EXHIBIT 99.1
------------
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Audited Consolidated Financial Statements
Independent Auditors' Report................................................. 2
Consolidated Balance Sheets as of December 28, 2003 and January 2, 2005...... 3
Consolidated Income Statements for the years ended December 29, 2002,
December 28, 2003 and January 2, 2005.................................... 4
Consolidated Statements of Stockholder's Deficit for the years ended
December 29, 2002, December 28, 2003 and January 2, 2005................. 5
Consolidated Statements of Cash Flows for the years ended December 29,
2002, December 28, 2003 and January 2, 2005.............................. 6
Notes to Consolidated Financial Statements .................................. 8
(1) Summary of Significant Accounting Policies........................... 8
(2) Significant Risks and Uncertainties.................................. 10
(3) Business Acquisition................................................. 11
(4) Balance Sheet Detail................................................. 13
(5) Goodwill and Other Intangible Assets................................. 16
(6) Long-Term Debt....................................................... 17
(7) Fair Value of Financial Instruments.................................. 19
(8) Income Taxes......................................................... 20
(9) Impairment........................................................... 21
(10)Interest and Other Income, Net....................................... 22
(11)Retirement and Other Benefit Plans................................... 22
(12)Lease Commitments.................................................... 23
(13)Supply Agreement..................................................... 24
(14)Guarantees........................................................... 24
(15)Transactions with Related Parties.................................... 25
(16)Legal Matters........................................................ 26
(17)Subsequent Event..................................................... 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of Arby's Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of Arby's
Restaurant Group, Inc. and subsidiaries (the "Company") as of January 2, 2005
and December 28, 2003, and the related consolidated income statements,
statements of stockholder's deficit and statements of cash flows for each of the
three fiscal years in the period ended January 2, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards as established by the Auditing Standards Board (United States) and in
accordance with the auditing standards of the Public Company Accounting
Oversight Board (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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit 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, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of January 2, 2005 and
December 28, 2003, and the results of its operations and its cash flows for each
of the three years in the period ended January 2, 2005, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
May 20, 2005, except for Note 17, as to
which the date is May 31, 2005
2
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 28, JANUARY 2,
2003 2005
---- ----
ASSETS
Current assets:
Cash (including cash equivalents of $17,125 and $15,548) (Note 6)........... $ 21,272 $ 19,418
Receivables (Note 4) ....................................................... 10,508 13,719
Inventories (Note 4) ....................................................... 2,416 2,222
Deferred income tax benefit (Note 8) ....................................... 4,287 3,698
Prepaid expenses ........................................................... 3,427 4,109
--------- ---------
Total current assets ................................................... 41,910 43,166
Restricted cash equivalents (Note 6) .......................................... 30,528 30,547
Properties (Notes 4 and 9) .................................................... 56,836 58,739
Goodwill (Notes 3, 5 and 9) ................................................... 64,153 64,153
Other intangible assets (Notes 5 and 9) ....................................... 8,006 6,426
Deferred income tax benefit (Note 8) .......................................... 23,777 27,033
Due from an affiliate (Note 8) ................................................ -- 2,944
Deferred costs and other assets (Note 4) ...................................... 7,730 7,069
--------- ---------
$ 232,940 $ 240,077
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt (Note 6).................................. $ 30,377 $ 31,764
Accounts payable (Note 4) .................................................. 12,991 10,530
Accrued expenses (Note 4) .................................................. 22,987 25,359
--------- ---------
Total current liabilities .............................................. 66,355 67,653
Long-term debt (Note 6) ....................................................... 287,020 255,669
Notes payable to an affiliate (Note 15) ....................................... 13,836 27,636
Other liabilities and deferred income (Notes 4, 8, 11, 12 and 14) ............. 22,893 23,298
Commitments and contingencies (Notes 2, 6, 8, 11, 12, 13, 14, 15 and 16)
Stockholder's deficit:
Common stock, $1.00 par value; 1,000 shares authorized, issued
and outstanding ......................................................... 1 1
Additional paid-in capital ................................................. 36,559 42,597
Accumulated deficit ........................................................ (193,494) (176,514)
Accumulated other comprehensive deficit .................................... (230) (263)
--------- ---------
Total stockholder's deficit .............................................. (157,164) (134,179)
--------- ---------
$ 232,940 $ 240,077
========= =========
See accompanying notes to consolidated financial statements.
3
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS)
YEAR ENDED
---------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 2,
2002 2003 2005
---- ---- ----
Revenues:
Net sales .................................................................. $ -- $ 201,484 $ 205,590
Royalties and franchise and related fees (A) ............................... 97,782 92,136 100,928
--------- --------- ---------
97,782 293,620 306,518
--------- --------- ---------
Costs and expenses:
Cost of sales, excluding depreciation and amortization (Notes 12, 13 and 15) -- 151,612 162,597
Advertising and selling .................................................... 2,948 16,115 16,587
General and administrative, excluding depreciation and
amortization (Notes 11, 12 and 15) ....................................... 34,213 50,746 55,239
Depreciation and amortization, excluding amortization of deferred
financing costs (Note 9) ................................................. 1,043 8,486 12,912
Goodwill impairment (Note 9) ............................................... -- 22,000 --
--------- --------- ---------
38,204 248,959 247,335
--------- --------- ---------
Operating profit ...................................................... 59,578 44,661 59,183
Interest expense (Note 6) ..................................................... (21,806) (29,227) (27,272)
Insurance expense related to long-term debt (Note 6) .......................... (4,516) (4,177) (3,874)
Interest and other income, net (Note 10) ...................................... 986 436 281
--------- --------- ---------
Income before income taxes ............................................ 34,242 11,693 28,318
Provision for income taxes (Note 8) ........................................... (13,405) (7,143) (11,338)
--------- --------- ---------
Net income............................................................. $ 20,837 $ 4,550 $ 16,980
========= ========= =========
(A) Includes royalties and franchise and related fees from Sybra, Inc. of
$7,433 for the year ended December 29, 2002, whereas the royalties and
franchise and related fees from Sybra, Inc. of $7,051 and $7,204 for the
years ended December 28, 2003 and January 2, 2005, respectively, were
eliminated in consolidation (see Note 3).
See accompanying notes to consolidated financial statements.
4
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE
DEFICIT
-------------------------
ADDITIONAL CURRENCY UNRECOGNIZED
COMMON PAID-IN ACCUMULATED TRANSLATION PENSION
STOCK CAPITAL DEFICIT ADJUSTMENT LOSS TOTAL
----- ------- ------- ---------- ------------ -----
Balance at December 31, 2001........... $ 1 $ 12,058 $ (218,881) $ (27) $ (116) $ (206,965)
Comprehensive income:
Net income........................ -- -- 20,837 -- -- 20,837
Unrecognized pension loss (Note 11) -- -- -- -- (177) (177)
Net change in currency
translation adjustment.......... -- -- -- (1) -- (1)
----------
Comprehensive income.............. 20,659
----------
Cash capital contributions (Note 15) -- 17,463 -- -- -- 17,463
Pushdown to the Company of Triarc
Restaurant Holdings, LLC's
acquisition basis in Sybra, Inc.,
including cash acquired of
$9,425 (Note 3) .................. -- 9,750 -- -- -- 9,750
Cash dividends (Note 15) ........... -- (1,110) -- -- -- (1,110)
Dividend of receivables (Note 15) -- (12) -- -- -- (12)
------ ---------- ------------ --------- ---------- ----------
Balance at December 29, 2002........... 1 38,149 (198,044) (28) (293) (160,215)
Comprehensive income:
Net income........................ -- -- 4,550 -- -- 4,550
Recovery of unrecognized
pension loss (Note 11) ......... -- -- -- -- 53 53
Net change in currency
translation adjustment.......... -- -- -- 38 -- 38
----------
Comprehensive income.............. 4,641
----------
Cash capital contributions (Note 15) -- 6,500 -- -- -- 6,500
Modification of stock option
terms (Note 11) .................. -- 173 -- -- -- 173
Cash dividends (Note 15) ........... -- (8,463) -- -- -- (8,463)
Adjustment of pushdown to the
Company of Triarc Restaurant
Holdings, LLC's acquisition
basis in Sybra, Inc. (Note 3) .... -- 200 -- -- -- 200
------ ---------- ------------ --------- ---------- ----------
Balance at December 28, 2003........... 1 36,559 (193,494) 10 (240) (157,164)
Comprehensive income:
Net income........................ -- -- 16,980 -- -- 16,980
Unrecognized pension loss (Note 11) -- -- -- -- (42) (42)
Net change in currency
translation adjustment.......... -- -- -- 9 -- 9
----------
Comprehensive income.............. 16,947
----------
Cash capital contributions (Note 15) -- 15,450 -- -- -- 15,450
Modification of stock option
terms (Note 11) .................. -- 86 -- -- -- 86
Cash dividends (Note 15) ........... -- (9,498) -- -- -- (9,498)
------ ---------- ------------ --------- ---------- ----------
Balance at January 2, 2005............. $ 1 $ 42,597 $ (176,514) $ 19 $ (282) $ (134,179)
====== ========== ============ ========= ========== ==========
See accompanying notes to consolidated financial statements.
