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 July 1, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 1-2207
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TRIARC COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 38-0471180
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
(212) 451-3000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
There were 28,882,238 shares of the registrant's Class A Common Stock and
63,879,317 shares of the registrant's Class B Common Stock outstanding as of
July 31, 2007.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, July 1,
2006 (A) 2007
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(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 148,152 $ 134,543
Restricted cash equivalents....................................................... 9,059 --
Short-term investments not pledged as collateral.................................. 113,950 35,424
Short-term investments pledged as collateral...................................... 8,168 7,531
Investment settlements receivable................................................. 16,599 13,047
Accounts and notes receivable..................................................... 43,422 27,190
Inventories....................................................................... 10,019 9,581
Deferred income tax benefit....................................................... 18,414 26,494
Prepaid expenses and other current assets......................................... 23,987 24,143
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Total current assets.......................................................... 391,770 277,953
Restricted cash equivalents............................................................ 1,939 41,575
Investments............................................................................ 60,197 93,279
Properties............................................................................. 488,484 502,408
Goodwill .............................................................................. 521,055 524,044
Other intangible assets................................................................ 70,923 68,030
Deferred income tax benefit............................................................ -- 12,281
Other deferred costs and other assets.................................................. 26,081 28,223
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$ 1,560,449 $ 1,547,793
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.....................................................................$ 4,564 $ 4,300
Current portion of long-term debt................................................. 18,118 17,750
Accounts payable.................................................................. 48,595 50,426
Accrued expenses and other current liabilities.................................... 150,045 162,881
Current liabilities relating to discontinued operations........................... 9,254 9,286
Deferred compensation payable to related parties.................................. -- 41,439
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Total current liabilities...................................................... 230,576 286,082
Long-term debt......................................................................... 701,916 713,317
Deferred income........................................................................ 11,563 17,861
Deferred compensation payable to related parties....................................... 35,679 --
Deferred income taxes.................................................................. 15,532 --
Minority interests in consolidated subsidiaries........................................ 14,225 11,083
Other liabilities...................................................................... 73,145 84,249
Stockholders' equity:
Class A common stock.............................................................. 2,955 2,955
Class B common stock.............................................................. 6,366 6,402
Additional paid-in capital........................................................ 311,609 288,159
Retained earnings................................................................. 185,726 146,353
Common stock held in treasury..................................................... (43,695) (16,857)
Accumulated other comprehensive income............................................ 14,852 8,189
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Total stockholders' equity..................................................... 477,813 435,201
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$ 1,560,449 $ 1,547,793
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(A) Derived, reclassified and restated from the audited consolidated financial
statements as of December 31, 2006.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
--------------------- --------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ---- ---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales.......................................................$ 270,555 $ 278,572 $ 529,397 $ 545,070
Royalties and franchise and related fees ....................... 21,234 21,408 39,622 41,078
Asset management and related fees .............................. 15,828 16,841 30,624 32,719
--------- --------- --------- ---------
307,617 316,821 599,643 618,867
--------- --------- --------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization.......... 194,017 204,887 386,401 399,859
Cost of services, excluding depreciation and amortization....... 5,910 6,308 11,430 13,198
Advertising and promotions...................................... 19,842 20,658 39,910 38,387
General and administrative, excluding depreciation and
amortization.................................................. 58,345 55,975 118,495 113,558
Depreciation and amortization, excluding amortization of
deferred financing costs...................................... 14,703 18,404 28,064 34,389
Facilities relocation and corporate restructuring............... 775 79,044 1,578 79,447
Loss on settlement of unfavorable franchise rights.............. 658 -- 658 --
--------- --------- --------- ---------
294,250 385,276 586,536 678,838
--------- --------- --------- ---------
Operating profit (loss)................................... 13,367 (68,455) 13,107 (59,971)
Interest expense..................................................... (38,246) (15,286) (65,622) (30,675)
Loss on early extinguishments of debt................................ (933) -- (13,477) --
Investment income, net............................................... 30,796 17,625 51,746 40,773
Gain on sale of unconsolidated business.............................. -- 2,561 2,256 2,558
Other income, net.................................................... 3,699 597 5,436 2,207
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Income (loss) from continuing operations before income
taxes and minority interests........................... 8,683 (62,958) (6,554) (45,108)
(Provision for) benefit from income taxes............................ (2,705) 36,002 2,932 28,559
Minority interests in income of consolidated subsidiaries............ (2,608) (1,067) (5,698) (4,264)
--------- --------- --------- ---------
Income (loss) from continuing operations.................. 3,370 (28,023) (9,320) (20,813)
--------- --------- --------- ---------
Loss from discontinued operations, net of income taxes:
Loss from operations............................................ (139) -- (215) --
Loss on disposal................................................ -- -- -- (149)
--------- --------- --------- ---------
Loss from discontinued operations......................... (139) -- (215) (149)
--------- --------- --------- ---------
Net income (loss).......................................$ 3,231 $ (28,023) $ (9,535) $ (20,962)
========= ========= ========= =========
Basic and diluted income (loss) from continuing operations and net
income (loss) per share of Class A common stock and Class B
common stock....................................................$ .04 $ (.30) $ (.11) $ (.23)
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
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July 2, July 1,
2006 2007
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(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net loss..............................................................................$ (9,535) $ (20,962)
Adjustments to reconcile net loss to net cash provided by (used in) continuing
operating activities:
Facilities relocation and corporate restructuring, net provision (payments) ..... (3,032) 78,914
Depreciation and amortization of properties...................................... 23,313 27,997
Amortization of other intangible assets and certain other items.................. 4,751 6,392
Amortization of deferred financing costs and original issue discount............. 1,125 977
Write-off of previously unamortized deferred financing costs on early
extinguishments of debt........................................................ 4,783 --
Share-based compensation provision............................................... 7,508 6,869
Receipt of deferred vendor incentive, net of amount recognized................... 11,978 5,886
Minority interests in income of consolidated subsidiaries........................ 5,698 4,264
Straight-line rent accrual....................................................... 3,060 3,388
Deferred compensation provision.................................................. 1,147 2,516
Loss from discontinued operations................................................ 215 149
Operating investment adjustments, net (see below)................................ (549,135) (29,112)
Deferred income tax benefit...................................................... (4,740) (28,759)
Payment of withholding taxes related to share-based compensation................. (1,761) (4,752)
Gain on sale of unconsolidated business.......................................... (2,256) (2,558)
Unfavorable lease liability recognized........................................... (2,682) (2,241)
Equity in undistributed earnings of investees.................................... (1,407) (1,159)
Charge for common stock issued to induce effective conversions of convertible
notes.......................................................................... 3,719 --
Other, net....................................................................... (1,220) 1,716
Changes in operating assets and liabilities:
Decrease in accounts and notes receivables................................... 10,539 16,514
Decrease in inventories...................................................... 2,442 476
Decrease in prepaid expenses and other current assets........................ 132 410
Decrease in accounts payable and accrued expenses and other current
liabilities................................................................ (24,634) (39,375)
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Net cash provided by (used in) continuing operating activities (A)........ (519,992) 27,550
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Cash flows from continuing investing activities:
Capital expenditures.................................................................. (33,057) (34,154)
Cost of business acquisitions, less cash acquired..................................... (1,824) (1,254)
Investment activities, net (see below)................................................ 603,990 18,849
Proceeds from dispositions of assets.................................................. 4,518 405
Other, net............................................................................ (602) (498)
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Net cash provided by (used in) continuing investing activities............ 573,025 (16,652)
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Cash flows from continuing financing activities:
Dividends paid ...................................................................... (28,277) (16,119)
Repayments of long-term debt and notes payable........................................ (55,715) (11,145)
Net contributions from (distributions to) minority interests in consolidated
subsidiaries........................................................................ 3,305 (7,378)
Deferred financing costs.............................................................. -- (1,164)
Proceeds from issuance of long-term debt and a note payable........................... 10,388 10,047
Proceeds from exercises of stock options.............................................. 5,841 1,371
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Net cash used in continuing financing activities.......................... (64,458) (24,388)
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Net cash used in continuing operations.................................................. (11,425) (13,490)
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Net cash used in discontinued operations:
Operating activities.................................................................. (302) (119)
Investing activities.................................................................. (680) --
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(982) (119)
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Net decrease in cash and cash equivalents............................................... (12,407) (13,609)
Cash and cash equivalents at beginning of period........................................ 202,840 148,152
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Cash and cash equivalents at end of period..............................................$ 190,433 $ 134,543
============ ===========
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended
----------------------------
July 2, July 1,
2006 2007
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(In Thousands)
(Unaudited)
Detail of cash flows related to investments:
Operating investment adjustments, net:
Proceeds from sales of trading securities and net settlements of trading
derivatives.......................................................................$ 4,079,231 $ 6,019
Cost of trading securities purchased................................................ (4,623,338) (230)
Net recognized (gains) losses from trading securities, derivatives and short
positions in securities........................................................... 3,189 (9,292)
Other net recognized gains, net of other than temporary losses...................... (7,477) (26,058)
Other............................................................................... (740) 449
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$ (549,135) $ (29,112)
============ ===========
Investing investment activities, net:
Proceeds from sales and maturities of available-for-sale securities and other
investments.......................................................................$ 137,277 $ 113,897
Cost of available-for-sale securities and other investments purchased............... (68,049) (64,471)
Proceeds from securities sold short................................................. 6,968,981 --
Payments to cover short positions in securities..................................... (6,219,536) --
Proceeds from sales of repurchase agreements, net................................... 523,047 --
Increase in restricted cash collateralizing securities obligations or held for
investment........................................................................ (737,730) (30,577)
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$ 603,990 $ 18,849
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(A) Net cash used in continuing operating activities and continuing investing
activities for the six months ended July 2, 2006 reflects the significant
net purchases of trading securities and net settlements of trading
derivatives, which were principally funded by net proceeds from securities
sold short and net proceeds from sales of repurchase agreements. Of these
activities, $544,542,000 of the net purchases of trading securities and net
settlements of trading derivatives and $753,753,000 of the net proceeds
from securities sold short and sales of repurchase agreements were
transacted through an investment fund, Deerfield Opportunities Fund, LLC
(the "Opportunities Fund"), which employed leverage in its trading
activities and which, through September 29, 2006, was consolidated in these
condensed consolidated financial statements. As of September 29, 2006,
Triarc Companies, Inc. (collectively with its subsidiaries, the "Company")
effectively redeemed its investment in the Opportunities Fund, which in
turn had liquidated substantially all of its investment positions
subsequent to July 2, 2006. Accordingly, the Company does not have any cash
flows associated with the Opportunities Fund for the six months ended July
1, 2007. Under accounting principles generally accepted in the United
States of America, the net purchases of trading securities and the net
settlements of trading derivatives must be reported in continuing operating
activities, while the net proceeds from securities sold short and the net
sales of repurchase agreements are reported in continuing investing
activities.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
July 1, 2007
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the
"Financial Statements") of Triarc Companies, Inc. ("Triarc" and, together with
its subsidiaries, the "Company") have been prepared in accordance with Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC") and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States of America ("GAAP"). In the opinion of the Company, however,
the Financial Statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position and results of operations as of and for the three-month and six-month
periods and its cash flows for the six-month periods, set forth in the following
paragraph. The results of operations for the three-month and six-month periods
ended July 1, 2007 are not necessarily indicative of the results to be expected
for the full 2007 fiscal year. In that regard, the pending sale of a significant
subsidiary described in Note 3, among other matters, would impact the results
for the second half of the 2007 fiscal year whereas significant corporate
restructuring charges described in Note 6 affected the 2007 first half and, to a
lesser extent, are expected to affect the 2007 second half. These Financial
Statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2006 (the "Form 10-K").
The Company reports on a fiscal year basis consisting of 52 or 53 weeks
ending on the Sunday closest to December 31. However, Deerfield & Company LLC
("Deerfield"), in which the Company owns a 63.6% capital interest (see Note 3),
Deerfield Opportunities Fund, LLC (the "Opportunities Fund"), in which the
Company owned a 73.7% capital interest prior to the effective redemption of its
investment on September 29, 2006, and DM Fund, LLC (the "DM Fund"), in which the
Company owned a 67% capital interest prior to the redemption of its investment
on December 31, 2006, report or reported on a calendar year basis ending on
December 31. The Company's first half of fiscal 2006 commenced on January 2,
2006 and ended on July 2, 2006, with its second quarter commencing on April 3,
2006, except that Deerfield, the Opportunities Fund and DM Fund are included on
a calendar-period basis. The Company's first half of fiscal 2007 commenced on
January 1, 2007 and ended on July 1, 2007, with its second quarter commencing on
April 2, 2007, except that Deerfield is included on a calendar-period basis. The
periods from April 3, 2006 to July 2, 2006 and January 2, 2006 to July 2, 2006
are referred to herein as the three-month and six-month periods ended July 2,
2006, respectively. The periods from April 2, 2007 to July 1, 2007 and January
1, 2007 to July 1, 2007 are referred to herein as the three-month and six-month
periods ended July 1, 2007, respectively. Each quarter contained 13 weeks and
each half contained 26 weeks. The effect of including Deerfield, the
Opportunities Fund and the DM Fund, as applicable, in the Financial Statements
on a calendar-period basis, instead of the Company's fiscal-period basis, was
not material to the Company's condensed consolidated financial position or
results of operations. All references to quarters, six-month periods, halves,
quarter-end(s) and six-month period end(s) herein relate to fiscal periods
rather than calendar periods, except with respect to Deerfield, the
Opportunities Fund and the DM Fund as disclosed above.
The Company's consolidated financial statements include the accounts of
Triarc and its subsidiaries, including the Opportunities Fund through the
Company's effective redemption of its investment on September 29, 2006 and the
DM Fund through the Company's redemption of its investment on December 31, 2006.
The Company no longer consolidates the accounts of the Opportunities Fund and
the DM Fund subsequent to September 29, 2006 and December 31, 2006,
respectively.
Certain amounts included in the accompanying prior periods' condensed
consolidated financial statements have been reclassified either to report the
results of operations and cash flows of two restaurants closed during the fourth
quarter of 2006 as discontinued operations (see Note 8) or to conform with the
current periods' presentation. In addition, the Financial Statements have been
restated, as applicable, for the adoption of FASB Staff Position No. AUG-AIR-1,
"Accounting for Planned Major Maintenance Activities" (see Note 2).
The effect of this restatement, as well as the adjustment to the beginning
balance of retained earnings upon the adoption of FASB Interpretation No. 48
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" effective January 1, 2007 (see Note 2), is reflected in the
following summary of the changes in retained earnings from December 31, 2006
through July 1, 2007 (in thousands):
Balance as reported at December 31, 2006...........................................................$ 182,555
Cumulative effect of change in accounting for planned major aircraft maintenance activities.. 3,171
----------
Balance as adjusted at December 31, 2006........................................................... 185,726
Cumulative effect of change in accounting for uncertainty in income taxes.................... (2,275)
----------
Balance as adjusted at January 1, 2007............................................................. 183,451
Net loss..................................................................................... (20,962)
Cash dividends............................................................................... (16,119)
Accrued dividends on nonvested restricted stock.............................................. (17)
----------
Balance at July 1, 2007............................................................................$ 146,353
==========
(2) Changes in Accounting Principles
Effective January 1, 2007, the Company adopted the provisions of FASB Staff
Position No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities"
("FSP AIR-1"). As a result, the Company now accounts for scheduled major
aircraft maintenance overhauls in accordance with the direct expensing method
under which the actual cost of such overhauls is recognized as expense in the
period it is incurred. Previously, the Company accounted for scheduled major
maintenance activities in accordance with the accrue-in-advance method under
which the estimated cost of such overhauls was recognized as expense in periods
through the scheduled date of the respective overhaul with any difference
between estimated and actual cost recorded in results from operations at the
time of the actual overhaul. In accordance with FSP AIR-1, the Company accounted
for the adoption of the direct expensing method retroactively with the
cumulative effect of the change in accounting method as of January 2, 2006 of
$2,774,000 increasing retained earnings as of that date, which is the beginning
of the earliest period presented. The effect of this adoption on the Company's
accompanying condensed consolidated balance sheet as of December 31, 2006 is to
reverse accruals for aircraft overhaul maintenance aggregating $4,955,000 and
related income tax benefits of $1,784,000, with the net effect of $3,171,000
increasing retained earnings as of that date. The Company's consolidated results
of operations for the three-month and six-month periods ended July 2, 2006 have
been restated. For the three-month period ended July 2, 2006, the restatement
resulted in an increase in pretax income of $218,000, or $139,000 net of income
taxes, representing an increase in basic income per share of class A common
stock and diluted income per share of class A and class B common stock of $.01
and an effect of less than $.01 on basic income per share of class B common
stock. For the six-month period ended July 2, 2006, the restatement resulted in
a decrease in pretax loss of $435,000, or $278,000 net of income taxes,
representing a reduction in basic and diluted loss per share of class A common
stock and class B common stock of $.01. The pretax adjustments of $218,000 and
$435,000 were reported as reductions of "General and administrative, excluding
depreciation and amortization" expense in the accompanying condensed
consolidated statements of operations for the three-month and six-month periods
ended July 2, 2006, respectively.
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). As a result, the Company
now measures income tax uncertainties in accordance with a two-step process of
evaluating a tax position. The Company first determines if it is more likely
than not that a tax position will be sustained upon examination based on the
technical merits of the position. A tax position that meets the
more-likely-than-not recognition threshold is then measured as the largest
amount that has a greater than fifty percent likelihood of being realized upon
effective settlement. In accordance with this method, as of January 1, 2007 the
Company recognized an increase in its reserves for uncertain income tax
positions of $4,820,000 and an increase in its liability for interest and
penalties related to uncertain income tax positions of $734,000, both partially
offset by an increase in its deferred income tax benefit of $3,200,000 and a
reduction in the tax related liabilities of discontinued operations of $79,000,
with the net effect of $2,275,000 decreasing retained earnings as of that date.
In conjunction with the adoption of FIN 48, the Company recognized $480,000
and $966,000 of interest related to uncertain income tax positions during the
three-month and six-month periods ended July 1, 2007, respectively, included in
"Interest expense" in the accompanying condensed consolidated statements of
operations. The Company has approximately $1,956,000 and $2,922,000 of accrued
interest and penalties at January 1, 2007 and July 1, 2007, respectively,
associated with its reserves for uncertain income tax positions. The accrued
interest at July 1, 2007 consists of $506,000 included in "Accrued expenses and
other current liabilities" and $2,416,000 included in "Other liabilities" in the
accompanying condensed consolidated balance sheet.
The statute of limitations for examination by the Internal Revenue Service
(the "IRS") of the Company's Federal income tax return for the year ended
December 29, 2002 expired during 2006 and years prior thereto are no longer
subject to examination. The Company's Federal income tax returns for years
subsequent to December 29, 2002 are not currently under examination by the IRS
although some of its state income tax returns are currently under examination.
The Company has received notices of proposed tax adjustments aggregating
$6,424,000 million in connection with certain of these state income tax returns
principally relating to discontinued operations. However, the Company is
contesting these proposed adjustments and, accordingly, cannot determine the
ultimate amount of any resulting tax liability or any related interest and
penalties.
At January 1, 2007 and July 1, 2007, the Company had $13,157,000 and
$13,812,000, respectively, of reserves for uncertain income tax positions
related to continuing operations, all of which would affect the Company's
effective income tax rate if they are not utilized. The Company does not
currently anticipate that total reserves for uncertain income tax positions will
significantly change as a result of the settlement of income tax audits and the
expiration of statute of limitations for examining the Company's income tax
returns prior to July 2, 2008.
(3) Pending Deerfield Sale
On April 19, 2007, the Company entered into a definitive agreement whereby
Deerfield Triarc Capital Corp. (the "REIT"), a real estate investment trust
managed by Deerfield, will acquire Deerfield (the "Pending Deerfield Sale").
Deerfield represents substantially all of the Company's asset management
business segment (see Note 12). At July 1, 2007, the Company owned 2.6% of the
REIT and accounts for its investment in the REIT in accordance with the equity
method. The total consideration to be received by the Company and the other
members of Deerfield was valued at approximately $300,000,000 as of April 19,
2007, consisting principally of $145,000,000 in cash, 9,635,000 shares of the
REIT, which had a market value of approximately $145,000,000 based upon the
average of the closing prices of the REIT common stock for the ten trading days
prior to April 19, 2007 (the "REIT Average Stock Price") of $15.05 per share,
the distribution of 330,000 shares of the REIT currently owned by Deerfield to
the selling members, which had a market value based upon the REIT Average Stock
Price of approximately $5,000,000 and cash distributions from Deerfield to the
selling members. The consideration to be received by the Company and other
members of Deerfield is subject to adjustment under certain circumstances,
including a deduction for any amount outstanding under the revolving note of
Deerfield, which is $2,000,000 as of July 1, 2007. Based on the REIT Average
Stock Price of $15.05, the Company would receive minimum consideration of
approximately $170,000,000 before expenses and amounts to be held in escrow for
its capital interest of 63.6% and its profits interest of at least 52.3% in
Deerfield. However, at July 1, 2007, the market price of the REIT common stock
was $14.63 per share and as of July 31, 2007 it had declined to $10.97 per share
and has continued to decline subsequent to that date. The total consideration
that the Company will receive, including the number of shares it will receive in
the REIT, is dependent upon Triarc's profits interest in Deerfield and the
actual price of the REIT common stock at the time of closing. A portion of the
consideration, in the form of approximately 2,500,000 shares of the REIT
issuable in the transaction, will be deposited into an escrow account to be used
to satisfy any indemnification claims related to Deerfield and will not be
reflected as consideration until released from escrow. The Pending Deerfield
Sale is subject to customary closing conditions, including as of July 1, 2007,
approval by the REIT stockholders, the finalization of funding under a financing
commitment received by the REIT for the cash portion of the sales price and a
registration statement covering resale of the REIT shares to be received by the
Company being declared effective by the SEC. On August 9, 2007, the REIT
stockholders approved the Pending Deerfield Sale. The sale is currently expected
to close on August 14, 2007 and the Company currently expects the sale will
result in significantly lower proceeds than the approximate $300,000,000 set
forth above as a result of the decline in the market price of the REIT common
stock previously disclosed.
Two of Deerfield's executives, one of whom is a former director of the
Company, in the aggregate currently hold approximately one-third of the capital
interests and profit interests in Deerfield. Those executives have rights (the
"Put Rights") under Deerfield's existing operating agreement to require the
Company to acquire, for cash, a substantial portion of their interests in
Deerfield under certain circumstances. In that regard, the Put Right of one of
those executives can be exercised upon the sale of Deerfield and in May 2007
that executive gave notice exercising his right to require the Company to
purchase his approximate one-quarter interests in Deerfield concurrent with the
closing of the Pending Deerfield Sale (the "Put Exercise"). Since this executive
has the right to be paid in cash, the amount to be paid to such executive is not
affected by any change in the common stock price of the REIT subsequent to April
19, 2007 and is currently estimated to be between $70,000,000 and $75,000,000.
The Company, however, would receive a combination of cash and shares issued by
the REIT for such interests upon the sale of Deerfield of which a portion of the
shares will be held in escrow. Subsequent to the closing of the Pending
Deerfield Sale and assuming the Company receives all of the shares held in
escrow for which the Company is entitled, and the additional shares to be
received from the sale of the Deerfield interests to be acquired under the Put
Exercise, the Company expects that it will own approximately 15% of the REIT,
including 1,000,000 shares of the REIT, or approximately 2%, that are currently
held in deferred compensation trusts that will be distributed to two former
executives of the Company during the second half of 2007 (see Note 10).
The results of operations of Deerfield have been included in the
accompanying condensed consolidated financial statements for the three-month and
six-month periods ended July 2, 2006 and July 1, 2007 and will continue to be
reported in the Company's results of operations through the date of the Pending
Deerfield Sale. The Company does not anticipate that Deerfield will be reported
as a discontinued operation since the Company will have significant continuing
involvement in the operations of Deerfield after the sale through the
significant number of REIT shares that it will own subsequent to the closing of
the Pending Deerfield Sale.
