UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(X)
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended September 30, 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
TRIARC
COMPANIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
38-0471180
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
1155
Perimeter Center West, Atlanta, Georgia
|
|
30338
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(678)
514-4100
(Registrant’s
telephone number, including area code)
280
Park Avenue, New York, New York 10017
(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 28,883,221 shares of the registrant’s Class A Common Stock and 63,884,280
shares of the registrant’s Class B Common Stock outstanding as of October 31,
2007.
|
3
|
|
3
|
|
3
|
|
4
|
|
5
|
|
7
|
|
20
|
|
20
|
|
22
|
|
23
|
|
33
|
|
38
|
|
38
|
|
39
|
|
39
|
|
39
|
|
40
|
|
44
|
|
|
|
45
|
|
45
|
|
47
|
|
48
|
|
48
|
|
49
|
|
|
|
50
|
|
51
|
PART
I.
FINANCIAL INFORMATION
TRIARC
COMPANIES, INC. AND SUBSIDIARIES
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2006
(A)
|
|
|
2007
|
|
|
|
(In
Thousands)
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
148,152
|
|
|
$ |
134,572
|
|
Restricted
cash equivalents
|
|
|
9,059
|
|
|
|
-
|
|
Short-term
investments not pledged as collateral
|
|
|
113,950
|
|
|
|
23,159
|
|
Short-term
investments pledged as collateral
|
|
|
8,168
|
|
|
|
5,122
|
|
Investment
settlements receivable
|
|
|
16,599
|
|
|
|
17,452
|
|
Accounts
and notes receivable
|
|
|
43,422
|
|
|
|
27,788
|
|
Inventories
|
|
|
10,019
|
|
|
|
9,744
|
|
Deferred
income tax benefit
|
|
|
18,414
|
|
|
|
26,540
|
|
Prepaid
expenses and other current assets
|
|
|
23,987
|
|
|
|
27,435
|
|
Total
current assets
|
|
|
391,770
|
|
|
|
271,812
|
|
Restricted
cash equivalents
|
|
|
1,939
|
|
|
|
39,544
|
|
Investments
|
|
|
60,197
|
|
|
|
82,705
|
|
Properties
|
|
|
488,484
|
|
|
|
512,268
|
|
Goodwill
|
|
|
521,055
|
|
|
|
524,816
|
|
Other
intangible assets
|
|
|
70,923
|
|
|
|
66,174
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
|
10,711
|
|
Other
deferred costs and other assets
|
|
|
26,081
|
|
|
|
22,376
|
|
|
|
$ |
1,560,449
|
|
|
$ |
1,530,406
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
4,564
|
|
|
$ |
3,896
|
|
Current
portion of long-term debt
|
|
|
18,118
|
|
|
|
17,844
|
|
Accounts
payable
|
|
|
48,595
|
|
|
|
52,018
|
|
Accrued
expenses and other current liabilities
|
|
|
150,045
|
|
|
|
156,683
|
|
Current
liabilities relating to discontinued operations
|
|
|
9,254
|
|
|
|
9,027
|
|
Deferred
compensation payable to related parties
|
|
|
-
|
|
|
|
36,163
|
|
Total
current liabilities
|
|
|
230,576
|
|
|
|
275,631
|
|
Long-term
debt
|
|
|
701,916
|
|
|
|
720,357
|
|
Deferred
income
|
|
|
11,563
|
|
|
|
14,285
|
|
Deferred
compensation payable to related parties
|
|
|
35,679
|
|
|
|
-
|
|
Deferred
income taxes
|
|
|
15,532
|
|
|
|
-
|
|
Minority
interests in consolidated subsidiaries
|
|
|
14,225
|
|
|
|
9,093
|
|
Other
liabilities
|
|
|
73,145
|
|
|
|
82,531
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
2,955
|
|
|
|
2,955
|
|
Class
B common stock
|
|
|
6,366
|
|
|
|
6,402
|
|
Additional
paid-in capital
|
|
|
311,609
|
|
|
|
289,480
|
|
Retained
earnings
|
|
|
185,726
|
|
|
|
142,020
|
|
Common
stock held in treasury
|
|
|
(43,695 |
) |
|
|
(16,806 |
) |
Accumulated
other comprehensive income
|
|
|
14,852
|
|
|
|
4,458
|
|
Total
stockholders’ equity
|
|
|
477,813
|
|
|
|
428,509
|
|
|
|
$ |
1,560,449
|
|
|
$ |
1,530,406
|
|
(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
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
Thousands Except Per Share Amounts)
|
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
272,493
|
|
|
$ |
285,496
|
|
|
$ |
801,890
|
|
|
$ |
830,566
|
|
Royalties
and franchise and related fees
|
|
|
21,403
|
|
|
|
21,777
|
|
|
|
61,025
|
|
|
|
62,855
|
|
Asset
management and related fees
|
|
|
17,766
|
|
|
|
16,940
|
|
|
|
48,390
|
|
|
|
49,659
|
|
|
|
|
311,662
|
|
|
|
324,213
|
|
|
|
911,305
|
|
|
|
943,080
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, excluding depreciation and amortization
|
|
|
197,582
|
|
|
|
210,940
|
|
|
|
583,983
|
|
|
|
610,799
|
|
Cost
of services, excluding depreciation and amortization
|
|
|
7,313
|
|
|
|
6,562
|
|
|
|
18,743
|
|
|
|
19,760
|
|
Advertising
and promotions
|
|
|
19,861
|
|
|
|
20,929
|
|
|
|
59,771
|
|
|
|
59,316
|
|
General
and administrative, excluding depreciation and
amortization
|
|
|
55,656
|
|
|
|
42,009
|
|
|
|
174,151
|
|
|
|
155,567
|
|
Depreciation
and amortization, excluding amortization of deferred financing
costs
|
|
|
16,250
|
|
|
|
20,022
|
|
|
|
44,314
|
|
|
|
54,411
|
|
Facilities
relocation and corporate restructuring
|
|
|
2,165
|
|
|
|
1,807
|
|
|
|
3,743
|
|
|
|
81,254
|
|
Loss
on settlement of unfavorable franchise rights
|
|
|
-
|
|
|
|
-
|
|
|
|
658
|
|
|
|
-
|
|
|
|
|
298,827
|
|
|
|
302,269
|
|
|
|
885,363
|
|
|
|
981,107
|
|
Operating
profit (loss)
|
|
|
12,835
|
|
|
|
21,944
|
|
|
|
25,942
|
|
|
|
(38,027 |
) |
Interest
expense
|
|
|
(34,426 |
) |
|
|
(15,489 |
) |
|
|
(100,048 |
) |
|
|
(46,164 |
) |
Loss
on early extinguishments of debt
|
|
|
(194 |
) |
|
|
-
|
|
|
|
(13,671 |
) |
|
|
-
|
|
Investment
income (loss), net
|
|
|
23,021
|
|
|
|
(1,083 |
) |
|
|
74,767
|
|
|
|
39,690
|
|
Gain
on sale of unconsolidated business
|
|
|
3
|
|
|
|
-
|
|
|
|
2,259
|
|
|
|
2,558
|
|
Other
income, net
|
|
|
318
|
|
|
|
1,101
|
|
|
|
5,754
|
|
|
|
3,308
|
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
1,557
|
|
|
|
6,473
|
|
|
|
(4,997 |
) |
|
|
(38,635 |
) |
(Provision
for) benefit from income taxes
|
|
|
203
|
|
|
|
(4,174 |
) |
|
|
3,135
|
|
|
|
24,385
|
|
Minority
interests in (income) loss of consolidated
subsidiaries
|
|
|
(976 |
) |
|
|
1,432
|
|
|
|
(6,674 |
) |
|
|
(2,832 |
) |
Income
(loss) from continuing operations
|
|
|
784
|
|
|
|
3,731
|
|
|
|
(8,536 |
) |
|
|
(17,082 |
) |
Loss
from discontinued operations, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(97 |
) |
|
|
-
|
|
|
|
(312 |
) |
|
|
-
|
|
Loss on
disposal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(149 |
) |
Loss
from discontinued operations
|
|
|
(97 |
) |
|
|
-
|
|
|
|
(312 |
) |
|
|
(149 |
) |
Net
income (loss)
|
|
$ |
687
|
|
|
$ |
3,731
|
|
|
$ |
(8,848 |
) |
|
$ |
(17,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) from continuing operations and net income
(loss)
per share of Class A common stock and Class B common stock
|
|
$ |
0.01
|
|
|
$ |
0.04
|
|
|
$ |
(0.10 |
) |
|
$ |
(0.19 |
) |
See
accompanying notes to condensed consolidated financial
statements.
TRIARC
COMPANIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
Thousands)
|
|
|
|
(Unaudited)
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(8,848 |
) |
|
$ |
(17,231 |
) |
Adjustments
to reconcile net loss to net cash provided by continuing operating
activities:
|
|
|
|
|
|
|
|
|
Facilities
relocation and corporate restructuring, net (payments)
provision
|
|
|
(5,950 |
) |
|
|
78,332
|
|
Depreciation
and amortization of properties
|
|
|
37,247
|
|
|
|
42,244
|
|
Amortization
of other intangible assets and certain other items
|
|
|
7,067
|
|
|
|
12,167
|
|
Amortization
of deferred financing cost and original issue discount
|
|
|
1,633
|
|
|
|
1,509
|
|
Write-off
of previously unamortized deferred financing costs on early
extinguishments of debt
|
|
|
4,903
|
|
|
|
-
|
|
Share-based
compensation provision
|
|
|
10,803
|
|
|
|
8,316
|
|
Straight-line
rent accrual
|
|
|
4,532
|
|
|
|
4,746
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
6,674
|
|
|
|
2,832
|
|
Receipt
of deferred vendor incentive, net of amount recognized
|
|
|
8,573
|
|
|
|
2,241
|
|
Deferred
compensation (reversal) provision
|
|
|
(274 |
) |
|
|
1,016
|
|
Loss
from discontinued operations
|
|
|
312
|
|
|
|
149
|
|
Deferred
income tax benefit
|
|
|
(5,395 |
) |
|
|
(24,872 |
) |
Operating
investment adjustments, net (see below)
|
|
|
563,706
|
|
|
|
(24,813 |
) |
Payment
of withholding taxes related to share-based compensation
|
|
|
(1,761 |
) |
|
|
(4,793 |
) |
Unfavorable
lease liability recognized
|
|
|
(3,651 |
) |
|
|
(3,301 |
) |
Gain
on sale of unconsolidated business
|
|
|
(2,259 |
) |
|
|
(2,558 |
) |
Equity
in undistributed earnings of investees
|
|
|
(2,078 |
) |
|
|
(873 |
) |
Charge
for common stock issued to induce effective conversions of convertible
notes
|
|
|
3,719
|
|
|
|
-
|
|
Other,
net
|
|
|
(2,259 |
) |
|
|
1,489
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
and notes receivables
|
|
|
18,057
|
|
|
|
15,328
|
|
Inventories
|
|
|
2,879
|
|
|
|
325
|
|
Prepaid
expenses and other current assets
|
|
|
(1,000 |
) |
|
|
(7,137 |
) |
Accounts
payable and accrued expenses and other current liabilities
|
|
|
(16,923 |
) |
|
|
(44,946 |
) |
Net
cash provided by continuing operating activities (1)
|
|
|
619,707
|
|
|
|
40,170
|
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(52,591 |
) |
|
|
(56,270 |
) |
Cost
of business acquisitions, less cash acquired
|
|
|
(1,824 |
) |
|
|
(1,529 |
) |
Investment
activities, net (see below)
|
|
|
(420,820 |
) |
|
|
33,013
|
|
Proceeds
from dispositions of assets
|
|
|
7,003
|
|
|
|
2,615
|
|
Other,
net
|
|
|
(2,581 |
) |
|
|
457
|
|
Net
cash used in continuing investing activities
|
|
|
(470,813 |
) |
|
|
(21,714 |
) |
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(49,089 |
) |
|
|
(24,162 |
) |
Repayments
of long-term debt and notes payable
|
|
|
(66,646 |
) |
|
|
(15,948 |
) |
Net
distributions to minority interests in consolidated
subsidiaries
|
|
|
(34,696 |
) |
|
|
(7,911 |
) |
Deferred
financing costs
|
|
|
-
|
|
|
|
(1,164 |
) |
Proceeds
from issuance of long-term debt and a note payable
|
|
|
15,946
|
|
|
|
15,908
|
|
Proceeds
from exercises of stock options
|
|
|
6,041
|
|
|
|
1,371
|
|
Net
cash used in continuing financing activities
|
|
|
(128,444 |
) |
|
|
(31,906 |
) |
Net
cash provided by (used in) continuing operations
|
|
|
20,450
|
|
|
|
(13,450 |
) |
Net
cash used in discontinued operations:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
(172 |
) |
|
|
(130 |
) |
Investing
activities
|
|
|
(685 |
) |
|
|
-
|
|
Net
cash used in discontinued operations
|
|
|
(857 |
) |
|
|
(130 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
19,593
|
|
|
|
(13,580 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
202,840
|
|
|
|
148,152
|
|
Cash
and cash equivalents at end of period
|
|
$ |
222,433
|
|
|
$ |
134,572
|
|
TRIARC
COMPANIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
CASH FLOWS (Continued)
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
Thousands)
|
|
|
|
(Unaudited)
|
|
Details
of cash flows related to investments:
|
|
|
|
|
|
|
Operating
investment adjustments, net:
|
|
|
|
|
|
|
Proceeds
from sales of trading securities and net settlements of trading
derivatives
|
|
$ |
7,399,884
|
|
|
$ |
6,018
|
|
Cost
of trading securities purchased
|
|
|
(6,831,622 |
) |
|
|
(230 |
) |
Net
recognized (gains) losses from trading securities, derivatives
and short
positions in securities
|
|
|
3,034
|
|
|
|
(1,842 |
) |
Other
net recognized gains, net of other than temporary losses
|
|
|
(7,766 |
) |
|
|
(29,715 |
) |
Other
|
|
|
176
|
|
|
|
956
|
|
|
|
$ |
563,706
|
|
|
$ |
(24,813 |
) |
Investing
investment activities, net:
|
|
|
|
|
|
|
|
|
Proceeds
from sales and maturities of available-for-sale securities and
other
investments
|
|
$ |
157,804
|
|
|
$ |
133,043
|
|
Cost
of available-for-sale securities and other investments
purchased
|
|
|
(76,379 |
) |
|
|
(71,484 |
) |
Proceeds
from securities sold short
|
|
|
8,624,893
|
|
|
|
-
|
|
Payments
to cover short positions in securities
|
|
|
(8,938,649 |
) |
|
|
-
|
|
Payments
under repurchase agreements, net
|
|
|
(521,356 |
) |
|
|
-
|
|
Decrease
(increase) in restricted cash collateralizing securities obligations
or
held for investment
|
|
|
332,867
|
|
|
|
(28,546 |
) |
|
|
$ |
(420,820 |
) |
|
$ |
33,013
|
|
(1) Net
cash provided by continuing operating activities for the nine months ended
October 1, 2006 reflects the significant net sales of trading securities
and net
settlements of trading derivatives, the proceeds from which were principally
used to cover short positions in securities and make payments under repurchase
agreements. Of these activities, $569,028,000 of the net sales of
trading securities and net settlements of trading derivatives and $309,448,000
of the net payments to cover short positions in securities and net payments
under 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 that date. Accordingly, the
Company does not have any cash flows associated with the Opportunities Fund
for
the nine months ended September 30, 2007. Under accounting principles
generally accepted in the United States of America, the net sales of trading
securities and the net settlements of trading derivatives must be reported
in
continuing operating activities, while the net payments to cover securities
sold
short and net payments under 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
September 30, 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 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
nine-month periods and its cash flows for the nine-month periods, set forth
in
the following paragraph. The results of operations for the
three-month and nine month periods ended September 30, 2007 are not necessarily
indicative of the results to be expected for the full 2007 fiscal
year. In that regard, if the potential divestiture of a significant
subsidiary described in Note 3 occurs, it could, depending on the timing,
impact
the results for the fourth quarter of the 2007 fiscal year. In
addition, the form of the potential divestiture could result in the presentation
of the significant subsidiary as a discontinued operation in all current
and
historical financial statements. In addition, the significant
corporate restructuring charges described in Note 6 affected the 2007 first
nine
months and, to a lesser extent, are expected to affect our corporate costs
in
the 2007 fourth quarter. 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 nine months of fiscal 2006 commenced
on January 2, 2006 and ended on October 1, 2006, with its third quarter
commencing on July 3, 2006, except that Deerfield, the Opportunities Fund,
through its effective redemption on September 29, 2006, and the DM Fund
are
included on a calendar-period basis. The Company’s first nine months
of fiscal 2007 commenced on January 1, 2007 and ended on September 30,
2007,
with its third quarter commencing on July 2, 2007, except that Deerfield
is
included on a calendar-period basis. The periods from July 3, 2006 to
October 1, 2006 and January 2, 2006 to October 1, 2006 are referred to
herein as
the three-month and nine month periods ended October 1, 2006,
respectively. The periods from July 2, 2007 to September 30, 2007 and
January 1, 2007 to September 30, 2007 are referred to herein as the three-month
and nine month periods ended September 30, 2007, respectively. Each
quarter contained 13 weeks and each nine-month period contained 39
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, nine-month periods,
quarter-end(s) and nine-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 the Financial Accounting
Standards Board ("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 September 30, 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
|
|
|
(17,231 |
) |
Cash
dividends
|
|
|
(24,162 |
) |
Accrued
dividends on nonvested restricted stock
|
|
|
(38 |
) |
Balance
at September 30, 2007
|
|
$ |
142,020
|
|
(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 nine month periods ended October 1, 2006 have been
restated. For the three month period ended October 1, 2006, the
restatement resulted in an increase in pre‑tax income of $217,000, or $139,000
net of income taxes, representing an increase in basic and diluted income
per
share of class A and class B common stock of less than $.01. For the
nine month period ended October 1, 2006, the restatement resulted in a
decrease
in pre-tax loss of $651,000, or $417,000 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 pre-tax adjustments of $217,000 and
$651,000 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 nine month
periods
ended October 1, 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 $482,000
and
$1,448,000 of interest related to uncertain income tax positions during
the
three month and nine month periods ended September 30, 2007, respectively,
included in “Interest expense” in the accompanying condensed consolidated
statements of operations. The Company has approximately $1,956,000
and $3,404,000 of accrued interest and penalties at January 1, 2007 and
September 30, 2007, respectively, associated with its reserves for uncertain
income tax positions. The accrued interest at September 30, 2007
consists of $759,000 included in “Accrued expenses and other current
liabilities” and $2,645,000 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
28, 2003 expired during 2007 and years prior thereto are no longer subject
to
examination. The Company’s Federal income tax returns for years
subsequent to December 28, 2003 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 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 September 30, 2007, the Company had $13,157,000 and
$14,074,000, 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 September 28, 2008.
