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 April 3, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 1-2207
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TRIARC COMPANIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-0471180
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, New York, New York 10017
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 451-3000
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(X) Yes ( ) No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
(X) Yes ( ) No
There were 23,902,892 shares of the registrant's Class A Common Stock and
42,663,278 shares of the registrant's Class B Common Stock outstanding as of
April 29, 2005.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 2, April 3,
2005 (A) 2005
------- ----
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.........................................................$ 367,992 $ 340,585
Restricted cash equivalents....................................................... 16,272 33,040
Short-term investments............................................................ 198,218 523,597
Investment settlements receivable................................................. 30,116 150,565
Trade and other receivables....................................................... 34,215 21,468
Inventories....................................................................... 2,222 2,125
Deferred income tax benefit....................................................... 14,620 14,509
Prepaid expenses and other current assets......................................... 6,111 6,405
----------- -----------
Total current assets........................................................... 669,766 1,092,294
Restricted cash equivalents............................................................ 32,886 32,894
Investments............................................................................ 82,214 84,219
Properties............................................................................. 103,434 101,109
Goodwill .............................................................................. 118,264 118,264
Asset management contracts and other intangible assets................................. 38,896 37,634
Deferred costs and other assets........................................................ 21,513 23,075
----------- -----------
$ 1,066,973 $ 1,489,489
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.....................................................................$ 15,334 $ 10,572
Current portion of long-term debt................................................. 37,214 37,053
Accounts payable.................................................................. 13,261 14,036
Investment settlements payable.................................................... 9,651 104,481
Securities sold under agreements to repurchase.................................... 15,169 269,810
Other liability positions related to short-term investments....................... 10,624 120,706
Accrued expenses and other current liabilities.................................... 90,757 67,915
Current liabilities relating to discontinued operations........................... 13,834 13,573
----------- -----------
Total current liabilities...................................................... 205,844 638,146
Long-term debt......................................................................... 446,479 436,691
Deferred compensation payable to related parties....................................... 32,941 33,769
Deferred income taxes.................................................................. 20,002 19,751
Minority interests in consolidated subsidiaries........................................ 10,688 12,263
Other liabilities and deferred income.................................................. 47,880 46,630
Stockholders' equity:
Class A common stock.............................................................. 2,955 2,955
Class B common stock.............................................................. 5,910 5,910
Additional paid-in capital........................................................ 128,096 134,455
Retained earnings................................................................. 337,415 335,410
Common stock held in treasury..................................................... (227,822) (227,096)
Deferred compensation payable in common stock..................................... 54,457 54,457
Unearned compensation............................................................. (1,350) (7,088)
Accumulated other comprehensive income............................................ 3,478 3,236
----------- -----------
Total stockholders' equity..................................................... 303,139 302,239
----------- -----------
$ 1,066,973 $ 1,489,489
=========== ===========
(A) Derived and reclassified from the audited consolidated financial
statements as of January 2, 2005.
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
---------------------------------
March 28, April 3,
2004 2005
---- ----
(In Thousands Except Per Share Amounts)
(Unaudited)
Revenues:
Net sales..........................................................................$ 46,724 $ 51,190
Royalties and franchise and related fees .......................................... 22,467 23,579
Asset management and related fees ................................................. -- 12,928
---------- ---------
69,191 87,697
---------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization............................. 37,385 39,189
Cost of services, excluding depreciation and amortization.......................... -- 4,149
Advertising and selling............................................................ 4,167 4,583
General and administrative, excluding depreciation and amortization................ 24,310 33,814
Depreciation and amortization, excluding amortization of deferred financing costs.. 3,351 5,526
---------- ---------
69,213 87,261
---------- ---------
Operating profit (loss)...................................................... (22) 436
Interest expense........................................................................ (9,634) (10,253)
Insurance expense related to long-term debt............................................. (991) (904)
Investment income, net.................................................................. 6,524 9,100
Gain on sale of business................................................................ 16 9,608
Other expense, net...................................................................... (40) (370)
---------- ---------
Income (loss) before income taxes and minority interests..................... (4,147) 7,617
Benefit from (provision for) income taxes............................................... 991 (2,513)
Minority interests in income of consolidated subsidiaries............................... -- (2,425)
---------- ---------
Net income (loss)............................................................$ (3,156) $ 2,679
========== =========
Basic and diluted income (loss) per share of Class A common stock and
Class B common stock...............................................................$ (.05) $ .04
========== =========
See accompanying notes to condensed consolidated financial statements.
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
----------------------------
March 28, April 3,
2004 2005
---- ----
(In Thousands)
(Unaudited)
Cash flows from continuing operating activities:
Net income (loss)...................................................................$ (3,156) $ 2,679
Adjustments to reconcile net income (loss) to net cash used in continuing
operating activities:
Operating investment adjustments, net (see below).............................. 13,815 (362,421)
Gain on sale of business....................................................... (16) (9,608)
Deferred asset management fees recognized...................................... -- (727)
Equity in net earnings of investees............................................ (580) (705)
Unfavorable lease liability recognized......................................... (438) (290)
Depreciation and amortization of properties.................................... 3,030 3,985
Amortization of other intangible assets and certain other items................ 321 1,541
Amortization of deferred financing costs and original issue discount........... 651 637
Minority interests in income of consolidated subsidiaries...................... -- 2,425
Deferred compensation expense.................................................. 885 463
Stock-based compensation provision............................................. -- 397
Deferred income tax provision (benefit)........................................ (572) 4
Deferred vendor incentive recognized........................................... (386) --
Other, net..................................................................... 478 504
Changes in operating assets and liabilities:
(Increase) decrease in trade and other receivables......................... (1,766) 7,667
Decrease in inventories.................................................... 54 97
(Increase) decrease in prepaid expenses and other current assets........... 753 (294)
Decrease in accounts payable and accrued expenses and other current
liabilities.............................................................. (14,077) (21,889)
------------ -----------
Net cash used in continuing operating activities........................ (1,004) (375,535)(A)
------------ -----------
Cash flows from continuing investing activities:
Investment activities, net (see below)............................................... (70,090) 367,202
Collection of a note receivable...................................................... -- 5,000
Costs of business acquisitions....................................................... -- (2,556)
Capital expenditures................................................................. (1,052) (1,588)
Other, net........................................................................... (35) (38)
------------ -----------
Net cash provided by (used in) continuing investing activities.......... (71,177) 368,020
------------ -----------
Cash flows from continuing financing activities:
Repayments of long-term debt and notes payable....................................... (8,605) (16,268)
Proceeds from issuance of a note payable............................................. -- 1,425
Dividends paid ..................................................................... (4,338) (4,684)
Net distributions to minority interests in consolidated subsidiaries................. -- (986)
Proceeds from exercises of stock options............................................. 7,083 785
Transfers from restricted cash equivalents collateralizing long-term debt............ 23 97
Repurchases of common stock for treasury............................................. (1,381) --
------------ -----------
Net cash used in continuing financing activities........................ (7,218) (19,631)
------------ -----------
Net cash used in continuing operations.................................................. (79,399) (27,146)
Net cash used in discontinued operations................................................ (217) (261)
------------ -----------
Net decrease in cash and cash equivalents............................................... (79,616) (27,407)
Cash and cash equivalents at beginning of period........................................ 560,510 367,992
------------ -----------
Cash and cash equivalents at end of period..............................................$ 480,894 $ 340,585
============ ===========
Detail of cash flows related to investments:
Operating investment adjustments,net:
Proceeds from sales of trading securities and net settlements of trading
derivatives.....................................................................$ 100,912 $ 685,723
Cost of trading securities purchased............................................. (84,634) (1,039,424)
Increase in restricted cash securing the notional amount of trading derivatives.. -- (5,308)
Net recognized (gains) losses from trading securities and derivatives and short
positions in securities....................................................... 443 (2,167)
Other net recognized gains, including other than temporary losses................ (2,242) (637)
Accretion of discount on debt securities net of distributions received........... (664) (608)
------------ -----------
$ 13,815 $ (362,421)
============ ===========
TRIARC COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended
-----------------------------
March 28, April 3,
2004 2005
---- ----
(In Thousands)
(Unaudited)
Investing investment activities, net:
Proceeds from sales of repurchase agreements.....................................$ -- $ 647,067
Payments under repurchase agreements............................................. -- (392,426)
Proceeds from securities sold short.............................................. 7,100 113,530
Payments to cover short positions in securities.................................. (8,543) (971)
Proceeds from sales and maturities of available-for-sale securities and other
investments................................................................... 43,718 43,464
Cost of available-for-sale securities and other investments purchased............ (119,632) (32,002)
(Increase) decrease in restricted cash collateralizing obligations for short
positions in securities....................................................... 7,267 (11,460)
------------ -----------
$ (70,090) $ 367,202
============ ===========
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(A) Net cash used in continuing operating activities reflects the
significant net purchases of trading securities and net settlements of
trading derivatives, which were principally funded by proceeds from
net sales of repurchase agreements and the net proceeds from
securities sold short. These purchases and sales were principally
transacted through an investment fund, Deerfield Opportunities Fund,
LLC, which employs leverage in its trading activities and which we
consolidate in our condensed consolidated financial statements. Under
accounting principles generally accepted in the United States of
America, the net purchases of trading securities and the net
settlements of trading derivatives must be reported in continuing
operating activities, while the net sales of repurchase agreements and
the net proceeds from securities sold short 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
April 3, 2005
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the
"Financial Statements") of Triarc Companies, Inc. ("Triarc" and, together with
its subsidiaries, the "Company") have been prepared in accordance with Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC") and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States of America ("GAAP"). In the opinion of the Company, however,
the Financial Statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations and cash flows as of and for the three-month
periods set forth in the following paragraph. The results of operations for the
three-month period ended April 3, 2005 are not necessarily indicative of the
results to be expected for the full year. 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 January 2, 2005 (the "Form 10-K").
The Company reports on a fiscal year consisting of 52 or 53 weeks ending on
the Sunday closest to December 31. However, Deerfield & Company LLC
("Deerfield"), in which the Company acquired a 63.6% capital interest on July
22, 2004 (see Note 3), and Deerfield Opportunities Fund, LLC (the "Opportunities
Fund"), which commenced during the fourth quarter of 2004 and in which the
Company owns a 95.2% capital interest, report on a calendar year ending on
December 31. The Company's first quarter of fiscal 2004 commenced on December
29, 2003 and ended on March 28, 2004. The Company's first quarter of fiscal 2005
commenced on January 3, 2005 and ended on April 3, 2005, except that this first
quarter includes Deerfield and the Opportunities Fund for the period commencing
on January 1, 2005 and ending on March 31, 2005. The period from December 29,
2003 to March 28, 2004 is referred to herein as the three-month period ended
March 28, 2004 and the period from January 3, 2005 to April 3, 2005 is referred
to herein as the three-month period ended April 3, 2005. Each quarter contained
13 weeks. The effect of including Deerfield and the Opportunities Fund in the
Company's Financial Statements for the period from January 1, 2005 to March 31,
2005 instead of the Company's three-month period ended April 3, 2005, was not
material. All references to quarters and quarter-end(s) herein relate to fiscal
quarters rather than calendar quarters, except with respect to Deerfield and the
Opportunities Fund.
Certain amounts included in the accompanying prior quarter's condensed
consolidated financial statements have been reclassified to conform with the
current quarter's presentation.
(2) Stock-Based Compensation
The Company maintains several equity plans (the "Equity Plans") which
collectively provide or provided for the grant of stock options, tandem stock
appreciation rights and restricted shares of the Company's common stock to
certain officers, other key employees, non-employee directors and consultants,
including shares of the Company's common stock granted in lieu of annual
retainer or meeting attendance fees to non-employee directors.
The Company measures compensation costs for its employee stock-based
compensation, other than employee membership interests in future profits of a
subsidiary, under the intrinsic value method rather than the fair value method.
Compensation cost for the Company's stock options is measured as the excess, if
any, of the market price of the Company's class A common stock (the "Class A
Common Stock"), and/or class B common stock, series 1 (the "Class B Common
Stock"), as applicable, at the date of grant, or at any subsequent measurement
date as a result of certain types of modifications to the terms of its stock
options, over the amount an employee must pay to acquire the stock. Such amounts
are recognized as compensation expense over the vesting period of the related
stock options.
On March 14, 2005, the Company granted 149,155 and 731,411 contingently
issuable performance-based restricted shares of Class A Common Stock and Class B
Common Stock, respectively, (the "Restricted Shares") to certain officers and
key employees under its 2002 equity participation plan. The Restricted Shares
vest ratably over three years, subject to meeting, in each case, certain Class B
Common Stock market price targets of between $12.09 and $16.09 per share, or to
the extent not previously vested, on March 14, 2010 subject to meeting a Class B
Common Stock market price target of $18.50 per share. The prices of the
Company's Class A and Class B Common Stock on the March 14, 2005 grant date were
$15.59 and $14.75 per share, respectively. The Company's Restricted Shares are
accounted for as variable plan awards, since they vest only if the Company's
Class B Common Stock meets certain market price targets. The Company measures
compensation cost for its Restricted Shares by estimating the expected number of
shares that will ultimately vest based on the market price of its Class B Common
Stock at the end of each period. Such amounts are recognized ratably as
compensation expense over the vesting period of the related Restricted Shares
and are adjusted based on the market price of the Class B Common Stock at the
end of each period.
