UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
Registrant's telephone number, including area code (954) 351-5600
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
All of the voting stock of the registrant is held by the registrant's
parent, CFC Holdings Corp. There were 1,000 shares of the registrant's common
stock ($1.00 par value) outstanding as of March 31, 1997.
The registrant meets the conditions set forth in General Instruction
J(1)(a) and (b) of Form 10-K and is therefore filing this report with the
reduced disclosure format.
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"ARBY'S," "RC COLA," "DIET RC," "ROYAL CROWN," "ROYAL CROWN
DRAFT COLA," "DIET RITE," "NEHI," "NEHI LOCKJAW," "UPPER 10," "KICK,"
AND "THIRST THRASHER" ARE REGISTERED TRADEMARKS OF
RC/ARBY'S CORPORATION OR ITS SUBSIDIARIES.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
including statements under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
RC/Arby's Corporation ("RCAC") and its subsidiaries 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 spinoff referred to herein will be tax-free to Triarc and its
subsidiaries and its stockholders or the failure to satisfy other customary
conditions to closing for transactions of the types 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;
construction schedules; the costs and other effects of legal and
administrative proceedings; and other risks and uncertainties referenced in
this 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 anticipated or
unanticipated events.
Item 1. Business.
INTRODUCTION
RCAC is a holding company that conducts business operations through its
wholly-owned subsidiaries, Royal Crown Company, Inc. ("Royal Crown") and
Arby's, Inc. (d/b/a Triarc Restaurant Group) ("Arby's"). Royal Crown produces
and sells soft drink concentrates used in the production and distribution of
soft drinks by independent bottlers under the brand names RC COLA, DIET RC
COLA, DIET RITE COLA, DIET RITE flavors, NEHI, NEHI LOCKJAW, UPPER 10 and
KICK. RC COLA is the third largest national brand cola and is the only
national brand cola alternative available to non-Coca-Cola and non-Pepsi-Cola
bottlers. Royal Crown is also the exclusive supplier of cola concentrate to
Cott Corporation ("Cott"), which sells private label soft drinks to major
retailers in the United States, Canada, the United Kingdom, Australia, Japan,
Spain and South Africa.
Arby's is the world's largest franchise restaurant system specializing in
roast beef sandwiches with an estimated market share in 1996 of approximately
73% of the roast beef sandwich segment of the quick-service sandwich
restaurant category. In addition, Arby's believes that it is the 11th largest
restaurant chain in the United States, based on domestic system-wide sales.
Worldwide sales for the Arby's system were approximately $2.0 billion in 1996.
Arby's acts both as a franchisor and as an owner and operator in a system that
included 3,022 restaurants as of December 31, 1996, of which 355 were
company-owned.
RCAC is a wholly-owned subsidiary of CFC Holdings Corp. ("CFC Holdings"),
94.6% of which in turn is owned by Triarc, and the remaining 5.4% of which is
owned by a wholly-owned subsidiary of Triarc. Triarc is a public corporation,
the Class A Common Stock of which (the only class of Triarc's voting
securities) is traded on the New York Stock Exchange.
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RCAC was incorporated in 1982 in Florida under the name "Royal Crown
Corporation" and reincorporated in Delaware in 1994. Royal Crown was
incorporated in 1978 in Delaware and, through its predecessor corporations,
has been in business since 1905. Arby's was incorporated in 1964 in Ohio and
reincorporated in Delaware in 1994. The principal executive offices of each of
RCAC and Arby's are located at 1000 Corporate Drive, Fort Lauderdale, Florida
33334. The telephone number at such offices is (954) 351-5600. The principal
executive offices of Royal Crown are located in White Plains, New York.
Reference herein to the "Company" includes collectively RCAC, Royal Crown and
Arby's, unless the context indicates otherwise.
STRATEGIC ALTERNATIVES
SPINOFF TRANSACTIONS
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, if any, of its proposed acquisition
of Snapple Beverage Corp. (which it announced on March 27, 1997) on the
anticipated structure of the Spinoff Transactions.
A registration statement has not been filed with the Securities and
Exchange Commission with respect to the proposed offering of common stock of
Triarc's restaurant and beverage businesses. The offering of common stock will
be made only by means of a prospectus. The common stock may not be sold, nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Form 10-K does not constitute an offer to sell or the
solicitation of an offer to buy such common stock, nor will there be any sale
of the common stock in any state in which such an offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such state.
TRIARC BEVERAGE GROUP
In October 1996 Triarc also announced the establishment of the Triarc
Beverage Group, which oversees the operations of Royal Crown and Mistic
Brands, Inc. ("Mistic"), Triarc's other beverage subsidiary. Michael
Weinstein, the chief executive officer of Mistic and Royal Crown is the chief
executive officer of the Triarc Beverage Group and has direct operating
responsibility for both companies. John Carson, the chairman of Royal Crown,
is chairman of Triarc Beverage Group and oversees international operations,
private label sales, domestic strategic franchising and industry affairs. The
Triarc Beverage Group is in the process of consolidating its headquarters
operations in White Plains, New York. Royal Crown and Mistic continue to
operate independent sales and marketing operations to serve their different
distribution systems and marketplace needs. The finance, administrative and
operational functions of the two companies are being consolidated to maximize
efficiencies.
SALE OF COMPANY-OWNED RESTAURANTS
On February 13, 1997, Arby's, Arby's Restaurant Development Corporation
("ARDC"), Arby's Restaurant Holding Company ("ARHC") and Arby's Restaurant
Operations Company ("AROC"), each a wholly-owned subsidiary of the Company,
entered into a stock purchase agreement with RTM, Inc. ("RTM") and RTM
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Partners Inc. ("Holdco") pursuant to which Holdco would acquire from ARDC,
ARHC and AROC (the "Sellers") all of the stock of two corporations ("Newco")
owning all of the Sellers' 355 company-owned Arby's restaurants. The purchase
price is approximately $71 million, consisting primarily of the assumption of
approximately $69 million in mortgage indebtedness and capitalized lease
obligations. The consummation of the transaction is subject to customary
closing conditions, including receipt of necessary consents and regulatory
approvals.
In connection with the transaction, the Sellers will receive options to
purchase from Holdco up to an aggregate of 20% of the common stock of Newco.
RTM, Holdco and two affiliated entities also agreed to enter into a guarantee
in favor of the Sellers and Triarc guaranteeing payment of, among other
things, the assumed debt obligations. RTM has also agreed to cause Newco to
build an additional 190 Arby's restaurants over the next 14 years pursuant to
a development agreement. This is in addition to a previous commitment RTM
entered into in 1996 to build an additional 210 Arby's restaurants.
Arby's future role in the Arby's system as a franchisor will be to enhance
the strength of the Arby's brand by increasing the number of restaurants in
the Arby's system and by establishing a "cut above" positioning for the Arby's
brand through upgraded menu items and facilities, while continuing to bring
new concepts to the system, such as P.T. Noodles, ZuZu and T.J. Cinnamons. See
" Item 1. -- Business Segments -- Restaurants."
CHANGE IN FISCAL YEAR
Effective January 1, 1997, the Company adopted a 52/53 week fiscal
convention pursuant to which the Company's fiscal year will end on the Sunday
closest to December 31. Each fiscal year will be comprised of four 13 week
fiscal quarters, although in some years the fourth quarter will represent a 14
week period.
BUSINESS SEGMENTS
BEVERAGES (ROYAL CROWN)
Royal Crown produces and sells concentrates used in the production of soft
drinks which are sold domestically and internationally to independent,
licensed bottlers who manufacture and distribute finished beverage products.
Royal Crown's major products have significant recognition and include: RC
COLA, DIET RC COLA, DIET RITE COLA, DIET RITE flavors, NEHI, UPPER 10, and
KICK. Further, Royal Crown is the exclusive supplier of cola concentrate to
Cott.
RC Cola is the third largest national brand cola and is the only national
brand cola available to non-Coca-Cola and non-Pepsi-Cola bottlers. DIET RITE
is available in a cola as well as various other flavors and formulations and
is the only national brand that is sugar-free (sweetened with 100% aspartame,
a non-nutritive sweetener), sodium-free and caffeine-free. DIET RC COLA is the
no-calorie version of RC COLA containing aspartame as its sweetening agent.
NEHI is a line of approximately 20 flavored soft drinks, UPPER 10 is a
lemon-lime soft drink and KICK is a citrus soft drink. Royal Crown's share of
the overall domestic carbonated soft drink market was approximately 1.9% in
1996 according to Beverage Digest/Maxwell estimates. Royal Crown's soft drink
brands have approximately a 2.1% share of national supermarket volume, as
measured by data of Information Resources, Inc. ("IRI").
BUSINESS STRATEGY
Royal Crown's management is pursuing business strategies designed to
strengthen its distribution system, make more effective use of its marketing
resources, continue the expansion of its international and private label
businesses, develop new packages and concentrate resources on its core brands.
Additionally, in January 1997, Triarc sold its interest in Saratoga Beverage
Group, Inc. ("Saratoga") and Royal Crown terminated its relationship with
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Saratoga. Royal Crown has also decided to discontinue selling Royal Crown
Draft Cola as a finished product. Royal Crown is evaluating the possibility of
selling concentrate for that product.
ADVERTISING AND MARKETING
A principal determinant of success in the soft drink industry is the
ability to establish a recognized brand name, the lack of which serves as a
significant barrier to entry to the industry. Advertising, promotions and
marketing expenditures in 1994, 1995 and 1996 were approximately $78.2
million, $86.2 million and $76.8 million, respectively. Royal Crown believes
that its products continue to enjoy nationwide brand recognition.
ROYAL CROWN'S BOTTLER NETWORK
Royal Crown sells its flavoring concentrates for branded products to
independent licensed bottlers in the United States and 61 foreign countries,
including Canada. Consistent with industry practice, each bottler is assigned
an exclusive territory within which no other bottler may distribute Royal
Crown branded soft drinks. As of December 31, 1996, Royal Crown products were
packaged and/or distributed domestically in 156 licensed territories, by 174
licensees, covering 50 states. There were a total of 56 production centers
operating pursuant to 49 production and distribution agreements and 124
distribution only agreements.
Royal Crown enters into a license agreement with each of its bottlers which
it believes is comparable to those prevailing in the industry. The duration of
the license agreements varies, but Royal Crown may terminate any such
agreement in the event of a material breach of the terms thereof by the
bottler that is not cured within a specified period of time.
Royal Crown's ten largest bottler groups accounted for 63.6% and 68.4% of
Royal Crown's domestic unit sales of concentrate for branded products during
1995 and 1996, respectively. The two largest bottler groups, Chicago Bottling
Group, and Beverage America, accounted for 20.1% and 10.2%, respectively, of
Royal Crown's domestic unit sales of concentrate for branded products during
1995 and 21.9% and 9.3%, respectively, during 1996.
PRIVATE LABEL
Royal Crown believes that private label sales through Cott, a leading
supplier of private label soft drinks, represent an opportunity to benefit
from the increased emphasis by national retailers on the development and
marketing of quality store brand merchandise at competitive prices. Royal
Crown's private label sales began in late 1990 and, as Cott's business
expanded, more than tripled from calendar year 1992 to calendar year 1994.
Unit sales to Cott declined in 1995, according to Cott, as a result of a
significant reduction in worldwide Cott system inventories and a slowing of
the rapid growth Cott's business has experienced. In 1996, sales to Cott
rebounded as Cott's business grew and its inventory normalized as Cott
increased its purchases from Royal Crown for certain non-cola concentrates. In
1994, 1995 and 1996, revenues from the Cott business represented approximately
14.2%, 12.1% and 12.6%, respectively, of Royal Crown's total revenues.
Royal Crown provides concentrate to Cott pursuant to a concentrate supply
agreement entered into in 1994 (the "Cott Worldwide Agreement"). Under the
Cott Worldwide Agreement, Royal Crown is Cott's exclusive worldwide supplier
of cola concentrates for retailer-branded beverages in various containers. In
addition, Royal Crown also supplies Cott with non-cola carbonated soft drink
concentrates. The Cott Worldwide Agreement requires that Cott purchase at
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least 75% of its total worldwide requirements for carbonated soft drink
concentrates from Royal Crown. The initial term of the Cott Worldwide
Agreement is 21 years, with multiple six-year extensions.
Cott delivers the private label concentrate and packaging materials to
independent bottlers for bottling. The finished private label product is then
shipped to Cott's trade customers, including major retailers such as Wal-Mart,
A&P and Safeway. The Cott Worldwide Agreement provides that, as long as Cott
purchases a specified minimum number of units of private label concentrate in
each year of the Cott Worldwide Agreement, Royal Crown will not manufacture
and sell private label carbonated soft drink concentrates to parties other
than Cott anywhere in the world.
Through its private label program, Royal Crown develops new concentrates
specifically for Cott's private label accounts. The proprietary formulae Royal
Crown uses for its private label program are customer specific and differ from
those of Royal Crown's branded products. Royal Crown works with Cott to
develop a concentrate according to each trade customer's specifications. Royal
Crown retains ownership of the formulae for such concentrates developed after
the date of the Cott Worldwide Agreement, except upon termination of the Cott
Worldwide Agreement as a result of breach or non-renewal by Royal Crown.
PRODUCT DISTRIBUTION
Bottlers distribute finished product through four major distribution
channels: take home (consisting of food stores, drug stores, mass
merchandisers, warehouses and discount stores); convenience (consisting of
convenience stores and retail gas station mini-markets); fountain/food service
(consisting of fountain syrup sales and restaurant single drink sales); and
vending (consisting of bottle and can sales through vending machines). The
take home channel is the principal channel of distribution for Royal Crown
products. According to IRI data, the volume of Royal Crown products in food
stores and drug stores in 1996 was down approximately 7% and 9%, respectively,
as compared to 1995, while the volume of Royal Crown products in mass
merchandisers was down approximately 12% in 1996. Royal Crown brands
historically have not been broadly distributed through vending machines or
convenience outlets; in 1996, the volume of Royal Crown products in the
convenience channel was down approximately 10% as compared to 1995.
INTERNATIONAL
Sales outside the United States accounted for approximately 9.9% , 9.6% and
10.3% of Royal Crown's sales in 1994, 1995, and 1996, respectively. Sales
outside the United States of branded concentrates accounted for approximately
8.9%, 10.2% and 12.3% of branded concentrate sales in 1994, 1995 and 1996,
respectively. As of December 31, 1996, 90 bottlers and 13 distributors sold
Royal Crown brand products outside the United States in 61 countries, with
international sales in 1996 distributed among Canada 11.3%, Latin America and
Mexico 29.8%, Europe 33.3%, the Middle East/Africa 14.7% and the Far East
10.9%. While the financial and managerial resources of Royal Crown have been
focused on the United States and Canada, Royal Crown's management believes
significant opportunities exist in international markets. In those countries
where Royal Crown brands are currently distributed, Royal Crown traditionally
has provided limited advertising support due to capital constraints. New
bottlers were added in 1996 to the following international markets: Brazil
(2), Sweden, Poland, Argentina, Korea, Syria and the C.I.S/Baltics (2).
PRODUCT DEVELOPMENT AND RAW MATERIALS
Royal Crown believes that it has a reputation as an industry leader in
product innovation. Royal Crown introduced the first national brand diet cola
in 1961. The DIET RITE flavors line was introduced in 1988 to complement the
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cola line and to target the non-cola segment of the market, which has been
growing faster than the cola segment due to a consumer trend toward lighter
beverages. In 1997, Royal Crown introduced a new version of DIET RITE COLA.
From time to time, Royal Crown purchases as much as a year's supply of
certain raw materials to protect itself against supply shortages, price
increases and/or political instabilities in the countries from which such raw
materials are sourced. Flavoring ingredients and sweeteners are generally
available on the open market from several sources.
RESTAURANTS (ARBY'S)
TRIARC RESTAURANT GROUP
In June 1996 the Company announced that Arby's would do business under the
name Triarc Restaurant Group to reflect the Company's commitment to the
multi-branded restaurant concept. See " -- Multi-Branding" below.
SALE OF COMPANY-OWNED RESTAURANTS
On February 13, 1997, Arby's, ARDC, ARHC and AROC, each a wholly-owned
subsidiary of the Company, entered into a stock purchase agreement with RTM
and Holdco pursuant to which Holdco would acquire from the Sellers (ARDC, ARHC
and AROC) all of the stock of Newco which will own all of the Sellers' 355
company-owned Arby's restaurants. The purchase price is approximately $71
million, consisting primarily of the assumption of approximately $69 million
in mortgage indebtedness and capitalized lease obligations. The consummation
of the transaction is subject to customary closing conditions, including
receipt of necessary consents and regulatory approvals.
GENERAL
Arby's is the world's largest franchise restaurant system specializing in
slow-roasted meat sandwiches with an estimated market share in 1996 of
approximately 73% of the roast beef sandwich segment of the quick service
sandwich restaurant category. In addition, the Company believes that Arby's is
the 11th largest quick service restaurant chain in the United States, based on
domestic system-wide sales. As of December 31, 1996, Arby's restaurant system
consisted of 3,022 restaurants, of which 2,859 operated within the United
States and 163 operated outside the United States. As of December 31, 1996,
Arby's owned and operated 355 restaurants and the remaining 2,667 restaurants
were owned and operated by franchisees. At December 31, 1996, all but 16
restaurants outside the United States were franchised. System-wide sales were
approximately $1.8 billion in 1994, approximately $1.9 billion in 1995 and
approximately $2.0 billion in 1996.
In addition to its various slow-roasted meat sandwiches, Arby's restaurants
also offer a selected menu of chicken, submarine sandwiches, side-dishes and
salads. A breakfast menu is also available at some Arby's restaurants. In
addition, Arby's has entered into agreements with three multi-branding
partners and intends to expand its multi-branding efforts which will add other
brands' items to Arby's menu items at such multi-branded restaurants. See "--
Multi-Branding" below.
Arby's revenues are derived from three principal sources: (i) sales at
company-owned restaurants (which will terminate upon the closing of the
transaction with RTM, see "Item 1. -- Business -- Strategic Alternatives");
(ii) royalties from franchisees and (iii) one-time franchise fees from new
franchisees. During 1994, 1995, and 1996 approximately 77% , 80% and 80%
respectively, of Arby's revenues were derived from sales at company-owned
restaurants and approximately 23% , 20%, and 20% respectively, were derived
from royalties and franchise fees.
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INDUSTRY
The U.S. restaurant industry is highly fragmented, with approximately
415,000 units nationwide. Industry surveys indicate that the largest chains
accounted for approximately 18% of all units and 30% of all industry sales in
1996. According to data compiled by the National Restaurant Association, total
domestic restaurant industry sales were estimated to be approximately $200
billion in 1996, of which approximately $98 billion was estimated to be in the
quick service restaurant ("QSR") or fast food segment.
ARBY'S RESTAURANTS
The first Arby's restaurant opened in Youngstown, Ohio in 1964. As of
December 31, 1996, Arby's restaurants were being operated in 48 states and 13
foreign countries. At December 31, 1996, the five leading states by number of
operating units were: Ohio, with 234 restaurants; Texas, with 183 restaurants;
California, with 166 restaurants; Michigan, with 155 restaurants; and Florida,
with 150 restaurants. The leading country outside the United States is Canada
with 111 restaurants.
Arby's restaurants in the United States and Canada typically range in
size from 700 square feet to 4,000 square feet. Restaurants in other countries
typically are larger than U.S. and Canadian restaurants. Restaurants typically
have a manager, assistant manager and as many as 20 full and part-time
employees. Staffing levels, which vary during the day, tend to be heaviest
during the lunch hours.
The following table sets forth the number of company-owned and franchised
Arby's restaurants at December 31, 1994, 1995 and 1996.
THROUGH DECEMBER 31, 1996
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1994 1995 1996
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Company-owned restaurants.......... 288 373 355
Franchised restaurants............. 2,500 2,577 2,667
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Total restaurants............ 2,788 2,950 3,022
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From April 1993 through December 31, 1995, Arby's had an accelerated
program of opening company-owned restaurants. Arby's opened 49 company-owned
restaurants in 1995, as compared to nine company-owned restaurants in 1994 and
five company-owned restaurants in 1993. In 1996, new restaurant openings
slowed down as management focused resources on converting existing restaurants
to multi-brand restaurants and upgrading facilities offering an expanded menu.
In 1996 Arby's opened three company-owned restaurants. In order to facilitate
new company-owned restaurant openings, in 1995 and 1996, RC/Arby's, ARDC and
ARHC entered into a series of transactions including loan agreements with FFCA
Mortgage Corp. (formerly known as FFCA Acquisition Corp.), a subsidiary of
Franchise Finance Corporation of America, pursuant to which they borrowed, in
the aggregate, $62.7 million ($58.4 million of which was outstanding as of
December 31, 1996), of the $87.3 million available under such agreements. In
February 1997, the Company entered into an agreement with RTM to sell to an
affiliate of RTM all of the 355 company-owned Arby's restaurants. See "Item 1.
Business -- Strategic Alternatives."
FRANCHISE NETWORK
At December 31, 1996, there were 571 Arby's franchisees operating 2,667
separate locations. The initial term of the typical "traditional" franchise
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agreement is 20 years. As of December 31, 1996, Arby's did not offer any
financing arrangements to its franchisees, except that in certain development
agreements Arby's has made available extended payment terms.
As of December 31, 1996, Arby's had received prepaid commitments for the
opening of up to 429 new domestic franchised restaurants over the next ten
years. Arby's plans opening approximately 115 new domestic franchised
restaurants in 1997. Arby's also expects that 20 new franchised restaurants
outside of the United States will open in 1997. In addition, as noted above,
RTM has agreed to cause Newco to build an additional 190 Arby's restaurants
pursuant to a development agreement. See "Item 1. -- Business -- Strategic
Alternatives." Arby's also has territorial agreements with international
franchisees in five countries at December 31, 1996. Under the terms of these
territorial agreements, many of the international franchisees have the
exclusive right to open Arby's restaurants in specific regions or countries,
and, in some cases, the right to sub-franchise Arby's restaurants. Arby's
management expects that future international franchise agreements will more
narrowly limit the geographic exclusivity of the franchisees and prohibit
sub-franchise arrangements.
Arby's offers franchises for the development of both single and multiple
"traditional" restaurant locations. All franchisees are required to execute
standard franchise agreements. Arby's standard U.S. franchise agreement
currently provides for, among other things, an initial $37,500 franchise fee
for the first franchised unit and $25,000 for each subsequent unit and a
monthly royalty payment based on 4.0% of restaurant sales for the term of the
franchise agreement. As a result of lower royalty rates still in effect under
earlier agreements, the average royalty rate paid by franchisees during 1996
was 3.1%. Franchisees typically pay a $10,000 commitment fee, credited against
the franchise fee referred to above, during the development process for a new
traditional restaurant.
In December 1994, Arby's began granting development agreements which give
developers rights to develop Arby's limited menu restaurants in conjunction
with either an existing operating food service or other business in
non-traditional locations for a specified term. These agreements require a
$1,000 development deposit per store which is then applied toward royalties
which are to be paid at a rate of 10% of sales (which includes the AFA
contribution referred to below). The developer/franchisee is required to sign
an individual franchise agreement for a term of five years. As of December 31,
1996, there were 30 franchised limited menu restaurants in operation.
Franchised restaurants are operated in accordance with uniform operating
standards and specifications relating to the selection, quality and
preparation of menu items, signage, decor, equipment, uniforms, suppliers,
maintenance and cleanliness of premises and customer service. Arby's
continuously monitors franchisee operations and inspects restaurants
periodically to ensure that company practices and procedures are being
followed.
MULTI-BRANDING
Arby's continues to pursue the development of a multi-branding strategy,
which allows a single restaurant to offer the consumer distinct, but
complementary, brands at the same restaurant. Collaborating to offer a broader
menu is intended to increase sales per square foot of facility space, a key
measure of return on investment in retail operations. Arby's has obtained
exclusive worldwide rights to operate or grant franchises to operate ZuZu
restaurants, which offer handmade Mexican food, at multi-brand locations. In
addition, in 1995 Arby's acquired P.T. Noodle's, which offers a variety of
Asian, Italian and American dishes based on serving corkscrew noodles with a
variety of different sauces. In August 1996, Arby's completed the purchase of
the tradenames, trademarks, service marks, logos, signs, recipes, secret
formulas and technical information of T.J. Cinnamons, Inc., an operator and
franchisor of retail bakeries specializing in gourmet cinnamon rolls and
related products. As of March 1, 1997, 22 company-owned Arby's restaurants
were multi-brand locations, including 14 that offer P.T. Noodles' products,
five that offer ZuZu's products and three that offer T.J. Cinnamons' products.
