form10k_022808.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(MARK
ONE)
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 30, 2007
OR
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR
THE TRANSITION PERIOD FROM _____________ TO ______________.
COMMISSION
FILE NUMBER 1-2207
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TRIARC
COMPANIES, INC.
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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38-0471180
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1155
Perimeter Center West, Atlanta, Georgia
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30338
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code: (678) 514-4100
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Securities
Registered Pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Class
A Common Stock, $.10 par value
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New
York Stock Exchange
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Class
B Common Stock, Series 1, $.10 par value
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New
York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ýYes □No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. □Yes ýNo
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. ýYes □No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. □
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer ý
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Accelerated
filer □
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Non-accelerated
filer □
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Smaller
reporting company □
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). □Yes ýNo
The
aggregate market value of the registrant’s common equity held by non-affiliates
of the registrant as of June 29, 2007 was approximately
$1,009,949,681. As of February 15, 2008, there were 28,884,858 shares
of the registrant's Class A Common Stock and 63,885,043 shares of the
registrant’s Class B Common Stock, Series 1, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required by Part III of this Form 10-K, to the extent not set forth
herein, is incorporated herein by reference from the registrant’s definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after December 30, 2007.
PART
1
Special
Note Regarding Forward-Looking Statements and Projections
Certain
statements in this Annual Report on Form 10-K, including statements under “Item
1. Business” and “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” that are not historical facts,
including, most importantly, information concerning possible or assumed future
results of operations of Triarc Companies, Inc. and its subsidiaries (“Triarc”),
and statements preceded by, followed by, or that include the words “may,”
“believes,” “plans,” “expects,” “anticipates,” or the negation thereof, or
similar expressions, 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. The forward-looking
statements contained in this Form 10-K are based on our current expectations,
speak only as of the date of this Form 10-K 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 all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Reform Act. Many important factors could affect our future results
and could cause those results to differ materially from those expressed in or
implied by the forward-looking statements contained herein. Such
factors, all of which are difficult or impossible to predict accurately and many
of which are beyond our control, include, but are not limited to, the
following:
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competition,
including pricing pressures and the potential impact of competitors’ new
units on sales by Arby’s®
restaurants;
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consumers’
perceptions of the relative quality, variety, affordability and value of
the food products we offer;
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success
of operating initiatives;
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development
costs, including real estate and construction
costs;
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·
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advertising
and promotional efforts by us and our
competitors;
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·
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consumer
awareness of the Arby’s brand;
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·
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the
existence or absence of positive or adverse
publicity;
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·
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new
product and concept development by us and our competitors, and market
acceptance of such new product offerings and
concepts;
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·
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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”;
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·
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changes
in spending patterns and demographic trends, such as the extent to which
consumers eat meals away from home;
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adverse
economic conditions, including high unemployment rates, in geographic
regions that contain a high concentration of Arby’s
restaurants;
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the
business and financial viability of key
franchisees;
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the
timely payment of franchisee obligations due to
us;
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availability,
location and lease terms of sites for restaurant development by us and our
franchisees;
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the
ability of our franchisees to open new restaurants in accordance with
their development commitments, including the ability of franchisees to
finance restaurant development;
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delays
in opening new restaurants or completing remodels of existing
restaurants;
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the
timing and impact of acquisitions and dispositions of
restaurants;
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our
ability to successfully integrate acquired restaurant
operations;
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anticipated
or unanticipated restaurant closures by us and our
franchisees;
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our
ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Arby’s
restaurants successfully;
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changes
in business strategy or development plans, and the willingness of our
franchisees to participate in our strategies and operating
initiatives;
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business
abilities and judgment of our and our franchisees’ management and other
personnel;
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availability
of qualified restaurant personnel to us and to our franchisees, and the
ability to retain such personnel;
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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;
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changes
in commodity (including beef and chicken), labor, supply, distribution and
other operating costs;
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availability
and cost of insurance;
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adverse
weather conditions;
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availability,
terms (including changes in interest rates) and effective deployment of
capital;
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changes
in legal or self-regulatory requirements, including franchising laws,
accounting standards, environmental laws, payment card industry rules,
overtime rules, minimum wage rates, government-mandated health benefits
and taxation rates;
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the
costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
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the
impact of general economic conditions on consumer spending, including a
slower consumer economy and the effects of war or terrorist
activities;
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the
impact of our continuing investment in Deerfield Capital Corp. following
our corporate restructuring; and
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other
risks and uncertainties affecting us and our subsidiaries referred to in
this Form 10-K (see especially “Item 1A. Risk Factors” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations”) and in our other current and periodic filings with the
Securities and Exchange Commission.
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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 Form
10-K 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. Business.
Introduction
We are a
holding company and, through our subsidiary Arby’s Restaurant Group, Inc.
(“ARG”), we are the franchisor of the Arby’s restaurant system. The
Arby’s restaurant system is comprised of approximately 3,700 restaurants, of
which, as of December 30, 2007, 1,106 were owned and operated by our
subsidiaries. References in this Form 10-K to restaurants that we
“own” or that are “company-owned” include owned and leased restaurants as well
as one restaurant managed pursuant to a management agreement. Our
corporate predecessor was incorporated in Ohio in 1929. We
reincorporated in Delaware in June 1994. Our principal executive
offices are located at 1155 Perimeter Center West, Atlanta, Georgia 30338, and
our telephone number is (678) 514-4100. We make our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
such reports, as well as our annual proxy statement, available, free of charge,
on our website as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission. Our website address is
www.triarc.com. Information contained on our website is not part of
this Form 10-K.
Sale
of Deerfield
On December
21, 2007, in connection with our previously announced corporate restructuring
and transition to a “pure play” restaurant company, we completed the sale of
Deerfield & Company LLC (“Deerfield”) to Deerfield Capital Corp. (formerly
known as Deerfield Triarc Capital Corp.), a real estate investment trust (“DFR”
or the “REIT”), in a transaction we refer to as the “Deerfield
Sale.” Deerfield is a holding company, the primary assets of which are the
outstanding membership interests of Deerfield Capital Management LLC, a
Chicago-based, fixed income asset manager that had been acting as the external
manager of DFR. In consideration for our interest in Deerfield, we
received approximately $48 million in senior secured notes with a fair value of
approximately $46 million and approximately 9.6 million shares of DFR
convertible preferred stock with a fair value of approximately $88.4 million,
both as of the date of the sale. We also received approximately
206,000 shares of DFR common stock previously owned by Deerfield as a
distribution prior to the sale. Each share of DFR preferred stock
will be convertible into one share of DFR common stock upon receipt of DFR
stockholder approval of the issuance of the underlying common
stock. The DFR shareholder meeting to vote on such approval is
currently scheduled to be held on March 11, 2008. The DFR shares held
by us as a result of the sale represent approximately 15% of DFR’s outstanding
common stock on an as converted basis. There can be no
assurance, however, that DFR’s stockholders will approve the issuance of common
stock in exchange for our DFR preferred stock. See “Liquidity and
Capital Resources – Deerfield Sale” for a detailed discussion of the Deerfield
Sale.
Business
Strategy
The key
elements of our business strategy include using our resources to grow our
restaurant business and evaluating and making various acquisitions and business
combinations in the restaurant industry. The implementation of this
business strategy may result in increases in expenditures for, among other
things, construction of new units, acquisitions and related financing activities
and, over time, marketing and advertising. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” Unless circumstances dictate otherwise, it is our policy
to publicly announce an acquisition or business combination only after a
definitive agreement with respect to such acquisition or business combination
has been reached.
On
November 1, 2005, Nelson Peltz, our Chairman and former Chief Executive Officer,
Peter W.
May, our Vice
Chairman and former President and Chief Operating Officer, and Edward P.
Garden, our Former Vice Chairman
and a member
of our Board of Directors (collectively, the “Principals”), started a
series of equity investment funds (the “Funds”) that are separate and distinct
from Triarc and that are being managed by the Principals and certain other
former senior officers and former employees of Triarc through a management
company (the “Management Company”) formed by the Principals. The
investment strategy of the Funds is to achieve capital appreciation by investing
in equity securities of publicly traded companies and effecting positive change
in those companies through active influence and involvement. Before
agreeing to acquire more than 50% of the outstanding voting securities of a
company in the quick service restaurant segment in which Arby’s operates, the
Principals have agreed to offer us such acquisition opportunity, which may
result in acquisition opportunities being made available to us from time to
time. See Note 28 to the Consolidated Financial Statements for
additional information on our agreements with the Management
Company.
Fiscal
Year
We use a
52/53 week fiscal year convention whereby our fiscal year ends each year on the
Sunday that is closest to December 31 of that year. Each fiscal year
generally is comprised of four 13 week fiscal quarters, although in some years
the fourth quarter represents a 14 week period. Deerfield, through
the date of its sale, reported on a calendar year basis.
Business
Operations
During
2007, our operations were in two business segments. We operate in the
restaurant business through our Company-owned and franchised Arby’s restaurants
and, until the Deerfield Sale, we also operated in the asset management
business. Financial information relating to the restaurants and asset
management segments is included herein at Note 30 to the Consolidated Financial
Statements.
The
Arby’s Restaurant System
We
participate in the quick service restaurant segment of the restaurant
industry. Arby’s is the largest restaurant franchising system
specializing in the roast beef sandwich segment of the quick service restaurant
industry. According to Nation’s Restaurant News,
Arby’s is the 12th largest
quick service restaurant chain in the United States. We acquired our
company-owned Arby’s restaurants principally through the acquisitions of Sybra,
Inc. in December 2002 and the RTM Restaurant Group in July 2005. We
increase the number of our company-owned restaurants from time to time through
acquisitions as well as the development and construction of new
restaurants. There are approximately 3,700 Arby’s restaurants in the
United States and Canada. As of December 30, 2007, there were 1,106
company-owned Arby’s restaurants and 2,582 Arby’s restaurants owned by 462
franchisees. Of the 2,582 franchisee-owned restaurants, 2,458
operated within the United States and 124 operated outside the United States,
principally in Canada.
ARG also
owns the T.J. Cinnamons® concept, which consists of gourmet cinnamon rolls,
gourmet coffees and other related products, and the Pasta Connection® concept,
which includes pasta dishes with a variety of different sauces. As of
December 30, 2007, there were a total of 243 T.J. Cinnamons outlets, 225 of
which are multi-branded with domestic Arby’s restaurants, and six Pasta
Connection outlets, all of which are multi-branded with domestic Arby’s
restaurants. ARG is not currently offering to sell any additional
Pasta Connection franchises.
In addition
to various slow-roasted roast beef sandwiches, Arby’s offers an extensive menu
of chicken, turkey and ham sandwiches, snack items and salads. In
2001, Arby’s introduced its Market Fresh line of premium sandwiches on a
nationwide basis. Since its introduction, the Arby’s Market
Fresh® line has grown to include fresh salads made with premium ingredients
such as fresh apples, dried cranberries, corn salsa and black
beans. Arby’s also offers Market Fresh wrap sandwiches with the same
ingredients as its Market Fresh sandwiches inside a tortilla
wrap. In
2007, Arby's added Toasted Subs to its sandwich selections, which is Arby’s
largest menu revision since the 2001 introduction of its Market Fresh
line. Arby’s initial lineup of Toasted Sub offerings includes four
varieties on toasted ciabatta rolls: the French Dip & Swiss Toasted Sub, the
Philly Beef Toasted Sub, the Classic Italian Toasted Sub and the Turkey Bacon
Club Toasted Sub. Additional varieties of the Toasted Subs are being
offered on a limited time basis.
During 2007,
ARG opened 51 new Arby’s restaurants and closed 15 generally underperforming
Arby’s restaurants. In addition, ARG acquired 11 existing Arby’s
restaurants from its franchisees and sold two of its company-owned restaurants
to new or existing franchisees. During 2007, Arby’s franchisees opened 97 new
Arby’s restaurants and closed 30 generally underperforming Arby’s
restaurants. In addition, during 2007, Arby’s franchisees opened one
and closed nine T.J. Cinnamons outlets located in Arby’s units, and franchisees
closed an additional five T.J. Cinnamons outlets located outside of Arby’s
units. As of December 30, 2007, franchisees have committed to open
386 Arby’s restaurants over the next seven years. You should read the
information contained in “Item 1A. Risk Factors—Our restaurant business is
significantly dependent on new restaurant openings, which may be affected by
factors beyond our control.”
As of
December 30, 2007, Canadian franchisees have committed to open six Arby’s
restaurants over the next four years. During 2007, one new Arby’s
unit was opened in Canada and four Arby’s units in Canada were
closed. During 2007, no other Arby’s units were opened or closed
outside the United States.
Overview
As the
franchisor of the Arby’s restaurant system, ARG, through its subsidiaries, owns
and licenses the right to use the Arby’s brand name and trademarks in the
operation of Arby’s restaurants. ARG provides Arby’s franchisees with
services designed to increase both the revenue and profitability of their Arby’s
restaurants. The most important of these services are providing
strategic leadership for the brand, product development, quality control,
operational training and counseling regarding site selection.
The
revenues from our restaurant business are derived from three principal sources:
(1) sales at company-owned restaurants; (2) franchise royalties received from
all Arby’s franchised restaurants; and (3) up-front franchise fees from
restaurant operators for each new unit opened.
Arby’s
Restaurants
Arby’s
opened its first restaurant in Boardman, Ohio in 1964. As of December
30, 2007, ARG and Arby’s franchisees operated Arby’s restaurants in 48 states,
and four foreign countries. As of December 30, 2007, the six leading
states by number of operating units were: Ohio, with 291
restaurants; Michigan, with 196 restaurants; Indiana, with 181 restaurants;
Florida, with 176 restaurants; Texas, with 167 restaurants; and Georgia, with
153 restaurants. The country outside the United States with the most
operating units is Canada with 115 restaurants as of December 30,
2007.
Arby’s
restaurants in the United States and Canada typically range in size from 2,500
square feet to 3,000 square feet, and almost all of the freestanding system-wide
restaurants feature drive-thru windows. Restaurants typically have a
manager, at least one assistant manager and as many as 30 full and part-time
employees. Staffing levels, which vary during the day, tend to be heaviest
during the lunch hours.
The
following table sets forth the number of Arby’s restaurants at the beginning and
end of each year from 2005 to 2007:
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2005
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2006
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2007
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Restaurants
open at beginning of period
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3,461 |
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3,506 |
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3,585 |
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Restaurants
opened during period
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101 |
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131 |
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148 |
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Restaurants
closed during period
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56 |
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52 |
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45 |
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Restaurants
open at end of period
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3,506 |
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3,585 |
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3,688 |
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During the period from January 3, 2005,
through December 30, 2007, 380 Arby’s restaurants were opened and 153 generally
underperforming Arby’s restaurants were closed. We believe that
closing underperforming Arby’s restaurants has contributed to an increase in the
average annual unit sales volume of the Arby’s system, as well as to an
improvement of the overall brand image of Arby’s.
As of December 30, 2007, ARG owned or
operated 1,106 domestic Arby’s restaurants, of which 1,070 were freestanding
units, 19 were in shopping malls, five were in office buildings/urban in-line
locations, four were in convenience stores, five were in travel plazas and three
were in strip center locations.
Franchise
Network
ARG seeks
to identify potential franchisees that have experience in owning and operating
quick service restaurant units, have a willingness to develop and operate Arby’s
restaurants and have sufficient net worth. ARG identifies applicants
through its website, targeted mailings, maintaining a presence at industry trade
shows and conventions, existing customer and supplier contacts and regularly
placed advertisements in trade and other publications. Prospective
franchisees are contacted by an ARG sales agent and complete an application for
a franchise. As part of the application process, ARG requires and
reviews substantial documentation, including financial statements and documents
relating to the corporate or other business organization of the
applicant. Franchisees that already operate one or more Arby’s
restaurants must satisfy certain criteria in order to be eligible to enter into
additional franchise agreements, including capital resources commensurate with
the proposed development plan submitted by the franchisee, a commitment by the
franchisee to employ trained restaurant management and to maintain proper
staffing levels, compliance by the franchisee with all of its existing franchise
agreements, a record of operation in compliance with Arby’s operating standards,
a satisfactory credit rating and the absence of any existing or threatened legal
disputes with Arby’s. The initial term of the typical “traditional”
franchise agreement is 20 years.
ARG
currently does not offer any financing arrangements to franchisees seeking to
build new franchised units.
In 2006, ARG terminated a program offered through CIT Group to provide
remodel financing to Arby’s franchisees, with ARG having no financial
obligations under the program. ARG continues to evaluate potential
new financial programs to assist franchisees in remodeling existing Arby’s
restaurants.
ARG
offers franchises for the development of both single and multiple “traditional”
and “non-traditional” restaurant locations. As compared to traditional
restaurants, non-traditional restaurants generally occupy a smaller retail
space, offer no or very limited seating, may cater to a captive audience, have a
limited menu, and possibly have reduced services, labor and storage and
different hours of operation. Both new and existing franchisees may enter
into a development agreement, which requires the franchisee to develop one or
more Arby’s restaurants in a particular geographic area or at a specific site
within a specific time period. All franchisees are required to execute
standard franchise agreements. ARG’s standard U.S. franchise agreement for
new Arby’s traditional restaurant franchises currently requires an initial
$37,500 franchise fee for the first franchised unit, $25,000 for each subsequent
unit and a monthly royalty payment equal to 4.0% of restaurant sales for the
term of the franchise agreement. ARG’s non-traditional restaurant
franchise agreement requires an initial $12,500 franchise fee for the first and
all subsequent units, and a monthly royalty payment ranging from 4.0% to 6.8%,
depending upon the non-traditional restaurant category. Franchisees of
traditional restaurants typically pay a $10,000 commitment fee, and franchisees
of non-traditional restaurants typically pay a $12,500 commitment fee, which is
credited against the franchise fee during the development process for a new
restaurant.
In 2007,
ARG introduced a program designed to accelerate the development of traditional
Arby’s restaurants in selected markets (our “SMI” program). ARG’s
franchise agreement for participants in the SMI program currently requires an
initial $27,500 franchise fee for the first franchised unit, $15,000 for each
subsequent unit and a monthly royalty payment equal to 1.0% of restaurant sales
for the first 36 months the unit is open. After 36 months, the monthly
royalty rate reverts to the prevailing 4% rate for the remaining term of the
agreement. The commitment fee is $5,000 per restaurant, which is credited
against the franchise fee during the development process.
Because
of lower royalty rates still in effect under certain earlier agreements, the
average royalty rate paid by U.S. franchisees was approximately 3.5% in 2005,
3.6% in 2006 and 3.6% in 2007.
Franchised
restaurants are required to be operated under uniform operating standards and
specifications relating to the selection, quality and preparation of menu items,
signage, decor, equipment, uniforms, suppliers, maintenance and cleanliness of
premises and customer service. ARG monitors franchisee operations and
inspects restaurants periodically to ensure that required practices and
procedures are being followed.
Acquisitions
and Dispositions of Arby’s Restaurants
As part
of ARG’s continuous efforts to enhance the Arby’s brand, grow the Arby’s system
and improve Arby’s system operations, ARG from time to time acquires or sells
individual or multiple Arby’s restaurants. ARG may use such
transactions as a way of further developing a targeted market. For
example, ARG may sell a number of restaurants in a particular market to a
franchisee and obtain a commitment from the franchisee to develop additional
restaurants in that market. Or, ARG may acquire restaurants from a
franchisee demonstrating a limited desire to grow and then seek to further
penetrate that market through the development of additional company-owned
restaurants. ARG believes that dispositions of multiple restaurants
at once can also be an effective strategy for attracting new franchisees who
seek to be multiple unit operators with the opportunity to benefit from
economies of scale. In addition, ARG may acquire restaurants from a
franchisee who wishes to exit the Arby’s system. When ARG acquires
underperforming restaurants, it seeks to improve their results of operations and
then either continues to operate them as company-owned restaurants or re-sells
them to new or existing franchisees.
Advertising
and Marketing
Arby’s
advertises nationally on several cable television networks. In addition,
from time to time, Arby’s will sponsor a nationally televised event or
participate in a promotional tie-in for a movie. Locally, Arby’s primarily
advertises through regional network and cable television, radio and
newspapers. The AFA Service Corporation (the “AFA”), an independent
membership corporation in which every domestic Arby’s franchisee is required to
participate, was formed to create advertising and perform marketing for the
Arby’s system. ARG’s chief marketing officer currently serves as president
of the AFA. The AFA is managed by ARG pursuant to a management
agreement, as described below. The AFA is funded primarily through
member dues, which have been increased beginning in 2008, as described
below. As of January 1, 2008, ARG and most domestic Arby’s franchisees
must pay 1.8% of gross sales as dues to AFA. Domestic franchisee
participants in our SMI program pay an extra 1% (currently 2.8% total) of gross
sales as AFA dues for the first 36 months of operation, then their dues revert
to the lower prevailing rate.
During
2007, the AFA by-laws were amended to allow the AFA board of directors, at its
discretion, to increase annual dues up to an additional 0.8% of gross sales for
the period commencing January 1, 2008 and ending December 31, 2009, at which
time the amendment is expected to be re-evaluated. Following this
amendment, the AFA board increased AFA dues from 1.2% of gross sales to 1.8% of
gross sales effective January 1, 2008. The increase was made in order to
provide more funding for national advertising activities in 2008. ARG
believes that most operators, including ARG, will offset this increase by
making a corresponding reduction in local advertising expenditures, subject to
the requirement in Arby’s license agreements to expend at least 3% of gross
sales on local marketing. There can be no assurance that the increased dues will
continue to apply in 2009 or beyond.
Effective
October 2005, ARG and the AFA entered into a management agreement (the
“Management Agreement”) that ARG believes has enabled a closer working
relationship between ARG and the AFA, allowed for improved collaboration on
strategic marketing decisions and created certain operational efficiencies, thus
benefiting the Arby’s system as a whole. Pursuant to the Management
Agreement, ARG assumed general responsibility for the day-to-day operations of
the AFA, including preparing annual operating budgets, developing the brand
marketing strategy and plan, recommending advertising agencies and media buying
agencies, and implementing all marketing/media plans. ARG performs
these tasks subject to the approval of the AFA’s Board of
Directors. In addition to these responsibilities, ARG is obligated to
pay for the general and administrative costs of the AFA, other than the cost of
an annual audit of the AFA and certain other expenses specifically retained by
the AFA. ARG incurred expenses of approximately $6.8 million to cover
the AFA’s general and administrative costs for 2007, a portion of which was
offset by the AFA’s payment of $1.5 million to ARG, as required under the
Management Agreement. The AFA is required to pay $500,000 to ARG in
2008 to defray a portion of these costs. Beginning in 2009 and for
each year thereafter, the AFA will no longer be required to make any such
payments to ARG. Under the Management Agreement, ARG is also required
to provide the AFA with appropriate office space at no cost to the
AFA. The Management Agreement with the AFA continues in effect until
terminated by either party upon one year’s prior written notice. In
addition, the AFA may terminate the Management Agreement upon six months’ prior
written notice if there is a change in the identity of any two of the
individuals holding the titles of Chief Executive Officer, Chief Operating
Officer or Chief Administrative Officer of ARG in any period of 36
months. See Note 24 to the Consolidated Financial Statements for
additional information on the Management Agreement with AFA.
In
addition to their contributions to the AFA, ARG and Arby’s domestic franchisees
are also required to spend a reasonable amount, but not less than 3% of gross
sales of their Arby’s restaurants, for local advertising. This amount
is divided between (i) individual local market advertising expenses and (ii)
expenses of a cooperative area advertising program. Contributions to
the cooperative area advertising program, in which both company-owned and
franchisee-owned restaurants participate, are determined by the local
cooperative participants and are generally in the range of 3% to 7% of gross
sales. Domestic franchisee participants in our SMI program are not,
however, required to make any expenditure for local advertising until
their restaurants have been in operation for 36 months.
In 2007,
Arby’s was a primary sponsor of Roush Racing’s NASCAR® team led by driver Matt
Kenseth and his #17 Ford® race car in 13 Busch® Series events and one Nextel
Cup® Series event. The Arby’s/NASCAR relationship was supported
through national and local television advertising, radio, print, in-store
merchandising and the Arby’s website. In 2008, Arby’s is
continuing its relationship with Matt Kenseth
in two Nationwide Series™ (formerly Busch Series) events, with support
through local
television advertising, radio, print, in-store and web merchandising and public
relations efforts.
Provisions
and Supplies
As of
December 30, 2007, two independent meat processors supplied all of Arby’s beef
for roasting in the United States. Franchise operators are required
to obtain beef for roasting from these approved suppliers.
ARCOP,
Inc., a not-for-profit purchasing cooperative, negotiates contracts with
approved suppliers on behalf of ARG and Arby’s franchisees. Suppliers
to the Arby’s system must comply with United States Department of Agriculture
(“USDA”) and United States Food and Drug Administration (“FDA”) regulations
governing the manufacture, packaging, storage, distribution and sale of all food
and packaging products. Franchisees may obtain other products,
including food, ingredients, paper goods, equipment and signs, from any source
that meets ARG’s specifications and approval. Through ARCOP, ARG and
Arby’s franchisees purchase food, beverage, proprietary paper and operating
supplies under national contracts with pricing based upon total system
volume.
Quality
Assurance
ARG has
developed a quality assurance program designed to maintain standards and the
uniformity of menu offerings at all Arby’s restaurants. ARG assigns a
quality assurance employee to each of the independent facilities that process
beef for domestic Arby’s restaurants. The quality assurance employee inspects
the beef for quality and uniformity and to assure compliance with quality and
safety requirements of the USDA and the FDA. In addition, ARG
periodically evaluates randomly selected samples of beef and other products from
its supply chain. Each year, ARG representatives conduct unannounced
inspections of operations of a number of franchisees to ensure that required
policies, practices and procedures are being followed. ARG field representatives
also provide a variety of on-site consulting services to
franchisees. ARG has the right to terminate franchise agreements if
franchisees fail to comply with quality standards.
Trademarks
ARG,
through its subsidiaries, owns several trademarks that we consider to be
material to our restaurant business, including Arby’s®, Arby’s Market Fresh®,
Market Fresh®, Horsey Sauce® and Sidekickers®.
ARG’s
material trademarks are registered in the U.S. Patent and Trademark Office and
various foreign jurisdictions. Our registrations for such trademarks
in the United States will last indefinitely as long as ARG continues to use and
police the trademarks and renew filings with the applicable governmental
offices. There are no pending challenges to ARG’s right to use any of its
material trademarks in the United States.
