UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-20286
RC/ARBY'S CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2277791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Corporate Drive, Fort Lauderdale, Florida 33334
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(Address of principal executive offices) (Zip Code)
(954) 351-5100
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
As of October 31, 1998, all of the voting stock of the registrant
(consisting of 1,000 shares of common stock, $1.00 par value) was held by the
registrant's parent, CFC Holdings Corp.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 28, September 27,
1997 (A) 1998
-------- --------
ASSETS (In thousands)
(Unaudited)
Current assets:
Cash and cash equivalents........................... $ 10,463 $ 24,581
Receivables, net.................................... 34,991 30,967
Note receivable from affiliate...................... 2,000 -
Inventories......................................... 12,444 6,259
Deferred income tax benefit......................... 21,537 21,537
Prepaid expenses and other current assets........... 3,583 3,067
---------- ---------
Total current assets.............................. 85,018 86,411
Properties, net ...................................... 8,805 10,010
Unamortized costs in excess of net assets
of acquired companies............................... 153,396 149,101
Deferred income tax benefit........................... 20,246 14,947
Deferred costs and other assets....................... 20,011 21,011
---------- ---------
$ 287,476 $ 281,480
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt................... $ 1,556 $ 1,983
Notes payable to affiliates......................... 1,200 -
Accounts payable.................................... 13,584 3,835
Due to affiliates................................... 8,062 14,364
Accrued expenses.................................... 51,846 45,525
---------- ---------
Total current liabilities......................... 76,248 65,707
Long-term debt........................................ 279,606 279,018
Deferred income and other liabilities................. 18,482 17,443
Stockholder's equity (deficit):
Common stock........................................ 1 1
Additional paid-in capital.......................... 73,690 73,690
Accumulated deficit................................. (160,253) (154,080)
Currency translation adjustment..................... (298) (299)
---------- ---------
Total stockholder's deficit....................... (86,860) (80,688)
---------- ---------
$ 287,476 $ 281,480
========== =========
(A) Derived from the audited consolidated financial statements as of December
28, 1997.
See accompanying notes to condensed consolidated financial statements.
2
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
-------------------------- --------------------------
September 28, September 27, September 28, September 27,
1997 1998 1997 1998
---- ---- ---- ----
(In thousands)
(Unaudited)
Revenues:
Net sales................... $ 32,960 $30,863 $187,894 $ 99,016
Royalties, franchise fees
and other revenues......... 17,942 19,811 47,583 57,142
-------- ------- -------- --------
50,902 50,674 235,477 156,158
-------- ------- -------- --------
Costs and expenses:
Cost of sales............... 5,451 7,158 85,631 24,024
Advertising, selling and
distribution............... 19,495 15,283 65,401 50,024
General and administrative.. 15,286 19,045 49,427 48,211
Facilities relocation and
corporate restructuring.... 587 - 7,310 -
-------- ------- -------- --------
40,819 41,486 207,769 122,259
-------- ------- -------- --------
Operating profit........... 10,083 9,188 27,708 33,899
Interest expense.............. (7,961) (7,896) (27,350) (23,315)
Other income, net............. 957 831 578 2,643
-------- ------- -------- --------
Income before income taxes
and extraordinary charge.. 3,079 2,123 936 13,227
Provision for income taxes.... (2,567) (1,525) (852) (7,054)
-------- ------- -------- --------
Income before extra-
ordinary charge........... 512 598 84 6,173
Extraordinary charge.......... - - (1,800) -
-------- ------- -------- --------
Net income (loss).......... $ 512 $ 598 $ (1,716) $ 6,173
======== ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
3
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
--------------------------
September 28, September 27,
1997 1998
---- ----
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net income (loss)................................... $(1,716) $ 6,173
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Amortization of costs in excess of net assets of
acquired companies and certain other items...... 5,321 5,121
Depreciation and amortization of properties...... 1,458 3,467
Amortization of deferred financing costs......... 1,643 1,621
Write-off of unamortized deferred financing costs 2,950 -
Provision for facilities relocation and
corporate restructuring......................... 7,310 -
Payments on facilities relocation and
corporate restructuring......................... (5,268) (1,658)
Provision for doubtful accounts.................. 567 962
Provision for(benefit from) deferred income taxes (1,047) 5,299
Loss on sale of businesses, net.................. 1,839 -
Other, net....................................... (1,552) (1,469)
Changes in operating assets and liabilities:
Decrease in receivables......................... 1,811 3,062
Decrease in inventories......................... 2,593 6,185
Decrease in prepaid expenses and other
current assets................................. 3,331 516
Decrease in accounts payable and
accrued expenses............................... (23,685) (14,412)
Increase (decrease) in due to affiliates........ (545) 6,572
------- -------
Net cash provided by (used in) operating activities... (4,990) 21,439
------- -------
Cash flows from investing activities:
Capital expenditures................................ (1,858) (5,368)
Business acquisition................................ - (3,000)
Proceeds from sales of properties and businesses.... 3,188 819
------- -------
Net cash provided by (used in) investing activities... 1,330 (7,549)
------- -------
Cash flows from financing activities:
Repayments of long-term debt........................ (3,694) (1,161)
Net borrowings from affiliates and, in 1998,
increase in due to affiliates...................... 7,285 1,389
Capital contribution................................ 6,211 -
------- -------
Net cash provided by financing activities............. 9,802 228
------- -------
Net increase in cash and cash equivalents............. 6,142 14,118
Cash and cash equivalents at beginning of period...... 7,411 10,463
------- -------
Cash and cash equivalents at end of period............ $13,553 $24,581
======= =======
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1998
(Unaudited)
(1) Basis of Presentation
RC/Arby's Corporation ("RCAC" or, collectively with its subsidiaries, the
"Company") is a direct wholly-owned subsidiary of CFC Holdings Corp. ("CFC
Holdings") and an indirect wholly-owned subsidiary of Triarc Companies, Inc.
