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 March 30, 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
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RC/ARBY'S CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 59-2277791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Corporate Drive, Fort Lauderdale, Florida 33334
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(Address of principal executive offices) (Zip Code)
(954) 351-5600
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(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 April 30, 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, March 30,
1996 (A) 1997 (Note 1)
-------- ------------
ASSETS (In thousands)
(Unaudited)
Current assets:
Cash and cash equivalents........................... $ 7,411 $ 16,879
Receivables, net.................................... 35,151 37,849
Note receivable from affiliate...................... 1,650 2,000
Inventories......................................... 12,110 10,598
Assets held for sale................................ 71,116 71,116
Deferred income tax benefit......................... 8,568 8,568
Prepaid expenses and other current assets........... 6,761 6,142
---------- ---------
Total current assets.............................. 142,767 153,152
Properties, net ...................................... 11,943 11,505
Unamortized costs in excess of net assets
of acquired companies............................... 159,123 157,692
Deferred income tax benefit........................... 24,231 24,231
Deferred costs and other assets....................... 22,380 21,391
---------- ---------
$ 360,444 $ 367,971
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt................... $ 73,055 $ 72,053
Notes payable to affiliates......................... 13,765 32,600
Accounts payable.................................... 24,027 18,344
Accrued expenses.................................... 61,744 64,111
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Total current liabilities......................... 172,591 187,108
Long-term debt........................................ 281,110 280,764
Note payable to affiliate............................. 6,700 -
Deferred income and other liabilities................. 14,011 14,131
Stockholder's equity (deficit):
Common stock........................................ 1 1
Additional paid-in capital.......................... 44,300 44,300
Accumulated deficit................................. (158,269) (158,333)
---------- ---------
Total stockholder's deficit....................... (113,968) (114,032)
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$ 360,444 $ 367,971
========== =========
(A) Derived from the audited consolidated financial statements as of December
31, 1996.
See accompanying notes to condensed consolidated financial statements.
2
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
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March 31, March 30,
1996 1997 (Note 1)
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(In thousands)
(Unaudited)
Revenues:
Net sales.............................................. $ 99,066 $ 89,473
Royalties, franchise fees and other revenues........... 12,433 13,314
-------- --------
111,499 102,787
-------- --------
Costs and expenses:
Cost of sales.......................................... 62,932 51,788
Advertising, selling and distribution.................. 23,067 22,165
General and administrative............................. 18,815 17,562
Facilities relocation and corporate restructuring...... - 1,876
-------- --------
104,814 93,391
-------- --------
Operating profit...................................... 6,685 9,396
Interest expense......................................... (10,668) (10,391)
Other income, net........................................ 234 806
-------- --------
Loss before income taxes.............................. (3,749) (189)
Benefit from income taxes................................ 921 125
-------- --------
Net loss.............................................. $ (2,828) $ (64)
======== ========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
----------------------
March 31, March 30,
1996 1997 (Note 1)
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(In thousands)
(Unaudited)
Cash flows from operating activities:
Net loss ............................................. $ (2,828) $ (64)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of properties........ 3,380 561
Amortization of costs in excess of net assets
of acquired companies and other intangibles....... 1,930 1,538
Amortization of deferred financing costs........... 565 571
Provision for facilities relocation
and corporate restructuring....................... - 1,876
Payments on facilities relocation
and corporate restructuring....................... - (962)
Provision for doubtful accounts.................... 153 242
Other, net......................................... 355 (720)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables..................................... (10,098) (2,940)
Inventories..................................... 1,328 1,512
Prepaid expenses and other current assets....... (980) 619
Decrease in accounts payable and accrued expenses. (7,379) (3,961)
-------- --------
Net cash used in operating activities................... (13,574) (1,728)
-------- --------
Cash flows from investing activities:
Proceeds from sales of properties..................... 19 1,327
Capital expenditures.................................. (2,964) (568)
-------- --------
Net cash provided by (used in) investing activities..... (2,945) 759
-------- --------
Cash flows from financing activities:
Net borrowings from affiliates........................ 11,125 11,785
Repayments of long-term debt.......................... (1,079) (1,348)
Proceeds from issuance of long-term debt.............. 1,029 -
Payment of deferred financing costs................... (40) -
-------- --------
Net cash provided by financing activities............... 11,035 10,437
-------- --------
Net increase (decrease) in cash......................... (5,484) 9,468
Cash at beginning of period............................. 9,744 7,411
-------- --------
Cash and cash equivalents at end of period.............. $ 4,260 $ 16,879
======== ========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 30, 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 own and/or operate Arby's
restaurants, 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
March 30, 1997 (see below) and its results of operations and cash flows for
the three-month periods ended March 31, 1996 and March 30, 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. Each
subsequent quarter of 1997 will consist of 13 weeks. For the purposes of the
consolidated financial statements, the period from January 1, 1997 to March
30, 1997 is referred to herein as the three-month period ended March 30, 1997.
