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
For the fiscal year ended December 28, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 0-20286
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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) 351-5100
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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, 1998.
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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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
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,"
that are not historical facts, including most importantly, those statements
preceded by, followed by, or that include the words "may," "believes,"
"expects," "anticipates," or the negation thereof, or similar expressions,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). In addition, 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 and shares of sales 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 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 including
product and pricing pressures; success of operating initiatives; development
and operating costs; 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 customer tastes; the success of
multi-branding; availability, location and terms of sites for restaurant
development; the ability of franchisees to open new restaurants in accordance
with their development commitments; the satisfaction by material customers of
the terms of 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; 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; general economic, business and political
conditions in countries and territories where RCAC and its subsidiaries
operate, including the ability to form successful strategic business alliances
with local participants; the impact of such conditions on consumer spending;
and other risks and uncertainties referred in this Form 10- K and periodic
filings by RCAC with the Securities and Exchange Commission. RCAC will not
undertake and specifically declines any obligation to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events. In addition, it
is RCAC's policy generally not to make any specific projections as to future
earnings, and RCAC does not endorse any projections regarding future
performance that may be made by third parties.
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) ("TRG"). Royal Crown produces and
sells concentrates used in the production and distribution of soft drinks by
independent bottlers under the brand names RC Cola(R), Diet RC Cola(R), Diet
Rite Cola(R), Diet Rite(R) flavors, Nehi(R), Upper 10(R) and Kick(R). RC Cola
is the third largest national brand cola and is the only national brand cola
available to bottlers who do not bottle either Coca-Cola or Pepsi-Cola. Royal
Crown is also the exclusive supplier of cola concentrate and a primary
supplier of flavor concentrates to Cott Corporation ("Cott"), which sells
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private label soft drinks to major retailers in the United States, Canada, the
United Kingdom, Australia, Japan, Spain and South Africa.
Arby's(R) is the world's largest franchise restaurant system specializing
in roast beef sandwiches with an estimated market share in 1997 of
approximately 73% of the roast beef sandwich segment of the quick-service
sandwich restaurant category. In addition, RCAC believes that Arby's is the
10th largest restaurant chain in the United States, based on domestic
system-wide sales. Worldwide sales for the Arby's system were approximately
$2.1 billion in 1997. TRG now operates solely as a franchisor in a system that
included 3,091 restaurants as of December 28, 1997.
RCAC is an indirect wholly-owned subsidiary of Triarc Companies, Inc.
("Triarc"). Triarc is a public company, the Class A Common Stock of which (the
only class of Triarc's voting securities) is traded on the New York Stock
Exchange.
RCAC was incorporated in 1982 in Florida under the name "Royal Crown
Corporation" and reincorporated in Delaware, by means of a merger, in March
1994. Royal Crown was incorporated in 1978 in Delaware and, through its
predecessor corporations, has been in business since 1905. TRG was
incorporated in 1964 in Ohio and reincorporated in Delaware in 1994. The
principal executive offices of each of RCAC and TRG are located at 1000
Corporate Drive, Fort Lauderdale, Florida 33334. The telephone number at such
offices is (954) 351-5100. The principal executive offices of Royal Crown are
located at 709 Westchester Avenue, White Plains, New York 10604. The telephone
number at such offices is (914) 397-9200. Reference herein to the "Company"
includes collectively RCAC, Royal Crown and TRG, unless the context indicates
otherwise.
RECENT DISPOSITIONS
Sale of Company-Owned Restaurants
On May 5, 1997, subsidiaries of RCAC sold to an affiliate of RTM, Inc.
("RTM"), the largest franchisee in the Arby's system, all of the stock of two
corporations owning all of the 355 company-owned Arby's restaurants. The
purchase price was approximately $73 million, consisting primarily of the
assumption of approximately $69 million in mortgage indebtedness and
capitalized lease obligations. In connection with the transaction, the Company
received options to purchase up to an aggregate of 20% of the common stock of
the two corporations owning such restaurants. RTM and certain affiliated
entities have agreed to indemnify and hold the Company harmless from, among
other things, the assumed debt and lease obligations. In addition, the two
corporations that were sold agreed to build an aggregate of 190 Arby's
restaurants over 14 years pursuant to a development agreement (in addition to
a previous agreement by affiliates of RTM to build 210 Arby's restaurants over
a ten and one-half year period).
Sale of C&C Beverage Line
On July 18, 1997, Royal Crown and TriBev Corporation ("TriBev"),
subsidiaries of RCAC, completed the sale of their rights to the C&C beverage
line, including the C&C trademark. In connection with the sale, Royal Crown
also agreed to sell concentrate for C&C products and to provide certain
technical services to the buyer for seven years. In consideration for the
foregoing, Royal Crown and TriBev will receive aggregate payments of
approximately $9.4 million, payable over seven years.
CANCELLATION OF SPINOFF TRANSACTIONS
On October 29, 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's stockholders (collectively, the "Spinoff Transactions").
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In May 1997 Triarc announced it would not proceed with the Spinoff
Transactions as a result of its acquisition of Snapple Beverage Corp.
("Snapple") and other issues.
CHANGE IN FISCAL YEAR
Effective January 1, 1997, the Company adopted a 52/53 week fiscal
convention whereby its fiscal year will end each year on the Sunday that is
closest to December 31 of such year. Each fiscal year generally 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)
TRIARC BEVERAGE GROUP
The Triarc Beverage Group ("TBG") oversees the Company's carbonated soft
drink operations, conducted by Royal Crown, and Triarc's premium beverage
operations, conducted by Snapple, Mistic Brands, Inc., and Cable Car Beverage
Corporation. TBG is headquartered in White Plains, New York. Royal Crown and
Triarc's premium beverage operations 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 beverage companies have been consolidated to maximize efficiencies.
GENERAL
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 and a
primary supplier of flavor concentrates to Cott which sells private label soft
drinks to major retailers in the United States, Canada, the United Kingdom,
Australia, Japan, Spain and South Africa.
RC Cola is the third largest national brand cola and is the only national
brand cola available to bottlers who do not bottle either Coca-Cola or
Pepsi-Cola. Diet Rite is available in a cola as well as various other flavors
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 presently containing aspartame as
its sweetening agent, but which is being reformulated to contain Sucralose, a
non-nutritive sweetening agent recently approved for use by the United States
Food and Drug Administration (the "FDA"). 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 1997 according to Beverage Digest/Maxwell
estimates. Royal Crown's soft drink brands have approximately a 1.7% share of
national supermarket volume, as measured by data of Information Resources,
Inc. ("IRI").
BUSINESS STRATEGY
TBG's management is pursuing business strategies designed to strengthen
Royal Crown's 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.
As a result, 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. In addition, in July 1997 Royal Crown completed the sale of its
rights to the C&C beverage line, including the C&C trademark. Royal Crown's
license relationship with Celestial Seasonings Inc. for ready to drink iced
teas terminated as of December 31, 1997.
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 1995, 1996 and 1997 were approximately $73.7
million, $61.7 million and $56.1 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 for bottled and canned products within which no other
bottler may distribute Royal Crown branded soft drinks. As of December 28,
1997, Royal Crown products were packaged and/or distributed domestically in
152 licensed territories, by 172 licensees, covering 50 states. There were a
total of 45 production centers operating pursuant to 48 production and
distribution agreements and 126 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 approximately 68%
and 74% of Royal Crown's domestic unit sales of concentrate for branded
products during 1996 and 1997, respectively. The two largest bottler groups,
the RC Chicago Bottling Group and Beverage America, accounted for
approximately 22% and 9%, respectively, of Royal Crown's domestic unit sales
of concentrate for branded products during 1996 and 27% and 9%, respectively,
during 1997. Royal Crown believes that, if required, there would be adequate
alternative bottlers available if Royal Crown's relationships with the RC
Chicago Bottling Group and Beverage America were terminated.
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 sales by retailers of store brands. Royal Crown's private label sales
began in late 1990. Unit sales of concentrate to Cott in 1997 increased by
4.6% over sales in 1996. In 1995, 1996 and 1997, revenues from sales to Cott
represented approximately 12.1%, 12.6% and 15.8%, 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
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.
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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 flavors 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 soft drink products through four major
distribution channels: take home (consisting of supermarkets, 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 supermarkets and drug stores in 1997 declined approximately 14.6%
and 19.9%, respectively, as compared to 1996, while the volume of Royal Crown
products in mass merchandisers increased approximately 28.2% in 1997. Royal
Crown brands historically have not been broadly distributed through vending
machines or convenience outlets; in 1997, the volume of Royal Crown products
in the convenience channel was relatively unchanged, down approximately 0.2%
as compared to 1996.
INTERNATIONAL
Sales outside the United States accounted for approximately 9.6%, 10.3% and
11.5% of Royal Crown's sales in 1995, 1996, and 1997, respectively. Sales
outside the United States of branded concentrates accounted for approximately
10.2%, 12.3% and 13.9% of branded concentrate sales in 1995, 1996 and 1997,
respectively. As of December 28, 1997, 92 bottlers and 13 distributors sold
Royal Crown branded products outside the United States in 64 countries, with
international sales in 1997 distributed among Canada (8.1%), Latin America and
Mexico (32.1%), Europe (22.4%), the Middle East/Africa (18.6%) and the Far
East (18.8%). While the financial and managerial resources of Royal Crown have
been focused on the United States, TBG's management believes significant
opportunities exist for Royal Crown in international markets. New bottlers
were added in 1997 to the following international markets: Russia, Ukraine,
Croatia, Latvia, Brazil and Bangladesh.
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
cola line and to target the non-cola segment of the market. In 1997, Royal
Crown introduced a new version of Diet Rite Cola. As mentioned above, Royal
Crown expects to soon be using Sucralose, instead of aspartame, as the
sweetening agent in Diet RC Cola. Royal Crown believes it will be the first
national diet soft drink brand to use Sucralose.
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, however, TBG and Triarc
have chosen, for quality control and other purposes, to purchase certain raw
materials (such as aspartame) on an exclusive or preferred basis from single
suppliers.
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RESTAURANTS (TRIARC RESTAURANT GROUP)
SALE OF COMPANY-OWNED RESTAURANTS
On May 5, 1997, subsidiaries of RCAC sold (the "Restaurant Sale") their 355
company-owned Arby's restaurants to an affiliate of RTM, the largest
franchisee in the Arby's system. See "Item 1. -- Business --Recent
Dispositions." Focused solely as a franchisor, TRG has reduced from recent
historical levels the operating costs of the restaurant segment and
substantially eliminated capital expenditure requirements, thereby improving
its cash flows. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." TRG's role in the Arby's system as the
franchisor is 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 T.J.
Cinnamons(R) and p.t. Noodles(R).
GENERAL
Arby's is the world's largest franchise restaurant system specializing in
slow-roasted meat sandwiches with an estimated market share in 1997 of
approximately 73% of the roast beef sandwich segment of the quick service
sandwich restaurant category. In addition, Triarc believes that Arby's is the
10th largest quick service restaurant chain in the United States, based on
domestic system-wide sales. As of December 28, 1997, the Arby's restaurant
system consisted of 3,091 franchised restaurants, of which 2,913 operated
within the United States and 178 operated outside the United States.
System-wide sales were approximately $1.9 billion in 1995, approximately $2.0
billion in 1996 and approximately $2.1 billion in 1997.
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 currently multi-brands with T.J. Cinnamons products,
primarily gourmet cinnamon rolls, premium coffees and related products, and
p.t. Noodles products, which are pasta dishes based on serving corkscrew or
fettucine pasta with a variety of different sauces. TRG 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.
As a result of the sale of the company-owned restaurants to RTM, TRG's
revenues are derived from two principal sources: (i) royalties from
franchisees and (ii) franchise fees. Prior to the Restaurant Sale, TRG's
revenues were principally derived from sales at company-owned restaurants.
During 1995, 1996, and 1997 approximately 80%, 80% and 53%, respectively, of
TRG's revenues were derived from sales at company-owned restaurants and
approximately 20%, 20% and 47%, respectively, were derived from royalties and
franchise fees.
INDUSTRY
According to data compiled by the National Restaurant Association, total
domestic restaurant industry sales were estimated to be approximately $207
billion in 1996, of which approximately $98 billion were estimated to be in
the Quick Service Restaurant ("QSR") or fast food segment. Large chains are
continuing to gain a greater share of industry sales. According to Technomic,
Inc., the 100 largest restaurant chains accounted for approximately 48.4% of
restaurant industry sales in 1995, up from approximately 39.7% in 1980. The
QSR segment accounts for approximately 70% of sales and 83% of restaurant
units within the top 100 restaurant chains, according to a study by Franchise
Finance Corporation of America.
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ARBY'S RESTAURANTS
The first Arby's restaurant opened in Youngstown, Ohio in 1964. As of
December 28, 1997, Arby's restaurants were being operated in 48 states and 10
foreign countries. At December 28, 1997, the six leading states by number of
operating units were: Ohio, with 234 restaurants; Texas, with 181 restaurants;
California, with 161 restaurants; Michigan, with 154 restaurants; and Georgia
and Indiana, with 152 restaurants each. The country outside the United States
with the most operating units is Canada, with 119 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 30 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, 1995 and 1996 and at December 28, 1997.
December 31, December 28,
1995 1996 1997
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Company-owned restaurants......... 373 355 -
Franchised restaurants............2,577 2,667 3,091
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Total restaurants...........2,950 3,022 3,091
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FRANCHISE NETWORK
At December 28, 1997, there were 574 Arby's franchisees operating 3,091
separate locations. The initial term of the typical "traditional" franchise
agreement is 20 years. As of December 28, 1997, TRG did not offer any
financing arrangements to its franchisees, except that in certain development
agreements TRG has made available extended payment terms.
As of December 28, 1997, TRG had received prepaid commitments for the
opening of up to 592 new domestic franchised restaurants over the next ten
years. TRG also expects that 15 new franchised restaurants outside of the
United States will open in 1998. TRG also has territorial agreements with
international franchisees in four countries at December 28, 1997. 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. TRG's management expects that future international franchise
agreements will more narrowly limit the geographic exclusivity of the
franchisees and prohibit sub-franchise arrangements.
TRG offers franchises for the development of both single and multiple
"traditional" restaurant locations. All franchisees are required to execute
standard franchise agreements. TRG's standard U.S. franchise agreement
currently requires an initial $37,500 franchise fee for the first franchised
unit and $25,000 for each subsequent unit and a monthly royalty payment equal
to 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 1997 was 3.2%. 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.
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Franchised restaurants are required to be 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. TRG
continuously monitors franchisee operations and inspects restaurants
periodically to ensure that company practices and procedures are being
followed.
MULTI-BRANDING
TRG has developed 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. Because lunchtime customers account for the majority of
sales at Arby's restaurants, TRG seeks multi-branding concepts that it expects
will attract higher breakfast or dinner traffic. TRG currently has two
multi-brand concepts: T.J. Cinnamons and p.t. Noodles. T.J. Cinnamons offers
gourmet cinnamon rolls, premium coffees and related products. p.t. Noodles
offers a variety of Italian and American dishes based on serving corkscrew or
fettucine pasta with a variety of different sauces. As of December 28, 1997,
127 Arby's restaurants were multi-brand locations, including 119 that offered
T.J. Cinnamons' products and eight that offered p.t. Noodles' products.
ADVERTISING AND MARKETING
TRG 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 participate.
Franchisees 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. As a result of the Restaurant Sale in May 1997, TRG's expenditures for
advertising and marketing in support of what were then company-owned
restaurants, were approximately $9.0 million in 1997, as compared to
approximately $25.8 million and $22.7 million in 1996 and 1995, respectively.
QUALITY ASSURANCE
TRG 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
five 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 TRG's headquarters
tests samples of roast beef periodically from franchisees. Each year,
representatives of TRG conduct unannounced inspections of operations of a
number of franchisees to ensure that Arby's policies, practices and procedures
are being followed. TRG's field representatives also provide a variety of
on-site consultative services to franchisees.
PROVISIONS AND SUPPLIES
Arby's roast beef is provided by five independent meat processors.
Franchise operators are required to obtain roast beef from one of the five
approved suppliers. ARCOP, Inc. ("ARCOP"), a non-profit purchasing
cooperative, negotiates contracts with approved suppliers on behalf of Arby's
franchisees, and has entered into "cost-plus" contracts with these suppliers.
TRG believes that satisfactory arrangements could be made to replace any of
the current roast beef suppliers, if necessary, on a timely basis.
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Franchisees may obtain other products, including food, beverage,
ingredients, paper goods, equipment and signs, from any source that meets
TRG'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, Diet Rite, Nehi, Upper 10 and Kick 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.
TRG is the sole owner of the Arby's trademark and considers it, and certain
other trademarks owned or licensed by TRG, to be material to its business.
Pursuant to its standard franchise agreement, TRG grants each of its
franchisees the right to use TRG's trademarks, service marks and trade names
in the manner specified therein.
The material trademarks of Royal Crown and TRG are registered in the U.S.
Patent and Trademark Office and various foreign jurisdictions. Royal Crown's
and TRG'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 TRG'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, marketing agreements (including so called
calendar marketing agreements), pricing, packaging and the development of new
products.
TRG faces direct and indirect competition from numerous well established
competitors, including national and regional fast food chains, such as
McDonald's, Burger King and Wendy's. In addition, TRG 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 soft drink products in supermarkets, with
local bottlers (and, in particular, competitive cola bottlers) granting
significant discounts and allowances off wholesale prices in order to, among
other things, maintain or increase market share in the supermarket segment.
While the net impact of price discounting in the soft drink and restaurant
industries cannot be quantified, such practices, if continued, could have an
adverse impact on the Company.
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WORKING CAPITAL
Royal Crown's and TRG's working capital requirements are generally met
through cash flow from operations. Accounts receivable of Royal Crown are
generally due in 30 days and TRG'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.
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 FDA. The FDA also regulates the labeling of Royal Crown's
products. In addition, Royal Crown's dealings with its licensees and/or
distributors may, in some jurisdictions, be subject to state laws governing
licensor-licensee or distributor relationships.
TRG 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, TRG franchisees are subject
to the Fair Labor Standards Act and the Americans with Disabilities Act, which
requires that all public accommodations and commercial facilities meet certain
federal requirements related to access and use by disabled persons, and
various state laws governing such matters as minimum wages, overtime and other
working conditions.
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 closed facilities. In 1994, hydrocarbons
were discovered in the groundwater at a former Royal Crown distribution site
in Miami, Florida. Assessment is proceeding under the direction of the Dade
County Department of Environmental Resources Management 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 28, 1997) will be approximately $59,000 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 at this site. Management
estimates the total cost of remediation to be approximately $60,000 (in excess
of amounts incurred through December 28, 1997), of which 60-70% is expected to
be reimbursed by the State of Texas Petroleum Storage Tank Remediation Fund.
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Royal Crown has incurred actual costs of $714,000, in the aggregate, through
December 28, 1997 for these matters. The Company does not believe that the
ultimate outcome of these matters will have a material adverse effect on its
consolidated results of operations or financial position.
SEASONALITY
The Company's 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 28, 1997, the Company employed approximately 325 personnel,
including approximately 295 salaried personnel and approximately 30 hourly
personnel. The Company's management believes that employee relations are
satisfactory. At December 28, 1997, none of the Company's employees were
represented by labor unions.
Item 2. Properties.
The Company maintains several properties. Management believes that these
properties, taken as a whole, are generally well maintained and are adequate
for current and foreseeable business needs. 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 28, 1997 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
TBG Headquarters
White Plains, NY * 1 leased 13,400
Restaurant........ TRG Headquarters
Fort Lauderdale, FL * 1 leased 47,300
- ---------
* Royal Crown shares approximately one-quarter of a 53,600 square foot lease
for TBG's headquarters in White Plains, NY. Royal Crown also subleases
approximately 3,500 square feet of the above space in TRG's headquarters.
TRG also owns six and leases 24 restaurants which are leased or sublet
principally to franchisees and has leases for 11 inactive properties.
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, Inc. ("Arby's") in Mexico, commenced an action in the
civil court of Mexico against Arby's for breach of contract. AR alleged that a
non-binding letter of intent dated November 9, 1994 between AR and Arby's
constituted a binding contract pursuant to which Arby's had obligated itself
to repurchase the master franchise rights from AR for $2.85 million and
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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 $2.85 million, plus interest and value added tax. Arby's has appealed
the civil court's decision. Arby's believes that it has a strong basis for an
appeal because, among other things, the civil court's decision ignored the
arbitration provisions of the franchise and development agreements and the
language of the November 9, 1994 letter. In May 1997, AR commenced an action
against Arby's in the United States District Court for the Southern District
of Florida alleging that (i) Arby's had engaged in fraudulent negotiations
with AR in 1994-1995, in order to force AR to sell the master franchise rights
for Mexico to Arby's cheaply and (ii) Arby's had tortiously interfered with an
alleged business opportunity that AR had with a third party. Arby's has moved
to dismiss that action. Arby's is vigorously contesting AR's various claims
and believes it has meritorious defenses to such claims.