("Triarc"). The Company's principal wholly-owned subsidiaries are Arby's, Inc.
(d/b/a Triarc Restaurant Group - "TRG") and Royal Crown Company, Inc.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of the Company,
however, the accompanying condensed consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of December 28, 1997 and
September 27, 1998, its results of operations for the three-month and
nine-month periods ended September 28, 1997 and September 27, 1998 and its
cash flows for the nine-month periods ended September 28, 1997 and September
27, 1998 (see below). This information should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 28, 1997 (the
"Form 10-K"). Certain statements in these notes to condensed consolidated
financial statements constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. See "Part II - Other Information".
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, the Company's first nine
months of 1997 commenced on January 1, 1997 and ended on September 28, 1997,
with its third quarter commencing on June 30, 1997, and the Company's first
nine months of 1998 commenced on December 29, 1997 and ended on September 27,
1998, with its third quarter commencing on June 29, 1998. For the purposes of
these consolidated financial statements, the periods (i) from January 1, 1997
to September 28, 1997 and June 30, 1997 to September 28, 1997 are referred to
below as the nine-month and three-month periods ended September 28, 1997,
respectively, and (ii) from December 29, 1997 to September 27, 1998 and June
29, 1998 to September 27, 1998 are referred to below as the nine-month and
three-month periods ended September 27, 1998, respectively.
Certain amounts included in the prior comparable periods' condensed
consolidated financial statements have been reclassified to conform with the
current periods' presentation.
(2) Significant 1997 Transactions
On May 5, 1997 certain subsidiaries of the Company sold to an affiliate of
RTM, Inc. (together with such affiliate, "RTM"), the largest franchisee in the
Arby's system, all of the 355 then company-owned Arby's restaurants (the "RTM
Sale"). The sales price consisted of cash and a promissory note (discounted
value) aggregating $3,471,000 and the assumption by RTM of an aggregate
$69,637,000 of mortgage and equipment notes payable and capitalized lease
obligations. On July 18, 1997 the Company completed the sale (the "C&C Sale"
5
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 27, 1998
(Unaudited)
and, collectively with the RTM Sale, the "Sales") of its rights to the C&C
beverage line of mixers, colas and flavors, including the C&C trademark and
equipment related to the operation of the C&C beverage line, to Kelco Sales &
Marketing Inc. for $750,000 in cash and an $8,650,000 note with a discounted
value of $6,003,000 consisting of $3,623,000 relating to the C&C Sale and
$2,380,000 relating to future revenues. See Note 3 to the consolidated
financial statements in the Form 10-K for a further discussion of the Sales.
Due to the significant effects of the Sales, the following supplemental
pro forma condensed consolidated summary operating data (the "Pro Forma Data")
of the Company for the nine months ended September 28, 1997 is presented for
comparative purposes. Such Pro Forma Data has been prepared by adjusting the
historical data as set forth in the accompanying condensed consolidated
statement of operations for such period to give effect to the Sales as if the
Sales had been consummated on January 1, 1997. Such Pro Forma Data is
presented for comparative purposes only and does not purport to be indicative
of the Company's actual results of operations had the Sales actually been
consummated on January 1, 1997 or of the Company's future results of
operations and is as follows (in thousands):
As Reported Pro Forma
----------- ---------
Revenues....................................... $ 235,477 $ 157,407
Operating profit............................... 27,708 32,836
Income before extraordinary charge............. 84 6,552
(3) Comprehensive Income (Loss)
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130
("SFAS 130") "Reporting Comprehensive Income". SFAS 130 requires the
disclosure of comprehensive income which is defined as the change in
stockholder's equity during a period exclusive of stockholder investments and
distributions to the stockholder. For the Company, in addition to net income
(loss), comprehensive income (loss) includes any changes in the currency
translation adjustment. The following is a summary of the components of
comprehensive income (loss) (in thousands):
Three months ended Nine months ended
-------------------------- --------------------------
September 28, September 27, September 28, September 27,
1997 1998 1997 1998
---- ---- ---- ----
Net income (loss)............... $ 512 $ 598 $ (1,716) $ 6,173
Currency translation adjustment. - 6 58 (1)
--------- --------- --------- ----------
Comprehensive income (loss)... $ 512 $ 604 $ (1,658) $ 6,172
========= ========= ========= ==========
6
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 27, 1998
(Unaudited)
(4)Inventories
The following is a summary of the components of inventories (in thousands):
December 28, September 27,
1997 1998
--------- ---------
Raw materials.................................. $ 5,904 $ 3,613
Work in process................................ 214 303
Finished goods................................. 6,326 2,343
--------- ---------
$ 12,444 $ 6,259
========= =========
(5) Income Taxes
The Internal Revenue Service (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, in connection therewith, the Company paid
$4,576,000, including interest, during 1997. Triarc is contesting at the
appellate division of the IRS the remaining proposed adjustments of
approximately $3,000,000 relating to the Company, the tax effect of which has
not yet been determined. The IRS has recently commenced its examination of the
Federal income tax returns of Triarc and its subsidiaries, including the
Company, for the tax year ended April 30, 1993 and eight-month transition
period ended December 31, 1993. The Company believes that adequate aggregate
provisions have been made principally in years prior to 1997 for any tax
liabilities, including interest, that may result from the resolution of the
contested adjustments and the recently commenced examination.
