EXHIBIT 99.2
------------
RTM Restaurant Group
Audited Combined Financial Statements (Restated)
Years ended May 26, 2002, May 25, 2003 and May 30, 2004
CONTENTS
Report of Independent Auditors.................................................1
Audited 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
Phone: (404) 874-8300
ERNST & YOUNG LLP www.ey.com
Suite 2800
600 Peachtree Street
Atlanta, Georgia 30308-2215
Report of Independent Auditors
Board of Directors
RTM Restaurant Group
We have audited the accompanying combined balance sheets (restated) of RTM
Restaurant Group (as defined in Note 1) as of May 25, 2003 and May 30, 2004, and
the related combined statements of operations, cash flows and net capital
deficiency (restated) for each of the three years in the period ended May 30,
2004. These financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes 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 includes, examining
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of RTM Restaurant Group
at May 25, 2003 and May 30, 2004, and the combined results of their operations
and their cash flows for each of the three years in the period ended May 30,
2004, in conformity with accounting principles generally accepted in the United
States.
The financial statements as of May 25, 2003 and May 30, 2004, and for each of
the three years in the period ended May 30, 2004, have been restated as
discussed in Note 20.
/s/ Ernst & Young LLP
March 14, 2005, except with respect to the third paragraph of
Note 10, as to which the date is May 26, 2005, and the first
paragraph of Note 19 and Note 20, as to which the date is July 8, 2005
RTM Restaurant Group
Combined Balance Sheets (Restated)
(IN THOUSANDS)
MAY 25, MAY 30,
2003 2004
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,621 $ 8,475
Income taxes receivable 1,546 2,498
Other receivables 4,441 4,858
Inventories 6,545 7,637
Prepaid expenses 9,633 8,124
Deferred income taxes 1,312 1,980
-----------------------
Total current assets 32,098 33,572
Land, property and equipment:
Land 91,680 97,458
Property and equipment, net of accumulated depreciation of $157,523
in 2003 and $148,462 in 2004, respectively 169,399 178,561
Capital leases, net of accumulated amortization of $10,683
in 2003 and $14,486 in 2004, respectively 38,467 43,506
-----------------------
Land, property and equipment, net 299,546 319,525
Other assets:
Notes receivable, net of current portion and deferred gain 2,542 4,042
Goodwill 61,785 60,861
Other intangibles, net of accumulated amortization of $12,064
in 2003 and $12,638 in 2004, respectively 20,135 19,178
Other 8,245 9,017
-----------------------
Total other assets 92,707 93,098
-----------------------
Total assets $ 424,351 $ 446,195
=======================
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 35,569 $ 38,629
Accrued expenses 27,040 26,744
Current portion of long-term debt 23,143 29,112
Current portion of financing obligations 161 268
Current portion of capital lease obligations 3,917 3,898
-----------------------
Total current liabilities 89,830 98,651
Long-term debt, net of current portion 188,796 190,293
Financing obligations, net of current portion 101,979 118,156
Capital lease obligations, net of current portion 38,458 43,712
Deferred income taxes 7,175 8,260
Other liabilities and deferred credits 26,826 26,985
-----------------------
Total liabilities 453,064 486,057
Commitments and contingent liabilities
Net capital deficiency:
Common stock 2 2
Additional paid-in capital 13,691 14,570
Retained earnings 32,859 39,661
Treasury stock -- (17,245)
Stock notes receivable (11,505) (10,480)
Notes and advances due from affiliates (63,760) (66,370)
-----------------------
Net capital deficiency (28,713) (39,862)
-----------------------
Total liabilities and net capital deficiency $ 424,351 $ 446,195
=======================
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
2
RTM Restaurant Group
Combined Statements of Operations (Restated)
(IN THOUSANDS)
YEAR ENDED
MAY 26, MAY 25, MAY 30,
2002 2003 2004
-----------------------------------
Net sales $ 684,407 $ 707,932 $ 739,996
Costs and expenses:
Costs of operations, excluding depreciation and
amortization 543,015 558,944 602,506
General and administrative, excluding depreciation
and amortization 83,656 86,533 77,710
Depreciation and amortization 27,616 24,384 24,926
-----------------------------------
654,287 669,861 705,142
-----------------------------------
Operating profit 30,120 38,071 34,854
Interest expense, net (30,840) (32,945) (34,285)
Other income 116 737 1,165
-----------------------------------
Income (loss) before income taxes and discontinued
operations (604) 5,863 1,734
Provision for income taxes (2,295) (4,556) (795)
-----------------------------------
Income (loss) from continuing operations (2,899) 1,307 939
Income from discontinued operations, net of income
taxes of $946, $1,232, and $2,587 in 2002, 2003
and 2004, respectively 1,654 2,191 11,252
-----------------------------------
Net (loss) income $ (1,245) $ 3,498 $ 12,191
====================================
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
3
RTM Restaurant Group
Combined Statements of Net Capital Deficiency (Restated)
(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 27, 2001, as
previously reported $2 $ 1,140 $41,260 $ (184) $ (9,997) $ (42,916) $(10,695)
Restatement adjustments -- -- (1,858) -- -- -- (1,858)
----------------------------------------------------------------------------------------------
Balance at May 27, 2001,
as restated 2 1,140 39,402 (184) (9,997) (42,916) (12,553)
Net loss -- -- (1,245) -- -- -- (1,245)
Repurchase of common stock -- -- -- (1,968) 807 53 (1,108)