A summary of the effect on net income (loss) and net income (loss) per
share as if the fair value method, calculated under the Black-Scholes-Merton
option pricing model (the "Black-Scholes Model"), had been applied to all
outstanding and unvested stock options and Restricted Shares is as follows (in
thousands except per share data):
Three Months Ended
----------------------------
March 28, April 3,
2004 2005
---- ----
Net income (loss), as reported.....................................................$ (3,156) $ 2,679
Reversal of stock-based compensation expense determined
under the intrinsic value method included in reported net income
or loss, net of related income taxes............................................. -- 156
Recognition of stock-based compensation expense determined
under the fair value method, net of related income taxes......................... (518) (1,877)
--------- ---------
Net income (loss), as adjusted.....................................................$ (3,674) $ 958
========= =========
Net income (loss) per share:
Class A Common Stock:
Basic, as reported............................................................$ (.05) $ .04
Basic, as adjusted............................................................ (.06) .01
Diluted, as reported.......................................................... (.05) .04
Diluted, as adjusted.......................................................... (.06) .01
Class B Common Stock:
Basic, as reported............................................................$ (.05) $ .04
Basic, as adjusted............................................................ (.06) .02
Diluted, as reported.......................................................... (.05) .04
Diluted, as adjusted.......................................................... (.06) .01
Stock options granted during the periods presented below are exercisable
for one share of Class A Common Stock (the "Class A Options") or one share of
Class B Common Stock (the "Class B Options"). The fair value of these stock
options granted under the Equity Plans on the date of grant was estimated using
the Black-Scholes Model with the following weighted average assumptions:
Three Months Ended
------------------------------------
March 28, 2004 April 3, 2005
-------------------- -------------
Class A Class B Class B
Options Options Options
------- ------- -------
Risk-free interest rate..................................................... 3.23% 3.71% 3.86%
Expected option life in years............................................... 7 7 7
Expected volatility......................................................... 20.4% 33.0% 28.1%
Dividend yield.............................................................. 2.41% 2.61% 2.63%
During the three-month period ended March 28, 2004, the Company granted
15,000 Class A Options and 180,000 Class B Options and during the three-month
period ended April 3, 2005, the Company granted 4,473,000 Class B Options under
the Equity Plans at exercise prices equal to the market price of the stock on
the grant dates. The weighted average grant date fair values of each of these
stock options, using the Black-Scholes Model with the assumptions set forth
above, were $2.22, $3.42 and $3.98 respectively.
The Black-Scholes Model has limitations on its effectiveness including that
it was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable and that the model
requires the use of highly subjective assumptions including expected stock price
volatility. The Company's stock-option awards to employees have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimates.
Therefore, in the opinion of the Company, the existing model does not
necessarily provide a reliable single measure of the fair value of the Company's
stock-option awards.
(3) Business Acquisition
On July 22, 2004 the Company completed the acquisition of a 63.6% capital
interest in Deerfield (the "Deerfield Acquisition") for an aggregate cost of
$94,907,000, consisting of payments of $86,532,000 to selling owners and
estimated expenses of $8,375,000, including expenses reimbursed to a selling
owner. In connection with the Deerfield Acquisition, effective August 20, 2004,
Deerfield granted membership interests in future profits to certain of its key
employees, which reduced the Company's interest in the profits of Deerfield
subsequent to August 19, 2004 to 61.5%. The Company acquired Deerfield with the
expectation of growing the substantial value of Deerfield's historically
profitable investment advisory brand. Deerfield is an asset manager and
represents a business segment of the Company (see Note 10).
Deerfield's results of operations, less applicable minority interests, and
cash flows subsequent to the July 22, 2004 date of the Deerfield Acquisition
have been included in the Company's condensed consolidated statements of
operations and cash flows. As such, Deerfield's results of operations and cash
flows are included in the Company's consolidated results for the three-month
period ended April 3, 2005, but are not included for the three-month period
ended March 28, 2004.
The preliminary allocation of the purchase price of Deerfield to the assets
acquired and liabilities assumed included in Note 3 to the consolidated
financial statements contained in the Form 10-K remains unchanged as of April 3,
2005.
The following supplemental pro forma condensed consolidated summary
operating data (the "As Adjusted Data") of the Company for the three-month
period ended March 28, 2004 has been prepared by adjusting the historical data
as set forth in the accompanying condensed consolidated statement of operations
to give effect to the Deerfield Acquisition as if it had been consummated as of
December 29, 2003 (in thousands except per share amounts):
Three Months Ended
March 28, 2004
-------------------------------
As Reported As Adjusted
----------- -----------
Revenues......................................................................$ 69,191 $ 81,118
Operating profit (loss)...................................................... (22) 3,664
Net loss..................................................................... (3,156) (2,012)
Basic and diluted loss per share of Class A Common Stock and
Class B Common Stock....................................................... (.05) (.03)
This As Adjusted Data is presented for comparative purposes only and does
not purport to be indicative of the Company's actual condensed consolidated
results of operations had the Deerfield Acquisition actually been consummated as
of December 29, 2003 or of the Company's future results of operations.
(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
-----------------------------
March 28, April 3,
2004 2005
---- ----
Net income (loss) ............................................................$ (3,156) $ 2,679
Unrealized gains (losses) on available-for-sale securities (see below)........ 552 (261)
Net change in currency translation adjustment................................. (3) 19
---------- ----------
Comprehensive income (loss)...................................................$ (2,607) $ 2,437
========== ==========
The following is a summary of the components of the unrealized gains or
losses on available-for-sale securities included in comprehensive income (loss)
(in thousands):
Three Months Ended
-----------------------------
March 28, April 3,
2004 2005
---- ----
Unrealized holding gains arising during the period............................$ 262 $ 1,394
Reclassifications of prior period net unrealized holding (gains) losses into
"Investment income, net"................................................... 598 (1,006)
---------- ----------
860 388
Equity in change in unrealized losses on available-for-sale securities and
other investments accounted for similarly................................... (2) (714)
Income tax (provision) benefit................................................ (306) 142
Minority interests in a consolidated subsidiary............................... -- (77)
---------- ----------
$ 552 $ (261)
========== ==========
(5) Income (Loss) Per Share
Basic income (loss) per share has been computed by dividing the allocated
income or loss for the Company's Class A Common Stock and the Company's Class B
Common Stock by the weighted average number of shares of each class. Both
factors are presented in the tables below. The net loss for the three-month
period ended March 28, 2004 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. Net income for the three-month period ended April 3, 2005 was
allocated between the Class A Common Stock and Class B Common Stock based on the
actual dividend payment ratio. The weighted average number of shares includes
the weighted average effect of the shares held in two deferred compensation
trusts reported in "Deferred compensation payable in common stock" as a
component of "Stockholders' Equity" in the accompanying condensed consolidated
balance sheets. These shares are not reported as outstanding shares for
financial statement purposes.
Diluted loss per share for the three-month period ended March 28, 2004 was
the same as basic loss per share for each share of the Class A and Class B
Common Stock since the Company reported a net loss and, therefore, the effect of
all potentially dilutive securities on the loss per share would have been
antidilutive. Diluted income per share for the three-month period ended April 3,
2005 has been computed by dividing the allocated income for the Class A Common
Stock and Class B Common Stock by the weighted average number of shares of each
class plus the potential common share effects on each class of (1) dilutive
stock options, computed using the treasury stock method, and (2) contingently
issuable performance-based Restricted Shares of Class A and Class B Common Stock
that would be issuable based on the market price as of April 3, 2005, as
presented in the table below. The shares used to calculate diluted income per
share exclude any effect of the Company's $175,000,000 of 5% convertible notes
which would have been antidilutive since the after-tax interest on the
convertible notes, which would be added back to the allocated income for
purposes of calculating diluted income per share, per share of Class A Common
Stock and Class B Common Stock obtainable on conversion exceeds the reported
basic income per share.
The only remaining Company securities as of April 3, 2005 that could dilute
basic income per share for periods subsequent to April 3, 2005 are (1)
outstanding stock options which are exercisable into 3,594,636 shares and
13,556,772 shares of the Company's Class A Common Stock and Class B Common
Stock, respectively, (2) the $175,000,000 of 5% convertible notes which are
convertible currently into 4,375,000 shares and 8,750,000 shares of the
Company's Class A Common Stock and Class B Common Stock, respectively, and (3)
149,155 and 731,411 contingently issuable Restricted Shares of the Company's
Class A Common Stock and Class B Common Stock, respectively.
Income (loss) per share has been computed by allocating the income or loss
as follows (in thousands):
Three Months Ended
-----------------------
March 28, April 3,
2004 2005
---- ----
Class A Common Stock................................................................$ (1,049) $ 882
Class B Common Stock................................................................ (2,107) 1,797
The number of shares used to calculate basic and diluted income (loss) per
share were as follows (in thousands):
Three Months Ended
----------------------
March 28, April 3,
2004 2005
---- ----
Class A Common Stock:
Weighted average shares
Outstanding.................................................................. 19,616 22,014
Held in deferred compensation trusts......................................... 376 1,695
---------- ----------
Basic shares...................................................................... 19,992 23,709
Dilutive effect of stock options............................................. -- 1,124
Contingently issuable Restricted Shares...................................... -- 18
---------- ----------
Diluted shares.................................................................... 19,992 24,851
========== ==========
Class B Common Stock:
Weighted average shares
Outstanding.................................................................. 39,401 38,454
Held in deferred compensation trusts......................................... 753 3,390
---------- ----------
Basic shares...................................................................... 40,154 41,844
Dilutive effect of stock options............................................. -- 2,445
Contingently issuable Restricted Shares...................................... -- 86
---------- ----------
Diluted shares.................................................................... 40,154 44,375
========== ==========
(6) Discontinued Operations
Prior to 2004 the Company sold (1) the stock of the companies comprising
the Company's former premium beverage and soft drink concentrate business
segments (the "Beverage Discontinued Operations"), (2) the stock or the
principal assets of the companies comprising the former utility and municipal
services and refrigeration business segments (the "SEPSCO Discontinued
Operations") of SEPSCO, LLC, a subsidiary of the Company, and (3) substantially
all of its interest in a partnership and subpartnership comprising the Company's
former propane business segment (the "Propane Discontinued Operations"). The
Beverage, SEPSCO and Propane Discontinued Operations have been accounted for as
discontinued operations by the Company. There remain certain obligations not
transferred to the buyers of these discontinued businesses to be liquidated.
Current liabilities relating to the discontinued operations consisted of
the following (in thousands):
January 2, April 3,
2005 2005
---- ----
Accrued expenses, including accrued income taxes, of the Beverage
Discontinued Operations....................................................$ 12,455 $ 12,221
Liabilities relating to the SEPSCO and Propane Discontinued Operations....... 1,379 1,352
----------- -----------
$ 13,834 $ 13,573
=========== ===========
The Company expects that the liquidation of these remaining liabilities
will not have a material adverse impact on its consolidated financial position
or results of operations. To the extent any estimated amounts included in
current liabilities relating to the discontinued operations are determined to be
in excess of the requirement to liquidate the associated liability, any such
excess will be released at that time as a component of gain on disposal of
discontinued operations.
(7) Retirement Benefit Plans
The Company maintains two defined benefit plans, the benefits under which
were frozen in 1992. After recognizing a curtailment gain upon freezing the
benefits, the Company has no unrecognized prior service cost related to these
plans. The measurement date used by the Company in determining the components of
pension expense is December 31.
The components of the net periodic pension cost incurred by the Company
with respect to these plans are as follows (in thousands):
Three Months Ended
----------------------------
March 28, April 3,
2004 2005
---- ----
Service cost (consisting entirely of plan expenses)...............................$ 22 $ 24
Interest cost..................................................................... 61 59
Expected return on the plans' assets.............................................. (71) (70)
Amortization of unrecognized net loss............................................. 8 12
---------- ----------
Net periodic pension cost.........................................................$ 20 $ 25
========== ==========
(8) Transactions with Related Parties
Prior to 2004 the Company provided incentive compensation of $22,500,000,
in the aggregate, to the Chairman and Chief Executive Officer and the President
and Chief Operating Officer of the Company (the "Executives") which was invested
in two deferred compensation trusts (the "Deferred Compensation Trusts") for
their benefit. Deferred compensation expense of $885,000 and $457,000 was
recognized in the three-month periods ended March 28, 2004 and April 3, 2005,
respectively, for increases in the fair value of the investments in the Deferred
Compensation Trusts. Under GAAP, the Company recognizes investment income for
any interest or dividend income on investments in the Deferred Compensation
Trusts and realized gains on sales of investments in the Deferred Compensation
Trusts, but is unable to recognize any investment income for unrealized
increases in the fair value of the investments in the Deferred Compensation
Trusts because these investments are accounted for under the cost method of
accounting. Accordingly, the Company recognized net investment income (loss)
from investments in the Deferred Compensation Trusts of $744,000 and $(78,000)
in the three-month periods ended March 28, 2004 and April 3 2005, respectively.
The net investment income during the three-month period ended March 28, 2004
consisted of an $828,000 realized gain from the sale of a cost-method investment
in the Deferred Compensation Trusts, which included increases in value prior to
the three-month period ended March 28, 2004 of $777,000, and $2,000 of interest
income, less $86,000 of investment management fees. The net investment loss
during the three-month period ended April 3, 2005 consisted of investment
management fees of $107,000, less interest income of $29,000. Realized gains,
interest income and investment management fees are included in "Investment
income, net" and deferred compensation expense is included in "General and
administrative, excluding depreciation and amortization" expenses in the
accompanying condensed consolidated statements of operations. As of April 3,
2005, the obligation to the Executives related to the Deferred Compensation
Trusts is $32,181,000 and is included in "Deferred compensation payable to
related parties" in the accompanying condensed consolidated balance sheets. As
of April 3, 2005, the assets in the Deferred Compensation Trusts consisted of
$20,001,000 included in "Investments," which does not reflect the unrealized
increase in the fair value of the investments, $5,272,000 included in "Cash and
cash equivalents" and $221,000 included in "Investment settlements receivable"
in the accompanying condensed consolidated balance sheet. The cumulative
disparity between (1) deferred compensation expense and net recognized
investment income and (2) the obligation to the Executives and the carrying
value of the assets in the Deferred Compensation Trusts will reverse in future
periods as either (1) additional investments in the Deferred Compensation Trusts
are sold and previously unrealized gains are recognized without any offsetting
increase in compensation expense or (2) the fair values of the investments in
the Deferred Compensation Trusts decrease resulting in the recognition of a
reversal of compensation expense without any offsetting losses recognized in
investment income.
The Company continues to have additional related party transactions of the
same nature and general magnitude as those described in Note 24 to the
consolidated financial statements contained in the Form 10-K.
