UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
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: 0-20286
RC/ARBY'S CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2277791
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Corporate Drive, Fort Lauderdale, Florida 33334
---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(954) 351-5100
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
As of October 31, 1997, all of the voting stock of the registrant
(consisting of 1,000 shares of common stock, $1.00 par value) was held by the
registrant's parent, CFC Holdings Corp.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 28,
1996 (A) 1997 (Note 1)
-------- ------------
ASSETS (In thousands)
(Unaudited)
Current assets:
Cash and cash equivalents........................... $ 7,411 $ 13,553
Receivables, net.................................... 35,151 36,454
Note receivable from affiliate...................... 1,650 2,000
Inventories......................................... 12,110 6,989
Assets held for sale................................ 71,116 -
Deferred income tax benefit......................... 8,568 8,568
Prepaid expenses and other current assets........... 6,761 2,961
---------- ---------
Total current assets.............................. 142,767 70,525
Properties, net ...................................... 11,943 9,569
Unamortized costs in excess of net assets
of acquired companies............................... 159,123 154,828
Deferred income tax benefit........................... 24,231 24,333
Deferred costs and other assets....................... 22,380 20,654
---------- ---------
$ 360,444 $ 279,909
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt................... $ 73,055 $ 1,861
Notes payable to affiliates......................... 13,765 4,950
Accounts payable.................................... 24,027 9,995
Accrued expenses.................................... 61,744 49,745
---------- ---------
Total current liabilities......................... 172,591 66,551
Long-term debt........................................ 281,110 279,872
Note payable to affiliate............................. 6,700 -
Deferred income and other liabilities................. 14,011 17,178
Minority interest..................................... - 2,552
Stockholder's equity (deficit):
Common stock........................................ 1 1
Additional paid-in capital.......................... 44,300 73,740
Accumulated deficit................................. (158,269) (159,985)
---------- ---------
Total stockholder's deficit....................... (113,968) (86,244)
---------- ---------
$ 360,444 $ 279,909
========== =========
(A) Derived from the audited consolidated financial statements as of December
31, 1996.
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
--------------------------- ---------------------------
September 30, September 28, September 30, September 28,
1996 1997 (Note 1) 1996 1997 (Note 1)
------------- ------------- ------------- -------------
(In thousands)
(Unaudited)
Revenues:
Net sales.................. $103,655 $ 32,960 $310,796 $187,894
Royalties, franchise fees
and other revenues........ 14,896 17,942 41,873 47,583
-------- -------- -------- --------
118,551 50,902 352,669 235,477
-------- -------- -------- --------
Costs and expenses:
Cost of sales............... 64,375 6,837 193,837 90,447
Advertising, selling and
distribution.............. 26,362 18,109 76,960 60,585
General and administrative.. 19,241 15,286 56,967 49,427
Facilities relocation and
corporate restructuring... - 587 - 7,310
-------- -------- -------- --------
109,978 40,819 327,764 207,769
-------- -------- -------- --------
Operating profit........... 8,573 10,083 24,905 27,708
Interest expense.............. (10,823) (7,961) (32,453) (27,350)
Other income, net............. 270 957 744 578
-------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
charge................... (1,980) 3,079 (6,804) 936
Benefit from (provision for)
income taxes................ 154 (2,567) 798 (852)
-------- -------- -------- --------
Income (loss) before
extraordinary charge..... (1,826) 512 (6,006) 84
Extraordinary charge.......... - - - (1,800)
-------- -------- -------- --------
Net income (loss).......... $ (1,826) $ 512 $ (6,006) $ (1,716)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
---------------------------
September 30, September 28,
1996 1997 (Note 1)
------------ -------------
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net loss............................................ $(6,006) $(1,716)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of properties...... 10,519 1,458
Amortization of costs in excess of net assets
of acquired companies and other intangibles..... 6,748 5,321
Amortization of deferred financing costs......... 1,799 1,643
Write-off of unamortized deferred financing costs - 2,950
Provision for facilities relocation and
corporate restructuring......................... - 7,310
Payments on facilities relocation and
corporate restructuring......................... - (5,268)
Loss on sales of businesses, net................. - 1,839
Provision for doubtful accounts.................. 702 567
Other, net....................................... (1,023) (1,552)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables................................... (10,488) 1,811
Inventories................................... 2,168 2,593
Prepaid expenses and other current assets..... (316) 3,331
Decrease in accounts payable
and accrued expenses.......................... (591) (25,277)
------- -------
Net cash provided by (used in) operating activities... 3,512 (4,990)
------- -------
Cash flows from investing activities:
Proceeds from sales of properties and businesses.... 910 3,188
Capital expenditures................................ (12,557) (1,858)
Business acquisitions............................... (3,697) -
------- -------
Net cash provided by (used in) investing activities... (15,344) 1,330
------- -------
Cash flows from financing activities:
Capital contribution................................ - 6,211
Net borrowings from affiliates...................... 7,190 7,285
Repayments of long-term debt........................ (5,387) (3,694)
Proceeds from issuance of long-term debt............ 5,777 -
Payment of deferred financing costs................. (181) -
------- -------
Net cash provided by financing activities............. 7,399 9,802
------- -------
Net increase (decrease) in cash....................... (4,433) 6,142
Cash at beginning of period........................... 9,744 7,411
------- -------
Cash and cash equivalents at end of period............ $ 5,311 $13,553
======= =======
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997
(Unaudited)
(1) Basis of Presentation
RC/Arby's Corporation ("RCAC" or, collectively with its subsidiaries, the
"Company") is a direct wholly-owned subsidiary of CFC Holdings Corp. ("CFC
Holdings") and an indirect wholly-owned subsidiary of Triarc Companies, Inc.
("Triarc"). The Company's principal wholly-owned subsidiaries are Arby's, Inc.
("Arby's") and Royal Crown Company, Inc. ("Royal Crown"). Additionally, the
Company has three wholly-owned subsidiaries which owned and/or operated Arby's
restaurants through May 4, 1997, Arby's Restaurant Development Corporation
("ARDC"), Arby's Restaurant Holding Company ("ARHC") and Arby's Restaurant
Operations Company ("AROC").
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of the Company,
however, the accompanying condensed consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of December 31, 1996 and
September 28, 1997 and its results of operations for the three-month and
nine-month periods ended September 30, 1996 and September 28, 1997 and its
cash flows for the nine-month periods ended September 30, 1996 and September
28, 1997 (see below). This information should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 (the "Form
10-K").
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, in 1997 the Company's third
quarter commenced on June 30 and ended on September 28 and the nine months
ended September 28 commenced on January 1 and are referred to herein as the
three-month and nine-month periods ended September 28, 1997, respectively. The
fourth quarter of 1997 will consist of 13 weeks ending December 28.
Certain amounts included in the prior comparable periods' condensed
consolidated financial statements have been reclassified to conform with the
current periods' presentation.
