UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 26, 2004
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 23,232,306 the registrant's Class A Common Stock and 41,231,083
the registrant's Class B Common Stock outstanding as of October 29, 2004.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 28, September 26,
2003 (A) 2004
------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 560,510 $ 419,087
Short-term investments............................................................ 173,127 167,948
Receivables ..................................................................... 13,070 28,081
Inventories....................................................................... 2,416 2,327
Deferred income tax benefit....................................................... 11,284 11,153
Prepaid expenses, restricted cash and other current assets........................ 12,575 5,323
----------- -----------
Total current assets........................................................... 772,982 633,919
Restricted cash equivalents............................................................ 32,467 32,866
Investments............................................................................ 37,363 66,073
Properties............................................................................. 106,231 104,450
Goodwill .............................................................................. 64,153 123,773
Asset management contracts............................................................. - 26,615
Other intangible assets................................................................ 8,115 9,193
Deferred costs and other assets........................................................ 21,654 20,031
----------- -----------
$ 1,042,965 $ 1,016,920
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.....................................................................$ - $ 16,610
Current portion of long-term debt................................................. 35,637 36,774
Accounts payable.................................................................. 16,314 13,405
Accrued expenses and other current liabilities.................................... 86,462 80,341
Current liabilities relating to discontinued operations........................... 24,004 15,499
----------- -----------
Total current liabilities...................................................... 162,417 162,629
Long-term debt......................................................................... 483,280 455,942
Deferred compensation payable to related parties....................................... 29,144 31,233
Deferred income taxes.................................................................. 48,697 25,796
Other liabilities, deferred income and minority interests in consolidated
subsidiaries......................................................................... 31,821 33,772
Stockholders' equity:
Class A common stock.............................................................. 2,955 2,955
Class B common stock.............................................................. 5,910 5,910
Additional paid-in capital........................................................ 129,572 133,361
Retained earnings................................................................. 341,642 345,691
Common stock held in treasury..................................................... (203,168) (223,464)
Deferred compensation payable in common stock..................................... 10,160 43,553
Accumulated other comprehensive income............................................ 535 754
Unearned compensation............................................................. - (1,212)
----------- -----------
Total stockholders' equity..................................................... 287,606 307,548
----------- -----------
$ 1,042,965 $ 1,016,920
=========== ===========
(A) Derived from the audited consolidated financial statements as of December
28, 2003.
See accompanying notes to condensed consolidated
financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales..................................................$ 51,093 $ 52,324 $150,988 $ 151,709
Royalties and franchise and related fees................... 23,542 26,721 68,181 73,992
Asset management and related fees.......................... - 6,915 - 6,915
--------- --------- -------- ---------
74,635 85,960 219,169 232,616
--------- --------- -------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization..... 38,295 40,902 112,139 119,891
Cost of services, excluding depreciation and amortization.. - 2,042 - 2,042
Advertising and selling.................................... 4,412 3,971 11,555 12,767
General and administrative, excluding depreciation and
amortization............................................. 23,402 28,713 70,681 77,495
Depreciation and amortization, excluding amortization
of deferred financing costs.............................. 3,379 4,804 10,176 11,619
--------- --------- -------- ---------
69,488 80,432 204,551 223,814
--------- --------- -------- ---------
Operating profit.................................... 5,147 5,528 14,618 8,802
Interest expense........................................... (10,032) (5,017) (27,857) (23,655)
Insurance expense related to long-term debt................ (1,025) (934) (3,163) (2,883)
Investment income (loss), net.............................. 4,014 (3,730) 10,884 7,439
Gain (costs) related to proposed business acquisitions not
consummated.............................................. 2,994 (26) 2,064 (793)
Other income, net.......................................... 449 373 1,424 1,901
--------- --------- -------- ---------
Income (loss) from continuing operations
before income taxes and minority interests...... 1,547 (3,806) (2,030) (9,189)
(Provision for) benefit from income taxes...................... (1,052) 15,618 (985) 16,559
Minority interests in (income) loss of consolidated
subsidiaries................................................. - (663) 112 (653)
--------- --------- -------- ---------
Income (loss) from continuing operations............ 495 11,149 (2,903) 6,717
Gain on disposal of discontinued operations.................... - 10,823 - 10,823
--------- --------- -------- ---------
Net income (loss)...................................$ 495 $ 21,972 $ (2,903) $ 17,540
========= ========= ======== =========
Basic income (loss) per share:
Class A common stock:
Continuing operations...............................$ .01 $ .16 $ (.05) $ .10
Discontinued operations............................. - .16 - .16
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .32 $ (.05) $ .26
========= ========= ======== =========
Class B common stock:
Continuing operations...............................$ .01 $ .18 $ (.05) $ .11
Discontinued operations............................. - .18 - .18
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .36 $ (.05) $ .29
========= ========= ======== =========
Diluted income (loss) per share:
Class A common stock:
Continuing operations...............................$ .01 $ .16 $ (.05) $ .09
Discontinued operations............................. - .15 - .15
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .31 $ (.05) $ .24
========= ========= ======== =========
Class B common stock:
Continuing operations...............................$ .01 $ .17 $ (.05) $ .10
Discontinued operations............................. - .17 - .17
--------- --------- -------- ---------
Net income (loss)...................................$ .01 $ .34 $ (.05) $ .27
========= ========= ======== =========
See accompanying notes to condensed consolidated
financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
--------------------------------
September 28, September 26,
2003 2004
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss).......................................................................$ (2,903) $ 17,540
Adjustments to reconcile net income (loss) to net cash provided by (used in)
continuing operating activities:
Operating investment adjustments, net (see below).............................. (17,647) 51,808
Depreciation and amortization of properties.................................... 9,203 9,833
Amortization of other intangible assets and certain other items................ 973 1,786
Amortization of deferred financing costs and original issue discount........... 1,666 1,954
Deferred compensation provision ............................................... 2,740 1,240
Release of income tax and related interest accruals ........................... - (18,934)
Deferred income tax benefit.................................................... (658) (3,455)
Equity in earnings of investee................................................. (1,025) (1,724)
Unfavorable lease liability recognized......................................... (1,131) (1,208)
Deferred vendor incentive recognized........................................... (1,420) (438)
Minority interests in income (loss) of consolidated subsidiaries............... (112) 653
Collection of non-current receivables.......................................... 1,667 378
Gain on disposal of discontinued operations.................................... - (10,823)
Other, net..................................................................... 606 1,437
Changes in operating assets and liabilities:
Increase in receivables.................................................... (485) (1,292)
(Increase) decrease in inventories......................................... (104) 89
Decrease in prepaid expenses and other current assets...................... 1,100 56
Decrease in accounts payable and accrued expenses and other current
liabilities.............................................................. (5,046) (2,572)
------------ -----------
Net cash provided by (used in) continuing operating activities.......... (12,576) 46,328
------------ -----------
Cash flows from continuing investing activities:
Investment activities, net (see below)............................................. 1,635 (57,352)
Capital expenditures............................................................... (3,465) (7,892)
Cost (adjustment to cost in 2003) of business acquisitions less cash acquired...... (200) (93,768)
Other, net......................................................................... (62) (302)
------------ -----------
Net cash used in continuing investing activities........................ (2,092) (159,314)
------------ -----------
Cash flows from continuing financing activities:
Repayments of notes and long-term debt............................................. (34,717) (26,666)
Issuance of long-term debt......................................................... 175,000 -
Dividends paid ................................................................... (4,238) (13,491)
Repurchases of common stock for treasury........................................... (41,700) (1,381)
Exercises of stock options......................................................... 10,422 13,354
Transfers from restricted cash equivalents collateralizing long-term debt.......... 127 65
Deferred financing costs........................................................... (6,525) -
Class B common stock distribution costs............................................ (910) -
------------ -----------
Net cash provided by (used in) continuing financing activities.......... 97,459 (28,119)
------------ -----------
Net cash provided by (used in) continuing operations.................................... 82,791 (141,105)
Net cash provided by (used in) discontinued operations.................................. 4,767 (318)
------------ -----------
Net increase (decrease) in cash and cash equivalents.................................... 87,558 (141,423)
Cash and cash equivalents at beginning of period........................................ 456,388 560,510
------------ -----------
Cash and cash equivalents at end of period..............................................$ 543,946 $ 419,087
============ ===========
Detail of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities........................................$ 206,465 $ 161,913
Cost of trading securities purchased............................................. (220,724) (114,394)
Net recognized (gains) losses from trading securities and short positions in
securities..................................................................... (372) 832
Other net recognized (gains) losses, net of other than temporary losses ......... (3,042) 5,267
Net (accretion of discount) amortization of premium on debt securities........... 26 (1,810)
------------ -----------
$ (17,647) $ 51,808
============= ===========
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments....................................................................$ 128,006 $ 171,587
Cost of available-for-sale securities and other investments purchased............ (129,610) (217,252)
Proceeds of securities sold short................................................ 28,777 19,539
Payments to cover short positions in securities.................................. (21,720) (38,493)
(Increase) decrease in restricted cash collateralizing obligations for short
positions in securities....................................................... (3,818) 7,267
------------ -----------
$ 1,635 $ (57,352)
============ ===========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 26, 2004
(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 28, 2003 and September 26, 2004, its results
of operations for the three-month and nine-month periods ended September 28,
2003 and September 26, 2004 and its cash flows for the nine-month periods ended
September 28, 2003 and September 26, 2004 (see below). This information should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 2003 (the "Form 10-K").