5
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 2,
2002 2003 2005
---- ---- ----
Cash flows from operating activities:
Net income .............................................................. $ 20,837 $ 4,550 $ 16,980
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of properties ......................... 443 7,629 10,160
Amortization and impairment of other intangible assets .............. 600 857 2,752
Amortization of deferred financing costs and original issue discount 1,882 1,740 1,588
Goodwill impairment ................................................. -- 22,000 --
Leasehold incentives received from a landlord ....................... -- -- 1,590
Income tax benefit receivable from an affiliate ..................... -- -- (2,944)
Deferred income tax provision (benefit) ............................. 18 (6,454) (2,641)
Unfavorable lease liability recognized .............................. -- (1,351) (1,382)
Deferred vendor incentive recognized ................................ -- (2,025) (438)
Recovery of doubtful accounts ....................................... (127) (494) (363)
Interest income on restricted cash equivalents ...................... (346) (137) (136)
Payment of deferred franchise costs ................................. (849) -- --
Other, net .......................................................... (1,224) 880 520
Changes in operating assets and liabilities:
(Increase) decrease in receivables .............................. 2,094 193 (3,236)
(Increase) decrease in inventories .............................. 69 (142) 194
(Increase) decrease in prepaid expenses ......................... 1,553 1,060 (682)
Decrease in accounts payable and accrued expenses ............... (2,974) (10,690) (89)
-------- -------- --------
Net cash provided by operating activities .................. 21,976 17,616 21,873
-------- -------- --------
Cash flows from investing activities:
Capital expenditures .................................................... (41) (4,588) (12,463)
Computer software expenditures .......................................... -- (700) (1,173)
Cash acquired in business acquisition "pushed down" to the Company ...... 9,425 -- --
Proceeds from sales of properties ....................................... 251 2 8
-------- -------- --------
Net cash provided by (used in) investing activities ........ 9,635 (5,286) (13,628)
-------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt ............................................ (19,392) (38,121) (29,968)
Repayments of debt and accrued interest related to business acquisition . (6,343) -- --
Cash dividends .......................................................... (1,110) (8,463) (9,498)
Borrowings from an affiliate ............................................ -- 13,836 13,800
Cash capital contributions .............................................. 17,463 6,500 15,450
Transfers from restricted cash equivalents collateralizing long-term debt 376 146 117
-------- -------- --------
Net cash used in financing activities ...................... (9,006) (26,102) (10,099)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....................... 22,605 (13,772) (1,854)
Cash and cash equivalents at beginning of year ............................. 12,439 35,044 21,272
-------- -------- --------
Cash and cash equivalents at end of year ................................... $ 35,044 $ 21,272 $ 19,418
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .............................................................. $ 20,016 $ 27,653 $ 25,280
======== ======== ========
Income taxes, net of refunds, to non-affiliates ....................... $ 1,014 $ 2,484 $ 1,861
======== ======== ========
6
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Due to their non-cash nature, the following transactions are not reflected
in the respective consolidated statements of cash flows (amounts in whole
dollars):
During 2002 the Company recorded a non-cash dividend to Triarc Restaurant
Holdings, LLC of $12,000 representing the extinguishment of certain receivables.
On December 27, 2002, Triarc Restaurant Holdings, LLC ("TRH") completed
the acquisition of all of the voting equity interests of Sybra, Inc. ("Sybra").
In connection therewith, the purchase price paid for Sybra by TRH was allocated
to the assets and liabilities of Sybra and "pushed down" to the Company,
resulting in non-cash increases of $325,000 and $200,000 in the Company's net
assets which are included in "Pushdown" and "Adjustment of pushdown" to the
Company of TRH's acquisition basis in Sybra in the accompanying consolidated
statements of stockholder's deficit for the years ended December 29, 2002 and
December 28, 2003, respectively. See Note 3 for further disclosure of this
transaction.
See accompanying notes to consolidated financial statements.
7
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Arby's Restaurant Group, Inc. ("ARG") is a wholly-owned subsidiary of
Triarc Restaurant Holdings, LLC ("TRH") which, in turn, is a wholly-owned
subsidiary of Triarc Acquisition, LLC ("Triarc Acquisition") and an indirect
wholly-owned subsidiary of Triarc Companies, Inc. ("Triarc"). ARG was
incorporated May 13, 2004 and, effective May 20, 2004 and May 21, 2004,
respectively, acquired by way of capital contribution all of the equity
interests previously owned by TRH of (1) Arby's, LLC ("Arby's" which, on May 20,
2004, was converted from a corporation under the name of Arby's, Inc. to a
limited liability company), which in turn, indirectly owns 100% of Arby's
Franchise Trust ("Arby's Trust"), and (2) Sybra, Inc. ("Sybra") which was
acquired by TRH on December 27, 2002. Until December 27, 2002, Arby's was a
direct wholly-owned subsidiary of Triarc Acquisition which then contributed its
investment in Arby's to TRH. See Note 3 for a discussion of the 2002 acquisition
of Sybra.
The accompanying consolidated financial statements present the
consolidated financial position, results of operations and cash flows of ARG as
if it had been incorporated as of December 31, 2001. The consolidated financial
position, results of operations and cash flows of each of ARG, Arby's, Sybra and
their subsidiaries have been included from their respective incorporation or
acquisition dates by TRH since such entities were under the common control of
Triarc during such periods and are reflected at their respective historical
costs. The aforementioned capital contributions of subsidiaries by Triarc
Acquisition to TRH and by TRH to ARG have been recognized using carryover basis
accounting since all such entities were under common control. The entity
representative of ARG and its subsidiaries or any one or more of such entities
or their subsidiaries, is referred to herein as the "Company".
All significant intercompany balances and transactions have been
eliminated in consolidation.
FISCAL YEAR
The Company reports on a fiscal year consisting of 52 or 53 weeks ending
on the Sunday closest to December 31 and each of its 2002 and 2003 fiscal years
contained 52 weeks and its 2004 fiscal year contained 53 weeks. Such periods are
referred to herein as (1) "the year ended December 29, 2002" or "2002," which
commenced on December 31, 2001 and ended on December 29, 2002, (2) "the year
ended December 28, 2003" or "2003," which commenced on December 30, 2002 and
ended on December 28, 2003 and (3) "the year ended January 2, 2005" or "2004,"
which commenced on December 29, 2003 and ended on January 2, 2005. December 28,
2003 and January 2, 2005 are referred to herein as "Year-End 2003" and "Year-End
2004," respectively. All references to years and year-ends herein relate to
fiscal years rather than calendar years.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
acquired are considered cash equivalents. The Company's cash equivalents
principally consist of cash in bank and mutual fund money market accounts and
interest-bearing bank accounts with a stable value.
INVENTORIES
The Company's inventories are stated at the lower of cost or market with
cost determined in accordance with the first-in, first-out method.
PROPERTIES AND DEPRECIATION AND AMORTIZATION
Properties are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of properties is computed
principally on the straight-line basis using the estimated useful lives of the
related major classes of properties: 3 to 10 years for office, restaurant and
transportation equipment and 25 years for buildings. Leased assets capitalized
and leasehold improvements are amortized over the shorter of their estimated
useful lives or the terms of the respective leases, including periods covered by
renewal options that the Company is reasonably assured of exercising.
8
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
AMORTIZATION OF INTANGIBLES AND DEFERRED COSTS
Goodwill, representing the costs in excess of net assets of acquired
companies, is not amortized.
Other intangible assets are amortized on the straight-line basis using the
estimated useful lives of the related classes of intangibles: 15 years for
trademarks and distribution rights; 3 years for computer software costs; and the
lives of the respective leases, including periods covered by renewal options
that the Company is reasonably assured of exercising, for favorable leases.
Deferred financing costs and original issue debt discount are being
amortized as interest expense over the lives of the respective debt using the
interest rate method.
See Note 5 for further information with respect to the Company's
intangible assets.