(2) Significant 1997 Transactions
Sales of Businesses
On May 5, 1997 certain of the principal subsidiaries comprising the
Company's restaurant segment sold to an affiliate of RTM, Inc. ("RTM"), the
largest franchisee in the Arby's system, all of the 355 company-owned Arby's
restaurants (the "RTM Sale"). The sales price consisted of cash and a
promissory note (discounted value) aggregating $1,379,000 and the assumption
by RTM of an aggregate $54,620,000 in mortgage and equipment notes payable and
$14,955,000 in capitalized lease obligations. RTM now operates the 355
restaurants as a franchisee and pays royalties to the Company at a rate of 4%
of those restaurants' net sales effective May 5, 1997. In the fourth quarter
of 1996 the Company recorded a charge to reduce the carrying value of the
long-lived assets associated with the restaurants sold (reported as "Assets
held for sale" in the accompanying condensed consolidated balance sheet as of
December 31, 1996) to their estimated fair values and, in the second quarter
of 1997, recorded a $2,342,000 loss on the sale (included in "Other income,
net"), which includes a $1,457,000 provision for the fair value of future
lease commitments and debt repayments assumed by RTM for which the Company or
5
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
Triarc remains contingently liable if the payments are not made by RTM. The
results of operations of the sold restaurants have been included in the
accompanying condensed consolidated statements of operations until the May 5,
1997 date of sale. Following the sale of all of its company-owned Arby's
restaurants, the Company continues as the franchisor of the Arby's system.
On July 18, 1997, the Company completed the sale (the "C&C Sale" and,
together with the RTM Sale, the "Sales") of its rights to the C&C beverage
line of mixers, colas and flavors, including the C&C trademark and equipment
related to the operation of the C&C beverage line, to Kelco Sales & Marketing
Inc. ("Kelco"), for the proceeds of $750,000 in cash and an $8,650,000 note
(the "Kelco Note") with a discounted value of $6,003,000 consisting of
$3,623,000 relating to the C&C Sale and $2,380,000 relating to future
revenues. The $2,380,000 of deferred revenues consists of (i) $2,096,000
relating to minimum take-or-pay commitments for sales of concentrate for C&C
products to Kelco and (ii) $284,000 relating to future technical services to
be performed for Kelco by the Company, both under a contract with Kelco. The
excess of the proceeds of $4,373,000 over the carrying value of the C&C
trademark of $1,575,000 and the related equipment of $2,000 resulted in a
pre-tax gain of $2,796,000 which is being recognized commencing in the third
quarter of 1997 pro rata between the gain on sale and the carrying value of
the assets sold based on the cash proceeds and collections under the Kelco
Note since realization of the Kelco Note is not yet fully assured.
Accordingly, a gain of $503,000 was recognized in "Other income, net" in the
accompanying condensed consolidated statements of operations for the three
months and nine months ended September 28, 1997.
The following unaudited pro forma condensed consolidated statements of
operations of the Company for the year ended December 31, 1996 and the nine
months ended September 28, 1997 have been prepared by adjusting such
statements of operations as derived and condensed, as applicable, from (i) the
consolidated statement of operations in the Form 10-K and (ii) the condensed
consolidated statement of operations appearing herein, respectively, to give
effect to the Sales as if the Sales had been consummated as of January 1,
1996. Such pro forma information does not purport to be indicative of the
Company's actual results of operations had the Sales actually been consummated
on January 1, 1996 or of the Company's future results of operations and are as
follows (in thousands):
6
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
For the Year Ended December 31, 1996
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Revenues:
Net sales.................................... $409,100 $(228,031)(a) $169,906
444 (g)
(11,607)(h)
Royalties, franchise fees and other revenues.. 57,252 9,121 (b) 66,433
60 (g)
-------- -------- --------
466,352 (230,013) 236,339
-------- -------- --------
Costs and expenses:
Cost of sales................................ 252,811 (187,535)(a) 55,156
178 (g)
(10,298)(h)
Advertising, selling and distribution........ 102,535 (24,764)(a) 76,069
(1,702)(h)
General and administrative................... 77,339 (9,913)(a) 66,992
(434)(h)
Reduction in carrying value of long-lived
assets impaired or to be disposed of........ 58,900 (58,900)(a) -
Facilities relocation and corporate
restructuring............................... 6,350 (2,400)(a) 3,950
-------- -------- --------
497,935 (295,768) 202,167
-------- -------- --------
Operating profit (loss)..................... (31,583) 65,755 34,172
Interest expense............................... (42,883) 8,421 (c) (32,171)
2,564 (d)
(273)(g)
Other income, net.............................. 562 16 (h) 1,261
683 (j)
-------- -------- --------
Income (loss) before income taxes........... (73,904) 77,166 3,262
Benefit from (provision for) income taxes...... 23,346 (29,403)(f) (6,635)
(578)(k)
-------- -------- --------
Net loss.................................... $(50,558) $ 47,185 $ (3,373)
======== ======== ========
7
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
For the Nine Months Ended September 28, 1997
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Revenues:
Net sales.................................... $187,894 $(74,195)(a) $106,823
243 (g)
(7,119)(h)
Royalties, franchise fees and other revenues.. 47,583 2,968 (b) 50,584
33 (g)
-------- -------- --------
235,477 (78,070) 157,407
-------- -------- --------
Costs and expenses:
Cost of sales................................ 90,447 (59,127)(a) 25,004
96 (g)
(6,412)(h)
Advertising, selling and distribution........ 60,585 (8,145)(a) 52,039
(401)(h)
General and administrative................... 49,427 (3,319)(a) 45,815
(293)(h)
Facilities relocation and corporate
restructuring............................... 7,310 (5,597)(a) 1,713
-------- -------- --------
207,769 (83,198) 124,571
-------- -------- --------
Operating profit............................ 27,708 5,128 32,836
Interest expense............................... (27,350) 2,756 (c) (23,636)
1,110 (d)
(152)(g)
Other income, net.............................. 578 1,798 (e) 2,323
69 (h)
(503)(i)
381 (j)
-------- -------- --------
Income before income taxes and
extraordinary charge...................... 936 10,587 11,523
Provision for income taxes..................... (852) (4,133)(f) (4,971)
14 (k)
-------- -------- --------
Income before extraordinary charge.......... $ 84 $ 6,468 $ 6,552
======== ======== ========
- -----------------
RTM Sale Pro Forma Adjustments:
(a)To reflect the elimination of the sales, cost of sales, advertising,
selling and distribution expenses and allocated general and administrative
expenses, the reduction in carrying value of long-lived assets impaired or
to be disposed of for the year ended December 31, 1996 related to the sold
restaurants and the portion of the facilities relocation and corporate
restructuring charge associated with restructuring the restaurant segment
in connection with the RTM Sale. The allocated general and administrative
expenses reflect the portion of the Company's total general and
administrative expenses allocable to the operating results associated with
the restaurants sold as determined by management of the Company. Such
allocated amounts consist of (i) salaries, bonuses, travel and
entertainment expenses, supplies, training and other expenses related to
area managers who had responsibility for the day-to-day operation of the
sold restaurants and (ii) the portion of general corporate overhead (e.g.
accounting, human resources, marketing, etc.) estimated to be avoided as
8
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
a result of the Company no longer operating restaurants. Since the Company
no longer owns any Arby's restaurants but continues to operate as the
Arby's franchisor, it undertook a reorganization of its restaurant segment
eliminating 65 positions in its corporate and field administrative offices
and significantly reducing leased office space. The effect of the elimina-
tion of income and expenses of the sold restaurants is significantly
greater in the year ended December 31, 1996 as compared with the nine months
ended September 28, 1997 principally due to two 1996 eliminations which
did not recur in the 1997 period for (i) the $58,900,000 reduction in
carrying value of long-lived assets associated with the restaurants sold
and (ii) depreciation and amortization on the long-lived restaurant assets
sold, which had been written down to their estimated fair values as of
December 31, 1996 and were no longer depreciated or amortized while they
were held for sale.