The Company reports on a fiscal year consisting of 52 or 53 weeks ending on
the Sunday closest to December 31. However, Deerfield & Company LLC
("Deerfield"), in which the Company acquired a 63.6% capital interest on July
22, 2004 (see Note 3), reports on a calendar year ending on December 31. The
Company's first nine-month period of fiscal 2003 commenced on December 30, 2002
and ended on September 28, 2003, with its third quarter commencing on June 30,
2003. The Company's first nine-month period of fiscal 2004 commenced on December
29, 2003 and ended on September 26, 2004, with its third quarter commencing on
June 28, 2004, except that for each of these periods, Deerfield is included
commencing July 23, 2004 through its quarter end of September 30, 2004. The
periods from June 30, 2003 to September 28, 2003 and December 30, 2002 to
September 28, 2003 are referred to herein as the three-month and nine-month
periods ended September 28, 2003, respectively. The periods from June 28, 2004
to September 26, 2004 and December 29, 2003 to September 26, 2004 are referred
herein as the three-month and nine-month periods ended September 26, 2004,
respectively. Each quarter contained 13 weeks and each nine-month period
contained 39 weeks. The effect of including Deerfield in the Company's condensed
consolidated financial statements through Deerfield's quarter end of September
30, 2004 instead of the Company's quarter end of September 26, 2004 was not
material.
(2) Significant Accounting Policies
Stock Based Compensation
The Company maintains several equity plans (the "Equity Plans") which
collectively provide or provided for the grant of stock options, tandem stock
appreciation rights and restricted shares of the Company's common stock to
certain officers, other key employees, non-employee directors and consultants
and shares of the Company's 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 class A common stock
(the "Class A Common Stock" or "Class A Common Shares") and/or class B common
stock, series 1 (the "Class B Common Stock" or "Class B Common Shares"), as
applicable, 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 income (loss) and net income (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 Nine Months Ended
---------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Net income (loss), as reported.........................$ 495 $ 21,972 $ (2,903) $ 17,540
Reversal of stock-based employee compensation expense
determined under the intrinsic value method included
in reported net income or loss, net of related income
taxes................................................ 110 - 159 157
Recognition of total stock-based employee compensation
expense determined under the fair value method, net
of related income taxes.............................. (1,297) (609) (3,980) (1,786)
---------- ---------- --------- -----------
Net income (loss), as adjusted.........................$ (692) $ 21,363 $ (6,724) $ 15,911
========== ========== ========= ===========
Net income (loss) per share:
Class A Common Stock:
Basic, as reported................................$ .01 $ .32 $ (.05) $ .26
Basic, as adjusted................................ (.01) .31 (.11) .24
Diluted, as reported.............................. .01 .31 (.05) .24
Diluted, as adjusted.............................. (.01) .30 (.11) .22
Class B Common Stock:
Basic, as reported................................$ .01 $ .36 $ (.05) $ .29
Basic, as adjusted................................ (.01) .35 (.11) .27
Diluted, as reported.............................. .01 .34 (.05) .27
Diluted, as adjusted.............................. (.01) .33 (.11) .25
Stock options granted prior to a stock distribution (the "Stock
Distribution") during the third quarter of 2003 of two shares of the Company's
Class B Common Stock for each share of the Company's Class A Common Stock, as
adjusted for the Stock Distribution, are each exercisable for one share of Class
A Common Stock and two shares of Class B Common Stock (the "Package Options").
Stock options granted subsequent to the Stock Distribution are exercisable for
one share of Class A Common Stock (the "Class A Options") or one share of Class
B Common Stock (the "Class B Options"). The fair value of these stock options
granted under the Equity Plans on the dates of grant were estimated using the
Black-Scholes option pricing model (the "Black-Scholes Model") with the
following weighted average assumptions for options granted during the nine-month
periods ended September 28, 2003 and September 26, 2004:
Nine Months Ended
-------------------------------------------
September 28, 2003 September 26, 2004
------------------ ---------------------
Package Class A Class B
Options Options Options
------- ------- -------
Risk-free interest rate....................................... 2.90 % 3.96 % 3.87 %
Expected option life in years................................. 7 7 7
Expected volatility........................................... 17.5 % 19.6 % 32.7 %
Dividend yield................................................ None(a) 2.41 % 2.63 %
- ------------------
(a) The grants of Package Options occurred prior to the commencement in the
third quarter of 2003 of the payment of quarterly cash dividends.
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. The Company's stock-based awards to employees have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate.
Therefore, 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.
During the nine-month period ended September 28, 2003, the Company granted
24,000 Package Options and during the nine-month period ended September 26,
2004, the Company granted 43,000 Class A Options and 239,000 Class B Options
under the Equity Plans at exercise prices equal to the market price of the stock
on the grant dates. The weighted average grant date fair value of each of these
stock options, using the Black-Scholes Model with the assumptions set forth
above, were $7.56, $2.23 and $3.33, respectively.
Update to Significant Accounting Policies
As a result of the acquisition of a 63.6% capital interest in Deerfield, an
alternative asset manager, the Company has adopted certain new accounting
policies. The following disclosure is supplemental to Note 1, "Summary of
Significant Accounting Policies," in the Form 10-K.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
Deerfield with minority interests commencing July 23, 2004.
Short-Term Investments
Deerfield holds investments in preferred shares of several collateralized
debt obligation instruments ("CDOs") for which it is the collateral manager.
Such investments are considered financial assets subject to prepayment and are
therefore accounted for similar to debt securities and are classified as
"available-for-sale" securities. Interest income is accreted on the preferred
shares over the respective lives of the CDOs using the effective yield method.
Revenue Recognition
Asset management and related fees consist of the following types of
revenues generated by Deerfield in its capacity as the trading manager for
various investment funds and private investment accounts (collectively, the
"Funds") and as the collateral manager for various CDOs: (1) management fees,
(2) incentive fees and (3) other related fees. Management fees are recognized as
revenue when the management services have been performed for the period and all
contingencies have been resolved, including the generation of sufficient cash
flows by the CDOs to pay the fees under the terms of the related management
agreements. Incentive fees are based upon the performance of the Funds and CDOs
and are recognized as revenues when the amounts become fixed and determinable
upon the close of a performance period for the Funds or the achievement of
performance targets for the CDOs. Other related fees primarily include
structuring and warehousing fees earned by Deerfield for services provided to
CDOs and are recognized as revenues upon the rendering of such services and the
closing of the respective CDO.
