UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 25, 2005
TRIARC COMPANIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation) |
1-2207 (Commission File Number) |
38-0471180 (IRS Employer Identification No.) |
| 280 Park Avenue New York, New York (Address of principal executive offices) |
10017 (Zip Code) |
Registrant's telephone number, including area code: (212) 451-3000
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| £ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
| £ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
| £ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
| £ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
This Form 8-K/A of Triarc Companies, Inc. (“Triarc” and, together with its subsidiaries, the “Company”) constitutes Amendment No. 1 to Triarc's Current Report on Form 8-K dated July 25, 2005 (the “Original Form 8-K”), which was filed with the Securities and Exchange Commission on July 29, 2005. This amendment provides information required by Items 9.01(a) and 9.01(b) omitted from the Original Form 8-K. This Current Report on Form 8-K/A 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. Those statements, as well as statements preceded by, followed by, or that include the words “may,” “believes,” “plans,” “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”). All statements that address operating performance, events or developments that are expected or anticipated to occur in the future, including statements relating to revenue growth,
earnings per share growth or statements expressing general optimism about future operating results are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on our current expectations, speak only as of the date of this Form 8-K/A and are susceptible to a number of risks, uncertainties and other factors. The Company's actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Many important factors could affect our future results 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: 2
•
competition, including pricing pressures and the potential impact of competitors' new units on sales by Arby's® restaurants;
•
consumers' perceptions of the relative quality, variety and value of the food products the Company offers;
•
success of operating initiatives;
•
development costs;
•
advertising and promotional efforts;
•
brand awareness;
•
the existence or absence of positive or adverse publicity;
•
new product and concept development by the Company and its competitors, and market acceptance of such new product offerings and concepts;
•
changes in consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, french fries or other foods or the effects of food-borne illnesses such as “mad cow disease” and avian influenza or “bird flu”;
•
changes in spending patterns and demographic trends;
•
the business and financial viability of key franchisees;
•
the timely payment of franchisee obligations due to the Company;
•
availability, location and terms of sites for restaurant development by the Company and its franchisees;
•
the ability of the Company's franchisees to open new restaurants in accordance with their development commitments, including the ability of franchisees to finance restaurant development;
•
delays in opening new restaurants or completing remodels;
•
anticipated or unanticipated restaurant closures by the Company and its franchisees;
•
the Company's ability to identify, attract and retain potential franchisees with sufficient experience and financial resources to develop and operate Arby's restaurants;
3
•
changes in business strategy or development plans, and the willingness of the Company's franchisees to participate in its strategy;
•
business abilities and judgment of the Company's and its franchisees' management and other personnel;
•
availability of qualified restaurant personnel to the Company and to its franchisees;
•
the Company's ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to Arby's restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
•
changes in commodity (including beef), labor, supplies and other operating costs and availability and cost of insurance;
•
adverse weather conditions;
•
significant reductions in client assets under management by the Company (which would reduce the Company's advisory fee revenue), due to such factors as weak performance of the Company's investment products (either on an absolute basis or relative to the Company's competitors or other investment strategies), substantial illiquidity or price volatility in the fixed income instruments that the Company trades, loss of key portfolio management or other personnel, reduced investor demand for the types of investment products the Company offers and loss of investor confidence due to adverse publicity;
•
increased competition from other asset managers offering similar types of products to those the Company offers;
•
pricing pressure on the advisory fees that the Company can charge for its investment advisory services;
•
difficulty in increasing assets under management, or efficiently managing existing assets, due to market-related constraints on trading capacity or lack of potentially profitable trading opportunities;
•
removal of the Company as investment manager of one or more of the preferred shares of collateralized debt obligation vehicles (“CDOs”) or other accounts it manages, or the reduction in the Company's CDO management fees because of payment defaults by issuers of the underlying collateral;
•
availability, terms (including changes in interest rates) and deployment of capital;
•
changes in legal or self-regulatory requirements, including franchising laws, investment management regulations, accounting standards, environmental laws, overtime rules, minimum wage rates and taxation rates;
•
the costs, uncertainties and other effects of legal, environmental and administrative proceedings;
•
the impact of general economic conditions on consumer spending or securities investing, including a slower consumer economy and the effects of war or terrorist activities;
•
the Company's ability to identify appropriate acquisition targets in the future and to successfully integrate any future acquisitions into its existing operations; and
•
other risks and uncertainties affecting the Company referred to in its Annual Report on Form 10-K for the fiscal year ended January 2, 2005 (see especially “Item 1. Business—Risk Factors” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations”) and in its Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2005 (especially “Part II. Other Information Special Note Regarding Forward-Looking Statements and Projections” and “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations”) and in its 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 Company's control.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect the Company. The Company assumes no obligation to update any forward-looking statements after the date of this Form 8-K/A as a result of new information, future events or developments, except as required by federal securities laws. In addition, it is the Company's policy generally not to make any specific projections as to future earnings, and the Company does
not endorse any projections regarding future performance that may be made by third parties. Item 9.01 Financial Statements and Exhibits. (a) Financial Statements of Business Acquired The combined financial statements, together with the notes thereto, of the business acquired, reflecting the historical results of the entities comprising the RTM Restaurant Group (“RTM”) required by this item, are set forth below. 4
(i)
Audited combined financial statements of RTM as of May 25, 2003 and May 30, 2004 and for the years ended May 25, 2003 and May 30, 2004.
(ii)
Unaudited combined financial statements of RTM as of February 29, 2004 and March 6, 2005 and for the forty weeks ended February 29, 2004 and March 6, 2005.
COMBINED FINANCIAL STATEMENTS As of May 26, 2002, May 25, 2003 and May 30, 2004 and for the 5
RTM Restaurant Group
Years Ended May 26, 2002, May 25, 2003 and May 30, 2004
With Report of Independent Auditors
RTM RESTAURANT GROUP CONTENTS Audited Combined Financial Statements 6
AUDITED COMBINED FINANCIAL STATEMENTS
Years Ended May 26, 2002, May 25, 2003 and May 30, 2004
7
8
9
10
11
12
REPORT OF INDEPENDENT AUDITORS Board of Directors We have audited the accompanying combined balance sheets of RTM Restaurant Group (as defined in Note 1) as of May 25, 2003 and May 30, 2004, and the related combined statements of operations, cash flows and net capital deficiency for each of the three years in the period ended May 30, 2004. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes, examining on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of RTM Restaurant Group at May 25, 2003 and May 30, 2004, and the combined results of their operations and their cash flows for each of the three years in the period ended May 30, 2004, in conformity with accounting principles generally accepted in the United States.
RTM RESTAURANT GROUP
/s/ ERNST & YOUNG LLP
March 14, 2005, except with respect to the third paragraph of
Note 10, as to which the date is May 26, 2005, and the first
paragraph of Note 19, as to which the date is July 8, 2005
7
RTM RESTAURANT GROUP ASSETS Current assets: Cash and cash equivalents Income taxes receivable Other receivables Inventories Prepaid expenses Deferred income taxes Total current assets Land, property and equipment: Land Property and equipment, net of accumulated depreciation of $157,523 in 2003 and $148,462 in 2004, respectively Capital leases, net of accumulated amortization of $10,683 in 2003 and $14,486 in 2004, respectively Land, property and equipment, net Other assets: Notes receivable, net of current portion and deferred gain Goodwill Other intangibles, net of accumulated amortization of $12,064 in 2003 and $12,638 in 2004, respectively Other Total other assets Total assets LIABILITIES AND NET CAPITAL DEFICIENCY Current liabilities: Accounts payable Accrued expenses Current portion of long-term debt Current portion of financing obligations Current portion of capital lease obligations Total current liabilities Long-term debt, net of current portion Financing obligations, net of current portion Capital lease obligations, net of current portion Deferred income taxes Other liabilities and deferred credits Total liabilities Commitments and contingent liabilities Net capital deficiency: Common stock Additional paid-in capital Retained earnings Treasury stock Stock notes receivable Notes and advances due from affiliates Net capital deficiency Total liabilities and net capital deficiency See accompanying notes to combined financial statements. 8
COMBINED BALANCE SHEETS
(In Thousands)
May 25,
2003
May 30,
2004
$
8,621
$
8,475
1,546
2,498
4,441
4,858
6,545
7,637
9,633
8,124
1,312
1,980
32,098
33,572
91,680
97,458
169,399
178,561
38,467
43,506
299,546
319,525
2,542
4,042
61,785
60,861
20,135
19,178
8,245
9,017
92,707
93,098
$
424,351
$
446,195
$
35,569
$
38,629
27,040
26,744
23,143
29,112
161
268
3,917
3,898
89,830
98,651
188,796
190,293
101,979
118,156
38,458
43,712
7,175
8,260
26,826
26,985
453,064
486,057
2
2
13,691
14,570
32,859
39,661
—
(17,245
)
(11,505
)
(10,480
)
(63,760
)
(66,370
)
(28,713
)
(39,862
)
$
424,351
$
446,195
RTM RESTAURANT GROUP Net sales Costs and expenses: Costs of operations, excluding depreciation and amortization General and administrative, excluding depreciation and amortization Depreciation and amortization Operating profit Interest expense, net Other income Income (loss) before income taxes and discontinued operations Provision for income taxes Income (loss) from continuing operations Income from discontinued operations, net of income taxes of $946, $1,232, and $2,587 in 2002, 2003 and 2004, respectively Net (loss) income See accompanying notes to combined financial statements. 9
COMBINED STATEMENTS OF OPERATIONS
(In Thousands)
Year Ended
May 26,
2002
May 25,
2003
May 30,
2004
$
684,407
$
707,932
$
739,996
543,015
558,944
602,506
83,656
86,533
77,710
27,616
24,384
24,926
654,287
669,861
705,142
30,120
38,071
34,854
(30,840
)
(32,945
)
(34,285
)
116
737
1,165
(604
)
5,863
1,734
(2,295
)
(4,556
)
(795
)
(2,899
)
1,307
939
1,654
2,191
11,252
$
(1,245
)
$
3,498
$
12,191
RTM RESTAURANT GROUP Balance at May 27, 2001 Net loss Repurchase of common stock Sale and issuance of common Vested stock awards Shareholder loan Dividends and distributions Loans to affiliates, net Balance at May 26, 2002 Net income Repurchase of common stock Sale and issuance of common Vested stock awards Shareholder loan Dividends and distributions Loans to affiliates, net Balance at May 25, 2003 Net income Repurchase of common stock Sale of common stock Vested stock awards Shareholder loan Dividends and distributions Loans to affiliates, net Balance at May 30, 2004 See accompanying notes to combined financial statements. 10
COMBINED STATEMENTS OF NET CAPITAL DEFICIENCY
(In Thousands)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Stock Notes
Receivable
Notes and
Advances
Due From
Affiliates
Total
$
2
$
1,140
$
39,402
$
(184
)
$
(9,997
)
$
(42,916
)
$
(12,553
)
—
—
(1,245
)
—
—
—
(1,245
)
—
—
—
(1,968
)
807
53
(1,108
)
stock
—
5,534
—
2,152
(3,391
)
—
4,295
—
2,705
—
—
—
—
2,705
transactions, net
—
—
—
—
2,971
—
2,971
—
—
(6,796
)
—
—
—
(6,796
)
—
—
—
—
—
(7,347
)
(7,347
)
2
9,379
31,361
—
(9,610
)
(50,210
)
(19,078
)
—
—
3,498
—
—
—
3,498
—
—
—
(3,992
)
608
—
(3,384
)
stock
—
1,878
—
3,992
(2,481
)
—
3,389
—
2,434
—
—
—
—
2,434
transactions, net
—
—
—
—
(22
)
—
(22
)
—
—
(2,000
)
—
—
—
(2,000
)
—
—
—
—
—
(13,550
)
(13,550
)
2
13,691
32,859
—
(11,505
)
(63,760
)
(28,713
)
—
—
12,191
—
—
—
12,191
and members' interest
—
—
(1,389
)
(17,696
)
2,406
216
(16,463
)
—
—
—
451
—
—
451
—
879
—
—
—
—
879
transactions, net
—
—
—
—
(1,381
)
—
(1,381
)
—
—
(4,000
)
—
—
—
(4,000
)
—
—
—
—
—
(2,826
)
(2,826
)
$
2
$
14,570
$
39,661
$
(17,245
)
$
(10,480
)
$
(66,370
)
$
(39,862
)
RTM RESTAURANT GROUP Cash flows from operating activities Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization, continuing operations Depreciation and amortization, discontinued operations Stock-based compensation expense (income) Deferred income taxes (Gain) loss on sales of units Gain on sale of discontinued operations Changes in operating assets and liabilities: Income taxes receivable Other receivables Inventories Accounts payable Accrued expenses Prepaid expenses Other liabilities and deferred credits Net cash provided by operating activities Cash flows from investing activities Purchase of land, property, and equipment Notes and advances due from affiliates Additions to notes receivable Collections on notes receivable Proceeds from disposal of land and property Purchase of other assets Proceeds from disposal of other assets Proceeds from sale of Phoenix district Other Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of long-term debt Payments on long-term debt, financing and capital lease obligations Repurchase of treasury stock Proceeds from sale of treasury stock Payments of dividends and distributions Purchase of members' interest Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Supplemental cash flow information Cash paid for interest Cash paid for income taxes, net of refunds Noncash investing and financing activities Additions to capital lease and financing obligations Treasury stock acquired in exchange for notes payable and other consideration Sale and issuance of common stock for notes Purchase of minority interests by issuance of common stock Note receivable from sale of Phoenix district Cancellation of notes receivable from shareholders and affiliates in share repurchases Other noncash stock transactions See accompanying notes to combined financial statements. 11
COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
May 26,
2002
May 25,
2003
May 30,
2004
$
(1,245
)
$
3,498
$
12,191
27,616
24,384
24,926
2,290
1,745
1,413
8,668
9,348
(53
)
(928
)
150
418
340
3
(518
)
—
—
(10,874
)
(19
)
(97
)
(952
)
(314
)
748
(471
)
703
(383
)
(1,092
)
(3,601
)
7,810
3,060
736
(3,142
)
(296
)
(352
)
(2,414
)
1,509
3,286
2,631
2,691
37,180
44,281
31,952
(5,457
)
(11,988
)
(25,520
)
(7,054
)
(13,550
)
(2,826
)
(6,375
)
(621
)
(2,195
)
11,281
2,036
1,368
4,122
1,822
3,971
(4,432
)
(3,262
)
(2,506
)
923
3,298
390
—
—
13,950
—
513
67
(6,992
)
(21,752
)
(13,301
)
5,982
17,475
22,971
(27,295
)
(31,814
)
(36,110
)
(831
)
(1,750
)
(720
)
—
1,511
451
(6,796
)
(2,000
)
(4,000
)
—
—
(1,389
)
(28,940
)
(16,578
)
(18,797
)
1,248
5,951
(146
)
1,422
2,670
8,621
$
2,670
$
8,621
$
8,475
$
30,351
$
39,719
$
39,192
7,202
5,419
4,275
16,918
17,105
26,168
586
1,634
14,354
3,391
2,481
—
4,295
—
—
—
—
2,000
860
608
2,622
309
—
—
RTM RESTAURANT GROUP May 30, 2004 1. Organization of the Group RTM Restaurant Group (the “Group”) is not a legal entity, but rather the combination of the financial statements of RTM Restaurant Group, Inc. (“RTMRG”) and its two wholly-owned subsidiaries, RTM, Inc. (and its subsidiaries) (“RTM”) and RTM Partners, Inc. (and its subsidiaries) (“Partners”), along with RTM Acquisition Company, L.L.C. (“RTMAC”), and RTM Management Company, L.L.C. (“Management”). These entities are owned and controlled by the same group of individuals (the “Owners”). Two of the companies were organized as Georgia limited liability companies. These limited liability companies and the related operating agreements shall be dissolved and terminated at the earlier of the written consent of a Majority Interest, as defined, sale
of the company, legal decree, or December 31, 2050. The Group is the largest licensee of Arby's® restaurants, owning and operating 772 Arby's restaurants as of May 30, 2004. The Arby's license agreements initially extend for twenty years and are renewable for successive twenty-year terms. 2. Summary of Significant Accounting Policies Basis of Presentation The combined financial statements include the accounts of RTMRG, RTM, Partners, RTMAC and Management. All significant inter-entity balances and transactions have been eliminated. Fiscal Year The Group reports on a fiscal year consisting of 52 or 53 weeks ending on the last Sunday in May. Each of the Group's 2002 and 2003 fiscal years contained 52 weeks and the 2004 fiscal year contained 53 weeks. The Group's 2002 fiscal year commenced on May 27, 2001 and ended on May 26, 2002, the 2003 fiscal year commenced on May 27, 2002 and ended on May 25, 2003, and the 2004 fiscal year commenced on May 26, 2003 and ended on May 30, 2004. Cash and Cash Equivalents Cash and cash equivalents consist principally of cash, including interest-bearing bank accounts. Inventories Inventories consist primarily of food, beverages, and supplies and are valued at the lower of first-in, first-out cost or market. Property and Equipment Property and equipment are stated at cost. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss is reflected in the statements of operations. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets, generally ranging from 3 to 30 years, or the term of the lease for leasehold improvements, if shorter. Leasehold improvements under leases for which there exists an economic compulsion to renew the lease under one or more renewal options are amortized over the term of the lease plus anticipated renewal periods. For such leases, minimum lease payments are recognized on a straight-line basis over the lease term, including the anticipated renewal periods.