(b)To reflect royalties on the sales of the sold restaurants through the May 5,
1997 RTM Sale date at the rate of 4%.
(c)To reflect a reduction to interest expense relating to the debt assumed by
RTM.
(d)To reflect a reduction to interest expense representing the interest
expense recorded during each of the periods presented through the May 5,
1997 RTM Sale date (i) on the demand note payable to Triarc by the Company
of which the entire then outstanding balance of $23,150,000 was forgiven by
Triarc on May 5, 1997 in partial consideration for the issuance of stock of
ARHC and AROC to Triarc and (ii) on $6,500,000 of a note payable to Triarc
due February 1998 repaid on May 5, 1997, both in connection with the RTM
Sale.
(e)To reflect the elimination of the $2,342,000 loss on sale of restaurants
and a $544,000 (only the portion related to the restaurant headquarters)
gain on termination of a portion of the Fort Lauderdale, Florida
headquarters lease for space no longer required by the restaurant segment
as a result of the RTM Sale recorded in the nine months ended September 28,
1997.
(f)To reflect the income tax effects of the above at the incremental income
tax rate of 38.9%.
C&C Sale Pro Forma Adjustments:
(g)To reflect through the date of the C&C Sale (i) realization of deferred
revenues based on the portion of the minimum take-or-pay commitment for
sales of concentrate for C&C products to Kelco to be fulfilled and fees
related to the technical services to be performed, both under the contract
with Kelco, (ii) imputation of interest expense on the deferred revenues
and (iii) recognition of the estimated cost of the concentrate to be sold.
(h)To reflect the elimination of sales, cost of sales, advertising, selling
and distribution expenses, general and administrative expenses and other
expense related to the C&C beverage line.
(i)To reflect the elimination of the $503,000 gain on the C&C Sale recorded in
the nine months ended September 28, 1997.
(j)To reflect accretion of the discount on the Kelco Note.
(k)To reflect the income tax effects of the above at the incremental income
tax rate of 36.6%.
9
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
Spinoff
In October 1996 Triarc had announced that its Board of Directors approved
a plan to offer up to approximately 20% of the shares of its beverage and
restaurant businesses (including those of the Company) to the public through
an initial public offering and to spin off the remainder of the shares of such
businesses to Triarc stockholders (collectively, the "Spinoff Transactions").
In May 1997 Triarc announced that it would not proceed with the Spinoff
Transactions as a result of its acquisition of Snapple Beverage Corp. and
other complex issues.
(3) Inventories
The following is a summary of the components of inventories (in
thousands):
December 31, September 28,
1996 1997
------------ -------------
Raw materials.................................. $ 8,184 $ 3,930
Work in process................................ 467 505
Finished goods................................. 3,459 2,554
--------- ---------
$ 12,110 $ 6,989
========= =========
(4) Properties
The following is a summary of the components of properties, net (in
thousands):
December 31, September 28,
1996 1997
------------ -------------
Properties, at cost............................ $ 29,082 $ 21,248
Less accumulated depreciation and amortization. 17,139 11,679
--------- ---------
$ 11,943 $ 9,569
========= =========
(5) Facilities Relocation and Corporate Restructuring
The facilities relocation and corporate restructuring charge in the
nine-month period ended September 28, 1997 principally consists of employee
severance and related termination costs and employee relocation associated
with restructuring the restaurant segment in connection with the RTM Sale and,
to a lesser extent (but comprising the entire charge in the three-month period
ended September 28, 1997), costs associated with the relocation of the Fort
Lauderdale, Florida headquarters of Royal Crown, which have been centralized
in the White Plains, New York headquarters of Mistic Brands, Inc., a
wholly-owned subsidiary of Triarc.
(6) Related Party Transactions
The Company continues to have certain related party transactions with
Triarc and its subsidiaries of the nature and general magnitude (except for
borrowings from and advances to affiliates and related interest set forth
below) as those described in Note 15 to the consolidated financial statements
contained in the Form 10-K. Details of the Company's promissory notes
10
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
payable to Triarc and one of its subsidiaries, Chesapeake Insurance Company
Limited ("Chesapeake Insurance"), and a note receivable from Triarc are as
follows (in thousands):
Interest December 31, September 28,
Affiliated Entity Rate Maturity 1996 1997
----------------- ---- -------- ------------ -------------
Notes payable to:
Chesapeake Insurance 9 1/2% June 1998 $ 1,750 $ 1,250
Triarc 11 7/8% February 1998 6,700 200
Triarc 11 7/8% Demand 12,015 3,500
-------- -------
Total notes payable to affiliates 20,465 4,950
Less amounts payable within one year 13,765 4,950
-------- -------
$ 6,700 $ -
======== =======
Note receivable from
Triarc 11 7/8% Demand $ 1,650 $ 2,000
======== =======
Interest expense on notes payable to Triarc and its subsidiaries amounted
to $2,150,000 and $1,291,000 for the nine months ended September 30, 1996 and
September 28, 1997, respectively. Interest income on the note receivable from
Triarc amounted to $212,000 and $171,000 for the nine months ended September
30, 1996 and September 28, 1997, respectively, and is included in "Other
income, net" in the accompanying condensed consolidated statements of
operations.
In connection with the RTM Sale, ARHC and AROC issued 950 common shares
(approximately 49% of the common stock after such issuances) each to Triarc in
exchange for cash of $6,211,000 and forgiveness of the then outstanding amount
of $23,150,000 plus related accrued interest of $2,638,000 under the demand
note payable to Triarc as of May 5, 1997. Triarc's 49% interest in the equity
of ARHC and AROC is reported as "Minority interest" in the accompanying
condensed consolidated balance sheet as of September 28, 1997. The excess of
$29,440,000 of the consideration for the stock issued to Triarc of $31,999,000
over such minority interest of $2,559,000 as of May 5, 1997 was accounted for
as a capital contribution and is reflected in "Additional paid-in capital".
The 49% minority interest in the losses of ARHC and AROC for the nine months
ended September 28, 1997 amounted to $7,000 and is included in "Other income,
net" in the accompanying condensed consolidated statements of operations. Also
in connection with the RTM Sale, the Company repaid $6,500,000 of the
$6,700,000 note due February 1998 to Triarc.
(7) Extraordinary Charge
The Company recognized an extraordinary charge of $1,800,000 in the second
quarter of 1997 consisting of the write-off of previously unamortized deferred
financing costs of $2,950,000 net of income tax benefit of $1,150,000 in
connection with the assumption by RTM of $54,620,000 of the mortgage and
equipment notes payable associated with the sold restaurants.
(8) Income Taxes
The Federal income tax returns of Triarc and its subsidiaries, including
the Company, have been examined by the Internal Revenue Service ("IRS") for
the tax years 1989 through 1992 and the IRS had issued notices of proposed
11
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
adjustments prior to 1997 relating to the Company increasing taxable income by
approximately $13,000,000. Triarc, on behalf of the Company, has resolved
approximately $10,000,000 of such proposed adjustments and in connection
therewith, the Company paid $4,576,000, including interest, in November 1997,
which amount had been fully reserved in prior years. The Company intends to
contest the unresolved adjustments of approximately $3,000,000 at the
appellate division of the IRS. The Company believes that adequate aggregate
provisions have been made in 1997 and prior years for any tax liabilities,
including interest, that may result from such examination and other tax
matters.