IMPAIRMENTS
GOODWILL
The Company reviews its goodwill for impairment at least annually. The
amount of impairment, if any, in goodwill is measured by the excess, if any, of
the net carrying amount of the goodwill over its implied fair value.
LONG-LIVED ASSETS
The Company reviews its long-lived assets, which excludes goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such review indicates an
asset may not be recoverable, an impairment loss is recognized for the excess of
the carrying amount over the fair value of an asset to be held and used or over
the fair value less cost to sell of an asset to be disposed.
See Note 9 for further disclosure related to the Company's impairment
charges.
COSTS OF BUSINESS ACQUISITIONS
The Company defers any costs incurred relating to the pursuit of business
acquisitions while the potential acquisition process is ongoing. Whenever the
acquisition is successful, such costs are included as a component of the
purchase price of the acquired entity. Whenever the Company decides it will no
longer pursue a potential acquisition, any related deferred costs are written
off at that time.
FOREIGN CURRENCY TRANSLATION
Financial statements of a Canadian subsidiary are prepared in Canadian
dollars and translated into United States dollars at the current exchange rate
for assets and liabilities and at an average rate for the year for revenues,
costs and expenses. Net gains or losses resulting from the translation of
Canadian financial statements are charged or credited directly to the "Currency
translation adjustment" component of "Accumulated other comprehensive deficit"
in the accompanying consolidated statements of stockholder's deficit.
INCOME TAXES
The Company is included in the consolidated Federal and certain state
income tax returns of Triarc, but provides for Federal and state income taxes on
the same basis as if the Company and its subsidiaries each filed separate
returns. Deferred income taxes are provided to recognize the tax effect of
temporary differences between the bases of assets and liabilities for tax and
financial statement purposes.
9
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
REVENUE RECOGNITION
Net sales of Company-owned restaurants are recognized upon delivery of
food to the customer. Royalties from franchised restaurants are based on a
percentage of net sales of the franchised restaurant and are recognized as
earned. Initial franchise fees are recorded as deferred income when received and
are recognized as revenue when a franchised restaurant is opened since all
material services and conditions related to the franchise fee have been
substantially performed by the Company upon the restaurant opening. Franchise
fees for multiple area development agreements represent the aggregate of the
franchise fees for the number of restaurants in the area being developed and are
recorded as deferred income when received and are recognized as revenue when
each restaurant is opened in the same manner as franchise fees for individual
restaurants. Renewal franchise fees are recognized as revenue when the license
agreements are signed and the fee is paid since there are no material services
and conditions related to the renewal franchise fee. Franchise commitment fee
deposits are forfeited and recognized as revenue upon the termination of the
related commitments to open new franchised restaurants. Franchise fee credits
under a discontinued restaurant remodel incentive program were recognized as a
reduction of franchise fee revenue when a franchisee earned the available
credits by opening new restaurants within the time frame allowed under the
remodel program since the Company had not incurred any obligation until the new
restaurant was opened and the use of the credit did not result in any loss to
the Company. As of January 2, 2005, there are no franchise fee credits
remaining.
ADVERTISING COSTS
The Company incurs various advertising costs, including contributions to
certain advertising cooperatives based upon a percentage of net sales of
Company-owned restaurants. The Company accounts for contributions made related
to the Company-owned restaurants to advertising cooperatives as expense when the
related net sales are recognized. In addition, the Company makes contributions
to one of the advertising cooperatives, which are not dependent on net sales,
specifically as part of a national cable television advertising campaign which
are expensed the first time the related advertising takes place. All other
advertising costs are expensed as incurred. Substantially all of the
"Advertising and selling" expenses in the accompanying consolidated income
statements for 2002, 2003 and 2004 represent advertising costs.
RENTAL EXPENSE
Rental expense is recognized on a straight-line basis over the term of the
respective operating lease, including periods covered by renewal options that
the Company believes it is reasonably assured of exercising because the failure
to renew the lease would result in an economic detriment to the Company.
(2) SIGNIFICANT RISKS AND UNCERTAINTIES
NATURE OF OPERATIONS
The Company operates solely in the restaurant business through franchised
and, effective with the acquisition of Sybra on December 27, 2002 (see Note 3),
Company-owned Arby's(R) 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. These include Arby's
Market Fresh(TM) sandwiches, salads and wraps. Some of the Arby's system-wiDE
restaurants are multi-branded with the Company's T.J. Cinnamons(R) product line.
The franchised restaurants arE principally located throughout the United States
and, to a much lesser extent, Canada. The Company's owned restaurants are
located in nine states, primarily Michigan, Texas, Pennsylvania and Florida.
Information concerning the number of Arby's franchised and Company-owned
restaurants is as follows:
2002 2003 2004
---- ---- ----
Franchised restaurants opened .................................... 116 121 93
Franchised restaurants closed .................................... 64 71 79
Franchised restaurants purchased in the acquisition of Sybra...... 239 -- --
Franchised restaurants open at end of year........................ 3,164 3,214 3,228
Company-owned restaurants open at end of year .................... 239 236 233
System-wide restaurants open at end of year....................... 3,403 3,450 3,461
10
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
SIGNIFICANT ESTIMATES
The Company's significant estimates which are susceptible to change in the
near term relate to (1) provisions for the resolution of income tax
contingencies subject to future examinations of the Company's state income tax
returns by the state taxing authorities (see Note 8), (2) estimates of valuation
allowances required, if any, for deferred income tax benefits, (3) provisions
for the resolution of legal matters (see Note 16), and (4) estimates of
impairment of the carrying values of the Company's goodwill and long-lived
assets (see Notes 1 and 9). The Company's estimates of each of these items
historically have been adequate. Due to uncertainties inherent in the estimation
process, it is reasonably possible that the actual resolution of any of these
items could vary significantly from the estimate and, accordingly, there can be
no assurance that the estimates may not materially change in the near term.
CERTAIN RISK CONCENTRATIONS
The Company has one significant major customer which is a franchisee that
accounted for 27%, 9% and 10% of consolidated revenues and 27%, 30% and 29% of
royalties and franchise and related fees in 2002, 2003 and 2004, respectively.
The loss of this franchisee would have a material adverse impact on the
Company's business. The Company's restaurant business could also 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 Company believes that its vulnerability
to risk concentrations related to significant vendors and sources of its raw
materials for itself and its franchisees is not significant, although increases
in the cost of beef adversely affected profit margins of the Company-owned
restaurants in 2003 and 2004. The Company also believes that its vulnerability
to risk concentrations related to geographical concentration is mitigated since
the Company and its franchisees generally operate throughout the United States
and have minimal foreign exposure.
(3) BUSINESS ACQUISITION
On December 27, 2002, TRH completed the acquisition of all of the voting
equity interests of Sybra (the "Sybra Acquisition") from I.C.H. Corporation
("ICH") under a plan of reorganization confirmed by a United States Bankruptcy
Court. In February 2002, ICH and Sybra had filed for protection under Chapter 11
of the United States Bankruptcy Code in order to restructure their financial
obligations. Sybra owns and operates Arby's restaurants, 239 as of the date of
the Sybra Acquisition, in nine states and, prior to the acquisition, was the
second largest franchisee of Arby's restaurants. Sybra was acquired with the
expectation of strengthening and increasing the value of the Company's Arby's
brand. The aggregate purchase price paid for Sybra by TRH was $9,950,000
(initially estimated at $9,750,000 as of December 29, 2002), consisting of
$8,219,000 of payments to ICH's creditors and $1,731,000 of fees and expenses.
11
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
The allocation of the purchase price of Sybra to the assets acquired and
liabilities assumed at the date of acquisition was "pushed down" to the Company.
Such allocation of the aggregate of amounts reflected as "Pushdown" and
"Adjustment of pushdown" to the Company of TRH's acquisition basis in Sybra in
the accompanying consolidated statements of stockholder's deficit in 2002 and
2003, respectively, is summarized in the following table (in thousands):
Current assets, including cash of $9,425.................................$ 18,014
Properties............................................................... 59,050
Goodwill................................................................. 67,424
Other intangible assets.................................................. 3,371
Deferred income tax benefit.............................................. 13,504
Deferred costs and other assets.......................................... 398
---------
Total assets acquired................................................. 161,761
---------
Current liabilities...................................................... 30,631
Long-term debt, including current portion................................ 103,242
Unfavorable lease liability.............................................. 15,475
Other liabilities and deferred income.................................... 2,463
---------
Total liabilities assumed............................................. 151,811
---------
Net assets acquired by TRH and "pushed down" to the Company.......$ 9,950
=========
The fair values of properties, other intangible assets and unfavorable
lease liability were determined in accordance with an independent appraisal.