Sale and issuance of common
stock -- 5,534 -- 2,152 (3,391) -- 4,295
Vested stock awards -- 2,705 -- -- -- -- 2,705
Shareholder loan transactions,
net -- -- -- -- 2,971 -- 2,971
Dividends and distributions -- -- (6,796) -- -- -- (6,796)
Loans to affiliates, net -- -- -- -- -- (7,347) (7,347)
----------------------------------------------------------------------------------------------
Balance at May 26, 2002 2 9,379 31,361 -- (9,610) (50,210) (19,078)
Net income -- -- 3,498 -- -- -- 3,498
Repurchase of common stock -- -- -- (3,992) 608 -- (3,384)
Sale and issuance of common stock -- 1,878 -- 3,992 (2,481) -- 3,389
Vested stock awards -- 2,434 -- -- -- -- 2,434
Shareholder loan transactions,
net -- -- -- -- (22) -- (22)
Dividends and distributions -- -- (2,000) -- -- -- (2,000)
Loans to affiliates, net -- -- -- -- -- (13,550) (13,550)
----------------------------------------------------------------------------------------------
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)
==============================================================================================
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
4
RTM Restaurant Group
Combined Statements of Cash Flows (Restated)
(IN THOUSANDS)
YEAR ENDED
MAY 26, MAY 25, MAY 30,
2002 2003 2004
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,245) $ 3,498 $ 12,191
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization, continuing operations 27,616 24,384 24,926
Depreciation and amortization, discontinued operations 2,290 1,745 1,413
Stock-based compensation expense (income) 8,668 9,348 (53)
Deferred income taxes (928) 150 418
(Gain) loss on sales of units 340 3 (518)
Gain on sale of discontinued operations -- -- (10,874)
Changes in operating assets and liabilities:
Income taxes receivable (19) (97) (952)
Other receivables (314) 748 (471)
Inventories 703 (383) (1,092)
Accounts payable (3,601) 7,810 3,060
Accrued expenses 736 (3,142) (296)
Prepaid expenses (352) (2,414) 1,509
Other liabilities and deferred credits 3,286 2,631 2,691
---------------------------------
Net cash provided by operating activities 37,180 44,281 31,952
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of land, property, and equipment (5,457) (11,988) (25,520)
Notes and advances due from affiliates (7,054) (13,550) (2,826)
Additions to notes receivable (6,375) (621) (2,195)
Collections on notes receivable 11,281 2,036 1,368
Proceeds from disposal of land and property 4,122 1,822 3,971
Purchase of other assets (4,432) (3,262) (2,506)
Proceeds from disposal of other assets 923 3,298 390
Proceeds from sale of Phoenix district -- -- 13,950
Other -- 513 67
---------------------------------
Net cash used in investing activities (6,992) (21,752) (13,301)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 5,982 17,475 22,971
Payments on long-term debt, financing and capital lease obligations (27,295) (31,814) (36,110)
Repurchase of treasury stock (831) (1,750) (720)
Proceeds from sale of treasury stock -- 1,511 451
Payments of dividends and distributions (6,796) (2,000) (4,000)
Purchase of members' interest -- -- (1,389)
---------------------------------
Net cash used in financing activities (28,940) (16,578) (18,797)
---------------------------------
Net increase (decrease) in cash and cash equivalents 1,248 5,951 (146)
Cash and cash equivalents at the beginning of the period 1,422 2,670 8,621
---------------------------------
Cash and cash equivalents at the end of the period $ 2,670 $ 8,621 $ 8,475
=================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 30,351 $ 39,719 $ 39,192
Cash paid for income taxes, net of refunds 7,202 5,419 4,275
NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to capital lease and financing obligations 16,918 17,105 26,168
Treasury stock acquired in exchange for notes payable and other
consideration 586 1,634 14,354
Sale and issuance of common stock for notes 3,391 2,481 --
Purchase of minority interests by issuance of common stock 4,295 -- --
Note receivable from sale of Phoenix district -- -- 2,000
Cancellation of notes receivable from shareholders and affiliates in
share repurchases 860 608 2,622
Other noncash stock transactions 309 -- --
SEE ACCOMPANYING NOTES TO COMBINED FINANCIAL STATEMENTS.
5
RTM Restaurant Group
Notes to Combined Financial Statements (Restated)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
May 30, 2004
1. ORGANIZATION OF THE GROUP
RTM Restaurant Group (the "Group") is not a legal entity, but rather the
combination of the financial statements of RTM Restaurant Group, Inc. ("RTMRG")
and its two wholly-owned subsidiaries, RTM, Inc. (and its subsidiaries) ("RTM")
and RTM Partners, Inc. (and its subsidiaries) ("Partners"), along with RTM
Acquisition Company, L.L.C. ("RTMAC"), and RTM Management Company, L.L.C.
("Management"). These entities are owned and controlled by the same group of
individuals (the "Owners"). Two of the companies were organized as Georgia
limited liability companies. These limited liability companies and the related
operating agreements shall be dissolved and terminated at the earlier of the
written consent of a Majority Interest, as defined, sale of the company, legal
decree, or December 31, 2050.
The Group is the largest licensee of Arby's(R) restaurants, owning and operating
772 Arby's restaurants as of May 30, 2004. The Arby's license agreements
initially extend for twenty years and are renewable for successive twenty-year
terms.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements include the accounts of RTMRG, RTM, Partners,
RTMAC and Management. All significant inter-entity balances and transactions
have been eliminated.