Routine 12
NOTES TO COMBINED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) maintenance and repairs are charged to expense, and expenditures for renewals and betterments are capitalized. Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, impairment is measured by comparing the carrying amount to the fair value or discounted future net cash flows. Management currently believes that no impairment exists with regard to the Group's long-lived assets. License Fees, Favorable Licenses and Favorable Leases Initial license fees and acquisition costs allocated to license fees and favorable licenses are recorded as other intangible assets and are amortized on a straight-line basis over the contractual term of the agreements, including one renewal period for which renewal of the licenses and agreements is anticipated and the cost of renewal is nominal. Acquisition costs allocated to favorable leases are also recorded as other intangible assets and are amortized on a straight line basis over the term of the leases plus renewal periods for which renewal of the leases is anticipated in the valuation of the intangible assets. Goodwill The Group adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets, effective May 28, 2001. Under SFAS 142, goodwill is no longer amortized but is reviewed annually for impairment. The Group assesses the recoverability of goodwill on at least an annual basis, or more frequently if circumstances suggest potential impairment. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the
goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Under SFAS 142, a reporting unit is defined as an operating segment or one level below an operating segment, referred to as a component. For purposes of assessing impairment of goodwill the Group deems each district to be a reporting unit. The Group performed its annual impairment test during each fiscal year and concluded that no impairment of goodwill existed since the fair value of each of the Group's reporting units exceeded its carrying value. No events have occurred, nor circumstances changed subsequent to the most recent annual test that would reduce the fair value of the Group's reporting unit below its carrying value. The Group will continue to test for impairment on an annual basis or an interim basis if circumstances change that would indicate the possibility of impairment. Stock Based Compensation The Group has elected to account for its stock awards and options in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. Based on the terms of the Group's stock awards and options, variable plan accounting is applied. As a result, the Group recognizes compensation expense related to stock awards and options or reverses previously recognized expense as the estimated market value of its common 13
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) stock changes from year to year. Because the common stock is not publicly traded, there is no ready market from which to determine its value. As a result, the Group obtains an independent valuation to estimate the market value of its common stock. A critical estimate in the valuation is anticipated future cash flows of the business. This estimate is subject to change as a result of many factors including, among others, changing economic conditions and the competitive environment. The Group is not required to disclose the pro-forma effects of accounting for the options under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, as the options are liability awards for which the accounting under SFAS 123 would be the same
as the accounting recorded by the Group under APB 25. Self-Insurance Reserves The Group records an estimate of the remaining costs to settle incurred self-insured workers' compensation claims. The Group purchases insurance policies which reimburse the Group in the event of claims over a specified amount. The estimate considers factors which may impact the ultimate cost of claims which include: the frequency and severity of historical claims, as well as changes in the business environment, benefit levels, health care costs and regulatory environment. The estimate also considers the impact of insurance which may reduce the overall cost of a given claim to the Group. In addition, at the balance sheet date, there may be incurred claims that have not been reported; accordingly, the Group may not be aware of them. An estimate of these incurred but not reported claims has been included in the reserve.
The Group has provided letters of credit to various states, municipalities and insurance companies as collateral for certain of its liabilities attributable to workers' compensation. Income Taxes The Group is comprised of five companies. Two of the companies are limited liability companies; accordingly, the tax attributes from the activities of those companies flow directly to the members of the limited liability companies. Thus, no tax provision, tax receivables or payables, or deferred tax assets or liabilities are reflected in the accompanying combined financial statements related to these companies. Three companies are C Corporations; accordingly, the tax attributes from the activities of those companies are reflected in the accompanying combined financial statements. Thus, tax provisions, tax receivables or payables, and deferred tax assets or liabilities arising from differences between the financial statement and tax basis of the assets and liabilities are reflected in the accompanying combined financial
statements related to these companies. Deferred taxes are provided using currently enacted tax rates and regulation. A valuation allowance is provided for deferred tax assets for which realization is not deemed more likely than not. Revenue Recognition Revenues from the sale of food and beverages are recognized at the time the products are sold and the cash is collected from the customer. Advertising Expense Advertising costs are expensed as incurred. The Group charges advertising costs, including contributions made to advertising cooperatives, to expense ratably in relation to revenues over the year in which incurred. Advertising expense from continuing operations totaled $39,893, $45,247 and $49,678 during 2002, 2003 and 2004, respectively. 14
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) Fair Value of Financial Instruments The Group uses financial instruments in the normal course of its business. The carrying value approximates fair value for financial instruments that are short-term in nature, such as cash, accounts receivable and accounts payable. The Group estimates that the carrying value of the Group's long-term debt and notes receivable approximates fair value based on current rates offered to and by the Group for debt and notes of the same remaining maturities. It is not practicable to assess the fair value of affiliate receivables, because the timing of receipts is not fixed. Gains and Losses on Restaurant Sales From time to time to optimize its store locations, the Group sells certain of its restaurants. The Group defers gains on unit sales when it has continuing involvement in the restaurants sold. Deferred gains are recognized over the remaining term of the continuing involvement. The Group also defers gains to the extent of proceeds in the form of notes receivable, when the purchaser is thinly capitalized and highly leveraged. These deferred gains are recognized as the cash is received or continuing involvement ceases and collectibility is reasonably assured. Losses are recognized immediately. The computation of gains or losses also includes an allocation of goodwill if the underlying unit was acquired through a transaction accounted for by the purchase method. Recently Issued Accounting Pronouncements The Financial Accounting Standards Board (“FASB”) issued the Revised Interpretation No. 46, Consolidation of Variable Interest Entities, in December 2003 (“FIN 46R”). The revised Interpretation requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation provisions of FIN 46R immediately apply to variable interest entities created after January 1, 2004 or interests in variable interest entities obtained after that date. For interests in variable interest entities obtained prior to January 1, 2004, the consolidation
provisions of FIN 46R become effective for the Group in its fiscal year ending May 28, 2006. Although the Group has not adopted FIN 46R, and its provisions have not been applied in the accompanying financial statements, the Group has determined that, as of May 30, 2004, it holds interests in four variable interest entities that it would consolidate upon application of FIN 46R: Winners International Restaurants, Inc., Mrs. Winners, L.P. and Winners Partners (collectively “Winners”) and RTM Future Associates. These entities are under common control with the Group. Winners owns and operates 99 restaurants under the name of Mrs. Winner's Chicken & Biscuits in seven states. RTM Future Associates was established to purchase the stock of RTMRG's largest shareholder (see Note 17). The Group's maximum exposure to loss as a result of its involvement with Winners includes the Group's guarantee of $27,131 of Winners' debt as of May 30, 2004, the Group's guarantee of Winners' leases of $17,858 as of May 30, 2004 and the Group's commitment to provide liquidity support for Winners, as needed, over the next fiscal year. Such exposure excludes receivables from Winners of $54,036 as of May 30, 2004 that are included in net capital deficiency in the accompanying balance sheet. See Note 17 for further discussion. Additionally, the Group has determined that it holds a variable interest in the form of a note receivable from an entity that purchased restaurants from the Group subsequent to January 1, 2004. As more fully described in Note 4, in April 2004, the Group sold restaurants to an unrelated third party for cash and a note receivable. The buyer is a variable interest entity; however, the 15
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) Group is not the primary beneficiary and, therefore, has not consolidated the entity. The Group's note receivable balance exposed to loss as a result of its involvement in this variable interest entity was $2,000 as of May 30, 2004. The Group may hold variable interests in the form of notes receivable from entities that purchased restaurants from the Group prior to January 1, 2004. The Group has not yet determined whether any such entities are variable interest entities or whether the Group would be required to consolidate any of them beginning in fiscal year 2006. In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123 (SFAS 123R), Share Based Payment. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The Statement eliminates the alternative method of accounting for employee share-based payments previously available under APB 25. The Statement will become effective for the Group in its fiscal year ending May 27, 2007. The Group is currently assessing the effect that the adoption of SFAS 123R will have on its financial position and results of operations. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”), SFAS 150 would require that the Group's redeemable common stock be classified as a liability and measured at fair value. The effective date of SFAS 150 for nonpublic companies has been deferred indefinitely. 3. Significant Risks and Uncertainties Nature of Operations The Group operates solely in the restaurant business through its Arby's® quick service restaurants specializing in slow-roasted roast beef sandwiches. Arby's restaurants also offer an extensive menu of chicken, turkey and ham sandwiches, side dishes and salads including Arby's Market Fresh® sandwiches. The Group's restaurants are located in 22 states throughout the United States. Information concerning the number of the Group's Arby's restaurants is as follows: Open at beginning of year Openings and acquisitions Transfers Closings Open at the end of the year Weighted average number in operation Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 16
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
May 26,
2002
May 25,
2003
May 30,
2004
(Unaudited)
760
771
788
18
25
29
—
—
(38
)
(7
)
(8
)
(7
)
771
788
772
768
779
790
RTM RESTAURANT GROUP 3. Significant Risks and Uncertainties—(Continued) The Group's significant estimates which are susceptible to change in the near term relate to tax matters, RTMRG valuation estimates related to stock based compensation, self-insurance reserves, impairment of goodwill and long-lived assets and gains and losses related to the disposition of restaurants. The Group evaluates those estimates and assumptions on an ongoing basis utilizing historical experience and various other factors which the Group believes are reasonable under the circumstances. Certain Risk Concentrations The Group does not have a single significant customer. However, the Group's restaurant business could be adversely affected by changing consumer preferences resulting from concerns over nutritional or safety aspects of beef, poultry, french fries or other foods or the effects of food-borne illnesses. The Group believes that its vulnerability to risk concentrations related to significant vendors and sources of its raw materials is not significant, although increases in the cost of beef during 2004 due to market-wide supply and demand factors adversely affected profit margins of the Group's restaurants in 2004 and are expected to have a continuing effect on profit margins in 2005. The Group also believes that its vulnerability to risk concentrations related to geographical concentration is mitigated since the Group
generally operates throughout the United States and has no foreign exposure. 4. Discontinued Operations On April 19, 2004, the Group sold all of its Arby's restaurants in the Phoenix, AZ district (the “Phoenix District”) to an unrelated third party for net proceeds of $15,950, including cash and a note receivable for $2,000 payable monthly over 10 years. The gain of $10,874 ($8,948 net of taxes) resulting from this transaction is included in income from discontinued operations, net of income taxes, in the accompanying combined statement of operations. Goodwill of $1,167 related to the Phoenix District was retired in connection with the sale. As of the date of the transaction, the Phoenix District's assets and liabilities were recorded at a net carrying value of approximately $4,432. The assets and liabilities of the Phoenix District included in the combined balance sheet as of May 25, 2003 and disposed of in the transaction are as follows: Assets Current assets Land, property and equipment, net Other assets Total assets Liabilities Current liabilities Long-term debt, net of current portion Other deferred credits Total liabilities Net assets The Phoenix District's revenues were $36,504, $31,458 and $29,070, and income before income taxes was $1,045, $1,801, and $1,391, excluding gain on sale, in 2002, 2003 and 2004, respectively, 17
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
May 25,
2003
$
786
5,024
1,521
7,331
1,373
3,253
66
4,692
$
2,639
RTM RESTAURANT GROUP 4. Discontinued Operations—(Continued) and are included in income from discontinued operations, net of income taxes, in the accompanying combined statements of operations. See Note 19 for discussion of discontinued operations subsequent to May 30, 2004. 5. Acquisitions During 2002, 2003 and 2004, the Group acquired several businesses that operated Arby's restaurants. Each of these acquisitions was accounted for as a purchase and their results of operations are included beginning at the date of acquisition. The following summarizes the allocation of the aggregate purchase price of the Group's acquisitions: Assets: Property and equipment Goodwill Other net assets acquired Aggregate purchase price 6. Notes Receivable Notes receivable consist of the following: Sales of restaurants: 10% note receivable, due in monthly installments of $71 including interest beginning 2006 10% note receivable, due in monthly installments of $12 including interest through 2017 7.4% note receivable, due in monthly installments of $24 including interest through 2014 Other notes receivable with varying interest rates Less deferred gains Less current portion The notes described above resulting from the sales of restaurants are collateralized by the restaurants and by assignment of the license and franchise rights related to the restaurants or are guaranteed by the owner of the purchaser. 18
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
May 25,
2003
May 30,
2004
$
50
$
165
314
195
36
5
$
400
$
365
May 25,
2003
May 30,
2004
$
4,187
$
4,187
1,110
1,071
—
2,000
2,107
1,592
(4,619
)
(4,619
)
2,785
4,231
243
189
$
2,542
$
4,042
RTM RESTAURANT GROUP 7. Property and Equipment and Capital Leases Property and equipment and capital leases, at cost, consist of the following: Property and equipment: Buildings Leasehold improvements Equipment and automobiles Construction in progress Less accumulated depreciation Capital leases: Buildings Equipment Less accumulated amortization For continuing operations, the Group incurred depreciation expense of $24,055, $20,550 and $19,638 in 2002, 2003 and 2004, respectively, and amortization expense (including amortization of intangible assets) of $3,561, $3,834 and $5,288 in 2002, 2003 and 2004, respectively. Real Estate Investment Joint Venture The Group has approximately a 50% interest in a joint venture with a third party whose purpose is to acquire, develop, construct, finance, lease and dispose of restaurant properties. The Group is involved in securing the land and constructing the buildings and enters into a lease with the joint venture for the restaurant properties. The joint venture then sells the land and building to a third party, subject to the lease. In accordance with the operating agreement, distributable cash flows are disbursed to the members of the joint venture. Gains are deferred and are amortized over the term of the lease for capital leases. In accordance with Emerging Issues Task Force Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction, and Statement of Financial Accounting Standards No. 98, Accounting for Leases, the Group is considered the owner of the property for accounting purposes while the property is held by the joint venture. In addition, the purchase of properties by the joint venture in connection with an acquisition by the Group in 2001 and the concurrent lease of such properties by the Group have been accounted for as a financing transaction. Accordingly, the land and building, along with the related financing obligations, are recorded in the accompanying financial statements. The amounts reported in the balance sheets related to all of the properties subject to such leases are as follows: Land, property and capital leases Financing obligations Capital lease obligations 19