Summary financial data for Deerfield, which, as discussed above, represents
substantially all of the Company's asset management business, as of and for the
six months ended July 1, 2007 is as follows (in thousands):
Total assets..............................$ 128,508
Revenues.................................. 32,719
Operating profit.......................... 4,001
Income from continuing operations before
income taxes and minority interests..... 3,268
(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 Six Months Ended
------------------- -------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ---- ---- ----
Net income (loss)...............................................$ 3,231 $ (28,023) $ (9,535) $ (20,962)
Net unrealized gains (losses), including reclassification
of prior period unrealized losses (gains), on
available-for-sale securities (see below)..................... 871 1,936 2,781 (7,067)
Net unrealized gains on cash flow hedges (see below)............ 1,149 1,062 2,973 134
Net change in currency translation adjustment................... (39) 223 10 270
-------- --------- --------- ---------
Comprehensive income (loss)...................................$ 5,212 $ (24,802) $ (3,771) $ (27,625)
======== ========= ========= =========
The following is a summary of the components of the net unrealized gains
(losses) on available-for-sale securities included in other comprehensive income
(loss) (in thousands):
Three Months Ended Six Months Ended
------------------- -------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ---- ---- ----
Unrealized holding gains arising during the period..............$ 3,178 $ 4,560 $ 6,689 $ 6,034
Reclassifications of prior period unrealized holding
(gains) losses into net income or loss........................ (547) (690) 67 (16,606)
Unrealized holding gain arising from the reclassification of
an investment previously accounted for under the
equity method to an available-for-sale investment............. -- 550 -- 550
Equity in change in unrealized holding losses arising
during the period............................................. (1,338) (1,479) (2,499) (1,122)
-------- --------- --------- ---------
1,293 2,941 4,257 (11,144)
Income tax (provision) benefit.................................. (492) (1,069) (1,570) 3,999
Minority interests in change in unrealized holding
gains and losses of a consolidated subsidiary................. 70 64 94 78
-------- --------- --------- ---------
$ 871 $ 1,936 $ 2,781 $ (7,067)
======== ========= ========= =========
The following is a summary of the components of the net unrealized gains
on cash flow hedges included in other comprehensive income (loss) (in
thousands):
Three Months Ended Six Months Ended
------------------- -------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ---- ---- ----
Unrealized holding gains arising during the period..............$ 1,471 $ 981 $ 3,495 $ 798
Reclassifications of prior period unrealized holding
gains into net income or loss................................. (316) (512) (404) (1,033)
Equity in change in unrealized holding gains arising
during the period............................................. 727 1,213 1,695 434
-------- --------- --------- ---------
1,882 1,682 4,786 199
Income tax provision............................................ (733) (620) (1,813) (65)
-------- --------- --------- ---------
$ 1,149 $ 1,062 $ 2,973 $ 134
======== ========= ========= =========
(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 (the "Class A Common
Stock" or "Class A Common Shares") and the Company's class B common stock (the
"Class B Common Stock" or "Class B Common Shares") by the weighted average
number of shares of each class. Both factors are presented in the tables below.
Net income for the three-month period ended July 2, 2006 was allocated between
the Class A Common Stock and Class B Common Stock based on the actual dividend
payment ratio. Net loss for the six-month period ended July 2, 2006 and the
three-month and six-month periods ended July 1, 2007 was allocated equally among
each share of Class A Common Stock and Class B Common Stock, resulting in the
same loss per share for each class for each of these respective periods.
Diluted income per share for the three-month period ended July 2, 2006 has
been computed by dividing the allocated income for the Class A Common Stock and
Class B Common Stock by the weighted average number of shares of each class plus
the potential common share effects on each class of (1) dilutive stock options,
computed using the treasury stock method, and (2) contingently issuable
performance-based restricted shares of Class A Common Stock and Class B Common
Stock (the "Restricted Shares") for which vesting was dependent upon the
Company's Class B Common Stock meeting certain market price targets and that
would have been issuable based on the market price of the Company's Class B
Common Stock as of July 2, 2006, both as presented in the table below. The
shares used to calculate diluted income per share for the three-month period
ended July 2, 2006 exclude any effect of the Company's 5% convertible notes due
2023 (the "Convertible Notes") which would have been antidilutive since the
after-tax interest on the Convertible Notes per share of Class A Common Stock
and Class B Common Stock obtainable on conversion exceeded the reported basic
income from continuing operations per share. Diluted loss per share for the
six-month period ended July 2, 2006 and the three-month and six-month periods
ended July 1, 2007 was the same as basic loss per share for each share of the
Class A Common Stock and Class B Common Stock since the Company reported a loss
from continuing operations and, therefore, the effect of all potentially
dilutive securities on the loss from continuing operations per share would have
been antidilutive. The basic and diluted loss from discontinued operations per
share for the three-month and six-month periods ended July 2, 2006 and the
six-month period ended July 1, 2007 was less than $.01 and, therefore, such
effect is not presented on the condensed consolidated statements of operations.
In addition, the reported diluted and basic income per share are the same for
each respective class of common stock for the three-month period ended July 2,
2006 since the difference is less than $.01.
In February 2006, $165,776,000 of the Convertible Notes were effectively
converted into 4,144,000 and 8,289,000 shares of the Company's Class A Common
Stock and Class B Common Stock, respectively, and, in May and June 2006, an
additional $1,604,000 of the Convertible Notes were converted, for which 25,000
and 50,000 shares of the Company's Class A Common Stock and Class B Common
Stock, respectively, were issued as of July 2, 2006 and 15,000 and 30,000 shares
of the Company's Class A Common Stock and Class B Common Stock, respectively,
were issued subsequent to July 2, 2006, as disclosed in Note 7. The weighted
average effect of these shares is included in the basic and diluted income
(loss) per share calculations from the dates of their issuance.
The only Company securities as of July 1, 2007 that could dilute basic
income per share for periods subsequent to July 1, 2007 are (1) outstanding
stock options which can be exercised into 459,000 shares and 4,971,000 shares of
the Company's Class A Common Stock and Class B Common Stock, respectively, (2)
193,000 nonvested restricted Class B Common Shares which were granted in 2007
and vest over three years, (3) 33,000 contingently issuable performance-based
restricted shares of the Company's Class B Common Stock which were granted in
2007 and (4) $2,100,000 of remaining Convertible Notes which are convertible
into 52,000 shares and 105,000 shares of the Company's Class A Common Stock and
Class B Common Stock, respectively.
Income (loss) per share has been computed by allocating the income or loss
as follows (in thousands):
Three Months Ended Six Months Ended
------------------------- -----------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ---- ---- ----
Class A Common Stock:
Continuing operations.................................$ 1,031 $ (8,749) $ (2,940) $ (6,500)
Discontinued operations............................... (42) -- (68) (47)
--------- --------- --------- ---------
Net income (loss).....................................$ 989 $ (8,749) $ (3,008) $ (6,547)
========= ========= ========= =========
Class B Common Stock:
Continuing operations.................................$ 2,339 $ (19,274) $ (6,380) $ (14,313)
Discontinued operations............................... (97) -- (147) (102)
--------- --------- --------- ---------
Net income (loss).....................................$ 2,242 $ (19,274) $ (6,527) $ (14,415)
========= ========= ========= =========
The number of shares used to calculate basic and diluted income (loss) per
share were as follows (in thousands):
Three Months Ended Six Months Ended
------------------------- -----------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ----- ---- ----
Class A Common Stock:
Basic weighted average shares outstanding............... 27,622 28,821 26,795 28,790
Dilutive effect of stock options................... 867 -- -- --
Contingently issuable Restricted Shares............ 94 -- -- --
--------- --------- --------- ---------
Diluted shares.......................................... 28,583 28,821 26,795 28,790
========= ========= ========= =========
Class B Common Stock:
Basic weighted average shares outstanding............... 59,939 63,490 58,141 63,389
Dilutive effect of stock options................... 2,418 -- -- --
Contingently issuable Restricted Shares............ 459 -- -- --
--------- --------- --------- ---------
Diluted shares.......................................... 62,816 63,490 58,141 63,389
========= ========= ========= =========
(6) Facilities Relocation and Corporate Restructuring
The facilities relocation and corporate restructuring charges for the
six-month period ended July 2, 2006 consisted of $578,000 related to the
Company's restaurant business segment and $1,000,000 of general corporate
charges. The charges for the six-month period ended July 1, 2007 consist of
$254,000 related to the Company's restaurant business segment and $79,193,000 of
general corporate charges. The charges in the restaurant segment in each period
principally related to additional charges associated with the Company combining
its existing restaurant operations with those of the RTM Restaurant Group
("RTM") following the acquisition of RTM in July 2005, including relocating the
corporate office of the restaurant group from Fort Lauderdale, Florida to new
offices in Atlanta, Georgia. The general corporate charge for the six-month
period ended July 2, 2006 relates to the Company's decision in December 2005 not
to relocate Triarc's corporate offices from New York City to Rye Brook, New York
and represents an adjustment to the previously estimated costs resulting from an
increase in the estimated marketing time needed to sublease the space. The
Company incurred and recognized additional facilities relocation and corporate
restructuring charges during the remainder of fiscal 2006 as described in more
detail in Note 18 to the consolidated financial statements contained in the Form
10-K.
The general corporate charge for the six-month period ended July 1, 2007
principally related to the ongoing transfer of substantially all of Triarc's
senior executive responsibilities to the Arby's Restaurant Group executive team
in Atlanta, Georgia (the "Corporate Restructuring"). In April 2007, the Company
announced that in light of the Pending Deerfield Sale, it will be closing its
New York headquarters and combining its corporate operations with its restaurant
operations in Atlanta, Georgia, which is expected to be completed in early 2008.
Accordingly, to facilitate this transition, the Company entered into negotiated
contractual settlements (the "Contractual Settlements") with its Chairman, who
was also the then Chief Executive Officer, and its Vice Chairman, who was also
the then President and Chief Operating Officer, (the "Executives") evidencing
the termination of their employment agreements and providing for their
resignation as executive officers as of June 29, 2007 (the "Separation Date").
Under the terms of the Contractual Settlements, the Chairman and former Chief
Executive Officer is entitled to a payment consisting of cash and investments
with a fair value of $50,289,000 as of July 1, 2007 and the Vice Chairman and
former President and Chief Operating Officer is entitled to a payment consisting
of cash and investments with a fair value of $25,144,000 as of July 1, 2007,
both subject to applicable withholding taxes. The Company has funded the payment
obligations to the Executives, net of applicable withholding taxes, by the
transfer of cash and investments to deferred compensation trusts (the "2007
Trusts") held by the Company (see Note 10 for detailed disclosure of the 2007
Trusts). The general corporate charge of $79,193,000 reflects the payment
entitlements under the Contractual Settlements, as well as severance due to
another former executive, excluding incentive compensation relating to the
six-month period ended July 1, 2007 and including applicable employer payroll
taxes. The Company expects to incur additional severance and incentive
compensation of approximately $7,500,000 with respect to other New York
headquarters' executives and employees during the second half of 2007 and early
2008, as well as an anticipated loss of approximately $850,000 on properties and
other assets at its New York headquarters, principally reflecting assets for
which the appraised value was less than book value, sold subsequent to July 1,
2007 to an affiliate of the Executives (see Note 10), all as part of the
Corporate Restructuring. In addition, the Company expects to incur a $2,000,000
severance charge relating to its asset management business segment with respect
to the chief executive officer of Deerfield upon completion of the Pending
Deerfield Sale.
The components of the facilities relocation and corporate restructuring
charges and an analysis of activity in the facilities relocation and corporate
restructuring accrual during the six-month periods ended July 2, 2006 and July
1, 2007 are as follows (in thousands):
Six Months Ended
July 2, 2006
---------------------------------------------
Balance Balance
January 1, Provisions July 2,
2006 (Reductions) Payments 2006
---- ------------ -------- ----
Restaurant Business Segment:
Cash obligations:
Severance and retention incentive compensation...$ 3,812 $ 730 $ (2,874) $ 1,668
Employee relocation costs........................ 1,544 (146)(a) (610) 788
Office relocation costs.......................... 260 (33)(a) (114) 113
Lease termination costs.......................... 774 27 (258) 543
--------- ---------- --------- ---------
Total restaurant business segment............. 6,390 578 (3,856) 3,112
General Corporate:
Cash obligations:
Lease termination costs.......................... 1,535 1,000 (754) 1,781
--------- ---------- -------- ---------
$ 7,925 $ 1,578 $ (4,610) $ 4,893
========= ========== ======== =========
Six Months Ended
July 1, 2007
--------------------------------------------------------------------
Total
Balance Balance Total Expected
December 31, July 1, Incurred to be
2006 Provisions Payments 2007 (b) to Date Incurred
---- ---------- -------- -------- ------- --------
Restaurant Business Segment:
Cash obligations:
Severance and retention incentive compensation...$ 340 $ -- $ (200) $ 140 $ 5,174 $ 5,174
Employee relocation costs........................ 134 254(a) (47) 341 4,148 4,148
Office relocation costs.......................... 45 -- (28) 17 1,463 1,463
Lease termination costs.......................... 302 -- (258) 44 819 819
--------- --------- --------- --------- --------- ---------
821 254 (533) 542 11,604 11,604
--------- --------- --------- --------- --------- ---------
Non-cash charges (c):
Compensation expense from modified
stock awards.................................. -- -- -- -- 612 612
Loss on disposal of properties................... -- -- -- -- 107 107
--------- --------- --------- --------- --------- ---------
-- -- -- -- 719 719
--------- --------- --------- --------- --------- ---------
Total restaurant business segment......... 821 254 (533) 542 12,323 12,323
Asset Management Business Segment:
Cash obligations:
Severance........................................ -- -- -- -- -- 2,000
General Corporate:
Cash obligations:
Severance and retention incentive compensation... -- 79,193 -- 79,193 79,193 86,693
Non-cash charges (c):
Loss on sale of properties and other assets...... -- -- -- -- -- 850
--------- --------- --------- --------- --------- ---------
$ 821 $ 79,447 $ (533) $ 79,735(b)$ 91,516 $ 101,866
========= ========= ========= ========= ========= =========
---------------
(a) Reflects change in estimate of total cost to be incurred.
(b) Balance consists of $41,439,000 reported as current "Deferred compensation
payable to related parties" and $38,296,000 included in "Accrued expenses
and other current liabilities" in the accompanying condensed consolidated
balance sheet as of July 1, 2007.
(c) During the six-month periods ended July 2, 2006 and July 1, 2007 the
Company did not incur any non-cash facilities relocation and corporate
restructuring charges.
(7) Loss on Early Extinguishments of Debt
The Company recorded losses on early extinguishments of debt aggregating
$933,000 and $13,477,000 in the three-month and six-month periods ended July 2,
2006, respectively, consisting of (1) $34,000 and $12,578,000, respectively,
related to conversions of the Company's Convertible Notes and (2) in the
three-month period ended July 2, 2006, $899,000 related to a prepayment of term
loans (the "Term Loans") under the Company's senior secured term loan facility.
In February 2006, an aggregate of $165,776,000 principal amount of the
Company's Convertible Notes were effectively converted into an aggregate of
4,144,000 Class A Common Shares and 8,289,000 Class B Common Shares. In order to
induce such effective conversion, the Company paid negotiated premiums
aggregating $8,694,000 to the converting noteholders consisting of cash of
$4,975,000 and 226,000 Class B Common Shares with an aggregate fair value of
$3,719,000 based on the closing market price of the Company's Class B Common
Stock on the dates of the effective conversions in lieu of cash to certain of
those noteholders. In addition, the Company issued an additional 46,000 Class B
Common Shares to those noteholders who agreed to receive such shares in lieu of
a cash payment for accrued and unpaid interest. In May and June 2006, an
additional $1,604,000 principal amount of Convertible Notes were converted, for
which 25,000 Class A Common Shares and 50,000 Class B Common Shares were issued
prior to July 2, 2006 and 15,000 Class A Common Shares and 30,000 Class B Common
Shares were issued subsequent to July 2, 2006. In connection with these
conversions and effective conversions of the Convertible Notes, the Company
recorded a loss on early extinguishments of debt of $12,578,000 in the six-month
period ended July 2, 2006, including $34,000 in the three-month period ended
July 2, 2006, consisting of the premiums aggregating $8,694,000 and the
write-off of $3,884,000 of related unamortized deferred financing costs,
including $34,000 in the three-month period ended July 2, 2006.
During the three-month period ended July 2, 2006 the Company prepaid
$45,000,000 principal amount of the Term Loans from excess cash and recorded a
loss on early extinguishments of debt of $899,000 representing the write-off of
related unamortized deferred financing costs.
(8) Discontinued Operations
During the fourth quarter of 2006, the Company closed two restaurants (the
"Restaurant Discontinued Operations") which were opened in 2005 and 2006, and
which were reported within the Company's restaurant segment. These two
restaurants have been accounted for as discontinued operations in 2006 through
their respective dates of closing since (1) their results of operations and cash
flows have been eliminated from the Company's ongoing operations as a result of
the closings and (2) the Company does not have any significant continuing
involvement in the operations of the restaurants after their closings. The
accompanying condensed consolidated statements of operations and cash flows have
been reclassified to report the results of operations and cash flows of the two
closed restaurants as discontinued operations for the three-month and six-month
periods ended July 2, 2006.
Prior to 2006 the Company sold (1) the stock of the companies comprising
the Company's former premium beverage and soft drink concentrate business
segments (collectively, the "Beverage Discontinued Operations") and (2) the
stock or the principal assets of the companies comprising the former utility and
municipal services and refrigeration business segments (the "SEPSCO Discontinued
Operations"). The Beverage and SEPSCO Discontinued Operations have also been
accounted for as discontinued operations by the Company.
During the three-month period ended April 1, 2007, the Company recorded
additional loss on disposal of the Restaurant Discontinued Operations relating
to finalizing the leasing arrangements for the two closed restaurants.
The loss from discontinued operations consisted of the following (in
thousands):
Three Months Six Months Ended
Ended ------------------------
July 2, July 2, July 1,
2006 2006 2007
---- ---- ----
Net sales...................................................$ 212 $ 329 $ --
============ ============ =============
Loss from operations before benefit from income taxes....... (233) (360) --
Benefit from income taxes................................... 94 145 --
------------ ------------ -------------
(139) (215) --
------------ ------------ -------------
Loss on disposal of businesses before benefit from income
taxes..................................................... -- -- (247)
Benefit from income taxes................................... -- -- 98
------------ ------------ -------------
-- -- (149)
------------ ------------ -------------
$ (139) $ (215) $ (149)
============ ============ =============
Certain of the Company's state income tax returns that relate to
discontinued operations are currently under examination. The Company has
received notices of proposed tax adjustments aggregating $6,352,000 in
connection with certain of these state income tax returns. However, the Company
is contesting these proposed adjustments.
Current liabilities remaining to be liquidated relating to the discontinued
operations result from certain obligations not transferred to the respective
buyers and consisted of the following (in thousands):
December 31, July 1,
2006 2007
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations....................................................$ 8,496 $ 8,416
Liabilities relating to the SEPSCO Discontinued Operations................... 556 535
Liabilities relating to the Restaurant Discontinued Operations............... 202 335
----------- -----------
$ 9,254 $ 9,286
=========== ===========
The Company expects that the liquidation of these remaining liabilities
associated with all of these discontinued operations as of July 1, 2007 will not
have any material adverse impact on its condensed consolidated financial
position or results of operations. To the extent any estimated amounts included
in the current liabilities relating to discontinued operations are determined to
be in excess of the requirement to liquidate the associated liability, any such
excess will be released at that time as a component of gain or loss on disposal
of discontinued operations.
(9) Retirement Benefit Plans
The Company maintains two defined benefit plans, the benefits under which
were frozen in 1992 and for which the Company has no unrecognized prior service
cost. The components of the net periodic pension cost incurred by the Company
with respect to these plans are as follows (in thousands):
Three Months Ended Six Months Ended
------------------------- -----------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ----- ---- ----
Service cost (consisting entirely of plan administrative
expenses)...............................................$ 23 $ 23 $ 47 $ 45
Interest cost............................................. 55 55 109 110
Expected return on the plans' assets...................... (65) (58) (131) (116)
Amortization of unrecognized net loss..................... 12 6 24 13
--------- --------- --------- --------
Net periodic pension cost..........................$ 25 $ 26 $ 49 $ 52
========= ========= ========= ========
(10) Transactions with Related Parties
In connection with the Corporate Restructuring disclosed in Note 6, the
Company entered into a series of agreements with the Executives and a management
company (the "Management Company") formed by the Executives and a director, who
is also the former Vice Chairman of the Company, (collectively, the
"Principals"). These agreements are described in the paragraphs set forth below.
As disclosed in Note 28 to the consolidated financial statements contained
in the Form 10-K, on November 1, 2005 the Principals started a series of equity
investment funds (the "Equity Funds") that are separate and distinct from the
Company and that are being managed by the Principals and other senior executives
of the Company (the "Employees") through the Management Company formed by the
Principals. Until June 29, 2007, the Principals and the Employees continued to
receive their regular compensation from the Company and the Company made
available the services of the Principals and the Employees, as well as certain
support services, to the Management Company. Through June 29, 2007 (see below)
the Company was reimbursed by the Management Company for the allocable cost of
these services. Such allocated costs for the six-month periods ended July 2,
2006 and July 1, 2007 amounted to $1,768,000 and $2,515,000, respectively, and
have been recognized as reductions of "General and administrative, excluding
depreciation and amortization" expense in the accompanying condensed
consolidated statements of operations. The Company was due $10,000 and
$1,432,000 as of December 31, 2006 and July 1, 2007, respectively, relating to
these services which are included in "Accounts and notes receivable" in the
accompanying condensed consolidated balance sheets and were subsequently
collected in the respective following month. As discussed further below,
effective June 29, 2007 the Principals and nearly all of the Employees became
employees of the Management Company and are no longer employed by the Company.
The Company has reduced its incentive compensation expense during the six-month
period ended July 1, 2007 by $2,700,000 representing the Company's current
estimate of the Management Company's allocable portion of the estimated
incentive compensation attributable to the Employees for the first six months of
2007. In addition, in July 2007 the Company paid $171,000 to the Management
Company representing the accrued vacation of the Employees as of June 29, 2007,
the obligation for which was assumed by the Management Company. A special
committee comprised of independent members of the Company's board of directors
has reviewed these arrangements.
As part of the agreement with the Executives and in connection with the
Corporate Restructuring, the Company has entered into a two-year transition
services agreement (the "Services Agreement") with the Management Company
beginning June 30, 2007 pursuant to which the Management Company will provide
the Company with a range of professional and strategic services. Under the
Services Agreement, the Company will pay the Management Company $3,000,000 per
quarter for the first year of services and $1,750,000 per quarter for the second
year of services.
In December 2005, the Company invested $75,000,000 in an account (the
"Equities Account") which is managed by the Management Company and co-invests on
a parallel basis with the Equity Funds and had a carrying value of $108,559,000
as of July 1, 2007. As part of the agreements with the Executives, in April 2007
the Company entered into an agreement under which the Management Company will
continue to manage the Equities Account until at least December 31, 2010, the
Company will not withdraw its investment from the Equities Account prior to
December 31, 2010 and, beginning January 1, 2008, the Company will pay
management and incentive fees to the Management Company in an amount customary
for other unaffiliated third party investors with similarly sized investments.
In accordance therewith, the amounts held together with any related obligations
in the Equities Account as of July 1, 2007 are reported as noncurrent assets and
long-term liabilities in the accompanying condensed consolidated balance sheet
and principally consist of $69,493,000 included in "Investments" and $39,636,000
included in "Restricted cash equivalents."