(6) Transactions with Related Parties
The Company continues to have certain related party transactions with
Triarc and its subsidiaries of the same nature and general magnitude, except
for interest on affiliated notes which have been subsequently repaid, as those
described in Note 13 to the consolidated financial statements contained in the
Form 10-K.
(7) Legal and Environmental Matters
The Company is involved in litigation, claims and environmental matters
incidental to its businesses. The Company has reserves for such legal and
environmental matters aggregating approximately $3,160,000 as of September 27,
1998. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information and given the Company's aforementioned
reserves, the Company does not believe that such legal and environmental
matters will have a material adverse effect on its financial position or
consolidated results of operations.
7
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report on Form 10-K for the fiscal year ended
December 28, 1997 (the "Form 10-K") of RC/Arby's Corporation ("RCAC" or,
collectively with its subsidiaries, the "Company"). The recent trends
affecting the Company's beverage and restaurant segments are described
therein. RCAC is a direct wholly-owned subsidiary of CFC Holdings Corp. ("CFC
Holdings") and an indirect wholly-owned subsidiary of Triarc Companies, Inc.
("Triarc"). RCAC's principal wholly-owned subsidiaries are Arby's, Inc. (d/b/a
Triarc Restaurant Group - "TRG") and Royal Crown Company, Inc. ("Royal
Crown"). Certain statements under this caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute
"forward-looking statements" under the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"). Such forward-looking statements involve risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. For these statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Reform Act. See "Part II - Other Information".
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, the Company's first nine
months of 1997 commenced on January 1, 1997 and ended on September 28, 1997,
with its third quarter commencing on June 30, 1997, and the Company's first
nine months of 1998 commenced on December 29, 1997 and ended on September 27,
1998, with its third quarter commencing on June 29, 1998. For the purposes of
this management's discussion and analysis, the periods (i) from January 1,
1997 to September 28, 1997 and June 30, 1997 to September 28, 1997 are
referred to below as the nine-month and three-month (or 1997 third quarter)
periods ended September 28, 1997, respectively, and (ii) from December 29,
1997 to September 27, 1998 and June 29, 1998 to September 27, 1998 are
referred to below as the nine-month and three-month (or 1998 third quarter)
periods ended September 27, 1998, respectively.
RESULTS OF OPERATIONS
Nine Months Ended September 27, 1998 Compared with Nine Months Ended
September 28, 1997
Revenues decreased $79.3 million (34%) to $156.2 million in the nine
months ended September 27, 1998. Restaurant revenues decreased $64.8 million
to $57.0 million, reflecting $74.2 million of nonrecurring sales in the 1997
period for the then company-owned Arby's restaurants, all 355 of which were
sold on May 5, 1997 (the "RTM Sale") to an affiliate of RTM, Inc. (together
with such affiliate, "RTM"), the largest franchisee in the Arby's system,
partially offset by a $9.4 million (20%) increase in royalties and franchise
fees. The increase in royalties and franchise fees was due to incremental
royalties of $3.2 million during the 1998 period from the 355 restaurants sold
to RTM and, with respect to restaurants other than those sold to RTM in the
RTM Sale, (i) a 3% increase in same-store sales of franchised restaurants and
(ii) an average net increase of 47 (2%) franchised restaurants. Beverage
revenues decreased $14.5 million (13%) to $99.2 million due to decreases in
sales of concentrate ($8.1 million or 8%) and finished goods ($6.4 million or
82%). The decrease in sales of concentrate reflects a $10.1 million decline in
branded sales primarily due to domestic volume declines, partially offset by a
$2.0 million volume increase in private label sales. The domestic volume
decline in branded sales reflects competitive pricing pressures in the
beverage industry and occurred despite the resulting shift in sales of the C&C
beverage line, the rights to which were sold in July 1997 (the "C&C Sale"),
8
<PAGE>
to concentrate from finished goods. The Company now sells concentrate to the
purchaser of the C&C beverage line rather than finished goods. The decrease in
sales of finished goods was principally due to the absence in the 1998 period
of sales of the C&C beverage line.
Gross profit (total revenues less cost of sales) decreased $17.7 million
to $132.1 million in the nine months ended September 27, 1998 while gross
margins (gross profit divided by total revenues) increased to 85% compared
with 64% for the 1997 period. Beverage gross profit declined $12.1 million to
$75.1 million due to the declines in branded concentrate and finished product
sales volumes discussed above and a decrease in gross margins to 76% in the
1998 period from 77% in the 1997 period. Beverage gross margins decreased as
the effect of the shift in product mix to higher-margin concentrate sales was
more than offset by the effect of a nonrecurring 1997 period reduction to cost
of sales of $2.9 million resulting from the guarantee to the Company of
certain minimum gross profit levels on sales to the Company's private label
customer. The Company has no similar guarantee of minimum gross profit levels
in 1998. Restaurant gross profit declined $5.6 million to $57.0 million due to
a $15.0 million decrease in store gross profit due to the RTM Sale partially
offset by the $9.4 million increase in royalties and franchise fees (with no
associated cost of sales) discussed above. Restaurant gross margins increased
to 100% from 51% due to the fact that royalties and franchise fees now
constitute the total revenues of this segment.