On June 3, 1997, ZuZu, Inc. ("ZuZu") and its subsidiary, ZuZu Franchising
Corporation ("ZFC") commenced an action against Arby's, Inc. and Triarc in the
District Court of Dallas County, Texas. Plaintiffs allege that Arby's and
Triarc conspired to steal the ZuZu Speedy Tortilla concept and convert it to
their own use. ZuZu seeks actual damages in excess of $70.0 million and
punitive damages of not less than $200.0 million against Triarc for its
alleged appropriation of trade secrets, conversion and unfair competition.
Additionally, plaintiffs seek injunctive relief against Arby's and Triarc
enjoining them from disclosing or using ZuZu's trade secrets. ZFC also made a
demand for arbitration with the Dallas, Texas office of the American
Arbitration Association ("AAA") against Arby's alleging that Arby's had
breached a Master Franchise Agreement between ZFC and Arby's. Arby's and
Triarc have moved to dismiss or, in the alternative, abate the Texas court
action on the ground that a Stock Purchase Agreement between Triarc and ZuZu
required that disputes be subject to mediation in Wilmington, Delaware and
that any litigation be brought in the Delaware courts. On July 16, 1997,
Arby's and Triarc commenced a declaratory judgment action against ZuZu and ZFC
in Delaware Chancery Court for New Castle County seeking a declaration that
the claims in both the litigation and the arbitration must be subject to
mediation in Wilmington, Delaware. In the arbitration proceeding, Arby's has
asserted counterclaims against ZuZu for unjust enrichment, breach of contract
and breach of the duty of good faith and fair dealing and has successfully
moved to transfer the proceeding to the Atlanta, Georgia office of the AAA. An
arbitrator has been chosen and discovery is taking place. The arbitration is
expected to commence in April 1998. Arby's and Triarc are vigorously
contesting plaintiffs' claims in both the litigation and the arbitration and
believe that plaintiffs' various claims are without merit. In a related case,
on March 13, 1998 ZuZu franchisees Gregg Katz, Susan Katz Zweig and ZuZu of
Orlando, LLC commenced an action against Arby's, ZuZu, ZFC and Triarc in the
Superior Court of Fulton County, Georgia. Plaintiffs allege, in connection
with the ZuZu handmade Mexican food concept and the ZuZu Speedy Tortilla
concept, that, among other things, the various defendants breached the
development and franchise agreements between the plaintiffs and ZuZu, as well
as other oral agreements, made false representations, intentionally failed to
disclose material information, and violated several Florida and Texas business
opportunity and similar statutes. The plaintiffs seek actual damages of not
less than $600,000, consequential damages, punitive damages, treble damages
and other fees, costs and expenses. While Triarc and Arby's have not yet filed
an answer in this action, they believe the claims are without merit.
Other matters have arisen in the ordinary course of the Company's business,
and it is the opinion of management that the outcome of any such matter will
not have a material adverse effect on the Company's consolidated results of
operations or financial position.
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 Triarc through wholly-owned
subsidiaries.
Item 6.Selected Financial Data.
Year Ended
------------------------------------------------
December 31,
----------------------------------- December 28,
1993 1994 1995 1996 1997(1)
---- ---- ---- ---- -------
(In thousands)
Net sales..................$314,686 $322,888 $389,591 $409,100 $221,077
Royalties, franchise fees
and other revenues....... 46,296 51,017 55,792 57,252 66,233
------- ------- ------- ------- -------
Total revenues............. 360,982 373,905 445,383 466,352 287,310
------- ------- ------- ------- -------
Operating profit (loss).... 9,713(2) 30,074 (4,756)(3)(31,583)(4)40,547 (5)
Loss before extraordinary
charges and cumulative
effect of changes in
accounting principles.... (22,890) (5,477) (33,650)(3)(50,558)(4) (184)(5)
Extraordinary charges...... (7,059) - - - (1,800)
Cumulative effect of change
in accounting principles. (1,891) - - - -
Net loss................... (31,840)(2)(5,477) (33,650)(3)(50,558)(4)(1,984)(5)
Total assets............... 358,657 346,403 404,099 369,642 287,476
Long-term debt and note
payable to affiliate..... 288,394 291,349 357,938 287,810 279,606
Stockholder's deficit(6)... (33,148) (38,625) (63,410) (113,968) (86,860)
- ------------------
(1)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
effective for the 1997 fiscal year which commenced January 1, 1997 and
ended on December 28, 1997.
(2)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.
(3)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 plus a $1,100,000
provision for income tax contingencies.
(4)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
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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 relating to the aggregate of the above
charges.
(5)Reflects certain significant charges recorded during 1997 as follows:
$7,034,000 charged to operating profit for facilities relocation and
corporate restructuring; $5,480,000 charged to loss before extraordinary
charges and cumulative effect of changes in accounting principles
representing the aforementioned $7,034,000 charged to operating profit,
less $1,554,000 of income tax benefit on such charge; and $7,280,000
charged to net loss representing the aforementioned $5,480,000 charge to
loss before extraordinary charges and cumulative effect of changes in
accounting principles and a $1,800,000 extraordinary charge from the early
extinguishment of debt.
(6)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
its direct parent 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. 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 express or implied by such forward-looking statements. See
"Special Note Regarding Forward-Looking Statements and Projections" in "Part
I" preceding "Item 1".
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 1997 fiscal
year commenced January 1, 1997 and ended on December 28, 1997. As used herein,
"1997" refers to the period January 1, 1997 through December 28, 1997 and
"1996" and "1995" refer to the calendar years ended December 31, 1996 and
1995, respectively.
Results of Operations
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.
Trends affecting the restaurant segment (TRG) 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. However,
following the sale of all of the 355 company-owned Arby's restaurants on May
5, 1997 (the "RTM Sale") to an affiliate of RTM, Inc. ("RTM"), the largest
franchisee in the Arby's system (see below under "Liquidity and Capital
Resources"), the effects of the trends on the restaurant segment are currently
limited to their impact on franchise fees and royalties.
1997 Compared with 1996
Revenues decreased $179.1 million (38.4%) to $287.3 million in 1997.
Restaurant revenues decreased $147.9 million (51.3%) to $140.4 million
principally reflecting the nonrecurring sales for the period from May 5, 1996
through December 31, 1996 resulting from the RTM Sale on May 5, 1997. Aside
from the effect on sales of the RTM Sale, restaurant revenues increased $6.5
million (4.8%) due to a $9.0 million (15.7%) increase in royalties and
franchise fees partially offset by a $2.5 million (3.2%) decrease in net sales
of company-owned Arby's restaurants through the date of the May 5, 1997 RTM
Sale, compared with the comparable 1996 period. The increase in royalties and
franchise fees is due to (i) incremental royalties of $6.2 million for the
period from May 5, 1997 through December 28, 1997 from the 355 restaurants
sold to RTM, (ii) a net increase of 69 (2.6%) franchised restaurants other
than from the RTM Sale and (iii) a 1.7% increase in same-store sales of
franchised restaurants. Beverage revenues decreased $31.2 million (17.5%) to
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$146.9 million due to decreases in sales of finished goods ($21.7 million)
and concentrate ($9.5 million). The decrease in sales of finished goods
principally reflects (i) the absence in the 1997 period of 1996 sales to
MetBev, Inc. ("MetBev"), a former distributor of the Company's beverage
products in the New York City metropolitan area and a volume decrease in sales
of Royal Crown branded finished products in areas other than those serviced by
MetBev (where in both instances the Company now sells concentrate rather than
finished goods), (ii) a volume decrease in sales of the C&C beverage line of
mixers, colas and flavors (where the Company now sells concentrate to the
purchaser of the C&C beverage line rather than finished goods), the rights to
which (including the C&C trademark) were sold in July 1997 (the "C&C Sale") as
described below and (iii) a volume reduction in the sales of finished Royal
Crown Premium Draft Cola ("Draft Cola") which the Company no longer sells.
Sales of concentrate decreased, despite the shift in sales to concentrate from
finished goods noted above, principally reflecting (i) a decrease in branded
sales due to volume declines, which were adversely affected by soft bottler
case sales and (ii) an overall lower average concentrate selling price.
Gross profit (total revenues less cost of sales) decreased $26.7 million
to $186.8 million in 1997 while gross margins (gross profit divided by total
revenues) increased to 65.0% compared with 45.8% for the same period of the
prior year. Restaurant gross profit declined $15.9 million to $81.2 million
due to a $24.9 million decrease in store gross profit partially offset by the
$9.0 million increase in royalties and franchise fees (with no associated cost
of sales) described above. The decrease in store gross profit is principally
due to the non-recurring 1996 gross profit associated with the company-owned
Arby's restaurants sold to RTM partially offset by the absence in 1997 of
depreciation and amortization on all long-lived restaurant assets which had
been written down to their estimated fair values as of December 31, 1996 and
were no longer depreciated or amortized through their May 5, 1997 date of
sale. Aside from the effect on sales of the RTM Sale, restaurant gross margins
increased to 57.8% from 44.9% primarily due to (i) the higher percentage of
royalties and franchise fees to total revenues in 1997 due to the RTM Sale
discussed above and (ii) the absence in 1997 of depreciation and amortization
on all long-lived restaurant assets as discussed above. Beverage gross profit
declined $10.8 million to $105.6 million principally due to the decline in
sales volume discussed above, whereas beverage gross margins increased to
71.9% from 65.4% principally due to the shift in product mix to higher-margin
concentrate sales compared with finished product sales discussed above.
Advertising, selling and distribution expenses decreased $25.0 million to
$77.5 million in 1997. Restaurant advertising expenses declined $16.7 million
principally due to the cessation of local restaurant advertising and marketing
expenses resulting from the RTM Sale. Beverage advertising expenses declined
$8.3 million principally due to (i) lower bottler promotional reimbursements
resulting from the decline in sales volume, (ii) the elimination of
advertising expenses for Draft Cola and (iii) planned reductions in connection
with the aforementioned decreases in sales of other Royal Crown and C&C
branded finished products.
General and administrative expenses decreased $15.5 million to $61.8
million in 1997 principally due to reduced spending levels related to
administrative support, principally payroll, no longer required for the sold
restaurants as a result of the RTM Sale and, to a lesser extent, reduced
travel activity in the restaurant segment prior to the RTM Sale.
The 1997 facilities relocation and corporate restructuring charge of $7.0
million consists of employee severance and related termination costs and
employee relocation associated with restructuring the restaurant segment in
connection with the RTM Sale and, to a lesser extent, costs associated with
the relocation (the "Royal Crown Relocation") of the Fort Lauderdale, Florida
headquarters of Royal Crown, which has been centralized in the White Plains,
New York headquarters of Triarc's other beverage subsidiaries. The 1996
facilities relocation and corporate restructuring charge of $6.3 million
results from (i) estimated losses on planned subleases (principally for the
write-off of nonrecoverable unamortized leasehold improvements and furniture
and fixtures) of surplus office space as a result of the then planned sale of
company-owned restaurants and the Royal Crown Relocation, (ii) employee
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severance costs associated with the Royal Crown Relocation and (iii) costs of
the shutdown of the beverage segment's Ohio production facility.
No provision for reduction in carrying value of long-lived assets impaired
or to be disposed of was required for 1997. The 1996 reduction in carrying
value of long-lived assets impaired or to be disposed of is discussed below
under "1996 Compared with 1995".
Interest expense decreased $7.2 million to $35.7 million in 1997 primarily
due to (i) the assumption by RTM of an aggregate $69.6 million of mortgage and
equipment notes payable and capitalized lease obligations in connection with
the RTM Sale on May 5, 1997, (ii) the absence in 1997 of losses incurred in
1996 on an interest rate swap agreement which terminated in September 1996 and
(iii) lower average borrowings in 1997 under a demand note payable to Triarc
(the "Demand Note") due to the forgiveness on May 5, 1997 of all $23.2 million
then outstanding as a capital contribution to the Company and the cessation of
interest expense on $6.5 million of an outstanding balance repaid effective
May 5, 1997 under another note payable to Triarc, both in connection with the
RTM Sale.
Other income (expense), net deteriorated $0.7 million to an expense of
$0.1 million in 1997 principally due to a $4.1 million loss from the RTM Sale
partially offset by (i) a $0.9 million gain on lease termination for a portion
of the space no longer required in the Fort Lauderdale facility due to staff
reductions as a result of the RTM Sale and the Royal Crown Relocation, (ii) a
$0.7 million increase in interest income from invested cash, (iii) a $0.6
million gain recognized from the C&C Sale and (iv) $1.3 million of increased
gains on other asset sales.
The Company's provision for and benefit from income taxes in 1997 and 1996
represented effective rates of 104% and 32%, respectively. Such rate is higher
in 1997 due principally to the differing impact on the respective effective
rates of the amortization of nondeductible costs in excess of net assets of
acquired companies ("Goodwill") in a period with pre-tax income compared with
a period with a pre-tax loss.
The extraordinary charge of $1.8 million incurred during 1997 resulted
from the assumption by RTM of mortgage and equipment notes payable in
connection with the RTM Sale and consists of the write-off of previously
unamortized deferred financing costs of $3.0 million net of income tax benefit
of $1.2 million.
1996 Compared with 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) an 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 an increase in same-store sales and (ii) an increase in
royalties and franchise fees 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 decrease 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) an increase in
finished beverage 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 volume increase in private
label concentrate sales, both partially offset by a decrease in branded
concentrate sales principally reflecting lower average selling prices.
Gross profit 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
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beef costs and health 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 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 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. 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 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 principally 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 then planned sale of all company-owned
restaurants. 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 reduction
in the net carrying value of certain restaurants and other long-lived
restaurant assets which were determined to be impaired and a 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 is discussed above.
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
principally during the second through fourth quarters of 1995 ($58.4 million
was outstanding at December 31, 1996).
Other income (expense), net improved $2.4 million to income of $0.6
million in 1996 principally due 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 Goodwill 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.
19
<PAGE>
Liquidity and Capital Resources
Consolidated cash and cash equivalents (collectively "cash") increased
$3.1 million during 1997 to $10.5 million. Such increase reflects (i) cash
provided by financing activities of $5.5 million (a capital contribution of
$6.2 million and net borrowings of $3.5 million from Triarc, net of repayments
of long-term debt of $4.2 million) and (ii) cash provided by investing
activities of $1.7 million (proceeds from sales of properties and the C&C Sale
of $3.2 million less capital expenditures of $1.5 million), partially offset
by cash used in operating activities of $4.1 million. The net cash used in
operating activities reflects (i) a net loss of $2.0 million and (ii) cash
used by changes in operating assets and liabilities of $20.3 million, both
partially offset by net non-cash charges of $18.2 million consisting of (a)
depreciation and amortization of $14.1 million (including a $3.0 million
write-off of unamortized deferred financing costs), (b) provision for doubtful
accounts of $2.9 million and (c) other of $1.2 million. The cash used by
changes in operating assets and liabilities of $20.3 million principally
reflects a $19.6 million decrease in accounts payable and accrued expenses,
primarily due to the paydown of payables and accruals subsequent to the RTM
Sale and C&C Sale which related to those sold operations. In conjunction with
the full year effect of the change in the restaurant operations to exclusively
franchising (see below) and the resulting anticipated improvement in operating
results, the Company expects cash flows from operations during 1998 to be
positive.
Working capital (current assets less current liabilities) was $8.8 million
at December 28, 1997, reflecting a current ratio (current assets divided by
current liabilities) of 1.1:1. Such amount represents an increase in working
capital of $47.8 million from December 31, 1996 principally reflecting (i) the
$3.1 million increase in cash discussed above, (ii) the $19.6 million decrease
in accounts payable and accrued expenses discussed above, (iii) a $12.9
million increase in current deferred income taxes reflecting an $11.8 million
increase in the net operating loss carryforward under the tax sharing
agreement with Triarc and (iv) a $12.6 million decrease in notes payable to
affiliates reflecting the capital contribution forgiving the Demand Note (see
below).
On May 5, 1997, certain of the subsidiaries of the Company sold to RTM all
of the 355 company-owned Arby's restaurants. The sales price consisted of cash
and a promissory note (discounted value) aggregating $3.5 million (including
$2.1 million of post-closing adjustments) and the assumption by RTM of
mortgage and equipment notes payable to FFCA Mortgage Corporation ("FFCA") of
$54.7 million (the "FFCA Borrowings") and capitalized lease obligations of
$14.9 million. RTM now operates the 355 restaurants as a franchisee and pays
royalties to the Company at a rate of 4% of those restaurants' net sales.
As a result of the RTM Sale, the Company's remaining restaurant operations
are exclusively franchising. The restaurant segment, without the operation of
the company-owned restaurants, has begun to experience and will continue to
benefit from improved cash flow as a result of (i) substantially reduced
capital expenditures, (ii) higher royalty fees as a result of the
aforementioned royalties relating to the restaurants sold to RTM and (iii) the
reduction of operating costs, a process begun in the second quarter and whose
full year effect should be realized in 1998.
On July 18, 1997, the Company completed the C&C Sale consisting 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 consideration of $0.8 million in cash and
an $8.6 million note (the "Kelco Note") with a discounted value of $6.0
million consisting of $3.6 million relating to the C&C Sale and $2.4 million
relating to future revenues for services to be performed over seven years. The
Kelco Note is due in monthly installments of varying amounts of approximately
$0.1 million through August 2004.
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. Under the indenture pursuant to which the
20
<PAGE>
Senior Notes were issued (the "Senior Note Indenture"), substantially all of
the Company's assets other than cash and cash equivalents are pledged as
security. Obligations under the Senior Notes have been guaranteed by Royal
Crown and TRG and all of the stock of Royal Crown and TRG are pledged as
collateral for such guarantees. 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 28, 1997 RCAC could not pay any dividends, or make any loans or
advances, to Its direct parent.
The Company has $3.8 million and $0.5 million, respectively, as of
December 28, 1997 of remaining FFCA mortgage notes and equipment notes after
the assumption of the FFCA Borrowings. Such mortgage and equipment notes are
repayable in equal monthly installments, including interest, through 2016 and
2003, respectively. Amounts due under these notes in 1998 aggregate $0.7
million consisting of $0.6 million to be assumed by RTM (and offset against a
receivable from RTM for an equal amount) and $0.1 million to be paid in cash.
During 1997 the Company reduced its borrowings from Triarc and its
subsidiaries to $1.2 million (payable in 1998) from $20.5 million as of
December 31, 1996, while a demand note receivable increased $0.4 million to
$2.0 million. In May 1997, in connection with the RTM Sale, two subsidiaries
of the Company issued common shares representing 49% of each of their common
stock after such issuances to Triarc in exchange for consideration of $32.0
million consisting of cash of $6.2 million and forgiveness of the then
outstanding balance of $23.2 million ($12.0 million as of December 31, 1996)
under the Demand Note plus related accrued interest of $2.6 million. The $29.4
million excess of the consideration for the stock issued to Triarc of $32.0
million over Triarc's 49% minority interest in the two subsidiaries of $2.6
million as of May 5, 1997 was accounted for as a capital contribution to the
Company. In addition, $6.5 million of a note due in February 1998 with an
outstanding balance of $6.7 million as of December 31, 1996 was repaid to
Triarc.
Consolidated capital expenditures amounted to $1.5 million in 1997, which
reflects reduced spending levels from 1996, principally in the restaurant
segment, first in anticipation of and then as a result of the consummation of
the RTM Sale. The Company expects that capital expenditures during 1998 will
approximate $1.4 million, exclusive of $4.6 million the Company was required
to reinvest in core business assets pursuant to the Senior Note Indenture as a
result of the C&C Sale and certain other asset disposals. As of December 28,
1997, there were no outstanding commitments for such estimated capital
expenditures other than the $4.6 million reinvestment requirement made in
January 1998.
Although the Company made no business acquisitions during 1997, 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.
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 has experienced additional
losses in 1994 through 1997. As a result, no subsequent payment has been
required through December 28, 1997 and, considering the $35.5 million of net
operating loss carryforwards under the Tax Sharing Agreement, the Company does
not expect to be required to make any such payments during 1998.
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
21
<PAGE>
$13.0 million. Triarc, on behalf of the Company, has resolved approximately
$10.0 million of such proposed adjustments and, in connection therewith, the
Company paid $4.6 million, including interest, in the fourth quarter of 1997.
The Company intends to contest the unresolved adjustments of approximately
$3.0 million at the appellate division of the IRS and, accordingly, the amount
of any payments required as a result thereof cannot presently be determined.
As of December 28, 1997, the Company had cash of $10.5 million available
to meet its cash requirements. The Company's cash requirements for 1998,
exclusive of operating cash flows, consist principally of (i) capital
expenditures of $6.0 million, including the reinvestment requirement of $4.6
million made in January 1998, (ii) debt principal repayments of $2.1 million,
including $1.2 million under affiliated notes, $0.8 million under other notes
and $0.1 million under the FFCA Loan Agreements (exclusive of the $0.6 million
to be assumed by RTM), (iii) payments, if any, to the IRS in connection with
the $3.0 million of proposed adjustments relating to the Company from the
examination of Triarc's income tax returns for the tax years 1989 through 1992
and (iv) the cost of business acquisitions, if any. The Company anticipates
meeting all such requirements through existing cash and/or cash flows from
operations and borrowings from Triarc under the Demand Note, to the extent
available.
Legal and Environmental Matters
The Company is involved in litigation, claims and environmental matters
incidental to its business. The Company has reserves for such legal and
environmental matters aggregating approximately $1.1 million as of December
28, 1997. Although the outcome of such matters cannot be predicted with
certainty and some of these 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
results of operations or financial position.
