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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 June 29, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 1-2207
------
TRIARC COMPANIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 38-0471180
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 451-3000
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(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 19,588,173 shares of the registrant's Class A Common Stock
outstanding as of July 31, 2003.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, June 29,
2002 (A) 2003
-------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 457,472 $ 561,948
Short-term investments............................................................ 175,161 192,697
Receivables....................................................................... 12,967 11,687
Inventories....................................................................... 2,274 2,348
Deferred income tax benefit....................................................... 15,037 15,477
Prepaid expenses and other current assets......................................... 6,471 7,399
---------- -----------
Total current assets........................................................... 669,382 791,556
Restricted cash equivalents............................................................ 32,476 32,469
Investments............................................................................ 34,717 34,740
Properties............................................................................. 115,224 110,902
Goodwill .............................................................................. 90,689 90,789
Other intangible assets................................................................ 8,291 8,182
Deferred costs and other assets........................................................ 16,604 21,837
---------- -----------
$ 967,383 $ 1,090,475
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................$ 34,422 $ 34,589
Accounts payable ................................................................. 18,998 17,032
Accrued expenses.................................................................. 73,338 85,150
Net current liabilities relating to discontinued operations....................... 33,083 36,844
---------- -----------
Total current liabilities...................................................... 159,841 173,615
Long-term debt......................................................................... 352,700 501,192
Deferred compensation payable to related parties....................................... 25,706 27,665
Deferred income taxes.................................................................. 60,070 59,543
Other liabilities, deferred income and minority interests in a consolidated subsidiary. 36,324 34,417
Stockholders' equity:
Common stock...................................................................... 2,955 2,955
Additional paid-in capital........................................................ 131,708 133,727
Retained earnings................................................................. 360,995 357,597
Common stock held in treasury..................................................... (162,084) (208,673)
Deferred compensation payable in common stock..................................... -- 10,160
Accumulated other comprehensive deficit........................................... (832) (1,723)
---------- -----------
Total stockholders' equity..................................................... 332,742 294,043
---------- -----------
$ 967,383 $ 1,090,475
========== ===========
(A) Derived and reclassified from the audited consolidated financial
statements as of December 29, 2002.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 29, June 30, June 29,
2002 2003 2002 2003
---- ---- ---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales...............................................$ -- $ 51,398 $ -- $ 99,895
Royalties and franchise and related fees (A)............ 24,837 23,402 47,218 44,639
--------- --------- -------- ---------
24,837 74,800 47,218 144,534
--------- --------- -------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization.. -- 37,589 -- 73,844
Advertising and selling................................. 1,070 4,043 1,115 7,143
General and administrative.............................. 18,261 23,899 37,722 47,279
Depreciation and amortization, excluding amortization
of deferred financing costs........................... 1,674 3,414 3,255 6,797
--------- --------- -------- ---------
21,005 68,945 42,092 135,063
--------- --------- -------- ---------
Operating profit................................. 3,832 5,855 5,126 9,471
Interest expense............................................ (6,803) (9,367) (13,163) (17,825)
Insurance expense related to long-term debt................. (1,130) (1,046) (2,305) (2,138)
Investment income (loss), net............................... (4,915) 3,729 1,147 6,870
Loss on sale of businesses.................................. (1,218) -- (1,218) --
Other income (expense), net................................. 210 (512) (360) 45
--------- --------- --------- ---------
Loss before income taxes and minority interests.. (10,024) (1,341) (10,773) (3,577)
(Provision for) benefit from income taxes................... 1,267 (195) 970 67
Minority interests in loss of a consolidated subsidiary..... 1,246 112 1,246 112
--------- --------- -------- ---------
Net loss.........................................$ (7,511) $ (1,424) $ (8,557) $ (3,398)
========= ========= ======== =========
Basic and diluted loss per share............................$ (.37) $ (.07) $ (.42) $ (.17)
========= ========= ======== =========
Pro forma basic and diluted loss per share (B)..............$ (.12) $ (.02) $ (.14) $ (.06)
========= ========= ======== =========
(A) Includes royalties from Sybra, Inc. of $1,865,000 and $3,601,000 for the
three-month and six-month periods ended June 30, 2002, respectively,
whereas the royalties from Sybra, Inc. of $1,773,000 and $3,450,000 for
the three-month and six-month periods ended June 29, 2003, respectively,
were eliminated in consolidation.
(B) Reflects the effect of a stock distribution, as more fully disclosed in
Note 11, of two shares of class B common stock for each outstanding share
of class A common stock declared on August 11, 2003 with a distribution
date of September 4, 2003.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
------------------------------
June 30, June 29,
2002 2003
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net loss................................................................................$ (8,557) $ (3,398)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
Depreciation and amortization of properties.......................................... 2,834 6,157
Amortization of other intangible assets and certain other items...................... 421 640
Amortization of deferred financing costs and original issue discount................. 964 1,001
Collection of litigation settlement receivable....................................... 1,667 1,667
Deferred compensation provision ..................................................... 627 1,959
Operating investment adjustments, net (see below).................................... 5,767 (37,344)
Deferred vendor incentive recognized................................................. -- (941)
Equity in losses (earnings) of investees, net........................................ 705 (799)
Unfavorable lease liability recognized............................................... -- (766)
Deferred income tax benefit.......................................................... (1,985) (440)
Minority interests in loss of a consolidated subsidiary ............................. (1,246) (112)
Other, net........................................................................... 214 (411)
Changes in operating assets and liabilities:
Decrease in receivables........................................................... 164 7
Increase in inventories........................................................... -- (74)
(Increase) decrease in prepaid expenses and other current assets.................. 31 (928)
Decrease in accounts payable and accrued expenses................................. (9,400) (10,334)
---------- ----------
Net cash used in continuing operating activities................................ (7,794) (44,116)
---------- ----------
Cash flows from continuing investing activities:
Investment activities, net (see below).................................................. (42,397) 38,945
Capital expenditures.................................................................... (23) (1,870)
Adjustment to cost of business acquisition.............................................. -- (100)
Purchase of fractional interest in corporate aircraft................................... (1,200) --
Other................................................................................... 183 (201)
---------- ----------
Net cash provided by (used in) continuing investing activities.................. (43,437) 36,774
---------- ----------
Cash flows from continuing financing activities:
Issuance of long-term debt.............................................................. -- 175,000
Repayments of long-term debt............................................................ (11,962) (26,343)
Repurchases of common stock for treasury................................................ -- (41,700)
Deferred financing costs................................................................ -- (6,525)
Exercises of stock options.............................................................. 3,273 6,333
Transfers from restricted cash equivalents.............................................. 210 94
---------- ----------
Net cash provided by (used in) continuing financing activities.................. (8,479) 106,859
---------- ----------
Net cash provided by (used in) continuing operations........................................ (59,710) 99,517
Net cash provided by discontinued operations................................................ 442 4,959
---------- ----------
Net increase (decrease) in cash and cash equivalents........................................ (59,268) 104,476
Cash and cash equivalents at beginning of period............................................ 506,461 457,472
---------- ----------
Cash and cash equivalents at end of period..................................................$ 447,193 $ 561,948
========== ==========
Details of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities............................................$ 25,531 $ 113,226
Cost of trading securities purchased................................................. (25,601) (148,567)
Net recognized losses (gains)from trading securities and short positions in
securities ........................................................................ 90 (141)
Other net recognized losses (gains), including other than temporary losses, and
equity in an investment limited partnership........................................ 5,500 (1,914)
Net amortization of premium on debt securities....................................... 247 52
---------- ----------
$ 5,767 $ (37,344)
========== ==========
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended
------------------------------
June 30, June 29,
2002 2003
---- ----
(In Thousands)
(Unaudited)
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments........................................................................$ 37,008 $ 98,089
Cost of available-for-sale securities and other investments purchased................ (81,667) (64,583)
Proceeds of securities sold short.................................................... 18,842 19,346
Payments to cover short positions in securities...................................... (16,580) (13,907)
----------- ----------
$ (42,397) $ 38,945
=========== ==========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 29, 2003
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Triarc Companies, Inc. ("Triarc" and, together with its subsidiaries, the
"Company") have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC") and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with 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 only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of December 29, 2002 and June 29, 2003, its results of
operations for the three and six-month periods ended June 30, 2002 and June 29,
2003 and its cash flows for the six-month periods ended June 30, 2002 and June
29, 2003 (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 29, 2002 (the
"Form 10-K").
