UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 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)
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(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 July 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, June 29,
1996 (A) 1997 (Note 1)
-------- ------------
ASSETS (In thousands)
(Unaudited)
Current assets:
Cash and cash equivalents........................... $ 7,411 $ 13,086
Receivables, net.................................... 35,151 40,349
Note receivable from affiliate...................... 1,650 2,000
Inventories......................................... 12,110 6,727
Assets held for sale................................ 71,116 -
Deferred income tax benefit......................... 8,568 8,568
Prepaid expenses and other current assets........... 6,761 4,084
---------- ---------
Total current assets.............................. 142,767 74,814
Properties, net ...................................... 11,943 10,757
Unamortized costs in excess of net assets
of acquired companies............................... 159,123 156,260
Deferred income tax benefit........................... 24,231 24,333
Deferred costs and other assets....................... 22,380 17,741
---------- ---------
$ 360,444 $ 283,905
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt................... $ 73,055 $ 2,220
Notes payable to affiliates......................... 13,765 1,700
Accounts payable.................................... 24,027 13,732
Accrued expenses.................................... 61,744 56,455
---------- ---------
Total current liabilities......................... 172,591 74,107
Long-term debt........................................ 281,110 280,078
Note payable to affiliate............................. 6,700 -
Deferred income and other liabilities................. 14,011 13,901
Minority interest..................................... - 2,575
Stockholder's equity (deficit):
Common stock........................................ 1 1
Additional paid-in capital.......................... 44,300 73,740
Accumulated deficit................................. (158,269) (160,497)
---------- ---------
Total stockholder's deficit....................... (113,968) (86,756)
---------- ---------
$ 360,444 $ 283,905
========== =========
(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 Six months ended
------------------ -----------------
June 30, June 29, June 30, June 29,
1996 1997(Note 1) 1996 1997(Note 1)
------- ------------ ------- ------------
(In thousands)
(Unaudited)
Revenues:
Net sales......................... $108,075 $ 65,461 $207,141 $154,934
Royalties, franchise fees
and other revenues.............. 14,544 16,327 26,977 29,641
-------- -------- -------- --------
122,619 81,788 234,118 184,575
-------- -------- -------- --------
Costs and expenses:
Cost of sales..................... 66,530 31,822 129,462 83,610
Advertising, selling and
distribution.................... 27,531 20,311 50,598 42,476
General and administrative........ 18,911 16,579 37,726 34,141
Facilities relocation and
corporate restructuring......... - 4,847 - 6,723
-------- -------- -------- --------
112,972 73,559 217,786 166,950
-------- -------- -------- --------
Operating profit................. 9,647 8,229 16,332 17,625
Interest expense.................... (10,962) (8,998) (21,630) (19,389)
Other income (expense), net......... 240 (1,185) 474 (379)
-------- --------- ------- --------
Loss before income taxes and
extraordinary charge........... (1,075) (1,954) (4,824) (2,143)
Benefit from (provision for)
income taxes...................... (277) 1,590 644 1,715
-------- -------- -------- --------
Loss before extraordinary charge. (1,352) (364) (4,180) (428)
Extraordinary charge................ - (1,800) - (1,800)
-------- -------- -------- --------
Net loss......................... $ (1,352) $ (2,164) $ (4,180) $ (2,228)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
----------------
June 30, June 29,
1996 1997 (Note 1)
-------- -------------
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net loss.............................................. $(4,180) $ (2,228)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization of properties........ 6,897 957
Amortization of costs in excess of net assets
of acquired companies and other intangibles....... 4,511 3,462
Amortization of deferred financing costs........... 1,214 1,113
Write-off of unamortized deferred financing costs.. - 2,950
Provision for facilities relocation and
corporate restructuring.......................... - 6,723
Payments on facilities relocation and
corporate restructuring.......................... - (2,896)
Loss on sale of restaurants........................ - 2,342
Provision for doubtful accounts.................... 388 461
Other, net......................................... 73 (814)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables..................................... (10,924) (2,968)
Inventories..................................... 2,429 2,775
Prepaid expenses and other current assets....... 149 2,400
Increase (decrease) in accounts payable
and accrued expenses............................ 4,363 (15,940)
-------- --------
Net cash provided by (used in) operating activities..... 4,920 (1,663)
-------- --------
Cash flows from investing activities:
Proceeds from sales of properties..................... 447 1,889
Capital expenditures.................................. (6,194) (1,668)
-------- --------
Net cash provided by (used in) investing activities..... (5,747) 221
-------- --------
Cash flows from financing activities:
Capital contribution.................................. - 6,211
