Business Context and Reporting Period
Company: Triarc Companies, Inc. (Parent of Arby's Restaurant System)
Filing Type: Form 10-K
Period Ended: December 30, 2001
Business Overview: Triarc operates as a holding company and the franchisor of the Arby's restaurant system, specializing in roast beef sandwiches. The company owns no restaurants; all 3,351 units are operated by franchisees. Revenue is derived primarily from franchise royalties (average rate of 3.3%) and up-front franchise fees. The company also holds significant investment assets and cash reserves following the sale of its beverage business in 2000.
Key Financial Metrics
| Metric | 2001 (in millions) | 2000 (in millions) |
|---|---|---|
| Total Revenues & Investment Income | $136.8 | $119.4 |
| Royalties and Franchise Fees | $92.3 | $87.2 |
| Investment Income, Net | $33.6 | $30.7 |
| Net Income | $52.4 | $441.2 |
| Income from Continuing Operations | $9.0 | $(10.2) |
| Income from Discontinued Operations | $43.5 | $472.1 |
| Working Capital | $556.6 | $596.3 |
| Total Assets | $868.4 | $1,067.4 |
| Long-Term Debt | $289.0 | $291.7 |
| Cash, Equivalents & Investments | $694.0 | $886.3 |
Note: 2000 Net Income was significantly inflated by a $481.0 million gain on the sale of the beverage business (discontinued operations). 2001 Net Income includes a $43.5 million adjustment to the gain on that sale.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% to $136.8 million, driven by a 6% increase in royalties/franchise fees and a 9% increase in investment income.
- Continuing Operations Turnaround: Income from continuing operations improved from a loss of $10.2 million in 2000 to a profit of $9.0 million in 2001. This reversal was primarily due to the absence of a $26.0 million capital market transaction compensation charge incurred in 2000.
- Discontinued Operations: Income from discontinued operations dropped significantly from $472.1 million in 2000 to $43.5 million in 2001. The 2000 figure included the bulk of the gain from the Snapple/Royal Crown sale, while 2001 reflected only post-closing adjustments.
- Interest Expense: Interest expense surged to $30.4 million in 2001 from $4.8 million in 2000, largely due to the full-year impact of $290 million in securitization notes issued in late 2000.
- Restaurant Count: Net increase of 32 restaurants (131 opened, 99 closed), bringing the total to 3,351 units.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook
- Cash Position: Management holds approximately $694 million in cash and investments. Options under evaluation include acquisitions, share repurchases, and further investments.
- 2002 Expectations: Management anticipates continued growth in royalties and franchise fees, though at a lower rate than 2001. Franchise fee revenue is expected to decline in 2002 due to fewer new openings and reduced forfeited deposits.
- Investment Income: Expected to be significantly lower in 2002 compared to 2001 due to the maturity of high-yield government agency debt and reinvestment into lower-yielding money market funds.
Risks and Contingencies
- Snapple Post-Closing Adjustment: A dispute exists with Cadbury Schweppes regarding the final purchase price adjustment. Cadbury claims Triarc owes $27.6 million; Triarc claims it is owed $5.6 million. Arbitration is ongoing, with resolution expected in late 2002.
- Franchisee Bankruptcy: Sybra, Inc., the second-largest franchisee (accounting for ~8% of royalties), filed for Chapter 11 bankruptcy in February 2002. Management does not expect a material adverse effect but notes the loss of future development commitments.
- Environmental Liability: A vacant property owned by a subsidiary (Adams Packing) was listed on the EPA's CERCLIS list for suspected contamination. Remediation costs are currently indeterminable but could be significant.
- Legal Proceedings: Pending class-action lawsuits regarding a 1999 tender offer and derivative suits regarding executive compensation.
Unusual Items
- Stock Repurchases: Completed the final tranche of a contract to repurchase all Class B common stock from the Posner entities for $43.8 million in August 2001.
- Executive Settlement: Received a $5.0 million note from executives in settlement of a class-action lawsuit regarding compensation, recorded as a reduction of general and administrative expenses.
Investor Verification Checklist
- Snapple Arbitration Outcome: Verify the final determination of the post-closing adjustment with Cadbury, as the liability could range from a $5.6 million receivable to a $27.6 million payable.
- Franchisee Stability: Monitor the impact of Sybra, Inc.'s bankruptcy on royalty collections and future store development commitments.
- Investment Yield: Assess the impact of the shift from high-yield government debt to money market funds on future investment income.
- Environmental Costs: Track the EPA investigation into the Adams Packing property for potential remediation liabilities.
- Debt Covenants: Confirm continued compliance with the debt service coverage ratio (1.6:1 as of year-end) required by the Arby's Franchise Trust securitization notes.