(9) 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 after which it will reevaluate the need for additional assessment or
remediation. The first sampling event occurred in January 2005 and the results
have been submitted to the FDEP for its review. Based on provisions of
$1,667,000 for those costs made prior to 2004, and after taking into
consideration various legal defenses available to the Company, including Adams,
Adams has provided for its estimate of its remaining liability for completion of
this matter.
In 1998, a number of class action lawsuits were filed on behalf of the
Company's stockholders. Each of these actions named the Company, the Executives
and other members of the Company's then board of directors as defendants. In
1999, certain plaintiffs in these actions filed a consolidated amended complaint
alleging that the Company's tender offer statement filed with the SEC in 1999,
pursuant to which the Company repurchased 3,805,015 shares of its Class A Common
Stock, failed to disclose material information. The amended complaint seeks,
among other relief, monetary damages in an unspecified amount. In 2000, the
plaintiffs agreed to stay this action pending determination of a related
stockholder action that was subsequently dismissed in October 2002 and is no
longer being appealed. Through April 3, 2005, no further action has occurred
with respect to the remaining class action lawsuit and such action remains
stayed.
In addition to the environmental matter and stockholder lawsuit described
above, the Company is involved in other litigation and claims incidental to its
current and prior businesses. Triarc and its subsidiaries have reserves for all
of their legal and environmental matters aggregating $1,200,000 as of April 3,
2005. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information, including legal defenses available to Triarc
and/or its subsidiaries, and given the aforementioned reserves, the Company does
not believe that the outcome of such legal and environmental matters will have a
material adverse effect on its consolidated financial position or results of
operations.
(10) Business Segments
The Company manages and internally reports its operations as two business
segments: (1) the operation and franchising of restaurants ("Restaurants") and
(2) asset management (see Note 3). The Company evaluates segment performance and
allocates resources based on each segment's earnings before interest, taxes,
depreciation and amortization ("EBITDA"). EBITDA has been computed as operating
profit plus depreciation and amortization, excluding amortization of deferred
financing costs ("Depreciation and Amortization"). Operating profit has been
computed as revenues less operating expenses. In computing EBITDA and operating
profit, interest expense and non-operating income and expenses have not been
considered. Identifiable assets by segment are those assets used in the
Company's operations of each segment. General corporate assets consist primarily
of cash and cash equivalents, short-term investments, receivables, non-current
investments and properties.
The following is a summary of the Company's segment information (in
thousands):
Three Months Ended
-------------------------
March 28, April 3,
2004 2005
---- ----
Revenues:
Restaurants.......................................................................$ 69,191 $ 74,769
Asset management.................................................................. -- 12,928
----------- -----------
Consolidated revenues........................................................$ 69,191 $ 87,697
=========== ===========
EBITDA:
Restaurants.......................................................................$ 14,011 $ 17,063
Asset management.................................................................. -- 3,923
General corporate................................................................. (10,682) (15,024)
----------- -----------
Consolidated EBITDA.......................................................... 3,329 5,962
----------- -----------
Less Depreciation and Amortization:
Restaurants....................................................................... 2,015 2,936
Asset management.................................................................. -- 1,083
General corporate................................................................. 1,336 1,507
----------- -----------
Consolidated Depreciation and Amortization................................... 3,351 5,526
----------- -----------
Operating profit (loss):
Restaurants....................................................................... 11,996 14,127
Asset management.................................................................. -- 2,840
General corporate................................................................. (12,018) (16,531)
----------- -----------
Consolidated operating profit (loss)......................................... (22) 436
Interest expense...................................................................... (9,634) (10,253)
Insurance expense related to long-term debt........................................... (991) (904)
Investment income, net................................................................ 6,524 9,100
Gain on sale of business.............................................................. 16 9,608
Other expense, net.................................................................... (40) (370)
----------- -----------
Consolidated income (loss) before income taxes and minority interests........$ (4,147) $ 7,617
=========== ===========
January 2, April 3,
2005 2005
---- ----
Identifiable assets:
Restaurants.........................................................................$ 209,856 $ 209,392
Asset management.................................................................... 138,818 123,555
General corporate................................................................... 718,299 1,156,542
----------- -----------
Consolidated total assets....................................................$ 1,066,973 $ 1,489,489
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction and Executive Overview
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Triarc Companies, Inc., which we refer to as Triarc,
and its subsidiaries should be read in conjunction with the accompanying
condensed consolidated financial statements and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the fiscal year ended January 2, 2005. Item 7 of our
2004 Form 10-K describes our contractual obligations and the application of our
critical accounting policies. There have been no significant changes as of April
3, 2005 pertaining to these topics. Certain statements we make under this Item 2
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. See "Special Note Regarding Forward-Looking Statements and
Projections" in "Part II - Other Information" preceding "Item 1."
We currently operate in two business segments. We operate in the restaurant
business through our franchised and Company-owned Arby's restaurants and,
effective with the July 2004 acquisition of Deerfield & Company, LLC, which we
refer to as Deerfield, we operate in the asset management business.
On July 22, 2004 we completed the acquisition of a 63.6% capital interest
in Deerfield, which transaction we refer to as the Deerfield Acquisition.
Deerfield, through its wholly-owned subsidiary Deerfield Capital Management LLC,
is an asset manager offering a diverse range of fixed income and credit-related
strategies to institutional investors. Deerfield provides asset management
services for (1) collateralized debt obligation vehicles, which we refer to as
CDOs, and (2) investment funds and private investment accounts, which we refer
to as Funds, including Deerfield Triarc Capital Corp., a real estate investment
trust formed in December 2004, which we refer to as the REIT. Deerfield's
results of operations, less applicable minority interests, and cash flows are
included in our consolidated results for the three-month period ended April 3,
2005, but are not included for the three-month period ended March 28, 2004.
In our restaurant business, we derive revenues in the form of royalties and
franchise and related fees and from sales by our Company-owned restaurants.
While over 60% of our existing 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 3.5% for the three months ended April 3, 2005. In
our asset management business, we derive revenues in the form of asset
management and related fees from our management of CDOs and Funds and we may
expand the types of investments that we offer and manage.
We derived investment income throughout the periods presented principally
from the investment of our excess cash. In that regard, in October 2004 we
invested $100.0 million to seed a new multi-strategy hedge fund, Deerfield
Opportunities Fund, LLC, which we refer to as the Opportunities Fund, which is
managed by Deerfield and currently accounted for as a consolidated subsidiary of
ours, with minority interests to the extent of participation by investors other
than us (see "Consolidation of Opportunities Fund"). The Opportunities Fund
principally invests in various fixed income securities and their derivatives, as
opportunities arise, and employs leverage in its trading activities, including
securities sold with an obligation to purchase or under agreements to
repurchase. In March 2005 we withdrew $4.8 million of our investment from the
Opportunities Fund to seed another new fund managed by Deerfield and
consolidated by us with minority interests.
Our goal is to enhance the value of our Company by increasing the revenues
of the Arby's restaurant business and our recently acquired 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 service levels and convenience. We plan to grow
Deerfield's assets under management by utilizing the value of its historically
profitable investment advisory brand and increasing the types of assets under
management, such as the REIT, thereby increasing Deerfield's asset management
fee revenues.
As discussed below under "Liquidity and Capital Resources - Investments and
Potential Acquisitions," we continue to evaluate our options for the use of our
significant cash and investment position, including business acquisitions,
repurchases of our common stock and investments. In recent years we evaluated a
number of business acquisition opportunities, including Deerfield, and we intend
to continue our disciplined search for potential business acquisitions that we
believe have the potential to create significant value to our stockholders.
In recent periods our restaurant business has experienced the following
trends:
o Growing U.S. adult population, our principal customer demographic;
o Addition of selected higher-priced quality items to menus, which
appeal more to adult tastes;
o Increased consumer preference for premium sandwiches with perceived
higher levels of freshness, quality and customization along with
increased competition in the premium sandwich category;
o Increased price competition, as evidenced by value menu concepts,
which offer comparatively lower prices on some menu items; combination
meal concepts, which offer a complete meal at an aggregate price lower
than the price of the individual food and beverage items; and use of
coupons and other price discounting;
o Increased competition among quick service restaurant competitors and
other retail food operators for available development sites, higher
development costs associated with those sites and continued tightening
in the lending markets typically used to finance new unit development;
o Increased availability to consumers of new product choices, including
low calorie, low carbohydrate and/or low fat products driven by a
greater consumer awareness of nutritional issues;
o Competitive pressures from operators outside the quick service
restaurant industry, such as the deli sections and in-store cafes of
several major grocery store chains, convenience stores and casual
dining outlets offering prepared food purchases;
o Increases in beef and other commodity costs, although in recent months
these costs have stabilized at levels which we anticipate will
continue in the foreseeable future; and
o Legislative activity on both the federal and state level, which could
result in higher (1) wages and related fringe benefits, including
health care and other insurance costs, and (2) packaging costs.
We experience the effects of these trends directly to the extent they
affect the operations of our Company-owned restaurants and indirectly to the
extent they affect sales by our franchisees and, accordingly, impact the
royalties and franchise fees we receive from them.
In recent periods, our asset management business has experienced the
following trends, including trends prior to our entrance into the asset
management business through the Deerfield Acquisition:
o Growth in the hedge fund market as investors appear to be increasing
their investment allocations to hedge funds;
o Increased competition in the hedge fund industry in the form of new
hedge funds offered by both new and established asset managers to meet
the increasing demand of hedge fund investors;
o Continued growth of the CDO market as it opens to individual
investors, in addition to the institutional investors which it has
mainly served in the past, with CDOs that offer more simplified income
tax reporting for the investor; and
o Increased competition in the fixed income investment markets resulting
in higher demand for, and costs of, investments purchased by CDOs
resulting in the need to continuously develop new investment
strategies with the goal of maintaining acceptable risk-adjusted
returns to investors.
Presentation of Financial Information
We report on a fiscal year consisting of 52 or 53 weeks ending on the
Sunday closest to December 31. However, Deerfield and the Opportunities Fund
report on a calendar year ending on December 31. Our first quarter of fiscal
2004 commenced on December 29, 2003 and ended on March 28, 2004, and our first
quarter of fiscal 2005 commenced on January 3, 2005 and ended on April 3, 2005.
When we refer to the "three months ended March 28, 2004," or the "2004 first
quarter," we mean the period from December 29, 2003 to March 28, 2004, and when
we refer to the "three months ended April 3, 2005," or the "2005 first quarter,"
we mean the period from January 3, 2005 to April 3, 2005. Each quarter contained
13 weeks. All references to years and quarters relate to fiscal periods rather
than calendar periods, except for Deerfield and the Opportunities Fund.
Results of Operations
Presented below is a table that summarizes our results of operations and
compares the amount and percent of the change between the 2004 first quarter and
the 2005 first quarter. We consider certain percentage changes between these
quarters to be not measurable or not meaningful, and we refer to these as "n/m."
The percentage changes used in the following discussion have been rounded to the
nearest whole percent.
Three Months Ended
------------------ Change
March 28, April 3, ------
2004 2005 Amount Percent
---- ---- ------ -------
(In Millions Except Percents)
Revenues:
Net sales...................................................$ 46.7 $ 51.2 $ 4.5 10 %
Royalties and franchise and related fees.................... 22.5 23.6 1.1 5 %
Asset management and related fees........................... -- 12.9 12.9 n/m
---------- --------- ---------
69.2 87.7 18.5 27 %
---------- --------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization...... 37.3 39.2 1.9 5 %
Cost of services, excluding depreciation and amortization... -- 4.2 4.2 n/m
Advertising and selling..................................... 4.2 4.6 0.4 10 %
General and administrative, excluding depreciation and
amortization.............................................. 24.3 33.8 9.5 39 %
Depreciation and amortization, excluding amortization of
deferred financing costs ................................. 3.4 5.5 2.1 62 %
---------- --------- ---------
69.2 87.3 18.1 26 %
---------- --------- ---------
Operating profit........................................ -- 0.4 0.4 n/m
Interest expense .............................................. (9.6) (10.2) (0.6) (6) %
Insurance expense related to long-term debt.................... (1.0) (0.9) 0.1 10 %
Investment income, net......................................... 6.5 9.1 2.6 40 %
Gain on sale of business....................................... -- 9.6 9.6 n/m
Other expense, net............................................. (0.1) (0.4) (0.3) n/m
---------- --------- ---------
Income (loss) before income taxes and minority
interests............................................ (4.2) 7.6 11.8 n/m
Benefit from (provision for) income taxes...................... 1.0 (2.5) (3.5) n/m
Minority interests in income of consolidated subsidiaries...... -- (2.4) (2.4) n/m
---------- --------- ---------
Net income (loss).......................................$ (3.2) $ 2.7 $ 5.9 n/m
========== ========= =========
Three Months Ended April 3, 2005 Compared with Three Months Ended March 28, 2004
Net Sales
Our net sales, which were generated entirely from the Company-owned
restaurants, increased by $4.5 million, or 10%, to $51.2 million for the three
months ended April 3, 2005 from $46.7 million for the three months ended March
28, 2004. This increase principally reflects a $4.2 million improvement due to a
9% growth in same-store sales of the Company-owned restaurants in the 2005 first
quarter compared with the weak same-store sales performance of the 2004 first
quarter. When we refer to same-store sales, we mean only sales of those
restaurants which were open during the same months in both of the comparable
periods. The increase in same-store sales reflected (1) the effects of an
increase in print media advertising, primarily couponing, and other marketing
initiatives launched in the 2005 first quarter, (2) the introduction of new
Market Fresh(TM) menu offerings since March 28, 2004 consisting of salads, wraps
and new sandwiches and (3) operational initiatives targeting continued
improvement in customer service levels and convenience.
The 9% growth in same-store sales of Company-owned restaurants in the 2005
first quarter compared with the 2004 first quarter exceeds the 3% growth in
same-store sales of franchised restaurants in the 2005 first quarter compared
with the 2004 first quarter discussed below under "Royalties and Franchise and
Related Fees." The comparatively higher same-store sales growth of the
Company-owned restaurants is due to the relatively weaker same-store sales
performance of the Company-owned restaurants versus the franchised restaurants
in the comparable prior year first quarter and the increased use of couponing in
the Company-owned restaurants in the 2005 first quarter.