Net borrowings from affiliates........................ 2,325 4,035
Repayments of long-term debt.......................... (4,522) (3,129)
Proceeds from issuance of long-term debt.............. 2,427 -
Payment of deferred financing costs................... (104) -
-------- --------
Net cash provided by financing activities............... 126 7,117
-------- --------
Net increase (decrease) in cash......................... (701) 5,675
Cash at beginning of period............................. 9,744 7,411
-------- --------
Cash and cash equivalents at end of period.............. $ 9,043 $ 13,086
======== ========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 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
June 29, 1997 and its results of operations for the three-month and six-month
periods ended June 30, 1996 and June 29, 1997 and its cash flows for the
six-month periods ended June 30, 1996 and June 29, 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, the Company's first quarter
of 1997 commenced on January 1, 1997 and ended on March 30, 1997 and its
second quarter of 1997 commenced on March 31, 1997 and ended on June 29, 1997.
Each subsequent quarter of 1997 will consist of 13 weeks. For the purposes of
the consolidated financial statements, the period from March 31, 1997 to June
29, 1997 and January 1, 1997 to June 29, 1997 are referred to herein as the
three-month and six-month periods ended June 29, 1997, respectively.
Certain amounts included in the prior comparable periods' condensed
consolidated financial statements have been reclassified to conform with the
current periods' presentation.
(2) Sale of Restaurants
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
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
(expense), net"), which includes a $1,457,000 provision for the fair value for
future lease commitments and debt repayments assumed by RTM for which the
Company or Triarc, respectively, remain contingently liable if the payments
5
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 1997
(Unaudited)
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.
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1996 and the six months ended June
29, 1997 give effect to the sale of the restaurants as if such sale 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 such sale
actually been consummated on January1, 1996 or of the Company's future results
of operations and are as follows (in thousands):
For the Year Ended December 31, 1996
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Revenues:
Net sales.................................... $409,100 $(228,031)(a)$181,069
Royalties, franchise fees and other revenues. 57,252 9,121 (b) 66,373
466,352 (218,910) 247,442
-------- -------- -------
Costs and expenses:
Cost of sales................................ 252,811 (187,535)(a) 65,276
Advertising, selling and distribution........ 102,535 (24,764)(a) 77,771
General and administrative................... 77,339 (9,913)(a) 67,426
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 (283,512) 214,423
-------- -------- -------
Operating profit (loss)..................... (31,583) 64,602 33,019
Interest expense............................... (42,883) 8,421 (c) (31,898)
2,564 (d)
Other income, net.............................. 562 - 562
-------- -------- -------
Income (loss) before income taxes........... (73,904) 75,587 1,683
Benefit from (provision for) income taxes...... 23,346 (29,403)(f) (6,057)
-------- -------- -------
Net loss.................................... $(50,558) $ 46,184 $(4,374)
======== ======== =======
6
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 1997
(Unaudited)
For the Six Months Ended June 29, 1997
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Revenues:
Net sales.................................... $154,934 $(74,195)(a) $80,739
Royalties, franchise fees and other revenues. 29,641 2,968 (b) 32,609
-------- -------- -------
184,575 (71,227) 113,348
-------- -------- -------
Costs and expenses:
Cost of sales................................ 83,610 (59,127)(a) 24,483
Advertising, selling and distribution........ 42,476 (8,145)(a) 34,331
General and administrative................... 34,141 (3,319)(a) 30,822
Facilities relocation and corporate
restructuring............................... 6,723 (5,597)(a) 1,126
-------- -------- -------
166,950 (76,188) 90,762
-------- -------- -------
Operating profit............................ 17,625 4,961 22,586
Interest expense............................... (19,389) 2,756 (c) (15,523)
1,110 (d)
Other income (expense), net.................... (379) 1,798 (e) 1,419
-------- -------- -------
Income (loss) before income taxes and
extraordinary charge...................... (2,143) 10,625 8,482
Benefit from (provision for) income taxes...... 1,715 (4,133)(f) (2,418)
-------- -------- -------
Income (loss) before extraordinary charge... $ (428) $ 6,492 $ 6,064
======== ======== =======
- -------------------
(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 have 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 attributable
to the restaurants. Since the Company no longer owns any Arby's restaurants
following the RTM Sale but continues to operate as the Arby's franchisor,
it has undertaken a reorganization of its restaurant segment eliminating
approximately 60 positions in its corporate and field administrative
offices and significantly reducing leased office space. The effect of the
elimination of income and expenses of the sold restaurants is significantly
greater in the year ended December 31, 1996 as compared with the six months
ended June 29, 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.