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
May 25,
2003
May 30,
2004
$
144,918
$
156,064
40,502
36,032
138,437
129,678
3,065
5,249
(157,523
)
(148,462
)
$
169,399
$
178,561
$
31,244
$
38,594
17,906
19,398
(10,683
)
(14,486
)
$
38,467
$
43,506
As of
May 25,
2003
May 30,
2004
$
34,655
$
41,431
$
20,091
$
20,984
$
15,857
$
22,716
RTM RESTAURANT GROUP 8. Other Intangible Assets Other intangible assets consist of the following: License fees Favorable licenses Favorable leases Non-compete agreement As of May 30, 2004, the estimated aggregate amortization expense related to other intangible assets for the next five fiscal years is as follows: 2005—$962; 2006—$880; 2007—$857; 2008—$838 and 2009—$818. The weighted average useful life of the licenses and favorable leases is 34 and 10 years, respectively. 9. Other Assets Other assets consist of the following: Receivables from split-dollar life insurance Market development agreement deposit Cash surrender value of life insurance policies Financing commitment fees Lease acquisition costs Refundable deposits Other The receivables from split-dollar life insurance contracts are collateralized by the cash surrender value of the life insurance policies. 10. Debt Long-term debt consists of: Installment notes payable to financial institutions Stock repurchase notes payable through 2024 Notes to shareholders, payable through 2013 Less current portion 20
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
May 25, 2003
May 30, 2004
Gross
Asset
Accumulated
Amortization
Net
Book
Value
Gross
Asset
Accumulated
Amortization
Net
Book
Value
$
11,481
$
(3,374
)
$
8,107
$
11,729
$
(3,592
)
$
8,137
12,404
(5,602
)
6,802
12,251
(5,992
)
6,259
7,744
(2,983
)
4,761
7,266
(2,920
)
4,346
570
(105
)
465
570
(134
)
436
$
32,199
$
(12,064
)
$
20,135
$
31,816
$
(12,638
)
$
19,178
May 25,
2003
May 30,
2004
contract policy owners
$
2,444
$
3,043
1,950
1,726
750
1,329
1,274
1,210
1,148
979
500
555
179
175
$
8,245
$
9,017
May 25,
2003
May 30,
2004
and commercial lenders through 2024 at varying
interest rates up to 14.2%
$
209,496
$
206,379
with interest at 5.31% to 7.74%
984
12,445
at interest rates ranging from 4.3% to 10%
1,459
581
211,939
219,405
23,143
29,112
$
188,796
$
190,293
RTM RESTAURANT GROUP 10. Debt—(Continued) The Group incurred interest expense of $32,520, $34,213 and $35,664 and the Group also recorded interest income of $1,268, $825 and $501, in 2002, 2003 and 2004, respectively. The Group capitalized $412, $443, and $878 of interest expense in 2002, 2003, and 2004, respectively. The total net interest expense from continuing operations in 2002, 2003, and 2004 was $30,840, $32,945 and $34,285, respectively. The Group has pledged certain receivables, land, buildings and equipment, leases and license agreements with a net book value of approximately $172,266 as collateral for the above notes. Certain notes include financial covenants, of which the most significant are minimum requirements of cash flow, debt-to-equity ratios and net worth. At May 30, 2004, the Group was not in compliance with certain financial covenants. The Group has obtained waivers through at least May 31, 2005 from each financial institution to which these covenants apply. Certain of the notes also include other customary provisions including subjective acceleration clauses for material adverse changes. The Group has evaluated the likelihood of acceleration of debt under these clauses as remote. In addition, the Group has guaranteed a third party's debt
of approximately $750. The Group has two revolving line-of-credit agreements. One agreement was increased from $8,200 to $13,200 during 2004. This agreement bears interest at the prime rate (3.50%) plus .50% at May 25, 2003 and at the prime rate (4.00%) at May 30, 2004. This agreement expires April 1, 2005 and is secured by assets having a net book value of $1,168. The Group is negotiating a renewal of this facility. The Group must pay a quarterly fee of 0.375% on unused amounts and up to $6,000 of this line can be used for letters of credit. The second agreement allows for borrowings of up to $15,000 with interest based on the rate of 30-day commercial paper (1.24% at May 25, 2003 and 1.00% at May 30, 2004) plus 2.65%. This agreement expires November 30, 2005 and is secured by assets having a net book value of $500. There were no outstanding
balances under the line-of-credit agreements as of May 25, 2003 and May 30, 2004. Aggregate maturities of long-term debt at May 30, 2004 are as follows: 2005 2006 2007 2008 2009 2010 and after Total As more fully described in Note 19, the Group intends to combine with Arby's Restaurant Group Inc. and, in connection therewith, substantially all of the Group's debt is expected to be retired or refinanced, along with the debt of Winners guaranteed by the Group. Were such debt to be retired as of May 30, 2004, management estimates prepayment penalties would aggregate approximately $20,000 at May 30, 2004, including $5,000 for the debt guaranteed by the Group. The Group is comprised of RTMRG, and its subsidiaries, along with two limited liability companies. RTMRG has 100,000,000 shares issued with no par value and has 100,000,000 and 94,469,393 shares outstanding as of May 25, 2003 and May 30, 2004, respectively. As of May 30, 2004, 5,530,607 shares were held in treasury resulting from repurchases of stock. 11. Net Capital Deficiency and Redeemable Common Stock RTMRG has stock repurchase agreements with all of its shareholders, except the largest shareholder (see Note 17), requiring the repurchase of RTMRG's stock when the shareholder is no 21
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
$
29,112
24,474
19,035
16,779
15,601
114,404
$
219,405
RTM RESTAURANT GROUP 11. Net Capital Deficiency and Redeemable Common Stock—(Continued) longer employed by the Group. The redemption value of the common stock is based on appraised value and is payable over periods up to 20 years. At May 30, 2004, the redemption value of such stock was $133,398. 12. Stock Option Plan RTMRG has awarded stock options to certain of its key executives. The stock option agreements contain certain provisions that require them to be accounted for using variable accounting under APB 25. Accordingly, RTMRG recognizes compensation expense as the value of the common stock changes from year to year. The Group recognized compensation expense associated with stock options of $2,108, $1,953 and $500 in 2002, 2003 and 2004, respectively. A summary of stock option activity and related information is as follows: Outstanding at beginning Granted Exercised Outstanding at end of the year Exercisable at end of year The exercise prices of the options range from $1.03 to $3.56 per share and the options vest over periods up to five years. The options do not have stated expiration dates. 13. Stock Awards Prior to May 26, 2002, the Group sold stock to employees in exchange for notes receivable. The stock was guaranteed to appreciate at 10% per year until vested at the later of 5 years or the date the note receivable, with interest accruing at 10% per year, was fully collected. Since the employee did not assume the risks and rewards of stock ownership, these stock awards have been accounted for as stock appreciation rights. Accordingly, the Group records compensation expense or reversal of expense on changes in the estimated market value of such stock until the shares are fully vested and are “mature” (six months after the shares are fully vested). At such time, the resulting liability is credited to additional paid-in capital. Compensation expense (reversal of expense) recorded for these stock awards was $6,560,
$6,584 and ($553) in 2002, 2003 and 2004, respectively. During the year ended May 26, 2002, 13,100,576 shares of such nonvested stock awards were issued. Nonvested stock awards outstanding at May 25, 2003 and May 30, 2004 aggregated 10,767,332 and 9,601,190 shares. The notes receivable for stock purchases are recorded in net capital deficiency. 14. Leases The Group leases offices, restaurants, and equipment under various agreements through 2030. Substantially all of the restaurant leases have initial lease terms of 15 to 20 years with two to three renewal options of five years. Many of the restaurant leases have rents that escalate over the 22
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
2002
2003
2004
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
of the year
924,008
$
1.51
4,335,430
$
1.37
4,411,422
$
1.76
3,411,422
1.33
1,000,000
3.24
2,500,000
3.30
—
—
(924,008
)
1.51
(1,000,000
)
3.24
4,335,430
1.37
4,411,422
1.76
5,911,422
2.16
924,008
1.51
682,284
1.33
2,364,569
2.14
RTM RESTAURANT GROUP 14. Leases—(Continued) base lease term and some contain provisions for additional rent based on a percentage of gross sales. Certain leases of restaurants in sale-leaseback transactions in which the Group has continuing involvement in the property sold in the form of a repurchase or purchase option or renewal options at other than fair market value at the renewal date are accounted for as financing obligations. Certain leases of restaurants under lease agreements with certain non-performance related default covenants are accounted for as capital leases. Certain leases of restaurant equipment are also accounted for as capital leases. Minimum and contingent rentals, net of sublease rental income, that comprise rental expense from continuing operations are as follows: Minimum rentals Contingent rentals Total rent expense As of May 30, 2004, future minimum rental commitments under noncancelable leases are as follows: 2005 2006 2007 2008 2009 2010 and thereafter Total minimum lease payments Payment in kind of property at end of lease term Less amount representing interest Capital lease and financing obligations Less current portion Noncurrent portion The Group leases and subleases restaurants and office facilities to third parties under various operating lease agreements through 2030 with renewal options. As of May 30, 2004, future minimum rentals due under noncancelable tenant and subtenant leases are as follows: 2005 2006 2007 2008 2009 2010 and thereafter Total minimum lease payments 23
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
May 26,
2002
May 25,
2003
May 30,
2004
$
36,095
$
37,502
$
40,051
2,418
2,249
2,126
$
38,513
$
39,751
$
42,177
Capital
Leases
Financing
Obligations
Operating
Leases
$
8,349
$
12,500
$
45,791
7,179
12,664
42,566
6,155
12,846
38,437
5,253
12,984
34,444
4,612
13,144
31,107
58,185
155,043
231,167
89,733
219,181
$
423,512
79,237
42,123
179,994
47,610
118,424
3,898
268
$
43,712
$
118,156
$
10,370
9,561
8,775
8,303
7,041
47,707
$
91,757
RTM RESTAURANT GROUP 15. Income Taxes The components of the combined provision for income taxes for the Group are as follows: Current expense: Federal State Deferred expense (benefit): Federal State Total income tax expense The combined provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory income tax rate to pretax income as a result of the following differences: Income tax expense at the statutory rate State income taxes, net of federal income tax benefit Valuation allowance Employment tax credits Stock compensation expense (reversed) Income (loss) of nontaxable entities Other, net A reconciliation of income taxes from continuing operations to total income tax expense follows: Income tax expense from continuing operations Income tax expense from discontinued operations Total income tax expense 24
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
Year Ended
May 26,
2002
May 25,
2003
May 30,
2004
$
2,859
$
3,808
$
1,714
1,310
1,830
1,250
4,169
5,638
2,964
(464
)
(179
)
(77
)
(464
)
329
495
(928
)
150
418
$
3,241
$
5,788
$
3,382
Year Ended
May 26,
2002
May 25,
2003
May 30,
2004
$
699
$
3,250
$
5,451
551
1,242
1,122
522
365
210
(377
)
(536
)
(503
)
1,782
2,247
(271
)
116
(1,804
)
(3,119
)
(52
)
1,024
492
$
3,241
$
5,788
$
3,382
Year Ended
May 26,
2002
May 25,
2003
May 30,
2004
$
2,295
$
4,556
$
795
946
1,232
2,587
$
3,241
$
5,788
$
3,382
RTM RESTAURANT GROUP 15. Income Taxes—(Continued) Significant components of deferred tax assets and liabilities are as follows: Deferred tax assets: Financing and capital lease obligations State net operating loss carryforwards Stock option expense Insurance accruals Straight-line rent accrual Other currently nondeductible accruals Tax over book interest income Other Gross deferred tax assets Less valuation allowance Net deferred tax asset Deferred tax liabilities: Depreciation and amortization Installment sales Other Gross deferred tax liability Net deferred tax liability As of May 30, 2004, the Group had approximately $58,000 of state operating loss available for carryforward, which may be used to offset future state taxable income, and which begin expiring in 2006. Because state tax returns are generally filed on a separate return basis, the Group is not able to offset combined income with the subsidiaries losses. A valuation allowance has been provided for the state loss carryforwards as cumulative losses create uncertainty about the realization of the tax benefits in future years. Net income (loss) would have been ($1,129), $1,694 and $9,072, and provision for income taxes would have been $3,125, $7,592 and $6,501 in 2002, 2003, and 2004, respectively, if the non-taxable entities had been subject to tax at the statutory federal income tax rate. 16. Employee Benefit Plans Since 2001, the Group maintains a defined contribution 401(k) plan covering substantially all employees of the Group and other affiliates who have met certain service and age requirements. The provisions of the plan allow employees to contribute up to 15% of gross earnings. The Group matches 25% of the first 4% of gross earnings contributed by employees. The Group's matching contributions totaled $291, $327 and $242 in 2002, 2003 and 2004, respectively. 17. Related Party Transactions The Group is affiliated through common ownership with Winners, Lee's Famous Recipe, Inc. and subsidiaries (“Lee's”), Marketing Events Partners, Inc. (“MVP”), RTM Family Restaurants, L.L.C. (“RTMFR”), RTM Future Associates (“RTMFA”), RTM Foundation and Crown Restaurants, Inc. As of May 25, 2003 and May 30, 2004, receivables from and cash advances to Winners aggregated $51,660 and $54,036, respectively. These receivables have been classified in net capital 25
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
May 25,
2003
May 30,
2004
$
4,257
$
5,597
2,268
2,478
2,185
2,437
1,118
1,750
1,433
2,007
499
470
579
366
843
796
13,182
15,901
2,268
2,478
10,914
13,423
(15,137
)
(17,825
)
(1,640
)
(1,595
)
—
(283
)
(16,777
)
(19,703
)
$
(5,863
)
$
(6,280
)
RTM RESTAURANT GROUP 17. Related Party Transactions—(Continued) deficiency in the accompanying balance sheets. The Group recognized interest income related to such receivables and cash advances of $1,672, $70 and $48 in 2002, 2003 and 2004, respectively. The Group received $38, $12, and $12 in 2002, 2003, 2004, respectively, from Winners for management fees. The Group paid $149, $160 and $115 in 2002, 2003 and 2004, respectively, to Winners for royalties and advertising. As of May 30, 2004, the Group has guaranteed $27,131 of Winners' debt and $17,858 of Winners' leases. RTM has committed to provide liquidity support for Winners, as needed, during the 2005 fiscal year. On October 14, 2004, RTMFR was merged into Group. Since RTMFR was under common control with the Group, the merger has been accounted for on a basis equivalent to a pooling of interests and the carrying values of RTMFR's assets and liabilities and the results of its operations have been combined with those of the Group for all periods presented. Such merger did not have a significant impact on the Group's combined financial statements. As of May 25, 2003 and May 30, 2004, the Group had an unsecured advance due from Lee's of $4,348 and $4,230, respectively. Subsequent to May 30, 2004, $3,435 of such advances was forgiven. Such advances have been classified in net capital deficiency in the accompanying balance sheets. Interest income of $221, $265 and $(265) in 2002, 2003 and 2004, respectively, has been recognized related to cash advances to Lee's. The $265 of interest income in 2003, related to the advance due from Lee's, was reversed in 2004 because it was determined that the interest would not be collected. As of May 30, 2004, the Group had guaranteed $10,074 of leases of restaurants previously operated by Lee's. The Group has transactions with non-combined affiliates on a daily basis that are typically settled monthly, and are included in other receivables and accounts payable. As of May 25, 2003 and May 30, 2004, the total of non-combined affiliate balances included in other receivables was $1,123 and $1,020, respectively, and the total of non-combined affiliate balances included in accounts payable was $199 and $6, respectively. The Group shares certain common management and employees with Marketing Event Partners (“MVP”). MVP manages golf tournaments and related charitable events and provides special event and meeting planning services. As of May 25, 2003 and May 30, 2004, the Group has advanced $200 and $390, respectively, to MVP, and has recognized interest on these advances of $4 and $11 in 2003 and 2004, respectively. Employees of MVP are paid by, and have their benefits administered by the Group, which in turn is reimbursed by MVP for these expenses quarterly. The Group paid MVP consulting fees for planning services of $360 and $440 in 2003 and 2004, respectively. The Group contributed $650, $678 and $560 in 2002, 2003 and 2004, respectively, to the RTM Foundation. The RTM Foundation was created to provide aid and support to other nonprofit organizations. The Group has advanced $1,077 and $723 to certain shareholders as of May 25, 2003 and May 30, 2004, respectively. RTM Future Associates (“RTMFA”) is an affiliated entity established to purchase the stock controlled by the largest shareholder in the event of his death. This redemption agreement is collateralized by a group of life insurance policies owned by RTMFA. In the event the life insurance proceeds are less than the appraised value of the shares, RTMRG will acquire the remaining shares in exchange for promissory notes. At May 30, 2004, the redemption value of such shareholder's stock was $101,000. As of May 30, 2004, the face amount of the policies totals $71,000. 26
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