FISCAL YEAR
The Group reports on a fiscal year consisting of 52 or 53 weeks ending on the
last Sunday in May. Each of the Group's 2002 and 2003 fiscal years contained 52
weeks and the 2004 fiscal year contained 53 weeks. The Group's 2002 fiscal year
commenced on May 27, 2001 and ended on May 26, 2002, the 2003 fiscal year
commenced on May 27, 2002 and ended on May 25, 2003, and the 2004 fiscal year
commenced on May 26, 2003 and ended on May 30, 2004.
6
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
Management currently believes that no impairment exists with regard to the
Group's long-lived assets.
7
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 annual impairment test during each fiscal year and
concluded that no impairment of goodwill existed since the fair value of each of
the Group's reporting units exceeded its carrying value. No events have
occurred, nor circumstances changed subsequent to the most recent annual test
that would reduce the fair value of the Group's reporting unit below its
carrying value. The Group will continue to test for impairment on an annual
basis or an interim basis if circumstances change that would indicate the
possibility of impairment.
8
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 obtains
an independent valuation to estimate the market value of its common stock. A
critical estimate in the valuation is anticipated future cash flows of the
business. This estimate is subject to change as a result of many factors
including, among others, changing economic conditions and the competitive
environment. The Group is not required to disclose the pro-forma effects of
accounting for the options under Statement of Financial Accounting Standards No.
123 ("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, as the options are
liability awards for which the accounting under SFAS 123 would be the same as
the accounting recorded by the Group under APB 25.
SELF-INSURANCE RESERVES
The Group records an estimate of the remaining costs to settle incurred
self-insured workers' compensation claims. The Group purchases insurance
policies which reimburse the Group in the event of claims over a specified
amount. The estimate considers factors which may impact the ultimate cost of
claims which include: the frequency and severity of historical claims, as well
as changes in the business environment, benefit levels, health care costs and
regulatory environment. The estimate also considers the impact of insurance
which may reduce the overall cost of a given claim to the Group. In addition, at
the balance sheet date, there may be incurred claims that have not been
reported; accordingly, the Group may not be aware of them. An estimate of these
incurred but not reported claims has been included in the reserve. The Group has
provided letters of credit to various states, municipalities and insurance
companies as collateral for certain of its liabilities attributable to workers'
compensation.
9
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Group is comprised of five companies. Two of the companies are limited
liability companies; accordingly, the tax attributes from the activities of
those companies flow directly to the members of the limited liability companies.
Thus, no tax provision, tax receivables or payables, or deferred tax assets or
liabilities are reflected in the accompanying combined financial statements
related to these companies. Three companies are C Corporations; accordingly, the
tax attributes from the activities of those companies are reflected in the
accompanying combined financial statements. Thus, tax provisions, tax
receivables or payables, and deferred tax assets or liabilities arising from
differences between the financial statement and tax basis of the assets and
liabilities are reflected in the accompanying combined financial statements
related to these companies. Deferred taxes are provided using currently enacted
tax rates and regulation. A valuation allowance is provided for deferred tax
assets for which realization is not deemed more likely than not.
REVENUE RECOGNITION
Revenues from the sale of food and beverages are recognized at the time the
products are sold and the cash is collected from the customer.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. The Group charges advertising costs,
including contributions made to advertising cooperatives, to expense ratably in
relation to revenues over the year in which incurred. Advertising expense from
continuing operations totaled $39,893, $45,247 and $49,678 during 2002, 2003 and
2004, respectively.
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 (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 $27,131 of Winners' debt as of May 30, 2004,
the Group's guarantee of Winners' leases of $17,858 as of May 30, 2004 and the
Group's commitment to provide liquidity support for Winners, as needed, over the
next fiscal year. Such exposure excludes receivables from Winners of $54,036 as
of May 30, 2004 that are included in net capital deficiency in the accompanying
balance sheet. See Note 17 for further discussion.
Additionally, the Group has determined that it holds a variable interest in the
form of a note receivable from an entity that purchased restaurants from the
Group subsequent to January 1, 2004. As more fully described in Note 4, in April
2004, the Group sold restaurants to an unrelated third party for cash and a note
receivable. The buyer is a variable interest entity; however, the Group is not
the primary beneficiary and, therefore, has not consolidated the entity. The
Group's note receivable balance exposed to loss as a result of its involvement
in this variable interest entity was $2,000 as of May 30, 2004.
The Group may hold variable interests in the form of notes receivable from
entities that purchased restaurants from the Group prior to January 1, 2004. The
Group has not yet determined whether any such entities are variable interest
entities or whether the Group would be required to consolidate any of them
beginning in fiscal year 2006.
In December 2004, the FASB issued a revision to Statement of Financial
Accounting Standards No. 123 (SFAS 123R), SHARE BASED PAYMENT. The revision
requires all entities to recognize compensation expense in an amount equal to
the fair value of share-based payments granted to employees. The Statement
eliminates the alternative method of accounting for employee share-based
payments previously available under APB 25. The Statement will become effective
for the Group in its fiscal year ending May 27, 2007. The Group is currently
assessing the effect that the adoption of SFAS 123R will have on its financial
position and results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY ("SFAS 150"), SFAS 150 would require that the Group's
redeemable common stock be classified as a liability and measured at fair value.