7
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 1997
(Unaudited)
(b)To reflect royalties from the sales of the sold restaurants 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 on the entire
outstanding balance of the demand note payable to Triarc by the Company
received from Triarc in exchange for the issuance of stock of ARHC and AROC
and on $6,500,000 of a note payable to Triarc due February 1998 repaid on
May 5, 1997.
(e)To reflect the elimination of the $2,342,000 loss on sale of restaurants
and a $544,000 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 six months ended June
29, 1997.
(f)To reflect the income tax effects of the above at the incremental income
tax rate of 38.9%.
(3) Inventories
The following is a summary of the components of inventories (in
thousands):
December 31, June 29,
1996 1997
----------- ----------
Raw materials.................................. $ 8,184 $ 4,164
Work in process................................ 467 459
Finished goods................................. 3,459 2,104
--------- ---------
$ 12,110 $ 6,727
========= =========
(4) Properties
The following is a summary of the components of properties, net (in
thousands):
December 31, June 29,
1996 1997
----------- ----------
Properties, at cost............................ $ 29,082 $ 28,857
Less accumulated depreciation and amortization. 17,139 18,100
--------- ---------
$ 11,943 $ 10,757
========= =========
8
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 1997
(Unaudited)
(5) Facilities Relocation and Corporate Restructuring
The facilities relocation and corporate restructuring charge in the
three-month and six-month periods ended June 29, 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 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 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, June 29,
Affiliated Entity Rate Maturity 1996 1997
----------------- ---- -------- -------- -------
Notes payable to:
Chesapeake Insurance 9 1/2% June 1998 $ 1,750 $ 1,500
Triarc 11 7/8% February 1998 6,700 200
Triarc 11 7/8% Demand 12,015 -
-------- -------
Total notes payable
to affiliates............................. 20,465 1,700
Less amounts payable
within one year............................. 13,765 1,700
-------- -------
$ 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 $1,478,000 and $1,186,000 for the six months ended June 30, 1996 and June
29, 1997, respectively. Interest income on the note receivable from Triarc
amounted to $162,000 and $111,000 for the six months ended June 30, 1996 and
June 29, 1997, respectively, and is included in "Other income (expense), 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, the demand note payable to Triarc in the then
amount of $23,150,000 and accrued interest payable on such note of $2,638,000
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 June 29, 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 asof May 5, 1997 is being accounted for as a capital
9
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 1997
(Unaudited)
contribution and is reflected in "Additional paid-in capital". The 49%
minority interest in the earnings of ARHC and AROC for the three month and six
month periods ended June 29,1997 amounted to $16,000 and is included in "Other
income (expense), 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
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 expects to pay approximately $5,000,000, including
interest, in the fourth quarter of 1997, which amount had been fully reserved
in prior years. The Company intends to contest approximately $3,000,000 of the
proposed adjustments 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. AR also alleged that
Arby's had breached a master development agreement between AR and Arby's.