(3) Business Acquisition
On July 22, 2004 the Company completed the acquisition of a 63.6% capital
interest in Deerfield (the "Deerfield Acquisition") for an aggregate cost of
$94,782,000, consisting of payments of $86,532,000 to selling owners and
estimated expenses of $8,250,000, including expenses reimbursed to a selling
owner. Deerfield, through its wholly-owned subsidiary Deerfield Capital
Management LLC, is an alternative asset manager offering a diverse range of
fixed income and credit-related strategies to institutional investors. Deerfield
currently provides asset management services for CDOs and Funds but may expand
its services into other types of investments. As of September 26, 2004,
Deerfield has over $8 billion of assets under management, consisting principally
of CDOs and, to a much lesser extent, Funds. Deerfield represents a business
segment of the Company (see Note 12).
The following table (1) summarizes on a preliminary basis the allocation of
the purchase price of Deerfield to the assets acquired and liabilities assumed
in the Deerfield Acquisition and remains subject to finalization due to the
recent date of the acquisition and (2) provides a reconciliation to "Cost of
business acquisitions less cash acquired" in the accompanying condensed
consolidated statement of cash flows (in thousands):
As of
July 22, 2004
-------------
Current assets.........................................................................$ 30,877
Restricted cash equivalents............................................................ 400
Investments............................................................................ 49
Properties............................................................................. 739
Goodwill............................................................................... 59,620
Asset management contracts............................................................. 27,199
Other intangible assets................................................................ 1,394
Other assets........................................................................... 590
----------
Total assets acquired............................................................ 120,868
----------
Current liabilities.................................................................... 24,039
Deferred income and minority interests in Deerfield.................................... 2,047
----------
Total liabilities assumed........................................................ 26,086
----------
Net assets acquired........................................................ 94,782
Less cash acquired..................................................................... 1,014
----------
Cost of business acquisitions less cash acquired.......................................$ 93,768
==========
The Deerfield Acquisition resulted in $59,620,000 of goodwill, which will
be fully deductible for income tax purposes and was assigned entirely to the
Company's new asset management business segment. Such goodwill reflects the
substantial value of Deerfield's historically profitable investment advisory
brand and the Company's expectation of being able to grow Deerfield's asset
management portfolio thereby increasing its asset management fee revenues. All
of the acquired identifiable intangible assets, aggregating $28,593,000, are
amortizable and principally include (1) asset management contracts for Funds of
$14,946,000, (2) asset management contracts for CDOs of $12,253,000, (3) asset
management computer software systems of $890,000 and (4) non-compete agreements
of $413,000. Each of those amounts represents the Company's 63.6% interest in
the fair value of the respective intangible asset, as determined in accordance
with a preliminary independent appraisal. The acquired identifiable intangible
assets have a weighted average amortization period of approximately 11 years,
reflecting a weighted average of approximately 12 years for the asset management
contracts and approximately 4 years for the other intangible assets.
Deerfield's results of operations, less applicable minority interests, and
cash flows subsequent to the July 22, 2004 date of the Deerfield Acquisition
through September 30, 2004 have been included in the accompanying condensed
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended September 26, 2004.
The following supplemental pro forma condensed consolidated summary
operating data (the "As Adjusted Data") of the Company for each of the periods
presented herein has been prepared by adjusting the historical data as set forth
in the accompanying condensed consolidated statements of operations to give
effect to the Deerfield Acquisition as if it had been consummated as of the
beginning of each respective period (in thousands except per share amounts):
Three Months Ended
-------------------------------------------------------
September 28, 2003 September 26, 2004
-------------------------- -------------------------
As Reported As Adjusted As Reported As Adjusted
----------- ----------- ----------- -----------
Revenues...............................................$ 74,635 $ 81,367 $ 85,960 $ 87,476
Operating profit....................................... 5,147 5,192 5,528 4,605
Income from continuing operations...................... 495 154 11,149 10,695
Net income............................................. 495 154 21,972 21,518
Basic income per share:
Class A Common Stock:
Continuing operations............................. .01 - .16 .15
Net income........................................ .01 - .32 .31
Class B Common Stock:
Continuing operations............................. .01 - .18 .17
Net income........................................ .01 - .36 .35
Diluted income per share:
Class A Common Stock:
Continuing operations............................. .01 - .16 .15
Net income........................................ .01 - .31 .30
Class B Common Stock:
Continuing operations............................. .01 - .17 .17
Net income........................................ .01 - .34 .33
Nine Months Ended
-------------------------------------------------------
September 28, 2003 September 26, 2004
-------------------------- -------------------------
As Reported As Adjusted As Reported As Adjusted
----------- ----------- ----------- -----------
Revenues...............................................$ 219,169 $ 241,097 $ 232,616 $ 260,135
Operating profit....................................... 14,618 15,332 8,802 15,990
Income (loss) from continuing operations............... (2,903) (3,475) 6,717 8,902
Net income (loss)...................................... (2,903) (3,475) 17,540 19,725
Basic income (loss) per share:
Class A Common Stock:
Continuing operations.......................... (.05) (.06) .10 .13
Net income (loss)................................. (.05 (.06) .26 .29
Class B Common Stock:
Continuing operations............................ (.05) (.06) .11 .15
Net income (loss)................................ (.05) (.06) .29 .33
Diluted income (loss) per share:
Class A Common Stock:
Continuing operations.......................... (.05) (.06) .09 .12
Net income (loss)................................ (.05) (.06) .24 .28
Class B Common Stock:
Continuing operations............................ (.05) (.06) .10 .14
Net income (loss)................................. (.05) (.06) .27 .31
This As Adjusted Data is presented for comparative purposes only and does
not purport to be indicative of the Company's actual results of operations had
the Deerfield Acquisition actually been consummated as of the beginning of each
of the respective periods presented above or of the Company's future results of
operations.
Deerfield granted membership interests in future profits effective August
20, 2004 (the "Profit Interests") to certain of its key personnel, which
effectively increased the minority interests in any profits of Deerfield
subsequent to August 19, 2004 by 2.1% to 38.5% from 36.4%. The estimated fair
value at the date of grant of the Profit Interests, in accordance with an
independent appraisal, was $2,050,000, which resulted in aggregate unearned
compensation of $1,260,000, net of minority interests, being charged to the
"Unearned compensation" component of "Stockholders equity" with an equal
offsetting increase in "Additional paid-in capital." The vesting of Profit
Interests varies by employee either vesting ratably in each of the three years
ended August 20, 2007, 2008, and 2009 or 100% on August 20, 2007. Accordingly,
this unearned compensation is being amortized as compensation expense as earned
over periods of three or five years.
The Company owns 63.6% of the capital interests and 61.5% of the Profit
Interests in Deerfield. The remaining economic interests in Deerfield are owned
by executives of Deerfield or their affiliates. Commencing July 22, 2009, the
Company will have certain rights to acquire the economic interests of Deerfield
owned by two of its executives, which aggregate 35.5% of the capital interests
and 34.3% of the Profit Interests. In addition, commencing July 22, 2007, those
two executives will have certain rights to require the Company to acquire their
economic interests. In each case, the rights are generally exercisable at a
price equal to the then current fair market value of those interests.
In connection with the Deerfield Acquisition, the Company also committed to
invest $100,000,000 to seed a new multi-strategy hedge fund to be managed by
Deerfield. Such fund was established and the $100,000,000 was funded in October
2004. The fund will initially be accounted for as a consolidated subsidiary of
the Company, with minority interests to the extent of third-party investor
participation, commencing in the quarter ending January 2, 2005.