The effective date of SFAS 150 for nonpublic companies has been deferred
indefinitely.
12
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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:
(UNAUDITED)
MAY 26, MAY 25, MAY 30,
2002 2003 2004
-----------------------------
Open at beginning of year 760 771 788
Openings and acquisitions 18 25 29
Transfers -- -- (38)
Closings (7) (8) (7)
-----------------------------
Open at the end of the year 771 788 772
==============================
Weighted average number in operation 768 779 790
==============================
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 (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 are
expected to have a continuing effect on profit margins in 2005. The Group also
believes that its vulnerability to risk concentrations related to geographical
concentration is mitigated since the Group generally operates throughout the
United States and has no foreign exposure.
4. DISCONTINUED OPERATIONS
On April 19, 2004, the Group sold all of its Arby's restaurants in the Phoenix,
AZ district (the "Phoenix District") to an unrelated third party for net
proceeds of $15,950, including cash and a note receivable for $2,000 payable
monthly over 10 years. The gain of $10,874 ($8,948 net of taxes) resulting from
this transaction is included in income from discontinued operations, net of
income taxes, in the accompanying combined statement of operations. Goodwill of
$1,167 related to the Phoenix District was retired in connection with the sale.
As of the date of the transaction, the Phoenix District's assets and liabilities
were recorded at a net carrying value of approximately $4,432. The assets and
liabilities of the Phoenix District included in the combined balance sheet as of
May 25, 2003 and disposed of in the transaction are as follows:
14
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. DISCONTINUED OPERATIONS (CONTINUED)
MAY 25,
2003
----------
ASSETS
Current assets $ 786
Land, property and equipment, net 5,024
Other assets 1,521
----------
Total assets 7,331
LIABILITIES
Current liabilities 1,373
Long-term debt, net of current portion 3,253
Other deferred credits 66
----------
Total liabilities 4,692
----------
Net assets $2,639
==========
The Phoenix District's revenues were $36,504, $31,458 and $29,070, and income
before income taxes was $1,045, $1,801, and $1,391, excluding gain on sale, in
2002, 2003 and 2004, respectively, and are included in income from discontinued
operations, net of income taxes, in the accompanying combined statements of
operations.
See Note 19 for discussion of discontinued operations subsequent to May 30,
2004.
5. ACQUISITIONS
During 2002, 2003 and 2004, the Group acquired several businesses that operated
Arby's restaurants. Each of these acquisitions was accounted for as a purchase
and their results of operations are included beginning at the date of
acquisition.
15
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. ACQUISITIONS (CONTINUED)
The following summarizes the allocation of the aggregate purchase price of the
Group's acquisitions:
MAY 25, MAY 30,
2003 2004
---------------------
Assets:
Property and equipment $ 50 $165
Goodwill 314 195
Other net assets acquired 36 5
---------------------
Aggregate purchase price $ 400 $365
=====================
6. NOTES RECEIVABLE
Notes receivable consist of the following:
MAY 25, MAY 30,
2003 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 1,110 1,071
7.4% note receivable, due in monthly installments
of $24 including interest through 2014 -- 2,000
Other notes receivable with varying interest rates 2,107 1,592
Less deferred gains (4,619) (4,619)
----------------------
2,785 4,231
Less current portion 243 189
----------------------
$ 2,542 $ 4,042
======================
16
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. NOTES RECEIVABLE (CONTINUED)
The notes described above resulting from the sales of restaurants are
collateralized by the restaurants and by assignment of the license and franchise
rights related to the restaurants or are guaranteed by the owner of the
purchaser.
7. PROPERTY AND EQUIPMENT AND CAPITAL LEASES
Property and equipment and capital leases, at cost, consist of the following:
MAY 25, MAY 30,
2003 2004
---------------------------
Property and equipment:
Buildings $ 144,918 $ 156,064
Leasehold improvements 40,502 36,032
Equipment and automobiles 138,437 129,678
Construction in progress 3,065 5,249
Less accumulated depreciation (157,523) (148,462)
---------------------------
$ 169,399 $ 178,561
===========================
Capital leases:
Buildings $ 31,244 $ 38,594
Equipment 17,906 19,398
Less accumulated amortization (10,683) (14,486)
---------------------------
$ 38,467 $ 43,506
===========================
For continuing operations, the Group incurred deprection expense of $24,055,
$20,550 and $19,638 in 2002, 2003 and 2004, respectively, and amortization
expense (including amortization of intangible assets) of $3,561, $3,834 and
$5,288 in 2002, 2003 and 2004, respectively.
17
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. PROPERTY AND EQUIPMENT AND CAPITAL LEASES (CONTINUED)
REAL ESTATE INVESTMENT JOINT VENTURE
The Group has approximately a 50% interest in a joint venture with a third party
whose purpose is to acquire, develop, construct, finance, lease and dispose of
restaurant properties. The Group is involved in securing the land and
constructing the buildings and enters into a lease with the joint venture for
the restaurant properties. The joint venture then sells the land and building to
a third party, subject to the lease. In accordance with the operating agreement,
distributable cash flows are disbursed to the members of the joint venture.
Gains are deferred and are amortized over the term of the lease for capital
leases.