Land has been valued using a market approach. Buildings, improvements and
personal property have been valued using a depreciated replacement cost approach
involving inspections, indexing and modeling. Favorable and unfavorable leases
have been valued by measuring the difference between current relevant local
market rents and contractual rents projected over the economic life of the
individual leases then discounted back to a present value. The Sybra Acquisition
resulted in $67,424,000 of goodwill (see Note 5), of which $56,705,000 is
estimated to be deductible for income tax purposes. The amount of goodwill
estimated to be deductible increased from the $17,723,000 estimated amount as of
December 29, 2002 as a result of the election by Triarc and ICH during the year
ended December 28, 2003 to treat the Sybra Acquisition as an asset purchase in
lieu of a stock purchase under the provisions of Section 338(h) (10) of the
United States Internal Revenue Code (the "Sybra 338(h) (10) Election"). Arby's
restaurants typically have relatively low levels of receivables and inventories,
as is the case with the Arby's restaurants owned by Sybra, and Sybra has
financed substantially all of its land and buildings, including those buildings
reported in leasehold improvements. As such, Sybra had net liabilities on its
historical financial statements before the allocation of the purchase price to
the assets acquired and liabilities assumed despite the substantial value of the
restaurants. This excess of the purchase price over the net tangible assets
acquired relates in part to the fair value of the franchise agreements; however,
since the Company is the franchisor of the acquired restaurants, that value was
included in goodwill in the Company's consolidated balance sheets under
accounting guidance in existence at the date of the Sybra Acquisition. The only
other significant identifiable intangible asset in accordance with the
independent appraisal is $3,265,000 of favorable leases which are amortizable
over the lives of the leases, including periods covered by renewal options, with
a weighted average remaining useful life of 18 years as of the date of the Sybra
Acquisition.
A reconciliation of the change in goodwill from the preliminary estimated
allocation of the purchase price of Sybra to the final allocation as reported in
the accompanying consolidated balance sheet as of December 28, 2003 and as set
forth in the preceding table, is summarized as follows (in thousands):
Goodwill in estimated preliminary allocation of purchase price................. $ 71,960
Changes in goodwill:
Decrease in properties for revision of preliminary estimated appraisal...... 1,027
Increase in deferred income tax benefit (a)................................. (5,177)
Increase in current liabilities for adjustment to accrued income taxes (a).. 1,085
Decrease in historical current liabilities for reversal of accrual for
future scheduled rent increases........................................... (1,494)
Increase in the original estimated purchase price........................... 200
Other net adjustments....................................................... (177)
-----------
(4,536)
-----------
Goodwill in final allocation of purchase price (b)................... $ 67,424
============
- --------------------
(a) Adjustments to deferred and accrued income taxes relate principally to the
Sybra 338(h) (10) Election discussed above.
(b) Before an impairment charge recorded in 2003 of $22,000,000 (see Note 9).
12
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
Sybra's results of operations and cash flows have been included in the
accompanying consolidated income statements and statements of cash flows for the
years ended January 2, 2005 and December 28, 2003 and for the two-day period
subsequent to the December 27, 2002 date of the Sybra Acquisition for the year
ended December 29, 2002. However, royalties and franchise and related fee
revenues from Sybra, which are no longer included in the accompanying
consolidated income statements and statements of cash flows subsequent to the
Sybra Acquisition, were included in such statements prior to the date of the
Sybra Acquisition. For the year ended December 29, 2002, Sybra's results of
operations before income taxes were reported in "Interest and other income, net"
(see Note 10) for convenience since Sybra's pretax income for the two-day period
subsequent to the December 27, 2002 acquisition date was not material to the
Company's consolidated income before income taxes. The pretax income of Sybra
for that two-day period consisted of the following components (in thousands):
Net sales and other income...................................$ 933
Costs and expenses........................................... 918
------------
Income before income taxes.............................$ 15
============
(4) BALANCE SHEET DETAIL
CASH
Cash and cash equivalents aggregating $9,495,000 and $10,222,000 as of
December 28, 2003 and January 2, 2005, respectively, are pledged as collateral
for the Company's insured securitization notes (see Note 6). Although such
balances were pledged as collateral, the indenture pursuant to which the
securitization notes were issued permits the usage of such balances during the
following month.
RECEIVABLES
The following is a summary of the components of receivables (in
thousands):
YEAR-END
-------------------
2003 2004
---- ----
Accounts:
Trade ............................................................$ 10,382 $ 12,183
Vendor incentives receivable (Note 13)............................ 81 1,166
Other ............................................................ 720 631
--------- --------
11,183 13,980
--------- --------
Less allowance for doubtful accounts:
Trade accounts.................................................... 507 137
Other accounts.................................................... 168 124
--------- --------
675 261
--------- --------
$ 10,508 $ 13,719
========= ========
13
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
The following is an analysis of the allowance for doubtful accounts (in
thousands):
2002 2003 2004
---- ---- ----
Balance at beginning of year .........................$ 1,510 $ 1,259 $ 675
Provision for (recovery of) doubtful accounts:
Trade accounts (a).................................. 331 (115) (363)
Other accounts...................................... 235 (12) --
Trade notes (b)..................................... (693) (367) --
-------- -------- -------
(127) (494) (363)
-------- -------- -------
Uncollectible accounts written off:
Trade accounts...................................... (82) (77) (7)
Other accounts...................................... (42) (13) (44)
-------- -------- -------
(124) (90) (51)
-------- -------- -------
Balance at end of year................................$ 1,259 $ 675 $ 261
======== ======== =======
- ------------------
(a) The recovery in 2003 and 2004 represents the release of allowances for
doubtful accounts no longer required due to a continuing favorable
collections history for formerly delinquent trade accounts.
(b) The reversal in 2002 and 2003 represents the realization of collections
related to fully-reserved notes receivable from two franchisees.
Certain trade receivables with an aggregate net book value of $8,837,000
as of January 2, 2005 are pledged as collateral for the Company's insured
securitization notes (see Note 6).
INVENTORIES
Inventories consist principally of food, beverage and paper inventories
and are classified entirely as raw materials. Certain inventories aggregating
$1,723,000 as of January 2, 2005 are pledged as collateral for certain debt (see
Note 6).
PROPERTIES
The following is a summary of the components of properties (in thousands):
YEAR-END
------------------
2003 2004
---- ----
Owned:
Land...................................................$ 1,526 $ 1,526
Buildings and improvements ............................ 1,097 1,080
Office, restaurant and transportation equipment ....... 26,358 32,586
Leasehold improvements................................. 38,300 41,978
Leased assets capitalized................................ 1,709 1,550
--------- --------
68,990 78,720
Less accumulated depreciation and amortization........... 12,154 19,981
--------- --------
$ 56,836 $ 58,739
========= ========
Properties with a net book value of $49,046,000 as of January 2, 2005 are
pledged as collateral for certain debt (see Note 6).
14
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
DEFERRED COSTS AND OTHER ASSETS
The following is a summary of the components of deferred costs and other
assets (in thousands):
YEAR-END
------------------
2003 2004
---- ----
Deferred financing costs.................................$ 13,122 $ 13,122
Deferred costs - other................................... -- 626
Other receivable - non-current........................... -- 388
Deposits................................................. 432 341
---------- --------
13,554 14,477
Less accumulated amortization ........................... 5,824 7,408
---------- --------
$ 7,730 $ 7,069
========== ========
ACCOUNTS PAYABLE
The following is a summary of the components of accounts payable (in
thousands):
YEAR-END
------------------
2003 2004
---- ----
Non-affiliates...........................................$ 8,835 $ 8,066
Affiliate (Note 15)...................................... 4,156 2,464
---------- --------
$ 12,991 $ 10,530
========== ========
ACCRUED EXPENSES
The following is a summary of the components of accrued expenses (in
thousands):
YEAR-END
------------------
2003 2004
---- ----
Accrued compensation and related benefits ................$ 11,508 $ 12,583
Accrued taxes ............................................ 2,777 3,350
Accrued franchisee marketing payments (a)................. 3,325 3,099
Accrued expenses - affiliate (Note 15) ................... 105 338
Other accrued expenses.................................... 5,272 5,989
---------- --------
$ 22,987 $ 25,359
========== ========
(a) Principally represents amounts collected from franchisees for remittance to
advertising cooperatives.