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. An assessment of the readiness of
third party entities with which the Company has relationships, such as its
suppliers, customers and payroll processor and others, is ongoing. As a result
of such study, the Company believes the majority of its systems are year 2000
compliant. However, certain systems, which are significant to the Company,
require remediation. The Company currently estimates it will complete the
required remediation by the end of the first half of 1999. The current
estimated cost of such remediation is approximately $1.5 million, including
computer software costs. Such costs, other than software, will be expensed as
incurred.
Inflation and Changing Prices
Management believes that inflation did not have a significant effect on
gross margins during 1995, 1996 and 1997, 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 June 1997 the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130 ("SFAS 130") "Reporting Comprehensive Income". SFAS 130 requires
that all items which are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income is defined as the change in the stockholder's equity
during a period exclusive of stockholder investments and distributions to the
22
<PAGE>
stockholder. For the Company, in addition to net income (loss), comprehensive
income includes any changes in the currency translation adjustment. In June
1997 the FASB also issued SFAS No. 131 ("SFAS 131") "Disclosures about
Segments of an Enterprise and Related Information" which supersedes SFAS No.
14 "Financial Reporting for Segments of a Business Enterprise". SFAS 131
requires disclosure in the Company's consolidated financial statements
(including quarterly condensed consolidated financial statements) of financial
and descriptive information by operating segment as used internally for
evaluating segment performance and deciding how to allocate resources to
segments. SFAS 130 and SFAS 131 are effective for the Company's fiscal year
beginning December 29, 1997 (exclusive of the quarterly segment data under
SFAS 131 which is effective the following fiscal year) and require comparative
information for earlier periods presented. The application of the provisions
of both SFAS 130 and SFAS 131 will require an additional financial statement
and may result in changes to segment disclosures but will not have any effect
on the Company's reported consolidated results of operations or financial
position.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. 25
Consolidated Balance Sheets as of December 31, 1996 and December 28, 1997. 26
Consolidated Statements of Operations for the years ended December 31,
1995 and 1996 and the fiscal year ended December 28, 1997............... 27
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended December 31, 1995 and 1996 and the fiscal year ended
December 28, 1997....................................................... 28
Consolidated Statements of Cash Flows for the years ended December 31,
1995 and 1996 and the fiscal year ended December 28, 1997............... 29
Notes to Consolidated Financial Statements................................ 31
24
<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 28, 1997 and December 31, 1996, and the related
consolidated statements of operations, stockholder's equity (deficit) and cash
flows for each of the three fiscal years in the period ended December 28,
1997. 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
28, 1997 and December 31, 1996 and the results of their operations and their
cash flows for each of the three fiscal years in the period ended December 28,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 10, 1998
25
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 28,
1996 1997
---- ----
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ($-0- and $7,075,000)........ $ 7,411 $10,463
Receivables, net (Note 4).............................. 35,151 34,991
Note receivable from affiliate (Note 13)............... 1,650 2,000
Inventories (Note 4)................................... 12,110 12,444
Assets held for sale (Note 3).......................... 71,116 -
Deferred income tax benefit (Note 7)................... 8,568 21,537
Prepaid expenses and other current assets.............. 6,761 3,583
-------- --------
Total current assets................................. 142,767 85,018
Properties, net (Note 4)................................. 11,943 8,805
Unamortized costs in excess of net assets of acquired
companies (Note 4)..................................... 159,123 153,396
Deferred income tax benefit (Note 7)..................... 33,429 20,246
Deferred costs and other assets (Note 4)................. 22,380 20,011
-------- --------
$369,642 $287,476
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt (Notes 3, 5 and 6)... $ 73,055 $ 1,556
Notes payable to affiliates (Notes 5 and 13)........... 13,765 1,200
Accounts payable....................................... 24,027 13,584
Due to affiliates (Note 13)............................ 12,283 8,062
Accrued expenses (Note 4).............................. 58,659 51,846
-------- --------
Total current liabilities............................ 181,789 76,248
Long-term debt (Notes 5 and 6)........................... 281,110 279,606
Note payable to affiliate (Notes 5 and 13)............... 6,700 -
Deferred income and other liabilities.................... 14,011 18,482
Commitments and contingencies (Notes 2, 7,10, 11 and 12)
Stockholder's equity (deficit) (Notes 5, 10 and 13):
Common stock, $1.00 par value; authorized 3,000 shares;
issued and outstanding 1,000 shares.................. 1 1
Additional paid-in capital............................. 44,300 73,690
Accumulated deficit.................................... (158,269) (160,253)
Currency translation adjustment........................ - (298)
-------- --------
Total stockholder's deficit.......................... (113,968) (86,860)
-------- --------
$369,642 $287,476
======== ========
See accompanying notes to consolidated financial statements.
26
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
----------------------------
December 31,
----------------- December 28,
1995 1996 1997
------- -------- --------
(In thousands)
Revenues:
Net sales..................................... $389,591 $409,100 $221,077
Royalties..................................... 50,135 53,639 62,388
Franchise fees................................ 4,648 2,834 3,149
Other revenues................................ 1,009 779 696
-------- -------- --------
445,383 466,352 287,310
-------- -------- --------
Costs and expenses:
Cost of sales................................. 239,870 252,811 100,470
Advertising, selling and distribution (Note 1) 108,584 102,535 77,497
General and administrative.................... 87,038 77,339 61,762
Reduction in carrying value of long-lived assets
impaired or to be disposed of (Note 3)....... 14,647 58,900 -
Facilities relocation and corporate
restructuring (Note 8)....................... - 6,350 7,034
-------- -------- --------
450,139 497,935 246,763
-------- -------- --------
Operating profit (loss).................... (4,756) (31,583) 40,547
Interest expense................................ (39,565) (42,883) (35,749)
Other income (expense), net (Notes 3 and 13).... (1,818) 562 (50)
-------- -------- -------
Income (loss) before income taxes
and extraordinary charge.................. (46,139) (73,904) 4,748
Benefit from (provision for) income taxes
(Note 7)...................................... 12,489 23,346 (4,932)
-------- -------- -------
Loss before extraordinary charge........... (33,650) (50,558) (184)
Extraordinary charge (Note 9)................... - - (1,800)
-------- -------- -------
Net loss................................... $(33,650) $(50,558) $(1,984)
======== ======== =======
See accompanying notes to consolidated financial statements.
27
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the three years ended December 28, 1997
Common Stock
----------------- Additional Currency
Number Paid-In Accumulated Translation
of Shares Amount Capital Deficit Adjustment
--------- ------ ------- ------- ----------
(Dollars in thousands)
Balance at December 31, 1994.. 1,000 $ 1 $ 35,435 $(74,061) $ -
Capital contribution
(Note 13)................. - - 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) -
Capital contribution
(Note 13)................. - - 29,390 - -
Net loss................... - - - (1,984) -
Net change in currency
translation adjustment... - - - - (298)
----- ------ -------- --------- --------
Balance at December 28, 1997.. 1,000 $ 1 $ 73,690 $(160,253) $ (298)
===== ====== ======== ========= ========
See accompanying notes to consolidated financial statements.
28
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
----------------------------
December 31,
---------------- December 28,
1995 1996 1997
------ ------ ------
(In thousands)
Cash flows from operating activities:
Net loss..................................... $ (33,650) $ (50,558) $ (1,984)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of costs in excess of net
assets of acquired companies and
other intangibles....................... 9,399 8,597 7,204
Depreciation and amortization
of properties........................... 13,768 14,095 1,803
Reduction in carrying value of
long-lived assets....................... 14,647 58,900 -
Amortization of deferred financing costs.. 2,204 2,369 2,174
Write-off of unamortized deferred
financing costs......................... - - 2,950
Provision for facilities relocation
and corporate restructuring............. - 6,350 7,034
Payments on facilities relocation
and corporate restructuring............. (711) (224) (6,097)
Provision for doubtful accounts........... 1,970 3,095 2,892
Provision for (benefit from) deferred
income taxes............................ (10,477) (24,377) 214
Other, net................................ (580) (91) 44
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables........................... (5,074) (7,576) 1,011
Inventories........................... (2,367) 1,120 (2,862)
Prepaid expenses and other
current assets....................... (999) 91 2,709
Increase (decrease) in:
Accounts payable and accrued expenses. 5,262 (728) (19,632)
Due to affiliates..................... 6,631 2,404 (1,584)
------- ------- -------
Net cash provided by (used in) operating
activities.................................... 23 13,467 (4,124)
------- ------- -------
Cash flows from investing activities:
Proceeds from sales of properties
and businesses............................. 1,997 1,408 3,175
Capital expenditures......................... (48,556) (16,175) (1,480)
Business acquisitions........................ (14,335) (1,972) -
Investment in affiliate...................... (1,000) - -
------- ------- -------
Net cash provided by (used in) investing
activities.................................... (61,894) (16,739) 1,695
------- ------- -------
Cash flows from financing activities:
Capital contribution......................... 8,865 - 6,211
Net borrowings from affiliates............... 5,950 3,690 3,535
Repayments of long-term debt................. (3,358) (6,453) (4,265)
Proceeds from long-term debt ................ 61,620 4,027 -
Deferred financing costs..................... (3,347) (325) -
------- ------- -------
Net cash provided by financing activities....... 69,730 939 5,481
------- ------- -------
Net increase (decrease) in cash................. 7,859 (2,333) 3,052
Cash at beginning of year....................... 1,885 9,744 7,411
------- ------- -------
Cash and cash equivalents at end of year........ $ 9,744 $ 7,411 $10,463
======= ======= =======
(continued)
29
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Year ended
---------------------------
December 31,
--------------- December 28,
1995 1996 1997
------ ------ ------
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest....................................... $36,683 $ 37,931 $36,634
======= ======== =======
Income taxes (refunds), net.................... $ 740 $ (101) $ 3,059
======= ======== =======
Supplemental disclosures of noncash investing and
financing activities:
Total capital expenditures..................... $48,918 $ 16,175 $ 1,480
Amounts representing capitalized leases........ (362) - -
------- -------- -------
Capital expenditures paid in cash............ $48,556 $ 16,175 $ 1,480
======= ======== =======
As described in Note 13, in May 1997 two subsidiaries of the Company issued
common shares representing 49% of each of their common stock after such
issuances to Triarc Companies, Inc. ("Triarc"), the Company's indirect parent,
in consideration for forgiveness of the then outstanding principal balance and
accrued interest aggregating $25,788,000 under a note payable by the Company
to Triarc together with cash of $6,211,000.
See accompanying notes to consolidated financial statements.
30
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1997
(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. (d/b/a Triarc Restaurant
Group - "TRG"). Additionally, the Company has three which, prior to the May
1997 sale of all company-owned restaurants (see Note 3), owned and/or operated
Arby's restaurants, consisting of 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.
Change in Fiscal Year
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 1997 fiscal
year commenced January 1, 1997 and ended December 28, 1997. Such period is
referred to herein as "the year ended December 28, 1997" or "1997". December
28, 1997 and December 31, 1996 are referred to herein as "Year-End 1997" and
"Year-End 1996", respectively.
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
acquired are considered cash equivalents. The Company typically invests its
excess cash in commercial paper of high credit-quality entities and in a U.S
Treasury money market fund.
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 computed on the
straight-line basis using the estimated useful lives of the related major
classes of properties: 3-15 years for machinery and equipment and 15-40 years
for buildings. Leased assets capitalized and leasehold improvements are
amortized over the shorter of their estimated useful lives or the terms of the
respective leases.
31
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
Amortization of Intangibles
Costs in excess of net assets of acquired companies ("Goodwill") are being
amortized on the straight-line basis over 31 to 40 years. Goodwill associated
with certain restaurant acquisitions was amortized over 15 years prior to
being written off as of December 31, 1996. Trademarks are being amortized on
the straight-line basis over 15 years. Deferred financing costs are being
amortized as interest expense over the lives of the respective debt using the
interest rate 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
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 (see Note 3).
Derivative Financial Instrument
The Company had an interest rate swap agreement (see Note 5) entered into in
order to synthetically alter the interest rate of certain of the Company's
fixed-rate debt until the agreement'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. Thus
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.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared in their
respective local currencies and translated into United States dollars at the
current exchange rates for assets and liabilities and an average rate for the
year of revenues, costs and expenses. Net gains or losses resulting from the
translation of foreign financial statements are charged or credited directly
to the "Currency translation adjustment" component of "Stockholder's equity
(deficit)".
32
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
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 $37,064,000, $31,056,000 and $16,068,000 for
1995, 1996 and 1997, respectively. In addition the Company supports its
beverage bottlers and distributors with promotional allowances, a portion of
which is utilized for indirect advertising by such bottlers and distributors.
Promotional allowances amounted to $58,431,000, $55,982,000 and $48,528,000
for 1995, 1996 and 1997, 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 development agreements 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
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 28, 1997): beverages (51%) and restaurants (49%).
The beverage segment produces and sells concentrates used in the production
and distribution of soft drinks by independent bottlers under the brand names
RC Cola(R), Diet RC Cola(R), Diet Rite Cola(R), Diet Rite(R) flavors, Nehi(R),
Upper 10(R), and Kick(R). The restaurant segment primarily franchises Arby's
quick service restaurants representing the largest franchise restaurant system
specializing in roast beef sandwiches. Prior to the May 1997 sale of all
company-owned restaurants, the Company also operated Arby's(R) restaurants
(see Note 3). The Company operates its businesses principally throughout the
United States with minimal foreign exposure.
33
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
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 provisions for
examinations of Triarc's income tax returns by the Internal Revenue Service
("IRS") (see Note 7).
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 somewhat mitigated due to the diversification of its two
businesses. In addition, no customer accounted for more than 10% of
consolidated revenues in 1997. While the beverage segment has chosen to
purchase certain raw materials (such as aspartame) on an exclusive basis from
single suppliers, the Company believes that, if necessary, adequate raw
materials can be obtained from alternate sources. Risk of geographical
concentration is also minimized since each of the businesses generally
operates throughout the United States with minimal foreign exposure.
(3) Dispositions and Prior Year Business Acquisitions
Sale of Restaurants
On May 5, 1997 certain subsidiaries of the Company sold to an affiliate of
RTM, Inc. ("RTM"), the largest franchisee in the Arby's system, all of the 355
company-owned restaurants (the "RTM Sale"). The sales price consisted of cash
and a promissory note (discounted value) aggregating $3,471,000 (including
$2,092,000 of post-closing adjustments) and the assumption by RTM of an
aggregate $54,682,000 in mortgage and equipment notes payable and $14,955,000
in capitalized lease obligations. RTM now operates the 355 restaurants as a
franchisee and pays royalties to the Company at a rate of 4% of those
restaurants' net sales effective May 5, 1997. In 1997 the Company recorded a
$4,089,000 loss on the sale included in "Other income (expense), net", which
(i) includes a $1,457,000 provision for the fair value of the Company's
effective guarantee of future lease commitments and debt repayments assumed by
RTM for which the Company or Triarc remains contingently liable if the
payments are not made by RTM and (ii) is exclusive of an extraordinary charge
in connection with the early extinguishment of debt (see Note 9). The results
of operations of the sold restaurants have been included in the accompanying
consolidated statements of operations until the May 5, 1997 date of sale.
Following the RTM Sale, the Company continues as the franchisor of the more
than 3,000 store Arby's system. See below under "Pro Forma Operating Data" for
the unaudited supplemental pro forma condensed summary operating data of the
Company (the "Pro Forma Data") for the years ended December 31, 1996 and
December 28, 1997 giving effect to the RTM Sale and the C&C Sale (see below).
In 1996 the Company recorded a $58,900,000 charge reported as "Reduction in
carrying value of long-lived assets impaired or to be disposed of" to (i)
reduce the carrying value of the long-lived assets to be sold (reported as
34
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
"Assets held for sale" in the accompanying consolidated balance sheet as of
December 31, 1996) by $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 would not be assumed by the
purchaser and estimated closing costs. The estimated fair value was determined
based on the terms of the February 1997 agreement for the RTM Sale including
the then 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 reflected $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 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 as of December 31,
1995 resulted in a pre-tax loss of $806,000 for the year ended December 31,
1995.
C&C Sale
On July 18, 1997, the Company completed the sale (the "C&C Sale" and,
together with the RTM Sale, the "Sales") of its rights to the C&C beverage
line of mixers, colas and flavors, including the C&C trademark and equipment
related to the operation of the C&C beverage line, to Kelco Sales & Marketing
Inc. ("Kelco"), for $750,000 in cash and an $8,650,000 note (the "Kelco Note")
with a discounted value of $6,003,000 consisting of $3,623,000 relating to the
C&C Sale and $2,380,000 relating to future revenues. The $2,380,000 of
deferred revenues consists of (i) $2,096,000 relating to minimum take-or-pay
commitments for sales of concentrate for C&C products to Kelco and (ii)
$284,000 relating to future technical services to be performed for Kelco by
the Company, both under the contract with Kelco. The excess of the proceeds of
$4,373,000 over the carrying value of the C&C trademark of $1,575,000 and the
related equipment of $2,000 resulted in a pretax gain of $2,796,000 which,
commencing in the third quarter of 1997, is being recognized pro rata between
the gain on sale and the carrying value of the assets sold based on the cash
proceeds and collections under the Kelco Note since realization of the Kelco
Note is not yet fully assured. Accordingly, a gain of $576,000 was recognized
in "Other income (expense), net" in the accompanying consolidated statement of
operations for the year ended December 28, 1997. See below under "Pro Forma
Operating Data" for the Pro Forma Data giving effect to the Sales.
Pro Forma Operating Data (Unaudited)
The following Pro Forma Data of the Company for the years ended December 31,
1996 and December 28, 1997 have been prepared by adjusting the historical data
as set forth in the accompanying consolidated statements of operations to give
effect to the Sales as if the Sales had been consummated as of January 1,
1996. 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, 1996 or of the Company's
35
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
future results of operations and are as follows (in thousands):
1996 1997
------------------------ ------------------------
As Reported Pro Forma(a) As Reported Pro Forma(a)
----------- ------------ ----------- ------------
Revenues.................. $466,352 $236,339 $287,310 $209,240
Operating profit (loss)... (31,583) 34,172 40,547 45,675
Income (loss) before
extraordinary charge.... (50,558) (3,373) (184) 7,305
- --------------------
(a) The effect of the RTM Sale consists of (i) the elimination of revenues
and expenses (including the reduction in carrying value of long-lived assets
impaired or to be disposed of for 1996 and the elimination of loss on sale for
1997) related to the sold Arby's restaurants, (ii) a decrease to interest
expense associated with the assumption of debt by RTM and the forgiveness and
repayment of certain amounts then outstanding under notes payable to Triarc
(see Note 13) and (iii) the income tax effects of the above. The effect of the
elimination of income and expenses of the sold restaurants is significantly
greater in 1996 as compared with 1997 principally due to two 1996 eliminations
which did not recur in 1997 for (i) a $58,900,000 reduction in carrying value
of long-lived assets associated with the restaurants sold and (ii)
depreciation and amortization on the long-lived restaurant assets sold, which
had been written down to their estimated fair values as of December 31, 1996
and were no longer depreciated or amortized while they were held for sale. The
effect of the C&C Sale consists of (i) the elimination of revenues and
expenses related to the C&C beverage line, (ii) realization of deferred
revenues based on the portion of the minimum take-or-pay commitment for sales
of concentrate for C&C products to Kelco and from fees related to technical
services performed, both under the contract with Kelco, (iii) imputation of
interest expense on the deferred revenues, (iv) recognition of the cost of the
concentrate to be sold, (v) elimination of the aforementioned $576,000 gain on
the sale of C&C recorded in 1997, (vi) accretion of the discount on the
portion of the Kelco Note relating to the C&C Sale and (vii) the income tax
effects of the above.
Purchase Price Allocations of Prior Years Acquisitions
The Company consummated several business acquisitions during 1995 and
1996 for cash of $14,335,000 and $1,972,000, respectively. All such
acquisitions have been accounted for in accordance with the purchase method of
accounting. In accordance therewith, the following table sets forth the
allocation of the aggregate purchase prices and a reconciliation to "Business
acquisitions" in the accompanying consolidated statements of cash flows (in
thousands):
1995 1996
---- ----
Deferred costs and other assets..................... $ 4,376 $ 4,268
Properties.......................................... 9,219 -
Goodwill............................................ 2,708 -
Net current assets (liabilities).................... 758 (358)
Other liabilities................................... - (188)
Long-term debt assumed including current portion.... (2,726) -
------- -------
14,335 3,722
Less: Long-term debt issued to sellers.............. - (1,750)
------- -------
$14,335 $ 1,972
======= =======
36
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
Cancellation of Spinoff Transactions
In October 1996 Triarc had announced that its Board of Directors approved a
plan to offer up to approximately 20% of the shares of its beverage and
restaurant businesses (including those of the Company) to the public through
an initial public offering and to spin off the remainder of the shares of such
businesses to Triarc stockholders (collectively, the "Spinoff Transactions").
In May 1997 Triarc announced it would not proceed with the Spinoff
Transactions as a result of its acquisition of Snapple Beverage Corp.
("Snapple") and other issues.