(4) Comprehensive Income (Loss)
The following is a summary of the components of comprehensive income
(loss), net of income taxes and minority interests (in thousands):
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Net income (loss).......................................$ 495 $ 21,972 $ (2,903) $ 17,540
Unrealized gains (losses) on available-for sale
securities (see below)................................ (202) 1,053 (1,105) 207
Net change in currency translation adjustment........... (4) 21 8 12
---------- ---------- --------- ----------
Comprehensive income (loss).............................$ 289 $ 23,046 $ (4,000) $ 17,759
========== ========== ========= ==========
The following is a summary of the components of the unrealized gains or
losses on available-for-sale securities included in other comprehensive income
(loss) (in thousands):
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Unrealized holding gains (losses) arising during the
period................................................$ (311) $ 604 $ (1,835) $ 415
Reclassification of prior period net unrealized holding
(gains) losses included in net income or loss......... (7) 1,006 105 (118)
---------- ---------- --------- ------------
(318) 1,610 (1,730) 297
Equity in change in unrealized gain on a retained
interest.............................................. (4) - (20) (2)
Equity in change in unrealized gain on available-for-
sale securities....................................... 3 (2) - (1)
Income tax benefit (provision).......................... 117 (599) 645 (131)
Minority interests in a consolidated subsidiary......... - 44 - 44
---------- ---------- --------- ------------
$ (202) $ 1,053 $ (1,105) $ 207
========== ========== ========= ============
(5) Income (Loss) Per Share
Basic income (loss) per share has been computed by dividing the allocated
income or loss for the Company's Class A Common Stock and the Company's Class B
Common Stock by the weighted average number of shares of each class. Both
factors are presented in the table below. Income for the three-month period
ended September 28, 2003 and the three and nine-month periods ended September
26, 2004 was allocated between the Class A Common Shares and Class B Common
Shares based on the actual dividend payment ratio to the extent of any dividends
paid during the period with any excess allocated giving effect to the current
minimum stated dividend participation rate of 110% for the Class B Common Shares
compared with the Class A Common Shares. Losses for the nine-month period ended
September 28, 2003 were allocated equally among each share of Class A Common
Stock and Class B Common Stock, resulting in the same loss per share for each
class. The weighted average number of shares includes the effect of the shares
held in the additional deferred compensation trusts which are not reported as
outstanding shares for financial statement purposes (see Note 10).
Diluted income per share for the three-month period ended September 28,
2003 and the three and nine-month periods ended September 26, 2004 has been
computed by dividing the allocated income for the Class A Common Shares and
Class B Common Shares by the weighted average number of shares of each class
plus the potential common share effects on each class of dilutive stock options,
computed using the treasury stock method, as presented in the table below. The
shares used to calculate diluted income per share for those periods exclude any
effect of the Company's $175,000,000 of 5% convertible notes (the "Convertible
Notes") which would have been antidilutive. Diluted loss per share for the
nine-month period ended September 28, 2003 was the same as basic loss per share
for each of the Class A and Class B Common Shares since the Company reported a
net loss for this period and, therefore, the effect of all potentially dilutive
securities on the loss per share would have been antidilutive.
The only remaining Company securities as of September 26, 2004 that could
dilute basic income per share for periods subsequent to September 26, 2004 are
(1) outstanding stock options which are exercisable into 4,116,000 shares and
8,590,000 shares of the Company's Class A Common Stock and Class B Common Stock,
respectively, and (2) the Convertible Notes which are convertible into 4,375,000
shares and 8,750,000 shares of the Company's Class A Common Stock and Class B
Common Stock, respectively.
Income (loss) per share has been computed by allocating the income or loss
as follows (in thousands):
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Class A Common Shares:
Continuing operations...............................$ 150 $ 3,728 $ (968) $ 2,149
Discontinued operations............................. - 3,666 - 3,539
----------- --------- ---------- ----------
Net income (loss)...................................$ 150 $ 7,394 $ (968) $ 5,688
=========== ========= ========== ==========
Class B Common Shares:
Continuing operations...............................$ 345 $ 7,421 $ (1,935) $ 4,568
Discontinued operations............................. - 7,157 - 7,284
----------- --------- ---------- ----------
Net income (loss)...................................$ 345 $ 14,578 $ (1,935) $ 11,852
=========== ========= ========== ==========
The number of shares used to calculate basic and diluted loss per share
were as follows (in thousands):
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Class A Shares:
Weighted average shares
Outstanding.................................... 19,267 21,736 19,862 20,834
Held in deferred compensation trusts........... 361 1,408 210 984
----------- --------- ---------- ----------
Basic shares........................................ 19,628 23,144 20,072 21,818
Dilutive effect of stock options............... 1,585 851 - 1,240
----------- --------- ---------- ----------
Diluted shares...................................... 21,213 23,995 20,072 23,058
=========== ========= ========== ==========
Class B Shares:
Weighted average shares
Outstanding.................................... 38,534 38,241 39,724 38,662
Held in deferred compensation trusts........... 722 2,816 420 1,967
----------- --------- ---------- ----------
Basic shares........................................ 39,256 41,057 40,144 40,629
Dilutive effect of stock options............... 3,170 1,703 - 2,479
----------- --------- ---------- ----------
Diluted shares...................................... 42,426 42,760 40,144 43,108
=========== ========= ========== ==========
(6) Capital Stock
In June 2004 the Company increased its authorized shares of Class B Common
Stock from 100,000,000 shares to 150,000,000 shares.
(7) Income Taxes
During the quarter ended September 26, 2004, the Internal Revenue Service
(the "IRS") finalized its examination of the Company's Federal income tax
returns for the years ended December 31, 2000 and December 30, 2001 without
asserting any additional income tax liability. Also during the quarter ended
September 26, 2004, a state income tax examination was finalized and the statute
of limitations for examinations of certain state income tax returns expired. In
connection with these matters, the Company determined that it had income tax
reserves and related interest accruals that were no longer required and released
(1) $25,415,000 of income tax reserves, of which $14,592,000 increased the
"Benefit from income taxes" and $10,823,000 was reported as the "Gain on
disposal of discontinued operations" (see Note 8), and (2) $4,342,000 of related
interest accruals as a reduction of "Interest expense" in the accompanying
condensed consolidated statements of operations for the three-month and
nine-month periods ended September 26, 2004. The Company's Federal income tax
returns subsequent to December 30, 2001 are not currently under examination by
the IRS although certain state income tax returns are currently under
examination. However, management of the Company believes that adequate aggregate
provisions have been made in prior periods for any liabilities, including
interest, that may result from any such examination(s).
(8) Discontinued Operations
Prior to 2003 the Company sold (1) the stock of the companies comprising
the Company's former premium beverage and soft drink concentrate business
segments (the "Beverage Discontinued Operations"), (2) the stock or the
principal assets of the companies comprising the former utility and municipal
services and refrigeration business segments (the "SEPSCO Discontinued
Operations") of SEPSCO, LLC, a subsidiary of the Company, and (3) substantially
all of its interests in a partnership and a subpartnership comprising the
Company's former propane business segment (the "Propane Discontinued
Operations"). There remain certain obligations not transferred to the buyers of
the Beverage, SEPSCO and Propane Discontinued Operations to be liquidated. The
Beverage, SEPSCO and Propane Discontinued Operations have been accounted for as
discontinued operations by the Company.
During the three-month period ended September 26, 2004, the Company
recorded additional gain on the disposal of the Beverage Discontinued Operations
of $10,823,000 resulting from the release of income tax reserves related to the
discontinued operations which were no longer required upon the finalization of
the examination of the Company's Federal income tax returns for the years ended
December 31, 2000 and December 30, 2001 and the expiration of the statute of
limitations with respect to examining certain of the Company's state income tax
returns.
Current liabilities relating to the discontinued operations consisted of
the following (in thousands):
December 28, September 26,
2003 2004
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations.........................................................$ 22,460 $ 14,095
Liabilities relating to the SEPSCO and the Propane Discontinued Operations........ 1,544 1,404
------------ -----------
$ 24,004 $ 15,499
============ ===========
The Company expects that the liquidation of these remaining liabilities
associated with all of these discontinued operations will not have any material
adverse impact on its financial position or results of operations. To the extent
any estimated amounts included in the current liabilities relating to the
discontinued operations are determined to be in excess of the requirement to
liquidate the associated liability, any such excess will be released at that
time as a component of gain or loss on disposal of discontinued operations.