The Company reports on a fiscal year basis consisting of 52 or 53 weeks
ending on the Sunday closest to December 31. The Company's first half of fiscal
2002 commenced on December 31, 2001 and ended on June 30, 2002, with its second
quarter of 2002 commencing on April 1, 2002. The Company's first half of 2003
commenced on December 30, 2002 and ended on June 29, 2003, with its second
quarter of 2003 commencing on March 31, 2003. The periods from April 1, 2002 to
June 30, 2002 and December 31, 2001 to June 30, 2002 are referred to herein as
the three-month and six-month periods ended June 30, 2002, respectively. The
periods from March 31, 2003 to June 29, 2003 and December 30, 2002 to June 29,
2003 are referred to herein as the three-month and six-month periods ended June
29, 2003, respectively. Each quarter contained 13 weeks and each half contained
26 weeks.
Certain amounts included in the accompanying prior periods' condensed
consolidated financial statements have been reclassified to conform with the
current periods' presentation.
(2) Stock-Based Compensation
The Company maintains or maintained several equity plans (the "Equity
Plans") which collectively provide or provided for the grant of stock options to
certain officers, other key employees, non-employee directors and consultants
and shares of the Company's class A common stock (the "Class A Common Stock")
pursuant to automatic grants in lieu of annual retainer or meeting attendance
fees to non-employee directors.
The Company measures compensation costs for its employee stock-based
compensation under the intrinsic value method rather than the fair value method.
Accordingly, compensation cost for the Company's stock options is measured as
the excess, if any, of the market price of the Company's common stock at the
date of grant, or at any subsequent measurement date as a result of certain
types of modifications to the terms of its stock options, over the amount an
employee must pay to acquire the stock. Such amounts are amortized as
compensation expense over the vesting period of the related stock options. Any
compensation cost is recognized as expense only to the extent it exceeds
compensation expense previously recognized for such stock options.
A summary of the effect on net loss and net loss per share in each period
presented as if the fair value method had been applied to all outstanding and
unvested stock options that were granted commencing January 1, 1995 is as
follows (in thousands except per share data):
Three Months Ended Six Months Ended
------------------------ ---------------------------
June 30, June 29, June 30, June 29,
2002 2003 2002 2003
---- ---- ---- ----
Net loss, as reported....................................$ (7,511) $ (1,424) $ (8,557) $ (3,398)
Reversal of stock-based employee compensation expense
determined under the intrinsic value method included
in reported net loss, net of related income taxes...... 173 49 173 49
Recognition of total stock-based employee compensation
expense determined under the fair value method, net
of related income taxes................................ (1,207) (1,413) (2,678) (2,683)
---------- --------- ---------- ----------
Net loss, as adjusted....................................$ (8,545) $ (2,788) $ (11,062) $ (6,032)
========== ========= ========== ==========
Basic and diluted loss per share:
As reported............................................$ (.37) $ (.07) $ (.42) $ (.17)
As adjusted............................................ (.42) (.14) (.54) (.30)
Pro forma basic and diluted loss per share:
As reported ........................................... (.12) (.02) (.14) (.06)
As adjusted (Note 11).................................. (.14) (.05) (.18) (.10)
The fair value of these stock options granted under the Equity Plans on the
date of grant was estimated using the Black-Scholes option pricing model (the
"Black-Scholes Model") with the assumptions set forth below for options granted
during the three and six-month periods ended June 30, 2002 and June 29, 2003:
Three and Six Months Ended
--------------------------
June 30, June 29,
2002 2003
---- ----
Risk-free interest rate.................. 4.80% 2.90%
Expected option life in years............ 7 7
Expected volatility...................... 15.8% 17.5%
Dividend yield .......................... None None
During the three and six-month periods ended June 30, 2002 and June 29,
2003, the Company granted 28,000 and 24,000 stock options, respectively, under
the Equity Plans at exercise prices equal to the market price of the stock on
the grant date. The weighted average grant date fair values of these stock
options, using the Black-Scholes Model with the assumptions set forth above,
were $8.78 and $7.56, respectively.
The Black-Scholes Model has limitations on its effectiveness including that
it was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable and that the model
requires the use of highly subjective assumptions including expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in the opinion of the Company, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards to
employees.
(3) Acquisition of Sybra
On December 27, 2002, the Company completed the acquisition (the "Sybra
Acquisition") of all of the voting equity interests of Sybra, Inc. ("Sybra")
from I.C.H. Corporation ("ICH") as disclosed in more detail in Note 3 to the
Company's consolidated financial statements contained in the Form 10-K. Sybra
owned and operated 239 Arby's restaurants in nine states as of the date of the
Sybra Acquisition and, prior to the acquisition, was the second largest
franchisee of Arby's restaurants. The aggregate purchase price paid for Sybra by
the Company was $9,850,000 (originally estimated at $9,750,000 as of December
29, 2002) consisting of $8,219,000 of payments to ICH's creditors and $1,631,000
of estimated fees and expenses.
The allocation of the original estimate of the purchase price of Sybra to
the assets acquired and the liabilities assumed at the date of the Sybra
Acquisition is set forth in Note 3 to the consolidated financial statements
contained in the Form 10-K. This allocation of the purchase price of Sybra is on
a preliminary basis and remains subject to finalization.
Sybra's results of operations and cash flows have been included in the
accompanying condensed consolidated statements of operations and cash flows for
the first half ended June 29, 2003 but have not been included for the first half
ended June 30, 2002. However, royalties and franchise and related fee revenues
from Sybra, which are no longer included in the accompanying condensed
consolidated statements of operations and cash flows for the first half ended
June 29, 2003, were included for the first half ended June 30, 2002.
The following pro forma condensed consolidated summary operating
information (the "As Adjusted for the Acquisition" information) of the Company
for the first half ended June 30, 2002 has been prepared by adjusting the
historical data as set forth in the accompanying condensed consolidated
statement of operations to give effect to the Sybra Acquisition as if it had
been consummated on December 31, 2001 (in thousands except per share amounts):
Six Months Ended June 30, 2002
------------------------------
As Adjusted
As Reported for the Acquisition
----------- -------------------
Revenues......................................................................$ 47,218 $ 147,492
Operating profit.............................................................. 5,126 3,509
Net loss...................................................................... (8,557) (13,133)
Basic and diluted loss per share.............................................. (.42) (.64)
Pro forma basic and diluted loss per share (Note 11).......................... (.14) (.21)
This pro forma information is presented for comparative purposes only and
does not purport to be indicative of the Company's actual results of operations
had the Sybra Acquisition actually been consummated on December 31, 2001 or of
the Company's future results of operations.
(4) Long-Term Debt and Stockholders' Equity
On May 19, 2003 the Company issued (the "Offering") $175,000,000 aggregate
principal amount of 5% convertible notes due 2023 (the "Convertible Notes") in a
private placement. The Company used a portion of the $175,000,000 proceeds from
the Offering to purchase 1,500,000 shares of Class A Common Stock for treasury
for $41,700,000 (the "Treasury Stock Purchase") and to pay estimated fees and
expenses associated with the Offering of $6,525,000. The balance of the net
proceeds from the Offering are being used by the Company for general corporate
purposes, which may include working capital, repayment of indebtedness,
acquisitions, additional share repurchases and investments.
The Convertible Notes are convertible under specified circumstances into an
aggregate 4,375,000 shares of the Company's Class A Common Stock at a conversion
rate of 25 shares per $1,000 principal amount of Convertible Notes, subject to
adjustment in certain circumstances, which represents an initial conversion
price of $40 per share. However, the conversion terms will be adjusted based on
a stock distribution declared on August 11, 2003, as disclosed in more detail in
Note 11. The Convertible Notes are redeemable at the Company's option commencing
May 20, 2010 and at the option of the holders on May 15, 2010, 2015 and 2020 or
upon the occurrence of a fundamental change, as defined, of the Company, in each
case at a price of 100% of the principal amount of the Convertible Notes plus
accrued interest. In July 2003, a registration statement covering the resale of
the Convertible Notes and the Class A Common Stock issuable upon any conversion
of the Convertible Notes was declared effective by the SEC. The indenture
pursuant to which the Convertible Notes were issued does not contain any
significant financial covenants.
The following pro forma operating information (the "As Adjusted for the
Offering" information) of the Company for the six months ended June 29, 2003 has
been prepared by adjusting the historical information set forth in the
accompanying condensed consolidated statement of operations to give effect to
the Offering and the Treasury Stock Purchase (which affects only the weighted
average number of common shares and the loss per share) prior to the May 19,
2003 Offering date as if such transactions had been consummated on December 30,
2002 and does not reflect incremental interest income or any other benefit of
the excess proceeds of the Offering (in thousands except per share amounts):
Six Months Ended June 29, 2003
------------------------------
As Adjusted
As Reported For the Offering
----------- ----------------
Interest expense...............................................................$ 17,825 $ 21,549
Net loss....................................................................... (3,398) (5,781)
Basic and diluted loss per share............................................... (.17) (.30)
Weighted average number of common shares used for calculation of basic
and diluted loss per share................................................ 20,294 19,140
Pro forma basic and diluted loss per share (Note 11)........................... (.06) (.10)
This pro forma information is presented for information purposes only and
does not purport to be indicative of the Company's actual results of operations
had the Offering actually occurred on December 30, 2002 or of the Company's
future results of operations.