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ADVERTISING AND MARKETING
Arby's advertises primarily through regional television, radio and
newspapers. Payment for advertising time and space is made by local
advertising cooperatives in which owners of local franchised restaurants and
Arby's, to the extent that it owns local company-owned restaurants,
participate. Franchisees and Arby's contribute 0.7% of gross sales to the
Arby's Franchise Association ("AFA"), which produces advertising and promotion
materials for the system. Each franchisee is also required to spend a
reasonable amount, but not less than 3% of its monthly gross sales, for local
advertising. This amount is divided between the franchisee's individual local
market advertising expense and the expenses of a cooperative area advertising
program with other franchisees who are operating Arby's restaurants in that
area. Contributions to the cooperative area advertising program are determined
by the participants in the program and are generally in the range of 3% to 5%
of monthly gross sales. In 1994, 1995 and 1996, Arby's expenditures for
advertising and marketing in support of company-owned stores were $17.2
million, $22.4 million, and $25.8 million, respectively.
QUALITY ASSURANCE
Arby's has developed a quality assurance program designed to maintain
standards and uniformity of the menu selections at each of its franchised
restaurants. A full-time quality assurance employee is assigned to each of the
four independent processing facilities that process roast beef for Arby's
domestic restaurants. The quality assurance employee inspects the roast beef
for quality and uniformity. In addition, a laboratory at Arby's headquarters
tests samples of roast beef periodically from each franchisee. Each year,
representatives of Arby's conduct unannounced inspections of operations of
each franchisee to ensure that Arby's policies, practices and procedures are
being followed. Arby's field representatives also provide a variety of on-site
consultative services to franchisees.
PROVISIONS AND SUPPLIES
Arby's roast beef is provided by four independent meat processors.
Franchise operators are required to obtain roast beef from one of the four
approved suppliers. Arby's, through the non-profit purchasing cooperative
ARCOP, Inc. ("ARCOP"), which negotiates contracts with approved suppliers on
behalf of Arby's and its franchisees, has entered into "cost-plus" contracts
and purchases with these suppliers. Arby's believes that satisfactory
arrangements could be made to replace any of its current roast beef suppliers,
if necessary, on a timely basis.
Franchisees may obtain other products, including food, beverage,
ingredients, paper goods, equipment and signs, from any source that meets
Arby's specifications and approval, which products are available from numerous
suppliers. Food, proprietary paper and operating supplies are also made
available, through national contracts employing volume purchasing, to Arby's
franchisees through ARCOP.
GENERAL
TRADEMARKS
Royal Crown considers its concentrate formulae, which are not the subject
of any patents, to be trade secrets. In addition, RC COLA, DIET RC, ROYAL
CROWN, ROYAL CROWN DRAFT COLA, DIET RITE, NEHI, NEHI LOCKJAW, UPPER 10, KICK
and THIRST THRASHER are registered as trademarks in the United States, Canada
and a number of other countries. Royal Crown believes that such trademarks are
material to its business.
Arby's is the sole owner of the ARBY'S trademark and considers it, and
certain other trademarks owned or licensed by Arby's, to be material to its
business. Pursuant to its standard franchise agreement, Arby's grants each of
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its franchisees the right to use Arby's trademarks, service marks and trade
names in the manner specified therein.
The material trademarks of Royal Crown and Arby's are registered in the
U.S. Patent and Trademark Office and various foreign jurisdictions. Royal
Crown's and Arby's rights to such trademarks in the United States will last
indefinitely as long as they continue to use and police the trademarks and
renew filings with the applicable governmental offices. No challenges have
arisen to Royal Crown's or Arby's right to use the foregoing trademarks in the
United States.
COMPETITION
The Company's two businesses operate in highly competitive industries.
Many of the major competitors in these industries have substantially greater
financial, marketing, personnel and other resources than does the Company or
Triarc.
Royal Crown's soft drink products compete generally with all liquid
refreshments and in particular with numerous nationally-known soft drinks such
as Coca-Cola and Pepsi-Cola. Royal Crown competes with other beverage
companies not only for consumer acceptance but also for shelf space in retail
outlets and for marketing focus by Royal Crown's distributors, most of which
also distribute other beverage brands. The principal methods of competition in
the beverage industry include product quality and taste, brand advertising,
trade and consumer promotions, pricing, packaging and the development of new
products.
Arby's faces direct and indirect competition from numerous well
established competitors, including national and regional fast food chains,
such as McDonald's, Burger King, Wendy's and Boston Market. In addition,
Arby's competes with locally owned restaurants, drive-ins, diners and other
food service establishments. Key competitive factors in the QSR industry are
price, quality of products, quality and speed of service, advertising, name
identification, restaurant location and attractiveness of facilities.
In recent years, both the beverage and restaurant businesses have
experienced increased price competition resulting in significant price
discounting throughout these industries. Price competition has been especially
intense with respect to sales of beverage products in food stores, with local
bottlers granting significant discounts and allowances off wholesale prices in
order to maintain or increase market share in the food store segment. When
instituting its own discount promotions, Arby's has experienced increases in
sales but, with respect to company-owned restaurant operations, lower gross
margins. While the net impact of price discounting in the soft drink and QSR
industries cannot be quantified, such practices could have an adverse impact
on the Company.
WORKING CAPITAL
Royal Crown's and Arby's working capital requirements are generally met
through cash flow from operations. Accounts receivable of Royal Crown are
generally due in 30 days and Arby's franchise royalty fee receivables are due
within 10 days after each month end.
GOVERNMENTAL REGULATIONS
Each of the Company's two business segments is subject to a variety of
federal, state and local laws, rules and regulations.
Arby's is subject to regulation by the Federal Trade Commission and
state laws governing the offer and sale of franchises and the substantive
aspects of the franchisor-franchisee relationship. In addition, Arby's is
subject to the Fair Labor Standards Act and various state laws governing such
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matters as minimum wages, overtime and other working conditions. Pursuant to
an amendment to the Fair Labor Standards Act, the federal minimum wage was
increased from $4.25 per hour to $4.75 per hour, effective October 1, 1996,
with an additional increase to $5.15 per hour to become effective on September
1, 1997. Significant numbers of the food service personnel at Arby's
restaurants are paid at rates related to the federal and state minimum wage,
and increases in the minimum wage may therefore increase the labor costs of
Arby's and its franchisees. Arby's is also subject to the Americans with
Disabilities Act (the "ADA"), which requires that all public accommodations
and commercial facilities meet certain federal requirements related to access
and use by disabled persons. Compliance with the ADA requirements could
require removal of access barriers and non-compliance could result in
imposition of fines by the U.S. government or an award of damages to private
litigants. Although Arby's management believes that its facilities are
substantially in compliance with these requirements, Arby's may incur
additional costs to comply with the ADA. However, the Company does not believe
that such costs will have a material adverse effect on the Company's
consolidated financial position or results of operations. From time to time,
Arby's has received inquiries from federal, state and local regulatory
agencies or has been named as a party to administrative proceedings brought by
such regulatory agencies. The Company does not believe that any such inquiries
or proceedings will have a material adverse effect on the Company's
consolidated financial position or results of operations.
The production and marketing of Royal Crown beverages are subject to the
rules and regulations of various federal, state and local health agencies,
including the United States Food and Drug Administration (the "FDA"). The FDA
also regulates the labeling of Royal Crown products. In addition, Royal
Crown's dealings with their licensees and/or distributors may, in some
jurisdictions, be subject to state laws governing licensor-licensee or
distributor relationships.
Except as described herein, the Company is not aware of any pending
legislation that in its view is likely to affect significantly the operations
of the Company's subsidiaries. The Company believes that the operations of its
subsidiaries comply substantially with all applicable governmental rules and
regulations.
ENVIRONMENTAL MATTERS
Certain of the Company's operations are subject to federal, state and
local environmental laws and regulations concerning the discharge, storage,
handling and disposal of hazardous or toxic substances. Such laws and
regulations provide for significant fines, penalties and liabilities, in
certain cases without regard to whether the owner or operator of the property
knew of, or was responsible for, the release or presence of such hazardous or
toxic substances. In addition, third parties may make claims against owners or
operators of properties for personal injuries and property damage associated
with releases of hazardous or toxic substances. The Company cannot predict
what environmental legislation or regulations will be enacted in the future or
how existing or future laws or regulations will be administered or
interpreted. The Company cannot predict the amount of future expenditures
which may be required in order to comply with any environmental laws or
regulations or to satisfy any such claims. The Company believes that its
operations comply substantially with all applicable environmental laws and
regulations.
In 1993 Royal Crown became aware of possible contamination from
hydrocarbons in groundwater at two abandoned bottling facilities. In 1994, as
a result of tests necessitated by the removal of four underground storage
tanks at Royal Crown's no longer used distribution site in Miami, Florida,
hydrocarbons were discovered in the groundwater. Assessment is proceeding
under the direction of the Dade County Department of Environmental Resources
Management ("DERM") to determine the extent of the contamination. Remediation
has commenced at this site, and management estimates that total remediation
costs (in excess of amounts incurred through December 31, 1996) will be
approximately $135,000, depending on the actual extent of the contamination.
Additionally, in 1994 the Texas Natural Resources Conservation Commission
approved the remediation of hydrocarbons in the groundwater by Royal Crown at
its former distribution site in San Antonio, Texas. Remediation has commenced
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at this site. Management estimates the total cost of remediation to be
approximately $110,000 (in excess of amounts incurred through December 31,
1996), of which 60-70% is expected to be reimbursed by the State of Texas
Petroleum Storage Tank Remediation Fund. Royal Crown has incurred actual costs
of $439,000, in the aggregate, through December 31, 1996 for these matters.
The Company does not believe that the outcome of these matters will have a
material adverse effect on the Company's consolidated results of operations or
financial position. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
SEASONALITY
The beverage and restaurant businesses are seasonal. In such businesses,
the highest sales occur during spring and summer (April through September).
However, the Company's consolidated financial results are not materially
affected by these seasonal factors.
EMPLOYEES
As of December 31, 1996, Arby's employed approximately 7,035 personnel,
including approximately 925 salaried personnel and approximately 6,110 hourly
personnel. As of such date, Royal Crown employed approximately 200 personnel,
including approximately 170 salaried personnel and approximately 30 hourly
personnel. The Company's management believes that employee relations are
satisfactory. At December 31, 1996, none of the Company's employees were
represented by labor unions.
Item 2. Properties.
The Company maintains a large number of diverse properties. Management
believes that these properties, taken as a whole, are generally well
maintained and are adequate for current and foreseeable business needs. The
majority of the properties are leased. Except as set forth below,
substantially all of the Company's materially important physical properties
are being fully utilized.
Certain information about the major plants and facilities maintained by
each of the Company's two business segments as of December 31, 1996 is set
forth in the following table:
Segment Facilities-Location Land Title Floor Space
------- ------------------- ---------- -----------
Beverages......... Concentrate Mfg.:
Columbus, GA
(including office) 1 owned 216,000
Cincinnati, OH 1 leased 23,000
Corporate Headquarters 1 leased 19,180*
Restaurant........ 355 Restaurants: 75 owned **
(all but 16 280 leased
locations
throughout the
United States)
Corporate Headquarters 1 leased 58,429*
Inactive Facilities
Restaurant........ Restaurants 1 owned **
10 leased
- ----------------
* Royal Crown and Arby's also share 18,759 square feet of common space in the
Company's corporate headquarters located in Fort Lauderdale, FL. In
connection with the formation of the Triarc Beverage Group, approximately
one half of a 32,320 square foot lease obligation for Mistic's headquarters
in White Plains, NY has been assumed by Royal Crown.
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** While Arby's restaurants range in size from approximately 700 square feet
to 4,000 square feet, the typical company-owned Arby's restaurant in the
United States is approximately 2,570 square feet. It is expected that all
of the company-owned Arby's restaurants will be sold. See "Item 1.
Business -- Strategic Alternatives" and "Business Segments -- Restaurants".
Arby's also owns seven and leases fifteen restaurants which are leased or
sublet principally to franchisees. Substantially all properties are pledged as
collateral for certain debt.
Item 3. Legal Proceedings.
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 $2.5 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 on the ground that 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 AR's commencement of suspension of
payments proceedings in February 1995 had automatically terminated the master
development agreement. In the civil court proceeding, the court denied a
motion by Arby's to suspend the 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. Arby's is contesting AR's
claims vigorously and believes that it has meritorious defenses to AR's
claims.
Other matters arise in the ordinary course of the Company's business, and
it is the opinion of management that the course of any such matter, or all of
them combined, will not have a material adverse effect on the Company's
consolidated financial condition or results of operations.
Item 4. Submission of Matters to Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of the Company's common stock is owned by CFC Holdings, 94.6% of which
in turn is owned by Triarc, and the remaining 5.4% of which is owned by a
wholly-owned subsidiary of Triarc.
Item 6. Selected Financial Data.
Year Ended December 31,
----------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
Net sales...................$298,886 $314,686 $322,888 $389,591 $409,100
Royalties, franchise fees
and other revenues....... 42,767 46,296 51,017 55,792 57,252
------- -------- -------- ------- --------
Total revenues.............. 341,653 360,982 373,905 445,383 466,352
------- -------- -------- -------- --------
Operating profit (loss)..... 48,005 9,713 (a)30,074 (4,756)(b)(31,583)(c)
Income (loss) before extra-
ordinary charges and
cumulative effect of
changes in accounting
principles............... 1,779 (22,890)(a)(5,477) (33,650)(b)(50,558)(c)
Extraordinary charges....... - (7,059) - - -
Cumulative effect of changes
in accounting principles. - (1,891) - - -
Net income (loss)........... 1,779 (31,840)(a)(5,477) (33,650)(b)(50,558)(c)
Total assets................ 293,950 355,059 340,842 394,220 360,444
Long-term debt and note
payable to affiliate..... 106,612 288,394 291,349 357,938 287,810
Stockholder's equity
(deficit) (d)............. 63,792 (33,148) (38,625) (63,410) (113,968)
- ------------------
(a)Reflects certain significant charges recorded during 1993 as follows:
$21,305,000 charged to operating profit representing $18,000,000 of
facilities relocation and corporate restructuring relating to a change in
control of the Company and $3,305,000 of other net charges; $18,507,000
charged to loss before extraordinary charges and cumulative effect of
changes in accounting principles representing the aforementioned
$21,305,000 charged to operating profit, $5,700,000 of other charges, less
$8,498,000 of income tax benefit relating to the aggregate of the above
charges; and $27,457,000 charged to net loss representing the
aforementioned $18,507,000 charged to loss before extraordinary charges and
cumulative effect of changes in accounting principles, $7,059,000 of
extraordinary charges from the early extinguishment of debt and $1,891,000
cumulative effect of changes in accounting principles.
(b)Reflects certain significant charges recorded during 1995 as follows:
$17,054,000 charged to operating loss representing a $14,647,000 charge for
a reduction in the carrying value of long-lived assets impaired or to be
disposed of and $2,407,000 of other charges; and $13,243,000 charged to
loss before extraordinary charges and cumulative effect of changes in
accounting principles and net loss representing the aforementioned
$17,054,000 charged to operating loss, less $4,911,000 of income tax
benefit relating to the aggregate of the above charges and plus a
$1,100,000 provision for income tax contingencies.
(c)Reflects certain significant charges recorded during 1996 as follows:
$65,250,000 charged to operating loss representing a $58,900,000 charge for
a reduction in the carrying value of long-lived assets impaired or to be
disposed of and $6,350,000 of facilities relocation and corporate
restructuring; and $41,107,000 charged to loss before extraordinary charges
and cumulative effect of changes in accounting principles and net loss
representing the aforementioned $65,250,000 charged to operating loss, less
$24,143,000 of income tax benefit on the above charges.
(d)The Company has not paid any cash dividends on its common shares during any
of the years presented. In 1993, the Company transferred as a dividend to
CFC Holdings a $75.0 million promissory note which evidenced an
intercompany loan from the Company to Triarc.
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Item 7. 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 the consolidated
financial statements included herein of RC/Arby's Corporation ("RCAC" or,
collectively with its subsidiaries, the "Company"). Certain statements under
this caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" constitute "forward-looking statements" under the
Reform Act. See "Special Note Regarding Forward-Looking Statements" in "Part
I" preceding "Item 1".
Results of Operations
Trends affecting the restaurant segment (Arby's) in recent years include
consistent growth of the restaurant industry as a percentage of total
food-related spending, with the quick service restaurant ("QSR"), or fast food
segment in which the Company operates (see below), being the fastest growing
segment of the restaurant industry. In addition, there has been increased
price competition in the QSR industry, particularly evidenced by the value
menu concept which offers comparatively lower prices on certain menu items,
the combination meals concept which offers a combination meal at an aggregate
price lower than the individual food and beverage items, couponing and other
price discounting. Some QSR's have been adding selected higher-priced premium
quality items to their menus, which appeal more to adult tastes and recover
some of the margins lost in the discounting of other menu items. Assuming
consummation of the RTM sale (see discussion below under "Liquidity and
Capital Resources"), the Company's restaurant operations will be exclusively
franchising.
Trends affecting the beverage segment (Royal Crown) in recent years have
included the increased market share of private label beverages, increased
price competition throughout the industry, the development of proprietary
packaging and the proliferation of new products being introduced including
"premium" beverages.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues increased $21.0 million (4.7%) to $466.4 million in 1996.
Restaurant revenues increased $15.6 million (5.7%) to $288.3 million due to
(i) a $14.1 million increase in net sales principally resulting from the
inclusion in 1996 of a full year of net sales for the 85 company-owned
restaurants added in 1995 (net of closings) and a 0.5% increase in same-store
sales and (ii) a $1.5 million increase in royalties, franchise fees and other
revenues resulting primarily from a net increase of 90 (3.5%) franchised
restaurants, a 0.8% increase in same-store sales of franchised restaurants and
a 2.0% increase in average royalty rates due to the declining significance of
older franchise agreements with lower rates, the effects of which were
partially offset by a $1.8 million decline in franchise fees resulting from
fewer franchise store openings in 1996. Beverage revenues increased $5.4
million (3.1%) to $178.1 million due to (i) a $6.9 million increase in
finished product sales (as opposed to concentrate) reflecting increased sales
in the New York metropolitan area, the distribution rights to which were
acquired during January 1995, as well as the full year effect of the 1995
addition of an herbal tea line and (ii) a $1.7 million volume increase in
private label concentrate sales, all partially offset by a $3.2 million
decrease in branded concentrate sales principally reflecting lower average
selling prices.
Gross profit (total revenues less cost of sales) increased $8.0 million to
$213.5 million in 1996 while gross margins (gross profit divided by total
revenues) were relatively unchanged at 45.8% in 1996 compared with 46.1% in
1995. Restaurant gross profit increased $7.2 million to $97.1 million due
primarily to the effect of the increase in revenues described above and an
increase in restaurant gross margins to 33.7% from 33.0%. The increase in
restaurant gross margins was primarily due to lower beef costs and health
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insurance costs and an improvement in labor efficiencies due to fewer new
store openings and related start-up costs in 1996 versus 1995, the effects of
which were partially offset by a slightly lower percentage of royalties and
franchise fees (with no associated cost of sales) to total revenues. Beverage
gross profit increased $0.8 million to $116.4 million as a result of the
effect of the increase in net sales volume noted above, substantially offset
by a decline in gross margins to 65.4% from 66.9% due to the increased sales
of lower-margin finished product noted above and lower average selling prices
for branded concentrate.
Advertising, selling and distribution expenses declined $6.0 million to
$102.5 million in 1996. Advertising and selling expenses in the beverage
segment declined $9.4 million primarily due to (i) a net reduction in media
spending for branded concentrate products and Royal Crown Premium Draft Cola
("Draft Cola"), for which there had been higher costs in connection with its
launch in mid-1995 and (ii) lower beverage coupon costs reflecting reduced
bottler utilization, partially offset by a $2.0 million provision in 1996 for
uncollectible trade receivables from MetBev, Inc. ("MetBev"), an affiliated
distributor, which sold the distribution rights for Royal Crown products in
New York City and certain surrounding counties in December 1996 and commenced
the liquidation of its remaining assets and liabilities. Partially offsetting
the decrease in the beverage segment, advertising and selling expenses in the
restaurant segment increased $3.4 million primarily in response to competitive
pressures, a larger company-owned store base and multi-brand restaurant
development.
General and administrative expenses decreased $9.7 million to $77.3 million
in 1996, principally reflecting the effect of cost reduction efforts in both
the restaurant and beverage segments and non- recurring 1995 charges of $2.1
million for the closing of certain unprofitable restaurants and a $1.2 million
provision for the guarantee (the "MetBev Guarantee") of MetBev's third party
accounts payable since MetBev had experienced in 1995 and continued to
experience in 1996 significant losses from operations There was no similar
provision for the guarantee in 1996 since MetBev made similar purchases from a
subsidiary of the Company in 1996.
The 1995 and 1996 reductions in carrying value of long-lived assets
impaired or to be disposed of result from the application of the evaluation
measurement requirements under Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which was adopted in 1995. The 1996 provision of
$58.9 million was recorded to reduce the carrying value of certain long-lived
assets and certain identifiable intangibles to estimated fair value relating
to the estimated loss on the anticipated disposal of long-lived assets in
connection with the planned sale of all company-owned restaurants (see further
discussion below under "Liquidity and Capital Resources"). The reduction in
carrying value of long-lived assets impaired or to be disposed of in the
amount of $14.6 million in 1995 reflects a $12.0 million reduction in the net
carrying value of certain restaurants and other long-lived restaurant assets
which were determined to be impaired and a $2.6 million reduction in the net
carrying value of certain other restaurants and equipment to be disposed of.
The 1996 facilities relocation and corporate restructuring charge of $6.3
million results from (i) $3.7 million of estimated losses on planned subleases
(principally for the write-off of nonrecoverable unamortized leasehold
improvements and furniture and fixtures) of surplus office space in excess of
anticipated sublease proceeds as a result of the planned sale of company-owned
restaurants discussed below under "Liquidity and Capital Resources" and the
relocation of the headquarters of Royal Crown which are being centralized with
the offices of Mistic Brands, Inc., Triarc's other beverage subsidiary, in
White Plains, New York, (ii) $2.2 million of employee severance costs
associated with the relocation of Royal Crown's headquarters and (iii) $0.4
million for the shutdown of the beverage segment's Ohio production facility.
Interest expense increased $3.3 million to $42.9 million in 1996
principally due to the full year effect in 1996 of financing for capital
spending at the restaurant segment through mortgage and equipment notes with
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FFCA Mortgage Corporation ("FFCA") principally during the second through
fourth quarters of 1995 ($58.4 million outstanding at December 31, 1996).
Other income (expense), net was income of $0.6 million in 1996 compared
with expense of $1.8 million in 1995. The favorable change between years was
principally attributable to $1.4 million of lower losses on asset disposals
and the nonrecurring 1995 write-down of a $1.0 million investment in MetBev.
The Company's benefit from income taxes in 1996 and 1995 represented
effective rates of 32% and 27%, respectively. Such benefit rate is higher in
1996 due to the reduced effect in 1996 of the amortization of non-deductible
costs in excess of net assets of acquired companies ("Goodwill") of $2.0
million in each year as a result of the significantly greater 1996 pre-tax
loss and a nonrecurring 1995 provision for income tax contingencies relating
to the examination of the Company's income tax returns for the years 1989
through 1992 of $1.1 million.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Revenues increased $71.5 million (19.1%) to $445.4 million in 1995.
Restaurant revenues increased $49.6 million (22.2%) due to (i) $50.1 million
of net sales resulting from 85 additional company-owned restaurants (including
acquired restaurants) to a total of 373 at the end of 1995, partially offset
by a $5.3 million decrease in company-owned same-store sales due primarily to
increased competitive discounting and a decline in the number of customer
orders, (ii) a $3.5 million increase in royalties resulting from a net
increase of 77 franchised restaurants, a 3.3% increase in average royalty
rates due to the declining significance of older franchise agreements with
lower rates, and a 0.9% increase in franchised same-store sales and (iii) a
$1.3 million increase in franchise fees and other revenues. Beverage revenues
increased $21.9 million (14.5%) reflecting $20.8 million of finished beverage
product sales arising from the Company's January 1995 acquisition of TriBev
Corporation ("TriBev"). The remaining increase reflected sales from the launch
of Draft Cola in the New York and Los Angeles metropolitan areas during the
second quarter of 1995.
Gross profit increased $7.0 million to $205.5 million in 1995 and margins
decreased to 46.1% compared with 53.1% in 1994. Restaurant gross profit
increased $6.8 million due primarily to the net increase in revenues described
above, the effects of which were partially offset by a decline in restaurant
margins to 33.0% from 37.3% due primarily to (i) $3.0 million of recurring
costs associated with replacing the point-of-sale register system in all
domestic company-owned restaurants and (ii) start-up costs associated with the
significantly higher number of new restaurant openings (49 in 1995 versus 9 in
1994). Also affecting margins was the lower percentage of royalties and
franchise fees to total revenues. Beverage gross profit increased $0.2 million
while beverage margins decreased to 66.9% from 76.5% due to the inclusion in
1995 of the lower-margin finished product sales associated with TriBev and
Draft Cola noted above.