Prior to 2006 the Company provided aggregate incentive compensation of
$22,500,000 to the Executives which had been invested in two deferred
compensation trusts (the "Deferred Compensation Trusts") for their benefit. As
of December 31, 2006 the obligation to the Executives related to the Deferred
Compensation Trusts was $35,679,000 and was reported as noncurrent "Deferred
compensation payable to related parties" in the accompanying condensed
consolidated balance sheet. Deferred compensation expense of $1,147,000 and
$2,516,000 was recognized in the six-month periods ended July 2, 2006 and July
1, 2007, respectively, for net increases in the fair value of the investments in
the Deferred Compensation Trusts. This obligation was settled effective July 1,
2007 as a result of the Executives' resignation and the assets in the Deferred
Compensation Trusts were either distributed to the Executives or used to satisfy
withholding taxes. In addition, the Company recorded a receivable from the
Executives of $801,000 as of July 1, 2007 for the balance of withholding taxes
payable on their behalf which was collected later in July 2007. As of the
settlement date, the obligation was $38,195,000 which represented the then fair
value of the assets held in the Deferred Compensation Trusts. As of December 31,
2006, the assets in the Deferred Compensation Trusts consisted of $13,409,000
included in "Investments," which did not reflect the unrealized net increase in
the fair value of the investments of $9,309,000 because the investments were
carried under the cost method of accounting, $1,884,000 included in "Cash and
cash equivalents" and $11,077,000 included in "Investment settlements
receivable" in the accompanying condensed consolidated balance sheet. Under
GAAP, the Company was unable to recognize any investment income for unrealized
net increases in the fair value of those investments in the Deferred
Compensation Trusts that were accounted for under the cost method of accounting.
Accordingly, the Company recognized net investment income from investments in
the Deferred Compensation Trusts of $141,000 and $8,653,000 in the six-month
periods ended July 2, 2006 and July 1, 2007, respectively. The net investment
income during the six-month period ended July 2, 2006 consisted of interest
income of $158,000 and a $1,000 adjustment to the realized gain from the sale of
a cost-method investment in the Deferred Compensation Trust, less investment
management fees of $18,000. The net investment income during the six-month
period ended July 1, 2007 consisted of $8,449,000 of realized gains almost
entirely attributable to the transfer of the investments to the Executives and
$222,000 of interest income, less investment management fees of $18,000.
Realized gains, interest income and investment management fees are included in
"Investment income, net" and deferred compensation expense is included in
"General and administrative, excluding depreciation and amortization" expense in
the accompanying condensed consolidated statements of operations. The unrealized
net increase in the fair value of the investment retained by the Company of
$3,154,000 at July 1, 2007 will be recognized when that investment is sold.
On June 29 and July 1, 2007, the Company funded the payment of the
obligations due to the Executives under the Contractual Settlements described in
Note 6, net of applicable withholding taxes of $33,994,000, in the 2007 Trusts.
The payment of the amounts in the 2007 Trusts, including any investment income
or less any investment loss, will be made to the Executives after six months
following their June 29, 2007 Separation Date. As of July 1, 2007, the aggregate
obligation to the Executives related to the 2007 Trusts was $41,439,000 and is
reported as "Deferred compensation payable to related parties" classified as a
current liability in the accompanying condensed consolidated balance sheet. As
of July 1, 2007, the assets in the 2007 Trusts consist of $23,155,000 included
in "Short-term investments not pledged as collateral," which had a fair value of
$29,545,000, $11,355,000 included in "Cash and cash equivalents" and $539,000
included in "Investment settlements receivable" in the accompanying condensed
consolidated balance sheet.
In July 2007, the Company sold substantially all of the properties and
other assets it owned and used at its New York headquarters to the Management
Company for an aggregate purchase price of $1,808,000, including $140,000 of
sales taxes. The assets sold included computers and other electronic equipment
and furniture and furnishings. The Company expects to recognize a loss of
approximately $850,000 with respect to the assets sold principally reflecting
assets for which the appraised value was less than book value.
In July 2007, the Company entered into an agreement under which the
Management Company will sublease (the "Sublease") one of the floors of the
Company's New York headquarters effective July 1, 2007. Under the terms of the
Sublease, the Management Company will pay the Company an amount equal to the
rent the Company pays plus a fixed amount reflecting a portion of the increase
in the monthly fair market value of the Company's leasehold interest. The
Management Company is also responsible for property taxes and the other costs
related to the use of the floor. Either the Management Company or the Company
may terminate the Sublease upon 60 days notice.
As of June 30, 2007, the Company assigned the lease for a corporate
facility to the Management Company such that after that date, other than with
respect to the Company's security deposit applicable to the lease, the Company
has no further rights or obligations with respect to the lease. The security
deposit of $113,000 will remain the property of the Company and, upon the
expiration of the lease, is to be returned to the Company in full.
In August 2007, the Company entered into time share agreements whereby the
Principals and the Management Company may use the Company's corporate aircraft
in exchange for payment of the incremental flight and related costs of such
aircraft.
The Company also intends to assign a 25% fractional interest in a
helicopter to the Management Company, although the terms of such assignment have
not yet been finalized. Pending that assignment, the Management Company has
agreed to pay the monthly management fee and other costs related to the
fractional interest in the helicopter. It is expected that subsequent to the
assignment, the Company will have no further rights or obligations under the
terms of the agreements applicable to the fractional interest. The Company does
not expect to recognize any material gain or loss upon finalization of this
assignment.
All of these agreements with the Executives and the Management Company were
negotiated and approved by a special committee of independent members of the
Company's board of directors. The special committee was advised by independent
outside counsel and worked with the compensation committee and the performance
compensation subcommittee of the Company's board of directors and its
independent outside counsel and independent compensation consultant.
In addition to the related party transactions related to the Corporate
Restructuring previously disclosed, the Company settled a post-closing purchase
price adjustment, the amount of which had been in dispute, as provided for in an
agreement and plan of merger pursuant to which the Company acquired RTM on July
25, 2005. The sellers of RTM include certain current officers of a subsidiary of
the Company and a current director of the Company. The Company has agreed to pay
the sellers of RTM an aggregate post-closing purchase price adjustment of
$1,600,000, which the Company has reflected as an increase in "Goodwill" with an
equal offsetting increase in "Accounts payable" in the accompanying condensed
consolidated balance sheet as of July 1, 2007.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 28 to the
consolidated financial statements contained in the Form 10-K.
(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 1970s. The
business operations of Adams were sold in December 1992. In February 2003, Adams
and the Florida Department of Environmental Protection (the "FDEP") agreed to a
consent order that provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the FDEP approved the work plan submitted by Adams'
environmental consultant and during 2004 the work under that plan was completed.
Adams submitted its contamination assessment report to the FDEP in March 2004.
In August 2004, the FDEP agreed to a monitoring plan consisting of two sampling
events which occurred in January and June 2005 and the results were submitted to
the FDEP for its review. In November 2005, Adams received a letter from the FDEP
identifying certain open issues with respect to the property. The letter did not
specify whether any further actions are required to be taken by Adams. Adams
sought clarification from the FDEP in order to attempt to resolve this matter.
On May 1, 2007, the FDEP sent a letter clarifying their prior correspondence and
reiterated the open issues identified in their November 2005 letter. In
addition, the FDEP offered Adams the option of voluntarily taking part in a
recently adopted state program that could lessen site clean up standards, should
such a clean up be required after a mandatory further study and site assessment
report. The Company, its consultants and outside counsel are presently reviewing
these new options and no decision has been made on a course of action based on
the FDEP's offer. Nonetheless, based on provisions made prior to 2006 of
$1,667,000 for all of these costs and after taking into consideration various
legal defenses available to the Company, including Adams, Adams has provided for
its estimate of its remaining liability for completion of this matter.
In addition to the environmental matter described above, the Company is
involved in other litigation and claims incidental to its current and prior
businesses. Triarc and its subsidiaries have reserves for all of their legal and
environmental matters aggregating $800,000 as of July 1, 2007. Although the
outcome of such matters cannot be predicted with certainty and some of these
matters may be disposed of unfavorably to the Company, based on currently
available information, including legal defenses available to Triarc and/or its
subsidiaries, and given the aforementioned reserves, the Company does not
believe that the outcome of such legal and environmental matters will have a
material adverse effect on its condensed consolidated financial position or
results of operations.
(12) Business Segments
The Company manages and internally reports its operations as two business
segments: (1) the operation and franchising of restaurants ("Restaurants") and
(2) asset management ("Asset Management") (see Note 3 regarding the pending sale
of substantially all of the Asset Management segment). The Company evaluates
segment performance and allocates resources based on each segment's earnings
before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA has
been computed as operating profit plus depreciation and amortization, excluding
amortization of deferred financing costs ("Depreciation and Amortization").
Operating profit (loss) has been computed as revenues less operating expenses.
In computing EBITDA and operating profit (loss), interest expense, including
amortization of deferred financing costs, and non-operating income and expenses
have not been considered. Identifiable assets by segment are those assets used
in the Company's operations of each segment. General corporate assets consist
primarily of cash and cash equivalents, short-term investments, investment
settlements receivable, current or non-current restricted cash equivalents,
non-current investments and properties.
The following is a summary of the Company's segment information (in
thousands):
Three Months Ended Six Months Ended
-------------------------- -------------------------
July 2, July 1, July 2, July 1,
2006 2007 2006 2007
---- ---- ---- ----
Revenues:
Restaurants.........................................$ 291,789 $ 299,980 $ 569,019 $ 586,148
Asset Management.................................... 15,828 16,841 30,624 32,719
----------- ----------- ----------- -----------
Consolidated revenues..........................$ 307,617 $ 316,821 $ 599,643 $ 618,867
=========== =========== =========== ===========
EBITDA:
Restaurants.........................................$ 39,210 $ 38,911 $ 69,157 $ 75,313
Asset Management.................................... 3,096 3,397 5,204 6,329
General corporate................................... (14,236) (92,359) (33,190) (107,224)
----------- ----------- ----------- -----------
Consolidated EBITDA............................ 28,070 (50,051) 41,171 (25,582)
----------- ----------- ----------- -----------
Less Depreciation and Amortization:
Restaurants......................................... 12,203 14,850 22,996 28,485
Asset Management.................................... 1,448 2,463 2,931 3,714
General corporate................................... 1,052 1,091 2,137 2,190
----------- ----------- ----------- -----------
Consolidated Depreciation and Amortization..... 14,703 18,404 28,064 34,389
----------- ----------- ----------- -----------
Operating profit (loss):
Restaurants......................................... 27,007 24,061 46,161 46,828
Asset Management.................................... 1,648 934 2,273 2,615
General corporate................................... (15,288) (93,450) (35,327) (109,414)
----------- ----------- ----------- -----------
Consolidated operating profit (loss) .......... 13,367 (68,455) 13,107 (59,971)
Interest expense........................................ (38,246) (15,286) (65,622) (30,675)
Loss on early extinguishments of debt................... (933) -- (13,477) --
Investment income, net.................................. 30,796 17,625 51,746 40,773
Gain on sale of unconsolidated business................. -- 2,561 2,256 2,558
Other income, net....................................... 3,699 597 5,436 2,207
----------- ----------- ----------- -----------
Consolidated income (loss) from continuing
operations before income taxes and
minority interests..........................$ 8,683 $ (62,958) $ (6,554) $ (45,108)
=========== =========== =========== ===========
December 31, July 1,
2006 2007
---- ----
Identifiable assets:
Restaurants.........................................................................$ 1,079,509 $ 1,118,605
Asset Management.................................................................... 183,733 134,176
General corporate................................................................... 297,207 295,012
----------- -----------
Consolidated total assets....................................................$ 1,560,449 $ 1,547,793
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Triarc Companies, Inc., which we refer to as Triarc,
and its subsidiaries should be read in conjunction with our accompanying
condensed consolidated financial statements included elsewhere herein and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the fiscal year ended December
31, 2006, which we refer to as the Form 10-K. Item 7 of our Form 10-K describes
the application of our critical accounting policies. 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 1A."
Introduction and Executive Overview
We currently operate in two business segments. We operate in the restaurant
business through our Company-owned and franchised Arby's restaurants and in the
asset management business through our 63.6% capital interest in Deerfield &
Company LLC, which we refer to as Deerfield. However, in April 2007 we entered
into a definitive agreement to sell our entire interest in Deerfield, which we
refer to as the Pending Deerfield Sale.
In our restaurant business, we derive revenues in the form of sales by our
Company-owned restaurants and from royalties and franchise and related fees.
While over 70% of our existing Arby's royalty agreements and all of our new
domestic royalty agreements provide for royalties of 4% of franchise revenues,
our average royalty rate was 3.6% for the six months ended July 1, 2007. In our
asset management business, we derive revenues in the form of asset management
and related fees from our management of (1) collateralized debt obligation
vehicles, which we refer to as CDOs, and (2) investment funds and private
investment accounts, which we refer to as Funds, including Deerfield Triarc
Capital Corp., a real estate investment trust, which we refer to as the REIT.
We derive investment income principally from the investment of our excess
cash. In that regard, in December 2005 we invested $75.0 million in an account,
which we refer to as the Equities Account, which is managed by a management
company, which we refer to as the Management Company, formed by our Chairman,
who is also our former Chief Executive Officer, and our Vice Chairman, who is
also our former President and Chief Operating Officer, whom we refer to as the
Executives, and a director, who is also our former Vice Chairman, all of whom we
refer to as the Principals. The Equities Account is invested principally in the
equity securities, including through derivative instruments, of a limited number
of publicly-traded companies. The Equities Account, including cash equivalents,
had a fair value of $108.6 million as of July 1, 2007. We had also invested in
several funds managed by Deerfield, including Deerfield Opportunities Fund, LLC,
which we refer to as the Opportunities Fund, and DM Fund LLC, which we refer to
as the DM Fund. Prior to 2006, we invested $100.0 million in the Opportunities
Fund and later transferred $4.8 million of that amount to the DM Fund. We
redeemed our investments in the Opportunities Fund and the DM Fund effective
September 29, 2006 and December 31, 2006, respectively. The Opportunities Fund
through September 29, 2006 and the DM Fund through December 31, 2006, were
accounted for as consolidated subsidiaries of ours, with minority interests to
the extent of participation by investors other than us. The Opportunities Fund
was a multi-strategy hedge fund that principally invested in various fixed
income securities and their derivatives and employed substantial leverage in its
trading activities which significantly impacted our consolidated financial
position, results of operations and cash flows. We also have an investment in
the REIT. When we refer to Deerfield, we mean only Deerfield & Company, LLC and
not the Opportunities Fund, the DM Fund or the REIT.
Our goal is to enhance the value of our Company by increasing the revenues
of our restaurant business, which may include through acquisitions, and, until
the Pending Deerfield Sale is completed, Deerfield's asset management business.
We are continuing to focus on growing the number of restaurants in the Arby's
system, adding new menu offerings and implementing operational initiatives
targeted at improving service levels and convenience. We continue to grow
Deerfield's assets under management by utilizing the value of its historically
profitable investment advisory brand and increasing the types of assets under
management, thereby increasing Deerfield's asset management fee revenues;
although recently the credit markets have experienced reduced liquidity which
could materially limit Deerfield's ability to increase assets under management
if those conditions were to continue for a prolonged period of time.
We are currently in the process of a corporate restructuring involving the
Pending Deerfield Sale and the disposition of certain other non-restaurant net
assets. See the discussions of "Facilities Relocation and Corporate
Restructuring" under "Results of Operations" and "Pending Deerfield Sale"
following "Liquidity and Capital Resources" for a detailed discussion of the
corporate restructuring and certain of its impacts on our results of operations
and our liquidity and capital resources.
In recent periods our restaurant business has experienced the following
trends:
o Addition of selected higher-priced quality items to menus, which appeal
more to adult tastes;
o Increased consumer preference for premium sandwiches with perceived higher
levels of freshness, quality and customization along with increased
competition in the premium sandwich category which has constrained the
pricing of these products;
o Increased price competition, as evidenced by (1) value menu concepts, which
offer comparatively lower prices on some menu items, (2) combination meal
concepts, which offer a complete meal at an aggregate price lower than the
price of the individual food and beverage items, (3) the use of coupons and
other price discounting and (4) many recent product promotions focused on
the lower price of certain menu items;
o Increased competition among quick service restaurant competitors and other
businesses for available development sites, higher development costs
associated with those sites and higher borrowing costs in the lending
markets typically used to finance new unit development;
o Increased availability to consumers of new product choices, including (1)
additional healthy products focused on freshness driven by a greater
consumer awareness of nutritional issues, (2) new products that tend to
include larger portion sizes and more ingredients and (3) beverage programs
which offer a selection of premium non-carbonated beverage choices,
including coffee and tea products;
o Competitive pressures from operators outside the quick service restaurant
industry, such as the deli sections and in-store cafes of several major
grocery store chains, convenience stores and casual dining outlets offering
prepared food purchases;
o Generally higher fuel prices, although fluctuating significantly in recent
months, which cause a decrease in many consumers' discretionary income and
increase our utility costs and the cost of commodities we will purchase
under new distribution contracts that become effective in the third quarter
of 2007;
o Competitive pressures due to extended hours of operation by many quick
service restaurant competitors particularly during the breakfast hours as
well as during late night hours;
o Federal, state and local legislative activity, such as minimum wage
increases and mandated health and welfare benefits which could continue to
result in increased wages and related fringe benefits, including health
care and other insurance costs;
o Competitive pressures from an increasing number of franchise opportunities
seeking to attract qualified franchisees; and
o Economically weak conditions in the Michigan and Ohio regions where a
disproportionate number of our Company-owned restaurants are located.
We experience the effects of these trends directly to the extent they
affect the operations of our Company-owned restaurants and indirectly to the
extent they affect sales by our franchisees and, accordingly, the royalties and
franchise fees we receive from them.
In recent periods, our asset management business has experienced the
following trends:
o Increased volatility and widening of interest rate spreads recently
experienced by the credit markets triggered by the higher default rates in
the subprime mortgage markets which could, for at least the near term,
negatively impact our future management and related fees from CDOs,
incentive fees from the REIT and the fair value of some of our CDO
investments, the extent to which we are unable to predict;
o Growth in the hedge fund market as investors appear to have increased their
investment allocations to hedge funds, with particular interest recently in
hedge strategies that focus on specific areas of growth in domestic and
foreign economies such as oil, commodities, interest rates, equities and
other specific areas, although such growth appears to have moderated
recently reflecting the recent performance of certain funds and the
competitive market;
o Increased demand for securities, although appearing to have moderated just
recently, partly due to an increase in the number of hedge funds, resulting
in higher purchase prices of certain securities and, during periods of
asset liquidation by those hedge funds, potentially lower sales prices,
which can negatively impact our returns;
o A flatter yield curve whereby the spread between short-term and long-term
interest rates is less than the historic average, resulting in higher
funding costs for our securities purchases, which has and can continue to
negatively impact our margins within our managed funds, potentially
lowering our asset management fees and assets under management;
o Reduced liquidity experienced recently in the credit markets which could
materially limit our ability to increase assets under management if such
conditions were to continue for a prolonged time, potentially lowering our
asset management fees; and
o Increased merger and acquisition activity, resulting in additional risks
and opportunities in the credit markets.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. However, Deerfield, the Opportunities Fund and
the DM Fund report or reported on a calendar year ending on December 31. Our
first half of fiscal 2006 commenced on January 2, 2006 and ended on July 2,
2006, with our second quarter commending on April 3, 2006, except that
Deerfield, the Opportunities Fund and DM Fund are included on a calendar-period
basis. Our first half of fiscal 2007 commenced on January 1, 2007 and ended on
July 1, 2007, with our second quarter commencing on April 2, 2007, except that
Deerfield is included on a calendar-period basis. When we refer to the "three
months ended July 2, 2006," or the "2006 second quarter," and the "six months
ended July 2, 2006" or the "2006 first half," we mean the periods from April 3,
2006 to July 2, 2006 and January 2, 2006 to July 2, 2006, respectivley. When we
refer to the "three months ended July 1, 2007," or the "2007 second quarter,"
and the "six months ended July 1, 2007," or the "2007 first half," we mean the
periods from April 2, 2007 to July 1, 2007 and January 1, 2007 to July 1, 2007,
respectively. Each quarter contained 13 weeks and each half contained 26 weeks.
All references to years, halves and quarters relate to fiscal periods rather
than calendar periods, except for Deerfield, the Opportunities Fund and the DM
Fund.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount and percent of the change (1) between the 2006 second
quarter and the 2007 second quarter and (2) between the 2006 first half and the
2007 first half. We consider certain percentage changes between these quarters
to be not measurable, or not meaningful, and we refer to these as "n/m." The
percentage changes used in the following discussion have been rounded to the
nearest whole percent.
Three Months Ended Six Months Ended
------------------ Change ----------------- Change
July 2, July 1, ----------------- July 2, July 1, ----------------
2006 2007 Amount Percent 2006 2007 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
(In Millions Except Percents)
Revenues:
Net sales...............................$ 270.6 $ 278.6 $ 8.0 3 % $ 529.4 $ 545.1 $ 15.7 3 %
Royalties and franchise and related
fees.................................. 21.2 21.4 0.2 1 % 39.6 41.1 1.5 4 %
Asset management and related fees....... 15.8 16.8 1.0 6 % 30.6 32.7 2.1 7 %
--------- -------- -------- ------- -------- --------
307.6 316.8 9.2 3 % 599.6 618.9 19.3 3 %
--------- -------- -------- ------- -------- --------
Costs and expenses:
Cost of sales, excluding depreciation
and amortization...................... 194.0 204.9 10.9 6 % 386.4 399.9 13.5 3 %
Cost of services, excluding depreciation
and amortization...................... 5.9 6.3 0.4 7 % 11.4 13.2 1.8 16 %
Advertising and promotions.............. 19.8 20.7 0.9 5 % 39.9 38.4 (1.5) (4)%
General and administrative, excluding
depreciation and amortization......... 58.3 56.0 (2.3) (4)% 118.4 113.6 (4.8) (4)%
Depreciation and amortization, excluding
amortization of deferred financing
costs................................. 14.7 18.4 3.7 25 % 28.1 34.4 6.3 22 %
Facilities relocation and corporate
restructuring......................... 0.8 79.0 78.2 n/m 1.6 79.4 77.8 n/m
Loss on settlement of unfavorable
franchise rights...................... 0.7 -- (0.7) (100)% 0.7 -- (0.7) (100)%
--------- -------- -------- ------- -------- --------
294.2 385.3 91.1 31 % 586.5 678.9 92.4 16 %
--------- -------- -------- ------- -------- --------
Operating profit (loss)............. 13.4 (68.5) (81.9) n/m 13.1 (60.0) (73.1) n/m
Interest expense........................... (38.2) (15.3) 22.9 60 % (65.6) (30.7) 34.9 53 %
Loss on early extinguishments of debt...... (0.9) -- 0.9 100 % (13.4) -- 13.4 100 %
Investment income, net..................... 30.7 17.6 (13.1) (43)% 51.7 40.8 (10.9) (21)%
Gain on sale of unconsolidated business.... -- 2.6 2.6 n/m 2.3 2.6 0.3 13 %
Other income, net.......................... 3.7 0.6 (3.1) (84)% 5.4 2.2 (3.2) (59)%
--------- -------- -------- ------- -------- --------
Income (loss) from continuing
operations before income taxes
and minority interests............ 8.7 (63.0) (71.7) n/m (6.5) (45.1) (38.6) n/m
(Provision for) benefit from income taxes.. (2.7) 36.0 38.7 n/m 2.9 28.5 25.6 n/m
Minority interests in income of
consolidated subsidiaries............... (2.6) (1.0) 1.6 62 % (5.7) (4.2) 1.5 25 %
--------- -------- -------- ------- -------- --------
Income (loss) from continuing
operations........................ 3.4 (28.0) (31.4) n/m (9.3) (20.8) (11.5) n/m
--------- -------- -------- ------- -------- --------
Loss from discontinued operations, net of
income taxes:
Loss from operations.................... (0.1) -- 0.1 100 % (0.2) -- 0.2 100 %
Loss on disposal........................ -- -- -- -- -- (0.1) (0.1) n/m
--------- -------- -------- ------- -------- --------
Loss from discontinued
operations........................ (0.1) -- 0.1 100 % (0.2) (0.1) 0.1 50 %
--------- -------- -------- ------- -------- ---------
Net income (loss)...............$ 3.3 $ (28.0) $ (31.3) n/m $ (9.5) $ (20.9) $ (11.4) n/m
========= ======== ======== ======= ======== ========
Three Months Ended July 1, 2007 Compared with Three Months Ended July 2, 2006
Net Sales
Our net sales, which were generated entirely from the Company-owned
restaurants, increased $8.0 million, or 3%, to $278.6 million for the three
months ended July 1, 2007 from $270.6 million for the three months ended July 2,
2006, due to a $12.6 million increase in net sales from the 41 net Company-owned
restaurants we added since July 2, 2006. We opened 54 new restaurants, with
generally higher than average sales volumes, and we acquired 9 restaurants from
franchisees since July 2, 2006 as compared with 14 generally underperforming
restaurants we closed and 8 restaurants we sold to franchisees since July 2,
2006. This increase was partially offset by a $4.6 million, or 2%, decrease in
same-store sales of our Company-owned restaurants. When we refer to same-store
sales, we mean only sales of those restaurants which were open during the same
months in both of the comparable periods. Same-store sales of our Company-owned
restaurants in the 2007 second quarter were negatively impacted by (1) a
continuing deterioration of economic conditions in the Michigan and Ohio regions
where we have a disproportionate number of Company-owned restaurants, (2)
advertising and promotions that were not as effective in the 2007 second quarter
as those in the 2006 second quarter and (3) the effect of price discounting
which we had expected to be more than offset by higher sales volume from
increased customer traffic, but which was not, under a value program which
offers a flexible combination of selected menu items for a discounted price.
