UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-20286
RC/ARBY'S CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2277791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Corporate Drive, Fort Lauderdale, Florida 33334
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(Address of principal executive offices) (Zip Code)
(954) 351-5100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1998, all of the voting stock of the registrant
(consisting of 1,000 shares of common stock, $1.00 par value) was held by the
registrant's parent, CFC Holdings Corp.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 28, June 28,
1997 (A) 1998
-------- --------
ASSETS (In thousands)
(Unaudited)
Current assets:
Cash and cash equivalents........................... $ 10,463 $ 21,345
Receivables, net.................................... 34,991 36,967
Note receivable from affiliate...................... 2,000 -
Inventories......................................... 12,444 6,416
Deferred income tax benefit......................... 21,537 21,536
Prepaid expenses and other current assets........... 3,583 3,567
---------- ---------
Total current assets.............................. 85,018 89,831
Properties, net ...................................... 8,805 11,337
Unamortized costs in excess of net assets
of acquired companies............................... 153,396 150,533
Deferred income tax benefit........................... 20,246 15,977
Deferred costs and other assets....................... 20,011 18,088
---------- ---------
$ 287,476 $ 285,766
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt................... $ 1,556 $ 1,471
Notes payable to affiliates......................... 1,200 375
Accounts payable.................................... 13,584 5,736
Due to affiliates................................... 8,062 13,515
Accrued expenses.................................... 51,846 48,992
---------- ---------
Total current liabilities......................... 76,248 70,089
Long-term debt........................................ 279,606 278,796
Deferred income and other liabilities................. 18,482 18,173
Stockholder's equity (deficit):
Common stock........................................ 1 1
Additional paid-in capital.......................... 73,690 73,690
Accumulated deficit................................. (160,253) (154,678)
Currency translation adjustment..................... (298) (305)
---------- ---------
Total stockholder's deficit....................... (86,860) (81,292)
---------- ---------
$ 287,476 $ 285,766
========== =========
(A) Derived from the audited consolidated financial statements as of December
28, 1997.
See accompanying notes to condensed consolidated financial statements.
2
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RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
------------------ ----------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
---- ---- ---- ----
(In thousands)
(Unaudited)
Revenues:
Net sales......................... $ 65,461 $ 35,958 $154,934 $ 68,153
Royalties, franchise fees
and other revenues............... 16,327 19,242 29,641 37,331
-------- -------- -------- --------
81,788 55,200 184,575 105,484
-------- -------- -------- --------
Costs and expenses:
Cost of sales..................... 29,938 8,762 80,180 16,866
Advertising, selling and
distribution..................... 22,195 18,595 45,906 34,741
General and administrative........ 16,579 15,011 34,141 29,166
Facilities relocation and
corporate restructuring.......... 4,847 - 6,723 -
-------- -------- -------- --------
73,559 42,368 166,950 80,773
-------- -------- -------- --------
Operating profit................. 8,229 12,832 17,625 24,711
Interest expense.................... (8,998) (7,807) (19,389) (15,419)
Other income (expense), net......... (1,185) 916 (379) 1,812
-------- -------- -------- --------
Income (loss) before income taxes
and extraordinary charge....... (1,954) 5,941 (2,143) 11,104
Benefit from (provision for)
income taxes...................... 1,590 (2,972) 1,715 (5,529)
-------- -------- -------- --------
Income (loss) before
extraordinary charge........... (364) 2,969 (428) 5,575
Extraordinary charge................ (1,800) - (1,800) -
-------- -------- -------- --------
Net income (loss)................ $ (2,164) $ 2,969 $ (2,228) $ 5,575
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
--------------------
June 29, June 28,
1997 1998
---- ----
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net income (loss)..................................... $ (2,228) $ 5,575
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of costs in excess of net assets of
acquired companies and other intangibles.......... 3,462 3,461
Depreciation and amortization of properties........ 957 2,296
Amortization of deferred financing costs........... 1,113 1,091
Write-off of unamortized deferred financing costs.. 2,950 -
Provision for facilities relocation and
corporate restructuring........................... 6,723 -
Payments on facilities relocation and
corporate restructuring........................... (2,896) (1,199)
Provision for doubtful accounts.................... 461 780
Provision for (benefit from) deferred income taxes. (3,049) 4,270
Loss on sale of restaurants........................ 2,342 -
Other, net......................................... (814) 162
Changes in operating assets and liabilities:
Increase in receivables........................... (2,968) (2,756)
Decrease in inventories........................... 2,775 6,028
Decrease in prepaid expenses and other
current assets................................... 2,400 16
Decrease in accounts payable and accrued expenses. (12,971) (9,503)
Increase in due to affiliates..................... 80 7,116
-------- --------
Net cash provided by (used in) operating activities..... (1,663) 17,337
-------- --------
Cash flows from investing activities:
Capital expenditures.................................. (1,668) (5,279)
Proceeds from sales of properties..................... 1,889 344
-------- --------
Net cash provided by (used in) investing activities..... 221 (4,935)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt.......................... (3,129) (895)
Net borrowings from (repayments to) affiliates........ 4,035 (625)
Capital contribution.................................. 6,211 -
-------- --------
Net cash provided by (used in) financing activities..... 7,117 (1,520)
-------- --------
Net increase in cash and cash equivalents............... 5,675 10,882
Cash and cash equivalents at beginning of period........ 7,411 10,463
-------- --------
Cash and cash equivalents at end of period.............. $ 13,086 $ 21,345
======== ========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 28, 1998
(Unaudited)
(1) Basis of Presentation
RC/Arby's Corporation ("RCAC" or, collectively with its subsidiaries, the
"Company") is a direct wholly-owned subsidiary of CFC Holdings Corp. ("CFC
Holdings") and an indirect wholly-owned subsidiary of Triarc Companies, Inc.