Competition
Arby’s
faces direct and indirect competition from numerous well-established
competitors, including national and regional non-burger sandwich chains, such as
Panera Bread®, Subway® and Quiznos®, as well as hamburger chains, such as
McDonald’s®, Burger King® and Wendy’s®, and other quick service restaurant
chains, such as Taco Bell®, Chick-Fil-A® and Kentucky Fried
Chicken®. In addition, Arby’s competes with locally owned
restaurants, drive-ins, diners and other similar establishments. Key competitive
factors in the quick service restaurant industry are price, quality of products,
quality and speed of service, advertising, brand awareness, restaurant location
and attractiveness of facilities. Arby’s also competes within the
food service industry and the quick service restaurant sector not only for
customers, but also for personnel, suitable real estate sites and qualified
franchisees.
Many of
the leading restaurant chains have focused on new unit development as one
strategy to increase market share through increased consumer awareness and
convenience. This has led to increased competition for available development
sites and higher development costs for those sites. Competitors also
employ strategies such as frequent use of price discounting, frequent promotions
and heavy advertising expenditures. Continued price discounting in
the quick service restaurant industry and the emphasis on value menus could have
an adverse impact on us. In addition, the growth of fast casual
chains and other in-line competitors could cause some fast food customers to
“trade up” to a more traditional dining out experience while keeping the
benefits of quick service dining.
Other restaurant chains have also
competed by offering higher quality sandwiches made with fresh ingredients and
artisan breads. Several chains have also sought to compete by
targeting certain consumer groups, such as capitalizing on trends toward certain
types of diets (e.g., low carbohydrate or low trans fat) by offering menu items
that are promoted as being consistent with such diets.
Additional
competitive pressures for prepared food purchases come from operators outside
the restaurant industry. A number of major grocery chains offer fully
prepared food and meals to go as part of their deli sections. Some of
these chains also have in-store cafes with service counters and tables where
consumers can order and consume a full menu of items prepared especially for
that portion of the operation. Additionally, convenience stores and
retail outlets at gas stations frequently offer sandwiches and other
foods.
Many of
our competitors have substantially greater financial, marketing, personnel and
other resources than we do.
Governmental
Regulations
Various
state laws and the Federal Trade Commission regulate ARG’s franchising
activities. The Federal Trade Commission requires that franchisors
make extensive disclosure to prospective franchisees before the execution of a
franchise agreement. Several states require registration and disclosure in
connection with franchise offers and sales and have “franchise relationship
laws” that limit the ability of franchisors to terminate franchise agreements or
to withhold consent to the renewal or transfer of these
agreements. In addition, ARG and Arby’s franchisees must comply with
the federal Fair Labor Standards Act and the Americans with Disabilities Act
(the “ADA”), which requires that all public accommodations and commercial
facilities meet federal requirements related to access and use by disabled
persons, and various state and local laws governing matters that include, for
example, the handling, preparation and sale of food and beverages, minimum
wages, overtime and other working and safety conditions. Compliance
with the ADA requirements could require removal of access barriers and
non-compliance could result in imposition of fines by the U.S. government or an
award of damages to private litigants. As described more fully under “Item 3.
Legal Proceedings,” one of ARG’s subsidiaries was a defendant in a lawsuit
alleging failure to comply with Title III of the ADA at approximately 775
company-owned restaurants acquired as part of the July 2005 acquisition of
the
RTM
Restaurant Group. Under a court approved settlement of that lawsuit,
we estimate that ARG will spend approximately $1.15 million per year of capital
expenditures over a seven-year period commencing in 2008 to bring these
restaurants into compliance with the ADA, in addition to paying certain legal
fees and expenses. We do not believe that the costs related to this
matter or any other costs relating to compliance with the ADA will have a
material adverse effect on the Company’s consolidated financial position or
results of operations. We cannot predict the effect on our
operations, particularly on our relationship with franchisees, of any pending or
future legislation.
General
Environmental
Matters
Our past
and present operations are governed by federal, state and local environmental
laws and regulations concerning the discharge, storage, handling and disposal of
hazardous or toxic substances. These laws and regulations provide for
significant fines, penalties and liabilities, sometimes without regard to
whether the owner or operator of the property knew of, or was responsible for,
the release or presence of the hazardous or toxic substances. In addition, third
parties may make claims against owners or operators of properties for personal
injuries and property damage associated with releases of hazardous or toxic
substances. We cannot predict what environmental legislation or regulations will
be enacted in the future or how existing or future laws or regulations will be
administered or interpreted. We similarly cannot predict the amount of future
expenditures that may be required to comply with any environmental laws or
regulations or to satisfy any claims relating to environmental laws or
regulations. We believe that our operations comply substantially with all
applicable environmental laws and regulations. Accordingly, the environmental
matters in which we are involved generally relate either to properties that our
subsidiaries own, but on which they no longer have any operations, or properties
that we or our subsidiaries have sold to third parties, but for which we or our
subsidiaries remain liable or contingently liable for any related environmental
costs. Our company-owned Arby’s restaurants have not been the subject
of any material environmental matters. Based on currently available
information, including defenses available to us and/or our subsidiaries, and our
current reserve levels, we do not believe that the ultimate outcome of the
environmental matter discussed below or other environmental matters in which we
are involved will have a material adverse effect on our consolidated financial
position or results of operations. See “Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations” below.
In 2001, a vacant property owned
by Adams Packing Association, Inc. (“Adams”), an inactive subsidiary of the
Company, was listed by the United States Environmental Protection Agency on the
Comprehensive Environmental Response, Compensation and Liability Information
System (“CERCLIS”) list of known or suspected contaminated sites. The
CERCLIS listing appears to have been based on an allegation that a former tenant
of Adams conducted drum recycling operations at the site from some time prior to
1971 until the late 1970s. The business operations of Adams were sold
in December 1992. In February 2003, Adams and the Florida Department
of Environmental Protection (the “FDEP”) agreed to a consent order that provided
for development of a work plan for further investigation of the site and limited
remediation of the identified contamination. In May 2003, the FDEP
approved the work plan submitted by Adams’ environmental consultant and during
2004 the work under that plan was completed. Adams submitted its
contamination assessment report to the FDEP in March 2004. In August
2004, the FDEP agreed to a monitoring plan consisting of two sampling events
which occurred in January and June 2005 and the results were submitted to the
FDEP for its review. In November 2005, Adams received a letter from
the FDEP identifying certain open issues with respect to the
property. The letter did not specify whether any further actions are
required to be taken by Adams. Adams sought clarification from the
FDEP in order to attempt to resolve this matter. On May 1, 2007, the
FDEP sent a letter clarifying their prior correspondence and reiterated the open
issues identified in their November 2005 letter. In addition, the
FDEP offered Adams the option of voluntarily taking part in a recently adopted
state program that could lessen site clean up standards, should such a clean up
be required after a mandatory further study and site assessment
report. The Company, its consultants and outside counsel are
presently reviewing this option and no decision has been made on a course of
action based on the FDEP’s offer. In January 2008, Adams replied to
the FDEP requesting an extension of time to April 30, 2008 to respond to the May
1, 2007 letter while Adams continues to work on potential solutions to the
matter. Nonetheless, based on amounts spent prior to 2006 of
approximately $1.7 million for all of these costs and after taking into
consideration various legal defenses available to the Company, including Adams,
the Company expects that the final resolution of this matter will not have a
material effect on the Company’s financial position or results of
operations. See “Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Legal and Environmental Matters.”
In
addition to the environmental matter described above, we are involved in other
litigation and claims incidental to our current and prior
businesses. We and our subsidiaries have reserved for all of our
legal and environmental matters aggregating $0.7 million as of December 30,
2007. Although the outcome of these matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to us, based
on currently available information, including legal defenses available to us
and/or our subsidiaries, and given the aforementioned reserves and our insurance
coverages, 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
consolidated results are not significantly impacted by
seasonality. However, our restaurant revenues are somewhat lower in
our first quarter.
Employees
As of
December 30, 2007, we had a total of 26,605 employees, including 3,382 salaried
employees and 23,223 hourly employees. As of December 30, 2007, none
of our employees was covered by a collective bargaining agreement. We
believe that our employee relations are satisfactory.
Item
1A. Risk
Factors.
We wish
to caution readers that in addition to the important factors described elsewhere
in this Form 10-K, the following important factors, among others, sometimes have
affected, or in the future could affect, our actual results and could cause our
actual consolidated results during 2008, and beyond, to differ materially from
those expressed in any forward-looking statements made by us or on our
behalf.
Risks
Related to Triarc
A
substantial amount of our shares of Class A Common Stock and Class B Common
Stock is concentrated in the hands of certain stockholders.
As of
February 15, 2008, Nelson Peltz, our Chairman and former Chief Executive
Officer, and Peter May, our Vice Chairman and former President and Chief
Operating Officer, beneficially owned shares of our outstanding Class A Common
Stock and Class B Common Stock, Series 1, that collectively constituted
approximately 36.7% of our Class A Common Stock, 21.3% of our Class B Common
Stock and 34.0% of our total voting power.
Messrs.
Peltz and May may from time to time acquire additional shares of Class A Common
Stock, including by exchanging some or all of their shares of Class B Common
Stock for shares of Class A Common Stock. Additionally, we may from
time to time repurchase shares of Class A Common Stock or Class B Common
Stock. Such transactions could result in Messrs. Peltz and May
together owning more than a majority of our outstanding voting
power. If that were to occur, Messrs. Peltz and May would be able to
determine the outcome of the election of members of our board of directors and
the outcome of corporate actions requiring majority stockholder approval,
including mergers, consolidations and the sale of all or substantially all of
our assets. They would also be in a position to prevent or cause a
change in control of us. In addition, to the extent we issue
additional shares of our Class B Common Stock for acquisitions, financings or
compensation purposes, such issuances would not proportionally dilute the voting
power of existing stockholders, including Messrs. Peltz and May.
Our success
depends substantially upon the continued retention of certain key
personnel.
We
believe that over time our success has been dependent to a significant extent
upon the efforts and abilities of our senior management team. The
failure by us to retain members of our senior management team, including our
Chief Executive Officer, Roland Smith, could adversely affect our ability to
build on the efforts we have undertaken to increase the efficiency and
profitability of our businesses.
Acquisitions
have been a key element of our business strategy, but we cannot assure you that
we will be able to identify appropriate acquisition targets in the future and
that we will be able to successfully integrate any future acquisitions into our
existing operations.
Acquisitions
involve numerous risks, including difficulties assimilating new operations and
products. In addition, acquisitions may require significant
management time and capital resources. We cannot assure you that we
will have access to the capital required to finance potential acquisitions on
satisfactory terms, that any acquisition would result in long-term benefits to
us or that management would be able to manage effectively the resulting
business. Future acquisitions, if any, are likely to result in the
incurrence of additional indebtedness, which could contain restrictive
covenants, or the issuance of additional equity securities, which could dilute
our existing stockholders.
Our investment of excess
funds in accounts managed by third parties is subject to risks associated with
the underlying investment strategy of the accounts .
From time to time we place our
excess cash in investment funds or accounts managed by third parties (including
the Management Company). These funds or accounts are subject to
inherent risks associated with the underlying investment strategy, which may
include significant exposure to the equity markets, the use of leverage and a
lack of diversification.
In
the future, we may have to take actions that we would not otherwise take so as
not to be subject to tax as a “personal holding company.”
If at any
time during the last half of our taxable year, five or fewer individuals own or
are deemed to own more than 50% of the total value of our shares and if during
such taxable year we receive 60% or more of our gross income, as specially
adjusted, from specified passive sources, we would be classified as a “personal
holding company” for U.S. federal income tax purposes. If this were
the case, we would be
subject to additional taxes at the rate of 15% on a portion of our income, to
the extent this income is not distributed to stockholders. We do not
currently expect to have any liability in 2008 for tax under the personal
holding company rules. However, we cannot assure you that we will not
become liable for such tax in the future. Because we do not wish to
be classified as a personal holding company or to incur any personal holding
company tax, we may be required in the future to take actions that we would not
otherwise take. These actions may influence our strategic and business
decisions, including causing us to conduct our business and acquire or dispose
of investments differently than we otherwise would.
Our
certificate of incorporation contains certain anti-takeover provisions and
permits our board of directors to issue preferred stock and additional series of
Class B Common Stock without stockholder approval.
Certain provisions in our certificate
of incorporation are intended to discourage or delay a hostile takeover of
control of us. Our certificate of incorporation authorizes the
issuance of shares of “blank check” preferred stock and additional series of
Class B Common Stock, which will have such designations, rights and preferences
as may be determined from time to time by our board of
directors. Accordingly, our board of directors is empowered, without
stockholder approval, to issue preferred stock and/or Class B Common Stock with
dividend, liquidation, conversion, voting or other rights that could adversely
affect the voting power and other rights of the holders of our Class A Common
Stock and Class B Common Stock. The preferred stock and additional
series of Class B Common Stock could be used to discourage, delay or prevent a
change in control of us that is determined by our board of directors to be
undesirable. Although we have no present intention to issue any
shares of preferred stock or additional series of Class B Common Stock, we
cannot assure you that we will not do so in the future.
Risks
Related to Arby’s
Our
restaurant business is significantly dependent on new restaurant openings, which
may be affected by factors beyond our control.
Our
restaurant business derives earnings from sales at company-owned restaurants,
franchise royalties received from franchised Arby’s restaurants and franchise
fees from restaurant operators for each new unit opened. Growth in
our restaurant revenues and earnings is significantly dependent on new
restaurant openings. Numerous factors beyond our control may affect
restaurant openings. These factors include but are not limited
to:
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our
ability to attract new franchisees;
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the
availability of site locations for new
restaurants;
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the
ability of potential restaurant owners to obtain
financing;
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the
ability of restaurant owners to hire, train and retain qualified operating
personnel;
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the
availability of construction materials and
labor;
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construction
and development costs of new restaurants, particularly in
highly-competitive markets;
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the
ability of restaurant owners to secure required governmental approvals and
permits in a timely manner, or at all;
and
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adverse
weather conditions.
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Although
as of December 30, 2007, franchisees had signed commitments to open 386 Arby’s
restaurants over the next seven years and have made or are required to make
non-refundable deposits of $10,000 per restaurant, we cannot assure you that
franchisees will meet these commitments and that they will result in open
restaurants. See “Item 1. Business--Business Operations—Franchise
Network.”
Arby’s
franchisees could take actions that could harm our business.
Arby’s
franchisees are contractually obligated to operate their restaurants in
accordance with the standards ARG sets through its agreements with
them. ARG also provides training and support to
franchisees. However, franchisees are independent third parties that
ARG does not control, and the franchisees own, operate and oversee the daily
operations of their restaurants. As a result, the ultimate success
and quality of any franchise restaurant rests with the franchisee. If
franchisees do not successfully operate restaurants in a manner consistent with
required standards, royalty payments to us will be adversely affected, the
Arby’s image and reputation could be harmed, which in turn could hurt ARG’s
business and operating results.
ARG’s
success depends on Arby’s franchisees’ participation in ARG’s
strategy.
Arby’s
franchisees are an integral part of ARG’s business. ARG may be unable
to successfully implement ARG’s brand strategies that it believes are necessary
for further growth if Arby’s franchisees do not participate in that
implementation. The failure of ARG’s franchisees to focus on the
fundamentals of restaurant operations such as quality, service and cleanliness
would have a negative impact on ARG’s success.
ARG’s
financial results are affected by the financial results of Arby’s
franchisees.
ARG
receives revenue in the form of royalties and fees from Arby’s franchisees,
which are generally based on a percentage of sales at franchised
restaurants. Accordingly, a substantial portion of ARG’s financial
results is to a large extent dependent upon the operational and financial
success of Arby’s franchisees. If sales trends or economic conditions
worsen for Arby’s franchisees, their financial results may worsen and ARG’s
royalty revenues may decline. When ARG sells company-owned
restaurants, ARG is often required to remain responsible for lease payments for
these restaurants to the extent that the purchasing franchisees default on their
leases. Additionally, if Arby’s franchisees fail to renew their
franchise agreements, or if ARG decides to restructure franchise agreements in
order to induce franchisees to renew these agreements, then ARG’s royalty
revenues may decrease.
ARG may be unable to manage effectively
its strategy of acquiring and disposing of Arby’s restaurants, which could
adversely affect ARG’s business and financial results.
ARG’s
strategy of acquiring Arby’s restaurants from franchisees and eventually
“re-franchising” these restaurants by selling them to new or existing
franchisees is dependent upon the availability of sellers and buyers as well as
ARG’s ability to negotiate transactions on terms that ARG deems
acceptable. In addition, the operations of restaurants that ARG
acquires may not be integrated successfully, and the intended benefits of such
transactions may not be realized. Acquisitions of Arby’s restaurants
pose various risks to ARG’s operations, including:
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diversion
of management attention to the integration of acquired restaurant
operations;
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increased
operating expenses and the inability to achieve expected cost savings and
operating efficiencies;
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exposure
to liabilities arising out of sellers’ prior operations of acquired
restaurants; and
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incurrence
or assumption of debt to finance acquisitions or improvements and/or the
assumption of long-term, non-cancelable
leases.
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In
addition, engaging in acquisitions and dispositions places increased demands on
ARG’s operational, financial and management resources and may require ARG to
continue to expand these resources. If ARG is unable to manage the
acquisition and disposition strategy effectively, its business and financial
results could be adversely affected.
ARG
does not exercise ultimate control over advertising and purchasing for the
Arby’s restaurant system, which could hurt sales and the Arby’s
brand.
Arby’s
franchisees control the provision of national advertising and marketing services
to the Arby’s franchise system through the AFA, a company controlled by Arby’s
franchisees. Subject to ARG’s right to protect its trademarks, and
except to the extent that ARG participates in the AFA through its company-owned
restaurants, the AFA has the right to approve all significant decisions
regarding the national marketing and advertising strategies and the creative
content of advertising for the Arby’s system. Although ARG has
entered into a management agreement pursuant to which ARG, on behalf of the AFA,
manages the day-to-day operations of the AFA, many areas are still subject to
ultimate approval by the AFA’s independent board of directors, and the
management agreement may be terminated by either party for any reason upon one
year’s prior notice. See “Item 1. Business--Business
Operations—Advertising and Marketing.” In addition, local
cooperatives run by operators of Arby’s restaurants in a particular local area
(including ARG) make their own decisions regarding local advertising
expenditures, subject to spending the required minimum amounts. ARG’s
lack of control over advertising could hurt sales and the Arby’s
brand.
In
addition, although ARG ensures that all suppliers to the Arby’s system meet
quality control standards, Arby’s franchisees control the purchasing of food,
proprietary paper, equipment and other operating supplies from such suppliers
through ARCOP, Inc., a not-for-profit entity controlled by Arby’s
franchisees. ARCOP negotiates national contracts for such food,
equipment and supplies. ARG is entitled to appoint one representative
on the board of directors of ARCOP and participate in ARCOP through its
company-owned restaurants, but otherwise does not control the decisions and
activities of ARCOP except to ensure that all suppliers satisfy Arby’s quality
control standards. If ARCOP does not properly estimate the needs of
the Arby’s system with respect to one or more products, makes poor purchasing
decisions, or decides to cease its operations, system sales and operating costs
could be adversely affected and the financial condition of ARG or the financial
condition of Arby’s franchisees could be hurt.
Shortages
or interruptions in the supply or delivery of perishable food products could
damage the Arby's brand reputation and adversely affect ARG's operating
results.
ARG and
Arby's franchisees are dependent on frequent deliveries of perishable food
products that meet ARG’s specifications. Shortages or interruptions in the
supply of perishable food products caused by unanticipated demand, problems in
production or distribution, disease or food-borne illnesses, inclement weather
or other conditions could adversely affect the availability, quality and cost of
ingredients, which could lower ARG's revenues, increase ARG’s operating costs,
damage Arby's reputation and otherwise harm ARG's business and the businesses of
Arby’s franchisees.
Additional
instances of mad cow disease or other food-borne illnesses, such as bird flu or
salmonella, could adversely affect the price and availability of beef, poultry
or other meats and create negative publicity, which could result in a decline in
sales.
Additional instances of mad cow disease
or other food-borne illnesses, such as bird flu, salmonella, e-coli or hepatitis
A, could adversely affect the price and availability of beef, poultry or other
meats. Additional incidents may cause consumers to shift their
preferences to other meats. As a result, Arby’s restaurants could experience a
significant increase in food costs if there are additional instances of mad cow
disease or other food-borne illnesses.
In
addition to losses associated with higher prices and a lower supply of our food
ingredients, instances of food-borne illnesses could result in negative
publicity for Arby’s. This negative publicity, as well as any other
negative publicity concerning types of food products Arby’s serves, may reduce
demand for Arby’s food and could result in a decrease in guest traffic to Arby’s
restaurants. A decrease in guest traffic to Arby’s restaurants as a
result of these health concerns or negative publicity could result in a decline
in sales at company-owned restaurants or in ARG’s royalties from sales at
franchised restaurants.
Changes
in consumer tastes and preferences and in discretionary consumer spending could
result in a decline in sales at company-owned restaurants and in the royalties
that ARG receives from franchisees.
The quick
service restaurant industry is often affected by changes in consumer tastes,
national, regional and local economic conditions, discretionary spending
priorities, demographic trends, traffic patterns and the type, number and
location of competing restaurants. ARG’s success depends to a significant extent
on discretionary consumer spending, which is influenced by general economic
conditions and the availability of discretionary income. Accordingly,
ARG may experience declines in sales during economic downturns. Any
material decline in the amount of discretionary spending or a decline in family
food-away-from-home spending could hurt ARG’s revenues, results of operations,
business and financial condition.
In
addition, if company-owned and franchised restaurants are unable to adapt to
changes in consumer preferences and trends, ARG and Arby’s franchisees may lose
customers and the resulting revenues from company-owned restaurants and the
royalties that ARG receives from its franchisees may decline.
Changes
in food and supply costs could harm ARG’s results of operations.
ARG’s
profitability depends in part on its ability to anticipate and react to changes
in food and supply costs. Any increase in food prices, especially
those of beef or chicken, could harm ARG’s operating
results. Recently, ARG has experienced higher product costs as
a result of (1) increased fuel costs, (2) the weak U.S. dollar, which has
resulted in greater foreign demand for U.S. food
products, and
(3) the increased demand for ethanol as a fuel alternative. Ethanol
production has increased the cost of corn, which has raised
corn oil prices and contributed to higher beef and chicken prices stemming from
increased corn feed pricing. The increase
in fuel costs has also contributed to an increase in distribution costs from
the distribution
centers to the
restaurants. In
addition, ARG is susceptible to increases in food costs as a result of other
factors beyond its control, such as weather conditions, food safety concerns,
product recalls and government regulations. Additionally, prices for
feed ingredients used to produce beef and chicken could be adversely affected by
changes in global weather patterns, which are inherently
unpredictable. ARG cannot predict whether it will be able to
anticipate and react to changing food costs by adjusting its purchasing
practices and menu prices, and a failure to do so could adversely affect ARG’s
operating results. In addition, ARG may not seek to or be able to
pass along price increases to its customers.
Competition
from other restaurant companies could hurt ARG.
The
market segments in which company-owned and franchised Arby’s restaurants compete
are highly competitive with respect to, among other things, price, food quality
and presentation, service, location, and the nature and condition of the
restaurant facility. Arby’s restaurants compete with a variety of
locally-owned restaurants, as well as competitive regional and national chains
and franchises. Several of these chains compete by offering high
quality sandwiches and/or menu items that are targeted at certain consumer
groups. Additionally, many of our competitors have introduced lower
cost, value meal menu options. ARG’s revenues and those of Arby’s
franchisees may be hurt by this product and price competition.
Moreover,
new companies, including operators outside the quick service restaurant
industry, may enter Arby’s market areas and target Arby’s customer
base. For example, additional competitive pressures for prepared food
purchases have come from deli sections and in-store cafes of a number of major
grocery store chains, as well as from convenience stores and casual dining
outlets. Such competitors may have, among other things, lower
operating costs, lower debt service requirements, better locations, better
facilities, better management, more effective marketing and more efficient
operations. Many of our competitors have substantially greater
financial, marketing, personnel and other resources than we do, which may allow
them to react to changes in pricing and marketing strategies in the quick
service restaurant industry better than we can. Many of our
competitors spend significantly more on advertising and marketing than we do,
which may give them a competitive advantage over Arby’s through higher levels of
brand awareness among consumers. All such competition may adversely
affect ARG’s revenues and profits by reducing revenues of company-owned
restaurants and royalty payments from franchised restaurants.
Current
Arby's restaurant locations may become unattractive, and attractive new
locations may not be available for a reasonable price, if at all.
The
success of any restaurant depends in substantial part on its location. There can
be no assurance that current Arby's locations will continue to be attractive as
demographic patterns change. Neighborhood or economic conditions where Arby's
restaurants are located could decline in the future, thus resulting in
potentially reduced sales in those locations. In addition, rising real estate
prices, particularly in the Northeastern region of the U.S. and in California,
may restrict the ability of ARG or Arby's franchisees to purchase or lease new
desirable locations. If desirable locations cannot be obtained at reasonable
prices, ARG's ability to effect its growth strategies will be adversely
affected.
ARG’s
business could be hurt by increased labor costs or labor shortages.
Labor is
a primary component in the cost of operating our company-owned
restaurants. ARG devotes significant resources to recruiting and
training its managers and hourly employees. Increased labor costs due
to competition, increased minimum wage or employee benefits costs or other
factors would adversely impact ARG’s cost of sales and operating
expenses. In addition, ARG’s success depends on its ability to
attract, motivate and retain qualified employees, including restaurant managers
and staff. If ARG is unable to do so, its results of operations may
be hurt.
ARG's
leasing and ownership of significant amounts of real estate exposes it to
possible liabilities and losses, including liabilities associated with
environmental matters.
As of
December 30, 2007, ARG leased or owned the land and/or the building for over
1,100 Arby's restaurants. Accordingly, ARG is subject to all of the risks
associated with leasing and owning real estate. In particular, the value of our
real property assets could decrease, and ARG's costs could increase, because of
changes in the investment climate for real estate, demographic trends, supply or
demand for the use of the restaurants, which may result from competition from
similar restaurants in the area, and liability for environmental
matters.
ARG is
subject to federal, state and local environmental, health and safety laws and
regulations concerning the discharge, storage, handling, release and disposal of
hazardous or toxic substances. These environmental laws provide for significant
fines, penalties and liabilities, sometimes without regard to whether the owner,
operator or occupant of the property knew of, or was responsible for, the
release or presence of the hazardous or toxic substances. Third parties may also
make claims against owners, operators or occupants of properties for personal
injuries and property damage associated with releases of, or actual or alleged
exposure to, such substances. A number of ARG's restaurant sites were
formerly gas stations or are adjacent to current or former gas stations, or were
used for other commercial activities that can create environmental impacts. ARG
may also acquire or lease these types of sites in the future. ARG has not
conducted a comprehensive environmental review of all of its properties. ARG may
not have identified all of the potential environmental liabilities at its leased
and owned properties, and any such liabilities identified in the future could
cause ARG to incur significant costs, including costs associated with
litigation, fines or clean-up responsibilities.
