EXHIBIT 99.1
------------
RTM Restaurant Group
Combined Financial Statements
As of March 6, 2005 and May 30, 2004 and for the
Forty weeks ended March 6, 2005 and February 29, 2004
CONTENTS
Combined Financial Statements
Combined Balance Sheets........................................................2
Combined Statements of Operations..............................................3
Combined Statements of Net Capital Deficiency..................................4
Combined Statements of Cash Flows..............................................5
Notes to Combined Financial Statements.........................................6
RTM Restaurant Group
Combined Balance Sheets
(IN THOUSANDS)
MARCH 6,
2005 MAY 30,
ASSETS (UNAUDITED) 2004
-----------------------
Current assets:
Cash and cash equivalents $ 10,846 $ 8,475
Income taxes receivable 3,516 2,498
Other receivables 4,065 4,858
Inventories 6,398 7,637
Prepaid expenses 9,782 8,124
Deferred income taxes 2,047 1,980
-----------------------
Total current assets 36,654 33,572
Land, property and equipment:
Land 104,429 97,458
Property and equipment, net of accumulated depreciation of $155,149
in 2005 and $148,462 in 2004, respectively 178,125 178,561
Capital leases, net of accumulated amortization of $17,905 in 2005
and $14,486 in 2004, respectively 45,277 43,506
-----------------------
Land, property and equipment, net 327,831 319,525
Other assets:
Notes receivable, net of current portion and deferred gain 3,200 4,042
Goodwill 63,798 60,861
Other intangibles, net of accumulated amortization of $12,793 in
2005 and $12,638 in 2004, respectively 18,816 19,178
Other 8,671 9,017
-----------------------
Total other assets 94,485 93,098
-----------------------
Total assets $ 458,970 $ 446,195
=======================
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 43,117 $ 38,629
Accrued expenses 27,179 26,744
Current portion of long-term debt 42,211 29,112
Current portion of financing obligations 356 268
Current portion of capital lease obligations 4,226 3,898
-----------------------
Total current liabilities 117,089 98,651
Long-term debt, net of current portion 171,427 190,293
Financing obligations, net of current portion 131,167 118,156
Capital lease obligations, net of current portion 46,326 43,712
Deferred income taxes 6,130 8,260
Other liabilities and deferred credits 28,180 26,985
-----------------------
Total liabilities 500,319 486,057
Commitments and contingent liabilities
Net capital deficiency:
Common stock 2 2
Additional paid-in capital 14,570 14,570
Retained earnings 44,412 39,661
Treasury stock (20,720) (17,245)
Stock notes receivable (11,892) (10,480)
Notes and advances due from affiliates (67,721) (66,370)
-----------------------
Net capital deficiency (41,349) (39,862)
-----------------------
Total liabilities and net capital deficiency $ 458,970 $ 446,195
=======================
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
2
RTM Restaurant Group
Combined Statements of Operations
(IN THOUSANDS)
(unaudited)
FORTY WEEKS ENDED
MARCH 6, FEBRUARY 29,
2005 2004
-----------------------
Net sales $ 606,295 $ 550,769
Costs and expenses:
Costs of operations, excluding depreciation and amortization 488,812 450,108
General and administrative, excluding depreciation and amortization 61,701 56,692
Depreciation and amortization 22,334 18,200
-----------------------
572,847 525,000
-----------------------
Operating profit 33,448 25,769
Interest expense, net (27,960) (25,918)
Other income 1,026 992
-----------------------
Income before income taxes and discontinued operations 6,514 843
Provision for income taxes 1,697 375
-----------------------
Income from continuing operations 4,817 468
Income from discontinued operations, net of income taxes of $1,978
and $686 in 2005 and 2004, respectively 3,516 589
-----------------------
Net income $ 8,333 $ 1,057
=======================
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
3
RTM Restaurant Group
Combined Statements of Net Capital Deficiency
(IN THOUSANDS)
NOTES AND
ADDITIONAL ADVANCES
COMMON PAID-IN RETAINED TREASURY STOCK NOTES DUE FROM
STOCK CAPITAL EARNINGS STOCK RECEIVABLE AFFILIATES TOTAL
---------------------------------------------------------------------------------------------
Balance at May 25, 2003 $2 $13,691 $32,859 $ -- $(11,505) $(63,760) $(28,713)
Net income -- -- 12,191 -- -- -- 12,191
Repurchase of common stock and
members' interest -- -- (1,389) (17,696) 2,406 216 (16,463)