(3)
|
Potential
Deerfield Divestiture
|
On
April
19, 2007, the Company entered into a definitive agreement, which the
parties mutually terminated on October 19, 2007, whereby Deerfield
Triarc Capital Corp. (the “REIT”), a real estate investment trust managed by
Deerfield, would have acquired Deerfield. Deerfield represents
substantially all of the Company’s asset management business segment (see Note
12). At September 30, 2007, the Company owned 2.6% of the REIT and
accounts for its investment in the REIT in accordance with the equity
method. On August 9, 2007, the REIT stockholders approved the
acquisition of Deerfield, which had been expected to close in the third
quarter of 2007. Due to instability in the credit markets, the REIT
was not able to complete, on acceptable terms, the financing for the cash
portion of the purchase price necessary to consummate the
transaction. The Company is continuing to explore with the REIT
revised terms and conditions as well as other options, including a sale of
its
interest in Deerfield to another buyer or a spin-off to the Company’s
shareholders. However, there can be no assurance that any of these
options (collectively, the “Potential Deerfield Divestiture”) will
occur.
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 Rights of one of
those executives was exercisable 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 interest in Deerfield concurrent with the closing
of
the sale of Deerfield contemplated by the April 19, 2007 definitive agreement
(the “Put Exercise”). However, the Put Exercise terminated
concurrently with the mutual termination of the definitive
agreement. The Put Rights continue to be available to these
executives under certain circumstances.
(4)
|
Comprehensive
Income (Loss)
|
The
following is a summary of the components of comprehensive income (loss),
net of
income taxes and minority interests (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
687
|
|
|
$ |
3,731
|
|
|
$ |
(8,848 |
) |
|
$ |
(17,231 |
) |
Net
unrealized gains (losses), including reclassification of prior
period
unrealized losses (gains), on available-for-sale securities (see
below)
|
|
|
2,868
|
|
|
|
(1,569 |
) |
|
|
5,649
|
|
|
|
(8,636 |
) |
Net
unrealized gains (losses) on cash flow hedges (see below)
|
|
|
(2,750 |
) |
|
|
(2,543 |
) |
|
|
223
|
|
|
|
(2,409 |
) |
Net
change in currency translation adjustment
|
|
|
11
|
|
|
|
381
|
|
|
|
21
|
|
|
|
651
|
|
Comprehensive
income (loss)
|
|
$ |
816
|
|
|
$ |
-
|
|
|
$ |
(2,955 |
) |
|
$ |
(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
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) arising during the period
|
|
$ |
2,695
|
|
|
$ |
(2,145 |
) |
|
$ |
8,064
|
|
|
$ |
3,639
|
|
Reclassifications
of prior period unrealized holding gains into net income or
loss
|
|
|
(1,537 |
) |
|
|
(426 |
) |
|
|
(150 |
) |
|
|
(16,782 |
) |
Unrealized
holding gain arising from the reclassification of an investment
accounted
for under the equity method to an available-for-sale
investment
|
|
|
-
|
|
|
|
- |
|
|
|
-
|
|
|
|
550
|
|
Equity
in change in unrealized holding gains (losses) arising during the
period
|
|
|
2,622
|
|
|
|
301
|
|
|
|
123
|
|
|
|
(821 |
) |
|
|
|
3,780
|
|
|
|
(2,270 |
) |
|
|
8,037
|
|
|
|
(13,414 |
) |
Income
tax (provision) benefit
|
|
|
(1,607 |
) |
|
|
861
|
|
|
|
(3,177 |
) |
|
|
4,860
|
|
Minority
interests in change in unrealized holding gains and losses of a
consolidated subsidiary
|
|
|
695
|
|
|
|
(160 |
) |
|
|
789
|
|
|
|
(82 |
) |
|
|
$ |
2,868
|
|
|
$ |
(1,569 |
) |
|
$ |
5,649
|
|
|
$ |
(8,636 |
) |
The
following is a summary of the components of the net unrealized gains (losses)
on
cash flow hedges included in other comprehensive income (loss) (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) arising during the period
|
|
$ |
(1,943 |
) |
|
$ |
(1,094 |
) |
|
$ |
1,552
|
|
|
$ |
(296 |
) |
Reclassifications
of prior period unrealized holding gains into net income or
loss
|
|
|
(557 |
) |
|
|
(513 |
) |
|
|
(961 |
) |
|
|
(1,546 |
) |
Equity
in change in unrealized holding losses arising during the
period
|
|
|
(1,910 |
) |
|
|
(2,440 |
) |
|
|
(215 |
) |
|
|
(2,006 |
) |
|
|
|
(4,410 |
) |
|
|
(4,047 |
) |
|
|
376
|
|
|
|
(3,848 |
) |
Income
tax (provision) benefit
|
|
|
1,660
|
|
|
|
1,504
|
|
|
|
(153 |
) |
|
|
1,439
|
|
|
|
$ |
(2,750 |
) |
|
$ |
(2,543 |
) |
|
$ |
223
|
|
|
$ |
(2,409 |
) |
(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 periods ended October 1, 2006
and September 30, 2007 was allocated between the Class A Common Stock and
Class
B Common Stock based on the actual dividend payment ratio. Net loss
for the nine month periods ended October 1, 2006 and September 30, 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 periods ended October 1, 2006 and
September
30, 2007 have 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 and in the three month period ended September
30, 2007,
nonvested restricted Class B Common Shares granted in 2007 (the “Nonvested
Shares”), each 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”), to the extent they are dilutive, as of
October 1, 2006 and September 30, 2007, as applicable, each as presented
in the
table below. The shares used to calculate diluted income per share
for the three month periods ended October 1, 2006 and September 30, 2007
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 nine month
periods ended October 1, 2006 and September 30, 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 nine
month periods ended October 1, 2006 and the nine month period ended September
30, 2007 was less than $.01 and, therefore, such effect is not presented
on the
condensed consolidated statements of operations. In addition, the
reported basic and diluted income per share for each of the three month
periods
ended October 1, 2006 and September 30, 2007 are the same for each respective
class of common stock since the difference is less than $.01.
During
the nine months ended October 1, 2006, an aggregate of $167,380,000 of the
Convertible Notes were converted or effectively converted into 4,184,000
and
8,369,000 shares of the Company’s Class A Common Stock and Class B Common Stock,
respectively, 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 after their respective
conversion dates.
The
only
Company securities as of September 30, 2007 that could dilute basic income
per
share for periods subsequent to September 30, 2007 are (1) outstanding stock
options which can be exercised into 459,000 shares and 4,881,000 shares of
the
Company’s Class A Common Stock and Class B Common Stock, respectively, (2)
193,000 Nonvested Shares which were granted in 2007 and vest over three years,
(3) 33,000 Restricted Shares of the Company’s Class B Common Stock which were
granted in 2007 and (4) $2,100,000 principal amount 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
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Class
A Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
227
|
|
|
$ |
1,072
|
|
|
$ |
(2,692 |
) |
|
$ |
(5,334 |
) |
Discontinued
operations
|
|
|
(28 |
) |
|
|
-
|
|
|
|
(98 |
) |
|
|
(47 |
) |
Net
income (loss)
|
|
$ |
199
|
|
|
$ |
1,072
|
|
|
$ |
(2,790 |
) |
|
$ |
(5,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
557
|
|
|
$ |
2,659
|
|
|
$ |
(5,844 |
) |
|
$ |
(11,748 |
) |
Discontinued
operations
|
|
|
(69 |
) |
|
|
-
|
|
|
|
(214 |
) |
|
|
(102 |
) |
Net
income (loss)
|
|
$ |
488
|
|
|
$ |
2,659
|
|
|
$ |
(6,058 |
) |
|
$ |
(11,850 |
) |
The
number of shares used to calculate basic and diluted income (loss) per share
were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Class
A Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
27,672
|
|
|
|
28,882
|
|
|
|
27,087
|
|
|
|
28,821
|
|
Dilutive
effect of stock options
|
|
|
957
|
|
|
|
115
|
|
|
|
-
|
|
|
|
-
|
|
Contingently
issuable Restricted Shares
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
shares
|
|
|
28,716
|
|
|
|
28,997
|
|
|
|
27,087
|
|
|
|
28,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
60,184
|
|
|
|
63,655
|
|
|
|
58,822
|
|
|
|
63,478
|
|
Dilutive
effect of stock options
|
|
|
2,246
|
|
|
|
650
|
|
|
|
-
|
|
|
|
-
|
|
Contingently
issuable Restricted Shares
|
|
|
427
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive
effect of Nonvested Shares
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
shares
|
|
|
62,857
|
|
|
|
64,362
|
|
|
|
58,822
|
|
|
|
63,478
|
|
(6)
|
Facilities
Relocation and Corporate
Restructuring
|
The
facilities relocation and corporate restructuring charges for the nine
month
period ended October 1, 2006 consisted of $578,000 related to the Company’s
restaurant business segment and $3,165,000 of general corporate
charges. The charges for the nine month period ended September 30,
2007 consist of $315,000 related to the Company’s restaurant business segment
and $80,939,000 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 nine month period ended October 1, 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 principally represents
a
lease termination fee the Company incurred to be released from the Rye
Brook
lease during the 2006 third quarter. The Company recognized
additional facilities relocation adjustments in our restaurant business
segment
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 nine month period ended September 30, 2007 principally
related to the ongoing transfer of substantially all of Triarc’s senior
executive responsibilities to the Arby’s Restaurant Group, Inc. (“ARG”)
executive team in Atlanta, Georgia (the “Corporate
Restructuring”). In April 2007, when the Company entered into the
definitive agreement to sell Deerfield to the REIT as described in Note
3, it
announced that 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 the then President and
Chief
Operating Officer, (the “Former 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 ($46,773,000 at September 30, 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 ($23,386,000 at September 30, 2007), both subject to applicable
withholding taxes. The Company has funded the payment obligations to
the Former 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 $1,746,000 for the three
month period ended September 30, 2007 includes severance due to a current
executive, excluding incentive compensation that is due to him for his
2007
period of employment with the Company and including applicable employer
payroll
taxes, partially offset by a $5,274,000 decline in the fair value of the
investments underlying the payment entitlements under the Contractual
Settlements. Under GAAP, we are unable to recognize investment
losses for unrealized net decreases in the fair value of the investments
in the
2007 Trusts that are accounted for under the cost method of accounting
until the 2007 Trust assets are distributed. The general corporate
charge of $80,939,000 for the nine months ended September 30, 2007 includes
the
fair value of the cash and investments placed in the 2007 Trusts under the
Contractual Settlements as of July 1, 2007, partially offset by a decline
of
$5,274,000 in the fair value of the investments underlying those payment
entitlements, as well as severance due to another former executive and
a current
executive, as described above. The three and nine-month periods also
include a loss of $835,000 on properties and other assets at the Company’s
former New York headquarters, principally reflecting assets for which the
appraised value was less than book value, sold during the 2007 third quarter
to
an affiliate of the Former Executives (see Note 10), all as part of the
Corporate Restructuring. The Company expects to incur additional
severance and consulting fees of $2,984,000 with respect to other New York
headquarters’ executives and employees principally during the fourth quarter of
2007 and the first half of 2008. The mutual termination of the sale
agreement disclosed in Note 3 will have no effect on the completion of
the
transfer of responsibilities to ARG.