ARG
leases real property generally for initial terms of 20 years with two
to four additional options to extend the term of the leases in
consecutive five-year increments. Many leases provide that the landlord may
increase the rent over the term of the lease and any renewals thereof. Most
leases require ARG to pay all of the costs of insurance, taxes, maintenance and
utilities. ARG generally cannot cancel these leases. If an existing or future
restaurant is not profitable, and ARG decides to close it, ARG may nonetheless
be committed to perform its obligations under the applicable lease including,
among other things, paying the base rent for the balance of the lease term. In
addition, as each of ARG's leases expires, ARG may fail to
negotiate additional renewals or renewal options, either on
commercially acceptable terms or at all, which could cause ARG to close stores
in desirable locations.
Complaints
or litigation may hurt ARG.
Occasionally,
ARG’s customers file complaints or lawsuits against it alleging that ARG is
responsible for an illness or injury they suffered at or after a visit to an
Arby’s restaurant, or alleging that there was a problem with food quality or
operations at an Arby’s restaurant. ARG is also subject to a variety
of other claims arising in the ordinary course of our business, including
personal injury claims, contract claims, claims from franchisees and claims
alleging violations of federal and state law regarding workplace and employment
matters, discrimination and similar matters. ARG could also become
subject to class action lawsuits related to these matters in the
future. Regardless of whether any claims against ARG are valid or
whether ARG is found to be liable, claims may be expensive to defend and may
divert management’s attention away from operations and hurt ARG’s
performance. A judgment significantly in excess of ARG’s insurance
coverage for any claims could materially adversely affect ARG’s financial
condition or results of operations. Further, adverse publicity
resulting from these allegations may hurt ARG and Arby’s
franchisees.
Additionally,
the restaurant industry has been subject to a number of claims that the menus
and actions of restaurant chains have led to the obesity of certain of their
customers. Adverse publicity resulting from these allegations may
harm the reputation of Arby’s restaurants, even if the allegations are not
directed against Arby’s restaurants or are not valid, and even if ARG is not
found liable or the concerns relate only to a single restaurant or a limited
number of restaurants. Moreover, complaints, litigation or adverse
publicity experienced by one or
more of Arby’s franchisees could also hurt ARG’s business as a
whole.
ARG’s
current insurance may not provide adequate levels of coverage against claims it
may file.
ARG
currently maintains insurance it believes is customary for businesses of its
size and type. However, there are types of losses it may incur that
cannot be insured against or that ARG believes are not economically reasonable
to insure, such as losses due to natural disasters or acts of terrorism. In addition, ARG
currently self-insures a significant portion of expected losses under its
workers compensation, general liability and property insurance
programs. Unanticipated changes in the actuarial assumptions and
management estimates underlying ARG’s reserves for these losses could result in
materially different amounts of expense under these programs, which could harm
ARG’s business and adversely affect its results of operations and financial
condition.
Changes
in governmental regulation may hurt ARG’s ability to open new restaurants or
otherwise hurt ARG’s existing and future operations and results.
Each Arby’s restaurant is subject to
licensing and regulation by health, sanitation, safety and other agencies in the
state and/or municipality in which the restaurant is located. State
and local government authorities may enact laws, rules or regulations that
impact restaurant operations and the cost of conducting those
operations. For example, recent efforts to require the listing of
specified nutritional information on menus and menu boards could adversely
affect consumer demand for our products, could make our menu boards less
appealing and could increase our costs of doing business. There can
be no assurance that ARG and/or Arby’s franchisees will not experience material
difficulties or failures in obtaining the necessary licenses or approvals for
new restaurants, which could delay the opening of such restaurants in the
future. In addition, more stringent and varied requirements of local
governmental bodies with respect to tax, zoning, land use and environmental
factors could delay or prevent development of new restaurants in particular
locations. ARG, and Arby’s franchisees, are also subject to the Fair
Labor Standards Act, which governs such matters as minimum wages, overtime and
other working conditions, along with the ADA, family leave mandates and a
variety of other laws enacted by the states that govern these and other
employment law matters. As described more fully under “Item 3. Legal
Proceedings,” one of our subsidiaries was a defendant in a lawsuit alleging
failure to comply with Title III of the ADA at approximately 775 company-owned
restaurants acquired as part of the RTM acquisition in July
2005. Under a court approved settlement of that lawsuit, ARG
estimates that it will spend approximately $1.15 million per year of capital
expenditures over a seven-year period commencing in 2008 to bring these
restaurants into compliance with the ADA, in addition to paying certain legal
fees and expenses. ARG cannot predict the amount of any other future
expenditures that may be required in order to permit company-owned restaurants
to comply with any changes in existing regulations or to comply with any future
regulations that may become applicable to ARG’s business.
ARG’s
operations could be influenced by weather conditions.
Weather,
which is unpredictable, can impact Arby’s restaurant sales. Harsh
weather conditions that keep customers from dining out result in lost
opportunities for Arby’s restaurants. A heavy snowstorm in the
Northeast or Midwest or a hurricane in the Southeast can shut down an entire
metropolitan area, resulting in a reduction in sales in that
area. Our first quarter includes winter months and historically has a
lower level of sales at company-owned restaurants. Because a
significant portion of ARG’s restaurant operating costs is fixed or semi-fixed
in nature, the loss of sales during these periods hurts ARG’s operating margins,
and can result in restaurant operating losses. For these reasons, a
quarter-to-quarter comparison may not be a good indication of ARG’s performance
or how it may perform in the future.
Due
to the concentration of Arby’s restaurants in particular geographic regions,
ARG’s business results could be impacted by the adverse economic conditions
prevailing in those regions regardless of the state of the national economy as a
whole.
As of
December 30, 2007 ARG and Arby’s franchisees operated Arby’s restaurants in 48
states and four foreign countries. As of December 30, 2007, the six
leading states by number of operating units were: Ohio, with 291 restaurants;
Michigan, with 196 restaurants; Indiana, with 181 restaurants; Florida, with 176
restaurants; Texas, with 167 restaurants; and Georgia, with 153
restaurants. This geographic concentration can cause economic
conditions in particular areas of the country to have a disproportionate impact
on ARG’s overall results of operations. It is possible that adverse
economic conditions in states or regions that contain a high concentration of
Arby’s restaurants could have a material adverse impact on ARG’s results of
operations in the future.
ARG and its
subsidiaries are subject to various restrictions, and substantially all of their
assets are pledged, under a credit agreement.
Under its
credit agreement, substantially all of the assets of ARG and its subsidiaries
(other than real property) are pledged as collateral security. The credit
agreement also contains financial covenants that, among other things, require
ARG and its subsidiaries to maintain certain financial ratios and restrict their
ability to incur debt, pay dividends or make other distributions, enter into
certain fundamental transactions (including sales of assets and certain mergers
and consolidations) and create or permit liens. If ARG and its
subsidiaries are unable to generate sufficient cash flow or otherwise obtain the
funds necessary to make required payments of interest or principal under, or are
unable to comply with covenants of, the credit agreement, then they would be in
default under the terms of the credit agreement, which would preclude the
payment of dividends to Triarc, restrict access to ARG’s revolving line of
credit and, under certain
circumstances, permit the lenders to accelerate the maturity of the
indebtedness. You should read the information in Note 11 to the
Consolidated Financial Statements.
We may not be able to adequately
protect our intellectual property, which could harm the value of our brands and
hurt our business.
Our
intellectual property is material to the conduct of our business. We
rely on a combination of trademarks, copyrights, service marks, trade secrets
and similar intellectual property rights to protect our brands and other
intellectual property. The success of our business strategy depends,
in part, on our continued ability to use our existing trademarks and service
marks in order to increase brand awareness and further develop our branded
products in both existing and new markets. If our efforts to protect our
intellectual property are not adequate, or if any third party misappropriates or
infringes on our intellectual property, either in print or on the Internet, the
value of our brands may be harmed, which could have a material adverse effect on
our business, including the failure of our brands to achieve and maintain market
acceptance. This could harm our image, brand or competitive position
and, if we commence litigation to enforce our rights, cause us to incur
significant legal fees.
We
franchise our restaurant brands to various franchisees. While we try
to ensure that the quality of our brands is maintained by all of our
franchisees, we cannot assure you that these franchisees will not take actions
that hurt the value of our intellectual property or the reputation of the Arby’s
restaurant system.
We have
registered certain trademarks and have other trademark registrations pending in
the United States and certain foreign jurisdictions. The trademarks
that we currently use have not been registered in all of the countries outside
of the United States in which we do business or may do business in the future
and may never be registered in all of these countries. We cannot
assure you that all of the steps we have taken to protect our intellectual
property in the United States and foreign countries will be
adequate. The laws of some foreign countries do not protect
intellectual property rights to the same extent as the laws of the United
States.
In
addition, we cannot assure you that third parties will not claim infringement by
us in the future. Any such claim, whether or not it has merit, could
be time-consuming, result in costly litigation, cause delays in introducing new
menu items or investment products or require us to enter into royalty or
licensing agreements. As a result, any such claim could harm our
business and cause a decline in our results of operations and financial
condition.
Other
Risks
The
value of our interest in DFR is subject to risks related to that
business.
At
December 30, 2007, as a result of the Deerfield Sale, we hold approximately $48
million principal amount of senior secured notes of DFR and beneficially own
approximately 15% of DFR’s outstanding common stock, assuming conversion of all
convertible preferred stock we own. DFR is a diversified financial company
that invests in real estate investments, primarily mortgage-backed securities,
as well as corporate investments. At December 30, 2007, the aggregate
carrying value of our investment in DFR was approximately $118.5 million.
Our investment in the convertible preferred stock of DFR currently is
non-marketable; however, it is mandatorily redeemable in seven years from
issuance. We value the preferred shares based on the quoted market price
of the common shares of DFR into which they are convertible. If those
shares should decline in value other than on a temporary basis, then in the
reporting period in which it is determined that the decline is other than
temporary, all or a portion of the decline would be required to be recognized in
our statement of operations. Payments to us of principal and interest
under the senior secured notes, which mature in December 2012, are dependent on
the cash flow of DFR. DFR’s investment portfolio is comprised primarily of
fixed income investments, including mortgage-backed securities and corporate
debt. Among the factors that may adversely affect DFR’s ability to make
payments under the senior secured notes are the current weakness in the mortgage
sector in particular and the broader financial markets in general. This
weakness could adversely affect DFR and one or more of its lenders, which could
result in increases in their borrowing costs, reductions in their liquidity and
reductions in the value of the investments in their portfolio, all of which
could reduce DFR’s cash flow and adversely affect its ability to make payments
to us under the senior secured notes. Such a condition could result in an
impairment charge by us or a provision by us for uncollectible notes receivable
which could be material.
See Note 32
to the Consolidated Financial Statement for a subsequent event related to our
investments in DFR.
One
of our subsidiaries remains contingently liable with respect to certain
obligations relating to a business that we have sold.
In July
1999, we sold 41.7% of our then remaining 42.7% interest in National Propane
Partners, L.P. and a sub-partnership, National Propane, L.P. to Columbia Energy
Group, and retained less than a 1% special limited partner interest in AmeriGas
Eagle Propane, L.P. (formerly known as National Propane, L.P. and as Columbia
Propane, L.P.). As part of the transaction, our subsidiary, National
Propane Corporation, agreed that while it remains a special limited partner of
AmeriGas, it would indemnify the owner of AmeriGas for any payments the owner
makes under certain debt of AmeriGas (aggregating approximately $138.0 million
as of December 30, 2007), if AmeriGas is unable to repay or refinance such debt,
but only after recourse to the assets of AmeriGas. Either National
Propane Corporation or AmeriGas Propane, L.P., the owner of AmeriGas, may
require AmeriGas 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, L.P. would owe us
tax
indemnification payments or we would accelerate payment of deferred taxes, which
amount to approximately $35.9 million as of December 30, 2007, associated with
our sale of the propane business.
Although we believe that it is unlikely
that we will be called upon to make any payments under the indemnification
described above, if we are required to make such payments it could have a
material adverse effect on our financial position and results of
operations. You should read the information in “Item. 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources” and in Note 27 to the Consolidated
Financial Statements.
Changes
in environmental regulation may adversely affect our existing and future
operations and results.
Certain
of our current and past operations are or have been subject to federal, state
and local environmental laws and regulations concerning the discharge, storage,
handling and disposal of hazardous or toxic substances that provide for
significant fines, penalties and liabilities, in certain cases without regard to
whether the owner or operator of the property knew of, or was responsible for,
the release or presence of such hazardous or toxic substances. In
addition, third parties may make claims against owners or operators of
properties for personal injuries and property damage associated with releases of
hazardous or toxic substances. Although we believe that our
operations comply in all material respects with all applicable environmental
laws and regulations, we cannot predict what environmental legislation or
regulations will be enacted in the future or how existing or future laws or
regulations will be administered or interpreted. We cannot predict
the amount of future expenditures that may be required in order to comply with
any environmental laws or regulations or to satisfy any such
claims. See “Item 1. Business--General--Environmental
Matters.”
Item
1B. Unresolved Staff
Comments.
Not applicable.
Item
2. Properties.
We
believe that our properties, taken as a whole, are generally well maintained and
are adequate for our current and foreseeable business needs. We lease each of
our material properties.
The
following table contains information about our material facilities as of
December 30, 2007:
|
ACTIVE
FACILITIES
|
|
FACILITIES-LOCATION
|
|
LAND
TITLE
|
|
APPROXIMATE
SQ. FT. OF FLOOR SPACE
|
|
Corporate
Headquarters
|
|
Atlanta,
GA
|
|
Leased
|
|
134,748*
|
|
Former
Corporate Headquarters
|
|
New
York, NY
|
|
Leased
|
|
31,237**
|
|
*
|
ARCOP,
the independent Arby’s purchasing cooperative, and the Arby’s Foundation,
a not-for-profit charitable foundation in which ARG has non-controlling
representation on the board of directors, sublease approximately 2,680 and
5,000 square feet, respectively, of this space from
ARG.
|
|
**
|
The
Management Company subleases approximately 18,734 square feet of this
space from us.
|
ARG also
owns 15 and leases 120 properties that are either leased or sublet principally
to franchisees. Our other subsidiaries also own or lease a few
inactive facilities and undeveloped properties, none of which are material to
our financial condition or results of operations.
At December 30, 2007, our company-owned
Arby’s restaurants were located in the following states: 113 in Michigan, 104 in
Ohio, 99 in Indiana, 95 in Georgia, 89 in Florida, 86 in Pennsylvania, 81 in
Minnesota, 70 in Alabama, 64 in Texas, 58 in North Carolina, 54 in Tennessee, 36
in Kentucky, 33 in Utah, 25 in Washington, 24 in Oregon, 17 in New
Jersey, 13 in South Carolina, 12 in Maryland, 12 in Connecticut, 5 in Illinois,
4 in Wisconsin, 4 in Missouri, 2 in Mississippi, 2 in Virginia, 1 in California,
1 in New York, 1 in West Virginia and 1 in Wyoming. ARG owns the land
and/or the building with respect to 138 of these restaurants and leases or
subleases the remainder. ARG has regional offices in: Atlanta,
Georgia; Indianapolis, Indiana; Flint, Michigan; Middleburg Heights, Ohio;
Sinking Springs, Pennsylvania; Plano, Texas and Missasauga, Canada.
Item 3. Legal
Proceedings.
In
November 2002, Access Now, Inc. and Edward Resnick, later replaced by Christ
Soter Tavantzis, on their own behalf and on the behalf of all those similarly
situated, brought an action in the United States District Court for the Southern
District of Florida against RTM Operating Company (“RTM”), which became a
subsidiary of ours following our acquisition of the RTM Restaurant Group in July
2005. The complaint alleged that the approximately 775 Arby’s
restaurants owned by RTM and its affiliates failed to comply with Title III of
the ADA. The plaintiffs requested class certification and injunctive
relief requiring RTM and such affiliates to comply with the ADA in all of their
restaurants. The complaint did not seek monetary damages, but did
seek attorneys’ fees. Without admitting liability, RTM entered into a
settlement agreement with the plaintiffs on a class-wide basis, which was
approved by the court on August 10, 2006. The settlement agreement
calls for the restaurants owned by RTM and certain of its affiliates to be
brought into ADA compliance over an eight year period at a rate of approximately
100 restaurants per year. The settlement agreement also applies to
restaurants subsequently acquired by RTM and such affiliates. ARG
estimates that it will spend approximately $1.15 million per year of capital
expenditures over a seven-year period commencing in 2008 to bring the
restaurants into compliance under the settlement agreement, in addition to
paying certain legal fees and expenses.
In
addition to the legal matters described above and the environmental matter
described under “Item 1. Business--General--Environmental Matters”, 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 $700,000 as of December 30,
2007. Although the outcome of these matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to us, based
on our currently available information, including legal defenses available to us
and/or our subsidiaries, and given the aforementioned reserves and our insurance
coverages, 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.
Item
4. Submission of
Matters to a Vote of Security Holders.
On June 5, 2007, Triarc held its Annual
Meeting of Stockholders. The matters acted upon by the stockholders
at that meeting were reported in our Quarterly Report on Form 10-Q for the
fiscal quarter ended July 1, 2007.
PART
II
Item 5. Market For
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The
principal market for our Class A Common Stock and Class B Common Stock is
the New York Stock Exchange (symbols: TRY and TRY.B,
respectively). The high and low market prices for our Class A Common
Stock and Class B Common Stock, as reported in the consolidated transaction
reporting system, are set forth below:
|
|
|
MARKET
PRICE
|
|
|
FISCAL
QUARTERS
|
|
CLASS A
|
|
|
CLASS B
|
|
|
|
|
HIGH
|
|
|
LOW
|
|
|
HIGH
|
|
|
LOW
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter ended April 2
|
|
|
18.50 |
|
|
|
16.44 |
|
|
|
17.48 |
|
|
|
14.80 |
|
|
Second
Quarter ended July 2
|
|
|
18.70 |
|
|
|
15.60 |
|
|
|
17.84 |
|
|
|
14.55 |
|
|
Third
Quarter ended October 1
|
|
|
17.70 |
|
|
|
14.35 |
|
|
|
16.50 |
|
|
|
12.86 |
|
|
Fourth
Quarter ended December 31
|
|
|
22.42 |
|
|
|
16.28 |
|
|
|
20.56 |
|
|
|
14.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter ended April 1
|
|
|
21.99 |
|
|
|
18.13 |
|
|
|
20.55 |
|
|
|
16.65 |
|
|
Second
Quarter ended July 1
|
|
|
19.74 |
|
|
|
15.64 |
|
|
|
18.99 |
|
|
|
15.25 |
|
|
Third
Quarter ended September 30
|
|
|
16.22 |
|
|
|
12.17 |
|
|
|
16.90 |
|
|
|
11.38 |
|
|
Fourth
Quarter ended December 30
|
|
|
14.50 |
|
|
|
7.89 |
|
|
|
15.00 |
|
|
|
7.82 |
|
Our Class B Common Stock is entitled
to one-tenth of a vote per share and our Class A Common Stock is entitled to one
vote per share on all matters on which stockholders are entitled to
vote. Our Class B Common Stock is also entitled to vote as a separate
class with respect to any merger or consolidation in which Triarc is a party
unless each holder of a share of Class B Common Stock receives the same
consideration as a holder of Class A Common Stock, other than consideration paid
in shares of common stock that differ as to voting rights, liquidation
preference and dividend preference to the same extent that our Class A and Class
B Common Stock differ. In accordance with the Certificate of
Designation for our Class B Common Stock, and resolutions adopted by our board
of directors on June 5, 2007, our Class B Common Stock was entitled,
through December 30, 2007, to receive regular quarterly cash dividends equal to
at least 110% of any regular quarterly cash dividends paid on our Class A Common
Stock. However, our board of directors has determined that for the
first fiscal quarter of 2008 we will continue to pay regular quarterly cash
dividends at that higher rate on our Class B Common Stock when regular quarterly
cash dividends are paid on our Class A Common Stock. Thereafter, each
share of our Class B Common Stock is entitled to at least 100% of the regular
quarterly cash dividend paid on each share of our Class A Common
Stock. In addition, our Class B Common Stock has a $.01 per share
preference in the event of any liquidation, dissolution or winding up of Triarc
and, after each share of our Class A Common Stock also receives $.01 per share
in any such liquidation, dissolution or winding up, our Class B Common Stock
would thereafter participate equally on a per share basis with our Class A
Common Stock in any remaining assets of Triarc.
During our 2006 and 2007 fiscal years,
we paid regular quarterly cash dividends of $0.08 and $0.09 per share on our
Class A Common Stock and Class B Common Stock,
respectively. On January 29, 2008, our board of directors declared
regular quarterly cash dividends of $0.08 and $0.09 per share on our Class A
Common Stock and Class B Common Stock, respectively, payable on
March 14, 2008 to holders of record on March 1, 2008.
In
connection with our corporate restructuring, we paid special cash dividends
during 2006 aggregating $0.45 per share on our Class A Common Stock and Class B
Common Stock. The special cash dividends were paid in three
installments of $0.15 per share on March 1, 2006, July 14, 2006 and December 20,
2006.
Although
we currently intend to continue to declare and pay regular quarterly cash
dividends, there can be no assurance that any additional regular quarterly cash
dividends will be declared or paid or the amount or timing of such dividends, if
any. Any future dividends will be made at the discretion of our board
of directors and will be based on such factors as our earnings, financial
condition, cash requirements and other factors. Our board of
directors has not yet made any determination of the relative amounts of any
regular quarterly cash dividends that will be paid on the Class A Common Stock
and Class B Common Stock after the first fiscal quarter of 2008. We
have no class of equity securities currently issued and outstanding except for
our Class A Common Stock and Class B Common Stock, Series 1. However,
we are currently authorized to issue up to 100 million shares of preferred
stock.
Because
we are a holding company, our ability to meet our cash requirements is primarily
dependent upon our cash, cash equivalents and short-term investments on hand,
cash flows from ARG, including loans, cash dividends, reimbursement by ARG to us
in connection with providing certain management services, and payments by ARG
under a tax sharing agreement, as well as dividend payments on the preferred
shares and interest on the senior secured notes, both received in connection
with the Deerfield Sale. Our cash requirements include, but are not limited to,
interest and principal payments on our indebtedness as well as required
quarterly payments to a management company, to which we refer to as the
Management Company, formed by certain former executives of
ours. Under the terms of ARG’s credit agreement (see “Item 1A. Risk
Factors—Risks Related to Arby’s – ARG and its subsidiaries are subject to
various restrictions, and substantially
all of their assets are pledged, under a credit agreement”), there are
restrictions on the ability of ARG and its subsidiaries to pay any dividends or
make any loans or advances to us. The ability of ARG to pay cash
dividends or make any loans or advances as well as to make payments for the
management services and under the tax sharing agreement to us is also dependent
upon its ability to achieve sufficient cash flows after satisfying its cash
requirements, including debt service. You should read the information in “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources” and Note 11 to our Consolidated
Financial Statements.
As of
February 15, 2008, there were approximately 2,169 holders of record of our Class
A Common Stock and 2,009 holders of record of our Class B Common
Stock.