(4) Balance Sheet Detail
Receivables, net
The following is a summary of the components of receivables (in thousands):
Year-End
-----------------
1996 1997
---- ----
Receivables:
Trade...................................... $35,749 $33,843
Other...................................... 4,061 7,833
------- -------
39,810 41,676
Less allowance for doubtful accounts............ 4,659 6,685
------- -------
$35,151 $34,991
======= =======
The following is an analysis of the allowance for doubtful accounts (in
thousands):
1995 1996 1997
------ ------ ------
Balance at beginning of year.......... $ 986 $ 1,910 $4,659
Provision for doubtful accounts
(Note 13)........................... 1,970 3,095 2,892
Recoveries of doubtful accounts....... 44 53 130
Uncollectible accounts written off.... (1,090) (399) (996)
-------- ------- ------
Balance at end of year................ $ 1,910 $ 4,659 $6,685
======== ======= ======
Substantially all receivables are pledged as collateral for certain debt
(see Note 5).
37
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
Inventories
The following is a summary of the components of inventories (in thousands):
Year-End
----------------
1996 1997
---- ----
Raw materials.................................. $ 8,184 $ 5,904
Work in process................................ 467 214
Finished goods................................. 3,459 6,326
------- -------
$12,110 $12,444
======= =======
Substantially all inventories are pledged as collateral for certain debt
(see Note 5).
Properties, net
The following is a summary of the components of properties, net (in
thousands):
Year-End
-----------------
1996 1997
---- ----
Land............................................ $ 3,413 $2,351
Buildings and improvements and
leasehold improvements........................ 11,422 8,277
Machinery and equipment......................... 13,359 8,938
Leased assets capitalized....................... 888 493
------- ------
29,082 20,059
Less accumulated depreciation and amortization.. 17,139 11,254
------- ------
$11,943 $8,805
======= ======
Substantially all properties are pledged as collateral for certain debt
(see Note 5).
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):
Year-End
----------------
1996 1997
---- ----
Costs in excess of net assets of
acquired companies............................ $223,721 $223,721
Less accumulated amortization................... 64,598 70,325
-------- --------
$159,123 $153,396
======== ========
38
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
Deferred Costs and Other Assets
The following is a summary of the components of deferred costs and other
assets (in thousands):
Year-End
----------------
1996 1997
---- ----
Deferred financing costs........................ $18,987 $15,739
Less accumulated amortization of
deferred financing costs....................... 8,077 9,953
------- -------
Deferred financing costs, net................. 10,910 5,786
------- -------
Trademarks...................................... 7,748 5,801
Less accumulated amortization of trademarks..... 934 1,099
------- -------
Trademarks, net............................... 6,814 4,702
------- -------
Notes receivable................................ - 7,181
Other........................................... 4,656 2,342
------- -------
$22,380 $20,011
======= =======
Accrued Expenses
The following is a summary of the components of accrued expenses (in
thousands):
Year-End
----------------
1996 1997
---- ----
Accrued interest................................ $16,949 $15,286
Accrued advertising............................. 12,504 9,436
Accrued compensation and related benefits....... 11,208 6,501
Accrued rent and other costs on closed
restaurants not sold to RTM................... 2,145 4,932
Other........................................... 15,853 15,691
------- -------
$58,659 $51,846
======= =======
39
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
(5) Long-term Debt and Notes Payable to Affiliates
Long-term debt consisted of the following (in thousands):
Year-End
----------------
1996 1997
---- ----
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 10.35% as of December 28, 1997,
due through 2016 (b)............................... 52,136 3,818
Equipment notes payable to FFCA, bearing interest at
10 1/2% at December 28, 1997, due through 2003 (b). 6,236 479
Notes, bearing interest at 7.94% to 9.69%,
due through 1999................................... 4,865 1,396
Capitalized lease obligations (c)................... 15,928 469
-------- --------
Total debt......................................... 354,165 281,162
Less amounts payable within one year............... 73,055 1,556
-------- --------
$281,110 $279,606
======== ========
Notes payable to affiliates consisted of the following (in thousands):
Year-End
-----------------
1996 1997
---- ----
Note payable to Chesapeake Insurance Company
Limited ("Chesapeake Insurance", an
affiliate) bearing interest at 9 1/2%
due in 1998 (Note 13).......................... $1,750 $ 1,000
Note payable to Triarc bearing interest at 11.875%
due in 1998 (Note 13).......................... 6,700 200
Note payable to Triarc bearing interest at 11.875%
due on demand (Note 13)........................ 12,015 -
------ -------
Total notes payable to affiliates.......... 20,465 1,200
Less amounts payable within one year............. 13,765 1,200
------ -------
$6,700 $ -
====== =======
Aggregate annual maturities of long-term debt and notes payable to
affiliates, including capitalized lease obligations, were as follows as of
December 28, 1997 (in thousands):
1998............................................ $ 2,756
1999............................................ 802
2000............................................ 275,187
2001............................................ 208
2002............................................ 232
Thereafter...................................... 3,177
--------
$282,362
========
(a) Prior to 1995 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
40
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
(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 at the maturity of the Swap Agreement 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 through September 24, 1996.
Under the Swap Agreement during 1994 the Company received $614,000 which was
determined at the inception of the Swap Agreement. Subsequently, the Company
paid (i) $2,271,000 during 1995 in connection with such year's two six-month
reset periods and (ii) $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
maturity on September 24, 1996.
(b) ARDC and ARHC maintained loan and financing agreements with FFCA which
permitted borrowings in the form of mortgage notes (the "Mortgage Notes") and
equipment notes (the "Equipment Notes" and, collectively with the Mortgage
Notes, the "FFCA Loan Agreements"). As discussed in Note 3, in May 1997 RTM
assumed an aggregate $54,682,000 of Mortgage Notes and Equipment Notes in
connection with the RTM Sale. The remaining Mortgage Notes and Equipment Notes
are repayable in equal monthly installments, including interest, over twenty
and seven years through 2016 and 2003, respectively.
(c) As discussed in Note 3, in May 1997 RTM assumed $14,955,000 of capitalized
lease obligations associated with the restaurants sold.
Under the indenture (the "Senior Note Indenture") pursuant to which the
Senior Notes were issued, substantially all of the Company's assets other than
cash and cash equivalents are pledged as security. In addition, obligations
under the Senior Notes have been guaranteed by Royal Crown and TRG and all of
the stock of Royal Crown and TRG are pledged as collateral for such
guarantees. Since the non-guarantor subsidiaries, primarily ARDC, ARHC and
AROC, were 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 15.
Triarc remains contingently liable under its guarantee for the borrowings
under the FFCA Loan Agreements which were assumed by RTM in connection with
the RTM sale upon the failure, if any, of RTM to satisfy such obligations. 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 such indenture, as of December 28, 1997 the Company could not pay
any dividends or make any loans or advances to CFC Holdings.
41
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
(6) Fair Value of Financial Instruments
The Company has the following financial instruments for which the disclosure
of fair values is required: cash and cash equivalents, accounts receivable and
payable, affiliated notes receivable and payable, accrued expenses and
long-term debt. The carrying amounts of cash and cash equivalents, affiliated
notes receivable and payable, accounts payable and accrued expenses
approximated fair value due to the short-term maturities of such assets and
liabilities. The carrying amount of accounts receivable approximated fair
value due to the related allowance for doubtful accounts. The carrying amounts
and fair values of long-term debt were as follows (in thousands):
Year-End
----------------------------------------
1996 1997
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Long-term debt (Note 5):
Senior Notes................... $275,000 $283,000 $275,000 $279,000
FFCA Loan Agreements........... 58,372 61,814 4,297 4,612
Other long-term debt........... 20,793 20,793 1,865 1,865
-------- -------- -------- --------
$354,165 $365,607 $281,162 $285,477
======== ======== ======== ========
The fair values of the Senior Notes are based on quoted market prices at the
respective reporting dates. The fair values of the Mortgage Notes and
Equipment Notes under the FFCA Loan Agreements were determined by discounting
the future monthly payments using the then rate of interest available under
such agreements at December 31, 1996 and a rate assumed to be available given
the same spread over a current Treasury bond yield for securities with similar
durations at December 28, 1997. The fair values of all other long-term debt
were assumed to reasonably approximate their carrying amounts since (i) for
capitalized lease obligations, the weighted average implicit interest rate
approximates current levels and (ii) for other notes, the remaining maturities
are relatively short-term.
(7) 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. As of December 31, 1996 and December 28, 1997, the
Company was in a net operating loss position and, as such, all of the
Company's income tax related balances are reported as deferred income taxes.
The income (loss) before income taxes and extraordinary charge consisted of
the following components (in thousands):
1995 1996 1997
-------- -------- --------
Domestic.............................. $(44,191) $(70,496) $ 4,534
Foreign............................... (1,948) (3,408) 214
-------- -------- --------
$(46,139) $(73,904) $ 4,748
======== ======== ========
42
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
The benefit from (provision for) income taxes consisted of the following
components (in thousands):
1995 1996 1997
-------- ------- --------
Current:
Federal................................. $ 1,986 $ 39 $ (3,383)
State................................... 383 (700) (891)
Foreign................................. (357) (370) (444)
------- -------- --------
2,012 (1,031) (4,718)
------- -------- --------
Deferred:
Federal................................. 9,642 21,963 202
State................................... 835 2,414 (416)
Foreign................................. - - -
-------- -------- --------
10,477 24,377 (214)
-------- -------- --------
$ 12,489 $ 23,346 $ (4,932)
======== ======== ========
The current and net non-current deferred income tax assets resulted from the
following components (in thousands):
Year-End
----------------
1996 1997
---- ----
Current deferred income tax assets:
Net operating loss carryforward under tax
sharing agreement with Triarc and state
net operating loss carryforwards.............. $ - $11,809
Accrued employee benefit costs.................. 2,525 1,794
Allowance for doubtful accounts................. 1,729 2,478
Accrued rent and other costs on closed
restaurants not sold to RTM................... 834 1,919
Facilities relocation and corporate restructuring 806 1,185
Accrued interest relating to income tax matters. 1,176 773
Accrued advertising and promotion............... 628 102
Other, net...................................... 870 1,477
------- -------
8,568 21,537
------- -------
Non-current deferred income tax assets (liabilities):
Net operating loss carryforward under tax
sharing agreement with Triarc and state
net operating loss carryforwards.............. 9,198 23,687
Depreciation and other properties
basis differences............................. 27,737 (314)
Reserve for income tax contingencies............ (6,794) (6,388)
Deferred franchise fees......................... 1,330 1,581
Other, net...................................... 1,958 1,680
------- -------
33,429 20,246
------- -------
$41,997 $41,783
======= =======
43
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
As of December 28, 1997 the Company had net operating loss carryforwards
for Federal income tax purposes under its tax sharing agreement with Triarc of
approximately $94,175,000. Such carryforwards will expire approximately
$11,134,000, $6,827,000, $13,575,000, $1,956,000 and $60,683,000 in 2008,
2009, 2010, 2011 and 2012.
The difference between the reported benefit from (provision for) income
taxes and the tax benefit (provision) that would result from applying the 35%
Federal statutory rate to the income (loss) before income taxes and
extraordinary charge is reconciled as follows (in thousands):
1995 1996 1997
------ ------ ------
Income tax benefit (provision) computed at
Federal statutory rate....................$16,149 $25,866 $(1,662)
Decrease (increase) in Federal tax
provision resulting from:
Amortization of non-deductible Goodwill.... (2,005) (2,005) (2,005)
State income (taxes) benefit, net of
Federal income tax effect................ 792 1,114 (850)
Foreign tax rate in excess of United States
Federal statutory rate and foreign
withholding taxes, net of Federal
income tax benefit....................... (307) (241) (233)
Effect of net operating losses of foreign
subsidiary for which no tax carryback
benefit is available..................... (548) (1,193) -
Provision for income tax contingencies..... (1,100) - -
Non-deductible amortization of restricted
stock.................................... (418) - -
Other, net................................. (74) (195) (182)
------- ------- -------
$12,489 $23,346 $(4,932)
======= ======= =======
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 resolved all issues related to such audit and, in connection therewith,
the Company paid $407,000 in 1996 in final settlement of such examination.
Such amount had been fully reserved in years prior to 1995. 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 the Company increasing taxable income by
approximately $13,000,000. Triarc, on behalf of the Company, has resolved
approximately $10,000,000 of such proposed adjustments and, in connection
therewith, the Company paid $4,576,000, including interest, during the fourth
quarter of 1997. The Company intends to contest the unresolved adjustments of
approximately $3,000,000, the tax effect of which has not yet been determined,
at the appellate division of the IRS. During 1995 the Company provided
$1,100,000 included in "Benefit from (provision for) income taxes" and in 1995
through 1997 provided $1,000,000 per year, included in "Interest expense", in
addition to amounts provided prior to 1995, relating to such examinations and
other tax matters. Management of the Company believes that adequate aggregate
provisions have been made in 1997 and prior periods for any tax liabilities,
including interest, that may result from the 1989 through 1992 examination and
other tax matters.
44
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
(8) Facilities Relocation and Corporate Restructuring
The 1996 facilities relocation and corporate restructuring charge of
$6,350,000 related to costs associated with (i) estimated losses on planned
subleases (principally for the write-off of nonrecoverable unamortized
leasehold improvements and furniture and fixtures) of surplus office space as
a result of the then planned sale of company-owned restaurants and the
relocation (the "Royal Crown Relocation") of Royal Crown's headquarters which
were centralized with the offices of Triarc's other beverage subsidiaries in
White Plains, New York ($3,700,000), (ii) employee severance costs associated
with the Royal Crown Relocation ($2,200,000) and (iii) the shutdown of the
beverage segment's Ohio production facility ($450,000).
The 1997 facilities relocation and corporate restructuring charge of
$7,034,000 related to (i) employee severance and related termination costs and
employee relocation associated with restructuring the restaurant segment in
connection with the RTM Sale ($5,597,000), (ii) costs associated with the
Royal Crown Relocation ($1,137,000) and (iii) the write-off of the remaining
unamortized costs of certain beverage distribution rights reacquired in prior
years and no longer being utilized by the Company as a result of the sale or
liquidation of the assets and liabilities of MetBev, Inc. ("MetBev"), an
affiliate ($300,000).
(9) Extraordinary Charge
The Company recognized an extraordinary charge of $1,800,000 in 1997 from
the early extinguishment of debt resulting from the assumption of $54,682,000
of the borrowings under the FFCA Loan Agreements by RTM associated with the
sold restaurants consisting of the write-off of previously unamortized
deferred financing costs of $2,950,000 net of income tax benefit of
$1,150,000.
(10) Pension and Other Benefit Plans
Triarc maintains a 401(k) defined contribution plan (the "Plan") covering,
among other employees of Triarc and its subsidiaries, all of the Company's
employees who meet certain minimum requirements and elect to participate.
Under the provisions of the Plan, employees may contribute various percentages
of their compensation up to a maximum of 15%, 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 additional annual Company contributions at an arbitrary aggregate
amount to be determined by the employers. In connection with these employer
contributions, the Company provided $1,175,000, $1,020,000 and $878,000 in
1995, 1996 and 1997, respectively.
The Company's employees who were eligible to participate prior to 1989 are
covered under a defined benefit pension plan which covers employees of both
the Company and certain affiliates. Prior to 1995 the plan was frozen.
45
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
The Company's portion of the components of the net periodic pension cost
were as follows (in thousands):
1995 1996 1997
------ ------ ------
Current service cost (represents
plan expenses)..............................$ 84 $ 83 $ 83
Interest cost on projected benefit obligation. 267 264 244
Return on plan assets......................... (674) (369) (643)
Net amortization and deferrals................ 472 138 384
------- -------- -------
Net periodic pension cost...................$ 149 $ 116 $ 68
======= ======== =======
The following table sets forth the Company's portion of the plan's funded
status (in thousands):
Year-End
------------------
1996 1997
---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $ 3,749 $ 3,540
Nonvested benefit obligation...................... 18 16
------- -------
Accumulated and projected benefit obligation. 3,767 3,556
Plan assets at fair value........................... (3,374) (3,744)
------- -------
Funded status....................................... 393 (188)
Unrecognized net gain from plan experience.......... 51 496
------- -------
Accrued pension cost......................... $ 444 $ 308
======= =======
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 8% for 1995, 7% for 1996,
and 7 1/2% for 1997. The discount rate used in determining the benefit
obligations above was 7 1/2% at December 31, 1996 and 7% at December 28, 1997.
The effects of the 1996 decrease and the 1997 increase in the discount rate
did not materially affect the net periodic pension cost. The 1997 decrease in
the discount rate used in determining the benefit obligation resulted in an
increase in the accumulated and projected benefit obligation of $190,000.
Plan assets as of December 28, 1997 are invested in managed portfolios
consisting of government and government agency obligations (51%), common stock
(37%), corporate debt securities (10%) and other investments (2%).
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 1995, 1996 and 1997, as well as the accumulated postretirement benefit
obligation as of December 28, 1997, were insignificant.
Prior to 1995, Triarc granted 133,750 restricted shares of Triarc Class A
common stock to certain Royal Crown and TRG senior executives under Triarc's
1993 Equity Participation Plan (the "1993 Triarc Equity Plan"). The aggregate
values of the awards at the respective dates of grant of $2,774,000 were being
charged to the Company as compensation expense over the applicable vesting
periods through 1996. On December 7, 1995, the Compensation Committee of
46
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
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 1993 Triarc Equity Plan and Triarc's 1997 Equity
Participation Plan. Of such options, 165,000 granted prior to 1995 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 and 298,000 granted in 1997 were at a
weighted average option price of $12.56 which was below the weighted average
fair market value of Triarc's Class A common stock on the respective dates of
grant of $14.63, resulting in an aggregate difference of $618,000. Such
differences are being charged to the Company as compensation expense over the
applicable vesting periods through 2002, 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 $1,612,000 (including the $662,000 from the accelerated vesting of
the restricted stock and net of $231,000 of Forfeiture Adjustments), $74,000
(net of $173,000 of Forfeiture Adjustments) and $51,000 (net of $308,000 of
Forfeiture Adjustments) during 1995, 1996 and 1997, respectively, and is
included in "General and administrative" in the accompanying consolidated
statements of operations.
(11) Lease Commitments
The Company leases buildings and improvements and machinery and equipment.
Prior to the RTM Sale, some leases provided for contingent rentals based upon
sales volume. In connection with the RTM Sale in May 1997, substantially all
operating and capitalized lease obligations associated with the sold
restaurants were assumed by RTM, although the Company remains contingently
liable if the future lease payments (which could potentially aggregate a
maximum of approximately $100,000,000 as of December 28, 1997) are not made by
RTM. The Company provided $9,677,000 in "Reduction in carrying value of
long-lived assets impaired or to be disposed of" in 1996 representing the
present value of future operating lease payments relating to certain equipment
transferred to RTM but the obligations for which remain with the Company.
Rental expense under operating leases consisted of the following components
(in thousands):
1995 1996 1997
------- -------- -------
Minimum rentals...................... $19,727 $23,164 $12,650
Contingent rentals................... 879 794 204
------- ------- -------
20,606 23,958 12,854
Less sublease income................. 5,358 5,460 5,509
------- ------- -------
$15,248 $18,498 $ 7,345
======= ======= =======
47
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
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 28,
1997, excluding $7,925,000 of those future operating lease payments for which
the Company has provided as set forth above, are as follows (in thousands):
Rental Payments Sublease Income
--------------------- ---------------------
Capitalized Operating Capitalized Operating
Leases Leases Leases Leases
------ ------ ------ ------
1998.......................... $ 105 $ 4,373 $ 60 $ 3,298
1999.......................... 87 2,147 60 1,246
2000.......................... 87 1,606 55 861
2001.......................... 87 1,576 41 720
2002.......................... 86 1,475 44 616
Thereafter.................... 317 3,363 160 1,337
------ -------- ------- -------
Total minimum payments...... 769 $ 14,540 $ 420 $ 8,078
======== ======= =======
Less interest................. 300
------
Present value of minimum
capitalized lease payments.. $ 469
======
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 5).
(12) 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 $1,073,000 as of December 28,
1997. Although the outcome of such matters cannot be predicted with certainty
and some of these 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 results of
operations or financial position.