These factors were partially offset by the effect of selective price increases
that were implemented in November 2006.
We currently anticipate positive same-store sales growth of Company-owned
restaurants for the second half of 2007, despite the negative factors mentioned
above, driven by the anticipated performance of various initiatives such as (1)
a major new product introduction with accompanying increased advertising
support, including couponing, (2) the effect of the selective price increases
mentioned above and anticipated additional selective price increases, including
price adjustments under our value program and (3) the use of limited time menu
items. In addition to the anticipated positive effect of same-store sales
growth, net sales should also be positively impacted by an increase in
Company-owned restaurants. We currently plan to open approximately 25 new
Company-owned restaurants during the remainder of 2007. We continually review
the performance of any underperforming Company-owned restaurants and evaluate
whether to close those restaurants, particularly in connection with the decision
to renew or extend their leases. Specifically, we have 31 restaurant leases that
are scheduled for renewal or expiration during the remainder of 2007. We
currently anticipate the renewal or extension of approximately 29 of those
leases.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $0.2 million, or 1%, to $21.4 million
for the three months ended July 1, 2007 from $21.2 million for the three months
ended July 2, 2006. This increase reflects (1) a $0.2 million net increase in
royalties from the 86 franchised restaurants opened since July 2, 2006, with
generally higher than average sales volumes, and the 8 restaurants sold to
franchisees since July 2, 2006 replacing the royalties from 31 generally
underperforming franchised restaurants closed and the elimination of royalties
from the 9 restaurants we acquired from franchisees since July 2, 2006 and (2) a
$0.2 million improvement due to a 1% increase in same-store sales of the
franchised restaurants in the 2007 second quarter as compared with the 2006
second quarter. These increases were partially offset by a $0.2 million decrease
in franchise and related fees. The increase in same-store sales of the
franchised restaurants reflects the full period effect of local marketing
initiatives implemented by our franchisees principally during the 2006 second
quarter, including more effective local television advertising and increased
couponing, similar to those we were already using for Company-owned restaurants
throughout the 2006 second quarter and the effect of the selective price
increases that were implemented in November 2006, partially offset by the effect
of poor weather conditions which decreased customer traffic in the Missouri,
Texas and Oklahoma regions where we have a large number of franchised
restaurants.
Same-store sales of the franchised restaurants increased during the 2007
second quarter whereas same-store sales of the Company-owned restaurants
declined principally due to (1) the disproportionate number of Company-owned
restaurants in the economically weaker Michigan and Ohio regions, (2) the full
period effect for the franchisees of the local marketing initiatives already
used for Company-owned restaurants throughout the 2006 second quarter and (3)
initially higher sales volume offsetting the effect of price discounting from
the value program discussed above under "Net Sales," which was recently
implemented in the franchised restaurants and had been previously implemented in
the Company-owned restaurants.
We expect that our royalties and franchise and related fees will increase
during the second half of 2007 as compared with the second half of 2006 due to
anticipated positive same-store sales growth of franchised restaurants from the
expected performance of the various initiatives described above under "Net
Sales" and the positive effect of net new restaurant openings by our
franchisees.
Asset Management and Related Fees
Our asset management and related fees, which were generated entirely from
the management of CDOs and Funds by Deerfield, increased $1.0 million, or 6%, to
$16.8 million for the three months ended July 1, 2007 from $15.8 million for the
three months ended July 2, 2006. This increase principally reflects (1) a $2.0
million net increase in management fees from the net addition of 4 CDOs and 3
Funds since July 2, 2006, (2) a $1.1 million increase in structuring and other
related fees associated with new CDOs and (3) a $0.5 million increase in
management fees from existing CDOs and Funds. These increases were partially
offset by (1) a $1.6 million decrease in incentive fees earned on existing CDOs
principally due to the recognition of $1.2 million of previously deferred
contingent fees on CDOs in the 2006 second quarter which did not recur in the
2007 second quarter and (2) a $0.8 million decrease in incentive fees from the
REIT as a result of not meeting certain performance thresholds during the 2007
second quarter due primarily to a provision to increase the allowance for loan
losses recognized by the REIT related to a particular borrower that filed for
protection under Chapter 11 of the United States Bankruptcy Code.
Our asset management and related fees will cease upon the completion of the
Pending Deerfield Sale. However, if the Pending Deerfield Sale is not completed
in 2007, we expect that our asset management and related fees for the second
half of 2007 will be less than the second half of 2006 due to an anticipated
decline in incentive fees from Funds other than the REIT, resulting from a lack
of arbitrage opportunities in our core strategies affecting the performance of
certain Funds. In accordance with our revenue recognition accounting policy,
incentive fees relating to the Funds which are based upon performance are
recognized when the amounts become fixed and determinable upon the close of a
performance period, which is generally at the end of our fourth quarter. During
the fourth quarter of 2006, we recognized $17.0 million of incentive fees from
Funds other than the REIT, whereas based on performance of the Funds to date in
2007, we expect to recognize a significantly lower amount in the fourth quarter
of 2007. In that regard, as of the end of the second quarter of 2006, we had
contingently earned but not recognized $5.2 million in incentive fees, whereas
we had not contingently earned any such incentive fees as of the end of the
second quarter of 2007. In addition, future incentive fees from the REIT and
management and related fees from CDOs could be negatively impacted by recent
developments in the subprime and other credit markets, the extent of which we
are unable to predict, although the REIT has publicly disclosed that its direct
exposure to subprime mortgages is limited.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization resulted
entirely from the Company-owned restaurants. Cost of sales increased $10.9
million, or 6%, to $204.9 million, resulting in a gross margin of 26%, for the
three months ended July 1, 2007, from $194.0 million, resulting in a gross
margin of 28%, for the three months ended July 2, 2006. We define gross margin
as the difference between net sales and cost of sales divided by net sales. The
increase in cost of sales is principally attributable to the effect of the 41
net Company-owned restaurants added since July 2, 2006. The 2% decrease in our
overall gross margin reflects the effects of (1) the price discounting
associated with the value program discussed above and (2) increases in our cost
of beef. These negative factors were partially offset by the effects of (1) our
continuing implementation of the more effective operational procedures of the
Arby's restaurants we acquired from RTM Restaurant Group in July 2005, which we
refer to as the RTM Acquisition, at the restaurants we owned prior to the RTM
Acquisition and (2) the effect of the selective price increases that were
implemented in November 2006.
We anticipate that our gross margin for the remainder of 2007 will be
relatively consistent with the 2007 first half gross margin of 27% as a result
of the positive effects of (1) our continuing implementation of the more
efficient operational procedures of RTM throughout our other Company-owned
restaurants, (2) cost savings from certain new commodity supply contracts
negotiated by our purchasing cooperative and (3) the full period effect on our
net sales of the selective price increases that were implemented in November
2006 and anticipated additional selective price increases. These positive
effects will be offset by the effects of (1) increased costs under new
distribution contracts that will become effective in the third quarter of 2007
that reflect the effects of higher fuel costs, (2) increased labor costs due to
the recent Federal minimum wage increase and (3) the effect of couponing to the
extent not sufficiently offset by increased sales.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, which
resulted entirely from the management of CDOs and Funds by Deerfield, increased
$0.4 million, or 7%, to $6.3 million for the three months ended July 1, 2007
from $5.9 million for the three months ended July 2, 2006 principally due to the
hiring of additional personnel to support our current and anticipated growth in
assets under management and increased incentive compensation levels of existing
personnel.
Our cost of services will cease upon the completion of the Pending
Deerfield Sale since our royalties and franchise and related fees have no
associated cost of services.
Advertising and Promotions
Our advertising and promotions expenses consist of third party costs for
local and national television, radio, direct mail and outdoor advertising, as
well as point of sale materials and local restaurant marketing. These expenses
increased $0.9 million, or 5%, principally due to the timing of our print
campaign for the month of April which commenced at the beginning of our second
quarter in 2007 but started at the end of our first quarter in 2006, partially
offset by a decrease in spending for local restaurant marketing. We expect to
shift a portion of this local spending to help fund an additional national
advertising campaign in the second half of 2007.
We expect that our advertising and promotions expenses for the second half
of 2007 will be higher than the second half of 2006 due to the additional
national advertising campaign planned in the 2007 period compared with the 2006
period.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization decreased $2.3 million, or 4%, principally due to (1) $4.0 million
of severance and related charges in connection with the replacement of three
senior restaurant executives during our 2006 second quarter that did not recur
in our 2007 second quarter and (2) a $3.0 million reduction in incentive
compensation including $0.8 million representing our current estimate of the
portion allocable to the Management Company. The allocable portion represents
the portion of the estimated incentive compensation for the 2007 second quarter
attributable to our former senior executive officers who are employed by the
Management Company and are no longer employees of the Company effective June 29,
2007. There was no similar allocation reported in the 2006 second quarter. These
decreases were partially offset by (1) a $1.8 million increase in charitable
contributions, (2) a $1.3 million increase in relocation costs in our restaurant
segment principally attributable to additional estimated declines in market
value and increased carrying costs related to homes we purchased for resale from
relocated employees and (3) a $1.3 million increase in deferred compensation
expense. Deferred compensation expense of $1.3 million in the 2007 second
quarter and less than $0.1 million in the 2006 second quarter 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 the
Executives, the obligation under which was settled in the 2007 second quarter,
as explained in more detail below under "Income (Loss) From Continuing
Operations Before Income Taxes and Minority Interests."
General and administrative expenses associated with the Deerfield portion
of our asset management segment, which were $6.2 million for the second quarter
of 2007, will cease upon the completion of the Pending Deerfield Sale. Deerfield
had general and administrative expenses of $14.3 million during the 2006 second
half, a portion of which will not recur as a result of the completion of the
Pending Deerfield Sale. We expect lower corporate general and administrative
expenses principally due to (1) the resignation effective June 29, 2007 of the
Executives and certain other officers and employees of Triarc who became
employees of the Management Company and are no longer employed by us and (2) our
sublease to the Management Company of one of the floors of our New York
headquarters, both partially offset by the fees for professional and strategic
services to be provided to us under a two-year transition services agreement we
entered into with the Management Company beginning June 30, 2007.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $3.7 million, or 25%, principally reflecting (1) $1.2
million related to the 41 net restaurants added since July 2, 2006, (2) $1.8
million of asset impairment charges in the 2007 second quarter related to (a)
asset management contracts for two CDOs, one of which was terminated early and
the other of which no longer has any future projected cash flows to us, and (b)
and an underperforming restaurant and (3) depreciation on additions to
properties at existing restaurants.
Facilities Relocation and Corporate Restructuring
Our facilities relocation and corporate restructuring charge of $0.8
million in the 2006 second quarter represented a $1.0 million general corporate
charge related to our decision in December 2005 not to move our corporate
offices to a leased facility in Rye Brook, New York, representing an adjustment
for the estimated costs from increasing the estimated marketing time to sublease
the space. This charge was partially offset by $0.2 million of net reductions of
previously recognized estimated charges for employee and office relocation costs
in connection with combining our then existing restaurant operations with those
of RTM following the RTM Acquisition and relocating the corporate office of the
restaurant group from Ft. Lauderdale, Florida to new offices in Atlanta,
Georgia. The charge of $79.0 million in the 2007 second quarter consists of
general corporate severance of $79.2 million, slightly offset by a $0.2 million
reduction of estimated employee relocation costs in connection with combining
our restaurant operations. The general corporate charge of $79.2 million
principally related to the ongoing transfer of substantially all of Triarc's
senior executive responsibilities to the Arby's Restaurant Group executive team
in Atlanta, Georgia. In April 2007, we announced that in light of the Pending
Deerfield Sale, we will be closing our New York headquarters and combining our
corporate operations with our restaurant operations in Atlanta, Georgia, which
is expected to be completed in early 2008. Accordingly, to facilitate this
transition, we entered into negotiated contractual settlements, which we refer
to as the Contractual Settlements, with the Executives evidencing the
termination of their employment agreements and providing for their resignation
as executive officers as of June 29, 2007. Under the terms of the Contractual
Settlements, our Chairman, who is also our former Chief Executive Officer, is
entitled to a payment consisting of cash and investments with a fair value of
$50.3 million as of July 1, 2007 and our Vice Chairman, who is also our former
President and Chief Operating Officer, is entitled to a payment consisting of
cash and investments with a fair value of $25.1 million as of July 1, 2007, both
subject to applicable withholding taxes during the 2007 fourth quarter. The
general corporate charge of $79.2 million reflects the payment entitlements
under the Contractual Settlements, as well as severance due to another former
executive, excluding incentive compensation relating to the 2007 first half and
including applicable employer payroll taxes.
We expect to incur additional severance and incentive compensation
aggregating approximately $9.5 million, consisting of $7.5 million with respect
to other New York headquarters' executives and employees during the second half
of 2007 and early 2008 and $2.0 million with respect to the chief executive
officer of Deerfield upon completion of the Pending Deerfield Sale, as well as
an anticipated loss of approximately $0.9 million on properties and other assets
at our New York headquarters, principally reflecting assets for which the
appraised value was less than book value, sold subsequent to July 1, 2007 to the
Management Company, all as part of the corporate restructuring.
Loss on Settlement of Unfavorable Franchise Rights
During the 2006 second quarter, we recognized a loss on settlement of
unfavorable franchise rights of $0.7 million in connection with an acquisition
of nine restaurants in April 2006. There was no similar loss on any of the
restaurants we acquired from franchisees during the 2007 second quarter. Under
accounting principles generally accepted in the United States of America, which
we refer to as GAAP, we are required to record as an expense and exclude from
the purchase price of acquired restaurants the value of any franchise agreements
that is attributable to royalty rates below the current 4% royalty rate that we
receive on new franchise agreements. The amount of the settlement loss
represents the present value of the estimated amount of future royalties by
which the royalty rate is unfavorable over the remaining life of the franchise
agreements.
Interest Expense
Interest expense decreased $22.9 million, or 60%, principally reflecting a
$23.4 million decrease in interest expense on debt securities sold with an
obligation to purchase or under agreements to repurchase due to the effective
redemption of our investment in the Opportunities Fund as of September 29, 2006,
which we refer to as the Redemption. As a result of the Redemption we no longer
consolidate the Opportunities Fund subsequent to September 29, 2006.
Accordingly, interest expense and related net investment income are no longer
affected by the significant leverage associated with the Opportunities Fund
after September 29, 2006.
Loss on Early Extinguishments of Debt
The loss on early extinguishment of debt of $0.9 million in the 2006 second
quarter, which did not recur in the 2007 second quarter, principally related to
the write-off of previously unamortized deferred financing costs in connection
with the prepayment of $45.0 million principal amount of our term loan
borrowings from excess cash, which we refer to as the Term Loan Prepayment.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Three Months Ended
-----------------------
July 2, July 1,
2006 2007 Change
---- ---- ------
(In Millions)
Interest income...............................................$ 29.3 $ 2.3 $ (27.0)
Recognized net gains.......................................... 1.5 16.6 15.1
Other than temporary unrealized losses........................ (0.1) (1.7) (1.6)
Dividends..................................................... 0.4 0.4 --
Other ........................................................ (0.4) -- 0.4
------- ------ -------
$ 30.7 $ 17.6 $ (13.1)
======= ====== =======
Our interest income decreased $27.0 million due to lower average
outstanding balances of our interest-bearing investments principally as a result
of the Redemption whereby our net investment income and interest expense are no
longer affected by the significant leverage associated with the Opportunities
Fund after September 29, 2006. Our recognized net gains include (1) realized
gains and losses on (a) sales of our available-for-sale securities and (b) sales
and transfers from the Deferred Compensation Trusts of our investments accounted
for under the cost method of accounting and (2) realized and unrealized gains
and losses on changes in the fair values of our trading securities, including
derivatives, and, in 2006, securities sold short with an obligation to purchase.
The $15.1 million increase in our recognized net gains includes $8.4 million of
gains realized on the transfer of several cost method investments from the
Deferred Compensation Trusts to the Executives in connection with the settlement
of the related obligation to the Executives in the 2007 second quarter. All of
these recognized gains and losses may vary significantly in future periods
depending upon changes in the value of our investments and, for
available-for-sale securities, the timing of the sales of our investments. The
increase in other than temporary unrealized losses of $1.6 million reflected the
recognition of impairment charges related to the decline in the market values of
four of our available-for-sale investments in CDOs in the 2007 second quarter.
Any 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 method investments and may or may not
recur in future periods.
As of July 1, 2007, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $14.2 million and $(2.1) million, respectively, included in
"Accumulated other comprehensive income." We evaluated the unrealized losses to
determine whether these losses were other than temporary and concluded that they
were not. Should either (1) we decide to sell any of these investments with
unrealized losses or (2) any of the unrealized losses continue such that we
believe they have become other than temporary, we would recognize the losses on
the related investments at that time.
Gain on Sale of Unconsolidated Business
The gain on sale of unconsolidated business of $2.6 million in the 2007
second quarter related to our investment in Encore Capital Group, Inc., an
investee of ours which we refer to as Encore, principally due to a cash sale of
a substantial portion of our remaining investment in Encore, while we made no
similar sale in the 2006 second quarter.
Other Income, Net
Other income, net decreased $3.1 million, principally reflecting (1) $1.7
million of gains recognized in the 2006 second quarter, which did not recur in
the 2007 second quarter, on the sale of a portion of our investment in Jurlique
International Pty Ltd., an Australian skin and beauty products company not
publicly traded, which we refer to as Jurlique, (2) a $0.4 million decrease in
equity in earnings of Encore, which we no longer account for under the equity
method subsequent to May 10, 2007, and (3) a $0.3 million decrease in rental
income on restaurants not operated by us. As a result of the most recent sale of
a portion of our investment in Encore referred to in the preceding paragraph,
which closed on May 10, 2007, we now own less than 1% of Encore and no longer
have representation on Encore's board of directors. As a result, we no longer
have the ability to exercise significant influence over operating and financial
policies of Encore. Accordingly, subsequent to May 10, 2007, we no longer
account for our remaining investment in Encore under the equity method.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income (loss) from continuing operations before income taxes and
minority interests declined $71.7 million to a loss of $63.0 million in the 2007
second quarter from income of $8.7 million in the 2006 second quarter. This
decrease is attributed principally to a $78.2 million increase in facilities
relocation and corporate restructuring charges which, together with the effects
of the other variances, is discussed above.
As discussed above, we recognized deferred compensation expense of less
than $0.1 million in the 2006 second quarter and $1.3 million in the 2007 second
quarter, within general and administrative expenses, for the net increases in
the fair value of investments in the Deferred Compensation Trusts, for the
benefit of the Executives. The related obligation was settled in the 2007 second
quarter following the Executives' resignation and the assets in the Deferred
Compensation Trusts were either distributed to the Executives or used to satisfy
withholding taxes. Under GAAP, we were unable to recognize any investment income
for unrealized net increases in the fair value of those investments in the
Deferred Compensation Trusts that were accounted for under the cost method of
accounting. We recognized net investment income from investments in the Deferred
Compensation Trusts of less than $0.1 million and $8.5 million in the 2006 and
2007 second quarters, respectively. The net investment income in the 2007 second
quarter consisted of $8.4 million of realized gains almost entirely attributable
to the transfer of the investments to the Executives and $0.1 million of
interest income. The unrealized net increase in the fair value of the investment
retained by us of $3.2 million at July 1, 2007 will be recognized when that
investment is sold.
(Provision For) Benefit From Income Taxes
The provision for income taxes represented a provision rate of 31% for the
three months ended July 2, 2006 and the benefit from income taxes represented a
benefit rate of 57% for the three months ended July 1, 2007. The benefit rate in
the 2007 second quarter is higher than the United States Federal statutory rate
of 35% due principally to the effect of recognizing a previously unrecognized
contingent tax benefit of $12.8 million in connection with the settlement of
certain obligations to the Executives relating to the Deferred Compensation
Trusts during the second quarter of 2007, for which the related expense was
principally recognized in prior years for financial statement purposes. The 2006
second quarter provision rate is lower, and the 2007 second quarter benefit rate
is also higher, than the 35% statutory rate as a result of the effect of
minority interests in income of consolidated subsidiaries which is not taxable
to us but included in pretax income or loss, partially offset by (1) the effect
of non-deductible expenses and (2) state income taxes, net of Federal benefit,
due to the differing mix of pretax income or loss among the consolidated
entities which file state returns on an individual basis.
Minority Interests in Income of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries decreased
$1.6 million principally reflecting (1) $0.7 million of minority interests in
the Opportunities Fund in the 2006 second quarter which did not recur in the
2007 second quarter as a result of the Redemption in September 2006 and (2) a
$0.7 million decrease due to lower income of Deerfield in the 2007 second
quarter as compared with the 2006 second quarter.
Minority interests in income of consolidated subsidiaries are not expected
to be significant following the completion of the Pending Deerfield Sale.
Loss From Discontinued Operations
The loss from discontinued operations in the 2006 second quarter consists
of a $0.1 million loss from operations related to our closing two
underperforming restaurants in the fourth quarter of 2006. Our accompanying
condensed consolidated statement of operations for the three months ended July
2, 2006 has been reclassified to report the results of operations of the two
closed restaurants as discontinued operations.
Net Income (Loss)
Our net income (loss) declined $31.3 million to a loss of $28.0 million in
the 2007 second quarter from income of $3.3 million in the 2006 second quarter.
This decrease is attributed to the $50.1 million after tax effect of the
increase in facilities relocation and corporate restructuring charges partially
offset by (1) $12.8 million from the recognition of a previously unrecognized
contingent tax benefit and (2) the $5.4 million after tax effect of the gains
realized on the transfer of several cost method investments from the Deferred
Compensation Trusts to the Executives in the 2007 second quarter, together with
the after tax and applicable minority interest effects of the other variances
discussed above.