(5) Income Taxes
The Company's Federal income tax returns for the years subsequent to 1993
have not been examined by the Internal Revenue Service (the "IRS"). However, the
Company has been notified by the IRS of its intent to examine the Company's
Federal income tax returns for the years ended December 31, 2000 and December
30, 2001. Management of the Company believes that adequate aggregate provisions
have been made in prior periods for any tax liabilities, including interest,
that may result from the completion of this examination.
(6) Comprehensive Loss
The following is a summary of the components of comprehensive loss, net of
income taxes (in thousands):
Three Months Ended Six Months Ended
------------------------ -------------------------
June 30, June 29, June 30, June 29,
2002 2003 2002 2003
---- ---- ---- ----
Net loss................................................. $ (7,511) $ (1,424) $ (8,557) $ (3,398)
Net change in unrealized holding gains or losses on
available-for-sale securities (see below).............. 1,875 (972) (1,109) (903)
Net change in currency translation adjustment............ (29) 6 (26) 12
--------- ---------- --------- ----------
Comprehensive loss.......................................$ (5,665) $ (2,390) $ (9,692) $ (4,289)
========= ========== ========= ==========
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 loss (in thousands):
Three Months Ended Six Months Ended
------------------------ -------------------------
June 30, June 29, June 30, June 29,
2002 2003 2002 2003
---- ---- ---- ----
Net change in unrealized appreciation or depreciation
of available-for-sale securities during the period.....$ (86) $ (1,444) $ (422) $ (1,590)
(Less) plus reclassification of prior period net
(appreciation) depreciation included in net loss....... 3,014 (84) (1,334) 178
--------- ---------- --------- ----------
2,928 (1,528) (1,756) (1,412)
Equity in change in unrealized gain on a retained
interest .............................................. (23) (9) 55 (16)
Equity in change in unrealized gain on available-for-
sale securities........................................ 2 (5) 2 (3)
Income tax (provision) benefit........................... (1,032) 570 590 528
--------- ---------- --------- ----------
$ 1,875 $ (972) $ (1,109) $ (903)
========= ========== ========= ==========
(7) Discontinued Operations
In October 2000 the Company sold (the "Snapple Beverage Sale") the stock of
the companies comprising the Company's former premium beverage and soft drink
concentrate business segments (the "Beverage Discontinued Operations") to
affiliates of Cadbury Schweppes plc ("Cadbury"). Prior thereto, 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
Discontinued Operations") of SEPSCO, LLC, a subsidiary of the Company. The
Beverage Discontinued Operations and the SEPSCO Discontinued 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 purchase and 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 $23,189,000 plus interest at 7.19% from the October
25, 2000 sale date while the Company, on the other hand, has stated that it
currently believes that no post-closing adjustment is required. The Company is
in arbitration with Cadbury to determine the amount of the post-closing
adjustment, if any. The Company currently expects the arbitration process to be
completed by December 28, 2003.
Net current liabilities relating to discontinued operations consisted of
the following (in thousands):
December 29, June 29,
2002 2003
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations....................................................$ 30,316 $ 34,134 (a)
Net liabilities of SEPSCO Discontinued Operations (net of assets held
for sale of $234).......................................................... 2,767 2,710
----------- -----------
$ 33,083 $ 36,844
=========== ===========
(a) Increase is principally due to the collection during 2003 of income tax receivables.
(8) Loss Per Share
Basic and diluted loss per share have been computed by dividing the net
loss by the weighted average number of common shares outstanding of 20,486,000
and 20,175,000 for the three-month periods ended June 30, 2002 and June 29,
2003, respectively, and 20,454,000 and 20,294,000 for the six-month periods
ended June 30, 2002 and June 29, 2003, respectively. The weighted average common
shares for the three and six-month periods ended June 29, 2003 include the
weighted-average effect commencing April 23, 2003 of the shares held in deferred
compensation trusts (see Note 9). Diluted loss per share for the three and
six-month periods ended June 30, 2002 and June 29, 2003 is the same as basic
loss per share since the Company reported a net loss for each of these periods
and, therefore, the effect of all potentially dilutive securities on the net
loss per share would have been antidilutive. Pro forma basic and diluted loss
per share reflecting the effect of the stock distribution declared on August 11,
2003 have been computed as disclosed in Note 11.
The only remaining Company securities as of June 29, 2003 that could dilute
basic income per share for periods subsequent to June 29, 2003 are (1) 7,961,489
outstanding stock options and (2) $175,000,000 of 5% convertible notes which are
convertible into 4,375,000 shares of the Company's Class A Common Stock (see
Note 4).
(9) Transactions with Related Parties
Prior to 2002 the Company provided incentive compensation of $22,500,000 to
the Chairman and Chief Executive Officer and President and Chief Operating
Officer of the Company (the "Executives") which was invested in two deferred
compensation trusts (the "Deferred Compensation Trusts") for their benefit.
Deferred compensation expense of $627,000 and $1,959,000 was recognized in the
six-month periods ended June 30, 2002 and June 29, 2003, respectively, for the
increase in the fair value of the investments in the Deferred Compensation
Trusts. Under accounting principles generally accepted in the United States of
America, the Company was not able to recognize any investment income on
unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts during the six-month periods ended June 30, 2002 and June
29, 2003. However, during the six-month period ended June 29, 2003, the Company
sold one of the investments in the Deferred Compensation Trusts and recognized a
previously unrealized gain of $452,000, which included increases in value prior
to the 2003 first half. The cumulative disparity between compensation expense
and net recognized investment income will reverse in future periods as either
(1) additional investments in the Deferred Compensation Trusts are sold and
previously unrealized gains are recognized without any offsetting increase in
compensation expense or (2) the fair values of the investments in the Deferred
Compensation Trusts decrease resulting in the recognition of a reversal of
deferred compensation expense without any offsetting losses recognized in
investment income. Recognized gains are included in "Investment income (loss),
net" and deferred compensation expense is included in "General and
administrative" in the accompanying condensed consolidated statements of
operations. The obligation to the Executives is reported as "Deferred
compensation payable to related parties" in the accompanying condensed
consolidated balance sheets. The assets in the Deferred Compensation Trusts
which are reflected in the accompanying condensed consolidated balance sheet as
of June 29, 2003 consisted of $22,384,000 included in "Investments," which does
not reflect the unrealized increase in the fair value of the investments,
$204,000 included in "Cash and cash equivalents" and $495,000 included in
"Receivables."
In April 2003 the Executives exercised an aggregate 1,000,000 stock options
under the Company's Equity Plans and paid the exercise price utilizing shares of
the Company's Class A Common Stock the Executives already owned for more than
six months. These exercises resulted in aggregate deferred gains to the
Executives of $10,160,000, represented by an additional 360,795 shares of the
Company's Class A Common Stock based on the market price at the date of
exercise. Such shares are being held in deferred compensation trusts. The
Executives had previously elected to defer the receipt of the 360,795 shares
until no earlier than January 3, 2005. The resulting obligation of $10,160,000
is reported as the "Deferred compensation payable in common stock" component of
"Stockholders' equity" in the accompanying condensed consolidated balance sheet
as of June 29, 2003.
The Company received a $5,000,000 interest-bearing note (the "Executives'
Note") from the Executives prior to 2002 as part of a settlement of a class
action lawsuit receivable in three equal installments. The Executives' Note bore
interest at 4.92% during the twelve-month period ended March 31, 2002 and at
1.75% thereafter through maturity. The Company recorded interest income on the
Executives' Note of $48,000 and $7,000 for the six-month periods ended June 30,
2002 and June 29, 2003, respectively. In March of 2002 and 2003 the Company
collected the second and third installments aggregating $3,334,000 on the
Executives' Notes and also collected related interest of $163,000 and $29,000,
respectively.
As disclosed in more detail in Note 23 ("Note 23") to the consolidated
financial statements contained in the Form 10-K regarding related party
transactions, the Company has provided certain of its management officers and
employees, including its executive officers, the opportunity to co-invest with
the Company in certain investments and made related loans to management prior to
2002. The Company did not enter into any new co-investments subsequent to 2001
and the co-investment policy no longer permits any new loans. During the quarter
ended December 29, 2002, the Company provided an allowance of $176,000 for the
uncollectible non-recourse portion of the notes owed by management in connection
with their co-investments in EBT Holding Company, LLC ("EBT") due to the
worthlessness of the investment owned by EBT. Such non-recourse notes were
subsequently forgiven in March 2003. During the six-month period ended June 29,
2003, the Company collected the remaining $176,000 of the recourse portion of
the notes with respect to EBT and $2,000 of related accrued interest. Under the
Company's co-investment policy, as of June 29, 2003 the Company had in total
$1,994,000 of remaining co-investment notes receivable from management, of which
$997,000 was non-recourse, less a $452,000 remaining allowance for the
uncollectible non-recourse portion of the notes, of which $393,000 was provided
during the quarter ended December 29, 2002 and $59,000 was provided for during
the six months ended June 29, 2003. These notes, net of the related allowance,
are included in "Deferred costs and other assets" in the accompanying condensed
consolidated balance sheets.