Advertising, selling and distribution expenses increased $13.2 million to
$108.6 million in 1995. The increase consisted of (i) $8.0 million of higher
expenses in the beverage segment, reflecting increased spending in connection
with the introduction of Draft Cola and costs resulting from TriBev following
its acquisition and (ii) $5.2 million of higher expenses in the restaurant
segment primarily attributable to the increased number of company-owned
restaurants and increased promotional food costs related to competitive
discounting.
General and administrative expenses increased $14.0 million to $87.0
million in 1995 due to (i) a $7.0 million increase in employee compensation,
relocation and severance costs principally associated with building an
infrastructure to facilitate the then growth plans primarily in the restaurant
segment, (ii) a $2.1 million provision for the closing of certain unprofitable
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restaurants, (iii) $1.2 million attributable to TriBev, (iv) a $1.2 million
provision for the MetBev Guarantee and (v) other general inflationary
increases.
The reduction in carrying value of long-lived assets impaired or to be
disposed of $14.6 million in 1995 is discussed above.
Interest expense increased $5.1 million to $39.6 million in 1995 due
principally to $58.7 million of additional mortgage and equipment loans from
FFCA and a $6.0 million net increase in borrowings from Triarc and its
subsidiaries, which were used to finance capital expenditures and business
acquisitions in the restaurant segment.
Other income (expense), net amounted to expense of $1.8 million in 1995
compared with income of $0.6 million in 1994. The unfavorable change between
years was principally attributable to $1.6 million of 1995 losses on asset
disposals and the write-down of the $1.0 million investment in MetBev in 1995.
The Company's benefit from income taxes in 1995 represented an effective
rate of 27%, while the provision for income taxes in 1994 reflected an
effective rate of (45%). The 1995 effective rate differed from the federal
income tax statutory rate of 35% principally due to the effect of amortization
of non- deductible Goodwill and the aforementioned $1.1 million provision for
income tax contingencies. The 1994 effective rate differed from the statutory
rate principally due to the effect of amortization of Goodwill and the effects
of foreign and state income taxes, net of Federal benefit.
Liquidity and Capital Resources
Consolidated cash decreased $2.3 million during 1996 to $7.4 million. Such
decrease reflects cash used in investing activities (primarily capital
expenditures and an acquisition described below) of $16.7 million partially
offset by (i) cash provided by operating activities of $13.5 million and (ii)
cash provided by financing activities (primarily borrowings from third parties
and Triarc, net of repayments) of $0.9 million. The net cash provided by
operating activities principally reflects non-cash charges for (i) the
reduction in carrying value of long-lived assets of $58.9 million, (ii)
depreciation and amortization of $25.1 million, (iii) provision for facilities
relocation and corporate restructuring, net of payments, of $6.1 million and
(iv) provision for doubtful accounts and other items, net of $3.0 million, all
partially offset by (i) a net loss of $50.6 million, (ii) benefit from
deferred income taxes of $26.0 million and (iii) changes in operating assets
and liabilities of $3.0 million. The cash used for operating assets and
liabilities of $3.0 million reflects an increase in receivables of $7.6
million principally due to a $4.2 million increase in receivables from MetBev,
higher beverage sales in the fourth quarter of 1996 versus 1995 and slower
collections, partially offset by decreases in inventories and other current
assets of $2.2 million and a net increase in accrued expenses and accounts
payable of $2.4 million. The Company expects continued positive cash flows
from operations during 1997.
The $275.0 million aggregate principal amount of 9 3/4% senior secured
notes due 2000 (the "Senior Notes") mature on August 1, 2000 and do not
require any amortization of the principal amount thereof prior to such date.
Interest at the rate of 9 3/4% per annum is payable semi-annually on February
1 and August 1 of each year. Obligations under the Senior Notes have been
guaranteed by Royal Crown and Arby's and all of the stock and substantially
all of the personal property of Royal Crown and Arby's are pledged as
collateral for such guarantees. The indenture pursuant to which the Senior
Notes were issued (the "Senior Note Indenture") contains various covenants
including, among others, restrictions on dividends and other similar payments
and limitations on (i) the incurrence of indebtedness, (ii) asset
dispositions, (iii) investments and (iv) affiliate transactions other than in
the normal course of business. Under the terms of the Senior Note Indenture,
as of December 31, 1996 RCAC could not pay any dividends, or make any loans or
advances, to CFC Holdings.
20
<PAGE>
Two subsidiaries of RCAC maintain loan and financing agreements with FFCA
which, as amended, permit borrowings in the form of mortgage notes (the
"Mortgage Notes") and equipment notes (the "Equipment Notes") aggregating
$87.3 million (the "FFCA Loan Agreements"). The Mortgage Notes and Equipment
Notes are repayable in equal monthly installments, including interest, over
twenty and seven years, respectively. As of December 31, 1996, borrowings
under the FFCA Loan Agreements aggregated $62.7 million (including cumulative
repayments of $4.3 million through December 31, 1996) resulting in remaining
availability of $24.6 million through December 31, 1997 to finance new
company-owned restaurants whose sites are identified to FFCA by September 30,
1997 on terms similar to those of outstanding borrowings. The assets of one of
the borrowers, Arby's Restaurant Development Corporation, will not be
available to pay creditors of Triarc, RCAC or Arby's until all loans under the
FFCA Loan Agreements have been repaid in full. As discussed below, in February
1997 the Company entered into an agreement to sell all of its restaurants and,
if such sale is consummated on terms as they currently exist, the buyer would
assume $54.7 million of borrowings under the FFCA Loan Agreements, and the
Company would have no further availability under these financing agreements.
During 1996, the Company increased its net borrowings from Triarc and its
subsidiaries by $3.7 million under promissory notes. The outstanding principal
amounts of such promissory notes, aggregating $20.5 million of notes payable
offset by a $1.6 million note receivable at December 31, 1996, consist of
$12.0 million payable on demand, $1.8 million payable in 1997, $6.7 million
payable in 1998 and $1.6 million receivable on demand. Subsequent to December
31, 1996, the Company borrowed an additional $11.8 million, net under the
demand promissory note (the "Demand Note") payable to Triarc.
In February 1997, the principal subsidiaries comprising the Company's
restaurant segment entered into an agreement (the "RTM Agreement") with RTM,
Inc. ("RTM"), the largest franchisee in the Arby's system, pursuant to which
certain of such subsidiaries would sell to an affiliate of RTM all of the 355
company-owned Arby's restaurants. The purchase price consists of cash and a
promissory note aggregating $2.0 million and the assumption of approximately
$54.7 million in Mortgage and Equipment Notes and substantially all
capitalized lease obligations of approximately $15.0 million. The consummation
of the sale is subject to customary closing conditions, including receipt of
necessary consents and regulatory approvals, and is expected to occur during
the second quarter of 1997. After the consummation of the sale, RTM's
affiliate will operate 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 previous commitment RTM entered into last year to build an
additional 210 Arby's restaurants.
Consolidated capital expenditures amounted to $16.2 million in 1996,
which reflects significantly reduced spending levels from 1995, principally in
the restaurant segment where fewer new company-owned restaurants were
constructed. The Company expects that capital expenditures during 1997 will be
approximately $6.0 million, which is significantly less than 1996 as a result
of the cessation of restaurant- related spending due to the planned sale to
RTM. As of December 31, 1996, there were approximately $0.5 million of
outstanding commitments for such capital expenditures. The Company anticipates
that it will meet its capital expenditure requirements through existing cash
and cash flows from operations.
In furtherance of the Company's growth strategy, the Company considers
selective acquisitions, as appropriate, to grow strategically and explore
other alternatives to the extent it has available resources to do so. In
August 1996, the Company acquired the trademarks, service marks, recipes and
proprietary formulas of T.J. Cinnamons, Inc., an operator and franchisor of
retail bakeries specializing in gourmet cinnamon rolls and related products
for cash of $2.0 million and the issuance of $1.8 million of debt.
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.
21
<PAGE>
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
1996. As a result, no subsequent payment has been required through December
31, 1996. The Company does not expect to be required to make any such payments
during 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.
The Company maintains a defined benefit pension plan under which benefits
are frozen. While the Company has no current plans to terminate the plan,
should interest rates increase to a level at which there would be an
insignificant cash cost to the Company to terminate the plan, the Company may
decide to do so. As of December 31, 1996, based on the 4.75% interest rate as
currently recommended by the Pension Benefit Guaranty Corporation (the "PBGC")
for purposes of such calculation, the Company would have incurred a cash
outlay of $2.1 million. Such liability upon plan termination is significantly
dependent upon the interest rate assumed for such calculation purposes and,
within a reasonable range, such contingent liability increases (decreases) by
approximately $0.3 million for each 1/2% decrease (increase) in the assumed
interest rate. Based upon current interest rates, the Company believes it
would be able to liquidate the pension obligation for less than the $2.1
million determined using the PBGC rate should it choose to terminate the plan.
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, if any, of its proposed acquisition
of Snapple Beverage Corp. (which it announced on March 27, 1997) on the
anticipated structure of the Spinoff Transactions. See "Item 1. -- Business --
Strategic Alternatives".
Assuming consummation of the sale of company-owned restaurants to RTM, the
Company's remaining restaurant operations will be exclusively franchising.
Royalties and franchise fees amounted to $56.5 million in 1996 and will
increase in 1997 from 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 its cash
flows.
As of December 31, 1996, the Company had cash of $7.4 million available to
meet its cash requirements. The Company's cash requirements for 1997,
exclusive of operating cash flows, consist principally of capital expenditures
of approximately $6.0 million, funding for acquisitions, if any, and debt
(including capitalized leases and affiliated note) principal repayments of
$7.1 million, subject to the assumption of debt obligations included in the
$7.1 million by RTM with respect to the RTM Agreement as discussed above, but
excluding any repayments of the $12.0 million principal balance under the
Demand Note, as discussed below. The Company anticipates meeting such
22
<PAGE>
requirements through existing cash and/or cash flows from operations and, to
the extent cash is required other than for repayments to Triarc under the
Demand Note, borrowings from Triarc to the extent available. The Company
believes that it will not be required to make any repayments under the Demand
Note if the RTM sale is consummated and, if such sale is not consummated, it
will be required to make repayments in 1997 only to the extent of its
remaining cash balances in excess of its ongoing requirements for working
capital. 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 assuming consummation of the restaurant
sales to RTM as discussed above.
Contingencies
In 1993 Royal Crown became aware of possible contamination from
hydrocarbons in groundwater at two abandoned bottling facilities. Tests have
confirmed hydrocarbons in the groundwater at both of the sites and remediation
has commenced. Management estimates remediation costs will aggregate $0.7
million, of which $0.4 million has been expended to date, with approximately
$0.2 million to $0.3 million expected to be reimbursed by the State of Texas
Petroleum Storage Tank Remediation Fund (the "Texas Fund") at one of the two
sites.
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 $2.5 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. Arby's is vigorously
contesting AR's claims and believes it has meritorious defenses to such
claims.
Based on currently available information and given (i) potential
reimbursements by the Texas Fund discussed above and (ii) the Company's
aggregate reserves for such legal and environmental matters of approximately
$0.8 million as of December 1996, the Company does not believe that the legal
and environmental matters 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.
Inflation and Changing Prices
Management believes that inflation did not have a significant effect on
gross margins during 1994, 1995 and 1996, since inflation rates generally
remained at relatively low levels. Historically, the Company has been
successful in dealing with the impact of inflation to varying degrees within
the limitations of the competitive environment of each segment of its
business.
Recently Issued Accounting Pronouncements
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1"). SOP 96-1
provides guidance for the recognition and measurement of environmental
liabilities and is effective as of January 1, 1997. While an evaluation of the
impact of SOP 96-1 has not been completed, the Company does not believe it
23
<PAGE>
will have a material impact on its consolidated results of operations or
financial position.
24
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................ 26
Consolidated Balance Sheets as of December 31, 1995 and 1996............ 27
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996..................................... 28
Consolidated Statements of Stockholder's Equity (Deficit) for the
years ended December 31, 1994, 1995 and 1996......................... 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996..................................... 30
Notes to Consolidated Financial Statements.............................. 32
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of RC/Arby's Corporation:
We have audited the accompanying consolidated balance sheets of RC/Arby's
Corporation (a wholly-owned subsidiary of CFC Holdings Corp.) and
subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 1996 and 1995 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995
the Company changed its method of accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 31, 1997
26
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------
1995 1996
---- ----
(In thousands)
ASSETS
Current assets:
Cash................................................... $ 9,744 $ 7,411
Receivables, net (Note 5).............................. 30,030 35,151
Note receivable from affiliate (Note 15)............... 5,500 1,650
Inventories (Note 6)................................... 14,870 12,110
Assets held for sale (Note 4).......................... - 71,116
Deferred income tax benefit (Note 13).................. 5,971 8,568
Prepaid expenses and other current assets.............. 7,829 6,761
-------- -------
Total current assets................................. 73,944 142,767
Properties, net (Note 7)................................. 122,686 11,943
Unamortized costs in excess of net assets of acquired
companies (Note 8)..................................... 170,693 159,123
Deferred income tax benefit (Note 13).................... 793 24,231
Deferred costs and other assets (Note 9)................. 26,104 22,380
-------- -------
$394,220 $360,444
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt (Notes 11 and 12).... $ 3,697 $73,055
Notes payable to affiliates (Note 11).................. 13,925 13,765
Accounts payable....................................... 22,635 24,027
Accrued expenses (Note 10)............................. 52,042 61,744
-------- -------
Total current liabilities............................ 92,299 172,591
Long-term debt (Notes 11 and 12)......................... 351,238 281,110
Note payable to affiliate (Note 11)...................... 6,700 6,700
Deferred income and other liabilities.................... 7,393 14,011
Commitments and contingencies (Notes 2, 4, 13, 17 and 18)
Stockholder's equity (deficit) (Notes 3, 4 and 11):
Common stock, $1.00 par value; authorized 3,000 shares;
issued and outstanding 1,000 shares.................. 1 1
Additional paid-in capital............................. 44,300 44,300
Accumulated deficit.................................... (107,711) (158,269)
-------- --------
Total stockholder's deficit.......................... (63,410) (113,968)
-------- --------
$394,220 $360,444
======== ========
See accompanying notes to consolidated financial statements.
27
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Revenues:
Net sales..................................... $322,888 $389,591 $409,100
Royalties..................................... 46,670 50,135 53,639
Franchise fees................................ 3,653 4,648 2,834
Other revenues................................ 694 1,009 779
------- -------- -------
373,905 445,383 466,352
------- -------- -------
Costs and expenses:
Cost of sales................................. 175,416 239,870 252,811
Advertising, selling and distribution (Note 1) 95,419 108,584 102,535
General and administrative (Notes 15 and 16).. 72,996 87,038 77,339
Reduction in carrying value of long-lived
assets impaired or to be disposed of
(Notes 1 and 4).............................. - 14,647 58,900
Facilities relocation and corporate
restructuring (Note 14)...................... - - 6,350
------- -------- -------
343,831 450,139 497,935
------- -------- -------
Operating profit (loss).................... 30,074 (4,756) (31,583)
Interest expense................................ (34,433) (39,565) (42,883)
Other income (expense), net (Notes 15 and 19)... 586 (1,818) 562
------- -------- -------
Loss before income taxes................... (3,773) (46,139) (73,904)
Benefit from (provision for) income taxes
(Note 13)...................................... (1,704) 12,489 23,346
------- -------- -------
Net loss................................... $(5,477) $(33,650) $(50,558)
======= ======== ========
See accompanying notes to consolidated financial statements.
28
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the three years ended December 31, 1996
Common Stock
------------ Additional
Number Paid-In Accumulated
of Shares Amount Capital Deficit
--------- ------ ------- -------
(Dollars in thousands)
Balance at December 31, 1993.. 10,445,000 $ 104 $ 35,332 $ (68,584)
Recapitalization (Note 3).. (10,444,000) (103) 103 -
Net loss................... - - - (5,477)
--------- --------- --------- ---------
Balance at December 31, 1994.. 1,000 1 35,435 (74,061)
Capital contribution
from CFC Holdings Corp.
(Note 15)............... - - 8,865 -
Net loss................... - - - (33,650)
--------- --------- --------- ---------
Balance at December 31, 1995.. 1,000 1 44,300 (107,711)
Net loss................... - - - (50,558)
--------- --------- --------- ---------
Balance at December 31, 1996.. 1,000 $ 1 $ 44,300 $(158,269)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
29
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net loss.................................... $ (5,477) $(33,650) $(50,558)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Reduction in carrying value of
long-lived assets....................... - 14,647 58,900
Depreciation and amortization
of properties........................... 10,107 13,768 14,095
Amortization of costs in excess of net
assets of acquired companies and other
intangibles............................. 7,743 9,399 8,597
Amortization of deferred financing costs. 2,168 2,204 2,369
Provision for facilities relocation and
corporate restructuring................. - - 6,350
Payments on facilities relocation and
corporate restructuring................. (5,615) (711) (224)
Provision for doubtful accounts.......... 577 1,970 3,095
Provision for (benefit from) deferred
income taxes............................ 71 (5,182) (26,035)
Other, net............................... (2,098) (580) (91)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables.......................... (7,768) (5,074) (7,576)
Inventories.......................... (1,478) (2,367) 1,120
Prepaid expenses and other current
assets ............................. (1,929) (1,976) 1,068
Increase (decrease) in:
Accounts payable..................... 8,998 229 (2,080)
Due to Triarc Companies, Inc. ....... (1,652) - -
Accrued expenses..................... (13,049) 7,346 4,437
------- ------- -------
Net cash provided by (used in) operating
activities................................... (9,402) 23 13,467
------- ------- -------
Cash flows from investing activities:
Business acquisitions:
Trademarks, favorable lease acquisition
costs, non-compete agreement and other
intangible assets........................ (883) (4,376) (1,972)
Properties, net........................... (10,110) (9,219) -
Costs in excess of net assets of acquired
companies................................ (5,319) (2,708) -
Net current assets........................ - (758) -
Capitalized leases assumed................ 2,726 2,726 -
------- -------- -------
(13,586) (14,335) (1,972)
Capital expenditures........................ (33,726) (48,556) (16,175)
Proceeds from sales of properties........... 7,314 1,997 1,408
Investment in affiliate..................... - (1,000) -
Other....................................... (1,203) - -
------- ------- -------
Net cash used in investing activities.......... (41,201) (61,894) (16,739)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ... - 61,620 4,027
Borrowings, net of repayments, and
collections on notes with affiliates....... 5,925 5,950 3,690
Repayments of long-term debt................ (8,673) (3,358) (6,453)
Payment of deferred financing costs......... - (3,347) (325)
Capital contribution from CFC Holdings Corp. - 8,865 -
------- -------- -------
Net cash provided by (used in) financing
activities................................... (2,748) 69,730 939
------- ------- -------
Net increase (decrease) in cash................ (53,351) 7,859 (2,333)
Cash at beginning of year...................... 55,236 1,885 9,744
------- -------- -------
Cash at end of year............................ $ 1,885 $ 9,744 $ 7,411
======= ======== =======
(continued)
30
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Year ended December 31,
-------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest ..................................... $31,939 $ 36,683 $37,931
======= ======== =======
Income taxes (refunds), net................... $ 3,889 $ 740 $ (101)
======= ======== =======
Supplemental disclosures of noncash investing
and financing activities:
Total capital expenditures.................... $36,184 $ 48,918 $16,175
Amounts representing capitalized leases....... (2,458) (362) -
------- -------- -------
Capital expenditures paid in cash........... $33,726 $ 48,556 $16,175
======= ======== =======
See accompanying notes to consolidated financial statements.
31
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of RC/Arby's
Corporation ("RCAC" or, collectively with its subsidiaries, the "Company"), a
direct wholly-owned subsidiary of CFC Holdings Corp. ("CFC Holdings") and an
indirect wholly-owned subsidiary of Triarc Companies, Inc. ("Triarc"), and its
subsidiaries. The Company's principal wholly-owned subsidiaries are Royal
Crown Company, Inc. ("Royal Crown") and Arby's, Inc. ("Arby's"). 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"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out basis) or market.
Properties and Depreciation and Amortization
Properties are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of properties is calculated on the
straight-line basis using the estimated useful lives of the related major
classes of properties: 15-40 years for buildings and 3-15 years for machinery
and equipment. Leased assets capitalized and leasehold improvements are
amortized over the shorter of their estimated useful lives or the terms of the
respective leases.
Amortization of Intangibles
Costs in excess of net assets of acquired companies ("Goodwill") are
being amortized on the straight-line basis over 15 to 40 years. Trademarks are
being amortized on the straight-line basis over 7 to 15 years. Deferred
financing costs are being amortized as interest expense over the lives of the
respective debt using the interest method.
Impairments
Intangible Assets
The amount of impairment, if any, in unamortized Goodwill is measured
based on projected future results of operations. To the extent future results
of operations of those subsidiaries to which the Goodwill relates through the
period such Goodwill is being amortized are sufficient to absorb the related
amortization, the Company has deemed there to be no impairment of Goodwill.
Long-Lived Assets
Effective October 1, 1995 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
32
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This standard
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In 1996 the Company recorded a provision of $58,900,000 in order
to reduce the carrying value of certain long-lived assets and identifiable
intangibles relating to the estimated loss on the anticipated sale of all
company-owned restaurants (see Note 4).
Derivative Financial Instrument
The Company had an interest rate swap agreement entered into in order to
synthetically alter the interest rate of certain of the Company's fixed-rate
debt (see Note 11) until the swap's maturity in 1996. The Company calculated
the estimated remaining amount to be paid or received under the interest rate
swap agreement for the period from the periodic settlement date immediately
prior to the financial statement date through the end of the agreement based
on the interest rate applicable at the financial statement date and recognized
such amount which applied to the period from the last periodic settlement date
through the financial statement date as a component of interest expense. The
recognition of gain or loss from the interest rate swap agreement was
effectively correlated with the underlying debt. A payment received at the
inception of the agreement, which was deemed to be a fee to induce the Company
to enter into the agreement, was amortized over the full life of the agreement
since the Company was not at risk for any gain or loss on such payment.
Advertising Costs
The Company accounts for advertising production costs by expensing such
production costs the first time the related advertising takes place.
Advertising costs amounted to $84,692,000, $95,495,000 and $87,038,000 for
1994, 1995 and 1996, respectively.
Income Taxes
The Company and its subsidiaries are included in the consolidated Federal
income tax return filed by Triarc. Under a tax sharing agreement, the Company
provides for Federal income taxes on the same basis as if it filed a separate
consolidated return. Deferred income taxes are provided to recognize the tax
effect of temporary differences between the bases of assets and liabilities
for tax and financial statement purposes.
Franchise Fees and Royalties
Franchise fees are recognized as income when a franchised restaurant is
opened. Franchise fees for multiple area developments represent the aggregate
of the franchise fees for the number of restaurants in the area development
and are recognized as income when each restaurant is opened in the same manner
as franchise fees for individual restaurants. Royalties are based on a
percentage of restaurant sales of the franchised outlet and are accrued as
earned.
33
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Reclassifications
Certain amounts included in the prior years' consolidated financial
statements have been reclassified to conform with the current year's
presentation.
(2) Significant Risks and Uncertainties
Nature of Operations
The Company is a holding company which is engaged in two lines of
business (each with the indicated percentage of the Company's consolidated
revenues for the year ended December 31, 1996): restaurants (62%) and
beverages (38%).
The restaurant segment primarily franchises and operates (see Note 4
regarding the February 1997 agreement to sell all company-owned restaurants)
Arby's quick service restaurants representing the largest franchise restaurant
system specializing in roast beef sandwiches. The beverage segment produces
and sells a broad selection of carbonated beverages and concentrates under the
principal brand names RC COLA, DIET RC, ROYAL CROWN, ROYAL CROWN DRAFT COLA,
DIET RITE, NEHI, NEHI LOCKJAW, UPPER 10, KICK and THIRST THRASHER. The
Company's operations principally are throughout the United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant Estimates
The Company's significant estimates are for costs related to (i)
provisions for examinations of its income tax returns by the Internal Revenue
Service (the "IRS") (see Note 13), (ii) provisions for impairment of
long-lived assets and for long-lived assets to be disposed of (see Note 4) and
(iii) provisions for environmental and other legal contingencies (see Note
18).