Advertising, selling and distribution expenses decreased $15.4 million to
$50.0 million in the nine months ended September 27, 1998. Restaurant
advertising and selling expenses declined $8.0 million principally due to the
cessation of local restaurant advertising and marketing expenses resulting
from the RTM Sale. Beverage advertising, selling and distribution expenses
declined $7.4 million principally due to (i) lower bottler promotional
reimbursements resulting from the decline in branded concentrate sales volume
and (ii) planned reductions in connection with the aforementioned decrease in
sales of C&C products.
General and administrative expenses decreased $1.2 million to $48.2
million in the nine months ended September 27, 1998 principally due to reduced
spending levels related to administrative support, principally payroll, no
longer required for the sold restaurants as a result of the RTM Sale and other
cost reduction measures partially offset by provisions in the 1998 third
quarter for the anticipated settlement of a lawsuit with TRG's Mexican master
franchisee and a severance arrangement under the last of the Company's 1993
executive employment agreements.
The nonrecurring facilities relocation and corporate restructuring charge
of $7.3 million in the nine months ended September 28, 1997 principally
consisted of employee severance and related termination costs and employee
relocation associated with restructuring the restaurant segment in connection
with the RTM Sale and, to a lesser extent, costs associated with the
relocation of Royal Crown's headquarters, which was centralized in the
headquarters of Triarc Beverage Holdings Corp., a wholly-owned subsidiary of
Triarc.
Interest expense decreased $4.0 million to $23.3 million in the nine
months ended September 27, 1998 principally due to the full period effect in
1998 of (i) the assumption by RTM in connection with the RTM Sale of $69.6
million of mortgage and equipment notes payable and capitalized lease
obligations and (ii) to a lesser extent, the reduction of outstanding
principal balances on May 5, 1997 aggregating $29.7 million under notes
payable to Triarc forgiven or repaid in connection with the RTM Sale.
Other income, net increased $2.1 million to $2.6 million in the nine
months ended September 27, 1998 principally due to (i) the then estimated $2.3
million nonrecurring loss on the RTM Sale in the 1997 first half and (ii) $0.7
million of increased interest income in the 1998 period partially offset by
(i) a $0.9 million non-recurring gain in the 1997 third quarter on lease
termination for a portion of the space no longer required in the current
headquarters of TRG and former headquarters of Royal Crown due to staff
reductions as a result of the RTM sale and the relocation of the Royal Crown
headquarters and (ii) a $0.3 million reduction in the gain on the C&C Sale
recognized in the 1998 period.
9
<PAGE>
The Company's provision for income taxes for the nine months ended
September 27, 1998 and September 28, 1997 represented effective rates of 53%
and 91%, respectively. Such rate is lower in the 1998 period due principally
to the reduced impact on the 1998 rate of the amortization of nondeductible
costs in excess of net assets of acquired companies ("Goodwill") since the
projected pretax income for the respective full years upon which such rates
were based was significantly higher for 1998 than 1997.
The extraordinary charge of $1.8 million in the nine months ended
September 28, 1997 resulted from the assumption by RTM of mortgage and
equipment notes payable in connection with the RTM Sale and was comprised of
the write-off of $3.0 million of previously unamortized deferred financing
costs less the related income tax benefit of $1.2 million.
Three Months Ended September 27, 1998 Compared with Three Months Ended
September 28, 1997
Revenues decreased $0.2 million (less than 1%) to $50.7 million in the
three months ended September 27, 1998. Beverage revenues decreased $1.9
million (6%) to $31.0 million due to decreases in sales of concentrate ($1.0
million or 3%) and finished goods ($0.9 million or 99%). The decrease in sales
of concentrate reflected a $3.0 million decline in branded sales primarily due
to domestic volume declines reflecting competitive pricing pressures in the
beverage industry and occurred despite the resulting shift in sales of the C&C
beverage line to concentrate from finished goods previously discussed,
partially offset by a $2.0 million volume increase in private label sales. The
decrease in sales of finished goods was principally due to the full period
effect in the 1998 quarter of the absence of sales of the C&C beverage line as
a result of the C&C Sale. Restaurant revenues (comprised entirely of royalties
and franchise fees) increased $1.7 million (10%) to $19.7 million due to (i) a
4% increase in same-store sales of franchised restaurants and (ii) an average
net increase of 61 (2%) franchised restaurants.
