<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 15, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from..............to..............
Commission file number TO BE ASSIGNED
AFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 58-2016606
(The State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Six Concourse Parkway, Suite 1700
Atlanta, Georgia 30328-5352
(Address of principal executive offices) (Zip Code)
(770) 391-9500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
---- ----
As of September 11, 1997, there were 34,448,604 shares of the registrant's
Common Stock outstanding.
<PAGE>
AFC ENTERPRISES, INC.
INDEX
Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
For the Twelve and Twenty-four Week Periods
Ended June 15, 1997 and June 16, 1996........................ 3
Condensed Consolidated Balance Sheets -
December 29, 1996 and June 15, 1997.......................... 4
Condensed Consolidated Statements of Cash Flows -
For the Twenty-four Week Periods Ended June 15, 1997
and June 16, 1996............................................ 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART 2 OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 16
(a) Exhibits.......................................... 16
(b) Current Reports on Form 8-K....................... 16
SIGNATURE............................................................... 16
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
------------------ ------------------
June 15, June 16, June 15, June 16,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales...................................... $ 91,546 $100,672 $194,727 $195,132
Revenues from franchising............................. 16,219 11,739 29,403 22,376
Revenues from manufacturing........................... 1,453 2,112 3,057 4,427
Other revenues........................................ 2,629 1,883 4,455 3,734
-------- -------- -------- --------
Total revenues...................................... 111,847 116,406 231,642 225,669
-------- -------- -------- --------
Costs and expenses:
Restaurant cost of sales.............................. 29,753 33,311 62,971 63,872
Restaurant operating expenses......................... 44,323 47,977 96,021 95,682
Manufacturing cost of sales........................... 955 1,708 1,979 3,376
General and administrative............................ 18,823 19,337 39,123 37,495
Depreciation and amortization......................... 7,984 6,866 15,087 13,661
Gain on sale of assets from AFDC transaction.......... (5,319) - (5,319) -
-------- -------- -------- --------
Total costs and expenses............................ 96,519 109,199 209,862 214,086
-------- -------- -------- --------
Income from operations.................................. 15,328 7,207 21,780 11,583
Other expenses:
Interest, net......................................... 4,544 3,695 7,822 8,903
-------- -------- -------- --------
Net income before extraordinary loss
and income taxes...................................... 10,784 3,512 13,958 2,680
Income tax expense.................................... (4,350) (1,410) (5,612) (1,164)
-------- -------- -------- --------
Net income before extraordinary loss.................... 6,434 2,102 8,346 1,516
Extraordinary loss on early retirement
of debt (net of $2,673 income tax benefit)............ - 4,456 - 4,456
-------- -------- -------- --------
Net income(loss)........................................ 6,434 (2,354) 8,346 (2,940)
Preferred stock dividends............................... 951 1,153 2,240 2,183
Accretion of 8% preferred stock discount................ - 8,525 - 9,168
-------- -------- -------- --------
Net income(loss) attributable to common stock........... $ 5,483 $(12,032) $ 6,106 $(14,291)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 15, December 29,
1997 1996
----------- ------------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents......................... $ 52,877 $ 19,216
Accounts and current notes receivable, net........ 8,429 9,314
Inventories....................................... 3,941 3,961
Deferred income taxes............................. 7,241 6,997
Prepaid expenses and other........................ 4,586 5,621
-------- --------
Total current assets............................ 77,074 45,109
-------- --------
Long-term Assets:
Notes receivable, net............................. 4,292 4,836
Property and equipment, net....................... 192,427 189,223
Other assets...................................... 7,802 7,295
Intangible assets, net............................ 113,920 94,211
-------- --------
Total long-term assets.......................... 318,441 295,565
-------- --------
Total assets.................................... $395,515 $340,674
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable.................................. $ 21,697 $ 18,370
Current portion of long-term debt and
capital lease obligations........................ 10,780 11,753
Bank overdrafts................................... 7,208 10,812
Accrued expenses and other........................ 24,402 27,400
-------- --------
Total current liabilities....................... 64,087 68,335
-------- --------
Long-term liabilities:
Long-term debt, net of current portion............ 47,584 121,806
10.25% Subordinated notes payable................. 175,000 -
Capital lease obligations,
net of current portion........................... 23,631 18,234
Other liabilities................................. 35,666 33,435
Deferred income taxes............................. 5,243 1,006
-------- --------
Total long-term liabilities..................... 287,124 174,481
-------- --------
Total liabilities............................... 351,211 242,816
-------- --------
Mandatorily redeemable preferred stock:
10% Preferred Stock............................... - 59,956
Shareholders' equity:
Common stock...................................... 344 344
Capital in excess of par value.................... 100,133 99,482
Accumulated deficit............................... (51,977) (58,083)
Notes receivable - officers....................... (4,196) (3,841)
-------- --------
Total shareholders' equity...................... 44,304 37,902
-------- --------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' equity....... $395,515 $340,674
======== ========
See accompanying notes to financial statements.