Also, as disclosed in more detail in Note 23, the Company and certain of
its officers, including entities controlled by them, have invested in Encore
Capital Group, Inc. ("Encore"), an investment accounted for by the Company under
the equity method. The Company and other stockholders of Encore, including the
present and former officers of the Company who have invested in Encore prior to
an initial public offering by Encore of its common stock in July 1999, on a
joint and several basis, had entered into guarantees (the "Bank Guarantees")
and/or certain related agreements to guarantee up to $15,000,000 of revolving
credit borrowings of a subsidiary of Encore. The $15,000,000 revolving credit
line had been scheduled to expire in April 2003. In April 2003, the maturity
date for any revolving credit borrowings was extended until April 15, 2004, but
the maximum amount available was reduced from $15,000,000 to $5,000,000. This
effectively reduced the Bank Guarantees to $5,000,000, of which the Company
would be responsible for approximately $600,000 assuming the full $5,000,000 was
borrowed and all of the parties, besides the Company, to the Bank Guarantees and
the related agreements fully perform thereunder. As of Encore's second quarter
ended June 30, 2003, Encore had no outstanding revolving credit borrowings.
Prior to the April 2003 extension, the Company had an interest-bearing bank
custodial account at the financial institution providing the revolving credit
line with a balance of $15,019,000, which was subject to set off under certain
circumstances if the parties to the Bank Guarantees and related agreements
failed to perform their obligations thereunder. The interest-bearing bank
account was included in "Cash and cash equivalents" in the accompanying
condensed consolidated balance sheet as of December 29, 2002. However, such
funds were subsequently withdrawn by the Company following the April 2003
extension of the revolving credit line. In addition, the Company continues to
guarantee the obligations under the senior notes of Encore as disclosed in more
detail in Note 23.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 23 to the
consolidated financial statements contained in the Form 10-K.
(10) Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc.
("Adams"), an inactive subsidiary of the Company, was listed by the United
States Environmental Protection Agency on the Comprehensive Environmental
Response, Compensation and Liability Information System ("CERCLIS") list of
known or suspected contaminated sites. The CERCLIS listing appears to have been
based on an allegation that a former tenant of Adams conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970's. The
business operations of Adams were sold in December 1992. In February 2003, Adams
and the Florida Department of Environmental Protection (the "FDEP"), agreed to a
consent order that provides for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the FDEP approved the work plan submitted by Adams'
environmental consultant and work has begun at the site. Based on a preliminary
cost estimate of approximately $1,000,000 for completion of the work plan
developed by Adams' environmental consultant, and after taking into
consideration various legal defenses available to the Company, including Adams,
Adams has provided for its estimate of its liability for this matter, including
related legal and consulting fees. Such provision was made primarily during the
three-month period ended June 30, 2002 principally as "Loss on sale of
businesses" in the accompanying condensed consolidated statement of operations
since the provision represented an adjustment to the previously recorded gain on
the sale of Adams.
In October 1998, various class action lawsuits were filed on behalf of the
Company's stockholders. Each of these actions named the Company, the Executives
and members of the Company's board of directors as defendants. On March 26,
1999, certain plaintiffs in these actions filed an amended complaint which
alleged that the Company's tender offer statement filed with the SEC in 1999,
pursuant to which the Company repurchased 3,805,015 shares of its Class A Common
Stock for $18.25 per share, was materially false and misleading. The amended
complaint seeks, among other items, damages in an unspecified amount. In October
2000, the plaintiffs agreed to stay this action pending determination of a
similar stockholder action which was subsequently dismissed in October 2002 and
is no longer being appealed. Through June 29, 2003, no further action has
occurred with respect to the remaining class action lawsuit.
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 $2,400,000 as of June 29, 2003. 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.
(11) Subsequent Events
On August 11, 2003, the Company declared a stock distribution of two shares
of a newly designated series of its previously authorized class B common stock
(the "Class B Common Stock") for each outstanding share of Class A Common Stock
held on August 21, 2003, with a distribution date of September 4, 2003. The
Class B Common Stock will be entitled to one-tenth of a vote per share, will
have a $.01 per share liquidation preference and will be entitled to receive
cash dividends per share of at least 110% of any regular quarterly cash
dividends per share when, as and if, declared on the Class A Common Stock
through September 4, 2006. Thereafter, the Class B Common Stock will participate
equally on a per share basis with the Class A Common Stock in any cash
dividends. Following the stock distribution, each $1,000 principal amount of
Convertible Notes will be convertible into a combination of 25 shares of Class A
Common Stock and 50 shares of Class B Common Stock and each stock option
outstanding under the Equity Plans will be exercisable for a combination of one
share of Class A Common Stock and two shares of Class B Common Stock. Loss per
share amounts in the accompanying condensed consolidated financial statements
and notes thereto have been set forth on both a pre-distribution and a pro forma
post-distribution basis, since the distribution has been declared but has not
yet been made.
Pro forma basic and diluted loss per share have been computed by dividing
the net loss attributable to the Class A Common Shares and Class B Common Shares
by the weighted average number of shares of each class assuming the stock
distribution had occurred at the beginning of each period presented. Since there
were no dividends declared or contractually payable in any of the periods
presented, the net loss was allocated one-third to the Class A Common Shares and
two-thirds to the Class B Common Shares based on how each class would have
shared in the net loss in accordance with the stock distribution. The weighted
average number of Class A Common Shares is unchanged from those disclosed in
Note 8 and the weighted average number of Class B Common Shares is twice that of
the Class A Common Shares. Pro forma loss per share is the same for each of the
two classes of common stock since there were no dividends declared or
contractually payable. Pro forma basic and diluted loss per share are the same
since the Company reported a net loss for each period presented.
On August 11, 2003, the Company also declared an initial regular quarterly
cash dividend of $0.065 and $0.075 per share on its Class A and Class B Common
Stock, respectively, both payable on September 25, 2003 to holders of record on
September 15, 2003. The Company currently intends to continue to declare and pay
quarterly cash dividends, however, there can be no assurance that any dividends
will be declared or paid in the future or the amount or timing of such
dividends, if any.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
We currently operate in one business, franchising and operating Arby's
restaurants.
On December 27, 2002, we completed the acquisition of Sybra, Inc. in a
transaction we refer to as the Sybra Acquisition. Sybra owns and operates 238
Arby's restaurants in nine states as of June 29, 2003 and, prior to the Sybra
Acquisition, was the second largest franchisee of Arby's restaurants. As a
result of the Sybra Acquisition, our consolidated results of operations and cash
flows for the 2003 first half include Sybra's results and cash flows but do not
include royalties and franchise and related fees from Sybra which are eliminated
in consolidation. Our consolidated results of operations and cash flows for the
2002 first half, however, include royalties and franchise and related fees from
Sybra but do not include Sybra's results and cash flows.
Presentation of Financial Information
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 29, 2002. Item 7 of our
Form 10-K describes the recent trends affecting our restaurant business,
contractual obligations and the application of our critical accounting policies.
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 5."
We report on a fiscal year basis consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. Our first half of fiscal 2002 commenced on
December 31, 2001 and ended on June 30, 2002, with our second quarter of 2002
commencing on April 1, 2002. Our first half of fiscal 2003 commenced on December
30, 2002 and ended on June 29, 2003, with our second quarter of 2003 commencing
on March 31, 2003. When we refer to the "three months ended June 30, 2002," or
the "2002 second quarter," and the "six months ended June 30, 2002," or the
"2002 first half," we mean the periods from April 1, 2002 to June 30, 2002 and
December 31, 2001 to June 30, 2002, respectively. When we refer to the "three
months ended June 29, 2003," or the "2003 second quarter," and the "six months
ended June 29, 2003," or the "2003 first half," we mean the periods from March
31, 2003 to June 29, 2003 and December 30, 2002 to June 29, 2003, respectively.
Each quarter contained 13 weeks and each half contained 26 weeks.
Certain amounts presented in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the three and six months
ended June 30, 2002 have been reclassified to conform with the current periods'
presentation.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount and percent of the change between (1) the 2002 second
quarter and the 2003 second quarter and (2) the 2002 first half and the 2003
first half. We consider certain percentage changes between these periods to be
not measurable or not meaningful, and we refer to these as "n/m." The percentage
changes used in the following discussion have been rounded to the nearest whole
percent.