Certain Risk Concentrations
The Company believes that its vulnerability to risk concentrations
related to significant customers and vendors, products sold and sources of its
raw materials is not significant on a consolidated basis. Risk of geographical
concentration is also minimized since each of the segments generally operates
throughout the United States with minimal foreign exposure.
34
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(3) Recapitalization
On March 21, 1994 RCAC, previously a Florida corporation, was
reincorporated in the state of Delaware whereby the 10,455,000 outstanding
shares ($.01 par value) of the predecessor corporation were canceled and 1,000
common shares ($1.00 par value) of the successor corporation were issued. As a
result, "Common stock" and "Additional paid-in capital" were reduced and
increased, respectively, by $103,000. The consolidated financial statements
for 1994 and 1995 have been restated to reflect this recapitalization.
(4) Planned Transactions
Spinoff
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, if any, of its proposed acquisition
of Snapple Beverage Corp. (which Triarc announced on March 27, 1997) on the
anticipated structure of the Spinoff Transactions.
Sale of Restaurants
In February 1997 the principal subsidiaries comprising the Company's
restaurant segment entered into an agreement (the "RTM Agreement") with RTM,
Inc. ("RTM"), the largest franchisee in the Arby's system, pursuant to which
certain of such subsidiaries would sell to an affiliate of RTM all of the 355
company-owned restaurants. The purchase price consists of cash and a
promissory note aggregating $2,000,000 and the assumption of approximately
$69,735,000 in mortgage and equipment notes payable to FFCA Mortgage
Corporation (see Note 11) and capitalized lease obligations. The consummation
of the sale is subject to customary closing conditions, including receipt of
necessary consents and regulatory approvals, and is expected to occur during
the second quarter of 1997.
In 1996 the Company recorded a $58,900,000 charge to (i) reduce the
carrying value of the long-lived assets to be sold (reported as "Assets held
for sale" in the accompanying consolidated balance sheet as of December 31,
1996) by approximately $46,000,000 to estimated fair value consisting of
adjustments to "Properties, net" of $36,343,000, "Unamortized costs in excess
of net assets of acquired companies" of $5,214,000 and "Deferred costs and
other assets" of $4,443,000 and (ii) provide for associated net liabilities of
approximately $12,900,000, principally reflecting the present value of certain
equipment operating lease obligations which will not be assumed by the
purchaser and estimated closing costs. The estimated fair value was determined
based on the terms of the RTM Agreement including anticipated sales price.
During 1996 the operations of the restaurants to be disposed of had net sales
of $231,041,000 and a pretax loss of $3,897,000. Such loss reflects
35
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
$10,071,000 of allocated general and administrative expenses and $8,692,000 of
interest expense related to the mortgage and equipment notes and capitalized
lease obligations directly related to the operations of the restaurants being
sold to RTM.
In 1995 the Company recorded a provision of $14,647,000 in its restaurant
segment consisting of a $12,019,000 reduction in the net carrying value of
certain restaurants and other restaurant-related long- lived assets which were
determined to be impaired and a $2,628,000 reduction to a net carrying value
of $975,000 of certain restaurants and related equipment to be disposed. Such
provision reduced "Properties, net" by $12,425,000, "Unamortized costs in
excess of net assets of acquired companies" by $1,260,000 and "Deferred costs
and other assets" by $962,000 to reflect the fair value of the respective
assets. The fair value was generally determined by applying a fair market
capitalization rate to the estimated expected future annual cash flows. The
results of operations of the restaurants to be disposed resulted in a pre-tax
loss of $806,000 for the year ended December 31, 1995.
(5) Receivables, net
The following is a summary of the components of receivables (in
thousands):
December 31,
-----------------
1995 1996
---- ----
Receivables:
Trade....................................... $27,619 $35,749
Other....................................... 4,321 4,061
------- -------
31,940 39,810
Less allowance for doubtful accounts............ 1,910 4,659
------- -------
$30,030 $35,151
======= =======
The following is an analysis of the allowance for doubtful accounts for
the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Balance at beginning of year........... $ 1,130 $ 986 $ 1,910
Provision for doubtful accounts
(Note 15)............................. 577 1,970 3,095
Recoveries of doubtful accounts........ 110 44 53
Uncollectible accounts written off..... (831) (1,090) (399)
------- ------- -------
Balance at end of year................. $ 986 $ 1,910 $ 4,659
======= ======= =======
Substantially all receivables are pledged as collateral for certain debt
(see Note 11).
36
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(6) Inventories
The following is a summary of the components of inventories (in
thousands):
December 31,
----------------
1995 1996
---- ----
Raw materials................................... $11,677 $ 8,184
Work in process................................. 479 467
Finished goods.................................. 2,714 3,459
------- -------
$14,870 $12,110
======= =======
Substantially all inventories are pledged as collateral for certain debt
(see Note 11).
(7) Properties
The following is a summary of the components of properties, at cost (in
thousands):
December 31,
----------------
1995 1996
---- ----
Land ........................................... $ 24,619 $ 3,413
Buildings and improvements and leasehold
improvements.................................. 83,561 11,422
Machinery and equipment......................... 57,674 13,359
Leased assets capitalized....................... 16,343 888
------- --------
182,197 29,082
Less accumulated depreciation and amortization.. 59,511 17,139
-------- --------
$122,686 $ 11,943
======== ========
The decrease in properties from December 31, 1995 to December 31, 1996
principally resulted from the 1996 reduction in carrying value of certain
long-lived assets to be disposed of and reclassification as of December 31,
1996 of such assets to "Assets held for sale" (see Note 4).
Substantially all properties are pledged as collateral for certain debt
(see Note 11).
(8) Unamortized Costs in Excess of Net Assets of Acquired Companies
The following is a summary of the components of unamortized costs in
excess of net assets of acquired companies (in thousands):
December 31,
----------------
1995 1996
---- ----
Costs in excess of net assets of acquired
companies..................................... $230,134 $223,721
Less accumulated amortization................... 59,441 64,598
-------- --------
$170,693 $159,123
======== ========
37
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(9) Deferred Costs and Other Assets
The following is a summary of the components of deferred costs and other
assets (in thousands):
December 31,
----------------
1995 1996
---- ----
Deferred financing costs........................ $18,909 $18,987
Less accumulated amortization of deferred
financing costs............................... 5,810 8,077
------- -------
Deferred financing costs, net............... 13,099 10,910
------- -------
Trademarks...................................... 3,421 7,748
Less accumulated amortization of trademarks..... 424 934
------- -------
Trademarks, net............................. 2,997 6,814
------- -------
Other........................................... 10,008 4,656
------- -------
$26,104 $22,380
======= =======
(10) Accrued Expenses
The following is a summary of the components of accrued expenses (in
thousands):
December 31,
----------------
1995 1996
---- ----
Accrued interest................................ $16,803 $16,949
Accrued advertising............................. 10,995 12,504
Accrued compensation and related benefits....... 10,149 11,208
Due to Triarc and affiliates.................... - 3,085
Other........................................... 14,095 17,998
------- -------
$52,042 $61,744
======= =======
38
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(11) Long-term Debt and Notes Payable to Affiliates
Long-term debt consisted of the following (in thousands):
December 31,
----------------
1995 1996
---- ----
9 3/4% senior secured notes due 2000 (a)........... $275,000 $275,000
Mortgage notes payable to FFCA Mortgage Corporation
("FFCA"), bearing interest at a weighted average
rate of 11.09% as of December 31, 1996, due
through 2016 (b)................................. 51,685 52,136
Equipment notes payable to FFCA, bearing interest
at a weighted average rate of 10.89% at
December 31, 1996, due through 2003 (b).......... 6,545 6,236
Notes, bearing interest at 7.94% to 13 1/2%, due
through 2002 secured by equipment and buildings.. 4,392 4,865
Capitalized lease obligations (c).................. 17,313 15,928
-------- --------
Total debt..................................... 354,935 354,165
Less amounts payable within one year............... 3,697 73,055
-------- --------
$351,238 $281,110
======== ========
Notes payable to affiliates consisted of the following (in thousands):
December 31,
----------------
1995 1996
---- ----
Note payable to Triarc bearing interest at 11.875%
due on demand (Note 15)........................... $11,675 $12,015
Note payable to Triarc bearing interest at 11.875%
due in 1998 (Note 15)............................. 6,700 6,700
Note payable to Chesapeake Insurance Company Limited
("Chesapeake Insurance" - an affiliate) bearing
interest at 9 1/2% due in 1997 (Note 15).......... 2,250 1,750
------- -------
Total notes payable to affiliates............... 20,625 20,465
Less amounts payable within one year................ 13,925 13,765
------- -------
$ 6,700 $ 6,700
======= =======
39
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Aggregate annual maturities of long-term debt and notes payable to
affiliates, including capitalized lease obligations, are as follows as of
December 31, 1996 (in thousands):
Year ending December 31,
------------------------
1997 ........................................... $ 86,820
1998 ........................................... 7,935
1999 ........................................... 1,075
2000 ........................................... 275,388
2001 ........................................... 409
Thereafter...................................... 3,003
--------
$374,630
========
(a) In September 1993, the Company entered into a three-year interest rate
swap agreement (the "Swap Agreement") in the amount of $137,500,000. Under the
Swap Agreement, interest on $137,500,000 was paid by the Company at a floating
rate (the "Floating Rate") based on the 180-day London Interbank Offered Rate,
and the Company received interest at a fixed rate of 4.72%. The Floating Rate
was set at the inception of the Swap Agreement through January 31, 1994 and
thereafter was retroactively reset at the end of each six-month calculation
period through July 31, 1996 and on September 24, 1996. The transaction
effectively changed the Company's interest rate on $137,500,000 of the 9 3/4%
senior secured notes due 2000 (the "Senior Notes") from a fixed rate to a
floating-rate basis. Under the Swap Agreement, during 1994 the Company
received $614,000 which was determined at the inception of the Swap Agreement.
Thereafter the Company paid (i) $439,000 during 1994 in connection with the
six-month reset period ended July 31, 1994, (ii) $2,271,000 during 1995 in
connection with such year's two six-month reset periods and (iii) $1,631,000
during 1996 in connection with such year's two six-month reset periods and the
reset period ending with the agreement's termination date of September 24,
1996.
(b) During 1995 and 1996 ARDC and ARHC entered into loan and financing
agreements with FFCA Mortgage Corporation ("FFCA") which, as amended, permit
borrowings in the form of mortgage notes (the "Mortgage Notes") and equipment
notes (the "Equipment Notes") aggregating $87,294,000 (the "FFCA Loan
Agreements"). The Mortgage Notes and Equipment Notes bear interest at rates in
effect at the time of the borrowings ranging from 10 1/8% to 11 1/2% plus,
with respect to the Mortgage Notes, participating interest to the extent gross
sales of the financed restaurants exceed certain defined levels which are in
excess of current levels. The Mortgage Notes and Equipment Notes are repayable
in equal monthly installments, including interest, over twenty and seven
years, respectively. As of December 31, 1996, borrowings under the FFCA Loan
Agreements aggregated $62,697,000 (including cumulative repayments of
$4,325,000 through December 31, 1996) resulting in remaining availability of
$24,597,000 through December 31, 1997 to finance new company-owned restaurants
whose sites are identified to FFCA by September 30, 1997 on terms similar to
those of outstanding borrowings. The assets of ARDC of approximately
$37,000,000 will not be available to pay creditors of RCAC, Triarc, or Arby's
until all loans under the FFCA Loan Agreements have been repaid in full. As
discussed in Note 4, in February 1997 the Company entered into an agreement to
sell all of its restaurants and, if such sale is consummated on terms as they
currently exist, the purchaser would assume $54,709,000 of borrowings under
the FFCA Loan Agreements.
(c) As discussed in Note 4, in February 1997 the Company entered into an
agreement to sell all of its restaurants and, if such sale is consummated on
terms as they currently exist, the purchaser would assume all capitalized
40
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
lease obligations associated with the restaurants currently estimated to be
approximately $15,000,000.
Under the Company's debt agreements, substantially all of the Company's
assets are pledged as security. In addition, obligations under the Senior
Notes have been guaranteed by Royal Crown and Arby's and all of the stock of
and substantially all of the personal property Royal Crown and Arby's are
pledged as collateral for such guarantees. Since the non-guarantor
subsidiaries, primarily ARDC, ARHC and AROC, are not inconsequential,
condensed consolidating financial statements of the Company, reporting the
parent company only, the guarantors in the aggregate and the non-guarantors in
the aggregate are set forth in Note 21. In addition, Triarc has guaranteed
repayment of $24,698,000 of borrowings under the FFCA Loan Agreements.
Assuming consummation of the RTM sale (see Note 4), Triarc would remain
contingently liable under its guarantee upon the failure, if any, of RTM and
certain of its affiliates to satisfy such obligation. The indenture pursuant
to which the Senior Notes were issued contains various covenants including,
among others, restrictions on dividends and other similar payments and
limitations on (i) the incurrence of indebtedness, (ii) asset dispositions,
(iii) investments and (iv) affiliate transactions other than in the normal
course of business. Under the terms of such indenture, as of December 31, 1996
the Company could not pay any dividends or make any loans or advances to CFC
Holdings.
(12) Fair Value of Financial Instruments
The carrying amounts and fair values of the Company's financial
instruments for which such amounts differ in total are as follows (in
thousands):
December 31,
--------------------------------------
1995 1996
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Long-term debt (Note 11):
Senior Notes....................... $275,000 $226,000 $275,000 $283,000
FFCA Loan Agreements............... 58,230 61,264 58,372 61,814
Other long-term debt............... 21,705 21,705 20,793 20,793
-------- ------- -------- --------
$354,935 $308,969 $354,165 $365,607
======== ======== ======== ========
Swap Agreement (liability) (Note 11).. $ (684) $ (896) $ - $ -
======== ======== ======== ========
The fair values of the Senior Notes are based on quoted market prices at
the respective reporting dates. The fair value of the Mortgage Notes and
Equipment Notes under the FFCA Loan Agreements at December 31, 1995 and 1996
was determined by discounting the future monthly payments using the rate of
interest available under such agreements at December 31, 1995 and 1996. The
fair values of all other long-term debt were assumed to reasonably approximate
their carrying amounts since (i) for the notes payable to Triarc, the
origination dates were during 1995 and the interest rates still approximate
current levels, (ii) for capitalized lease obligations, the weighted average
implicit interest rate approximates current levels and (iii) for other notes,
the remaining maturities are relatively short-term. The fair value of the Swap
Agreement as of December 31, 1995 represented the estimated amount the Company
would have paid to terminate the Swap Agreement, as quoted by the
counterparty.
41
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(13) Income Taxes
As discussed in Note 1, the Company is included in the consolidated
Federal income tax return of Triarc. Pursuant to a tax sharing agreement, the
Company provides for Federal income taxes on the same basis as if it filed a
separate consolidated return. The benefit from current Federal income taxes
due from Triarc has been netted with other amounts due to Triarc resulting in
a net receivable of $977,000 as of December 31, 1995 included in "Prepaid
expenses and other current assets" and a net liability of $3,085,000 as of
December 31, 1996 included in "Accrued expenses" (Note 10).
The loss before income taxes consists of the following components for the
years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Domestic.................................. $ (6,243) $(44,191) $(70,496)
Foreign................................... 2,470 (1,948) (3,408)
-------- -------- --------
$ (3,773) $(46,139) $(73,904)
======== ======== ========
The benefit from (provision for) income taxes consists of the following
components for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Current:
Federal................................ $ 1,091 $ 7,281 $ (1,619)
State.................................. (496) 383 (700)
Foreign................................ (2,228) (357) (370)
-------- ------- --------
(1,633) 7,307 (2,689)
-------- ------- --------
Deferred:
Federal................................. (662) 4,347 23,621
State................................... (162) 835 2,414
Foreign................................. 753 - -
-------- -------- --------
(71) 5,182 26,035
-------- -------- --------
$ (1,704) $ 12,489 $ 23,346
======== ======== ========
42
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The net current deferred income tax asset and the net non-current deferred
income tax asset resulted from the following components (in thousands):
December 31,
-----------------
1995 1996
---- ----
Current deferred income tax assets (liabilities):
Accrued employee benefit costs................. $ 2,514 $ 3,404
Allowance for doubtful accounts................ 475 1,729
Accrued interest relating to income tax matters 968 1,176
Closed facilities reserves..................... 1,061 821
Other, net..................................... 953 1,438
------- -------
5,971 8,568
------- -------
Non-current deferred income tax assets (liabilities):
Depreciation and other properties basis
differences.................................. 2,733 28,126
Reserve for income tax contingencies........... (4,090) (7,115)
Deferred franchise fees........................ 1,303 1,330
Other, net..................................... 847 1,890
------- -------
793 24,231
------- -------
$ 6,764 $32,799
======= =======
The difference between the reported income tax benefit (provision) and the
tax benefit that would result from applying the 35% Federal statutory rate to
the loss before income taxes is reconciled as follows (in thousands):
1994 1995 1996
------- -------- ------
Income tax benefit computed at Federal
statutory rate......................... $ 1,321 $ 16,149 $25,866
Decrease (increase) in Federal taxes
resulting from:
Amortization of non-deductible Goodwill (2,057) (2,005) (2,005)
Effect of net operating losses of
foreign subsidiary for which no tax
carryback benefit is available....... - (548) (1,193)
State income (taxes) benefit, net of
Federal income tax effect............ (428) 792 1,114
Foreign tax rate in excess of United
States Federal statutory rate and
foreign withholding taxes, net of
Federal income tax benefit........... (479) (307) (241)
Provision for income tax contingencies. - (1,100) -
Non-deductible amortization of
restricted stock................... - (418) -
Other, net........................... (61) (74) (195)
------- -------- -------
$(1,704) $ 12,489 $23,346
======= ======== =======
The Federal income tax returns of Triarc and its subsidiaries, including
the Company, have been examined by the IRS for the tax years 1985 through
1988. Triarc has resolved all the issues related to such audit and, in
connection therewith, the Company paid $4,803,000 and $407,000 in 1994 and
1996, respectively, in final settlement of such examination. Such amounts had
been fully reserved in years prior to 1994. The IRS has completed its
43
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
examination of the Federal income tax returns of Triarc and its subsidiaries
for the tax years from 1989 through 1992 and has issued notices of proposed
adjustments relating to the Company increasing taxable income by approximately
$13,000,000, 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. During 1995 the Company provided $1,100,000 included in "Benefit
from (provision for) income taxes" and during 1994, 1995 and 1996 provided
$900,000, $1,000,000 and $1,000,000, respectively, included in "Interest
expense" relating to such examinations and other tax matters. Management of
the Company believes that adequate aggregate provisions have been made in 1996
and prior periods for any tax liabilities, including interest, that may result
from the 1989 through 1992 examination and other tax matters.
(14) Facilities Relocation and Corporate Restructuring
The "Facilities relocation and corporate restructuring" charge of
$6,350,000 set forth in the accompanying consolidated statement of operations
for 1996 relates to costs associated with (i) estimated costs of planned
subleases (principally for the write-off of nonrecoverable unamortized
leasehold improvements and furniture and fixtures) of surplus office space in
excess of anticipated sublease proceeds as a result of the RTM sale (see Note
4) and the relocation of Royal Crown's headquarters which is being centralized
with the offices of Mistic Brands, Inc., Triarc's other beverage subsidiary,
in White Plains, New York ($3,700,000), (ii) employee severance costs
associated with the relocation of Royal Crown's headquarters ($2,200,000) and
(iii) the shutdown of the beverage segment's Ohio production facility
($450,000).
(15) Related Party Transactions
The following is a summary of transactions between the Company and its
related parties (in thousands):
Year Ended December 31,
-------------------------
1994 1995 1996
---- ---- ----
Costs allocated to the Company by Triarc
under a management services agreement (a).. $ 9,000 $ 9,000 $ 7,000
Net sales to MetBev, Inc. ("MetBev"), net
of marketing support credits (b)........... - 551 8,985
Guarantee of MetBev accounts payable (b)..... - 1,194 -
Provision for uncollectible receivables from
sales to MetBev and guarantee of MetBev
accounts payable (b)....................... - 1,745 2,000
Investment in preferred stock of MetBev (b).. - 1,000 -
Interest expense on notes payable to:
Triarc (c)................................. - 2,169 2,588
Chesapeake Insurance (c)................... 285 243 208
44
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Year Ended December 31,
-------------------------
1994 1995 1996
---- ---- ----
Southeastern Public Service Company
("SEPSCO") (c).......................... 93 750 -
Interest income on notes receivable from
Triarc (c)................................. - 212 261
Compensation costs charged to the Company by
Triarc for restricted stock and below
market stock options (Note 16)............. 1,452 1,612 74
Capital contribution from CFC Holdings (d). - 8,865 -
Lease payments to NPC Leasing Corp. ("NPC"),
an affiliate (e)........................... 178 21 -
Sale of certain promissory notes from
franchisees to SEPSCO at remaining
outstanding principal amount............... 1,239 - -
Payments to affiliates for usage of aircraft. 357 73 -
- -------------
(a) The Company receives from Triarc certain management services, including
legal, accounting, tax, insurance, financial and other management services,
under a management services agreement. The Company was allocated costs under
such agreement of $9,000,000, $9,000,000, and $7,000,000 during the years
ended December 31, 1994, 1995, and 1996, respectively. Such costs were
allocated to the Company by Triarc based upon the relative sum of the greater
of income before income taxes, depreciation and amortization and 10% of
revenues. Management of the Company believes that such allocation method is
reasonable. Further, management of the Company believes that such allocation
approximates the costs that would have been incurred by the Company on a stand
alone basis.
(b) During 1995 the Company paid $1,000,000 and contributed a license for a
period of five years for the Royal Crown distribution rights for its products
in New York City and certain surrounding counties to MetBev in exchange for
preferred stock in MetBev representing a 37.5% voting interest and a warrant
to acquire 37.5% of the common stock of MetBev. The remaining 62.5% was owned
by other parties and was subject to certain vesting provisions. Upon
consummation of the sale of the MetBev distribution rights (see below), the
Company's voting interest in MetBev was 44.7% principally due to the
cancellation of nonvested stock. MetBev has incurred significant losses from
its inception and had stockholders' deficits as of December 31, 1995 and 1996
of $2,524,000 and $8,943,000, respectively. In December 1996, the distribution
rights of MetBev were sold to a third party and MetBev commenced the
liquidation of its remaining assets and liabilities. In connection therewith,
in 1995 the Company wrote off its $1,000,000 investment to "Other income
(expense), net". Further, the Company provided $1,745,000 and $2,000,000
(included in "General and administrative" and "Advertising, selling and
distribution") in 1995 and 1996, respectively, for uncollectible receivables
from sales (with minimal gross profit) of finished product to MetBev and in
1995 a guarantee of a MetBev third party accounts payable.
(c) The Company borrowed cash under various promissory notes with Triarc and
two of its subsidiaries, SEPSCO and Chesapeake Insurance. See Note 11 for
details involving such promissory notes which were outstanding as of December
31, 1995 and 1996. Also, ARDC and ARHC made cash advances to Triarc, of which
$5,500,000 and $1,650,000 were outstanding from ARDC at December 31, 1995 and
45
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
1996, respectively, under a promissory note presently due upon demand. All
such promissory notes payable and receivable bear or bore interest at 11.875%
per annum, payable quarterly, except for the promissory note to Chesapeake
Insurance which bears interest at 9 1/2% per annum.
(d) In February 1995, CFC Holdings made a capital contribution of $8,865,000
of cash to the Company using funds contributed to it by Triarc.
(e) During 1994 and 1995 the Company leased vehicles and other equipment
from NPC, an indirect wholly-owned subsidiary of Triarc, under long-term lease
obligations. Lease payments to NPC by the Company were based on the actual
costs to NPC plus a small profit factor.
(16) Pension and Other Benefit Plans
Triarc maintains a 401(k) defined contribution plan covering all of the
Company's and Triarc's employees who meet certain minimum requirements and
elect to participate. Employees may contribute up to 15% of their
compensation, subject to certain limitations. The plan provides for Company
matching contributions of 50% of employee contributions up to the first 5% of
an employee's contributions. The plan also provides for annual additional
contributions at the Company's discretion. In connection with these employer
contributions, the Company provided $396,000, $1,175,000, and $1,020,000 in
1994, 1995, and 1996, respectively.
The Company's employees who were eligible to participate prior to 1989
are covered under a defined benefit pension plan (the "Plan") which covers
employees of both the Company and certain affiliates. Prior to 1994 the plan
was frozen.