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 nine month periods ended October 1, 2006 and September
30,
2007 are as follows (in thousands):
|
|
Nine
Months Ended
|
|
|
|
October
1, 2006
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
January
1,
|
|
|
Provisions
|
|
|
|
|
|
October
1,
|
|
|
|
2006
|
|
|
(Reductions)
|
|
|
Payments
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
$ |
3,812
|
|
|
$ |
668
|
|
|
$ |
(3,602 |
) |
|
$ |
878
|
|
Employee
relocation costs
|
|
|
1,544
|
|
|
|
(136 |
) |
|
|
(837 |
) |
|
|
571
|
|
Office
relocation costs
|
|
|
260
|
|
|
|
(33 |
) |
|
|
(124 |
) |
|
|
103
|
|
Lease
termination costs
|
|
|
774
|
|
|
|
79
|
|
|
|
(430 |
) |
|
|
423
|
|
Total
Restaurant Business Segment
|
|
|
6,390
|
|
|
|
578
|
|
|
|
(4,993 |
) |
|
|
1,975
|
|
General
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
termination costs
|
|
|
1,535
|
|
|
|
3,165
|
|
|
|
(4,700 |
) |
|
|
-
|
|
|
|
$ |
7,925
|
|
|
$ |
3,743
|
|
|
$ |
(9,693 |
) |
|
$ |
1,975
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Total
|
|
|
Expected
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
Asset
|
|
|
September
30,
|
|
|
Incurred
|
|
|
to
be
|
|
|
|
2006
|
|
|
Provisions
|
|
|
Payments
|
|
|
Write-offs
|
|
|
2007
|
|
|
to
Date
|
|
|
Incurred
|
|
Restaurant
Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
$ |
340
|
|
|
$ |
-
|
|
|
$ |
(277 |
) |
|
$ |
-
|
|
|
$ |
63
|
|
|
$ |
5,174
|
|
|
$ |
5,174
|
|
Employee
relocation costs
|
|
|
134
|
|
|
|
315 |
(a) |
|
|
(115 |
) |
|
|
-
|
|
|
|
334
|
|
|
|
4,209
|
|
|
|
4,209
|
|
Office
relocation costs
|
|
|
45
|
|
|
|
-
|
|
|
|
(45 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
1,463
|
|
|
|
1,463
|
|
Lease
termination costs
|
|
|
302
|
|
|
|
-
|
|
|
|
(302 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
819
|
|
|
|
819
|
|
|
|
|
821
|
|
|
|
315
|
|
|
|
(739 |
) |
|
|
-
|
|
|
|
397
|
|
|
|
11,665
|
|
|
|
11,665
|
|
Non-cash
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense from modified stock awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
612
|
|
|
|
612
|
|
Loss
on disposal of properties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107
|
|
|
|
107
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
719
|
|
|
|
719
|
|
Total
Restaurant Business Segment
|
|
|
821
|
|
|
|
315
|
|
|
|
(739 |
) |
|
|
-
|
|
|
|
397
|
|
|
|
12,384
|
|
|
|
12,384
|
|
General
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation and consulting fees
|
|
|
-
|
|
|
|
80,104 |
(b) |
|
|
(2,183 |
)(c) |
|
|
-
|
|
|
|
|
|
|
|
80,104
|
|
|
|
83,088
|
|
Non-cash
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on sale of properties and other assets
|
|
|
-
|
|
|
|
835
|
|
|
|
-
|
|
|
|
(835 |
) |
|
|
-
|
|
|
|
835
|
|
|
|
835
|
|
Total
general corporate
|
|
|
-
|
|
|
|
80,939
|
|
|
|
(2,183 |
) |
|
|
(835 |
) |
|
|
77,921
|
|
|
|
80,939
|
|
|
|
83,923
|
|
|
|
$ |
821
|
|
|
$ |
81,254
|
|
|
$ |
(2,922 |
) |
|
$ |
(835 |
) |
|
$ |
78,318 |
(d) |
|
$ |
93,323
|
|
|
$ |
96,307
|
|
|
(a)
|
Reflects
change in estimate of total cost to be
incurred.
|
|
(b)
|
Includes
original value of investments underlying the Contractual Settlements
as of
June 29, 2007, as adjusted primarily for a decline in their fair
value of
$5,274,000 recorded during the third quarter of
2007.
|
|
(c)
|
Represents
payroll taxes for the Former Executives in connection with the
Contractual
Settlements.
|
|
(d)
|
Balance
consists of $36,163,000 reported as “Deferred compensation payable to
related parties” included in current liabilities and $42,155,000 included
in “Accrued expenses and other current liabilities” in the accompanying
condensed consolidated balance sheet as of September 30,
2007.
|
(7)
|
Loss
on Early Extinguishments of
Debt
|
The
Company recorded losses on early extinguishments of debt aggregating $194,000
and $13,671,000 in the three month and nine month periods ended October
1, 2006,
respectively, consisting of (1) $74,000 and $12,652,000, respectively,
related
to conversions of the Company’s Convertible Notes and (2) $120,000 and
$1,019,000, respectively, related to prepayments of term loans (the “Term
Loans”) under the Company’s senior secured term loan facility.
During
the nine months ended October 1, 2006, an aggregate of $167,380,000 principal
amount of the Company’s Convertible Notes were converted or effectively
converted into an aggregate of 4,184,000 Class A Common Shares and 8,369,000
Class B Common Shares. In order to induce such effective conversions,
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 connection with these conversions and effective
conversions of the Convertible Notes, the Company recorded a loss on early
extinguishments of debt of $12,652,000 during the nine month period ended
October 1, 2006 consisting of the premiums aggregating $8,694,000, the
write-off
of $3,884,000 of related previously unamortized deferred financing costs
and
$74,000 of legal fees related to the conversions.
In
June and
September 2006, the Company prepaid $45,000,000 and $6,000,000, respectively,
of
principal amount of the Term Loans from excess cash. In connection
with these prepayments, the Company recorded losses on early extinguishments
of
debt of $120,000 and $1,019,000 during the three month and nine month
periods ended October 1, 2006, respectively, representing the write-off
of
related previously 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 nine month periods ended October 1,
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 finalization
of
the leasing arrangements for the two closed restaurants.
The
loss
from discontinued operations consisted of the following (in
thousands):
|
|
Three
Months
|
|
|
|
|
|
|
Ended
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
215
|
|
|
$ |
544
|
|
|
$ |
-
|
|
Loss
from operations before benefit from income taxes
|
|
|
(161 |
) |
|
|
(521 |
) |
|
|
-
|
|
Benefit
from income taxes
|
|
|
64
|
|
|
|
209
|
|
|
|
-
|
|
|
|
|
(97 |
) |
|
|
(312 |
) |
|
|
-
|
|
Loss
on disposal of businesses before benefit from income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
(247 |
) |
Benefit
from income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(149 |
) |
|
|
$ |
(97 |
) |
|
$ |
(312 |
) |
|
$ |
(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,
|
|
|
September
30,
|
|
|
|
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
|
|
|
|
525
|
|
Liabilities
relating to the Restaurant Discontinued Operations
|
|
|
202
|
|
|
|
86
|
|
|
|
$ |
9,254
|
|
|
$ |
9,027
|
|
The
Company expects that the
liquidation of the remaining liabilities associated with all of these
discontinued operations as of September 30, 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
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost (consisting entirely of plan administrative expenses)
|
|
$ |
24
|
|
|
$ |
22
|
|
|
$ |
71
|
|
|
$ |
67
|
|
Interest
cost
|
|
|
54
|
|
|
|
55
|
|
|
|
163
|
|
|
|
165
|
|
Expected
return on the plans’ assets
|
|
|
(66 |
) |
|
|
(58 |
) |
|
|
(197 |
) |
|
|
(174 |
) |
Amortization
of unrecognized net loss
|
|
|
12
|
|
|
|
7
|
|
|
|
36
|
|
|
|
20
|
|
Net
periodic pension cost
|
|
$ |
24
|
|
|
$ |
26
|
|
|
$ |
73
|
|
|
$ |
78
|
|
(10)
|
Transactions
with Related Parties
|
In
connection with the Corporate
Restructuring referred to in Note 6, the Company entered into a series of
agreements with the Former Executives and a management company (the “Management
Company”) formed by the Former 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
discussed
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 former 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 nine
month periods ended October 1, 2006 and September 30, 2007 amounted to
$2,827,000 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. Subsequent to June 29, 2007, the Company is continuing to
provide, and is being reimbursed for, some minimal support services to
the
Management Company. As discussed further below, effective June 29,
2007 the Principals and 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 nine month period ended September
30, 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 Former 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 provides the Company with
a
range of professional and strategic services. Under the Services
Agreement, the Company is paying 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. The Company incurred $3,000,000 of such service fees for
the nine month period ended September 30, 2007, which are included in “General
and administrative, excluding depreciation and amortization” in the accompanying
condensed consolidated statements of operations.
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 $99,267,000
as
of September 30, 2007. As part of the agreements with the
Former 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 in the
Equities Account as of September 30, 2007 are reported as noncurrent assets
in
the accompanying condensed consolidated balance sheet and principally consist
of
$61,296,000 included in “Investments” and $37,605,000 included in “Restricted
cash equivalents.”
Prior
to 2006
the Company provided aggregate incentive compensation of $22,500,000 to
the
Former 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 Former 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 (reversal)
of $(274,000) and $2,516,000 was recognized in the nine month periods ended
October 1, 2006 and September 30, 2007, respectively, for the net changes
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 Former Executives’ resignation and the assets in the Deferred
Compensation Trusts were either distributed to the Former Executives or
used to
satisfy withholding taxes. In addition, the Former Executives paid
$801,000 to the Company during the third quarter of 2007 which represented
the
balance of withholding taxes payable on their behalf and which had been
recorded
during the second quarter of 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
(loss) from investments in the Deferred Compensation Trusts of $(1,943,000)
and
$8,653,000 in the nine month periods ended October 1, 2006 and September
30,
2007, respectively. The net investment losses during the nine month
period ended October 1, 2006 consisted of an impairment charge of $2,093,000
related to an investment fund within the Deferred Compensation Trusts which
experienced a significant decline in market value which the Company deemed
to be
other than temporary and management fees of $27,000, less interest income
of
$176,000 and a $1,000 adjustment to the realized gain from the sale of
a
cost-method investment in the Deferred Compensation Trusts. The net
investment income (loss) during the nine month period ended September 30,
2007
consisted of $8,449,000 of realized gains almost entirely attributable
to the
transfer of the investments to the Former Executives and $222,000 of interest
income, less investment management fees of $18,000. The other than
temporary loss, realized gains, interest income and investment management
fees
are included in “Investment income, net” and deferred compensation expense
(reversal) 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 $2,929,000 at September 30,
2007 will be recognized when that investment is sold.
In
October 2007, there was a settlement of a lawsuit related to an investment
that
had been included in the Deferred Compensation Trusts. The terms of
the Contractual Settlements disclosed in Note 6 included provisions pursuant
to
which the Former Executives would be responsible for any settlement amounts
under this lawsuit. As a result, the Former Executives are
responsible for the approximate $1,500,000 settlement cost. The
Company reduced both its deferred compensation expense included in “General and
administrative, excluding depreciation and amortization” and its net investment
income in the accompanying condensed consolidated statements of operations
for
the nine months ended September 30, 2007 to reflect the responsibility of
the
Former Executives for the settlement. We received the reimbursement
from the Former Executives, net of applicable taxes withheld which are expected
to be refunded to us in connection with the respective payroll tax return
filings in early 2008, and paid the settlement amount during the fourth quarter
of 2007.
On
June
29 and July 1, 2007, the Company funded the payment of the obligations
due to
the Former Executives under the Contractual Settlements disclosed 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 Former
Executives on December 30, 2007, six months following their June 29, 2007
Separation Date. As of September 30, 2007, the aggregate obligation
to the Former Executives related to the 2007 Trusts was $36,163,000 and
is
reported as “Deferred compensation payable to related parties” classified as a
current liability in the accompanying condensed consolidated balance
sheet. A reversal of corporate restructuring charges of $5,274,000
was recognized in the three month period ended September 30, 2007 for net
decreases in the fair value of the investments held in the 2007 Trusts
underlying the payment entitlements under the Contractual Settlements primarily
related to a decrease in value of the REIT shares held in the 2007
Trusts. As of September 30, 2007, the assets in the 2007 Trusts
consist of $20,543,000 included in “Short-term investments not pledged as
collateral” (which had a fair value of $23,553,000), and $12,610,000 included in
“Cash and cash equivalents” in the accompanying condensed consolidated balance
sheet.
In
July
2007, as part of the Corporate Restructuring, the Company sold substantially
all
of the properties and other assets it owned and used at its former 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 recognized a loss of $835,000, which is included in the corporate
restructuring charge as disclosed in Note 6, 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 is subleasing (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 is paying the Company approximately $119,000
per month which includes an amount equal to the rent the Company pays plus
a
fixed amount reflecting a portion of the increase in the fair market value
of
the Company’s leasehold interest as well as amounts 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 sixty days
notice. The Company recognized $358,000 from the Management Company
under the Sublease for the nine month period ended September 30, 2007 which
has
been recorded as a reduction of “General and administrative, excluding
depreciation and amortization” in the accompanying condensed consolidated
statement of operations.
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 on July 31, 2010, 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. As of September 30, 2007, the Company was due $406,000,
which is included in “Accounts and notes receivable” in the accompanying
condensed consolidated balance sheet, from the Principals and the Management
Company for their use of the aircraft. The amount due was recorded as
a reduction of “General and administrative, excluding depreciation and
amortization” in the accompanying condensed consolidated statement of operations
for the nine month period ended September 30, 2007.
The
Company intends to assign its 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 been
paying the monthly management fee and other costs related to the fractional
interest in the helicopter since July 1, 2007 on behalf of the
Company. It is expected that subsequent to the assignment, the
Company will have no further rights or obligations under the agreements
applicable to the fractional interest.