We expect to continue to experience same-store sales growth of
Company-owned restaurants for the remainder of 2005, although at a lower rate
than the 9% in the 2005 first quarter because of expected decreased use of
couponing in the remaining three quarters of 2005 and the improved same-store
sales performance in the last nine months of the prior year compared with the
prior year first quarter. This continued same-store sales growth is due to a
continuation of the same factors affecting our first quarter 2005 same-store
sales comparisons, other than the increased use of couponing. We presently plan
to open ten new Company-owned restaurants during the remainder of 2005. In
addition, we will evaluate whether to close any underperforming Company-owned
restaurants and continually review the performance of each of those restaurants,
particularly in connection with the decision to renew or extend their leases.
Specifically, we have twelve restaurants where the facilities leases either are
scheduled for renewal or expire during the remainder of 2005 and we currently
anticipate the renewal or extension of most of these leases.
Royalties and Franchise and Related Fees
Our royalties and franchise and related fees, which were generated entirely
from the franchised restaurants, increased $1.1 million, or 5%, to $23.6 million
for the three months ended April 3, 2005 from $22.5 million for the three months
ended March 28, 2004. This increase consisted of (1) a $0.7 million improvement
in royalties due to a 3% increase in same-store sales of the franchised
restaurants during the 2005 first quarter compared with the weak same-store
sales performance during the 2004 first quarter and (2) a $0.6 million
improvement in royalties from the 81 restaurants opened since March 28, 2004
with generally higher than average sales volumes, replacing the royalties from
the 74 generally underperforming restaurants closed since March 28, 2004. The
increase in same-store sales of the franchised restaurants reflects (1) the new
Market Fresh(TM) menu offerings introduced since March 28, 2004 discussed above
under "Net Sales," (2) a new marketing program launched in the 2005 first
quarter supporting both traditional and new menu offerings and (3) operational
initiatives targeting continued improvement in customer service levels and
convenience. These increases were partially offset by a $0.2 million decrease in
franchise and related fees principally due to the opening of 11 fewer franchised
restaurants in the 2005 first quarter compared with the 2004 first quarter.
We expect to continue to experience positive same-store sales growth of
franchised restaurants during the remainder of 2005 at a similar 3% rate as
experienced in the 2005 first quarter due to the anticipated continuation of the
same factors that benefited the first quarter.
Asset Management and Related Fees
Our asset management and related fees of $12.9 million for the 2005 first
quarter resulted entirely from the management of CDOs and Funds reflecting the
Deerfield Acquisition.
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 $1.9
million, or 5%, to $39.2 million for the three months ended April 3, 2005,
resulting in a gross margin of 23%, from $37.3 million for the three months
ended March 28, 2004, resulting in a gross margin of 20%. 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 largely driven by the higher level of sales in the
first quarter of 2005 compared with the first quarter of 2004, as discussed
above under "Net Sales." The improvement in gross margin in the first quarter of
2005 compared with the first quarter of 2004 is primarily attributable to
improved oversight and training of store management and improved operational
reporting made available by the new back office and point-of-sale restaurant
systems implemented in the latter part of 2004, which facilitated labor
efficiencies and reduced food waste. Also favorably affecting our margin in the
2005 first quarter were slightly lower costs for roast beef, the largest
component of our menu offerings, and the impact of price increases implemented
in the second half of 2004 for some of our menu items.
We expect that the improvement in our gross margin to 23% that we
experienced during the 2005 first quarter will continue during the remainder of
2005 primarily as a result of the labor efficiencies and reduced food waste
referred to above.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services, excluding depreciation and amortization, of $4.2
million for the 2005 first quarter resulted entirely from the management of CDOs
and Funds by Deerfield.
Our royalties and franchise and related fees have no associated cost of
services.
Advertising and Selling
Our advertising and selling expenses increased $0.4 million, or 10%,
principally due to an increase in advertising expenses of the Company-owned
restaurants relating to increased spending for print media campaigns, primarily
couponing.
General and Administrative, Excluding Depreciation and Amortization
Our general and administrative expenses, excluding depreciation and
amortization increased $9.5 million, partially reflecting $4.9 million of
general and administrative expenses of Deerfield. Aside from the effect of the
Deerfield Acquisition, general and administrative expenses increased $4.6
million primarily due to a $5.3 million increase in employee compensation
reflecting higher incentive compensation costs and, to a much lesser extent,
increased headcount and, in the 2005 first quarter, a provision for stock-based
compensation related to grants of 149,155 and 731,411 shares of our contingently
issuable performance-based restricted class A and class B common stock,
respectively, on March 14, 2005, as discussed below. The increase was partially
offset by (1) a $0.6 million decrease in severance charges and (2) a $0.4
million decrease in deferred compensation expense. Deferred compensation expense
of $0.9 million in the 2004 first quarter and $0.5 million in the 2005 first
quarter represents the increase in the fair value of investments in two deferred
compensation trusts, which we refer to as the Deferred Compensation Trusts, for
the benefit of our Chairman and Chief Executive Officer and our President and
Chief Operating Officer, whom we refer to as the Executives, as explained in
more detail below under "Income (Loss) Before Income Taxes and Minority
Interests."
The provision for stock-based compensation related to the restricted stock
grants was $0.2 million during the 2005 first quarter and may vary significantly
during the remaining nine months of 2005. These restricted shares vest ratably
over three years, subject to meeting, in each case, certain class B common share
market price targets of between $12.09 and $16.09 per share, or to the extent
not previously vested, on March 14, 2010 subject to meeting a class B common
share market price target of $18.50 per share. The provision for stock-based
compensation during the remainder of 2005 will vary depending on the market
price of our class B common stock in relation to the market price targets upon
which vesting of the restricted shares is contingent and will be adjusted based
on the market price of the class B common stock at the end of each quarter.
We are required to adopt Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment," no later than our 2006 fiscal first
quarter. As a result, we will be required to measure the cost of employee
services received in exchange for an award of equity instruments, including
grants of employee stock options and restricted stock, based on the fair value
of the award rather than its intrinsic value, which we are currently using. We
currently expect that the adoption of this statement will materially increase
the amount of compensation expense recognized over the periods that the
respective stock options and restricted stock vest.
Depreciation and Amortization, Excluding Amortization of Deferred Financing
Costs
Our depreciation and amortization, excluding amortization of deferred
financing costs increased $2.1 million, partially reflecting $1.1 million of
depreciation and amortization related to Deerfield. Aside from the effect of the
Deerfield Acquisition, depreciation and amortization increased $1.0 million
entirely due to an increase in depreciation and amortization of properties and
amortization of software partially related to our new back office and
point-of-sale restaurant systems installed in the second half of 2004.
Interest Expense
Interest expense increased $0.6 million principally due to a $1.3 million
increase in interest expense on debt securities sold with an obligation to
purchase or under agreements to repurchase in connection with the use of
leverage in the Opportunities Fund. This increase was partially offset by a $0.7
million decrease attributable to lower outstanding amounts of a majority of our
long-term debt.
Investment Income, Net
The following table summarizes and compares the major components of
investment income, net:
Three Months Ended
------------------------
March 28, April 3,
2004 2005 Change
---- ---- ------
(In Millions)
Interest income.............................................$ 4.1 $ 6.3 $ 2.2
Recognized net gains........................................ 1.8 3.1 1.3
Distributions, including dividends.......................... 0.7 0.2 (0.5)
Other than temporary unrealized losses...................... -- (0.3) (0.3)
Other....................................................... (0.1) (0.2) (0.1)
--------- -------- ---------
$ 6.5 $ 9.1 $ 2.6
========= ======== =========
Interest income increased $2.2 million partially reflecting $0.7 million of
interest income of Deerfield. Aside from the effect of the Deerfield
Acquisition, interest income increased $1.5 million primarily due to an increase
in average rates on our interest-bearing investments from 2.5% in the 2004 first
quarter to 3.3% in the 2005 first quarter and, to a lesser extent, higher
average outstanding balances of our interest-bearing investments. The increase
in the average rates was principally due to our investing through the
Opportunities Fund in some higher yielding, but more risk-inherent, debt
securities with the objective of improving the overall return on our
interest-bearing investments and the general increase in the money market and
short-term interest rate environment. The higher average outstanding balance of
our interest-bearing investments was due to the use of leverage in the
Opportunities Fund. However, the average outstanding balances of our
interest-bearing investments, net of related leveraging liabilities, decreased
principally due to the liquidation of some of those investments to provide cash
for the Deerfield Acquisition. Our recognized net gains include (1) realized
gains and losses on sales of our available-for-sale securities and our
investments accounted for under the cost method of accounting and (2) realized
and unrealized gains and losses on changes in the fair values of our trading
securities and our securities sold short with an obligation to purchase. The
increase in our recognized net gains of $1.3 million was principally due to an
increase of $2.2 million in unrealized gains on our securities sold short with
an obligation to purchase, partially offset by a $0.8 million realized gain in
the 2004 quarter, which did not recur in the 2005 first quarter, from the sale
of a cost-method investment held in the Deferred Compensation Trusts, as
explained in more detail below under "Income (Loss) Before Income Taxes and
Minority Interests." All of these recognized gains and losses may vary
significantly in future periods depending upon the timing of the sales of our
investments, including the investments in the Deferred Compensation Trusts, or
the changes in the value of our investments, as applicable. Distributions,
including dividends, decreased $0.5 million due to the effect of the liquidation
of certain stock investments previously held in a trading portfolio principally
during the third quarter of 2004. We recognized $0.3 million of other than
temporary unrealized losses in the 2005 first quarter reflecting impairment
charges based on significant declines in the market values of two of our
available-for-sale investments in publicly traded companies. 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 April 3, 2005, we had pretax unrealized holding gains and (losses) on
available-for-sale marketable securities of $8.1 million and $(0.9) 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 Business
The gain on sale of business of $9.6 million for the 2005 first quarter
principally relates to a $9.4 million gain on a sale of a portion of our
investment in Encore Capital Group, Inc., an equity investee of ours, which we
refer to as Encore.
Other Expense, Net
Other expense, net, increased $0.3 million principally due to $1.3 million
of costs expensed in the 2005 first quarter related to our decision not to
pursue a certain financing alternative in connection with a potential
acquisition that is still pending, partially offset by the effect of $0.8
million of costs expensed in the 2004 first quarter related to a proposed
business acquisition that we decided not to pursue and did not consummate.
Income (Loss) Before Income Taxes and Minority Interests
Our income (loss) before income taxes and minority interests increased
$11.8 million to income of $7.6 million for the three months ended April 3, 2005
from a loss of $4.2 million for the three months ended March 28, 2004 due to the
effect of the variances explained in the captions above.
As discussed above, we recognized deferred compensation expense of $0.9
million in the 2004 first quarter and $0.5 million in the 2005 first quarter,
within general and administrative expenses, for the increases in the fair value
of investments in the Deferred Compensation Trusts. Under accounting principles
generally accepted in the United States of America, we recognize investment
income for any interest or dividend income on investments in the Deferred
Compensation Trusts and realized gains on sales of investments in the Deferred
Compensation Trusts, but are unable to recognize any investment income for
unrealized increases in the fair value of the investments in the Deferred
Compensation Trusts because these investments are accounted for under the cost
method of accounting. We recognized net investment income (loss) from
investments in the Deferred Compensation Trusts of $0.7 million in the 2004
first quarter and $(0.1) million in the 2005 first quarter. The net investment
income during the 2004 first quarter consisted of a $0.8 million realized gain
from the sale of a cost-method investment in the Deferred Compensation Trusts
referred to above under "Investment Income, Net," which represented increases in
value prior to that quarter, less $0.1 million of investment management fees.
The net investment loss during the 2005 first quarter consisted of investment
management fees. The cumulative disparity between deferred compensation expense
and net recognized investment income will reverse in future periods as either
(1) additional investments in the Deferred Compensation Trusts are sold and
previously unrealized gains are recognized without any offsetting increase in
compensation expense or (2) the fair values of the investments in the Deferred
Compensation Trusts decrease resulting in the recognition of a reversal of
compensation expense without any offsetting losses recognized in investment
income.
Benefit From (Provision For) Income Taxes
The provision for income taxes represented an effective rate of 33% for the
three months ended April 3, 2005 and the benefit from income taxes represented
an effective rate of 24% for the three months ended March 28, 2004. The
effective provision rate in the 2005 first quarter is lower than the Federal
statutory rate of 35% due to the effect of minority interests in income of
consolidated subsidiaries which are not taxable to us but which are not deducted
from the pretax income used to calculate the effective tax rate. This decrease
is partially offset by (1) the effect of non-deductible compensation costs and
(2) state income taxes, net of Federal income tax benefit, due to the differing
mix of pretax income or loss among the consolidated entities which file state
tax returns on an individual company basis. The effective benefit rate in the
2004 first quarter was lower than the Federal statutory rate due to (1) the
effect of non-deductible compensation costs and (2) state income taxes, net of
Federal income tax benefit, for the reasons discussed above.
Minority Interests in Income of Consolidated Subsidiaries
The minority interests in income of consolidated subsidiaries of $2.4
million in the 2005 first quarter principally consisted of $2.0 million related
to Deerfield.
Liquidity and Capital Resources
Cash Flows from Continuing Operating Activities
Our consolidated operating activities from continuing operations used cash
and cash equivalents, which we refer to in this discussion as cash, of $375.5
million during the three months ended April 3, 2005 reflecting net income of
$2.7 million adjusted for decreases consisting of net operating investment
adjustments of $362.4 million, cash used by changes in operating assets and
liabilities of $14.4 million and other net adjustments of $1.4 million.