("Triarc"). The Company's principal wholly-owned subsidiaries are Arby's, Inc.
(d/b/a Triarc Restaurant Group - "TRG") and Royal Crown Company, Inc.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of the Company,
however, the accompanying condensed consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of December 28, 1997 and
June 28, 1998, its results of operations for the three-month and six-month
periods ended June 29, 1997 and June 28, 1998 and its cash flows for the
six-month periods ended June 29, 1997 and June 28, 1998 (see below). This
information should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1997 (the "Form 10-K"). Certain
statements in these notes to condensed consolidated financial statements
constitute "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. See "PART II - OTHER INFORMATION."
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, the Company's first half of
1997 commenced on January 1, 1997 and ended on June 29, 1997, with its second
quarter commencing on March 31, 1997, and the Company's first half of 1998
commenced on December 29, 1997 and ended on June 28, 1998, with its second
quarter commencing on March 30, 1998. For the purposes of these consolidated
financial statements, the periods (i) from January 1, 1997 to June 29, 1997
and March 31, 1997 to June 29, 1997 are referred to below as the six-month and
three-month periods ended June 29, 1997, respectively, and (ii) from December
29, 1997 to June 28, 1998 and March 30, 1998 to June 28, 1998 are referred to
below as the six-month and three-month periods ended June 28, 1998,
respectively.
Certain amounts included in the prior comparable periods' condensed
consolidated financial statements have been reclassified to conform with the
current periods' presentation.
(2) Significant 1997 Transactions
On May 5, 1997 certain subsidiaries of the Company sold to an affiliate of
RTM, Inc. ("RTM"), the largest franchisee in the Arby's system, all of the 355
then company-owned restaurants (the "RTM Sale") for cash and a promissory note
(discounted value) aggregating $3,471,000 and the assumption by RTM of an
aggregate $69,637,000 of mortgage and equipment notes payable and capitalized
lease obligations. On July 18, 1997, the Company completed the sale (the "C&C
Sale" and, collectively with the RTM Sale, the "Sales") of its rights to the
C&C beverage line of mixers, colas and flavors, including the C&C trademark
and equipment related to the operation of the C&C beverage line, to Kelco
Sales & Marketing Inc. for $750,000 in cash and an $8,650,000 note with a
discounted value of $6,003,000 consisting of $3,623,000 relating to the C&C
Sale and $2,380,000 relating to future revenues. See Note 3 to the
consolidated financial statements in the Form 10-K for a further discussion of
the Sales.