Arby's promptly commenced an arbitration proceeding since the franchise and
development agreements each provided that all disputes arising thereunder were
to be resolved by arbitration. Arby's is seeking a declaration in the
arbitration to the effect that the November 9, 1994 letter of intent was not a
binding contract and, therefore, AR has no valid breach of contract claim, as
well as a declaration that the master development agreement has been
automatically terminated as a result of AR's commencement of suspension of
payments proceedings in February 1995. In the civil court proceeding in
Mexico, the court denied Arby's motion to suspend such proceedings pending the
results of the arbitration, and Arby's has appealed that ruling. 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, with the purpose of weakening
AR's financial condition 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 believes that it had good cause to
terminate its master agreement and franchise agreement with AR. Arby's is
vigorously contesting AR's claims and believes it has meritorious defenses to
such claims.
10
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 1997
(Unaudited)
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 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") against 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.
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.
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.
(10)Subsequent Event
On July 18, 1997, the Company completed the sale (the "C&C 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 the proceeds of $750,000 in
cash and an $8,650,000 note (the "Note") with a discounted value of $6,003,000
consisting of $4,373,000 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 will be 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 Note since realization of the Note is not yet fully
assured.
The following unaudited supplemental pro forma consolidated summary
operating data of the Company for the six-month period ended June 29, 1997
adjusts the pro forma condensed consolidated statement of operations which
gave effect to the RTM Sale (see Note 2) to give effect to the C&C Sale as if
such sale had been consummated as of January 1, 1997. The pro forma effect of
such sale includes (i) realization of deferred revenues based on the portion
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 1997
(Unaudited)
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 on the deferred revenue, (iii) recognition of the estimated cost of
the concentrate to be sold, (iv) the elimination of the sales, cost of sales,
advertising, selling and distribution expenses, general and administrative
expenses and other expenses related to the C&C beverage line, (v) accretion of
the discount on the Note and (vi) the related income tax effects. Such pro
forma information does not purport to be indicative of the Company's actual
results of operations had such sale actually been consummated on January 1,
1997 or of the Company's future results of operations and are as follows (in
thousands):
Revenues.....................................$107,213
Operating profit............................. 22,707
Income before extraordinary charge........... 6,264
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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 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 effect 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, the Company's second quarter
began on March 31, 1997 and ended on June 29, 1997. For purposes of this
management's discussion and analysis, the period from January 1, 1997 to June
29, 1997 is referred to below as the six months ended June 29, 1997 or the
1997 first half and the period from March 30, 1997 to June 29, 1997 is
referred to below as the three months ended June 29, 1997 or the 1997 second
quarter.
RESULTS OF OPERATIONS
Six Months Ended June 29, 1997 Compared with Six Months Ended June 30, 1996
Revenues decreased $49.5 million (21.2%) to $184.6 million in the six
months ended June 29, 1997. Restaurant revenues decreased $35.8 million
(25.7%) to $103.8 million due to a $38.5 million (34.2%) decrease in net sales
of company-owned restaurants, partially offset by a $2.7 million (9.9%)
increase in royalties and franchise fees. The $38.5 million decrease in net
sales of company-owned restaurants is almost entirely due to the RTM Sale. The
$2.7 million increase in royalties and franchise fees is due to $1.4 million
of incremental royalties for the period from May 5, 1997 through June 29, 1997
from the 355 restaurants sold to RTM, an average net increase of 83 (3.2%)
other franchised restaurants and a 1.9% increase in same-store sales of
franchised restaurants. Beverage revenues decreased $13.7 million (14.5%) to
$80.8 million due to an $8.8 million decrease in sales of finished goods and a
$4.9 million decrease in concentrate sales. The decrease in sales of finished
goods principally reflects (a) the absence in the 1997 first half of $5.8
million 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 $1.5
million decrease in sales of other Royal Crown branded finished products in
areas other than those serviced by MetBev (where the Company now sells
concentrate rather than finished goods) and (b) a $1.5 million reduction in
the sales of finished Royal Crown Premium Draft Cola ("Draft Cola") which the
Company no longer sells. Sales of concentrate decreased, despite the shift in
sales to concentrate from finished goods noted above, reflecting (i) a $5.3
million 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 and (ii) a $0.4 million increase in private label
sales volume.