All
of
these agreements with the Former 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 described above, during the third
quarter of 2007 the Company paid $1,600,000 to settle a post-closing purchase
price adjustment provided for in the agreement and plan of merger pursuant
to
which the Company acquired RTM. The sellers of RTM included certain
current officers of a subsidiary of the Company and a current director of
the
Company. The Company has reflected such payment as an increase in
“Goodwill.”
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 amounts
spent 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,
the Company expects that the final resolution of this matter will not have
a
material effect on the Company’s financial position or results of
operations.
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 approximately $800,000 as
of September 30, 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 financial position or results of operations.
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 potential divestiture
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, 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
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
$ |
293,896
|
|
|
$ |
307,273
|
|
|
$ |
862,915
|
|
|
$ |
893,421
|
|
Asset
Management
|
|
|
17,766
|
|
|
|
16,940
|
|
|
|
48,390
|
|
|
|
49,659
|
|
Consolidated
revenues
|
|
$ |
311,662
|
|
|
$ |
324,213
|
|
|
$ |
911,305
|
|
|
$ |
943,080
|
|
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
$ |
39,349
|
|
|
$ |
44,507
|
|
|
$ |
108,506
|
|
|
$ |
119,820
|
|
Asset
Management
|
|
|
3,760
|
|
|
|
5,551
|
|
|
|
8,964
|
|
|
|
11,880
|
|
General
corporate (a)
|
|
|
(14,024 |
) |
|
|
(8,092 |
) |
|
|
(47,214 |
) |
|
|
(115,316 |
) |
Consolidated
EBITDA
|
|
|
29,085
|
|
|
|
41,966
|
|
|
|
70,256
|
|
|
|
16,384
|
|
Less
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
|
13,459
|
|
|
|
14,661
|
|
|
|
36,455
|
|
|
|
43,146
|
|
Asset
Management
|
|
|
1,698
|
|
|
|
4,289
|
|
|
|
4,629
|
|
|
|
8,003
|
|
General
corporate
|
|
|
1,093
|
|
|
|
1,072
|
|
|
|
3,230
|
|
|
|
3,262
|
|
Consolidated
Depreciation and Amortization
|
|
|
16,250
|
|
|
|
20,022
|
|
|
|
44,314
|
|
|
|
54,411
|
|
Operating
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
|
25,890
|
|
|
|
29,846
|
|
|
|
72,051
|
|
|
|
76,674
|
|
Asset
Management
|
|
|
2,062
|
|
|
|
1,262
|
|
|
|
4,335
|
|
|
|
3,877
|
|
General
corporate (a)
|
|
|
(15,117 |
) |
|
|
(9,164 |
) |
|
|
(50,444 |
) |
|
|
(118,578 |
) |
Consolidated
operating profit (loss)
|
|
|
12,835
|
|
|
|
21,944
|
|
|
|
25,942
|
|
|
|
(38,027 |
) |
Interest
expense
|
|
|
(34,426 |
) |
|
|
(15,489 |
) |
|
|
(100,048 |
) |
|
|
(46,164 |
) |
Loss
on early extinguishments of debt
|
|
|
(194 |
) |
|
|
-
|
|
|
|
(13,671 |
) |
|
|
-
|
|
Investment
income (loss), net
|
|
|
23,021
|
|
|
|
(1,083 |
) |
|
|
74,767
|
|
|
|
39,690
|
|
Gain
on sale of unconsolidated business
|
|
|
3
|
|
|
|
-
|
|
|
|
2,259
|
|
|
|
2,558
|
|
Other
income, net
|
|
|
318
|
|
|
|
1,101
|
|
|
|
5,754
|
|
|
|
3,308
|
|
Consolidated
income (loss) from continuing operations before income taxes and
minority
interests
|
|
$ |
1,557
|
|
|
$ |
6,473
|
|
|
$ |
(4,997 |
) |
|
$ |
(38,635 |
) |
(a)
|
General
corporate EBITDA and Operating loss includes charges described
in Note 6
for facilities relocation and corporate restructuring of $2,165
and $1,746
for the three months ended October 1, 2006 and September 30, 2007,
respectively, and $3,165 and $80,939 for the nine months ended
October 1,
2006 and September 30, 2007,
respectively.
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
Identifiable
assets:
|
|
|
|
|
|
|
Restaurants
|
|
$ |
1,079,509
|
|
|
$ |
1,128,475
|
|
Asset
Management
|
|
|
183,733
|
|
|
|
131,247
|
|
General
corporate
|
|
|
297,207
|
|
|
|
270,684
|
|
Consolidated
total assets
|
|
$ |
1,560,449
|
|
|
$ |
1,530,406
|
|
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.”
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. In April 2007 we
entered into a definitive agreement to sell our entire interest in Deerfield
to
Deerfield Triarc Capital Corp., a real estate investment trust managed by
Deerfield which we refer to as the REIT. In October 2007, this
agreement was mutually terminated by the parties because the REIT was unable
to
complete, on acceptable terms, the financing for the cash portion of the
purchase price necessary to consummate the transaction due to instability
in the
credit markets. We are continuing to explore, with the REIT, revised
terms and conditions as well as other options, including a sale of our interest
in Deerfield to another buyer or a spin-off to our shareholders. Upon
the completion of any of these options, which we refer to as the Potential
Deerfield Divestiture, we will no longer earn any asset management and related
fees, have any other items of income and expense related to Deerfield or
have
any minority interests in the results of Deerfield’s
operations. However, there can be no assurance that the Potential
Deerfield Divestiture will occur.
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 nine months
ended
September 30, 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 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 Former 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 $99.3 million
as of September 30, 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 both
our
restaurant business, which may include acquisitions, and, until any Potential
Deerfield Divestiture 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. Historically our goals have also included growing
Deerfield’s assets under management by utilizing the value of its profitable
investment advisory brand and increasing the types of assets under management,
thereby increasing Deerfield’s asset management fee revenues. However, recent
trends including reduced liquidity in the credit markets could materially
limit
Deerfield’s ability to increase assets under management while those conditions
persist.
We
are
currently in the process of a corporate restructuring involving the Potential
Deerfield Divestiture and the disposition of certain other non-restaurant
net
assets. See the discussions of “Facilities Relocation and Corporate
Restructuring” under “Results of Operations” and “Potential Deerfield
Divestiture” 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:
|
·
|
Addition
of selected higher-priced quality items to menus, which appeal
more to
adult tastes;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
Higher
fuel costs which cause a decrease in many consumers’ discretionary income
as well as consumer concerns about the effect of falling home prices
on
consumer confidence;
|
|
·
|
Higher
fuel costs which have increased our utility costs as well as the
cost of
goods we purchase under distribution contracts that became effective
in
the third quarter of 2007;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
Competitive
pressures from an increasing number of franchise opportunities
seeking to
attract qualified franchisees;
|
|
·
|
Legal
or regulatory activity
related to nutritional content or product labeling which could
result in
increased costs; and
|
|
·
|
Higher
commodity prices which
have increased our food
cost.
|
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.
Our
asset
management segment has been affected by current credit market conditions
which
make it difficult to separate short-term market reactions from developing
longer
term trends. However, in recent periods, our asset management
business has experienced the following market events which may develop into
longer term trends:
|
·
|
Increased
volatility and widening of interest rate spreads recently experienced
by
the credit markets triggered by the higher delinquency and default
rates
in the subprime mortgage markets, which is negatively impacting
our
management and related fees from CDOs as well as the fair value
of our CDO
investments and recently has, and could continue to, negatively
impact our
incentive fees from the
REIT.
|
|
·
|
Greater
volatility in market interest rates which will place greater reliance
on
the effectiveness of our interest rate hedging strategies in the
REIT and
other Funds we manage;
|
|
·
|
Decreased
ability to create new CDO transactions due to reduced investor
demand for
the debt obligations typically used to fund those
transactions;
|
|
·
|
Tighter
lending standards imposed by financial institutions which could
result in
either (1) a diminished ability to finance some security
positions in CDOs, the REIT and other Funds or (2) financing on
less
favorable terms; and
|
|
·
|
Reduced
liquidity in the credit markets which could materially limit our
ability
to increase assets under management while such conditions persist,
thereby
limiting our ability to increase, or in some cases maintain, asset
management fees.
|
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 nine-month period of fiscal 2006 commenced on January 2, 2006 and ended
on
October 1, 2006, with our third quarter commencing on July 3, 2006, except
that
Deerfield, the Opportunities Fund through our effective redemption on September
29, 2006 and the DM Fund are included on a calendar-period basis. Our
first nine-month period of fiscal 2007 commenced on January 1, 2007 and ended
on
September 30, 2007, with our third quarter commencing on July 2, 2007, except
that Deerfield is included on a calendar-period basis. When we refer
to the “three months ended October 1, 2006,” or the “2006 third quarter,” and
the “nine months ended October 1, 2006” or the “first nine months of 2006,” we
mean the periods from July 3, 2006 to October 1, 2006 and January 2, 2006
to
October 1, 2006, respectively. When we refer to the “three months
ended September 30, 2007,” or the “2007 third quarter,” and the “nine months
ended September 30, 2007,” or the “first nine months of 2007,” we mean the
periods from July 2, 2007 to September 30, 2007 and January 1, 2007 to September
30, 2007, respectively. Each quarter contained 13 weeks and each
nine-month period contained 39 weeks. All references to years, first
nine months and quarters relate to fiscal periods rather than calendar periods,
except for Deerfield, the Opportunities Fund and the DM Fund.
Presented
below is a table that summarizes our results of operations and compares the
amount and percent of the change (1) between the 2006 third quarter and the
2007
third quarter and (2) between the first nine months of 2006 and the first
nine
months of 2007. We consider certain percentage changes between these
periods to be not measurable, or not meaningful, and we refer to these as
“n/m.” The percentage changes used in the following discussion have
been rounded to the nearest whole percent.
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
Change
|
|
|
October
1,
|
|
|
September
30,
|
|
|
Change
|
|
|
|
2006
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
2006
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(In
Millions Except Percents)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
272.5
|
|
|
$ |
285.5
|
|
|
$ |
13.0
|
|
|
|
5%
|
|
|
$ |
801.9
|
|
|
$ |
830.6
|
|
|
$ |
28.7
|
|
|
|
4%
|
|
Royalties
and franchise and related fees
|
|
|
21.4
|
|
|
|
21.8
|
|
|
|
0.4
|
|
|
|
2%
|
|
|
|
61.0
|
|
|
|
62.9
|
|
|
|
1.9
|
|
|
|
3%
|
|
Asset
management and related fees
|
|
|
17.8
|
|
|
|
16.9
|
|
|
|
(0.9 |
) |
|
|
(5)%
|
|
|
|
48.4
|
|
|
|
49.6
|
|
|
|
1.2
|
|
|
|
2%
|
|
|
|
|
311.7
|
|
|
|
324.2
|
|
|
|
12.5
|
|
|
|
4%
|
|
|
|
911.3
|
|
|
|
943.1
|
|
|
|
31.8
|
|
|
|
3%
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, excluding depreciation and amortization
|
|
|
197.6
|
|
|
|
210.9
|
|
|
|
13.3
|
|
|
|
7%
|
|
|
|
584.0
|
|
|
|
610.8
|
|
|
|
26.8
|
|
|
|
5%
|
|
Cost
of services, excluding depreciation and amortization
|
|
|
7.3
|
|
|
|
6.6
|
|
|
|
(0.7 |
) |
|
|
(10)%
|
|
|
|
18.7
|
|
|
|
19.8
|
|
|
|
1.1
|
|
|
|
6%
|
|
Advertising
and promotions
|
|
|
19.9
|
|
|
|
20.9
|
|
|
|
1.0
|
|
|
|
5%
|
|
|
|
59.8
|
|
|
|
59.3
|
|
|
|
(0.5 |
) |
|
|
(1)%
|
|
General
and administrative, excluding depreciation and
amortization
|
|
|
55.8
|
|
|
|
42.0
|
|
|
|
(13.8 |
) |
|
|
(25)%
|
|
|
|
174.2
|
|
|
|
155.6
|
|
|
|
(18.6 |
) |
|
|
(11)%
|
|
Depreciation
and amortization, excluding amortization of deferred financing
costs
|
|
|
16.2
|
|
|
|
20.0
|
|
|
|
3.8
|
|
|
|
23%
|
|
|
|
44.3
|
|
|
|
54.4
|
|
|
|
10.1
|
|
|
|
23%
|
|
Facilities
relocation and corporate restructuring
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
(0.3 |
) |
|
|
(14)%
|
|
|
|
3.7
|
|
|
|
81.2
|
|
|
|
77.5
|
|
|
|
n/m
|
|
Loss
on settlement of unfavorable franchise rights
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.7
|
|
|
|
-
|
|
|
|
(0.7 |
) |
|
|
(100)%
|
|
|
|
|
298.9
|
|
|
|
302.2
|
|
|
|
3.3
|
|
|
|
1%
|
|
|
|
885.4
|
|
|
|
981.1
|
|
|
|
95.7
|
|
|
|
11%
|
|
Operating
profit (loss)
|
|
|
12.8
|
|
|
|
22.0
|
|
|
|
9.2
|
|
|
|
72%
|
|
|
|
25.9
|
|
|
|
(38.0 |
) |
|
|
(63.9 |
) |
|
|
n/m
|
|
Interest
expense
|
|
|
(34.4 |
) |
|
|
(15.5 |
) |
|
|
18.9
|
|
|
|
55%
|
|
|
|
(100.0 |
) |
|
|
(46.2 |
) |
|
|
53.8
|
|
|
|
54%
|
|
Loss
on early extinguishments of debt
|
|
|
(0.2 |
) |
|
|
-
|
|
|
|
0.2
|
|
|
|
100%
|
|
|
|
(13.7 |
) |
|
|
-
|
|
|
|
13.7
|
|
|
|
100%
|
|
Investment
income (loss), net
|
|
|
23.0
|
|
|
|
(1.1 |
) |
|
|
(24.1 |
) |
|
|
n/m
|
|
|
|
74.8
|
|
|
|
39.7
|
|
|
|
(35.1 |
) |
|
|
(47)%
|
|
Gain
on sale of unconsolidated business
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.3
|
|
|
|
2.6
|
|
|
|
0.3
|
|
|
|
13%
|
|
Other
income, net
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
0.8
|
|
|
|
n/m
|
|
|
|
5.7
|
|
|
|
3.3
|
|
|
|
(2.4 |
) |
|
|
(42)%
|
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
1.5
|
|
|
|
6.5
|
|
|
|
5.0
|
|
|
|
n/m
|
|
|
|
(5.0 |
) |
|
|
(38.6 |
) |
|
|
(33.6 |
) |
|
|
n/m
|
|
(Provision
for) benefit from income taxes
|
|
|
0.3
|
|
|
|
(4.2 |
) |
|
|
(4.5 |
) |
|
|
n/m
|
|
|
|
3.2
|
|
|
|
24.3
|
|
|
|
21.1
|
|
|
|
n/m
|
|
Minority
interests in (income) loss of consolidated subsidiaries
|
|
|
(1.0 |
) |
|
|
1.4
|
|
|
|
2.4
|
|
|
|
n/m
|
|
|
|
(6.7 |
) |
|
|
(2.8 |
) |
|
|
3.9
|
|
|
|
58%
|
|
Income
(loss) from continuing operations
|
|
|
0.8
|
|
|
|
3.7
|
|
|
|
2.9
|
|
|
|
n/m
|
|
|
|
(8.5 |
) |
|
|
(17.1 |
) |
|
|
(8.6 |
) |
|
|
n/m
|
|
Loss
from discontinued operations, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
0.1
|
|
|
|
100%
|
|
|
|
(0.3 |
) |
|
|
-
|
|
|
|
0.3
|
|
|
|
100%
|
|
Loss
on disposal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
n/m
|
|
Loss
from discontinued operations
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
0.1
|
|
|
|
100%
|
|
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
0.2
|
|
|
|
67%
|
|
Net
income (loss)
|
|
$ |
0.7
|
|
|
$ |
3.7
|
|
|
$ |
3.0
|
|
|
|
n/m
|
|
|
$ |
(8.8 |
) |
|
$ |
(17.2 |
) |
|
$ |
(8.4 |
) |
|
|
n/m
|
|
Three
Months Ended September 30, 2007 Compared with Three Months Ended October
1,
2006
Net
Sales
Our
net
sales, which were generated entirely from the Company-owned restaurants,
increased $13.0 million, or 5%, to $285.5 million for the three months ended
September 30, 2007 from $272.5 million for the three months ended October
1,
2006, due to a $15.1 million increase in net sales from the 54 net Company-owned
restaurants we added since October 1, 2006. We opened 58 new
restaurants, with generally higher than average sales volumes, and we acquired
13 restaurants from franchisees since October 1, 2006 as compared with 14
generally underperforming restaurants we closed and 3 restaurants we sold
to
franchisees since October 1, 2006. This increase was partially offset
by a $2.1 million, or 1%, 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 third quarter were negatively impacted by lower sales volume
from a
decline in customer traffic caused by (1) increased competitive pressure
from
larger quick service restaurant operators that have greater economic resources
than us which allows them to focus their promotional and marketing strategies
on
multiple product offerings at the same time and (2) a shift in our marketing
strategy with decreased emphasis on limited time value oriented menu offerings
in the 2007 third quarter as compared with the 2006 third
quarter. These factors were partially offset by the effect of
selective price increases that were implemented in November 2006, price
increases that went into effect in August 2007 under our value program, which
offers a flexible combination of selected menu items for a discounted price,
and
additional selective price increases that were implemented in September
2007.