RTM RESTAURANT GROUP 17. Related Party Transactions—(Continued) The premiums on the policies held by RTMFA are paid by RTMRG on behalf of RTMFA. The premiums are to be reimbursed from future death benefits. At termination of the agreement prior to the death of the shareholder, the premiums would be repaid to the extent of cash surrender value plus loans against cash surrender value. The agreement is terminated if RTMRG becomes a public company or a subsidiary of a public company. Since RTMFA is under common control with the Group, the premiums paid in excess of cash surrender value of $587 in 2002, $225 in 2003 and $(79) in 2004, have been accounted for as an equity transaction in the accompanying financial statements. The accumulated balances of premiums paid in excess of cash surrender value on RTMFA policies was $5,193 and $5,114 at May 25, 2003 and May 30, 2004, respectively, and
have been classified in net capital deficiency in the accompanying balance sheets. As of May 25, 2003 and May 30, 2004, the Group had advances to RTMFA of $1,291 and $1,615, respectively. Such advances have been classified in net capital deficiency in the accompanying balance sheets. The Group had receivables from split-dollar life insurance contract policy owners, who are shareholders, in excess of cash surrender value of $1,268 and $1,375 at May 25, 2003 and May 30, 2004, respectively. Such advances have been classified in net capital deficiency in the accompanying balance sheets. 18. Commitments and Contingent Liabilities Pending court approval, the Group has reached a settlement with a third party regarding the accessibility of the Group's restaurants to individuals in accordance with the Americans with Disabilities Act. The Group estimates it will make capital expenditures and pay related fees aggregating approximately $9,000 over the next 8 years to meet the requirements of the settlement. Under its development agreement with Arby's Restaurant Group (“ARG”), the Group has agreed to develop 204 more Arby's restaurants by December 31, 2010, with specific annual commitments for each calendar year until that time. The Group's commitment may be reduced for each restaurant developed by another franchisee in the Group's territories. Standby letters of credit primarily related to workers' compensation insurance are issued to provide collateral to insurance companies, states or municipalities. In the event the Group fails to pay insurance claims, the issuing bank may be asked to release some or all of this collateral to the insurance company, state or municipality. As of May 30, 2004, such standby letters of credit totaled $5,800. As of May 30, 2004, the Group had guaranteed leases of $8,168 related to Arby's restaurants previously operated by the Group. 19. Subsequent Events Merger Transaction The Group and Triarc Companies Inc. have announced their intent to enter into a series of transactions which will result in the merger of Arby's Restaurant Group Inc. and the Group. The resulting entity will operate solely in the restaurant business as the franchisor of the Arby's restaurant system and the owner of the Arby's restaurant operations of Arby's Restaurant Group, Inc. and the Group. The transactions contemplate that substantially all of the outstanding debt of the Group will be repaid or refinanced. 27
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
RTM RESTAURANT GROUP 19. Subsequent Events—(Continued) Sale of Restaurants On September 13, 2004, the Group sold the operations of 4 of its restaurants in Georgia to a former stockholder for net proceeds of $3,513, including a note receivable for $832, receipt of the shareholder's stock of $108, and cash. On September 27, 2004, the Group sold the operations of 6 of its restaurants in Indiana to a former stockholder for net proceeds of $3,675, including receipt of the shareholder's stock of $1,590, and cash. As of the date of the transactions, the assets and liabilities disposed of related to these 10 restaurants were recorded at a net carrying value of approximately $865. For purposes of these financial statements, the results of operations of these restaurants have been included in discontinued operations. Revenues related to the 10 restaurants sold in September were $9,551, $10,380 and $10,746, and income before income taxes was $1,555, $1,622 and $1,574 in 2002, 2003 and 2004, respectively, and are included in income from discontinued operations, net of income taxes, in the accompanying combined statements of operations. 28
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
COMBINED FINANCIAL STATEMENTS As of May 30, 2004 and March 6, 2005 and for the 29
RTM Restaurant Group
Forty Weeks Ended February 29, 2004 and March 6, 2005
RTM RESTAURANT GROUP CONTENTS Combined Financial Statements 30
COMBINED FINANCIAL STATEMENTS
As of May 30, 2004 and March 6, 2005 and for the
Forty Weeks Ended February 29, 2004 and March 6, 2005
31
32
33
34
35
RTM RESTAURANT GROUP ASSETS Current assets: Cash and cash equivalents Income taxes receivable Other receivables Inventories Prepaid expenses Deferred income taxes Total current assets Land, property and equipment: Land Property and equipment, net of accumulated depreciation Capital leases, net of accumulated amortization of $14,486 Land, property and equipment, net Other assets: Notes receivable, net of current portion and deferred gain Goodwill Other intangibles, net of accumulated amortization of $12,638 Other Total other assets Total assets LIABILITIES AND NET CAPITAL DEFICIENCY Current liabilities: Accounts payable Accrued expenses Current portion of long-term debt Current portion of financing obligations Current portion of capital lease obligations Total current liabilities Long-term debt, net of current portion Financing obligations, net of current portion Capital lease obligations, net of current portion Deferred income taxes Other liabilities and deferred credits Total liabilities Commitments and contingent liabilities Net capital deficiency: Common stock Additional paid-in capital Retained earnings Treasury stock Stock notes receivable Notes and advances due from affiliates Net capital deficiency Total liabilities and net capital deficiency See accompanying notes to combined financial statements. 31
COMBINED BALANCE SHEETS
(In Thousands)
May 30,
2004
March 6,
2005
(Unaudited)
$
8,475
$
10,846
2,498
3,516
4,858
4,065
7,637
6,398
8,124
9,782
1,980
2,047
33,572
36,654
97,458
104,429
of $148,462 in 2004 and $155,149 in 2005, respectively
178,561
178,125
in 2004 and $17,905 in 2005, respectively
43,506
45,277
319,525
327,831
4,042
3,200
60,861
63,798
in 2004 and $12,793 in 2005, respectively
19,178
18,816
9,017
8,671
93,098
94,485
$
446,195
$
458,970
$
38,629
$
43,117
26,744
27,179
29,112
42,211
268
356
3,898
4,226
98,651
117,089
190,293
171,427
118,156
131,167
43,712
46,326
8,260
6,130
26,985
28,180
486,057
500,319
2
2
14,570
14,570
39,661
44,412
(17,245
)
(20,720
)
(10,480
)
(11,892
)
(66,370
)
(67,721
)
(39,862
)
(41,349
)
$
446,195
$
458,970
RTM RESTAURANT GROUP Net sales Costs and expenses: Costs of operations, excluding depreciation and amortization General and administrative, excluding depreciation and amortization Depreciation and amortization Operating profit Interest expense, net Other income Income before income taxes and discontinued operations Provision for income taxes Income from continuing operations Income from discontinued operations, net of income taxes of $686 and $1,978 in 2004 and 2005, respectively Net income See accompanying notes to combined financial statements. 32
COMBINED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
Forty Weeks Ended
February 29,
2004
March 6,
2005
$
550,769
$
606,295
450,108
488,812
56,692
61,701
18,200
22,334
525,000
572,847
25,769
33,448
(25,918
)
(27,960
)
992
1,026
843
6,514
375
1,697
468
4,817
589
3,516
$
1,057
$
8,333
RTM RESTAURANT GROUP Balance at May 25, 2003 Net income Repurchase of common stock Sale of common stock Vested stock awards Shareholder loan Dividends and distributions Loans to affiliates, net Balance at May 30, 2004 Net income Repurchase of common stock Shareholder loan Member's contribution Dividends and distributions Loans to affiliates, net Balance at March 6, 2005 See accompanying notes to combined financial statements. 33
COMBINED STATEMENTS OF NET CAPITAL DEFICIENCY
(In Thousands)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Stock Notes
Receivable
Notes and
Advances
Due From
Affiliates
Total
$
2
$
13,691
$
32,859
$
—
$
(11,505
)
$
(63,760
)
$
(28,713
)
—
—
12,191
—
—
—
12,191
and members' interest
—
—
(1,389
)
(17,696
)
2,406
216
(16,463
)
—
—
—
451
—
—
451
—
879
—
—
—
—
879
transactions, net
—
—
—
—
(1,381
)
—
(1,381
)
—
—
(4,000
)
—
—
—
(4,000
)
—
—
—
—
—
(2,826
)
(2,826
)
2
14,570
39,661
(17,245
)
(10,480
)
(66,370
)
(39,862
)
—
—
8,333
—
—
—
8,333
and members' interests
—
—
—
(3,475
)
—
—
(3,475
)
transactions, net
—
—
—
—
228
—
228
—
—
1,640
—
(1,640
)
—
—
—
—
(5,222
)
—
—
—
(5,222
)
—
—
—
—
—
(1,351
)
(1,351
)
(unaudited)
$
2
$
14,570
$
44,412
$
(20,720
)
$
(11,892
)
$
(67,721
)
$
(41,349
)
RTM RESTAURANT GROUP Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, continuing operations Depreciation and amortization, discontinued operations Stock-based compensation expense Deferred income taxes Gain on sales of units Gain on sale of discontinued operations Changes in operating assets and liabilities: Income taxes receivable Other receivables Inventories Accounts payable Accrued expenses Prepaid expenses Other liabilities and deferred credits Net cash provided by operating activities Cash flows from investing activities Purchase of land, property, and equipment Notes and advances due from affiliates Additions to notes receivable Collections on notes receivable Proceeds from disposal of land and property Purchase of other assets Proceeds from disposal of other assets Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of long-term debt Payments on long-term debt, financing and capital lease obligations Repurchase of treasury stock and members' interests Proceeds from sale of treasury stock Payments of dividends and distributions Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Supplemental cash flow information Cash paid for interest Cash paid for income taxes, net of refunds Noncash investing and financing activities Additions to capital lease and financing obligations Treasury stock acquired in exchange for notes receivable and other consideration Note receivable from sale of restaurants Net liabilities assumed, notes and receivables exchanged and notes payable—issued in purchase of restaurants Contribution of note receivable to members' equity See accompanying notes to combined financial statements. 34
COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Forty Weeks Ended
February 29,
2004
March 6,
2005
$
1,057
$
8,333
18,200
22,334
1,473
70
(41
)
4,157
(1,140
)
(2,197
)
(441
)
(490
)
—
(4,940
)
(3,392
)
(1,018
)
2,764
710
(571
)
1,239
14,934
4,488
(2,664
)
332
3,459
(1,658
)
1,463
(1,146
)
35,101
30,214
(30,598
)
(11,878
)
(2,305
)
(1,351
)
(1,389
)
(2,134
)
597
2,059
4,695
5,746
(2,203
)
(549
)
13
734
(31,190
)
(7,373
)
29,625
13,559
(26,882
)
(26,542
)
(1,677
)
(2,717
)
451
452
(4,000
)
(5,222
)
(2,483
)
(20,470
)
1,428
2,371
8,621
8,475
$
10,049
$
10,846
$
32,243
$
33,973
3,978
6,309
20,378
19,382
17,831
1,210
—
832
—
3,120
—
1,640
RTM RESTAURANT GROUP March 6, 2005 1. Organization of the Group RTM Restaurant Group (the “Group”) is not a legal entity, but rather the combination of the financial statements of RTM Restaurant Group, Inc. (“RTMRG”) and its two wholly-owned subsidiaries, RTM, Inc. (and its subsidiaries) (“RTM”) and RTM Partners, Inc. (and its subsidiaries) (“Partners”), along with RTM Acquisition Company, L.L.C. (“RTMAC”), and RTM Management Company, L.L.C. (“Management”). These entities are owned and controlled by the same group of individuals (the “Owners”). Two of the companies were organized as Georgia limited liability companies. These limited liability companies and the related operating agreements shall be dissolved and terminated at the earlier of the written consent of a Majority Interest, as defined, sale
of the company, legal decree, or December 31, 2050. The Group is the largest licensee of Arby's® restaurants, owning and operating 773 Arby's restaurants as of March 6, 2005. The Arby's license agreements initially extend for twenty years and are renewable for successive twenty-year terms. 2. Summary of Significant Accounting Policies Basis of Presentation The combined financial statements include the accounts of RTMRG, RTM, Partners, RTMAC and Management. All significant inter-entity balances and transactions have been eliminated. Fiscal Year and Reporting Period The Group reports on a fiscal year consisting of 53 or 52 weeks ending on the last Sunday in May. The Group's 2004 fiscal year contained 53 weeks and the 2005 fiscal year contained 52 weeks. These financial statements include the combined statements of operations and cash flow for the 40 weeks ended February 29, 2004, the balance sheet as of May 30, 2004, the related combined statements of operations, cash flows and net capital deficiency for the 40 weeks ended March 6, 2005, and the balance sheet as of March 6, 2005. Cash and Cash Equivalents Cash and cash equivalents consist principally of cash, including interest-bearing bank accounts. Inventories Inventories consist primarily of food, beverages, and supplies and are valued at the lower of first-in, first-out cost or market. Property and Equipment Property and equipment are stated at cost. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss is reflected in the statements of operations. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets, generally ranging from 3 to 30 years, or the term of the lease for leasehold improvements, if shorter. Leasehold improvements under leases for which there exists an economic compulsion to renew the lease under one or more renewal options are amortized over the term of the lease plus anticipated renewal 35
NOTES TO COMBINED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) periods. For such leases, minimum lease payments are recognized on a straight-line basis over the lease term, including the anticipated renewal periods. Routine maintenance and repairs are charged to expense, and expenditures for renewals and betterments are capitalized. Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, impairment is measured by comparing the carrying amount to the fair value or discounted future net cash flows. No impairment charges were recorded for the 40 week period ended February 29, 2004. Impairment charges of $1,131 related to property and equipment at restaurants with negative cash flows were recorded in the 40 week period ended March 6, 2005 and are included in depreciation expense
in the accompanying statement of operations. License Fees, Favorable Licenses and Favorable Leases Initial license fees and acquisition costs allocated to license fees and favorable licenses are recorded as other intangible assets and are amortized on a straight-line basis over the contractual term of the agreements, including one renewal period for which renewal of the licenses and agreements is anticipated and the cost of renewal is nominal. Acquisition costs allocated to favorable leases are also recorded as other intangible assets and are amortized on a straight line basis over the term of the leases plus renewal periods for which renewal of the leases is anticipated in the valuation of the intangible assets. Goodwill The Group adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets, effective May 28, 2001. Under SFAS 142, goodwill is no longer amortized but is reviewed annually for impairment. The Group assesses the recoverability of goodwill on at least an annual basis, or more frequently if circumstances suggest potential impairment. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying
value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Under SFAS 142, a reporting unit is defined as an operating segment or one level below an operating segment, referred to as a component. For purposes of assessing impairment of goodwill the Group deems each district to be a reporting unit. The Group performed its last annual impairment test during the final quarter of the fiscal year ended May 30, 2004, and concluded that no impairment of goodwill existed since the fair value of each of the Group's reporting units exceeded its carrying value. No events have occurred, nor circumstances changed subsequent to the most recent annual test that would reduce the fair value of the Group's reporting unit below its carrying value. The Group will continue to test for impairment on an annual basis or an interim basis if circumstances change that would indicate the possibility of impairment. 36
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) Stock Based Compensation The Group has elected to account for its stock awards and options in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. Based on the terms of the Group's stock awards and options, variable plan accounting is applied. As a result, the Group recognizes compensation expense related to stock awards and options or reverses previously recognized expense as the estimated market value of its common stock changes from year to year. Because the common stock is not publicly traded, there is no ready market from which to determine its value. As a result, the Group has historically obtained an independent valuation to estimate the market value of its common stock. A critical estimate in the valuation
is anticipated future cash flows of the business. This estimate is subject to change as a result of many factors including, among others, changing economic conditions and the competitive environment. During 2005, the estimated fair value was determined based on the terms of an agreement and plan of merger which was executed on May 27, 2005. See Note 19 for further discussion. The Group is not required to disclose the pro-forma effects of accounting for the options under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, as the options are liability awards for which the accounting under SFAS 123 would be the same as the accounting recorded by the Group under APB 25. Self-Insurance Reserves The Group records an estimate of the remaining costs to settle incurred self-insured workers' compensation claims. The Group purchases insurance policies which reimburse the Group in the event of claims over a specified amount. The estimate considers factors which may impact the ultimate cost of claims which include: the frequency and severity of historical claims, as well as changes in the business environment, benefit levels, health care costs and regulatory environment. The estimate also considers the impact of insurance which may reduce the overall cost of a given claim to the Group. In addition, at the balance sheet date, there may be incurred claims that have not been reported; accordingly, the Group may not be aware of them. An estimate of these incurred but not reported claims has been included in the reserve.