Sale of common stock -- -- -- 451 -- -- 451
Vested stock awards -- 879 -- -- -- -- 879
Shareholder loan transactions,
net -- -- -- -- (1,381) -- (1,381)
Dividends and distributions -- -- (4,000) -- -- -- (4,000)
Loans to affiliates, net -- -- -- -- -- (2,826) (2,826)
---------------------------------------------------------------------------------------------
Balance at May 30, 2004 2 14,570 39,661 (17,245) (10,480) (66,370) (39,862)
Net income -- -- 8,333 -- -- -- 8,333
Repurchase of common stock and
members' interests -- -- -- (3,475) -- -- (3,475)
Shareholder loan transactions,
net -- -- -- -- 228 -- 228
Member's contribution -- -- 1,640 -- (1,640) -- --
Dividends and distributions -- -- (5,222) -- -- -- (5,222)
Loans to affiliates, net -- -- -- -- -- (1,351) (1,351)
---------------------------------------------------------------------------------------------
Balance at March 6, 2005 $2 $14,570 $44,412 $(20,720) $(11,892) $(67,721) $(41,349)
(unaudited)
=============================================================================================
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
4
RTM Restaurant Group
Combined Statements of Cash Flows
(IN THOUSANDS)
(unaudited)
FORTY WEEKS ENDED
MARCH 6, FEBRUARY 29,
2005 2004
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,333 $ 1,057
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization, continuing operations 22,334 18,200
Depreciation and amortization, discontinued operations 70 1,473
Stock-based compensation expense 4,157 (41)
Deferred income taxes (2,197) (1,140)
Gain on sales of units (490) (441)
Gain on sale of discontinued operations (4,940) --
Changes in operating assets and liabilities:
Income taxes receivable (1,018) (3,392)
Other receivables 710 2,764
Inventories 1,239 (571)
Accounts payable 4,488 14,934
Accrued expenses 332 (2,664)
Prepaid expenses (1,658) 3,459
Other liabilities and deferred credits (1,146) 1,463
---------------------
Net cash provided by operating activities 30,214 35,101
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of land, property, and equipment (11,878) (30,598)
Notes and advances due from affiliates (1,351) (2,305)
Additions to notes receivable (2,134) (1,389)
Collections on notes receivable 2,059 597
Proceeds from disposal of land and property 5,746 4,695
Purchase of other assets (549) (2,203)
Proceeds from disposal of other assets 734 13
---------------------
Net cash used in investing activities (7,373) (31,190)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 13,559 29,625
Payments on long-term debt, financing and capital lease obligations (26,542) (26,882)
Repurchase of treasury stock and members' interests (2,717) (1,677)
Proceeds from sale of treasury stock 452 451
Payments of dividends and distributions (5,222) (4,000)
---------------------
Net cash used in financing activities (20,470) (2,483)
---------------------
Net increase in cash and cash equivalents 2,371 1,428
Cash and cash equivalents at the beginning of the period 8,475 8,621
---------------------
Cash and cash equivalents at the end of the period $ 10,846 $ 10,049
=====================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 33,973 $ 32,243
Cash paid for income taxes, net of refunds 6,309 3,978
NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to capital lease and financing obligations 19,382 20,378
Treasury stock acquired in exchange for notes receivable and other
consideration 1,210 17,831
Note receivable from sale of restaurants 832 --
Net liabilities assumed, notes and receivables exchanged and notes payable
---issued in purchase of restaurants 3,120 --
Contribution of note receivable to members' equity 1,640 --
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
5
RTM Restaurant Group
Notes to Combined Financial Statements
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
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(R) 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 52 or 53 weeks ending on the
last Sunday in May. The Group's 2005 fiscal year contains 52 weeks and the 2004
fiscal year contained 53 weeks. These financial statements include the balance
sheet as of March 6, 2005, and the related combined statements of operations,
cash flows and net capital deficiency for the 40 weeks ended March 6, 2005, the
balance sheet as of May 30, 2004 and the combined statements of operations and
cash flows for the 40 weeks ended February 29, 2004.