4
<PAGE>
AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
24 Weeks Ended
--------------------------
June 15, June 16,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss).......................................... $ 8,346 $ (2,940)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 15,087 13,662
(Gains)/losses on disposition and retirement of
property and equipment............................... (3,104) 1,442
Amortization of notes payable discount................... - 7,725
Other.................................................... 1,996 2,489
(Increase) decrease in operating assets.................. 1,150 5,648
Increase (decrease) in operating liabilities............. 6,725 (2,334)
--------- ---------
Total adjustments.................................... 21,854 28,632
--------- ---------
Net cash provided by operating activities.................. 30,200 25,692
--------- ---------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment........ 17,473 1,125
Investment in property and equipment....................... (18,881) (16,023)
Investment in intangible assets............................ (14,142) -
Notes receivable additions................................. (2,186) -
Payments received on notes ................................ 2,169 734
--------- ---------
Net cash used in investing activities...................... (15,567) (14,164)
--------- ---------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt....................... (127,213) (66,447)
Proceeds from long-term debt............................... 50,000 -
Proceeds from subordinated notes........................... 175,000 -
Net borrowings under short-term revolver................... - 2,000
Principal payments for capital lease obligations........... (3,213) (1,544)
Increase (decrease) in bank overdrafts, net................ (3,604) (489)
Redemption of 10% preferred stock.......................... (62,196) -
Notes receivable - officers, net........................... (311) (4,469)
Issuance of common stock................................... 6 70,203
Bond and debt issuance costs .............................. (9,441) -
Stock issuance costs ...................................... - (6,250)
Preferred stock dividends paid............................. - (1,955)
--------- ---------
Net cash provided by (used in) financing activities........ 19,028 (8,951)
--------- ---------
Net increase (decrease) in cash and cash equivalents....... 33,661 2,577
Cash and cash equivalents at beginning of the period....... 19,216 13,609
--------- ---------
Cash and cash equivalents at end of the period............. $ 52,877 $ 16,186
========= =========
Supplemental Cash Flow Information:
Cash payments for income taxes............................. $ 1,318 $ 1,003
Cash payments for interest................................. 7,194 6,237
Noncash investing and financing activities:
Retirement of 8% preferred stock......................... - 45,150
Issuance of 10% preferred stock.......................... - 53,515
Issuance of common stock - 10,000
Capital lease obligations incurred....................... 10,838 2,378
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
AFC Enterprises, Inc. (herein referred to as "AFC" or the "Company")
operates and franchises quick-service restaurants under the primary trade names
of Popeyes Chicken & Biscuits ("Popeyes"), Churchs Chicken ("Churchs") and
Chesapeake Bagel ("Chesapeake"). The accompanying condensed consolidated
financial statements have been prepared pursuant to the rules and regulations
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements are not included herein. The accompanying condensed consolidated
financial statements have not been audited by independent certified public
accountants, but in the opinion of management contain all adjustments (which are
of a normal recurring nature) necessary for a fair presentation of the Company's
financial condition and results of operations for the interim periods presented.
Interim period operating results are not necessarily indicative of the results
expected for the full fiscal year. Certain items in the financial statements of
the previous year have been reclassified in conformity with the 1997
presentation. These reclassifications had no effect on reported results of
operations.
Significant Accounting Policies
The accounting and reporting policies practiced by the Company are set
forth in Note 1 to the Company's consolidated financial statements for the
fiscal year ended December 29, 1996, which are contained in the Company's
Registration Statement on Form S-4, Registration No. 333-29731 (the
"Registration Statement") filed with the Securities and Exchange Commission on
August 4, 1997 and are incorporated herein by reference.
2. REFINANCING
In May 1997, the Company completed a debt offering of $175.0 million of
Senior Subordinated Notes (the "Notes") under Rule 144A of the Securities Act of
1933, as amended (the "Rule 144A Offering"). In connection with the Rule 144A
Offering, the Company also entered into a new $175.0 million Senior Secured
Credit Facility (the "New Credit Facility") whereby the Company was provided
with a $50.0 million term loan (the "Term Loan"), a $25.0 million revolving
credit facility (the "Revolving Facility") and a $100.0 million facility to be
used for future acquisitions (the "Acquisition Facility"). The Term Loan and
the Notes provided the Company with proceeds of $225.0 million, which was used
to repay the existing balances under the Company's 1996 Term Loan, repay and
retire the Company's 10% Preferred Stock, pay expenses associated with the above
transactions and provide working capital.