OTHER LIABILITIES AND DEFERRED INCOME
The following is a summary of the components of other liabilities and
deferred income (in thousands):
YEAR-END
------------------
2003 2004
---- ----
Unfavorable lease liability (Note 12) ....................$ 13,778 $ 12,396
Deferred income........................................... 5,499 4,749
Straight-line rent liability.............................. 752 3,394
Other .................................................... 2,864 2,759
---------- --------
$ 22,893 $ 23,298
========== ========
15
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a summary of the components of goodwill (in thousands):
YEAR-END
------------------
2003 2004
---- ----
Goodwill .................................................$ 75,830 $ 75,830
Less accumulated amortization ............................ 11,677 11,677
--------- -----------
$ 64,153 $ 64,153
========= ===========
The Company no longer amortizes goodwill. A summary of the changes in the
carrying amount of goodwill for 2003 and 2004 is as follows (in thousands):
2003 2004
---- ----
Balance at beginning of year...............................$ 90,689 $ 64,153
Adjustments to goodwill acquired in the Sybra Acquisition
(Note 3) ............................................... (4,536) --
Impairment (Note 9)........................................ (22,000) --
--------- --------
Balance at end of year.....................................$ 64,153 $ 64,153
========= ========
The following is a summary of the components of other intangible assets,
all of which are subject to amortization (in thousands):
YEAR-END 2003 YEAR-END 2004
ACCUMULATED ACCUMULATED
-------------------------------- ------------------------------
COST AMORTIZATION NET COST AMORTIZATION NET
---- ------------ --- ---- ------------ ---
Trademarks...........................$ 7,776 $ 3,604 $ 4,172 $ 6,194 $ 4,120 $ 2,074
Favorable leases..................... 3,265 186 3,079 3,218 348 2,870
Computer software.................... 806 116 690 1,906 480 1,426
Distribution rights.................. 110 45 65 110 54 56
-------- -------- --------- -------- --------- --------
$ 11,957 $ 3,951 $ 8,006 $ 11,428 $ 5,002 $ 6,426
======== ======== ========= ======== ========= ========
Aggregate amortization expense:
Actual for fiscal year:
2003$....................................................... 857
2004........................................................2,752 (a)
Estimate for fiscal year:
2005$.......................................................1,118
2006........................................................1,003
2007........................................................ 758
2008........................................................ 503
2009........................................................ 503
- ----------------
(a) This amount includes $1,670,000 of impairment charges related to other
intangible assets (see Note 9).
16
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
(6) LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
YEAR-END
-----------------
2003 2004
---- ----
Insured securitization notes bearing interest at 7.44% having expected
repayments through 2011, net of unamortized original issue discount of
$23 as of
January 2, 2005 (a).......................................................$ 234,112 $ 211,860
Leasehold notes bearing interest at a weighted average rate of 9.63% as of
January 2, 2005 due through 2021 (b)...................................... 69,901 64,640
Equipment notes bearing interest at a weighted average rate of 9.71% as of
January 2, 2005 due through 2009 (c)...................................... 5,039 3,681
Mortgage notes bearing interest at a weighted average rate of 9.82% as of
January 2, 2005 due through 2018 (d)...................................... 3,210 3,061
Mortgage notes related to restaurants sold in 1997
bearing interest at a weighted average rate of 10.37% as of
January 2, 2005 due through 2016 (e) ..................................... 2,888 2,768
Capitalized lease obligations ................................................ 1,835 1,036
Other......................................................................... 412 387
---------- ----------
Total debt ........................................................... 317,397 287,433
Less amounts payable within one year.................................. 30,377 31,764
---------- ----------
$ 287,020 $ 255,669
========== ==========
Aggregate annual maturities of long-term debt were as follows as of
January 2, 2005 (in thousands):
FISCAL YEAR AMOUNT
----------- ------
2005..........................................................$ 31,764
2006.......................................................... 33,388
2007.......................................................... 35,348
2008.......................................................... 37,348
2009.......................................................... 39,986
Thereafter.................................................... 109,622
-----------
287,456
Less unamortized original issue discount ..................... 23
-----------
$ 287,433
===========
--------------
(a) The Company, through Arby's Trust, has outstanding $211,883,000 of
insured non-recourse securitization notes (the "Securitization
Notes") as of January 2, 2005 which are due no later than December
2020. However, based on current projections and assuming the
adequacy of available funds, as defined under the indenture (the
"Securitization Indenture") pursuant to which the Securitization
Notes were issued, the Company currently estimates it will repay
$23,969,000 in 2005 with increasing annual payments to $37,377,000
in 2011 in accordance with a targeted principal payment schedule.
The table of annual maturities of long-term debt above reflects
these targeted payments. The Securitization Notes are redeemable by
Arby's Trust at an amount equal to the total of remaining principal,
accrued interest and the excess, if any, of the discounted value of
the remaining principal and interest payments over the outstanding
principal amount of the Securitization Notes.
Obligations under the Securitization Notes are insured by a
financial guarantee company and are collateralized by assets of the
Company with an aggregate net book value of $49,606,000 as of
January 2, 2005 consisting of cash and cash equivalents of
$10,222,000, a cash equivalent reserve account of $30,547,000 and
royalties receivable of $8,837,000.
(b) The leasehold notes (the "Leasehold Notes") were assumed in the
Sybra Acquisition and are due in equal monthly installments,
including interest, through 2021 of which $5,551,000 of principal is
due in 2005. The Leasehold Notes bear interest at rates ranging from
6.23% to 10.93% and are secured by restaurant leasehold
improvements, equipment and inventories with respective net book
values of $29,467,000, $12,253,000 and $1,723,000.
17
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
(c) The equipment notes (the "Equipment Notes") were assumed in the Sybra
Acquisition and are due in equal monthly installments, including
interest, through 2009 of which $1,338,000 of principal is due in
2005. The Equipment Notes bear interest at rates ranging from 8.50%
to 11.64% and are secured by restaurant equipment with a net book
value of $5,221,000.
(d) The mortgage notes (the "Mortgage Notes") were assumed in the Sybra
Acquisition and are due in equal monthly installments, including
interest, through 2018 of which $164,000 of principal is due in 2005.
The Mortgage Notes bear interest at rates ranging from 8.77% to
10.11% and are secured by land and buildings of restaurants with net
book values of $1,110,000 and $995,000, respectively.
(e) The Company remains liable for $2,768,000 of mortgage notes payable
as of January 2, 2005, of which it is a co-obligor for notes
aggregating $409,000 as of January 2, 2005.
The loan agreements for most of the Leasehold Notes, Mortgage Notes and
Equipment Notes contain various prepayment provisions that provide for
prepayment penalties of up to 5% of the principal amount prepaid or are based
upon specified "yield maintenance" formulas.
The various note agreements and indentures contain various covenants, the
most restrictive of which (1) require periodic financial reporting, (2) require
meeting certain debt service coverage ratio tests and (3) restrict, among other
matters, (a) the incurrence of indebtedness by certain of the Company's
subsidiaries, (b) certain asset dispositions and (c) the payment of
distributions by Arby's Trust. The Company was in compliance with all of such
covenants as of January 2, 2005.
In accordance with the Securitization Indenture, as of January 2, 2005,
Arby's Trust had no amounts available for the payment of distributions. However,
on January 20, 2005, $1,268,000 relating to cash flows for the calendar month of
December 2004 became available for the payment of such distributions by Arby's
Trust, through its parent to Arby's which, in turn, would be available to Arby's
to pay management service fees or Federal income tax-sharing payables to Triarc
or, to the extent of any excess, make distributions to TRH.
Sybra is required to maintain a fixed charge coverage charge ratio (the
"FCCR") under the agreements for the Leasehold Notes and Mortgage Notes and
Sybra was in compliance with the minimum FCCR as of January 2, 2005.
18
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments for which the disclosure of fair values is required were as follows
(in thousands):
YEAR-END
-----------------------------------------------------
2003 2004
----------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash equivalents (a).......................$ 21,272 $ 21,272 $ 19,418 19,418
Restricted cash equivalents (Note 6) (a)............ 30,528 30,528 30,547 30,547
Financial liabilities:
Long-term debt, including current portion (Note 6):
Securitization Notes (b)........................ 234,112 259,270 211,860 228,522
Leasehold Notes (b)............................. 69,901 68,848 64,640 63,207
Equipment Notes (b)............................. 5,039 5,031 3,681 3,641
Mortgage Notes (b).............................. 3,210 3,168 3,061 2,989
Mortgage and equipment notes related to
restaurants sold in 1997 (b).................. 2,888 3,315 2,768 3,161
Capitalized lease obligations (b)............... 1,835 1,834 1,036 1,026
Other (b)....................................... 412 407 387 378
---------- ---------- ---------- ------
Total long-term debt......................... 317,397 341,873 287,433 302,924
---------- ---------- ---------- ------
Notes payable to an affiliate (Note 15) (c)......... 13,836 13,836 27,636 27,636
Guarantees of obligations of (Note 14):
Subsidiaries of RTM Restaurant Group, Inc. ("RTM"):
Lease obligations (d)............................. 127 127 85 85
Mortgage and equipment notes payable (d).......... 95 95 66 66
- -------------------------
(a) The carrying amounts approximated fair value due to the
short-term maturities of the cash equivalents or restricted cash
equivalents.