The
following table provides information with respect to repurchases of shares of
our common stock by us and our “affiliated purchasers” (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) during the
fourth fiscal quarter of 2007:
Issuer
Repurchases of Equity Securities
|
Period
|
Total
Number of Shares Purchased (1)
|
Average
Price Paid Per Share (1)
|
Total
Number of Shares Purchased As Part of Publicly Announced Plan
(2)
|
Approximate
Dollar Value of Shares That May Yet Be Purchased Under the Plan
(2)
|
|
October
1, 2007
through
October
28, 2007
|
---
|
---
|
---
|
$50,000,000
|
|
October
29, 2007
through
November
25, 2007
|
---
|
---
|
---
|
$50,000,000
|
|
November
26, 2007
through
December
30, 2007
|
---
|
---
|
---
|
$50,000,000
|
|
Total
|
---
|
---
|
---
|
$50,000,000
|
|
(1)
|
There
were no shares tendered as payment of (i) the exercise price of employee
stock options or (ii) tax withholding obligations in respect of such
exercises.
|
|
(2)
|
On
June 30, 2007, our then existing $50 million stock repurchase program
expired, and on July 1, 2007 a new stock repurchase program became
effective pursuant to which we may repurchase up to $50 million of our
Class A Common Stock and/or Class B Common Stock, Series 1 during the
period from July 1, 2007 through and including December 28, 2008 when and
if market conditions warrant and to the extent legally
permissible. No transactions were effected under our stock
repurchase program during the fourth fiscal quarter of
2007.
|
Item
6. Selected
Financial Data.
|
|
|
Year-Ended(1)
|
|
|
|
|
December
28, 2003(2)
|
|
|
January
2, 2005(2)(3)
|
|
|
January
1, 2006(2)(3)
|
|
|
December
31, 2006(2)(3)
|
|
|
December
30, 2007(3)
|
|
|
|
|
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
293,620 |
|
|
$ |
328,579 |
|
|
$ |
727,334 |
|
|
$ |
1,243,278 |
|
|
$ |
1,263,717 |
|
|
Operating
profit (loss)
|
|
|
103 |
(6) |
|
|
2,562 |
|
|
|
(31,363 |
)(8) |
|
|
44,627 |
|
|
|
19,900 |
(10) |
|
Income
(loss) from continuing operations
|
|
|
(12,248 |
)(6) |
|
|
1,367 |
(7) |
|
|
(58,457 |
)(8) |
|
|
(10,803 |
)(9) |
|
|
15,086 |
(10) |
|
Income
(loss) from discontinued operations
|
|
|
2,245 |
|
|
|
12,464 |
|
|
|
3,285 |
|
|
|
(129 |
) |
|
|
995 |
|
|
Net
income (loss)
|
|
|
(10,003 |
)(6) |
|
|
13,831 |
(7) |
|
|
(55,172 |
)(8) |
|
|
(10,932 |
)(9) |
|
|
16,081 |
(10) |
|
Basic
income (loss) per share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(.21 |
) |
|
|
.02 |
|
|
|
(.84 |
) |
|
|
(.13 |
) |
|
|
.15 |
|
|
Discontinued
operations
|
|
|
.04 |
|
|
|
.18 |
|
|
|
.05 |
|
|
|
- |
|
|
|
.01 |
|
|
Net
income (loss)
|
|
|
(.17 |
) |
|
|
.20 |
|
|
|
(.79 |
) |
|
|
(.13 |
) |
|
|
.16 |
|
|
Class
B common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(.21 |
) |
|
|
.02 |
|
|
|
(.84 |
) |
|
|
(.13 |
) |
|
|
.17 |
|
|
Discontinued
operations
|
|
|
.04 |
|
|
|
.21 |
|
|
|
.05 |
|
|
|
- |
|
|
|
.01 |
|
|
Net
income (loss)
|
|
|
(.17 |
) |
|
|
.23 |
|
|
|
(.79 |
) |
|
|
(.13 |
) |
|
|
.18 |
|
|
Diluted
income (loss) per share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(.21 |
) |
|
|
.02 |
|
|
|
(.84 |
) |
|
|
(.13 |
) |
|
|
.15 |
|
|
Discontinued
operations
|
|
|
.04 |
|
|
|
.17 |
|
|
|
.05 |
|
|
|
- |
|
|
|
.01 |
|
|
Net
income (loss)
|
|
|
(.17 |
) |
|
|
.19 |
|
|
|
(.79 |
) |
|
|
(.13 |
) |
|
|
.16 |
|
|
Class
B common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(.21 |
) |
|
|
.02 |
|
|
|
(.84 |
) |
|
|
(.13 |
) |
|
|
.17 |
|
|
Discontinued
operations
|
|
|
.04 |
|
|
|
.20 |
|
|
|
.05 |
|
|
|
- |
|
|
|
.01 |
|
|
Net
income (loss)
|
|
|
(.17 |
) |
|
|
.22 |
|
|
|
(.79 |
) |
|
|
(.13 |
) |
|
|
.18 |
|
|
Cash
dividends per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
.13 |
|
|
|
.26 |
|
|
|
.29 |
|
|
|
.77 |
|
|
|
.32 |
|
|
Class
B common stock
|
|
|
.15 |
|
|
|
.30 |
|
|
|
.33 |
|
|
|
.81 |
|
|
|
.36 |
|
|
Working
capital (deficiency)
|
|
|
610,854
|
|
|
|
462,618 |
|
|
|
295,567 |
|
|
|
161,194 |
|
|
|
(36,909 |
) |
|
Total
assets
|
|
|
1,042,965 |
|
|
|
1,066,973 |
|
|
|
2,809,489 |
|
|
|
1,560,449 |
|
|
|
1,454,567 |
|
|
Long-term
debt
|
|
|
483,280 |
|
|
|
446,479 |
|
|
|
894,527 |
|
|
|
701,916 |
|
|
|
711,531 |
|
|
Stockholders’
equity
|
|
|
290,035 |
|
|
|
305,458 |
|
|
|
398,344 |
|
|
|
477,813 |
|
|
|
448,874 |
|
|
Weighted
average shares outstanding(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
20,003 |
|
|
|
22,233 |
|
|
|
23,766 |
|
|
|
27,301 |
|
|
|
28,836 |
|
|
Class
B common stock
|
|
|
40,010 |
|
|
|
40,840 |
|
|
|
46,245 |
|
|
|
59,343 |
|
|
|
63,523 |
|
|
|
(1)
|
Triarc
Companies, Inc. and its subsidiaries (the “Company”) reports on a fiscal
year consisting of 52 or 53 weeks ending on the Sunday closest to December
31. Deerfield & Company LLC (Deerfield), in which the
Company held a 63.6% capital interest from July 22, 2004 through its sale
on December 21, 2007, Deerfield Opportunities Fund, LLC (the
“Opportunities Fund”), which commenced on October 4, 2004 and in which our
investment was effectively redeemed on September 29, 2006, and DM Fund
LLC, which commenced on March 1, 2005 and in which our investment was
effectively redeemed on December 31, 2006, reported on a calendar year
ending on December 31 through their respective sale or redemption
dates. In accordance with this method, each of the Company’s
fiscal years presented above contained 52 weeks except for the 2004 fiscal
year which contained 53 weeks. All references to years relate
to fiscal years rather than calendar
years.
|
|
|
(2)
|
In
conjunction with the adoption of the provisions of Financial Accounting
Standards Board Staff Position No. AUG AIR-1, “Accounting for Planned
Major Maintenance Activities” (“FSP AIR-1”), the Company now accounts for
scheduled major aircraft maintenance overhauls in accordance with the
direct expensing method under which the actual cost of such overhauls is
recognized as expense in the period it is incurred. Previously,
the Company accounted for scheduled major maintenance activities in
accordance with the accrue-in-advance method under which the estimated
cost of such overhauls was recognized as expense in periods through the
scheduled date of the respective overhaul with any difference between
estimated and actual cost recorded in results from operations at the time
of the actual overhaul. In accordance with the retroactive
application of FSP AIR-1, the Company has credited (charged) $1,304,000,
($172,000), $711,000 and $620,000 to operating profit (loss) and
$835,000, ($110,000), $455,000 and $397,000 to income (loss) from
continuing operations and net income (loss) for 2003, 2004, 2005 and 2006,
respectively.
|
|
|
(3)
|
Selected
financial data reflects the operations of RTM Restaurant Group (“RTM”)
commencing with its acquisition by the Company on July 25,
2005.
|
|
|
(4)
|
Income
(loss) per share amounts reflect the effect of a stock distribution (the
“Stock Distribution”) on September 4, 2003 of two shares of the Company’s
class B common stock, series 1, for each share of the Company’s class A
common stock issued as of August 21, 2003, as if the Stock Distribution
had occurred at the beginning of the year ended December 28,
2003. For the purposes of calculating income per share, net
income subsequent to the date of the Stock Distribution was allocated
between the class A common shares and class B common shares based on the
actual dividend payment ratio. For the purposes of calculating
loss per share, the net loss for any year was allocated
equally.
|
|
|
(5)
|
The
weighted average shares outstanding reflect the effect of the Stock
Distribution. The number of shares used in the calculation of
diluted income (loss) per share are the same as basic income (loss) per
share for the years 2003, 2005 and 2006 since all potentially dilutive
securities would have had an antidilutive effect based on the loss from
continuing operations for each of those years. The number of
shares used in the calculation of diluted income per share of class A and
class B common stock for 2004 are 23,415,000 and 43,206,000,
respectively. The numbers of shares used in the calculation of
diluted income per share of class A and class B common stock for 2007 are
28,965,000 and 64,282,000, respectively. These shares used for the
calculation of diluted income per share in 2004 and 2007 consist of the
weighted average common shares outstanding for each class of common stock
and potential common shares reflecting the effect of dilutive stock
options and nonvested restricted shares of 1,182,000 for class A common
stock and 2,366,000 for class B common stock in 2004 and, in 2007, 129,000
for class A common stock and 759,000 for class B common
stock.
|
|
|
(6)
|
Reflects
certain significant charges and credits recorded during 2003 as follows:
$22,000,000 charged to operating loss representing an impairment of
goodwill; $11,799,000 charged to loss from continuing operations
representing the aforementioned $22,000,000 charged to operating loss
partially offset by (1) a $5,834,000 gain on sale of unconsolidated
business arising principally from the sale by the Company of a portion of
its investment in an equity method investee and a non-cash gain to the
Company from the public offering by the investee of its common stock and
(2) $4,367,000 of income tax benefit relating to the above net charges;
and $9,554,000 charged to net loss representing the aforementioned
$11,799,000 charged to loss from continuing operations partially offset by
a $2,245,000 credit to income from discontinued operations principally
resulting from the release of reserves, net of income taxes, in connection
with the settlement of a post-closing sales price adjustment related to
the sale of the Company’s beverage
businesses.
|
|
|
(7)
|
Reflects
certain significant credits recorded during 2004 as follows: $17,333,000
credited to income from continuing operations representing (1) $14,592,000
of income tax benefit due to the release of income tax reserves which were
no longer required upon the finalization of the examination of the
Company’s Federal income tax returns for the years ended December 31, 2000
and December 30, 2001, the finalization of a state income tax examination
and the expiration of the statute of limitations for the examination of
certain of the Company’s state income tax returns and (2) a $2,741,000
credit, net of a $1,601,000 income tax provision, representing the release
of related interest accruals no longer required; and $29,797,000 credited
to net income representing the aforementioned $17,333,000 credited to
income from continuing operations and $12,464,000 of additional gain on
disposal of the Company’s beverage businesses sold in 2000 resulting from
the release of income tax reserves related to discontinued operations
which were no longer required upon finalization of an Internal Revenue
Service examination of the Federal income tax returns for the years ended
December 31, 2000 and December 30, 2001 and the expiration of the statute
of limitations for examinations of certain of the Company’s state income
tax returns.
|
|
|
(8)
|
Reflects
certain significant charges and credits recorded during 2005 as follows:
$58,939,000 charged to operating loss representing (1) share-based
compensation charges of $28,261,000 representing the intrinsic value of
stock options which were exercised by the Chairman and then Chief
Executive Officer and the Vice Chairman and then President and Chief
Operating Officer and subsequently replaced on the date of exercise, the
grant of contingently issuable performance-based restricted shares of the
Company’s class A and class B common stock and the grant of equity
interests in two of the Company’s subsidiaries, (2) a $17,170,000 loss on
settlements of unfavorable franchise rights representing the cost of
settling franchise agreements acquired as a component of the acquisition
of RTM with royalty rates below the current 4% royalty rate that the
Company receives on new franchise agreements and (3) facilities relocation
and corporate restructuring charges of $13,508,000; $67,526,000 charged to
loss from continuing operations representing the aforementioned
$58,939,000 charged to operating loss and a $35,809,000 loss on early
extinguishments of debt upon a debt refinancing in connection with the
acquisition of RTM, both partially offset by $27,222,000 of income tax
benefit relating to the above charges; and $64,241,000 charged to net loss
representing the aforementioned $67,526,000 charged to loss from
continuing operations partially offset by income from discontinued
operations of $3,285,000 principally resulting from the release of
reserves for state income taxes no longer
required.
|
|
|
(9)
|
Reflects
a significant charge recorded during 2006 as follows: $9,005,000 charged
to loss from continuing operations and net loss representing a $14,082,000
loss on early extinguishments of debt related to conversions or effective
conversions of the Company’s 5% convertible notes due 2023 and prepayments
of term loans under the Company’s senior secured term loan facility,
partially offset by an income tax benefit of $5,077,000 related to the
above charge.
|
|
|
(10)
|
Reflects
certain significant charges and credits recorded during 2007 as follows:
$45,224,000 charged to operating profit; consisting of facilities
relocation and corporate restructuring costs of $85,417,000 less
$40,193,000 from the gain on sale of the Company’s interest in Deerfield;
$16,596,000 charged to income from continuing operations and net income
representing the aforementioned $45,224,000 charged to operating profit
offset by $15,828,000 of income tax benefit related to the above
charge; and a $12,800,000 previously unrecognized prior year
contingent tax benefit related to certain severance obligations to certain
of the Company’s former executives.
|
|
Item 7.
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations.
|
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of Triarc Companies, Inc., and its subsidiaries, which we refer to
as Triarc, should be read in conjunction with our consolidated financial
statements included elsewhere herein. Certain statements we make
under this Item 7 constitute “forward-looking statements” under the Private
Securities Litigation Reform Act of 1995. See “Special Note Regarding
Forward-Looking Statements and Projections” in “Part I” preceding “Item
1.”
Introduction
and Executive Overview
During
2007, our operations were in two business segments. We operate in the restaurant
business through our Company-owned and franchised Arby’s restaurants and,
through December 21, 2007, we also operated in the asset management business
through our 63.6% capital interest in Deerfield & Company LLC, which we
refer to as Deerfield. On December 21, 2007, we sold our entire
capital interest in Deerfield, which we refer to as the Deerfield Sale, to
Deerfield Capital Corp. (formerly known as Deerfield Triarc Capital Corp.), a
real estate investment trust, which we refer to as DFR or the
REIT. See “Liquidity and Capital Resources—Deerfield Sale” for a
detailed discussion of the Deerfield Sale and its effect on our investment in
the REIT.
In April
2007, concurrent with the original announcement of the intended sale of our
asset management business, we announced that we would be closing our New York
headquarters and combining our corporate operations with our restaurant
operations in Atlanta, Georgia, which we refer to as the Corporate
Restructuring. The Corporate Restructuring includes the transfer of
substantially all of Triarc’s senior executive responsibilities to the ARG
executive team in Atlanta, Georgia. This transition is expected to be completed
in early 2008. Accordingly, to facilitate this transition, the
Company entered into negotiated contractual settlements, which we refer to as
the Contractual Settlements, with our Chairman, who was also the then Chief
Executive Officer, and our Vice Chairman, who was the then
President and Chief Operating Officer, who we refer to collectively as the
Former Executives, evidencing the termination of their employment agreements and
providing for their resignation as executive officers as of June 29, 2007, which
we refer to as the Separation Date. Additionally, in connection with the
Corporate Restructuring, we incurred severance and consulting fees with respect
to other New York headquarters’ executives and employees and a loss on
properties and other assets at our former New York headquarters, principally
reflecting assets for which the fair value was less than the book value, sold to
an affiliate of the Former Executives. See “Results of
Operations—2007 Compared with 2006—Facilities Relocation and Corporate
Restructuring” for a detailed discussion of the charges related to our Corporate
Restructuring.
On July 25,
2005 we completed the acquisition of substantially all of the equity interests
or the assets of the entities comprising the RTM Restaurant Group, Arby’s then
largest franchisee with 775 Arby’s restaurants in 22 states as of that date, in
a transaction we refer to as the RTM Acquisition. Accordingly, RTM’s
results of operations and cash flows are included in our 2005 consolidated
results subsequent to the July 25, 2005 date of the RTM Acquisition and are
included in our 2006 and 2007 consolidated results for the full years.
Commencing on July 26, 2005, franchise revenues from RTM are eliminated in
consolidation.
In our
restaurant business, we derive revenues in the form of sales by our
Company-owned restaurants and franchise revenues which include royalty income
from franchisees, franchise and related fees and rental income from properties
leased to franchisees. While over 70% of our existing Arby’s royalty
agreements and substantially all of our new domestic royalty agreements provide
for royalties of 4% of franchise revenues, our average royalty rate was 3.6% for
the year ended December 30, 2007. In our former asset management
business, revenues were derived through the date of the Deerfield Sale in the
form of asset management and related fees from our management of (1)
collateralized debt and collateralized loan obligation vehicles, which we refer
to as CDOs, and (2) investment funds and private investment accounts, which we
refer to as Funds, including the REIT.
In our
discussions of “Net Sales” and “Franchise Revenues” below, we discuss same-store
sales. 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. Historically, and including the 2007 fiscal year, the
calculation of same-store sales commenced after a store was open for twelve
continuous months. Beginning in our 2008 fiscal year, we will
be reporting same-store sales commencing after a store has been open for fifteen
continuous months, which we refer to as the Fifteen Month Method, in order that
our externally reported information will be consistent with the metrics used by
our management for internal reporting and analysis. The same-store sales
discussion for the current year below provides our historical presentation as
well as the same store sales data on the basis of reporting that we will utilize
in 2008. There would have been no difference in the increase or
decrease in same-store sales between those previously reported on a quarterly
basis in 2007 and those computed on the Fifteen Month Method. The
same-store sales discussion for our 2006 fiscal year as compared to our 2005
fiscal year, however, only provides our historical presentation and does not
also present same-store sales information under the Fifteen Month
Method.
We derive
investment income principally from the investment of our excess
cash. In that regard, in December 2005 we invested $75.0 million in
an account, which we refer to as the Equities Account, which is managed by a
management company, which we refer to as the Management Company, formed by the
Former Executives and a director, who is also our former Vice Chairman, all of
whom we refer to as the Principals. The Equities Account is invested
principally in the equity securities, including through derivative instruments,
of a limited number of publicly-traded companies. In addition, the
Equities Account invests in market put options in order to lessen the impact
of
significant market downturns. The Equities Account, including
restricted cash equivalents, had a fair value of $99.3 million as of December
30, 2007. We also had invested in several funds managed by Deerfield,
including Deerfield Opportunities Fund, LLC, which we refer to as the
Opportunities Fund, and DM Fund LLC, which we refer to as the DM
Fund. Prior to 2005, we invested $100.0 million in the Opportunities
Fund and later transferred $4.8 million of that amount to the DM Fund in March
2005. We redeemed our investments in the Opportunities Fund and the
DM Fund effective September 29, 2006 and December 31, 2006,
respectively. The Opportunities Fund through September 29, 2006 and
the DM Fund through December 31, 2006 were accounted for as consolidated
subsidiaries of ours, with minority interests to the extent of participation by
investors other than us. The Opportunities Fund was a multi-strategy
hedge fund that principally invested in various fixed income securities and
their derivatives and employed substantial leverage in its trading activities
which significantly impacted our consolidated financial position, results of
operations and cash flows. We also have an investment in the
REIT. When we refer to Deerfield, we mean only Deerfield &
Company, LLC and not the Opportunities Fund, the DM Fund or the
REIT.
Our goal
is to enhance the value of our Company by increasing the revenues of our
restaurant business, which may include growth through
acquisitions. We are continuing to focus on growing the number of
restaurants in the Arby’s system, adding new menu offerings and implementing
operational initiatives targeted at improving service levels and
convenience.
In recent
years our restaurant business has experienced the following trends:
|
|
·
|
Increased
availability to consumers of new product choices, including (1) additional
healthy products focused on freshness driven by a greater consumer
awareness of nutritional issues, (2) new products that tend to include
larger portion sizes and more ingredients and (3) beverage programs which
offer a selection of premium non-carbonated beverage choices, including
coffee and tea products
|
|
|
·
|
Increased
price competition, as evidenced by (1) value menu concepts, which offer
comparatively lower prices on some menu items, (2) combination meal
concepts, which offer a complete meal at an aggregate price lower than the
price of the individual food and beverage items, (3) the use of coupons
and other price discounting and (4) many recent product promotions focused
on the lower prices of certain menu
items
|
|
|
·
|
Addition
of selected higher-priced quality items to menus, which appeal more to
adult tastes;
|
|
|
·
|
Increased
consumer preference for premium sandwiches with perceived higher levels of
freshness, quality and customization along with increased competition in
the premium sandwich category which has constrained the pricing of these
products;
|
|
|
·
|
Increased
competition among quick service restaurant competitors and other
businesses for available development sites, higher development costs
associated with those sites and higher borrowing costs in the lending
markets typically used to finance new unit
development;
|
|
|
·
|
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;
|
|
|
·
|
High
fuel costs which cause a decrease in many consumers’ discretionary
spending as well as the effect of falling home prices on consumer
confidence;
|
|
|
·
|
Increases
in our utility costs as well as the cost of goods we purchase under
distribution contracts that became effective in the third quarter of 2007
as a result of higher fuel costs;
|
|
|
·
|
Competitive
pressures due to extended hours of operation by many quick service
restaurant competitors particularly during the breakfast hours as well as
during late night hours;
|
|
|
·
|
Federal,
state and local legislative activity, such as minimum wage increases and
mandated health and welfare benefits which have and are expected to
continue to result in increased wages and related fringe benefits,
including health care and other insurance
costs;
|
|
|
·
|
Competitive
pressures from an increasing number of franchise opportunities seeking to
attract qualified franchisees;
|
|
|
·
|
Legal
or regulatory activity related to nutritional content or product labeling
which could result in increased costs;
and
|
|
|
·
|
Higher
commodity prices which have increased our food
cost.
|
We
experience the effects of these trends directly to the extent they affect the
operations of our Company-owned restaurants and indirectly to the extent they
affect sales by our franchisees and, accordingly, the royalties and franchise
fees we receive from them.
Presentation
of Financial Information
We report
on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to
December 31. However, Deerfield, the Opportunities Fund and the DM
Fund reported on a calendar year ending on December 31 until their respective
sale or redemption dates. Our 2005 fiscal year commenced
on January 3, 2005 and ended on January 1, 2006 except that (a) RTM is included
commencing July 26, 2005 and (b) Deerfield, the Opportunities Fund and,
commencing March 1, 2005, the DM fund are included on a calendar year
basis. Our 2006
fiscal year commenced on January 2, 2006 and ended on December 31, 2006 except
that (a) Deerfield and the DM Fund are included on a calendar year basis and (b)
the Opportunities Fund is included from January 1, 2006 through its September
29, 2006 redemption date. Our 2007 fiscal year commenced on January 1, 2007 and
ended on December 30, 2007 except that Deerfield is included from January 1,
2007 through its December 21, 2007 sale date. All references to years
relate to fiscal years rather than calendar years, except for Deerfield, the
Opportunities Fund and the DM Fund.
Results
of Operations
Presented
below is a table that summarizes our results of operations and compares the
amount of the change between (1) 2005 and 2006, which we refer to as the 2006
Change, and (2) 2006 and 2007, which we refer to as the 2007
Change.
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2006
Change
|
|
|
2007
Change
|
|
|
|
|
(In
Millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
570.8 |
|
|
$ |
1,073.3 |
|
|
$ |
1,113.4 |
|
|
$ |
502.5 |
|
|
$ |
40.1 |
|
|
Franchise
revenues
|
|
|
91.2 |
|
|
|
82.0 |
|
|
|
87.0 |
|
|
|
(9.2 |
) |
|
|
5.0 |
|
|
Asset
management and related fees
|
|
|
65.3 |
|
|
|
88.0 |
|
|
|
63.3 |
|
|
|
22.7 |
|
|
|
(24.7 |
) |
|
|
|
|
727.3 |
|
|
|
1,243.3 |
|
|
|
1,263.7 |
|
|
|
516.0 |
|
|
|
20.4 |
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, excluding depreciation and amortization
|
|
|
418.0 |
|
|
|
778.6 |
|
|
|
815.2 |
|
|
|
360.6 |
|
|
|
36.6 |
|
|
Cost
of services, excluding depreciation and amortization
|
|
|
24.8 |
|
|
|
35.3 |
|
|
|
25.2 |
|
|
|
10.5 |
|
|
|
(10.1 |
) |
|
Advertising
and promotions
|
|
|
43.5 |
|
|
|
78.6 |
|
|
|
79.3 |
|
|
|
35.1 |
|
|
|
0.7 |
|
|
General
and administrative, excluding depreciation and
amortization
|
|
|
205.1 |
|
|
|
235.8 |
|
|
|
205.4 |
|
|
|
30.7 |
|
|
|
(30.4 |
) |
|
Depreciation
and amortization, excluding amortization of deferred financing
costs
|
|
|
36.6 |
|
|
|
66.2 |
|
|
|
73.3 |
|
|
|
29.6 |
|
|
|
7.1 |
|
|
Facilities
relocation and corporate restructuring
|
|
|
13.5 |
|
|
|
3.3 |
|
|
|
85.4 |
|
|
|
(10.2 |
) |
|
|
82.1 |
|
|
Loss
on settlements of unfavorable franchise rights
|
|
|
17.2 |
|
|
|
0.9 |
|
|
|
0.2 |
|
|
|
(16.3 |
) |
|
|
(0.7 |
) |
|
Gain
on sale of consolidated business
|
|
|
- |
|
|
|
- |
|
|
|
(40.2 |
) |
|
|
- |
|
|
|
(40.2 |
) |
|
|
|
|
758.7 |
|
|
|
1,198.7 |
|
|
|
1,243.8 |
|
|
|
440.0 |
|
|
|
45.1 |
|
|
Operating
profit (loss)
|
|
|
(31.4 |
) |
|
|
44.6 |
|
|
|
19.9 |
|
|
|
76.0 |
|
|
|
(24.7 |
) |
|
Interest
expense
|
|
|
(68.8 |
) |
|
|
(114.1 |
) |
|
|
(61.3 |
) |
|
|
(45.3 |
) |
|
|
52.8 |
|
|
Insurance
expense related to long-term debt
|
|
|
(2.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
2.3 |
|
|
|
- |
|
|
Loss
on early extinguishments of debt
|
|
|
(35.8 |
) |
|
|
(14.1 |
) |
|
|
- |
|
|
|
21.7 |
|
|
|
14.1 |
|
|
Investment
income, net
|
|
|
55.3 |
|
|
|
80.2 |
|
|
|
52.2 |
|
|
|
24.9 |
|
|
|
(28.0 |
) |
|
Gain
(loss) on sale of unconsolidated businesses
|
|
|
13.1 |
|
|
|
4.0 |
|
|
|
(0.3 |
) |
|
|
(9.1 |
) |
|
|
(4.3 |
) |
|
Other
income (expense), net
|
|
|
3.9 |
|
|
|
4.7 |
|
|
|
(1.1 |
) |
|
|
0.8 |
|
|
|
(5.8 |
) |
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
(66.0 |
) |
|
|
5.3 |
|
|
|
9.4 |
|
|
|
71.3 |
|
|
|
4.1 |
|
|
(Provision
for) benefit from income taxes
|
|
|
16.3 |
|
|
|
(4.6 |
) |
|
|
8.4 |
|
|
|
(20.9 |
) |
|
|
13.0 |
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(8.8 |
) |
|
|
(11.5 |
) |
|
|
(2.7 |
) |
|
|
(2.7 |
) |
|
|
8.8 |
|
|
Income
(loss) from continuing operations
|
|
|
(58.5 |
) |
|
|
(10.8 |
) |
|
|
15.1 |
|
|
|
47.7 |
|
|
|
25.9 |
|
|
Income
(loss) from discontinued operations, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
- |
|
|
|
(0.4 |
) |
|
|
- |
|
|
|
(0.4 |
) |
|
|
0.4 |
|
|
Gain on
disposal
|
|
|
3.3 |
|
|
|
0.3 |
|
|
|
1.0 |
|
|
|
(3.0 |
) |
|
|
0.7 |
|
|
Income
(loss) from discontinued operations
|
|
|
3.3 |
|
|
|
(0.1 |
) |
|
|
1.0 |
|
|
|
(3.4 |
) |
|
|
1.1 |
|
|
Net
income (loss)
|
|
$ |
(55.2 |
) |
|
$ |
(10.9 |
) |
|
$ |
16.1 |
|
|
$ |
44.3 |
|
|
$ |
27.0 |
|
2007
Compared with 2006
Net
Sales
Our net
sales, which were generated entirely from our Company-owned restaurants,
increased $40.1 million, or 4% to $1,113.4 million for 2007 from $1,073.3
million for 2006, due to the $56.3 million increase in net sales from the 45 net
Company-owned restaurants we added during 2007. We opened 51
new restaurants, with generally higher than average sales volumes, and we
acquired 11 restaurants from franchisees during 2007 as compared with 15
generally underperforming restaurants we closed and 2 restaurants we sold to
franchisees during 2007. This increase was partially offset by a
$16.2 million, or 2% (1% on the Fifteen Month Method) decrease in same-store
sales of our Company-owned restaurants. Same store sales of our Company-owned
restaurants decreased principally due to lower sales volume from a decline in
customer traffic as a result of (1) increased price discounting by other larger
quick service restaurants and (2) the introduction of a new value program as
well as a major new product launch that accounted for a large percentage of our
sales but drove less traffic than expected. These negative factors were
partially offset by the effect of selective price increases that were
implemented in late 2006 and during 2007. Same-store sales of our
Company-owned restaurants declined while same-store sales of our franchised
restaurants discussed below grew 1% primarily due to (1) the franchised
restaurants implementing certain selective price increases earlier in 2007 than
the Company-owned restaurants, and (2) the use throughout 2007 by franchised
restaurants of incremental marketing and print advertising initiatives which we
were already using for the Company-owned restaurants. These positive
impacts on same-store sales of franchised restaurants more than offset declines
in traffic.