(9) Retirement Benefit Plans
The Company maintains two defined benefit plans, the benefits under which
were frozen in 1992. After recognizing a curtailment gain upon freezing the
benefits, the Company has no unrecognized prior service cost related to these
plans. The measurement date used by the Company in determining the components of
pension expense is December 31.
The components of the net periodic pension cost incurred by the Company
with respect to these plans are as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Service cost (consisting entirely of plan expenses)......$ 21 $ 23 $ 63 $ 68
Interest cost............................................ 63 61 187 182
Expected return on the plans' assets..................... (67) (71) (199) (213)
Amortization of unrecognized net loss.................... 16 8 50 24
---------- --------- ---------- ----------
Net periodic pension cost................................$ 33 $ 21 $ 101 $ 61
========== ========= ========== ==========
The Company currently expects to contribute an aggregate $264,000 to its
two defined benefit plans for all of 2004, of which $203,000 was contributed
during the nine-month period ended September 26, 2004.
(10) Transactions with Related Parties
Prior to 2003 the Company provided incentive compensation of $22,500,000,
in the aggregate, 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 $2,740,000 and $1,239,000 was
recognized in the nine-month periods ended September 28, 2003 and September 26,
2004, respectively, for increases 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 is permitted to recognize investment
income for any interest or dividend income on investments in the Deferred
Compensation Trusts and realized gains on sales of investments in the Deferred
Compensation Trusts, but is unable to recognize any investment income for
unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts because these investments are accounted for under the cost
method of accounting. Accordingly, the Company recognized net investment income
from investments in the Deferred Compensation Trusts of $592,000 and $563,000
during the nine-month periods ended September 28, 2003 and September 26, 2004,
respectively. Such net investment income during the nine-month periods ended
September 28, 2003 and September 26, 2004 consisted of realized gains from the
sale of certain cost-method investments in the Deferred Compensation Trusts of
$744,000 and $828,000, respectively, which included increases in value of
$513,000 and $777,000 prior to the nine-month periods ended September 28, 2003
and September 26, 2004, respectively, and interest income of $5,000 and $11,000,
respectively, less management fees of $157,000 and $276,000, respectively.
Recognized gains, interest income and investment fees are included in
"Investment income (loss), net" and deferred compensation expense is included in
"General and administrative, excluding depreciation and amortization" in the
accompanying condensed consolidated statements of operations. As of September
26, 2004, the obligation to the Executives related to the Deferred Compensation
Trusts is $30,383,000 and is included in "Deferred compensation payable to
related parties" in the accompanying condensed consolidated balance sheets. As
of September 26, 2004, the assets in the Deferred Compensation Trusts consisted
of $22,196,000 included in "Investments," which does not reflect the unrealized
increase in the fair value of the investments, and $1,861,000 included in "Cash
and cash equivalents" in the accompanying condensed consolidated balance sheet.
The cumulative disparity between (1) deferred compensation expense and net
recognized investment income and (2) the obligation to the Executives and the
carrying value of the assets in the Deferred Compensation Trusts will reverse in
future periods as either (1) additional investments in the Deferred Compensation
Trusts are sold and previously unrealized gains are recognized without any
offsetting increase in compensation expense or (2) the fair values of the
investments in the Deferred Compensation Trusts decrease resulting in the
recognition of a reversal of compensation expense without any offsetting losses
recognized in investment income.
During the nine months ended September 26, 2004, the Executives exercised
an aggregate 2,850,000 Package Options (see Note 2) under the Company's Equity
Plans and paid the exercise prices utilizing shares of the Company's Class B
Common Stock received by the Executives in connection with the Stock
Distribution and effectively owned by the Executives for more than six months at
the dates the options were exercised. These exercises resulted in aggregate
deferred gains to the Executives of $33,393,000, represented by an additional
1,047,450 Class A Common Shares and 2,094,887 shares of Class B Common Shares
based on the market prices at the date of exercise. Such shares are being held
in two additional deferred compensation trusts (the "Additional Deferred
Compensation Trusts"). The resulting obligation of $33,393,000 is included in
the "Deferred compensation payable in common stock" component of "Stockholders'
equity" in the accompanying condensed consolidated balance sheet as of September
26, 2004. The Executives had previously elected to defer the receipt of the
shares held in the Additional Deferred Compensation Trusts until no earlier than
January 2, 2005 and, during the 2004 second quarter, elected to further defer
the receipt of these shares until no earlier than January 2, 2008. The cash
equivalents funded from cumulative dividends paid on shares held by the
Additional Deferred Compensation Trusts of $850,000 are included in "Cash and
cash equivalents," and the related obligation is included in "Deferred
compensation payable to related parties" in the accompanying condensed
consolidated balance sheet as of September 26, 2004.
In accordance with an employment agreement with an executive of Deerfield
who is also a director of the Company, Deerfield incurred and paid $59,000 to an
entity of which the executive is the principal owner to reimburse operating
expenses for the usage of an airplane during the period from the July 22, 2004
date of the Deerfield Acquisition through Deerfield's quarter end of September
30, 2004.
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.
(11) 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 provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the FDEP approved the work plan submitted by Adams'
environmental consultant and, as of September 26, 2004, the work at the site has
been completed. Adams submitted its contamination assessment report to the FDEP
in March 2004. In August 2004, the FDEP agreed to a monitoring plan consisting
of two sampling events after which it will reevaluate the need for additional
assessment or remediation. Based on provisions of $1,667,000 for those costs
made prior to 2003, and after taking into consideration various legal defenses
available to the Company, including Adams, Adams has provided for its estimate
of its remaining liability for completion of this matter.
In 1998, a number of class action lawsuits were filed on behalf of the
Company's stockholders. Each of these actions named the Company, the Executives
and other members of the Company's board of directors as defendants. In 1999,
certain plaintiffs in these actions filed a consolidated amended complaint
alleging 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, failed to disclose material information. The amended
complaint seeks, among other relief, monetary damages in an unspecified amount.
In 2000, the plaintiffs agreed to stay this action pending determination of a
related stockholder action which was subsequently dismissed in October 2002 and
is no longer being appealed. Through September 26, 2004, no further action has
occurred with respect to the remaining class action lawsuit and such action
remains stayed.
In addition to the environmental matter and stockholder lawsuit described
above, the Company is involved in other litigation and claims incidental to its
current and prior businesses. Triarc and its subsidiaries have reserves for all
of their legal and environmental matters aggregating $1,800,000 as of September
26, 2004. Although the outcome of such matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to the
Company, based on currently available information, including legal defenses
available to Triarc and/or its subsidiaries, and given the aforementioned
reserves, the Company does not believe that the outcome of such legal and
environmental matters will have a material adverse effect on its consolidated
financial position or results of operations.
(12) Business Segments
As a result of the Deerfield Acquisition, the Company now manages and
internally reports its operations as two business segments: (1) the operation
and franchising of restaurants and (2) asset management (see Note 3). The
Company evaluates segment performance and allocates resources based on each
segment's earnings before interest, taxes, depreciation and amortization
("EBITDA"). Information concerning the segments in which the Company operates is
shown in the table below. EBITDA has been computed as operating profit plus
depreciation and amortization, excluding amortization of deferred financing
costs ("Depreciation and Amortization"). Operating profit has been computed as
revenues less operating expenses. In computing EBITDA and operating profit,
interest expense and non-operating income and expenses have not been considered.
Identifiable assets by segment are those assets that are used in the Company's
operations in each segment. General corporate assets consist primarily of cash
and cash equivalents, short-term and non-current investments and properties.