The Group has provided letters of credit to various states, municipalities and insurance companies as collateral for certain of its liabilities attributable to workers' compensation. Income Taxes The Group is comprised of five companies (and their subsidiaries). Two of the companies are limited liability companies; accordingly, the tax attributes from the activities of those companies flow directly to the members of the limited liability companies. Thus, no tax provision, tax receivables or payables, or deferred tax assets or liabilities are reflected in the accompanying combined financial statements related to these companies. Three companies are C Corporations; accordingly, the tax attributes from the activities of those companies are reflected in the accompanying combined financial statements. Thus, tax provisions, tax receivables or payables, and deferred tax assets or liabilities arising from differences between the financial statement and tax basis of the assets and liabilities are reflected in the accompanying
combined financial statements related to these companies. Deferred taxes are provided using currently enacted tax rates and regulation. A valuation allowance is provided for deferred tax assets for which realization is not deemed more likely than not. 37
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) Revenue Recognition Revenues from the sale of food and beverages are recognized at the time the products are sold and the cash is collected from the customer. Advertising Expense Advertising costs are expensed as incurred. The Group charges advertising costs, including contributions made to advertising cooperatives, to expense ratably in relation to revenues over the year in which incurred. Advertising expense from continuing operations totaled $37,606 and $38,361 for the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. Fair Value of Financial Instruments The Group uses financial instruments in the normal course of its business. The carrying value approximates fair value for financial instruments that are short-term in nature, such as cash, accounts receivable and accounts payable. The Group estimates that the carrying value of the Group's long-term debt and notes receivable approximates fair value based on current rates offered to and by the Group for debt and notes of the same remaining maturities. It is not practicable to assess the fair value of affiliate receivables, because the timing of receipts is not fixed. Gains and Losses on Restaurant Sales From time to time to optimize its store locations, the Group sells certain of its restaurants. The Group defers gains on unit sales when it has continuing involvement in the restaurants sold. Deferred gains are recognized over the remaining term of the continuing involvement. The Group also defers gains to the extent of proceeds in the form of notes receivable, when the purchaser is thinly capitalized and highly leveraged. These deferred gains are recognized as the cash is received or continuing involvement ceases and collectibility is reasonably assured. Losses are recognized immediately. The computation of gains or losses also includes an allocation of goodwill if the underlying unit was acquired through a transaction accounted for by the purchase method. Recently Issued Accounting Pronouncements The Financial Accounting Standards Board (“FASB”) issued the Revised Interpretation No. 46, Consolidation of Variable Interest Entities, in December 2003 (“FIN 46R”). The revised Interpretation requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation provisions of FIN 46R immediately apply to variable interest entities created after January 1, 2004 or interests in variable interest entities obtained after that date. For interests in variable interest entities obtained prior to January 1, 2004, the consolidation
provisions of FIN 46R become effective for the Group in its fiscal year ending May 28, 2006. Although the Group has not adopted FIN 46R, and its provisions have not been applied in the accompanying financial statements, the Group has determined that, as of May 30, 2004, it holds interests in four variable interest entities that it would consolidate upon application of FIN 46R: Winners International Restaurants, Inc., Mrs. Winners, L.P. and Winners Partners (collectively “Winners”) and RTM Future Associates. These entities are under common control with the Group. Winners owns and operates 99 restaurants under the name of Mrs. Winner's Chicken & Biscuits in 38
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
RTM RESTAURANT GROUP 2. Summary of Significant Accounting Policies—(Continued) seven states. RTM Future Associates was established to purchase the stock of RTMRG's largest shareholder (see Note 17). The Group's maximum exposure to loss as a result of its involvement with Winners includes the Group's guarantee of $20,043 of Winners' debt as of March 6, 2005, the Group's guarantee of Winners' leases of $17,277 as of March 6, 2005, and the Group's commitment to provide liquidity support for Winners, as needed, over the 2005 fiscal year. Such exposure excludes receivables from Winners of $58,804 as of March 6, 2005, that are included in net capital deficiency in the accompanying balance sheet. See Note 17 for further discussion. Additionally, the Group has determined that it holds variable interests in the form of notes receivable from entities that purchased restaurants from the Group subsequent to January 1, 2004. As more fully described in Note 4, in April and September of 2004, the Group sold restaurants to unrelated third parties for cash and notes receivable. The buyers are variable interest entities; however, the Group is not considered the primary beneficiary and, therefore, has not consolidated the entities. The Group's outstanding notes receivable balances exposed to loss as a result of its involvement in these variable interest entities totaled $2,600 as of March 6, 2005. The Group may hold variable interests in the form of notes receivable from entities that purchased restaurants from the Group prior to January 1, 2004. The Group has not yet determined whether any of such entities are variable interest entities or whether the Group would be required to consolidate any of them beginning in fiscal year 2006. In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123 (SFAS 123R), Share Based Payment. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The Statement eliminates the alternative method of accounting for employee share-based payments previously available under APB 25. The Statement will become effective for the Group in its fiscal year ending May 27, 2007. The Group has not yet assessed the effect that the adoption of SFAS 123R will have on its financial position and results of operations. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 would require that the Group's redeemable common stock be classified as a liability and measured at fair value. The effective date of SFAS 150 for nonpublic companies has been deferred indefinitely. 3. Significant Risks and Uncertainties Nature of Operations The Group operates solely in the restaurant business through its Arby's® quick service restaurants specializing in slow-roasted roast beef sandwiches. Arby's restaurants also offer an extensive menu of chicken, turkey and ham sandwiches, side dishes and salads including Arby's Market Fresh® sandwiches. The Group's restaurants are located in 22 states throughout the United States. Information concerning the number of the Group's Arby's restaurants is as follows: 39
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
RTM RESTAURANT GROUP 3. Significant Risks and Uncertainties—(Continued) Open at beginning of year Openings and acquisitions Transfers Closings Open as of date indicated Weighted average number in operation Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Group's significant estimates which are susceptible to change in the near term relate to tax matters, RTMRG valuation estimates related to stock based compensation, self-insurance reserves, impairment of goodwill and long-lived assets and gains and losses related to the disposition of restaurants. The Group evaluates those estimates and assumptions on an ongoing basis utilizing historical experience and various other factors which the Group believes are reasonable under the circumstances. Certain Risk Concentrations The Group does not have a single significant customer. However, the Group's restaurant business could be adversely affected by changing consumer preferences resulting from concerns over nutritional or safety aspects of beef, poultry, french fries or other foods or the effects of food-borne illnesses. The Group believes that its vulnerability to risk concentrations related to significant vendors and sources of its raw materials is not significant, although increases in the cost of beef during 2004 due to market-wide supply and demand factors adversely affected profit margins of the Group's restaurants in 2004 and 2005. The Group also believes that its vulnerability to risk concentrations related to geographical concentration is mitigated since the Group generally operates throughout the United States and has no foreign
exposure. 4. Discontinued Operations Phoenix District On April 19, 2004, the Group sold all of its Arby's restaurants in the Phoenix, AZ district (the “Phoenix District”) to an unrelated third party for net proceeds of $15,950, including cash and a note receivable for $2,000 payable monthly over 10 years. The gain of $10,874 ($8,948 net of taxes) resulting from this transaction was recorded in the fourth quarter of fiscal year 2004 in discontinued operations. Goodwill of $1,167 related to the Phoenix District was retired in connection with the sale. As of the date of the transaction, the Phoenix District's assets and liabilities were recorded at a net carrying value of approximately $4,432. 40
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
May 25,
2003
May 30,
2004
March 6,
2005
771
788
772
25
29
22
—
(38
)
(10
)
(8
)
(7
)
(11
)
788
772
773
779
790
772
RTM RESTAURANT GROUP 4. Discontinued Operations—(Continued) The Phoenix District's revenues were $24,321, and income before income taxes was $103, during the 40 weeks ended February 29, 2004, and is included in income from discontinued operations, net of income taxes, in the accompanying combined statement of operations. Other Restaurant Sales On September 13, 2004, the Group sold the operations of 4 of its restaurants in Georgia to a former stockholder for net proceeds of $3,513, including a note receivable for $832, receipt of the shareholder's stock of $108, and cash. On September 27, 2004, the Group sold the operations of 6 of its restaurants in Indiana to a former stockholder for net proceeds of $3,675, including receipt of the shareholder's stock of $1,590, and cash. Gains aggregating $4,940 ($3,162 net of tax) resulted from these transactions and are included in income from discontinued operations, and $748 was deferred as of March 6, 2005. The deferred gain will be recognized as collections are made on a note receivable from the buyer. As of the date of the transactions, the assets and liabilities disposed of related to these 10 restaurants were recorded at a net carrying value of approximately $865. As of May 30, 2004, the net carrying value of such assets and liabilities was $602. For purposes of these financial statements, the results of operations of these restaurants have been included in discontinued operations. Revenues related to the 10 restaurants sold in September 2004 were $8,067 and $8,652, and income before income taxes, exclusive of the gains on sale, was $1,172 and $5,494 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, and is included in income from discontinued operations, net of income taxes, in the accompanying combined statements of operations. 5. Acquisitions During 2004 and 2005, the Group acquired several businesses that operated Arby's restaurants. Each of these acquisitions was accounted for as a purchase and their results of operations are included beginning at the date of acquisition. Additionally, during the 40 weeks ended March 6, 2005, the Group reacquired two restaurants sold to TLSE, LLC (“TLSE”) during 1999. The restaurants were reacquired for $2,250, including cash, the exchange of a note receivable, issuance of a note and the assumption of certain liabilities. At the date of the sale of the restaurants to TLSE, the Group took a note and guaranteed TLSE's third-party debt. As a result, this transaction was not accounted for as a sale. This is consistent with the rules established by the Securities and Exchange Commission. As of the reacquisition date, the Company had recorded a deferred credit related to the transaction of $1,750. Such deferred credit was applied as a reduction of the acquisition cost allocated to the net assets acquired. The following summarizes the allocation of the aggregate purchase price of the Group's acquisitions: Assets: Property and equipment Goodwill Other net assets acquired Aggregate purchase price, net 41
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
May 30,
2004
March 6,
2005
$
165
$
250
195
2,572
5
678
$
365
$
3,500
RTM RESTAURANT GROUP 6. Notes Receivable Notes receivable consist of the following: Sales of restaurants: 10% note receivable, due in monthly installments 10% note receivable, due in monthly installments 7.4% note receivable, due in monthly installments Other notes receivable with varying interest rates Less deferred gains Less current portion The notes described above resulting from the sales of restaurants are collateralized by the restaurants and by assignment of the license and franchise rights related to the restaurants or are guaranteed by the owner of the purchaser. 7. Property and Equipment and Capital Leases Property and equipment and capital leases, at cost, consist of the following: Property and equipment: Buildings Leasehold improvements Equipment and automobiles Construction in progress Less accumulated depreciation Capital leases: Buildings Equipment Less accumulated amortization For continuing operations, the Group incurred depreciation expense of $14,871 and $17,555 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, and amortization expense (including amortization of intangible assets) of $3,329 and $4,779 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. Real Estate Investment Joint Venture The Group has approximately a 50% interest in a joint venture with a third party whose purpose is to acquire, develop, construct, finance, lease and dispose of restaurant properties. The Group is involved in securing the land and constructing the buildings and enters into a lease with 42
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
May 30,
2004
March 6,
2005
of $71 including interest beginning 2006
$
4,187
$
4,187
of $12 including interest through 2017
1,071
1,005
of $24 including interest through 2014
2,000
1,731
1,592
1,030
(4,619
)
(4,619
)
4,231
3,334
189
134
$
4,042
$
3,200
May 30,
2004
March 6,
2005
$
156,064
$
161,472
36,032
38,975
129,678
129,342
5,249
3,485
(148,462
)
(155,149
)
$
178,561
$
178,125
$
38,594
$
41,698
19,398
21,484
(14,486
)
(17,905
)
$
43,506
$
45,277
RTM RESTAURANT GROUP 7. Property and Equipment and Capital Leases—(Continued) the joint venture for the restaurant properties. The joint venture then sells the land and building to a third party, subject to the lease. In accordance with the operating agreement, distributable cash flows are disbursed to the members of the joint venture. Gains are deferred and are amortized over the term of the lease for capital leases. In accordance with Emerging Issues Task Force Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction, and Statement of Financial Accounting Standards No. 98, Accounting for Leases, the Group is considered the owner of the property for accounting purposes while the property is held by the joint venture. In addition, the purchase of properties by the joint venture in connection with an acquisition by the Group in 2001 and the concurrent lease of such properties by the Group has been accounted for as a financing transaction. Accordingly, the land and building, along with the related financing obligations, are recorded in the accompanying financial statements. The amounts reported in the balance sheets related to all of the properties subject to such leases are as follows: Land, property and capital leases Financing obligations Capital lease obligations 8. Other Intangible Assets Other intangible assets consist of the following: License fees Favorable licenses Favorable leases Non-compete agreement As of May 30, 2004, the estimated aggregate amortization expense related to other intangible assets for the next five fiscal years is as follows: 2005—$962; 2006—$880; 2007—$857; 2008—$838 and 2009—$818. The weighted average remaining useful life of the licenses and favorable leases is 34 and 10 years, respectively. 43
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
As of
May 30,
2004
March 6,
2005
$
41,431
$
40,302
20,984
20,984
22,716
22,467
May 30, 2004
March 6, 2005
Gross
Asset
Accumulated
Amortization
Net
Book
Value
Gross
Asset
Accumulated
Amortization
Net
Book
Value
$
11,729
$
(3,592
)
$
8,137
$
11,999
$
(3,675
)
$
8,324
12,251
(5,992
)
6,259
11,974
(2,529
)
9,445
7,266
(2,920
)
4,346
7,066
(6,433
)
633
570
(134
)
436
570
(156
)
414
$
31,816
$
(12,638
)
$
19,178
$
31,609
$
(12,793
)
$
18,816
RTM RESTAURANT GROUP 9. Other Assets Other assets consist of the following: Receivables from split-dollar life insurance contract policy owners Market development agreement deposit Cash surrender value of life insurance policies Financing commitment fees Lease acquisition costs Refundable deposits Other The receivables from split-dollar life insurance contracts are collateralized by the cash surrender value of the life insurance policies. 10. Debt Long-term debt consists of: Installment notes payable to financial institutions Line of credit borrowings Stock repurchase notes payable through 2024 Notes to shareholders, payable through 2013 Less current portion The Group incurred interest expense of $26,940 and $28,967 and the Group also recorded interest income of $347 and $575, during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. The Group capitalized $675 and $432 during the 40 week periods ended February 29, 2004 and March 6, 2005, respectively. During the 40 week periods ended February 29, 2004 and March 6, 2005, the total net interest expense from continuing operations was $25,918 and $27,960, respectively. The Group has pledged certain receivables, land, buildings and equipment, leases and license agreements with a net book value of approximately $170,000 as collateral for the above notes. Certain notes include financial covenants, of which the most significant are minimum requirements of cash flow, debt-to-equity ratios and net worth. At May 30, 2004, the Group was not in compliance with certain financial covenants. The Group has obtained waivers through at least May 31, 2005 from each financial institution to which these covenants apply. Based on its preliminary results for the year ended May 29, 2005, the Group believes it is probable that the Group will be in compliance with such covenants at May 29, 2005. At March 6, 2005, the Group was in compliance with the covenants that are measured on a quarterly basis. Certain
of the notes 44
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
May 30,
2004
March 6,
2005
$
3,043
$
3,417
1,726
1,433
1,329
1,205
1,210
1,065
979
901
555
477
175
173
$
9,017
$
8,671
May 30,
2004
March 6,
2005
and commercial lenders through 2024 at varying
interest rates up to 14.2%
$
206,379
$
185,430
—
12,759
with interest at 5.31% to 7.74%
12,445
12,654
at interest rates ranging from 4.3% to 10%
581
2,795
219,405
213,638
29,112
42,211
$
190,293
$
171,427
RTM RESTAURANT GROUP 10. Debt—(Continued) also include other customary provisions including subjective acceleration clauses for material adverse changes. The Group has evaluated the likelihood of acceleration of debt under these clauses as remote. The Group has two revolving line-of-credit agreements. As of March 6, 2005, one agreement allows for borrowings up to $25,000 through December 15, 2005. This agreement bears interest at the prime rate (4.00% at May 30, 2004 and 5.00% at March 6, 2005). This agreement is secured by assets having a net book value of $1,168 as of May 30, 2004 and $2,029 as of March 6, 2005. The Group pays a quarterly fee of 0.375% on unused amounts and up to $6,000 of this line can be used for letters of credit. The second agreement allows for borrowings of up to $15,000 with interest based on the rate of 30-day commercial paper (1.00% at May 30, 2004 and 2.46% at March 6, 2005) plus 2.65%. This agreement expires November 30, 2005 and is secured by assets having a net book value of $500 as of May 30, 2004 and $794 as of March 6, 2005.