Components of net periodic pension cost related to the Company are as
follows for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Current service cost (represents plan
expenses)................................. $ 77 $ 84 $ 83
Interest cost on projected benefit obligation. 238 267 264
Return on plan assets (gain) loss........... 62 (674) (369)
Net amortization and deferrals.............. (293) 472 138
------- ------- -------
Net periodic pension cost................. $ 84 $ 149 $ 116
======= ======= =======
46
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The following table sets forth the Company's portion of the Plan's funded
status as of December 31 (in thousands):
1995 1996
---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $ 3,778 $ 3,749
Nonvested benefit obligation...................... 19 18
------- -------
Accumulated and projected benefit obligation........ 3,797 3,767
Plan assets at fair value........................... (2,979) (3,374)
------- -------
Funded status....................................... 818 393
Unrecognized net gain (loss) from plan experience... (34) 51
------- -------
Accrued pension cost................................ $ 784 $ 444
======= =======
Significant assumptions used in measuring the net periodic pension cost
for the Plan included the following: (i) the expected long-term rate of return
on plan assets was 8% and (ii) the discount rate was 7% for 1994, 8% for 1995
and 7% for 1996. The discount rate used in determining the benefit obligations
above was 7% at December 31, 1995 and 7 1/2% at December 31, 1996. The effects
of the 1995 increase and the 1996 decrease in the discount rate did not
materially affect the net periodic pension cost. The 1996 increase in the
discount rate used in determining the benefit obligation resulted in a
decrease in the accumulated and projected benefit obligation of $151,000.
Plan assets as of December 31, 1996 are invested in managed portfolios
consisting of government and government agency obligations (51%), common stock
(39%), corporate debt securities (5%) and other investments (5%).
The Company maintains unfunded postretirement medical and death benefit
plans for a limited number of employees who have retired and have provided
certain minimum years of service. The medical benefits are principally
contributory while death benefits are noncontributory. The net postretirement
benefit cost for 1994, 1995 and 1996 as well as the accumulated postretirement
benefit obligation as of December 31, 1996 were insignificant.
Prior to 1994 and during 1994, respectively, Triarc granted 113,000 and
20,750 restricted shares of Triarc Class A common stock to certain Royal Crown
and Arby's senior executives under Triarc's 1993 Equity Participation Plan
(the "Triarc Equity Plan"). The aggregate values of the awards at the
respective dates of grant of $2,316,000 for 1993 and $458,000 for 1994 were
being charged to the Company as compensation expense over the applicable
vesting periods through 1996. On December 7, 1995, the Compensation Committee
of Triarc's Board of Directors authorized management of Triarc to accelerate
the vesting of all of the then outstanding shares of restricted stock. On
January 16, 1996 management of Triarc accelerated the vesting and the Company
recorded the resulting additional amortization expense of $662,000 in its
entirety in 1995. In addition, Triarc has granted stock options to certain key
employees of the Company under the Triarc Equity Plan. Of such options,
165,000 granted prior to 1994 were at an option price of $20.00 per share
which was below the $31.75 fair market value of Triarc's Class A common stock
at the date of grant representing an aggregate difference of $1,939,000. Such
amount is being charged to the Company as compensation expense over the
applicable vesting period through 1998, net of reversals of prior charges
arising from the forfeiture of certain of those options in connection with
employee terminations (the "Forfeiture Adjustments"). Compensation expense
resulting from the grants of restricted shares and below market stock options
aggregated $1,452,000 (including $66,000 for 3,500 previously unvested shares
47
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
of restricted stock which were vested and repurchased from the grantee),
$1,612,000 (including the $662,000 from the accelerated vesting of the
restricted stock and net of $231,000 of Forfeiture Adjustments) and $74,000
(net of $173,000 of Forfeiture Adjustments) during 1994, 1995, and 1996,
respectively, and is included in "General and administrative" in the
accompanying consolidated statements of operations.
(17) Lease Commitments
The Company leases buildings and improvements and machinery and
equipment. Some leases provide for contingent rentals based upon sales volume.
Rental expense under operating leases consists of the following
components for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Minimum rentals...................... $12,160 $19,727 $23,164
Contingent rentals................... 1,454 879 794
------- ------- -------
13,614 20,606 23,958
Less sublease income................. 2,826 5,358 5,460
------- ------- -------
$10,788 $15,248 $18,498
======= ======= =======
The Company's future minimum rental payments and sublease rental income
for leases having an initial lease term in excess of one year as of December
31, 1996 are set forth below. Such future minimum rental payments exclude an
aggregate $11,540,000 of future operating lease payments relating to equipment
to be transferred to RTM assuming consummation of the RTM sale (see Note 4)
but the obligations for which will remain with the Company. As such the
Company has provided for the present value of $9,677,000 of such lease
payments in "Reduction in carrying value of long-lived assets impaired or to
be disposed of". Such future minimum rental payments include an aggregate
$105,165,000 ($9,844,000, $9,264,000, $8,403,000, $7,828,000, $7,476,000 and
$62,350,000 in 1997, 1998, 1999, 2000, 2001 and thereafter, respectively) of
future operating lease payments and, in addition, substantially all of the
future capitalized lease payments which will be assumed by RTM assuming
consummation of the sale to RTM. Such rental payments and sublease rental
income were as follows (in thousands):
Rental Payments Sublease Income
---------------------- ---------------------
Capitalized Operating Capitalized Operating
Year Ending December 31, Leases Leases Leases Leases
------------------------ ------ ------ ------ ------
1997........................... $16,120 $17,467 $ 81 $ 5,510
1998........................... 105 14,085 60 3,224
1999........................... 87 11,270 60 1,483
2000........................... 87 10,170 57 938
2001........................... 87 9,302 43 342
Thereafter..................... 397 71,250 219 1,300
------- -------- ------- -------
Total minimum payments......... 16,883 $133,544 $ 520 $12,797
======== ======= =======
Less interest.................. 955
-------
Present value of minimum
capitalized lease payments... $15,928
=======
48
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The present value of minimum capitalized lease payments is included, as
applicable, with "Long-term debt" or "Current portion of long-term debt" in
the accompanying consolidated balance sheets (see Note 11).
In August 1994, the Company completed the sale and leaseback of the land
and buildings of fourteen company-owned restaurants. The net cash sales price
of the properties was $6,703,000. The Company entered into individual
twenty-year land and building leases for such properties and capitalized the
building portion of such leases while the land portion is being accounted for
as operating leases, reflected in the table above. Such sale resulted in a
gain of $605,000 which was being amortized to income over the twenty-year
lives of the leases (see Note 4).
(18) Legal and Environmental Matters
In 1993 Royal Crown became aware of possible contamination from
hydrocarbons in groundwater at two abandoned bottling facilities. Tests have
confirmed hydrocarbons in the groundwater at both of the sites and remediation
has commenced. Management estimates remediation costs will aggregate $685,000,
of which $439,000 has been expended to date, with approximately $225,000 to
$260,000 expected to be reimbursed by the State of Texas Petroleum Storage
Tank Remediation Fund (the "Texas Fund") at one of the two sites.
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 $2,500,000. 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. Arby's is vigorously
contesting AR's claims and believes it has meritorious defenses to such
claims.
Based on currently available information and given (i) potential
reimbursements by the Texas Fund discussed above and (ii) the Company's
aggregate reserves for such legal and environmental matters of approximately
$750,000 as of December 1996, the Company does not believe that the legal and
environmental matters 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.
(19) Business Acquisitions
The Company consummated several business acquisitions during 1994, 1995
and 1996 for cash of $13,586,000, $14,335,000 and $1,972,000, respectively,
and the issuance of debt in 1996 of $1,750,000. All such acquisitions have
been accounted for in accordance with the purchase method of accounting. In
addition, in 1994 Triarc entered into a definitive merger agreement with Long
John Silver's Restaurants, Inc. ("LJS"), an owner, operator and franchisor of
49
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
quick service fish and seafood restaurants, whereby Triarc would acquire all
of the outstanding stock of LJS. In December 1994, Triarc decided not to
proceed with the acquisition of LJS due to the higher interest rate
environment and difficult capital markets which would have resulted in
significantly higher than anticipated costs and unacceptable terms of
financing. Accordingly, the Company recorded a charge of $1,521,000 in 1994
for the expenses it incurred directly relating to the failed acquisition of
LJS representing consulting, legal and other costs, which is included in
"Other income (expense), net".
(20) Business Segments
The Company operates in two major segments, restaurants and beverages
(see Note 2 for a description of each segment). Information concerning the
segments in which the Company operates is shown in the table below. Operating
profit (loss) is total revenues less operating expenses. In computing
operating profit (loss), interest expense, general corporate expenses and
non-operating income and expenses, including interest income, have not been
considered. Operating loss for the restaurant segment reflects provisions in
1995 and 1996 of $14,647,000 and $58,900,000, respectively, for reductions in
carrying value of long-lived assets impaired or to be disposed of (see Note
4). Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. General corporate assets consist
primarily of deferred financing costs.
No customer accounted for more than 10% of consolidated revenues in the
years ended December 31, 1994, 1995 or 1996.
50
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
1994 1995 1996
---- ---- ----
(In thousands)
Revenues:
Restaurants.......................... $223,155 $272,739 $288,293
Beverages............................ 150,750 172,644 178,059
-------- -------- --------
Consolidated revenues.............. $373,905 $445,383 $466,352
======== ======== ========
Operating profit (loss):
Restaurants.......................... $ 15,542 $ (6,437) $(43,341)
Beverages............................ 14,607 1,852 11,947
-------- -------- --------
Segment operating profit (loss).... 30,149 (4,585) (31,394)
Interest expense....................... (34,433) (39,565) (42,883)
Non-operating income (expense), net.... 586 (1,818) 562
General corporate expenses............. (75) (171) (189)
-------- -------- --------
Consolidated loss before
income taxes..................... $ (3,773) $(46,139) $(73,904)
======== ======== ========
Identifiable assets:
Restaurants.......................... $137,943 $187,199 $162,223
Beverages............................ 190,568 195,272 193,300
-------- -------- -------
Total identifiable assets.......... 328,511 382,471 355,523
General corporate assets............. 12,331 11,749 4,921
-------- -------- --------
Consolidated assets................ $340,842 $394,220 $360,444
======== ======== ========
Capital expenditures:
Restaurants.......................... $ 34,875 $ 47,444 $15,584
Beverages............................ 1,309 1,474 591
-------- -------- -------
Consolidated capital expenditures.. $ 36,184 $ 48,918 $16,175
======== ======== =======
Depreciation and amortization of properties:
Restaurants.......................... $ 9,335 $ 12,927 $13,096
Beverages............................ 772 841 999
-------- -------- -------
Consolidated depreciation and
amortization of properties..... $ 10,107 $ 13,768 $14,095
======== ======== =======
(21) Condensed Consolidating Financial Information
The following condensed consolidating financial statements set forth, in
separate columns, (i) RCAC (parent company only), (ii) the aggregate of those
subsidiaries which have fully and unconditionally guaranteed RCAC's
obligations with respect to the Senior Notes as of the end of the respective
years presented, principally Arby's and Royal Crown, (the "Guarantors"), (iii)
those subsidiaries which have not guaranteed RCAC's obligations with respect
to the Senior Notes, including ARDC, ARHC, AROC and certain other subsidiaries
of RCAC and Arby's, (the "Non-Guarantors"), (iv) the aggregate of
consolidating eliminations and reclassifications ("Eliminations") and (v)
consolidated totals of RC/Arby's Corporation and subsidiaries
("Consolidated").
51
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
CONDENSED CONSOLIDATING BALANCE SHEETS
- --------------------------------------
Non- Elimin- Consol-
December 31, 1995: RCAC Guarantors Guarantors ations idated
- ------------------ ---- ---------- ---------- ------ ------
ASSETS
Current assets:
Cash......................... $ 374 $ 5,884 $ 3,486 $ - $ 9,744
Receivables, net............. - 29,796 234 - 30,030
Note receivable from
affiliate.................. - - 5,500 - 5,500
Inventories.................. - 14,074 796 - 14,870
Deferred income tax benefit.. (258) 6,192 37 - 5,971
Prepaid expenses and other
current assets.............. 992 5,913 924 - 7,829
-------- ------- -------- --------- --------
Total current assets...... 1,108 61,859 10,977 - 73,944
Properties, net................ - 64,459 58,227 - 122,686
Unamortized costs in excess
of net assets of acquired
companies.................... - 170,483 210 - 170,693
Intercompany receivables....... 218,355 - - (218,355) -
Investment in subsidiaries..... 14,715 - - (14,715) -
Deferred income tax benefit.... (2,774) 2,767 800 - 793
Deferred costs and other assets 9,846 12,346 3,912 - 26,104
-------- -------- -------- --------- --------
$241,250 $311,914 $ 74,126 $(233,070)$394,220
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-
term debt.................. $ - $ 2,271 $ 1,426 $ - $ 3,697
Notes payable to affiliates.. 13,925 - - - 13,925
Purchase option deposit...... - 6,700 (6,700) - -
Accounts payable............. - 20,800 1,835 - 22,635
Accrued expenses............. 15,735 34,724 1,583 - 52,042
-------- -------- -------- --------- --------
Total current liabilities.. 29,660 64,495 (1,856) - 92,299
Intercompany payables.......... - 211,865 6,560 (218,425) -
Long-term debt................. 275,000 19,434 56,804 - 351,238
Note payable to affiliate...... - - 6,700 - 6,700
Deferred income and other
liabilities.................. - 7,749 (356) - 7,393
Stockholder's equity (deficit):
Common stock................ 1 3 535 (538) 1
Additional paid-in capital.. 44,300 70,932 11,611 (82,543) 44,300
Accumulated deficit......... (107,711) (62,564) (5,872) 68,436 (107,711)
-------- -------- -------- --------- --------
Total stockholder's
equity (deficit)......... (63,410) 8,371 6,274 (14,645) (63,410)
-------- -------- -------- --------- --------
$241,250 $311,914 $ 74,126 $(233,070)$394,220
======== ======== ======== ========= ========
52
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Non- Elimin- Consol-
December 31, 1996: RCAC Guarantors Guarantors ations idated
- ------------------ ---- ---------- ---------- ------ ------
ASSETS
Current assets:
Cash......................... $ 56 $ 4,890 $ 2,465 $ - $ 7,411
Receivables, net............. - 34,640 511 - 35,151
Note receivable from
affiliate.................. - - 1,650 - 1,650
Inventories.................. - 11,462 648 - 12,110
Assets held for sale......... - 47,596 23,520 - 71,116
Deferred income tax benefit.. (112) 8,504 176 - 8,568
Prepaid expenses and other
current assets............ 15 6,030 716 - 6,761
-------- ------- -------- -------- -------
Total current assets..... (41) 113,122 29,686 - 142,767
Properties, net................ - 11,926 17 - 11,943
Unamortized costs in excess of
net assets of acquired
companies ................... - 159,123 - - 159,123
Intercompany receivables....... 221,560 - - (221,560) -
Investment in subsidiaries..... (33,442) - - 33,442 -
Deferred income tax benefit.... (2,774) 14,507 12,498 - 24,231
Deferred costs and other assets 7,736 11,279 3,365 - 22,380
-------- ------- -------- -------- --------
$193,039 $309,957 $ 45,566 $(188,118)$360,444
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-
term debt.................. $ - $17,802 $ 55,253 $ - $73,055
Notes payable to affiliates.. 13,765 - - - 13,765
Purchase option deposit...... - 6,700 (6,700) - -
Accounts payable............. - 22,996 1,031 - 24,027
Accrued expenses............. 18,242 41,859 1,643 - 61,744
-------- -------- -------- -------- --------
Total current liabilities.. 32,007 89,357 51,227 - 172,591
Intercompany payables.......... - 215,579 6,051 (221,630) -
Long-term debt................. 275,000 2,991 3,119 - 281,110
Note payable to affiliate...... - - 6,700 - 6,700
Deferred income and other
liabilities.................. - 15,184 (1,173) - 14,011
Stockholder's equity (deficit):
Common stock................ 1 3 535 (538) 1
Additional paid-in capital.. 44,300 70,932 7,861 (78,793) 44,300
Accumulated deficit......... (158,269) (84,089) (28,754) 112,843 (158,269)
-------- -------- -------- -------- --------
Total stockholder's equity
(deficit)................. (113,968) (13,154) (20,358) 33,512 (113,968)
-------- -------- -------- -------- --------
$193,039 $309,957 $ 45,566 $(188,118)$360,444
======== ======== ======== ========= ========
53
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Non- Elimin- Consol-
Year Ended December 31, 1994: RCAC Guarantors Guarantors ations idated
- ----------------------------- ---- ---------- ---------- ------ ------
Revenues:
Net sales................... $ - $317,937 $ 4,951 $ - $322,888
Royalties, franchise fees
and other revenues........ - 50,998 19 - 51,017
------- ------- -------- -------- --------
- 368,935 4,970 - 373,905
------- ------- -------- -------- --------
Costs and expenses:
Cost of sales............... - 170,706 4,710 - 175,416
Advertising, selling and
distribution.............. - 95,342 77 - 95,419
General and administrative.. 75 72,649 272 - 72,996
------- ------- -------- -------- --------
75 338,697 5,059 - 343,831
------- ------- -------- -------- --------
Operating profit (loss).... (75) 30,238 (89) - 30,074
Interest expense............... (32,251) (2,182) - - (34,433)
Allocation of interest expense
from RCAC................... 21,800 (21,800) - - -
Other income (expense), net.... 1,141 (623) 68 - 586
Equity in net earnings of
subsidiaries................ 623 - - (623) -
------- ------- -------- -------- --------
Income (loss) before
income taxes............... (8,762) 5,633 (21) (623) (3,773)
Benefit from (provision for)
income taxes................ 3,285 (4,960) (29) - (1,704)
------- ------- -------- -------- --------
Net income (loss)........... $(5,477) $ 673 $ (50) $ (623)$ (5,477)
======= ======= ======== ======== ========
54
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Non- Elimin- Consol-
Year Ended December 31, 1995: RCAC Guarantors Guarantors ations idated
- ----------------------------- ---- ---------- ---------- ------ ------
Revenues:
Net sales.................. $ - $360,747 $ 28,844 $ - $389,591
Royalties, franchise fees
and other revenues....... - 56,933 (1,141) - 55,792
------- ------- -------- -------- --------
- 417,680 27,703 - 445,383
------- ------- -------- -------- --------
Costs and expenses:
Cost of sales............... - 216,191 23,679 - 239,870
Advertising, selling and
distribution.............. - 105,864 2,720 - 108,584
General and administrative.. 171 86,645 222 - 87,038
Reduction in carrying value of
long-lived assets impaired or
to be disposed of.......... - 11,527 3,120 - 14,647
-------- -------- -------- -------- --------
171 420,227 29,741 - 450,139
-------- -------- -------- -------- --------
Operating loss............. (171) (2,547) (2,038) - (4,756)
Interest expense............... (33,742) (2,164) (3,659) - (39,565)
Allocation of interest expense
from RCAC................... 23,985 (23,985) - - -
Other income (expense), net.... 16 (2,138) 304 - (1,818)
Equity in net losses of
subsidiaries................. (26,107) - - 26,107 -
-------- -------- -------- -------- --------
Loss before income taxes... (36,019) (30,834) (5,393) 26,107 (46,139)
Benefit from income taxes...... 2,369 8,608 1,512 - 12,489
-------- -------- -------- -------- --------
Net loss.................... $(33,650) $(22,226) $ (3,881) $ 26,107 $(33,650)
======== ======== ======== ======== ========
55
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Non- Elimin- Consol-
Year Ended December 31, 1996: RCAC Guarantors Guarantors ations idated
- ----------------------------- ---- ---------- ---------- ------ ------
Revenues:
Net sales................... $ - $357,282 $ 51,818 $ - $409,100
Royalties, franchise fees
and other revenues........ - 59,321 (2,069) - 57,252
-------- -------- -------- -------- --------
- 416,603 49,749 - 466,352
-------- -------- -------- -------- --------
Costs and expenses:
Cost of sales............... - 209,994 42,817 - 252,811
Advertising, selling and
distribution.............. - 97,215 5,320 - 102,535
General and administrative.. 188 77,004 147 - 77,339
Reduction in carrying value of
long-lived assets impaired or
to be disposed of.......... - 27,886 31,014 - 58,900
Facilities relocation and
corporate restructuring... - 6,350 - - 6,350
-------- -------- -------- -------- --------
188 418,449 79,298 - 497,935
-------- -------- -------- -------- --------
Operating profit (loss).... (188) (1,846) (29,549) - (31,583)
Interest expense............... (32,869) (2,457) (7,557) - (42,883)
Allocation of interest expense
from RCAC................... 23,592 (23,592) - - -
Other income (expense), net.... 2 808 (248) - 562
Equity in net losses of
subsidiaries................. (44,407) - - 44,407 -
-------- -------- -------- -------- --------
Loss before income taxes.... (53,870) (27,087) (37,354) 44,407 (73,904)
Benefit from income taxes...... 3,312 5,562 14,472 - 23,346
-------- -------- -------- -------- --------
Net loss.................... $(50,558) $(21,525) $(22,882) $ 44,407 $(50,558)
======== ======== ======== ======== ========
56
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
CONDENSED CONSOLIDATING STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
Non- Elimin- Consol-
RCAC Guarantors Guarantors ations idated
---- ---------- ---------- ------ ------
Common stock:
Balance at December 31, 1993 $ 104 $ 2 $ 564 $ (566) $ 104
Recapitalization.......... (103) - - - (103)
Capital contributions..... - - 3 (3) -
Dissolution of
subsidiaries............ - - (36) 36 -
------- ------- -------- -------- -------
Balance at December 31, 1994 $ 1 $ 2 $ 531 $ (533) $ 1
Capital contributions..... - - 6 (6) -
Designation of certain Non-
Guarantors as Guarantors.. - 1 (2) 1 -
------- ------- -------- -------- -------
Balance at December 31, 1995
and 1996.................. $ 1 $ 3 $ 535 $ (538) $ 1
======= ======= ======== ======== =======
Additional paid-in capital:
Balance at December 31, 1993 $35,332 $67,298 $ 4,097 $(71,395) $35,332
Recapitalization.......... 103 - - - 103
Capital contributions..... - - 2,293 (2,293) -
Return of capital......... - - (300) 300 -
Dissolution of
subsidiaries............ - - (54) 54 -
------- ------- -------- -------- -------
Balance at December 31, 1994 35,435 67,298 6,036 (73,334) 35,435
Capital contributions..... 8,865 - 14,733 (14,733) 8,865
Return of capital......... - - (5,500) 5,500 -
Designation of certain Non-
Guarantors as Guarantors - 3,634 (3,658) 24 -
------- ------- -------- -------- -------
Balance at December 31, 1995 44,300 70,932 11,611 (82,543) 44,300
Return of capital......... - - (3,750) 3,750 -
------- ------- -------- -------- -------
Balance at December 31, 1996 $44,300 $70,932 $ 7,861 $(78,793) $44,300
======= ======= ======== ======== =======
Accumulated deficit:
Balance at December 31, 1993 $(68,584) $(22,727) $ (5,492) $ 28,219 $(68,584)
Dissolution of
subsidiaries............ - 146 (146) - -
Net loss.................. (5,477) 673 (50) (623) (5,477)
------- ------- -------- -------- --------
Balance at December 31, 1994 (74,061) (21,908) (5,688) 27,596 (74,061)
Designation of certain Non-
Guarantors as Guarantors - (3,697) 3,697 - -
Dividend.................. - (14,733) - 14,733 -
Net loss.................. (33,650) (22,226) (3,881) 26,107 (33,650)
------- ------- -------- -------- --------
Balance at December 31, 1995 (107,711) (62,564) (5,872) 68,436 (107,711)
Net loss.................. (50,558) (21,525) (22,882) 44,407 (50,558)
------- ------- -------- -------- --------
Balance at December 31,
1996......................$(158,269) $(84,089) $(28,754) $112,843$(158,269)
========= ======== ======== ======== ========
57
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Non- Elimin- Consol-
Year Ended December 31, 1994: RCAC Guarantors Guarantors ations idated
- ----------------------------- ---- ---------- ---------- ------ ------
Net cash provided by (used in)
operating activities.......... $(33,983) $24,747 $ (166) $ - $(9,402)
-------- ------- -------- -------- -------
Cash flows from investing activities:
Business acquisitions........ - (13,120) (466) - (13,586)
Capital expenditures......... - (33,689) (37) - (33,726)
Proceeds from sales of
properties................. - 7,314 - - 7,314
Other........................ (2,296) (157) 1,250 - (1,203)
------- ------- -------- -------- -------
Net cash provided by (used in)
investing activities......... (2,296) (39,652) 747 - (41,201)
------- ------- -------- -------- -------
Cash flows from financing activities:
Borrowings and collections
from affiliates, net........ (8,348) 14,273 - - 5,925
Repayments of long-term debt... (6,470) (2,203) - - (8,673)
------- ------- -------- -------- -------
Net cash provided by (used in)
financing activities......... (14,818) 12,070 - - (2,748)
------- ------- -------- -------- -------
Net increase (decrease) in cash. (51,097) (2,835) 581 - (53,351)
Cash at beginning of year....... 51,985 3,060 191 - 55,236
------- ------- -------- -------- -------
Cash at end of year............. $ 888 $ 225 $ 772 $ - $ 1,885
======= ======= ======== ======== =======
58
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Non- Elimin- Consol-
Year Ended December 31, 1995: RCAC Guarantors Guarantors ations idated
- ----------------------------- ---- ---------- ---------- ------ ------
Net cash provided by (used in)
operating activities.......... $(24,449) $17,901 $ 6,571 $ - $ 23
-------- ------- -------- -------- -------
Cash flows from investing activities:
Business acquisitions........ - (14,335) - - (14,335)
Capital expenditures......... - (32,442) (16,114) - (48,556)
Investment in preferred stock
of affiliate................ - (1,000) - - (1,000)
Return of capital............ 5,500 - (5,500) - -
Proceeds from sales of
properties................. - 33,599 (31,602) - 1,997
Other........................ (6) - 6 - -
------- ------- -------- -------- -------
Net cash provided by (used in)
investing activities......... 5,494 (14,178) (53,210) - (61,894)
------- ------- -------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of debt - 2,950 58,670 - 61,620
Purchase option deposit...... - 6,700 (6,700) - -
Borrowings and collections
from affiliates, net....... 9,576 (4,826) 1,200 - 5,950
Repayments of long-term debt. - (2,918) (440) - (3,358)
Capital contribution from
CFC Holdings Corp........... 8,865 - - - 8,865
Deferred financing costs..... - - (3,347) - (3,347)
------- ------- -------- -------- -------
Net cash provided by financing
activities.................... 18,441 1,906 49,383 - 69,730
------- ------- -------- -------- -------
Net increase (decrease) in cash. (514) 5,629 2,744 - 7,859
Designation of certain Non-
Guarantors as Guarantors...... - 30 (30) - -
Cash at beginning of year....... 888 225 772 - 1,885
------- ------- -------- -------- -------
Cash at end of year............. $ 374 $ 5,884 $ 3,486 $ - $ 9,744
======= ======= ======== ======== =======
59
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Non- Elimin- Consol-
Year Ended December 31, 1994: RCAC Guarantors Guarantors ations idated
- ----------------------------- ---- ---------- ---------- ------ ------
Net cash provided by (used in)
operating activities.......... $(4,982) $18,354 $ 95 $ - $13,467
------- ------- -------- -------- -------
Cash flows from investing activities:
Business acquisitions........ - (4,754) 2,782 - (1,972)
Capital expenditures......... - (13,543) (2,632) - (16,175)
Proceeds from sales of
properties................. - 2,591 (1,183) - 1,408
Return of capital............ 3,750 - (3,750) - -
------- ------- -------- -------- -------
Net cash provided by (used in)
investing activities......... 3,750 (15,706) (4,783) - (16,739)
------- ------- -------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of debt - - 4,027 - 4,027
Borrowings and collections
from affiliates, net....... 914 (1,074) 3,850 - 3,690
Repayments of long-term debt. - (2,568) (3,885) - (6,453)
Deferred financing costs..... - - (325) - (325)
------- ------- -------- -------- -------
Net cash provided by (used in)
financing activities......... 914 (3,642) 3,667 - 939
------- ------- -------- -------- -------
Net decrease in cash............ (318) (994) (1,021) - (2,333)
Cash at beginning of year....... 374 5,884 3,486 - 9,744
------- ------- -------- -------- -------
Cash at end of year............. $ 56 $ 4,890 $ 2,465 $ - $ 7,411
======= ======= ======== ======== =======
60
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Items 10, 11, 12 and 13.