Gross profit decreased $1.9 million to $43.5 million in the three months
ended September 27, 1998 and gross margins decreased to 86% compared with 89%
for the 1997 third quarter. Beverage gross profit declined $3.6 million to
$23.8 million due to the declines in branded concentrate and finished product
sales volumes discussed above and a decrease in gross margins to 77% in the
1998 third quarter from 83% in the 1997 third quarter. Beverage gross margins
decreased primarily due to the effect of a nonrecurring reduction to cost of
sales of $1.9 million in the 1997 third quarter resulting from the previously
discussed guarantee to the Company of certain minimum gross profit levels on
sales to the Company's private label customer. Restaurant gross profit
increased $1.7 million to $19.7 million due to the increase in royalties and
franchise fees described above. Restaurant gross margins are 100% in both
periods due to the fact that royalties and franchise fees (with no associated
cost of sales) now constitute the total revenues of that segment.
Advertising, selling and distribution expenses decreased $4.2 million to
$15.3 million in the three months ended September 27, 1998 principally due to
lower bottler promotional reimbursements resulting from the decline in branded
concentrate sales volume.
General and administrative expenses increased $3.8 million to $19.0
million in the three months ended September 27, 1998 principally due to the
provisions in the 1998 third quarter for the anticipated settlement of a
franchisee lawsuit and the executive severance agreement, both as described
above in the nine-month discussion.
Interest expense was relatively unchanged at $7.9 million in the 1998
quarter.
Other income, net decreased $0.1 million to $0.8 million due to a $0.4
million reduction in the gain on the C&C Sale recognized in the 1998 quarter
substantially offset by $0.3 million of increased interest income in the 1998
quarter.
10
<PAGE>
The Company's provision for income taxes for the three months ended
September 27, 1998 and September 28, 1997 represent effective rates of 72% and
83%, respectively. Such rate is lower in the 1998 period due principally to
the reduced impact on the 1998 rate of the amortization of Goodwill since the
projected pretax income for the respective full years upon which such rates
were based was higher for 1998 than 1997 partially offset by the catch-up
effect of a year-to-date increase in the estimated full-year 1998 effective
tax rate from 50% to 53%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash and cash equivalents
(collectively "cash") of $21.4 million during the nine months ended September
27, 1998 reflecting (i) net income of $6.2 million, (ii) net non-cash charges
of $13.3 million and (iii) cash provided by changes in operating assets and
liabilities of $1.9 million. The Company expects continued positive cash flows
from operations during the remainder of 1998.
Working capital (current assets less current liabilities) was $20.7
million at September 27, 1998, reflecting a current ratio (current assets
divided by current liabilities) of 1.3:1. Such amount represents an increase
in working capital of $11.9 million from December 28, 1997 principally due to
the increase in cash during the period generated by operating activities.
The Company's $275.0 million 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. The Senior Notes are,
however, redeemable at the option of the Company at approximately 102.8% and
101.4% of principal amount through July 31, 1999 and 2000, respectively. The
Company and Triarc are currently evaluating refinancing alternatives with
respect to the Senior Notes. No decision has been made to pursue any
particular refinancing alternative and there can be no assurance that any such
refinancing will be effected.
As of September 27, 1998 the Company has $4.2 million of notes payable to
FFCA Mortgage Corporation ("FFCA") which were not initially assumed by RTM in
connection with the RTM Sale. Such notes are repayable in monthly
installments, including interest, through 2016. Amounts due under these notes
during the remainder of 1998 are $0.1 million to be paid in cash.
Consolidated capital expenditures amounted to $5.4 million in the nine
months ended September 27, 1998, including $4.6 million which the Company was
required to reinvest in core business assets under the indenture pursuant to
which the Senior Notes were issued as a result of the C&C Sale and certain
other asset disposals in the latter half of 1997 in lieu of the Company
utilizing the net proceeds to purchase Senior Notes. The Company expects that
capital expenditures will approximate $0.3 million during the remainder of
1998. As of September 27, 1998, there were approximately $0.1 million of
outstanding commitments for such estimated capital expenditures.
In furtherance of the Company's growth strategy, the Company considers
selective business acquisitions, as appropriate, to grow strategically and
explores other alternatives to the extent it has available resources to do so.
In that connection, on August 27, 1998 the Company acquired from Paramark
Enterprises, Inc. ("Paramark", formerly known as T.J. Cinnamons, Inc.) all of
Paramark's franchise agreements for T.J. Cinnamons full concept bakeries as
well as Paramark's wholesale distribution rights for T.J. Cinnamons products,
thereby expanding the Company's existing T.J. Cinnamons operations. The
purchase price consisted of cash of $3.0 million, a $1.0 million promissory
note payable in equal monthly installments over 24 months and a contingent
payment of up to $1.0 million dependent upon achieving certain specified sales
targets during the full 1998 calendar year.
11
<PAGE>
The Company is a party to a tax sharing agreement with Triarc (the "Tax
Sharing Agreement") whereby the Company is required to pay amounts relating to
taxes based on the taxable income of the Company and its eligible subsidiaries
on a stand alone basis. The Company had overpaid its 1993 tax obligation due
to losses during the fourth quarter of 1993, and had experienced additional
losses in 1994 through 1997 significantly in excess of the $13.2 million of
pretax income in the first nine months of 1998. As a result, no subsequent
payment has been required through September 27, 1998 and, considering the
approximately $26.4 million of remaining unutilized tax benefits from net
operating loss carryforwards under the Tax Sharing Agreement as of September
27, 1998, the Company does not expect to be required to make any such payments
during the remainder of 1998.
The Internal Revenue Service (the "IRS") has completed its examination of
the Federal income tax returns of Triarc and its subsidiaries, including the
Company, for the tax years from 1989 through 1992 and, in connection
therewith, the Company paid $4.6 million, including interest, during 1997.