Three Months Ended Six Months Ended
--------------------- Change -------------------- Change
June 30, June 29, --------------- June 30, June 29, -----------------
2002 2003 Amount Percent 2002 2003 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
(In Millions Except Percents)
Revenues:
Net sales.....................................$ -- $ 51.4 $ 51.4 n/m $ -- $ 99.9 $ 99.9 n/m
Royalties and franchise and related fees (a).. 24.8 23.4 (1.4) (6)% 47.2 44.6 (2.6) (5)%
--------- -------- ------- ------- ------- -------
24.8 74.8 50.0 n/m 47.2 144.5 97.3 n/m
-------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of sales, excluding depreciation
and amortization .......................... -- 37.6 37.6 n/m -- 73.8 73.8 n/m
Advertising and selling...................... 1.1 4.1 3.0 n/m 1.1 7.2 6.1 n/m
General and administrative .................. 18.2 23.9 5.7 31 % 37.7 47.3 9.6 25 %
Depreciation and amortization, excluding
amortization of deferred financing costs... 1.7 3.4 1.7 100 % 3.3 6.8 3.5 109 %
-------- ------- ------- ------- ------- -------
21.0 69.0 48.0 n/m 42.1 135.1 93.0 n/m
-------- ------- ------- -------- ------- -------
Operating profit ........................ 3.8 5.8 2.0 53 % 5.1 9.4 4.3 85 %
Interest expense ............................... (6.8) (9.3) (2.5) (38)% (13.2) (17.8) (4.6) (35)%
Insurance expense related to long-term debt..... (1.1) (1.0) 0.1 7 % (2.3) (2.1) 0.2 7 %
Investment income (loss), net................... (4.9) 3.7 8.6 n/m 1.1 6.9 5.8 n/m
Loss on sale of businesses...................... (1.2) -- 1.2 100 % (1.2) -- 1.2 100 %
Other income (expense), net..................... 0.2 (0.5) (0.7) n/m (0.3) -- 0.3 100 %
-------- ------- ------- ------- ------- -------
Loss before income taxes and
minority interests..................... (10.0) (1.3) 8.7 87 % (10.8) (3.6) 7.2 67 %
(Provision for) benefit from income taxes....... 1.3 (0.2) (1.5) n/m 1.0 0.1 (0.9) (93)%
Minority interests in loss of a consolidated
subsidiary................................... 1.2 0.1 (1.1) (91)% 1.2 0.1 (1.1) (91)%
-------- ------- ------- ------- ------- -------
Net loss.................................$ (7.5) $ (1.4) $ 6.1 81 % $ (8.6) $ (3.4) $ 5.2 60 %
======== ======= ======= ======= ======== =======
(a) Includes royalties from Sybra of $1.9 million and $3.6 million for the 2002 second quarter and first half, respectively,
whereas the royalties from Sybra of $1.8 million and $3.5 million for the 2003 second quarter and first half, respectively,
were eliminated in consolidation.
Three Months Ended June 29, 2003 Compared with Three Months Ended June 30, 2002
Net Sales
Our net sales of $51.4 million for the three months ended June 29, 2003
resulted entirely from our operation of the Arby's restaurants acquired in the
Sybra Acquisition.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from our restaurant franchising operations, were reduced by $1.4 million, or 6%,
to $23.4 million for the three months ended June 29, 2003 from $24.8 million for
the three months ended June 29, 2002. This reduction reflects that we no longer
include royalties from the restaurants we acquired in the Sybra Acquisition
whereas we included $1.9 million of royalties from Sybra in the 2002 second
quarter. Aside from the effect of the Sybra Acquisition, royalties and franchise
and related fees increased $0.5 million in the 2003 second quarter compared with
the 2002 second quarter reflecting a $0.3 million, or 1%, increase in royalties
and a $0.2 million, or 18%, increase in franchise and related fees. The increase
in royalties consisted of a $0.9 million improvement resulting from the
royalties from the 124 restaurants opened since June 30, 2002, with generally
higher than average sales volumes, replacing the royalties from the 63 generally
underperforming restaurants closed since June 30, 2002, partially offset by a
$0.6 million reduction due to a 3% decline in same-store sales of franchised
restaurants during the 2003 second quarter compared with the 2002 second
quarter. Franchise and related fees increased due to the opening of 9 more
franchised restaurants in the 2003 second quarter compared with the 2002 second
quarter.
The 3% decline in same-store sales of franchised restaurants in the 2003
second quarter followed a 3% decline in the 2002 fourth quarter and a 2% decline
in the 2003 first quarter. We believe these declines were affected by price
discounting in the quick service restaurant industry, the generally sluggish
economy, strong same-store sales comparisons of the prior years' comparable
quarters and, in the 2002 fourth quarter and 2003 first quarter, the adverse
effects of worse weather conditions. The same-store sales comparison during the
2003 fourth quarter will be more favorable due to the weak same-store sales in
the 2002 fourth quarter.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization, of $37.6
million for the three months ended June 29, 2003 resulted entirely from our
operation of the Arby's restaurants acquired in the Sybra Acquisition.
Our royalties and franchise fees have no associated cost of sales.
Advertising and Selling
Our advertising and selling expenses increased $3.0 million reflecting $3.4
million of advertising expenses of Sybra. Aside from the effect of the Sybra
Acquisition, advertising and selling expenses decreased $0.4 million due to a
recovery of doubtful accounts upon realization in the 2003 second quarter of
collections on two fully-reserved notes from a franchisee.
General and Administrative
Our general and administrative expenses increased $5.7 million reflecting
$4.5 million of general and administrative expenses related to Sybra. Aside from
the effect of the Sybra Acquisition, general and administrative expenses
increased $1.2 million principally due to a $1.5 million increase in deferred
compensation expense. Deferred compensation expense, which increased to an
expense of $1.2 million for the three months ended June 29, 2003 from a reversal
of expense of $0.3 million for the three months ended June 30, 2002, represents
the increase and decrease, respectively, in the fair value of investments in two
deferred compensation trusts, which we refer to as the Trusts, for the benefit
of our Chairman and Chief Executive Officer and President and Chief Operating
Officer, whom we refer to as the Executives, as explained in more detail under
"Loss 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 $1.7 million for the three months ended June 29, 2003
entirely due to depreciation and amortization related to Sybra.
Interest Expense
Interest expense increased $2.5 million reflecting $2.3 million of interest
expense of Sybra. Aside from the effect of the Sybra Acquisition, interest
expense increased $0.2 million, or 4%, principally due to interest expense of
$1.1 million on the $175.0 million principal amount of our 5% convertible notes,
which we refer to as the Convertible Notes, issued on May 19, 2003, partially
offset by (1) a $0.4 million decrease due to lower outstanding balances of our
7.44% insured non-recourse securitization notes, which we refer to as the
Securitization Notes, and (2) a $0.3 million decrease in interest expense
related to the change in fair value of an interest rate swap agreement on one of
our term loans.
Investment Income (Loss), Net
The following table summarizes and compares the major components of
investment income (loss), net:
Three Months Ended
------------------
June 30, June 29,
2002 2003 Change
---- ---- ------
(In Millions)
Other than temporary unrealized losses....................$ (8.0) $ (0.3) $ 7.7
Recognized net gains...................................... -- 1.5 1.5
Interest income........................................... 2.8 2.0 (0.8)
Distributions, including dividends........................ 0.5 0.6 0.1
Other..................................................... (0.2) (0.1) 0.1
-------- ------ --------
$ (4.9) $ 3.7 $ 8.6
======== ====== ========
Our recognized net gains and other than temporary unrealized losses are
dependent upon the underlying economics and/or volatility in the value of our
investments in available-for-sale securities and cost basis investments and/or
the timing of the sales of those investments and may not recur in future periods
(see further discussion below). The decrease in interest income is due to a
decline in average rates of our interest-bearing investments partially offset by
higher average amounts of these investments. Average rates on our
interest-bearing investments declined from 1.9% in the 2002 second quarter to
1.3% in the 2003 second quarter principally due to the general decline in the
money market and short-term interest rate environment. The average amount of our
interest-bearing investments increased principally due to the investment of a
portion of the net proceeds from the May 2003 issuance of the Convertible Notes.
As of June 29, 2003, we had pretax unrealized holding gains and (losses) on
available-for-sale marketable securities of $1.6 million and $(2.8) million,
respectively, included in accumulated other comprehensive deficit, which we
presently believe are not other than temporary. 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 $1.4
million cost basis investment in Scientia Health Group Limited, an entity which
we refer to as Scientia, representing original cost less adjustments for
unrealized losses in investments made by Scientia that were deemed to be other
than temporary. The amount of this investment is before related minority
interests of $0.6 million. In addition, as of June 29, 2003 we have notes
receivable from management officers and employees relating to a portion of their
investments in 280 BT Holdings of which $0.8 million is non-recourse, less an
allowance of $0.5 million for uncollectible amounts. If the value of Scientia
declines further and, accordingly, we recognize additional other than temporary
losses, we would also provide additional allowances relating to the non-recourse
notes receivable in "General and administrative" expenses.