The following is a summary of the Company's segment information (in
thousands):
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 28, September 26, September 28, September 26,
2003 2004 2003 2004
---- ---- ---- ----
Revenues:
Restaurants......................................$ 74,635 $ 79,045 $ 219,169 $ 225,701
Asset management................................. - 6,915 - 6,915
----------- ----------- ------------ ------------
Consolidated revenues............................$ 74,635 $ 85,960 $ 219,169 $ 232,616
=========== =========== ============ ============
EBITDA:
Restaurants......................................$ 18,689 $ 20,837 $ 57,106 $ 52,047
Asset management................................. - 964 - 964
General corporate................................ (10,163) (11,469) (32,312) (32,590)
----------- ----------- ------------ ------------
Consolidated EBITDA.............................. 8,526 10,332 24,794 20,421
----------- ----------- ------------ ------------
Less Depreciation and Amortization:
Restaurants...................................... 1,994 2,640 6,051 6,988
Asset management................................. - 836 - 836
General corporate................................ 1,385 1,328 4,125 3,795
----------- ----------- ------------ ------------
Consolidated Depreciation and Amortization....... 3,379 4,804 10,176 11,619
----------- --------- ------------ ------------
Operating profit:
Restaurants...................................... 16,695 18,197 51,055 45,059
Asset management................................. - 128 - 128
General corporate................................ (11,548) (12,797) (36,437) (36,385)
----------- ----------- ------------ ------------
Consolidated operating profit.................... 5,147 5,528 14,618 8,802
Interest expense..................................... (10,032) (5,017) (27,857) (23,655)
Insurance expense related to long-term debt.......... (1,025) (934) (3,163) (2,883)
Investment income (loss), net........................ 4,014 (3,730) 10,884 7,439
Gain (costs) related to proposed business
acquisitions not consummated....................... 2,994 (26) 2,064 (793)
Other income, net.................................... 449 373 1,424 1,901
----------- ----------- ------------ ------------
Consolidated income (loss) from continuing
operations before income taxes and minority
interests..........................................$ 1,547 $ (3,806) $ (2,030) $ (9,189)
=========== =========== ============ ============
December 28, September 26,
2003 2004
---- ----
Identifiable assets:
Restaurants......................................................................$ 209,167 $ 207,979
Asset management................................................................. - 123,918
General corporate................................................................ 833,798 685,023
------------ ------------
Consolidated total assets........................................................$ 1,042,965 $ 1,016,920
============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction and Executive Overview
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 28, 2003. Item 7 of our
2003 Form 10-K describes our contractual obligations and the application of our
critical accounting policies. There have been no significant changes as of
September 26, 2004 pertaining to these topics. Certain statements we make under
this Item 2 constitute "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking
Statements and Projections" in "Part II - Other Information" preceding "Item 1."
On July 22, 2004 we completed the acquisition of a 63.6% capital interest
in Deerfield & Company LLC in a transaction we refer to as the Deerfield
Acquisition. Deerfield, through its wholly-owned subsidiary Deerfield Capital
Management LLC, is an alternative asset manager offering a diverse range of
fixed income and credit-related strategies to institutional investors. As of
September 26, 2004, Deerfield has over $8 billion of assets under management,
consisting of (1) collateralized debt obligation instruments, which we refer to
as CDOs, and (2) to a much lesser extent, fixed income and investment funds and
private investment accounts, which we refer to as Funds. Our consolidated
results of operations include Deerfield's results commencing July 23, 2004, with
applicable minority interests.
We operate in the restaurant business through our franchised and
Company-owned Arby's restaurants and, as a result of the Deerfield Acquisition,
in the asset management business. In our restaurant business, we derive revenues
in the form of royalties and franchise and related fees and from sales by our
Company-owned restaurants. While over 60% of our existing royalty agreements and
all of our new domestic royalty agreements provide for royalties of 4% of
franchise revenues, our average royalty rate was 3.5% for the nine months ended
September 26, 2004. In our asset management business, we derive revenues in the
form of asset management and related fees from our management of CDOs and Funds
and we may expand our services into other types of investments. We also derived
investment income or loss throughout the periods presented principally from the
investment of our excess cash.
We intend to enhance the value of our company by increasing the revenues of
the Arby's restaurant business and our newly acquired asset management business.
In April 2004, we began adding new Arby's menu items such as salads and wraps
and we are continuing to focus on growing the number of restaurants in the
Arby's system, adding new menu offerings and implementing new operational
initiatives targeted at service levels and convenience. We plan to grow
Deerfield's asset management portfolio by utilizing the value of its
historically profitable investment advisory brand, thereby increasing its asset
management fee revenues.
As discussed below under "Liquidity and Capital Resources - Acquisitions
and Investments," we continue to evaluate our options for the use of our
significant cash, cash equivalent and investment position, including additional
business acquisitions, repurchases of our common shares and investments. In
recent periods we evaluated a number of business acquisition opportunities,
including Deerfield, and we intend to continue our disciplined search for
potential business acquisitions that we believe have the potential to create
significant value to our stockholders.
In recent periods our restaurant business has experienced the following
trends:
o Continued growth of food consumed away from home as a percentage of total
food-related spending;
o Increases in the cost and overall difficulty of developing new units in
many areas of the country, primarily as a result of increased competition
among quick service restaurants and other retail food operators for
available development sites, higher development costs associated with those
sites and continued tightening in the lending markets typically used to
finance new unit development;
o Increased price competition in the quick service restaurant industry,
particularly as evidenced by the value menu concept which offers
comparatively lower prices on some menu items, the combination meals
concept which offers a combination meal at an aggregate price lower than
the individual food and beverage items, couponing and other price
discounting;
o The continuing proliferation of competitors in the higher end of the
sandwich category, many of whom are competing with Arby's in the offering
of higher-priced sandwiches with perceived higher levels of freshness,
quality and customization;
o Competition from new product choices, offering a variety of options which
include low calorie, low carbohydrate and/or low fat products as a result
of a greater consumer awareness of nutritional issues;
o Additional competitive pressures for prepared food purchases from operators
outside the quick service restaurant industry such as deli sections and
in-store cafes of several major grocery store chains, convenience stores
and casual dining outlets;
o The addition of selected higher-priced quality items to menus, which appeal
more to adult tastes;
o Increases in beef and other commodity costs resulting from reduced supplies
and increased demand; and
o Legislative activity on both the Federal and state level, which could
result in higher wages, fringe benefits, health care and other insurance
and packaging costs.
We experience the effects of these trends directly to the extent they
affect the operations of our Company-owned restaurants and indirectly to the
extent they affect sales by our franchisees and, accordingly, impact the
royalties and franchise fees we receive from them.