Certain amounts included in the prior comparable periods' condensed
consolidated financial statements have been reclassified to conform with the
current periods' presentation.
(2) Inventories
The following is a summary of the components of inventories (in
thousands):
December 31, March 30,
1996 1997
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Raw materials.................................. $ 8,184 $ 7,698
Work in process................................ 467 341
Finished goods................................. 3,459 2,559
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$ 12,110 $ 10,598
========= =========
5
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 30, 1997
(Unaudited)
(3) Properties
The following is a summary of the components of properties, net (in
thousands):
December 31, March 30,
1996 1997
---------- ---------
Properties, at cost............................ $ 29,082 $ 29,214
Less accumulated depreciation and amortization. 17,139 17,709
--------- ---------
$ 11,943 $ 11,505
========= =========
(4) Facilities Relocation and Corporate Restructuring
The facilities relocation and corporate restructuring charge in the
three-month period ended March 30, 1997 principally consists of severance
costs incurred through March 30 associated with restructuring the restaurant
segment in connection with the sale of all company-owned restaurants (see Note
7) and, to a lesser extent, costs associated with the relocation of the Fort
Lauderdale, Florida headquarters of Royal Crown, which is being centralized in
the White Plains, New York headquarters of Mistic Brands, Inc., a wholly-owned
subsidiary of Triarc.
(5) 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, March 30,
Affiliated Entity Rate Maturity 1996 1997
----------------- ---- -------- ----------- ---------
Notes payable to:
Triarc 11 7/8% Demand $ 12,015 $ 24,150 (a)
Triarc 11 7/8% February 1998 6,700 6,700 (b)
Chesapeake Insurance 9 1/2% June 1997 1,750 1,750
-------- --------
Total notes payable
to affiliates 20,465 32,600
Less amounts payable
within one year 13,765 32,600
-------- --------
$ 6,700 $ -
======== ========
Note receivable from:
Triarc 11 7/8% Demand $ 1,650 $ 2,000
======== ========
6
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 30, 1997
(Unaudited)
(a) Contributed by Triarc to the capital of ARHC and AROC in May 1997 in
connection with the sale of the restaurants described in Note 7.
(b) $6,500,000 was repaid in May 1997 in connection with the sale of the
restaurants described in Note 7.
Interest expense on notes payable to Triarc and its subsidiaries amounted
to $758,000 and $800,000 for the three months ended March 31, 1996 and March
30, 1997, respectively. Interest income on the note receivable from Triarc
amounted to $106,000 and $52,000 for the three months ended March 31, 1996 and
March 30, 1997, respectively, and is included in "Other income, net" in the
accompanying condensed consolidated statements of operations.
(6) Contingencies
On February 19, 1996, Arby's Restaurantes S.A. de C.V. ("AR"), the master
franchisee of Arby's 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, the court denied
Arby's motion to suspend such proceedings pending the results of the
arbitration, and Arby's has appealed that ruling. In the arbitration, some
evidence has been taken but proceedings have been suspended by the court
handling the suspension of payments proceedings. 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 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.
The Company continues to have income tax contingencies as a result of the
examination of the Federal income tax returns of Triarc and its subsidiaries,
including the Company, by the Internal Revenue Service for the tax years 1989
through 1992 and 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 Notes 13 and 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.
7
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 30, 1997
(Unaudited)
(7) Subsequent Event
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 sales price consisted of cash and a promissory note
(discounted value) aggregating $1,379,000 and the assumption by RTM of an
aggregate $69,517,000 in mortgage and equipment notes payable and capitalized
lease obligations. RTM now operates the 355 restaurants as a franchisee and
will pay royalties to the Company at a rate of 4% of those restaurants' net
sales. 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 sheets) to their estimated fair values and, accordingly,
the Company does not expect the sale to result in any substantial gain or
loss. The results of operations of the sold restaurants have been included in
the accompanying condensed consolidated statements of operations for the
three-month periods ended March 31, 1996 and March 30, 1997 and will continue
to be reported in the Company's results of operations through the May 5, 1997
date of sale. The following unaudited supplemental pro forma consolidated
summary operating data of the Company for the three-month period ended March
30, 1997 gives effect to the sale of the restaurants as if such sale had been
consummated as of January 1, 1997. The pro forma effects of the sale of
restaurants include (i) the elimination of the sales, cost of sales,
advertising, selling and distribution expenses and allocated general and
administrative expenses related to the sold restaurants, (ii) the recognition
of royalties from the sales of the sold restaurants at the rate of 4%, (iii)
the elimination of the interest expense related to the debt assumed by RTM and
(iv) the income tax effects of the above. 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.....................................$52,738
Operating profit............................. 8,272
Net income................................... 483
In connection with the assumption of the mortgage and equipment notes
payable, the Company will recognize 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.