6
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
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. No impairment charges were recorded for the 40 week period ended
February 29, 2004.
7
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
8
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
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.
9
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $38,361 and $37,606 for the 40 weeks ended March
6, 2005 and February 29, 2004, 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.
10
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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).
11
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
12
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
3. SIGNIFICANT RISKS AND UNCERTAINTIES
NATURE OF OPERATIONS
The Group operates solely in the restaurant business through its 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 including Arby's Market Fresh(R) 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:
MAY 25, MAY 30, MARCH 6,
2003 2004 2005
---------------------------------
Open at beginning of year 771 788 772
Openings and acquisitions 25 29 22
Transfers -- (38) (10)
Closings (8) (7) (11)
---------------------------------
Open as of date indicated 788 772 773
=================================
Weighted average number in operation 779 790 772
=================================
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.
13
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
3. SIGNIFICANT RISKS AND UNCERTAINTIES (CONTINUED)
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.
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.
14
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
4. DISCONTINUED OPERATIONS (CONTINUED)
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 $8,652 and $8,067, and income
before income taxes, exclusive of the gains on sale, was $5,494 and $1,172
during the 40 weeks ended March 6, 2005 and February 29, 2004, respectively, and
is included in income from discontinued operations, net of income taxes, in the
accompanying combined statements of operations.
5. ACQUISITIONS
During 2005 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.
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.
15
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
5. ACQUISITIONS (CONTINUED)
The following summarizes the allocation of the aggregate purchase price of the
Group's acquisitions:
MARCH 6, MAY 30,
2005 2004
-----------------------
Assets:
Property and equipment $ 250 $ 165
Goodwill 2,572 195
Other net assets acquired 678 5
-----------------------
Aggregate purchase price, net $3,500 $365
=======================
6. NOTES RECEIVABLE
Notes receivable consist of the following:
MARCH 6, MAY 30,
2005 2004
-----------------------
Sales of restaurants:
10% note receivable, due in monthly installments
of $71 including interest beginning 2006 $ 4,187 $ 4,187
10% note receivable, due in monthly installments
of $12 including interest through 2017 1,005 1,071
7.4% note receivable, due in monthly installments
of $24 including interest through 2014 1,731 2,000
Other notes receivable with varying interest rates 1,030 1,592
Less deferred gains (4,619) (4,619)
-----------------------
3,334 4,231
Less current portion 134 189
-----------------------
$ 3,200 $ 4,042
=======================
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.
16
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
7. PROPERTY AND EQUIPMENT AND CAPITAL LEASES
Property and equipment and capital leases, at cost, consist of the following:
MARCH 6, MAY 30,
2005 2004
-------------------------
Property and equipment:
Buildings $ 161,472 $ 156,064
Leasehold improvements 38,975 36,032
Equipment and automobiles 129,342 129,678
Construction in progress 3,485 5,249
Less accumulated depreciation (155,149) (148,462)
-------------------------
$ 178,125 $ 178,561
=========================
Capital leases:
Buildings $ 41,698 $ 38,594
Equipment 21,484 19,398
Less accumulated amortization (17,905) (14,486)
-------------------------
$ 45,277 $ 43,506
=========================
For continuing operations, the Group incurred depreciation expense of $17,555
and $14,871 during the 40 weeks ended March 6, 2005 and February 29, 2004,
respectively, and amortization expense (including amortization of intangible
assets) of $4,779 and $3,329 during the 40 weeks ended March 6, 2005 and
February 29, 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.
17
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
7. PROPERTY AND EQUIPMENT AND CAPITAL LEASES (CONTINUED)
REAL ESTATE INVESTMENT JOINT VENTURE (CONTINUED)
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:
AS OF
--------------------
MARCH 6, MAY 30,
2005 2004
--------------------
Land, property and capital leases $40,302 $41,431
Financing obligations 20,984 20,984
Capital lease obligations 22,467 22,716
8. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
MARCH 6, 2005 MAY 30, 2004
---------------------------------------- --------------------------------------
NET NET
GROSS ACCUMULATED BOOK GROSS ACCUMULATED BOOK
ASSET AMORTIZATION VALUE ASSET AMORTIZATION VALUE
---------------------------------------- --------------------------------------
License fees $11,999 $ (3,675) $ 8,324 $11,729 $ (3,592) $ 8,137
Favorable licenses 11,974 (2,529) 9,445 12,251 (5,992) 6,259
Favorable leases 7,066 (6,433) 633 7,266 (2,920) 4,346
Non-compete agreement 570 (156) 414 570 (134) 436
---------------------------------------- --------------------------------------
$31,609 $(12,793) $18,816 $31,816 $(12,638) $19,178
======================================== ======================================
18
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
8. OTHER INTANGIBLE ASSETS (CONTINUED)
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.