In recent periods, our asset management business has experienced the
following trends, including trends prior to our entrance into the asset
management business through the Deerfield Acquisition:
o Growth in the hedge fund market as investors appear to be increasing their
investment allocations to hedge funds;
o Increased competition in the hedge fund industry in the form of new hedge
funds offered by both new and established investment managers to meet the
increasing demand of hedge fund investors;
o Continued growth of the CDO market as it opens to individual investors, in
addition to the institutional investors which it has mainly served in the
past, with funds that offer more simplified income tax reporting for the
investor; and
o Increased competition in the fixed income investment markets resulting in
higher demand for and costs of investments purchased by CDOs resulting in
the need to continuously develop new investment strategies with the goal of
maintaining acceptable returns to investors.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. However, Deerfield reports on a calendar year
ending on December 31. Our first nine-month period of fiscal 2003 commenced on
December 30, 2002 and ended on September 28, 2003, with our third quarter
commencing on June 30, 2003. Our first nine-month period of fiscal 2004
commenced on December 29, 2003 and ended on September 26, 2004, with our third
quarter commencing on June 28, 2004, except that for each of these periods,
Deerfield is included from July 23, 2004 through its quarter end of September
30, 2004. When we refer to the "three months ended September 28, 2003," or the
"2003 third quarter," and the "nine months ended September 28, 2003," or the
"first nine months of 2003," we mean the periods from June 30, 2003 to September
28, 2003 and December 30, 2002 to September 28, 2003, respectively. When we
refer to the "three months ended September 26, 2004," or the "2004 third
quarter," and the "nine months ended September 26, 2004," or the "first nine
months of 2004," we mean the periods from June 28, 2004 to September 26, 2004
and December 29, 2003 to September 26, 2004, respectively. Each quarter
contained 13 weeks and each nine-month period contained 39 weeks. The effect of
including Deerfield in our results through Deerfield's quarter end of September
30, 2004 instead of our quarter end of September 26, 2004 was not material. Our
2004 fiscal year will end on January 2, 2005 and will contain 53 weeks compared
with 52 weeks in 2003. Accordingly, our results of operations for the fourth
quarter of fiscal 2004 will contain one more week than the comparable period of
fiscal 2003. All references to years, first nine months and quarters relate to
fiscal periods rather than calendar periods.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount and percent of the change between the (1) 2003 third quarter
and the 2004 third quarter and (2) the first nine months of 2003 and the first
nine months of 2004. 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 Nine Months Ended
-------------------------- Change --------------------------- Change
September 28,September 26,---------------September 28, September 26,--------------
2003 2004 Amount Percent 2003 2004 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
(In Millions Except Percents)
Revenues:
Net sales.................................$ 51.1 $ 52.3 $ 1.2 2 % $ 151.0 $ 151.7 $ 0.7 - %
Royalties and franchise and related
fees.................................... 23.5 26.7 3.2 14 % 68.2 74.0 5.8 9 %
Asset management and related fees......... - 6.9 6.9 n/m - 6.9 6.9 n/m
-------- ------- ------ ------- ------- -------
74.6 85.9 11.3 15 % 219.2 232.6 13.4 6 %
-------- ------- ------ ------- ------- -------
Costs and expenses:
Cost of sales, excluding depreciation
and amortization........................ 38.3 40.9 2.6 7 % 112.1 119.9 7.8 7 %
Cost of services, excluding depreciation
and amortization........................ - 2.0 2.0 n/m - 2.0 2.0 n/m
Advertising and selling................... 4.4 4.0 (0.4) (9)% 11.6 12.8 1.2 10 %
General and administrative, excluding
depreciation and amortization........... 23.4 28.7 5.3 23 % 70.7 77.5 6.8 10 %
Depreciation and amortization, excluding
amortization of deferred financing
costs................................... 3.4 4.8 1.4 41 % 10.2 11.6 1.4 14 %
-------- -------- ------ ------- ------- -------
69.5 80.4 10.9 16 % 204.6 223.8 19.2 9 %
-------- -------- ------ ------- ------- -------
Operating profit..................... 5.1 5.5 0.4 8 % 14.6 8.8 (5.8) (40)%
Interest expense ........................... (10.0) (5.0) 5.0 50 % (27.8) (23.6) 4.2 15 %
Insurance expense related to long-term
debt...................................... (1.0) (1.0) - - % (3.2) (2.9) 0.3 9 %
Investment income (loss), net............... 4.0 (3.7) (7.7) n/m 10.9 7.4 (3.5) (32)%
Gain (costs) related to proposed business
acquisitions not consummated............. 3.0 - (3.0) (100)% 2.1 (0.8) (2.9) n/m
Other income, net........................... 0.4 0.4 - - 1.4 1.9 0.5 36 %
-------- ------- ------ ------- ------- -------
Income (loss) from continuing
operations before income taxes and
minority interests................. 1.5 (3.8) (5.3) n/m (2.0) (9.2) (7.2) n/m
(Provision for) benefit from income taxes... (1.0) 15.6 16.6 n/m (1.0) 16.6 17.6 n/m
Minority interests in (income) loss of
consolidated subsidiaries................ - (0.7) (0.7) n/m 0.1 (0.7) (0.8) n/m
-------- ------- ------ ------- ------- -------
Income (loss) from continuing
operations......................... 0.5 11.1 10.6 n/m (2.9) 6.7 9.6 n/m
Gain on disposal of discontinued operations. - 10.8 10.8 n/m - 10.8 10.8 n/m
-------- ------- ------ ------- ------- -------
Net income (loss)....................$ 0.5 $ 21.9 $ 21.4 n/m $ (2.9) $ 17.5 $ 20.4 n/m
========= ======= ====== ======= ======= =======
Three Months Ended September 26, 2004 Compared with Three Months Ended September
28, 2003
Net Sales
Our net sales, which were generated entirely from the Company-owned Arby's
restaurants, increased $1.2 million, or 2%, to $52.3 million for the three
months ended September 26, 2004 from $51.1 million for the three months ended
September 28, 2003.
This increase reflects a $1.4 million improvement due to a 3% growth in
same-store sales of the Company-owned restaurants in the 2004 third quarter
compared with the weak same-store sales performance of the 2003 third quarter
slightly offset by a $0.2 million decrease due to the closing of two
underperforming Company-owned restaurants since September 28, 2003. When we
refer to same-store sales, we mean only sales of those restaurants which were
open during the same months in both of the comparable periods. The growth in
same-store sales resulted principally from new lines of salads and wraps and new
sandwich menu offerings introduced during the 2004 second and third quarters,
the effects of which were partially offset by less favorable performance in our
restaurants in the Michigan region, an area where approximately one-third of our
Company-owned restaurants are located and which has been particularly impacted
by high unemployment. The growth in same-store sales of Company-owned
restaurants of 3% was less than the 8% growth in same-store sales of franchised
restaurants discussed under "Royalties and Franchise and Related Fees" below.
Contributing factors to this difference include the (1) economic conditions in
the Michigan region, as previously discussed, and (2) weaker revenue performance
in the Dallas region as a result of lower advertising spending in the region for
our combined Company-owned and franchised restaurants than would have occurred
if that market were more fully penetrated.
We expect that same-store sales of the Company-owned restaurants for the
fourth quarter of 2004 will exceed the weak same-store sales of the comparable
period of 2003. We expect that this sales growth will result from (1) the
continued sales of the new lines of salads and wraps and new sandwich menu
offerings introduced during the 2004 second and third quarters, (2) the
introduction of new salad and wrap offerings during the 2004 fourth quarter and
(3) new operational initiatives targeted at service levels and convenience. We
presently expect to open one new Company-owned restaurant and close three
underperforming Company-owned restaurants during the fourth quarter of 2004.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $3.2 million, or 14%, to $26.7
million for the three months ended September 26, 2004 from $23.5 million for the
three months ended September 28, 2003, reflecting a $3.1 million, or 13%,
increase in royalties and a $0.1 million increase in franchise and related fees.
The increase in royalties consisted of (1) a $2.0 million improvement due to an
8% increase in same-store sales of the franchised restaurants in the 2004 third
quarter compared with the weak same-store sales performance of the 2003 third
quarter and (2) a $1.1 million improvement resulting from the royalties of the
114 restaurants opened since September 28, 2003, with generally higher than
average sales volumes, replacing the royalties from the 76 generally
underperforming restaurants closed since September 28, 2003.
We expect that same-store sales of the franchised restaurants during the
fourth quarter of 2004 will exceed the weak same-store sales of the comparable
period of 2003 due to the new lines of salads and wraps and new sandwich menu
offerings already introduced through the end of the 2004 third quarter, (2) the
introduction of additional new salad and wrap offerings during the fourth
quarter and (3) new operational initiatives targeted at service levels and
customer convenience.