The net operating investment adjustments of $362.4 million includes $353.7
million of net purchases of trading securities and net settlements of trading
derivatives, which were principally funded by the $367.2 million of proceeds
from the net sales of repurchase agreements and the net proceeds from securities
sold short. Under accounting principles generally accepted in the United States
of America, the net purchases of trading securities and the net settlements of
trading derivatives must be reported in continuing operating activities, while
the net sales of repurchase agreements and the net proceeds from securities sold
short are reported in continuing investing activities in the accompanying
condensed consolidated statements of cash flows. The net operating investment
adjustments also reflect a $5.3 million increase in restricted cash securing the
notional amount of trading derivatives and $3.4 million of net recognized gains
on investments and accretion of discount on debt securities net of distributions
received. The cash used by changes in operating assets and liabilities of $14.4
million primarily reflects a $21.9 million decrease in accounts payable and
accrued expenses due to the annual payment of previously accrued incentive
compensation, partially offset by a $7.7 million decrease in trade and other
receivables principally resulting from collections of asset management incentive
fees receivable. The other net adjustments of $1.4 million were principally due
to the reclassification of the gain on sale of business of $9.6 million from
operating activities to investing activities and the recognition of $0.7 million
of deferred asset management fees, partially offset by non-cash adjustments for
depreciation and amortization of $6.2 million and minority interests in income
of consolidated subsidiaries of $2.4 million.
Due to the potential significant effects of net operating investment
adjustments, which represent the discretionary investment of excess cash and
proceeds from the use of leverage, we are currently unable to estimate whether
or not we will have positive cash flows from our continuing operating activities
during the remaining nine months of 2005.
Working Capital and Capitalization
Working capital, which equals current assets less current liabilities, was
$454.1 million at April 3, 2005, reflecting a current ratio, which equals
current assets divided by current liabilities, of 1.7:1. Working capital at
April 3, 2005 decreased $9.8 million from $463.9 million at January 2, 2005
reflecting long-term debt repayments of $10.1 million.
Our total capitalization at April 3, 2005 was $786.5 million, consisting of
stockholders' equity of $302.2 million, long-term debt of $473.7 million,
including current portion, and notes payable of $10.6 million. Our total
capitalization at April 3, 2005 decreased $15.6 million from $802.1 million at
January 2, 2005 principally due to (1) long-term debt and notes payable
repayments of $16.3 million and (2) dividend payments of $4.7 million, both
partially offset by (1) net income of $2.7 million, (2) proceeds from issuance
of a note payable of $1.4 million and (3) proceeds from stock option exercises
of $0.8 million.
Securitization Notes
We have outstanding, through our ownership of Arby's Franchise Trust, 7.44%
insured non-recourse securitization notes, which we refer to as Securitization
Notes, with a remaining principal balance of $206.1 million as of April 3, 2005,
which are due no later than December 2020. However, based on current projections
and assuming the adequacy of available funds, as defined under the indenture for
the Securitization Notes, which we refer to as the Securitization Indenture, we
currently estimate that we will repay $18.1 million during the remaining nine
months of 2005 with increasing annual payments to $37.4 million in 2011 in
accordance with a targeted principal payment schedule. The Securitization Notes
are redeemable by Arby's Franchise Trust at an amount equal to the total of
remaining principal, accrued interest and the excess, if any, of the discounted
value of the remaining principal and interest payments over the outstanding
principal amount of the Securitization Notes.
Restaurant Notes
We have outstanding, through our ownership of Sybra, Inc., leasehold notes,
equipment notes and mortgage notes relating to our Company-owned restaurants
with a total remaining principal balance of $69.0 million as of April 3, 2005.
The loan agreements for most of the Sybra leasehold notes, mortgage notes and
equipment notes contain various prepayment provisions that provide for
prepayment penalties of (1) up to 5% of the principal amount prepaid or (2) are
based upon specified "yield maintenance" formulas.
Other Long-Term Debt
We have outstanding $175.0 million of 5% convertible notes due 2023, which
we refer to as the Convertible Notes, which do not have any scheduled principal
repayments prior to 2023. However, the Convertible Notes are redeemable at our
option commencing May 20, 2010 and at the option of the holders on May 15, 2010,
2015 and 2020 or upon the occurrence of a fundamental change, as defined,
relating to us, in each case at a price of 100% of the principal amount of the
Convertible Notes plus accrued interest. We have a secured bank term loan
payable through 2008 with an outstanding principal amount of $10.8 million as of
April 3, 2005. We also have a secured promissory note payable through 2006 with
an outstanding principal amount of $8.9 million as of April 3, 2005. In
addition, we have mortgage notes payable through 2016 related to restaurants we
sold in 1997 with outstanding principal amounts totaling $2.7 million as of
April 3, 2005.
Notes Payable
We have outstanding $10.6 million of notes payable as of April 3, 2005
which relate to Deerfield and are secured by short-term investments in preferred
shares of CDOs with a carrying value of $15.4 million as of April 3, 2005. These
notes must be repaid from a portion or all of the distributions on, or sales
proceeds from, those investments and a portion of the total asset management
fees received from the respective CDOs.
Revolving Credit Facilities
We do not have any revolving credit facilities as of April 3, 2005.
Debt Repayments and Covenants
Our total scheduled long-term debt and note payable repayments during the
remaining nine months of 2005 are $31.6 million consisting principally of the
$18.1 million expected to be paid under our Securitization Notes, $4.7 million
under our restaurant leasehold, equipment and mortgage notes, $2.2 million under
our secured bank term loan, $1.7 million under our secured promissory note and
$4.5 million expected to be paid under our notes payable.
The various note agreements and indentures contain various covenants, the
most restrictive of which (1) require periodic financial reporting, (2) require
meeting certain debt service coverage ratio tests and (3) restrict, among other
matters, (a) the incurrence of indebtedness by certain of our subsidiaries, (b)
certain asset dispositions and (c) the payment of distributions by Arby's
Franchise Trust. We were in compliance with all of these covenants as of April
3, 2005.
In accordance with the Securitization Indenture, as of April 3, 2005 Arby's
Franchise Trust had no amounts available for the payment of distributions.
However, on April 20, 2005, $1.7 million relating to cash flows for the calendar
month of March 2005 became available for the payment of distributions by Arby's
Franchise Trust through its parent to Arby's, LLC which, in turn, was used by
Arby's, LLC to pay management service fees of $0.4 million and Federal income
tax-sharing payables of $1.3 million to Triarc.
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, it would indemnify the owner of
AmeriGas Eagle for any payments the owner makes related to the owner's
obligations under certain of the debt of AmeriGas Eagle, aggregating
approximately $138.0 million as of April 3, 2005, 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 April 3, 2005. We
believe it is unlikely that we will be called upon to make any payments under
this indemnity. Either National Propane or AmeriGas Propane L.P., which we refer
to as 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 $36.1 million as of April 3, 2005,
associated with the sale, prior to 2002, of our former propane business if
National Propane required the repurchase.
Triarc guarantees mortgage notes payable through 2015 of approximately
$38.0 million as of April 3, 2005 related to 355 restaurants we sold in 1997.
The purchaser of the restaurants also assumed substantially all of the
associated lease obligations which extend through 2031, including all then
existing extension or renewal option periods, although Arby's, LLC remains
contingently liable if the purchaser does not make the required future lease
payments. Those lease obligations could total a maximum of approximately $51.0
million as of April 3, 2005, assuming the purchaser has made all scheduled
payments under those lease obligations through that date.
Capital Expenditures
Cash capital expenditures amounted to $1.6 million during the three months
ended April 3, 2005. We expect that cash capital expenditures will be
approximately $30.0 million for the remaining nine months of 2005, principally
relating to (1) leasehold improvements for our newly leased corporate office
facility, (2) the opening of ten new Company-owned restaurants and remodeling of
ten of our existing restaurants and (3) maintenance capital expenditures for our
restaurants. We have $0.5 million of outstanding commitments for these capital
expenditures as of April 3, 2005.
Investments and Potential Acquisitions
In July 2004 we acquired a 25% equity interest (14.3% general voting
interest) in Jurlique, a privately held Australian skin and beauty products
company, for $25.6 million, including expenses of $0.4 million. We are
accounting for Jurlique under the cost method since our voting stock interest of
14.3% does not provide us the ability to exercise significant influence over
Jurlique's operating and financial policies. We paid $13.3 million of the cost
of the Jurlique acquisition, including expenses of $0.4 million, in July 2004.
Our remaining payment for Jurlique is payable in July 2005 in 18.0 million
Australian dollars, or $13.9 million based on the exchange rate as of April 3,
2005, plus accrued interest from March 23, 2005. We entered into a forward
contract whereby we fixed the exchange rate for the payment of this liability in
order to limit the related foreign currency risk. In addition, we entered into a
put and call arrangement on a portion of our total cost related to this
investment whereby we have limited the overall foreign currency risk of holding
the investment through July 2007.
As of April 3, 2005, we had $618.3 million of cash and cash equivalents,
restricted cash equivalents, investments other than investments held in deferred
compensation trusts and receivables from sales of investments, net of
liabilities related to investments. This amount includes $32.9 million of
noncurrent restricted cash equivalents, including $30.6 million related to the
Securitization Notes, and also includes $100.0 million invested in the
Opportunities Fund and another fund managed by Deerfield and consolidated by us
which we have agreed not to withdraw until October 2006. We continue to evaluate
strategic opportunities for the use of our significant cash and investment
position, including additional business acquisitions, repurchases of Triarc
common stock (see "Treasury Stock Purchases" below) and investments.
In that regard, we are engaged in negotiations to acquire RTM Restaurant
Group, which we refer to as RTM, our largest franchisee with 774 Arby's
restaurants in the United States as of April 3, 2005, which we plan on combining
with our Arby's restaurant business. There can be no assurance that RTM, its
owners or we will enter into definitive agreements or that this acquisition will
be consummated.
Dividends
On March 15, 2005, we paid regular quarterly cash dividends of $0.065 and
$0.075 per share on our class A and class B common stock, respectively,
aggregating $4.7 million. We currently intend to continue to declare and pay
quarterly cash dividends, however, there can be no assurance that any dividends
will be declared or paid in the future or of the amount or timing of such
dividends, if any. If we pay quarterly cash dividends for the remainder of 2005
at the same rate as declared and paid in our 2005 first quarter, based on the
number of our class A and class B common shares outstanding as of April 29,
2005, our total cash requirement for dividends would be $14.0 million for the
remaining nine months of 2005.
Treasury Stock Purchases
Our management is currently authorized, when and if market conditions
warrant and to the extent legally permissible, to repurchase through June 30,
2006 up to a total of $50.0 million of our class A and class B common stock as
of April 3, 2005. We did not make any treasury stock purchases during the 2005
first quarter 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 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 the 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.
Cash Requirements
As of April 3, 2005, our consolidated cash requirements for continuing
operations for the remaining nine months of 2005, exclusive of operating cash
flow requirements, consist principally of (1) a maximum of an aggregate $50.0
million of payments for repurchases of our class A and class B common stock for
treasury under our current stock repurchase program, (2) scheduled debt
principal repayments aggregating $31.6 million, (3) cash capital expenditures of
approximately $30.0 million, (4) regular quarterly cash dividends aggregating
approximately $14.0 million, (5) our remaining payment for Jurlique of
approximately $13.9 million and (6) the cost of business acquisitions, if any,
including RTM. We anticipate meeting all of these requirements through (1) the
use of our liquid net current assets, (2) cash flows from continuing operating
activities, if any, and (3) if necessary for any business acquisitions and if
market conditions permit, borrowings including proceeds from sales, if any, of
up to $2.0 billion of our securities under the universal shelf registration
statement.
Consolidation of Opportunities Fund
We consolidate the Opportunities Fund since we currently have a majority
voting interest of 95.2%. However, the Opportunities Fund is being marketed to
other investors. Should the sales of equity shares of the Opportunities Fund
result in us owning less than a majority voting interest, we would no longer
consolidate the Opportunities Fund. However, no assurance can be given that this
will occur. If this does occur, we will account for our investment in the
Opportunities Fund under the equity method of accounting on a prospective basis
from the date of deconsolidation.
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 after which it will reevaluate
the need for additional assessment or remediation. The first sampling event
occurred in January 2005 and the results have been submitted to the Florida DEP
for its review. Based on provisions of $1.7 million for those costs made prior
to 2004, and after taking into consideration various legal defenses available to
us, including Adams Packing, Adams Packing has provided for its estimate of its
remaining liability for completion of this matter.
In 1998, a number of class action lawsuits were filed on behalf of our
stockholders. Each of these actions named us, the Executives and other members
of our then board of directors as defendants. In 1999, certain plaintiffs in
these actions filed a consolidated amended complaint alleging that our tender
offer statement filed with the Securities and Exchange Commission in 1999,
pursuant to which we repurchased 3,805,015 shares of our class A common stock,
failed to disclose material information. The amended complaint seeks, among
other relief, monetary damages in an unspecified amount. In 2000, the plaintiffs
agreed to stay this action pending determination of a related stockholder action
which was subsequently dismissed in October 2002 and is no longer being
appealed. Through April 3, 2005, no further action has occurred with respect to
the remaining class action lawsuit and such action remains stayed.
In addition to the environmental matter and stockholder lawsuit described
above, 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 $1.2 million as of April 3, 2005. Although
the outcome of these matters cannot be predicted with certainty and some of
these matters may be disposed of unfavorably to us, based on currently available
information, including legal defenses available to us and/or our subsidiaries,
and given the aforementioned reserves, we do not believe that the outcome of
these legal and environmental matters will have a material adverse effect on our
consolidated financial position or results of operations.
Seasonality
Our continuing operations are not significantly impacted by seasonality.
However, our restaurant revenues are somewhat lower in our first quarter.
Further, while our asset management business is not directly affected by
seasonality, our asset management revenues are higher in our fourth quarter as a
result of our revenue recognition accounting policy for incentive fees related
to the Funds which are based upon performance and are recognized when the
amounts become fixed and determinable upon the close of a performance period.