We
currently anticipate positive same-store sales growth of Company-owned
restaurants for the 2007 fourth quarter, 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, including price increases under our value program and (3)
the
periodic 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 the additional 54 net Company-owned restaurants added
since October 1, 2006 and the approximately 10 new Company-owned restaurants
which are anticipated to open during the fourth quarter 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 15 restaurant leases that are scheduled
for renewal or expiration during the remainder of 2007. We currently
anticipate the renewal or extension of approximately 14 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 $0.4 million, or 2%, to $21.8 million for
the
three months ended September 30, 2007 from $21.4 million for the three months
ended October 1, 2006. This increase reflects higher royalties of (1)
$0.6 million from the 75 franchised restaurants opened since October 1, 2006,
with generally higher than average sales volumes, and the 3 restaurants sold
to
franchisees since October 1, 2006 replacing the royalties from 29 generally
underperforming franchised restaurants closed and the elimination of royalties
from the 13 restaurants we acquired from franchisees since October 1, 2006
and
(2) $0.2 million due to a 1% increase in same-store sales of the franchised
restaurants in the 2007 third quarter as compared with the 2006 third
quarter. These increases in royalties were partially offset by a $0.4
million decrease in franchise and related fees.
Same-store
sales of the franchised restaurants increased during the 2007 third quarter,
whereas same-store sales of the Company-owned restaurants declined, principally
due to (1) the earlier implementation at the franchised restaurants of both
2007
third quarter price increases discussed above under “Net Sales” and (2) the full
period effect for the franchisees of the local marketing initiatives already
used for Company-owned restaurants throughout the 2006 third
quarter.
We
expect
that our royalties and franchise and related fees will be higher for the
2007
fourth quarter as compared with the 2006 fourth quarter 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 since October 1, 2006 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, decreased $0.9 million, or 5%, to $16.9 million
for the three months ended September 30, 2007 from $17.8 million for the
three
months ended October 1, 2006. This decrease principally reflects
(1)
a $1.3 million decrease in incentive fees from the REIT as a result
of
not meeting certain performance thresholds during the 2007 third quarter
due
primarily to losses from interest rate derivatives and asset-backed securities
held by the REIT, (2) a $1.1 million decrease in management fees from the
REIT
as a result of the decline in the value of both the nonvested REIT stock
and
stock options granted to us for the management fees, and a decrease in the
REIT’s net assets on which a portion of our fees are based and (3) a $0.3
million net decrease in structuring and other related fees associated with
new
CDOs. These decreases were partially offset by (1) a $1.1 million net
increase in management fees from the net addition of five CDOs and increased
warehouse fees since October 1, 2006, (2) a $0.4 million increase in management
fees on existing CDOs and Funds other than the REIT and (3) a $0.3 million
increase in incentive fees from existing Funds other than the REIT.
We
expect
that our asset management and related fees for the 2007 fourth quarter will
be
less than the 2006 fourth quarter 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 2006 third quarter we had contingently earned but not recognized
$9.7
million in incentive fees, whereas we had not contingently earned any such
incentive fees as of the end of the 2007 third quarter. In
addition, future management and related fees from CDOs and possibly the
incentive fees from the REIT are expected to continue to 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 $13.3 million, or
7%, to $210.9 million, resulting in a gross margin of 26%, for the three
months
ended September 30, 2007, from $197.6 million, resulting in a gross margin
of
27%, for the three months ended October 1, 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 54 net Company-owned restaurants added since October 1,
2006. The 1% decrease in our overall gross margin reflects the
effects of (1) the price discounting associated with the value program discussed
above under “Net Sales”, (2) increases in our cost of beef and other menu items,
(3) increased costs under new distribution contracts that became effective
in
the third quarter of 2007 and reflect the effects of higher fuel costs and
(4)
increased labor costs due to the Federal minimum wage increase implemented
in
July 2007. These negative factors were partially offset by the
effects of the selective price increases discussed above under “Net
Sales”.
We
anticipate that our gross margin for the 2007 fourth quarter will be relatively
consistent with the gross margin for the current nine-month period as a result
of the continuing effects of the factors discussed above.
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, decreased $0.7 million,
or
10%, to $6.6 million for the three months ended September 30, 2007 from $7.3
million for the three months ended October 1, 2006 principally due to a $0.6
million reversal of incentive compensation which had been recorded in prior
quarters of 2007, but will not be paid, for employees who left Deerfield
in
September 2007, as well as a net decrease of $0.2 million in incentive
compensation for existing employees related to Deerfield’s weaker performance
during the 2007 third quarter.
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 $1.0 million, or 5%, principally due to an increase in
our
portion of advertising spending by an
independently controlled advertising cooperative, which we refer to as
AFA,
due to
the timing of its expenditures in the 2007 third quarter as compared with
the
2006 third quarter.
We
expect
that our advertising and promotions expenses for the 2007 fourth quarter
will be
higher than the 2006 fourth quarter due to additional local electronic media
advertising 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 $13.8 million, or 25%, principally due to (1) a $5.4 million decrease
in corporate general and administrative expenses principally related to (a)
the
resignation effective in June 2007 of the Former Executives and certain other
officers and employees of Triarc who became employees of the Management Company
and are no longer employed by us and (b) 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 provided to us under a two-year
transition services agreement we entered into with the Management Company
which
commenced on June 30, 2007, (2) a $5.3 million decrease in incentive
compensation due to weaker than planned performance at our business segments,
(3) a $2.1 million decrease in outside consultant fees at our restaurant
segment partially offset by a $1.0 million increase in salaries, which partially
replaced those fees, primarily attributable to the strengthening of the
infrastructure of that segment following the acquisition of the Arby’s
restaurants we purchased from RTM Restaurant Group in July 2005, which we
refer
to as the RTM Acquisition and (4) a $1.5 million reduction of training and
travel costs at our restaurant segment as part of an expense reduction
initiative.
Our
corporate general and administrative expenses are expected to be lower during
the 2007 fourth quarter as compared to the 2006 fourth quarter as a result
of
the transition of our corporate headquarters to Atlanta.
Depreciation
and Amortization, Excluding Amortization of Deferred Financing
Costs
Our
depreciation and amortization, excluding amortization of deferred financing
costs, increased $3.8 million, or 23%, principally reflecting (1) a $3.0
million
asset impairment charge related to an internally developed financial model
that
our asset management segment no longer intends to use internally and expects
to
sell at a loss, (2) $1.3 million related to the 54 net
restaurants added since October 1, 2006 and (3) depreciation on additions
to
properties at existing restaurants, all partially offset by $1.9 million
of
asset impairment charges in the third quarter of 2006 related to two
underperforming restaurants which did not recur in the 2007 third
quarter.
Facilities
Relocation and Corporate Restructuring
Our
facilities relocation and corporate restructuring charge of $2.1 million
in the
2006 third quarter was recognized as a general corporate expense and related
to
our decision not to move our corporate offices to a leased facility in Rye
Brook, New York. This charge principally resulted from a lease
termination fee we incurred to be released from the Rye Brook lease during
the
2006 third quarter. The charge of $1.8 million in the 2007 third
quarter consists of a general corporate charge of $1.7 million and a $0.1
million increase in estimated employee relocation costs in connection with
combining our existing restaurant operations with RTM after the RTM
Acquisition. The general corporate charge of $1.7 million principally
related to the ongoing transfer of substantially all of Triarc’s senior
executive responsibilities to the ARG executive team in Atlanta, Georgia
and the
closing of our New York headquarters and reflects a (1) $6.2 million severance
charge principally for a current Triarc executive, excluding incentive
compensation that is due to him for his 2007 period of employment with the
Company and including applicable employer payroll taxes and (2) loss of $0.8
million on properties and other assets at our former New York headquarters,
principally reflecting assets for which the appraised value was less than
book
value, sold during the 2007 third quarter to the Management
Company. These charges were partially offset by a $5.3 million
decline in the fair value of the investments in trusts which were established
to
fund the payment entitlements under the negotiated contractual settlements
in
connection with the resignations effective June 2007 of the Former Executives,
which we refer to as Contractual Settlements, which resulted in a corresponding
reduction of the severance payment obligations to the Former Executives
previously recorded in the second quarter of 2007. The Company had
funded the severance payment obligations to the Former Executives, net of
applicable withholding taxes, by the transfer of cash and investments to
deferred compensation trusts, which we refer to as the 2007 Trusts, in the
second quarter of 2007.
We
expect
to incur additional severance charges and consulting fees aggregating
approximately $3.0 million with respect to other New York headquarters’
executives and employees principally during the 2007 fourth quarter and the
first half of 2008.
Interest
Expense
Interest
expense decreased $18.9 million, or 55%, principally reflecting a $19.3 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 extinguishments of debt of $0.2 million in the 2006 third quarter,
which did not recur in the 2007 third quarter, consisted of (1) $0.1 million
of
legal fees related to conversions 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
(2) a $0.1 million write-off of previously unamortized deferred financing
costs
in connection with a September 2006 prepayment of $6.0 million principal
amount
of our term loan borrowings, which we refer to as the Term Loan, from excess
cash.
Investment
Income (Loss), Net
The
following table summarizes and compares the major components of investment
income (loss), net:
|
|
Three
Months Ended
|
|
|
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
22.4
|
|
|
$ |
2.3
|
|
|
$ |
(20.1 |
) |
Recognized
net gains
|
|
|
3.3
|
|
|
|
1.3
|
|
|
|
(2.0 |
) |
Other
than temporary unrealized losses
|
|
|
(2.8 |
) |
|
|
(5.1 |
) |
|
|
(2.3 |
) |
Distributions,
including dividends
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.1
|
|
Other
|
|
|
(0.2 |
) |
|
|
-
|
|
|
|
0.2
|
|
|
|
$ |
23.0
|
|
|
$ |
(1.1 |
) |
|
$ |
(24.1 |
) |
Our
interest income decreased $20.1 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 sales of our available-for-sale securities and
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 $2.0 million decrease in our recognized
net gains reflects (1) a $7.5 million decline in value of derivatives held
in
the Equities Account and (2) a $3.1 million decline in realized gains on
sales
of available-for-sale securities, both partially offset by an $8.6 million
increase in net gains realized on sales of cost method investments, including
a
$10.1 million gain related to one specific security sold in the 2007 third
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 $2.3 million reflects the recognition of impairment charges related
to
the significant decline in the market values of six of our available-for-sale
investments in CDOs in the 2007 third quarter compared with the significant
decline in the market value of one of our cost method investments in the
2006
third 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
September 30, 2007, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $11.6 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.
Other
Income, Net
Other
income, net, increased $0.8 million, principally reflecting a charge of $1.5
million in the 2006 third quarter, which did not recur in the 2007 third
quarter, for costs recognized related to a strategic business alternative
that
was not pursued partially offset by a $0.7 million decrease in our equity
in the
REIT’s operations.
Income
(Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our
income from continuing operations before income taxes and minority interests
increased $5.0 million to $6.5 million in the 2007 third quarter from $1.5
million in the 2006 third quarter. This increase is attributed
principally to the $9.2 million improvement in our operating profit which
is
largely attributable to the reduction in general and administrative expenses
as
well as the other variances discussed above.
(Provision
For) Benefit From Income Taxes
Despite
income from continuing operations before income taxes and minority interests
in
both three month periods ended September 30, 2007 and October 1, 2006, there
is
a benefit from taxes in the 2006 three-month period as compared to a provision
for income taxes in the 2007 three-month period as a result of the catch
up
effect in 2006 of a year-to-date change in the estimated full year tax
rate.
Minority
Interests in (Income) Loss of Consolidated Subsidiaries
Minority
interests in (income) loss of consolidated subsidiaries decreased $2.4 million
principally due to a loss incurred by Deerfield in the 2007 third quarter
as
compared with income in the 2006 third quarter.