In accordance with Emerging Issues Task Force Issue No. 97-10, THE EFFECT OF
LESSEE INVOLVEMENT IN ASSET CONSTRUCTION, and Statement of Financial Accounting
Standards No. 98, ACCOUNTING FOR LEASES, the Group is considered the owner of
the property for accounting purposes while the property is held by the joint
venture. In addition, the purchase of properties by the joint venture in
connection with an acquisition by the Group in 2001 and the concurrent lease of
such properties by the Group have been accounted for as a financing transaction.
Accordingly, the land and building, along with the related financing
obligations, are recorded in the accompanying financial statements.
The amounts reported in the balance sheets related to all of the properties
subject to such leases are as follows:
AS OF
--------------------
MAY 25, MAY 30,
2003 2004
--------------------
Land, property and capital leases $34,655 $41,431
Financing obligations $20,091 $20,984
Capital lease obligations $15,857 $22,716
18
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
MAY 25, 2003 MAY 30, 2004
-------------------------------------- -------------------------------------
NET NET
GROSS ACCUMULATED BOOK GROSS ACCUMULATED BOOK
ASSET AMORTIZATION VALUE ASSET AMORTIZATION VALUE
-------------------------------------- -------------------------------------
License fees $11,481 $ (3,374) $ 8,107 $11,729 $ (3,592) $ 8,137
Favorable licenses 12,404 (5,602) 6,802 12,251 (5,992) 6,259
Favorable leases 7,744 (2,983) 4,761 7,266 (2,920) 4,346
Non-compete agreement 570 (105) 465 570 (134) 436
-------------------------------------- -------------------------------------
$32,199 $(12,064) $20,135 $31,816 $(12,638) $19,178
====================================== =====================================
As of May 30, 2004, the estimated aggregate amortization expense related to
other intangible assets for the next five fiscal years is as follows: 2005 -
$962; 2006 - $880; 2007 - $857; 2008 - $838 and 2009 - $818. The weighted
average useful life of the licenses and favorable leases is 34 and 10 years,
respectively.
9. OTHER ASSETS
Other assets consist of the following:
MAY 25, MAY 30,
2003 2004
--------------------------
Receivables from split-dollar life insurance contract policy owners $2,444 $3,043
Market development agreement deposit 1,950 1,726
Cash surrender value of life insurance policies 750 1,329
Financing commitment fees 1,274 1,210
Lease acquisition costs 1,148 979
Refundable deposits 500 555
Other 179 175
---------------------------
$8,245 $9,017
===========================
The receivables from split-dollar life insurance contracts are collateralized by
the cash surrender value of the life insurance policies.
19
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. DEBT
Long-term debt consists of:
MAY 25, MAY 30,
2003 2004
--------------------
Installment notes payable to financial institutions and commercial
lenders through 2024 at varying interest rates up to 14.2% $209,496 $206,379
Stock repurchase notes payable through 2024 with interest at 5.31%
to 7.74% 984 12,445
Notes to shareholders, payable through 2013 at interest rates
ranging from 4.3% to 10% 1,459 581
--------------------
211,939 219,405
Less current portion 23,143 29,112
--------------------
$188,796 $190,293
====================
The Group incurred interest expense of $32,520, $34,213 and $35,664 and the
Group also recorded interest income of $1,268, $825 and $501, in 2002, 2003 and
2004, respectively. The Group capitalized $412, $443, and $878 of interest
expense in 2002, 2003, and 2004, respectively. The total net interest expense
from continuing operations in 2002, 2003, and 2004 was $30,840, $32,945 and
$34,285, respectively.
The Group has pledged certain receivables, land, buildings and equipment, leases
and license agreements with a net book value of approximately $172,266 as
collateral for the above notes. Certain notes include financial covenants, of
which the most significant are minimum requirements of cash flow, debt-to-equity
ratios and net worth. At May 30, 2004, the Group was not in compliance with
certain financial covenants. The Group has obtained waivers through at least May
31, 2005 from each financial institution to which these covenants apply. Certain
of the notes also include other customary provisions including subjective
acceleration clauses for material adverse changes. The Group has evaluated the
likelihood of acceleration of debt under these clauses as remote. In addition,
the Group has guaranteed a third party's debt of approximately $750.
20
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. DEBT (CONTINUED)
The Group has two revolving line-of-credit agreements. One agreement was
increased from $8,200 to $13,200 during 2004. This agreement bears interest at
the prime rate (3.50%) plus .50% at May 25, 2003 and at the prime rate (4.00%)
at May 30, 2004. This agreement expires April 1, 2005 and is secured by assets
having a net book value of $1,168. The Group is negotiating a renewal of this
facility. The Group must pay a quarterly fee of 0.375% on unused amounts and up
to $6,000 of this line can be used for letters of credit. The second agreement
allows for borrowings of up to $15,000 with interest based on the rate of 30-day
commercial paper (1.24% at May 25, 2003 and 1.00% at May 30, 2004) plus 2.65%.
This agreement expires November 30, 2005 and is secured by assets having a net
book value of $500. There were no outstanding balances under the line-of-credit
agreements as of May 25, 2003 and May 30, 2004.
Aggregate maturities of long-term debt at May 30, 2004 are as follows:
2005 $ 29,112
2006 24,474
2007 19,035
2008 16,779
2009 15,601
2010 and after 114,404
-----------
Total $ 219,405
===========
As more fully described in Note 19, the Group intends to combine with Arby's
Restaurant Group Inc. and, in connection therewith, substantially all of the
Group's debt is expected to be retired or refinanced, along with the debt of
Winners guaranteed by the Group. Were such debt to be retired as of May 30,
2004, management estimates prepayment penalties would aggregate approximately
$20,000 at May 30, 2004, including $5,000 for the debt guaranteed by the Group.