Recently Issued Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board (the "FASB")
ratified the consensus reached by the Emerging Issues Task Force on issue 03-1,
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides guidance on evaluating whether an
investment is other-than-temporarily impaired. The recognition and measurement
provisions of EITF 03-1, which were to be effective for periods beginning after
June 15, 2004, were delayed by the FASB pending further guidance. During the
period of delay, we will continue to evaluate our investments as required by
existing authoritative guidance, including Securities and Exchange Commission
Staff Accounting Bulletin Topic 5M, "Other Than Temporary Impairment of Certain
Investments in Debt and Equity Securities." We do not expect that the
recognition and measurement provisions of EITF 03-1 will have a significant
impact on our financial position or results of operations if and when they
become effective, since the principles we use to measure any other than
temporary impairment losses are generally consistent with those proposed in EITF
03-1.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which
revises SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The requirements of SFAS 123(R) are similar to
those of SFAS 123, except that SFAS 123(R) generally requires companies to
measure the cost of employee services received in exchange for an award of
equity instruments, including grants of employee stock options and restricted
stock, based on the fair value of the award. We currently use the intrinsic
value method of measuring these awards under APB 25, which will no longer be an
alternative to the fair value method under SFAS 123(R). In April 2005, the
Securities and Exchange Commission adopted an amendment to Rule 4-01(a) of
Regulation S-X that defers the required effective date of SFAS 123(R) for us to
no later than our 2006 fiscal first quarter. Under SFAS 123(R), we must
determine the appropriate fair value model to be used in our circumstances, the
recognition method for compensation cost and the transition method to be used
upon adoption. We are evaluating the requirements of SFAS 123(R) and expect that
the adoption of SFAS 123(R) will have a material impact on our consolidated
results of operations and income (loss) per share. We have not yet determined
the fair value model, the recognition method or adoption method we will use.
Accordingly, we are unable to estimate the effect of adopting SFAS 123(R) or
whether the adoption will result in future expense amounts that are similar to
those included in our pro forma disclosures under SFAS 123.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This "Quantitative and Qualitative Disclosures about Market Risk" 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
January 2, 2005. 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 1."
We are exposed to the impact of interest rate changes, changes in commodity
prices, changes in the market value of our investments and, to a lesser extent,
foreign currency fluctuations. In the normal course of business, we employ
established policies and procedures to manage our exposure to these changes
using financial instruments we deem appropriate. We had no significant changes
in our management of, or our exposure to, commodity price risk, equity market
risk or foreign currency risk during the three months ended April 3, 2005.
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. We did not enter into any new interest
rate caps or swaps relating to our long-term debt during the three months ended
April 3, 2005. As of April 3, 2005, our notes payable and long-term debt,
including current portion, aggregated $484.3 million and consisted of $462.9
million of fixed-rate debt, $10.8 million of a variable-rate bank loan and $10.6
million of variable-rate notes payable. The fair value of our fixed-rate debt
will increase if interest rates decrease. In addition to our fixed-rate and
variable-rate debt, our investment portfolio includes debt securities that are
subject to interest rate risk with remaining maturities which range from less
than ninety days to approximately thirty years. See below for a discussion of
how we manage this risk. The fair market value of our investments in fixed-rate
debt securities will decline if interest rates increase.
Overall Market Risk
We balance our exposure to overall market risk by investing a portion of
our portfolio in cash and cash equivalents with relatively stable and
risk-minimized returns. We periodically interview and select asset managers to
avail ourselves of potentially higher, but more risk-inherent, returns from the
investment strategies of these managers. We also seek to identify alternative
investment strategies that may earn higher returns with attendant increased risk
profiles for a portion of our investment portfolio. We regularly review the
returns from each of our investments and may maintain, liquidate or increase
selected investments based on this review and our assessment of potential future
returns. We are continuing to adjust our asset allocation to increase the
portion of our investments that offers the opportunity for higher, but more risk
inherent, returns. In that regard, in October 2004 we invested $100.0 million to
seed a new multi-strategy hedge fund, Deerfield Opportunities Fund, LLC, which
we refer to as the Opportunities Fund, which is managed by a subsidiary of ours
and is currently consolidated by us with minority interests to the extent of
participation by investors other than us. The Opportunities Fund invests
principally in various fixed income securities and their derivatives, as
opportunities arise. Further, the Opportunities Fund employs leverage in its
trading activities, including securities sold with an obligation to purchase or
under agreements to repurchase as well as the effective leverage represented by
the notional amounts of its various derivatives. The investments of the
Opportunities Fund are subject to interest rate risk and the inherent credit
risk related to the underlying creditworthiness of the various issuers. The
Opportunities Fund uses hedging strategies, including the derivatives it holds
and other asset/liability management strategies, to generally minimize its
overall interest rate risk while retaining an acceptable level of credit risk as
part of its technical trading strategies. The Opportunities Fund monitors its
overall credit risk and attempts to maintain an acceptable level of exposure
through diversification of credit positions by industry, credit rating and
individual issuer concentrations. In March 2005 we withdrew $4.8 million of our
investment from the Opportunities Fund to seed another new fund managed by
Deerfield and consolidated by us with minority interests. As of April 3, 2005,
the derivatives held in our short-term investment trading portfolios,
principally through the Opportunities Fund, consisted of (1) credit default
swaps, (2) interest rate swaps and a related option, (3) bank loan total return
swaps, (4) forward contracts on foreign currencies and (5) futures contracts
relating to interest rates, foreign currencies and a foreign stock market index.
We did not designate any of these strategies as hedging instruments and,
accordingly, all of these derivative instruments were recorded at fair value
with changes in fair value recorded in our results of operations.
We maintain investment portfolio holdings of various issuers, types and
maturities. As of April 3, 2005 these investments were classified in our
condensed consolidated balance sheet as follows (in thousands):
Cash equivalents included in "Cash and cash equivalents"...................................$ 332,845
Short-term investments..................................................................... 523,597
Investment settlements receivable.......................................................... 150,565
Current and non-current restricted cash equivalents........................................ 65,934
Non-current investments.................................................................... 84,219
-------------
$ 1,157,160
=============
Certain liability positions related to investments:
Investment settlements payable..........................................................$ (104,481)
Securities sold under agreements to repurchase ......................................... (269,810)
Securities sold with an obligation to purchase included in "Other liability positions
related to short-term investments".................................................. (120,249)
Derivatives held in trading portfolios in liability positions included in "Other
liability positions related to short-term investments".............................. (457)
Remaining payment due for investment in Jurlique International Pty Ltd., an
Australian company, included in "Accrued expenses and other current liabilities".... (13,906)
-------------
$ (508,903)
==============
Our cash equivalents are short-term, highly liquid investments with
maturities of three months or less when acquired and consisted principally of
cash in mutual fund and bank money market accounts, securities purchased under
agreements to resell the following day collateralized by United States
government debt securities, interest-bearing brokerage and bank accounts with a
stable value, United States government debt securities and commercial paper of
high credit-quality entities.
At April 3, 2005 our investments were classified in the following general
types or categories (in thousands):
Carrying Value
At Fair --------------------
Type At Cost Value (e) Amount Percent
---- ------- -------- ------ -------
Cash equivalents (a)............................$ 332,845 $ 332,845 $ 332,845 29%
Investment settlements receivable (b)........... 150,565 150,565 150,565 13%
Restricted cash equivalents..................... 65,934 65,934 65,934 6%
Investments accounted for as:
Available-for-sale securities (c).......... 122,713 129,970 129,970 11%
Trading securities......................... 372,457 367,204 367,204 32%
Trading derivatives........................ 874 5,890 5,890 --%
Non-current investments held in deferred
compensation trusts accounted for at cost..... 20,001 26,741 20,001 2%
Other current and non-current investments in
investment limited partnerships and similar
investment entities accounted for at cost..... 21,615 33,518 21,615 2%
Other current and non-current investments
accounted for at:
Cost....................................... 36,868 39,746 36,868 3%
Equity..................................... 14,683 33,803 19,947 2%
Fair value ................................ 6,321 6,321 6,321 --%
----------- ----------- ---------- ----
Total cash equivalents and long investment
positions.....................................$ 1,144,876 $ 1,192,537 $1,157,160 100%
=========== =========== ========== ====
Certain liability positions related to
investments:
Investment settlements payable (b).........$ (104,481) $ (104,481) $ (104,481) N/A
Securities sold under agreements to
repurchase.............................. (269,306) (269,810) (269,810) N/A
Securities sold with an obligation to
purchase................................ (118,820) (120,249) (120,249) N/A
Derivatives held in trading portfolios in
liability positions..................... -- (457) (457) N/A
Remaining payment due for investment
in Jurlique (d)......................... (12,308) (13,906) (13,906) N/A
----------- ----------- -----------
$ (504,915) $ (508,903) $ (508,903) N/A
=========== =========== ===========
- --------
(a) Includes $6,860,000 of cash equivalents held in deferred compensation
trusts.
(b) Represents unsettled security trades as of April 3, 2005 principally
in the Opportunities Fund.
(c) Includes $15,442,000 of preferred shares of collateralized debt
obligation vehicles, which we refer to as CDOs, which, if sold, would
require us to use the proceeds to repay our related notes payable of
$10,572,000.
(d) The fair value of this liability does not reflect the offsetting
effect of a related foreign currency forward contract in an asset
position which had a fair value of $1,492,000.
(e) 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. 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
held in trading portfolios are similar to and classified as 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. Our
investments accounted for under the equity method consist of non-current
investments in (1) a public company and (2) a real estate investment trust
managed by a subsidiary of ours. We also hold restricted stock and stock options
in the real estate investment trust that we received as stock-based compensation
and that we account 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
For purposes of this disclosure, market risk sensitive instruments are
divided into two categories: instruments entered into for trading purposes and
instruments entered into for purposes other than trading. Our estimate of market
risk exposure is presented for each class of financial instruments held by us at
April 3, 2005 for which an immediate adverse market movement causes a potential
material impact on our financial position or results of operations. We believe
that the rates of 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.
The following tables reflect the estimated market risk exposure as of April
3, 2005 based upon assumed immediate adverse effects as noted below (in
thousands):
Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Equity securities............................................... $ 40 $ -- $ (4) $ --
Debt securities................................................. 367,164 (10,357) -- --
Trading derivatives in asset positions.......................... 5,890 (5,569) -- (80)
Trading derivatives in liability positions...................... (457) -- (27) (28)
The sensitivity analysis of financial instruments held for trading purposes
assumes (1) an instantaneous 10% adverse change in the equity markets in which
we are invested, (2) an instantaneous one percentage point adverse change in
market interest rates and (3) an instantaneous 10% adverse change in the foreign
currency exchange rates versus the United States dollar, each from their levels
at April 3, 2005, with all other variables held constant.
The interest rate risk with respect to our debt securities and trading
derivatives reflects the effect of the assumed adverse interest rate change on
the fair value of each of those securities or derivative positions and does not
reflect any offsetting of hedged positions. The adverse effects on the fair
values of the respective securities and derivatives were determined based on
market standard pricing models applicable to those particular instruments. Those
models consider variables such as coupon rate and frequency, maturity date(s),
yield and, in the case of derivatives, volatility, price of the underlying
instrument, strike price, expiration, prepayment assumptions and probability of
default.
Other Than Trading Purposes:
Carrying Interest Equity Foreign
Value Rate Risk Price Risk Currency Risk
----- --------- ---------- -------------
Cash equivalents.................................$ 332,845 $ (2) $ -- $ --
Investment settlements receivable................ 150,565 -- -- --
Restricted cash equivalents...................... 65,934 -- -- --
Available-for-sale equity securities............. 47,351 -- (4,735) --
Available-for-sale asset-backed securities....... 25,656 (2,052) -- --
Available-for-sale preferred shares of CDOs...... 20,192 (1,017) -- --
Available-for-sale United States government and
government agency debt securities............. 13,042 (65) -- --
Available-for-sale commercial paper.............. 11,715 (15) -- --
Available-for-sale debt mutual fund.............. 8,644 (173) -- --
Available-for-sale corporate debt securities,
other than commercial paper................... 3,370 (135) -- --
Investment in Jurlique........................... 25,611 -- (2,561) (1,241)
Other investments................................ 79,141 (1,683) (5,365) (41)
Foreign currency forward contract in an asset
position...................................... 1,492 -- -- (1,389)
Foreign currency put and call arrangement in a
net liability position........................ (581) -- -- (1,221)
Investment settlements payable................... (104,481) -- -- --
Securities sold under agreements to repurchase... (269,810) (5) -- --
Securities sold with an obligation to purchase... (120,249) (4,791) (740) --
Remaining payment due for investment in
Jurlique...................................... (13,906) -- -- (1,391)
Notes payable and long-term debt, excluding
capitalized lease obligations................. (483,401) (20,062) -- --
Interest rate swap agreement in a payable
position...................................... (172) (162) -- --
The sensitivity analysis of financial instruments held at April 3, 2005 for
purposes of other than trading 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 April 3, 2005, 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.
For purposes of this analysis, our investments in debt securities and
preferred shares of CDOs with interest rate risk had a range of remaining
maturities and were assumed to have weighted average remaining maturities as
follows:
Range Weighted Average
----- ----------------
Cash equivalents (other than money market funds
and interest-bearing brokerage and bank accounts
and securities purchased under agreements to resell)................... 4 days - 25 days 10 days
United States government and government agency debt
securities............................................................. 23 days - 1 year 6 months
Asset-backed securities...................................................13 months - 30 years 8 years
CDOs underlying preferred shares..........................................2 1/3 years - 8 years 5 years
Commercial paper.......................................................... 38 days - 7 months 1 1/2 months
Debt mutual fund.......................................................... 1 day - 35 years 2 years
Corporate debt securities, other than commercial paper....................2 1/2 months - 4 years 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 reflects, for each of these investments in debt
securities and the preferred shares of CDOs, 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. Our cash
equivalents included $289.4 million of mutual fund and bank money market
accounts and interest-bearing brokerage and bank accounts which are designed to
maintain a stable value and $38.0 million of securities purchased under
agreements to resell the following day and, as a result, were assumed to have no
interest rate risk. Our restricted cash equivalents were invested in money
market funds and are assumed to have no interest rate risk since those funds are
designed to maintain a stable value.
The interest rate risk presented with respect to our notes payable and
long-term debt, excluding capitalized lease obligations, relates only to our
fixed-rate debt and represents the potential impact a decrease in interest rates
of one percentage point has on the fair value of this debt, and not on our
financial position or our results of operations. The fair value of our
variable-rate debt, as well as almost all of our obligations for securities sold
under agreements to repurchase, approximates the carrying value since the
floating interest rate resets daily, monthly or quarterly and, as a result, we
assumed no associated interest rate risk. However, we have an interest rate swap
agreement with an embedded written call option on our variable-rate bank loan.