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Gross profit (total revenues less cost of sales) decreased $3.7 million
to $101.0 million in the six months ended June 29, 1997 while gross margins
(gross profit divided by total revenues) increased to 54.7% compared with
44.7% for the same period of the prior year. Beverage gross profit declined
$3.6 million to $56.4 million principally due to the decline in sales volume
discussed above, whereas beverage gross margins increased to 69.8% from 63.6%
principally due to (i) the recognition of $1.0 million included in the 1997
first quarter resulting from the 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 larger proportion of higher-margin
concentrate sales compared with finished product sales reflecting the shift
from sales of finished goods discussed above. Restaurant gross profit was
unchanged at $44.6 million while restaurant gross margins increased to 42.9%
from 31.9% primarily due to (i) the higher percentage of royalties and
franchise fees (with no associated cost of sales) to total revenues in the
1997 first half principally 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 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.
Advertising, selling and distribution expenses decreased $8.1 million to
$42.5 million in the six months ended June 29, 1997. Beverage advertising
expenses declined $5.0 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 decrease in sales of other
Royal Crown branded finished products. Restaurant advertising expenses
declined $3.1 million principally due to the cessation of local restaurant
advertising and marketing expenses resulting from the RTM Sale.
General and administrative expenses decreased $3.6 million to $34.1
million in the six months ended June 29, 1997 principally due to (i) reduced
spending levels related to administrative support no longer required for the
sold restaurants as a result of the RTM Sale, particularly payroll, (ii)
reduced travel activity in the restaurant segment prior to the RTM Sale and
(iii) lower compensation expense related to grants of below market Triarc
stock options to employees who have since terminated employment.
The facilities relocation and corporate restructuring charge of $6.7
million in the six months ended June 29, 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. An additional charge for facilities relocation and
corporate restructuring of approximately $0.6 million relating to additional
costs associated with the relocation of the Royal Crown headquarters is
expected to be incurred in the third quarter of 1997.
Interest expense decreased $2.2 million to $19.4 million in the six
months ended June 29, 1997 primarily due to the assumption by RTM of $69.6
million of mortgage and equipment notes payable and capitalized lease
obligations in connection with the RTM Sale and, to a lesser extent, (i) the
absence of losses in the 1997 first half on an interest rate swap agreement
which terminated in September 1996 and (ii) the cessation of interest expense
effective May 5, 1997 on a demand note payable ($23.2 million balance as of
May 5, 1997) to Triarc (the "Demand Note") contributed to the capital of ARHC
and AROC and on $6.5 million of an outstanding balance repaid under another
note payable to Triarc also in connection with the RTM Sale.
Other income (expense), net was an expense of $0.4 million in the six
months ended June 29, 1997 compared with income of $0.5 million in the same
period of 1996. The unfavorable change between years was principally due to a
$2.3 million loss from the RTM Sale partially offset by 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 and $0.6 million of increased
gains on other asset sales.
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The benefit from income taxes represents annual effective tax rates of
approximately 80% and 13% based on the estimated annual tax rates as of June
29, 1997 and June 30, 1996, respectively. Such rate in the 1997 period was
based on projected pretax income for the year ending December 28, 1997
compared with a projected pretax loss for the year ended December 31, 1996,
and is higher 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 in a period with pretax income compared with a
period with a pretax loss.
The extraordinary charge of $1.8 million in the six months ended June 29,
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 June 29, 1997 Compared with Three Months Ended June 30, 1996
Revenues decreased $40.8 million (33.3%) to $81.8 million in the three
months ended June 29, 1997. Restaurant revenues decreased $34.2 million
(47.1%) to $38.4 million due to a $36.0 million (62.0%) decrease in net sales
of company-owned restaurants, partially offset by a $1.8 million (12.3%)
increase in royalties and franchise fees. The $36.0 million decrease in net
sales of company-owned restaurants is due to the RTM Sale. The $1.8 million
increase in royalties and franchise fees is due to $1.4 million of incremental
royalties from the restaurants sold to RTM, an average net increase of 79
(3.0%) other franchised restaurants and a 2.9% increase in same-store sales of
franchised restaurants. Beverage revenues decreased $6.6 million (13.2%) to
$43.4 million due to (i) a $4.5 million decrease in sales of finished goods
principally reflecting (a) the absence in the 1997 second quarter of $2.6
million of 1996 sales to MetBev and a $1.2 million decrease in sales of other
Royal Crown branded finished products in areas other than those served by
MetBev and (b) a $0.7 million decrease in sales of Draft Cola and (ii) a $2.1
million decrease in concentrate sales reflecting a $3.2 million volume decline
in branded sales partially offset by a $1.1 million volume increase in private
label sales, all as described in more detail in the six-month discussion
above.