Loss
From Discontinued Operations
The
loss
from discontinued operations in the 2006 third 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 October 1,
2006
has been reclassified to report the results of operations of the two closed
restaurants as discontinued operations.
Net
Income
Our
net
income increased $3.0 million to $3.7 million in the 2007 third quarter from
$0.7 million in the 2006 third quarter. This increase is due to the
after-tax and applicable minority interest effects of the variances discussed
above.
Nine
Months Ended September 30, 2007 Compared with Nine Months Ended October 1,
2006
Net
Sales
Our
net
sales, which were generated entirely from the Company-owned restaurants,
increased $28.7 million, or 4%, to $830.6 million for the nine months ended
September 30, 2007 from $801.9 million for the nine months ended October
1,
2006, due to a $40.1 million increase in net sales from the 54 net Company-owned
restaurants we added since October 1, 2006, consisting of 58 new restaurants
opened, with generally higher than average sales volumes, and 13 restaurants
we
acquired from franchisees since October 1, 2006 as compared with 14 generally
underperforming restaurants we closed and 3 restaurants we sold to franchisees
since October 1, 2006. This increase was partially offset by an $11.4
million, or 1%, decrease in same-store sales of our Company-owned
restaurants. Same-store sales of our Company-owned restaurants in the
first nine months of 2007 were negatively impacted by (1) a continued
deterioration of economic conditions in the Michigan and Ohio regions, where
we
have a disproportionate number of Company-owned restaurants, in the 2007
first
half, (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, (4) the effect of price discounting
under a value program in the 2007 second quarter, which we had expected to
be
more than offset by higher sales volume from increased customer traffic,
but
which was not, (5) increased competitive pressure from larger quick service
restaurant operators that have greater economic resources than us which
allows them to focus their promotional and marketing strategies on multiple
product offerings at the same time and (6) a shift in our marketing strategy
with decreased emphasis on limited time value oriented menu offerings in
the
2007 third quarter as compared with the 2006 third quarter. 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 discussed in the comparison of the three-month
periods.
We
currently anticipate positive same-store sales growth of Company-owned
restaurants for the fourth quarter 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 $1.9 million, or 3%, to $62.9 million for
the
nine months ended September 30, 2007 from $61.0 million for the nine months
ended October 1, 2006, reflecting higher royalties of (1) $2.4 million from
the
75 franchised restaurants opened since October 1, 2006, with generally higher
than average sales volumes, and the 3 restaurants sold to franchisees since
October 1, 2006 replacing the royalties from the 29 generally underperforming
franchised restaurants closed and the elimination of royalties from the 13
restaurants we acquired from franchisees since October 1, 2006 and (2) $0.3
million due to a 1% increase in same-store sales of the franchised restaurants
in the 2007 first nine months as compared with the 2006 first nine months.
These
increases in royalties were partially offset by a $0.8 million decrease in
franchise and related fees.
We
expect
that our royalties and franchise and related fees will be higher for the
fourth
quarter of 2007 as compared with the fourth quarter 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 $1.2 million, or 2%, to $49.6 million
for the nine months ended September 30, 2007 from $48.4 million for the nine
months ended October 1, 2006. This increase principally reflects (1)
a $4.5 million increase in management fees primarily attributable to the
full
nine-month effect of CDOs and Funds that were entered into prior to October
1,
2006, (2) a $0.7 million increase in structuring and other related fees
associated with new CDOs and (3) a $0.7 million net increase in management
fees
from the net addition of five CDOs and increased warehouse fees since October
1,
2006. These increases were partially offset by (1) a $1.7 million
decrease in incentive fees earned on existing CDOs principally due to a $1.0
million decrease in deferred contingent fees on CDOs from $1.2 million
recognized in the first nine months of 2006 to $0.2 million recognized in
the
first nine months of 2007, (2) a $1.6 million decrease in incentive fees
from
the REIT as a result of not meeting certain performance thresholds during
the
2007 second and third quarters and (3) a $1.5 million decrease in management
fees from the REIT as described in the comparison of the three-month
periods.
We
expect
that our asset management and related fees for the fourth quarter of 2007
will
be less than the fourth quarter 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 $26.8 million, or
5%, to $610.8 million, resulting in a gross margin of 26%, for the nine months
ended September 30, 2007, from $584.0 million, resulting in a gross margin
of
27%, for the nine months ended October 1, 2006. The increase in cost
of sales is principally attributable to the effect of the 54 net Company-owned
restaurants added since October 1, 2006. The 1% decrease in our
overall gross margin reflects the effects of (1) the price discounting
associated with the value program discussed under “Net Sales” above, (2)
increases in our cost of beef and other menu items, (3) increased costs under
new distribution contracts that became effective in the third quarter of
2007
and reflect the effects of higher fuel costs and (4) increased labor costs
due
to the Federal minimum wage increase implemented in July 2007. These
negative factors were partially offset by the effects of (1) selective
price increases discussed under “Net Sales” above and (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.
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
gross margin for the current nine-month period.
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 $1.1 million,
or
6%, to $19.8 million for the nine months ended September 30, 2007 from $18.7
million for the nine months ended October 1, 2006 principally due to (1)
a $1.1
million increase related to the hiring of additional personnel to support
a
previously anticipated growth in assets under management and (2) a $0.6 million
increase in incentive compensation levels of existing
personnel. These increases were partially offset by a $0.6 million
decrease in incentive compensation which had been recorded in prior quarters
of
2007, but will not be paid, for employees who left Deerfield in September
2007.
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
$0.5
million, or 1%, despite the increase
in net sales,
principally due to a decrease in our portion of advertising spending
by
AFA due to the timing of its expenditures in the 2007 nine-month period as
compared to the same period in 2006.
As
discussed in the comparison of the three-month periods, we expect our
advertising and promotions expenses for the fourth quarter 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 $18.6 million, or 11%, principally due to (1) a $10.7
million decrease in general and administrative expenses principally
related to (a) the resignation effective in June 2007 of the Former Executives
and certain other officers and employees of Triarc who became employees of
the
Management Company and are no longer employed by us and (b) 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 provided to us under a two-year transition services agreement we
entered into with the Management Company which commenced on June 30, 2007,
(2)
a $4.5 million decrease in incentive compensation due to weaker than
planned performance at our business segments, (3)
a $4.1
million decrease in outside consultant fees at our restaurant segment partially
offset by a $2.4 million increase in salaries, which partially replaced those
fees, primarily attributable to the strengthening of the infrastructure of
that
segment following the RTM Acquisition, (4) $4.0 million of severance and
related charges in connection with the replacement of three senior restaurant
executives during our 2006 first nine months that did not recur in our 2007
first nine months and (5) a $2.5 million reduction of training and travel
costs
at our restaurant segment as part of an expense reduction initiative. These
decreases were partially offset by (1) a $3.2 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 (2) a $1.6 million increase
in
charitable contributions, primarily at corporate.
We
expect
lower corporate general and administrative expenses in the 2007 fourth quarter
as compared to the 2006 fourth quarter, 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 $10.1 million, or 23%, principally reflecting (1) $5.0 million
of asset impairment charges in the 2007 first nine months principally related
to
(a) anticipated losses related to an internally developed financial model,
as
described in the comparison of the three-month periods, (b) 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
(c) an underperforming restaurant, (2) $2.9 million related to the 54 net
restaurants added since October 1, 2006, (3) $1.1 million related to losses
on
disposals of properties included in depreciation and amortization and (4)
depreciation on additions to properties at existing restaurants, all partially
offset by $2.2 million of asset impairment charges recorded in the 2006 third
quarter principally related to two underperforming restaurants which did
not
fully recur in the 2007 nine months.
Facilities
Relocation and Corporate Restructuring
The
charge of $3.7 million in the 2006
first nine months consists of $3.1 million of general corporate expense related
to our decision not to move our corporate offices to a leased facility in
Rye
Brook, New York and $0.6 million of additional net charges recognized by
our
restaurant segment relating to combining our existing restaurant operations
with
those of RTM both as discussed in the comparison of the three-month
periods. The charge of $81.2 million in the first nine months of 2007
consists of general corporate severance charges of $80.9 million and a $0.3
million additional charge for employee relocation costs in connection with
combining our restaurant operations. The general corporate charge of
$80.9 million reflects (1) the payment entitlements under the Contractual
Settlements, as well as severance for another former executive and a current
executive, excluding incentive compensation relating to their 2007 period
of
employment with the Company and including applicable employer payroll taxes
and
(2) a loss of approximately $0.8 million on properties and other assets at
our
former New York headquarters, principally reflecting assets for which the
appraised value was less than book value, sold during the 2007 third quarter
to
the Management Company, all as part of the corporate restructuring. 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
which had a fair value of $50.3 million as of July 1, 2007 ($46.7 million
as of
September 30, 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 which had a fair value of $25.1 million as of July 1, 2007 ($23.4
million as of September 30, 2007), both subject to applicable withholding
taxes,
during the 2007 fourth quarter. As discussed in the comparison of the
three-month periods, the Company recorded a $5.3 million reduction of severance
expense in the third quarter of 2007 related to declines in value of
the related investments held in the 2007 Trusts.
As
disclosed in the comparison of the three-month periods, we expect to incur
additional severance charges and consulting fees aggregating approximately
$3.0
million with respect to other New York headquarters’ executives and employees
principally during the 2007 fourth quarter and the first half of
2008.
Loss
on Settlement of Unfavorable Franchise Rights
During
the nine months ended October 1, 2006 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 nine months. 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 $53.8 million, or 54%, principally reflecting a $54.8 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 $13.7 million in the nine months ended
October 1, 2006, which did not recur in the 2007 first nine months, consisted
of
(1) $12.7 million which resulted from the conversions and effective conversions
of an aggregate $167.4 million, during the first nine months of 2006, of
our
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, the write-off of $3.9 million of related previously
unamortized deferred financing costs and $0.1 million of legal fees related
to
the conversions and (2) a $1.0 million write-off of previously unamortized
deferred financing costs in connection with Term Loan prepayments from excess
cash of $45.0 million and $6.0 million in June and September 2006,
respectively.
Investment
Income (Loss), Net
The
following table summarizes and compares the major components of investment
income (loss), net:
|
|
Nine
Months Ended
|
|
|
|
|
|
|
October
1,
|
|
|
September
30,
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
69.7
|
|
|
$ |
7.2
|
|
|
$ |
(62.5 |
) |
Recognized
net gains
|
|
|
7.7
|
|
|
|
39.0
|
|
|
|
31.3
|
|
Other
than temporary unrealized losses
|
|
|
(2.9 |
) |
|
|
(7.5 |
) |
|
|
(4.6 |
) |
Distributions,
including dividends
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
0.1
|
|
Other
|
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
0.6
|
|
|
|
$ |
74.8
|
|
|
$ |
39.7
|
|
|
$ |
(35.1 |
) |
Our
interest income decreased $62.5 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 $31.3
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, (2) a $10.1 million
realized gain on the sale in the 2007 third quarter of one of our cost method
investments and (3) $8.4 million of gains realized on the transfer of several
cost method investments from two deferred compensation trusts, which we refer
to
as the Deferred Compensation Trusts, to the Former Executives in connection
with
the settlement of the related obligation to the Former 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
$4.6 million reflects the recognition of impairment charges related to the
significant decline in the market values of six of our available-for-sale
investments in CDOs in the first nine months of 2007 compared with the
significant decline in market value of one of our cost method investments
in the
comparable period of 2006. 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
September 30, 2007, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $11.6 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 nine months, respectively, was principally due to cash sales
of a
portion of our investment in Encore Capital Group, Inc., an investee of ours
which we refer to as Encore, in each period.
Other
Income, Net
Other
income, net, decreased $2.4 million, principally reflecting (1) $1.7 million
of
gains recognized in the 2006 first nine months, which did not recur in the
2007
first nine months, on the sale of a portion of our investment in Jurlique
International Pty Ltd., an Australian company which we refer to as Jurlique,
(2)
a $0.7 million increase in the loss from a foreign currency derivative related
to Jurlique which matured on July 5, 2007, (3) a $0.6 million decrease in
equity
in earnings of Encore, which we no longer account for under the equity method
subsequent to May 10, 2007, (4) a $0.6 million decrease in our equity in
the
REIT’s operations for the respective nine-month periods and (5) a $0.3 million
decrease in rental income on restaurants not operated by us. These
decreases were partially offset by a charge of $1.5 million in the 2006 third
quarter, which did not recur in the 2007 first nine months, for costs recognized
related to a strategic business alternative that was not pursued.
Income
(Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our
loss
from continuing operations before income taxes and minority interests increased
$33.6 million to $38.6 million in the first nine months of 2007 from $5.0
million in the first nine months of 2006. The increased loss is
attributed principally to the $63.9 million decline in our operating profit
to
an operating loss largely attributable to the $81.2 million of facilities
relocation and corporate restructuring charge primarily related to our corporate
restructuring that commenced in the 2007 second quarter, partially offset
by a
$31.3 million increase in recognized net gains included in our investment
income, as well as the other variances discussed above.
We
recognized a reversal of deferred compensation expense of $0.3 million in
the
2006 first nine months and deferred compensation expense of $1.0 million in
the first nine months of 2007, net of a $1.5 million settlement of a lawsuit
related to an investment which was included in the Deferred Compensation
Trusts,
recorded in the three months ended September 30, 2007, within general and
administrative expenses, for the net decrease or increase in the fair value
of
investments in the Deferred Compensation Trusts, for the benefit of the Former
Executives. The related obligation was settled in the 2007 second
quarter following the Former Executives’ resignation and the assets in the
Deferred Compensation Trusts were either distributed to the Former 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
losses from investments in the Deferred Compensation Trusts of $1.9 million
in
the 2006 first nine months and net investment income of $7.1 million in the
first nine months of 2007, net of the $1.5 million settlement of the lawsuit
described above, in the three months ended September 30, 2007. The
$1.9 million of net investment losses in the 2006 first nine months consisted
principally of an other than temporary loss related to an investment fund
within
the Deferred Compensation Trusts which experienced a significant decline
in
market value. The gross investment income of $8.6 million in the 2007
first nine months consisted of $8.4 million of realized gains almost entirely
attributable to the transfer of the investments to the Former Executives
and
$0.2 million of interest income. The unrealized net increase in the
fair value of the investment retained by us of $2.9 million at September
30,
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 63% for the nine months
ended September 30, 2007 and the nine months ended October 1, 2006.
The
effective benefit rate for the nine months ended September 30, 2007 includes
the
effect of recognizing a previously unrecognized contingent tax benefit of $12.8
million in connection with the settlement of certain obligations to the Former
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.