5
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 28, 1998
(Unaudited)
Due to the significant effects of the Sales, the following supplemental
pro forma condensed consolidated summary operating data (the "Pro Forma Data")
of the Company for the six months ended June 29, 1997 is presented for
comparative purposes. Such Pro Forma Data has been prepared by adjusting the
historical data as set forth in the accompanying condensed consolidated
statement of operations for such period to give effect to the Sales as if the
Sales had been consummated on January 1, 1997. Such Pro Forma Data is
presented for comparative purposes only and does not purport to be indicative
of the Company's actual results of operations had the Sales actually been
consummated on January 1, 1997 or of the Company's future results of
operations and is as follows (in thousands):
As Reported Pro Forma
----------- ---------
Revenues....................................... $ 184,575 $ 107,221
Operating profit............................... 17,625 22,810
Income (loss) before extraordinary charge...... (428) 6,385
(3) Comprehensive Income (Loss)
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130
("SFAS 130") "Reporting Comprehensive Income". SFAS 130 requires the
disclosure of comprehensive income which is defined as the change in
stockholder's equity during a period exclusive of stockholder investments and
distributions to the stockholder. For the Company, in addition to net income
(loss), comprehensive income includes any changes in the currency translation
adjustment. The following is a summary of the components of comprehensive
income (loss) (in thousands):
Three months ended Six months ended
------------------ ----------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
---- ---- ---- ----
Net income (loss)................ $ (2,164) $ 2,969 $ (2,228) $ 5,575
Currency translation adjustment.. - (5) - (7)
-------- -------- -------- --------
Comprehensive income (loss).... $ (2,164) $ 2,964 $ (2,228) $ 5,568
======== ======== ======== ========
(4) Inventories
The following is a summary of the components of inventories (in thousands):
December 28, June 28,
1997 1998
--------- ---------
Raw materials.................................. $ 5,904 $ 3,959
Work in process................................ 214 281
Finished goods................................. 6,326 2,176
--------- ---------
$ 12,444 $ 6,416
========= =========
6
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 28, 1998
(Unaudited)
(5) Related Party Transactions
The Company continues to have certain related party transactions with
Triarc and its subsidiaries of the same nature and general magnitude as those
described in Note 13 to the consolidated financial statements contained in the
Form 10-K.
(6) Income Taxes
The Internal Revenue Service ("IRS") has completed its examination of the
Federal income tax returns of Triarc and its subsidiaries for the tax years
from 1989 through 1992 and, in connection therewith, the Company paid
$4,576,000, including interest, during 1997. The Company is contesting at the
appellate division of the IRS the remaining proposed adjustments of
approximately $3,000,000, the tax effect of which has not yet been determined.
The IRS has recently commenced its examination of the Federal income tax
returns of Triarc and its subsidiaries, including the Company, for the tax
year ended April 30, 1993 and eight-month transition period ended December 31,
1993. The Company believes that adequate aggregate provisions have been made
principally in years prior to 1997 for any tax liabilities, including
interest, that may result from the resolution of the contested adjustments and
the recently commenced examination.
(7) Legal and Environmental Matters
The Company is involved in litigation, claims and environmental matters
incidental to its businesses. The Company has reserves for such legal and
environmental matters aggregating approximately $1,415,000 as of June 28,
1998. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information and given the Company's aforementioned
reserves, the Company does not believe that such legal and environmental
matters will have a material adverse effect on its consolidated results of
operations or financial position.
7
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report on Form 10-K for the fiscal year ended
December 28, 1997 (the "Form 10-K") of RC/Arby's Corporation ("RCAC" or,
collectively with its subsidiaries, the "Company"). The recent trends
affecting the Company's restaurant and beverage segments are described
therein. RCAC is a direct wholly-owned subsidiary of CFC Holdings Corp. ("CFC
Holdings") and an indirect wholly-owned subsidiary of Triarc Companies, Inc.
("Triarc"). RCAC's principal wholly-owned subsidiaries are Arby's, Inc. (d/b/a
Triarc Restaurant Group - "TRG") and Royal Crown Company, Inc. ("Royal
Crown"). Certain statements under this caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute
"forward-looking statements" under the Private Securities Litigation Reform
Act of 1995. See "PART II - OTHER INFORMATION."
Effective January 1, 1997 the Company changed its fiscal year from a
calendar year to a year consisting of 52 or 53 weeks ending on the Sunday
closest to December 31. In accordance therewith, the Company's first half of
1997 commenced on January 1, 1997 and ended on June 29, 1997, with its second
quarter commencing on March 31, 1997, and the Company's first half of 1998
commenced on December 29, 1997 and ended on June 28, 1998, with its second
quarter commencing on March 30, 1998. For the purposes of this management's
discussion and analysis, the periods (i) from January 1, 1997 to June 29, 1997
and March 31, 1997 to June 29, 1997 are referred to below as the six-month (or
1997 first half) and three-month (or 1997 second quarter) periods ended June
29, 1997, respectively, and (ii) from December 29, 1997 to June 28, 1998 and
March 30, 1998 to June 28, 1998 are referred to below as the six-month (or
1998 first half) and three-month (or 1998 second quarter) periods ended June
28, 1998, respectively.