48
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
(13) Transactions with Related Parties
The following is a summary of transactions between the Company and its
related parties (in thousands):
1995 1996 1997
------- -------- -------
Costs allocated to the Company by Triarc
under a management services agreement (a). $ 9,000 $ 7,000 $ 7,000
Capital contributions (b)................... 8,865 - 29,390
Interest expense on notes payable to:
Triarc (c)................................ 2,169 2,588 1,278
Chesapeake Insurance (c).................. 243 208 130
Southeastern Public Service Company
("SEPSCO") (c)......................... 750 - -
Interest income on notes receivable from
Triarc (c)................................ 212 261 230
Repurchase of $720 principal amount of
promissory notes due from franchisees
from SEPSCO at fair value................. - - 690
Net sales to MetBev, net of marketing
support credits (d)....................... 551 8,985 -
Provision for uncollectible receivables from
sales to MetBev, guarantee of MetBev
accounts payable and advance
to MetBev (d)............................. 1,745 2,000 975
Investment in preferred stock of MetBev
and write-off thereof (d)................. 1,000 - -
Shared services allocation from Triarc
beverage affiliates, net (e)............. - - 547
Compensation costs charged to the Company by
Triarc for restricted stock and below
market stock options (Note 10)............ 1,612 74 51
Payments to Triarc for usage of aircraft.... 73 - 32
Lease payments to NPC Leasing Corp.,
an affiliate.............................. 21 - -
- -------------
(a) The Company receives from Triarc certain management services,
including legal, accounting, tax, insurance, financial and other management
services, under a management services agreement. Such costs were allocated to
the Company by Triarc based upon the Company's pro rata share of the sum of
the greater of income before income taxes, depreciation and amortization and
10% of revenues of Triarc's principle operating subsidiaries. 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) 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. In
May 1997, in connection with the RTM Sale, ARHC and AROC issued 950 common
shares (approximately 49% of the common stock after such issuances) each to
Triarc in exchange for aggregate consideration of $31,999,000 consisting of
cash of $6,211,000 and forgiveness of the then outstanding amount of
$23,150,000 plus related accrued interest of $2,638,000 under a note payable
by the Company to Triarc as of May 5, 1997. Triarc's 49% interest in the
equity of ARHC and AROC is included in "Deferred income and other liabilities"
49
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
in the accompanying condensed consolidated balance sheet as of December 28,
1997. The excess of $29,390,000 of the consideration for the stock issued to
Triarc of $31,999,000 over such minority interest of $2,609,000 as of May 5,
1997 was accounted for as a capital contribution and is reflected in
"Additional paid-in capital". The 49% minority interest in the losses of ARHC
and AROC for the year ended December 28, 1997 aggregated $39,000 and is
included in "Other income (expense), net" in the accompanying consolidated
statement of operations. Also in connection with the RTM Sale, the Company
repaid $6,500,000 of the $6,700,000 note due February 1998 to Triarc.
(c) The Company borrowed cash under various promissory notes with Triarc
and two of its subsidiaries, SEPSCO and Chesapeake Insurance. See Note 5 for
details involving such promissory notes which were outstanding as of December
31, 1996 and December 28, 1997. Also, the Company made cash advances to
Triarc, of which $1,650,000 and $2,000,000 were outstanding at December 31,
1996 and December 28, 1997, respectively, under a promissory note receivable
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, payable
quarterly.
(d) 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. In December 1996, the distribution
rights of MetBev were sold to a third party for minimum payments over a
three-year period aggregating $1,050,000 and MetBev commenced the liquidation
of its remaining assets and liabilities. During 1997 the Company advanced
MetBev $539,000 for costs incurred in liquidating the remaining assets and
liabilities and related close-down costs of its facility. The Company has not
received any payments on the $1,050,000 from the purchaser of MetBev's
distributor rights and does not expect to collect due to financial
difficulties of the purchaser which the Company believes is due to competitive
pressures on the purchaser following Triarc's acquisition of Snapple and its
revitalization of Snapple. In connection therewith, in 1995 the Company wrote
off its $1,000,000 investment to "Other income (expense), net" since MetBev
had incurred significant losses from its inception and had a stockholders'
deficit as of December 31, 1996 of $8,943,000. 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) resulting in remaining accounts receivable of $997,000 as of December
31, 1996. In 1997 the Company wrote off its remaining receivables from MetBev,
after offsetting amounts otherwise payable to the purchaser, amounting to
$975,000 (included in "General and administrative").
(e) During 1997, Royal Crown was charged $702,000 for an allocated portion
of the salaries and related benefit costs of certain employees of Triarc's
other beverage subsidiaries who performed shared finance, administrative and
operational functions for Royal Crown and for office space utilized by Royal
Crown in their centralized headquarters in White Plains, NY. Such allocation
was based on the estimated proportion of time expended on the respective
businesses. Royal Crown was also credited $155,000 in 1997 for the allocated
cost of shared legal services that employees of Royal Crown provided Triarc's
other beverage subsidiaries.
50
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
(14) Business Segments
The Company has two major segments, beverages and restaurants (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 or 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 in 1995 and 1996 reflects provisions
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 3). Identifiable
assets by segment are those assets that are used in the Company's operations
in each segment. General corporate assets consist primarily of cash
equivalents and deferred financing costs.
No customer accounted for more than 10% of consolidated revenues in 1995,
1996 or 1997.
1995 1996 1997
------- -------- -------
(In thousands)
Revenues:
Beverages............................ $172,644 $178,059 $146,881
Restaurants.......................... 272,739 288,293 140,429
-------- -------- --------
Consolidated revenues.............. $445,383 $466,352 $287,310
======== ======== ========
Operating profit (loss):
Beverages............................ $ 1,852 $ 11,947 $12,164
Restaurants.......................... (6,437) (43,341) 28,532
-------- -------- -------
Segment operating profit (loss).... (4,585) (31,394) 40,696
Interest expense....................... (39,565) (42,883) (35,749)
Non-operating income (expense), net.... (1,818) 562 (50)
General corporate expenses............. (171) (189) (149)
-------- -------- -------
Consolidated income (loss) before
income taxes and extraordinary
charge........................... $(46,139) $(73,904) $ 4,748
======== ======== =======
Identifiable assets:
Beverages............................ $195,272 $193,300 $202,618
Restaurants.......................... 187,199 162,223 73,223
-------- -------- --------
Total identifiable assets.......... 382,471 355,523 275,841
General corporate assets............. 11,749 14,119 11,635
-------- -------- --------
Consolidated assets................ $394,220 $369,642 $287,476
======== ======== ========
51
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
1995 1996 1997
------- -------- -------
(In thousands)
Capital expenditures:
Beverages............................ $ 1,474 $ 591 $ 517
Restaurants.......................... 47,444 15,584 963
------- -------- -------
Consolidated capital expenditures.. $48,918 $ 16,175 $ 1,480
======= ======== =======
Depreciation and amortization of properties:
Beverages............................ $ 841 $ 999 $ 1,101
Restaurants.......................... 12,927 13,096 702
------- -------- -------
Consolidated depreciation and
amortization of properties..... $13,768 $ 14,095 $ 1,803
======= ======== =======
(15) 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 Royal Crown and TRG, (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 TRG, (the "Non-Guarantors"), (iv) the aggregate of consolidating
eliminations and reclassifications ("Eliminations") and (v) consolidated
totals of RC/Arby's Corporation and subsidiaries ("Consolidated"). During
1995, two of the Company's less significant subsidiaries which had not
previously been guarantors of RCAC's obligations under the Senior Notes
executed the necessary instruments under the Senior Note Indenture to become
guarantors.
52
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
CONDENSED CONSOLIDATING BALANCE SHEETS
- --------------------------------------
December 31, 1996: Non- Elimin- Consol-
- ------------------ 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........ 214,343 - - (214,343) -
Investment in subsidiaries...... (33,442) - - 33,442 -
Deferred income tax benefit..... (6,990) 25,143 15,276 - 33,429
Deferred costs and other assets. 7,736 11,279 3,365 - 22,380
-------- -------- -------- --------- --------
$181,606 $320,593 $ 48,344 $(180,901)$369,642
======== ======== ======== ========= ========
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
Due to affiliates............ (8,807) 21,090 - - 12,283
Accrued expenses............. 15,616 41,489 1,554 - 58,659
-------- ------- -------- -------- -------
Total current liabilities... 20,574 110,077 51,138 - 181,789
Intercompany payables........... - 205,495 8,918 (214,413) -
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 deficit.(113,968) (13,154) (20,358) 33,512 (113,968)
-------- ------- -------- -------- --------
$181,606 $320,593 $ 48,344 $(180,901)$369,642
======== ======== ======== ======== ========
53
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
December 28, 1997: Non- Elimin- Consol-
- ------------------ RCAC Guarantors Guarantors ations idated
---- ---------- ---------- ------ ------
ASSETS
Current assets:
Cash and cash equivalents.... $ 3,609 $ 6,231 $ 623 $ - $10,463
Receivables, net............. - 33,782 1,209 - 34,991
Note receivable from
affiliate.................. - - 2,000 - 2,000
Inventories.................. - 12,443 1 - 12,444
Deferred income tax benefit. 9,618 11,915 4 - 21,537
Prepaid expenses and other
current assets.............. 15 2,878 690 - 3,583
-------- -------- -------- --------- --------
Total current assets...... 13,242 67,249 4,527 - 85,018
Properties, net................. - 8,805 - - 8,805
Unamortized costs in excess
of net assets of acquired
companies..................... - 153,396 - - 153,396
Intercompany receivables........ 224,060 31,190 - (255,250) -
Investment in subsidiaries...... 515 - - (515) -
Deferred income tax benefit..... (7,234) 7,962 19,518 - 20,246
Deferred costs and other assets. 5,626 12,779 1,606 - 20,011
-------- -------- -------- --------- --------
$236,209 $281,381 $ 25,651 $(255,765)$287,476
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-
term debt.................. $ - $ 813 $ 743 $ - $ 1,556
Notes payable to affiliates.. 1,000 - 200 - 1,200
Accounts payable............. - 13,579 5 - 13,584
Due to affiliates............ 1,463 6,599 - - 8,062
Accrued expenses............. 14,416 37,073 357 - 51,846
-------- ------- -------- -------- -------
Total current liabilities... 16,879 58,064 1,305 - 76,248
Intercompany payables........... 31,190 211,212 12,918 (255,320) -
Long-term debt.................. 275,000 1,052 3,554 - 279,606
Deferred income and other
liabilities................... - 15,912 - 2,570 18,482
Stockholder's equity (deficit):
Common stock................. 1 3 534 (537) 1
Additional paid-in capital... 73,690 70,932 38,294 (109,226) 73,690
Accumulated deficit..........(160,253) (75,799) (30,651) 106,450 (160,253)
Currency translation
adjustment................. (298) 5 (303) 298 (298)
-------- ------- -------- -------- -------
Total stockholder's
equity (deficit).......... (86,860) (4,859) 7,874 (3,015) (86,860)
-------- -------- -------- --------- --------
$236,209 $281,381 $ 25,651 $(255,765)$287,476
======== ======== ======== ========= ========
54
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
- ------------------------------------------------
Year ended December 31, 1995: Non- Elimin- Consol-
- ----------------------------- RCAC Guarantors Guarantors ations idated
---- ---------- ---------- ------ ------
Revenues:
Net sales....................$ - $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 $(33,650)
======== ======== ======== ======== ========
55
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
Year ended December 31, 1996: Non- Elimin- Consol-
- ----------------------------- RCAC Guarantors Guarantors ations idated
---- ---------- ---------- ------ ------
Revenues:
Net sales....................$ - $357,282 $ 51,818 $ - $409,100
Royalties, franchise fees
and other revenues......... - 59,321 (2,069) - 57,252
-------- -------- -------- -------- -------
- 416,603 49,749 - 466,352
-------- -------- -------- -------- -------
Costs and expenses:
Cost of sales................ - 209,994 42,817 - 252,811
Advertising, selling and
distribution .............. - 97,215 5,320 - 102,535
General and administrative... 188 77,004 147 - 77,339
Reduction in carrying value of
long-lived assets impaired or
to be disposed of........... - 27,886 31,014 - 58,900
Facilities relocation and
corporate restructuring.... - 6,350 - - 6,350
-------- -------- -------- -------- -------
188 418,449 79,298 - 497,935
-------- -------- -------- -------- -------
Operating loss.............. (188) (1,846) (29,549) - (31,583)
Interest expense................ (32,869) (2,457) (7,557) - (42,883)
Allocation of interest expense
from RCAC.................... 23,592 (23,592) - - -
Other income (expense), net..... 2 808 (248) - 562
Equity in net losses of
subsidiaries.................. (44,407) - - 44,407 -
-------- -------- -------- -------- -------
Loss before income taxes..... (53,870) (27,087) (37,354) 44,407 (73,904)
Benefit from income taxes....... 3,312 5,562 14,472 - 23,346
-------- -------- -------- -------- -------
Net loss.....................$(50,558) $(21,525) $(22,882) $ 44,407 $(50,558)
======== ======== ======== ======== ========
56
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
Year ended December 28, 1997: Non- Elimin- Consol-
- ----------------------------- RCAC Guarantors Guarantors ations idated
---- ---------- ---------- ------ ------
Revenues:
Net sales....................$ - $204,653 $ 16,424 $ - $221,077
Royalties, franchise fees
and other revenues......... - 66,883 (650) - 66,233
------- ------- -------- -------- -------
- 271,536 15,774 - 287,310
------- ------- -------- -------- -------
Costs and expenses:
Cost of sales................ - 87,905 12,565 - 100,470
Advertising, selling and
distribution............... - 75,289 2,208 - 77,497
General and administrative... 149 61,578 35 - 61,762
Facilities relocation and
corporate restructuring.... - 7,034 - - 7,034
------- ------- -------- -------- -------
149 231,806 14,808 - 246,763
------- ------- -------- -------- -------
Operating profit (loss)..... (149) 39,730 966 - 40,547
Interest expense................ (31,043) (1,900) (2,806) - (35,749)
Allocation of interest expense
from RCAC, net............... 20,219 (20,219) - - -
Other income (expense), net..... 68 922 (1,079) 39 (50)
Equity in net earnings of
subsidiaries.................. 5,104 - - (5,104) -
------- ------- -------- -------- -------
Income (loss) before income
taxes and extraordinary
charge..................... (5,801) 18,533 (2,919) (5,065) 4,748
Benefit from (provision for)
income taxes................. 3,817 (9,918) 1,169 - (4,932)
------- ------- -------- -------- -------
Income (loss) before
extraordinary charge........ (1,984) 8,615 (1,750) (5,065) (184)
Extraordinary charge............ - - (1,800) - (1,800)
------- ------- -------- -------- -------
Net income (loss)............ $(1,984) $ 8,615 $ (3,550) $ (5.065) $(1,984)
======= ======= ======== ======== =======
57
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
CONDENSED CONSOLIDATING STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
Non- Elimin- Consol-
RCAC Guarantors Guarantors ations idated
---- ---------- ---------- ------ ------
Common stock:
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
Capital contributions...... - - 2 (2) -
Dissolution of subsidiaries - - (3) 3 -
------- ------- -------- -------- -------
Balance at December 28, 1997. $ 1 $ 3 $ 534 $ (537) $ 1
======= ======= ======== ======== =======
Additional paid-in capital:
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
Capital contributions...... 29,390 - 32,322 (32,322) 29,390
Dissolution of subsidiaries - - (1,889) 1,889 -
------- ------- -------- -------- -------
Balance at December 28, 1997. $73,690 $70,932 $ 38,294 $(109,226) $73,690
======= ======= ======== ========= =======
Accumulated deficit:
Balance at December 31, 1994.$(74,061) $(21,908) $ (5,688) $ 27,596 $(74,061)
Designation of certain Non-
Guarantors as Guarantors. - (3,697) 3,697 - -
Dividend................... - (14,733) - 14,733 -
Net loss................... (33,650) (22,226) (3,881) 26,107 (33,650)
-------- ------- -------- -------- -------
Balance at December 31, 1995.(107,711) (62,564) (5,872) 68,436 (107,711)
Net loss................... (50,558) (21,525) (22,882) 44,407 (50,558)
-------- ------- -------- -------- -------
Balance at December 31, 1996.(158,269) (84,089) (28,754) 112,843 (158,269)
Net loss................... (1,984) 8,615 (3,550) (5,065) (1,984)
Dividend................... - (325) - 325 -
Dissolution of subsidiaries - - 1,653 (1,653) -
-------- ------- -------- -------- -------
Balance at December 28,
1997......................$(160,253) $(75,799) $(30,651) $106,450$(160,253)
======== ======== ======== ======== ========
Currency translation adjustment:
Balance at December 31,
1994, 1995 and 1996....... $ - $ - $ - $ - $ -
Net change in currency
translation adjustment.. (298) 5 (303) 298 (298)
------- ------- -------- -------- -------
Balance at December 28,1997. $ (298) $ 5 $ (303) $ 298 $ (298)
======= ======= ======== ======== =======
58
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended December 31, 1995: Non- Elimin- Consol-
- ----------------------------- 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:
Capital expenditures......... - (32,442) (16,114) - (48,556)
Business acquisitions........ - (14,335) - - (14,335)
Proceeds from sales of
properties................. - 33,599 (31,602) - 1,997
Investment in affiliate...... - (1,000) - - (1,000)
Return of capital............ 5,500 - (5,500) - -
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 long-term debt. - 2,950 58,670 - 61,620
Net borrowings from (repayments
to) affiliates............. 9,576 (4,826) 1,200 - 5,950
Capital contribution......... 8,865 - - - 8,865
Repayments of long-term debt. - (2,918) (440) - (3,358)
Deferred financing costs..... - - (3,347) - (3,347)
Purchase option deposit...... - 6,700 (6,700) - -
------- ------- -------- -------- -------
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 28, 1997
Year ended December 31, 1996: Non- Elimin- Consol-
- ----------------------------- 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:
Capital expenditures......... - (13,543) (2,632) - (16,175)
Business acquisitions........ - (4,754) 2,782 - (1,972)
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 long-term debt. - - 4,027 - 4,027
Net borrowings from (repayments
to) affiliates............. 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>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 1997
Year ended December 28, 1997: Non- Elimin- Consol-
- ----------------------------- RCAC Guarantors Guarantors ations idated
---- ---------- ---------- ------ ------
Net cash provided by (used in)
operating activities..........$(13,898) $18,152 $ (8,378) $ - $(4,124)
-------- ------- -------- -------- -------
Cash flows from investing activities:
Proceeds from sales of
properties and businesses... - 3,175 - - 3,175
Capital expenditures......... - (1,421) (59) - (1,480)
------- ------- -------- -------- -------
Net cash provided by (used in)
investing activities......... - 1,754 (59) - 1,695
------- ------- -------- -------- -------
Cash flows from financing activities:
Capital contribution......... - - 6,211 - 6,211
Net borrowings from (repayments
to) affiliates............. 17,451 (9,341) (4,575) - 3,535
Return of purchase option
deposit.................... - (6,500) 6,500 - -
Repayments of long-term debt. - (2,724) (1,541) - (4,265)
------- ------- -------- -------- -------
Net cash provided by (used in)
financing activities......... 17,451 (18,565) 6,595 - 5,481
------- ------- -------- -------- -------
Net increase (decrease) in cash. 3,553 1,341 (1,842) - 3,052
Cash at beginning of year....... 56 4,890 2,465 - 7,411
------- ------- -------- -------- -------
Cash and cash equivalents
at end of year.............. $ 3,609 $ 6,231 $ 623 $ - $10,463
======= ======= ======== ======== =======
61
<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 contained elsewhere in "Item 8. Financial
Statements and Supplementary Data".
3. Exhibits:
Copies of the following exhibits are available at a charge of $.25
per page upon written request to the Secretary of RC/Arby's
Corporation at 1000 Corporate Drive, Fort Lauderdale, Florida
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 (SEC file No.
0-20286).
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") (SEC file No. 0-20286).
3.3 Certificate of Merger Merging RCAC into RCC Investments,
Inc. incorporated herein by reference to Exhibit 3.3 to the
1993 10-K (SEC file No. 0-20286).
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 (SEC file No. 0-20286).
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 RCAC's
Registration Statement on Form S-1 (the "S-1") dated May 13,
1993 (Registration No. 33-62778).
62
<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 (SEC file No. 0-20286).
3.7 By-Laws of Royal Crown, incorporated herein by reference to
Exhibit 3.4 to the S-1 (Registration No. 33-62778).
3.8 Restated Certificate of Incorporation of Arby's, Inc.
("Arby's"), incorporated herein by reference to Exhibit 3.5
to the S-1 (Registration No. 33-62778).
3.9 Amended Code of Regulations of Arby's, incorporated herein
by reference to Exhibit 3.6 to the S-1 (Registration No.
33-62778).
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 (SEC file No. 0-20286).
4.1 Indenture dated as of August 1, 1993 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 4.2 to the Triarc Companies,
Inc. ("Triarc") Registration Statement on Form S-4 dated
October 22, 1997 (SEC file No. 1-2207).
4.2 Master Agreement dated as of May 5, 1997, among Franchise
Finance Corporation of America, FFCA Acquisition Corporation,
FFCA Mortgage Corporation, Triarc, Arby's Restaurant
Development Corporation ("ARDC"), Arby's Restaurant Holding
Company ("ARHC"), Arby's Restaurant Operations Company
("AROC"), Arby's, RTM Operating Company ("RTMOC"), RTM
Development Company, RTM Partners, Inc. ("Holdco"), RTM
Holding Company, Inc. ("RTM Parent"), RTM Management Company,
LLC ("RTMM") and RTM, Inc. ("RTM"), incorporated herein by
reference to Exhibit 4.16 to Triarc's Registration Statement
on Form S-4 dated October 22, 1997 (SEC file No. 1-2207).
10.1 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 (Registration No. 33-62778).
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") (Registration
No. 33-62778).
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 (Registration No.
33-62778).
10.4 Employment Agreement dated as of April 24, 1993 among John
C. Carson, Royal Crown and Triarc incorporated herein by
reference to Exhibit 8 to Triarc's Current Report on Form
8-K dated April 23, 1993 (SEC file No.1-2207).