Six Months Ended July 1, 2007 Compared with Six Months Ended July 2, 2006
Net Sales
Our net sales, which were generated entirely from the Company-owned
restaurants, increased $15.7 million, or 3%, to $545.1 million for the six
months ended July 1, 2007 from $529.4 million for the six months ended July 2,
2006, due to a $25.1 million increase in net sales from the 41 net Company-owned
restaurants we added since July 2, 2006, consisting of 54 new restaurants
opened, with generally higher than average sales volumes, and 9 restaurants we
acquired from franchisees since July 2, 2006 as compared with 14 generally
underperforming restaurants we closed and 8 restaurants we sold to franchisees
since July 2, 2006. This increase was partially offset by a $9.4 million, or 2%,
decrease in same-store sales of our Company-owned restaurants. Same-store sales
of our Company-owned restaurants in the 2007 first half were negatively impacted
by (1) a continuing deterioration of economic conditions in the Michigan and
Ohio regions where we have a disproportionate number of Company-owned
restaurants, (2) poor weather conditions which decreased our customer traffic in
the northern and central sections of the United States in the 2007 first
quarter, (3) advertising and promotions that were not as effective in the 2007
second quarter as those in the 2006 second quarter and (4) the effect of price
discounting which we had expected to be more than offset by higher sales volume
from increased customer traffic, but which was not, under a value program as
discussed in the comparison of the three-month periods. These factors were
partially offset by (1) incremental sales principally in the 2007 first quarter
from some of our limited time product offerings and (2) the effect of the
selective price increases that were implemented in November 2006.
We currently anticipate positive same-store sales growth of Company-owned
restaurants for the second half of 2007 as a result of the factors discussed in
the comparison of the three-month periods.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $1.5 million, or 4%, to $41.1 million
for the six months ended July 1, 2007 from $39.6 million for the six months
ended July 2, 2006, reflecting a $1.8 million net increase in royalties from the
86 franchised restaurants opened since July 2, 2006, with generally higher than
average sales volumes, and the 8 restaurants sold to franchisees since July 2,
2006 replacing the royalties from the 31 generally underperforming franchised
restaurants closed and the elimination of royalties from the 9 restaurants we
acquired from franchisees since July 2, 2006. This increase was partially offset
by a $0.3 million decrease in franchise and related fees. Same-store sales of
the franchised restaurants for the 2007 first half were relatively unchanged
compared to the first half of 2006.
We expect that our royalties and franchise and related fees will increase
during the second half of 2007 as compared with the second half of 2006 as a
result of the factors discussed in the comparison of the three-month periods.
Asset Management and Related Fees
Our asset management and related fees, which were generated entirely from
the management of CDOs and Funds by Deerfield, increased $2.1 million, or 7%, to
$32.7 million for the six months ended July 1, 2007 from $30.6 million for the
six months ended July 2, 2006. This increase principally reflects (1) a $3.0
million net increase in management fees from the net addition of 4 CDOs and 3
Funds since July 2, 2006, (2) a $1.1 million increase in structuring and other
related fees associated with new CDOs and (3) a $0.2 million increase in
management fees from existing CDOs and Funds. These increases were partially
offset by (1) a $1.7 million decrease in incentive fees earned on existing CDOs
principally due to the recognition of $1.2 million of previously deferred
contingent fees on CDOs in the 2006 second quarter which did not recur in the
2007 first half and (2) a $0.3 million decrease in incentive fees from the REIT
as a result of not meeting certain performance thresholds during the 2007 second
quarter due primarily to a provision to increase the allowance for loan losses
recognized by the REIT related to a particular borrower that filed for
protection under Chapter 11 of the United States Bankruptcy Code.
Our asset management and related fees will cease upon the completion of the
Pending Deerfield Sale. However, if the Pending Deerfield Sale is not completed
in 2007, we expect that our asset management and related fees for the second
half of 2007 will be less than the second half of 2006, as discussed in the
comparison of the three-month periods.
Cost of Sales, Excluding Depreciation and Amortization
Our cost of sales, excluding depreciation and amortization resulted
entirely from the Company-owned restaurants. Cost of sales increased $13.5
million, or 3%, to $399.9 million, resulting in a gross margin of 27%, for the
six months ended July 1, 2007, from $386.4 million, resulting in a gross margin
of 27%, for the six months ended July 2, 2006. The increase in cost of sales is
principally attributable to the effect of the 41 net Company-owned restaurants
added since July 2, 2006. Our overall gross margin was positively impacted by
(1) our continuing implementation of the more effective operational procedures
of RTM at the restaurants we owned prior to the RTM Acquisition, (2) decreased
beverage costs partially due to increased rebates received in the 2007 first
quarter from a new beverage supplier we were in the process of converting to
during the 2006 first quarter and (3) the effect of the selective price
increases implemented in November 2006. These positive effects were offset by
(1) the price discounting associated with the value program discussed above and
(2) increases in our cost of beef in the 2007 second quarter that more than
offset decreases in the 2007 first quarter.
As discussed in the comparison of the three-month periods, we expect our
overall gross margin for the remainder of 2007 will be relatively consistent
with the 2007 first half gross margin of 27%.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, which
resulted entirely from the management of CDOs and Funds by Deerfield, increased
$1.8 million, or 16%, to $13.2 million for the six months ended July 1, 2007
from $11.4 million for the six months ended July 2, 2006 principally due to the
hiring of additional personnel to support our current and anticipated growth in
assets under management and increased incentive compensation levels of existing
personnel.
Our cost of services will cease upon completion of the Pending Deerfield
Sale since our royalties and franchise and related fees have no associated cost
of services.
Advertising and Promotions
Our advertising and promotions expenses consist of third party costs for
local and national television, radio, direct mail and outdoor advertising, as
well as point of sale materials and local restaurant marketing. These expenses
decreased $1.5 million, or 4%, despite the increase in net sales, principally
due to a decrease in spending for local restaurant marketing principally during
the 2007 second quarter. We expect to shift a portion of this local spending to
help fund an additional national advertising campaign in the second half of
2007.
As discussed in the comparison of the three-month periods, we expect our
advertising and promotions expenses for the second half of 2007 will be higher
than the comparable period of 2006.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization decreased $4.8 million, or 4%, principally due to (1) a $5.1
million reduction in incentive compensation including $2.7 million representing
our current estimate of the portion allocable to the Management Company, for
which there was no similar allocation in the 2006 first half, as discussed in
more detail in the comparison of the three-month periods, (2) $4.0 million of
severance and related charges in connection with the replacement of three senior
restaurant executives during our 2006 second quarter that did not recur in our
2007 first half and (3) a $0.6 million decrease in share-based compensation
primarily due to the effect of some of our employee share-based awards becoming
fully vested prior to April 1, 2007 partially offset by the effect of
accelerated vesting of some of our restricted stock and equity interest awards
as approved by the performance compensation subcommittee of our board of
directors during the 2007 second quarter. These decreases were partially offset
by (1) a $2.7 million increase in relocation costs in our restaurant segment
principally attributable to additional estimated declines in market value and
increased carrying costs related to homes we purchased for resale from relocated
employees, (2) a $1.7 million increase in charitable contributions and (3) a
$1.4 million increase in deferred compensation expense. Deferred compensation
expense of $2.5 million in the 2007 first half and $1.1 million in the 2006
first half represents the increase in the fair value of investments in two
Deferred Compensation Trusts, as discussed in more detail in the comparison of
the three-month periods.
General and administrative expenses associated with the Deerfield portion
of our asset management segment, which were $11.8 million for the first half of
2007, will cease upon the completion of the Pending Deerfield sale. We expect
lower corporate general and administrative expenses, for the reasons discussed
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 $6.3 million, or 22%, principally reflecting (1) $2.3
million related to the 41 net restaurants added since July 2, 2006, (2) $1.9
million of asset impairment charges in the 2007 first half principally related
to (a) asset management contracts for two CDOs, one of which was terminated
early and the other of which no longer has any projected future cash flows to
us, and (b) an underperforming restaurant, (3) $0.7 million related to losses on
disposals of properties included in depreciation and amortization and (4)
depreciation on additions to properties at existing restaurants.
Facilities Relocation and Corporate Restructuring
The charge of $1.6 million in the 2006 first half consists of $1.0 million
of general corporate charges related to the decision not to move our corporate
offices to a leased facility in Rye Brook, New York and $0.6 million related
principally to additional severance and retention compensation in connection
with combining our restaurant operations, both as discussed in the comparison of
the three-month periods. The charge of $79.4 million in the 2007 first half
consists of general corporate severance of $79.2 million and a $0.2 million
additional charge for employee relocation costs in connection with combining our
restaurant operations. The general corporate charge of $79.2 million principally
related to transferring substantially all of Triarc's senior executive
responsibilities to the Arby's Restaurant Group executive team in Atlanta,
Georgia, as discussed in more detail in the comparison of the three-month
periods.
As discussed in the comparison of the three-month periods, we expect to
incur additional corporate restructuring charges aggregating approximately $10.4
million during the second half of 2007 and early 2008.
Loss on Settlement of Unfavorable Franchise Rights
During the 2006 first half we recognized a loss on settlement of
unfavorable franchise rights of $0.7 million in connection with an acquisition
of nine restaurants in April 2006, for which there was no similar loss during
the 2007 first half, as discussed in more detail in the comparison of the
three-month periods.
Interest Expense
Interest expense decreased $34.9 million, or 53%, principally reflecting a
$35.5 million decrease in interest expense on debt securities sold with an
obligation to purchase or under agreements to repurchase due to the Redemption,
as discussed in more detail in the comparison of the three-month periods.
Loss on Early Extinguishments of Debt
The loss on early extinguishments of debt of $13.4 million in the 2006
first half, which did not recur in the 2007 first half, consisted of (1) $12.5
million which resulted from the conversions and effective conversions of an
aggregate $167.4 million of our 5% convertible notes due 2023, which we refer to
as the Convertible Notes, into our class A and class B common stock, and
consisted of $8.7 million of negotiated inducement premiums that we paid in cash
and shares of our class B common stock and the write-off of $3.8 million of
related previously unamortized deferred financing costs and (2) a $0.9 million
write-off of previously unamortized deferred financing costs in connection with
the Term Loan Prepayment.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Six Months Ended
-----------------------
July 2, July 1,
2006 2007 Change
---- ---- ------
(In Millions)
Interest income.............................................$ 47.3 $ 4.8 $ (42.5)
Recognized net gains........................................ 4.4 37.7 33.3
Other than temporary unrealized losses...................... (0.1) (2.3) (2.2)
Dividends................................................... 0.6 0.7 0.1
Other....................................................... (0.5) (0.1) 0.4
--------- -------- --------
$ 51.7 $ 40.8 $ (10.9)
========= ======== ========
Our interest income decreased $42.5 million due to lower average
outstanding balances of our interest-bearing investments principally as a result
of the Redemption whereby our net investment income and interest expense are no
longer affected by the significant leverage associated with the Opportunities
Fund after September 29, 2006. Our recognized net gains, as discussed in more
detail in the comparison of the three-month periods, increased $33.3 million and
included (1) a $12.8 million realized gain on the sale in the 2007 first quarter
of one of our available-for-sale securities and (2) $8.4 million of gains
realized on the transfer of several cost method investments from the Deferred
Compensation Trusts to the Executives in connection with the settlement of the
related obligation to the Executives during the 2007 second quarter. All of
these recognized gains and losses may vary significantly in future periods
depending upon changes in the value of our investments and, for
available-for-sale securities, the timing of the sales of our investments. The
increase in other than temporary unrealized losses of $2.2 million reflected the
recognition of impairment charges related to the decline in the market values of
four of our available-for-sale investments in CDOs in the 2007 first half. Any
other than temporary unrealized losses are dependant upon the underlying
economics and/or volatility in the value of our investments in
available-for-sale securities and cost method investments and may or may not
recur in future periods.
As of July 1, 2007, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $14.2 million and $(2.1) million, respectively, included in
"Accumulated other comprehensive income." We evaluated the unrealized losses to
determine whether these losses were other than temporary and concluded that they
were not. Should either (1) we decide to sell any of these investments with
unrealized losses or (2) any of the unrealized losses continue such that we
believe they have become other than temporary, we would recognize the losses on
the related investments at that time.
Gain on Sale of Unconsolidated Business
The gain on sale of unconsolidated business of $2.3 million and $2.6
million in the 2006 and 2007 first half, respectively, was principally due to
cash sales of a portion of our investment in Encore in each period.
Other Income, Net
Other income, net decreased $3.2 million, principally reflecting (1) $1.7
million of gains recognized in the 2006 first half, which did not recur in the
2007 first half, on the sale of a portion of our investment in Jurlique, (2) a
$0.6 million increase in the loss from a foreign currency derivative related to
Jurlique which subsequently matured on July 5, 2007, (3) a $0.3 million decrease
in equity in earnings of Encore, which we no longer account for under the equity
method subsequent to May 10, 2007, as discussed in the comparison of the
three-month periods and (4) a $0.3 million decrease in rental income on
restaurants not operated by us.
Income (Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our loss from continuing operations before income taxes and minority
interests increased $38.6 million to $45.1 million in the 2007 first half from
$6.5 million in the 2006 first half. This increase is attributed to a $77.8
million increase in facilities relocation and corporate restructuring charges
partially offset by (1) a $13.4 million loss on early extinguishments of debt in
the 2006 first half which did not recur in the 2007 first half, (2) the $12.8
million gain on sale of one of our available-for-sale securities in the 2007
first quarter with no similar gain in the 2006 second quarter and (3) the $8.4
million of gains realized on the transfer of several cost method investments
from the Deferred Compensation Trusts to the Executives in the 2007 second
quarter with no similar transfer in the 2006 second quarter. Each of these
variances, together with the effects of the other variances, is discussed in the
captions above.
As discussed above, we recognized deferred compensation expense of $1.1
million in the 2006 first half and $2.5 million in the 2007 first half, within
general and administrative expenses, for the net increases in the fair value of
investments in the Deferred Compensation Trusts, for the benefit of the
Executives. The related obligation was settled in the 2007 second quarter
following the Executives' resignation and the assets in the Deferred
Compensation Trusts were either distributed to the Executives or used to satisfy
withholding taxes. Under GAAP, we were unable to recognize any investment income
for unrealized net increases in the fair value of those investments in the
Deferred Compensation Trusts that were accounted for under the cost method of
accounting. We recognized net investment income from investments in the Deferred
Compensation Trusts of $0.1 million in the 2006 first half and $8.6 million in
the 2007 first half. The net investment income in the 2006 first half consisted
principally of interest income. The net investment income in the 2007 first half
consisted of $8.4 million of realized gains almost entirely attributable to the
transfer of the investments to the Executives and $0.2 million of interest
income. The unrealized net increase in the fair value of the investment retained
by us of $3.2 million at July 1, 2007 will be recognized when that investment is
sold.
(Provision for) Benefit From Income Taxes
The benefit from income taxes represented a tax rate of 45% and 63% for the
six months ended July 2, 2006 and July 1, 2007, respectively. The benefit rate
for the six months ended July 1, 2007 is significantly higher than the rate for
the comparable period in 2006 due principally to the effect of recognizing a
previously unrecognized contingent tax benefit of $12.8 million in connection
with the settlement of certain obligations to the Executives relating to the
Deferred Compensation Trusts during the first half of 2007, for which the
related expense was principally recognized in prior years for financial
statement purposes.
Minority Interests in Income of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries decreased
$1.5 million principally reflecting (1) $2.4 million of minority interests in
the Opportunities Fund in the 2006 first half which did not recur in the 2007
first half as a result of the Redemption in September 2006 and (2) a $1.0
million decrease due to lower income of Deerfield in the 2007 first half as
compared with the 2006 first half, both partially offset by a $1.9 million
correction in the 2007 first quarter of a prior period understatement of
minority interests in income of consolidated subsidiaries which was not deemed
to be material to our consolidated financial statements.
Minority interests in income of consolidated subsidiaries are not expected
to be significant following the completion of the Pending Deerfield Sale.
Loss From Discontinued Operations
The loss from discontinued operations related to our closing two
underperforming restaurants in the fourth quarter of 2006 and consists of a $0.2
million loss from operations in the 2006 first half and an additional $0.1
million loss on disposal in the 2007 first quarter. Our accompanying condensed
consolidated statement of operations for the six months ended July 2, 2006 has
been reclassified to report the results of operations of the two closed
restaurants as discontinued operations.
Net Income (Loss)
Our net loss increased $11.4 million to $20.9 million in the 2007 first
half from $9.5 million in the 2006 first half attributed to the $49.8 million
after tax effect of the increase in facilities relocation and corporate
restructuring charges partially offset by (1) $12.8 million from the recognition
of a previously unrecognized contingent tax benefit, (2) the $8.6 million after
tax effect of the loss on early extinguishments of debt in the 2006 first half
which did not recur in the 2007 first half, (3) the $8.2 million after tax
effect from the gain on sale of one of our available-for-sale securities in the
2007 first quarter and (4) the $5.4 million after tax effect from the gains
realized on the transfer of several cost method investments from the Deferred
Compensation Trusts to the Executives in the 2007 second quarter, together with
the after tax and applicable minority interest effects of the other variances
discussed above.
Liquidity and Capital Resources
Cash Flows From Continuing Operating Activities
Our consolidated operating activities from continuing operations provided
cash and cash equivalents, which we refer to in this discussion as cash, of
$27.6 million during the six months ended July 1, 2007 principally reflecting
(1) the provision, net of payments, for facilities relocation and corporate
restructuring of $78.9 million, (2) depreciation and amortization of $35.4
million, (3) a share-based compensation provision of $6.9 million and (4) the
receipt of a deferred vendor incentive, net of amount recognized, of $5.9
million, all partially offset by (1) net operating investment adjustments of
$29.1 million, (2) a deferred income tax benefit of $28.8 million, (3) cash used
by changes in operating assets and liabilities of $22.0 million and (4) our net
loss of $21.0 million.
The cash used by changes in operating assets and liabilities of $22.0
million principally reflects a $39.4 million decrease in accounts payable and
accrued expenses and other current liabilities partially offset by a $16.5
million decrease in accounts and notes receivable. The decrease in accounts
payable and accrued expenses and other current liabilities was principally due
to the annual payment of previously accrued incentive compensation. The decrease
in accounts and notes receivable resulted from collections of asset management
incentive fees receivable that were recognized principally in the fourth quarter
of 2006. Our asset management revenues are higher in our fourth quarter as a
result of our revenue recognition accounting policy for incentive fees related
to the Funds which are based upon performance and are recognized when the
amounts become fixed and determinable upon the close of a performance period.
The net operating investment adjustments principally reflect (1) $26.1 million
of other net recognized gains, net of other than temporary losses, including a
$12.8 million gain realized on one specific available-for-sale security we sold
in the 2007 first quarter and $8.4 million of gains realized on the transfer of
several cost method investments from the Deferred Compensation Trusts to the
Executives in the 2007 second quarter and (2) $9.3 million of net recognized
gains from trading securities, derivatives and short positions in securities,
both partially offset by $6.0 million of proceeds from sales of trading
securities and net settlements of trading derivatives.
Assuming the Pending Deerfield Sale is completed, we expect that our cash
flows from continuing operating activities will use cash during the second half
of 2007 as a result of (1) the severance and contractual settlement payments in
connection with the corporate restructuring as discussed above in the comparison
of the three-month periods under "Results of Operations - Facilities Relocation
and Corporate Restructuring" and (2) the cessation of operating cash flows from
Deerfield upon its sale.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
a deficit of $8.1 million at July 1, 2007, reflecting a current ratio, which
equals current assets divided by current liabilities, of slightly less than
1.0:1. Working capital at July 1, 2007 decreased $169.3 million from $161.2
million at December 31, 2006, primarily due to (1) the reclassification of $91.8
million of net current assets in the Equities Account as non-current in
connection with our entering into an agreement with the Management Company
whereby we will not withdraw our investment from the Equities Account prior to
December 31, 2010 and (2) a $79.2 million increase in accrued expenses and other
current liabilities and deferred compensation payable to the Executives and
another former executive for severance to be settled through a combination of
cash payments and the transfer of short-term investments in the 2007 second half
in connection with our corporate restructuring, as discussed in more detail in
the comparison of the three-month periods under "Results of Operations -
Facilities Relocation and Corporate Restructuring."
Our total capitalization at July 1, 2007 was $1,170.6 million, consisting
of stockholders' equity of $435.2 million, long-term debt of $731.1 million,
including current portion, and notes payable of $4.3 million. Our total
capitalization at July 1, 2007 decreased $31.8 million from $1,202.4 million at
December 31, 2006 principally reflecting (1) our net loss of $21.0 million, (2)
dividends paid of $16.1 million and (3) the components of comprehensive loss
that bypass net income of $6.7 million principally reflecting the
reclassification of prior period unrealized holding gains into net income upon
our sales of available-for-sale securities, all partially offset by a $10.8
million net increase in long-term debt, including current portion, and notes
payable.
Credit Agreement
We have a credit agreement, which we refer to as the Credit Agreement, for
our restaurant segment. The Credit Agreement includes a senior secured term loan
facility, which we refer to as the Term Loan, with a remaining principal balance
of $556.6 million as of July 1, 2007 and a senior secured revolving credit
facility of $100.0 million, under which there were no borrowings as of July 1,
2007. However, the availability under the facility as of July 1, 2007 was $93.4
million, which is net of a reduction of $6.6 million for outstanding letters of
credit. The Term Loan has scheduled repayments of $3.1 million during the second
half of 2007. In addition, the Term Loan requires annual prepayments of
principal amounts resulting from excess cash flows of the restaurant segment and
from certain events, both as determined under the Credit Agreement. No
prepayments were required under the Term Loan during the 2007 first half and we
do not expect that any will be required during the second half of 2007.
Sale-Leaseback Obligations
We have outstanding $94.3 million of sale-leaseback obligations as of July
1, 2007, which relate to our restaurant segment and are due through 2027, of
which $1.0 million is due during the second half of 2007.
Capitalized Lease Obligations
We have outstanding $70.4 million of capitalized lease obligations as of
July 1, 2007, which relate to our restaurant segment and extend through 2036, of
which $1.9 million is due during the second half of 2007.
Convertible Notes
We have outstanding at July 1, 2007, $2.1 million of Convertible Notes
which do not have any scheduled principal repayments prior to 2023 and are
convertible into 52,000 shares of our class A common stock and 105,000 shares of
our class B common stock. The Convertible Notes are redeemable at our option
commencing May 20, 2010 and at the option of the holders on May 15, 2010, 2015
and 2020 or upon the occurrence of a fundamental change, as defined, relating to
us, in each case at a price of 100% of the principal amount of the Convertible
Notes plus accrued interest.
Other Long-Term Debt
We have outstanding a secured bank term loan payable through 2008 in the
amount of $3.8 million as of July 1, 2007, of which $1.6 million is due during
the second half of 2007. We also have outstanding $2.0 million under a revolving
note as of July 1, 2007, which we refer to as the Revolving Note, which is due
in 2009 but which we expect to repay at or prior to the completion of the
Pending Deerfield Sale. Additionally, we have outstanding $1.9 million of
leasehold notes as of July 1, 2007, which are due through 2018, of which $0.1
million is due during the second half of 2007.
Notes Payable
We have outstanding $4.3 million of notes payable as of July 1, 2007. Of
these, $2.8 million relate to our asset management segment and are secured by
some of our short-term investments in preferred shares of CDOs as of July 1,
2007. These notes are non-recourse except in limited circumstances and have no
stated maturities but must be repaid from either a portion or all of the
distributions we receive on, or sales proceeds from, the respective preferred
shares of CDOs, as well as a portion of the asset management fees to be paid to
us from the respective CDOs. The other $1.5 million represents secured
borrowings by an independently controlled advertising cooperative, which we
refer to as AFA and which is consolidated as part of our restaurant segment,
under a $3.5 million line of credit which expires in July 2008.
Revolving Credit Facilities
We have $93.4 million available for borrowing under our restaurant
segment's $100.0 million revolving credit facility as of July 1, 2007, which is
net of the reduction of $6.6 million for outstanding letters of credit as noted
above. In addition, our restaurant segment has a $30.0 million conditional
funding commitment, of which $24.6 million was available as of July 1, 2007,
from a real estate finance company for sale-leaseback financing for development
and operation of Arby's restaurants. This conditional funding commitment
currently ends on July 31, 2008. Additionally, AFA has $2.0 million available
for borrowing under its $3.5 million line of credit. Our asset management
segment has $8.0 million available under the Revolving Note as of July 1, 2007
which, upon completion of the Pending Deerfield Sale, would no longer be
available.