The Group is comprised of RTMRG, and its subsidiaries, along with two limited
liability companies. RTMRG has 100,000,000 shares issued with no par value and
has 100,000,000 and 94,469,393 shares outstanding as of May 25, 2003 and May 30,
2004, respectively. As of May 30, 2004, 5,530,607 shares were held in treasury
resulting from repurchases of stock.
21
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. NET CAPITAL DEFICIENCY AND REDEEMABLE COMMON STOCK
RTMRG has stock repurchase agreements with all of its shareholders, except the
largest shareholder (see Note 17), requiring the repurchase of RTMRG's stock
when the shareholder is no longer employed by the Group. The redemption value of
the common stock is based on appraised value and is payable over periods up to
20 years. At May 30, 2004, the redemption value of such stock was $133,398.
12. STOCK OPTION PLAN
RTMRG has awarded stock options to certain of its key executives. The stock
option agreements contain certain provisions that require them to be accounted
for using variable accounting under APB 25. Accordingly, RTMRG recognizes
compensation expense as the value of the common stock changes from year to year.
The Group recognized compensation expense associated with stock options of
$2,108, $1,953 and $500 in 2002, 2003 and 2004, respectively.
A summary of stock option activity and related information is as follows:
2002 2003 2004
---------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------------------------------------------------------------------------
Outstanding at 924,008 $ 1.51 4,335,430 $ 1.37 4,411,422 $ 1.76
beginning of the year
Granted 3,411,422 1.33 1,000,000 3.24 2,500,000 3.30
Exercised -- -- (924,008) 1.51 (1,000,000) 3.24
-------------------------------------------------------------------------
Outstanding at end
of the year 4,335,430 1.37 4,411,422 1.76 5,911,422 2.16
Exercisable at end
of year 924,008 1.51 682,284 1.33 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 (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. STOCK AWARDS
Prior to May 26, 2002, the Group sold stock to employees in exchange for notes
receivable. The stock was guaranteed to appreciate at 10% per year until vested
at the later of 5 years or the date the note receivable, with interest accruing
at 10% per year, was fully collected. Since the employee did not assume the
risks and rewards of stock ownership, these stock awards have been accounted for
as stock appreciation rights. Accordingly, the Group records compensation
expense or reversal of expense on changes in the estimated market value of such
stock until the shares are fully vested and are "mature" (six months after the
shares are fully vested). At such time, the resulting liability is credited to
additional paid-in capital. Compensation expense (reversal of expense) recorded
for these stock awards was $6,560, $6,584 and ($553) in 2002, 2003 and 2004,
respectively.
During the year ended May 26, 2002, 13,100,576 shares of such nonvested stock
awards were issued. Nonvested stock awards outstanding at May 25, 2003 and May
30, 2004 aggregated 10,767,332 and 9,601,190 shares.
The notes receivable for stock purchases are recorded in net capital deficiency.
14. LEASES
The Group leases offices, restaurants, and equipment under various agreements
through 2030. Substantially all of the restaurant leases have initial lease
terms of 15 to 20 years with two to three renewal options of five years. Many of
the restaurant leases have rents that escalate over the 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 (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. LEASES (CONTINUED)
Minimum and contingent rentals, net of sublease rental income, that comprise
rental expense from continuing operations are as follows:
MAY 26, MAY 25, MAY 30,
2002 2003 2004
------------------------------------
Minimum rentals $36,095 $37,502 $40,051
Contingent rentals 2,418 2,249 2,126
------------------------------------
Total rent expense $38,513 $39,751 $42,177
====================================
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 79,237
lease term
Less amount representing interest 42,123 179,994
-------------------------
Capital lease and financing obligations 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 (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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
The components of the combined provision for income taxes for the Group are as
follows:
YEAR ENDED
MAY 26, MAY 25, MAY 30,
2002 2003 2004
---------------------------------------
Current expense:
Federal $2,859 $3,808 $1,714
State 1,310 1,830 1,250
---------------------------------------
4,169 5,638 2,964
Deferred expense (benefit):
Federal (464) (179) (77)
State (464) 329 495
---------------------------------------
(928) 150 418
---------------------------------------
Total income tax expense $3,241 $5,788 $3,382
=======================================
25
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. INCOME TAXES (CONTINUED)
The combined provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pretax
income as a result of the following differences:
YEAR ENDED
MAY 26, MAY 25, MAY 30,
2002 2003 2004
-------------------------------------
Income tax expense at the statutory rate $ 699 $ 3,250 $ 5,451
State income taxes, net of federal income tax
benefit 551 1,242 1,122
Valuation allowance 522 365 210
Employment tax credits (377) (536) (503)
Stock compensation expense (reversed) 1,782 2,247 (271)
Income (loss) of nontaxable entities 116 (1,804) (3,119)
Other, net (52) 1,024 492
-------------------------------------
$3,241 $ 5,788 $ 3,382
=====================================
A reconciliation of income taxes from continuing operations to total income tax
expense follows:
YEAR ENDED
MAY 26, MAY 25, MAY 30,
2002 2003 2004
-------------------------------------
Income tax expense from continuing operations $2,295 $4,556 $ 795
Income tax expense from discontinued operations 946 1,232 2,587
-------------------------------------
Total income tax expense $3,241 $5,788 $3,382
=====================================
26
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. INCOME TAXES (CONTINUED)
Significant components of deferred tax assets and liabilities are as follows:
MAY 25, MAY 30,
2003 2004
---------------------
Deferred tax assets:
Financing and capital lease obligations $ 4,257 $ 5,597
State net operating loss carryforwards 2,268 2,478
Stock option expense 2,185 2,437
Insurance accruals 1,118 1,750
Straight-line rent accrual 1,433 2,007
Other currently nondeductible accruals 499 470
Tax over book interest income 579 366
Other 843 796
---------------------
Gross deferred tax assets 13,182 15,901
Less valuation allowance 2,268 2,478
---------------------
Net deferred tax asset 10,914 13,423
Deferred tax liabilities:
Depreciation and amortization (15,137) (17,825)
Installment sales (1,640) (1,595)
Other -- (283)
---------------------
Gross deferred tax liability (16,777) (19,703)
---------------------
Net deferred tax liability $ (5,863) $ (6,280)
=====================
As of May 30, 2004, the Group had approximately $58,000 of state operating loss
available for carryforward, which may be used to offset future state taxable
income, and which begin expiring in 2006. Because state tax returns are
generally filed on a separate return basis, the Group is not able to offset
combined income with the subsidiaries losses. A valuation allowance has been
provided for the state loss carryforwards as cumulative losses create
uncertainty about the realization of the tax benefits in future years.