8
<PAGE>
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. 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 own and/or operate Arby's restaurants: 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 first quarter
of 1997 ended on March 30, 1997. For purposes of this management's discussion
and analysis, the period from January 1, 1997 to March 30, 1997 is referred to
below as the three months ended March 30, 1997 or the 1997 first quarter.
RESULTS OF OPERATIONS
Three Months Ended March 30, 1997 Compared with Three Months Ended March 31,
1996
Revenues decreased $8.7 million (7.8%) to $102.8 million in the three
months ended March 30, 1997. Beverage revenues decreased $7.1 million (15.9%)
to $37.3 million due to (i) a $4.3 million decrease in sales of finished goods
principally reflecting (a) the elimination of $3.2 million of sales to MetBev,
Inc., a former distributor of the Company's beverage products in the New York
City metropolitan area (where the Company continues to sell concentrate) and
(b) a $0.8 million reduction in the sales of finished Royal Crown Premium
Draft Cola ("Draft Cola") which the Company no longer sells and (ii) a $2.8
million decrease in concentrate sales reflecting decreases in (a) branded
sales ($2.1 million) due to volume declines which were adversely affected by
soft bottler case sales and the timing of shipments to bottlers, partially
offset by a higher average concentrate selling price and (b) private label
sales ($0.7 million) due to a volume decrease reflecting the timing of
shipments to the Company's private label customer. Restaurant revenues
decreased $1.6 million (2.5%) to $65.5 million due to a $2.5 million decrease
in net sales of company-owned restaurants, partially offset by a $0.9 million
increase in royalties and franchise fees. The $2.5 million decrease in net
sales of company-owned restaurants reflects a $1.2 million decrease due to two
less days in the 1997 quarter, a $0.7 million (1.3%) decline in same-store
sales and a $0.6 million decrease resulting from an average of 15 fewer
company-owned restaurants in the 1997 period. The $0.9 million increase in
royalties and franchise fees is due to an average net increase of 89 (3.4%)
franchised restaurants, a 2.0% increase in average royalty rates due to the
declining significance of older franchise agreements with lower rates and a
1.0% increase in same-store sales of franchised restaurants. (See below under
"Liquidity and Capital Resources" for a discussion of the May 1997 sale of all
company-owned restaurants).
9
<PAGE>
Gross profit (total revenues less cost of sales) increased $2.4 million to
$51.0 million in the three months ended March 30, 1997 and gross margins
(gross profit divided by total revenues) increased to 49.6% compared with
43.6% for the same period of the prior year. Restaurant gross profit increased
$4.0 million to $24.4 million and restaurant gross margins increased to 37.3%
from 30.5% due primarily to (i) the absence in the 1997 first quarter of
depreciation and amortization on all long-lived restaurant assets held for
sale, which had been written down to their estimated fair values as of
December 31, 1996 and are no longer depreciated or amortized while they are
held for sale and (ii) the $0.9 million increase in royalties and franchise
fees with no associated cost of sales. Beverage gross profit declined $1.6
million to $26.6 million principally due to the decline in sales volume
discussed above, whereas beverage gross margins increased to 71.1% from 63.3%
principally due to (i) the recognition of $1.5 million 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 first quarter and (ii) the higher proportion of higher-margin concentrate
sales compared with finished product sales reflecting the lower sales of
finished goods discussed above.
Advertising, selling and distribution expenses decreased $0.9 million to
$22.2 million in the three months ended March 30, 1997 principally due to the
elimination of advertising expenses related to Draft Cola.
General and administrative expenses decreased $1.3 million to $17.6
million in the three months ended March 30, 1997 due to the reversal of prior
years' compensation expense related to grants of below market Triarc stock
options to employees who have since terminated employment, reduced travel
activity in the restaurant segment and a net reduction in other general and
administrative expenses.