There were no outstanding balances under the line-of-credit agreements as of May 30, 2004. As of March 6, 2005, there was an outstanding balance of $12,759 which is included in the current portion of long-term debt. Aggregate maturities of long-term debt at March 6, 2005 are as follows: Remainder of fiscal year ended May 29, 2005 2006 2007 2008 2009 2010 and after Total As more fully described in Note 19, the Group intends to combine with Arby's Restaurant Group Inc. and, in connection therewith, substantially all of the Group's debt is expected to be retired or refinanced, along with the debt of Winners guaranteed by the Group. Were such debt to be retired as of March 6, 2005, management estimates prepayment penalties would aggregate approximately $20,000 at March 6, 2005, including $5,000 for the debt guaranteed by the Group. 11. Net Capital Deficiency and Redeemable Common Stock The Group is comprised of RTMRG and its subsidiaries, along with two limited liability companies. RTMRG has 100,000,000 shares issued with no par value and has 94,469,393 and 92,862,239 shares outstanding as of May 30, 2004 and March 6, 2005, respectively. As of May 30, 2004 and March 6, 2005, 5,530,607 and 7,137,761 shares, respectively, were held in treasury resulting from repurchases of stock. RTMRG has stock repurchase agreements with all of its shareholders, except the largest shareholder (see Note 17), requiring the repurchase of RTMRG's stock when the shareholder is no longer employed by the Group. The redemption value of the common stock is based on appraised value and is payable over periods up to 20 years. At March 6, 2005, the redemption value of such stock was $131,914. 12. Stock Option Plan RTMRG has awarded stock options to certain of its key executives. The stock option agreements contain certain provisions that require them to be accounted for using variable 45
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
$
6,791
37,301
19,107
16,859
15,659
117,921
$
213,638
RTM RESTAURANT GROUP 12. Stock Option Plan—(Continued) accounting under APB 25. Accordingly, RTMRG recognizes compensation expense (reversal of expense) as the value of the common stock changes from year to year. The Group recognized compensation expense associated with stock options of $384 and $1,966 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. A summary of stock option activity and related information is as follows: Outstanding at beginning of period Forfeited Granted Exercised Outstanding at end of period Exercisable at end of period The exercise prices of the options range from $1.03 to $3.56 per share and the options vest over periods up to five years. The options do not have stated expiration dates. 13. Stock Awards Prior to May 26, 2002, the Group sold stock to employees in exchange for notes receivable. The stock was guaranteed to appreciate at 10% per year until vested at the later of 5 years or the date the note receivable, with interest accruing at 10% per year, was fully collected. Since the employee did not assume the risks and rewards of stock ownership, these stock awards have been accounted for as stock appreciation rights. Accordingly, the Group records compensation expense or reversal of expense on changes in the estimated market value of such stock until the shares are fully vested and are “mature” (six months after the shares are fully vested). At such time, the resulting liability is credited to additional paid-in capital. Compensation expense (reversal of expense) recorded for these stock awards was ($426)
and $2,189 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. During the year ended May 26, 2002, 13,100,576 shares of such nonvested stock awards were issued. Nonvested stock awards outstanding at May 30, 2004 and March 6, 2005 aggregated 9,601,190 shares. The notes receivable for stock purchases are recorded in net capital deficiency. 14. Leases The Group leases offices, restaurants, and equipment under various agreements through 2030. Substantially all of the restaurant leases have initial lease terms of 15 to 20 years with two to three renewal options of five years. Many of the restaurant leases have rents that escalate over the base lease term and some contain provisions for additional rent based on a percentage of gross sales. Certain leases of restaurants in sale-leaseback transactions in which the Group has continuing involvement in the property sold in the form of a repurchase or purchase option or renewal options at other than fair market value at the renewal date are accounted for as financing obligations. Certain leases of restaurants under lease agreements with certain non-performance 46
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Year Ended
May 30, 2004
Forty Weeks Ended
March 6, 2005
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
4,411,422
$
1.76
5,911,422
$
2.16
—
—
(1,000,000
)
3.24
2,500,000
3.30
—
—
(1,000,000
)
3.24
—
—
5,911,422
2.16
4,911,422
1.94
2,364,569
2.14
2,480,187
1.67
RTM RESTAURANT GROUP 14. Leases—(Continued) related default covenants are accounted for as capital leases. Certain leases of restaurant equipment are also accounted for as capital leases. Minimum and contingent rentals, net of sublease rental income, that comprise rental expense from continuing operations are as follows: Minimum rentals Contingent rentals Total rent expense As of May 30, 2004, future minimum rental commitments under noncancelable leases are as follows: 2005 2006 2007 2008 2009 2010 and thereafter Total minimum lease payments Payment-in-kind of property at end of lease term Less amount representing interest Present value of minimum lease payments Less current portion Noncurrent portion The Group leases and subleases restaurants and office facilities to third parties under various operating lease agreements through 2030 with renewal options. As of May 30, 2004, future minimum rentals due under noncancelable tenant and subtenant leases are as follows: 2005 2006 2007 2008 2009 2010 and thereafter Total minimum lease payments 47
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Forty Weeks Ended
February 29,
2004
March 6,
2005
$
31,268
$
30,549
1,572
1,779
$
32,840
$
32,328
Capital
Leases
Financing
Obligations
Operating
Leases
$
8,349
$
12,500
$
45,791
7,179
12,664
42,566
6,155
12,846
38,437
5,253
12,984
34,444
4,612
13,144
31,107
58,185
155,043
231,167
89,733
219,181
$
423,512
79,237
42,123
179,994
47,610
118,424
3,898
268
$
43,712
$
118,156
$
10,370
9,561
8,775
8,303
7,041
47,707
$
91,757
RTM RESTAURANT GROUP 15. Income Taxes A reconciliation of income taxes from continuing operations to total income tax expense for the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, follows: Income tax expense from continuing operations Income tax expense from discontinued operations Total income tax expense The combined provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory rate to pretax income principally as a result of state income taxes, employment tax credits, stock award compensation expense and income from nontaxable entities. Income (loss) from continuing operations would have been $(61) and $2,445 and the provision for income taxes from continuing operations would have been $904 and $4,069 for the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, if the nontaxable entities had been subject to tax at the statutory federal income tax rate. Significant components of deferred tax assets and liabilities as of May 30, 2004 are as follows: Deferred tax assets: Financing and capital lease obligations State net operating loss carryforwards Stock option expense Insurance accruals Straight-line rent accrual Other currently nondeductible accruals Tax over book interest income Other Gross deferred tax assets Less valuation allowance Net deferred tax asset Deferred tax liabilities: Depreciation and amortization Installment sales Other Gross deferred tax liability Net deferred tax liability 16. Employee Benefit Plans The Group maintains a defined contribution 401(k) plan covering substantially all employees of the Group and other affiliates who have met certain service and age requirements. The provisions of the plan allow employees to contribute up to 15% of gross earnings. The Group matches 25% of the first 4% of gross earnings contributed by employees. The Group's matching contributions totaled $229 and $171 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. 48
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Forty Weeks Ended
February 29,
2004
March 6,
2005
$
375
$
1,697
686
1,978
$
1,061
$
3,675
May 30,
2004
$
5,597
2,478
2,437
1,750
2,007
470
366
796
15,901
2,478
13,423
(17,825
)
(1,595
)
(283
)
(19,703
)
$
(6,280
)
RTM RESTAURANT GROUP 17. Related Party Transactions The Group is affiliated through common ownership with Winners, Lee's Famous Recipe, Inc. and subsidiaries (“Lee's”), Marketing Events Partners, Inc. (“MVP”), RTM Family Restaurants, L.L.C. (“RTMFR”), RTM Future Associates (“RTMFA”), RTM Foundation and Crown Restaurants, Inc. As of May 30, 2004 and March 6, 2005, receivables from and cash advances to Winners aggregated $54,036 and $58,804, respectively. These receivables have been classified in net capital deficiency in the accompanying balance sheets. The Group received $9 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, from Winners for management fees. The Group paid $40 and $32 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, to Winners for royalties and advertising. As of March 6, 2005, the Group has guaranteed $20,043 of Winners' debt and $17,277 of Winners' leases. RTM has committed to provide liquidity support for Winners, as needed, during the 2005 fiscal year. On October 14, 2004, RTMFR was merged into Group. Since RTMFR was under common control with the Group, the merger has been accounted for on a basis equivalent to a pooling of interests and the carrying values of RTMFR's assets and liabilities and the results of its operations have been combined with those of the Group for all periods presented. Such merger did not have a significant impact on the Group's combined financial statements. As of May 30, 2004, the Group had an unsecured advance due from Lee's of $4,230. During the 40 weeks ended March 6, 2005, $3,435 of such advances was forgiven and the remainder was repaid with a note receivable from Winners International. This advance has been classified in net capital deficiency in the accompanying May 30, 2004 balance sheet. Interest income of $265, related to cash advances to Lees', was reversed during the 40 weeks ended February 29, 2004, because it was determined that the interest would not be collected. As of March 6, 2005, the Group had guaranteed $9,738 of leases of restaurants previously operated by Lee's. The Group has transactions with non-combined affiliates on a daily basis that are typically settled monthly, and are included in other receivables and accounts payable. As of May 30, 2004 and March 6, 2005, the total of non-combined affiliate balances included in other receivables was $1,020 and $765, respectively, and the total of non-combined affiliate balances included in accounts payable was $6 and $2,364, respectively. The Group shares certain common management and employees with Marketing Event Partners (“MVP”). MVP manages golf tournaments and related charitable events and provides special event and meeting planning services. As of May 30, 2004 and March 6, 2005, the Group has advanced $390 and $240, respectively, to MVP, and has recognized interest on these advances of $8 and $14 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. Employees of MVP are paid by, and have their benefits administered by the Group, which in turn is reimbursed by MVP for these expenses quarterly. The Group paid MVP consulting fees for planning services of $320 and $240 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively. The Group contributed $410 and $225 during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, to the RTM Foundation. The RTM Foundation was created to provide aid and support to other nonprofit organizations. The Group has advanced $723 and $229 to certain shareholders as of May 30, 2004 and March 6, 2005, respectively. RTM Future Associates (“RTMFA”) is an affiliated entity established to purchase the stock controlled by the largest shareholder in the event of his death. This redemption agreement is collateralized by a group of life insurance policies owned by RTMFA. In the event the life insurance proceeds are less than the appraised value of the shares, RTMRG will acquire the remaining shares in exchange for 49
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
RTM RESTAURANT GROUP 17. Related Party Transactions—(Continued) promissory notes. At March 6, 2005, the redemption value of such shareholder's stock was $98,102. As of March 6, 2005, the face amount of the policies totals $71,000. The premiums on the policies held by RTMFA are paid by RTMRG on behalf of RTMFA. The premiums are to be reimbursed from future death benefits. At termination of the agreement prior to the death of the shareholder, the premiums would be repaid to the extent of cash surrender value plus loans against cash surrender value plus loans from RTMRG to RTMFA. The agreement is terminated if RTMRG becomes a public company or a subsidiary of a public company. Since RTMFA is under common control with the Group, the changes in premiums paid in excess of cash surrender value of $88 and $(84) during the 40 weeks ended February 29, 2004 and March 6, 2005, respectively, have been accounted for as an equity transaction in the accompanying financial statements. The accumulated balances of premiums paid in excess of cash surrender
value on RTMFA policies was $5,114 and $5,030 at May 30, 2004 and March 6, 2005, respectively, and have been classified in net capital deficiency in the accompanying balance sheets. As of May 30, 2004 and March 6, 2005, the Group had advances to RTMFA of $1,615 and $1,770, respectively. Such advances have been classified in net capital deficiency in the accompanying balance sheets. The Group had receivables from split-dollar life insurance contract policy owners, who are shareholders, in excess of cash surrender value of $1,358 and $1,322 at May 30, 2004 and March 6, 2005, respectively. Such advances have been classified in net capital deficiency in the accompanying balance sheets. 18. Commitments and Contingent Liabilities Pending court approval, the Group has reached a settlement with a third party regarding the accessibility of the Group's restaurants to individuals in accordance with the Americans with Disabilities Act. The Group estimates it will make capital expenditures and pay related fees aggregating approximately $9,000 over the next 8 years to meet the requirements of the settlement. Under its development agreement with Arby's Restaurant Group (“ARG”), the Group has agreed to develop 204 more Arby's restaurants by December 31, 2010, with specific annual commitments for each calendar year until that time. The Group's commitment may be reduced for each restaurant developed by another franchisee in the Group's territories. Standby letters of credit primarily related to workers' compensation insurance are issued to provide collateral to insurance companies, states or municipalities. In the event the Group fails to pay insurance claims, the issuing bank may be asked to release some or all of this collateral to the insurance company, state or municipality. As of March 6, 2005, such standby letters of credit totaled $5,800. As of March 6, 2005, the Group had guaranteed leases of $8,168 related to Arby's restaurants previously operated by the Group. 19. Subsequent Events Merger Transaction On May 27, 2005, the Group and Triarc Companies Inc. signed an agreement to enter into a series of transactions which will result in the merger of Arby's Restaurant Group Inc. and the Group. The resulting entity will operate solely in the restaurant business as the franchisor of the Arby's restaurant system and the owner of the Arby's restaurant operations of Arby's Restaurant Group, Inc. and the Group. The transactions contemplate that substantially all of the outstanding debt of the Group will be repaid or refinanced. 50