Debt Repayments and Covenants
Our total scheduled long-term debt and notes payable repayments during the
second half of 2007 are $10.9 million consisting of $3.1 million under our Term
Loan, $2.0 million expected to be paid under our Revolving Note, $1.9 million
relating to capitalized leases, $1.6 million under our secured bank term loan,
$1.2 million expected to be paid under our notes payable, $1.0 million relating
to sale-leaseback obligations and $0.1 million under our leasehold notes.
Our Credit Agreement contains various covenants relating to our restaurant
segment, the most restrictive of which (1) require periodic financial reporting,
(2) require meeting certain leverage and interest coverage ratio tests and (3)
restrict, among other matters, (a) the incurrence of indebtedness, (b) certain
asset dispositions, (c) certain affiliate transactions, (d) certain investments,
(e) certain capital expenditures and (f) the payment of dividends indirectly to
Triarc. We were in compliance with all of these covenants as of July 1, 2007 and
we expect to remain in compliance with all of these covenants during the
remainder of 2007. In May 2007 we obtained an amendment to the Credit Agreement
which revised certain of the covenants to make them less restrictive, including
the leverage and interest coverage ratio tests. We incurred $1.2 million of
deferred financing costs representing the fees paid to our lenders related to
this amendment. As of July 1, 2007 there was $31.4 million available for the
payment of dividends indirectly to Triarc under the covenants of the Credit
Agreement.
A significant number of the underlying leases for our sale-leaseback
obligations and our capitalized lease obligations, as well as our operating
leases, require or required periodic financial reporting of certain subsidiary
entities within our restaurant segment or of individual restaurants, which in
many cases has not been prepared or reported. We have negotiated waivers and
alternative covenants with our most significant lessors which substitute
consolidated financial reporting of our restaurant segment for that of
individual subsidiary entities and which modify restaurant level reporting
requirements for more than half of the affected leases. Nevertheless, as of July
1, 2007, we were not in compliance, and remain not in compliance, with the
reporting requirements under those leases for which waivers and alternative
financial reporting covenants have not been negotiated. However, none of the
lessors has asserted that we are in default of any of those lease agreements. We
do not believe that this non-compliance will have a material adverse effect on
our condensed consolidated financial position or results of operations.
Contractual Obligations
Our contractual obligations as reported in Item 7 of our Form 10-K included
a $35.7 million obligation as of December 31, 2006 for deferred compensation
payable to related parties. In the 2007 second quarter, following the
resignation of the Executives, we settled this obligation which was previously
due January 1, 2008. In addition, we entered into a two-year transition services
agreement with the Management Company beginning June 30, 2007 under which the
Management Company will provide us with a range of professional and strategic
services for which we are obligated to pay $6.0 million during the second half
of 2007 and an aggregate of $13.0 million during fiscal years 2008 and 2009.
There were no other significant changes to our contractual obligations since
December 31, 2006. However, we are currently unable to estimate the amount and
timing of future cash tax payments relating to the potential settlement of
uncertain income tax positions, the reserves for which have been determined in
accordance with FASB Interpretation No. 48, which we refer to as Interpretation
48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109." We adopted Interpretation 48 commencing with our 2007 first
quarter. Our total reserves for uncertain income tax positions relating to
continuing operations as determined under Interpretation 48 was $13.8 million as
of July 1, 2007.
Guarantees and Commitments
Our wholly-owned subsidiary, National Propane Corporation, which we refer
to as National Propane, retains a less than 1% special limited partner interest
in our former propane business, now known as AmeriGas Eagle Propane, L.P., which
we refer to as AmeriGas Eagle. National Propane agreed that while it remains a
special limited partner of AmeriGas Eagle, National Propane would indemnify the
owner of AmeriGas Eagle for any payments the owner makes related to the owner's
obligations under certain of the debt of AmeriGas Eagle, aggregating
approximately $138.0 million as of July 1, 2007, if AmeriGas Eagle is unable to
repay or refinance such debt, but only after recourse by the owner to the assets
of AmeriGas Eagle. National Propane's principal asset is an intercompany note
receivable from Triarc in the amount of $50.0 million as of July 1, 2007. We
believe it is unlikely that we will be called upon to make any payments under
this indemnity. Prior to 2006 AmeriGas Propane, L.P., which we refer to as
AmeriGas Propane, purchased all of the interests in AmeriGas Eagle other than
National Propane's special limited partner interest. Either National Propane or
AmeriGas Propane may require AmeriGas Eagle to repurchase the special limited
partner interest. However, we believe it is unlikely that either party would
require repurchase prior to 2009 as either AmeriGas Propane would owe us tax
indemnification payments if AmeriGas Propane required the repurchase or we would
accelerate payment of deferred taxes of $35.9 million as of July 1, 2007,
including $34.5 million associated with the gain on sale of the propane business
and the remainder associated with other tax basis differences, prior to 2006, of
our propane business if National Propane required the repurchase. As of July 1,
2007, we have net operating loss tax carryforwards sufficient to offset
substantially all of the remaining deferred taxes.
RTM guarantees the lease obligations of 23 RTM restaurants formerly
operated by affiliates of RTM as of July 1, 2007, which we refer to as the
Affiliate Lease Guarantees. The RTM selling stockholders have indemnified us
with respect to the guarantee of the remaining lease obligations. In addition,
RTM remains contingently liable for 21 leases for restaurants sold by RTM prior
to the RTM Acquisition if the respective purchasers do not make the required
lease payments. All of these lease obligations, which extend through 2025,
including all existing extension or renewal option periods, could aggregate a
maximum of approximately $37.0 million as of July 1, 2007, including
approximately $32.0 million under the Affiliate Lease Guarantees, assuming all
scheduled lease payments have been made by the respective tenants through July
1, 2007.
Capital Expenditures
Cash capital expenditures amounted to $34.2 million during the 2007 first
half. We expect that cash capital expenditures will be approximately $55.0
million during the second half of 2007 principally relating to (1) the opening
of an estimated 25 new Company-owned restaurants, (2) remodeling some of our
existing restaurants and (3) maintenance capital expenditures for our
Company-owned restaurants. We have $33.8 million of outstanding commitments for
capital expenditures as of July 1, 2007, of which $26.8 million is expected to
be paid during the second half of 2007.
Dividends
On March 15, 2007 and June 15, 2007 we paid regular quarterly cash
dividends of $0.08 and $0.09 per share on our class A and class B common stock,
respectively, aggregating $16.1 million. On August 9, 2007, we declared regular
quarterly cash dividends of $0.08 and $0.09 per share on our class A common
stock and class B common stock, respectively, payable on September 15, 2007 to
holders of record on September 1, 2007. Our board of directors has determined
that until December 30, 2007 regular quarterly cash dividends paid on each share
of class B common stock will be at least 110% of the regular quarterly cash
dividends paid on each share of class A common stock, but has not yet made any
similar determination beyond that date. Accordingly, after December 30, 2007,
our class B common stock will be entitled to participate at least equally on a
per share basis with our class A common stock in any cash dividends. We
currently intend to continue to declare and pay regular quarterly cash
dividends; however, there can be no assurance that any regular quarterly
dividends will be declared or paid in the future or of the amount or timing of
such dividends, if any. If we pay regular quarterly cash dividends for the
fourth quarter of 2007 at the same rates as to be paid in our 2007 third
quarter, our total cash requirement for dividends for the second half of 2007
would be $16.1 million based on the number of our class A and class B common
shares outstanding at July 31, 2007.
Income Taxes
The statute of limitations for examination by the Internal Revenue Service,
which we refer to as the IRS, of our Federal income tax return for the year
ended December 29, 2002 expired during 2006 and years prior thereto are no
longer subject to examination. Our Federal income tax returns for years
subsequent to December 29, 2002 are not currently under examination by the IRS
although some of our state income tax returns are currently under examination.
We have received notices of proposed tax adjustments aggregating $6.4 million in
connection with certain of these state income tax returns. However, we are
contesting these proposed adjustments and, accordingly, cannot determine the
ultimate amount of any resulting tax liability or any related interest and
penalties.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant and to the extent legally permissible, to repurchase through December
28, 2008 up to a total of $50.0 million of our class A and/or class B common
stock. We did not make any treasury stock purchases during the 2007 first half
and we cannot assure you that we will repurchase any shares under this program
in the future.
Universal Shelf Registration Statement
In December 2003, the Securities and Exchange Commission, which we refer to
as the SEC, declared effective a Triarc universal shelf registration statement
in connection with the possible future offer and sale, from time to time, of up
to $2.0 billion of our common stock, preferred stock, debt securities and
warrants to purchase any of these types of securities. Unless otherwise
described in the applicable prospectus supplement relating to any offered
securities, we anticipate using the net proceeds of each offering for general
corporate purposes, including financing of acquisitions and capital
expenditures, additions to working capital and repayment of existing debt. We
have not presently made any decision to issue any specific securities under this
universal shelf registration statement.
Business Acquisitions
We continue to evaluate strategic opportunities to enhance the value of our
Company, which may include business acquisitions within the restaurant industry.
Cash Requirements
Our consolidated cash requirements for continuing operations for the second
half of 2007 anticipate the use of cash for operating activities, including the
severance payments in connection with our corporate restructuring as discussed
above in "Results of Operations - Facilities Relocation and Corporate
Restructuring." Our cash requirements other than operating cash flow
requirements for the second half of 2007, consist principally of (1) cash
capital expenditures of approximately $55.0 million, (2) a maximum of an
aggregate $50.0 million of payments for repurchases, if any, of our class A
and/or class B common stock for treasury under our current stock repurchase
program, (3) regular quarterly cash dividends aggregating approximately $16.1
million, (4) scheduled debt principal repayments aggregating $10.9 million, (5)
any prepayments under our Credit Agreement and (6) the cost of business
acquisitions, if any. We anticipate meeting all of these requirements, including
the requirements for operations, through (1) the use of our liquid current
assets, (2) borrowings under our restaurant segment's revolving credit facility
of which $93.4 million is currently available, (3) the remaining $24.6 million
available under the conditional funding commitment for sale-leaseback financing
from the real estate finance company, (4) proceeds from the completion of the
Pending Deerfield Sale, net of payments required to concurrently repurchase
minority interests in Deerfield held by affiliates of one of its executives who
is a former director of ours, as discussed in more detail below under "Pending
Deerfield Sale," (5) proceeds from sales, if any, of our remaining investments
and (6) proceeds from sales, if any, of up to $2.0 billion of our securities
under the universal shelf registration statement.
Pending Deerfield Sale
On April 19, 2007, we entered into a definitive agreement whereby the REIT
will acquire Deerfield. Deerfield represents substantially all of our asset
management business segment. At July 1, 2007, we owned 2.6% of the REIT and
account for our investment in the REIT in accordance with the equity method. The
total consideration to be received by us and the other members of Deerfield was
valued at approximately $300.0 million as of April 19, 2007, consisting
principally of $145.0 million in cash, 9,635,000 shares of the REIT, which had a
market value of approximately $145.0 million based upon the average of the
closing prices of the REIT common stock for the ten trading days prior to April
19, 2007, which we refer to as the REIT Average Stock Price, of $15.05 per
share, the distribution of 330,000 shares of the REIT currently owned by
Deerfield to the selling members, which had a market value based upon the REIT
Average Stock Price of approximately $5.0 million and cash distributions from
Deerfield to the selling members. The consideration to be received by us and
other members of Deerfield is subject to adjustment under certain circumstances,
including a deduction for any amount outstanding under the revolving note of
Deerfield, which is $2.0 million as of July 1, 2007. Based on the REIT Average
Stock Price of $15.05, we would receive minimum consideration of approximately
$170.0 million before expenses and amounts to be held in escrow for our capital
interest of 63.6% and our profits interest of at least 52.3% in Deerfield.
However, at July 1, 2007, the market price of the REIT common stock was $14.63
per share and as of July 31, 2007 was $10.97 per share and has continued to
decline subsequent to that date. The total consideration that we will receive,
including the number of shares we will receive in the REIT, is dependent upon
our profits interest in Deerfield and the actual price of the REIT common stock
at the time of closing. A portion of the consideration, in the form of
approximately 2.5 million shares of the REIT issuable in the transaction, will
be deposited into an escrow account to be used to satisfy any indemnification
claims related to Deerfield and will not be reflected as consideration until
released from escrow. The Pending Deerfield Sale is subject to customary closing
conditions, including as of July 1, 2007, approval by the REIT stockholders, the
finalization of funding under a financing commitment received by the REIT for
the cash portion of the sales price and a registration statement covering resale
of the REIT shares to be received by us being declared effective by the SEC. On
August 9, 2007, the REIT stockholders approved the Pending Deerfield Sale. The
sale is currently expected to close on August 14, 2007 and we currently expect
the sale will result in significantly lower proceeds than the approximate $300.0
million set forth above as a result of the decline in the market price of the
REIT common stock previously disclosed.
Two of Deerfield's executives, one of whom is a former director of ours, in
the aggregate currently hold approximately one-third of the capital interests
and profit interests in Deerfield. Those executives have rights, which we refer
to as the Put Rights, under Deerfield's existing operating agreement to require
us to acquire, for cash, a substantial portion of their interests in Deerfield
under certain circumstances. In that regard, the Put Right of one of those
executives can be exercised upon the sale of Deerfield and in May 2007 that
executive gave notice exercising his right to require us to purchase his
approximate one-quarter interests in Deerfield concurrent with the closing of
the Pending Deerfield Sale, which we refer to as the Put Exercise. Since this
executive has the right to be paid in cash, the amount to be paid to such
executive is not affected by any change in the common stock price of the REIT
subsequent to April 19, 2007 and is currently estimated to be between $70.0
million and $75.0 million. We, however, would receive a combination of cash and
shares issued by the REIT for such interests upon the sale of Deerfield of which
a portion of the shares will be held in escrow. Subsequent to the closing of the
Pending Deerfield Sale and assuming we receive all of the shares held in escrow
for which we are entitled, and the additional shares to be received from the
sale of the Deerfield interests to be acquired under the Put Exercise, we expect
that we will own approximately 15% of the REIT, including 1.0 million shares of
the REIT, or approximately 2%, that are currently held in deferred compensation
trusts that will be distributed to the Executives during the second half of
2007.
The results of operations of Deerfield have been included in the
accompanying condensed consolidated financial statements for the three-month and
six-month periods ended July 2, 2006 and July 1, 2007 and will continue to be
reported in our results of operations through the date of the Pending Deerfield
Sale. We do not anticipate that Deerfield will be reported as a discontinued
operation since we will have significant continuing involvement in the
operations of Deerfield after the sale through the significant number of REIT
shares that we will own subsequent to the closing of the Pending Deerfield Sale.
Summary financial data for Deerfield, which, as discussed above, represents
substantially all of our asset management business segment, as of and for the
six months ended July 1, 2007 is as follows (in thousands):
Total assets..............................$ 128,508
Revenues.................................. 32,719
Operating profit.......................... 4,001
Income from continuing operations before
income taxes and minority interests..... 3,268
Legal and Environmental Matters
In 2001, a vacant property owned by Adams Packing Association, Inc., which
we refer to as Adams Packing, an inactive subsidiary of ours, was listed by the
United States Environmental Protection Agency on the Comprehensive Environmental
Response, Compensation and Liability Information System, which we refer to as
CERCLIS, list of known or suspected contaminated sites. The CERCLIS listing
appears to have been based on an allegation that a former tenant of Adams
Packing conducted drum recycling operations at the site from some time prior to
1971 until the late 1970's. The business operations of Adams Packing were sold
in December 1992. In February 2003, Adams Packing and the Florida Department of
Environmental Protection, which we refer to as the Florida DEP, agreed to a
consent order that provided for development of a work plan for further
investigation of the site and limited remediation of the identified
contamination. In May 2003, the Florida DEP approved the work plan submitted by
Adams Packing's environmental consultant and during 2004 the work under that
plan was completed. Adams Packing submitted its contamination assessment report
to the Florida DEP in March 2004. In August 2004, the Florida DEP agreed to a
monitoring plan consisting of two sampling events which occurred in January and
June 2005 and the results were submitted to the Florida DEP for its review. In
November 2005, Adams Packing received a letter from the Florida DEP identifying
certain open issues with respect to the property. The letter did not specify
whether any further actions are required to be taken by Adams Packing. Adams
Packing sought clarification from the Florida DEP in order to attempt to resolve
this matter. On May 1, 2007, the Florida DEP sent a letter clarifying their
prior correspondence and reiterated the open issues identified in their November
2005 letter. In addition, the Florida DEP offered Adams Packing the option of
voluntarily taking part in a recently adopted state program that could lessen
site clean up standards, should such a clean up be required after a mandatory
further study and site assessment report. We, our consultants and our outside
counsel are presently reviewing these new options and no decision has been made
on a course of action based on the Florida DEP's offer. Nonetheless, based on
provisions made prior to 2006 of $1.7 million for all of these costs and after
taking into consideration various legal defenses available to us, including
Adams Packing, Adams Packing has provided for its estimate of its remaining
liability for completion of this matter.
In addition to the environmental matter described above, we are involved in
other litigation and claims incidental to our current and prior businesses. We
and our subsidiaries have reserves for all of our legal and environmental
matters aggregating $0.8 million as of July 1, 2007. Although the outcome of
these matters cannot be predicted with certainty and some of these matters may
be disposed of unfavorably to us, based on currently available information,
including legal defenses available to us and/or our subsidiaries, and given the
aforementioned reserves, we do not believe that the outcome of these legal and
environmental matters will have a material adverse effect on our condensed
consolidated financial position or results of operations.
Application of Critical Accounting Policies
The only significant change to the application of our critical accounting
policies since December 31, 2006 as disclosed in Item 7 of our 2006 Form 10-K
results from our adoption of Interpretation 48 effective January 1, 2007. As a
result, we now measure income tax uncertainties in accordance with a two-step
process of evaluating a tax position. We first determine if it is more likely
than not that a tax position will be sustained upon examination based on the
technical merits of the position. A tax position that meets the
more-likely-than-not recognition threshold is then measured as the largest
amount that has a greater than fifty percent likelihood of being realized upon
effective settlement. In accordance with this method, as of January 1, 2007 we
recognized an increase in our reserves for uncertain income tax positions of
$4.8 million and an increase in our liability for interest and penalties related
to uncertain income tax positions of $0.7 million, both partially offset by an
increase in our deferred income tax benefit of $3.2 million and a reduction in
the tax related liabilities of discontinued operations of $0.1 million, with the
net effect of $2.2 million decreasing retained earnings as of that date.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant revenues are somewhat lower in our first quarter.
Further, while our asset management business is not directly affected by
seasonality, our asset management revenues are higher in our fourth quarter as
discussed in the comparison of the three-month periods under "Results of
Operations - Asset Management and Related Fees." However, our asset management
and related fees will cease upon completion of the Pending Deerfield Sale as
discussed above under "Pending Deerfield Sale."
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, which we refer
to as the FASB, issued Statement of Financial Accounting Standards No. 157,
"Fair Value Measurements," which we refer to as SFAS 157. SFAS 157 addresses
issues relating to the definition of fair value, the methods used to measure
fair value and expanded disclosures about fair value measurements. SFAS 157 does
not require any new fair value measurements. The definition of fair value in
SFAS 157 focuses on the price that would be received to sell an asset or paid to
transfer a liability, not the price that would be paid to acquire an asset or
received to assume a liability. The methods used to measure fair value should be
based on the assumptions that market participants would use in pricing an asset
or a liability. SFAS 157 expands disclosures about the use of fair value to
measure assets and liabilities in interim and annual periods subsequent to
adoption. SFAS 157 is, with some limited exceptions, to be applied prospectively
and is effective commencing with our first fiscal quarter of 2008. We do not
believe that the adoption of SFAS 157 will result in any change in the methods
we use to measure the fair value of those financial assets and liabilities we
currently hold that require measurement at fair value. We will, however, be
required to present the expanded fair value disclosures upon adoption of SFAS
157.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115," which we refer
to as SFAS 159. SFAS 159 does not mandate but permits the measurement of many
financial instruments and certain other items at fair value providing reporting
entities the opportunity to mitigate volatility in reported earnings, without
having to apply complex hedge accounting provisions, caused by measuring related
assets and liabilities differently. SFAS 159 will require the reporting of
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. SFAS 159 will also
require expanded disclosures related to its application. SFAS 159 is effective
commencing with our first fiscal quarter of 2008. SFAS 159 was only recently
issued and we have not yet evaluated whether we will elect the fair value option
for financial instruments and certain other items, nor have we evaluated the
effect any such election may have on our consolidated financial position and
results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This "Quantitative and Qualitative Disclosures about Market Risk" has been
presented in accordance with Item 305 of Regulation S-K promulgated by the
Securities and Exchange Commission and should be read in conjunction with "Item
7A. Quantitative and Qualitative Disclosures about Market Risk" in our annual
report on Form 10-K for the fiscal year ended December 31, 2006. Item 7A of our
Form 10-K describes in more detail our objectives in managing our interest rate
risk with respect to long-term debt, as referred to below, our commodity price
risk, our equity market risk and our foreign currency risk.
Certain statements we make under this Item 3 constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part II
- Other Information" preceding "Item 1A."
We are exposed to the impact of interest rate changes, changes in commodity
prices, changes in the market value of our investments and, to a lesser extent,
foreign currency fluctuations. In the normal course of business, we employ
established policies and procedures to manage our exposure to these changes
using financial instruments we deem appropriate. We had no significant changes
in our management of, or our exposure to, commodity price risk, equity market
risk or foreign currency risk during the six months ended July 1, 2007.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit
their impact on our earnings and cash flows. We have historically used interest
rate cap and/or interest rate swap agreements on a portion of our variable-rate
debt to limit our exposure to the effects of increases in short-term interest
rates on our earnings and cash flows. As of July 1, 2007 our notes payable and
long-term debt, including current portion, aggregated $735.4 million and
consisted of $562.4 million of variable-rate debt, $164.7 million of capitalized
lease and sale-leaseback obligations, $4.3 million of variable-rate notes
payable and $4.0 million of fixed-rate debt. We continue to have three interest
rate swap agreements that fix the London Interbank Offered Rate (LIBOR)
component of the interest rate at 4.12%, 4.56% and 4.64% on $100.0 million,
$50.0 million and $55.0 million, respectively, of the $556.6 million outstanding
principal amount of our variable-rate senior secured term loan borrowings until
September 30, 2008, October 30, 2008 and October 30, 2008, respectively. The
interest rate swap agreements related to the term loans were designated as cash
flow hedges and, accordingly, are recorded at fair value with changes in fair
value recorded through the accumulated other comprehensive income component of
stockholders' equity in our accompanying condensed consolidated balance sheet to
the extent of the effectiveness of these hedges. There was no ineffectiveness
from these hedges through July 1, 2007. If a hedge or portion thereof is
determined to be ineffective, any changes in fair value would be recognized in
our results of operations. In addition, we continue to have an interest rate
swap agreement, with an embedded written call option, in connection with our
variable-rate bank loan of which $3.8 million principal amount was outstanding
as of July 1, 2007, which effectively establishes a fixed interest rate on this
debt so long as the one-month LIBOR is below 6.5%. The fair value of our
fixed-rate debt will increase if interest rates decrease. The fair market value
of our investments in fixed-rate debt securities will decline if interest rates
increase. See below for a discussion of how we manage this risk.
Foreign Currency Risk
We had no significant changes in our management of, or our exposure to,
foreign currency fluctuations during the first half of 2007. However, on July 5,
2007 the put and call arrangement whereby we had limited the overall foreign
currency risk on our cost-method investment in Jurlique International Pty Ltd.,
an Australian company which we refer to as Jurlique, matured. In connection with
the maturity, we made a net payment of $1.3 million. Subsequent to this
maturity, we will have exposure to foreign currency risk related to our entire
remaining investment in Jurlique, which has a carrying value of $8.5 million, to
the extent we do not enter another such arrangement.