The facilities relocation and corporate restructuring charge in the 1997
first quarter principally consists of employee severance costs incurred
through March 30 associated with restructuring the restaurant segment in
connection with the sale of all company-owned restaurants (see below) and, to
a lesser extent, costs associated with the relocation of the Fort Lauderdale,
Florida headquarters of Royal Crown, which are being 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 $5.5 million relating to additional employee
severance and related termination costs and employee relocation associated
with restructuring the restaurant segment and additional costs associated with
the relocation of the Royal Crown headquarters is expected to be incurred
principally in the second quarter of 1997.
Interest expense decreased $0.3 million to $10.4 million in the three
months ended March 30, 1997 due to two less days in the 1997 quarter and the
absence of losses on an interest rate swap agreement which terminated in
September 1996.
Other income, net increased $0.6 million to $0.8 million in the three
months ended March 30, 1997 due to $0.7 million of gains on sales of
properties in the 1997 quarter with no similar gains in the 1996 quarter.
The benefit from income taxes represents annual effective tax rates of
66% and 25% based on the estimated annual tax rates as of March 30, 1997 and
March 31, 1996, respectively. Such rate in the 1997 period was based on
projected pretax income for the year ending December 31, 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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash and cash equivalents (collectively "cash") increased
$9.5 million during the three months ended March 30, 1997 to $16.9 million.
Such increase reflects (i) cash provided by financing activities (borrowings
from Triarc, net of repayments of long-term debt) of $10.4 million and (ii)
cash provided by investing activities (proceeds from sales of properties, net
of capital expenditures) of $0.8 million, partially offset by cash used in
operating activities of $1.7 million. The net cash used in operating
activities principally reflects (i) a net loss of $0.1 million, (ii) cash used
for operating assets and liabilities of $4.8 million and (iii) other items,
net of $0.4 million, all partially offset by non-cash charges for (i)
depreciation and amortization of $2.7 million and (ii) provision for
facilities relocation and corporate restructuring, net of payments, of $0.9
million. The cash used for operating assets and liabilities of $4.8 million
reflects an increase in receivables of $2.9 million, principally due to slower
collections from bottlers, and a net decrease in accounts payable and accrued
expenses of $4.0 million, partially offset by a decrease in inventories and
other current assets of $2.1 million. The net decrease in accounts payable and
accrued expenses resulted primarily from the semi-annual interest payment made
during the first quarter of 1997 on the Company's $275.0 million of 9 3/4%
senior debt securities due 2000 (the "Senior Notes"), the timing of payments
to vendors in the Company's beverage segment and reduced capital expenditure
activity in the Company's restaurant segment prior to the sale of the
company-owned restaurants described below. 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 an affiliate of RTM, Inc. ("RTM"), the
largest franchisee in the Arby's system, 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 $54.6
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 will pay royalties to the Company at a rate of 4% of those
restaurants' net sales. As part of the transaction, RTM has agreed to build an
additional 190 Arby's restaurants over the next 14 years pursuant to a
development agreement. This is in addition to a commitment RTM previously
entered into to build an additional 210 Arby's restaurants.
As a result of the sale of company-owned restaurants to RTM, the Company's
remaining restaurant operations will be exclusively franchising. Royalties and
franchise fees will increase during the remainder 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 and, together with substantially
reduced capital expenditure requirements, improve the restaurant segment's
cash flows.
During the three months ended March 30, 1997, the Company increased its
net borrowings from Triarc and its subsidiaries by $11.8 million under
promissory notes, principally to fund the semi-annual interest payment on the
Senior Notes. The outstanding principal amounts of such promissory notes,
aggregating $32.6 million of notes payable offset by a $2.0 million note
receivable at March 30, 1997, consisted of $24.1 million payable on demand to
Triarc (the "Demand Note"), $1.8 million payable in June 1997, $6.7 million
payable in 1998 and $2.0 million receivable on demand. In connection with the
sale of all the company-owned restaurants in May 1997, the balance outstanding
under the Demand Note was contributed by Triarc to the capital of ARHC and
AROC and $6.5 million of the $6.7 million note due in February 1998 was repaid
to Triarc.
Consolidated capital expenditures amounted to $0.6 million in the three
months ended March 30, 1997, which reflects reduced spending levels from the
comparable period of 1996, principally in the restaurant segment in
anticipation of the sale of its company-owned restaurants. The Company expects
that capital expenditures during the remainder of 1997 will be approximately
11
<PAGE>
$1.2 million, which is significantly less than the comparable period of 1996
as a result of the cessation of restaurant-related spending. As of March 30,
1997, there were approximately $0.2 million of outstanding commitments for
such capital expenditures. As a result of the sale of company-owned
restaurants to RTM and certain other asset disposals, the Company will be
required to reinvest approximately $7.1 million in core business assets
through October 1997 by way of capital expenditures (including certain of
those above) and/or business acquisitions, in accordance with the indenture
pursuant to which the Senior Notes 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 and borrowings from Triarc, to
the extent available.