Net income (loss) would have been ($1,129), $1,694 and $9,072, and provision for
income taxes would have been $3,125, $7,592 and $6,501 in 2002, 2003, and 2004,
respectively, if the non-taxable entities had been subject to tax at the
statutory federal income tax rate.
27
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
16. EMPLOYEE BENEFIT PLANS
Since 2001, the Group maintains a defined contribution 401(k) plan covering
substantially all employees of the Group and other affiliates who have met
certain service and age requirements. The provisions of the plan allow employees
to contribute up to 15% of gross earnings. The Group matches 25% of the first 4%
of gross earnings contributed by employees. The Group's matching contributions
totaled $291, $327 and $242 in 2002, 2003 and 2004, respectively.
17. RELATED PARTY TRANSACTIONS
The Group is affiliated through common ownership with Winners, Lee's Famous
Recipe, Inc. and subsidiaries ("Lee's"), Marketing Events Partners, Inc.
("MVP"), RTM Family Restaurants, L.L.C. ("RTMFR"), RTM Future Associates
("RTMFA"), RTM Foundation and Crown Restaurants, Inc.
As of May 25, 2003 and May 30, 2004, receivables from and cash advances to
Winners aggregated $51,660 and $54,036, respectively. These receivables have
been classified in net capital deficiency in the accompanying balance sheets.
The Group recognized interest income related to such receivables and cash
advances of $1,672, $70 and $48 in 2002, 2003 and 2004, respectively. The Group
received $38, $12, and $12 in 2002, 2003, 2004, respectively, from Winners for
management fees. The Group paid $149, $160 and $115 in 2002, 2003 and 2004,
respectively, to Winners for royalties and advertising. As of May 30, 2004, the
Group has guaranteed $27,131 of Winners' debt and $17,858 of Winners' leases.
RTM has committed to provide liquidity support for Winners, as needed, during
the 2005 fiscal year.
On October 14, 2004, RTMFR was merged into Group. Since RTMFR was under common
control with the Group, the merger has been accounted for on a basis equivalent
to a pooling of interests and the carrying values of RTMFR's assets and
liabilities and the results of its operations have been combined with those of
the Group for all periods presented. Such merger did not have a significant
impact on the Group's combined financial statements.
28
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
As of May 25, 2003 and May 30, 2004, the Group had an unsecured advance due from
Lee's of $4,348 and $4,230, respectively. Subsequent to May 30, 2004, $3,435 of
such advances was forgiven. Such advances have been classified in net capital
deficiency in the accompanying balance sheets. Interest income of $221, $265 and
$(265) in 2002, 2003 and 2004, respectively, has been recognized related to cash
advances to Lee's. The $265 of interest income in 2003, related to the advance
due from Lee's, was reversed in 2004 because it was determined that the interest
would not be collected. As of May 30, 2004, the Group had guaranteed $10,074 of
leases of restaurants previously operated by Lee's.
The Group has transactions with non-combined affiliates on a daily basis that
are typically settled monthly, and are included in other receivables and
accounts payable. As of May 25, 2003 and May 30, 2004, the total of non-combined
affiliate balances included in other receivables was $1,123 and $1,020,
respectively, and the total of non-combined affiliate balances included in
accounts payable was $199 and $6, respectively.
The Group shares certain common management and employees with Marketing Event
Partners ("MVP"). MVP manages golf tournaments and related charitable events and
provides special event and meeting planning services. As of May 25, 2003 and May
30, 2004, the Group has advanced $200 and $390, respectively, to MVP, and has
recognized interest on these advances of $4 and $11 in 2003 and 2004,
respectively. Employees of MVP are paid by, and have their benefits administered
by the Group, which in turn is reimbursed by MVP for these expenses quarterly.
The Group paid MVP consulting fees for planning services of $360 and $440 in
2003 and 2004, respectively.