Asset Management and Related Fees
Our asset management and related fees of $6.9 million for the three months
ended September 26, 2004 resulted entirely from the management of CDOs and Funds
acquired in the Deerfield Acquisition.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization, resulted
entirely from the Company-owned Arby's restaurants. Cost of sales increased $2.6
million, or 7%, to $40.9 million for the three months ended September 26, 2004,
representing a gross margin of 22%, from $38.3 million for the three months
ended September 28, 2003, representing a gross margin of 25%. We define gross
margin as the difference between net sales and cost of sales divided by net
sales. The decrease in gross margins is due principally to (1) the new menu
offerings which have relatively higher costs than our other products, (2)
increased price discounting of some of our other products primarily through
increased use of coupons and (3) higher roast beef costs, the largest component
of our menu offerings, as well as higher costs for other commodities, resulting
from overall decreased supplies and increased demand.
We currently anticipate that our gross margin for the fourth quarter of
2004 will be relatively unchanged compared with the 22% gross margin in both the
2004 third quarter and the 2003 fourth quarter.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, of $2.0
million for the three months ended September 26, 2004 resulted entirely from the
management of CDOs and Funds acquired in the Deerfield Acquisition.
Our royalties and franchise fees have no associated cost of services.
Advertising and Selling
Our advertising and selling expenses decreased $0.4 million, or 9%,
principally due to a $0.3 million decrease as a result of the timing within each
year of our contractual commitment as the Arby's franchisor for advertising
support. We contributed and expensed $0.7 million toward the Arby's national
cable television advertising campaign in the 2004 third quarter compared with
$1.0 million in the 2003 third quarter. However, our overall advertising costs
for this campaign for the full years 2004 and 2003 are anticipated to be
relatively unchanged.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization increased $5.3 million, primarily reflecting $3.9 million of
general and administrative expenses of Deerfield. Aside from the effect of the
Deerfield Acquisition, general and administrative expenses increased $1.4
million principally due to (1) a $1.5 million expense in the 2004 third quarter
for an environmental liability insurance policy covering unknown pre-existing
and future conditions on all of our currently-owned properties as well as
unknown pre-existing conditions on formerly-owned properties and (2) a $0.5
million increase in severance, recruiting and relocation costs attributable to
personnel changes, both partially offset by a $0.6 million decrease in deferred
compensation expense. Deferred compensation expense, which decreased from $0.8
million for the three months ended September 28, 2003 to $0.2 million for the
three months ended September 26, 2004, represents the increase in the fair value
of investments in two deferred compensation trusts, which we refer to as the
Deferred Compensation 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 below under "Income (Loss) From
Continuing Operations Before Income Taxes and Minority Interests."
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $1.4 million, reflecting $0.8 million of depreciation
and amortization related to Deerfield. Aside from the effect of the Deerfield
Acquisition, depreciation and amortization increased $0.6 million principally
due to our implementation of new back office and point-of-sale restaurant
systems.
Interest Expense
Interest expense decreased $5.0 million principally due to (1) the release
in the 2004 third quarter of $4.3 million of interest accruals no longer
required upon the finalization by the Internal Revenue Service of its
examination of our Federal income tax returns for the years ended December 31,
2000 and December 30, 2001, which we refer to as the IRS Examination, and (2) a
$0.7 million decrease attributable to lower outstanding amounts of a majority of
our long-term debt in the 2004 third quarter.
Investment Income (Loss), Net
The following table summarizes and compares the major components of
investment income (loss), net:
Three Months Ended
-----------------------------
September 28, September 26,
2003 2004 Change
---- ---- ------
(In Millions)
Recognized net gains (losses)...............................$ 1.4 $ (4.0) $ (5.4)
Other than temporary unrealized losses ..................... - (3.7) (3.7)
Interest income............................................. 2.2 3.3 1.1
Distributions, including dividends.......................... 0.6 0.9 0.3
Other....................................................... (0.2) (0.2) -
--------- --------- ---------
$ 4.0 $ (3.7) $ (7.7)
========= ======== =========
Our recognized net gains (losses) include realized gains and losses on
sales of our available-for-sale securities and cost-basis investments and
unrealized gains and losses on changes in the fair values of our trading
securities and our securities sold short with an obligation to repurchase. Our
recognized net gains (losses) worsened $5.4 million principally due to losses
realized on the sales of two of our available-for-sale securities in the 2004
third quarter. These recognized gains and losses may vary significantly in
future periods depending upon the timing of the sales of our investments or the
changes in the value of our investments, as applicable. Our 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 may or may not recur in future periods. In the 2004 third
quarter, we recognized $3.7 million of other than temporary losses due to the
recognition of impairment charges based on declines in market values of some of
our higher yielding, but more risk-inherent, debt securities entered into with
the objective of improving the overall return on our interest-bearing
investments, as well as declines in two available-for-sale investments in large
public companies and a cost method investment. Interest income increased $1.1
million principally reflecting $0.6 million of interest income of Deerfield.
Aside from the effect of the Deerfield Acquisition, interest income increased
$0.5 million primarily due to an increase in average rates on our
interest-bearing investments from 1.3% in the 2003 third quarter to 1.9% in the
2004 third quarter principally due to the general increase in the money market
and short-term interest rate environment and, to a lesser extent, our investing
in some higher yielding, but more risk-inherent, debt securities. These factors
were partially offset by a lower average outstanding balance of our
interest-bearing investments in the 2004 third quarter because of the
liquidation of some of those investments to provide cash for the Deerfield
Acquisition.
As of September 26, 2004, we had pretax unrealized holding gains and
(losses) on available-for-sale marketable securities of $4.9 million and $(2.6)
million, respectively, included in accumulated other comprehensive income. We
presently believe that the unrealized losses are not other than temporary.
Should either (1) we decide to sell any of these investments with unrealized
losses or (2) any of the unrealized losses continue such that we believe they
have become other than temporary, we would recognize the losses on the related
investments at that time.
Gain (Costs) Related to Proposed Business Acquisitions Not Consummated
The $3.0 million gain related to proposed business acquisitions not
consummated in the three months ended September 28, 2003 represented a payment
received by us for the use of due diligence materials related to a proposed
business acquisition we had previously decided not to continue to pursue and did
not consummate. The costs incurred in connection with this proposed acquisition
were expensed before the 2003 third quarter since recovery of the costs was not
certain.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests decreased $5.3 million to a loss of $3.8 million for the
three months ended September 26, 2004 from income of $1.5 million for the three
months ended September 28, 2003 due to the effect of the variances explained in
the captions above.
As discussed above, we recognized deferred compensation expense of $0.8
million in the 2003 third quarter and $0.2 million in the 2004 third quarter,
within general and administrative expenses in the accompanying condensed
consolidated statements of operations, for the increases in the fair value of
investments in the Deferred Compensation Trusts. Under accounting principles
generally accepted in the United States of America, we recognize investment
income for any interest or dividend income on investments in the Deferred
Compensation Trusts and realized gains on sales of investments in the Deferred
Compensation Trusts, but are unable to recognize any investment income for
unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts because these investments are accounted for under the cost
method of accounting. During the 2003 third quarter, we recognized net
investment income from investments in the Deferred Compensation Trusts of $0.1
million consisting of a $0.2 million gain, which represented an increase in
value prior to that period, less $0.1 million of investment management fees.
During the 2004 third quarter, we recognized a net investment loss of $0.1
million consisting of investment fees. The cumulative disparity between deferred
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 compensation expense without any offsetting losses recognized in
investment income.
(Provision For) Benefit From Income Taxes
We had a benefit from income taxes for the three months ended September 26,
2004 which greatly exceeded our pretax loss due to the release of $14.6 million
of income tax reserves related to our continuing operations which were no longer
required upon the finalization of the IRS Examination and the finalization of a
state income tax examination and the expiration of the statute of limitations
for examinations of certain state income tax returns. Our provision for income
taxes for the three months ended September 28, 2003 represented an effective
rate of 68% which is substantially higher than the United States Federal
statutory rate of 35% 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.
Minority Interests in (Income) Loss of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries of $0.7
million for the three-month period ended September 26, 2004 related to the
minority interests resulting from the Deerfield Acquisition.
Gain on Disposal of Discontinued Operations
During the three-month period ended Sept