We
anticipate positive same-store sales growth, as calculated on the Fifteen Month
Method, for 2008 of both Company-owned and franchised restaurants as a result of
(1) a significant increase in national advertising, (2) a strong product and
promotional calendar for the year which includes some new product offerings and
improvements to existing product offerings as well as additional value offers
and (3) a shift in our advertising approach to focus on the unique qualities and
benefits of our food. In addition to the anticipated positive effect
of same-store sales growth, net sales should also be positively impacted by an
increase in Company-owned restaurants. We presently plan to open approximately
50 new Company-owned restaurants in 2008. We continually review the
performance of any underperforming Company-owned restaurants and evaluate
whether to close those restaurants, particularly in connection with the decision
to renew or extend their leases. Specifically, we have 52 restaurant
leases that are scheduled for renewal or expiration during 2008. We
currently anticipate the renewal or extension of all but approximately 10 of
those leases.
Franchise
Revenues
Our
franchise revenues, which were generated entirely from the franchised
restaurants, increased $5.0 million, or 6%, to $87.0 million for 2007 from $82.0
million for 2006. Excluding $2.2 million of rental income from
properties leased to franchisees being included in franchise revenues in 2007,
franchise revenues increased $2.8 million reflecting higher royalties of (1)
$2.5 million from the 97 franchised restaurants opened during 2007, with
generally higher than average sales volumes, and the 2 restaurants sold to
franchisees during 2007 replacing the royalties from the 30 generally
underperforming franchised restaurants closed and the elimination of royalties
from the 11 restaurants we acquired from franchisees during 2007 and (2) $0.7
million from a 1% increase (1% on the Fifteen Month Method) in same-store sales
of the franchised restaurants in 2007 as compared with 2006. These
increases in royalties were partially offset by a $0.4 million decrease in
franchise and related fees.
We expect
that our franchise revenues will increase during 2008 as compared with 2007 due
to anticipated positive same-store sales growth of franchised restaurants from
the expected performance of the various initiatives described above under “Net
Sales” and the positive effect of net new restaurant openings by our
franchisees.
Asset
Management and Related Fees
Our asset
management and related fees, which were generated entirely from the management
of CDOs and Funds by Deerfield and which ceased with the Deerfield Sale on
December 21, 2007, decreased $24.7 million, or 28%, to $63.3 million for 2007,
through December 21, 2007, from $88.0 million for 2006. This decrease
principally reflects (1) a $16.6 million decrease in incentive fees related to a
certain Fund due to a decline in its performance during 2007, (2) a $7.4 million
net decrease in incentive fees from one CDO principally due to the decrease in
the amount of contingent fees recognized primarily as a result of a call on that
CDO in 2006, (3) a $3.6 million decrease in management fees from the REIT as a
result of the decline in value of the REIT stock and stock options granted to us
and a decrease in the REIT’s net assets on which a portion of our fees are based
and (4) a $2.1 million decrease in incentive fees from the REIT as a result of
the REIT not meeting certain performance thresholds
during 2007. These decreases were partially offset by (1)
a $4.0 million increase in management fees from existing CDOs and Funds, (2) a
$0.7 million net increase in management fees from the net addition of five CDOs
and one Fund during 2007 and (3) a $0.3 million increase in structuring and
other related fees associated with new CDOs. Due to the Deerfield
Sale, we will recognize no asset management and related fees in future
periods.
Cost
of Sales, Excluding Depreciation and Amortization
Our cost
of sales, excluding depreciation and amortization resulted entirely from the
Company-owned restaurants. Cost of sales increased $36.6 million, or
5%, to $815.2 million for 2007 from $778.6 million for 2006, resulting in a
gross margin of 27% for each year. 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 primarily attributable to the
effect of the 45 net Company-owned restaurants added during 2007. Our
gross margin was impacted by the effects of (1) the price discounting associated
with the value program discussed under “Net Sales” above, (2) increases in our
cost of beef and other menu items, (3) increased costs under new distribution
contracts that became effective in the third quarter of 2007 and reflect the
effects of higher fuel costs and (4) increased labor costs due to the Federal
and state minimum wage increases implemented in 2007. These negative factors
were offset by the effects of (1) selective price increases discussed under “Net
Sales” above and (2) decreased beverage costs partially due to the full year
effect of increased rebates earned from a new beverage supplier we were in the
process of converting to during 2006.
We
anticipate that our gross margin in 2008 will be comparable to 2007 as a result
of the positive effects of (1) the full year effect on our net sales of the
selective price increases that were implemented during 2007 and (2) changes in
our product offerings which are expected to increase gross margin that will be
offset by (1) the full year effect of the cost increases from the distribution
contracts entered into during the third quarter of 2007, (2) the
expiration of favorable commodity supply contracts which expired primarily in
late 2007 which will increase the cost of a number of our commodities and (3)
the full year effect of the 2007, as well as of the additional 2008, Federal and
state minimum wage increases.
Cost
of Services, Excluding Depreciation and Amortization
Our cost
of services, excluding depreciation and amortization, which resulted entirely
from the management of CDOs and Funds by Deerfield, decreased $10.1 million, or
29%, to $25.2 million for 2007, through December 21, 2007, from $35.3 million
for 2006 principally due to a net decrease of $9.1 million in incentive
compensation for existing employees related to Deerfield’s weaker performance
during 2007 as well as a $1.0 million reversal of incentive compensation which
had been recorded in prior quarters of 2007, but will not be paid, for employees
who left Deerfield in September 2007. We will not incur any cost of services in
2008 due to the Deerfield Sale.
Our
franchise revenues have no associated cost of services.
Advertising
and Promotions
Our
advertising and promotions expenses consist of third party costs for local and
national television, radio, direct mail and outdoor advertising as well as point
of sale materials and local restaurant marketing. These expenses
increased $0.7 million, or 1% but remained unchanged as a percentage of net
sales. We expect that our advertising and promotions expenditures
will increase during 2008 as compared with 2007 due to a higher number of
planned national media advertising events but that it will remain comparable, as
a percentage of net sales, in 2008 as compared to 2007.
General
and Administrative, Excluding Depreciation and Amortization
In accordance with Financial Accounting
Standards Board Staff Position No. AUG AIR-1, “Accounting for Planned Major
Maintenance Activities,” which we refer to as FSP AIR-1, we accounted
for the adoption of the direct expensing method retroactively. As
such, our general and administrative expenses, excluding depreciation and
amortization, have been restated for 2006.
Our
general and administrative expenses, excluding depreciation and amortization
decreased $30.4 million, or 13%, principally due to (1) a $17.0 million decrease
in corporate general and administrative expenses principally related to (a) the
resignation effective in June 2007 of the Former Executives and certain other
officers and employees of Triarc who became employees of the Management Company
and are no longer employed by us and (b) our sublease to the Management Company
of one of the floors of our New York headquarters, both partially offset by the
fees for professional and strategic services provided to us under a two-year
transition services agreement, which we refer to as the Services Agreement, we
entered into with the Management Company which commenced on June 30, 2007, (2)
an $8.1 million decrease in incentive compensation due to weaker than planned
performance at our business segments, (3) a $5.9 million decrease in outside
consultant fees at our restaurant segment partially offset by a $2.1
million increase in salaries, which partially replaced those fees, primarily
attributable to the strengthening of the infrastructure of that segment
following the RTM Acquisition, (4) a $4.0 million reduction of severance and
related charges in connection with the replacement of three senior restaurant
executives during 2006 that did not recur in 2007, (5) a $1.8 million decrease
in recruiting fees at our restaurant segment associated with the strengthening
of the infrastructure in 2006 following the RTM Acquisition and (6) a $1.7
million reduction of training and travel costs at our restaurant segment as part
of an expense reduction initiative. These decreases were partially
offset by (1) a $2.6 million severance charge in 2007 for one of our asset
management executives and (2) a $2.3 million increase in relocation costs in our
restaurant segment principally attributable to additional estimated declines in
market value and increased carrying costs related to homes we purchased for
resale from relocated employees.
Our
general and administrative expenses will be lower during 2008 as compared to
2007 as a result of the completion of the transition of our corporate
headquarters to Atlanta and the Deerfield Sale.
Depreciation
and Amortization, Excluding Amortization of Deferred Financing
Costs
Our
depreciation and amortization, excluding amortization of deferred financing
costs increased $7.1 million, or 11%, principally reflecting (1) a $3.0 million
asset impairment charge related to an internally developed financial model that
our asset management segment did not use and that was subsequently sold, (2)
$2.7 million related to the 45 net restaurants added during 2007, (3) a
$0.4 million increase in asset impairment charges related to our TJ Cinnamons
brand and (4) depreciation on additions to properties at existing
restaurants. These increases were partially offset by (1) a $1.8
million decrease in asset impairment charges related to underperforming
restaurants and (2) a $1.1 million decrease related to amortization of CDO
contracts at our former asset management segment.
We expect
our depreciation and amortization expense will be lower during 2008 as compared
to 2007 as we no longer operate in the asset management segment as a result of
the Deerfield Sale. This decrease, however, will be partially offset
by increases related to the addition of new restaurants.
Facilities
Relocation and Corporate Restructuring
The charge of $85.4
million in 2007 consisted of general corporate charges of $84.8 million and a
$0.6 million additional charge for employee relocation costs in connection with
combining our then existing restaurant operations with those of RTM following
the RTM Acquisition. The general corporate charges of $84.8 million
were principally related to the Corporate Restructuring discussed above under
“Introduction and Executive Overview” and consist of (1) the payment
entitlements under the Contractual Settlements of $72.8
million, including the additional $1.6 million total payments
described below, of which $3.5 million is included in “General and
administrative, excluding depreciation and amortization” expenses as incentive
compensation, (2) severance for two other former executives of $12.9 million,
excluding incentive compensation that is due to them for their 2007 period of
employment with the Company, both including applicable employer payroll taxes,
(3) severance and consulting fees of $1.8 million with respect to other New York
headquarters’ executives and employees and (4) a loss of approximately $0.8
million on properties and other assets at our former New York headquarters,
principally reflecting assets for which the fair value was less than the book
value, sold during the 2007 third quarter to the Management Company. Under the
terms of the Contractual Settlements, our Chairman, who is also our former Chief
Executive Officer, was entitled to a payment consisting of cash and investments
which had a fair value of $50.3 million as of July 1, 2007 ($47.4 million upon
distribution on December 30, 2007) and our Vice Chairman, who is also our former
President and Chief Operating Officer, was entitled to a payment consisting of
cash and investments which had a fair value of $25.1 million as of July 1, 2007
($23.7 million upon distribution on December 30, 2007), both subject to
applicable withholding taxes, during the 2007 fourth quarter. We had
funded the severance payment obligations to the Former Executives, net of
estimated withholding taxes, by the transfer of cash and investments to rabbi
trusts, which we refer to as the 2007 Trusts, in the second quarter of
2007. The $4.3 million decline in value of the assets in the 2007
Trusts reduced our general corporate charges since it resulted in a
corresponding reduction of the payment obligations under the Contractual
Settlements. Funding the 2007 Trusts net of estimated withholding
taxes provided us with additional operating liquidity, but reduced the amounts
that otherwise would have been held in the 2007 Trusts for the benefit of the
Former Executives. Accordingly, the former Chief Executive Officer and
former President and Chief Operating Officer were paid $1.1 million and $0.5
million, respectively, representing an interest component on the amounts that
otherwise would have been included in the 2007 Trusts. The charges of
$3.3 million in 2006 included $3.2 million of general counsel corporate expense
principally representing a fee related to our decision in 2006 to terminate the
lease of an office facility in Rye Brook, New York rather than continue our
efforts to sublease the facility.
We
currently expect to incur approximately $0.7 million of general corporate
severance charges in 2008 in connection with the Corporate
Restructuring.
Loss
on Settlements of Unfavorable Franchise Rights
The loss
of $0.9 million in 2006 related to certain of the 13 franchised restaurants we
acquired during that year. The loss of $0.2 million in 2007
related to one of the franchised restaurants we acquired during
2007. Under accounting principles generally accepted in the United
States of America, which we refer to as GAAP, we are required to record as an
expense and exclude from the purchase price of acquired restaurants the value of
any franchise agreements that is attributable to royalty rates below the current
4% royalty rate that we receive on new franchise agreements. The
amounts of the settlement losses represent the present value of the estimated
amount of future royalties by which the royalty rate is unfavorable over the
remaining life of the franchise agreements.
Gain
on Sale of Consolidated Business
The gain on
sale of consolidated business of $40.2 million in 2007 relates to the sale of
our 63.6% capital interest in Deerfield. The gain reflects the excess of the
fair value of the REIT’s preferred stock, which we refer to as the REIT
Preferred Stock, and senior secured notes, which we refer to as the REIT Notes,
received as consideration over the carrying value of our interest, net of
expenses of the sale, and has been reduced by the portion of the gain
representing our continuing interest in the preferred and common shares of the
REIT. See “Liquidity and Capital Resources—Deerfield Sale” for a
detailed discussion of the Deerfield Sale.
Interest
Expense
Interest
expense decreased $52.8 million, or 46%, principally reflecting a $54.2 million
decrease in interest expense on debt securities sold with an obligation to
purchase or under agreements to repurchase due to the effective redemption of
our investment in the Opportunities Fund as of September 29, 2006, which we
refer to as the Redemption. We no longer consolidate the
Opportunities Fund subsequent to the Redemption. Accordingly,
interest expense and related net investment income are no longer affected by the
significant leverage associated with the Opportunities Fund.
In connection with the RTM Acquisition,
we entered into a credit agreement in 2005, which we refer to as the Credit
Agreement, for our restaurant segment. In accordance with the terms
of the Credit Agreement, we entered into three interest rate swap agreements,
which we refer to as the Term Loan Swap Agreements and which expire in September
2008 and October 2008, that fixed the LIBOR interest rate on a total of $205.0
million of the outstanding principal amount of three 2005 advances pursuant to
the term loans, which we refer to as the Term Loan. The Term
Loan borrowing provided financing for the RTM Acquisition and refinanced then
existing higher interest rate debt of our restaurant segment, which we refer to
as the Refinancing. The expiration of the Term Loan Swap
Agreements during 2008 could have a material impact on our interest expense;
however, we cannot determine any potential impact at this time because it is
dependent on (1) our entry into future swap agreements and (2) the
direction and magnitude of any changes in the variable interest rate
environment.
Loss
on Early Extinguishments of Debt
The loss
on early extinguishments of debt of $14.1 million in 2006 consisted of (1) $13.1
million which resulted from the conversion or effective conversion of an
aggregate $172.9 million principal amount of our 5% convertible notes due 2023,
which we refer to as the Convertible Notes, into shares of our class A and class
B common stock mostly in February 2006, which we refer to as the Convertible
Notes Conversions, and consisted of $9.0 million of negotiated inducement
premiums that we paid in cash and shares of our class B common stock, the
write-off of $4.0 million of related previously unamortized deferred financing
costs and $0.1 million of fees related to the conversions and (2) a $1.0 million
write-off of previously unamortized deferred financing costs in connection with
principal repayments of the Term Loan from excess cash, which we refer to as the
Term Loan Prepayments. There were no early extinguishments of debt in
2007.
Investment
Income, Net
The
following table summarizes and compares the major components of investment
income, net:
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
|
(In
Millions)
|
|
|
Interest
income
|
|
$ |
72.5 |
|
|
$ |
9.1 |
|
|
$ |
(63.4 |
) |
|
Recognized
net gains
|
|
|
10.6 |
|
|
|
51.4 |
|
|
|
40.8 |
|
|
Other
than temporary unrealized losses
|
|
|
(4.1 |
) |
|
|
(9.9 |
) |
|
|
(5.8 |
) |
|
Distributions,
including dividends
|
|
|
1.5 |
|
|
|
1.8 |
|
|
|
0.3 |
|
|
Other
|
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
|
$ |
80.2 |
|
|
$ |
52.2 |
|
|
$ |
(28.0 |
) |
Our
interest income decreased $63.4 million due to lower average outstanding
balances of our interest-bearing investments principally as a result of the
Redemption whereby our net investment income and interest expense are no longer
affected by the significant leverage associated with the Opportunities Fund
after September 29, 2006. Our recognized net gains increased $40.8
million and included (1) a $15.2 million realized gain on the sale in 2007 of
two of our available-for-sale securities, (2) $13.9 million of realized gains on
the sale in 2007 of two of our cost method investments, (3) $8.4 million of
gains realized on the transfer of several cost method investments from two
deferred compensation trusts, which we refer to as the “Deferred Compensation
Trusts,” to the Former Executives as a result of the Contractual
Settlements during 2007 and (4) $2.7 million of unrealized gains on
derivatives other than trading. All of these recognized gains and losses may
vary significantly in future periods depending upon changes in the value of our
investments and, for available-for-sale securities, the timing of the sales of
our investments. The increase in other than temporary unrealized
losses of $5.8 million primarily reflects the recognition of impairment charges
related to the significant decline in the market values of certain of our
available-for-sale investments in CDOs in 2007, through the date of the
Deerfield Sale, compared with the significant decline in market value in 2006 of
one of our cost method investments in the Deferred Compensation Trusts and one
of our available-for-sale
investments. Any other than temporary unrealized losses are dependant
upon the underlying economics and/or volatility in the value of our investments
in available-for-sale securities and cost method investments and may or may not
recur in future periods.
As of
December 30, 2007, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $7.6 million and ($11.1) million (which related primarily to the
preferred stock we received from the REIT as consideration in the Deerfield
Sale), respectively, included in “Accumulated other comprehensive income
(loss).” 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.
See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation – Liquidity and Capital Resources – Deerfield Sale” for first quarter
2008 information related to the Company’s investment in the REIT.
Gain
(Loss) on Sale of Unconsolidated Businesses
The gain
(loss) on sale of unconsolidated businesses decreased $4.3 million to a loss of
($0.3) million in 2007 from a gain of $4.0 million in 2006. This
decrease reflects a (1) a $2.9 million loss in 2007 on the REIT common shares
distributed from the 2007 Trusts and (2) a $1.7 million gain in 2006 which did
not recur in 2007 on the sale of a portion of our investment in Jurlique
International Pty Ltd., an Australian company which we refer to as
Jurlique. These decreases were partially offset by $0.3 million of
higher gains in 2007 compared with 2006 on sales of portions of our investment
in Encore Capital Group, Inc., a former investee of ours, which we refer to as
Encore.
Other
Income (Expense), Net
Other
income (expense), net, decreased $5.8 million in 2007 as compared to 2006,
principally reflecting (1) a $4.0 million decrease in our equity in the REIT’s
operations for the respective years, (2) a $0.9 million decrease in equity in
earnings of Encore, which we no longer accounted for under the equity method
subsequent to May 10, 2007, the date of the sale of substantially all our
investment and (3) a $0.5 million increase in the loss from a foreign currency
derivative related to Jurlique which matured on July 5, 2007. These
decreases were partially offset by a $2.1 million decrease in costs recognized
related to strategic business alternatives that were not pursued.
Income
(Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our income
from continuing operations before income taxes and minority interests increased
$4.1 million to $9.4 million in 2007 from $5.3 million in 2006. The
increase is attributed principally to the $40.8 million increase in recognized
net gains included in our investment income, partially offset by the $24.7
million decline in our operating profit largely attributable to the $82.1
million increase in our facilities relocation and corporate restructuring
charges, and the effect of the $40.2 million gain before taxes and minority
interests on the Deerfield Sale, as well as the other variances discussed
above.
We recognized
deferred compensation expense within “General and administrative, excluding
depreciation and amortization” of $1.7 million in 2006 and $1.0 million in
2007, net of a $1.5 million settlement of a lawsuit in 2007 related to an
investment which was included in the Deferred Compensation Trusts, for the net
increases in the fair value of investments in the Deferred Compensation Trusts,
for the benefit of the Former Executives. The related obligation was
settled in 2007 following the Former Executives’ resignation and the assets in
the Deferred Compensation Trusts were either distributed to the Former
Executives or used to satisfy withholding taxes. We recognized net
investment losses from investments in the Deferred Compensation Trusts of $1.0
million in 2006 and net investment income of $7.1 million in
2007. The $1.0 million of net investment losses in 2006 consisted
principally of an other than temporary loss of $2.1 million related to an
investment fund within the Deferred Compensation Trusts which experienced a
significant decline in market value, partially offset by a total of $1.0 million
that is comprised of other realized gains and the equity in earnings of an
investment purchased and sold during 2006. The net investment income
of $7.1 million in 2007 consisted of $8.4 million of realized gains on
investments that were accounted for under the cost method of accounting and $0.2
million of interest income, net of the $1.5 million settlement of the lawsuit
described above.
(Provision
For) Benefit From Income Taxes
In 2007, the
Company had income from continuing operations before minority interests of $9.4
million and an income tax benefit of $8.4 million. This resulted in
an effective tax benefit rate of 89% compared to a provision for income taxes
representing an effective rate of 86% in 2006. In 2007, the Company recognized a
previously unrecognized contingent tax benefit of $12.8 million in connection
with the settlement of certain obligations to the Former Executives relating to
the Deferred Compensation Trusts during 2007, for which the related expense was
principally recognized in prior years for financial statement
purposes. In connection with a simplification of our subsidiary
structure in 2007, we incurred a one-time tax charge of $1.0
million.
Additionally,
the effective rates in both years include the effects of (1) non-deductible
expenses, (2) adjustments related to prior year tax matters, (3) minority
interests in income of consolidated subsidiaries which are not taxable to us but
which are not deducted from the pre-tax income used to calculate the effective
tax rates and (4) state income taxes, net of Federal income tax benefit, due to
the differing mix of pre-tax income or loss among the consolidated entities
which file state tax returns on an individual basis, the effects of which are
lower in 2007 as compared to 2006 due to the pre-tax income or loss in the
respective periods.
Minority
Interests in Income of Consolidated Subsidiaries
Minority
interests in income of consolidated subsidiaries decreased by $8.8 million
principally reflecting a decrease of $9.1 million as a result of lower income of
Deerfield through December 21, 2007, the date of the Deerfield Sale, as compared
with 2006.
Income
(Loss) From Discontinued Operations
The loss
from discontinued operations of $0.1 million in 2006 consists of a $1.3 million
loss from operations related to our closing two underperforming restaurants,
substantially offset by (1) the release of $0.7 million of reserves for state
income taxes no longer required upon the expiration of a state income tax
statute of limitations and (2) the release of $0.5 million of certain other
accruals as a result of revised estimates to liquidate the remaining
liabilities. The income from discontinued operations of $1.0 million
in 2007 consists of a $1.1 million release of an accrual for state income taxes
no longer required after the settlement of a state income tax audit partially
offset by an additional $0.1 million loss relating to the finalization of the
leasing arrangements of the two closed restaurants mentioned above.
Net
Income (Loss)
Our net
results improved $27.0 million from a loss of $10.9 million in 2006 to income of
$16.1 million in 2007. This increase is a result of the
after-tax and applicable minority interest effects of the variances discussed
above.
2006
Compared with 2005
Net
Sales
Our net
sales, which were generated entirely from our Company-owned restaurants,
increased $502.5 million to $1,073.3 million for 2006 from $570.8 million for
2005, primarily due to the effect of including RTM in our results for all of
2006 but only for the portion of 2005 following the July 25, 2005 acquisition
date. In addition, net sales were favorably affected by 22 net
Company-owned restaurants added during 2006.
Same-store
sales of our Company-owned restaurants increased 1% in
2006. Same-store sales of our Company-owned restaurants were
positively impacted by (1) our 2006 marketing initiatives, including value
oriented menu offerings, an enhanced menu board design and new promotions, (2)
the launch in March 2006 of Arby’s Chicken Naturals®, a line of menu offerings
made with 100 percent all natural chicken breast and (3) selective price
increases implemented in November 2006. Partially offsetting these
positive factors was the effect of higher fuel prices on consumers’
discretionary income which we believe had a negative impact on our sales
beginning in the second half of 2005, although the effect moderated in the
second half of 2006. Same-store sales growth of our Company-owned
restaurants was less than the 5% same-store sales growth of our franchised
restaurants discussed below primarily due to (1) the introduction and use
throughout 2006 of local marketing initiatives by our franchisees similar to
those initiatives which we were already using for Company-owned restaurants in
2005, including more effective local television advertising and increased
couponing, and (2) the disproportionate number of Company-owned restaurants in
the economically-weaker Michigan and Ohio regions which underperformed the
system.
Franchise
Revenues
Our
franchise revenues, which were generated entirely from the franchised
restaurants, decreased $9.2 million to $82.0 million for 2006 from $91.2 million
for 2005, reflecting $16.3 million of franchise revenues from RTM recognized in
2005 for the period prior to the RTM Acquisition whereas franchise revenues from
RTM are eliminated in consolidation for the full year of 2006. Aside
from the effect of the RTM Acquisition, franchise revenues increased $7.1
million in 2006, reflecting (1) a $3.2 million improvement in royalties due to a
5% increase in same-store sales of the franchised restaurants in 2006 as
compared with 2005, (2) a $2.9 million net increase in royalties from the 94
franchised restaurants opened in 2006, with generally higher than average sales
volumes, and the 16 restaurants sold to franchisees in 2006 replacing the
royalties from the 40 generally underperforming restaurants closed and the
elimination of royalties from 13 restaurants we acquired from franchisees in
2006 and (3) a $1.0 million increase in franchise and related
fees. The increase in same-store sales of the franchised restaurants
reflects the factors affecting same-store sales of our Company-owned restaurants
as well as the additional factors affecting the franchised restaurants compared
with our Company-owned restaurants discussed above under “Net
Sales.”