Overall Market Risk
We balance our exposure to overall market risk by investing a portion of
our portfolio in cash and cash equivalents with relatively stable and
risk-minimized returns. We periodically interview and select asset managers to
avail ourselves of potentially higher, but more risk-inherent, returns from the
investment strategies of these managers. We also seek to identify alternative
investment strategies that may earn higher returns with attendant increased risk
profiles for a portion of our investment portfolio. We regularly review the
returns from each of our investments and may maintain, liquidate or increase
selected investments based on this review and our assessment of potential future
returns. In December 2005 we invested $75.0 million in an account, which we
refer to as the Equities Account, which is managed by a management company
formed by our Chairman, who is also our former Chief Executive Officer, our Vice
Chairman, who is also our former President and Chief Operating Officer and a
director, who is also our former Vice Chairman. The Equities Account is invested
principally in the equity securities, including through derivative instruments,
of a limited number of publicly-traded companies. The Equities Account,
including cash equivalents, had a fair value of $108.6 million as of July 1,
2007. As of July 1, 2007, the investment derivatives we held, principally in the
Equities Account, consisted of (1) a total return swap on an equity security,
(2) put and call combinations on equity securities, (3) market put options and
(4) stock options. We did not designate any of these strategies as hedging
instruments and, accordingly, all of these derivative instruments were recorded
at fair value with changes in fair value recorded in our results of operations.
We maintain investment holdings of various issuers, types and maturities.
As of July 1, 2007 these investments were classified in our condensed
consolidated balance sheet as follows (in thousands):
Cash equivalents included in "Cash and cash equivalents"...............................$ 101,335
Short-term investments not pledged as collateral....................................... 35,424
Short-term investments pledged as collateral........................................... 7,531
Investment settlements receivable...................................................... 13,047
Non-current restricted cash equivalents................................................ 41,575
Non-current investments................................................................ 93,279
--------------
$ 292,191
==============
Investment settlement payable included in "Other liabilities"..........................$ (926)
==============
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired and consisted of cash in mutual
fund money market and bank money market accounts and cash in interest-bearing
brokerage and bank accounts with a stable value.
At July 1, 2007 our investments were classified in the following general
types or categories (in thousands):
Carrying Value
At Fair ----------------------
Type At Cost Value (d) Amount Percent
---- ------- --------- ------ -------
Cash equivalents (a)............................$ 101,335 $ 101,335 $ 101,335 35%
Investment settlements receivable (b)........... 13,047 13,047 13,047 4%
Restricted cash equivalents..................... 41,575 41,575 41,575 14%
Current and non-current investments accounted
for as available-for-sale securities (c)...... 61,838 72,242 72,242 25%
Investments held in deferred compensation
trusts accounted for at:
Equity..................................... 15,000 14,630 13,186 4%
Cost....................................... 4,952 9,898 4,952 2%
Available-for-sale......................... 3,322 5,017 5,017 2%
Other current and non-current investments in
investment limited partnerships and similar
investment entities accounted for at cost..... 9,474 20,701 9,474 3%
Other current and non-current investments
accounted for at:
Cost....................................... 14,571 18,530 14,571 5%
Equity..................................... 4,949 4,764 4,781 2%
Fair value ................................ 5,226 12,011 12,011 4%
------------ ------------ ------------ ----
Total cash equivalents and
investment positions..........................$ 275,289 $ 313,750 $ 292,191 100%
============ ============ ============ ====
Investment settlement payable...................$ (926) $ (926) $ (926) N/A
============ ============ ============
---------------
(a) Includes $448,000 of cash equivalents held in deferred compensation trusts.
(b) Includes $539,000 held in deferred compensation trusts.
(c) Fair value and carrying value include $7,531,000 of preferred shares of
collateralized debt obligation vehicles, which we refer to as CDOs, which,
if sold, would require us to use the proceeds to repay our related notes
payable of $2,800,000.
(d) There can be no assurance that we would be able to sell certain of these
investments at these amounts.
Our marketable securities are reported at fair market value and are
classified and accounted for either as "available-for-sale" or "trading" with
the resulting net unrealized holding gains or losses, net of income taxes,
reported either as a separate component of comprehensive income or loss
bypassing net income or net loss, or included as a component of net income or
net loss, respectively. At July 1, 2007, we held no trading securities. Our
investments in preferred shares of CDOs are accounted for similar to debt
securities and are classified as available-for-sale. Investment limited
partnerships and similar investment entities and other current and non-current
investments in which we do not have significant influence over the investees are
accounted for at cost. Derivative instruments are similar to trading securities
which are accounted for as described above. Realized gains and losses on
investment limited partnerships and similar investment entities and other
current and non-current investments recorded at cost are reported as investment
income or loss in the period in which the securities are sold. Investments in
which we have significant influence over the investees are accounted for in
accordance with the equity method of accounting under which our results of
operations include our share of the income or loss of the investees. As of July
1, 2007, our only investment accounted for under the equity method is in a
publicly traded real estate investment trust managed by a subsidiary of ours. We
also hold restricted stock and stock options of the real estate investment
trust, which we received as share-based compensation, and which we refer to as
the Restricted Investments. Other than the vested portion of the restricted
stock of the real estate investment trust, which we account for in accordance
with the equity method of accounting, the Restricted Investments are accounted
for at fair value. We review all of our investments in which we have unrealized
losses and recognize investment losses currently for any unrealized losses we
deem to be other than temporary. The cost-basis component of investments
reflected in the table above represents original cost less a permanent reduction
for any unrealized losses that were deemed to be other than temporary.
Sensitivity Analysis
Our estimate of market risk exposure is presented below for each class of
financial instruments held by us at July 1, 2007 for which an immediate adverse
market movement causes a potential material impact on our financial position or
results of operations. As of July 1, 2007, we did not hold any market risk
sensitive instruments which were entered into for trading purposes, so the table
below reflects those entered into for purposes other than trading. We believe
that the adverse market movements described below represent the hypothetical
loss to future earnings and do not represent the maximum possible loss nor any
expected actual loss, even under adverse conditions, because actual adverse
fluctuations would likely differ. In addition, since our investment portfolio is
subject to change based on our portfolio management strategy as well as market
conditions, these estimates are not necessarily indicative of the actual results
which may occur.
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Cash equivalents........................................$ 101,335 $ -- $ -- $ --
Investment settlements receivable....................... 13,047 -- -- --
Restricted cash equivalents............................. 41,575 -- -- --
Available-for-sale equity securities.................... 65,355 -- (6,536) --
Available-for-sale preferred shares of CDOs............. 11,904 (1,457) -- (74)
Investment in Jurlique.................................. 8,504 -- (850) (603)
Investment derivatives.................................. 10,042 -- (6,733) (543)
Other investments....................................... 40,429 (1,783) (2,053) (20)
Interest rate swaps in an asset position................ 2,323 (2,272) -- --
Investment settlement payable .......................... (926) -- -- --
Foreign currency put and call arrangement in a net
liability position................................... (1,209) -- -- (1,119)
Notes payable and long-term debt, excluding
capitalized lease and sale-leaseback obligations..... (570,632) (22,752) -- --
The sensitivity analysis of financial instruments held at July 1, 2007
assumes (1) an instantaneous one percentage point adverse change in market
interest rates, (2) an instantaneous 10% adverse change in the equity markets in
which we are invested and (3) an instantaneous 10% adverse change in the foreign
currency exchange rates versus the United States dollar, each from their levels
at July 1, 2007 and with all other variables held constant. The equity price
risk reflects the impact of a 10% decrease in the carrying value of our equity
securities, including those in "Other investments" in the table above. The
sensitivity analysis also assumes that the decreases in the equity markets and
foreign exchange rates are other than temporary. We have not reduced the equity
price risk for available-for-sale investments and cost investments to the extent
of unrealized gains on certain of those investments, which would limit or
eliminate the effect of the indicated market risk on our results of operations
and, for cost investments, our financial position.
Our investments in debt securities and preferred shares of CDOs with
interest rate risk had a range of remaining maturities and, for purposes of this
analysis, were assumed to have weighted average remaining maturities as follows:
Range Weighted Average
----- ----------------
CDOs underlying preferred shares..............................1 1/3 years - 27 1/2 years 5 1/3 years
Debt securities included in other investments (principally
held by investment limited partnerships and similar
investment entities)........................................ (a) 10 years
---------------
(a) Information is not available for the underlying debt investments of these
entities.
The interest rate risk for each of these investments in debt securities and
the preferred shares of CDOs reflects the impact on our results of operations.
Assuming we reinvest in similar securities at the time these securities mature,
the effect of the interest rate risk of an increase of one percentage point
above the existing levels would continue beyond the maturities assumed. The
interest rate risk for our preferred shares of CDOs excludes those portions of
the CDOs for which the risk has been fully hedged. As of July 1, 2007, our cash
equivalents and restricted cash equivalents consisted of mutual fund money
market and bank money market accounts and/or interest-bearing brokerage and bank
accounts which are designed to maintain a stable value, and thus are assumed to
have no associated interest rate risk.
As of July 1, 2007, a majority of our debt was variable-rate debt and
therefore the interest rate risk presented with respect to our $566.7 million of
variable-rate notes payable and long-term debt, excluding capitalized lease and
sale-leaseback obligations, represents the potential impact an increase in
interest rates of one percentage point has on our results of operations. Our
variable-rate notes payable and long-term debt outstanding as of July 1, 2007
had a weighted average remaining maturity of approximately 4 1/2 years. However,
as discussed above under "Interest Rate Risk," we have four interest rate swap
agreements, one with an embedded written call option, on a portion of our
variable-rate debt. The interest rate risk of our variable-rate debt presented
in the table above excludes the $205.0 million for which we designated interest
rate swap agreements as cash flow hedges for the terms of the swap agreements.
As interest rates decrease, the fair market values of the interest rate swap
agreements and the written call option all decrease, but not necessarily by the
same amount in the case of the written call option and related interest rate
swap agreement. The interest rate risks presented with respect to the interest
rate swap agreements represent the potential impact the indicated change has on
the net fair value of the swap agreements and embedded written call option and
on our financial position and, with respect to the interest rate swap agreement
with the embedded written call option which was not designated as a cash flow
hedge, also our results of operations. We only have $4.0 million of fixed-rate
debt as of July 1, 2007, for which a potential impact of a decrease in interest
rates of one percentage point would have an immaterial impact on the fair value
of such debt and, accordingly, is not reflected in the table above.
The foreign currency risk presented for our investment in Jurlique as of
July 1, 2007 excludes the portion of risk that is hedged by the foreign currency
put and call arrangement. The foreign currency risk presented with respect to
the foreign currency put and call arrangement as of July 1, 2007 represents the
potential impact the indicated change has on the net fair value of such
financial instrument and on our financial position and results of operations and
has been determined by an independent broker/dealer. However, as discussed above
under "Foreign Currency Risk," the put and call arrangement matured on July 5,
2007. For investments held since December 31, 2006 in investment limited
partnerships and similar investment entities, all of which are accounted for at
cost, and other non-current investments included in "Other investments" in the
table above, the sensitivity analysis assumes that the investment mix for each
such investment between equity versus debt securities and securities denominated
in United States dollars versus foreign currencies was unchanged since that date
since more current information was not readily available. To the extent such
entities invest in convertible bonds which trade primarily on the conversion
feature of the securities rather than on the stated interest rate, this analysis
assumed equity price risk but no interest rate risk. The foreign currency risk
presented excludes those investments where the investment manager has fully
hedged the risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
our Executive Vice President and Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this Quarterly Report. Based on that evaluation, our
Chief Executive Officer and our Executive Vice President and Chief Financial
Officer have concluded that, as of the end of such period, our disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act was recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission (the "SEC").
Change in Internal Control Over Financial Reporting
We acquired the RTM Restaurant Group ("RTM") in July 2005. Prior to our
acquisition, RTM was privately held and had no public reporting obligations with
the SEC. As previously reported, there had been certain deficiencies in RTM's
systems, procedures and internal control over financial reporting, which we have
continued to remediate. In addition, during the fiscal second quarter of 2007,
our restaurant business implemented new accounting systems. In cases where the
functions of the new systems were not fully operational as of the end of the
2007 second quarter, we relied on existing procedures and controls or utilized
supplementary procedures and controls. We are continuing to work toward the full
utilization of the new systems and expect to complete that process during the
remainder of 2007.
Effective June 30, 2007, the Chief Executive Officer of our subsidiary,
Arby's Restaurant Group, Inc. ("ARG"), was appointed as our Chief Executive
Officer and, accordingly, participated in the evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures noted above.
We are currently in the process of a corporate restructuring, pursuant to
which we will transfer our headquarters operations function to ARG in Atlanta,
Georgia. Since much of this transition will occur during our fiscal third
quarter of 2007, the related changes did not significantly impact the operation
of our system of internal controls as of the end of the period covered by this
Quarterly Report.
There were no other changes in our internal control over financial
reporting made during our most recent fiscal quarter that materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system,
including the potential for human error and the circumvention or overriding of
the controls and procedures. Additionally, judgments in decision-making can be
faulty and breakdowns can occur because of simple error or mistake. An effective
control system can provide only reasonable, not absolute, assurance that the
control objectives of the system are adequately met. Accordingly, our
management, including our Chief Executive Officer and our Executive Vice
President and Chief Financial Officer, does not expect that our control system
can prevent or detect all error or fraud. Finally, projections of any evaluation
or assessment of effectiveness of a control system to future periods are subject
to the risks that, over time, controls may become inadequate because of changes
in an entity's operating environment or deterioration in the degree of
compliance with policies or procedures.
Part II. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Quarterly Report on Form 10-Q and oral statements made from time to
time by representatives of the Company may contain or incorporate by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of
Triarc Companies, Inc. and its subsidiaries (collectively "Triarc" or the
"Company"), and those statements preceded by, followed by, or that include the
words "may," "believes," "plans," "expects," "anticipates," or the negation
thereof, or similar expressions, that constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). All statements that address operating performance, events or
developments that are expected or anticipated to occur in the future, including
statements relating to revenue growth, earnings per share growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Reform Act. Our forward-looking statements
are based on our expectations at the time such statements are made, speak only
as of the dates they are made and are susceptible to a number of risks,
uncertainties and other factors. Our actual results, performance and
achievements may differ materially from any future results, performance or
achievements expressed or implied by our forward-looking statements. For all of
our forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Reform Act. Many important factors
could affect our future results and could cause those results to differ
materially from those expressed in, or implied by the forward-looking statements
contained herein. Such factors, all of which are difficult or impossible to
predict accurately, and many of which are beyond our control, include, but are
not limited to, the following:
o competition, including pricing pressures and the potential impact of
competitors' new units on sales by Arby's(R) restaurants;
o consumers' perceptions of the relative quality, variety, affordability
and value of the food products we offer;
o success of operating initiatives;
o development costs, including real estate and construction costs;
o advertising and promotional efforts by us and our competitors;
o consumer awareness of the Arby's brand;
o the existence or absence of positive or adverse publicity;
o new product and concept development by us and our competitors, and
market acceptance of such new product offerings and concepts;
o changes in consumer tastes and preferences, including changes resulting
from concerns over nutritional or safety aspects of beef, poultry,
french fries or other foods or the effects of food-borne illnesses such
as "mad cow disease" and avian influenza or "bird flu";
o changes in spending patterns and demographic trends, such as the extent
to which consumers eat meals away from home;
o adverse economic conditions, including high unemployment rates, in
geographic regions that contain a high concentration of Arby's
restaurants;
o the business and financial viability of key franchisees;
o the timely payment of franchisee obligations due to us;
o availability, location and terms of sites for restaurant development by
us and our franchisees;
o the ability of our franchisees to open new restaurants in accordance
with their development commitments, including the ability of franchisees
to finance restaurant development;
o delays in opening new restaurants or completing remodels;
o the timing and impact of acquisitions and dispositions of restaurants;
o our ability to successfully integrate acquired restaurant operations;
o anticipated or unanticipated restaurant closures by us and our
franchisees;
o our ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Arby's restaurants successfully;
o changes in business strategy or development plans, and the willingness
of our franchisees to participate in our strategies and operating
initiatives;
o business abilities and judgment of our and our franchisees' management
and other personnel;
o availability of qualified restaurant personnel to us and to our
franchisees, and our and our franchisees' ability to retain such
personnel;
o our ability, if necessary, to secure alternative distribution of
supplies of food, equipment and other products to Arby's restaurants at
competitive rates and in adequate amounts, and the potential financial
impact of any interruptions in such distribution;
o changes in commodity (including beef and chicken), labor, supply,
distribution and other operating costs;
o availability and cost of insurance;
o adverse weather conditions;
o significant reductions in our client assets under management (which
would reduce our advisory fee revenue), due to such factors as weak
performance of our investment products (either on an absolute basis or
relative to our competitors or other investment strategies), substantial
illiquidity or price volatility in the fixed income instruments that we
trade, loss of key portfolio management or other personnel (or lack of
availability of additional key personnel if needed for expansion),
reduced investor demand for the types of investment products we offer,
and loss of investor confidence due to adverse publicity, and
non-renewal or early termination of investment management agreements;
o increased competition from other asset managers offering products
similar to those we offer;
o pricing pressure on the advisory fees that we can charge for our
investment advisory services;
o difficulty in increasing assets under management, or efficiently
managing existing assets, due to market-related constraints on trading
capacity, inability to hire the necessary additional personnel or lack
of potentially profitable trading opportunities;
o our removal as investment manager of the real estate investment trust or
one or more of the collateral debt obligation vehicles (CDOs) or other
accounts we manage, or the reduction in our CDO management fees because
of payment defaults by issuers of the underlying collateral or the
triggering of certain structural protections built into CDOs;
o availability, terms (including changes in interest rates) and deployment
of capital;
o changes in legal or self-regulatory requirements, including franchising
laws, investment management regulations, accounting standards,
environmental laws, overtime rules, minimum wage rates and taxation
rates;
o the costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
o the impact of general economic conditions on consumer spending or
securities investing, including a slower consumer economy and the
effects of war or terrorist activities and;
o other risks and uncertainties affecting us and our subsidiaries referred
to in our Annual Report on Form 10-K for the fiscal year ended December
31, 2006 (the "Form 10-K") (see especially "Item 1A. Risk Factors" and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations") and in our other current and periodic filings
with the Securities and Exchange Commission.
All future written and oral forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. New risks
and uncertainties arise from time to time, and it is impossible for us to
predict these events or how they may affect us. We assume no obligation to
update any forward-looking statements after the date of this Quarterly Report on
Form 10-Q as a result of new information, future events or developments, except
as required by federal securities laws. In addition, it is our policy generally
not to make any specific projections as to future earnings, and we do not
endorse any projections regarding future performance that may be made by third
parties.
Item 1A. Risk Factors.
In addition to the information contained in this report, you should
carefully consider the risk factors disclosed in our Form 10-K and our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 1, 2007 (the "First
Quarter Form 10-Q"), which could materially affect our business, financial
condition or future results. There were no material changes from the risk
factors previously disclosed in our Form 10-K and our First Quarter Form 10-Q
during the fiscal quarter ended July 1, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of
shares of our common stock by us and our "affiliated purchasers" (as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) during
the second fiscal quarter of 2007:
Issuer Repurchases of Equity Securities
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
Total Number of Shares Approximate Dollar
Purchased As Part of Value of Shares That
Total Number of Average Price Paid Per Publicly Announced Plan May Yet Be Purchased
Period Shares Purchased Share (1) Under the Plan (1)
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
April 2, 2007 1,196 Class A(2) $18.40 - Class A --- $50,000,000
through 25,819 Class B(2) $17.18 - Class B
April 29, 2007
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
April 30, 2007 3,719 Class A(2) $17.63 - Class A ---
through 7,442 Class B(2) $16.47 - Class B $50,000,000
May 27, 2007
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
May 28, 2007
through 151,820 Class B(2) $15.72 --- $50,000,000
July 1, 2007
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
Total 4,915 Class A(2) $17.82 - Class A ---
185,081 Class B(2) $15.96 - Class B $50,000,000
-------------------------- ---------------------- --------------------------- -------------------------- -------------------------
(1) On June 30, 2007, our then existing $50 million stock repurchase expired.
No transactions were effected under this stock repurchase program during
the second fiscal quarter of 2007. On July 1, 2007 a new stock repurchase
program became effective pursuant to which we may repurchase up to $50
million of our Class A Common Stock and/or Class B Common Stock, Series 1
during the period from July 1, 2007 through and including December 28,
2008 when and if market conditions warrant and to the extent legally
permissible.
(2) Reflects shares of Class A Common Stock or Class B Common Stock, Series 1,
tendered as payment of (i) the exercise price of stock options, or related
statutory minimum withholding taxes, under the Company's Amended and
Restated Equity Participation Plans or (ii) tax withholding obligations in
respect of the vesting of shares of restricted stock issued to employees
under the Company's Amended and Restated 2002 Equity Participation Plan.
The shares were valued at the closing prices of the Class A Common Stock
or Class B Common Stock, Series 1, on the respective dates of exercise of
such stock options or, as applicable, the vesting date for such shares of
restricted stock.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 5, 2007, we held our Annual Meeting of Stockholders. As previously
announced, at the Annual Meeting Nelson Peltz, Peter W. May, Hugh L. Carey,
Clive Chajet, Edward P. Garden, Joseph A. Levato, David E. Schwab II, Roland C.
Smith, Raymond S. Troubh, Gerald Tsai, Jr., Russell V. Umphenour, Jr. and Jack
G. Wasserman were elected to serve as Directors. Stockholders also approved
Proposal 2, an amendment to the Company's Amended and Restated 2002 Equity
Participation Plan, as described in the proxy statement, Proposal 3, an
amendment to the Company's 1999 Executive Bonus Plan, as described in the proxy
statement, and Proposal 4, ratifying the appointment of Deloitte & Touche LLP as
our independent registered public accountants.
The voting on the above matters is set forth below:
Nominee Votes For Votes Withheld
------- --------- --------------
Nelson Peltz 31,097,568 589,914
Peter W. May 31,084,935 602,547
Hugh L. Carey 31,151,910 535,571
Clive Chajet 30,924,677 762,805
Edward P. Garden 31,079,287 608,195
Joseph A. Levato 30,927,624 759,858
David E. Schwab II 31,081,464 606,018
Roland C. Smith 30,742,754 944,728
Raymond S. Troubh 30,767,181 920,301
Gerald Tsai, Jr. 28,509,730 3,177,751
Russell V. Umphenour, Jr. 30,926,745 760,737
Jack G. Wasserman 30,933,501 753,981
Proposal 2 - There were 30,435,778 votes for, 1,227,643 votes against
and 24,053 abstentions. There were no broker non-votes for
this item.
Proposal 3 - There were 30,667,993 votes for, 990,523 votes against and
28,957 abstentions. There were no broker non-votes for this
item.
Proposal 4 - There were 31,629,058 votes for, 49,596 votes against and
8,825 abstentions. There were no broker non-votes for this
item.
Item 5. Other Information.
Sale of Deerfield & Company LLC
-------------------------------
In connection with our corporate restructuring, on April 19, 2007 a
definitive agreement (the "Merger Agreement") was entered into pursuant to which
Deerfield Triarc Capital Corp. ("DFR"), a diversified financial company that is
externally managed by a subsidiary of Deerfield & Company LLC ("Deerfield"),
will acquire Deerfield, a Chicago-based fixed income asset manager in which we
own a controlling interest.
