July 2001.
Costs of Proposed Business Acquisitions Not Consummated
The $2.2 million of costs of proposed business acquisitions not consummated
in the first nine months of 2002 were primarily for a business acquisition
proposal we submitted in July 2002 which was not accepted. The $0.6 million of
costs in the first nine months of 2001 were for other less significant proposed
business acquisitions not consummated.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests decreased $33.0 million to a loss of $16.9 million for the
nine months ended September 29, 2002 from income of $16.1 million for the nine
months ended September 30, 2001 due to the effect of the variances explained in
the captions above.
As disclosed above, we recognized $1.1 million in the first nine months of
2001 and $0.5 million in the first nine months of 2002 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 first nine months of 2001, but were not permitted to recognize any
investment income on the investments in the Trusts during the first nine months
of 2002. This disparity between compensation expense and investment income
recognized will reverse in the 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 21% for the nine months ended September 29, 2002 and 54% for the nine months
ended September 30, 2001, respectively. The effective benefit rate in the first
nine months of 2002 is lower than the United States Federal statutory rate of
35% and the effective provision rate in the first nine months of 2001 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 $2.3 million
for the nine months ended September 29, 2002 reflect provisions for unrealized
losses by 280 BT Holdings as previously explained in more detail in the
comparison of the three-month periods.
Discontinued Operations
The income from discontinued operations of $38.5 million for the nine
months ended September 30, 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.
Liquidity And Capital Resources
Cash Flows from Continuing Operating Activities
Our consolidated operating activities from continuing operations provided
cash and cash equivalents, which we refer to in this discussion as cash, of $0.3
million during the nine months ended September 29, 2002 despite a net loss of
$11.1 million due to (1) net operating investment adjustments of $7.9 million,
(2) net non-cash charges of $3.4 million and (3) collection of a litigation
settlement receivable of $1.7 million, all partially offset by cash used by
changes in operating assets and liabilities of $1.6 million.
The net operating investment adjustments of $7.9 million consisted
principally of net recognized losses other than from trading securities and
short positions in securities. The non-cash charges of $3.4 million consisted
principally of depreciation and amortization less deferred income tax benefit
and minority interests in loss of a consolidated subsidiary. The cash used by
changes in operating assets and liabilities of $1.6 million reflects a decrease
in accounts payable and accrued expenses of $4.2 million partially offset by
decreases in prepaid expenses of $1.5 million and receivables of $1.1 million.
The decrease in accounts payable and accrued expenses was principally due to the
annual payment of previously accrued incentive compensation substantially offset
by the accrual of incentive compensation costs for the first nine months of
2002. The decrease in prepaid expenses was principally due to a reduction in
prepaid advertising costs related to our Arby's national cable television
advertising campaign. The decrease in receivables was principally due to the
collection of past due amounts from franchisees.
We expect continued positive cash flows from operations during the fourth
quarter of 2002, 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
$536.0 million at September 29, 2002, reflecting a current ratio, which equals
current assets divided by current liabilities, of 5.2:1. Working capital
decreased $20.6 million from $556.6 million at December 30, 2001 principally due
to the reclassification of $19.2 million of long-term debt to current.
Our total capitalization at September 29, 2002 was $619.5 million
consisting of stockholders' equity of $323.9 million and $295.6 million of
long-term debt, including current portion. Our total capitalization decreased
$26.6 million from $646.1 million at December 30, 2001 principally due to (1)
repayments of long-term debt of $18.1 million, (2) a net loss of $11.1 million,
(3) repurchases of $3.1 million of our common stock discussed below under
"Treasury Stock Purchases" and (4) adjustments of $1.1 million in deriving
comprehensive loss from net loss, all partially offset by proceeds of $5.4
million from stock option exercises.
Securitization Notes
We have outstanding Securitization Notes with a remaining principal balance
of $259.7 million as of September 29, 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 $4.9 million during the 2002 fourth
quarter 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
September 29, 2002. As of September 29, 2002, the indenture restricted Arby's
Trust from paying any 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. On October 21, 2002, $2.5
million relating to the cash flows for the calendar month of September became
available for the payment of distributions by Arby's Franchise Trust.
Other Long-Term Debt
We have a secured bank term loan payable through 2008 with an outstanding
principal amount of $19.1 million as of September 29, 2002. We also have an
8.95% secured promissory note payable through 2006 with an outstanding principal
amount of $13.8 million as of September 29, 2002.
Our total scheduled long-term debt repayments during the 2002 fourth
quarter are $6.2 million consisting principally of the $4.9 million expected to
be paid under the Securitization Notes, $0.8 million due on the secured bank
term loan and $0.4 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 September 29, 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 $68.0 million as of
September 29, 2002, assuming the purchaser has made all scheduled payments
through that date under these 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 September 29, 2002. Triarc is
also a guarantor of $0.5 million as of September 29, 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.