Gross profit decreased $6.1 million to $50.0 million in the three months
ended June 29, 1997 while gross margins increased to 61.1% compared with 45.7%
for the same quarter of the prior year. Restaurant gross profit declined $4.0
million to $20.1 million due to a $5.8 million decrease in gross profit from
company-owned restaurants principally due to the RTM Sale partially offset by
the $1.8 million increase in royalties and franchise fees described above.
Restaurant gross margins increased to 52.4% from 33.3% primarily due to the
higher percentage of royalties and franchise fees to total revenues. Beverage
gross profit declined $2.1 million to $29.9 million principally due to the
decline in sales volume discussed above, whereas beverage gross margins
increased to 68.8% from 63.9% principally due to the larger proportion of
higher-margin concentrate sales compared with finished product sales
reflecting the shift from sales of finished goods discussed above.
Advertising, selling and distribution expenses decreased $7.2 million to
$20.3 million in the three months ended June 29, 1997. Beverage advertising
expenses declined $4.0 million principally due to (i) lower bottler
promotional reimbursements resulting from the decline in sales volume, (ii)
planned reductions in connection with the aforementioned decrease in sales of
other Royal Crown branded finished products and (iii) the elimination of
advertising expenses for Draft Cola. Restaurant advertising expenses declined
$3.2 million principally due to the cessation of local restaurant advertising
and marketing expenses resulting from the RTM Sale.
General and administrative expenses decreased $2.3 million to $16.6
million in the three months ended June 29, 1997 due to reduced spending levels
related to administrative support no longer required for the sold restaurants,
principally payroll.
The facilities relocation and corporate restructuring charge of $4.8
million in the three months ended June 29, 1997 principally consists of
additional employee severance and related termination costs and employee
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relocation associated with restructuring the restaurant segment in connection
with the RTM Sale and, to a lesser extent, additional costs associated with
the relocation of the Fort Lauderdale headquarters of Royal Crown.
Interest expense decreased $2.0 million to $9.0 million in the three
months ended June 29, 1997 primarily due to the assumption by RTM of $69.6
million of mortgage and equipment notes payable and capitalized lease
obligations in connection with the RTM Sale and, to a lesser extent, (i) the
absence of losses in the 1997 second quarter on an interest rate swap
agreement which terminated in September 1996 and (ii) the cessation of
interest expense effective May 5, 1997 on the Demand Note contributed to the
capital of ARHC and AROC and the $6.5 million repaid under another note
payable to Triarc also in connection with the RTM Sale.
Other income (expense), net was an expense of $1.2 million in the three
months ended June 29, 1997 compared with income of $0.2 million in the same
quarter of 1996. The unfavorable change between years was due to the
aforementioned $2.3 million loss from the RTM Sale partially offset by a $0.9
million gain on lease termination for a portion of the space no longer
required in the Fort Lauderdale facility.
The benefit from income taxes in the three months ended June 29, 1997 is
based on an annual effective tax rate of approximately 80% which is higher
than the statutory 35% Federal income tax rate as previously described. A
provision for income taxes was incurred in the three months ended June 30,
1996, despite a pretax loss, principally due to the second quarter effect of
$0.4 million of a revision in the estimated full year effective tax rate as
well as the impact of non-deductible amortization of costs in excess of net
assets of acquired companies.