NOTES TO COMBINED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
(b) Pro Forma Financial Information UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated balance sheet of Triarc Companies, Inc. (“Triarc” and, together with its subsidiaries, the “Company”) as of July 3, 2005 and unaudited pro forma condensed consolidated statements of operations of the Company for the year ended January 2, 2005 and for the six months ended July 3, 2005 have been derived and condensed, as applicable, from (i) the audited consolidated financial statements of the Company in the Company's Annual Report on Form 10-K for the fifty-three week fiscal year ended January 2, 2005 (the “Form 10-K”) and (ii) the unaudited condensed consolidated financial statements for the twenty-six week period ended July 3, 2005 in the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 3, 2005 (the “Form 10-Q”). These financial statements have been adjusted to reflect the acquisition (the “RTM Acquisition”) of substantially all of the equity interests or the assets of the entities comprising the RTM Restaurant Group (“RTM”) on July 25, 2005 and the related refinancing (the “Debt Refinancing”) of substantially all of the existing indebtedness of the Company's restaurant segment and certain debt of RTM with a substantial portion of the proceeds from borrowings under a new credit facility, as previously reported in the Original Form 8-K. The unaudited pro forma condensed consolidated financial statements have been prepared as if the RTM Acquisition and the Debt Refinancing had occurred as of July 3, 2005 for the pro forma condensed consolidated balance sheet and as of December 29, 2003 for the pro forma condensed consolidated statements of operations. These pro forma statements include the unaudited combined balance sheet of RTM as of May 29, 2005 and the unaudited combined statements of operations of RTM for the fifty-three weeks ended November 14, 2004 (the “Twelve Months Ended November 14, 2004”) and for the twenty-eight weeks ended May 29, 2005. The date and periods included in the pro forma statements are the most comparable to those of the Company and differ from those reflected in RTM's historical financial
statements included in Item 9.01(a) “Financial Statements of Business Acquired” of this Form 8-K/A (“Item 9.01(a)”). A reconciliation of the audited combined statement of operations of RTM for the fiscal year ended May 30, 2004 to the unaudited combined statement of operations of RTM for the Twelve Months Ended November 14, 2004 is presented under “RTM Statement of Operations for the Twelve Months Ended November 14, 2004” in the notes to unaudited pro forma condensed consolidated statements of operations. The RTM combined financial statements for the fiscal year ended May 29, 2005 are currently being audited and, accordingly, the RTM combined balance sheet as of May 29, 2005 and the combined statement of operations for the six months ended May 29, 2005 are subject to adjustments, if any, resulting from the audit. The pro forma adjustments to the
unaudited pro forma condensed consolidated balance sheet and the effect thereof on the
unaudited pro forma condensed consolidated statements of operations are based on
preliminary estimates and are subject to change. The pro forma adjustments are described in the accompanying notes to the pro forma condensed consolidated balance sheet and statements of operations and should be read in conjunction with such statements. The pro forma condensed consolidated financial statements should also be read in conjunction with (i) the Company's audited consolidated financial statements and management's discussion and analysis of financial condition and results of operations contained in the Form 10-K, (ii) the Company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations contained in the Form 10-Q and (iii) the audited combined and unaudited combined financial statements of RTM for the fiscal years ended May 25, 2003
and May 30, 2004 and the forty weeks ended February 29, 2004 and March 6, 2005, respectively, both included in Item 9.01(a). The pro forma condensed consolidated financial statements do not purport to be indicative of the actual financial position or results of operations of the Company had the RTM Acquisition and the Debt Refinancing actually been consummated on July 3, 2005 and December 29, 2003, respectively, or of the future financial position or results of operations of the Company. Due to the recent date of the RTM Acquisition, the Company is continuing the process of consulting with its advisors on the proper measurement of certain assets acquired and liabilities assumed in the acquisition. Accordingly, the allocation of the purchase price for RTM reflected in these pro forma condensed consolidated financial statements is preliminary and is subject to change. There can be no assurance that changes to the purchase price allocation will not be material. 51
TRIARC COMPANIES, INC. AND SUBSIDIARIES ASSETS Current assets: Cash and cash equivalents Restricted cash equivalents Short-term investments Investment settlements receivable Trade and other receivables Inventories Deferred income tax benefit Prepaid expenses and other current assets Total current assets Investment in RTM Restricted cash equivalents Investments Properties Goodwill Asset management contracts and other intangible assets Deferred costs and other assets 52
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
July 3, 2005
As
Reported
RTM
Reclassifications,
Eliminations and
Excluded Items
Adjustments
Adjustments
for the RTM
Acquisition
and Debt
Refinancing
Pro Forma
(In Thousands)
$
318,789
$
9,887
$
—
$
(215,438
)(e)
$
233,815
10,252
(f)
110,325
(i)
196,285
—
—
—
196,285
628,674
—
—
—
628,674
210,820
—
—
—
210,820
21,648
15,582
(2,400
)(a)
—
34,395
(435
)(b)
2,386
6,868
—
—
9,254
15,459
2,047
—
—
17,506
9,854
13,592
(300
)(a)
(3,915
)(e)
18,592
(639
)(b)
1,403,915
47,976
(3,774
)
(98,776
)
1,349,341
—
—
—
369,209
(e)
—
(369,209
)(h)
32,912
—
—
(32,912
)(i)
—
87,032
—
—
—
87,032
99,101
319,436
(10,350
)(b)
15,821
(h)
423,404
(604
)(c)
118,566
63,777
—
344,931
(h)
527,274
35,975
18,615
604
(c)
41,555
(h)
96,749
27,181
11,068
(1,408
)(a)
(877
)(h)
31,214
(4,408
)(b)
12,654
(i)
(6,008
)(i)
(6,988
)(e)
$
1,804,682
$
460,872
$
(19,940
)
$
269,400
$
2,515,014
TRIARC COMPANIES, INC. AND SUBSIDIARIES LIABILITIES
AND STOCKHOLDERS' EQUITY Current
liabilities: Notes
payable Current
portion of long-term debt Accounts
payable Investment
settlements payable Securities
sold under agreements to repurchase Other
liability positions related to short-term investments Accrued
expenses and other current liabilities Current
liabilities relating to discontinued operations Total
current liabilities Long-term
debt Deferred
compensation payable to related parties Deferred
income taxes Minority
interests in consolidated subsidiaries Other
liabilities and deferred income Stockholders'
equity (deficit): Class
A common stock Class
B common stock RTM
Restaurant Group common stock Additional
paid-in capital Retained
earnings Common
stock held in treasury Deferred
compensation payable in common stock Unearned
compensation Accumulated
other comprehensive income Notes
receivable and advances due from affiliates Total
stockholders' equity (deficit) 53
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET—(Continued)
July 3, 2005
As
Reported
RTM
Reclassifications,
Eliminations and
Excluded Items
Adjustments
Adjustments
for the RTM
Acquisition
and Debt
Refinancing
Pro Forma
(In Thousands)
$
9,150
$
—
$
—
$
—
$
9,150
14,235
41,182
—
(39,611
)(i)
15,806
19,296
44,324
(2,400
)(a)
(6,524
)(e)
54,628
(68
)(b)
40,751
—
—
—
40,751
400,044
—
—
—
400,044
368,967
—
—
—
368,967
74,804
34,613
(65
)(b)
(4,665
)(i)
104,687
13,290
—
—
—
13,290
940,537
120,119
(2,533
)
(50,800
)
1,007,323
450,599
339,031
—
8,972
(h)
976,768
178,166
(i)
34,348
—
—
—
34,348
20,549
7,456
—
20,728
(h)
28,801
(19,932
)(i)
12,559
—
—
—
12,559
45,985
31,617
(1,708
)(a)
(12,500
)(d)
52,641
8,364
(h)
(19,117
)(h)
2,955
—
—
—
2,955
5,910
—
—
—
5,910
—
2
—
)(h)
—
140,314
14,570
(27,070
)(b)
12,500
(d)
209,347
67,850
(e)
1,183
(g)
331,136
46,644
(56,224
)(b)
(17,024
)(h)
284,213
9,580
(h)
(29,899
)(i)
(225,829
)
(20,720
)
—
81,542
(e)
(144,287
)
20,720
(h)
54,457
—
—
—
54,457
(10,481
)
—
—
(1,183
)(g)
(11,664
)
1,643
—
—
—
1,643
—
(77,847
)
67,595
(b)
10,252
(f)
—
300,105
(37,351
)
(15,699
)
155,519
402,574
$
1,804,682
$
460,872
$
(19,940
)
$
269,400
$
2,515,014
TRIARC COMPANIES, INC. AND SUBSIDIARIES 54
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
Reclassifications,
Eliminations and Excluded Items Adjustments
(a)
To eliminate assets and liabilities
which, on a pro forma basis, would be intercompany items between the Company
and RTM.
(b)
To eliminate assets not acquired
and liabilities not assumed in the RTM Acquisition but included in the RTM
combined balance sheet as of May 29, 2005 with the difference included in
(1) “Retained earnings” until all of the $46,644,000 of
RTM retained earnings had been eliminated, (2) “Additional paid-in
capital” until all of the $27,070,000 of RTM additional paid-in capital
had been eliminated, including the amount reclassified in entry (d) below,
and (3) accumulated deficit of RTM for the excess of $9,580,000.
(c)
To reclassify RTM's computer
software from “Properties” to “Asset management contracts
and other intangible assets” to conform with the Company's classification.
Pro Forma Adjustments
for the RTM Acquisition
(d)
To reclassify RTM's deferred
stock compensation for nonvested variable stock options and stock appreciation
rights from “Other liabilities and deferred income” to “Additional
paid-in capital” to reflect the vesting of such deferred stock compensation
immediately prior to the RTM Acquisition.
(e)
To reflect the Company's
estimated investment in RTM of $369,209,000 consisting of (1) $175,000,000
in cash, including approximately $17,024,000 for the settlement loss from
unfavorable franchise rights, subject to post-closing adjustment, (2) 9,684,000
shares of the Company's class B common stock, series 1 (the “Class
B Common Stock”) issued from treasury with a fair value of $145,265,000
as of July 25, 2005 based on the closing price of the Company's Class
B Common Stock on such date of $15.00 per share, (3) $21,817,000 of
debt, including related accrued interest and prepayment penalties, that
was not an obligation of the entities included in the RTM Acquisition, (4) the
vested portion of stock options to purchase 774,000 shares of the Company's
Class B Common Stock, with a fair value of $4,127,000 as of July 25, 2005,
issued in exchange for existing RTM stock options and (5) $23,000,000
of related estimated expenses, of which (a) $4,379,000 was paid as
of July 3, 2005 including $3,915,000 included in “Prepaid expenses
and other currents assets” and $464,000 in “Deferred costs and
other assets” and (b) $6,524,000 had been accrued in “Accounts
payable” as of July 3, 2005 with an offsetting amount in “Deferred
costs and other assets”. The settlement loss from unfavorable franchise
rights resulted from royalty rates less than the current standard 4% rate
in franchise agreements acquired in the RTM Acquisition. The average cost
of the 9,684,000 shares issued from treasury aggregated $81,542,000. The
value of the vested portion of the options to purchase 774,000 shares was
determined by subtracting the intrinsic value of the nonvested portion of
the options related to future service of the employees from the fair value
of the total options calculated using the Black-Scholes-Merton option pricing
model. The closing price on July 25, 2005 of the Company's Class
B Common Stock was used to value the 9,684,000 shares in (2) above since
that was the date that the final terms of the RTM Acquisition were agreed
to and announced.
(f)
To reflect the collection of
notes receivable from RTM shareholders in connection with the RTM Acquisition.
(g)
To reflect the nonvested portion
of the stock options to purchase 774,000 shares, described in more detail
in entry (e) above, in unearned compensation.
TRIARC COMPANIES, INC. AND SUBSIDIARIES Adjust
“Properties” to increase the carrying amount to fair value
in accordance with a preliminary independent appraisal Adjust “Asset management contracts and other intangible assets” to increase the carrying amount of favorable leases by $37,418 and franchise agreements by $4,137 to fair value in accordance with a preliminary independent appraisal Eliminate lease acquisition costs included in “Deferred costs and other assets” Adjust RTM's unfavorable leases included in “Other liabilities and deferred income” to fair value in accordance with a preliminary independent appraisal Eliminate RTM's deferred income and accruals for rent differentials recognized on a straight-line basis included in “Other liabilities and deferred income” Adjust RTM's sale-leaseback obligations that do not qualify for sale-leaseback accounting and capitalized lease obligations included in “Long-term debt” to fair value in accordance with a preliminary independent appraisal Record “Deferred income taxes” for the tax effects of the purchase price allocation adjustments above, excluding $6,459 which will be deductible for income tax purposes, at the incremental tax rate of 40% Record the settlement loss from unfavorable franchise rights which are agreements that provide for royalty rates less than the current standard 4% rate Eliminate the $2 par value of the RTM common stock from “RTM Restaurant Group common stock,” the RTM accumulated deficit of $9,580 from “Retained earnings” after the effects on retained earnings of the elimination of excluded assets and liabilities included in entry (b) above and the $20,720 of RTM “Common stock held in treasury” Adjust “Goodwill” to eliminate the historical goodwill of RTM of $63,777 and record the excess of the Company's investment in RTM over the adjusted net liabilities of RTM Pro Forma Adjustments for the Debt Refinancing 55
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET—(Continued)
(h)
To record the allocation of
the purchase price of RTM, on a preliminary basis subject to change, and
the settlement loss from unfavorable franchise rights, as follows (in thousands):
Debit
(Credit)
$
15,821
41,555
(877
)
(8,364
)
19,117
(8,972
)
(20,728
)
17,024
(30,298
)
Eliminate the Company's investment in RTM
(369,209
)
344,931
$
—
(i)
To record the Debt Refinancing
consisting of (1) proceeds of borrowings of $620,000,000 of term loans
under a new credit facility, including $6,200,000 of current portion, (2) payment
of $13,000,000 of related estimated deferred financing costs, of which $346,000
had been paid as of July 3, 2005, (3) repayment of substantially
all of the existing indebtedness of the Company's restaurant segment
which, as of July 3, 2005, amounted to $270,734,000 and certain
TRIARC COMPANIES, INC. AND SUBSIDIARIES 56
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET—(Continued)
debt of RTM which as of May 29,
2005 amounted to $210,711,000, including $45,811,000 reported in current
portion, plus aggregate related accrued interest of $4,665,000, (4) payment
of $43,823,000 of estimated prepayment penalties and fees and the write-off
of $6,008,000 of deferred financing costs (collectively the “Refinancing
Write-off”) related to the above debt repayments and (5) an income
tax benefit of $19,932,000 associated with the Refinancing Write-off. The
Company used $32,912,000 of previously restricted cash equivalents in addition
to proceeds from the term loan borrowings in connection with the Debt Refinancing.