Asset
Management and Related Fees
Our asset
management and related fees, which were generated entirely from the management
of CDOs and Funds by Deerfield, increased $22.7 million, or 35%, to $88.0
million for 2006 from $65.3 million for 2005. This increase reflects
(1) a $5.7 million increase in incentive fees from Funds other than the REIT,
principally related to one of the Funds which experienced improved performance,
including the impact of higher assets under management, (2) $4.6 million in
management and related fees from new CDOs and Funds, (3) a $4.4 million increase
in management and incentive fees from the REIT principally reflecting the full
year effect in 2006 of a $363.5 million increase in assets under management for
the REIT resulting from an initial public stock offering in June 2005, (4) a
$4.1 million increase in incentive fees from CDOs principally due to the
recognition of contingent fees upon the early termination of a particular CDO
and (5) a $3.9 million increase in management fees principally reflecting higher
assets under management of previously existing CDOs and Funds other than the
REIT.
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 $360.6 million to
$778.6 million for 2006 from $418.0 million for 2005, resulting in a gross
margin of 27% for each year. The increase in cost of sales is
primarily attributable to the full year effect in 2006 of the restaurants
acquired in the RTM Acquisition and the effect of the 22 net restaurants added
in 2006. Our overall gross margin was positively affected by (1) the
inclusion of restaurants acquired in the RTM Acquisition with their higher gross
margins for the full year 2006 compared with only the portion of 2005 following
the July 25, 2005 acquisition date, (2) our continuing implementation of the
more effective operational procedures of the RTM restaurants at the restaurants
we owned prior to the RTM Acquisition, (3) increased beverage rebates resulting
from the agreement for Pepsi beverage products effective January 1, 2006 and (4)
decreases in our cost of beef. These positive effects were
substantially offset by the effect of increased price discounting principally in
the second half of 2006 associated with our value oriented menu
offerings.
Cost
of Services, Excluding Depreciation and Amortization
Our cost
of services, excluding depreciation and amortization, which resulted entirely
from the management of CDOs and Funds by Deerfield, increased $10.5 million, or
42%, to $35.3 million for 2006 from $24.8 million for 2005 principally due to
the hiring of additional personnel to support our current and anticipated growth
in assets under management and increased incentive compensation
levels.
Our
franchise revenues have no associated cost of services.
Advertising
and Promotions
Our
advertising and promotions expenses consist of third party costs for local and
national television, radio, direct mail and outdoor advertising as well as point
of purchase materials and local restaurant marketing. These expenses
increased $35.1 million principally due to the full year effect on advertising
and promotions in 2006 of the restaurants acquired in the RTM
Acquisition. However, advertising and promotions expenses as a
percentage of net sales decreased slightly from 7.6% in 2005 to 7.3% in
2006.
General
and Administrative, Excluding Depreciation and Amortization
In
accordance with FSP AIR-1 we accounted for the adoption of the direct expensing
method retroactively. As such, our general and administrative
expenses, excluding depreciation and amortization have been restated for both
years presented.
Our
general and administrative expenses, excluding depreciation and amortization
increased $30.7 million, reflecting a $54.9 million increase in general and
administrative expenses of our restaurant segment principally relating to the
full year effect of the RTM Acquisition on 2006. Such increase in our
restaurant segment reflects (1) a $26.8 million increase in salaries and
incentive compensation as a result of increased headcount due to the RTM
Acquisition and the strengthening of the infrastructure of our restaurant
segment, (2) a $10.3 million increase in fringe benefits, recruiting, travel,
training and other employee-related costs resulting from the increased
headcount, (3) a $7.6 million increase in costs related to outside consultants
that we utilized to assist with the integration of RTM, including compliance
with the Sarbanes-Oxley Act of 2002 and the integration of computer systems, (4)
a $5.6 million increase in severance and related charges of which $4.0 million
was in connection with the replacement of three senior restaurant executives
during 2006 and (5) a $4.7 million increase in employee share-based compensation
resulting from the adoption of Statement of Financial Accounting Standards No.
123 (revised 2004) “Share-Based Payment,” which we refer to as SFAS 123(R),
which we adopted effective January 2, 2006 (see discussion in following
paragraphs). Aside from the increase attributable to our restaurant
segment, general and administrative expenses decreased $24.2 million primarily
due to (1) an $18.4 million decrease in share-based compensation (see the
discussion in the following paragraphs), (2) a $3.6 million increase in the
reimbursement of our expenses by the Management Company for the allocable cost
of services provided by us to the Management Company and (3) a $0.5 million
decrease in deferred compensation expense, from $2.2 million in 2005 to $1.7
million in 2006. The deferred compensation expense represents the net
increase in the fair value of investments in the Deferred Compensation
Trusts. The decrease from 2005 includes the effect of a $2.1 million
impairment charge related to a significant decline in value of one of the
investments in the Deferred Compensation Trusts recognized in 2006 with a
corresponding equal reduction of “Investment income, net.”
As
indicated above, effective January 2, 2006, we adopted SFAS 123(R) which revised
Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based
Compensation,” which we refer to as SFAS 123. As a result, we now
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 at the date of grant rather than its
intrinsic value, the method we previously used. We are using the
modified prospective application method under SFAS 123(R) and elected not to use
retrospective application. Thus, amortization of the fair value of
all nonvested grants as of January 2, 2006, as determined under the previous pro
forma disclosure provisions of SFAS 123, except as adjusted for estimated
forfeitures, is included in our results of operations commencing January 2,
2006, and prior periods are not restated. Employee stock compensation
grants or grants modified, repurchased or cancelled on or after January 2, 2006
are valued in accordance with SFAS 123(R). Had we used the fair value
alternative under SFAS 123 during 2005, our pretax compensation expense using
the Black-Scholes-Merton option pricing model would have been $15.6 million
higher, or $10.0 million after taxes and minority interests.
The
Company’s total share-based compensation included in general and administrative
expenses in 2006 decreased $13.7 million, reflecting a $4.7 million increase in
our restaurant segment more than offset by an $18.4 million decrease excluding
our restaurant segment as disclosed above. The $13.7 million net
decrease principally reflects a $16.4 million provision in 2005 for the
intrinsic value of stock options exercised by the Executives that were replaced
by us on the date of exercise, as compared with a $1.8 million provision in 2006
for the fair value of stock options granted by us to replace stock options
exercised by two senior executive officers other than the Executives, in each
case for our own tax planning reasons. We also recognized $4.2
million of lower share-based compensation on equity instruments of certain
subsidiaries and our contingently issuable performance-based restricted shares
of our class A and class B common stock granted in 2005 due to the declining
amounts of compensation expense, which is recognized ratably over their vesting
periods, principally as a result of vesting during 2006. These
decreases were partially offset by the additional compensation expense of $6.9
million for the fair value of stock options recognized in 2006 under SFAS
123(R).
Depreciation
and Amortization, Excluding Amortization of Deferred Financing
Costs
Our
depreciation and amortization, excluding amortization of deferred financing
costs increased $29.6 million, principally reflecting the full year effect in
2006 of the RTM Acquisition and, to a much lesser extent, a $3.6 million
increase in asset impairment charges principally related to underperforming
restaurants and early termination of certain asset management contracts for
CDOs.
Facilities
Relocation and Corporate Restructuring
The
charges of $3.3 million in 2006 included $3.2 million of general corporate
expense principally representing a fee related to our decision in 2006 to
terminate the lease of an office facility in Rye Brook, New York rather than
continue our efforts to sublease the facility. The charges of $13.5 million in
2005 consisted of $12.0 million related to our restaurant segment and $1.5
million of general corporate charges. The $12.0 million of charges in
our restaurant segment principally related to combining our existing restaurant
operations with those of RTM following the RTM Acquisition and relocating the
corporate office of the restaurant group from Fort Lauderdale, Florida to new
offices in Atlanta, Georgia. RTM and AFA Service Corporation, an
independently controlled advertising cooperative, which we refer to as AFA,
concurrently relocated from their former facilities in Atlanta to the new
offices in Atlanta. The charges consisted of severance and employee
retention incentives, employee relocation costs, lease termination costs and
office relocation expenses. The general corporate charges of $1.5
million related to our decision in December 2005 not to move our corporate
offices from New York City to the newly leased office facility in Rye Brook, New
York. This charge represented our estimate as of the end of 2005 of
all future costs, net of estimated sublease rental income, related to the Rye
Brook lease subsequent to the decision not to move the corporate
offices.
Loss
on Settlements of Unfavorable Franchise Rights
The loss
of $0.9 million in 2006 related to certain of the 13 franchised restaurants we
acquired during the year and the loss of $17.2 million in 2005 consisted
principally of $17.0 million in connection with the RTM
Acquisition.
Interest
Expense
Interest
expense increased $45.3 million reflecting (1) a $33.6 million increase in
interest expense on debt securities sold with an obligation to purchase or under
agreements to repurchase in connection with the significant increase in the use
of leverage in the Opportunities Fund prior to the Redemption as of September
29, 2006, (2) an $11.2 million net increase in interest expense reflecting the
higher average debt of our restaurant segment following the Term Loan and (3)
$8.8 million of interest expense principally relating to the full year effect in
2006 of an increase in sale-leaseback and capitalized lease obligations due to
the obligations assumed in the RTM Acquisition and obligations entered into
subsequently both for new restaurants opened and the renewal of expiring
leases. These increases were partially offset by an $8.4 million
decrease in interest expense related to the convertible notes conversions, as
discussed in more detail below under “Liquidity and Capital Resources –
Convertible Notes.” As a result of the Redemption we no longer
consolidate the Opportunities Fund subsequent to September 29,
2006.
Insurance
Expense Related to Long-Term Debt
Insurance
expense related to long-term debt of $2.3 million in 2005 did not recur in 2006
due to the repayment of the related debt as part of the
Refinancing.
Loss
on Early Extinguishments of Debt
The loss
on early extinguishments of debt of $35.8 million in 2005 resulted from the
Refinancing and consisted of $27.4 million of prepayment penalties, $4.8 million
of write-offs of previously unamortized deferred financing costs and original
issue discount, $3.5 million of accelerated insurance payments related to the
extinguished debt and $0.1 million of fees. The loss on early
extinguishments of debt of $14.1 million in 2006 consisted of (1) $13.1 million
which resulted from the Convertible Notes Conversions and consisted of $9.0
million of negotiated inducement premiums that we paid in cash and shares of our
class B common stock, the write-off of $4.0 million of related
previously unamortized deferred financing costs and $0.1 million of fees related
to the conversions and (2) a $1.0 million write-off of previously unamortized
deferred financing costs in connection with the Term Loan
Prepayments.
Investment
Income, Net
The
following table summarizes and compares the major components of investment
income, net:
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
|
(In
Millions)
|
|
|
Interest
income
|
|
$ |
42.7 |
|
|
$ |
72.5 |
|
|
$ |
29.8 |
|
|
Other
than temporary unrealized losses
|
|
|
(1.5 |
) |
|
|
(4.1 |
) |
|
|
(2.6 |
) |
|
Recognized
net gains
|
|
|
12.7 |
|
|
|
10.6 |
|
|
|
(2.1 |
) |
|
Distributions,
including dividends
|
|
|
1.9 |
|
|
|
1.5 |
|
|
|
(0.4 |
) |
|
Other
|
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
0.2 |
|
|
|
|
$ |
55.3 |
|
|
$ |
80.2 |
|
|
$ |
24.9 |
|
Interest
income increased $29.8 million principally due to higher average outstanding
balances of our interest-bearing investments reflecting the use of significant
leverage in the Opportunities Fund prior to the Redemption (see the paragraph
below). In addition, we experienced an increase in average rates
principally due to our investing through the use of leverage in 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. Despite the higher outstanding
balances of our interest-bearing investments, these balances, net of related
leveraging liabilities, decreased principally due to the liquidation of some of
those investments to provide cash principally for the RTM Acquisition in July
2005. Our other than temporary unrealized losses increased $2.6
million, reflecting the recognition of a $2.1 million impairment charge related
to the significant decline in the market value of one of the investments in the
Deferred Compensation Trusts in 2006. The $2.1 million impairment
charge related to the Deferred Compensation Trusts had a corresponding equal
reduction of “General and administrative, excluding depreciation and
amortization.” Any other than temporary unrealized losses are
dependant upon the underlying economics and/or volatility in the value of our
investments in available-for-sale securities and cost method investments and may
or may not recur in future periods. 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, including derivatives, and our securities sold short with an
obligation to purchase, which were principally recognized by the Opportunities
Fund and the DM Fund. The $2.1 million decrease in our recognized net
gains is principally due to lesser gains realized on the sales of two investment
limited partnerships in 2006 compared with the gains realized on the sales of
two investment limited partnerships in 2005, partially offset by a gain realized
on the sale of another cost method investment in 2006 which did not occur in
2005. All of these recognized gains and losses may vary significantly
in future periods depending upon the timing of the sales of our investments, or
the changes in the value of our investments, as applicable.
As a
result of the Redemption, our net investment income and interest expense are no
longer affected by the significant leverage associated with the Opportunities
Fund after September 29, 2006.
Gain
on Sale of Unconsolidated Businesses
The gain
on sale of unconsolidated businesses decreased $9.1 million to $4.0 million for
2006 from $13.1 million for 2005. This decrease principally reflects
(1) a $9.5 million decrease in gains on sales of portions of our investment in
Encore and (2) a $1.3 million decrease in non-cash gains from (a) our equity in
the net proceeds to both the REIT in 2005 and Encore in 2005 and 2006 from their
sales of stock, including shares issued for an Encore business acquisition in
2005 and exercises of stock options, over the portion of our respective carrying
values allocable to our decrease in ownership percentages and (b) the final
amortization in 2005 of deferred gain on a restricted Encore stock award to a
former officer of ours. In accordance with our accounting policy, we
recognize a non-cash gain or loss upon sale by an equity investee of any
previously unissued stock to third parties to the extent of the decrease in our
ownership of the investee to the extent realization of the gain is reasonably
assured. These decreases were partially offset by a $1.7 million gain
on sale of a portion of our cost basis investment in Jurlique in
2006.
Other
Income, Net
Other
income, net increased $0.8 million, principally due to (1) $1.5 million of costs
recognized in 2005 related to our decision not to pursue a certain financing
alternative in connection with the RTM Acquisition and (2) $1.4 million of costs
incurred in 2005 related to a business acquisition proposal we submitted but was
not accepted. The positive effect of these factors on other income in
2006 were partially offset by (1) $2.1 million of costs recognized in 2006
related to a strategic business alternative that was not pursued, (2) a $0.9
million decrease from the foreign currency transaction and derivatives related
to Jurlique from gains of $0.5 million in 2005 to losses of $0.4 million in
2006, (3) a $0.7 million gain recognized in 2005 on lease termination of an
underperforming Company-owned restaurant and (4) a $0.3 million recovery in 2005
upon collection of a fully-reserved non-trade note receivable held by a
subsidiary which predated our acquisition of that subsidiary.
Income
(Loss) From Continuing Operations Before Income Taxes and Minority
Interests
Our
income (loss) from continuing operations before income taxes and minority
interests improved $71.3 million to income of $5.3 million in 2006 from a loss
of $66.0 million in 2005. Both fiscal years reflect the retroactive
adjustment of FSP AIR-1. This improvement is attributed principally
to the decrease in certain significant charges in 2006 as compared with 2005,
including (1) a $21.7 million decrease in the loss on early extinguishments of
debt, reflecting higher charges associated with the Refinancing in 2005 as
compared with the charges associated with our Convertible Notes Conversions and
Term Loan Prepayments in 2006, (2) a $16.3 million decrease in the loss on
settlements of unfavorable franchise rights principally reflecting a $17.0
million loss in 2005 in connection with the RTM Acquisition, (3) a $14.3 million
decrease in total share-based compensation, of which $13.7 million was reflected
in general and administrative expenses, including $16.4 million of compensation
expense in 2005 for the intrinsic value of stock options exercised by the
Executives and replaced by us and (4) a $10.2 million decrease in facilities
relocation and corporate restructuring charges principally in connection with
combining our existing restaurant operations with those of RTM following the RTM
Acquisition. The effects of the other variances are discussed in the
captions above.
As
discussed above, we recognized deferred compensation expense of $2.2 million in
2005 and $1.7 million in 2006, within general and administrative expenses,
for net increases in the fair value of investments in the Deferred Compensation
Trusts. Under GAAP, we were unable to recognize any investment income
for unrealized increases in the fair value of those investments in the Deferred
Compensation Trusts that were accounted for under the cost method of
accounting. Accordingly, we recognized net investment income from
investments in the Deferred Compensation Trusts of $1.8 million in 2005 and net
investment losses of $1.0 million in 2006. The net investment income
in 2005 consisted of realized gains from the sale of certain cost method
investments in the Deferred Compensation Trusts of $2.0 million, which included
increases in value prior to 2005 of $1.6 million, interest income of $0.1
million, less management fees of $0.3 million. The net investment
loss during 2006 consisted of an impairment charge of $2.1 million related to an
investment fund within the Deferred Compensation Trusts which experienced a
significant decline in market value which we deemed to be other than temporary
and management fess of less than $0.1 million, less realized gains from the sale
of certain cost method investments of $0.6 million, which included increases in
value prior to 2006 of $0.4 million, equity in earnings of an equity method
investment purchased and sold during 2006 of $0.4 million and interest income of
$0.2 million. 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 reversed in 2007 when previously unrealized gains were
recognized upon the transfer of the investments in the Deferred Compensation
Trusts to the Executives.
(Provision
For) Benefit From Income Taxes
The
benefit from income taxes represented an effective rate of 25% in 2005 and the
provision for income taxes represented an effective rate of 86% in 2006 on the
respective income (loss) from continuing operations before income taxes and
minority interests. The effective benefit rate in 2005 was lower
than, and the effective provision rate in 2006 was higher than, the United
States Federal statutory rate of 35% principally due to (1) the effect of
non-deductible compensation and other non-deductible expenses, (2) state income
taxes, net of Federal income tax benefit, due to the differing mix of pretax
income or loss among the consolidated subsidiaries which file state tax returns
on an individual company basis and (3) in 2005 the non-deductible loss on
settlements of unfavorable franchise rights discussed above. These
effects were partially offset by the effect of minority interests in income of
consolidated subsidiaries which were not taxable to us but which are not
deducted from the pretax income (loss) used to calculate the effective tax
rates. The effects of each of these items on the effective tax and
benefit rates were significantly different in 2005 and 2006 due to the relative
levels of income (loss) from continuing operations before income taxes and
minority interests in each of those years.
Minority
Interests in Income of Consolidated Subsidiaries
The
minority interests in income of consolidated subsidiaries increased $2.7
million, principally reflecting (1) an increase of $2.6 million due to increased
income of Deerfield exclusive of costs discussed below in which we did not
participate and (2) an increase of $1.3 million due to the increased
participation of investors other than us in increased income of the
Opportunities Fund prior to the Redemption on September 29,
2006. These increases were partially offset by $1.2 million of costs
related to a strategic business alternative that was not pursued that were
incurred on behalf of and allocated entirely to the minority shareholders of
Deerfield and, accordingly, are reflected as a reduction of minority interests
in income of consolidated subsidiaries in 2006.
Income
(Loss) From Discontinued Operations
The
income (loss) from discontinued operations declined $3.4 million from income of
$3.3 million for 2005 to a loss of $0.1 million for 2006. The loss in
2006 consists of a $1.3 million loss from operations related to our closing two
underperforming restaurants, substantially offset by gains on disposal
consisting of (1) the release of $0.7 million of reserves for state income taxes
no longer required upon the expiration of a state income tax statute of
limitations and (2) the release of $0.5 million of certain other accruals as a
result of revised estimates to liquidate the remaining
liabilities. During 2005 we recorded an additional gain on disposal
of $3.3 million resulting from (1) the release of $2.8 million of reserves for
state income taxes no longer required upon the expiration of the statute of
limitations for examinations of certain of our state income tax returns and (2)
a $0.5 million gain from a sale of a former refrigeration property that
had been
held for sale and a reversal of a related reserve for potential environmental
liabilities associated with the property that were assumed by the
purchaser.
Net
Loss
Our net
loss decreased $44.3 million to $10.9 million in 2006 from $55.2 million in
2005. This decrease is due to the after-tax and applicable minority
interest effects of the variances discussed above.
Liquidity
and Capital Resources
Cash
Flows From Continuing Operating Activities
Our
consolidated operating activities from continuing operations provided cash and
cash equivalents, which we refer to in this discussion as cash, of $20.8 million
during 2007 reflecting our net income of $16.1 million and non-cash adjustments
for depreciation and amortization of $75.4 million, our share-based compensation
of $10.0 million, and straight-line rent, net of $5.9 million, all partially
offset by our $40.2 million gain from the Deerfield Sale, $33.5 million of net
operating investment adjustments and a deferred income tax benefit of $10.8
million.
In
addition, the cash provided by changes in operating assets and liabilities of
$3.5 million principally reflects a $15.0 million decrease in accounts and notes
receivable due to collections of incentive fees outstanding as of December 31,
2006 in our former asset management segment which did not recur as of December
30, 2007 due to the Deerfield Sale, partially offset by a $7.4 million decrease
in accounts payable and accrued expenses and other current liabilities due to
(1) decreases in our incentive compensation accruals as a result of the
resignation of the Former Executives and other corporate officers and employees
as part of the Corporate Restructuring and as a result of weaker than planned
performance and (2) amounts related to our former asset management segment
included in the gain on the Deerfield Sale, offset by obligations remaining
related to the Corporate Restructuring of $12.2 million.
The net
operating investment adjustments in 2007 principally reflect $37.8 million of
other net recognized gains, net of other than temporary losses, and include
realized gains on the sale of our investments of $47.7 million during 2007
offset by other than temporary losses of $9.9 million. The other than
temporary losses included $8.7 million of impairment charges on certain
investments in CDOs at our former asset management segment and $1.1 million
of impairment charges based on the significant decline in the market value of
one of our available-for-sale securities.
We expect
positive cash flows from continuing operating activities during
2008 notwithstanding the remaining charges related to the
Corporate Restructuring.
Working
Capital and Capitalization
Working
capital, which equals current assets less current liabilities, was a deficiency
of ($36.9) million at December 30, 2007, reflecting a current ratio, which
equals current assets divided by current liabilities, of
0.8:1. Working capital at December 30, 2007 decreased $198.1 million
from $161.2 million at December 31, 2006, primarily due to (1) the
reclassification of $91.8 million of net current assets in the Equities Account
as non-current in connection with our entering into an agreement with the
Management Company whereby we will not withdraw our investment from the Equities
Account prior to December 31, 2010 and (2) the payment of $72.8 million under
the Contractual Settlements and (3) dividends paid of $32.1
million.
Our total
capitalization at December 30, 2007 was $1,188.2 million, consisting of
stockholders’ equity of $448.9 million and long-term debt of $739.3 million,
including current portion. Our total capitalization at December 30,
2007 decreased $14.2 million from $1,202.4 million at December 31, 2006, as
restated for FSP AIR-1, principally reflecting (1) dividends paid of $32.1
million and (2) the components of comprehensive loss that bypass net income of
$17.0 million principally reflecting the reclassification of prior period
unrealized holding gains into net income upon our sales of available for sale
securities, all partially offset by (1) our $16.1 million net income and (2) a
$14.7 million net increase in long-term debt, including current portion and
notes payable.
Credit
Agreement
The
Credit Agreement includes the Term Loan with a remaining principal balance of
$555.1 million as of December 30, 2007 and a senior secured revolving credit
facility of $100.0 million, under which there were no borrowings as of December
30, 2007. However, the availability under the facility as of December
30, 2007 was $92.3 million, which is net of a reduction of $7.7 million for
outstanding letters of credit. Of the Term Loan balance, including
the excess cash flow payment as described below, approximately $18.8 million is
due in 2008, $6.2 million in 2009, $7.8 million in 2010, $294.5 million in 2011
and $227.8 million in 2012. The Term Loan requires prepayments of
principal amounts resulting from certain events and from excess cash flow of the
restaurant segment as determined under the Credit Agreement, which we refer to
as the Excess Cash Flow Payment. The excess cash flow calculation results in a
payment of approximately $12.5 million that is due in the first half of
2008.
Sale-Leaseback
Obligations
We have
outstanding $105.9 million of sale-leaseback obligations as of December 30,
2007, which relate to our restaurant segment and are due through 2028, of which
$2.4 million is due in 2008.
Capitalized
Lease Obligations
We have
outstanding $72.3 million of capitalized lease obligations as of December 30,
2007, which relate to our restaurant segment and extend through 2036, of which
$4.4 million is due in 2008.
Other
Long-Term Debt
We have
outstanding a secured bank term loan payable in 2008 in the amount of $2.2
million as of December 30, 2007. Additionally, we have outstanding
$1.8 million of leasehold notes as of December 30, 2007, which are due through
2018, of which $0.1 million is due in 2008.
Convertible
Notes
We have
outstanding as of December 30, 2007, $2.1 million of Convertible Notes which do
not have any scheduled principal repayments prior to 2023 and are convertible
into 52,000 shares of our class A common stock and 105,000 shares of our class B
common stock. The Convertible Notes are redeemable at our option
commencing May 20, 2010 and at the option of the holders on May 15, 2010, 2015
and 2020 or upon the occurrence of a fundamental change, as defined, relating to
us, in each case at a price of 100% of the principal amount of the Convertible
Notes plus accrued interest.
In 2006,
an aggregate of $172.9 million principal amount of the Convertible Notes was
converted or effectively converted into an aggregate of 4,323,000 shares of our
class A common stock and 8,645,000 shares of our class B common
stock. In order to induce the effective conversions, we paid
negotiated premiums aggregating $9.0 million to some converting noteholders
consisting of cash of $5.0 million and 244,000 shares of our class B common
stock with an aggregate fair value of $4.0 million based on the closing market
price of our class B common stock on the dates of the effective conversions in
lieu of cash to certain of those noteholders.
Revolving
Credit Facilities
We have $92.3
million available for borrowing under our restaurant segment’s $100.0 million
revolving credit facility as of December 30, 2007, which is net of the reduction
of $7.7 million for outstanding letters of credit noted above. The
revolving credit facility expires on July 25, 2011. In addition, our
restaurant segment has a $30.0 million conditional funding commitment for
sale-leaseback financing, of which the full amount was available as of December
30, 2007, from a real estate finance company for development and operation of
Arby’s restaurants which is cancellable on 60 days notice and expires on July
31, 2008. Additionally, AFA has $3.5 million available for borrowing
under its $3.5 million line of credit.
Debt
Repayments and Covenants
Our total
scheduled long-term debt and notes payable repayments during 2008 are $27.8
million consisting of $18.7 million under our Term Loans, including the Excess
Cash Flow Payment, $4.4 million relating to capitalized leases, $2.4 million
relating to sale-leaseback obligations, $2.2 million under our secured bank term
loan and $0.1 million under our leasehold notes.