Additionally,
the effective rates in both nine-month periods include the effects of (1)
non-deductible expenses, (2) minority interests in income of consolidated
subsidiaries which are not taxable to us but which are not deducted from
the
forecasted pre-tax income used to calculate the effective tax rates and (3)
state income taxes, net of Federal income tax benefit, due to the differing
mix
of pre-tax income or loss among the consolidated entities which file state
tax
returns on an individual basis, the effects of which are lower in the 2007
nine-month period as compared to the nine-month period of 2006 due to the
forecasted pre-tax income or loss in the respective periods.
Minority
Interests in (Income) Loss of Consolidated Subsidiaries
Minority
interests in income of consolidated subsidiaries decreased by $3.9 million
principally reflecting (1) a decrease of $3.2 million principally due to
lower
income of Deerfield in the first nine months of 2007 as compared with the
first
nine months of 2006 and (2) a decrease of $2.6 million of minority interests
in
the income of the Opportunities Fund in the 2006 first nine months which
did not
recur in the 2007 first nine months as a result of the Redemption in September
2006. These decreases were 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.
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 $0.3 million
loss
from operations in the 2006 first nine months and an additional $0.1 million
loss on disposal in the 2007 first quarter. Our accompanying
condensed consolidated statement of operations for the nine months ended
October
1, 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 $8.4 million to $17.2 million in the 2007 first nine months
from
$8.8 million in the 2006 first nine months. This increase is due to
the after-tax and applicable minority interest effects of the variances
discussed above.
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 $40.2
million
during the nine months ended September 30, 2007 principally reflecting (1)
the
provision, net of payments, for facilities relocation and corporate
restructuring of $78.3 million, (2) depreciation and amortization of $55.9
million and (3) a share-based compensation provision of $8.3 million, all
partially offset by (1) cash used by changes in operating assets and liabilities
of $36.4 million, (2) a deferred income tax benefit of $24.9 million, (3)
net
operating investment adjustments of $24.8 million and (4) our net loss of
$17.2 million.
The
cash
used by changes in operating assets and liabilities of $36.4 million principally
reflects a $44.9 million decrease in accounts payable and accrued expenses
and
other current liabilities partially offset by a $15.3 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 and by a decrease in
the comparative accruals for the 2007 and 2006 nine-month periods for former
Triarc employees. 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. Historically, our asset management revenues have been 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 $31.6 million of net recognized gains, net of other than
temporary losses, including gains of $22.9 million realized on two specific
investments we sold in the 2007 first nine months and $8.4 million of gains
realized on the transfer of several cost method investments from the Deferred
Compensation Trusts to the Former Executives in the 2007 second quarter,
partially offset by $6.0 million of proceeds from sales of trading securities
and net settlements of trading derivatives.
We
expect
that our cash flows from continuing operating activities will use cash during
the fourth quarter of 2007 primarily as a result of the severance and
contractual settlement payments in connection with the corporate restructuring
as discussed above in the comparison of the nine-month periods under “Results of
Operations – Facilities Relocation and Corporate Restructuring”.
Working
Capital and Capitalization
Working
capital, which equals current assets less current liabilities, was a deficit
of
$3.8 million at September 30, 2007, reflecting a current ratio, which equals
current assets divided by current liabilities, of slightly less than
1.0:1. Working capital at September 30, 2007 decreased $165.0 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 $77.9 million increase in accrued
expenses and other current liabilities and deferred compensation payable
to the
Former Executives, another former executive and a current executive for
severance to be settled through a combination of cash payments and the transfer
of short-term investments in the 2007 fourth quarter in connection with our
corporate restructuring, as discussed in more detail in the comparison of
the
nine-month periods under “Results of Operations – Facilities Relocation and
Corporate Restructuring.”
Our
total
capitalization at September 30, 2007 was $1,170.6 million, consisting of
stockholders’ equity of $428.5 million, long-term debt of $738.2 million,
including current portion, and notes payable of $3.9 million. Our
total capitalization at September 30, 2007 decreased $31.8 million from $1,202.4
million at December 31, 2006 principally reflecting (1) dividends paid of
$24.2
million, (2) our net loss of $17.2 million and (3) the components
of comprehensive loss that bypass net income of $10.4 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 $17.5 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 $555.1 million as of September 30, 2007 and a senior secured revolving
credit
facility of $100.0 million, under which there were no borrowings as of September
30, 2007. However, the availability under the facility as of
September 30, 2007 was $92.3 million, which is net of a reduction of $7.7
million for outstanding letters of credit. The Term Loan has
scheduled repayments of $1.6 million during the fourth quarter 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 nine months and we do not expect that any will be required
during
the fourth quarter of 2007.
Sale-Leaseback
Obligations
We
have
outstanding $101.5 million of sale-leaseback obligations as of September
30,
2007, which relate to our restaurant segment and are due through 2027, of
which
$0.4 million is due during the fourth quarter of 2007.
Capitalized
Lease Obligations
We
have
outstanding $72.8 million of capitalized lease obligations as of September
30,
2007, which relate to our restaurant segment and extend through 2036, of
which
$0.9 million is due during the fourth quarter of 2007.
Convertible
Notes
We
have
outstanding at September 30, 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
$2.9
million as of September 30, 2007, of which $0.8 million is due during the
fourth
quarter of 2007. We also have outstanding $2.0 million under a
revolving note as of September 30, 2007, which we refer to as the Revolving
Note, which is due in 2009. Additionally, we have outstanding $1.8
million of leasehold notes as of September 30, 2007, which are due through
2018,
of which less than $0.1 million is due during the fourth quarter of
2007.
Notes
Payable
We
have
outstanding $3.9 million of notes payable as of September 30,
2007. Of these, $2.4 million relate to our asset management segment
and are secured by some of our short-term investments in preferred shares
of
CDOs as of September 30, 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 AFA, 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
$92.3 million available for borrowing under our restaurant segment’s $100.0
million revolving credit facility as of September 30, 2007, which is net
of the
reduction of $7.7 million for outstanding letters of credit as noted
above. In addition, our restaurant segment has a $30.0 million
conditional funding commitment, of which $30.0 million was available as of
September 30, 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 September 30,
2007.
Debt
Repayments and Covenants
Our
total
scheduled long-term debt and notes payable repayments during the fourth quarter
of 2007 are $4.5 million consisting of $1.6 million under our Term Loan,
$0.9
million relating to capitalized leases, $0.8 million under our secured bank
term
loan, $0.8 million expected to be paid under our notes payable and $0.4 million
relating to sale-leaseback obligations.
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
September 30, 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 September 30, 2007 there was $16.8 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 September 30, 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 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 Former Executives, we settled this obligation which was
previously due January 1, 2008. Under the terms of the Contractual
Settlements, our former Chief Executive Officer and our former President
are
each entitled to a payment of cash and investments with a fair value of $46.7
million and $23.4 million, respectively, as of September 30, 2007. We
anticipate settling these obligations by the end of the 2007 fourth quarter.
In
addition, we incurred obligations under severance agreements for a former
executive and a current executive which total $12.6 million of which
approximately $5.7 million will be paid by the end of the fourth quarter
of 2007
and $6.9 million will be paid by the end of 2008. We also 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
$3.0 million during the fourth quarter of 2007 and an aggregate of $13.0
million
during fiscal years 2008 and 2009. There have been 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 $14.1 million as of September 30, 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 September 30, 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 September 30, 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 September 30,
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 September 30, 2007, we have net operating loss tax carryforwards sufficient
to offset substantially all of the remaining deferred taxes.
RTM
guarantees the lease obligations of 10 RTM restaurants formerly operated
by
affiliates of RTM as of September 30, 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. Our
obligation related to 13 additional leases similarly operated by affiliates
of
RTM was released during the third quarter of 2007 in conjunction with their
assignment and termination. 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 $19.0 million as of September 30, 2007, including
approximately $14.0 million under the Affiliate Lease Guarantees, assuming
all
scheduled lease payments have been made by the respective tenants through
September 30, 2007.
During
the 2007 third quarter our restaurant segment signed a letter of intent for
the purchase of 41 existing franchised Arby’s restaurants for an aggregate net
purchase price of approximately $15.0 million, including the payment of cash
and
an assumption of debt. Arby’s is currently the sublessor for
approximately 27 of the locations to be purchased. The transaction
has an anticipated closing date during the first quarter of 2008.
AFA
Service Corporation, which we refer to as AFA, an independently controlled
advertising cooperative in which we have voting interests of less than 50%,
but
with respect to which we are deemed to be the primary beneficiary under GAAP
and, therefore, is consolidated, will incur costs in December for a national
advertising event which will result in advertising expenses in excess of
dues
collected for 2007. To partially fund the planned deficit resulting
from the December 2007 advertising event, our restaurant segment has agreed
to
prepay an aggregate of $3.5 million of its 2008 dues to AFA in January
2008. The prepayment will be recouped by reducing future payments of
dues by our restaurant segment to AFA, with the total expected to be recouped
before the end of the 2008 third quarter.
Capital
Expenditures
Cash
capital expenditures amounted to $56.3 million during the 2007 first nine
months. We expect that cash capital expenditures will be
approximately $25.0 million during the fourth quarter of 2007 principally
relating to (1) the opening of an estimated 10 new Company-owned restaurants,
(2) remodeling some of our existing restaurants and (3) maintenance capital
expenditures for our Company-owned restaurants. We have
$30.7 million of outstanding commitments for capital expenditures as of
September 30, 2007, of which $20.5 million is expected to be paid during
the
fourth quarter of 2007.
Dividends
On
March
15, 2007, June 15, 2007 and September 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 $24.2 million. On October 16, 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 December
17, 2007 to holders of record on December 3, 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, absent such a determination, 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. Our total cash requirement for
dividends for the 2007 fourth quarter, based on the number of class A and
class
B common shares outstanding as of October 31, 2007, would be approximately
$8.1
million.
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 28, 2003 expired during 2007 and years prior thereto are no longer
subject to examination. Our Federal income tax returns for years
subsequent to December 28, 2003 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 nine months
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. As discussed in “Guarantees and Commitments” above, we have
signed a letter of intent for the purchase of 41 existing franchised Arby’s
restaurants. In addition, we are incurring significant costs to
evaluate a potential material acquisition of another company in the restaurant
industry. There can be no assurance that either of these acquisitions
will occur.
Cash
Requirements
Our
consolidated cash requirements for continuing operations for the fourth quarter
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 fourth quarter of 2007, consist principally of (1) 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, (2) cash capital expenditures of approximately $25.0
million, (3) regular quarterly cash dividends aggregating approximately
$8.1 million, (4) scheduled debt principal repayments aggregating $4.5 million,
(5) any prepayments we elect to make under our Credit Agreement and (6) the
cost
of business acquisitions, if any, as well as the cost to evaluate potential
acquisitions. We anticipate meeting all of these requirements,
including the requirements for operations, through (1) the use of our liquid
current assets, including the assets in the 2007 Trusts, (2) borrowings under
our restaurant segment’s revolving credit facility of which $92.3 million is
currently available, (3) the $30.0 million available under the conditional
funding commitment for sale-leaseback financing from the real estate finance
company, (4) proceeds from sales, if any, of our remaining investments, (5)
proceeds from sales, if any, of up to $2.0 billion of our securities under
the
universal shelf registration statement and (6) in the event we make a material
acquisition, other financing sources.
On
April
19, 2007, we entered into a definitive agreement, which the
parties mutually terminated on October 19, 2007, whereby the REIT
would have acquired Deerfield. Deerfield represents
substantially all of our asset management business segment. At
September 30, 2007, we owned 2.6% of the REIT and account for our investment
in
the REIT in accordance with the equity method. On August 9, 2007, the
REIT stockholders approved the acquisition of Deerfield, which had been
expected to close in the third quarter of 2007. Due to instability in
the credit markets, the REIT was not able to complete, on acceptable terms,
the financing for the cash portion of the purchase price necessary to consummate
the transaction. We are continuing to explore with the REIT revised
terms and conditions as well as other options, including a sale of our interest
in Deerfield to another buyer or a spin-off to our
shareholders. However, there can be no assurance that any of these
options will occur.
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 (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 Rights of one of those
executives was exercisable 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 interest in Deerfield concurrent with the closing
of the
sale of Deerfield contemplated by the April 19, 2007 definitive agreement
(the
“Put Exercise”). However, the Put Exercise terminated concurrently
with the mutual termination of the definitive agreement. The Put
Rights continue to be available to these executives under certain
circumstances.
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 amounts spent 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, we expect that the final resolution of this matter will
not have a material effect on our financial position or results of
operations.
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 September
30,
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 financial position or results of
operations.
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.
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
generally higher in our fourth quarter, although we anticipate recording
significantly lower fees in the fourth quarter of 2007, 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 if we complete the Potential Deerfield Divestiture
as
discussed above under “Potential Deerfield Divestiture.”
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. We are in the process of evaluating whether we will
elect the fair value option for financial instruments and certain other items
and are evaluating 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, except as discussed below
in
“Foreign Currency Risk,” during the nine months ended September 30,
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
September 30, 2007 our notes payable and long-term debt, including current
portion, aggregated $742.1 million and consisted of $560.0 million of
variable-rate debt, $174.3 million of capitalized lease and sale-leaseback
obligations, $3.9 million of variable-rate notes payable and $3.9 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 $555.1 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 September 30, 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 $2.9
million principal amount was outstanding as of September 30, 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 nine months of 2007 with the exception of the
maturity on July 5, 2007 of the put and call arrangement whereby we had limited
the overall foreign currency risk on our cost-method investment in
Jurlique. In connection with the maturity, we made a net payment of
$1.3 million in the third quarter of fiscal 2007. We currently have
exposure to foreign currency risk related to our entire remaining investment
in
Jurlique, which has a carrying value of $8.5 million.