(9) Contingencies
On February 19, 1996, Arby's Restaurants S.A. de C.V. ("AR"), the master
franchisee of Arby's in Mexico, commenced an action in the civil court of
Mexico against Arby's for breach of contract. AR alleged that a non-binding
letter of intent dated November 9, 1994 between AR and Arby's constituted a
binding contract pursuant to which Arby's had obligated itself to repurchase
the master franchise rights from AR for $2,850,000 and that Arby's had
breached a master development agreement with AR. Arby's commenced an
arbitration proceeding since the franchise and development agreements each
provided that all disputes arising thereunder were to be resolved by
arbitration. In September 1997, the arbitrator ruled that (i) the November 9,
1994 letter of intent was not a binding contract and (ii) the master
development agreement was properly terminated. AR has the right to challenge
the arbitrator's decision. In May 1997, AR commenced an action against Arby's
in the United States District Court for the Southern District of Florida
alleging that (i) Arby's had engaged in fraudulent negotiations with AR in
1994-1995, in order to force AR to sell the master franchise rights for Mexico
to Arby's cheaply and (ii) Arby's had tortiously interfered with an alleged
business opportunity that AR had with a third party. Arby's has moved to
dismiss that action. Arby's is vigorously contesting AR's various claims and
believes it has meritorious defenses to such claims.
On June 3, 1997, ZuZu, Inc. ("ZuZu") and its subsidiary, ZuZu Franchising
Corporation ("ZFC"), commenced an action against Arby's and Triarc in the
District Court of Dallas County, Texas alleging that Arby's and Triarc
conspired to steal the ZuZu Speedy Tortilla concept and convert it to their
own use. ZuZu seeks injunctive relief and actual damages in excess of
$70,000,000 and punitive damages of not less than $200,000,000 against Triarc
for its alleged appropriation of trade secrets, conversion and unfair
competition. ZFC also made a demand for arbitration with the Dallas, Texas
office of the American Arbitration Association ("AAA") seeking unspecified
monetary damages from Arby's, alleging that Arby's had breached a Master
Franchise Agreement between ZFC and Arby's. Arby's and Triarc have moved to
dismiss or, in the alternative, abate the Texas court action on the ground
that a stock purchase agreement between Triarc and ZuZu required that disputes
be subject to mediation in Wilmington, Delaware and that any litigation be
brought in the Delaware courts. On July 16, 1997, Arby's and Triarc commenced
a declaratory judgment action against ZuZu and ZFC in Delaware Chancery Court
for New Castle County seeking a declaration that the claims in both the
litigation and the arbitration must be subject to mediation in Wilmington,
Delaware. In the arbitration proceeding, Arby's has asserted counterclaims
against ZuZu for unjust enrichment, breach of contract and breach of the duty
of good faith and fair dealing and has successfully moved to transfer the
proceeding to the Atlanta, Georgia office of the AAA. The parties have agreed
to suspend further proceedings pending non-binding mediation. Arby's and
Triarc are vigorously contesting plaintiffs' claims in both the litigation and
the arbitration and believe that plaintiffs' various claims are without merit.
The Company continues to have an environmental contingency for possible
contamination from hydrocarbons in ground water at two abandoned bottling
facilities, both of the same nature and general magnitude as described in Note
18 to the consolidated financial statements contained in the Form 10-K.
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 1997
(Unaudited)
Based on currently available information and given the Company's aggregate
reserves for such matters, the Company does not believe that the legal, tax
and environmental contingencies referred to above, as well as ordinary routine
litigation incidental to its businesses, will have a material adverse effect
on its consolidated results of operations or financial position.
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report on Form 10-K for the year ended December 31,
1996 (the "Form 10-K") of RC/Arby's Corporation ("RCAC" or, collectively with
its subsidiaries, the "Company"). The recent trends affecting the Company's
two business segments, restaurants and beverages, are described therein.
However, following the sale of all of the 355 company-owned Arby's restaurants
on May 5, 1997 (the "RTM Sale") to an affiliate of RTM, Inc. ("RTM"), the
largest franchisee in the Arby's system (see below under "Liquidity and
Capital Resources"), the effects of the trends on the restaurant segment are
limited to their impact on franchise fees and royalties. RCAC is a direct
wholly-owned subsidiary of CFC Holdings Corp. ("CFC Holdings") and an indirect
wholly-owned subsidiary of Triarc Companies, Inc. ("Triarc"). RCAC's principal
wholly-owned subsidiaries are Arby's, Inc. ("Arby's") and Royal Crown Company,
Inc. ("Royal Crown"). Additionally, RCAC has three wholly-owned subsidiaries
which owned and/or operated Arby's restaurants through May 4, 1997: Arby's
Restaurant Development Corporation ("ARDC"), Arby's Restaurant Holding Company
("ARHC") and Arby's Restaurant Operations Company ("AROC"). Certain statements
under this caption constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. See "PART II - OTHER INFORMATION".
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, in 1997 the Company's third
quarter commenced on June 30 and ended on September 28 and the nine months
ended September 28 commenced on January 1 and are referred to herein as the
three months ended September 28, 1997 or the 1997 third quarter and the nine
months ended September 28, 1997, respectively.
RESULTS OF OPERATIONS
Nine months Ended September 28, 1997 Compared with Nine months Ended
September 30, 1996
Revenues decreased $117.2 million (33.2%) to $235.5 million in the nine
months ended September 28, 1997. Restaurant revenues decreased $91.4 million
(42.9%) to $121.8 million principally reflecting the nonrecurring sales for
the period from May 5, 1996 through September 30, 1996 resulting from the RTM
Sale on May 5, 1997. Aside from the effect of the RTM Sale, restaurant
revenues increased $3.2 million (2.7%) due to a $5.7 million (13.6%) increase
in royalties and franchise fees partially offset by a $2.5 million (3.2%)
decrease in net sales of company-owned Arby's restaurants. The increase in
royalties and franchise fees is due to (i) incremental royalties for the
period from May 5, 1997 through September 28, 1997 from the 355 restaurants
sold to RTM, (ii) an average net increase of 75 (2.9%) franchised restaurants
other than from the RTM Sale and (iii) a 1.5% increase in same-store sales of
franchised restaurants. The decrease in net sales of company-owned restaurants
is primarily attributed to a decrease in the number of company-owned Arby's
restaurants prior to the RTM Sale. Beverage revenues decreased $25.8 million
(18.5%) to $113.7 million due to decreases in sales of finished goods ($15.5
million) and concentrate ($10.3 million). The decrease in sales of finished
goods reflects (a) the absence in the 1997 period of 1996 sales to MetBev,
Inc. ("MetBev"), a former distributor of the Company's beverage products in
the New York City metropolitan area, and a volume decrease in sales of Royal
Crown branded finished products in areas other than those serviced by MetBev
(where the Company now sells concentrate rather than finished goods), (b) a
volume decrease in sales of the C&C beverage line of mixers, colas and flavors
(where the Company now sells concentrate to the purchaser of the C&C beverage
line rather than finished goods), the rights to which (including the C&C
trademark) were sold in July 1997 (the "C&C Sale") as described below and (c)
a volume reduction in the sales of finished Royal Crown Premium Draft Cola
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("Draft Cola") which the Company no longer sells. Sales of concentrate
decreased, despite the shift in sales to concentrate from finished goods noted
above principally reflecting a decrease in branded sales due to volume
declines, which were adversely affected by soft bottler case sales, partially
offset by a higher average concentrate selling price.