The assumed $270,734,000 repayment of the restaurant segment debt referred
to above includes $2,353,000 of repayments made subsequent to July 3, 2005
but before the Debt Refinancing. The assumed $210,711,000 repayment of RTM
indebtedness referred to above does not include additional borrowings of
approximately $7,769,000 less debt repayments of approximately $5,728,000
all of which occurred subsequent to the May 29, 2005 date of RTM's
balance sheet but prior to the Debt Refinancing.
TRIARC COMPANIES, INC. AND SUBSIDIARIES Revenues: Net sales Royalties and franchise and related fees Asset management and related fees Costs and expenses: Cost of sales, excluding depreciation and amortization Cost of services, excluding depreciation and amortization Advertising and selling General and administrative, excluding depreciation and amortization Depreciation and amortization, excluding amortization of deferred financing costs Operating profit Interest expense Insurance expense related to long-term debt Investment income, net Other income, net Income (loss) from continuing operations before income taxes and minority interests Benefit from (provision for) income taxes Minority interests in income of consolidated subsidiaries Income from continuing operations Basic income from continuing operations per share (q): Class A common stock Class B common stock Diluted income from continuing operations per share (q): Class A common stock Class B common stock 57
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
Year Ended January 2, 2005
As Reported
RTM
Reclassifications,
Eliminations and
Excluded Items
Adjustments
Adjustments
for the RTM
Acquisition
and Debt
Refinancing
Pro Forma
(In Thousands Except Per Share Amounts)
$
205,590
$
778,101
$
—
$
—
$
983,691
100,928
—
(28,606
)(a)
—
71,677
(645
)(b)
22,061
—
—
—
22,061
328,579
778,101
(29,251
)
—
1,077,429
162,597
630,759
(29,915
)(a)
(930
)(h)
710,690
(51,821
)(c)
7,794
—
—
—
7,794
16,587
—
51,821
(c)
—
68,408
118,582
79,449
(2,404
)(d)
1,069
(i)
188,505
(8,191
)(p)
20,285
27,221
(354
)(b)
1,110
(j)
47,410
(714
)(d)
(138
)(e)
325,845
737,429
(33,525
)
(6,942
)
1,022,807
2,734
40,672
4,274
6,942
54,622
(34,171
)
(35,975
)
595
(d)
7,734
(m)
(62,628
)
(673
)(f)
(138
)(e)
(3,874
)
—
—
3,874
(n)
—
21,662
—
—
(3,194
)(k)
18,468
560
433
(726
)(d)
—
940
673
(f)
(13,089
)
5,130
4,005
15,356
11,402
17,483
(1,045
)
(1,194
)(d)
(114
)(l)
6,804
(407
)(g)
(4,643
)(o)
(3,276
)(p)
(2,917
)
—
—
—
(2,917
)
$
1,477
$
4,085
$
2,404
$
7,323
$
15,289
$
.02
$
.19
$
.02
$
.22
$
.02
$
.18
$
.02
$
.21
TRIARC COMPANIES, INC. AND SUBSIDIARIES Revenues: Net sales Royalties and franchise and related fees Asset management and related fees Costs and expenses: Cost of sales, excluding depreciation and amortization Cost of services, excluding depreciation and amortization Advertising and selling General and administrative, excluding depreciation and amortization Depreciation and amortization, excluding amortization of deferred financing costs Operating profit Interest expense Insurance expense related to long-term debt Investment income, net Gain on sale of businesses Other income (expense), net Income from continuing operations before income taxes and minority interests Benefit
from (provision for) income taxes Minority interests in income of consolidated subsidiaries Income from continuing operations Basic income from continuing operations per share (q): Class A common stock Class B common stock Diluted income from continuing operations per share (q): Class A common stock Class B common stock 58
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
Six Months Ended July 3, 2005
As Reported
RTM
Reclassifications,
Eliminations and
Excluded Items
Adjustments
Adjustments
for the RTM
Acquisition
and Debt
Refinancing
Pro Forma
(In Thousands Except Per Share Amounts)
$
106,179
$
416,364
$
—
$
—
$
522,543
50,526
—
(14,275
)(a)
—
36,132
(119
)(b)
24,715
—
—
—
24,715
181,420
416,364
(14,394
)
—
583,390
80,227
331,864
(15,089
)(a)
(465
)(h)
370,785
(25,752
)(c)
8,763
—
—
—
8,763
9,010
—
25,752
(c)
—
34,762
69,188
46,204
(1,267
)(d)
114
(i)
109,027
(5,212
)(p)
11,067
14,897
(188
)(b)
422
(j)
25,730
(381
)(d)
(87
)(e)
178,255
392,965
(17,012
)
(5,141
)
549,067
3,165
23,399
2,618
5,141
34,323
(22,737
)
(21,156
)
249
(d)
6,188
(m)
(37,917
)
(374
)(f)
(87
)(e)
(1,763
)
—
—
1,763
(n)
—
16,676
—
—
(2,172
)(k)
14,504
12,664
—
—
—
12,664
1,113
(135
)
(410
)(d)
—
942
374
(f)
9,118
2,108
2,370
10,920
24,516
(3,010
)
184
(595
)(d)
(433
)(l)
(9,472
)
(353
)(g)
(3,180
)(o)
(2,085
)(p)
(3,481
)
—
—
—
(3,481
)
$
2,627
$
2,292
$
1,422
$
5,222
$
11,563
$
.04
$
.14
$
.04
$
.16
$
.04
$
.13
$
.04
$
.15
TRIARC COMPANIES, INC. AND SUBSIDIARIES RTM Statement of Operations for the Twelve Months Ended November 14, 2005 A reconciliation of the audited combined statement of operations of RTM for the fiscal year ended May 30, 2004 to the unaudited combined statement of operations of RTM for the Twelve Months Ended November 14, 2004 set forth in the accompanying unaudited pro forma condensed consolidated statement of operations for the year ended January 2, 2005 is as follows (in thousands): Revenues: Net sales Costs and expenses: Cost of sales, excluding depreciation and amortization General and administrative, excluding depreciation and amortization Depreciation and amortization Operating profit Interest expense, net Other income, net Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Reclassifications, Eliminations and Excluded Items Adjustments 59
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
May 30,
2004
Less
24 Weeks Ended
November 9,
2003
Add
24 Weeks Ended
November 14,
2004
12 Months
Ended
November 14,
2004
$
739,996
$
337,491
$
375,596
$
778,101
602,506
272,839
301,092
630,759
77,710
36,648
38,387
79,449
24,926
10,676
12,971
27,221
705,142
320,163
352,450
737,429
34,854
17,328
23,146
40,672
(34,285
)
(14,716
)
(16,406
)
(35,975
)
1,165
743
11
433
1,734
3,355
6,751
5,130
(795
)
(769
)
(1,019
)
(1,045
)
$
939
$
2,586
$
5,732
$
4,085
(a)
To eliminate in consolidation royalties from RTM to the Company. The amounts of royalties recognized by the Company as revenue differ from the amounts of royalties recognized as expense by RTM, due to the different fiscal periods of the Company and RTM used in the pro forma condensed consolidated financial statements.
(b)
To eliminate in consolidation franchise fees from RTM to the Company. These amounts differ since the Company recognizes franchise fees in revenue as restaurants open and RTM capitalizes franchise fees paid and amortizes them to expense over the useful life of the franchise agreement and due to the different fiscal periods of the Company and RTM used in the pro forma condensed consolidated financial statements.
(c)
To reclassify RTM's advertising and selling expenses from “Cost of sales, excluding depreciation and amortization,” to “Advertising and selling” to conform with the Company's classification.
(d)
To exclude the effect on results of operations relating to assets and liabilities and costs and expenses of RTM not acquired by the Company in the RTM Acquisition.
(e)
To reclassify RTM's amortization of deferred financing costs from “Depreciation and amortization, excluding amortization of deferred financing costs” to “Interest expense” to conform with the Company's classification.
(f)
To reclassify RTM's interest income from “Interest expense” to “Other income, net” to conform with the Company's classification.
TRIARC COMPANIES, INC. AND SUBSIDIARIES 60
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)
(g)
To reflect the income tax provision on the net effect of the eliminations in entries (a) and (b) above at the incremental tax rate of 40.0%.
Pro Forma Adjustments for the RTM Acquisition
(h)
To adjust rent expense for the amortization of unfavorable lease liabilities assumed in the RTM Acquisition.
(i)
To adjust compensation expense over the remaining vesting period for the amortization of unearned compensation relating to the nonvested portion of stock options to purchase 774,000 Class B Common Shares issued in connection with the RTM Acquisition. The vested portion of such stock options has been included as a component of the purchase price for RTM.
(j)
To adjust “Depreciation and amortization, excluding amortization of deferred financing costs” as follows (in thousands):
Year Ended
January 2,
2005
Six Months
Ended
July 3,
2005
Record depreciation and amortization on the properties acquired in the RTM Acquisition over the remaining useful lives ranging from 5 to 17 years
$
22,522
$
11,261
Record amortization on the identifiable intangible assets acquired in the RTM Acquisition, all of which were determined to have finite lives, over the remaining useful lives ranging from 7 to 30 years
4,603
2,302
Reverse RTM's reported depreciation and amortization, as adjusted by entries (b), (d) and (e) above and excluding an impairment charge of $1,100 recognized by RTM during the six months ended May 29, 2005
(26,015
)
(13,141
)
$
1,110
$
422
(k)
To reverse interest income on the $127,773,000 of existing cash and cash equivalents, including $32,912,000 of previously restricted cash equivalents, used by the Company to partially fund the cash portion of the purchase price for RTM. The interest income was computed using the Company's average rates on its interest-bearing investments of 2.5% and 3.4% per annum for the year ended January 2, 2005 and the six months ended July 3, 2005, respectively.
(l)
To adjust “Benefit from (provision for) income taxes” as follows (in thousands):
Year Ended
January 2,
2005
Six Months
Ended
July 3,
2005
Reflect the estimated income tax benefit from entries (h) through (k) above at the incremental tax rate of 40%
$
1,778
$
897
Reflect an income tax provision on the portion of RTM's pretax income relating to limited liability companies for which no tax provision was provided, at the incremental tax rate of 40%
(1,892
)
(1,330
)
$
(114
)
$
(433
)
TRIARC COMPANIES, INC. AND SUBSIDIARIES Pro Forma Adjustments for the Debt Refinancing (m) To adjust “Interest expense” as follows (in thousands): Cost Savings as a Direct Result of the RTM Acquisition 61
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)
Year Ended
January 2,
2005
Six Months
Ended
July 3,
2005
Record interest expense at an assumed interest rate of 5.73% on the assumed term loan borrowings initially of $620,000 under the new credit facility(1)
$
(35,393
)
$
(17,563
)
Record amortization expense under the interest rate method on the estimated $13,000 of deferred financing costs associated with the new credit facility
(2,012
)
(1,007
)
Record amortization credit under the interest rate method on the fair value adjustment of RTM's sale-leaseback and capital lease obligations not refinanced
412
204
Reverse reported interest expense and on the debt refinanced
43,501
23,983
Reverse reported amortization of deferred financing costs and original issue discount associated with the debt refinanced
1,726
821
Record a commitment fee of 0.5% on the $100,000 of availability under the revolving credit component of the new credit facility
(500
)
(250
)
$
7,734
$
6,188
(1)
The assumed interest rate represents the rate in effect as of July 28, 2005 based on the 30-day London Interbank Offered Rate (3.48% set as of July 26, 2005) plus 2.25% charged on the average outstanding borrowings under the term loans. The average outstanding borrowings reflect scheduled repayments under the term loans assuming the initial borrowings occurred at the beginning of the fiscal year ended January 2, 2005 and were $6,200 for the year ended January 2, 2005 and $3,100 for the six months ended July 3, 2005.
If the assumed interest rate on the term loan borrowings under the new credit facility changes by 0.125%, the pro forma interest expense would change by $772 for the year ended January 2, 2005 and $383 for the six months ended July 3, 2005.
(n)
To reverse “Insurance expense related to long-term debt” as a result of the repayment of the Company's securitization notes to which the insurance related.
(o)
To reflect the estimated income tax effect of entries (m) and (n) above at the incremental tax rate of 40.0%.
(p)
To reflect the adjustment to compensation expense and related income tax effect for the resignation (the “RTM Officer Resignations”) of RTM's former Chief Executive Officer, Chairman of the Board and Senior Vice President Real Estate who were also the principal RTM selling shareholders (the “Selling Shareholders”) effective as of the July 25, 2005 closing date of the RTM Acquisition. The RTM Officer Resignations were required under the terms of the purchase agreement. However, one of the Selling Shareholders will continue to perform limited services for the Company at a reduced level of compensation and the amount of the compensation expense adjustment gives effect to such ongoing compensation. The other duties of this Selling Shareholder and all of the duties of the other two Selling Shareholders have been assumed
by executives currently employed by the Company.
TRIARC COMPANIES, INC. AND SUBSIDIARIES Earnings Per Share Non-recurring Transactions The accompanying pro forma condensed consolidated statements of operations do not reflect the Refinancing Write-off of $49,831,000 before tax benefit, or $29,899,000 after tax benefit, or the settlement loss from unfavorable franchise agreements of $17,024,000, with a tax benefit which has not yet been determined, resulting from the RTM Acquisition and Debt Refinancing, as they are non-recurring in nature and the inclusion of such charges would not be representative of the Company's expected future results of continuing operations. These amounts will be recorded in the results of operations of the Company in its quarter ending October 2, 2005. 62
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)
(q)
The As Reported and Pro Forma basic and diluted income from continuing operations per share of Class A common stock has been determined by dividing the income allocated to the Class A common stock as disclosed below by the Class A basic and diluted weighted average shares outstanding of 22,233,000 and 23,415,000 for the year ended January 2, 2005, respectively, and 23,729,000 and 24,913,000 for the six-month period ended July 3, 2005, respectively.
The number of weighted average shares used to calculate basic and diluted income from continuing operations per share of Class B Common Stock were as follows (in thousands):
Year
Ended
January 2,
2005
Six Months
Ended
July 3,
2005
Basic shares, as reported
40,840
41,882
Shares issued in RTM
Acquisition
9,684
9,684
Pro forma basic shares
50,524
51,566
Diluted shares, as
reported
43,206
44,656
Shares issued in RTM
Acquisition
9,684
9,684
Effect of stock options
issued in the RTM Acquisition
168
259
Pro forma diluted shares
53,058
54,599
Income from continuing
operations per share has been computed by allocating such income as follows
(in thousands):
Year Ended
January 2,
2005
Six Months
Ended
July 3,
2005
Class A Common Stock
As reported
$
476
$
865
Pro forma
4,249
3,303
Class B Common Stock
As reported
1,001
1,762
Pro forma
11,040
8,260
(c) Exhibits 23.1 63
Exhibit
No.
Description
Consent of Independent Auditors.
SIGNATURE 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 hereunto duly authorized. Date: August 26, 2005 64
TRIARC COMPANIES, INC.
(Registrant)
By: /s/ FRANCIS T. MCCARRON
Francis T. McCarron
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX 23.1
Exhibit
No.
Description
Consent of Independent Auditors.