(b) The fair values were determined by discounting the future
scheduled payments using an interest rate assuming the same
original issuance spread over a current Treasury bond yield for
securities with similar durations.
(c) The fair value approximated the carrying value as the notes bear
interest at a rate that varies with the prime rate.
(d) The fair values were assumed to reasonably approximate their
carrying amounts since the carrying amounts represent the fair
value as of the inception of the guarantee less subsequent
amortization.
The carrying amounts of accounts receivable, accounts payable and accrued
expenses approximated fair value due to the related allowance for doubtful
accounts receivable and the short-term maturities of accounts payable and
accrued expenses and, accordingly, they are not required to be presented in the
table above.
19
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
(8) INCOME TAXES
As disclosed in Note 1, the Company is included in the consolidated
Federal and certain state income tax returns of Triarc, but provides for Federal
and state income taxes on the same basis as if the Company and it subsidiaries
each filed separate returns. Accordingly, commencing December 27, 2002, the
Company has recorded a deferred tax benefit on Sybra's losses before income
taxes, which effectively represents a net operating loss carryforward benefit
that the Company will not realize until Sybra generates taxable income in future
periods. To the extent that Triarc utilized a portion of Sybra's net operating
loss carryforward benefit in its consolidated Federal income tax return for
2003, such amount, totaling $2,944,000, has been reflected as "Due from an
affiliate" in the accompanying consolidated balance sheet as of January 2, 2005,
and has been reflected as a current component of the provision for income taxes
for 2004 in the table below. Amounts currently payable for Federal and certain
state income taxes as of December 28, 2003 and January 2, 2005 were paid in cash
by Arby's to Triarc during 2003 and 2004, respectively.
Income before income taxes consisted of the following components (in
thousands):
2002 2003 2004
---- ---- ----
Domestic .................................................$ 34,270 $ 11,743 $ 28,334
Foreign .................................................. (28) (50) (16)
-------- -------- ---------
$ 34,242 $ 11,693 $ 28,318
======== ======== =========
The provision for (benefit from) income taxes consisted of the following
components (in thousands):
2002 2003 2004
---- ---- ----
Current:
Federal................................................$ 11,052 $ 11,434 $ 10,855
State.................................................. 2,079 1,887 2,864
Foreign................................................ 256 276 260
-------- -------- ---------
13,387 13,597 13,979
-------- -------- ---------
Deferred:
Federal................................................ 14 (6,222) (1,844)
State.................................................. 4 (232) (797)
-------- -------- ---------
18 (6,454) (2,641)
-------- -------- ---------
Total .................................................$ 13,405 $ 7,143 $ 11,338
======== ======== =========
The current and non-current deferred income tax benefits resulted from the
following components (in thousands):
YEAR-END
-------------------
2003 2004
---- ----
Current deferred income tax benefit:
Accrued compensation and related benefits......................$ 2,157 $ 2,704
Severance, relocation and closed store reserves ............... 353 131
Allowance for doubtful accounts ............................... 263 102
Other, net .................................................... 1,514 761
---------- --------
4,287 3,698
---------- --------
Non-current deferred income tax benefit:
Net operating loss carryforwards of Sybra...................... 4,797 9,954
Unfavorable leases............................................. 5,321 4,787
Goodwill impairment............................................ 5,254 4,032
Other basis differences ....................................... 3,858 3,632
Deferred franchise commitment fees............................. 1,904 1,795
Other, net .................................................... 2,643 2,833
---------- --------
23,777 27,033
---------- --------
$ 28,064 $ 30,731
========== ========
The increase in the total deferred income tax benefit from $28,064,000 at
December 28, 2003 to $30,731,000 at January 2, 2005, or an increase of
$2,667,000, differs from the benefit for deferred income taxes of $2,641,000 for
2004 due to the $26,000 deferred income tax benefit associated with the
unrecognized pension loss (see Note 11) which was charged directly to the
"Unrecognized pension loss" component of "Accumulated other comprehensive
deficit" in the accompanying consolidated statements of stockholder's deficit.
20
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
As of January 2, 2005, the Company had net operating loss carryforwards of
Sybra for Federal income tax purposes of approximately $24,700,000, of which
approximately $4,900,000 and $19,800,000 expire in 2023 and 2024, respectively.
A reconciliation of the difference between the reported provision for
income taxes and the provision that would result from applying the 35% Federal
statutory rate to the income before income taxes is as follows (in thousands):
2002 2003 2004
---- ---- ----
Income tax provision computed at Federal statutory rate ........$ 11,985 $ 4,093 $ 9,911
Increase in Federal income taxes resulting from:
State income taxes, net of Federal income tax benefit ....... 1,354 1,076 1,344
Impairment of non-deductible goodwill........................ -- 1,891 --
Other, net................................................... 66 83 83
-------- -------- ---------
$ 13,405 $ 7,143 $ 11,338
======== ======== =========
During 2004, the Internal Revenue Service (the "IRS") finalized its
examination of the consolidated Federal income tax returns of Triarc and its
subsidiaries, including certain of the Company's subsidiaries, for the years
ended December 31, 2000 and December 30, 2001 without assessing any additional
income tax liability. Triarc's Federal income tax returns subsequent to December
30, 2001 are not currently under examination by the IRS although certain state
income tax returns are currently under examination. However, management of the
Company believes that adequate aggregate provisions have been made in prior
periods for any liabilities, including interest, which may result from any such
examination(s). Such contingency reserves are included in "Other liabilities and
deferred income" in the accompanying consolidated balance sheets.
(9) IMPAIRMENT
LONG-LIVED ASSETS
The Company had determined that for the year ended December 29, 2002 all
of its long-lived assets that required testing for impairment were recoverable
and did not require the recognition of any associated impairment loss. However,
for the years ended December 28, 2003 and January 2, 2005, the Company recorded
impairment losses of $364,000 and $3,382,000, respectively. The impairment loss
in 2003 related entirely to restaurant equipment and leasehold improvements of
certain of its Company-owned restaurants acquired in the Sybra Acquisition and
reported in "Properties" in the accompanying consolidated balance sheets. The
impairment loss in 2004 included $1,800,000 related to Company-owned restaurants
acquired in the Sybra Acquisition and $1,582,000 related to the Company's T.J.
Cinnamons trademark. The 2004 impairment loss related to Company-owned
restaurants included $1,712,000 related to equipment, leasehold improvements and
leased assets capitalized, $65,000 related to computer software and $23,000
related to favorable leases. The restaurant impairment losses in 2003 and 2004
predominantly reflect (1) impairment charges resulting from the deterioration in
operating performance of certain restaurants and (2) in 2004, additional charges
for restaurants impaired in 2003 which did not recover in 2004, principally for
the investment in their back office and point-of-sale systems installed in each
of the Company-owned restaurants in 2004. The trademark impairment loss in 2004
resulted from the Company's assessment during the fourth quarter of the T.J.
Cinnamons brand, which offers, through franchised and Company-owned restaurants,
a product line of gourmet cinnamon rolls, coffee rolls, coffees and other
related products. This assessment resulted in (1) the Company's decision to not
actively pursue new T.J. Cinnamons franchisees until additional new product
offerings within its existing product line are tested and become available and
(2) the corresponding reduction in anticipated T.J. Cinnamons unit growth. These
impairment losses represented the excess of the carrying value over the fair
value of the affected assets and are included in "Depreciation and amortization,
excluding amortization of deferred financing costs" in the accompanying
consolidated income statements for the years ended December 28, 2003 and January
2, 2005. The fair value of the impaired assets was estimated to be the present
value of the anticipated cash flows associated with each affected Company-owned
restaurant and the T.J. Cinnamons trademark.