63
<PAGE>
10.5 Concentrate Sales Agreement dated as of January 28, 1994
between Royal Crown and Cott Corporation--Confidential
treatment has been granted for portions of the agreement--
incorporated herein by reference to Exhibit 10.12 to
Amendment No. 1 to Triarc's Registration Statement on Form
S-4 dated March 11, 1994 (SEC file No. 1-2207).
10.6 Stock Purchase Agreement dated February 13, 1997 by and
among Arby's, ARDC, ARHC, AROC, Holdco and RTM, incorporated
herein by reference to Exhibit 10.1 to RCAC's Current Report
of Form 8-K dated February 20, 1997 (SEC file No. 0-20286).
10.7 Option granted by Holdco in favor of ARHC, together with a
schedule identifying other documents omitted and the
material details in which such documents differ,
incorporated herein by reference to Exhibit 10.30 to
Triarc's Registration Statement on Form S-4 dated October
22, 1997 (SEC file No. 1-2207).
10.8 Guaranty dated as of May 5, 1997 by RTM, RTM Parent, Holdco,
RTMM and RTMOC in favor of Arby's, ARDC, ARHC, AROC and
Triarc, incorporated herein by reference to Exhibit 10.31 to
Triarc's Registration Statement on Form S-4 dated October
22, 1997 (SEC file No. 1-2207).
27.1 Financial Data Schedule for the fiscal year ended December
28, 1997, submitted to the Securities and Exchange
Commission in electronic format.*
* Filed herewith
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the
three months ended December 28, 1997.
(d) Financial Statements:
Consolidated financial statements of Arby's as of December 31,
1996 and December 28, 1997 and for the years ended December 31,
1995 and 1996 and the fiscal year ended December 28, 1997.
Consolidated financial statements of Royal Crown as of December
31, 1996 and December 28, 1997 and for the years ended December
31, 1995 and 1996 and the fiscal year ended December 28, 1997.
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
Dated: April 9, 1998 Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on April 9, 1998 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. Executive 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 28, 1997
-----------------
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................... 1
Consolidated Balance Sheets as of December 31, 1996 and December 28, 1997.. 2
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1996 and the fiscal year ended December 28, 1997. 3
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1995 and 1996 and the fiscal year ended December 28, 1997. 4
Consolidated Statements of Cash Flows for the years ended
December 31,1995 and 1996 and the fiscal year ended December 28, 1997.. 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 28, 1997 and December 31, 1996, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three fiscal years in the period ended December 28, 1997. 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 28, 1997 and December 31, 1996 and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended December 28, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 10, 1998
1
<PAGE>
ARBY'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 28,
1996 1997
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ($-0- and $3,500,000)........ $ 4,090 $ 5,330
Receivables, net (Note 4).............................. 6,821 6,761
Inventories............................................ 2,157 -
Assets held for sale (Note 3).......................... 47,596 -
Deferred income tax benefit (Note 7)................... 4,026 5,782
Prepaid expenses and other current assets.............. 2,341 228
-------- -------
Total current assets................................. 67,031 18,101
Properties, net (Note 4)................................. 6,699 4,249
Unamortized costs in excess of net assets
of acquired companies (Note 4)......................... 21,666 20,856
Note receivable from Parent (Notes 3 and 12)............. - 31,190
Deferred income tax benefit (Note 7)..................... 15,840 80
Deferred costs and other assets (Note 4)................. 7,324 5,996
-------- -------
$118,560 $80,472
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 5)............. $17,802 $ 813
Due to Parent and affiliates, net (Notes 7 and 12)..... 21,090 6,599
Accounts payable....................................... 10,306 2,730
Purchase option deposit from affiliate (Note 12)....... 6,700 -
Accrued expenses (Notes 4 and 7)....................... 20,849 19,683
-------- -------
Total current liabilities............................ 76,747 29,825
Long-term debt (Note 5).................................. 2,991 1,052
Deferred income and other liabilities.................... 14,258 11,109
Commitments and contingencies (Notes 7, 9, 10 and 11)
Stockholder's equity (Note 5):
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)................ (309) 13,608
Currency translation adjustment........................ - 5
-------- -------
Total stockholder's equity........................... 24,564 38,486
-------- -------
$118,560 $80,472
======== =======
See accompanying notes to consolidated financial statements.
2
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
------------------------------
DECEMBER 31,
----------------- DECEMBER 28,
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
Revenues:
Net sales.....................................$188,144 $179,275 $ 57,818
Royalties..................................... 51,277 55,708 63,038
Franchise fees................................ 4,648 2,834 3,149
Other revenues................................ 1,008 779 696
------- -------- --------
245,077 238,596 124,701
------- -------- --------
Costs and expenses:
Cost of sales................................. 159,119 148,374 46,695
Advertising and selling (Note 1).............. 19,638 20,292 7,215
General and administrative.................... 59,204 53,288 37,997
Reduction in carrying value of long-lived
assets impaired or to be disposed of
(Note 3)................................... 11,527 27,886 -
Corporate restructuring (Note 8).............. - 2,400 5,597
------- -------- --------
249,488 252,240 97,504
------- -------- --------
Operating profit (loss).................... (4,411) (13,644) 27,197
Interest expense................................. (2,188) (2,457) (1,806)
Allocation of interest expense, net of
interest income, from Parent (Note 12)......... (3,985) (3,592) (219)
Other income (expense), net...................... (1,341) 522 (836)
------- ------- -------
Income (loss) before income taxes ......... (11,925) (19,171) 24,336
Benefit from (provision for) income taxes (Note 7) 3,764 4,606 (10,094)
------- ------- -------
Net income (loss).......................... $(8,161) $(14,565) $14,242
======= ======== =======
See accompanying notes to consolidated financial statements.
3
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE YEARS ENDED DECEMBER 28, 1997
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------- ADDITIONAL EARNINGS CURRENCY
NUMBER PAID-IN (ACCUMULATED TRANSLATION
OF SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT
--------- ----- ------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994. 1,000 $ 1 $ 24,872 $37,150 $ -
Dividend (Note 12)........ - - - (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) -
Dividend (Note 12)........ - - - (325) -
Net income................ - - - 14,242 -
Net change in currency
translation adjustment.. - - - - 5
-------- ------- -------- ------- ---------
Balance at December 28, 1997. 1,000 $ 1 $ 24,872 $13,608 $ 5
======== ======= ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
----------------------------
DECEMBER 31,
--------------- DECEMBER 28,
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)............................. $ (8,161) $(14,565) $14,242
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Amortization of costs in excess of net assets
of acquired companies and other intangibles 3,334 2,919 1,966
Depreciation and amortization of properties 11,098 8,947 702
Reduction in carrying value of long-lived
assets................................... 11,527 27,886 -
Provision for corporate restructuring...... - 2,400 5,597
Payments on corporate restructuring........ - - (3,555)
Provision for doubtful accounts............ 566 424 582
Provision for (benefit from) deferred
income taxes............................. (3,524) (11,332) 14,004
Other, net................................. (3,290) (518) (2,122)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables............................ (1,173) (279) 1,323
Inventories............................ 444 46 219
Prepaid expenses and other current assets 675 (1,168) 1,925
Increase (decrease) in accounts payable and
accrued expenses....................... 832 2,994 (16,398)
-------- -------- -------
Net cash provided by operating activities........ 12,328 17,754 18,485
-------- -------- -------
Cash flows from investing activities:
Proceeds from sales of properties............. 33,012 2,563 2,224
Capital expenditures.......................... (30,968) (12,952) (904)
Business acquisitions......................... (11,412) (4,754) -
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... (9,368) (15,143) 1,320
-------- -------- -------
Cash flows from financing activities:
Net repayments to Parent and affiliates....... (4,826) (1,074) (9,341)
Purchase option deposit received from
(returned to) affiliate.................... 6,700 - (6,500)
Repayments of long-term debt.................. (2,918) (2,568) (2,724)
Proceeds from issuance of long-term debt...... 2,950 - -
-------- -------- -------
Net cash provided by (used in) financing activities 1,906 (3,642) (18,565)
-------- -------- -------
Net increase (decrease) in cash ................. 4,866 (1,031) 1,240
Cash at beginning of year........................ 255 5,121 4,090
-------- -------- -------
Cash and cash equivalents at end of year......... $ 5,121 $ 4,090 $ 5,330
======== ======== =======
(continued)
5
<PAGE>
ARBY'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEAR ENDED
----------------------------
DECEMBER 31,
--------------- DECEMBER 28,
1995 1996 1997
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................. $ 2,537 $ 2,440 $ 1,810
======= ======== =======
Income taxes.............................. $ 685 $ 142 $ 633
======= ======== =======
Supplemental disclosures of noncash investing
and financing activities:
Total capital expenditures................ $31,330 $ 12,952 $ 904
Amounts representing capitalized leases... (362) - -
------- -------- -------
Capital expenditures paid in cash........ $30,968 $ 12,952 $ 904
======= ======== =======
As described in Note 12, in May 1995 Arby's, Inc. made a non-cash dividend
aggregating $14,733,000 to the Parent consisting of the land, buildings and
related improvements of 39 restaurants. As described in Notes 3 and 12, in
connection with the sale of all of its 274 company owned restaurants to the
Parent in May 1997, Arby's, Inc. received demand promissory notes aggregating
$31,190,000 from the Parent and the Parent assumed $14,955,000 in capitalized
lease obligations. Arby's, Inc. also recorded a $325,000 non-cash dividend to
the Parent in connection with such sale.
See accompanying notes to consolidated financial statements.
6
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Arby's, Inc.
(together with its subsidiaries, d/b/a Triarc Restaurant Group - "TRG"), 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"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The Parent has certain wholly-owned subsidiaries other than
TRG, including Royal Crown Company, Inc. ("Royal Crown") and certain
subsidiaries which, prior to the May 1997 sale of all company-owned
restaurants, owned and/or operated Arby's restaurants, principally Arby's
Restaurant Development Corporation ("ARDC"), Arby's Restaurant Holding Company
("ARHC") and Arby's Restaurant Operations Company ("AROC").
CHANGE IN FISCAL YEAR
Effective January 1, 1997, TRG 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, TRG's 1997 fiscal year commenced January
1, 1997 and ended December 28, 1997. Such period is referred to herein as "the
year ended December 28, 1997" or "1997". December 28, 1997 and December 31,
1996 are referred to herein as "Year-End 1997" and "Year-End 1996",
respectively.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
acquired are considered cash equivalents. TRG typically invests its excess
cash in a U.S. Treasury money market fund.
INVENTORIES
Inventories, consisting principally of raw materials, were 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 computed 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.
AMORTIZATION OF INTANGIBLES
Costs in excess of net assets of acquired companies ("Goodwill") are being
amortized on the straight-line basis over 31 to 40 years. Goodwill associated
with certain restaurant acquisitions was amortized over 15 years prior to
being written off as of December 31, 1996. Trademarks are being amortized on
the straight-line basis over 15 years. Deferred financing costs are
7
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
being amortized as interest expense over the lives of the respective debt
using the interest rate 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 through the period such Goodwill is being amortized are
sufficient to absorb the related amortization, TRG has deemed there to be no
impairment of Goodwill.
Long-Lived Assets
Effective October 1, 1995 TRG 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 (see Note 3).
FOREIGN CURRENCY TRANSLATION
Financial statements of TRG's Canadian subsidiary are prepared in Canadian
dollars and translated into United States dollars at the current exchange
rates for assets and liabilities and an average rate for the year for
revenues, costs and expenses. Net gains and losses resulting from the
translation of such financial statements are charged or credited directly to
the "Currency translation adjustment" component of "Stockholder's equity".
ADVERTISING COSTS
TRG accounts for advertising production costs by expensing such production
costs the first time the related advertising takes place. Advertising costs
amounted to $19,072,000, $19,868,000 and $6,633,000 for 1995, 1996 and 1997,
respectively.
INCOME TAXES
TRG is included in the consolidated Federal income tax return filed by
Triarc. Under a tax sharing agreement between Triarc and the Parent, TRG
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 development agreements 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
8
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
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
TRG primarily franchises Arby's(R) quick service restaurants representing
the largest franchise restaurant system specializing in roast beef sandwiches.
Prior to the May 1997 sale of all company-owned restaurants, TRG also operated
Arby's restaurants (see Note 3). TRG's franchisees 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
TRG has not used any estimates it considers significant in the preparation
of its consolidated financial statements as of December 28, 1997.
CERTAIN RISK CONCENTRATIONS
TRG has one significant franchisee which accounted for 11.5% of
consolidated revenues in 1997. No customer accounted for more that 10% of
consolidated revenues in 1995 or 1996. TRG believes that its vulnerability to
risk concentrations related to significant vendors and sources of its raw
materials for its franchisees is not significant. Risk of geographical
concentration is also minimized since TRG's franchisees generally operate
throughout the United States with limited foreign exposure.
(3)DISPOSITION AND PRIOR YEARS BUSINESS ACQUISITIONS
SALE OF RESTAURANTS
On May 5, 1997 certain subsidiaries of the Parent sold to an affiliate of
RTM, Inc. ("RTM"), the largest franchisee in the Arby's system, all of their
355 company-owned restaurants (the "RTM Sale"), including the 274 restaurants
owned by TRG. The sales price consisted of cash and a promissory note
(discounted value) aggregating $3,471,000 (including $2,092,000 of
post-closing adjustments) and the assumption by RTM of an aggregate $54,682,000
9
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
in mortgage and equipment notes payable and $14,955,000 in capitalized lease
obligations. TRG sold its 274 company-owned restaurants to the Parent in
exchange for 11.875% demand notes aggregating $31,190,000 and the assumption
of $14,955,000 in capitalized lease obligations. RTM now operates all of the
355 restaurants as a franchisee and pays royalties to TRG at a rate of 4% of
those restaurants' net sales effective May 5, 1997. In 1997 TRG recorded a
$2,712,000 loss on the sale included in "Other income (expense), net", which
includes a $1,457,000 provision for the fair value of TRG's effective
guarantee of future lease commitments and debt repayments assumed by RTM for
which TRG or Triarc remains contingently liable if the payments are not made
by RTM. The results of operations of the sold restaurants have been included
in the accompanying consolidated statements of operations until the May 5,
1997 date of sale. Following the RTM Sale, TRG continues as the franchisor of
the more than 3,000 store Arby's system. See below under "Pro Forma Operating
Data" for the unaudited supplemental pro forma condensed summary operating
data of TRG (the "Pro Forma Data") for the years ended December 31, 1996 and
December 28, 1997 giving effect to the RTM Sale.
In 1996 TRG recorded a $27,886,000 charge reported as "Reduction in
carrying value of long-lived assets impaired or to be disposed of" 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 $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 would not be assumed by the purchaser and
estimated closing costs. The estimated fair value was determined based on the
terms of the February 1997 agreement for the RTM Sale including the then
anticipated sales price. During 1996 the operations of TRG's restaurants to be
disposed of had net sales of $179,275,000 and a pretax loss of $651,000. Such
loss reflected $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 sold to RTM.
In 1995, TRG 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 as of December 31, 1995 resulted
in a pretax loss of $806,000 for the year ended December 31, 1995.
PRO FORMA OPERATING DATA (UNAUDITED)
The following Pro Forma Data of TRG for the years ended December 31, 1996
and December 28, 1997 have been prepared by adjusting the historical data as
set forth in the accompanying consolidated statements of operations to give
effect to the RTM Sale as if such sale had been consummated as of January 1,
1996. Such Pro Forma Data is presented for comparative purposes only and does
not purport to be indicative of TRG's actual results of operations had the RTM
Sale actually been consummated on January 1, 1996 or of TRG's future results
of operations and are as follows (in thousands):
10
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
1996 1997
------------------------- -------------------------
AS REPORTED PRO FORMA(a) AS REPORTED PRO FORMA(a)
----------- ------------ ----------- ------------
Revenues................... $238,596 $ 69,236 $124,701 $ 69,196
Operating profit (loss).... (13,644) 16,919 27,197 32,774
Net income (loss).......... (14,565) 5,387 14,242 20,528
- --------------------
(a)The effect of the RTM Sale consists of (i) the elimination of revenues
and expenses (including the reduction in carrying value of long-lived assets
impaired or to be disposed of for 1996 and the elimination of loss on sale for
1997 related to the sold Arby's restaurants), (ii) a decrease to interest
expense associated with the assumption of debt by RTM and the forgiveness and
repayment of certain amounts then outstanding under notes payable to Triarc
(see Note 12) and (iii) the income tax effects of the above. The effect of the
elimination of income and expenses of the sold restaurants is significantly
greater in 1996 as compared with 1997 principally due to two 1996 eliminations
which did not recur in 1997 for (i) a $27,886,000 reduction in carrying value
of long-lived assets associated with the restaurants sold and (ii)
depreciation and amortization on the long-lived restaurant assets sold, which
had been written down to their estimated fair values as of December 31, 1996
and were no longer depreciated or amortized while they were held for sale.
PURCHASE PRICE ALLOCATIONS OF PRIOR YEARS ACQUISITIONS
TRG consummated several business acquisitions during 1995 and 1996 for cash
of $11,412,000 and $4,754,000, respectively. All such acquisitions have been
accounted for in accordance with the purchase method of accounting. In
accordance therewith, the following table sets forth the allocation of the
aggregate purchase price and a reconciliation to "Business acquisitions" in
the accompanying consolidated statements of cash flows (in thousands):
1995 1996
---- ----
Deferred costs and other assets..................... $ 1,876 $ 4,268
Properties.......................................... 9,219 2,782
Goodwill............................................ 2,708 -
Net current assets (liabilities).................... 335 (358)
Other liabilities................................... - (188)
Long-term debt assumed including current portion.... (2,726) -
------- -------
11,412 6,504
Less: Long-term debt issued to sellers............. - (1,750)
------- -------
$11,412 $ 4,754
======= =======
CANCELLATION OF SPINOFF TRANSACTIONS
In October 1996 Triarc had announced that its Board of Directors approved
a plan to offer up to approximately 20% of the shares of its beverage and
restaurant businesses (including those of TRG) to the public through an
initial public offering and to spin off the remainder of the shares of such
businesses to Triarc stockholders (collectively, the "Spinoff Transactions").
In May 1997 Triarc announced it would not proceed with the Spinoff
Transactions as a result of its acquisition of Snapple Beverage Corp. and
other issues.
11
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(4) BALANCE SHEET DETAIL
RECEIVABLES, NET
The following is a summary of the components of receivables (in
thousands):
YEAR-END
------------------
1996 1997
---- ----
Receivables:
Trade....................................... $ 6,837 $ 6,938
Other....................................... 1,004 1,140
------- -------
7,841 8,078
Less allowance for doubtful accounts............ 1,020 1,317
------- -------
$ 6,821 $ 6,761
======= =======
The following is an analysis of the allowance for doubtful accounts (in
thousands):
1995 1996 1997
---- ---- ----
Balance at beginning of year........... $ 748 $ 974 $ 1,020
Provision for doubtful accounts........ 566 424 582
Recoveries of doubtful accounts........ 44 21 -
Uncollectible accounts written off..... (384) (399) (285)
-------- ------- --------
Balance at end of year................. $ 974 $ 1,020 $ 1,317
======== ======= ========
Substantially all receivables are pledged as collateral for certain debt of
the Parent (see Note 5).
PROPERTIES, NET
The following is a summary of the components of properties, net (in
thousands):
YEAR-END
-------------------
1996 1997
---- ----
Land............................................ $ 2,689 $1,562
Buildings and improvements and leasehold
improvements.................................. 6,918 3,371
Machinery and equipment......................... 7,016 2,679
Leased assets capitalized....................... 888 493
------- ------
17,511 8,105
Less accumulated depreciation and amortization.. 10,812 3,856
------- ------
$ 6,699 $4,249
======= ======
Substantially all properties are pledged as collateral for certain debt of
the Parent or TRG (see Note 5).
12
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
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):
YEAR-END
--------------------
1996 1997
---- ----
Costs in excess of net assets of acquired
companies.................................... $29,188 $29,188
Less accumulated amortization................... 7,522 8,332
------- -------
$21,666 $20,856
======= =======
DEFERRED COSTS AND OTHER ASSETS
The following is a summary of the components of deferred costs and other
assets (in thousands):
YEAR-END
-------------------
1996 1997
---- ----
Trademarks...................................... $ 4,620 $4,615
Less accumulated amortization of trademarks..... 198 604
------- ------
Trademarks, net............................... 4,422 4,011
Notes receivable................................ - 690
Other........................................... 2,902 1,295
------- ------
$ 7,324 $5,996
======= ======
ACCRUED EXPENSES
The following is a summary of the components of accrued expenses (in
thousands):
YEAR-END
-------------------
1996 1997
---- ----
Accrued rent and other costs on
closed restaurants not sold to RTM........... $ 2,145 $4,932
Accrued compensation and related benefits....... 8,972 4,589
Accrued rent on equipment no longer used........ 2,036 3,187
Accrued restructuring costs..................... - 2,182
Other........................................... 7,696 4,793
------- -------
$20,849 $19,683
======= =======
13
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(5) LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
YEAR-END
--------------------
1996 1997
---- ----
Notes, bearing interest at 7.94% to 9.69%, due
through 1999....................................... $ 4,865 $ 1,396
Capitalized lease obligations....................... 15,928 469
------- -------
Total debt ...................................... 20,793 1,865
Less amounts payable within one year............. 17,802 813
------- -------
$ 2,991 $ 1,052
======= =======
Aggregate annual maturities of long-term debt, including capitalized lease
obligations, are as follows as of December 28, 1997 (in thousands):
1998............................................ $ 813
1999............................................ 674
2000............................................ 44
2001............................................ 49
2002............................................ 55
Thereafter...................................... 230
-------
$ 1,865
=======
As discussed in Note 3, in May 1997 RTM assumed $14,955,000 of capitalized
lease obligations associated with the restaurants sold.