As interest rates decrease, the fair market values of the interest rate swap
agreement and the written call option both decrease, but not necessarily by the
same amount. The interest rate risk presented with respect to the interest rate
swap agreement represents the potential impact the indicated change has on the
net fair value of the swap agreement and embedded written call option and on our
financial position and results of operations.
The foreign currency risk presented for our investment in Jurlique as of
April 3, 2005 excludes the portion of risk that is hedged by the foreign
currency put and call arrangement and by the portion of Jurlique's operations
which are denominated in United States dollars. The foreign currency risk
presented with respect to the foreign currency forward contract and foreign
currency put and call arrangement represents the potential impact the indicated
change has on the net fair value of each of these respective financial
instruments and on our financial position and results of operations and has been
determined by an independent broker/dealer. For investments held since January
2, 2005 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. The analysis also assumed that the decrease in the equity
markets and the change in foreign currency were other than temporary with
respect to these investments. To the extent such entities invest in convertible
bonds which trade primarily on the conversion feature of the securities rather
than on the stated interest rate, this analysis assumed equity price risk but no
interest rate risk. The foreign currency risk presented excludes those
investments where the investment manager has fully hedged the risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chairman and Chief Executive
Officer and our Executive Vice President and Chief Financial Officer, carried
out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of the end of the period covered by this quarterly report. Based on that
evaluation, our Chairman and Chief Executive Officer and our Executive Vice
President and Chief Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act was recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission.
Change in Internal Control Over Financial Reporting
No change in our internal control over financial reporting was made during
our most recent fiscal quarter that materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system,
including the potential for human error and the circumvention or overriding of
the controls and procedures. Additionally, judgments in decision-making can be
faulty and breakdowns can occur because of simple error or mistake. An effective
control system can provide only reasonable, not absolute, assurance that the
control objectives of the system are adequately met. Accordingly, our
management, including our Chairman and Chief Executive Officer and our Executive
Vice President and Chief Financial Officer, does not expect that our control
system can prevent or detect all error or fraud. Finally, projections of any
evaluation or assessment of effectiveness of a control system to future periods
are subject to the risks that, over time, controls may become inadequate because
of changes in an entity's operating environment or deterioration in the degree
of compliance with policies or procedures.
Part II. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Quarterly Report on Form 10-Q contains or incorporates 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. These forward-looking
statements are based on our current expectations, speak only as of the date of
this Form 10-Q 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
such forward-looking statements. For those 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 the forward-looking
statements contained herein. Such factors include, but are not limited to, the
following:
o competition, including pricing pressures, the potential impact of
competitors' new units on sales by Arby's(R) restaurants;
o consumers' perceptions of the relative quality, variety and value of
the food products we offer;
o success of operating initiatives;
o development costs;
o advertising and promotional efforts;
o brand awareness;
o the existence or absence of positive or adverse publicity;
o new product and concept development by us and our competitors, and
market acceptance of such new product offerings and concepts;
o changes in consumer tastes and preferences, including changes
resulting from concerns over nutritional or safety aspects of beef,
poultry, french fries or other foods or the effects of food-borne
illnesses such as "mad cow disease" and avian influenza or "bird flu";
o changes in spending patterns and demographic trends;
o the business and financial viability of key franchisees;
o the timely payment of franchisee obligations due to us;
o availability, location and terms of sites for restaurant development
by us and our franchisees;
o the ability of our franchisees to open new restaurants in accordance
with their development commitments, including the ability of
franchisees to finance restaurant development;
o delays in opening new restaurants or completing remodels;
o anticipated or unanticipated restaurant closures by us and our
franchisees;
o our ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Arby's restaurants;
o changes in business strategy or development plans, and the willingness
of our franchisees to participate in our strategy;
o business abilities and judgment of our and our franchisees' management
and other personnel;
o availability of qualified restaurant personnel to us and to our
franchisees;
o our ability, if necessary, to secure alternative distribution of
supplies of food, equipment and other products to Arby's restaurants
at competitive rates and in adequate amounts, and the potential
financial impact of any interruptions in such distribution;
o changes in commodity (including beef), labor, supplies and other
operating costs and availability and cost of insurance;
o adverse weather conditions;
o significant reductions in our client assets under management (which
would reduce our advisory fee revenue), due to such factors as weak
performance of our investment products (either on an absolute basis or
relative to our competitors or other investment strategies),
substantial illiquidity or price volatility in the fixed income
instruments that we trade, loss of key portfolio management or other
personnel, reduced investor demand for the types of investment
products we offer, and loss of investor confidence due to adverse
publicity;
o increased competition from other asset managers offering similar types
of products to those we offer;
o pricing pressure on the advisory fees that we can charge for our
investment advisory services;
o difficulty in increasing assets under management, or efficiently
managing existing assets, due to market-related constraints on trading
capacity or lack of potentially profitable trading opportunities;
o our removal as investment manager of one or more of the collateral
debt obligation vehicles (CDOs) or other accounts we manage, or the
reduction in our CDO management fees because of payment defaults by
issuers of the underlying collateral;
o availability, terms (including changes in interest rates) and
deployment of capital;
o changes in legal or self-regulatory requirements, including
franchising laws, investment management regulations, accounting
standards, environmental laws, overtime rules, minimum wage rates and
taxation rates;
o the costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
o the impact of general economic conditions on consumer spending or
securities investing, including a slower consumer economy and the
effects of war or terrorist activities;
o our ability to identify appropriate acquisition targets in the future
and to successfully integrate any future acquisitions into our
existing operations; and
o other risks and uncertainties affecting us and our subsidiaries
referred to in our Annual Report on Form 10-K for the fiscal year
ended January 2, 2005 (see especially "Item 1. Business--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 of
which are difficult or impossible to predict accurately and many of
which are beyond our control.
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 1. Legal Proceedings
In 2001, a vacant property owned by Adams Packing Association, Inc., an
inactive subsidiary of ours, was listed by the United States Environmental
Protection Agency on the Comprehensive Environmental Response, Compensation and
Liability Information System, which we refer to as CERCLIS, list of known or
suspected contaminated sites. The CERCLIS listing appears to have been based on
an allegation that a former tenant of Adams Packing conducted drum recycling
operations at the site from some time prior to 1971 until the late 1970s. 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
the work under that plan has been 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 after which it will reevaluate the need for additional assessment or
remediation. The results of the first sampling event, which occurred in January
2005, have been submitted to the Florida DEP for its review. Based on provisions
made prior to 2004 of approximately $1.7 million for costs associated with this
matter, and after taking into consideration various legal defenses available to
us, Adams Packing has provided for its estimate of its liability for this
matter, including related legal and consulting fees. Accordingly, this matter is
not expected to have a material adverse effect on our consolidated financial
position or results of operations. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Legal and
Environmental Matters."
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On December 16, 2004, we announced that our existing stock repurchase
program, which was originally approved by our board of directors on January 18,
2001, had been extended until June 30, 2006 and that the amount available under
the program had been replenished to permit the purchase of up to $50 million of
our Class A Common Stock and Class B Common Stock. No transactions were effected
under our stock repurchase program during the first fiscal quarter of 2005.
Item 5. Other Information.
We are engaged in negotiations to acquire RTM Restaurant Group, our largest
franchisee with 774 Arby's restaurants in the United States as of April 3, 2005,
and combine it with our Arby's restaurant business. We do not anticipate making
any further announcement concerning the possible acquisition until a definitive
agreement is reached or negotiations are terminated. There can be no assurance
that RTM, its owners or we will enter into definitive agreements or that such
acquisition will be consummated.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of Triarc Companies, Inc., as currently
in effect, incorporated herein by reference to Exhibit 3.1 to Triarc's
Current Report on Form 8-K dated June 9, 2004 (SEC file no. 1-2207).
3.2 By-laws of Triarc Companies, Inc., as currently in effect,
incorporated herein by reference to Exhibit 3.1 to Triarc's Current
Report on Form 8-K dated November 5, 2004 (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 Third Amended and Restated Commitment Agreement, dated as of February
28, 2005, by and among Triarc Companies, Inc., Sachs Capital
Management LLC, Scott A. Roberts and Deerfield Capital Management
LLC.*
10.2 Form of Restricted Stock Agreement for Class A Common Stock under
Triarc's 2002 Equity Participation Plan, incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K/A
dated March 11, 2005 (SEC file no. 1-2207).
10.3 Form of Restricted Stock Agreement for Class B Common Stock, Series 1,
under Triarc's 2002 Equity Participation Plan, incorporated herein by
reference to Exhibit 10.2 to Triarc's Current Report on Form 8-K/A
dated March 11, 2005 (SEC file no. 1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished as an exhibit to this report on Form 10-Q. *
- -----------------------
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIARC COMPANIES, INC.
(Registrant)
Date: May 12, 2005 By: /S/ FRANCIS T. McCARRON
------------------------------
Francis T. McCarron
Executive Vice President
and Chief Financial Officer
(On behalf of the Company)
Date: May 12, 2005 By: /S/ FRED H. SCHAEFER
------------------------------
Fred H. Schaefer
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Exhibit Index
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 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 November 5, 2004 (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 Third Amended and Restated Commitment Agreement, dated as of February
28, 2005, by and among Triarc Companies, Inc., Sachs Capital
Management LLC, Scott A. Roberts and Deerfield Capital Management
LLC.*
10.2 Form of Restricted Stock Agreement for Class A Common Stock under
Triarc's 2002 Equity Participation Plan,incorporated herein by
reference to Exhibit 10.1 to Triarc's Current Report on Form 8-K/A
dated March 11, 2005 (SEC file no. 1-2207).
10.3 Form of Restricted Stock Agreement for Class B Common Stock, Series 1,
under Triarc's 2002 Equity Participation Plan, incorporated herein by
reference to Exhibit 10.2 to Triarc's Current Report on Form 8-K/A
dated March 11, 2005 (SEC file no. 1-2207).
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished as an exhibit to this report on Form 10-Q. *
- -----------------------
* Filed herewith.
EXHIBIT 10.1
THIRD AMENDED AND RESTATED COMMITMENT AGREEMENT
This THIRD AMENDED AND RESTATED COMMITMENT AGREEMENT (this "Agreement")
dated as of February 28, 2005, by and among Triarc Companies, Inc., a Delaware
corporation ("Triarc"), Sachs Capital Management LLC, a Delaware limited
liability company ("SCM"), Scott A. Roberts ("Roberts") and Deerfield Capital
Management LLC, a Delaware limited liability company ("DCM"), hereby amends and
restates the Second Amended and Restated Commitment Agreement dated as of
December 30, 2004 and shall hereafter govern.
RECITALS
WHEREAS, Triarc, SCM, Deerfield Partners Fund II LLC, Roberts, Marvin
Shrear and Gregory H. Sachs are parties to the Purchase Agreement, dated as of
June 26, 2004 (as amended, supplemented or otherwise modified from time to time,
the "Purchase Agreement"), relating to the sale of certain membership interests
in Deerfield & Company LLC ("D&C") to Triarc;
WHEREAS, each of Triarc, SCM, Roberts, Jonathan Trutter and the other
Members party thereto previously executed and delivered a Fourth Amended and
Restated Operating Agreement of D&C, dated as of June 26, 2004 (as amended,
supplemented or otherwise modified from time to time, the "Operating
Agreement");
WHEREAS, in connection with the execution and delivery of the Purchase
Agreement and the consummation of the transactions contemplated thereby, each of
the parties hereto entered into that certain Commitment Agreement dated as of
June 26, 2004 (the "Commitment Agreement");
WHEREAS, the parties hereto amended and restated the Commitment Agreement
as of September 30, 2004 and again as of December 30, 2004 (the "Amended and
Restated Commitment Agreement"); and
WHEREAS, the parties hereto desire to further amend and restate the Amended
and Restated Commitment Agreement.
NOW, THEREFORE, in consideration of the mutual agreements set forth herein
and other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Investment by Triarc in the Fund. Upon the terms and subject to the
conditions set forth herein, in connection with the Closing (as defined in the
Purchase Agreement), Triarc and an affiliate thereof have invested an aggregate
of $100,000,000 (the "Triarc Investment") in Deerfield Opportunities Fund, LLC,
(the "Fund"), a hedge fund managed by DCM that conducts its business in
accordance with the Fund's Confidential Private Placement Memorandum dated
December 30, 2004 (as amended, supplemented or otherwise modified from time to
time, the "Offering Memorandum") and the Fund's Amended and Restated Limited
Liability Company Agreement dated as of December 30, 2004 (as amended,
supplemented or otherwise modified from time to time, the "Fund Operating
Agreement"). Triarc's obligation to maintain the investment of all or any
portion of the Triarc Investment is subject to Triarc's satisfaction in its sole
discretion during the Compliance Period (as defined in the Operating Agreement)
that the Fund remains in compliance with Section 11.7 of the Operating Agreement
in all material respects, to the extent applicable. References herein to
"Triarc" shall include, as applicable, any affiliate of Triarc that has also
made an investment in the Fund.
2. Investment by SCM and Roberts. Upon the terms and subject to the
conditions set forth herein, in connection with the Closing, each of SCM and
Roberts has invested in the Fund an amount equal to ten percent (10%) of the
after-tax portion of the Estimated Purchase Price (as defined in the Purchase
Agreement) received by SCM and Roberts, respectively, pursuant to the Purchase
Agreement (each, the "Management Investment").
3. Lock-Up. Subject to Section 4 below, each of Triarc, SCM and Roberts may
not make a full or partial redemption or withdrawal, as the case may be, of its
capital account in the Fund for a period of two years (the "Lock-Up Period")
from October 4, 2004 (the "Start Date"). The foregoing shall only apply to the
Triarc Investment and each Management Investment and not to any subsequent
investments in the Fund or any DCM Product (as defined below). Each of Triarc's,
SCM's and Roberts' initial investment in the Fund, together with any subsequent
investments by them in the Fund, is referred to herein as its "Investment".