9. OTHER ASSETS
Other assets consist of the following:
MARCH 6, MAY 30,
2005 2004
--------------------------
Receivables from split-dollar life insurance contract policy owners $3,417 $3,043
Market development agreement deposit 1,433 1,726
Cash surrender value of life insurance policies 1,205 1,329
Financing commitment fees 1,065 1,210
Lease acquisition costs 901 979
Refundable deposits 477 555
Other 173 175
--------------------------
$8,671 $9,017
==========================
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:
MARCH 6, MAY 30,
2005 2004
---------------------------
Installment notes payable to financial institutions and $185,430 $206,379
commercial lenders through 2024 at varying interest rates up
to 14.2%
Line of credit borrowings 12,759 --
Stock repurchase notes payable through 2024 with interest at
5.31% to 7.74% 12,654 12,445
Notes to shareholders, payable through 2013 at interest rates
ranging from 4.3% to 10% 2,795 581
---------------------------
213,638 219,405
Less current portion 42,211 29,112
---------------------------
$171,427 $190,293
===========================
19
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
10. DEBT (CONTINUED)
The Group incurred interest expense of $28,967 and $26,940 and the Group also
recorded interest income of $575 and $347, during the 40 weeks ended March 6,
2005 and February 29, 2004, respectively. The Group capitalized $432 and $675
during the 40 week periods ended March 6, 2005 and February 29, 2004,
respectively. During the 40 week periods ended March 6, 2005 and February 29,
2004, the total net interest expense from continuing operations was $27,960 and
$25,918, 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 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.
20
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
10. DEBT (CONTINUED)
Aggregate maturities of long-term debt at March 6, 2005 are as follows:
Remainder of fiscal year ended May 29, 2005 $ 6,791
2006 37,301
2007 19,107
2008 16,859
2009 15,659
2010 and after 117,921
------------
Total $213,638
============
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 92,862,239 and 94,469,393 shares outstanding as of March 6, 2005 and May 30,
2004, respectively. As of March 6, 2005 and May 30, 2004, 7,137,761 and
5,530,607 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.
21
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
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 (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
$1,966 and $384 during the 40 weeks ended March 6, 2005 and February 29, 2004,
respectively.
A summary of stock option activity and related information is as follows:
FORTY WEEKS ENDED YEAR ENDED
------------------------------------------------------
MARCH 6, MAY 30,
2005 2004
------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------------------------------------------------
Outstanding at beginning of period 5,911,422 $ 2.16 4,411,422 $ 1.76
Forfeited (1,000,000) 3.24 -- --
Granted -- -- 2,500,000 3.30
Exercised -- -- (1,000,000) 3.24
------------------------------------------------------
Outstanding at end of period 4,911,422 1.94 5,911,422 2.16
Exercisable at end of period 2,480,187 1.67 2,364,569 2.14
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.
22
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
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 $2,189 and ($426) during the 40 weeks ended March 6,
2005 and February 29, 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 March 6, 2005 and May
30, 2004 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 related default
covenants are accounted for as capital leases. Certain leases of restaurant
equipment are also accounted for as capital leases.