Items 10, 11, 12 and 13 are omitted because RCAC meets the conditions set
forth in General Instruction J(1)(a) and (b) of Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements
See Index to Financial Statements (Item 8)
2. Financial Statement Schedules:
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
3. Exhibits:
Copies of the following exhibits are available at a charge of $.25
per page upon written request to the Secretary of the Company at
1000 Corporate Drive, Fort Lauderdale, FL 33334.
Exhibit
No. Description
--- -----------
3.1 Certificate of Incorporation of RC/Arby's Corporation
("RCAC"), incorporated herein by reference to RCAC's Current
Report on Form 8-K dated November 14, 1996.
3.2 Articles of Amendment of RCAC incorporated herein by
reference to Exhibit 3.2 to the Annual Report on Form 10-K
of RCAC for the year ended December 31, 1993 (the "1993
10-K").
3.3 Certificate of Merger Merging RCAC into RCC Investments,
Inc. incorporated herein by reference to Exhibit 3.3 to the
1993 10-K.
3.4 By-Laws of RCAC, incorporated herein by reference to Exhibit
3.2 to RCAC's Current Report on Form 8-K dated November 14,
1996.
3.5 Certificate of Incorporation of Royal Crown Company, Inc.,
then known as Royal Crown Cola Co. ("Royal Crown"),
incorporated herein by reference to Exhibit 3.3 to the S-1.
61
<PAGE>
3.6 Certificate of Amendment of Certificate of Incorporation of
Royal Crown incorporated herein by reference to Exhibit 3.6
to the 1993 10-K.
3.7 By-Laws of Royal Crown, incorporated herein by reference to
Exhibit 3.4 to the S-1.
3.8 Restated Certificate of Incorporation of Arby's, Inc.
("Arby's"), incorporated herein by reference to Exhibit 3.5
to the S-1.
3.9 Amended Code of Regulations of Arby's, incorporated herein
by reference to Exhibit 3.6 to the S-1.
3.10 Certificate of Merger Merging Arby's, Inc. into Arby's
Merger Corp. incorporated herein by reference to Exhibit
3.10 to the 1993 10-K.
4.1 Indenture dated as of April 23, 1993 among RCAC, Royal
Crown, Arby's and The Bank of New York, incorporated herein
by reference to Exhibit 5 to Triarc Companies, Inc.'s., then
known as DWG Corporation ("Triarc"), Current Report on Form
8-K dated April 23, 1993 (SEC file #1-2207).
4.2 Note Purchase Agreement dated as of April 23, 1993 among
RCAC, Triarc, RCRB Funding, Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, incorporated herein by
reference to Exhibit 4 to Triarc's Current Report on Form
8-K dated April 23, 1993 (SEC file #1-2207).
4.3 Form of Indenture among RCAC, Royal Crown, Arby's and The
Bank of New York, as Trustee, relating to the 9-3/4% Senior
Secured Notes Due 2000, incorporated herein by reference to
Exhibit 4.1 to the S-1.
4.4 Loan Agreement dated as of May 1, 1995 by and between FFCA
Acquisition Corporation and Arby's Restaurant Development
Corporation ("ARDC"), incorporated herein by reference to
Exhibit 4.1 to RCAC's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
4.5 Amended and Restated Loan Agreement dated as of October 13,
1995 by and between FFCA Acquisition Corporation and ARDC,
incorporated herein by reference to Exhibit 10.1 to RCAC's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
4.6 Loan Agreement dated as of October 13, 1995 by and between
FFCA Acquisition Corporation and Arby's Restaurant Holding
Company ("ARHC"), incorporated herein by reference to
Exhibit 10.2 to RCAC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995.
4.7 Letter Agreement dated December 15, 1996 among ARHC, ARDC
and FFCA Acquisition Corporation, incorporated herein by
reference to Exhibit 4.7 to the Annual Report on Form 10-K
of RCAC for the year ended December 31, 1995.
4.8 Loan Agreement dated as of September 5, 1996 by and between
FFCA Mortgage Corporation and ARHC, incorporated herein by
reference to Exhibit 4.1 to RCAC's Current Report on Form
8-K, dated November 14, 1996.
62
<PAGE>
4.9 Supplement to Loan Agreements as of June 26, 1996 among FFCA
Acquisition Corporation, ARHC, ARDC and Triarc Companies,
Inc., incorporated herein by reference to Exhibit 4.2 to
RCAC's Current Report on Form 8-K, dated November 14, 1996.
4.10 Agreement Regarding Cross-Collateralization and
Cross-Default Provisions as of June 26, 1996 by and among
FFCA Acquisition Corporation, ARDC, ARHC and Arby's,
incorporated herein by reference to Exhibit 4.3 to RCAC's
Current Report on Form 8-K, dated November 14, 1996.
10.1 Tax Sharing Agreement dated as of April 23, 1993 between
RCAC and Triarc, incorporated herein by reference to Exhibit
10.1 to the S-1.
10.2 Management Services Agreement dated as of April 23, 1993
between Triarc and Royal Crown, incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to the S-1
dated July 12, 1993 (the "Amendment No. 1").
10.3 Management Services Agreement dated as of April 23, 1993
between Triarc and Arby's, incorporated herein by reference
to Exhibit 10.4 to Amendment No. 1.
10.4 Employment Agreement dated as of April 24, 1993 among Royal
Crown, Triarc and John C. Carson, incorporated herein by
reference to Exhibit 8 to Triarc's Current Report on Form
8-K dated April 23, 1993 (SEC file #1-2207).
10.5 Employment Agreement dated as of April 24, 1993 between
Arby's and Donald L. Pierce, incorporated herein by
reference to Exhibit 7 to Triarc's Current Report on Form
8-K dated April 23, 1993 (SEC file #1-2207).
10.6 Concentrate Sales Agreement dated as of January 28, 1994
between Royal Crown and Cott Corporation, incorporated
herein by reference to Exhibit 10.12 to Amendment No. 1 to
Triarc's Registration Statement Form S-4 dated March 11,
1994 (SEC file #1-2207).
10.7 Triarc's 1993 Equity Participation Plan, incorporated herein
by reference to Exhibit E to Triarc's Definitive Proxy
Statement relating to Triarc's annual meeting of
stockholders held on June 9, 1994 (SEC file No. 1-2207).
10.8 Form of Non-Incentive Stock Option Agreement under Triarc's
Amended and Restated 1993 Equity Participation Plan,
incorporated herein by reference to Exhibit 12 to Triarc's
Current Report on Form 8-K dated April 23, 1993 (SEC file
#1-2207).
10.9 Form of Restricted Stock Agreement under Triarc's Amended
and Restated 1993 Equity Participation Plan, incorporated
herein by reference to Exhibit 13 to Triarc's Current Report
on Form 8-K dated April 23, 1993 (SEC file #1-2207).
10.10 Stock Purchase Agreement dated February 13, 1997 by and
among Arby's, ARDC, ARHC, Arby's Restaurant Operations
Company, RTM, Inc. and RTM Partners, Inc., incorporated
herein by reference to Exhibit 10.1 to RCAC's Current Report
on Form 8-K dated February 20, 1997.
63
<PAGE>
27.1 Financial Data Schedule for the year ended December 31, 1996,
submitted t o the Securities and Exchange Commission in
electronic format.*
---------------
* Filed herewith
(b) Reports on Form 8-K:
During the three months ended December 31, 1996, the registrant
filed reports on Form 8-K dated October 29, 1996 with respect to
Item 5, "Other Events," and dated November 14, 1996 with respect
to Item 7, "Exhibits."
(d) Financial Statements:
Consolidated financial statements of Arby's as of December 31,
1995 and 1996 and for the years ended December 31, 1994, 1995 and
1996.
Consolidated financial statements of Royal Crown as of December
31, 1995 and 1996 and for the years ended December 31, 1994, 1995
and 1996.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ NELSON PELTZ
By:....................
Nelson Peltz
Chairman and Chief
Dated: April 15, 1997 Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on April 15, 1997 by the following persons
on behalf of the registrant in the capacities indicated.
Signature Titles
--------- ------
/s/ NELSON PELTZ Chairman and Chief Executive
................................. Officer, and Director
(Nelson Peltz) (Principal Executive Officer)
/s/ PETER W. MAY President and Chief Operating
................................. Officer, and Director
(Peter W. May) (Principal Operating Officer)
/s/ JOHN L. BARNES, JR. Senior Vice President and
................................. Chief Financial Officer
(John L. Barnes, Jr.) (Principal Financial Officer)
/s/ FRED H. SCHAEFER Vice President and Chief
................................. Accounting Officer
(Fred H. Schaefer) (Principal Accounting Officer)
/s/ ALEXANDER E. FISHER Director
.................................
(Alexander E. Fisher)
65
<PAGE>
ARBY'S, INC.
------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 1996
-----------------
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report............................................... 1
Consolidated Balance Sheets as of December 31, 1995 and 1996............... 2
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996....................................... 3
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1994, 1995 and 1996....................................... 4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996....................................... 5
Notes to Consolidated Financial Statements................................. 7
(i)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Arby's, Inc.:
We have audited the accompanying consolidated balance sheets of Arby's,
Inc. (a wholly-owned subsidiary of RC/Arby's Corporation) and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of Arby's, Inc. management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Arby's, Inc. and subsidiaries
as of December 31, 1996 and 1995 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995
Arby's, Inc. changed its method of accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 31, 1997
1
<PAGE>
ARBY'S, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------
1995 1996
---- ----
(In thousands)
ASSETS
Current assets:
Cash..................................................... $ 5,121 $ 4,090
Receivables, net (Note 4)................................ 6,966 6,821
Inventories.............................................. 2,203 2,157
Assets held for sale (Note 3)............................ - 47,596
Deferred income tax benefit (Note 8)..................... 4,155 4,026
Prepaid expenses and other current assets................ 1,173 2,341
------- -------
Total current assets................................... 19,618 67,031
Properties, net (Note 5)................................... 57,564 6,699
Unamortized costs in excess of net assets
of acquired companies (Note 1)........................... 28,109 21,666
Deferred income tax benefit (Note 8)....................... 4,379 15,840
Deferred costs and other assets............................ 9,140 7,324
-------- --------
$118,810 $118,560
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 7)............... $ 2,271 $17,802
Due to Parent and affiliates, net (Note 10).............. 11,588 10,410
Accounts payable......................................... 8,912 10,306
Purchase option deposit from affiliate (Note 10)......... 6,700 6,700
Accrued expenses (Note 6)................................ 24,320 31,529
-------- -------
Total current liabilities.............................. 53,791 76,747
Long-term debt (Note 7).................................... 19,434 2,991
Deferred income and other liabilities...................... 6,456 14,258
Commitments and contingencies (Notes 2, 3, 7, 8, 12 and 13)
Stockholder's equity (Note 7):
Common stock, $1.00 par value; 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional paid-in capital............................... 24,872 24,872
Retained earnings (accumulated deficit).................. 14,256 (309)
-------- --------
Total stockholder's equity............................. 39,129 24,564
-------- --------
$118,810 $118,560
======== ========
See accompanying notes to consolidated financial statements.
2
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1994 1995 1996
--------- ------ -----
(In thousands)
Revenues:
Net sales.....................................$171,858 $188,144 $179,275
Royalties..................................... 46,670 51,277 55,708
Franchise fees................................ 3,653 4,648 2,834
Other revenues................................ 700 1,008 779
------- -------- --------
222,881 245,077 238,596
------- -------- --------
Costs and expenses:
Cost of sales................................. 139,744 159,119 148,374
Advertising and selling (Note 1).............. 17,156 19,638 20,292
General and administrative (Notes 10 and 11).. 50,390 59,204 53,288
Reduction in carrying value of long-lived
assets impaired or to be disposed of
(Notes 1 and 3)............................ - 11,527 27,886
Corporate restructuring (Note 9).............. - - 2,400
------- -------- --------
207,290 249,488 252,240
------- -------- --------
Operating profit (loss).................... 15,591 (4,411) (13,644)
Interest expense................................. (2,166) (2,188) (2,457)
Allocation of interest expense from Parent
(Note 10)...................................... (1,800) (3,985) (3,592)
Other income (expense), net (Note 14)............ (872) (1,341) 522
------- ------- --------
Income (loss) before income taxes ......... 10,753 (11,925) (19,171)
Benefit from (provision for) income taxes
(Note 8)....................................... (4,761) 3,764 4,606
------- ------- --------
Net income (loss).......................... $ 5,992 $(8,161) $(14,565)
======= ======= ========
See accompanying notes to consolidated financial statements.
3
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 1996
Common Stock
------------------ Additional Retained
Number Paid-in Earnings
of Shares Amount Capital (Deficit)
--------- ------ ------- ---------
(Dollars in thousands)
Balance at December 31, 1993........ 1,000 $ 1 $24,872 $31,158
Net income....................... - - - 5,992
-------- -------- ------- -------
Balance at December 31, 1994........ 1,000 1 24,872 37,150
Dividend (Note 10)............... - - - (14,733)
Net loss......................... - - - (8,161)
-------- -------- ------- -------
Balance at December 31, 1995........ 1,000 1 24,872 14,256
Net loss......................... - - - (14,565)
-------- -------- ------- -------
Balance at December 31, 1996........ 1,000 $ 1 $24,872 $ (309)
======== ======== ======= =======
See accompanying notes to consolidated financial statements.
4
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1994 1995 1996
-------- ------ -----
(In thousands)
Cash flows from operating activities:
Net income (loss)............................. $ 5,992 $ (8,161) $(14,565)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Reduction in carrying value of long-lived
assets................................... - 11,527 27,886
Depreciation and amortization of properties 9,324 11,098 8,947
Amortization of costs in excess of net
assets of acquired companies and other
intangibles.............................. 2,029 3,334 2,919
Provision for corporate restructuring...... - - 2,400
Payments on facilities relocation and
corporate restructuring.................. (1,375) - -
Benefit from deferred income taxes......... (1,135) (3,524) (11,332)
Provision for doubtful accounts............ 420 566 424
Loss (gain) on disposal of properties, net. (124) 1,492 (305)
Other, net................................. (1,761) (4,782) (213)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables............................ 444 (1,173) (279)
Inventories............................ (226) 444 46
Prepaid expenses and other current
assets................................ (241) 675 (1,168)
Increase (decrease) in:
Accounts payable....................... 6,007 (3,551) (1,844)
Accrued expenses....................... 3,967 4,383 4,838
-------- -------- -------
Net cash provided by operating activities........ 23,321 12,328 17,754
-------- -------- -------
Cash flows from investing activities:
Business acquisitions:
Properties, net............................. (9,894) (9,219) (2,782)
Trademarks, favorable lease acquisition costs
and non-compete agreement................. (878) (1,876) (1,972)
Costs in excess of net assets of acquired
companies................................. (5,074) (2,708) -
Net current assets.......................... - (335) -
Capitalized leases assumed.................. 2,726 2,726 -
-------- -------- -------
(13,120) (11,412) (4,754)
Capital expenditures.......................... (32,430) (30,968) (12,952)
Proceeds from sales of properties............. 7,306 33,012 2,563
Other ....................................... (157) - -
-------- -------- -------
Net cash used in investing activities............ (38,401) (9,368) (15,143)
-------- -------- -------
Cash flows from financing activities:
Repayments of long-term debt.................. (2,097) (2,918) (2,568)
Borrowings from (advances/repayments to) Parent
and affiliates, net......................... 14,273 (4,826) (1,074)
Purchase option deposit received from affiliate - 6,700 -
Proceeds from issuance of long-term debt...... - 2,950 -
-------- -------- -------
Net cash provided by (used in) financing activities 12,176 1,906 (3,642)
-------- -------- -------
Net increase (decrease) in cash ................. (2,904) 4,866 (1,031)
Cash at beginning of year........................ 3,159 255 5,121
-------- -------- -------
Cash at end of year.............................. $ 255 $ 5,121 $ 4,090
======== ======== =======
(continued)
See accompanying notes to consolidated financial statements.
5
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Year ended December 31,
--------------------------
1994 1995 1996
------ ------ ------
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................. $ 2,134 $ 2,537 $ 2,440
======= ======== =======
Income taxes.............................. $ 1,384 $ 685 $ 142
======= ======== =======
Supplemental disclosures of noncash investing
and financing activities:
Total capital expenditures................ $34,873 $ 31,330 $12,952
Amounts representing capitalized leases... (2,443) (362) -
------- -------- -------
Capital expenditures paid in cash........ $32,430 $ 30,968 $12,952
======= ======== =======
As described in Note 10, in May 1995 Arby's made a non-cash dividend
aggregating $14,733,000 to the Parent consisting of the land, buildings and
related improvements of 39 restaurants.
See accompanying notes to consolidated financial statements.
6
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Arby's, Inc.
("Arby's"), a wholly-owned subsidiary of RC/Arby's Corporation (the "Parent"),
which is a direct wholly-owned subsidiary of CFC Holdings Corp. ("CFC
Holdings") and an indirect wholly-owned subsidiary of Triarc Companies, Inc.
("Triarc") and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The Parent has certain
wholly-owned subsidiaries other than Arby's, including Royal Crown Company,
Inc. ("Royal Crown") and certain subsidiaries involved in quick service
restaurant operations, principally Arby's Restaurant Development Corporation
("ARDC"), Arby's Restaurant Holding Company ("ARHC") and Arby's Restaurant
Operations Company ("AROC").
Inventories
Inventories, consisting principally of raw materials, are stated at the
lower of cost (determined on the first-in, first-out basis) or market.
Substantially all inventories are pledged as collateral for certain debt of
the Parent (see Note 7).
Properties and Depreciation and Amortization
Properties are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated on the straight-line
basis using the estimated useful lives of the related major classes of
properties: 15-20 years for buildings and 3-8 years for machinery and
equipment. Leased assets capitalized and leasehold improvements are amortized
over the shorter of their estimated useful lives or the terms of the
respective leases.
Unamortized Costs in Excess of Net Assets of Acquired Companies
Costs in excess of net assets of acquired companies ("Goodwill") are being
amortized on the straight- line basis over 15 to 40 years. Aggregate
accumulated amortization of Goodwill was $7,263,000 and $7,522,000 as of
December 31, 1995 and 1996, respectively.
Impairments
Goodwill
The amount of impairment, if any, in unamortized Goodwill is measured
based on projected future results of operations. To the extent future results
of operations through the period such Goodwill is being amortized are
sufficient to absorb the related amortization, Arby's has deemed there to be
no impairment of Goodwill.
7
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Long-Lived Assets
Effective October 1, 1995 Arby's adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This standard requires
that long-lived assets and certain identifiable intangibles held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In 1996 Arby's recorded a provision of $27,886,000 in order to
reduce the carrying value of certain long-lived assets and identifiable
intangibles relating to the estimated loss on the anticipated sale of all
company-owned restaurants (see Note 3).
Advertising Costs
The Company accounts for advertising production costs by expensing such
production costs the first time the related advertising takes place.
Advertising costs amounted to $16,742,000, $19,072,000 and $19,868,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Income Taxes
Arby's is included in the consolidated Federal income tax return filed by
Triarc. Under a tax sharing agreement between Triarc and the Parent, Arby's
provides for Federal income taxes on the same basis as if it filed a separate
consolidated return. Deferred income taxes are provided to recognize the tax
effect of temporary differences between the bases of assets and liabilities
for tax and financial statement purposes.
Franchise Fees and Royalties
Franchise fees are recognized as income when a franchised restaurant is
opened. Franchise fees for multiple area developments represent the aggregate
of the franchise fees for the number of restaurants in the area development
and are recognized as income when each restaurant is opened in the same manner
as franchise fees for individual restaurants. Royalties are based on a
percentage of restaurant sales of the franchised outlet and are accrued as
earned.
Reclassifications
Certain amounts included in the prior years' consolidated financial
statements have been reclassified to conform with the current year's
presentation.
(2) Significant Risks and Uncertainties
Nature of Operations
Arby's primarily franchises and operates (see Note 3 regarding the February
1997 agreement to sell all company-owned restaurants) Arby's quick service
restaurants representing the largest franchise restaurant system specializing
in roast beef sandwiches. Arby's operations principally are throughout the
United States.
8
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant Estimates
Arby's significant estimates are for costs related to (i) provisions for
impairment of long-lived assets and for long-lived assets to be disposed of
(see Note 3) and (ii) provisions for legal contingencies (see Note 13).
Certain Risk Concentrations
Arby's believes that its vulnerability to risk concentrations related to
significant customers and vendors, products sold and sources of its raw
materials is not significant. Risk of geographical concentration is also
minimized since Arby's generally operates throughout the United States with
limited foreign exposure.
(3) Planned Transactions
Spinoff
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 Arby's) 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 Internal Revenue Service
("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, if any, of
its proposed acquisition of Snapple Beverage Corp. (which Triarc announced on
March 27, 1997) on the anticipated structure of the Spinoff Transactions.