6
<PAGE>
Senior Subordinated Notes
The Notes bear interest at 10.25 percent per annum and interest will be due
and payable on May 15 and November 15 of each year, commencing on November 15,
1997. The Notes mature on May 15, 2007. The Notes will not be redeemable prior
to May 15, 2002. On or after such date, the Notes will be subject to
redemption, at the option of the Company, in whole or in part, at any time
before maturity. The Notes are redeemable at prices set forth in the agreement,
plus accrued and unpaid interest to the date of redemption.
Pursuant to the terms of that certain Exchange and Registration Rights
Agreement dated May 15, 1997 between the Company and the Initial Purchasers of
the Notes, the Company commenced an exchange offer for the Notes on August 7,
1997. The exchange offer expired on September 8, 1997. All of the Notes were
exchanged for similar notes with similar terms under the Exchange and
Registration Rights Agreement.
New Credit Facility
The New Credit Facility bears interest, at the Company's election, at
either (i) a defined base rate plus 1.25 percent per annum or (ii) LIBOR plus
2.25 percent per annum, subject to reduction based on the achievement of certain
leverage ratios commencing in June 1998. Interest is payable at varying dates
ranging from one to three months. The New Credit Facility matures on June 30,
2002. The New Credit Facility is secured by substantially all of the Company's
assets and contains certain covenants including, but not limited to, covenants
related to minimum fixed charge coverage, minimum cash interest coverage and
maximum leverage. In addition, the New Credit Facility contains other
affirmative and negative covenants relating to, among other things, limitations
on capital expenditures, other indebtedness, liens, investments, guarantees,
restricted junior payments (dividends, redemptions and payments on the Notes),
mergers and acquisitions, sales of assets, leases and transactions with
affiliates.
The Term Loan principal amount of $50.0 million is payable based on an
annual amortization schedule in quarterly installments ranging from $1.0 million
to $7.5 million commencing on September 30, 1997. In addition to the scheduled
amortization payments, the Company is required to make prepayments on the New
Credit Facility under certain circumstances.
The Company may borrow under the Revolving Facility from time to time
through June 2002. The maximum amount the Company can borrow is the $25.0
million less outstanding letters of credit, as defined. At June 15, 1997, the
maximum amount the Company could borrow under the Revolving Facility was
approximately $10.7 million. As of June 15, 1997, there were no outstanding
borrowings under the Revolving Facility.
The Company may borrow under the Acquisition Facility from time to time
through June 1999. Amounts outstanding on June 1999 will be converted to a term
loan due in June 2002. In addition, the Company will also be required to make
scheduled quarterly amortization payments on the term portion of the Acquisition
Facility. As of June 15, 1997, there were no outstanding borrowings under the
Acquisition Facility.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. Such
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in any discussion of the Company's expected future performance or
operations, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that the
Company's operating expectations will be realized. Such performance could be
materially affected by a number of factors, including without limitation those
factors set forth in the "Risk Factors" section in the Registration Statement.
General
The Company is the second largest quick-service chicken restaurant company
in the world, franchising and operating quick-service restaurants under the
brands Popeyes and Churchs. Effective May 1997 the Company also became the
franchisor of 158 Chesapeake Bagel Bakery ("Chesapeake Bagel") quick-service
bagel bakeries and restaurants.
RECENT DEVELOPMENTS
AFDC TRANSACTION
On March 24, 1997 the Company sold 100 Company-operated restaurants in
eight domestic markets to Atlanta Franchise Development Corporation ("AFDC").
The Company also sold the land, building and equipment for 51 of these
restaurants, and it sold the building and equipment and leased the land for 49
of the restaurants to AFDC. The Company received approximately $19.9 million in
cash, along with a warrant to acquire, for nominal consideration, a 5.0% equity
interest in AFDC. As a result of this transaction, the Company recorded $2.5
million in franchise fees and approximately $5.3 million of gain associated with
the sale of the property in the second quarter of 1997.
CHESAPEAKE BAGEL ACQUISITION
In May 1997, the Company acquired from The American Bagel Company, the
franchise business and rights to Chesapeake Bagel. As a result of this
acquisition, the Company became the franchisor of 158 franchised Chesapeake
Bagel restaurants located primarily in Washington, D.C., Maryland and Virginia.
The net purchase price of the acquisition was approximately $11.8 million, plus
a potential earn out of up to $3.5 million, contingent upon the number of
restaurants which open in the future out of the existing pool of franchise
commitments. Substantially all of the purchase price was allocated to
intangible assets including franchise rights, trademarks and goodwill.