Loss on Sale of Businesses
The loss on sale of businesses of $1.2 million in the three months ended
June 30, 2002 represents a reduction of a gain related to a business previously
sold due to a charge for estimated environmental clean-up and related costs.
Other Income (Expense), Net
Other income (expense), net, decreased $0.7 million to an expense of $0.5
million for the three months ended June 29, 2003 from income of $0.2 million for
the three months ended June 30, 2002 principally due to a $0.8 million increase
in costs of proposed business acquisitions not consummated, partially offset by
a $0.2 million increase in equity in earnings of Encore Capital Group, Inc., an
equity investee of ours which we refer to as Encore.
Loss Before Income Taxes and Minority Interests
Our loss before income taxes and minority interests decreased $8.7 million
to $1.3 million for the three months ended June 29, 2003 from $10.0 million for
the three months ended June 30, 2002 due to the effect of the variances
explained in the captions above.
As disclosed above, we recognized compensation expense of $1.2 million in
the 2003 second quarter and a reversal of compensation expense of $0.3 million
in the 2002 second quarter within general and administrative expenses for the
increase and decrease, respectively, in the fair value of investments in the
Trusts, in which we invested prior to 2002 for the benefit of the Executives.
Under accounting principles generally accepted in the United States of America,
we were unable to recognize any investment income or loss on unrealized
increases or decreases, respectively, in the fair value of the investments in
the Trusts during those quarters. The cumulative disparity between compensation
expense and net recognized investment income will reverse in future periods as
either (1) 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, as they did in the
2002 second quarter, resulting in the recognition of a reversal of deferred
compensation expense without any offsetting losses recognized in investment
income.
(Provision For) Benefit From Income Taxes
We had a provision for income taxes for the three months ended June 29,
2003 despite a pretax loss principally due to (1) the effect of non-deductible
compensation costs and (2) state income taxes, net of Federal income tax
benefit, due to the differing mix of pretax income or loss among the
consolidated entities which file state tax returns on an individual company
basis. The benefit from income taxes for the three months ended June 30, 2002
represented a rate of 13% which was lower than the United States Federal
statutory rate of 35% principally due to the impact of the same items on a
higher pretax loss. In addition, the 2002 effective rate reflects the catch-up
effect of the ability to determine the estimated full-year 2002 effective tax
benefit rate of 9% from an actual tax provision of 40% in connection with the
2002 first quarter pretax loss. The change for the 2002 quarter reflects the
fact that as of the end of the first quarter we projected a full year tax
provision despite a full year pretax loss whereas as of June 30, 2002 we
projected a full year tax benefit due to a higher projected full year pretax
loss.
Minority Interests in Loss of a Consolidated Subsidiary
The minority interests in loss of a consolidated subsidiary of $0.1 million
and $1.2 million for the three-month periods ended June 29, 2003 and June 30,
2002, respectively, reflect provisions for unrealized losses by 280 BT Holdings
on its cost basis investments deemed to be other than temporary.
Six Months Ended June 29, 2003 Compared with Six Months Ended June 30, 2002
Net Sales
Our net sales of $99.9 million for the six months ended June 29, 2003
resulted entirely from our operation of the Arby's restaurants acquired in the
Sybra Acquisition.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from our restaurant franchising operations, were reduced by $2.6 million, or 5%,
to $44.6 million for the six months ended June 29, 2003 from $47.2 million for
the six months ended June 30, 2002. This reduction reflects that we no longer
include royalties from the restaurants we acquired in the Sybra Acquisition
whereas we included $3.6 million of royalties from Sybra in the 2002 first half.
Aside from the effect of the Sybra Acquisition, royalties and franchise and
related fees increased $1.0 million in the 2003 first half compared with the
2002 first half reflecting a $0.8 million, or 2%, increase in royalties and a
$0.2 million, or 16%, increase in franchise and related fees. The increase in
royalties consisted of a $1.7 million improvement resulting from the royalties
from the 124 restaurants opened since June 30, 2002, with generally higher than
average sales volumes, replacing the royalties from the 63 generally
underperforming restaurants closed since June 30, 2002, partially offset by a
$0.9 million reduction due to a 2% decline in same-store sales of franchised
restaurants during the 2003 first half compared with the 2002 first half.
Franchise and related fees increased due to the opening of 8 more franchised
restaurants in the 2003 first half compared with the 2002 first half.
The 2% decline in same-store sales of franchised restaurants in the 2003
first half followed a 3% decline in the 2002 fourth quarter. We believe these
declines were affected by the same factors discussed in the comparison of the
three-month periods. The same-store sales comparison during the 2003 fourth
quarter will be more favorable due to the weak same-store sales in the 2002
fourth quarter.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization, of $73.8
million for the six months ended June 29, 2003 resulted entirely from our
operation of the Arby's restaurants acquired in the Sybra Acquisition.
Our royalties and franchise fees have no associated cost of sales.
Advertising and Selling
Our advertising and selling expenses increased $6.1 million reflecting $6.5
million of advertising expenses of Sybra. Aside from the effect of the Sybra
Acquisition, advertising and selling expenses decreased $0.4 million due to a
recovery of doubtful accounts upon realization in the 2003 second quarter of
collections on two fully-reserved notes from a franchisee.
General and Administrative
Our general and administrative expenses increased $9.6 million reflecting
$8.4 million of general and administrative expenses related to Sybra. Aside from
the effect of the Sybra Acquisition, general and administrative expenses
increased $1.2 million principally due to a $1.4 million increase in deferred
compensation expense. Deferred compensation expense, which increased to $2.0
million for the six months ended June 29, 2003 from $0.6 million for the six
months ended June 30, 2002, represents the increase in the fair value of
investments in the Trusts as explained in more detail in the comparison of the
three-month periods.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs, increased $3.5 million for the six months ended June 29, 2003
entirely due to depreciation and amortization related to Sybra.
Interest Expense
Interest expense increased $4.6 million reflecting $4.6 million of interest
expense of Sybra. Aside from the effect of the Sybra Acquisition, interest
expense was unchanged, reflecting interest expense of $1.1 million on the
Convertible Notes issued on May 19, 2003, entirely offset by (1) a $0.8 million
decrease due to lower outstanding balances of the Securitization Notes and (2)
$0.3 million of other decreases in interest expense.
Investment Income (Loss), Net
The following table summarizes and compares the major components of
investment income (loss), net:
Six Months Ended
----------------
June 30, June 29,
2002 2003 Change
---- ---- ------
(In Millions)
Other than temporary unrealized losses....................$ (8.1) $ (0.4) $ 7.7
Interest income........................................... 5.7 4.0 (1.7)
Distributions, including dividends........................ 1.2 1.0 (0.2)
Recognized net gains...................................... 2.4 2.5 0.1
Other..................................................... (0.1) (0.2) (0.1)
-------- ------ --------
$ 1.1 $ 6.9 $ 5.8
======== ====== ========
Our recognized net gains and other than temporary unrealized losses are
dependent upon the underlying economics and/or volatility in the value of our
investments in available-for-sale securities and cost basis investments and/or
the timing of the sales of those investments and may not recur in future periods
(see further discussion below). The decrease in interest income is due to a
decline in average rates of our interest-bearing investments partially offset by
higher average amounts of these investments. Average rates on our
interest-bearing investments declined from 1.9% in the 2002 second half to 1.3%
in the 2003 second half principally due to the general decline in the money
market and short-term interest rate environment. The average amount of our
interest-bearing investments increased principally due to the investment of a
portion of the net proceeds from the May 2003 issuance of the Convertible Notes.
As of June 29, 2003, we had pretax unrealized holding gains and (losses) on
available-for-sale marketable securities of $1.6 million and $(2.8) million,
respectively, included in accumulated other comprehensive deficit, which we
presently believe are not other than temporary. 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
$1.4 million cost basis investment, before related minority interests of $0.6
million, for which an additional other than temporary loss could possibly occur
in future periods and which could result in additional losses relating to the
non-recourse portion of notes from management officers and employees of up to a
maximum of $0.3 million.
Loss on Sale of Business
The loss on sale of businesses of $1.2 million in the six months ended June
30, 2002 represents a reduction of a gain related to a business previously sold
due to a charge for estimated environmental clean-up and related costs.
Other Income (Expense), Net
Other income (expense), net improved by $0.3 million in the six months
ended June 29, 2003 principally reflecting a $1.5 million improvement in our
equity in the earnings (losses) of Encore, partially offset by a $0.8 million
increase in costs of proposed business acquisitions not consummated. During the
first quarter of the 2002 first half, we recognized $0.7 million in previously
unrecorded equity in losses of Encore upon our investment of $0.9 million in
newly-issued convertible preferred stock of Encore. The equity in these losses
had not been recorded as we had previously reduced our investment in Encore to
zero. During the 2003 first half we recognized $0.8 million of equity in
earnings of Encore, including $0.3 million relating to a litigation settlement.