23
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
14. LEASES (CONTINUED)
Minimum and contingent rentals, net of sublease rental income, that comprise
rental expense from continuing operations are as follows:
FORTY WEEKS ENDED
------------------------
MARCH 6, FEBRUARY 29,
2005 2004
------------------------
Minimum rentals $30,549 $31,268
Contingent rentals 1,779 1,572
------------------------
Total rent expense $32,328 $32,840
========================
As of May 30, 2004, future minimum rental commitments under noncancelable leases
are as follows:
CAPITAL FINANCING OPERATING
LEASES OBLIGATIONS LEASES
----------------------------------
2005 $ 8,349 $ 12,500 $ 45,791
2006 7,179 12,664 42,566
2007 6,155 12,846 38,437
2008 5,253 12,984 34,444
2009 4,612 13,144 31,107
2010 and thereafter 58,185 155,043 231,167
----------------------------------
Total minimum lease payments 89,733 219,181 $423,512
===========
Payment-in-kind of property at end of
lease term 79,237
Less amount representing interest 42,123 179,994
-----------------------
Present value of minimum lease payments 47,610 118,424
Less current portion 3,898 268
-----------------------
Noncurrent portion $43,712 $118,156
=======================
24
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
14. LEASES (CONTINUED)
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 $10,370
2006 9,561
2007 8,775
2008 8,303
2009 7,041
2010 and thereafter 47,707
----------
Total minimum lease payments $91,757
==========
15. INCOME TAXES
A reconciliation of income taxes from continuing operations to total income tax
expense for the 40 weeks ended March 6, 2005 and February 29, 2004,
respectively, follows:
FORTY WEEKS ENDED
MARCH 6, FEBRUARY 29,
2005 2004
-----------------------
Income tax expense from continuing operations $1,697 $ 375
Income tax expense from discontinued operations 1,978 686
-----------------------
Total income tax expense $3,675 $1,061
=======================
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 $2,445 and $(61) and
the provision for income taxes from continuing operations would have been $4,069
and $904 for the 40 weeks ended March 6, 2005 and February 29, 2004,
respectively, if the nontaxable entities had been subject to tax at the
statutory federal income tax rate.
25
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
15. INCOME TAXES
Significant components of deferred tax assets and liabilities as of May 30, 2004
are as follows:
MAY 30,
2004
-----------
Deferred tax assets:
Financing and capital lease obligations $ 5,597
State net operating loss carryforwards 2,478
Stock option expense 2,437
Insurance accruals 1,750
Straight-line rent accrual 2,007
Other currently nondeductible accruals 470
Tax over book interest income 366
Other 796
-----------
Gross deferred tax assets 15,901
Less valuation allowance 2,478
-----------
Net deferred tax asset 13,423
Deferred tax liabilities:
Depreciation and amortization (17,825)
Installment sales (1,595)
Other (283)
-----------
Gross deferred tax liability (19,703)
-----------
Net deferred tax liability $ (6,280)
===========
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 $171 and
$229 during the 40 weeks ended March 6, 2005 and February 29, 2004,
respectively.
26
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
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 March 6, 2005 and May 30, 2004, receivables from and cash advances to
Winners aggregated $58,804 and $54,036, respectively. These receivables have
been classified in net capital deficiency in the accompanying balance sheets.
The Group received $9 during the 40 weeks ended March 6, 2005 and February 29,
2004, respectively, from Winners for management fees. The Group paid $32 and $40
during the 40 weeks ended March 6, 2005 and February 29, 2004, 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 March 6, 2005 and May 30, 2004, the total of
non-combined affiliate balances included in other receivables was $765 and
$1,020, respectively, and the total of non-combined affiliate balances included
in accounts payable was $2,364 and $6, respectively.
27
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
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 March 6, 2005 and
May 30, 2004, the Group has advanced $240 and $390, respectively, to MVP, and
has recognized interest on these advances of $14 and $8 during the 40 weeks
ended March 6, 2005 and February 29, 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 $240 and $320 during the 40 weeks ended March 6,
2005 and February 29, 2004, respectively.
The Group contributed $225 and $410 during the 40 weeks ended March 6, 2005 and
February 29, 2004, respectively, to the RTM Foundation. The RTM Foundation was
created to provide aid and support to other nonprofit organizations.
The Group has advanced $229 and $723 to certain shareholders as of March 6, 2005
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 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 $(84) and $88 during the 40 weeks ended March 6, 2005
and February 29, 2004, 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 $5,030
and $5,114 at March 6, 2005 and May 30, 2004, respectively, and have been
classified in net capital deficiency in the accompanying balance sheets.
28
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
As of March 6, 2005 and May 30, 2004, the Group had advances to RTMFA of $1,770
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 $1,322 and
$1,358 at March 6, 2005 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 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.
29
RTM Restaurant Group
Notes to Combined Financial Statements (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(unaudited)
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.
30