RESULTS OF OPERATIONS
Six Months Ended June 28, 1998 Compared with Six Months Ended June 29, 1997
Revenues decreased $79.1 million (43%) to $105.5 million in the six months
ended June 28, 1998. Restaurant revenues decreased $66.5 million to $37.3
million, reflecting $74.2 million of nonrecurring sales in the 1997 first half
for the then company-owned restaurants, all 355 of which were sold on May 5,
1997 (the "RTM Sale") to an affiliate of RTM, Inc. ("RTM"), the largest
franchisee in the Arby's system, partially offset by a $7.7 million (26%)
increase in royalties and franchise fees. The increase in royalties and
franchise fees was due to incremental royalties of $3.2 million during the
1998 first half from the 355 restaurants sold to RTM and, with respect to
restaurants other than those sold to RTM in the RTM Sale, (i) a 2% increase in
same-store sales of franchised restaurants and (ii) an average net increase of
59 (2%) franchised restaurants. Beverage revenues decreased $12.6 million
(16%) to $68.2 million due to decreases in sales of concentrate ($7.1 million
or 10%) and finished goods ($5.5 million or 79%). The decrease in sales of
concentrate was primarily due to domestic volume declines for branded
concentrate reflecting competitive pricing pressures in the beverage industry
and occurred despite the resulting shift in sales of the C&C beverage line,
the rights to which were sold in July 1997, to concentrate from finished
goods. The Company now sells concentrate to the purchaser of the C&C beverage
line rather than finished goods. The decrease in sales of finished goods was
principally due to the absence in the 1998 period of sales of the C&C beverage
line.
8
<PAGE>
Gross profit (total revenues less cost of sales) decreased $15.7 million
to $88.6 million in the six months ended June 28, 1998 while gross margins
(gross profit divided by total revenues) increased to 84% compared with 57%
for the 1997 first half. Beverage gross profit declined $8.5 million to $51.3
million due to the declines in branded concentrate and finished product sales
volumes discussed above partially offset by an increase in gross margins to
75% in the 1998 first half from 74% in the 1997 first half. The increase in
gross margins is attributed to the effect of the shift in product mix to
higher-margin concentrate sales which more than offset the effect of a
nonrecurring 1997 first half reduction to cost of sales of $1.0 million
resulting from the guarantee to the Company of certain minimum gross profit
levels on sales to the Company's private label customer. The Company has no
similar guarantee of minimum gross profit levels in 1998. Restaurant gross
profit declined $7.2 million to $37.3 million due to a $14.9 million decrease
in store gross profit due to the RTM Sale partially offset by the $7.7 million
increase in royalties and franchise fees (with no associated cost of sales)
described above. Restaurant gross margins increased to 100% from 43% due to
the fact that royalties and franchise fees now constitute the total revenues
of this segment.
Advertising, selling and distribution expenses decreased $11.1 million to
$34.7 million in the six months ended June 28, 1998. Restaurant advertising
and selling expenses declined $7.8 million principally due to the cessation of
local restaurant advertising and marketing expenses resulting from the RTM
Sale. Beverage advertising, selling and distribution expenses declined $3.3
million principally due to (i) lower bottler promotional reimbursements
resulting from the decline in branded concentrate sales volume and (ii)
planned reductions in connection with the aforementioned decrease in sales of
C&C products.
General and administrative expenses decreased $5.0 million to $29.2
million in the six months ended June 28, 1998 principally due to reduced
spending levels related to administrative support, principally payroll, no
longer required for the sold restaurants as a result of the RTM Sale and other
cost reduction measures.
The nonrecurring facilities relocation and corporate restructuring charge
of $6.7 million in the 1997 first half principally consisted of employee
severance and related termination costs and employee relocation associated
with restructuring the restaurant segment in connection with the RTM Sale and,
to a lesser extent, costs associated with the relocation of the Fort
Lauderdale, Florida headquarters of Royal Crown, which was centralized in the
White Plains, New York headquarters of Triarc Beverage Holdings Corp., a
wholly-owned subsidiary of Triarc.
Interest expense decreased $4.0 million to $15.4 million in the six months
ended June 28, 1998 principally due to the full period effect in 1998 of (i)
the assumption by RTM in connection with the RTM Sale of $69.6 million of
mortgage and equipment notes payable and capitalized lease obligations and
(ii) to a lesser extent, the reduction of outstanding principal balances on
May 5, 1997 aggregating $29.7 million under notes payable to Triarc forgiven
or repaid in connection with the RTM Sale.
Other income (expense), net improved $2.2 million to income of $1.8
million in the six months ended June 28, 1998 principally due to the then
estimated $2.3 million nonrecurring loss on the RTM Sale in the 1997 second
quarter.
The Company's (provision for) and benefit from income taxes for the six
months ended June 28, 1998 and June 29, 1997 represented effective rates of
50% and 80%, respectively. Such rate is lower in the 1998 period due
principally to the reduced impact on the 1998 rate of the amortization of
nondeductible costs in excess of net assets of acquired companies since the
projected pretax income for the respective full years upon which such rates
were based was higher for 1998 than 1997.