The extraordinary charge of $1.8 million in the three months ended June
29, 1997 is described in the six-month discussion above.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash and cash equivalents (collectively "cash") increased
$5.7 million during the six months ended June 29, 1997 to $13.1 million. Such
increase reflects (i) cash provided by financing activities (a capital
contribution of $6.2 million and borrowings of $4.0 million from Triarc, net
of repayments of long-term debt of $3.1 million) of $7.1 million and (ii) cash
provided by investing activities (proceeds from sales of properties of $1.9
million less capital expenditures of $1.7 million) of $0.2 million, partially
offset by cash used in operating activities of $1.6 million. The net cash used
in operating activities principally reflects (i) a net loss of $2.2 million
and (ii) cash used for operating assets and liabilities of $13.7 million and
(iii) other items, net of $0.4 million, all partially offset by non-cash
charges for (i) depreciation and amortization of $8.5 million (including a
$3.0 million write-off of unamortized deferrred financing costs), (ii)
provision for facilities relocation and corporate restructuring, net of
payments, of $3.8 million and (iii) a $2.3 million loss on the sale of
restaurants. The cash used for operating assets and liabilities of $13.7
million reflects an increase in receivables of $3.0 million, principally due
to seasonality of beverage sales and slower collections from bottlers, and a
net decrease in accounts payable and accrued expenses of $15.9 million,
primarily due to the paydown of restaurant-related payables and accruals
subsequent to the RTM Sale, partially offset by a decrease in inventories and
prepaid expenses and other current assets of $5.2 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.
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.
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As a result of the RTM Sale, the Company's remaining restaurant
operations are exclusively franchising. Royalties and franchise fees should be
higher in the second half of 1997 as a result of the aforementioned royalties
relating to the restaurants sold to RTM. The Company believes that, without
the restaurant operations, it will be able to reduce the operating costs of
the restaurant segment, a process begun in the second quarter of 1997, and,
together with substantially reduced capital expenditure requirements, improve
the restaurant segment's cash flows.
During the six months ended June 29, 1997, the Company reduced its
borrowings from Triarc and its subsidiaries to $1.7 million (of which $0.5
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 was contributed by Triarc to the capital of ARHC and AROC 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 cash contribution of $6.2 million to the capital of ARHC.
Consolidated capital expenditures amounted to $1.7 million in the six
months ended June 29, 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 $2.0 million, which is significantly less than the comparable
period of 1996 as a result of the cessation of restaurant-related spending. As
of June 29, 1997, there were no significant outstanding commitments for such
capital expenditures. As a result of the RTM Sale and certain other asset
disposals, the Company will be required to reinvest approximately $2.7 million
in core business assets through October 1997 (and up to an additional $4.4
million through January 1998 in connection with the sale of the C&C beverage
line in July 1997 described below) through capital expenditures (including
certain of those planned above) and/or business acquisitions, in accordance
with the indenture pursuant to which the Company's $275.0 million of 9 3/4%
senior secured notes due 2000 were issued (the "Senior Note Indenture"). In
furtherance of the Company's growth strategy, 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 second quarter of 1997. As a result, no subsequent payment has been
required through June 29, 1997 and, considering the substantial loss for
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 expects to pay approximately $5.0 million, including
interest, in the fourth quarter of 1997. The Company intends to contest
approximately $3.0 million of the proposed adjustments at the appellate
division of the IRS and, accordingly, the amount of any payments required as a
result thereof cannot presently be determined. However, management of the
Company expects to be required to make payments in the latter part of 1997
relating to the portion of the adjustments that are agreed to.
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
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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 no longer pursue the Spinoff
Transactions as a result of its recent acquisition of Snapple Beverage Corp.
and other complex issues.
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 the proceeds of $0.8 million in cash and an $8.6
million note (the "Note") with a discounted value of $6.0 million consisting
of $4.4 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.
As of June 29, 1997, the Company had cash of $13.1 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 anticipated tax
payment of approximately $5.0 million described above, consist principally of
capital expenditures and/or business acquisitions of not less than $2.7
million required under the Senior Note Indenture through October 1997 and debt
principal repayments of $1.6 million, including affiliated notes. The Company
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 $2.8 million. AR also alleged that
Arby's had breached a master development agreement between AR and Arby's.