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. TRG has fully and
unconditionally guaranteed the Parent's obligations with respect to the Senior
Notes jointly and severally with Royal Crown. TRG's common stock and
substantially all of its personal property secure such guarantee.
(6)FAIR VALUE OF FINANCIAL INSTRUMENTS
TRG has the following financial instruments for which the disclosure of
fair values is required: cash and cash equivalents, accounts receivable and
payable, affiliated notes receivable and payable, accrued expenses and
long-term debt. The carrying amounts of cash and cash equivalents, affiliated
notes receivable and payable, accounts payable and accrued expenses
approximated fair value due to the short-term maturities of such assets and
liabilities. The carrying amount of accounts receivable approximated fair
value due to the related allowance for doubtful accounts. 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.
14
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(7)INCOME TAXES
As discussed in Note 1, TRG is included in the consolidated Federal income
tax return of Triarc. Pursuant to a tax sharing agreement between Triarc and
the Parent, TRG provides for Federal income taxes on the same basis as if it
filed a separate consolidated return. Amounts currently payable for Federal
income taxes of $10,680,000 and $6,469,000 as of December 31, 1996 and
December 28, 1997, respectively, have been included in "Due to Parent and
affiliates" in the accompanying consolidated balance sheets.
The income (loss) before income taxes consisted of the following components
(in thousands):
1995 1996 1997
---- ---- ----
Domestic.................... $(11,554) $(15,933) $24,230
Foreign..................... (371) (3,238) 106
-------- -------- -------
$(11,925) $(19,171) $24,336
======== ======== =======
The benefit from (provision for) income taxes consisted of the following
components (in thousands):
1995 1996 1997
---- ---- ----
Current:
Federal................................... $ 543 $ (5,368) $ 4,262
State..................................... 59 (988) 92
Foreign................................... (362) (370) (444)
------- -------- --------
240 (6,726) 3,910
------- -------- --------
Deferred:
Federal................................... 2,936 10,931 (12,424)
State..................................... 588 401 (1,580)
Foreign................................... - - -
------- -------- --------
3,524 11,332 (14,004)
------- -------- --------
$ 3,764 $ 4,606 $(10,094)
======= ======== ========
15
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
The current and net non-current deferred income tax assets resulted from
the following components (in thousands):
YEAR-END
--------------------
1996 1997
---- ----
Current deferred income tax assets:
Accrued employee benefit costs................. $ 1,922 $ 1,226
Accrued rent and other costs on closed
restaurants not sold to RTM................. 834 1,919
Accrued restructuring costs.................... - 849
State net operating loss carryforwards......... - 655
Allowance for doubtful accounts................ 397 512
Other, net..................................... 873 621
------- -------
4,026 5,782
------- -------
Non-current deferred income tax assets (liabilities):
Reserve for income tax contingencies........... (1,475) (1,650)
Deferred franchise fees........................ 1,330 1,581
Depreciation and other properties basis
differences................................. 15,279 (311)
Other, net..................................... 706 460
------- -------
15,840 80
------- -------
$19,866 $ 5,862
======= =======
The difference between the reported benefit from (provision for) income
taxes 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):
1995 1996 1997
---- ---- ----
Income tax benefit (provision) computed at
Federal statutory rate.................... $ 4,174 $ 6,710 $(8,518)
Decrease (increase) in Federal tax provision
resulting from:
State income (taxes) benefit, net of Federal
income tax effect....................... 421 (382) (967)
Amortization of non-deductible Goodwill... (284) (284) (284)
Foreign tax rate in excess of United States
Federal statutory rate and foreign
withholding taxes, net of Federal income
tax benefit.............................. (308) (241) (271)
Effect of foreign net operating losses for
which no tax carryback benefit is
available................................ - (1,133) -
Non-deductible amortization of restricted
stock.................................... (274) - -
Other, net................................ 35 (64) (54)
------- -------- --------
$ 3,764 $ 4,606 $(10,094)
======= ======== ========
16
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
The Federal income tax returns of Triarc and its subsidiaries, including
TRG, have been examined by the Internal Revenue Service ("IRS") for the tax
years 1989 through 1992 and the IRS had issued notices of proposed adjustments
prior to 1997 relating to TRG increasing taxable income by approximately
$600,000. Triarc, on behalf of TRG, has resolved such proposed adjustments
and, in connection therewith, the Parent made a settlement payment of related
taxes and interest in the fourth quarter of 1997 on behalf of itself, TRG and
Royal Crown.
(8) CORPORATE RESTRUCTURING
The 1996 corporate restructuring charge of $2,400,000 related to estimated
losses on planned subleases (principally for the write-off of nonrecoverable
unamortized leasehold improvements and furniture and fixtures) of surplus
office space as a result of the then planned sale of company-owned
restaurants. The 1997 corporate restructuring charge of $5,597,000 principally
related to employee severance and related termination costs and employee
relocation associated with restructuring in connection with the RTM Sale.
(9) PENSION AND STOCK COMPENSATION PLANS
Triarc maintains a 401(k) defined contribution plan (the "Plan") covering,
among other employees of Triarc and its subsidiaries, all of TRG's employees
who meet certain minimum requirements and elect to participate. Under the
provisions of the Plan, employees may contribute various percentages of their
compensation up to a maximum of 15%, 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
additional annual company contributions at an arbitrary aggregate amount to be
determined by the employers. In connection with these employer contributions,
TRG provided $959,000, $689,000 and $602,000 in 1995, 1996 and 1997,
respectively.
TRG's employees who were eligible to participate prior to 1989 are covered
under a defined benefit pension plan sponsored by the Parent which covers
employees of TRG, Royal Crown and certain other affiliates. Prior to 1995 the
plan was frozen. Net periodic pension cost (credit) under the plan was
immaterial in each of the years presented.
Prior to 1995, Triarc granted 76,750 restricted shares of Triarc Class A
common stock to certain TRG senior executives under Triarc's 1993 Equity
Participation Plan (the "1993 Triarc Equity Plan"). The aggregate values of
the awards at the respective dates of grant of $1,613,000 were being charged
to TRG 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 TRG 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 TRG
under the 1993 Triarc Equity Plan and Triarc's 1997 Equity Participation Plan.
Of such options, 100,000 granted prior to 1995 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 and 162,000 granted in 1997 were at a weighted
average option price of $12.57 which was below the weighted average fair
market value of Triarc's Class A common stock on the respective dates of grant
of $14.53, resulting in an aggregate difference of $317,000. Such differences
are being charged to TRG as compensation expense over the applicable vesting
17
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
periods through 2002, 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 (credit)
resulting from the grants of restricted shares and below market stock options
aggregated $870,000 (including the $454,000 from the accelerated vesting of
the restricted stock and net of $231,000 of Forfeiture Adjustments),
$(104,000) (net of $173,000 of Forfeiture Adjustments) and $32,000 (net of
$154,000 of Forfeiture Adjustments) during 1995, 1996 and 1997, respectively,
and is included in "General and administrative" in the accompanying
consolidated statements of operations.
(10) LEASE COMMITMENTS
TRG leases buildings and improvements and machinery and equipment. Prior
to the RTM Sale, some leases provided for contingent rentals based upon sales
volume. In connection with the RTM Sale in May 1997, substantially all
operating and capitalized lease obligations associated with the sold
restaurants were assumed by RTM, although TRG remains contingently liable if
the future lease payments (which could potentially aggregate a maximum of
approximately $100,000,000 as of December 28, 1997) are not made by RTM. TRG
provided $9,677,000 in "Reduction in carrying value of long-lived assets
impaired or to be disposed of" in 1996 representing the present value of
future operating lease payments relating to certain equipment transferred to
RTM but the obligations for which remain with TRG.
Rental expense under operating leases consisted of the following
components (in thousands):
1995 1996 1997
---- ---- ----
Minimum rentals...................... $14,873 $ 16,190 $ 7,020
Contingent rentals................... 879 793 204
------- -------- -------
15,752 16,983 7,224
Less sublease income................. 688 489 509
------- -------- -------
$15,064 $ 16,494 $ 6,715
======= ======== =======
TRG's future minimum rental payments and sublease rental income for leases
having an initial lease term in excess of one year as of December 28, 1997,
excluding $7,925,000 of those future operating lease payments for which TRG
has provided as set forth above, are as follows (in thousands):
18
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
RENTAL PAYMENTS SUBLEASE INCOME
---------------------- ---------------------
CAPITALIZED OPERATING CAPITALIZED OPERATING
LEASES LEASES LEASES LEASES
------ ------ ------ ------
1998........................... $ 105 $ 1,375 $ 60 $ 567
1999........................... 87 1,090 60 463
2000........................... 87 1,043 55 442
2001........................... 87 1,047 41 359
2002........................... 86 945 44 255
Thereafter..................... 317 2,740 160 1,127
------- ------- ------- -------
Total minimum payments....... 769 $ 8,240 $ 420 $ 3,213
======= ======= =======
Less interest.................. 300
-------
Present value of minimum
capitalized lease payments... $ 469
=======
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 5).
(11) LEGAL MATTERS
TRG is involved in litigation and claims incidental to its business. TRG
has reserves for such legal matters aggregating approximately $823,000 as of
December 28, 1997. Although the outcome of such matters cannot be predicted
with certainty and some of these may be disposed of unfavorably to TRG, based
on currently available information and given TRG's aforementioned reserves,
TRG does not believe that such legal matters will have a material adverse
effect on its consolidated results of operations or financial position.
19
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(12)TRANSACTIONS WITH RELATED PARTIES
The following is a summary of transactions between TRG and its related
parties (in thousands):
1995 1996 1997
---- ---- ----
Costs allocated to TRG by Triarc under a
management services agreement (a)......... $ 4,100 $ 3,850 $ 3,850
Interest expense allocated to TRG
from Parent (b)........................... 3,985 3,592 2,634
Interest income on note receivable from
Parent (c)................................ - - 2,415
Proceeds from sales of restaurants to
affiliates (c)............................ 31,602 1,600 31,190
Receipt (return) of purchase option
deposit from affiliate (d)................ 6,700 - (6,500)
Option premium income from affiliate (d).... - - 200
Repurchase of $720 principal amount of
promissory notes due from franchisees
from Southeastern Public Service Company,
a subsidiary of Triarc, at fair value..... - - 690
Royalty income from affiliates (e).......... 1,132 2,067 650
Dividend of restaurants to Parent (f)....... 14,733 - 325
Compensation costs charged (credited) to
TRG by Triarc for restricted stock and
below market stock options (Note 9)....... 870 (104) 32
Payments to Triarc for usage of aircraft.... 58 - 32
Purchase of restaurants from affiliates (g). - 2,782 -
(a) TRG receives from Triarc certain management services, including legal,
accounting, tax, insurance, financial and other management services, under a
management services agreement. Such costs were allocated to TRG by Triarc
based upon TRG's pro rata share of the sum of the greater of income before
income taxes, depreciation and amortization and 10% of revenues of Triarc's
principal operating subsidiaries. Management of TRG believes that such
allocation method is reasonable. Further, management of TRG believes that such
allocation approximates the costs that would have been incurred by TRG 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 TRG 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 TRG of $1,800,000 during
each of the years 1995, 1996 and 1997. In addition, during 1995, 1996 and
1997, the Parent allocated to TRG interest expense of $2,185,000, $1,792,000
and $834,000, respectively incurred in connection with borrowings from Triarc
in 1995 through May 5, 1997 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 TRG to fund capital
expenditures, acquisitions and other cash requirements of TRG. Management of
TRG believes such allocations are reasonable and, with respect to the Triarc
and SEPSCO Interest, approximated the interest TRG would have incurred in the
open market. However, the allocation of the Senior Notes Interest may not be
indicative of interest expense which TRG would have incurred on a stand-alone
basis, the amounts of which would be dependent upon TRG's capital structure on
such stand-alone basis.
20
<PAGE>
ARBY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(c)During 1995, TRG 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 TRG 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. As described in Note 3, in
connection with the RTM Sale in May 1997, TRG sold the land, buildings and
related equipment of all of its 274 company-owned restaurants at approximate
net book value in exchange for demand promissory notes aggregating $31,190,000
which bear interest at 11.875% per annum and the assumption of $14,955,000 in
capitalized lease obligations. The $2,415,000 of interest income represents
interest on the $31,190,000 of notes from May 5 through December 28, 1997.
(d)In connection with the acquisition by TRG of 35 previously franchised
restaurants in February 1995, TRG received a $6,700,000 non-interest bearing
refundable purchase option deposit from Arby's Restaurants, Inc. ("ARINC"), a
wholly-owned subsidiary of the Parent, which gave 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 terminated in
connection with the RTM Sale and TRG returned $6,500,000 of such option
deposit and recognized $200,000 of option premium income.
(e)TRG 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, 1996 and 1997, TRG recognized royalties of $879,000,
$1,347,000 and $415,000 from AROC and $253,000, $720,000 and $235,000 from
ARHC, respectively. TRG also entered into management agreements with each of
AROC, ARDC and ARHC pursuant to which TRG provided certain management
services, as well as financial and accounting services, to such companies for
reimbursement of the direct costs to TRG of such services plus an annual fee
of $10,000 from each of those companies. Such franchise license and management
service agreements were terminated in May 1997 in connection with the RTM
Sale.
(f)In May 1995, TRG dividended land, buildings and related improvements of
39 restaurants with a net book value of $14,733,000 to the Parent. In
connection with the RTM Sale in May 1997, TRG recorded a $325,000 dividend of
restaurant assets to the Parent.
(g)During 1996, TRG 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.
21
<PAGE>
ROYAL CROWN COMPANY, INC.
-------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 28, 1997
-----------------
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................... 1
Consolidated Balance Sheets as of December 31, 1996 and December 28, 1997.. 2
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1996 and the fiscal year ended December 28, 1997. 3
Consolidated Statements of Stockholder's Equity (Deficit) for the years ended
December 31, 1995 and 1996 and the fiscal year ended December 28, 1997. 4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and the fiscal year ended December 28, 1997. 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 28, 1997 and December 31, 1996 and
the related consolidated statements of operations, stockholder's equity
(deficit) and cash flows for each of the three fiscal years in the period
ended December 28, 1997. 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
28, 1997 and December 31, 1996 and the results of their operations and their
cash flows for each of the three fiscal years in the period ended December 28,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 10, 1998
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 28,
1996 1997
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash................................................ $ 800 $ 901
Receivables, net (Note 4)........................... 27,819 27,021
Inventories (Note 4)................................ 9,305 12,443
Deferred income tax benefit (Note 7)................ 4,478 6,133
Prepaid expenses and other current assets........... 3,746 2,650
-------- --------
Total current assets.............................. 46,148 49,148
Properties, net (Note 4).............................. 5,227 4,556
Unamortized costs in excess of net assets of
acquired companies (Note 4)......................... 137,457 132,540
Deferred income tax benefit (Note 7).................. 9,365 7,944
Deferred costs and other assets (Note 4).............. 3,955 6,783
-------- --------
$202,152 $200,971
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.................................... $ 12,677 $10,849
Accrued expenses (Note 4)........................... 20,704 17,186
-------- --------
Total current liabilities......................... 33,381 28,035
Due to Parent and affiliates, net (Note 12)........... 206,855 212,770
Other liabilities..................................... 926 4,803
Commitments and contingencies (Notes 7, 9, 10 and 11)
Stockholder's equity (deficit) (Note 5):
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................................. (81,437) (87,064)
-------- --------
Total stockholder's deficit....................... (39,010) (44,637)
-------- --------
$202,152 $200,971
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
-------------------------------
DECEMBER 31,
--------------- DECEMBER 28,
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
Net sales...................................... $172,603 $178,007 $ 146,835
-------- -------- ---------
Costs and expenses:
Cost of sales............................... 57,072 61,620 41,210
Advertising, selling and distribution (Note 1) 86,226 76,923 68,074
General and administrative.................. 27,441 23,716 23,581
Facilities relocation and corporate
restructuring (Note 8).................... - 3,950 1,437
-------- -------- ---------
170,739 166,209 134,302
-------- -------- ---------
Operating profit.......................... 1,864 11,798 12,533
Interest expense............................... (13) - (94)
Allocation of interest expense from Parent
(Note 12).................................... (20,000) (20,000) (20,000)
Other income (expense), net.................... (760) 286 1,758
--------- -------- ---------
Loss before income taxes.................... (18,909) (7,916) (5,803)
Benefit from income taxes (Note 7)............. 4,844 956 176
-------- -------- ---------
Net loss.................................... $(14,065) $ (6,960) $ (5,627)
======== ======== =========
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 28, 1997
COMMON STOCK
------------------- ADDITIONAL
NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT
--------- ------ ------- -------
(DOLLARS IN THOUSANDS)
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)
Net loss........................ - - - (5,627)
-------- ------- -------- --------
Balance at December 28, 1997....... 1,000 $ 1 $ 42,426 $(87,064)
======== ======= ======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
ROYAL CROWN COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
------------------------------
DECEMBER 31,
---------------- DECEMBER 28,
1995 1996 1997
-------- ------ ----
(IN THOUSANDS)
Cash flows from operating activities:
Net loss..................................... $(14,065) $(6,960) $(5,627)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of costs in excess of net
assets acquired and other intangibles.. 5,961 5,432 5,239
Depreciation and amortization of properties 838 999 1,101
Provision for facilities relocation and
corporate restructuring................ - 3,950 1,437
Payments on facilities relocation and
corporate restructuring................ (711) (224) (2,542)
Provision for doubtful accounts........... 1,402 2,655 1,820
Benefit from deferred income taxes........ (2,457) (1,076) (234)
Noncash charges (benefit) from Parent..... 15,874 (1,966) 5,915
Other, net................................ 1,524 (403) (164)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables.......................... (4,078) (7,004) (180)
Inventories.......................... (2,256) 926 (3,182)
Prepaid expenses and other current
assets.............................. (180) 137 904
Increase (decrease) in accounts payable
and accrued expenses................. 3,721 4,134 (4,820)
------- ------ -------
Net cash provided by (used in) operating
activities.................................... 5,573 600 (333)
------- ------ -------
Cash flows from investing activities:
Proceeds from sales of properties and business 587 28 951
Capital expenditures......................... (1,474) (591) (517)
Business acquisition......................... (2,923) - -
Investment in affiliate...................... (1,000) - -
------- ------ -------
Net cash provided by (used in) investing
activities (4,810) (563) 434
------- ------ -------
Cash flows from financing activities............ - - -
------- ------ -------
Net increase in cash ........................... 763 37 101
Cash at beginning of year....................... - 763 800
------- ------ -------
Cash at end of year............................. $ 763 $ 800 $ 901
======= ====== =======
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest................................... $ 13 $ - $ -
======= ====== =======
Income taxes (refunds), net................ $ 55 $ (245) $ -
======= ======= =======
See accompanying notes to consolidated financial statements.
5
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Royal Crown
Company, Inc. (together with its subsidiary, "Royal Crown") and its
wholly-owned subsidiary, TriBev Corporation ("TriBev"). Royal Crown is 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"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
CHANGE IN FISCAL YEAR
Effective January 1, 1997, Royal Crown 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, Royal Crown's 1997 fiscal
year commenced January 1, 1997 and ended December 28, 1997. Such period is
referred to herein as "the year ended December 28, 1997" or "1997". December
28, 1997 and December 31, 1996 are referred to herein as "Year-End 1997" and
"Year-End 1996", respectively.
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 computed on the straight-line
basis using the estimated useful lives of the related major classes of
properties: 3-15 years for machinery and equipment and 15-40 years for
buildings. 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 40 years. Trademarks are being
amortized on the straight-line basis principally over 15 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.
6
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
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
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 $15,274,000, $5,724,000 and $7,601,000 for 1995,
1996 and 1997, respectively. In addition Royal Crown supports its beverage
bottlers and distributors with promotional allowances, a portion of which is
utilized for indirect advertising by such bottlers and distributors.
Promotional allowances amounted to $58,431,000, $55,982,000 and $48,528,000
for 1995, 1996 and 1997, 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 concentrates used in the production and
distribution of soft drinks by independent bottlers under the brand names RC
Cola(R), Diet RC Cola(R), Diet Rite Cola(R), Diet Rite(R) flavors, Nehi(R),
Upper 10(R), and Kick(R). Royal Crown operates its business principally
throughout the United States with minimal foreign exposure.
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
7
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
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 has not used any estimates it considers significant in the
preparation of its consolidated financial statements as of December 28, 1997.