The extraordinary charge of $1.8 million in the 1997 first half resulted
from the assumption by RTM of mortgage and equipment notes payable in
connection with the RTM Sale and was comprised of the write-off of previously
unamortized deferred financing costs of $3.0 million less income tax benefit
of $1.2 million.
9
<PAGE>
Three Months Ended June 28, 1998 Compared with Three Months Ended June 29,
1997
Revenues decreased $26.7 million (33%) to $55.2 million in the three
months ended June 28, 1998. Restaurant revenues decreased $19.2 million to
$19.2 million, reflecting $22.1 million of nonrecurring sales in the 1997
second quarter for the then company-owned restaurants sold in the RTM Sale
partially offset by a $2.9 million (18%) increase in royalties and franchise
fees. The increase in royalties and franchise fees was due to incremental
royalties of $0.9 million during the 1998 second quarter from the 355
restaurants sold to RTM and, with respect to restaurants other than those sold
to RTM in the RTM Sale, (i) an average net increase of 59 (2%) franchised
restaurants and (ii) a 1% increase in same-store sales of franchised
restaurants. Beverage revenues decreased $7.5 million (17%) to $36.0 million
due to decreases in sales of concentrate ($4.9 million or 12%) and finished
goods ($2.6 million or 79%). The decrease in sales of concentrate reflects (i)
a $3.3 million decline in branded sales primarily due to domestic volume
declines reflecting competitive pricing pressures in the beverage industry and
occurred despite the resulting shift in sales of the C&C beverage line to
concentrate from finished goods previously discussed and (ii) a $1.6 million
volume decrease in private label sales (which offset the 1998 first quarter
increase of the same amount). The decrease in sales of finished goods was
principally due to the absence in the 1998 quarter of sales of the C&C
beverage line.
Gross profit decreased $5.4 million to $46.4 million in the three months
ended June 28, 1998 while gross margins increased to 84% compared with 63% for
the 1997 second quarter. Beverage gross profit declined $4.5 million to $27.2
million due to the declines in concentrate and finished product sales volumes
discussed above partially offset by an increase in gross margins to 76% in the
1998 second quarter from 73% in the 1997 second quarter. The increase in gross
margins is attributed to the aforementioned shift in product mix to
higher-margin concentrate sales. Restaurant gross profit declined $0.9 million
to $19.2 million due to a $3.8 million decrease in store gross profit due to
the RTM Sale partially offset by the $2.9 million increase in royalties and
franchise fees described above. Restaurant gross margins increased to 100%
from 52% due to the fact that royalties and franchise fees now constitute the
total revenues of this segment.
Advertising, selling and distribution expenses decreased $3.6 million to
$18.6 million in the three months ended June 28, 1998. Restaurant advertising
and selling expenses declined $2.5 million principally due to the cessation of
local restaurant advertising and marketing expenses resulting from the RTM
Sale. Beverage advertising, selling and distribution expenses declined $1.1
million principally due to (i) lower bottler promotional reimbursements
resulting from the decline in branded concentrate sales volume and (ii)
planned reductions in connection with the aforementioned decrease in sales of
C&C products.
General and administrative expenses decreased $1.6 million to $15.0
million in the three months ended June 28, 1998 principally due to reduced
spending levels related to the RTM Sale as previously discussed and other cost
reduction measures.
The nonrecurring facilities relocation and corporate restructuring charge
of $4.8 million in the 1997 second quarter principally consisted of additional
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, additional costs associated with the
aforementioned relocation of Royal Crown's headquarters.
Interest expense decreased $1.2 million to $7.8 million in the three
months ended June 28, 1998 principally due to the full period effect in the
1998 quarter of (i) the assumption by RTM in connection with the RTM Sale of
$69.6 million of mortgage and equipment notes payable and capitalized lease
obligations and (ii) to a lesser extent, the reduction of outstanding
principal balances on May 5, 1997 aggregating $29.7 million under notes
payable to Triarc forgiven or repaid in connection with the RTM Sale.
Other income (expense), net improved $2.1 million to income of $0.9
million in the three months ended June 28, 1998 principally due to the then
estimated $2.3 million nonrecurring loss on the RTM Sale in the 1997 second
quarter.
10
<PAGE>
The Company's (provision for) and benefit from income taxes for the three
months ended June 28, 1998 and June 29, 1997 represent effective rates of 50%
and 81%, respectively. Such rate is lower in the 1998 period due principally
to the reduced impact on the 1998 rate of the amortization of nondeductible
costs in excess of net assets of acquired companies since the projected pretax
income for the respective full years upon which such rates were based was
higher for 1998 than 1997.