Our
Credit Agreement contains various covenants, as amended during 2007 to make them
less restrictive, relating to our restaurant segment, the most restrictive of
which (1) require periodic financial reporting, (2) require meeting certain
leverage and interest coverage ratio tests and (3) restrict, among other
matters, (a) the incurrence of indebtedness, (b) certain asset dispositions, (c)
certain affiliate transactions, (d) certain investments, (e) certain capital
expenditures and (f) the payment of dividends indirectly to
Triarc. We were in compliance with all of these covenants as of
December 30, 2007 and we expect to remain in compliance with all of these
covenants during 2008. As of December 30, 2007 there was $5.0 million
available for the payment of dividends indirectly to Triarc under the covenants
of the Credit Agreement.
A
significant number of the underlying leases for our sale-leaseback obligations
and our capitalized lease obligations, as well as our operating leases, require
or required periodic financial reporting of certain subsidiary entities within
our restaurant segment or of individual restaurants, which in many cases has not
been prepared or reported. We have negotiated waivers and alternative
covenants with our most significant lessors which substitute consolidated
financial reporting of our restaurant segment for that of individual subsidiary
entities and which modify restaurant level reporting requirements for more than
half of the affected leases. Nevertheless, as of December 30, 2007,
we were not in compliance, and remain not in compliance, with the reporting
requirements under those leases for which waivers and alternative financial
reporting covenants have not been negotiated. However, none of the
lessors has asserted that we are in default of any of those lease
agreements. We do not believe that this non-compliance will have a
material adverse effect on our consolidated financial position or results of
operations.
Contractual
Obligations
The
following table summarizes the expected payments under our outstanding
contractual obligations at December 30, 2007:
|
|
|
Fiscal
Years
|
|
|
|
|
2008
|
|
|
|
2009-2010
|
|
|
|
2011-2012
|
|
|
After
2012
|
|
|
Total
|
|
|
|
|
(In
Millions)
|
|
|
Long-term
debt (a)
|
|
$ |
21.0 |
|
|
$ |
14.3 |
|
|
$ |
522.9 |
|
|
$ |
2.9 |
|
|
$ |
561.1 |
|
|
Sale-leaseback
obligations (b)
|
|
|
2.4 |
|
|
|
6.1 |
|
|
|
10.1 |
|
|
|
87.3 |
|
|
|
105.9 |
|
|
Capitalized
lease obligations (b)
|
|
|
4.4 |
|
|
|
10.1 |
|
|
|
8.1 |
|
|
|
49.7 |
|
|
|
72.3 |
|
|
Operating
leases (c)
|
|
|
77.5 |
|
|
|
138.8 |
|
|
|
119.4 |
|
|
|
404.6 |
|
|
|
740.3 |
|
|
Purchase
obligations (d)
|
|
|
24.7 |
|
|
|
18.5 |
|
|
|
18.9 |
|
|
|
35.6 |
|
|
|
97.7 |
|
|
Severance
obligations (e)
|
|
|
11.3 |
|
|
|
0.7 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
12.2 |
|
|
Total
(f)
|
|
$ |
141.3 |
|
|
$ |
188.5 |
|
|
$ |
679.6 |
|
|
$ |
580.1 |
|
|
$ |
1,589.5 |
|
|
(a)
|
Includes
in 2008, the excess cash flow payment of $12.5 million; excludes
sale-leaseback and capitalized lease obligations, which are shown
separately in the table, and
interest.
|
|
(b)
|
Excludes
interest; also excludes related sublease rental receipts of $10.8 million
on sale-leaseback obligations and $3.6 million on capitalized lease
obligations, respectively.
|
|
(c)
|
Represents
the future minimum rental obligations, including $37.6 million of
unfavorable lease amounts included in “Other liabilities” in our
consolidated balance sheet as of December 30, 2007 which will reduce our
rent expense in future periods. Also, these amounts have not
been decreased by $50.1 million of related sublease rental obligations due
to us.
|
|
(d)
|
Includes
(1) an approximate $73.4 million remaining obligation for our
Company-owned restaurants to purchase PepsiCo, Inc. beverage products
under an agreement to serve PepsiCo beverage products in all of our
Company-owned and franchised restaurants, (2) $22.9 million of purchase
obligations for expected future capital expenditures and (3) $1.4 million
of other purchase obligations.
|
|
(e)
|
Represents
severance for two former senior executives and severance and consulting
fees with respect to our New York headquarters employees in connection
with the Corporate Restructuring.
|
|
(f)
|
Excludes
Financial Accounting Standards Board Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes,” which we refer to as “FIN 48”,
obligations of $12.3 million. The Company is unable to predict
when, and if, payment of any of this accrual will be
required.
|
Guarantees
and Commitments
Our
wholly-owned subsidiary, National Propane Corporation, which we refer to as
National Propane, retains a less than 1% special limited partner interest in our
former propane business, now known as AmeriGas Eagle Propane, L.P., which we
refer to as AmeriGas Eagle. National Propane agreed that while it
remains a special limited partner of AmeriGas Eagle, National Propane would
indemnify the owner of AmeriGas Eagle for any payments the owner makes related
to the owner’s obligations under certain of the debt of AmeriGas Eagle,
aggregating approximately $138.0 million as of December 30, 2007, if AmeriGas
Eagle is unable to repay or refinance such debt, but only after recourse by the
owner to the assets of AmeriGas Eagle. National Propane’s principal
asset is an intercompany note receivable from Triarc in the amount of $50.0
million as of December 30, 2007. We believe it is unlikely that we
will be called upon to make any payments under this indemnity. Prior
to 2005, AmeriGas Propane, L.P., which we refer to as AmeriGas Propane,
purchased all of the interests in AmeriGas Eagle other than National Propane’s
special limited partner interest. Either National Propane or AmeriGas
Propane may require AmeriGas Eagle to repurchase the special limited partner
interest. However, we believe it is unlikely that either party would
require repurchase prior to 2009 as either AmeriGas Propane would owe us tax
indemnification payments if AmeriGas Propane required the repurchase or we would
accelerate payment of deferred taxes of $35.9 million as of December 30, 2007,
including $34.5 million associated with the gain on sale of the propane business
and the remainder associated with other tax basis differences, prior to 2005, of
our propane business if National Propane required the repurchase. As
of December 30, 2007, we have net operating loss tax carryforwards sufficient to
offset substantially all of the remaining deferred taxes.
RTM
guarantees the lease obligations of 10 RTM restaurants formerly operated by
affiliates of RTM as of December 30, 2007, which we refer to as the Affiliate
Lease Guarantees. The RTM selling stockholders have indemnified us
with respect to the guarantee of the remaining lease obligations. Our
obligation related to 13 additional leases operated by affiliates of RTM was
released during 2007 in conjunction with their assignment and/or
termination. In addition, RTM remains contingently liable for 17
leases for restaurants sold by RTM prior to the RTM Acquisition if the
respective purchasers do not make the required lease payments. Our
obligation related to 4 additional leases that had been sold by RTM prior to the
RTM Acquisition was released during 2007 in conjunction with their assignment
and/or termination. All of these lease obligations, which extend
through 2025, including all existing extension or renewal option periods, could
aggregate a maximum of approximately $18.0 million as of December 30, 2007,
including approximately $14.0 million under the Affiliate Lease Guarantees,
assuming all scheduled lease payments have been made by the respective tenants
through December 30, 2007.
During
January 2008, we purchased 41 existing franchised Arby’s restaurants for an
aggregate net purchase price of approximately $15.0 million, including the
payment of approximately $9.2 million of cash and an assumption of approximately
$5.8 million of debt. Prior to the closing of the purchase, we were
the sublessor for approximately 27 of the locations that were
purchased.
AFA
incurred costs in December for a national advertising event which resulted in
advertising expenses in excess of dues collected for 2007. To
partially fund the deficit resulting from the December 2007 advertising event,
Arby’s prepaid an aggregate of $3.5 million of its 2008 dues to AFA in January
2008. The prepayment will be recouped by reducing future payments of
dues by our restaurant segment to AFA, with the total expected to be recouped
before the end of the 2008 third quarter.
Capital
Expenditures
In 2007, cash
capital expenditures amounted to $73.0 million and non-cash capital expenditures
consisting of capitalized leases and certain sale-leaseback obligations, which
we refer to as “Non-Cash Capital Expenditures”, amounted to $14.5
million. In 2008, we expect that cash capital expenditures will be
approximately $56.0 million, and Non-Cash Capital Expenditures will be
approximately $33.0 million, and will principally relate to (1) the opening of
an estimated 50 new Company-owned restaurants, (2) remodeling some of our
existing restaurants and (3) maintenance capital expenditures for our
Company-owned restaurants. We have $22.9 million of outstanding
commitments for capital expenditures as of December 30, 2007, of which $15.9
million is expected to be paid in 2008.
Deerfield
Sale
On
December 21, 2007, we sold our 63.6% capital interest in Deerfield, our former
asset management business, to the REIT. The Deerfield Sale resulted in proceeds
to us aggregating $134.6 million consisting of (1) 9,629,368 preferred shares,
which we refer to as the “Preferred Stock,” of the REIT with an estimated fair
value of $88.4 million before expenses of the sale and the amount excluded from
the gain as described below and (2) $48.0 million principal amount of senior
secured notes of the REIT due 2012, which we refer to as the “REIT Notes,” with
an estimated fair value of $46.2 million. The Preferred Stock contains a
mandatory redemption feature seven years after their issuance and, as such, are
being accounted for as available-for-sale debt securities. The Deerfield Sale
resulted in an approximate pretax gain of $40.2 million, net of the $6.9 million
unrecognized gain due to our continuing interest in the REIT, and is net of $2.3
million of related fees and expenses. The recorded gain on the date of sale
excluded $7.7 million that we could not recognize because of our then
approximate 16% continuing interest in Deerfield through our ownership of the
Preferred Stock and common stock of the REIT we already owned. As a result of
the subsequent distribution of the 1,000,000 REIT common shares previously owned
by the Company, our ownership in the REIT decreased to approximately 15% and we
recognized $0.8 million of the originally unrecognized gain. The fees and
expenses include $0.8 million representing a portion of the additional fees that
are attributable to our utilization of Management Company personnel in
connection with the provision of services in excess of the amount originally
contemplated by the parties under the Services Agreement. Expenses
related to the Deerfield Sale incurred after September 30, 2007 are being paid
either by Deerfield or from a $0.3 million fund paid by the REIT to us at
closing, as the representative of the sellers. The payment of those expenses
remain a liability of ours but should they not be paid by the REIT, we are
entitled to be reimbursed for any payments made by us on their
behalf. The proceeds are subject to finalization of a post-closing
purchase price adjustment, if any, pursuant to provisions of the Deerfield Sale
agreement.
In
response to unanticipated credit and liquidity events in 2008, the REIT
announced that it is repositioning its investment portfolio to focus on agency
only mortgage-backed securities and on fee-based management
activities. In addition, the REIT announced that during the first
quarter of 2008, its portfolio was adversely impacted by the further
deterioration of the global credit markets and that, as a result, it has sold a
significant portion of its mortgage-backed securities and significantly reduced
the net notional amount of interest rate swaps used to hedge a portion of its
mortgage-backed securities, all at a net loss of approximately $233.0 million to
the REIT.
We are
currently evaluating the impact these changes in the REIT’s investment holdings
will have on the fair value and carrying value of our various investments in the
REIT. We continue to monitor the situation in order to determine
whether it will be necessary to record future impairment charges with respect to
our investments in the REIT.
Dividends
During
2007 we paid regular quarterly cash dividends of $0.08 and $0.09 per share on
our class A and class B common stock, respectively, aggregating $32.1
million. On January 30, 2008, we declared regular quarterly cash
dividends of $0.08 and $0.09 per share on our class A common stock and class B
common stock, respectively, payable on March 14, 2008 to holders of record on
March 1, 2008. Our board of directors has determined that regular
quarterly cash dividends paid on each share of class B common stock will be at
least 110% of the regular quarterly cash dividends paid on each share of class A
common stock through the first fiscal quarter of 2008, but has not yet made any
similar determination beyond that date. We currently intend to
continue to declare and pay regular quarterly cash dividends; however, there can
be no assurance that any regular quarterly dividends will be declared or paid in
the future or of the amount or timing of such dividends, if any. If
we pay regular quarterly cash dividends for the remainder of 2008 at the same
rate as declared in our 2008 first quarter and do not pay any special cash
dividends, our total cash requirement for dividends for all of 2008 would be
approximately $32.2 million based on the number of our class A and class B
common shares outstanding at February 15, 2008.
Income
Taxes
The
statute of limitations for examination by the Internal Revenue Service, which we
refer to as the IRS, of our Federal income tax return for the year ended
December 28, 2003 expired during 2007 and years prior thereto are no longer
subject to examination. Our Federal income tax returns for years
subsequent to December 28, 2003 are not currently under examination by the IRS
although some of our state income tax returns are currently under
examination. We have received notices of proposed tax adjustments
aggregating $4.1 million in connection with certain of these state income tax
returns. However, we have disputed these notices and, accordingly,
cannot determine
the ultimate amount of any resulting tax liability or any related interest and
penalties.
Treasury
Stock Purchases
Our
management is currently authorized, when and if market conditions warrant and to
the extent legally permissible, to repurchase through December 28, 2008 up to a
total of $50.0 million of our class A and class B common stock. We
did not make any treasury stock purchases during 2007 and we cannot assure you
that we will repurchase any shares under this program in the
future.
Universal
Shelf Registration Statement
Prior to
2005, 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 any offered securities, we anticipate using the net
proceeds of each offering for general corporate purposes, including financing of
acquisitions and capital expenditures, additions to working capital and
repayment of existing debt. We have not presently made any decision
to issue any specific securities under this universal shelf registration
statement.
Cash
Requirements
Our
consolidated cash requirements for continuing operations for 2008, exclusive of
operating cash flow requirements, consist principally of (1) cash capital
expenditures of approximately $56.0 million, (2) a maximum of an aggregate $50.0
million of payments for repurchases, if any, of our class A and class B common
stock for treasury under our current stock repurchase program, (3) regular
quarterly cash dividends aggregating approximately $32.2 million, (4) scheduled
debt principal repayments aggregating $27.8 million, including the Excess Cash
Flow Payment, (5) the costs of any business acquisitions, including the $9.2
million cash portion of the purchase price of 41 restaurants purchased in
January 2008 and (6) any additional prepayments under our Credit
Agreement. We anticipate meeting all of these requirements through
(1) cash flows from continuing operating activities, (2) borrowings under our
restaurant segment’s revolving credit facility of which $92.3 million is unused
as of December 30, 2007, (3) the $30.0 million conditional funding commitment
for sale-leaseback financing from the real estate finance company, all of which
is unused as of December 30, 2007 and (4) proceeds from sales, if any, of up to
$2.0 billion of our securities under the universal shelf registration
statement.
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 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 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 Packing’ environmental consultant and during 2004 the work under that
plan was completed. Adams Packing submitted its contamination
assessment report to the FDEP in March 2004. In August 2004, the FDEP
agreed to a monitoring plan consisting of two sampling events which occurred in
January and June 2005 and the results were submitted to the FDEP for its
review. In November 2005, Adams Packing received a letter from the
FDEP identifying certain open issues with respect to the
property. The letter did not specify whether any further actions are
required to be taken by Adams Packing. Adams Packing sought
clarification from the FDEP in order to attempt to resolve this
matter. On May 1, 2007, the FDEP sent a letter clarifying their prior
correspondence and reiterated the open issues identified in their November 2005
letter. In addition, the FDEP offered Adams Packing the option of
voluntarily taking part in a recently adopted state program that could lessen
site clean up standards, should such a clean up be required after a mandatory
further study and site assessment report. We, our consultants and our
outside counsel are presently reviewing this option and no decision has been
made on a course of action based on the FDEP’s offer. In January
2008, Adams Packing replied to the FDEP requesting an extension of time to April
30, 2008 to respond to the May 1, 2007 letter while Adams Packing continues to
work on potential solutions to the matter. Nonetheless, based on
amounts spent prior to 2006 of $1.7 million for all of these costs and after
taking into consideration various legal defenses available to us, including
Adams Packing, we expect that the final resolution of this matter will not have
a material effect on our financial position or results of
operations.
In
addition to the environmental matter described above, we are involved in other
litigation and claims incidental to our current and prior
businesses. We and our subsidiaries have reserves for all of our
legal and environmental matters aggregating $0.7 million as of December 30,
2007. Although the outcome of these matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to us, based
on currently available information, including legal defenses available to us
and/or our subsidiaries, and given the aforementioned reserves and our insurance
coverages, 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.
Application
of Critical Accounting Policies
The
preparation of our consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions in applying our critical
accounting policies that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Our estimates and assumptions
concern, among other things, uncertainties for tax, legal and environmental
matters, the valuations of some of our investments and impairment of long-lived
assets. We evaluate those estimates and assumptions on an ongoing
basis based on historical experience and on various other factors which we
believe are reasonable under the circumstances.
We
believe that the following represent our more critical estimates and assumptions
used in the preparation of our consolidated financial statements:
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Recognition
of income tax benefits and estimated accruals for the resolution of income
tax matters which are subject to future examinations of our Federal and
state income tax returns by the Internal Revenue Service or state taxing
authorities, including remaining provisions included in “Current
liabilities relating to discontinued operations” in our consolidated
balance sheets:
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Effective
January 1, 2007, we adopted
Financial Accounting Standards Board, which we refer to as the FASB,
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, which
we refer to as “FIN 48”. As a result, we now measure income
tax uncertainties in accordance with a two-step process of evaluating a tax
position. We first determine if it is more likely than not that a tax
position will be sustained upon examination based on the technical merits of the
position. A tax position that meets the more-likely-than-not
recognition threshold is then measured as the largest amount that has a greater
than fifty percent likelihood of being realized upon effective
settlement. With the adoption of FIN 48, at January 1, 2007 we
recognized an increase in our reserves for uncertain income tax positions of
$4.8 million, an increase in our liability for interest of $0.5 million and an
increase in our liability for penalties of $0.2 million related to uncertain
income tax positions. These increases were partially offset by
an increase in a deferred income tax benefit of $3.2 million. There
was also a reduction in the tax related liabilities of discontinued operations
of $0.1 million. The net effect of all these adjustments was a
decrease in retained earnings of $2.2 million. The Company has
unrecognized tax benefits of $13.2 million and $12.3 million at January 1, 2007
and December 30, 2007.
The
Company recognizes interest accrued related to uncertain tax positions in
“Interest expense” and penalties in “General and administrative expenses,
excluding depreciation and amortization”. At January 1, 2007 and
December 30, 2007 the Company had $1.8 million and $3.4 million accrued for the
payment of interest and $0.2 million and $0.2 million accrued for penalties,
both respectively.
Our
Federal income tax returns are not currently under examination by the Internal
Revenue Service although certain of our state income tax returns are currently
under examination. We believe that adequate provisions have been made
for any liabilities, including interest and penalties, that may result from the
completion of these examinations. To the extent uncertain tax
positions pertaining to the former beverage businesses that we sold in October
2000 are determined to be less than or in excess of the amounts included in
“Current liabilities relating to discontinued operations” in the accompanying
consolidated balance sheets, any such material difference will be recorded at
that time as a component of gain or loss on disposal of discontinued
operations.
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Reserves
which total $0.7 million at December 30, 2007 for the resolution of all of
our legal and environmental matters as discussed immediately above under
“Legal and Environmental Matters”:
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Should
the actual cost of settling these matters, whether resulting from adverse
judgments or otherwise, differ from the reserves we have accrued, that
difference will be reflected in our results of operations when the matter is
resolved or when our estimate of the cost changes.
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Valuations
of some of our investments:
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Our
investments in marketable securities are valued principally based on quoted
market prices, broker/dealer prices or statements of account received from
investment managers which are principally based on quoted market or
broker/dealer prices. Accordingly, we do not anticipate any
significant changes from the valuations of these marketable
investments. Our other investments accounted for under the cost
method are valued almost entirely based on statements of account received from
the investment managers or the investees which are principally based on quoted
market or broker/dealer prices. To the extent that some of these
investments, including the underlying investments in investment limited
partnerships, do not have available quoted market or broker/dealer prices, we
rely on unobservable inputs (that are not corroborated by observable market
data) that reflect assumptions market participants would use in pricing the
investment. These inputs are subjective and thus subject to estimates
which could change significantly from period to period. Those changes
in estimates in these cost investments would be recognized only to the extent of
losses which are deemed to be other than temporary. The total
carrying value of the cost investments not valued based on quoted market or
broker/dealer prices was approximately $4.2 million as of December 30,
2007. In addition, we have an $8.5 million cost investment in
Jurlique, an Australian company not publicly traded, for which we currently
believe the carrying amount is recoverable as a result of the sale during 2006
of a portion of our investment in Jurlique at a higher valuation than that
reflected in the carrying value. We also have $1.3 million of
non-marketable cost investments in securities for which it is not practicable to
estimate fair value because the investments are non-marketable and are
principally in start-up enterprises for which we currently believe the carrying
amount is recoverable.
Our
investment in the preferred stock of the REIT received in connection with the
Deerfield Sale is currently non-marketable; however, it is mandatorily
redeemable in seven years from issuance. We value that investment, less the
unrecognized portion of the gain due to our continuing ownership in the REIT,
based on the quoted market price of the common shares of the REIT into which
those preferred shares are convertible on a one-for-one basis upon approval by
the REIT common shareholders. The REIT filed a preliminary Form S-3
with the Securities and Exchange Commission in January 2008 in order to register
the preferred shares it issued in connection with the Deerfield Sale. We
anticipate that the REIT’s shareholders will approve the conversion of the
preferred stock into common stock at a shareholder meeting during the first
quarter of 2008.
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Provision
for uncollectible notes receivable:
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The repayment of the $48.0 million principal amount of notes receivable due in
2012 received in connection with the Deerfield Sale and the payment of related
interest are dependent on the cash flow of the REIT including
Deerfield. The REIT’s investment portfolio is comprised primarily of
fixed income investments, including mortgage-backed securities and corporate
debt and its activities also include the asset management business of Deerfield.
Among the factors that may affect the REIT’s ability to continue to pay the
notes receivable and related interest is the current dislocation in the
sub-prime mortgage sector and the current weakness in the broader financial
market, both of which could adversely affect the REIT and one or more of its
lenders, which could result in increases in its borrowing costs, reductions in
its liquidity and reductions in the value of its investments in its portfolio,
all of which could reduce cash flows and may result in an impairment charge or a
provision for uncollectible notes receivable. In initially
determining the fair value of those notes, we made estimates of the projected
future cash flows of the REIT, including Deerfield, which indicated that the
notes and related interest would be collectible.
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Provisions
for unrealized losses on certain investments deemed to be other than
temporary:
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We review
all of our investments that have unrealized losses for any that we might deem
other than temporary. The losses we have recognized were deemed to be
other than temporary due to declines in the market value of or liquidity
problems associated with specific securities. This includes the
underlying investments of any of our investment limited partnerships and similar
investment entities in which we have an overall unrealized loss. This
process is subjective and subject to estimation. In determining
whether an investment has suffered an other than temporary loss, we consider
such factors as the length of time the carrying value of the investment was
below its market value, the severity of the decline, the investee’s financial
condition and the prospect for future recovery in the market value of the
investment, including our ability and intent to hold the investments for a
period of time sufficient for a forecasted recovery. The use of
different judgments and estimates could affect the determination of which
securities suffered an other than temporary loss and the amount of that
loss. We have aggregate unrealized holding losses on our
available-for-sale marketable securities of $11.1 million almost solely related
to the REIT Preferred Stock, as of December 30, 2007 which, if not recovered,
may result in the recognition of future losses. Also, should any of
our investments accounted for under the cost method totaling approximately $14.0
million experience declines in value due to conditions that we deem to be other
than temporary, we may recognize additional other than temporary
losses. We have permanently reduced the cost basis component of the
investments for which we have recognized other than temporary losses of $1.5
million, $4.1 million and $9.9 million during 2005, 2006 and 2007,
respectively. As such, recoveries in the value of investments, if
any, and to the extent they remain in our portfolio after the Deerfield Sale,
will not be recognized in income until the investments are sold.
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Provisions
for impairment of goodwill and long-lived
assets:
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As of
December 30, 2007, our goodwill of $468.8 million relates entirely to our
restaurant segment, of which $451.2 million is associated with the Company-owned
restaurant operating unit with the balance associated with our franchising
unit. We test the goodwill of each of our Company-owned restaurant
and restaurant franchising business reporting units for impairment
annually. We recognize a goodwill impairment charge, if any, for any
excess of the net carrying amount of the respective goodwill over the implied
fair value of the goodwill. The implied fair value of the goodwill is
determined in the same manner as the existing goodwill was determined
substituting the fair value for the cost of the reporting unit. The
fair value of each reporting unit has been estimated to be the present value of
the anticipated cash flows associated with that reporting unit. The
recoverability of the goodwill in 2005, 2006 and 2007 was based on estimates we
made regarding the present value of the anticipated cash flows associated with
each reporting unit. Those estimates are subject to change as a
result of many factors including, among others, any changes in our business
plans, changing economic conditions and the competitive
environment. Should actual cash flows and our future estimates vary
adversely from those estimates we used, we may be required to recognize goodwill
impairment charges in future years. Further, fair value of the
reporting unit can be determined under several different methods, of which
discounted cash flows is one alternative. Had we utilized an
alternative method, the amount of any potential goodwill impairment charge might
have differed significantly from the amounts as determined. Based
upon our analyses of the fair values of our reporting units, we did not record
any goodwill impairment in 2005, 2006 or 2007.