Gross profit (total revenues less cost of sales) decreased $13.8 million
to $145.0 million in the nine months ended September 28, 1997 while gross
margins (gross profit divided by total revenues) increased to 62% compared
with 45% for the same period of the prior year. Beverage gross profit declined
$7.3 million to $82.5 million principally due to the decline in sales volume
discussed above, whereas beverage gross margins increased to 73% from 64%
principally due to (i) the recognition in the 1997 period of a guarantee to
the Company of certain minimum gross profit levels on sales to the Company's
private label customer, recorded as a reduction to cost of sales, for which no
similar amount was recognized in the 1996 comparable period and (ii) the shift
in product mix to higher-margin concentrate sales compared with finished
product sales reflecting the shift from sales of finished goods discussed
above. Restaurant gross profit declined $6.5 million to $62.5 million due to a
$12.2 million decrease in store gross profit partially offset by the $5.7
million increase in royalties and franchise fees (with no associated cost of
sales) described above. The decrease in store gross profit is principally due
to the non-recurring 1996 gross profit associated with the company-owned
Arby's restaurants sold to RTM partially offset by the absence in the 1997
period of depreciation and amortization on all long-lived restaurant assets
which had been written down to their estimated fair values as of December 31,
1996 and were no longer depreciated or amortized through their May 5, 1997
date of sale. Aside from the effect of the RTM Sale, restaurant gross margins
increased to 51.4% from 45.4% primarily due to (i) the higher percentage of
royalties and franchise fees to total revenues in the 1997 period due to the
RTM Sale discussed above and (ii) the absence in the 1997 period of
depreciation and amortization on all long-lived restaurant assets as discussed
above.
Advertising, selling and distribution expenses decreased $16.4 million
to $60.6 million in the nine months ended September 28, 1997. Restaurant
advertising expenses declined $9.9 million principally due to the cessation of
local restaurant advertising and marketing expenses resulting from the RTM
Sale. Beverage advertising expenses declined $6.5 million principally due to
(i) lower bottler promotional reimbursements resulting from the decline in
sales volume, (ii) the elimination of advertising expenses for Draft Cola and
(iii) planned reductions in connection with the aforementioned decreases in
sales of other Royal Crown and C&C branded finished products.
General and administrative expenses decreased $7.5 million to $49.4
million in the nine months ended September 28, 1997 principally due to reduced
spending levels related to administrative support, principally payroll, no
longer required for the sold restaurants as a result of the RTM Sale and, to a
lesser extent, reduced travel activity in the restaurant segment prior to the
RTM Sale and lower compensation expense related to grants of below market
Triarc stock options to employees who had terminated employment by the end of
the 1997 second quarter.
The facilities relocation and corporate restructuring charge of $7.3
million in the nine months ended September 28, 1997 principally consists of
employee severance and related termination costs and employee relocation
associated with restructuring the restaurant segment in connection with the
RTM Sale and, to a lesser extent, costs associated with the relocation of the
Fort Lauderdale, Florida headquarters of Royal Crown, which has been
centralized in the White Plains, New York headquarters of Mistic Brands, Inc.,
a wholly-owned subsidiary of Triarc.
Interest expense decreased $5.1 million to $27.4 million in the nine
months ended September 28, 1997 primarily due to the assumption by RTM of an
aggregate $69.6 million of mortgage and equipment notes payable and
capitalized lease obligations in connection with the RTM Sale on May 5,1997
and, to a lesser extent, (i) the absence in the 1997 period of losses incurred
in the 1996 period on an interest rate swap agreement which terminated in
September 1996 and (ii) lower average borrowings in the 1997 period under a
demand note payable to Triarc (the "Demand Note") due to the forgiveness on
May 5, 1997 of all $23.2 million then outstanding as a capital contribution
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to the Company and the cessation of interest expense on $6.5 million of an
outstanding balance repaid effective May 5, 1997 under another note payable to
Triarc, both in connection with the RTM Sale.
Other income, net decreased $0.2 million to $0.6 million in the nine
months ended September 28, 1997 principally due to a $2.3 million loss from
the RTM Sale partially offset by (i) a $0.9 million gain on lease termination
for a portion of the space no longer required in the Fort Lauderdale facility
due to staff reductions as a result of the RTM Sale and the relocation of the
Royal Crown headquarters, (ii) a $0.5 million gain recognized from the C&C
Sale and (iii) $0.5 million of increased gains on other sales of properties.
The benefit from and (provision for) income taxes represent annual
effective tax rates of 91% and 12% based on the estimated annual tax rates as
of September 28, 1997 and September 30, 1996, respectively. Such rate is
higher in the 1997 period due principally to the differing impact on the
respective effective rates of the amortization of nondeductible costs in
excess of net assets of acquired companies ("Goodwill") in a period with
pre-tax income compared with a period with a pre-tax loss.
The extraordinary charge of $1.8 million incurred during the second
quarter of 1997 consists of the write-off of previously unamortized deferred
financing costs of $3.0 million net of income tax benefit of $1.2 million in
connection with the assumption by RTM of $54.6 million of the mortgage and
equipment notes payable associated with the sold restaurants.
Three Months Ended September 28, 1997 Compared with Three Months Ended
September 30, 1996
Revenues decreased $67.6 million (57.1%) to $50.9 million in the three
months ended September 28, 1997. Restaurant revenues decreased $55.5 million
(75.6%) to $17.9 million principally reflecting the nonrecurring sales for the
period from July 1, 1996 through September 30, 1996 resulting from the RTM
Sale on May 5, 1997. After the sale of all company-owned Arby's restaurants in
the RTM Sale, restaurant revenues consist entirely of royalties and franchise
fees which increased $3.0 million (20.4%) due to (i) incremental royalties
from the restaurants sold to RTM, (ii) an average net increase of 59 (2.3%)
franchised restaurants other than from the RTM Sale and (iii) a 0.7% increase
in same-store sales of franchised restaurants. Beverage revenues decreased
$12.1 million (26.8%) to $33.0 million due to due to decreases in sales of
finished goods ($6.7 million) and concentrate ($5.4 million). The decrease in
sales of finished goods principally reflects (i) the absence in the 1997 third
quarter of 1996 sales to MetBev, (ii) a volume decrease in sales of C&C
beverages principally due to the C&C Sale in July 1997 and (iii) a volume
decrease in sales of Royal Crown branded finished products in areas other than
those serviced by MetBev. The decrease in concentrate sales reflects a volume
decline in branded sales which were adversely affected by soft bottler case
sales and a volume decrease in private label sales.
Gross profit decreased $10.1 million to $44.1 million in the three
months ended September 28, 1997 while gross margins increased to 87% compared
with 46% for the same quarter of the prior year. Restaurant gross profit
declined $6.5 million to $18.0 million due to a $9.5 million decrease in gross
profit from company-owned Arby's restaurants principally due to the
nonrecurring third quarter 1996 gross profit associated with the company-owned
Arby's restaurants sold to RTM partially offset by the $3.0 million increase
in royalties and franchise fees (with no associated cost of sales) described
above. After the sale of all company-owned Arby's restaurants in the RTM Sale,
margins are 100.0% due to the fact that royalties and franchise fees now
constitute all revenues in that segment. Beverage gross profit declined $3.6
million to $26.1 million principally due to the decline in sales volume
discussed above, whereas beverage gross margins increased to 79% from 66%
principally due to (i) the recognition in the 1997 period of a guarantee to
the Company of certain minimum gross profit levels on sales to the Company's
private label customer, recorded as a reduction to cost of sales, for which no
similar amount was recognized in the 1996 comparable quarter and (ii) the
shift in product mix to higher-margin concentrate sales from finished product
sales reflecting the shift from sales of finished goods as described in the
nine-month discussion.