Triarc is contesting at the appellate division of the IRS the remaining
proposed adjustments of approximately $3.0 million relating to the Company,
the tax effect of which has not yet been determined. Accordingly, the amount
and timing of any payments required as a result of such examination cannot
presently be determined. The IRS has recently commenced its examination of the
Federal income tax returns of Triarc and its subsidiaries, including the
Company, for the tax year ended April 30, 1993 and eight-month transition
period ended December 31, 1993. The Company, however, does not expect the
recently commenced examination to result in any tax or interest payments
during the remainder of 1998.
The Company's cash requirements for the remainder of 1998, exclusive of
operating cash flow requirements, consist principally of (i) estimated capital
expenditures of $0.3 million, (ii) scheduled debt principal repayments of $0.3
million, including $0.2 million under other notes and $0.1 million under the
FFCA notes, (iii) Federal income tax payments, if any, in connection with the
$3.0 million of contested proposed adjustments relating to the Company from
the IRS examination of Triarc's 1989 through 1992 income tax returns and (iv)
the cost of additional business acquisitions, if any. The Company anticipates
meeting all of such requirements through existing cash and cash equivalents
($24.6 million as of September 27, 1998) and cash provided by operations.
Legal and Environmental Matters
The Company is involved in litigation, claims and environmental matters
incidental to its businesses. The Company has reserves for such legal and
environmental matters aggregating approximately $3.2 million as of September
27, 1998. Although the outcome of such matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to the
Company, based on currently available information and given the Company's
aforementioned reserves, the Company does not believe that such legal and
environmental matters will have a material adverse effect on its consolidated
financial position or results of operations.
Year 2000
The Company has undertaken a study of its functional application systems
to determine their compliance with year 2000 issues and, to the extent of
noncompliance, the required remediation. The Company's study consisted of an
eight-step methodology to: (1) obtain an awareness of the issues; (2) perform
an inventory of its software and hardware systems; (3) identify its systems
and computer programs with year 2000 exposure; (4) assess the impact on its
operations by each mission critical application; (5) consider solution
alternatives; (6) initiate remediation; (7) perform validation and
confirmation testing and (8) implement. The Company has completed steps one
through five and expects to complete steps six and seven in the first half of
1999 with final implementation prior to January 1, 2000. Such study addressed
both information technology ("IT") and non-IT systems, including imbedded
technology such as micro controllers in telephone systems, production
processes and delivery systems. As a result of such study, the Company
12
<PAGE>
believes the majority of its systems are presently year 2000 compliant,
including all significant systems in its restaurant segment. However, certain
significant systems in the Company's beverage segment, principally Royal
Crown's order processing, inventory control and production scheduling system,
require remediation. If such remediation is not completed on a timely basis,
the most reasonably likely worst-case scenario is that Royal Crown might
experience a delay in production and/or fulfilling and processing orders
resulting in either lost sales or delayed cash receipts, although the Company
does not believe that such delay would be material due to the relatively
moderate number of bottlers and volume of orders that Royal Crown typically
handles. In such case, Royal Crown's contingency plan would be to revert to a
manual system in order to perform the required functions without any
significant disruption of business. To date, the expenses incurred by the
Company in order to become year 2000 compliant, including computer software
and hardware costs, have been $0.1 million and the current estimated cost to
complete such remediation is expected to be $1.5 million. Such costs are being
expensed as incurred, except for the direct purchase costs of software and
hardware which are being capitalized. Commencing with the Company's 1999
fiscal year, the software-related costs will be capitalized in accordance with
the provisions of Statement of Position ("SOP") 98-1 described below.
An assessment of the readiness of year 2000 compliance of third party
entities with which the Company has relationships, such as its suppliers,
banking institutions, customers, payroll processors and others ("third party
entities") is ongoing. The Company has inquired, or is in the process of
inquiring, of the significant aforementioned third party entities as to their
readiness with respect to year 2000 compliance and to date has received
indications that many of them are either compliant or in the process of
remediation. The Company is, however, subject to certain risks with respect to
these third party entities' potential year 2000 non-compliance. The Company
believes that these risks are primarily associated with its banks and major
suppliers, including its beverage bottlers and the food suppliers and
distributors to its restaurant franchisees. At present, the Company cannot
determine the impact on its results of operations in the event of year 2000
non-compliance by these third party entities. In the most reasonably likely
worst-case scenario, such year 2000 non-compliance might result in a prolonged
disruption of business and loss of revenues, including the effects of any lost
customers, in either the Company's beverage or restaurant segment or in both.
The Company will continue to monitor these third party entities to determine
the impact on the business of the Company and the actions the Company must
take, if any, in the event of non-compliance by any of these third party
entities. The Company is in the process of collecting additional information
from third party entities that disclosed that remediation is required and will
begin detailed evaluations of these third party entities, as well as those
that could not satisfactorily respond, by the first quarter of 1999 in order
to develop its contingency plans in conjunction therewith. The Company
believes there are multiple vendors of the goods and services it receives from
its suppliers and thus the risk of non-compliance with year 2000 by any of its
suppliers is mitigated by this factor. Also, only two customers accounted for
approximately 10% each, and no individual customer accounted for more than
15%, of the Company's consolidated revenues during the first nine months of
1998, thus mitigating the adverse risk to the Company's business if some
customers are not year 2000 compliant.