The extraordinary charge of $1.8 million in the 1997 second quarter
resulted from the assumption by RTM of mortgage and equipment notes payable in
connection with the RTM Sale, as described above.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash and cash equivalents (collectively "cash") increased
$10.9 million during the six months ended June 28, 1998 to $21.3 million. Such
increase reflects cash provided by operating activities of $17.3 million
partially offset by (i) cash used by investing activities (principally capital
expenditures) of $4.9 million and (ii) cash used by financing activities
(repayments of debt) of $1.5 million. The net cash provided by operating
activities reflects (i) net income of $5.6 million, (ii) net non-cash charges
of $10.8 million and (iii) cash provided by changes in operating assets and
liabilities of $0.9 million. The Company expects to continue to generate
positive cash flows from operations in the 1998 second half.
Working capital (current assets less current liabilities) was $19.7
million at June 28, 1998, reflecting a current ratio (current assets divided
by current liabilities) of 1.3:1. Such amount represents an increase in
working capital of $11.0 million from December 28, 1997 principally due to the
increase in cash during the period generated by operating activities.
The Company's $275.0 million of 9 3/4% senior secured notes due 2000 (the
"Senior Notes") mature on August 1, 2000 and do not require any amortization
of the principal amount thereof prior to such date. Effective August 1, 1998
they are, however, redeemable at the option of the Company at approximately
102.8% and 101.4% of principal amount through July 31, 1999 and 2000,
respectively. The Company and Triarc are currently evaluating refinancing
alternatives with respect to the Senior Notes. No decision has been made to
pursue any particular refinancing alternative and there can be no assurance
that any such refinancing will be effected.
The Company also has $4.2 million of notes payable to FFCA Mortgage
Corporation ("FFCA") which were not initially assumed by RTM in connection
with the RTM Sale. Such notes are repayable in monthly installments, including
interest, through 2016. Amounts due under these notes during the remainder of
1998 aggregate $1.0 million consisting of an additional $0.9 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. In addition, the Company had a $0.4
million balance under a note payable to a subsidiary of Triarc, which was
repaid subsequent to June 28, 1998.
Consolidated capital expenditures amounted to $5.3 million in the six
months ended June 28, 1998, including $4.6 million which the Company was
required to reinvest in core business assets under the indenture pursuant to
which the Senior Notes were issued as a result of the sale of the C&C beverage
line and certain other asset disposals in the latter half of 1997 in lieu of
the Company utilizing the net proceeds to purchase Senior Notes. The Company
expects that capital expenditures during the remainder of 1998 will be
approximately $0.7 million. As of June 28, 1998, there were outstanding
commitments aggregating approximately $0.1 million for such estimated capital
expenditures.
11
<PAGE>
Although the Company made no business acquisitions during the first half
of 1998, the Company considers selective business acquisitions, as
appropriate, to grow strategically and explores other alternatives to the
extent it has available resources to do so. In that connection, on June 30,
1998 the Company entered into an agreement with Paramark Enterprises, Inc.
("Paramark", formerly known as T.J. Cinnamons, Inc.) to assume all of
Paramark's franchise agreements for T.J. Cinnamons full concept bakeries as
well as Paramark's wholesale distribution rights for T.J. Cinnamons products,
thereby expanding the Company's existing T.J. Cinnamons operations. The
consideration to be paid by the Company consists of cash of $3.0 million, a
$1.0 million promissory note and additional consideration of up to $1.0
million contingent upon achieving certain specified sales targets during the
1998 calendar year. The consummation of the transaction is subject to
customary closing conditions and is expected to occur later in August 1998.
The Company is a party to a tax sharing agreement with Triarc (the "Tax
Sharing Agreement") whereby the Company is required to pay amounts relating to
taxes based on the taxable income of the Company and its eligible subsidiaries
on a stand alone basis. The Company had overpaid its 1993 tax obligation due
to losses during the fourth quarter of 1993, and had experienced additional
losses in 1994 through 1997 significantly in excess of the $11.1 million of
pretax income in the first half of 1998. As a result, no subsequent payment
has been required through June 28, 1998 and, considering the approximately
$27.4 million of remaining unutilized tax benefits from net operating loss
carryforwards under the Tax Sharing Agreement as of June 28, 1998, the Company
does not expect to be required to make any such payments during the remainder
of 1998.
The Internal Revenue Service ("IRS") has completed its examination of the
Federal income tax returns of Triarc and its subsidiaries, including the
Company, for the tax years from 1989 through 1992 and, in connection
therewith, the Company paid $4.6 million, including interest, during 1997. The
Company is contesting at the appellate division of the IRS the remaining
proposed adjustments of approximately $3.0 million, the tax effect of which
has not yet been determined. Accordingly, the amount and timing of any
payments required as a result of such examination cannot presently be
determined. The IRS has recently commenced its examination of the Federal
income tax returns of Triarc and its subsidiaries, including the Company, for
the tax year ended April 30, 1993 and eight-month transition period ended
December 31, 1993. The Company, however, does not expect the recently
commenced examination to result in any tax or interest payments during the
remainder of 1998.