21
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
GOODWILL
The Company determined that for the years ended December 29, 2002 and
January 2, 2005 its goodwill was recoverable and did not require the recognition
of an impairment loss. However, for the year ended December 28, 2003, the
Company recorded an impairment loss of $22,000,000 with respect to goodwill
relating to Sybra, an identified reporting unit one level below the restaurant
business operating segment, on a stand-alone basis. The impairment loss
represented the excess of the carrying value of the goodwill of this reporting
unit over the implied fair value of such goodwill. The implied fair value of the
goodwill was determined by allocating the fair value of Sybra to all of the
Sybra assets and liabilities based on their estimated fair values with the
excess fair value representing goodwill. The fair value of Sybra was estimated
to be the present value of the anticipated cash flows associated with the
Company-owned restaurant reporting unit. The impairment loss resulted from the
overall effect of stiff competition from new product choices in the marketplace
and significant cost increases in roast beef, the largest component for Sybra's
menu offerings. Consequently, the cash flows during 2003 and anticipated cash
flows of the Company-owned restaurant reporting unit were adversely impacted in
2003. In light of the increased competitive pressures and recognizing the
unfavorable trend in roast beef costs versus historical averages during 2003,
the Company determined that in evaluating the Company-owned restaurants as a
separate reporting unit, the expected cash flows were not sufficient to fully
support the carrying value of the goodwill associated with the Sybra
Acquisition.
Although the Company reports its Company-owned restaurants and its
franchising of restaurants as one business segment and acquired Sybra with the
expectation of strengthening and increasing the value of its Arby's brand, its
Company-owned restaurants are considered to be a separate reporting unit for
purposes of measuring goodwill impairment under Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Accordingly, goodwill is tested for impairment at the Sybra level based on its
separate cash flows independent of the Company's strategic reasons for owning
restaurants.
(10) INTEREST AND OTHER INCOME, NET
Interest and other income, net consisted of the following income (expense)
components (in thousands):
2002 2003 2004
---- ---- ----
Interest income ..........................................$ 596 $ 439 $ 243
Sublease rental income (Note 12).......................... 278 233 164
Sublease rental expense................................... (180) (155) (116)
Amortization of fair value of debt guarantees ............ 156 109 70
Loss on disposition of fixed assets....................... (10) (349) (393)
Sybra's two-day results of operations (Note 3)............ 15 -- --
Other income ............................................. 167 208 346
Other expenses ........................................... (36) (49) (33)
--------- --------- --------
$ 986 $ 436 $ 281
========= ========= ========
(11) RETIREMENT AND OTHER BENEFIT PLANS `
The Company and Triarc maintain two 401(k) defined contribution plans (the
"401(k) Plans") covering all of the Company's employees who meet certain minimum
requirements and elect to participate, including employees of Sybra subsequent
to December 27, 2002. Under the provisions of the 401(k) Plans, employees may
contribute various percentages of their compensation ranging up to a maximum of
20% for one of the 401(k) Plans and 100% for the other plan, subject to certain
limitations. One of the 401(k) Plans provides for Company matching contributions
at 50% of employee contributions up to the first 6% thereof and the
participating employers make such contributions. The other plan permits
unspecified matching contributions; however, no such contributions have been
made. In addition, the 401(k) Plans permit discretionary annual Company
profit-sharing contributions to be determined by the employer regardless of
whether the employee otherwise elects to participate in the 401(k) Plans. In
connection with the matching and profit sharing contributions, the Company
provided $759,000, $833,000 and $773,000 as compensation expense in 2002, 2003
and 2004, respectively.
22
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
The Company's employees who were eligible to participate through December
31, 1988 are covered under a defined benefit pension plan sponsored by RCAC,
LLC, an indirect wholly-owned subsidiary of Triarc, which covers employees of
the Company and certain other affiliates, the benefits under which were frozen
in 1992. The measurement date used in determining amounts related to this
defined benefit plan is December 31 based on an actuarial report with a one-year
lag. The net periodic pension cost for 2002, 2003 and 2004 was $71,000, $71,000
and $39,000, respectively. The accrued pension cost included in "Other
liabilities and deferred income" as of December 28, 2003 and January 2, 2005 was
$124,000 and $113,000, respectively. As of December 28, 2003 and January 2,
2005, the actuarial present value of accumulated benefits exceeded plan assets
and accrued pension liabilities resulting in a minimum pension liability of
$393,000 and $461,000, respectively. The Company has no unrecognized prior
service cost related to this plan. The unrecognized pension losses in 2002 and
2004, and the recovery in 2003, less related deferred income taxes, have been
reported as "Unrecognized pension loss " and "Recovery of unrecognized pension
loss," respectively, as components of comprehensive income reported in the
accompanying consolidated statements of stockholder's deficit consisting of the
following (in thousands):
2002 2003 2004
---- ---- ----
Unrecognized pension (loss) recovery.................$ (290) $ 87 $ (68)
Deferred income tax benefit (provision).............. 113 (34) 26
------- ------ ------
$ (177) $ 53 $ (42)
======= ====== ======
The Company will not be required, and accordingly, does not expect to make
any contributions to this defined benefit plan in 2005.
Triarc has granted stock options to certain key employees of the Company
under several equity plans of Triarc. All stock options granted are currently
exercisable into either (1) a package consisting of one share of Triarc's Class
A Common Stock and two shares of Triarc's Class B Common Stock (collectively,
the "Triarc Common Stock") or (2) one share of Triarc's Class B Common Stock.
All stock options granted were issued at exercise prices equal to the fair
market values of the Triarc Common Stock at the date of grant, resulting in no
compensation cost being recognized by the Company upon the grants under the
intrinsic value method of measuring employee stock-based compensation utilized
by Triarc. All currently outstanding stock options under the Triarc equity plans
have maximum terms of ten years and vest ratably over periods of two or three
years. During 2003 and 2004, there were certain modifications to the vesting or
exercise periods of stock options relating to certain terminated employees of
the Company. Such modifications resulted in aggregate compensation of $173,000
and $86,000 during 2003 and 2004, respectively, which was credited to
"Additional paid-in capital" with an equal offsetting charge to "General and
administrative, excluding depreciation and amortization" expenses. Such
compensation expense was charged to the Company rather than Triarc, since the
terminated employees who had been granted the stock options which were modified
provided service to the Company and not to Triarc.
(12) LEASE COMMITMENTS
The Company leases real property and restaurant and office equipment. Some
leases related to restaurant operations provide for contingent rentals based on
sales volume. Certain leases also provide for payments of other costs such as
real estate taxes, insurance and common area maintenance which are not included
in rental expense or the future minimum rental payments set forth below.
Rental expense under operating leases, which increased significantly
commencing in 2003 due to the Sybra Acquisition, consisted of the following
components (in thousands):
2002 2003 2004
---- ---- ----
Minimum rentals .....................................$ 716 $ 14,612 $ 15,137
Contingent rentals................................... 6 739 745
------- --------- ---------
722 15,351 15,882
Less sublease income (Note 11)....................... 278 233 164
------- --------- ---------
$ 444 $ 15,118 $ 15,718
======= ========= =========
23
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
The Company's (1) future minimum rental payments and (2) sublease rental
receipts, for noncancelable leases having an initial lease term in excess of one
year as of January 2, 2005, are as follows (in thousands):
SUBLEASE
RENTAL PAYMENTS RENTAL RECEIPTS
------------------------ ---------------
CAPITALIZED OPERATING OPERATING
FISCAL YEAR LEASES LEASES LEASES
----------- ------ ------ ------
2005....................................................$ 678 $ 14,495 $ 151
2006.................................................... 317 13,540 151
2007.................................................... 69 12,854 67
2008.................................................... 69 12,099 16
2009.................................................... 58 11,439 --
Thereafter.............................................. -- 87,642 --
--------- --------- --------
Total minimum payments .............................. 1,191 $ 152,069 $ 385
========= ========
Less interest........................................... 155
---------
Present value of minimum capitalized lease payments.....$ 1,036
=========
As of January 2, 2005, the Company had $2,870,000 related to "Favorable
leases," net of accumulated amortization, included in "Other intangible assets"
(see Note 5) and $12,396,000 related to "Unfavorable lease liability" included
in "Other liabilities and deferred income" (see Note 4) resulting in $9,526,000
of net unfavorable leases. The future minimum rental payments set forth above
have been reduced by (1) the $9,526,000 of net unfavorable leases, (2) the lease
obligations assumed by RTM in connection with the May 1997 sale of restaurants
(see Note 14), (3) the lease obligations for closed restaurants for which the
fair value of those obligations, reduced by estimated related sublease rental
receipts, has already been recognized by the Company and (4) adjusted to reflect
straight-line rent for those leases containing rent escalations.
The present value of minimum capitalized lease payments is included either
with "Long-term debt" or "Current portion of long-term debt," as applicable, in
the accompanying consolidated balance sheet as of January 2, 2005 (see Note 6).