Recently Issued Accounting Pronouncements
In March 1998 the Accounting Standards Executive Committee (the "AcSEC")
of the American Institute of Certified Public Accountants issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1, which is effective no later than for the Company's
fiscal year commencing January 4, 1999, provides accounting guidance on a
prospective basis for the costs of computer software developed or obtained for
internal use. The SOP requires that once the computer software capitalization
criteria have been met, costs of developing, upgrading and enhancing computer
software for internal use, including (i) external direct costs of materials
and services consumed in developing or obtaining such software and (ii)
payroll and payroll-related costs for employees who are directly associated
with such software project to the extent of their time spent directly on the
project, should be capitalized. The Company presently capitalizes the direct
purchase cost of internal-use computer software but does not capitalize either
13
<PAGE>
the services consumed or the internal payroll costs incurred in the
implementation of such software. Since (i) the Company does not develop its
own internal-use software, (ii) the Company does not anticipate obtaining
significant internal use computer software, (iii) the Company currently
capitalizes the direct software purchase cost and (iv) SOP 98-1 is effective
prospectively only, the Company does not believe that the adoption of SOP 98-1
will have a material impact on its consolidated financial position or results
of operations.
In April 1998 the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 broadly defines start-up activities and
requires the costs of start-up activities and organization costs to be
expensed as incurred. Start-up activities include one-time activities related
to opening a new facility, introducing a new product or service, conducting
business in a new territory, initiating a new process in an existing facility,
or commencing some new operation. The SOP is effective no later than for the
Company's fiscal year commencing January 4, 1999 and requires any existing
deferred start-up or organization costs as of the effective date to be
expensed as the cumulative effect of a change in accounting principle. Since
the Company does not have any significant deferred start-up or organization
costs as of September 27, 1998, the Company does not believe the adoption of
SOP 98-5 will have a material impact on its consolidated financial position or
results of operations.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 provides a comprehensive
standard for the recognition and measurement of derivatives and hedging
activities. The standard requires all derivatives be recorded on the balance
sheet at fair value and establishes special accounting for three types of
hedges. The accounting treatment for each of these three types of hedges is
unique but results in including the offsetting changes in fair values or cash
flows of both the hedge and hedged item in results of operations in the same
period. Changes in fair value of derivatives that do not meet the criteria of
one of the aforementioned categories of hedges are included in results of
operations. SFAS 133 is effective for the Company's fiscal year beginning
January 3, 2000. The provisions of SFAS 133 are complex and the Company is
only beginning its evaluation of whether it has any derivatives or hedges as
defined by SFAS 133 and, accordingly, is unable to determine at this time the
impact it will have on the Company's financial position and results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
14
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of
RC/Arby's Corporation ("RCAC" or "the Company") and statements preceded by,
followed by or that include the words "may," "believes," "expects,"
"anticipates," or the negation thereof, or similar expressions, which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). All statements
which address operating performance, events or developments that are expected
or anticipated to occur in the future, including statements relating to volume
and revenue growth or statements expressing general optimism about future
operating results, are forward-looking statements within the meaning of the
Reform Act. Such forward-looking statements involve risks, uncertainties and
other factors which may cause the actual performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. For
those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Reform Act. Many important factors
could affect the future results of the Company and could cause those results
to differ materially from those expressed in the forward-looking statements
contained herein. Such factors include, but are not limited to, the following:
competition, including product and pricing pressures; success of operating
initiatives; the ability to attract and retain customers; development and
operating costs; advertising and promotional efforts; brand awareness; the
existence or absence of adverse publicity; market acceptance of new product
offerings; new product and concept development by competitors; changing trends
in consumer tastes; the success of multi-branding; availability, location and
terms of sites for restaurant development by franchisees; the ability of
franchisees to open new restaurants in accordance with their development
commitments; the performance by material customers of their obligations under
their purchase agreements; changes in business strategy or development plans;
quality of management; availability, terms and deployment of capital; business
abilities and judgment of personnel; availability of qualified personnel;
labor and employee benefit costs; availability and cost of raw materials and
supplies; unexpected costs associated with Year 2000 compliance or the
business risk associated with Year 2000 non-compliance by customers and/or
suppliers; general economic, business and political conditions in the
countries and territories where the Company operates, including the ability to
form successful strategic business alliances with local participants; changes
in, or failure to comply with, government regulations, including accounting
standards, environmental laws and taxation requirements; the costs,
uncertainties and other effects of legal and administrative proceedings; the
impact of general economic conditions on consumer spending; and other risks
and uncertainties affecting the Company and its competitors detailed in RCAC's
other current and periodic filings with the Securities and Exchange
Commission, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. The Company will not
undertake and specifically declines any obligation to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
Item 1.Legal Proceedings
As reported in RCAC's Annual Report on Form 10-K for the fiscal year ended
December 28, 1997 (the "Form 10-K") and RCAC's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 28, 1998, on March 13, 1998, Gregg Katz,
Susan Zweig Katz and ZuZu of Orlando, LLC commenced an action against Arby's,
Inc. ("Arby's"), ZuZu, Inc. ("ZuZu"), ZuZu Franchising Corporation ("ZFC") and
Triarc in the Superior Court of Fulton County, Georgia. Plaintiffs are a ZuZu
franchisee and the owners/investors of the franchisee corporation. Plaintiffs
assert causes of action for, among other things, rescission of the development
and franchise agreements, fraud, fraudulent concealment, breach of the
development and franchise agreements, tortious interference with contract,
quantum meruit, breach of oral agreement, negligence and violation of several
Florida and Texas business opportunity and similar statutes. Plaintiffs seek
15
<PAGE>
actual damages of not less than $600,000 and consequential, punitive and
treble damages in an unspecified amount, as well as attorneys' fees, costs and
expenses. Arby's has filed an answer and plaintiffs voluntarily dismissed
Triarc from the case. The court dismissed the case against ZuZu and ZFC on
jurisdictional grounds. The litigation is in the initial stages of discovery.