Loss Before Income Taxes and Minority Interests
Our loss before income taxes and minority interests decreased $7.2 million
to $3.6 million for the six months ended June 29, 2003 from $10.8 million for
the six months ended June 30, 2002 due to the effect of the variances explained
in the captions above.
Income Taxes
Our benefit from income taxes for the six months ended June 29, 2003
represents a rate of 2% which is substantially lower than the United States
Federal statutory rate of 35% principally due to (1) the effect of
non-deductible compensation costs and (2) state income taxes, net of Federal
income tax benefit, due to the differing mix of pretax income or loss among the
consolidated entities which file state tax returns on an individual company
basis. Our benefit from income taxes for the six months ended June 30, 2002
represented an effective rate of 9% which was lower than the United States
Federal statutory rate of 35% principally due to the impact of the same items
which affected the provision in the 2003 first half.
Minority Interests in Loss of a Consolidated Subsidiary
The minority interests in loss of a consolidated subsidiary of $0.1 million
and $1.2 million for the six-month periods ended June 29, 2003 and June 30,
2002, respectively, reflect provisions for unrealized losses by 280 BT Holdings
as previously explained in the comparison of the three-month periods.
Liquidity And Capital Resources
Cash Flows from Continuing Operating Activities
Our consolidated operating activities from continuing operations used cash
and cash equivalents, which we refer to in this discussion as cash, of $44.1
million during the six months ended June 29, 2003 reflecting (1) net operating
investment adjustments of $37.3 million, (2) cash used by changes in operating
assets and liabilities of $11.3 million and (3) a net loss of $3.4 million, all
partially offset by (1) net non-cash charges of $6.2 million and (2) the
collection of a litigation settlement receivable of $1.7 million.
The net operating investment adjustments of $37.3 million principally
reflected $35.3 million of net purchases of trading securities in excess of
sales. The cash used by changes in operating assets and liabilities of $11.3
million principally reflected (1) a $6.5 million reduction in accrued
compensation and related benefits principally due to the annual payment of
previously accrued incentive compensation, partially offset by the current year
accrual, and (2) a $6.3 million reduction of Sybra's accounts payable and
accrued expenses, other than accrued compensation and related benefits,
principally to satisfy a portion of Sybra's net negative working capital assumed
as contemplated as part of the Sybra Acquisition. The net non-cash charges of
$6.2 million principally relate to $7.8 million of depreciation and
amortization.
Excluding the effect of any net purchases of trading securities, which
represent the discretionary investment of excess cash and represented $35.3
million of the $44.1 million of cash used in operating activities during the
2003 first half, we expect positive cash flows from continuing operating
activities during the second half of 2003. This is due to our expectation that
the annual payment of incentive compensation impacting the $11.3 million of cash
used in the 2003 first half by changes in operating assets and liabilities
discussed above should not recur during the second half of 2003 and, to an
extent, should reverse. However, our continuing operating activities may require
a net use of cash for the full year 2003, exclusive of the net purchases of
trading securities, due to the $8.8 million used during the 2003 first half
principally to fund a portion of Sybra's net negative working capital assumed in
the Sybra Acquisition.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$617.9 million at June 29, 2003, reflecting a current ratio, which equals
current assets divided by current liabilities, of 4.6:1. Working capital
increased $108.4 million from $509.5 million at December 29, 2002 principally
due to the net proceeds of $126.8 million, after a related repurchase of $41.7
million of our common stock, from our issuance on May 19, 2003 of $175.0 million
principal amount of the Convertible Notes, discussed below under "Convertible
Notes" and "Treasury Stock Purchases," less the reclassification of $26.5
million of long-term debt to current.
Our total capitalization at June 29, 2003 was $829.8 million consisting of
stockholders' equity of $294.0 million and $535.8 million of long-term debt,
including current portion. Our total capitalization increased $110.0 million
from $719.8 million at December 29, 2002 principally due to (1) the issuance of
the Convertible Notes of $175.0 million and (2) proceeds of $6.3 million from
stock option exercises, both partially offset by (1) the repurchase of $41.7
million of our common stock and (2) repayments of long-term debt of $26.3
million.
Stock Distribution
On August 11, 2003, we declared a stock distribution of two shares of a
newly designated series of our previously authorized class B common stock for
each outstanding share of our class A common stock held on August 21, 2003, with
a distribution date of September 4, 2003. The class B common stock will be
entitled to one-tenth of a vote per share, will have a $.01 per share
liquidation preference and will be entitled to receive cash dividends per share
of at least 110% of any regular quarterly cash dividends per share when, as and
if, declared on the class A common stock through September 4, 2006. Thereafter,
the class B common stock will participate equally on a per share basis with the
class A common stock in any cash dividends.
Securitization Notes
We have outstanding, through our ownership of Arby's Franchise Trust,
Securitization Notes with a remaining principal balance of $244.7 million as of
June 29, 2003 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, which we refer to as the Note
Indenture, we currently estimate that we will repay $10.5 million during the
second half of 2003 with increasing annual payments to $37.4 million in 2011 in
accordance with a targeted principal payment schedule.
Sybra Notes
We have outstanding, through our ownership of Sybra, leasehold notes,
equipment notes and mortgage notes with total remaining principal balances of
$81.5 million as of June 29, 2003. The leasehold notes have a remaining
principal of $72.5 million and are due in equal monthly installments including
interest through 2021, of which $2.6 million is due during the second half of
2003. The equipment notes have a remaining principal of $5.7 million and are due
in equal monthly installments including interest through 2009, of which $0.7
million is due during the second half of 2003. The mortgage notes have a
remaining principal of $3.3 million and are due in equal monthly installments
including interest through 2018, of which $0.1 million is due during the second
half of 2003.
Convertible Notes
On May 19, 2003 we issued $175.0 million principal amount of 5% Convertible
Notes due 2023 in a private placement, which we refer to as the Offering. The
Convertible Notes are redeemable at our option commencing May 20, 2010 and at
the option of the holders on May 15, 2010, 2015 and 2020 or upon the occurrence
of a fundamental change, as defined, relating to us, in each case at a price of
100% of the principal amount of the Convertible Notes plus accrued interest. We
used a portion of the $175.0 million proceeds from the Offering to purchase
1,500,000 shares of our class A common stock for treasury for $41.7 million and
to pay estimated fees and expenses associated with the Offering of $6.5 million.
The balance of the net proceeds from the Offering are being used by us for
general corporate purposes, which may include working capital, repayment of
indebtedness, acquisitions, additional share repurchases and investments.
Other Long-Term Debt
We have a secured bank term loan payable through 2008 with an outstanding
principal amount of $16.7 million as of June 29, 2003, of which $1.6 million is
due during the second half of 2003. We also have an 8.95% secured promissory
note payable through 2006 with an outstanding principal amount of $12.4 million
as of June 29, 2003, of which $1.0 million is due during the second half of
2003.
Revolving Credit Facilities
We did not have any revolving credit facilities as of June 29, 2003.
Debt Repayments and Covenants
Our total scheduled long-term debt repayments during the second half of
2003 are $16.9 million consisting principally of the $10.5 million expected to
be paid under the Securitization Notes, $3.4 million under Sybra's leasehold,
equipment and mortgage notes, $1.6 million under the secured bank term loan and
$1.0 million under the 8.95% secured promissory note.
The various note agreements and indentures contain various covenants, the
most restrictive of which (1) require periodic financial reporting, (2) require
meeting certain debt service coverage ratio tests and (3) restrict, among other
matters, (a) the incurrence of indebtedness, (b) certain asset dispositions and
(c) the payment of distributions by Arby's Franchise Trust and Sybra. The
Company was in compliance with all of these covenants as of June 29, 2003.
In accordance with the Note Indenture, as of June 29, 2003 Arby's Franchise
Trust had no amounts available for the payment of distributions. However, on
July 21, 2003, $2.1 million relating to cash flows for the calendar month of
June 2003 became available for the payment of distributions by Arby's Franchise
Trust 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. Under the plan of
reorganization of Sybra confirmed by a United States Bankruptcy Court under
which we acquired Sybra, we agreed that Sybra would not pay any distributions
prior to December 27, 2004.