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Advertising, selling and distribution expenses decreased $8.3 million to
$18.1 million in the three months ended September 28, 1997. Restaurant
advertising expenses declined $6.8 million principally due to the cessation of
local restaurant advertising and marketing expenses resulting from the RTM
Sale. Beverage advertising expenses declined $1.5 million principally due to
(i) lower bottler promotional reimbursements resulting from the decline in
sales volume, (ii) planned reductions in connection with the aforementioned
decreases in sales of other Royal Crown and C&C branded finished products and
(iii) the elimination of advertising expenses for Draft Cola.
General and administrative expenses decreased $4.0 million to $15.3
million in the three months ended September 28, 1997 due to reduced spending
levels related to administrative support, principally payroll, no longer
required for the sold restaurants.
The facilities relocation and corporate restructuring charge of $0.6
million in the three months ended September 28, 1997 consists of additional
costs associated with the relocation of the Fort Lauderdale headquarters of
Royal Crown.
Interest expense decreased $2.9 million to $8.0 million in the three
months ended September 28, 1997 primarily due to the assumption by RTM of an
aggregate $69.6 million of mortgage and equipment notes payable and
capitalized lease obligations in connection with the RTM Sale on May 5, 1997
and, to a lesser extent, (i) the absence in the 1997 third quarter of losses
incurred in the 1996 quarter on an interest rate swap agreement which
terminated in September 1996 and (ii) lower average borrowings in the 1997
quarter under the Demand Note and the nonrecurring 1996 interest expense on
the $6.5 million repaid effective May 5, 1997 under another note payable to
Triarc, both in connection with the RTM Sale and as described in more detail
in the nine-month discussion above.
Other income, net increased $0.7 million to $1.0 million in the three
months ended September 28, 1997 due principally to the $0.5 million gain
recognized from the C&C Sale.
The benefit from and (provision for) income taxes for the three-month
periods ended September 28, 1997 and September 30, 1996 represent effective
tax rates of 83% and 8%, respectively. Such rate is higher in the 1997 quarter
due principally to the differing impact on the respective effective rates of
Goodwill amortization in a period with pre-tax income compared with a period
with a pre-tax loss.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash and cash equivalents (collectively "cash") increased
$6.1 million during the nine months ended September 28, 1997 to $13.6 million.
Such increase reflects (i) cash provided by financing activities of $9.8
million (a capital contribution of $6.2 million and net borrowings of $7.3
million from Triarc, net of repayments of long-term debt of $3.7 million) and
(ii) cash provided by investing activities of $1.3 million (proceeds from
sales of properties and the C&C Sale of $3.2 million less capital expenditures
of $1.9 million), partially offset by cash used in operating activities of
$5.0 million. The net cash used in operating activities principally reflects
(i) a net loss of $1.7 million and (ii) cash used for operating assets and
liabilities of $17.6 million, both partially offset by net non-cash charges of
$14.3 million including (a) depreciation and amortization of $11.4 million
(including a $3.0 million write-off of unamortized deferred financing costs),
(b) provision for facilities relocation and corporate restructuring, net of
payments, of $2.0 million and (c) other items, net of $0.9 million. The cash
used for operating assets and liabilities of $17.6 million reflects a decrease
in accounts payable and accrued expenses of $25.3 million, primarily due to
the paydown of payables and accruals subsequent to the RTM Sale and C&C Sale
which related to those sold operations and the August 1, 1997 semi-annual
interest payment on the Company's $275.0 million principal amount of 9 3/4%
senior notes due 2000 (the "Senior Notes"), partially offset by decreases in
receivables, inventories and prepaid expenses and other current assets
aggregating $7.7 million. In conjunction with the change in the restaurant
operations to exclusively franchising (see below) and the resulting
anticipated improvement in operating results, the Company expects cash flows
from operations during the remainder of 1997 to be positive.
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On May 5, 1997, certain of the principal subsidiaries comprising the
Company's restaurant segment sold to RTM all of the 355 company-owned
restaurants. The sales price consisted of cash and a promissory note
(discounted value) aggregating $1.4 million and the assumption by RTM of $54.7
million of mortgage and equipment notes payable and capitalized lease
obligations of $14.9 million. RTM now operates the 355 restaurants as a
franchisee and pays royalties to the Company at a rate of 4% of those
restaurants' net sales.
As a result of the RTM Sale, the Company's remaining restaurant
operations are exclusively franchising. The restaurant segment, without the
operation of the company-owned restaurants, has begun to experience and will
continue to benefit from improved cash flow as a result of (i) substantially
reduced capital expenditures, (ii) higher royalty fees as a result of the
aforementioned royalties relating to the restaurants sold to RTM and (iii) the
reduction of operating costs, a process begun in the second quarter and whose
full period effect should be effectuated in the fourth quarter.
On July 18, 1997, the Company completed the sale of its rights to the
C&C beverage line of mixers, colas and flavors, including the C&C trademark
and equipment related to the operation of the C&C beverage line, to Kelco
Sales & Marketing Inc. ("Kelco"), for consideration of $0.8 million in cash
and an $8.6 million note (the "Kelco Note") with a discounted value of $6.0
million consisting of $3.6 million relating to the C&C Sale and $2.4 million
relating to future revenues for services to be performed over seven years. The
Note is due in monthly installments with varying amounts of approximately $0.1
million through August 2004.
During the nine months ended September 28, 1997, the Company reduced its
borrowings from Triarc and its subsidiaries to $5.0 million (of which $0.3
million is payable during the remainder of 1997) from $20.5 million as of
December 31, 1996 while a demand note receivable increased $0.4 million to
$2.0 million. In connection with the RTM Sale, the then outstanding balance of
$23.2 million ($12.0 million as of December 31, 1996) under a demand note
payable (the "Demand Note") was forgiven as a capital contribution to the
Company and $6.5 million of a note due in February 1998 with an outstanding
balance of $6.7 million as of December 31, 1996 was repaid to Triarc. In
addition, Triarc made a $6.2 million capital contribution in cash. During the
1997 third quarter, the Company reborrowed $3.5 million under the Demand Note.
Consolidated capital expenditures amounted to $1.9 million in the nine
months ended September 28, 1997, which reflects reduced spending levels from
the comparable period of 1996, principally in the restaurant segment, first in
anticipation of and then as a result of the consummation of the RTM Sale. The
Company expects that capital expenditures during the remainder of 1997 will be
approximately $0.2 million, which is significantly less than the comparable
period of 1996 as a result of the cessation of restaurant-related spending. As
of September 28, 1997, there were no significant outstanding commitments for
such capital expenditures. In accordance with the indenture pursuant to which
the Company's Senior Notes were issued (the "Senior Note Indenture"), the
Company is required to reinvest within 180 days the proceeds of certain asset
sales in core business assets. In accordance therewith, the Company completed
the reinvestment of the applicable proceeds from the RTM Sale and certain
other asset disposals by reinvesting $2.1 million in core business assets
other than properties and equipment during October 1997. Also in accordance
with the Senior Note Indenture, the Company is required to reinvest up to an
additional $4.4 million through January 1998 in connection with the C&C Sale
through capital expenditures (including up to $0.2 million of those planned
above) and/or business or other asset acquisitions. Although the Company made
no business acquisitions during the first nine months of 1997, the Company
considers selective business acquisitions, as appropriate, to grow
strategically and explore other alternatives to the extent it has available
resources to do so. The Company anticipates that it will meet its capital
expenditure and business acquisition requirements, including such reinvestment
requirement, through existing cash and/or cash flows from operations.