4. Redemptions/Withdrawals.
(a) Notwithstanding anything herein to the contrary:
(i) Triarc may, in accordance with the provisions governing
redemptions by investors in the Fund set forth in the Fund Operating
Agreement, redeem or withdraw all or a portion of its Investment in
the Fund if the Triarc Investment constitutes 20% or less of the
aggregate net asset value of the Fund;
(ii) if (a) there is a material adverse change in the business,
operations or condition (financial or otherwise) of the Fund, (b) DCM
is terminated or withdraws as investment manager of the Fund for any
reason, (c) there is a decline as of the end of any calendar month of
more than twenty-five percent (25%) of the Fund's net asset value from
the Start Date (excluding any additions to, redemptions by or
distributions to investors in the Fund from the capital of the Fund),
(d) there is a failure by DCM or the Fund to hold all necessary
registrations, licenses, consents or approvals to carry out its
business, or (e) unless Triarc provides its prior written approval to
such change, there is a fundamental change in the investment strategy
of the Fund from that described in the Offering Memorandum, Triarc may
redeem or withdraw all or a portion of its Investment upon 10 days
prior written notice to DCM;
(iii) SCM and Roberts, as applicable, may redeem or withdraw all
or a portion of its Investment at any time after (a) the exercise by
the Sachs Affiliated Parties (as defined in the Operating Agreement)
or the Roberts Affiliated Parties (as defined in the Operating
Agreement), as applicable, of their Put Rights (as defined in the
Operating Agreement) with respect to all of their remaining Membership
Interests (as defined in the Operating Agreement) pursuant to the
Operating Agreement or (b) the exercise by Triarc of its Call Option
(as defined in the Operating Agreement) with respect to all of the
Membership Interests of the Sachs Affiliated Parties or the Roberts
Affiliated Parties, as applicable, pursuant to the Operating
Agreement;
(iv) at the election of Triarc, SCM or Roberts, as applicable, at
any time and from time to time, all or any portion of its Investment
may be subsequently converted into an indirect investment in the Fund
by Triarc's, SCM's or Roberts', as applicable, withdrawal from its
capital account in the Fund (without penalties or charges) and
reinvestment of the entire withdrawal proceeds through a total return
swap transaction or a similar arrangement with a counterparty under
which the reference asset is a specified interest in the Fund. For the
avoidance of doubt, (a) any such indirect investment, together with
any direct investment, shall be deemed a part of Triarc's, SCM's or
Roberts', as applicable, "Investment" hereunder, and (b) each party's
rights and obligations hereunder shall continue with respect to such
Investment; and
(v) upon the prior written consent of Triarc, SCM and Roberts, at
any time and from time to time, Triarc may redeem all or any portion
of its Investment if the entire redeemed amount (or an amount equal to
the entire redeemed amount) is simultaneously (or, in any event, as
promptly as practicable) invested in another investment product
managed by DCM or one of its affiliates (a "DCM Product"); provided
that, except as otherwise agreed to in writing by Triarc, SCM and
Roberts, any such subsequent investment shall be subject to the same
terms and conditions as Triarc's, SCM's and Roberts' Investment
hereunder as if such terms and conditions applied to such subsequent
investment. For the avoidance of doubt, and without limiting the
generality of the foregoing, (a) there shall be no lock-up period
applicable to any such subsequent investment in a DCM Product, (b) in
the case of any management fee payable by Triarc to DCM or one of its
affiliates with respect to any such subsequent investment, such fee
shall be the same as that which is charged to other investors in such
DCM Product but in no event shall it exceed the fee set forth in
Section 6, (c) the "Start Date" for purposes of any such subsequent
investment shall be the date of Triarc's initial investment in such
DCM Product and (d) references herein to the Offering Memorandum and
the Fund Operating Agreement shall be deemed to be references to the
comparable documents applicable to any such DCM Product, in each case
except as otherwise agreed to in writing by Triarc, SCM and Roberts.
(b) Notwithstanding anything herein to the contrary, if Triarc elects to
redeem or withdraw all or a portion of its Investment in the Fund pursuant to
this Agreement, each of SCM and Roberts may and, in the case of Section 4(a)(v),
shall redeem or withdraw (and, in the case of Section 4(a)(v), invest in a DCM
Product), upon the same terms and conditions applicable to Triarc on such
redemption or withdrawal, a portion of its Investment in the Fund equal to an
amount no greater than the percentage that the amount that Triarc has so elected
to redeem or withdraw bears to the amount of Triarc's Investment at such time.
(c) Any partial redemption or withdrawal, as the case may be, by Triarc
from the Fund that is permitted under this Agreement may be made in any amount
of not less than $250,000 as long as Triarc's remaining capital account balance
in the Fund is at least $1,000,000 (the parties will agree on a case-by-case
basis whether to make this provision applicable to subsequent investments in DCM
Products).
(d) If the Fund limits the total amount of redemptions in any quarter,
Triarc, SCM and Roberts will be treated on a pro rata basis with other investors
in the Fund.
(e) Each of Triarc, SCM and Roberts will not be charged or obligated to pay
any subscription, disposition, redemption or other similar fees in connection
with the acquisition or disposition of all or any portion of its Investment,
including in the event that all or any portion of its Investment is compulsorily
redeemed.
5. Distributions.
(a) Distributions from the Fund in satisfaction of a full redemption or
withdrawal, as the case may be, will be made such that Triarc, SCM or Roberts,
as the case may be, receives, within three business days of the effective
redemption or withdrawal date, cash in an amount equal to at least 95% of the
estimated net asset value of such entity's or person's capital account in the
Fund on the effective redemption or withdrawal date. The Fund will pay Triarc,
SCM or Roberts, as the case may be, interest on the balance of such entity's or
person's redemption or withdrawal, as the case may be, from the effective
redemption or withdrawal date to the date such balance is actually paid, at a
rate per annum equal to the average (calculated weekly) annual 91 day Treasury
Bill rate. The Fund will pay the balance (subject to audit adjustments) and all
of the accrued interest in cash within five business days after completion of
the Fund's monthly books.
(b) Distributions from the Fund in satisfaction of a partial redemption or
withdrawal, as the case may be, will be made such that Triarc, SCM or Roberts,
as the case may be, receives, within three business days of the effective
redemption or withdrawal date, cash in an amount equal to 100% of the amount
requested to be redeemed or withdrawn.
6. Fees. Notwithstanding the constituent documents of the Fund (the "Fund
Agreement"), the management fee borne by each of Triarc, SCM and Roberts on an
annual basis shall be equal to 1.5% of such entity's capital account balance in
the Fund.
7. Right of First Refusal. Each of Triarc, SCM and Roberts may have a right
of first refusal on additional interests offered by the Fund. Any offering of
shares or other interests in a vehicle (other than the Fund) managed by DCM or
an affiliate thereof with investment objectives and guidelines substantially
similar to those of the Fund will be deemed to be an offering of the Fund.
8. Assignment. Each of Triarc, SCM and Roberts may assign its interests in
the Fund to any of its affiliates without the consent of the Fund or DCM.
Triarc, SCM and Roberts, as the case may be, will have no obligation to pay any
redemption or withdrawal fee or penalty in connection with any such assignment.
For purposes of this Agreement, (a) affiliates of any entity (including SCM)
shall include any person who is an "affiliate" as defined in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended from time to time, (b) affiliates of an individual shall include (i)
members of such individual's Immediate Family (as defined in the Operating
Agreement), (ii) the heirs or legal representatives of any such deceased
individual, and (iii) a trust, corporation, partnership or limited liability
company, all of the beneficial interests in which shall be held by such
individual or such individual's Immediate Family members or such deceased
individual's heirs or legal representatives, and (c) affiliates of SCM shall
also include any person who would be an affiliate of Gregory H. Sachs if he were
a party to this Agreement.
9. Notice. DCM will provide written notice to each of Triarc, SCM and
Roberts upon the occurrence of:
(a) any material amendment or modification to the Fund Operating Agreement;
(b) to the knowledge of DCM or any of its representatives, the commencement
with respect to the Fund of any tax audit or other investigations or proceedings
with respect to taxes;
(c) a termination of the Fund's investment management, administration or
custodian agreements or a change in, or termination of, the Fund's legal
counsel, administrator, prime broker or auditor;
(d) to the knowledge of DCM or any of its representatives, any
investigation of the Fund, DCM or their principals by a federal, state or
regulatory body with authority over the Fund, DCM or their principals;
(e) to the knowledge of DCM or any of its representatives, any
administrative, civil or criminal legal actions in which the Fund, DCM or any of
their principals are named a party or material witness, or which may limit the
Fund's ability to perform its duties;
(f) any material changes to investment strategies of the Fund, any material
changes to valuation policies relating to the Fund or any material changes
relating to soft dollar arrangements;
(g) any reduction of aggregate investments in the Fund by any of the
members, employees and principals of DCM by twenty percent (20%) or more of
their value as of the end of any calendar month;
(h) any substantial reduction from the date of the first closing of the
Fund of the time commitment of any of Gregory H. Sachs, Scott A. Roberts or
Jonathan W. Trutter to the investments, business and operation of the Fund; or
(i) any of the events specified in Section 4(a)(ii) above.
If such notice is not provided to any of Triarc, SCM or Roberts within 30
days, any redemption or withdrawal fees or penalties with respect to such person
will be waived by the Fund.
10. Most Favored Nations. DCM hereby confirms and agrees that none of the
Fund, DCM or any of their respective affiliates has entered into any side letter
or similar agreement or arrangement with any other investor or prospective
investor in the Fund on or prior to the date hereof. If the Fund, DCM or any of
their respective affiliates shall in the future enter into any side letter or
similar agreement or arrangement with a proposed or existing investor in the
Fund (collectively, "Side Letters"), Triarc, SCM and Roberts shall be promptly
furnished with a copy of such Side Letters. DCM, on behalf of the Fund, hereby
agrees that Triarc, SCM and Roberts shall have the benefit of any provision in
any Side Letter.
11. Tax Reporting. DCM shall cause the Fund to be treated as a partnership
for U.S., state and local tax purposes and to prepare IRS Form 1065 and
Schedules K-1 (and related state and local filings) within 90 days of year end.
12. Subsequent Investments. The terms of the Investment by each of Triarc,
SCM and Roberts will also apply to any subsequent investments by Triarc, SCM or
Roberts, as the case may be, in the Fund.
13. Insurance. DCM shall cause the Fund to maintain with financially sound
and reputable insurers, insurance in amounts and against such risks as are
customarily maintained by reputable companies under similar circumstances and
shall furnish copies of such insurance upon written request by Triarc, SCM or
Roberts.
14. Amendment; Waiver. Any amendment, supplement or modification of this
Agreement or any waiver of the terms and conditions hereof shall not be binding
upon any party, unless approved in writing by each of the parties hereto. Each
party agrees that no failure or delay by another party to this Agreement in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
applicable principles of conflict of laws (if as a result the governing law of
another jurisdiction would apply).
16. Counterparts. This Agreement may be executed in counterparts, which,
taken together, shall constitute a single original document.
17. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO, ON BEHALF OF ITSELF
AND EACH OF ITS AFFILIATES, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
18. Third Party Beneficiaries; Assignment. This Agreement is not intended
to and does not confer upon any person other than the parties hereto any rights,
claims or remedies hereunder. Without the written consent of each other party
hereto, none of the parties hereto may assign any of its rights or delegate any
of its obligations under this Agreement, except that each of Triarc, SCM and
Roberts may assign, in its sole discretion, any or all of its rights, interests
and obligations under this Agreement to any of its affiliates; provided, that,
no such assignment shall relieve Triarc, SCM and Roberts, as the case may be, of
any of its obligations under this Agreement. Any purported assignment or
delegation in violation of this provision shall be void.
19. Entire Agreement. This Agreement (including the Exhibits), together
with the Purchase Agreement, the Operating Agreement, the Offering Memorandum,
the Fund Operating Agreement and, as applicable, the definitive agreements
relating to the organization and management of any DCM Product in which Triarc,
SCM and Roberts invest pursuant hereto, sets forth the entire agreement and
understanding among the parties relating to the subject matter hereof and
supersedes any prior agreement or understanding, whether written or oral,
relating to the subject matter hereof.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto, each intending to be legally bound
hereby, have caused this Agreement to be executed as of the date first above
written.
TRIARC COMPANIES, INC.
By: /S/ DAVID I. MOSSE
-------------------------------
Name: David I. Mosse
Title: Vice President and
Assistant General Counsel
DEERFIELD CAPITAL MANAGEMENT LLC
By: /S/ MARVIN SHREAR
-------------------------------
Name: Marvin Shrear
Title: Chief Financial Officer
SACHS CAPITAL MANAGEMENT, LLC
By: /S/ GREGORY H. SACHS
-------------------------------
Name: Gregory H. Sachs
Title: Trustee of the Gregory H. Sachs
Revocable Trust, Member
/S/ SCOTT A. ROBERTS
-------------------------------
SCOTT A. ROBERTS
EXHIBIT 31.1
CERTIFICATIONS
I, Nelson Peltz, the Chairman and Chief Executive Officer of Triarc
Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 12, 2005
/S/ NELSON PELTZ
------------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Francis T. McCarron, the Executive Vice President and Chief Financial
Officer of Triarc Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Triarc Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 12, 2005
/S/ FRANCIS T. McCARRON
----------------------------
Francis T. McCarron
Executive Vice President
and Chief Financial Officer
EXHIBIT 32.1
Certification Pursuant to
18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Triarc Companies, Inc., a Delaware corporation (the
"Company"), does hereby certify, to the best of such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended April 3, 2005 (the
"Form 10-Q") of the Company fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: May 12, 2005 /S/ NELSON PELTZ
------------------------------------
Nelson Peltz
Chairman and Chief Executive Officer
Dated: May 12, 2005 /S/ FRANCIS T. McCARRON
------------------------------------
Francis T. McCarron
Executive Vice President and Chief
Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Triarc Companies, Inc.
and will be retained by Triarc Companies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Form 10-Q or as a separate disclosure document.