The Group contributed $650, $678 and $560 in 2002, 2003 and 2004, respectively,
to the RTM Foundation. The RTM Foundation was created to provide aid and support
to other nonprofit organizations.
The Group has advanced $1,077 and $723 to certain shareholders as of May 25,
2003 and May 30, 2004, respectively.
RTM Future Associates ("RTMFA") is an affiliated entity established to purchase
the stock controlled by the largest shareholder in the event of his death. This
redemption agreement is collateralized by a group of life insurance policies
owned by RTMFA. In the event the life insurance proceeds are less than the
appraised value of the shares, RTMRG will acquire the
29
RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
remaining shares in exchange for promissory notes. At May 30, 2004, the
redemption value of such shareholder's stock was $101,000. As of May 30, 2004,
the face amount of the policies totals $71,000.
The premiums on the policies held by RTMFA are paid by RTMRG on behalf of RTMFA.
The premiums are to be reimbursed from future death benefits. At termination of
the agreement prior to the death of the shareholder, the premiums would be
repaid to the extent of cash surrender value plus loans against cash surrender
value. The agreement is terminated if RTMRG becomes a public company or a
subsidiary of a public company. Since RTMFA is under common control with the
Group, the premiums paid in excess of cash surrender value of $587 in 2002, $225
in 2003 and $(79) in 2004, have been accounted for as an equity transaction in
the accompanying financial statements. The accumulated balances of premiums paid
in excess of cash surrender value on RTMFA policies was $5,193 and $5,114 at May
25, 2003 and May 30, 2004, respectively, and have been classified in net capital
deficiency in the accompanying balance sheets.
As of May 25, 2003 and May 30, 2004, the Group had advances to RTMFA of $1,291
and $1,615, respectively. Such advances have been classified in net capital
deficiency in the accompanying balance sheets.
The Group had receivables from split-dollar life insurance contract policy
owners, who are shareholders, in excess of cash surrender value of $1,268 and
$1,375 at May 25, 2003 and May 30, 2004, respectively. Such advances have been
classified in net capital deficiency in the accompanying balance sheets.
18. COMMITMENTS AND CONTINGENT LIABILITIES
Pending court approval, the Group has reached a settlement with a third party
regarding the accessibility of the Group's restaurants to individuals in
accordance with the Americans with Disabilities Act. The Group estimates it will
make capital expenditures and pay related fees aggregating approximately $9,000
over the next 8 years to meet the requirements of the settlement.
Under its development agreement with Arby's Restaurant Group ("ARG"), the Group
has agreed to develop 204 more Arby's restaurants by December 31, 2010, with
specific annual commitments for each calendar year until that time. The Group's
commitment may be reduced for each restaurant developed by another franchisee in
the Group's territories.
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RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
18. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Standby letters of credit primarily related to workers' compensation insurance
are issued to provide collateral to insurance companies, states or
municipalities. In the event the Group fails to pay insurance claims, the
issuing bank may be asked to release some or all of this collateral to the
insurance company, state or municipality. As of May 30, 2004, such standby
letters of credit totaled $5,800.
As of May 30, 2004, the Group had guaranteed leases of $8,168 related to Arby's
restaurants previously operated by the Group.
19. SUBSEQUENT EVENTS
MERGER TRANSACTION
The Group and Triarc Companies Inc. have announced their intent to enter into a
series of transactions which will result in the merger of Arby's Restaurant
Group Inc. and the Group. The resulting entity will operate solely in the
restaurant business as the franchisor of the Arby's restaurant system and the
owner of the Arby's restaurant operations of Arby's Restaurant Group, Inc. and
the Group. The transactions contemplate that substantially all of the
outstanding debt of the Group will be repaid or refinanced.
SALE OF RESTAURANTS
On September 13, 2004, the Group sold the operations of 4 of its restaurants in
Georgia to a former stockholder for net proceeds of $3,513, including a note
receivable for $832, receipt of the shareholder's stock of $108, and cash. On
September 27, 2004, the Group sold the operations of 6 of its restaurants in
Indiana to a former stockholder for net proceeds of $3,675, including receipt of
the shareholder's stock of $1,590, and cash. As of the date of the transactions,
the assets and liabilities disposed of related to these 10 restaurants were
recorded at a net carrying value of approximately $865.
For purposes of these financial statements, the results of operations of these
restaurants have been included in discontinued operations. Revenues related to
the 10 restaurants sold in September were $9,551, $10,380 and $10,746, and
income before income taxes was $1,555, $1,622 and $1,574 in 2002, 2003 and 2004,
respectively, and are included in income from discontinued operations, net of
income taxes, in the accompanying combined statements of operations.
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RTM Restaurant Group
Notes to Combined Financial Statements (Restated) (continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
20. RESTATEMENT
During 1999, the Group sold two restaurants for cash and a note aggregating
$1.75 million. In connection with the sale, the Group guaranteed the buyer's
third-party debt. As a result of the note and the guarantee, this transaction
should not have been accounted for as a sale. This is consistent with rules
established by the Securities and Exchange Commission. Accordingly, the sale has
been reversed and a deferred credit of $1,750 has been recorded.
In addition, accruals for straight-line rent expense were increased by $1.1
million applicable to years prior to fiscal year 2002.
The net effect of these adjustments was an increase of $1,858 in Other
Liabilities and Deferred Credits and a decrease of $1,858 in Retained Earnings
as of May 27, 2001 and for each year presented.
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