Arby's promptly commenced an arbitration proceeding since the franchise and
development agreements each provided that all disputes arising thereunder were
to be resolved by arbitration. Arby's is seeking a declaration in the
arbitration to the effect that the November 9, 1994 letter of intent was not a
binding contract and, therefore, AR has no valid breach of contract claim, as
well as a declaration that the master development agreement has been
automatically terminated as a result of AR's commencement of suspension of
payments proceedings in February 1995. In the civil court proceeding in
Mexico, the court denied Arby's motion to suspend such proceedings pending the
results of the arbitration, and Arby's has appealed that ruling. 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, with the purpose of weakening
AR's financial condition 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 believes that it had good cause to
terminate its master agreement and franchise agreement with AR. Arby's is
vigorously contesting AR's 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. Plaintiffs allege that Arby's and
Triarc conspired to steal the ZuZu Speedy Tortilla concept and convert it to
their own use. ZuZu seeks 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") against 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
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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.
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.
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Certain statements in this Quarterly Report on Form 10-Q that are not
historical facts constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risks, uncertainties and other factors which may cause the
actual results, performance or achievements of RC/Arby's Corporation ("RCAC")
and its subsidiaries (collectively with RCAC, "the Company") to be materially
different from any future results, performance or achievements express or
implied by such forward-looking statements. Such factors include, but are not
limited to, the following: general economic and business conditions;
competition; success of operating initiatives; development and operating
costs; advertising and promotional efforts; brand awareness; the existence or
absence of adverse publicity; acceptance of new product offerings; changing
trends in customer tastes; the success of multi-branding; 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 and other risks and uncertainties detailed in
RCAC's Annual Report on Form 10-K for the year ended December 31, 1996 (the
"Form 10-K"). 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 any anticipated or
unanticipated events.
Item 1. Legal Proceedings
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. Plaintiffs allege that Arby's and
Triarc Companies, Inc. ("Triarc") conspired to steal the ZuZu Speedy Tortilla
concept and convert it to their own use. ZuZu seeks 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. Additionally, plaintiffs seek preliminary and permanent
injunctive relief against Arby's and Triarc enjoining them from directly or
indirectly disclosing or using ZuZu's trade secrets. ZFC also made a demand
for arbitration with the Dallas, Texas office of the American Arbitration
Association ("AAA") against 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. 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.
Reference is made to the Company's Quarterly Report on Form 10-Q for the
period ended March 30, 1997 for a description of litigation between Arby's,
Inc. and Arby's Restaurants S.A. de C.V.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits:
10.1 Stock Purchase Agreement dated February 13, 1997 among Arby's,
Inc.("Arby's"), Arby's Restaurant Development Corporation ("ARDC"),
Arby's Restaurant Holding Company ("ARHC"), Arby's Restaurant
Operations Company ("AROC"), RTM Inc. ("RTM") and RTM Partners,
Inc.("Holdco"), incorporated herein by reference to Exhibit 10.1
to RCAC's Current Report on Form 8-K dated February 20, 1997 (the
"Form 8-K").
10.2 Form of Option granted by Holdco in favor of ARDC, ARHC and AROC,
incorporated herein by reference to Exhibit 10.2 to the Form 8-K.
10.3 Form of Guaranty by RTM, Holdco, RTM Management Co. LLC and Triarc
Restaurants Disposition 1, Inc.("Newco") in favor of Arby's, ARDC,
ARHC, AROC and Triarc, incorporated herein by reference to Exhibit
10.3 to the Form 8-K.
10.4 Form of Development Agreement between Arby's and Newco,
incorporated herein by reference to Exhibit 10.4 to the Form 8-K.
27.1 Financial Data Schedule for the three-month period ended June 29,
1997, submitted to the Securities and Exchange Commission in
electronic format.*
----------------
* Filed herewith
(b)Reports on Form 8-K:
During the three months ended June 29, 1997 the registrant filed a
report on Form 8-K dated May 20, 1997 with respect to certain
subsidiaries of the Registrant completing the sale on May 5, 1997 to
RTM Partners, Inc. of all the stock of two subsidiaries of the
Registrant owning all 355 Arby's restaurants owned by the Registrant
and its subsidiaries.
21
<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: August 13, 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)
22
<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 six-month period ended June 29,
1997 and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-29-1997
<CASH> 13,086
<SECURITIES> 0
<RECEIVABLES> 40,349
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<INVENTORY> 6,727
<CURRENT-ASSETS> 74,814
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 283,905
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