Sale of Restaurants
In February 1997 Arby's, ARDC, ARHC and AROC entered into an agreement (the
"RTM Agreement") with RTM, Inc. ("RTM"), the largest franchisee in the Arby's
system, to sell to an affiliate of RTM all of their 355 company-owned
restaurants. In connection therewith, Arby's will sell its 274 company-owned
restaurants to the Parent in exchange for a note of approximately $31,500,000
and the assumption of approximately $15,000,000 of capitalized lease
obligations. The consummation of the sale is subject to customary closing
conditions, including receipt of necessary consents and regulatory approvals,
and is expected to occur during the second quarter of 1997.
9
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
In 1996 Arby's recorded a $27,886,000 charge to (i) reduce the carrying
value of the long-lived assets to be sold (reported as "Assets held for sale"
in the accompanying consolidated balance sheet as of December 31, 1996) by
approximately $15,469,000 to estimated fair value consisting of adjustments to
"Properties, net" of $5,812,000, "Unamortized costs in excess of net assets of
acquired companies" of $5,214,000 and "Deferred costs and other assets" of
$4,443,000 and (ii) provide for associated net liabilities of $12,417,000,
principally reflecting the present value of certain equipment operating lease
obligations which will not be assumed by the purchaser and estimated closing
costs. The estimated fair value was determined based on the terms of the RTM
Agreement including anticipated sales price. During 1996 the operations of
Arby's restaurants to be disposed of had net sales of $179,275,000 and a
pretax loss of $651,000. Such loss reflects $10,071,000 of allocated general
and administrative expenses and $1,930,000 of interest expense related to the
capitalized lease obligations directly related to the operations of the
restaurants being sold to RTM.
In 1995, Arby's recorded a provision of $11,527,000 consisting of an
$8,899,000 reduction in the net carrying value of certain restaurants and
other restaurant-related long-lived assets which were determined to be
impaired and a $2,628,000 reduction to a net carrying value of $975,000 of
certain restaurants and related equipment to be disposed. Such provision
reduced "Properties, net" by $10,347,000, "Unamortized costs in excess of net
assets of acquired companies" by $1,040,000 and "Deferred costs and other
assets" by $140,000 to reflect the fair value of the respective assets. The
fair value was generally determined by applying a fair market capitalization
rate to the estimated expected future annual cash flows. The results of
operations of the restaurants to be disposed resulted in a pre-tax loss of
$806,000 for the year ended December 31, 1995.
(4) Receivables, net
The following is a summary of the components of receivables (in thousands):
December 31,
-----------------
1995 1996
---- ----
Receivables:
Trade....................................... $ 6,079 $ 6,837
Other....................................... 1,861 1,004
------- -------
7,940 7,841
Less allowance for doubtful accounts (trade).... 974 1,020
------- -------
$ 6,966 $ 6,821
======= =======
The following is an analysis of the allowance for doubtful accounts for the
years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Balance at beginning of year........... $ 818 $ 748 $ 974
Provision for doubtful accounts........ 420 566 424
Recoveries of doubtful accounts........ 101 44 21
Uncollectible accounts written off..... (591) (384) (399)
-------- ------- --------
Balance at end of year................. $ 748 $ 974 $ 1,020
======== ======= ========
Substantially all receivables are pledged as collateral for certain debt of
the Parent (see Note 7).
10
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(5) Properties
The following is a summary of the components of properties, at cost (in
thousands):
December 31,
-----------------
1995 1996
---- ----
Land ........................................... $ 4,234 $ 2,689
Buildings and improvements and leasehold
improvements.................................. 39,491 6,918
Machinery and equipment......................... 36,612 7,016
Leased assets capitalized....................... 16,343 888
------- ------
96,680 17,511
Less accumulated depreciation and amortization.. 39,116 10,812
------- ------
$57,564 $6,699
======= ======
The decrease in properties from December 31, 1995 to December 31, 1996
principally resulted from the 1996 reduction in carrying value of certain
long-lived assets to be disposed of and reclassification as of December 31,
1996 of such assets to "Assets held for sale" (see Note 3).
Substantially all properties are pledged as collateral for certain debt of
Arby's and the Parent (see Note 7).
(6) Accrued Expenses
The following is a summary of the components of accrued expenses (in
thousands):
December 31,
-----------------
1995 1996
---- ----
Accrued taxes................................... $ 6,223 $12,589
Accrued compensation and related benefits....... 9,105 8,972
Reserve for closed stores....................... 2,952 2,145
Other........................................... 6,040 7,823
------- -------
$24,320 $31,529
======= =======
(7) Long-term Debt
Long-term debt consisted of the following (in thousands):
December 31,
----------------
1995 1996
---- ----
Capitalized lease obligations....................... $17,313 $15,928
Notes, bearing interest at 7.94% to 13 1/2%,
due through 2002 secured by equipment and
buildings......................................... 4,392 4,865
------- -------
Total debt ...................................... 21,705 20,793
Less amounts payable within one year................ 2,271 17,802
------- -------
$19,434 $ 2,991
======= =======
11
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Aggregate annual maturities of long-term debt, including capitalized lease
obligations, are as follows as of December 31, 1996 (in thousands):
Year ending December 31,
------------------------
1997 ........................................... $ 17,802
1998 ........................................... 1,129
1999 ........................................... 956
2000 ........................................... 254
2001 ........................................... 260
Thereafter...................................... 392
-------
$20,793
=======
As discussed in Note 3, in February 1997 Arby's entered into an agreement
to sell all of its restaurants and, if such sale is consummated on terms as
they currently exist, the purchaser would assume all capitalized lease
obligations associated with the restaurants currently estimated to be
approximately $15,000,000.
The fair values of long-term debt are assumed to reasonably approximate
their carrying amounts since (i) for capitalized lease obligations, the
weighted average implicit interest rates approximate current levels and (ii)
for notes payable, the remaining maturities are relatively short-term.
The Parent has outstanding $275,000,000 of 9 3/4% senior secured notes due
2000 (the "Senior Notes") which mature on August 1, 2000. Arby's has fully and
unconditionally guaranteed the Parent's obligations with respect to the Senior
Notes jointly and severally with Royal Crown. Arby's common stock and
substantially all of its personal property secure such guarantee.
(8) Income Taxes
As discussed in Note 1, Arby's is included in the consolidated Federal
income tax return of Triarc. Pursuant to a tax sharing agreement between
Triarc and the Parent, Arby's provides for Federal income taxes on the same
basis as if it filed a separate consolidated return. Amounts currently payable
for income taxes are included in "Accrued expenses" in the accompanying
consolidated balance sheets.
The income (loss) before income taxes consists of the following components
for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Domestic.................................. $10,631 $(11,554) $(15,933)
Foreign................................... 122 (371) (3,238)
------- -------- --------
$10,753 $(11,925) $(19,171)
======= ======== ========
12
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The benefit from (provision for) income taxes consists of the following
components for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Current:
Federal................................... $(3,940) $ 543 $(5,368)
State..................................... (773) 59 (988)
Foreign................................... (1,183) (362) (370)
------- -------- -------
(5,896) 240 (6,726)
------- -------- -------
Deferred:
Federal................................... 323 2,936 10,931
State..................................... 59 588 401
Foreign................................... 753 - -
------- -------- -------
1,135 3,524 11,332
------- -------- -------
$(4,761) $ 3,764 $ 4,606
======= ======== =======
The current deferred income tax asset and the net non-current deferred
income tax asset resulted from the following components (in thousands):
December 31,
-----------------
1995 1996
---- ----
Current deferred income tax assets:
Accrued employee benefit costs................. $ 2,266 $ 1,922
Closed store reserve........................... 1,061 834
Allowance for doubtful accounts................ 334 397
Accrued legal and advertising.................. 70 279
Other, net..................................... 424 594
------- -------
4,155 4,026
------- -------
Non-current deferred income tax assets (liabilities):
Depreciation and other properties basis
differences.................................. 2,383 15,668
Deferred franchise fees........................ 1,303 1,330
Reserve for income tax contingencies........... (653) (1,644)
Other, net..................................... 1,346 486
------- -------
4,379 15,840
------- -------
$ 8,534 $19,866
======= =======
13
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The difference between the reported income tax benefit (provision) and the
tax benefit (provision) that would result from applying the 35% Federal
statutory rate to the income (loss) before income taxes is reconciled as
follows (in thousands):
1994 1995 1996
---- ---- ----
Income tax benefit (provision) computed at
Federal statutory rate....................$ (3,764) $ 4,174 $6,710
Decrease (increase) in Federal taxes
resulting from:
Effect of net operating losses for which
no tax carryback benefit is available.... - - (1,133)
State income (taxes) benefit, net of Federal
income tax effect....................... (464) 421 (382)
Amortization of non-deductible Goodwill... (336) (284) (284)
Foreign tax rate in excess of United
States Federal statutory rate and
foreign withholding taxes, net of
Federal income tax benefit............... (265) (308) (241)
Non-deductible amortization of
restricted stock......................... - (274) -
Other, net................................ 68 35 (64)
------- -------- -------
$(4,761) $ 3,764 $ 4,606
======= ======== =======
The IRS has completed its examination of the Federal income tax returns of
Triarc and its subsidiaries for the tax years from 1989 through 1992 and has
issued notices of proposed adjustments relating to Arby's increasing taxable
income by approximately $600,000, 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. Management of Arby's believes that adequate aggregate
provisions have been made in prior periods for any tax liabilities, including
interest, that may result from the 1989 through 1992 examination and other tax
matters.
(9) Corporate Restructuring
The "Corporate restructuring" charge of $2,400,000 set forth in the
accompanying consolidated statement of operations for 1996 relates to
estimated costs of planned subleases (principally for the write- off of
nonrecoverable unamortized leasehold improvements and furniture and fixtures)
of surplus office space in excess of anticipated sublease proceeds as a result
of the RTM sale (see Note 3).
(10) Related Party Transactions
The following is a summary of transactions between Arby's and its related
parties (in thousands):
1994 1995 1996
---- ---- ----
Costs allocated to Arby's by Triarc under a
management services agreement (a)......... $ 4,100 $ 4,100 $ 3,850
Interest expense allocated to Arby's
from Parent (b)........................... 1,800 3,985 3,592
Royalty income from affiliates (c).......... 6 1,132 2,067
Purchase of restaurants from affiliates (d). - - 2,782
Proceeds from sales of restaurants to
affiliates (e)............................ - 31,602 1,600
14
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
1994 1995 1996
---- ---- ----
Compensation costs charged (credited) to
Arby's by Triarc for restricted stock
and below market stock options (Note 11).. 794 870 (104)
Dividend of restaurants to Parent (f)....... - 14,733 -
Purchase option deposit from affiliate (g).. - 6,700 -
Payments to affiliates for usage of aircraft 168 58 -
Sale of certain promissory notes from
franchisees to Southeastern Public
Service Company, a subsidiary of Triarc,
at remaining outstanding principal amount. 1,239 - -
(a) Arby's receives from Triarc certain management services, including
legal, accounting, tax, insurance, financial and other management services,
under a management services agreement. Arby's was allocated costs under such
agreement of $4,100,000, $4,100,000 and $3,850,000 during the years ended
December 31, 1994, 1995 and 1996, respectively included in "General and
administrative" in the accompanying consolidated statements of operations.
Such costs were allocated to Arby's by Triarc based upon the relative sum of
the greater of income before income taxes, depreciation and amortization and
10% of revenues. Management of Arby's believes that such allocation method is
reasonable. Further, management of Arby's believes that such allocation
approximates the costs that would have been incurred by Arby's on a
stand-alone basis.
(b) A substantial portion of interest expense on the Senior Notes (the
"Senior Notes Interest") has been allocated by the Parent to Arby's and Royal
Crown based upon the approximate proportion of Goodwill pushed down to those
subsidiaries in connection with their original acquisition by Triarc and its
subsidiaries, which resulted in interest allocated to Arby's of $1,800,000
during each of the years ended December 31, 1994, 1995 and 1996. In addition,
during 1995 and 1996, the Parent allocated to Arby's interest expense of
$2,185,000 and $1,792,000, respectively incurred in connection with borrowings
from Triarc in 1995 and 1996 and Southeastern Public Service Company, a
subsidiary of Triarc, in 1995 (the "Triarc and SEPSCO Interest"), the proceeds
of which were principally advanced by the Parent to Arby's to fund capital
expenditures, acquisitions and other cash requirements of Arby's. Management
of Arby's believes such allocations are reasonable and, with respect to the
Triarc and SEPSCO Interest, approximated the interest Arby's would have
incurred in the open market. However, the allocation of the Senior Notes
Interest may not be indicative of interest expense which Arby's would have
incurred on a stand-alone basis, the amounts of which would be dependent upon
Arby's capital structure on such stand-alone basis.
(c) Arby's entered into franchise license agreements for each of the
restaurants operated by AROC (51 restaurants) and ARHC (30 restaurants) under
terms similar to those for unaffiliated parties except that franchise fees are
not required. During 1995 and 1996, Arby's recognized royalties of $879,000
and $1,347,000 from AROC and $253,000 and $720,000 from ARHC, respectively.
Triarc has, under certain circumstances, guaranteed the payment by AROC of
royalty payments to Arby's under AROC's license agreements. Arby's also
entered into management agreements with each of AROC, ARDC and ARHC pursuant
to which Arby's provides certain management services, as well as financial and
accounting services to such companies for reimbursement of the direct costs to
Arby's of such services plus an annual fee of $10,000 from each of those
companies.
15
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(d) During 1996, Arby's purchased the land, buildings and related equipment
of 4 restaurants from ARDC and AROC for cash of $2,782,000, representing the
net book value of the related assets.
(e) During 1995, Arby's sold the land, buildings and related equipment of an
aggregate 29 restaurants and the equipment of the 39 restaurants referred to
in (f) below to ARDC and ARHC for proceeds of $31,602,000, representing the
approximate net book value of the related assets. During 1996 Arby's sold the
land, buildings and related equipment of 3 restaurants with a net book value
of $785,000 to ARHC for proceeds of $1,600,000.
(f) In May 1995, Arby's dividended land, buildings and related improvements
of 39 restaurants with a net book value of $14,733,000 to the Parent.
(g) In connection with the acquisition by Arby's of 35 previously franchised
restaurants in February 1995, Arby's received a $6,700,000 non-interest
bearing refundable purchase option deposit from Arby's Restaurants, Inc.
("ARINC"), a newly-formed wholly-owned subsidiary of the Parent, which gives
ARINC the right to purchase any or all of such 35 acquired restaurants and
apply up to the full amount of the option payment against the purchase price.
The option's expiration date is August 31, 1997. To the extent the option is
not utilized, such deposit or portion thereof will be refunded to ARINC. It is
currently expected that the option will be terminated if the RTM sale (see
Note 3) is consummated.
(11) Pension and Stock Compensation Plans
Triarc maintains a 401(k) defined contribution plan covering all of Arby's
employees who meet certain minimum requirements and elect to participate.
Employees may contribute up to 15% of their compensation, subject to certain
limitations. The plan provides for company matching contributions of 50% of
employee contributions up to the first 5% of an employee's contributions. The
plan also provides for annual additional contributions at Arby's discretion.
In connection with these employer contributions, Arby's provided $338,000,
$959,000 and $689,000 in 1994, 1995 and 1996, respectively.
Arby's employees who were eligible to participate prior to 1989 are
covered under a defined benefit pension plan (the "Plan") sponsored by the
Parent which covers employees of Arby's, Royal Crown and certain other
affiliates. Prior to 1994 the plan was frozen. Net periodic pension cost
(credit) under the Plan was immaterial in each of the years presented.
Prior to 1994 and during 1994, respectively, Triarc granted 70,500 and
6,250 restricted shares of Triarc Class A common stock to certain Arby's
senior executives under Triarc's 1993 Equity Participation Plan (the "Triarc
Equity Plan"). The aggregate values of the awards at the respective dates of
grant of $1,482,000 for 1993 and $131,000 for 1994 were being charged to
Arby's as compensation expense over the applicable vesting periods through
1996. On December 7, 1995, the Compensation Committee of Triarc's Board of
Directors authorized management of Triarc to accelerate the vesting of all of
the then outstanding shares of restricted stock. On January 16, 1996
management of Triarc accelerated the vesting and Arby's recorded the resulting
additional amortization expense of $454,000 in its entirety in 1995. In
addition, Triarc has granted stock options to certain key employees of Arby's
under the Triarc Equity Plan. Of such options, 100,000 granted prior to 1994
were at an option price of $20.00 per share which was lower than the $31.75
fair market value of Triarc's Class A common stock at the date of grant,
representing an aggregate difference of $1,175,000. Such amount is being
charged to Arby's as compensation expense over the applicable vesting period
through 1998, net of reversals of prior charges arising from the forfeiture of
16
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
certain of those options in connection with employee terminations (the
"Forfeiture Adjustments"). Compensation expense resulting from the grants of
restricted shares and below market stock options aggregated $794,000 and
$870,000 (including the $454,000 from the accelerated vesting of the
restricted stock and net of $231,000 of Forfeiture Adjustments) during 1994
and 1995, respectively. During 1996, the Company recorded a net compensation
credit of $104,000 with respect to below market stock options (which reflects
$173,000 of Forfeiture Adjustments). All such stock compensation expenses and
credits are included in "General and administrative" in the accompanying
consolidated statements of operations.
(12) Lease Commitments
Arby's leases buildings and improvements and machinery and equipment.
Some leases provide for contingent rentals based upon sales volume.
Rental expense under operating leases consists of the following
components for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Minimum rentals...................... $ 9,548 $ 14,873 $16,190
Contingent rentals................... 1,454 879 793
------- -------- -------
11,002 15,752 16,983
Less sublease income................. 336 688 489
------- -------- -------
$10,666 $ 15,064 $16,494
======= ======== =======
Arby's future minimum rental payments and sublease rental income for
leases having an initial lease term in excess of one year as of December 31,
1996 are set forth below. Such future minimum rental payments exclude an
aggregate $11,540,000 of future operating lease payments relating to equipment
to be transferred to RTM assuming consummation of the RTM sale (see Note 3)
but the obligations for which will remain with Arby's. As such Arby's has
provided for the present value of $9,677,000 of such lease payments in
"Reduction in carrying value of long-lived assets impaired or to be disposed
of". Such future minimum rental payments include an aggregate $91,754,000
($9,160,000, $8,580,000, $7,715,000, $7,111,000, $6,759,000 and $52,429,000 in
1997, 1998, 1999, 2000, 2001 and thereafter, respectively) of future operating
lease payments and, in addition, substantially all of the future capitalized
lease payments which will be assumed by RTM assuming consummation of the sale
to RTM. Such rental payments and sublease rental income were as follows (in
thousands):
17
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Rental Payments Sublease Income
--------------- ---------------
Capitalized Operating Capitalized Operating
Year Ending December 31, Leases Leases Leases Leases
------------------------ ------ ------ ------ ------
1997........................... $16,120 $11,634 $ 81 $ 481
1998........................... 105 10,358 60 454
1999........................... 87 9,063 60 410
2000........................... 87 8,438 57 396
2001........................... 87 8,086 43 342
Thereafter..................... 397 58,865 219 1,300
------- ------- ------- -------
Total minimum payments......... 16,883 $106,444 $ 520 $ 3,383
======== ======= =======
Less interest.................. 955
-------
Present value of minimum
capitalized lease payments... $15,928
=======
The present value of minimum capitalized lease payments is included, as
applicable, with "Long-term debt" or "Current portion of long-term debt" in
the accompanying consolidated balance sheets (see Note 7).
In August 1994, Arby's completed the sale and leaseback of the land and
buildings of fourteen company-owned restaurants. The net cash sales price of
the properties was $6,703,000. Arby's entered into individual twenty-year land
and building leases for such properties and capitalized the building portion
of such leases while the land portion is being accounted for as operating
leases, reflected in the table above. Such sale resulted in a gain of $605,000
which was being amortized to income over the twenty- year lives of the leases
(see Note 3).
(13) Legal 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 $2,500,000. 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. Arby's is vigorously
contesting AR's claims and believes it has meritorious defenses to such
claims.
Arby's has accrued an amount which it believes represents the minimum of
the range of the potential liability as a result of such legal matter and no
other amount within the range is any more likely than the amount accrued by
Arby's. Based on currently available information and given Arby's reserve for
18
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
such legal matter as of December 31, 1996, Arby's does not believe that the
legal matter referred to above, as well as ordinary routine litigation
incidental to its business, will have a material adverse effect on its
consolidated results of operations or financial position.
(14) Business Acquisitions
Arby's consummated several business acquisitions during 1994, 1995 and 1996
for cash of $13,120,000, $11,412,000 and $4,754,000, respectively, and the
issuance of debt in 1996 of $1,750,000. All such acquisitions have been
accounted for in accordance with the purchase method of accounting. In
addition, in 1994 Triarc entered into a definitive merger agreement with Long
John Silver's Restaurants, Inc. ("LJS"), an owner, operator and franchisor of
quick service fish and seafood restaurants, whereby Triarc would acquire all
of the outstanding stock of LJS. In December 1994, Triarc decided not to
proceed with the acquisition of LJS due to the higher interest rate
environment and difficult capital markets which would have resulted in
significantly higher than anticipated costs and unacceptable terms of
financing. Accordingly, Arby's recorded a charge of $1,122,000 in 1994 for the
expenses it incurred directly relating to the failed acquisition of LJS
representing consulting, legal and other costs, which is included in "Other
income (expense), net".
19
<PAGE>
ROYAL CROWN COMPANY, INC.
-------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 1996
-----------------
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................... 1
Consolidated Balance Sheets as of December 31, 1995 and 1996............... 2
Consolidated Statements of Operations for the years ended December 31,
1994, 1995, and 1996................................................... 3
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended December 31, 1994, 1995, and 1996................................ 4
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995, and 1996................................................... 5
Notes to Consolidated Financial Statements................................. 7
(i)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Royal Crown Company, Inc.:
We have audited the accompanying consolidated balance sheets of Royal
Crown Company, Inc. (a wholly-owned subsidiary of RC/Arby's Corporation) and
subsidiary ("Royal Crown") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of Royal Crown's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Royal Crown as of December
31, 1996 and 1995 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 31, 1997
1
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------
1995 1996
---- ----
(In thousands)
ASSETS
Current assets:
Cash.................................................... $ 763 $ 800
Receivables, net (Note 4)............................... 22,830 27,819
Inventories (Note 5).................................... 11,871 9,305
Deferred income tax benefit (Note 10)................... 2,037 4,478
Prepaid expenses and other current assets............... 3,883 3,746
-------- --------
Total current assets.................................. 41,384 46,148
Properties, net (Note 6).................................. 6,895 5,227
Unamortized costs in excess of net assets of
acquired companies (Note 7)............................. 142,374 137,457
Deferred costs and other assets (Note 8).................. 3,206 3,955
-------- --------
$193,859 $192,787
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable......................................... $ 11,875 $ 12,677
Accrued expenses (Note 9)................................ 14,828 20,704
-------- --------
Total current liabilities.............................. 26,703 33,381
Due to Parent and affiliates, net (Note 13)................ 196,363 196,219
Deferred income taxes (Note 10)............................ 1,550 1,271
Other liabilities (Note 14)................................ 1,293 926
Commitments and contingencies (Notes 2, 3, 10, 11, 15 and 16)
Stockholder's equity (deficit) (Note 11):
Common stock, $1.00 par value; 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional paid-in capital............................... 42,426 42,426
Accumulated deficit...................................... (74,477) (81,437)
-------- --------
Total stockholder's deficit............................ (32,050) (39,010)
-------- --------
$193,859 $192,787
======== ========
See accompanying notes to consolidated financial statements.
2
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Net sales...................................... $146,146 $172,603 $178,007
-------- -------- --------
Costs and expenses:
Cost of sales............................... 31,076 57,072 61,620
Advertising, selling and distribution (Note 1). 78,186 86,226 76,923
General and administrative (Notes 13 and 14). 22,298 27,441 23,716
Facilities relocation and corporate
restructuring (Note 12)................... - - 3,950
-------- ------- --------
131,560 170,739 166,209
-------- ------- --------
Operating profit.......................... 14,586 1,864 11,798
Interest expense............................... (16) (13) -
Allocation of interest expense from Parent
(Note 13).................................... (20,000) (20,000) (20,000)
Other income (expense), net (Note 13).......... 243 (760) 286
--------- ------- --------
Loss before income taxes.................... (5,187) (18,909) (7,916)
Benefit from (provision for) income taxes
(Note 10)..................................... (201) 4,844 956
--------- -------- --------
Net loss ................................... $ (5,388) $(14,065) $ (6,960)
========= ======== ========
See accompanying notes to consolidated financial statements.