The total consideration to be received by us and other members of
Deerfield, consists of $145 million in cash, approximately 9.6 million shares of
DFR common stock (having a value as of April 19, 2007, the date of the Merger
Agreement, of approximately $145 million, based on the average of the closing
prices of DFR common stock over the 10 trading days prior to April 19, 2007 (the
"DFR Average Stock Price") of $15.05 per share), the distribution prior to the
closing of approximately 330,000 shares of DFR common stock currently owned by
Deerfield, and cash distributions from Deerfield to the selling members of
Deerfield of approximately $6.0 million plus amounts for taxes relating to
pre-closing periods, for an aggregate consideration of approximately $300
million (as of the date of the Merger Agreement). The consideration to be
received by us and the other members of Deerfield is subject to adjustment under
certain circumstances, including a deduction for any amount outstanding under a
revolving note of Deerfield, the principal amount of which was $2.0 million as
of July 1, 2007. Of the 9.6 million shares of DFR common stock, approximately
2.5 million shares will be deposited into an escrow account and will be
available to satisfy the post-closing indemnification and other payment
obligations of us and the other pre-closing members of Deerfield. Barring any
outstanding indemnification claims, the escrow fund will terminate one year from
the closing date of the merger and any remaining shares of DFR common stock and
other assets in the escrow fund will be released to the pre-closing members of
Deerfield, including Triarc. Based on the DFR Average Stock Price, we would
receive a minimum of approximately $170 million, before expenses and including
any amounts held in escrow, in consideration for our capital interest of
approximately 64% and our profits interest of at least 52% in Deerfield.
However, at July 31, 2007, the closing market price of the DFR common stock was
$10.97 per share and the market price of the DFR common stock has declined since
that date.
Certain affiliates of Gregory H. Sachs, a former director of Triarc, the
founder of Deerfield and a director and the chairman and chief executive officer
of Deerfield and its subsidiaries, have the right, under Deerfield's existing
operating agreement, to require Triarc to purchase for cash all or a portion of
the membership interests in Deerfield held by these affiliates of Mr. Sachs (the
"Sachs Affiliated Parties") simultaneously with the merger. The Sachs Affiliated
Parties hold in the aggregate 25.854% of the capital interests and 24.988% of
the profits interests in Deerfield.
On May 25, 2007, the Sachs Affiliated Parties, Deerfield and Triarc entered
into a letter agreement (the "Put Exercise Agreement") pursuant to which the
Sachs Affiliated Parties irrevocably exercised their right to require Triarc to
purchase for cash all of the membership interests in Deerfield held by the Sachs
Affiliated Parties simultaneously with the completion of the Merger. In the Put
Exercise Agreement, the parties agreed that the purchase price for all of the
membership interests in Deerfield held by the Sachs Affiliated Parties will be
based on a total equity value of Deerfield (negotiated by the parties for this
purpose only) equal to $285,373,000 minus the amount of the Severance Benefit
(as defined below) and the Pro Rata Bonus (as defined below) that actually
reduces the aggregate cash consideration payable to the members of Deerfield
under the Merger Agreement. If the parties had not agreed on a purchase price,
pursuant to Deerfield's operating agreement, an independent third party
valuation firm would have determined the price to be paid by Triarc for the
membership interests in Deerfield held by the Sachs Affiliated Parties.
In connection with this exercise, Mr. Sachs tendered his irrevocable
resignation as a director and as chairman and chief executive officer of
Deerfield and its subsidiaries, effective upon completion of the Merger. The Put
Exercise Agreement provides that Mr. Sachs' resignation will be treated under
his employment agreement as a termination by Deerfield of Mr. Sachs without
"cause", entitling him to a severance benefit in an amount equal to the annual
base salary (currently $1.0 million) Mr. Sachs would have received had he
remained employed with Deerfield and its subsidiaries from the closing date of
the Merger through July 22, 2009 (the "Severance Benefit") and a pro rata bonus
for 2007 equal to the amount determined in accordance with Mr. Sachs' existing
employment agreement (the "Pro Rata Bonus"). As previously announced, Mr. Sachs
decided not to stand for reelection as a director of Triarc at Triarc's 2007
annual meeting. It is anticipated, however, that Mr. Sachs will remain as a
director of DFR.
The Put Exercise Agreement also provides that the Sachs Affiliated Parties
will remain members of Deerfield until the closing of the Merger Agreement, and
therefore will participate in any distributions made by Deerfield until then
pursuant to the Merger Agreement. The Sachs Affiliated Parties, however, will
not be considered members of Deerfield for purposes of the payment of aggregate
merger consideration or the post-closing indemnification provisions contained in
the Merger Agreement.
It is anticipated that a separate agreement will be entered into governing
certain other aspects relating to Mr. Sachs' departure from Deerfield upon
completion of the merger.
The merger, which is expected to close during the 2007 third quarter, is
subject to customary closing conditions, including, without limitation, the
receipt by DFR of financing for the cash portion of the purchase price and
related transaction costs, receipt of certain third party consents, a
registration statement for the DFR shares to be received being declared
effective by the Securities and Exchange Commission and other conditions set
forth in the definitive agreement. On August 9, 2007, the transaction was
approved by DFR stockholders representing (1) a majority of the votes cast at a
meeting to approve the transaction and (2) a majority of the votes cast by
stockholders not affiliated with Deerfield. When the transaction closes, DFR
will discontinue the use of "Triarc" in its name. However, there can be no
assurance that the sale of Deerfield will be completed.
As a result of the foregoing transactions, we expect to own approximately
15% of DFR's common stock (which amount includes the shares of DFR common stock
that are to be held in escrow and 1.0 million shares (or approximately 2% of
DFR's common stock) that are held in deferred compensation trusts that will (as
described below under "Corporate Restructuring") be distributed to our Chairman
and Vice Chairman in December 2007). Options for the shares of DFR common stock
to be received in the transaction are under review and could include a special
dividend or distribution to shareholders of such shares. In 2006, in addition to
regular quarterly cash dividends, we declared special extraordinary cash
dividends on our outstanding common stock totaling $0.45 per share.
Following completion of the sale of Deerfield, our sole operating business
will be our Arby's restaurant business. We expect to change our name to reflect
our new identity as a publicly traded restaurant company. Arby's is the
franchisor of the Arby's restaurant system and the owner and operator of over
1,000 Arby's restaurants. There are approximately 3,600 Arby's restaurants
worldwide. Our goal is to increase shareholder value by growing our restaurant
business organically and through acquisitions of other restaurant companies.
Corporate Restructuring
-----------------------
As noted above, following the completion of the sale of Deerfield, our sole
operating business will be our Arby's restaurant business. To facilitate our
transition to a "pure play" restaurant company and to reduce corporate costs, we
are in the process of consolidating our corporate operations and headquarters in
Atlanta, Georgia and transferring our senior executive responsibilities to the
Arby's Restaurant Group, Inc. ("ARG") executive team in Atlanta, which will
eliminate the need to maintain a New York City headquarters.
In connection with this corporate restructuring, in July 2007 we entered
into an agreement with Trian Fund Management, L.P. ("Trian Mgmt."), an
investment management firm that was founded in November 2005 by Messrs. Nelson
Peltz, (our Chairman), Peter W. May (our Vice Chairman) and Edward P. Garden (a
director of Triarc and our former Vice Chairman), pursuant to which Trian Mgmt.
subleases one of the floors of our New York headquarters (the "Sublease"). Under
the terms of the Sublease, Trian Mgmt. will pay us an amount equal to the rent
that we pay plus an amount reflecting a portion of the increase in the monthly
fair market value of our leasehold interest. Trian Mgmt. is also responsible for
property taxes and the other costs related to the use of the floor. Either party
may terminate the sublease upon 60 days notice. We also sold substantially all
of the properties and other assets that we owned and used at our New York
headquarters and other corporate facilities to Trian Mgmt. for an aggregate
purchase price of $1,808,100 (including applicable sales taxes).
In connection with the corporate restructuring, we also assigned, as of
June 30, 2007, the lease for a corporate facility to Trian Mgmt. Pursuant to the
assignment, we have no further obligations under the lease. The security deposit
for the facility will remain our property and, upon the expiration of the lease,
is to be returned to us in full.
We also intend to assign our 25% fractional interest in a helicopter to
Trian Mgmt., although the terms of such assignment have not yet been finalized.
Pending that assignment, Trian Mgmt. has agreed to pay the monthly management
fee and other costs related to the fractional interest in the helicopter. It is
expected that subsequent to the assignment, we will have no further rights or
obligations under the terms of the agreements applicable to the fractional
interest.
In August 2007, we entered into time share arrangements whereby Trian Mgmt.
and its principals (including our Chairman and Vice Chairman) may use our
corporate aircraft in exchange for payment of the incremental flight and related
costs of such aircraft.
As previously reported, in connection with the corporate restructuring, on
June 29, 2007, Nelson Peltz and Peter W. May resigned as our Chairman and Chief
Executive Officer and the President and Chief Operating Officer, respectively.
Such resignations were in accordance with the contractual settlements that they
entered into with us in April 2007. In accordance with these contractual
settlements, we have funded our payment obligations, net of withholding taxes,
to Messrs. Peltz and May in separate rabbi trusts for their benefit and the
payment of the amounts in the trusts will be made to them in December 2007.
Messrs. Peltz and May continue to serve on our Board of Directors, as
non-executive Chairman and Vice-Chairman, respectively, and remain large
shareholders of Triarc. Roland C. Smith, the Chief Executive Officer of ARG was
appointed Chief Executive Officer of Triarc effective June 30, 2007. Mr. Smith
has served as Chief Executive Officer of ARG since April 2006 and as a member of
Triarc's Board of Directors since June 2007. Mr. Smith also served as President
of ARG from April 2006 to June 2006.
Also as previously reported, in connection with the corporate restructuring
and the departures of Messrs. Peltz and May and nearly all of the senior members
of our management team, we entered into a transition services agreement, which
commenced on June 30, 2007 (the "Services Agreement"), with Trian Mgmt. pursuant
to which Trian Mgmt. provides us with a range of professional and strategic
services. In addition, our indirect subsidiary, TCMG-MA, LLC, entered into an
amended and restated Investment Management Agreement with Trian Mgmt (the
"Amended and Restated Investment Management Agreement") regarding a Trian Mgmt
managed account that co-invests on a parallel basis with the equity investment
funds managed by Trian Mgmt.
The contractual settlements and other related agreements with Messrs. Peltz
and May referred to above were negotiated and approved by a Special Committee of
independent members of our Board of Directors consisting of the following
directors: David E. Schwab II (Chair), Joseph A. Levato (Vice Chair), Clive
Chajet and Raymond S. Troubh (and, as applicable, recommended by the
Compensation Committee and Performance Compensation Subcommittee). The Special
Committee was advised by independent outside counsel and worked with the Board's
Compensation Committee and Performance Compensation Subcommittee and its
independent outside counsel and independent compensation consultant.
Item 6. Exhibits.
2.1 Agreement and Plan of Merger, dated as of April 19, 2007, by and among
Deerfield Triarc Capital Corp., DFR Merger Company, LLC, Deerfield &
Company LLC and, solely for the purposes set forth therein, Triarc
Companies, Inc. (in such capacity, the Sellers' Representative),
incorporated herein by reference to Exhibit 2.1 to Triarc's Current
Report on Form 8-K dated April 24, 2007 (SEC file no. 1-2207).
3.1 Certificate of Incorporation of Triarc Companies, Inc., as currently in
effect, incorporated herein by reference to Exhibit 3.1 to Triarc's
Current Report on Form 8-K dated June 9, 2004 (SEC file no. 1-2207).
3.2 By-laws of Triarc Companies, Inc., as currently in effect, incorporated
herein by reference to Exhibit 3.1 to Triarc's Current Report on Form
8-K dated July 3, 2007 (SEC file no. 1-2207).
3.3 Certificate of Designation of Class B Common Stock, Series 1, dated as
of August 11, 2003, incorporated herein by reference to Exhibit 3.3 to
Triarc's Current Report on Form 8-K dated August 11, 2003 (SEC file no.
1-2207).
10.1 Amendment No. 2, dated as of May 21, 2007 to that certain Credit
Agreement dated as of July 25, 2005 among Arby's Restaurant Group, Inc.,
Arby's Restaurant Holdings, LLC, Triarc Restaurant Holdings, LLC,
Citicorp North America, Inc., as administrative agent for the Lenders
and Issuers and as collateral agent for the Secured Parties, Bank of
America, N.A. and Credit Suisse, Cayman Islands Branch, as
co-syndication agents for the Lenders and Issuers, and Wachovia Bank,
National Association, Suntrust Bank and GE Capital Franchise Finance
Corporation, as co-documentation agents for the Lenders and Issuers,
incorporated herein by reference to Exhibit 10.1 to Triarc's Current
Report on Form 8-K dated May 25, 2007 (SEC file no. 1-2207).
10.2 Letter Agreement dated as of May 25, 2007, among Sachs Capital
Management, LLC, Spensyd Asset Management LLLP, Deerfield & Company LLC
and Triarc Companies, Inc., incorporated herein by reference to Exhibit
10.1 to Triarc's Current Report on Form 8-K dated May 30, 2007 (SEC file
no. 1-2207).
10.3 Amendment No. 2 to Triarc Companies, Inc. Amended and Restated 2002
Equity Participation Plan, incorporated herein by reference to Exhibit
10.1 to Triarc's Current Report on Form 8-K dated June 6, 2007 (SEC file
no. 1-2207).
10.4 Amendment to the Triarc Companies, Inc. 1999 Executive Bonus Plan,
incorporated herein by reference to Exhibit 10.2 to Triarc's Current
Report on Form 8-K dated June 6, 2007 (SEC file no. 1-2207).
10.5 Registration Rights Agreement, dated as of April 19, 2007, among
Deerfield Triarc Capital Corp., the parties identified as Stockholders
on the signature pages thereto and the other persons who may become
parties thereto from time to time in accordance therewith and Triarc
Companies, Inc., as the Sellers' Representative, incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
April 24, 2007 (SEC file no. 1-2207).
10.6 Amended and Restated Amendment No. 1 to Employment Agreement between
Triarc Companies, Inc. and Brian L. Schorr, incorporated herein by
reference to Exhibit 10.5 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.7 Services Agreement, dated as of April 30, 2007, by and among Triarc
Companies, Inc. and Trian Fund Management, L.P., incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.8 Amended and Restated Investment Management Agreement, dated as of April
30, 2007, between TCMG-MA, LLC and Trian Fund Management, L.P.,
incorporated herein by reference to Exhibit 10.2 to Triarc's Current
Report on Form 8-K dated April 30, 2007 (SEC file no. 1-2207).
10.9 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Nelson Peltz, incorporated herein by reference to
Exhibit 10.3 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
10.10 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Peter W. May, incorporated herein by reference to
Exhibit 10.4 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
10.11 Settlement Agreement and Mutual Release, dated as of July __, 2007, by
and among Triarc Companies, Inc., Arby's Restaurant Group, Inc., Arby's
Restaurant, LLC and Russell V. Umphenour, Jr., Dennis E. Cooper and J.
Russell Welch, as the RTM Representatives, incorporated herein by
reference to Exhibit 10.3 to Triarc's Current Report on Form 8-K dated
August 10, 2007 (SEC file no. 1-2207).
10.12 Bill of Sale dated July 31, 2007 by Triarc Companies, Inc. to Trian Fund
Management, L.P., incorporated herein by reference to Exhibit 10.2 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.13 Agreement of Sublease between Triarc Companies, Inc. and Trian Fund
Management, L.P., incorporated herein by reference to Exhibit 10.4 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.14 Assignment and Assumption of Lease, dated as of June 30, 2007, between
Triarc Companies, Inc. and Trian Fund Management, L.P., incorporated
herein by reference to Exhibit 10.1 to Triarc's Current Report on Form
8-K dated August 10, 2007 (SEC file no. 1-2207).
10.15 Form of Aircraft Time Sharing Agreement between Triarc Companies, Inc.
and each of Trian Fund Management, L.P., Nelson Peltz, Peter W. May and
Edward P. Garden, incorporated herein by reference to Exhibit 10.5 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.16 Form of Aircraft Time Sharing Agreement between 280 Holdings, LLC and
each of Trian Fund Management, L.P., Nelson Peltz, Peter W. May and
Edward P. Garden, incorporated herein by reference to Exhibit 10.6 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.17 Letter Agreement dated August 6, 2007 between Triarc Companies, Inc. and
Trian Fund Management, L.P., incorporated herein by reference to Exhibit
10.7 to Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC
file No. 1-2207).
10.18 Letter Agreement dated August 8, 2007 among Deerfield and Company LLC,
Deerfield Triarc Capital Corp., DFR Merger Company, LLC and Triarc
Companies, Inc., as sellers' representative, incorporated herein by
reference to Exhibit 10.8 to Triarc's Current Report on Form 8-K dated
August 10, 2007 (SEC file No. 1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as
an exhibit to this report on Form 10-Q. *
-----------------------
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIARC COMPANIES, INC.
(Registrant)
Date: August 10, 2007 By: /s/FRANCIS T. MCCARRON
-----------------------
Francis T. McCarron
Executive Vice President and
Chief Financial Officer
(On behalf of the Company)
Date: August 10, 2007 By: /s/FRED H. SCHAEFER
----------------------
Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Exhibit Index
-------------
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger, dated as of April 19, 2007, by and among
Deerfield Triarc Capital Corp., DFR Merger Company, LLC, Deerfield &
Company LLC and, solely for the purposes set forth therein, Triarc
Companies, Inc. (in such capacity, the Sellers' Representative),
incorporated herein by reference to Exhibit 2.1 to Triarc's Current
Report on Form 8-K dated April 24, 2007 (SEC file no. 1-2207).
3.1 Certificate of Incorporation of Triarc Companies, Inc., as currently in
effect, incorporated herein by reference to Exhibit 3.1 to Triarc's
Current Report on Form 8-K dated June 9, 2004 (SEC file no. 1-2207).
3.2 By-laws of Triarc Companies, Inc., as currently in effect, incorporated
herein by reference to Exhibit 3.1 to Triarc's Current Report on Form
8-K dated July 3, 2007 (SEC file no. 1-2207).
3.3 Certificate of Designation of Class B Common Stock, Series 1, dated as
of August 11, 2003, incorporated herein by reference to Exhibit 3.3 to
Triarc's Current Report on Form 8-K dated August 11, 2003 (SEC file no.
1-2207).
10.1 Amendment No. 2, dated as of May 21, 2007 to that certain Credit
Agreement dated as of July 25, 2005 among Arby's Restaurant Group, Inc.,
Arby's Restaurant Holdings, LLC, Triarc Restaurant Holdings, LLC,
Citicorp North America, Inc., as administrative agent for the Lenders
and Issuers and as collateral agent for the Secured Parties, Bank of
America, N.A. and Credit Suisse, Cayman Islands Branch, as
co-syndication agents for the Lenders and Issuers, and Wachovia Bank,
National Association, Suntrust Bank and GE Capital Franchise Finance
Corporation, as co-documentation agents for the Lenders and Issuers,
incorporated herein by reference to Exhibit 10.1 to Triarc's Current
Report on Form 8-K dated May 25, 2007 (SEC file no. 1-2207).
10.2 Letter Agreement dated as of May 25, 2007, among Sachs Capital
Management, LLC, Spensyd Asset Management LLLP, Deerfield & Company LLC
and Triarc Companies, Inc., incorporated herein by reference to Exhibit
10.1 to Triarc's Current Report on Form 8-K dated May 30, 2007 (SEC file
no. 1-2207).
10.3 Amendment No. 2 to Triarc Companies, Inc. Amended and Restated 2002
Equity Participation Plan, incorporated herein by reference to Exhibit
10.1 to Triarc's Current Report on Form 8-K dated June 6, 2007 (SEC file
no. 1-2207).
10.4 Amendment to the Triarc Companies, Inc. 1999 Executive Bonus Plan,
incorporated herein by reference to Exhibit 10.2 to Triarc's Current
Report on Form 8-K dated June 6, 2007 (SEC file no. 1-2207).
10.5 Registration Rights Agreement, dated as of April 19, 2007, among
Deerfield Triarc Capital Corp., the parties identified as Stockholders
on the signature pages thereto and the other persons who may become
parties thereto from time to time in accordance therewith and Triarc
Companies, Inc., as the Sellers' Representative, incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
April 24, 2007 (SEC file no. 1-2207).
10.6 Amended and Restated Amendment No. 1 to Employment Agreement between
Triarc Companies, Inc. and Brian L. Schorr, incorporated herein by
reference to Exhibit 10. 5 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.7 Services Agreement, dated as of April 30, 2007, by and among Triarc
Companies, Inc. and Trian Fund Management, L.P., incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 1-2207).
10.8 Amended and Restated Investment Management Agreement, dated as of April
30, 2007, between TCMG-MA, LLC and Trian Fund Management, L.P.,
incorporated herein by reference to Exhibit 10.2 to Triarc's Current
Report on Form 8-K dated April 30, 2007 (SEC file no. 1-2207).
10.9 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Nelson Peltz, incorporated herein by reference to
Exhibit 10.3 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
10.10 Separation Agreement, dated as of April 30, 2007, between Triarc
Companies, Inc. and Peter W. May, incorporated herein by reference to
Exhibit 10.4 to Triarc's Current Report on Form 8-K dated April 30, 2007
(SEC file no. 1-2207).
10.11 Settlement Agreement and Mutual Release, dated as of July __, 2007, by
and among Triarc Companies, Inc., Arby's Restaurant Group, Inc., Arby's
Restaurant, LLC and Russell V. Umphenour, Jr., Dennis E. Cooper and J.
Russell Welch, as the RTM Representatives, incorporated herein by
reference to Exhibit 10.3 to Triarc's Current Report on Form 8-K dated
August 10, 2007 (SEC file no. 1-2207).
10.12 Bill of Sale dated July 31, 2007 by Triarc Companies, Inc. to Trian Fund
Management, L.P., incorporated herein by reference to Exhibit 10.2 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.13 Agreement of Sublease between Triarc Companies, Inc. and Trian Fund
Management, L.P., incorporated herein by reference to Exhibit 10.4 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.14 Assignment and Assumption of Lease, dated as of June 30, 2007, between
Triarc Companies, Inc. and Trian Fund Management, L.P., incorporated
herein by reference to Exhibit 10.1 to Triarc's Current Report on Form
8-K dated August 10, 2007 (SEC file no. 1-2207).
10.15 Form of Aircraft Time Sharing Agreement between Triarc Companies, Inc.
and each of Trian Fund Management, L.P., Nelson Peltz, Peter W. May and
Edward P. Garden, incorporated herein by reference to Exhibit 10.5 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.16 Form of Aircraft Time Sharing Agreement between 280 Holdings, LLC and
each of Trian Fund Management, L.P., Nelson Peltz, Peter W. May and
Edward P. Garden, incorporated herein by reference to Exhibit 10.6 to
Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC file no.
1-2207).
10.17 Letter Agreement dated August 6, 2007 between Triarc Companies, Inc. and
Trian Fund Management, L.P., incorporated herein by reference to Exhibit
10.7 to Triarc's Current Report on Form 8-K dated August 10, 2007 (SEC
file No. 1-2207).
10.18 Letter Agreement dated August 8, 2007 among Deerfield and Company LLC,
Deerfield Triarc Capital Corp., DFR Merger Company, LLC and Triarc
Companies, Inc., as sellers' representatives incorporated herein by
reference to Exhibit 10.8 to Triarc's Current Report on Form 8-K dated
August 10, 2007 (SEC file No. 1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. *
31.3 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as
an exhibit to this report on Form 10-Q. *
-----------------------
* Filed herewith.
EXHIBIT 31.1
CERTIFICATIONS
I, Roland C. Smith, the Chief Executive Officer of Triarc Companies, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 10, 2007
/s/ROLAND C. SMITH
------------------
Roland C. Smith
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Francis T. McCarron, the Executive Vice President and Chief Financial
Officer of Triarc Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 10, 2007
/s/FRANCIS T. MCCARRON
----------------------
Francis T. McCarron
Executive Vice President
and Chief Financial Officer
EXHIBIT 32.1
Certification Pursuant to
18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Triarc Companies, Inc., a Delaware corporation (the
"Company"), does hereby certify, to the best of such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended July 1, 2007 (the
"Form 10-Q") of the Company fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: August 10, 2007
/s/ROLAND C. SMITH
------------------
Roland C. Smith
Chief Executive Officer
Dated: August 10, 2007
/s/FRANCIS T. MCCARRON
----------------------
Francis T. McCarron
Executive Vice President and Chief
Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Triarc Companies, Inc.
and will be retained by Triarc Companies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Form 10-Q or as a separate disclosure document.