As of June 28, 1998, the Company had cash of $21.3 million available to
meet its cash requirements. The Company's cash requirements for the remainder
of 1998, exclusive of operating cash flows, consist principally of (i) $3.0
million for the Paramark franchise rights acquisition and the cost of
additional business acquisitions, if any, (ii) scheduled debt principal
repayments of $1.0 million, including $0.4 million under an affiliated note,
$0.5 million under other notes and $0.1 million under the FFCA notes
(exclusive of the $0.9 million to be assumed by RTM), (iii) capital
expenditures of $0.7 million and (iv) Federal income tax payments, if any, in
connection with the $3.0 million of contested proposed adjustments relating to
the Company from the IRS examination of Triarc's 1989 through 1992 income tax
returns. The Company anticipates meeting all such requirements through
existing cash balances and cash provided by operations.
Legal and Environmental Matters
The Company is involved in litigation, claims and environmental matters
incidental to its businesses. The Company has reserves for such legal and
environmental matters aggregating approximately $1.4 million as of June 28,
1998. Although the outcome of such matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to the Company, based
on currently available information and given the Company's aforementioned
reserves, the Company does not believe that such legal and environmental
matters will have a material adverse effect on its consolidated results of
operations or financial position.
12
<PAGE>
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. 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,
including testing, by the end of the first half of 1999. To date, the expenses
incurred by the Company in order to become year 2000 compliant, including
computer software costs, have been $0.2 million and the current estimated cost
to complete such remediation is expected to be $1.3 million. Such costs, other
than software, have been and will continue to be expensed as incurred.
An assessment of the readiness of year 2000 compliance of third party
entities with which the Company has relationships, such as its suppliers,
banking institutions, customers, payroll processors and others is ongoing. The
Company has inquired, or is in the process of inquiring, of the significant
aforementioned third party entities as to their readiness with respect to year
2000 compliance and to date has received indications that many of them are
either compliant or in the process of remediation. The Company will continue
to monitor these third party entities to determine the impact on the business
of the Company and the actions the Company must take, if any, in the event of
non-compliance by any of these third parties. The Company's initial assessment
of compliance by third party entities is that there is not a material business
risk to the Company posed by any such non-compliance and, as such, the Company
has not yet developed any related contingency plans. The Company believes
there are multiple vendors of the goods and services it receives from its
suppliers and thus risk of non-compliance with year 2000 by any of its
suppliers is mitigated by this factor. Also, only two customers accounted for
approximately 10% each, and no individual customer accounted for more than
15%, of the Company's consolidated revenues during the 1998 first half, thus
mitigating the adverse risk to the Company's business if some customers are
not year 2000 compliant.
Recently Issued Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 provides a comprehensive
standard for the recognition and measurement of derivatives and hedging
activities. The standard requires all derivatives be recorded on the balance
sheet at fair value and establishes special accounting for three types of
hedges. The accounting treatment for each of these three types of hedges is
unique but results in including the offsetting changes in fair values or cash
flows of both the hedge and hedged item in results of operations in the same
period. Changes in fair value of derivatives that do not meet the criteria of
one of the aforementioned categories of hedges are included in results of
operations. SFAS 133 is effective for the Company's fiscal year beginning
January 3, 2000. The provisions of SFAS 133 are complex and the Company is
only beginning its evaluation of whether it has any derivatives or hedges as
defined by SFAS 133 and, accordingly, is unable to determine at this time the
impact it will have on the Company's financial position and results of
operations.