3
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the three years ended December 31, 1996
Common Stock
------------ Additional
Number Paid-In Accumulated
of Shares Amount Capital Deficit
--------- ------ ------- -------
(Dollars in thousands)
Balance at December 31, 1993....... 1,000 $ 1 $ 42,426 $(55,024)
Net loss........................ - - - (5,388)
-------- ------- -------- ---------
Balance at December 31, 1994....... 1,000 1 42,426 (60,412)
Net loss........................ - - - (14,065)
-------- ------- -------- --------
Balance at December 31, 1995....... 1,000 1 42,426 (74,477)
Net loss........................ - - - (6,960)
-------- ------- -------- --------
Balance at December 31, 1996....... 1,000 $ 1 $ 42,426 $(81,437)
======== ======= ======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net loss .......................................$ (5,388)$(14,065) $(6,960)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of properties... 767 838 999
Amortization of costs in excess of net assets
acquired and other intangibles.............. 5,661 5,961 5,432
Provision for facilities relocation and
corporate restructuring..................... - - 3,950
Payments on facilities relocation and
corporate restructuring..................... (4,240) (711) (224)
Provision for (benefit from) deferred
income taxes................................ 3,241 (1,712) (2,720)
Write-off of investment in affiliate.......... - 1,000 -
Provision for doubtful accounts............... 185 1,402 2,655
Noncash charges (benefit) from Parent......... 21,524 15,129 (322)
Other, net.................................... (479) 524 (403)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables................................ (9,542) (4,078) (7,004)
Inventories................................ (1,234) (2,256) 926
Prepaid expenses and other current assets.. (1,871) (180) 137
Increase (decrease) in:
Accounts payable........................... 2,390 2,568 802
Accrued expenses........................... (9,818) 1,153 3,332
------- ------- -------
Net cash provided by operating activities........... 1,196 5,573 600
------- ------- -------
Cash flows from investing activities:
Capital expenditures............................. (1,296) (1,474) (591)
Proceeds from sales of properties................ 8 587 28
Business acquisition............................. - (2,923) -
Investment in affiliate.......................... - (1,000) -
------- ------- -------
Net cash used in investing activities............... (1,288) (4,810) (563)
------- ------- -------
Cash flows from financing activities................ - - -
------- ------- -------
Net increase (decrease) in cash .................... (92) 763 37
Cash at beginning of year........................... 92 - 763
------- ------- -------
Cash at end of year................................. $ - $ 763 $ 800
======= ======= =======
(continued)
5
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Year ended December 31,
------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest....................................... $ 16 $ 13 $ -
====== ====== ======
Income taxes................................... $ (25) $ 55 $ (245)
====== ====== ======
Supplemental disclosures of noncash investing
and financing activities:
Total capital expenditures..................... $1,296 $1,474 $ 591
Amounts representing capitalized leases........ - - -
------ ------ ------
Capital expenditures paid in cash............. $1,296 $1,474 $ 591
====== ====== ======
See accompanying notes to consolidated financial statements.
6
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Royal Crown
Company, Inc. ("Royal Crown"), a wholly-owned subsidiary of RC/Arby's
Corporation (the "Parent"), which is a direct wholly- owned subsidiary of CFC
Holdings Corp. ("CFC Holdings") and an indirect wholly-owned subsidiary of
Triarc Companies, Inc. ("Triarc") and its wholly-owned subsidiary, TriBev
Corporation ("TriBev"), which commenced operations in January 1995. All
significant intercompany balances and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out basis) or market.
Properties and Depreciation and Amortization
Properties are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated on the straight-line
basis using the estimated useful lives of the related major classes of
properties: 15-40 years for buildings and 3-15 years for machinery and
equipment. Leased assets capitalized and leasehold improvements are amortized
over the shorter of their estimated useful lives or the terms of the
respective leases.
Amortization of Intangibles
Costs in excess of net assets acquired ("Goodwill") are being amortized
on the straight-line basis over 40 years. Trademarks and distribution rights
are being amortized on the straight-line basis principally over 7 to 10 years.
Impairments
Intangible Assets
The amount of impairment, if any, in unamortized Goodwill is measured
based on projected future results of operations. To the extent future results
of operations through the period such Goodwill is being amortized are
sufficient to absorb the related amortization, Royal Crown has deemed there to
be no impairment of Goodwill.
Long-Lived Assets
Effective October 1, 1995, Royal Crown adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This standard
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this standard had no effect on Royal Crown's
7
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
consolidated results of operations or financial position in the periods
presented.
Advertising Costs
Royal Crown accounts for advertising production costs by expensing such
production costs the first time the related advertising takes place.
Advertising costs amounted to $67,877,000, $73,703,000 and $61,704,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Income Taxes
Royal Crown is included in the consolidated Federal income tax return
filed by Triarc. Under a tax- sharing agreement between Triarc and the Parent,
Royal Crown provides for Federal income taxes on the same basis as if it filed
a separate consolidated return. Deferred income taxes are provided to
recognize the tax effect of temporary differences between the bases of assets
and liabilities for tax and financial statement purposes.
Reclassifications
Certain amounts included in the prior years' consolidated financial
statements have been reclassified to conform with the current year's
presentation.
(2) Significant Risks and Uncertainties
Nature of Operations
Royal Crown produces and sells a broad selection of carbonated beverages
and concentrates under the principal brand names RC COLA, DIET RC, ROYAL
CROWN, ROYAL CROWN DRAFT COLA, DIET RITE, NEHI, NEHI LOCKJAW, UPPER 10, KICK
and THIRST THRASHER. Royal Crown's operations principally are throughout the
United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant Estimates
Royal Crown's only significant estimates are for costs related to (i)
provisions for examinations of its income tax returns by the Internal Revenue
Service ("IRS") (see Note 10) and (ii) provisions for environmental
contingencies (see Note 16).
8
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
Certain Risk Concentrations
Royal Crown had two significant customers which accounted for 12.5% and
12.2% of net sales for the year ended December 31, 1994, 10.5% and 12.3% for
the year ended December 31, 1995 and 17% and 13% for the year ended December
31, 1996. Royal Crown believes that its vulnerability to risk concentrations
related to significant vendors and sources of its raw materials is not
significant. Risk of geographical concentrations is also minimized since Royal
Crown products are produced in the United States and principally sold
throughout the United States. However, the industry Royal Crown competes in
contains a small group of competitors and Royal Crown's proportionate market
share is comparatively small.
(3) Planned Transactions
Spinoff
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 Royal Crown) 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, if any, of its proposed acquisition
of Snapple Beverage Corp. (which Triarc announced on March 27, 1997) on the
anticipated structure of the Spinoff Transactions.
(4) Receivables
The following is a summary of the components of receivables (in
thousands):
December 31,
-----------------
1995 1996
---- ----
Receivables:
Trade....................................... $21,308 $28,394
Other....................................... 2,458 3,054
------- -------
23,766 31,448
Less allowance for doubtful accounts........... 936 3,629
------- -------
$22,830 $27,819
======= =======
9
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The following is an analysis of the allowance for doubtful accounts for
the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Balance at beginning of year............... $ 284 $ 239 $ 936
Provision for doubtful accounts (Note 13).. 185 1,402 2,655
Recoveries of doubtful accounts............ 9 - 174
Uncollectible accounts written off......... (239) (705) (136)
-------- -------- -------
Balance at end of year..................... $ 239 $ 936 $ 3,629
======== ======== =======
Substantially all receivables are pledged as collateral for the certain
debt of the Parent (see Note 11).
(5) Inventories
The following is a summary of the components of inventories (in thousands):
December 31,
-------------------
1995 1996
---- ----
Raw materials................................. $ 8,689 $ 5,394
Work in process............................... 479 467
Finished goods................................ 2,703 3,444
------- -------
$11,871 $ 9,305
======= =======
Substantially all inventories are pledged as collateral for certain debt
of the Parent (see Note 11).
(6) Properties
The following is a summary of the components of properties, at cost (in
thousands):
December 31,
-----------------
1995 1996
---- ----
Land........................................ $ 724 $ 724
Buildings and leasehold improvements........ 5,168 4,487
Machinery and equipment..................... 5,200 6,343
------- -------
11,092 11,554
Less accumulated depreciation and
amortization.............................. 4,197 6,327
------- -------
$ 6,895 $ 5,227
======= =======
Substantially all properties are pledged as collateral for certain debt of
the Parent (see Note 11).
10
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(7) Unamortized Costs in Excess of Net Assets of Acquired Companies
The following is a summary of the components of unamortized costs in
excess of net assets of acquired companies (in thousands):
December 31,
----------------
1995 1996
---- ----
Costs in excess of net assets of acquired
companies..................................... $194,533 $194,533
Less accumulated amortization................... 52,159 57,076
-------- --------
$142,374 $137,457
======== ========
(8) Deferred Costs and Other Assets
The following is a summary of the components of deferred costs and others
assets (in thousands):
December 31,
------------------
1995 1996
---- ----
Trademarks...................................... $2,770 $ 3,128
Less accumulated amortization of trademarks..... 397 736
------ -------
Trademarks, net............................... 2,373 2,392
Other........................................... 833 1,563
------ -------
$3,206 $ 3,955
====== =======
(9) Accrued Expenses
The following is a summary of the components of accrued expenses (in
thousands):
December 31,
------------------
1995 1996
---- ----
Accrued advertising............................. $ 10,007 $11,609
Facilities relocation and corporate
restructuring................................. - 2,650
Accrued compensation and related benefits....... 1,044 1,989
Reserve for guarantee of MetBev, Inc. accounts
payable (Note 13)........................... 1,194 1,194
Other........................................... 2,583 3,262
-------- -------
$ 14,828 $20,704
======== =======
(10) Income Taxes
As discussed in Note 1, Royal Crown is included in the consolidated
Federal income tax return of Triarc. Pursuant to a tax-sharing agreement
between Triarc and the Parent, Royal Crown provides for Federal income taxes
11
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
on the same basis as if it filed a separate consolidated return. Amounts
currently payable or receivable for Federal income taxes are included in "Due
to Parent and affiliates, net".
The benefit from (provision for) income taxes consists of the following
components for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Current:
Federal................................... $ 2,762 $ 2,918 $(1,644)
State..................................... 278 214 (120)
------- ------- -------
3,040 3,132 (1,764)
------- ------- -------
Deferred:
Federal.................................. (3,020) 1,586 2,535
State.................................... (221) 126 185
------- ------- -------
(3,241) 1,712 2,720
------- ------- -------
$ (201) $ 4,844 $ 956
======= ======= =======
The current deferred income tax asset and the net non-current deferred
income tax (liability) resulted from the following components (in thousands):
December 31,
------------------
1995 1996
---- ----
Current deferred income tax assets:
Allowance for doubtful accounts, including
affiliates.................................... $ 343 $ 1,333
Facilities relocation and corporate restructuring 68 974
Accrued advertising............................. 295 526
Accrued incentive compensation.................. 241 503
Reserve for guarantee of MetBev, Inc. accounts
payable....................................... 437 437
Deferred revenue................................ 366 275
Other, net...................................... 287 430
------- -------
2,037 4,478
------- -------
Non-current deferred income tax assets (liabilities):
Reserve for income tax contingencies.......... (1,588) (1,588)
Write-off of investment in affiliate.......... 366 366
Depreciation and other properties basis
differences................................. (388) 8
Other, net.................................... 60 (57)
------- -------
(1,550) (1,271)
------- -------
$ 487 $ 3,207
======= =======
12
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The difference between the reported income tax benefit (provision) and
the tax benefit that would result from applying the 35% Federal statutory rate
to the loss before income taxes is reconciled as follows (in thousands):
1994 1995 1996
---- ---- ----
Income tax benefit computed at Federal
statutory rate............................. $ 1,815 $ 6,618 $ 2,771
Decrease (increase) in Federal taxes
resulting from:
Amortization of non-deductible Goodwill.... (1,721) (1,721) (1,721)
State income taxes, net of Federal income
tax effect............................... 37 221 42
Other, net................................. (332) (274) (136)
-------- -------- -------
$ (201) $ 4,844 $ 956
======== ======== =======
The IRS has completed its examination of the Federal income tax returns
of Triarc and its subsidiaries for the tax years from 1989 through 1992 and
has issued notices of proposed adjustments relating to Royal Crown increasing
taxable income by approximately $3,000,000, 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. Management of Royal Crown believes
that adequate aggregate provisions have been made in prior periods for any tax
liabilities, including interest, that may result from the 1989 through 1992
examination and other tax matters.
(11) Guaranty
The Parent has outstanding $275,000,000 of 9 3/4% rate senior secured
notes due 2000 (the "Senior Notes") which mature on August 1, 2000. Royal
Crown has fully and unconditionally guaranteed the Parent's obligations with
respect to the Senior Notes jointly and severally with Arby's, Inc.
("Arby's"), a wholly-owned subsidiary of the Parent. Royal Crown's common
stock and substantially all of its personal property secure such guarantee.
(12) Facilities Relocation and Corporate Restructuring
The "Facilities relocation and corporate restructuring" charge of
$3,950,000 set forth in the accompanying consolidated statement of operations
for 1996 relates to costs associated with (i) estimated costs of planned
subleases (principally for the write-off of nonrecoverable unamortized
leasehold improvements and furniture and fixtures) of surplus office space in
excess of anticipated sublease proceeds as a result of the relocation of Royal
Crown's headquarters which is being centralized with the offices of Mistic
Brands, Inc., Triarc's other beverage subsidiary, in White Plains, New York
($1,300,000), (ii) employee severance costs associated with the relocation of
Royal Crown's headquarters ($2,200,000) and (iii) the shutdown of Royal
Crown's Ohio production facility ($450,000).
13
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
(13) Related Party Transactions
The following is a summary of transactions between Royal Crown and its
related parties (in thousands):
1994 1995 1996
---- ---- ----
Interest expense allocated to Royal
Crown from Parent (a)................... $20,000 $ 20,000 20,000
Costs allocated to Royal Crown by Triarc
under a management services agreement (b) 4,900 4,900 3,150
Net sales to MetBev, Inc. ("MetBev"), net
of marketing support credits (c)........ - 551 8,985
Guarantee of MetBev accounts payable (c). - 1,194 -
Provision for uncollectible receivables from
sales to MetBev and guarantee of MetBev
accounts payable (c).................... - 1,745 2,000
Investment in preferred stock of MetBev (c). - 1,000 -
Compensation costs charged to Royal Crown by
Triarc for restricted stock and below market
stock options (Note 14)................. 658 742 178
Lease payments to NPC Leasing Corp. ("NPC"),
an affiliate (d)........................ 178 21 -
Payments to affiliates for usage of aircraft 189 15 -
(a) A substantial portion of interest expense on the Senior Notes has been
allocated by the Parent to Royal Crown and Arby's based upon the approximate
proportion of Goodwill pushed down to those subsidiaries in connection with
their original acquisition by Triarc and its subsidiaries, an allocation
method which management of Royal Crown believes is reasonable. Such
allocations may not be indicative of interest expense which Royal Crown would
have incurred on a stand-alone basis, the amounts of which would be dependent
upon Royal Crown's capital structure on such stand-alone basis.
(b) Royal Crown receives from Triarc certain management services, including
legal, accounting, tax, insurance, financial and other management services,
under a management services agreement. Royal Crown was allocated costs under
such agreement of $4,900,000, $4,900,000, and $3,150,000 during the years
ended December 31, 1994, 1995 and 1996, respectively included in "General and
administrative" in the accompanying consolidated statements of operations.
Such costs were allocated to Royal Crown by Triarc based upon the relative sum
of the greater of income before income taxes, depreciation and amortization
and 10% of revenues. Management of Royal Crown believes that such allocation
method is reasonable. Further, management of Royal Crown believes that such
allocation approximates the costs that would have been incurred by Royal Crown
on a stand-alone basis.
(c) During 1995 Royal Crown paid $1,000,000 and contributed a license for a
period of five years for the Royal Crown distribution rights for its products
in New York City and certain surrounding counties to MetBev in exchange for
preferred stock in MetBev representing a 37.5% voting interest and a warrant
to acquire 37.5% of the common stock of MetBev. The remaining 62.5% was owned
14
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
by other parties and was subject to certain vesting provisions. Upon
consummation of the sale of the MetBev distribution rights (see below), Royal
Crown's voting interest in MetBev was 44.7% principally due to the
cancellation of nonvested stock. MetBev has incurred significant losses from
its inception and had stockholders' deficits as of December 31, 1995 and 1996
of $2,524,000 and $8,943,000, respectively. In December 1996, the distribution
rights of MetBev were sold to a third party and MetBev commenced the
liquidation of its remaining assets and liabilities. In connection therewith,
in 1995 Royal Crown wrote off its $1,000,000 investment to "Other income
(expense), net". Further, Royal Crown provided $1,745,000 and $2,000,000
(included in "General and administrative" and "Advertising, selling and
distribution") in 1995 and 1996, respectively, for uncollectible receivables
from sales (with minimal gross profit) of finished product to MetBev and in
1995 a guarantee of a MetBev third party accounts payable.
(d) During 1994 and 1995 Royal Crown leased vehicles and other equipment from
NPC, an indirect wholly-owned subsidiary of Triarc, under long-term lease
obligations. Lease payments to NPC by Royal Crown were based on the actual
costs to NPC plus a small profit factor.
The "Due to Parent and affiliates, net" of $196,363,000 and $196,219,000
at December 31, 1995 and 1996, respectively, carries no stated maturity.
(14) Pension and Other Benefit Plans
Triarc maintains a 401(k) defined contribution plan covering all of Royal
Crown's employees who meet certain minimum requirements and elect to
participate. Employees may contribute up to 15% of their compensation, subject
to certain limitations. The plan provides for company matching contributions
of 50% of annual employee contributions up to the first 5% of an employee's
contributions. The plan also provides for annual additional contributions at
Royal Crown's discretion. In connection with these employer contributions,
Royal Crown provided $58,000, $216,000 and $331,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
Royal Crown's employees who were eligible to participate prior to 1989
are covered under a defined benefit pension plan (the "Plan") sponsored by the
Parent which covers employees of Royal Crown, Arby's and certain other
affiliates. Prior to 1994 the plan was frozen.
Components of net periodic pension cost related to Royal Crown are as
follows for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Current service cost (represents plan expenses) $ 56 $ 61 $ 61
Interest cost on projected benefit obligation 197 212 205
Return on plan assets (gain) loss............ 44 (483) (264)
Net amortization and deferrals............... (209) 340 101
-------- -------- -------
Net periodic pension cost.................... $ 88 $ 130 $ 103
======== ======== =======
15
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
The following table sets forth Royal Crown's portion of the Plan's funded
status as of December 31 (in thousands):
1995 1996
---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation.......................... $ 2,996 $ 2,906
Nonvested benefit obligation....................... 15 14
------- -------
Accumulated and projected benefit obligation......... 3,011 2,920
Plan assets at fair value............................ (2,098) (2,462)
------- -------
Funded status........................................ 913 458
Unrecognized net gain from plan experience........... 214 316
------- -------
Accrued pension cost included in "Other liabilities". $ 1,127 $ 774
======= =======
Significant assumptions used in measuring the net periodic pension cost
for the Plan included the following: (i) the expected long-term rate of return
on plan assets was 8% and (ii) the discount rate was 7% for 1994, 8% for 1995
and 7% for 1996. The discount rate used in determining the benefit obligations
above was 7% at December 31, 1995 and 7 1/2% at December 31, 1996. The effects
of the 1995 increase and the 1996 decrease in the discount rate did not
materially affect the net periodic pension cost. The 1996 increase in the
discount rate used in determining the benefit obligations resulted in a
decrease in the accumulated and projected benefit obligations of $117,000.
Plan assets as of December 31, 1996 are invested in managed portfolios
consisting of government and government agency obligations (51%), common stock
(39%), corporate debt securities (5%) and other investments (5%).
Royal Crown maintains unfunded postretirement medical and death benefit
plans for a limited number of employees who have retired and have provided
certain minimum years of service. The medical benefits are principally
contributory while death benefits are noncontributory. The net postretirement
benefit cost for 1994, 1995 and 1996 as well as the accumulated postretirement
benefit obligation as of December 31, 1996 were insignificant.
Prior to 1994 and during 1994, respectively, Triarc granted 42,500 and
14,500 restricted shares of Triarc Class A common stock to certain Royal Crown
senior executives under Triarc's 1993 Equity Participation Plan (the "Triarc
Equity Plan"). The aggregate values of the awards at the respective dates of
grant of $834,000 for 1993 and $327,000 for 1994 were being charged to Royal
Crown as compensation expense over the applicable vesting periods through
1996. On December 7, 1995, the Compensation Committee of Triarc's Board of
Directors authorized management of Triarc to accelerate the vesting of all of
the then outstanding shares of restricted stock. On January 16, 1996
management of Triarc accelerated the vesting and Royal Crown recorded the
resulting additional amortization expense of $208,000 in its entirety in 1995.
In addition, Triarc has granted stock options to certain key employees of
Royal Crown under the Triarc Equity Plan. Of such options, 65,000 granted
prior to 1994 were at an option price of $20.00 per share which was lower than
the $31.75 fair market value of Triarc's Class A common stock at the date of
grant representing an aggregate difference of $764,000. Such amount is being
16
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
charged to Royal Crown as compensation expense over the applicable vesting
period through 1998. Compensation expense resulting from the grants of
restricted shares and below market stock options aggregated $658,000
(including $66,000 for 3,500 previously unvested shares of restricted stock
which were vested and repurchased from the grantee), $742,000 (including the
$208,000 from the accelerated vesting of the restricted stock) and $178,000
during 1994, 1995 and 1996, respectively, and is included in "General and
administrative" in the accompanying consolidated statements of operations.
(15) Lease Commitments
Royal Crown leases buildings and improvements and machinery and
equipment. Rental expense under operating leases consists of the following
components for the years ended December 31 (in thousands):
1994 1995 1996
---- ---- ----
Minimum rentals......................... $ 608 $ 725 $ 866
Less sublease income.................... 396 447 313
-------- -------- -------
$ 212 $ 278 $ 553
======== ======== =======
Royal Crown's future minimum rental payments and sublease rental income
for operating leases having an initial lease term in excess of one year as of
December 31, 1996 were as follows (in thousands):
Rental Sublease
Year Ending December 31, Payments Income
------------------------ -------- ------
1997................................................ $ 704 $ 374
1998................................................ 601 227
1999................................................ 540 72
2000................................................ 525 42
2001................................................ 499 -
Thereafter.......................................... 2,464 -
------- -------
$ 5,333 $ 715
======= =======
(16) Legal and Environmental Matters
In 1993 Royal Crown became aware of possible contamination from
hydrocarbons in groundwater at two abandoned bottling facilities. Tests have
confirmed hydrocarbons in the groundwater at both of the sites and remediation
has commenced. Management estimates remediation costs will aggregate $685,000,
of which $439,000 has been expended to date, with approximately $225,000 to
$260,000 expected to be reimbursed by the State of Texas Petroleum Storage
Tank Remediation Fund (the "Texas Fund") at one of the two sites.
Based on currently available information and given (i) potential
reimbursements by the Texas Fund described above and (ii) Royal Crown's
reserve for such environmental matter of approximately $250,000, Royal Crown
17
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996
does not believe that the environmental matter referred to above, as well as
ordinary routine litigation incidental to its business, will have a material
adverse effect on its consolidated results of operations or financial
position.
(17) Business Acquisitions
In January 1995, Royal Crown reacquired the distribution rights for Royal
Crown's branded products in the New York metropolitan area and acquired the
trademark and distribution rights for C&C products, which includes cola, mixer
and flavor lines and existing inventories through its newly-formed subsidiary,
TriBev, for cash of $2,923,000. This acquisition has been accounted for in
accordance with the purchase method of accounting. In accordance therewith,
the cost of the acquisition was assigned as follows (in thousands):
Deferred costs and other assets:
Trademarks............................................. $ 2,100
Distribution rights.................................... 400
Inventories............................................. 707
Prepaid expenses and other current assets
(return of deposit)................................... (284)
-------
$ 2,923
=======
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ACcOMPANYING FORM 10-K
OF RC/ARBY'S CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,411
<SECURITIES> 0
<RECEIVABLES> 35,151
<ALLOWANCES> 4,659
<INVENTORY> 12,110
<CURRENT-ASSETS> 142,767
<PP&E> 29,082
<DEPRECIATION> 17,139
<TOTAL-ASSETS> 360,444
<CURRENT-LIABILITIES> 172,591
<BONDS> 281,110
0
0
<COMMON> 1
<OTHER-SE> (113,969)
<TOTAL-LIABILITY-AND-EQUITY> 360,444
<SALES> 409,100
<TOTAL-REVENUES> 466,352
<CGS> 252,811
<TOTAL-COSTS> 252,811
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,095
<INTEREST-EXPENSE> 42,883
<INCOME-PRETAX> (73,904)
<INCOME-TAX> (23,346)
<INCOME-CONTINUING> (50,558)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,558)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