Arby's believes that Plaintiffs' claims against Arby's are without merit and
Arby's is vigorously defending this action.
As reported in the Form 10-K, 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 US$2.85
million and that Arby's had breached a master development agreement between AR
and Arby's. Arby's commenced an arbitration proceeding since the franchise and
development agreements each provided that all disputes arising thereunder were
to be resolved by arbitration. In September 1997, the arbitrator ruled that
(i) the November 9, 1994 letter of intent was not a binding contract and (ii)
the master development agreement was properly terminated. AR has challenged
the arbitrator's decision. In March 1998, the civil court of Mexico ruled that
the November 9, 1994 letter of intent was a binding contract and ordered
Arby's to pay AR US$2.85 million, plus interest and value added tax. In August
1998, an appellate court affirmed that decision and Arby's filed an appeal in
Mexican federal court. In May 1997, AR commenced an action against Arby's in
the United States District Court for the Southern District of Florida alleging
that (i) Arby's had engaged in fraudulent negotiations with AR in 1994- 1995,
in order to force AR to sell the master franchise rights for Mexico to Arby's
cheaply and (ii) Arby's had tortiously interfered with an alleged business
opportunity that AR had with a third party. Arby's has moved to dismiss that
action. The parties have agreed in principle to settle all the litigation in
order to avoid the expense of continuing litigation and expect to enter into
an escrow agreement pursuant to which Arby's would deposit US$1.65 million in
escrow. Under the terms of the proposed escrow agreement, the funds would be
released to AR if by February 28, 1999 a definitive settlement agreement has
been executed by the parties and, if necessary, approved by a Mexican court
presiding over AR's suspension of payments proceeding. If the definitive
settlement agreement has not been executed by February 28, 1999, the escrowed
funds would be returned to Arby's. During the pendency of the proposed escrow
arrangement, the parties would stay all proceedings in the U.S. and, to the
extent possible, not pursue the proceedings in Mexico.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Letter Agreement dated July 23, 1998 between John L. Belsito and
Royal Crown Company, Inc., incorporated herein by reference to
Exhibit 10.1 to RCAC's Current Report on Form 8-K dated November
5, 1998 (SEC file No. 0-20286).
10.2 Letter Agreement dated August 27, 1998 among John C. Carson,
Triarc Companies, Inc. and Royal Crown Company, Inc., incorporated
herein by reference to Exhibit 10.2 to RCAC's Current Report on
Form 8-K dated November 5, 1998 (SEC file No. 0-20286).
27.1 Financial Data Schedule for the fiscal nine-month period ended
September 27, 1998 (and for the fiscal nine-month period ended
September 28, 1997 on a restated basis), submitted to the
Securities and Exchange Commission in electronic format.*
---------------
* Filed herewith
16
<PAGE>
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the three
months ended September 27, 1998. The registrant did, however, file a
report on Form 8-K dated November 5, 1998 with respect to certain
exhibits incorporated herein by reference.
17
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RC/ARBY'S CORPORATION
(Registrant)
Date: November 12, 1998 By: /s/ JOHN L. BARNES, JR.
-----------------------
John L. Barnes, Jr.
Executive Vice President
and Chief Financial Officer
(On behalf of the Company)
By: /s/ FRED H. SCHAEFER
-----------------------
Fred H. Schaefer
Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INCOME STATEMENT INFORMATION FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 28, 1997 (RESTATED) AND SEPTEMBER 27, 1998 AND SUMMARY
BALANCE SHEET INFORMATION AS OF SEPTEMBER 27, 1998 EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM
10-Q OF RC/ARBY'S CORPORATION FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 27,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. THIS
SCHEDULE ALSO CONTAINS SUMMARY HISTORICAL BALANCE SHEET INFORMATION AS OF
SEPTEMBER 28, 1997 EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS INCLUDED IN THE FORM 10-Q OF RC/ARBY'S CORPORATION FOR THE
NINE-MONTH PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-Q.
</LEGEND>
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<CURRENCY> US DOLLARS
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<FISCAL-YEAR-END> DEC-28-1997 JAN-03-1999
<PERIOD-START> JAN-01-1997 DEC-29-1997
<PERIOD-END> SEP-28-1997 SEP-27-1998
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<CASH> 13,553 24,581
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<RECEIVABLES> 36,454 30,967
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<INVENTORY> 6,989 6,259
<CURRENT-ASSETS> 70,525 86,411
<PP&E> 9,569 10,010
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 279,909 281,480
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<BONDS> 279,872 279,018
0 0
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