(13) SUPPLY AGREEMENT
Effective January 2, 2001, Sybra entered into a 10-year beverage supply
agreement with Coca-Cola North America Fountain ("Coca-Cola"), a division of The
Coca-Cola Company. The supply agreement allows either party to terminate the
agreement without cause after giving 12 months' prior written notice. The
agreement provides that, with certain limited exceptions, Coca-Cola will be the
exclusive supplier of fountain beverages to the Company's restaurants. In
connection with this agreement, Sybra received a prepayment in 2001 that
represented vendor incentives expected to be earned over an initial 3 year
period. The Company recognized $2,025,000 and $2,243,000 of vendor incentives as
a reduction of "Cost of sales, excluding depreciation and amortization" in 2003
and 2004, respectively, and had remaining deferred income relating to this
prepayment included in "Other liabilities and deferred income" in the
consolidated balance sheet of $438,000 as of December 28, 2003 (none as of
January 2, 2005). As of January 2, 2005, the Company had a rebate receivable
related to this agreement of $1,081,000 included in "Receivables" in the
accompanying consolidated balance sheet.
(14) GUARANTEES
In connection with the 1997 sale of all 355 of the then Company-owned
restaurants to RTM (the "Restaurant Sale"), substantially all lease obligations
associated with the sold restaurants were assumed by RTM, although the Company
remains contingently liable if the future lease payments, which extend through
2031 including all then existing extension or renewal option periods, are not
made by RTM (the "Lease Guarantee"). Such lease obligations could aggregate a
maximum of approximately $59,000,000 and $52,000,000 as of December 28, 2003 and
January 2, 2005, respectively, assuming RTM has made all scheduled payments
thereof through those dates.
Triarc has guaranteed obligations under mortgage and equipment notes
payable through 2015 (the "Mortgage and Equipment Notes Guarantee") which were
assumed by subsidiaries of RTM in connection with the Restaurant Sale, of which
approximately $40,000,000 and $38,000,000 were outstanding as of December 28,
2003 and January 2, 2005, respectively.
24
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
The carrying amounts of the Mortgage and Equipment Notes Guarantee and the
Lease Guarantee aggregated $222,000 and $151,000 as of December 28, 2003 and
January 2, 2005, respectively (see Note 7). Such carrying amounts are included
in "Other liabilities and deferred income" in the accompanying consolidated
balance sheets.
(15) TRANSACTIONS WITH RELATED PARTIES
The following is a summary of transactions between the Company and its
related parties (in thousands):
2002 2003 2004
---- ---- ----
Raw materials and supplies purchases from Triarc (a) .......$ -- $ 35,278 $ 62,397
Borrowings from Triarc (b) ................................. -- 13,836 13,800
Cash capital contributions received (c) .................... 17,463 6,500 15,450
Cash dividends paid (d) .................................... 1,110 8,463 9,498
Non-cash dividend (d) ...................................... 12 -- --
Costs allocated to Arby's by Triarc under a
management services agreement (e) ..................... 4,097 4,194 4,274
- ---------------------
(a) Commencing May 2003, Sybra purchases certain food, paper goods,
cleaning items and other raw materials and supplies from Triarc at
Triarc's purchase cost from unaffiliated third-party distributors. Such
purchases from Triarc are reported in "Cost of sales, excluding
depreciation and amortization" in the accompanying consolidated income
statements. Management of the Company believes that the purchase costs
paid to Triarc approximated the amounts that would have been incurred
by Sybra on a stand-alone basis. At December 28, 2003 and January 2,
2005, the Company owed Triarc $4,156,000 and $2,464,000, respectively,
relating to such purchases, which are included in "Accounts payable" in
the accompanying consolidated balance sheets (see Note 4).
(b) During 2003, Sybra borrowed from Triarc (1) $700,000 under a
$15,000,000 standby financing facility to fund operating shortfalls of
Sybra, payable on December 26, 2006, and (2) $13,136,000 under other
promissory notes due in December 2006 to prepay certain long-term debt
of Sybra and pay income taxes related to the Sybra 338 (h) (10)
Election. During 2004, Sybra borrowed from Triarc (1) an additional
$5,000,000 under the standby financing facility payable on December 26,
2006 and (2) $8,800,000 under another $15,000,000 standby financing
facility, payable on May 28, 2007, to fund capital and software
expenditures and operating shortfalls. Total borrowings from Triarc of
$13,836,000 and $27,636,000 as of December 28, 2003 and January 2,
2005, respectively, are reflected as "Notes payable to an affiliate" in
the accompanying consolidated balance sheets. The borrowings from
Triarc bear interest at the prime rate plus 1%. As of January 2, 2005,
the interest rate on the borrowings from Triarc was 6.25%. Sybra
recorded $375,000 and $1,079,000 of interest expense on all these notes
during 2003 and 2004, respectively. There was $105,000 and $338,000 of
unpaid interest on these notes at December 28, 2003 and January 2,
2005, respectively, included in "Accrued expenses" in the accompanying
consolidated balance sheets. As of January 2, 2005, Sybra had
$11,200,000 borrowing availability under the two standby facilities
with Triarc.
(c) During 2002, Arby's received cash capital contributions from Triarc
Acquisition aggregating $3,000,000. During 2002, Sybra received cash
capital contributions from TRH aggregating $14,463,000, of which
$6,343,000 was used to repay $5,525,000 of principal and pay $818,000
of related accrued interest on secured debt of Sybra. During 2003,
Arby's and Sybra received cash capital contributions from TRH of
$1,500,000 and $5,000,000, respectively. During 2004, Arby's and Sybra
received cash capital contributions from TRH (through ARG subsequent to
May 21, 2004) of $5,700,000 and $9,750,000, respectively.
(d) During 2002, Arby's paid periodic cash dividends to Triarc Acquisition.
During 2003 and 2004, Arby's paid periodic cash dividends to TRH
(through ARG subsequent to May 21, 2004). In addition, during 2002 the
Company recorded a $12,000 non-cash dividend to TRH representing the
extinguishment of certain amounts receivable. All amounts were charged
to "Additional paid-in capital" in the accompanying statements of
stockholder's deficit.
25
ARBY'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 2, 2005
(e) Arby's receives from Triarc certain management services, including
legal, accounting, tax, insurance, financial and other management
services, under a management services agreement entered into with
Triarc prior to 2002. The management services agreement originally
provided for an initial annual fixed fee of $3,800,000 plus annual cost
of living adjustments. As of January 3, 2005 the annual fixed fee
increased to $4,412,000. Such fees are included in "General and
administrative, excluding depreciation and amortization" in the
accompanying consolidated income statements.
In addition, Triarc's president and chief operating officer has an equity
interest in a franchisee that owns an Arby's restaurant. That franchisee is a
party to a standard Arby's franchise license agreement and pays to Arby's fees
and royalty payments that unaffiliated third-party franchisees pay. Under an
arrangement that pre-dated the Sybra Acquisition, Sybra manages the restaurant
for the franchisee and did not receive any compensation for its services during
2002, 2003 or 2004.
The Company also has related party transactions disclosed in previous
notes consisting of (1) the "pushdown" of the Sybra Acquisition to the Company
from TRH (see Note 3), (2) the Company's inclusion in the Federal and certain
state income tax returns of Triarc and the related payment of Federal and
certain state income taxes to Triarc (see Note 8) and (3) the Company's
participation in the retirement and other benefit plans maintained by Triarc and
RCAC, LLC (see Note 11).
(16) LEGAL MATTERS
The Company is involved in litigation and claims incidental to its
business. The Company has reserves for all of its legal matters aggregating
$764,000 as of January 2, 2005. Although the outcome of such matters cannot be
predicted with certainty and some of these matters may be disposed of
unfavorably to the Company, based on currently available information, including
legal defenses available to the Company, and given the aforementioned reserves,
the Company does not believe that the outcome of such legal matters will have a
material adverse effect on its consolidated financial position or results of
operations.
(17) SUBSEQUENT EVENT
On May 31, 2005 Triarc announced that it entered into a definitive
agreement pursuant to which it will acquire RTM, Arby's largest franchisee,
which currently operates 775 Arby's restaurants in the United States and which
Triarc plans on combining with the Company. In connection with the acquisition,
it is expected that substantially all of the Company's long-term debt will be
refinanced under a new credit facility of the Company. In addition, the Company
expects to incur prepayment penalties, corporate restructuring and relocation
costs following the acquisition. The acquisition and related debt financings are
expected to be completed during the third quarter of 2005 subject to the
satisfaction of customary closing conditions, obtaining necessary third-party
consents, the RTM sellers receiving their expected tax treatment for the
acquisition and the receipt of funding contemplated under financing commitments
obtained by the Company. There can be no assurance that such acquisition will be
consummated.
26