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 first quarter of 1997. As a result, no subsequent payment has been
required through March 30, 1997 and, considering the loss for income tax
purposes anticipated on the sale of restaurants to RTM, 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 has issued notices of proposed
adjustments relating to the Company increasing taxable income by approximately
$13.0 million, the tax effect of which has not yet been determined. Triarc is
contesting the majority of the proposed adjustments 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 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").
Consummation of the Spinoff Transactions will be subject to, among other
things, receipt of a favorable ruling from the IRS that the Spinoff
Transactions will be tax-free to Triarc and its subsidiaries and its
stockholders. The request for the ruling from the IRS contains several complex
issues and there can be no assurance that Triarc will receive the ruling or
that Triarc will consummate the Spinoff Transactions. The Spinoff Transactions
are not expected to occur prior to the end of the second quarter of 1997.
Triarc is currently evaluating the impact of its proposed acquisition of
Snapple Beverage Corp. (which it announced on March 27, 1997) on the
anticipated structure of the Spinoff Transactions.
As of March 30, 1997, the Company had cash of $16.9 million available to
meet its cash requirements. The Company's cash requirements for the remainder
of 1997, exclusive of operating cash flows, consist principally of capital
expenditures and/or business acquisitions of not less than $7.1 million
required under the Senior Note Indenture through October 1997 and debt
principal repayments of $10.5 million, including the notes to Triarc repaid in
connection with the sale of restaurants discussed above. The Company
anticipates meeting such requirements through existing cash and/or cash flows
from operations and borrowings from Triarc to the extent available. 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 restaurant sales to RTM as
discussed above.
12
<PAGE>
Legal and Environmental Matters
On February 19, 1996, Arby's Restaurantes 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, the
court denied Arby's motion to suspend such proceedings pending the results of
the arbitration, and Arby's has appealed that ruling. In the arbitration, some
evidence has been taken but proceedings have been suspended by the court
handling the suspension of payments proceedings. 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 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.
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.
13
<PAGE>
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; the Company's indirect parent, Triarc
Companies, Inc. ("Triarc"), not receiving from the Internal Revenue Service a
favorable ruling that the spin-off referred to herein will be tax-free to
Triarc and its subsidiaries and stockholders or the failure to satisfy other
customary conditions to closing for transactions of the type referred to
herein; 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
As reported in the Form 10-K, on February 19, 1996, Arby's Restaurantes
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.
Arby's promptly commenced an arbitration proceeding on the ground that the
relevant agreements each provided that all disputes arising thereunder were to
be resolved by arbitration. 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 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.
Item 5. Other Information
On May 5, 1997, Arby's Restaurant Development Corporation, Arby's
Restaurant Holding Company, and Arby's Restaurant Operations Company, each a
wholly-owned subsidiary of the Company (collectively, "Sellers"), completed
the sale to RTM Partners, Inc. ("Holdco"), an affiliate of RTM, Inc., the
largest franchisee in the Arby's system, of all of the stock of two
corporations ("Newco") owning all of the Sellers' 355 company-owned Arby's
restaurants. The purchase price was approximately $71 million, consisting
primarily of the assumption of approximately $69 million in mortgage
indebtedness and capitalized lease obligations.
In connection with the transaction, the Sellers received options to
purchase from Holdco up to an aggregate of 20% of the stock of Newco. RTM,
Holdco and certain affiliated entities also entered into a guarantee in favor
of the Sellers and Triarc guaranteeing payment of, among other things, the
assumed debt obligations. In addition, Newco agreed to build an additional 190
Arby's restaurants over the next 14 years pursuant to a development agreement.
14
<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 March 30,
1997, submitted to the Securities and Exchange Commission in
electronic format.*
----------------
* Filed herewith
(b) Reports on Form 8-K:
During the three months ended March 30, 1997 the Registrant filed a
report on Form 8-K dated February 20, 1997 with respect to certain
subsidiaries of the Registrant entering into a stock purchase agreement
with RTM, Inc. and RTM Partners, Inc. ("Holdco") pursuant to which
Holdco would acquire all the stock of two subsidiaries of the
registrant owning all 355 Arby's restaurants owned by the Registrant
and its subsidiaries.
15
<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: May 14, 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)
16
<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 three-month period ended March 30,
1997 and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
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<INVENTORY> 10,598
<CURRENT-ASSETS> 153,152
<PP&E> 29,214
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0
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