CERTAIN RISK CONCENTRATIONS
Royal Crown had two significant customers which accounted for 11% and 12%
of net sales in 1995, 17% and 13% in 1996 and three significant customers
which accounted for 16%, 13% and 10% of net sales in 1997. While Royal Crown
has chosen to purchase certain raw materials (such as aspartame) on an
exclusive basis from single suppliers, Royal Crown believes that, if
necessary, adequate raw materials can be obtained from alternate sources. Risk
of geographical concentration 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) DISPOSITION AND PRIOR YEAR ACQUISITION
C&C SALE
On July 18, 1997, Royal Crown completed the sale (the "C&C Sale") of its
rights to the C&C beverage line of mixers, colas and flavors, including the
C&C trademark and equipment related to the operation of the C&C beverage line,
to Kelco Sales & Marketing Inc. ("Kelco"), for $750,000 in cash and an
$8,650,000 note (the "Kelco Note") with a discounted value of $6,003,000
consisting of $3,623,000 relating to the C&C Sale and $2,380,000 relating to
future revenues. The $2,380,000 of deferred revenues consists of (i)
$2,096,000 relating to minimum take-or-pay commitments for sales of
concentrate for C&C products to Kelco and (ii) $284,000 relating to future
technical services to be performed for Kelco by Royal Crown, both under the
contract with Kelco. The excess of the proceeds of $4,373,000 over the
carrying value of the C&C trademark of $1,575,000 and the related equipment of
$2,000 resulted in a pretax gain of $2,796,000 which, commencing in the third
quarter of 1997, is being recognized pro rata between the gain on sale and the
carrying value of the assets sold based on the cash proceeds and collections
under the Kelco Note since realization of the Kelco Note is not yet fully
assured. Accordingly, a gain of $576,000 was recognized in "Other income
(expense), net" in the accompanying consolidated statement of operations for
the year ended December 28, 1997. See below under "Pro Forma Operating Data"
for the unaudited supplemental pro forma condensed summary operating data of
Royal Crown (the "Pro Forma Data") for the years ended December 31, 1996 and
December 28, 1997 giving effect to the C&C Sale.
8
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
PRO FORMA OPERATING DATA (UNAUDITED)
The following Pro Forma Data of Royal Crown for the years ended December
31, 1996 and December 28, 1997 have been prepared by adjusting the historical
data as set forth in the accompanying consolidated statements of operations to
give effect to the C&C Sale as if such sale had been consummated as of January
1, 1996. Such Pro Forma Data is presented for comparative purposes only and
does not purport to be indicative of Royal Crown's actual results of
operations had the C&C Sale actually been consummated on January 1, 1996 or of
Royal Crown's future results of operations and are as follows (in thousands):
1996 1997
-------------------------- ------------------------
AS REPORTED PRO FORMA (a) AS REPORTED PRO FORMA(a)
----------- ------------- ----------- ------------
Revenues $178,007 $166,904 $146,835 $139,992
Operating profit 11,798 12,951 12,533 12,700
Net loss (6,960) (5,959) (5,627) (5,697)
- --------------------
(a)The effect of the C&C Sale consists of (i) the elimination of revenues
and expenses related to the C&C beverage line, (ii) realization of deferred
revenues based on the portion of the minimum take-or-pay commitment for sales
of concentrate for C&C products to Kelco and from fees related to technical
services performed, both under the contract with Kelco, (iii) imputation of
interest expense on the deferred revenues, (iv) recognition of the cost of the
concentrate to be sold, (v) elimination of the aforementioned $576,000 gain on
the sale of C&C recorded in 1997, (vi) accretion of the discount on the
portion of the Kelco Note relating to the C&C Sale and (vii) the income tax
effects of the above.
PURCHASE PRICE ALLOCATION OF PRIOR YEAR ACQUISITION
Royal Crown consummated a business acquisition during 1995 for cash of
$2,923,000. Such acquisition was accounted for in accordance with the purchase
method of accounting. In accordance therewith, the following table sets forth
the allocation of the aggregate purchase price reflected in "Business
acquisitions" in the accompanying 1995 consolidated statement of cash flows
(in thousands):
Deferred costs and other assets......................... $ 2,500
Net current assets...................................... 423
-------
$ 2,923
=======
CANCELLATION OF SPINOFF TRANSACTIONS
In October 1996 Triarc had announced that its Board of Directors approved
a plan to offer up to approximately 20% of the shares of its beverage and
restaurant businesses (including those of 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").
In May 1997 Triarc announced it would not proceed with the Spinoff
Transactions as a result of its acquisition of Snapple Beverage Corp.
("Snapple") and other issues.
9
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(4) BALANCE SHEET DETAIL
RECEIVABLES, NET
The following is a summary of the components of receivables (in
thousands):
YEAR-END
--------------------
1996 1997
----- ----
Receivables:
Trade....................................... $28,394 $26,116
Other....................................... 3,054 5,773
------- -------
31,448 31,889
Less allowance for doubtful accounts........... 3,629 4,868
------- -------
$27,819 $27,021
======= =======
The following is an analysis of the allowance for doubtful accounts (in
thousands):
1995 1996 1997
-------- -------- ------
Balance at beginning of year............... $ 239 $ 936 $ 3,629
Provision for doubtful accounts (Note 12).. 1,402 2,655 1,820
Recoveries of doubtful accounts............ - 174 130
Uncollectible accounts written off......... (705) (136) (711)
-------- -------- -------
Balance at end of year..................... $ 936 $ 3,629 $ 4,868
======== ======== =======
Substantially all receivables are pledged as collateral for certain debt
of the Parent (see Note 5).
INVENTORIES
The following is a summary of the components of inventories (in
thousands):
YEAR-END
-----------------
1996 1997
---- ----
Raw materials................................. $ 5,394 $ 5,904
Work in process............................... 467 214
Finished goods................................ 3,444 6,325
------- --------
$ 9,305 $ 12,443
======= ========
Substantially all inventories are pledged as collateral for certain debt
of the Parent (see Note 5).
10
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
PROPERTIES
The following is a summary of the components of properties, net (in
thousands):
YEAR-END
-------------------
1996 1997
---- ----
Land....................................... $ 724 $ 789
Buildings and leasehold improvements....... 4,487 4,906
Machinery and equipment.................... 6,343 6,259
------- --------
11,554 11,954
Less accumulated depreciation and
amortization............................. 6,327 7,398
------- --------
$ 5,227 $ 4,556
======= ========
Substantially all properties are pledged as collateral for certain debt of
the Parent (see Note 5).
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):
YEAR-END
--------------------
1996 1997
---- ----
Costs in excess of net assets of acquired
companies.................................... $194,533 $194,533
Less accumulated amortization.................. 57,076 61,993
-------- --------
$137,457 $132,540
======== ========
DEFERRED COSTS AND OTHER ASSETS
The following is a summary of the components of deferred costs and others
assets (in thousands):
YEAR-END
--------------------
1996 1997
---- ----
Trademarks..................................... $ 3,128 $ 1,186
Less accumulated amortization of trademarks.... 736 495
-------- --------
Trademarks, net.............................. 2,392 691
Note receivable................................ - 5,047
Other.......................................... 1,563 1,045
-------- --------
$ 3,955 $ 6,783
======== ========
11
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
ACCRUED EXPENSES
The following is a summary of the components of accrued expenses (in
thousands):
YEAR-END
-------------------
1996 1997
---- ----
Accrued advertising............................ $ 11,609 $ 9,401
Deferred revenue............................... 751 2,355
Accrued compensation and related benefits...... 1,989 1,912
Facilities relocation and corporate restructuring 2,650 917
Other........................................... 3,705 2,601
-------- --------
$ 20,704 $ 17,186
======== ========
(5) 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. (d/b/a
Triarc Restaurant Group - "TRG"), a wholly-owned subsidiary of the Parent.
Royal Crown's common stock and substantially all of its personal property
secure such guarantee.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Royal Crown has the following financial instruments for which the
disclosure of fair values is required: cash, accounts receivable, accounts
payable and accrued expenses. The carrying amounts of cash, accounts payable
and accrued expenses approximated fair value due to the short-term maturities
of such assets and liabilities. The carrying amount of accounts receivable
approximated fair value due to the related allowance for doubtful accounts.
(7) 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
on the same basis as if it filed a separate consolidated return. As of
December 31, 1996 and December 28, 1997, Royal Crown was in a net operating
loss position and, as such, all of Royal Crown's income tax related balances
are reported as deferred income taxes.
Royal Crown's loss before income taxes was entirely from domestic
operations.
12
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
The benefit from income taxes consisted of the following components (in
thousands):
1995 1996 1997
------- -------- ------
Current:
Federal................................... $ 2,173 $ - $ -
State..................................... 214 (120) (58)
------- -------- -------
2,387 (120) (58)
------- -------- -------
Deferred:
Federal................................... 2,331 891 164
State..................................... 126 185 70
------- -------- -------
2,457 1,076 234
------- -------- -------
$ 4,844 $ 956 $ 176
======= ======== =======
The current and net non-current deferred income tax assets resulted from
the following components (in thousands):
YEAR-END
--------------------
1996 1997
---- ----
Current deferred income tax assets:
Net operating loss carryforward under Parent's
tax sharing agreement with Triarc and
state net operating loss carryforwards...... $ - $ 1,983
Allowance for doubtful accounts................. 1,333 1,966
Deferred revenue................................ 275 689
Accrued employee benefit costs.................. 507 568
Facilities relocation and corporate restructuring 806 336
Accrued advertising and promotions.............. 526 102
Other, net...................................... 1,031 489
-------- --------
4,478 6,133
-------- --------
Non-current deferred income tax assets (liabilities):
Net operating loss carryforward under Parent's
tax sharing agreement with Triarc........... 10,636 9,260
Reserve for income tax contingencies............ (1,433) (1,433)
Write-off of investment in affiliate............ 366 366
Other, net...................................... (204) (249)
-------- --------
9,365 7,944
-------- --------
$ 13,843 $ 14,077
======== ========
As of December 28, 1997 Royal Crown had net operating loss carryforwards
for Federal income tax purposes under the Parent's tax sharing agreement with
Triarc of approximately $29,077,000. Such carryforwards will expire
approximately $10,326,000, $7,602,000, $9,312,000 and $1,837,000 in 2008,
2009, 2010 and 2012, respectively.
13
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
The difference between the reported benefit from income taxes 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):
1995 1996 1997
-------- ------- ------
Income tax benefit computed at Federal
statutory rate............................. $ 6,618 $ 2,771 $ 2,031
Decrease (increase) in Federal tax provision
resulting from:
Amortization of non-deductible Goodwill.... (1,721) (1,721) (1,721)
State income taxes, net of Federal
income tax effect........................ 221 42 8
Other, net................................. (274) (136) (142)
-------- ------- -------
$ 4.844 $ 956 $ 176
======== ======= =======
The Federal income tax returns of Triarc and its subsidiaries, including
Royal Crown, have been examined by the Internal Revenue Service ("IRS") for
the tax years 1989 through 1992 and the IRS had issued notices of proposed
adjustments prior to 1997 relating to Royal Crown increasing taxable income by
approximately $3,000,000. Triarc, on behalf of Royal Crown, has resolved such
proposed adjustments and, in connection therewith, the Parent made a
settlement payment of related taxes and interest in the fourth quarter of 1997
on behalf of itself, Royal Crown and TRG.
(8) FACILITIES RELOCATION AND CORPORATE RESTRUCTURING
The 1996 facilities relocation and corporate restructuring charge of
$3,950,000 related to costs associated with (i) estimated losses on planned
subleases (principally for the write-off of nonrecoverable unamortized
leasehold improvements and furniture and fixtures) of surplus office space as
a result of the relocation (the "Royal Crown Relocation") of Royal Crown's
headquarters which were centralized with the offices of Triarc's other
beverage subsidiaries in White Plains, New York ($1,300,000), (ii) employee
severance costs associated with the Royal Crown Relocation ($2,200,000) and
(iii) the shutdown of Royal Crown's Ohio production facility ($450,000).
The 1997 facilities relocation and corporate restructuring charge of
$1,437,000 related to costs associated with the Royal Crown Relocation
($1,137,000) and the write-off of the remaining unamortized costs of certain
beverage distribution rights reacquired in prior years and no longer being
utilized by Royal Crown as a result of the sale or liquidation of the assets
and liabilities of MetBev, Inc. ("MetBev"), an affiliate ($300,000).
(9) PENSION AND OTHER BENEFIT PLANS
Triarc maintains a 401(k) defined contribution plan (the "Plan")
covering, among other employees of Triarc and its subsidiaries, all of Royal
Crown's employees who meet certain minimum requirements and elect to
participate. Under the provisions of the Plan, employees may contribute
various percentages of their compensation up to a maximum of 15%, 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 additional annual company
contributions at an arbitrary aggregate amount to be determined by the
employers. In connection with these employer contributions, Royal Crown
provided $216,000, $331,000 and $276,000 in 1995, 1996 and 1997, respectively.
14
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
Royal Crown's employees who were eligible to participate prior to 1989
are covered under a defined benefit pension plan sponsored by the Parent which
covers employees of Royal Crown, TRG and certain other affiliates. Prior to
1995 the plan was frozen.
Royal Crown's portion of the components of the net periodic pension cost
were as follows (in thousands):
1995 1996 1997
-------- -------- --------
Current service cost (represents plan expenses) $ 61 $ 61 $ 61
Interest cost on projected benefit obligation 212 205 190
Return on plan assets........................ (483) (264) (444)
Net amortization and deferrals............... 340 101 251
-------- -------- -------
Net periodic pension cost................ $ 130 $ 103 $ 58
======== ======== =======
The following table sets forth Royal Crown's portion of the plan's funded
status (in thousands):
YEAR-END
------------------
1996 1997
---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation........................ $ 2,906 $ 2,736
Nonvested benefit obligation..................... 14 14
-------- --------
Accumulated and projected benefit obligation. 2,920 2,750
Plan assets at fair value.......................... (2,462) (2,753)
-------- --------
Funded status...................................... 458 (3)
Unrecognized net gain from plan experience......... 316 632
-------- --------
Accrued pension cost......................... $ 774 $ 629
======== ========
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 8% for 1995, 7% for 1996
and 7 1/2% for 1997. The discount rate used in determining the benefit
obligations above was 7 1/2% at December 31, 1996 and 7% at December 28, 1997.
The effects of the 1996 decrease and the 1997 increase in the discount rate
did not materially affect the net periodic pension cost. The 1997 decrease in
the discount rate used in determining the benefit obligations resulted in an
increase in the accumulated and projected benefit obligation of $122,000.
Plan assets as of December 28, 1997 are invested in managed portfolios
consisting of government and government agency obligations (51%), common stock
(37%), corporate debt securities (10%) and other investments (2%).
15
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
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 1995, 1996 and 1997, as well as the accumulated
postretirement benefit obligation as of December 28, 1997, were insignificant.
Prior to 1995, Triarc granted 57,000 restricted shares of Triarc Class A
common stock to certain Royal Crown senior executives under Triarc's 1993
Equity Participation Plan (the "1993 Triarc Equity Plan"). The aggregate
values of the awards at the respective dates of grant of $1,161,000 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 1993 Triarc Equity Plan and Triarc's 1997 Equity
Participation Plan. Of such options, 65,000 granted prior to 1995 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 $764,000 and 136,000 granted in 1997 were at a
weighted average option price of $12.54 which was below the weighted average
fair market value of Triarc's Class A common stock on the respective dates of
grant of $14.75, resulting in an aggregate difference of $301,000. Such
differences are being charged to Royal Crown as compensation expense over the
applicable vesting periods through 2000, 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 $742,000 (including the $208,000 from the accelerated vesting of
the restricted stock), $178,000 and $19,000 (net of $154,000 of Forfeiture
Adjustments) during 1995, 1996 and 1997, respectively, and is included in
"General and administrative" in the accompanying consolidated statements of
operations.
(10) LEASE COMMITMENTS
Royal Crown leases buildings and improvements and machinery and
equipment. Rental expense under operating leases consisted of the following
components (in thousands):
1995 1996 1997
---- ---- ----
Minimum rentals......................... $ 725 $ 866 $ 559
Less sublease income.................... 447 313 374
-------- -------- -------
$ 278 $ 553 $ 185
======== ======== =======
16
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
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 28, 1997 are as follows (in thousands):
RENTAL SUBLEASE
PAYMENTS INCOME
-------- ------
1998................................................ $ 562 $ 404
1999................................................ 586 433
2000................................................ 563 403
2001................................................ 529 361
2002................................................ 530 361
Thereafter.......................................... 623 210
------- -------
$ 3,393 $ 2,172
======= =======
(11) LEGAL AND ENVIRONMENTAL MATTERS
Royal Crown is involved in litigation, claims and environmental matters
incidental to its businesses. Royal Crown has reserves for such legal and
environmental matters aggregating approximately $250,000 as of December 28,
1997. Although the outcome of such matters cannot be predicted with certainty
and some of these may be disposed of unfavorably to Royal Crown, based on
currently available information and given Royal Crown's aforementioned
reserves, Royal Crown does not believe that such legal and environmental
matters will have a material adverse effect on its consolidated results of
operations or financial position.
17
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(12) RELATED PARTY TRANSACTIONS
The following is a summary of transactions between Royal Crown and its
related parties (in thousands):
1995 1996 1997
-------- -------- --------
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 3,150 3,150
Net sales to MetBev, net of marketing
support credits (c).................... 551 8,985 -
Provision for uncollectible receivables
from sales to MetBev and guarantee of
MetBev accounts payable and advance to
MetBev (c).............................. 1,745 2,000 975
Investment in preferred stock of MetBev
and write-off thereof (c)............... 1,000 - -
Shared services allocation from Triarc
beverage affiliates, net (d)............ - - 547
Compensation costs charged to Royal
Crown by Triarc for restricted stock
and below market stock options (Note 9). 742 178 19
Lease payments to NPC Leasing Corp.,
an affiliate............................ 21 - -
Payments to Triarc for usage of aircraft. 15 - -
(a) A substantial portion of interest expense on the Senior Notes has
been allocated by the Parent to Royal Crown and TRG 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 allocation
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. Such costs were allocated to
Royal Crown by Triarc based upon Royal Crown's pro rata share of the sum of
the greater of income before income taxes, depreciation and amortization and
10% of revenues of Triarc's principal operating subsidiaries. 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 by other parties and was subject to certain vesting
provisions. Upon consummation of the sale of the MetBev distribution rights
18
<PAGE>
ROYAL CROWN COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 28, 1997
(see below), Royal Crown's voting interest in MetBev was 44.7% principally due
to the cancellation of nonvested stock. In December 1996, the distribution
rights of MetBev were sold to a third party for minimum payments over a
three-year period aggregating $1,050,000 and MetBev commenced the liquidation
of its remaining assets and liabilities. During 1997 Royal Crown advanced
MetBev $539,000 for costs incurred in liquidating the remaining assets and
liabilities and related close-down costs of its facility. Royal Crown has not
received any payments on the $1,050,000 from the purchaser of MetBev's
distributor rights and does not expect to collect due to financial
difficulties of the purchaser which Royal Crown believes is due to competitive
pressures on the purchaser following Triarc's acquisition of Snapple and its
revitalization of Snapple. In connection therewith, in 1995 Royal Crown wrote
off its $1,000,000 investment to "Other income (expense), net" since MetBev
had incurred significant losses from its inception and had a stockholders'
deficit as of December 31, 1996 of $8,943,000. 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) resulting in remaining accounts receivable of $997,000 as of December
31, 1996. In 1997 Royal Crown wrote off its remaining receivables from MetBev,
after offsetting amounts otherwise payable to the purchaser, amounting to
$975,000 (included in "General and administrative").
(d) During 1997, Royal Crown was charged $702,000 for an allocated
portion of the salaries and related benefit costs of certain employees of
Triarc's other beverage subsidiaries who performed shared finance,
administrative and operational functions for Royal Crown and for office space
utilized by Royal Crown in their centralized headquarters in White Plains, NY.
Such allocation was based on the estimated proportion of time expended on the
respective businesses. Royal Crown was also credited $155,000 in 1997 for the
allocated cost of shared legal services that employees of Royal Crown provided
Triarc's other beverage subsidiaries.
The "Due to Parent and affiliates, net" of $206,855,000 and $212,770,000
as set forth in the accompanying consolidated balance sheets as of December
31, 1996 and December 28, 1997, respectively, carries no stated maturity.
19
<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 28, 1997 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-28-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-28-1997
<CASH> 10,463
<SECURITIES> 0
<RECEIVABLES> 34,991
<ALLOWANCES> 6,685
<INVENTORY> 12,444
<CURRENT-ASSETS> 85,018
<PP&E> 20,059
<DEPRECIATION> 11,254
<TOTAL-ASSETS> 287,476
<CURRENT-LIABILITIES> 76,248
<BONDS> 279,606
0
0
<COMMON> 1
<OTHER-SE> (86,861)
<TOTAL-LIABILITY-AND-EQUITY> 287,476
<SALES> 221,077
<TOTAL-REVENUES> 287,310
<CGS> 100,470
<TOTAL-COSTS> 100,470
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,892
<INTEREST-EXPENSE> 35,749
<INCOME-PRETAX> 4,748
<INCOME-TAX> 4,932
<INCOME-CONTINUING> (184)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,800)
<CHANGES> 0
<NET-INCOME> (1,984)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