The Company is a party to a tax-sharing agreement with Triarc whereby
the Company is required to pay amounts relating to taxes based on the taxable
income of the Company and its eligible subsidiaries on a stand alone basis.
The Company had overpaid its 1993 tax obligation due to losses during the
fourth quarter of 1993, and has experienced additional losses in 1994 through
the third quarter of 1997. As a result, no subsequent payment has been
required through September 28, 1997 and, considering the substantial loss for
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income tax purposes on the RTM Sale, the Company does not expect to be
required to make any such payments during the remainder of 1997.
The Federal income tax returns of Triarc and its subsidiaries, including
the Company, have been examined by the Internal Revenue Service ("IRS") for
the tax years 1989 through 1992 and the IRS had issued notices of proposed
adjustments prior to 1997 relating to the Company increasing taxable income by
approximately $13.0 million. Triarc, on behalf of the Company, has resolved
approximately $10.0 million of such proposed adjustments and in connection
therewith, the Company paid $4.6 million, including interest, in November
1997. The Company intends to contest the unresolved adjustments of
approximately $3.0 million at the appellate division of the IRS and,
accordingly, the amount of any payments required as a result thereof cannot
presently be determined.
In October 1996 Triarc had announced that its Board of Directors
approved a plan to offer up to approximately 20% of the shares of its beverage
and restaurant businesses (including those of the Company) to the public
through an initial public offering and to spin off the remainder of the shares
of such businesses to Triarc stockholders (collectively, the "Spinoff
Transactions"). In May 1997 Triarc announced that it would not proceed with
the Spinoff Transactions as a result of its acquisition of Snapple Beverage
Corp. and other complex issues.
As of September 28, 1997, the Company had cash of $13.6 million
available to meet its cash requirements. The Company's cash requirements for
the remainder of 1997, exclusive of operating cash flows (which include the
tax payment of $4.6 million described above), consist principally of (i) the
core asset reinvestment of $2.1 million required under the Senior Note
Indenture made during October 1997 and any portion of the $4.4 million
required through January 1998 made in 1997, (ii) debt principal repayments of
$0.8 million, including affiliated notes and (iii) business acquisitions, if
any. The Company has met or anticipates meeting such requirements through
existing cash and/or cash flows from operations. The ability of the Company to
meet its long-term cash requirements is dependent upon its ability to obtain
and sustain sufficient cash flows from operations which should be improved as
a result of the RTM Sale as discussed above.
Legal and Environmental Matters
On February 19, 1996, Arby's Restaurants S.A. de C.V. ("AR"), the master
franchisee of Arby's in Mexico, commenced an action in the civil court of
Mexico against Arby's for breach of contract. AR alleged that a non-binding
letter of intent dated November 9, 1994 between AR and Arby's constituted a
binding contract pursuant to which Arby's had obligated itself to repurchase
the master franchise rights from AR for $2.85 million and that Arby's had
breached a master development agreement with AR. Arby's commenced an
arbitration proceeding since the franchise and development agreements each
provided that all disputes arising thereunder were to be resolved by
arbitration. In September 1997, the arbitrator ruled that (i) the November 9,
1994 letter of intent was not a binding contract and (ii) the master
development agreement was properly terminated. AR has the right to challenge
the arbitrator's decision. In May 1997, AR commenced an action against Arby's
in the United States District Court for the Southern District of Florida
alleging that (i) Arby's had engaged in fraudulent negotiations with AR in
1994-1995, in order to force AR to sell the master franchise rights for Mexico
to Arby's cheaply and (ii) Arby's had tortiously interfered with an alleged
business opportunity that AR had with a third party. Arby's has moved to
dismiss that action. Arby's is vigorously contesting AR's various claims and
believes it has meritorious defenses to such claims.
On June 3, 1997, ZuZu, Inc.("ZuZu") and its subsidiary, ZuZu Franchising
Corporation ("ZFC"), commenced an action against Arby's and Triarc in the
District Court of Dallas County, Texas alleging that Arby's and Triarc
conspired to steal the ZuZu Speedy Tortilla concept and convert it to their
own use. ZuZu seeks injunctive relief and actual damages in excess of $70.0
million and punitive damages of not less than $200.0 million against Triarc
for its alleged appropriation of trade secrets, conversion and unfair
competition. ZFC also made a demand for arbitration with the Dallas, Texas
office of the American Arbitration Association ("AAA") seeking unspecified
monetary damages from Arby's, alleging that Arby's had breached a Master
Franchise Agreement between ZFC and Arby's. Arby's and Triarc have moved to
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dismiss or, in the alternative, abate the Texas court action on the ground
that a stock purchase agreement between Triarc and ZuZu required that disputes
be subject to mediation in Wilmington, Delaware and that any litigation be
brought in the Delaware courts. On July 16, 1997, Arby's and Triarc commenced
a declaratory judgment action against ZuZu and ZFC in Delaware Chancery Court
for New Castle County seeking a declaration that the claims in both the
litigation and the arbitration must be subject to mediation in Wilmington,
Delaware. In the arbitration proceeding, Arby's has asserted counterclaims
against ZuZu for unjust enrichment, breach of contract and breach of the duty
of good faith and fair dealing and has successfully moved to transfer the
proceeding to the Atlanta, Georgia office of the AAA. The parties have agreed
to suspend further proceedings pending non-binding mediation. Arby's and
Triarc are vigorously contesting plaintiffs' claims in both the litigation and
the arbitration and believe that plaintiffs' various claims are without merit.
The Company continues to have an environmental contingency of the same
nature and general magnitude as that described in "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the Form 10-K.
Based on currently available information and given the Company's
aggregate reserves for such matters, the Company does not believe that the
legal and environmental contingencies referred to above, as well as ordinary
routine litigation incidental to its businesses, will have a material adverse
effect on its consolidated results of operations or financial position.
Recently Issued Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about
Segments of an Enterprise and Related Information" which supersedes SFAS 14
"Financial Reporting for Segments of a Business Enterprise". SFAS 131 requires
disclosure in the Company's consolidated financial statements (including
quarterly condensed consolidated financial statements) of financial and
descriptive information by operating segment as used internally for evaluating
segment performance and deciding how to allocate resources to segments. SFAS
131 is effective for the Company's fiscal year beginning December 29, 1997
(exclusive of the quarterly segment data under SFAS 131 which is effective the
following fiscal year) and requires comparative information for earlier
periods presented. The application of the provisions of SFAS 131 may result in
changes to segment disclosures but will not have any effect on the Company's
reported financial position and results of operations.
20
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
The statements in this Quarterly Report on Form 10-Q that are not
historical facts, including, most importantly, those statements preceded by,
followed by, or that include the words "may," "believes," "expects,"
"anticipates," or the negation thereof, or similar expressions, constitute
"forward-looking statements" that involve risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any outcomes expressed or implied by such
forward-looking statements. For those statements, RC/Arby's Corporation
("RCAC") claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Art of 1995.