13
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company and statements preceded by, followed by or that include the words
"may," "believes," "expects," "anticipates," or the negation thereof, or
similar expressions, which constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). All statements which address operating performance, events or
developments that are expected or anticipated to occur in the future,
including statements relating to volume and revenue growth, or statements
expressing general optimism about future operating results, are
forward-looking statements within the meaning of the Reform Act. Such
forward-looking statements involve risks, uncertainties and other factors
which may cause the actual performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. For those statements,
the Company claims the protection of the safe harbor for forward-looking
statements contained in the Reform Act. Several important factors could affect
the future results of the Company and could cause those results to differ
materially from those expressed in the forward-looking statements contained
herein. Such factors include, but are not limited to, the following:
competition, including product and pricing pressures; success of operating
initiatives; development and operating costs; advertising and promotional
efforts; brand awareness; the existence or absence of adverse publicity;
market acceptance of new product offerings; new product and concept
development by competitors; changing trends in customer tastes; the success of
multi-branding; availability, location and terms of sites for restaurant
development by franchisees; the ability of franchisees to open new restaurants
in accordance with their development commitments; the performance by material
customers of their obligations under their purchase agreements; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and cost of raw materials and supplies; unexpected costs
associated with year 2000 compliance or the business risk associated with year
2000 non-compliance by customers and/or suppliers; economic, business and
political conditions in the countries and territories where the Company
operates, including the ability to form successful strategic business
alliances with local participants; changes in, or failure to comply with,
government regulations, including accounting standards, environmental laws and
taxation requirements; the costs, uncertainties and other effects of legal and
administrative proceedings; the impact of general economic conditions on
consumer spending; and other risks and uncertainties affecting the Company and
its competitors detailed in the Company's other current and periodic filings
with the Securities and Exchange Commission, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company. The Company will not undertake and specifically declines any
obligation to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Item 1. Legal Proceedings
As reported in the Company's Annual Report on Form 10-K for the fiscal
year ended December 28, 1997 (the "Form 10-K"), on June 3, 1997, ZuZu, Inc.
("ZuZu") and its subsidiary, ZuZu Franchising Corporation ("ZFC") commenced an
action against Arby's, Inc. ("Arby's") and Triarc in the District Court of
Dallas County, Texas (the "Texas action"). Plaintiffs assert claims for
misappropriation of trade secrets, conversion and unfair competition and seek
actual damages in an unspecified amount and punitive damages of not less than
$200 million. In a prior arbitration proceeding between Arby's and ZFC related
to the same transaction, ZFC was awarded damages in the amount of $765,000 on
its claims and Arby's was awarded $75,000 in damages on a counterclaim,
resulting in a net damages award of $690,000 for ZFC. Arby's and Triarc have
moved to dismiss and for summary judgment on all claims asserted in the Texas
action and are vigorously defending the Texas action. Triarc and Arby's
believe that Plaintiffs' claims in the Texas action are without merit and are
14
<PAGE>
precluded by the prior arbitration proceeding. In addition, Triarc and Arby's
have initiated litigation in Delaware Chancery Court against ZuZu seeking,
inter alia, a declaratory judgment that ZuZu is precluded from pursuing the
Texas action, an injunction prohibiting ZuZu from proceeding with the Texas
action, and asserting a claim against ZuZu for breach of contract.
As reported in the Form 10-K, in a related case, on March 13, 1998, Gregg
Katz, Susan Zweig Katz and ZuZu of Orlando, LLC commenced an action against
Arby's, ZuZu, ZFC and Triarc in the Superior Court of Fulton County, Georgia.
Plaintiffs are a ZuZu franchisee and the owners/investors of the franchisee
corporation. Plaintiffs assert causes of action for, among other things,
rescission of the development and franchise agreements, fraud, fraudulent
concealment, breach of the development and franchise agreements, tortious
interference with contract, quantum meruit, breach of oral agreement,
negligence and violation of several Florida and Texas business opportunity and
similar statutes. Plaintiffs seek actual damages of not less than $600,000 and
consequential, punitive treble damages in an unspecified amount, as well as
attorneys' fees, costs and expenses. Triarc has moved to dismiss and Arby's
has filed an answer. The litigation is in the initial stages of discovery.
Triarc and Arby's believe that Plaintiffs' claims against them are without
merit and are vigorously defending this action.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the fiscal six-month period ended June
28, 1998 (and for the fiscal six-month period ended June 29, 1997
on a restated basis), 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 June 28, 1998.
15
<PAGE>
RC/ARBY'S CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RC/ARBY'S CORPORATION
(Registrant)
Date: August 17, 1998 By: /s/ JOHN L. BARNES, JR.
-------------------------
John L. Barnes, Jr.
Executive Vice President
and Chief Financial Officer
(On behalf of the Company)
By: /s/ FRED H. SCHAEFER
-------------------------
Fred H. Schaefer
Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
16
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INCOME STATEMENT INFORMATION FOR THE SIX-MONTH
PERIODS ENDED JUNE 29, 1997 (RESTATED) AND JUNE 28, 1998 AND SUMMARY BALANCE
SHEET INFORMATION AS OF JUNE 28, 1998 EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-Q OF
RC/ARBY'S CORPORATION FOR THE SIX-MONTH PERIOD ENDED JUNE 28, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. THIS SCHEDULE ALSO
CONTAINS SUMMARY HISTORICAL BALANCE SHEET INFORMATION AS OF JUNE 29, 1997
EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
FORM 10-Q OF RC/ARBY'S CORPORATION FOR THE SIX-MONTH PERIOD THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
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