Guarantees 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 agreed that while it remains a special limited partner of
AmeriGas Eagle, it would indemnify the owner of AmeriGas Eagle for any payments
the owner makes related to the owner's obligations under certain of the debt of
AmeriGas Eagle, aggregating approximately $138.0 million as of June 29, 2003, if
AmeriGas Eagle is unable to repay or refinance such debt, but only after
recourse by the owner to the assets of AmeriGas Eagle. National Propane's
principal asset is an intercompany note receivable from Triarc in the amount of
$50.0 million as of June 29, 2003. 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 National Propane's special limited
partner interest. Either National Propane or AmeriGas Propane may require
AmeriGas Eagle to repurchase the special limited partner interest. However, we
believe it is unlikely that either party would require repurchase prior to 2009
as either AmeriGas Propane would owe us tax indemnification payments if AmeriGas
Propane required the repurchase or we would accelerate payment of deferred
taxes, which would amount to $41.4 million as of June 29, 2003, associated with
our July 1999 sale of the propane business if National Propane required the
repurchase. In the event the interest is not repurchased prior to 2009, we
estimate our actual related taxes payable to be $2.0 million during the second
half of 2003 with further payments in 2004 through 2008 reducing the taxes
payable in 2009 to approximately $36.0 million.
Triarc guarantees mortgage and equipment notes payable through 2015 of
approximately $41.0 million as of June 29, 2003 related to 355 restaurants sold
by us in 1997. The purchaser of the restaurants also assumed substantially all
of the associated lease obligations which extend through 2031, including all
then existing extension or renewal option periods, although Arby's remains
contingently liable if the purchaser does not make the required future lease
payments. Those lease obligations total approximately $62.0 million as of June
29, 2003, assuming the purchaser has made all scheduled payments through that
date under those lease obligations.
We guarantee up to $6.7 million of senior notes that mature in January 2007
issued by Encore to a major financial institution. The outstanding principal
amount of these notes was $7.2 million as of June 29, 2003. Our guarantee will
be reduced by (1) any repayments 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 guarantee and could
indirectly benefit from it.
In addition to the note guarantee, we and 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, had
entered into guarantees and/or related agreements to guarantee up to $15.0
million of revolving credit borrowings of a subsidiary of Encore. The $15.0
million revolving credit line had been scheduled to expire in April 2003. In
April 2003, the maturity date for any revolving credit borrowings was extended
until April 15, 2004, but the maximum amount available was reduced from $15.0
million to $5.0 million. This effectively reduced the guarantees to $5.0
million, of which we would be responsible for approximately $0.6 million
assuming the full $5.0 million was borrowed and all of the parties, besides us,
to the guarantees and the related agreements fully perform thereunder. As of
Encore's second quarter ended June 30, 2003, Encore had no outstanding revolving
credit borrowings. Prior to the April 2003 extension, we had an interest-bearing
bank custodial account at the financial institution providing the revolving
credit line with a balance of $15.0 million, which was subject to set off under
certain circumstances if the parties to the guarantees and related agreements
failed to perform their obligations thereunder. However, these funds were
subsequently withdrawn by us following the April 2003 extension of the revolving
credit line.
Capital Expenditures
Cash capital expenditures amounted to $1.9 million during the 2003 first
half. We expect that cash capital expenditures will be approximately $4.3
million for the second half of 2003, principally for maintenance and remodel
capital expenditures for company-owned restaurants, for which there were $0.4
million of outstanding commitments as of June 29, 2003.
Acquisitions and Investments
As of June 29, 2003, we have $771.3 million of cash, cash equivalents and
investments, including $34.7 million of investments classified as non-current
and net of $18.1 million of securities 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 cash equivalents and non-current investments include
$22.6 million of investments, at cost, in the Trusts designated to satisfy
deferred compensation. We continue to evaluate strategic opportunities for the
use of our significant cash and investment position, including business
acquisitions, repurchases of Triarc common shares (see "Treasury Stock
Purchases" below) and investments.
Income Taxes
Our Federal income tax returns for years subsequent to 1993 have not been
examined by the Internal Revenue Service, which we refer to as the IRS. However,
we have been notified by the IRS of its intent to examine our Federal income tax
returns for the years ended December 31, 2000 and December 30, 2001. Should any
income taxes or associated interest be assessed as the result of any Federal or
state examinations for periods through the October 25, 2000 date of sale of our
former beverage businesses, the purchaser has agreed to pay up to $5.0 million
of any resulting income taxes or interest relating to the operations of the
former beverage businesses.
Dividends
On August 11, 2003, we declared an initial regular quarterly cash dividend
of $0.065 and $0.075 per share on our class A and class B common stock,
respectively, both payable on September 25, 2003 to holders of record on
September 15, 2003. We currently intend to continue to declare and pay regular
quarterly cash dividends, however, there can be no assurance that any dividends
will be declared or paid in the future or the amount or timing of such
dividends, if any. If we were to pay cash dividends in the 2003 fourth quarter
at the same rate as declared in our 2003 third quarter, based on the number of
common shares outstanding on July 31, 2003 as adjusted for the class B common
stock distribution, our cash requirement for dividends would be $8.4 million for
the 2003 second half.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant and to the extent legally permissible, to repurchase up to $50.0 million
of our class A and class B common stock under a program that, as extended, ends
on January 18, 2005. Under this program, we repurchased 1,500,000 shares of
class A common stock for a total cost of $41.7 million during the 2003 first
half in connection with the issuance of the Convertible Notes discussed above.
Following this purchase, the amount permissible for repurchase of shares under
this program was replenished to $50.0 million. We cannot assure you that we will
repurchase any additional shares 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 plus interest at
7.19% from October 25, 2000 while we, on the other hand, have stated that we
currently believe that no post-closing adjustment is required. We are in
arbitration with the purchaser to determine the amount of the post-closing
adjustment, if any. We currently expect the arbitration process to be completed
by December 28, 2003.
Cash Requirements
As of June 29, 2003, our consolidated cash requirements for continuing
operations for the second half of 2003, exclusive of operating cash flow
requirements, consist principally of (1) a maximum of $50.0 million of payments
for repurchases of our class A and class B common stock for treasury under our
current stock repurchase program, (2) scheduled debt principal repayments
aggregating $16.9 million, (3) regular cash dividends of $8.4 million, (4)
capital expenditures of approximately $4.3 million and (5) the cost of business
acquisitions, if any. Our consolidated cash requirements relating to
discontinued operations for the second half of 2003 consist principally of the
post-closing adjustment, if any, of up to $23.2 million related to the sale of
our former beverage businesses, excluding related accrued interest which will be
included in operating cash flows. We anticipate meeting all of these
requirements through (1) the use of our aggregate $736.6 million of existing
cash and cash equivalents and short-term investments, net of $18.1 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., an
inactive subsidiary of ours, was listed by the United States Environmental
Protection Agency on the Comprehensive Environmental Response, Compensation and
Liability Information System, which we refer to as CERCLIS, list of known or
suspected contaminated sites. The CERCLIS listing appears to have been based on
an allegation that a former tenant of Adams Packing conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970's. The
business operations of Adams Packing were sold in December 1992. In February
2003, Adams Packing and the Florida Department of Environmental Protection,
which we refer to as the Florida DEP, agreed to a consent order that provides
for development of a work plan for further investigation of the site and limited
remediation of the identified contamination. In May 2003, the Florida DEP
approved the work plan submitted by Adams Packing's environmental consultant and
work has begun at the site. Based on a preliminary cost estimate of
approximately $1.0 million for completion of the work plan developed by Adams
Packing's environmental consultant, and after taking into consideration various
legal defenses available to us, including Adams Packing, Adams Packing has
provided for its estimate of its liability for this matter, including related
legal and consulting fees.
In October 1998, various class action lawsuits were filed on behalf of our
stockholders. Each of these actions named us, the Executives and members of our
board of directors as defendants. On March 26, 1999, certain plaintiffs in these
actions filed an amended complaint which alleged that our tender offer statement
filed with the Securities and Exchange Commission in 1999, pursuant to which we
repurchased 3,805,015 shares of our class A common stock for $18.25 per share,
was materially false and misleading. The amended complaint seeks, among other
items, damages in an unspecified amount. In October 2000, the plaintiffs agreed
to stay this action pending determination of a similar stockholder action which
was subsequently dismissed in October 2002 and is no longer being appealed.
Through June 29, 2003, no further action has occurred with respect to the
remaining class action lawsuit.
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 our legal and
environmental matters aggregating $2.4 million as of June 29, 2003. Although the
outcome of these matters cannot be predicted with certainty and some of these
matters may be disposed of unfavorably to us, based on currently available
information, including legal defenses available to us and/or our subsidiaries,
and given the aforementioned reserves, we do not believe that the outcome of
these legal and environmental matters will have a material adverse effect on our
consolidated financial position or results of operations.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant revenues are somewhat lower in our first quarter.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." Variable interest entities, which were formerly referred to as
special purpose entities, are generally entities that either (1) have equity
investors that do not provide significant financial resources for the entity to
sustain its activities or (2) have equity investors without voting rights. Under
Interpretation No. 46 variable interest entities must be consolidated by the
prima