We review
our long-lived assets, other than goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If that review indicates an asset may not be
recoverable based upon forecasted, undiscounted cash flows, an impairment loss
is recognized for the excess of the carrying amount over the fair value of the
asset. The fair value is estimated to be the present value of the
associated cash flows. Our critical estimates in this review process
include the anticipated future cash flows of each of our Company-owned
restaurants used in assessing the recoverability of their respective long-lived
assets. We recognized related impairment losses of $1.9 million, $5.5 million
and $7.0 million in 2005, 2006 and 2007, respectively, of which $0.9 million,
$3.6 million and $1.8 million of the losses in 2005, 2006 and 2007,
respectively, related to long-lived assets of certain restaurants which were
determined to not be fully recoverable. Of the remaining losses, $0.5
million, $0.4 million and $0.8 million in 2005, 2006 and 2007, respectively,
related to the TJ Cinnamons brand. In addition, $0.5 million, $1.5
million and $1.4 million of the losses in 2005, 2006 and 2007, respectively,
related to the write-off of the value of asset management
contracts. The remaining loss in 2007 consisted of a $3.0
million write-off of an internally developed financial model that our asset
management segment did not use and was subsequently sold. The fair
values of the impaired assets were estimated to be the present value of the
anticipated cash flows associated with each affected Company-owned restaurant,
the trademark and the asset management contracts. Those estimates are
or were subject to change as a result of many factors including, among others,
any changes in our business plans, changing economic conditions and the
competitive environment. Should actual cash flows and our future
estimates vary adversely from those estimates we used, we may be required to
recognize additional impairment charges in future years. Further,
fair value of the long-lived assets can be determined under several different
methods, of which discounted cash flows is one alternative. Had we
utilized an alternative method, the amounts of the respective impairment charges
might have differed significantly from the charges reported. As of
December 30, 2007, the remaining net carrying value of the Company-owned
restaurant long-lived assets were $474.1 million. We no longer have
any asset management contracts following the Deerfield Sale. The Company-owned
restaurant long-lived assets could require testing for impairment should future
events or changes in circumstances indicate they may not be
recoverable.
Our
estimates of each of these items historically have been adequate. Due
to uncertainties inherent in the estimation process, it is reasonably possible
that the actual resolution of any of these items could vary significantly from
the estimate and, accordingly, there can be no assurance that the estimates may
not materially change in the near term.
Inflation
and Changing Prices
We
believe that inflation did not have a significant effect on our consolidated
results of operations during 2005, 2006 and 2007 since inflation rates generally
remained at relatively low levels.
Seasonality
Our
continuing operations are not significantly impacted by
seasonality. However, our restaurant revenues are somewhat lower in
our first quarter. Prior to the Deerfield Sale, our asset management
business was not directly affected by seasonality, but our asset management
revenues generally were higher in our fourth quarter as a result of our revenue
recognition accounting policy for incentive fees related to the Funds which were
based upon performance and were recognized when the amounts became fixed and
determinable upon the close of a performance period. As discussed above in
“Asset Management and Related Fees” under “Results of Operations—2007 Compared
with 2006,” we experienced a decrease in the level of our incentive fees during
2007.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements,” which we refer to as SFAS 157. SFAS
157 addresses issues relating to the definition of fair value, the methods used
to measure fair value and expanded disclosures about fair value
measurements. SFAS 157 does not require any new fair value
measurements. The definition of fair value in SFAS 157 focuses on the
price that would be received to sell an asset or paid to transfer a liability,
not the price that would be paid to acquire an asset or received to assume a
liability. The methods used to measure fair value should be based on
the assumptions that market participants would use in pricing an asset or a
liability. SFAS 157 expands disclosures about the use of fair value
to measure assets and liabilities in interim and annual periods subsequent to
adoption. The FASB has issued several proposed FASB Staff Positions,
which we refer to as FSPs, that give further guidance related to SFAS 157;
however, none of these FSPs have been finalized at this time. The
FASB has issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13, ” which we refer to as FSP FAS 157-1, which states that SFAS 157
does not apply under Statement of Financial Accounting Standards No. 13,
“Accounting for Leases,” which we refer to as SFAS 13 and other accounting
pronouncements that address fair value measurements for purposes of lease
classification or measurement under SFAS 13. In addition, the FASB
issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157,” which we refer
to as FSP FAS 157-2. FAS 157-2 defers the application of FAS 157 to
nonfinancial assets and nonfinancial liabilities, as defined, for those items
that are recognized or disclosed at fair value in an entity’s financial
statement on a recurring basis which is defined as at least annually, until our
2009 fiscal year. SFAS 157 is, with some limited exceptions, to be
applied prospectively and is effective commencing with our first fiscal quarter
of 2008 ,with the exception of the areas under which exemptions to or deferrals
of the application of certain aspects of FAS 157 have been granted by the FSPs
mentioned above. Our adoption of SFAS 157 in the
first quarter of 2008 will not result in any change in the methods we use to
measure the fair value of those financial assets and liabilities we currently
hold that require measurement at fair value. We will, however, be
required to present the expanded fair value disclosures of SFAS 157, as amended
by the FSP FAS 157-2, commencing in the first quarter of 2008.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement No. 115,” which we refer to as SFAS
159. SFAS 159 does not mandate but permits the measurement of many
financial instruments and certain other items at fair value in order to provide
reporting entities the opportunity to mitigate volatility in reported earnings,
without having to apply complex hedge accounting provisions, caused by measuring
related assets and liabilities differently. SFAS 159 will require the
reporting of unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. SFAS 159 will also require expanded disclosures related to its
application. SFAS 159 is effective commencing with our first fiscal
quarter of 2008. We do not expect to elect the fair value option
described in SFAS 159 for financial instruments and certain other items upon its
initial adoption. We will, however, adopt the provisions of SFAS 159 which
relate to the amendment of FASB Statement No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” which applies to all entities with
available-for-sale and trading securities in the first quarter of
2008. These provisions of SFAS 159 require separate presentations of
the fair value of available for sale securities and trading
securities. In addition, cash flows from trading security
transactions will be classified based on the nature and purpose for which the
securities were acquired. We do not expect that adopting these
provisions will have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(revised 2007), “Business Combinations,” which we refer to as SFAS141(R), and
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51,” which we
refer to as SFAS 160. These statements change the way companies
account for business combinations and noncontrolling interests by, among other
things, requiring (1) more assets and liabilities to be measured at fair value
as of the acquisition date, including a valuation of the entire company being
acquired regardless of percentage being acquired, (2) an acquirer in
preacquisition periods to expense all acquisition-related costs and (3)
noncontrolling interests in subsidiaries initially to be measured at fair value
and classified as a separate component of equity. These statements
are to be applied prospectively beginning with our 2009 fiscal
year. However, SFAS 160 requires entities to apply the presentation
and disclosure requirements retrospectively for all periods
presented. Both standards prohibit early
adoption. Together these statements are not currently expected to
have a significant impact on our consolidated financial statements, with the
exception of the effect from the application of SFAS 160 on certain of our
historical consolidated financial statements whereby minority interests in
consolidated subsidiaries, which are currently reported as a liability, will be
reclassified as a component of stockholders’ equity. A significant
impact may, however, result from any future business
acquisitions. The amounts of such impact will depend upon the nature
and terms of such future acquisitions, if any.
Item
7A. Quantitative and
Qualitative Disclosures about Market Risk.
Certain
statements we make under this Item 7A constitute “forward-looking statements”
under the Private Securities Litigation Reform Act of 1995. See
“Special Note Regarding Forward-Looking Statements and Projections” in “Part I”
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.
Interest
Rate Risk
Our
objective in managing our exposure to interest rate changes is to limit their
impact on our earnings and cash flows. We have historically used
interest rate cap and/or interest rate swap agreements on a portion of our
variable-rate debt to limit our exposure to the effects of increases in
short-term interest rates on our earnings and cash flows. As of
December 30, 2007 our long-term debt, including current portion, aggregated
$739.3 million and consisted of $557.2 million of variable-rate debt, $178.2
million of capitalized lease and sale-leaseback obligations and $3.9 million of
fixed-rate debt. At December 30, 2007, we have $555.1 million of term
loan borrowings outstanding under a variable-rate senior secured term loan
facility due through 2012. The term loan currently bears interest at
the London Interbank Offered Rate (LIBOR) plus 2.25%. In connection
with the terms of the related credit agreement, we have three interest rate swap
agreements that fix the LIBOR component of the interest rate at 4.12%, 4.56% and
4.64% on $100.0 million, $50.0 million and $55.0 million, respectively, of the
outstanding principal amount until September 30, 2008, October 30, 2008 and
October 30, 2008, respectively. The expiration of these interest rate
swap agreements during 2008 could have a material impact on our interest
expense; however, we cannot determine any potential impact at this time because
it is dependent on (1) our entry into future swap agreements and (2) the
direction and magnitude of any changes in the variable interest rate
environment. The interest rate swap agreements related to the term
loans were designated as cash flow hedges and, accordingly, are recorded at fair
value with changes in fair value recorded through the accumulated other
comprehensive income (loss) component of stockholders’ equity in our
accompanying consolidated balance sheet to the extent of the effectiveness of
these hedges. There was no ineffectiveness from these hedges through
December 30, 2007. If a hedge or portion thereof is determined to be
ineffective, any changes in fair value would be recognized in our results of
operations. In addition, we continue to have an interest rate swap
agreement, with an embedded written call option, in connection with our
variable-rate bank loan of which $2.2 million principal amount was outstanding
as of December 30, 2007 and is due in 2008, which effectively establishes a
fixed interest rate on this debt so long as the one-month LIBOR is below
6.5%. We did not have any interest rate cap agreements outstanding as
of December 30, 2007. The fair value of our fixed-rate debt will
increase if interest rates decrease. The fair market value of our
investments in fixed-rate debt securities will decline if interest rates
increase. See below for a discussion of how we manage this
risk.
Commodity
Price Risk
We
purchase certain food products, such as beef, poultry, pork and cheese, that are
affected by changes in commodity prices and, as a result, we are subject to
variability in our food costs. Our ability to recover increased costs
through higher pricing is, at times, limited by the competitive environment in
which we operate. Management monitors our exposure to commodity price
risk. However, we do not enter into financial instruments to hedge
commodity prices or hold any significant inventories of these
commodities. In order to ensure favorable pricing for beef, poultry,
pork, cheese and other food products, as well as maintain an adequate supply of
fresh food products, a purchasing cooperative with our franchisees negotiates
contracts with approved suppliers on behalf of the Arby's
system. These contracts establish pricing arrangements, and
historically have limited the variability of these commodity costs, but do not
establish any firm purchase commitments by us or our franchisees.
Equity
Market Risk
Our
objective in managing our exposure to changes in the market value of our
investments is to balance the risk of the impact of these changes on our
earnings and cash flows with our expectations for long-term investment
returns. Our primary exposure to equity price risk relates to our
investments in equity securities, investment limited partnerships and similar
investment entities and equity derivatives. Our board of directors
has established certain policies and procedures governing the type and relative
magnitude of investments we may make. We have a capital and
investment committee that is comprised of the Chairman and Vice Chairman of our
Board of Directors and our Chief Executive Officer, which supervises the
investment of certain funds not currently required for our
operations. It has delegated the discretionary authority to our Chief
Executive Officer to make certain investment decisions. Any decisions
which the Chief Executive Officer cannot make within his authority must be made
by the committee or the Board of Directors.
Foreign
Currency Risk
Our
objective in managing our exposure to foreign currency fluctuations is to limit
the impact of these fluctuations on earnings and cash flows. As of December 30,
2007, our primary exposure to foreign currency risk related to our cost-method
investment in Jurlique International Pty Ltd., an Australian company which we
refer to as Jurlique. On July 5, 2007 the put and call arrangement
whereby we had limited the overall foreign currency risk on our investment in
Jurlique matured. In connection with the maturity, we made a net
payment of $1.3 million. We currently have exposure to foreign
currency risk related to our entire remaining investment in Jurlique, which has
a carrying
value of $8.5 million. To a more limited extent, we have exposure to
foreign currency risk relating to our investments in certain investment limited
partnerships and similar investment entities that hold foreign securities and a
total return swap with respect to a foreign equity security. The
fixed payment reflected in the total return swap is denominated in the same
foreign currency as the underlying security thereby also mitigating the foreign
currency risk. We monitor these exposures and periodically determine
our need for the use of strategies intended to lessen or limit our exposure to
these fluctuations. We also have a relatively limited amount of
exposure to (1) investments in one foreign subsidiary and (2) export revenues
and related receivables denominated in foreign currencies, both of which are
subject to foreign currency fluctuations. Our foreign subsidiary
exposures relate to administrative operations in Canada and our export revenue
exposures relate to royalties earned from Arby’s franchised restaurants in
Canada. Foreign operations and foreign export revenues for both of
the years ended December 31, 2006 and December 30, 2007 together represented
only 4%, of our total franchise revenues and represented less than 1% of our
total revenues. Accordingly, an immediate 10% change in foreign
currency exchange rates versus the United States dollar from their levels at
December 31, 2006 and December 30, 2007 would not have a material effect on our
consolidated financial position or results of
operations.
Overall
Market Risk
Our
overall market risk as of December 30, 2007 includes the investments which we
received in connection with the Deerfield Sale as well as the investments in
accounts, which we refer to collectively as the Equities Account, that are
managed by a management company formed by certain former executives, which we
refer to as the “Management Company.”
At
December 30, 2007, as a result of the Deerfield Sale, we hold approximately 9.6
million shares of convertible preferred stock of the REIT with a carrying value
of approximately $70.4 million, which we refer to as the REIT Preferred Stock,
approximately $46.2 million in senior secured notes of the REIT, which we refer
to as the REIT Notes and, and approximately 206,000 shares of common stock of
the REIT, which we refer to as the REIT Common Stock, with a carrying value of
approximately $1.9 million. On an as-if converted basis, these investments would
represent approximately 14.7% of the REIT’s outstanding common stock. As of
December 30, 2007, the aggregate carrying value of our investment in REIT is
approximately $118.5 million. Our investment in the REIT Preferred Stock is
currently non-marketable; however, it is mandatorily redeemable in seven years
from issuance. We value the REIT Preferred Stock based on the quoted
market price of the REIT common stock into which it
is convertible. If those shares should decline in value other
than on a temporary basis, which would relate to our investment in both the REIT
Preferred Stock and the REIT Common Stock, then in the reporting period in which
it is determined that the decline is other than temporary all or a portion of
the decline would be required to be included in our results of operations and
cash flow. The payment of the REIT Notes and related interest are
dependent on the cash flow of the REIT. The REIT’s investment portfolio is
comprised primarily of fixed income investments, including mortgage-backed
securities and corporate debt. Among the factors that may affect the
REIT’s ability to pay the REIT Notes and related interest are the current
dislocation in the mortgage sector and the current weakness in the broader
financial market, both of which could adversely affect the REIT and one or more
of their lenders, which could result in increases in their borrowing costs,
reductions in their liquidity and reductions in the value of the investments in
their portfolio, all of which could reduce the REIT’s cash
flow. That, in turn, could result in an impairment charge by us or a
provision by us for uncollectible notes receivable.
Our
Equities Account investments are primarily in underperforming companies which
the Management Company believes provide opportunity for increases in fair value
and in cash equivalents. In order to partially mitigate the exposure
of the portfolio to market risk, the Management Company employs a hedging
program which utilizes a put option on a market index. In December
2005 we invested $75.0 million in the Equities Account, and in April 2007, as
part of the agreements with the Former Executives, we entered into an agreement
under which the Management Company will continue to manage the Equities Account
until at least December 31, 2010, we will not withdraw our investment from the
Equities Account prior to December 31, 2010 and, beginning January 1, 2008, we
will pay management and incentive fees to the Management Company in an amount
customary for other unaffiliated third party investors with similarly sized
investments. The Equities Account is invested principally in the
equity securities of a limited number of publicly-traded companies, cash
equivalents and equity derivatives and had a fair value of $99.3 million as of
December 30, 2007. As of December 30, 2007, the derivatives held in
our Equities Account investment portfolio consisted of (1) a put option on a
market index, (2) a total return swap on an equity security and (3) put and call
option combinations on equity securities. 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
balanced our exposure to overall market risk in 2006 by investing a portion of
our portfolio in cash and cash equivalents with relatively stable and
risk-minimized returns. In addition, through September 29, 2006 we
had an investment in a multi-strategy hedge fund, the Opportunities Fund, which
was managed by a then subsidiary of ours, and was consolidated by us with
minority interests to the extent of participation by investors other than
us. As a result of the effective redemption on September 29, 2006 of
our investment in the Opportunities Fund, we no longer consolidated the accounts
of this fund subsequent to that date, and therefore no longer bore the
associated risks as of September 30, 2006.
We
maintain investment holdings of various issuers, types and
maturities. As of December 31, 2006 and December 30, 2007, these
investments were classified in our consolidated balance sheets as follows (in
thousands):
|
|
|
Year-End
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Cash
equivalents included in “Cash” in our consolidated balance
sheets
|
|
$ |
124,455 |
|
|
$ |
60,466 |
|
|
Current
restricted cash equivalents
|
|
|
9,059 |
|
|
|
- |
|
|
Short-term
investments
|
|
|
122,118 |
|
|
|
2,608 |
|
|
Investment
settlements receivable
|
|
|
16,599 |
|
|
|
252 |
|
|
Non-current
restricted cash equivalents
|
|
|
1,939 |
|
|
|
45,295 |
|
|
Non-current
investments
|
|
|
60,197 |
|
|
|
141,909 |
|
|
|
|
$ |
334,367 |
|
|
$ |
250,530 |
|
|
|
|
|
|
|
|
|
|
|
|
Certain
liability positions related to investments included in “Accrued expenses”
in 2006 and “Other liabilities” in 2007:
|
|
|
|
|
|
|
|
|
|
Investment
settlements payable
|
|
$ |
(12 |
) |
|
|
|
|
|
Derivatives
in liability positions
|
|
|
(160 |
) |
|
$ |
(310 |
) |
|
|
|
$ |
(172 |
) |
|
$ |
(310 |
) |
Our cash
equivalents are short-term, highly liquid investments with maturities of three
months or less when acquired and consisted principally of cash in bank money
market and mutual fund money market accounts, cash in interest-bearing brokerage
and bank accounts and commercial paper of high credit-quality
entities.
At
December 31, 2006 our investments were classified in the following general types
or categories (in thousands):
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
|
Type
|
|
At
Cost
|
|
|
At
Fair Value (a)
|
|
|
Amount
|
|
|
Percent
|
|
|
Cash
equivalents (b)
|
|
$ |
124,455 |
|
|
$ |
124,455 |
|
|
$ |
124,455 |
|
|
|
37%
|
|
|
Investment
settlements receivable
|
|
|
16,599 |
|
|
|
16,599 |
|
|
|
16,599 |
|
|
|
5%
|
|
|
Current
and non-current restricted cash equivalents
|
|
|
10,998 |
|
|
|
10,998 |
|
|
|
10,998 |
|
|
|
3%
|
|
|
Investments
accounted for as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities (c)
|
|
|
79,642 |
|
|
|
101,762 |
|
|
|
101,762 |
|
|
|
31%
|
|
|
Trading
securities
|
|
|
272 |
|
|
|
273 |
|
|
|
273 |
|
|
|
-%
|
|
|
Non-current
investments held in deferred compensation trusts accounted for at
cost
|
|
|
13,409 |
|
|
|
22,718 |
|
|
|
13,409 |
|
|
|
4%
|
|
|
Other
current and non-current investments in investment limited partnerships and
similar investment entities accounted for at cost
|
|
|
24,812 |
|
|
|
38,856 |
|
|
|
24,812 |
|
|
|
8%
|
|
|
Other
current and non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
14,386 |
|
|
|
17,687 |
|
|
|
14,386 |
|
|
|
4%
|
|
|
Equity
|
|
|
20,289 |
|
|
|
34,684 |
|
|
|
24,639 |
|
|
|
7%
|
|
|
Fair
value
|
|
|
2,997 |
|
|
|
3,034 |
|
|
|
3,034 |
|
|
|
1%
|
|
|
Total
cash equivalents and long investment positions
|
|
$ |
307,859 |
|
|
$ |
371,066 |
|
|
$ |
334,367 |
|
|
|
100%
|
|
|
Certain
liability positions related to investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
settlements payable
|
|
$ |
(12 |
) |
|
$ |
(12 |
) |
|
$ |
(12 |
) |
|
|
N/A
|
|
|
Derivatives
in liability positions
|
|
|
(2 |
) |
|
|
(160 |
) |
|
|
(160 |
) |
|
|
N/A
|
|
|
|
|
$ |
(14 |
) |
|
$ |
(172 |
) |
|
$ |
(172 |
) |
|
|
|
|
|
(a)
|
There
was no assurance at December 30, 2006 that we would have been able to sell
certain of these investments at these
amounts.
|
|
(b)
|
Included
$1.9 million of cash equivalents held in deferred compensation
trusts
|
|
(c)
|
Fair
value and carrying value included $8.2 million of preferred shares of
CDOs, which, if sold, would have required us to use the proceeds to repay
our related notes payable of $4.6 million. Those amounts also
included $15.4 million of unrealized gain with respect to an investment in
one thinly-traded equity
security.
|
At
December 30, 2007 our investments were classified in the following general types
or categories (in thousands):
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
|
Type
|
|
At
Cost
|
|
|
At
Fair Value (a)(b)
|
|
|
Amount
|
|
|
Percent
|
|
|
Cash
equivalents
|
|
$ |
60,466 |
|
|
$ |
60,466 |
|
|
$ |
60,466 |
|
|
|
24%
|
|
|
Investment
settlements receivable
|
|
|
252 |
|
|
|
252 |
|
|
|
252 |
|
|
|
-%
|
|
|
Current
and non-current investments accounted for as available-for-sale securities
(c)
|
|
|
124,587 |
|
|
|
121,054 |
|
|
|
121,055 |
|
|
|
48%
|
|
|
Other
current and non-current investments in investment limited partnerships and
similar investment entities accounted for at cost
|
|
|
2,085 |
|
|
|
2,342 |
|
|
|
2,085 |
|
|
|
1%
|
|
|
Other
current and non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
11,908 |
|
|
|
16,456 |
|
|
|
11,908 |
|
|
|
5%
|
|
|
Equity
|
|
|
1,888 |
|
|
|
1,651 |
|
|
|
1,862 |
|
|
|
1%
|
|
|
Fair
value
|
|
|
5,936 |
|
|
|
7,607 |
|
|
|
7,607 |
|
|
|
3%
|
|
|
Non-current
restricted cash equivalents
|
|
|
45,295 |
|
|
|
45,295 |
|
|
|
45,295 |
|
|
|
18%
|
|
|
Total
cash equivalents and long investment positions
|
|
$ |
252,417 |
|
|
$ |
255,123 |
|
|
$ |
250,530 |
|
|
|
100%
|
|
|
Certain
liability positions related to investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
in liability positions
|
|
$ |
- |
|
|
$ |
(310 |
) |
|
$ |
(310 |
) |
|
|
N/A
|
|
|
(a)
|
There
can be no assurance that we would be able to sell certain of these
investments at these amounts.
|
|
(b)
|
Includes
fair value of $48.1 million of non-current available-for-sale securities,
$7.6 million non-current investment derivatives, $0.3 million non-current
cost investments, $43.4 million of the restricted cash equivalents net of
$0.3 million non-current derivatives in liability positions that are being
managed in the Equities Account by the Management Company until at least
December 31, 2010.
|
|
(c)
|
In
addition to the Equities Account information included in footnote (b),
non-current investments accounted for as available-for-sale securities
includes $70.4 million of the carrying and fair value of REIT Preferred
Stock, net of unrecognized gain.
|
Our
marketable securities are reported at fair market value and are classified and
accounted for as “available-for-sale” or “trading securities” with the resulting
net unrealized holding gains or losses, net of income taxes, reported as a
separate component of comprehensive income or loss bypassing net income or as a
component of net income or loss. 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 unrealized holding gains or losses,
net of income taxes, are reported as a component of net income or
loss. 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 a non-current investment in the
common stock of the REIT in both fiscal 2006 and 2007 and included Encore in
2006 and 2007 until we disposed of substantially all of our interest in May
2007. 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 tables 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
December 31, 2006 and December 30, 2007 for which an immediate adverse market
movement causes a potential material impact on our financial position or results
of operations. We believe that the adverse market movements described below
represent the hypothetical loss to future earnings and do not represent the
maximum possible loss nor any expected actual loss, even under adverse
conditions, because actual adverse fluctuations would likely differ. In
addition, since our investment portfolio is subject to change based on our
portfolio management strategy as well as market conditions, these estimates are
not necessarily indicative of the actual results which may
occur.
The
following tables reflect the estimated market risk exposure as of December 31,
2006 and December 30, 2007 (we have no trading securities in our investments as
of December 30, 2007) based upon assumed immediate adverse effects as noted
below (in thousands):
Trading
Purposes:
|
|
|
Year-End
2006
|
|
|
|
|
Carrying
Value
|
|
|
Equity
Price Risk
|
|
|
Equity
securities
|
|
$ |
273 |
|
|
$ |
(27 |
) |
|
Trading
derivatives in liability positions
|
|
|
(2 |
) |
|
|
(3 |
) |
The
sensitivity analysis of financial instruments held for trading purposes assumes
an instantaneous 10% adverse change in the equity markets in which we are
invested from their levels at December 31, 2006 with all other variables held
constant.
Other
Than Trading Purposes:
|
|
|
Year-End
2006
|
|
|
|
|
Carrying
Value
|
|
|
Interest
Rate Risk
|
|
|
Equity
Price Risk
|
|
|
Foreign
Currency Risk
|
|
|
Cash
equivalents
|
|
$ |
124,455 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
Investment
settlements receivable
|
|
|
16,599 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Restricted
cash equivalents
|
|
|
10,998 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Available-for-sale
equity securities
|
|
|
77,710 |
|
|
|
- |
|
|
$ |
(7,771 |
) |
|
|
|
|
|
Available-for-sale
preferred shares of CDOs
|
|
|
14,903 |
|
|
|
(1,344 |
) |
|
|
- |
|
|
$ |
(73 |
) |
|
Available-for-sale
debt mutual fund
|
|
|
9,149 |
|
|
|
(229 |
) |
|
|
- |
|
|
|
- |
|
|
Investment
in Jurlique
|
|
|
8,504 |
|
|
|
- |
|
|
|
(850 |
) |
|
|
(603 |
) |
|
Other
investments
|
|
|
71,776 |
|
|
|
(2,199 |
) |
|
|
(5,209 |
) |
|
|
(149 |
) |
|
Interest
rate swaps in an asset position
|
|
|
2,570 |
|
|
|
(3,252 |
) |
|
|
- |
|
|
|
- |
|
|
Foreign
currency put and call arrangement in a net liability
position
|
|
|
(449 |
) |
|
|
- |
|
|
|
- |
|
|
|
(935 |
) |
|
Investment
settlements payable
|
|
|
(12 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Put
and call option combinations on equity securities
|
|
|
(158 |
) |
|
|
- |
|
|
|
(1,300 |
) |
|
|
- |
|
|
Notes
payable and long-term debt, excluding capitalized lease and sale-leaseback
obligations
|
|
|
(576,972 |
) |
|
|
(24,646 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
Year-End
2007
|
|
|
|
|
Carrying
Value
|
|
|
Interest
Rate Risk
|
|
|
Equity
Price Risk
|
|
|
Foreign
Currency Risk
|
|
|
Cash
equivalents
|
|
$ |
60,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
settlements receivable
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|