We guarantee a $6.7 million portion of senior notes issued by Encore to a
major financial institution. During the first nine months of 2002, 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. As of
the end of Encore's 2002 third quarter on September 30, 2002, Encore had $7.5
million of outstanding revolving credit borrowings. At September 29, 2002 we had
a $15.0 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 for its nine-month period
ended September 30, 2002. 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
nine months ended September 29, 2002. We expect that cash capital expenditures
will be less then $0.1 million for the remainder of 2002 for which there were no
outstanding commitments as of September 29, 2002. In addition, during the first
nine months of 2002, we purchased a fractional interest in the use of a
helicopter for $1.2 million in conjunction with the termination of a helicopter
lease.
Acquisitions and Investments
We have submitted a proposal to acquire the second largest franchisee of
Arby's restaurants, Sybra, Inc. and its affiliate, Sybra of Connecticut, Inc.,
which are subsidiaries of I.C.H. Corporation which we collectively refer to as
Sybra. Sybra owns and operates 239 Arby's restaurants. ICH and Sybra had filed
for protection under chapter 11 of the United States Bankruptcy Code on February
5, 2002 in order to restructure their financial obligations. We filed a proposed
chapter 11 plan of reorganization for ICH/Sybra which, as amended most recently
on October 23, 2002, provides for our purchase of Sybra in exchange for $8.0
million to be paid to ICH's general unsecured creditors and our agreement to pay
certain other amounts which, based on estimates prepared by ICH/Sybra, are not
expected to be substantial. In addition, we will invest $14.5 million, less the
amount necessary to fund the certain other amounts referred to above, in Sybra,
which amount will be used to pay Sybra's unsecured creditors and to fund working
capital requirements. Furthermore, we will make available to, or obtain for,
Sybra a $5.0 million financing facility for each of three years following the
acquisition (up to $15.0 million in the aggregate) to fund any operating
shortfalls of Sybra. Sybra will remain exclusively liable for its long-term debt
and capital lease obligations which aggregated approximately $104.0 million as
of December 31, 2001, the most recent date for which this information is
available. ICH/Sybra filed its own chapter 11 plan of reorganization which, as
amended most recently on October 17, 2002, proposes the acquisition of Sybra by
an affiliate of RTM, Inc., the largest franchisee of Arby's restaurants. The
bankruptcy court presiding over the ICH/Sybra chapter 11 cases set a hearing for
November 25, 2002 to consider approval of the competing chapter 11 plans. At
this time, it is not possible to determine the outcome of the hearing and, as a
result, our efforts to acquire Sybra.
As of September 29, 2002, we have $658.4 million of cash, cash equivalents
and investments, including $37.8 million of investments classified as
non-current and net of $14.4 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
awarded in December 2000 which is 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 and 125,000 shares for a total cost of $3.1 million in our
first nine months of 2002. Additionally, we repurchased 164,500 shares for a
total cost of $3.9 million during our fiscal October month ended October 27,
2002. We cannot assure you that we will repurchase any additional shares under
the remaining $39.5 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 currently believes that it is entitled
to receive from us a post-closing adjustment of $23.2 million and we, on the
other hand, have stated that we currently believe that we are entitled to
receive from the purchaser a post-closing adjustment of $0.8 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 first quarter of 2003.
Cash Requirements
As of September 29, 2002, our consolidated cash requirements for continuing
operations for the 2002 fourth quarter, 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 $6.2 million and (3) a maximum of $43.4 million of
payments for repurchases of our class A common stock for treasury under our
current stock repurchase program, of which $3.9 million of repurchases were made
in October 2002. We anticipate meeting all of these requirements through (1) an
aggregate $620.7 million of existing cash and cash equivalents and short-term
investments, net of $14.4 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, which we refer to as CERCLIS, list of known or
suspected contaminated sites. The CERCLIS listing appears to have been based on
an allegation that a former tenant of Adams Packing conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970s. The
business operations of Adams Packing were sold in December 1992. In October
2001, an environmental consultant engaged by the Florida Department of
Environmental Protection, which we refer to as the Florida DEP, 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 its own environmental consultant that,
under the supervision of the Florida DEP, has conducted a further investigation
of the site that was intended to develop additional information on the extent
and nature of the soil and groundwater contamination and the appropriate
remediation for that contamination. Adams Packing's environmental consultant has
submitted to the Florida DEP a summary of the results of this investigation with
a proposal for remediation and monitoring of the identified contamination. The
Florida DEP has responded by requesting certain additional investigative and
remedial work. Adams Packing currently intends to negotiate a work plan that is
acceptable to the Florida DEP and is not materially more costly than Adams
Packing's original proposal which is estimated to cost approximately $1.0
million. Based on the preliminary cost estimate and Adams Packing's intent to
negotiate a work plan that does not materially exceed that estimate, 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, including related legal and consulting fees.
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. On October 17, 2002 this action was
dismissed by the court presiding over this matter. The stockholder has until
November 25, 2002 to file a notice of appeal.
In addition to the environmental matter and stockholder lawsuit described
above, we are involved in other litigation and claims incidental to our
business. We and our subsidiaries have reserves for all of these legal and
environmental matters aggregating $2.8 million as of September 29, 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 the
outcome of these legal and environmental matters will have a material adverse
effect on our consolidated financial position or results of operations.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant franchising royalty revenues are 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 Result