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 also invest with asset managers with alternative
investment strategies that may earn higher returns with attendant increased
risk
profiles. 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 $99.3 million as of September 30, 2007. As of September
30, 2007, the investment derivatives we held, principally in the Equities
Account, consisted of (1) market put options, (2) put and call combinations
on
equity securities, (3) stock options and (4) a total return swap on an equity
security. 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 September 30, 2007 these investments were
classified in our condensed consolidated balance sheet as follows (in
thousands):
Cash
equivalents included in “Cash and cash equivalents”
|
|
$ |
108,513
|
|
Short-term
investments not pledged as collateral
|
|
|
23,159
|
|
Short-term
investments pledged as collateral
|
|
|
5,122
|
|
Investment
settlements receivable
|
|
|
17,452
|
|
Non-current
restricted cash equivalents
|
|
|
39,544
|
|
Non-current
investments
|
|
|
82,705
|
|
|
|
$ |
276,495
|
|
|
|
|
|
|
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
September 30, 2007 our investments were classified in the following general
types or categories (in thousands):
|
|
|
|
|
At
Fair
|
|
|
Carrying
Value
|
|
Type
|
|
At
Cost
|
|
|
Value
(c)
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents (a)
|
|
$ |
108,513
|
|
|
$ |
108,513
|
|
|
$ |
108,513
|
|
|
|
39%
|
|
Investment
settlements receivable
|
|
|
17,452
|
|
|
|
17,452
|
|
|
|
17,452
|
|
|
|
6%
|
|
Restricted
cash equivalents
|
|
|
39,544
|
|
|
|
39,544
|
|
|
|
39,544
|
|
|
|
14%
|
|
Current
and non-current investments accounted for as available-for-sale
securities
(b)
|
|
|
54,987
|
|
|
|
62,953
|
|
|
|
62,953
|
|
|
|
23%
|
|
Investments
held in deferred compensation trusts accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
15,000
|
|
|
|
9,050
|
|
|
|
10,761
|
|
|
|
4%
|
|
Cost
|
|
|
4,952
|
|
|
|
9,673
|
|
|
|
4,952
|
|
|
|
2%
|
|
Available-for-sale
|
|
|
3,269
|
|
|
|
4,830
|
|
|
|
4,830
|
|
|
|
2%
|
|
Other
current and non-current investments in investment limited partnerships
and
similar investment entities accounted for at cost
|
|
|
2,076
|
|
|
|
2,507
|
|
|
|
2,076
|
|
|
|
1%
|
|
Other
current and non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
14,131
|
|
|
|
18,691
|
|
|
|
14,131
|
|
|
|
5%
|
|
Equity
|
|
|
4,949
|
|
|
|
2,947
|
|
|
|
3,990
|
|
|
|
1%
|
|
Fair
value
|
|
|
7,959
|
|
|
|
7,293
|
|
|
|
7,293
|
|
|
|
3%
|
|
Total
cash equivalents and investment positions
|
|
$ |
272,832
|
|
|
$ |
283,453
|
|
|
$ |
276,495
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes
$12,610,000 of cash equivalents held in deferred compensation
trusts.
|
|
(b)
|
Fair
value and carrying value include $5,122,000 of preferred shares
of
collateralized debt obligation vehicles, which we refer to as CDOs,
which
are pledged as collateral and, if sold, would require us to use
the
proceeds to repay our related notes payable of
$2,400,000.
|
|
(c)
|
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 September 30, 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 September 30, 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 September 30, 2007 for which an immediate adverse
market movement causes a potential material impact on our financial position
or
results of operations. As of September 30, 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
Value
|
|
|
Interest
Rate Risk
|
|
|
Equity
Price Risk
|
|
|
Foreign
Currency Risk
|
|
Cash
equivalents
|
|
$ |
108,513
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Investment
settlements receivable
|
|
|
17,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted
cash equivalents
|
|
|
39,544
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Available-for-sale
equity securities
|
|
|
60,647
|
|
|
|
-
|
|
|
|
(6,065 |
) |
|
|
-
|
|
Available-for-sale
preferred shares of CDOs
|
|
|
7,136
|
|
|
|
(996 |
) |
|
|
-
|
|
|
|
(78 |
) |
Investment
in Jurlique
|
|
|
8,504
|
|
|
|
-
|
|
|
|
(850 |
) |
|
|
(850 |
) |
Investment
derivatives
|
|
|
6,074
|
|
|
|
-
|
|
|
|
(7,305 |
) |
|
|
(27 |
) |
Other
investments
|
|
|
28,625
|
|
|
|
(1,473 |
) |
|
|
(1,323 |
) |
|
|
(18 |
) |
Interest
rate swaps in an asset position
|
|
|
702
|
|
|
|
(1,785 |
) |
|
|
-
|
|
|
|
-
|
|
Notes
payable and long-term debt, excluding capitalized lease and sale-leaseback
obligations
|
|
|
(567,821 |
) |
|
|
(21,537 |
) |
|
|
-
|
|
|
|
-
|
|
The
sensitivity analysis of financial instruments held at September 30, 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
September 30, 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
3/4
years – 31
1/4
years
|
53/4
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 September 30, 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
September 30, 2007, a majority of our debt was variable-rate debt and therefore
the interest rate risk presented with respect to our $563.9 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 September 30, 2007 had a weighted average remaining maturity
of approximately 4 ¼ 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 $3.9 million of fixed-rate debt as of
September 30, 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.
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.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and our
Senior
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 Senior 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
As
previously reported, our
restaurant business implemented new accounting systems during the second
quarter
of 2007. In the one functional area where the functions of the new
systems were not fully operational as of the end of the 2007 third 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
September 1, 2007, the
Chief Financial Officer of our subsidiary, Arby’s Restaurant Group, Inc.
(“ARG”), was appointed as our Senior Vice President and Chief Financial 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 have transferred our headquarters
operations function from New York to ARG in Atlanta, Georgia. Much of
this transition occurred during our fiscal third quarter of 2007, and has
included the transfer of all headquarters accounting and external reporting
functions to ARG’s offices in Atlanta.
There
were no other changes in our
internal control over financial reporting made during our most recent fiscal
quarter that materially affected, or are 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 Senior 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.
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:
|
·
|
competition,
including pricing pressures and the potential impact of competitors’ new
units on sales by Arby’s®
restaurants;
|
|
·
|
consumers’
perceptions of the relative quality, variety, affordability and
value of
the food products we offer;
|
|
·
|
success
of operating initiatives;
|
|
·
|
development
costs, including real estate and construction
costs;
|
|
·
|
advertising
and promotional efforts by us and our
competitors;
|
|
·
|
consumer
awareness of the Arby’s brand;
|
|
·
|
the
existence or absence of positive or adverse
publicity;
|
|
·
|
new
product and concept development by us and our competitors, and
market
acceptance of such new product offerings and
concepts;
|
|
·
|
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”;
|
|
·
|
changes
in spending patterns and demographic trends, such as the extent
to which
consumers eat meals away from home;
|
|
·
|
adverse
economic conditions, including high unemployment rates, in geographic
regions that contain a high concentration of Arby’s
restaurants;
|
|
·
|
the
business and financial viability of key
franchisees;
|
|
·
|
the
timely payment of franchisee obligations due to
us;
|
|
·
|
availability,
location and terms of sites for restaurant development by us and
our
franchisees;
|
|
·
|
the
ability of our franchisees to open new restaurants in accordance
with
their development commitments, including the ability of franchisees
to
finance restaurant development;
|
|
·
|
delays
in opening new restaurants or completing
remodels;
|
|
·
|
the
timing and impact of acquisitions and dispositions of
restaurants;
|
|
·
|
our
ability to successfully integrate acquired restaurant
operations;
|
|
·
|
anticipated
or unanticipated restaurant closures by us and our
franchisees;
|
|
·
|
our
ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Arby’s restaurants successfully;
|
|
·
|
changes
in business strategy or development plans, and the willingness
of our
franchisees to participate in our strategies and operating
initiatives;
|
|
·
|
business
abilities and judgment of our and our franchisees’ management and other
personnel;
|
|
·
|
availability
of qualified restaurant personnel to us and to our franchisees,
and our
and our franchisees’ ability to retain such
personnel;
|
|
·
|
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;
|
|
·
|
changes
in commodity (including beef and chicken), labor, supply, distribution
and
other operating costs;
|
|
·
|
availability
and cost of insurance;
|
|
·
|
adverse
weather conditions;
|
|
·
|
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;
|
|
·
|
increased
competition from other asset managers offering products similar
to those
we offer;
|
|
·
|
pricing
pressure on the advisory fees that we can charge for our investment
advisory services;
|
|
·
|
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;
|
|
·
|
our
removal as investment manager of the real estate investment trust
or one
or more of the collateralized 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;
|
|
·
|
availability,
terms (including changes in interest rates) and deployment of
capital;
|
|
·
|
the
outcome of and costs related to the Potential Deerfield
Divestiture;
|
|
·
|
changes
in legal or self-regulatory requirements, including franchising
laws,
investment management regulations, accounting standards, environmental
laws, payment card industry rules, overtime rules, minimum wage
rates,
government-mandated health benefits, and taxation
rates;
|
|
·
|
the
costs, uncertainties and other effects of legal, environmental
and
administrative proceedings;
|
|
·
|
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
|
|
·
|
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”) (in particular, “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 First Quarter Form 10-Q, which could
materially affect our business, financial condition or future
results. Except as described in this report, there were no material
changes from the risk factors previously disclosed in our Form 10-K during
the
fiscal quarter ended September 30, 2007.
The
following risk factor, which was previously updated in our Quarterly Report
on
Form 10-Q for the quarterly period ended April 1, 2007, has been further
updated
as follows:
Our
success depends substantially upon the continued retention of certain key
personnel.
We
believe that over time our success has been dependent to a significant extent
upon the efforts and abilities of our and our subsidiaries’ senior management
teams. As previously reported, we are in the process of closing our New York
headquarters and combining our corporate operations with our restaurant
operations in Atlanta, Georgia. To facilitate this transition, we have
transferred substantially all of our senior executive responsibilities to
the
Arby’s Restaurant Group (“ARG”) executive team in Atlanta led by Roland Smith,
Chief Executive Officer of ARG, and other senior members of the ARG management
team. In connection with that transition, we have entered into contractual
settlements with our former Chief Executive Officer, Nelson Peltz, and our
former President and Chief Operating Officer, Peter W. May, evidencing the
termination of their employment agreements and their resignation from their
positions as executive officers of Triarc. Although Messrs. Peltz and May
continue to be significant stockholders and directors of the Company, and
notwithstanding the transition services that we receive pursuant to a transition
services agreement that we have entered into with Trian Fund Management,
L.P.,
an investment management firm founded in November 2005 by Messrs. Peltz,
May and
Edward P. Garden, our former Vice Chairman, the success of the Arby’s business,
and if the sale of Deerfield & Company LLC (“Deerfield”) is not completed,
our asset management business, will depend to a significant extent upon the
efforts and abilities of the ARG senior management team and the Deerfield
senior
management team. The failure by us to retain members of the ARG senior
management team, or the Deerfield senior management team if the Deerfield
sale
is not completed, could adversely affect our ability to build on the efforts
we
have undertaken to increase the efficiency and profitability of our
businesses.
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
third fiscal quarter of 2007:
Issuer
Repurchases of Equity Securities
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased As Part of Publicly Announced
Plan (1)
|
Approximate
Dollar Value of Shares That May Yet Be Purchased Under the Plan
(1)
|
July
2, 2007
through
July
29, 2007
|
---
|
---
|
---
|
$50,000,000
|
July
30, 2007
through
August
26, 2007
|
60,455
Class B(2)
|
$15.47
– Class B
|
---
|
$50,000,000
|
August
27, 2007
through
September
30, 2007
|
---
|
---
|
---
|
$50,000,000
|
Total
|
60,455
Class B(2)
|
$15.47
– Class B
|
---
|
$50,000,000
|
(1)
|
On
June 30, 2007, our then existing $50 million stock repurchase program
expired, and 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. No transactions were effected under this stock
repurchase program during the third fiscal quarter of
2007.
|
(2)
|
Reflects
shares of 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 price of the 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.
|
Sale
of Deerfield & Company LLC
On
October 22, 2007, we announced that we are continuing to explore with Deerfield
Triarc Capital Corp. (“DFR”) revised terms and conditions of the previously
announced sale to DFR of Deerfield & Company LLC (“Deerfield”), a
Chicago-based fixed income asset manager of which we own a controlling interest.
DFR is a diversified financial company that is externally managed by a
subsidiary of Deerfield. The parties mutually terminated their April 19,
2007
agreement (the “Merger Agreement”) on October 19, 2007. The related registration
rights agreement dated April 19, 2007 terminated automatically upon termination
of the Merger Agreement. We also announced that we are
also actively examining other options to realize the value of our ownership
interest in Deerfield, including a sale of our interest in Deerfield to another
buyer or a spin-off to our shareholders.
Concurrently
with the termination of the Merger Agreement, the exercise by certain affiliates
of Gregory H. Sachs, a former director of Triarc and a director and the
Chairman
and Chief Executive Officer of Deerfield, under a letter agreement dated
as of
May 25, 2007 (the “Put Exercise Agreement”) of their right to require Triarc to
purchase all of their interests in Deerfield (“put rights”) in connection with,
and subject to the consummation of, the proposed sale of Deerfield to DFR,
has
also terminated. Mr. Sachs’ affiliates continue to have certain put rights under
Deerfield’s existing operating agreement. In addition, Mr. Sachs’ resignation as
a director and as Chairman and Chief Executive Officer of Deerfield and
its
subsidiaries, which was subject to the consummation of the merger, has
been
deemed withdrawn and is no longer effective, as provided in the Put Exercise
Agreement. Thus, Mr. Sachs remains Chairman and Chief Executive Officer
of
Deerfield and its subsidiaries.
Corporate
Restructuring
As
previously reported, 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
August
2007, we entered into time share arrangements whereby Trian Fund Management,
L.P. and its principals (including our Chairman, Vice Chairman and our
former
Vice Chairman who remains a director) may use our corporate aircraft in
exchange
for payment of the incremental flight and related costs of such
aircraft.
In
connection with the corporate restructuring, we also entered into an agreement
with our former Executive Vice President and General Counsel, Brian L.
Schorr,
evidencing the termination of his employment agreement and the cessation
of his
services as an officer and employee of Triarc as of June 30,
2007.
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
|
Amended
and Restated 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 September 10, 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
|
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).
|
10.2
|
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).
|
10.3
|
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).
|
10.4
|
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).
|
10.5
|
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).
|
10.6
|
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).
|
10.7
|
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).
|
10.8
|
Letter
Agreement dated August 10, 2007 between Triarc Companies, Inc.
and Brian
L. Schorr, incorporated herein by reference to Exhibit 10.1 to
Triarc’s
Current Report on Form 8-K filed August 15, 2007 (SEC file No.
1-2207).
|
_______________________
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: November
9, 2007
|
By: /s/
STEPHEN E.
HARE
|
|
Stephen
E. Hare
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
|
(On
behalf of the Company)
|
Date: November
9, 2007
|
By: /s/
STEVEN B.
GRAHAM
|
|
Steven
B. Graham
|
|
Senior
Vice President and
|
|
Chief
Accounting Officer
|
|
(Principal
Accounting Officer)
|
Exhibit
No. Description
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
|
Amended
and Restated 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 September 10, 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
|
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).
|
10.2
|
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).
|
10.3
|
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).
|
10.4
|
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).
|
10.5
|
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).
|
10.6
|
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).
|
10.7
|
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).
|
10.8
|
Letter
Agreement dated August 10, 2007 between Triarc Companies, Inc.
and Brian
L. Schorr, incorporated herein by reference to Exhibit 10.1 to
Triarc’s
Current Report on Form 8-K filed August 15, 2007 (SEC file No.
1-2207).
|
_______________________