Such factors include, but are not limited to, the following: success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; market acceptance of new product offerings; changing trends in
consumer tastes; changes in business strategy or development plans; quality of
management; availability, terms and deployment of capital; business abilities
and judgment of personnel; availability of qualified personnel; labor and
employee benefit costs; availability and cost of raw materials and supplies;
changes in, or failure to comply with, government regulations; the costs and
other effects of legal and administrative proceedings; pricing pressures
resulting from competitive discounting; general economic, business and
political conditions in the countries and territories where RCAC operates; the
impact of such conditions on consumer spending; and other risks and
uncertainties detailed in RCAC's other current and periodic filings with the
Securities and Exchange Commission. RCAC will not undertake and specifically
declines any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
Item 1. Legal Proceedings
As reported in RCAC's Annual Report on Form 10-K for the year ended
December 31, 1996, on February 19, 1996, Arby's Restaurants S.A. de C.V.
("AR"), the master franchisee of Arby's in Mexico, commenced an action in the
civil court of Mexico against Arby's, Inc. ("Arby's") for breach of contract.
AR alleged that a non-binding letter of intent dated November 9, 1994 between
AR and Arby's constituted a binding contract pursuant to which Arby's had
obligated itself to repurchase the master franchise rights from AR for $2.85
million and that Arby's had breached a master development agreement with AR.
Arby's commenced an arbitration proceeding since the franchise and development
agreements each provided that all disputes arising thereunder were to be
resolved by arbitration. In September 1997, the arbitrator ruled that (i) the
November 9, 1994 letter of intent was not a binding contract and (ii) the
master development agreement was properly terminated. AR has the right to
challenge the arbitrator's decision. In May 1997, AR commenced an action
against Arby's in the United States District Court for the Southern District
of Florida alleging that (i) Arby's had engaged in fraudulent negotiations
with AR in 1994-1995, in order to force AR to sell the master franchise rights
for Mexico to Arby's cheaply and (ii) Arby's had tortiously interfered with an
alleged business opportunity that AR had with a third party. Arby's has moved
to dismiss that action. Arby's is vigorously contesting AR's various claims
and believes it has meritorious defenses to such claims.
As reported in RCAC's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 1997, on June 3, 1997, ZuZu, Inc. ("ZuZu") and its subsidiary,
ZuZu Franchising Corporation ("ZFC"), commenced an action against Arby's and
Triarc in the District Court of Dallas County, Texas alleging that Arby's and
Triarc conspired to steal the ZuZu Speedy Tortilla concept and convert it to
their own use. ZuZu seeks injunctive relief and actual damages in excess of
$70.0 million and punitive damages of not less than $200.0 million against
Triarc for its alleged appropriation of trade secrets, conversion and unfair
competition. ZFC also made a demand for arbitration with the Dallas, Texas
office of the American Arbitration Association ("AAA") seeking unspecified
monetary damages from Arby's, alleging that Arby's had breached a Master
Franchise Agreement between ZFC and Arby's. Arby's and Triarc have moved to
dismiss or, in the alternative, abate the Texas court action on the ground
that a stock purchase agreement between Triarc and ZuZu required that disputes
21
<PAGE>
be subject to mediation in Wilmington, Delaware and that any litigation be
brought in the Delaware courts. On July 16, 1997, Arby's and Triarc commenced
a declaratory judgment action against ZuZu and ZFC in Delaware Chancery Court
for New Castle County seeking a declaration that the claims in both the
litigation and the arbitration must be subject to mediation in Wilmington,
Delaware. In the arbitration proceeding, Arby's has asserted counterclaims
against ZuZu for unjust enrichment, breach of contract and breach of the duty
of good faith and fair dealing and has successfully moved to transfer the
proceeding to the Atlanta, Georgia office of the AAA. The parties have agreed
to suspend further proceedings pending non-binding mediation. Arby's and
Triarc are vigorously contesting plaintiffs' claims in both the litigation and
the arbitration and believe that plaintiffs' various claims are without merit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Indenture dated as of August 1, 1993 among RCAC, Royal Crown
Company, Inc., Arby's and The Bank of New York, as Trustee,
relating to RCAC's 9-3/4% Senior Secured Notes Due 2000,
incorporated herein by reference to Exhibit 4.2 to the Triarc
Companies, Inc.("Triarc") Registration Statement on Form S-4 dated
October 22, 1997 (SEC File No. 1-2207).
4.2 Master Agreement dated as of May 5, 1997, among Franchise Finance
Corporation of America, FFCA Acquisition Corporation, FFCA
Mortgage Corporation, Triarc, Arby's Restaurant Development
Corporation ("ARDC"), Arby's Restaurant Holding Company ("ARHC"),
Arby's Restaurant Operations Company ("AROC"), Arby's, RTM
Operating Company ("RTMOC"), RTM Development Company, RTM
Partners, Inc.("Holdco"), RTM Holding Company, Inc.("RTM Parent"),
RTM Management Company, LLC ("RTMM") and RTM, Inc.("RTM"), incorp-
orated herein by reference to Exhibit 4.16 to Triarc's Registration
Statement on Form S-4 dated October 22, 1997 (SEC File No. 1-2207).
10.1 Option granted by Holdco in favor of ARHC, together with a
schedule identifying other documents omitted and the material
details in which such documents differ, incorporated herein by
reference to Exhibit 10.30 to Triarc's Registration Statement on
Form S-4 dated October 22, 1997 (SEC File No. 1-2207).
10.2 Guaranty dated as of May 5, 1997 by RTM, RTM Parent, Holdco, RTMM
and RTMOC in favor of Arby's, ARDC, ARHC, AROC and Triarc,
incorporated herein by reference to Exhibit 10.31 to Triarc's
Registration Statement on Form S-4 dated October 22, 1997 (SEC
File No. 1-2207).
27.1 Financial Data Schedule for the nine months ended September 28,
1997, submitted to the Securities and Exchange Commission in
electronic format. *
----------------
* Filed herewith
(b) Reports on Form 8-K:
During the three months ended September 28, 1997 the registrant filed a
report on Form 8-K dated July 18, 1997 with respect to the sale by
certain subsidiaries of the Registrant of their rights to the C&C
beverage line of mixers, colas and flavors, including the C&C
trademark, to Kelco Sales & Marketing, Inc.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RC/ARBY'S CORPORATION
(Registrant)
Date: November 12, 1997 By: /s/ JOHN L. BARNES, JR.
-----------------------
John L. Barnes, Jr.
Senior Vice President
and Chief Financial Officer
(On behalf of the Company)
By: /s/ FRED H. SCHAEFER
-----------------------
Fred H. Schaefer
Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements included in the accompanying Form
10-Q of RC/Arby's Corporation for the nine-month period ended September 28,
1997 and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-28-1997
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<SECURITIES> 0
<RECEIVABLES> 36,454
<ALLOWANCES> 0
<INVENTORY> 6,989
<CURRENT-ASSETS> 70,525
<PP&E> 21,248
<DEPRECIATION> 11,679
<TOTAL-ASSETS> 279,909
<CURRENT-LIABILITIES> 66,551
<BONDS> 279,872
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 279,909
<SALES> 187,894
<TOTAL-REVENUES> 235,477
<CGS> 90,447
<TOTAL-COSTS> 90,447
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<INCOME-PRETAX> 936
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