8
<PAGE>
RESULTS OF OPERATIONS
The following table presents selected revenues and expenses from the
Company's unaudited Consolidated Statements of Operations for the twelve and
twenty-four weeks ended June 15, 1997 and June 16, 1996. Amounts are in
millions and, accordingly, may differ from amounts reported elsewhere in this
document due to rounding. Percentage increases and decreases presented in the
table and presented throughout the discussion set forth below are calculated
based on the amounts reported in the table below.
HISTORICAL REVENUES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
12 WEEKS ENDED 24 WEEKS ENDED
------------------------------ ----------------------------
JUNE JUNE % JUNE JUNE %
15, 16, CHANGE 15, 16, CHANGE
1997 1996 1997-1996 1997 1996 1997-1996
------ ------ ----------- ------- ------ ----------
REVENUES:
Restaurant sales $ 91.5 $100.7 (9.1)% $ 194.7 $195.1 (0.2)%
Revenues from franchising 16.2 11.7 38.5 29.4 22.4 31.3
Revenues from manufacturing 1.5 2.1 (28.6) 3.1 4.4 (29.5)
Other revenues 2.6 1.9 36.8 4.4 3.7 18.9
------ ------ ------- ------
Total revenues 111.8 116.4 (4.0) 231.6 225.6 2.7
COSTS AND EXPENSES:
Restaurant cost of sales 29.7 33.3 (10.8) 63.0 63.9 (1.4)
Restaurant operating expenses 44.3 48.0 (7.7) 96.0 95.7 0.3
Manufacturing cost of sales 1.0 1.7 (41.2) 2.0 3.3 (39.4)
General and administrative 18.8 19.3 (2.6) 39.1 37.5 4.3
Depreciation and amortization 8.0 6.9 15.9 15.0 13.6 10.3
Gain on sale of assets - AFDC (5.3) - N/A (5.3) - N/A
------ ------ ------- ------
Total costs and expenses 96.5 109.2 (11.6) 209.8 214.0 (2.0)
------ ------ ------- ------
INCOME FROM OPERATIONS 15.3 7.2 112.5 21.8 11.6 87.9
Interest expense 4.5 3.7 21.6 7.8 8.9 (12.4)
------ ------ ------- ------
NET INCOME BEFORE
EXTRAORDINARY LOSS AND TAXES 10.8 3.5 208.6 14.0 2.7 453.3
Income tax expense 4.4 1.4 214.3 5.7 1.2 375.0
------ ------ ------- ------
NET INCOME BEFORE
EXTRAORDINARY ITEMS 6.4 2.1 204.8 8.3 1.5 453.3
Extraordinary loss - 4.4 N/A - 4.4 N/A
------ ------ ------- ------
NET INCOME/(LOSS) $ 6.4 $(2.3) 378.3 % $ 8.3 $ (2.9) 386.2 %
====== ===== ======= ======
</TABLE>
9
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth certain financial information and other
restaurant data relating to Company and franchise restaurants, as reported to
the Company by franchisees (dollars in millions).
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------------- --------------------------
JUNE JUNE % JUNE JUNE %
15, 16, CHANGE 15, 16, CHANGE
1997 1996 1997-1996 1997 1996 1997-1996
------ ------ --------- ------ ------ ----------
EBITDA, as defined (1) $ 19.9 $ 15.7 27.2% $ 34.4 $ 27.7 24.2%
Capital Expenditures $ 16.2 $ 9.3 74.2% $ 29.4 $ 19.4 51.5%
RESTAURANT DATA:
Systemwide restaurant
sales:
Popeyes $195.8 $178.0 10.0% $380.3 $340.6 11.7%
Churchs 170.5 155.4 9.7 331.9 302.2 9.8
Chesapeake Bagel 8.4 N/A N/A 8.4 N/A N/A
------ ------ ------ ------
Total $374.7 $333.4 12.4% $720.6 $642.8 12.1%
Systemwide restaurant
openings:
Popeyes 26 26 - % 50 45 11.1%
Churchs 28 20 40.0 66 33 100.0
Chesapeake Bagel 10 N/A N/A 10 N/A N/A
------ ------ ------ ------
Total 64 46 39.1% 126 78 61.5%
Systemwide restaurants
open, end of period:
Popeyes 1,060 980 8.2%
Churchs 1,318 1,224 7.7
Chesapeake Bagel 163 N/A N/A
------ ------
Total 2,541 2,204 15.3%
Systemwide change in
comparable sales (2):
Popeyes 1.9% 1.3% 3.2% 1.4%
Churchs 5.4 1.5 6.0 3.7
</TABLE>
(1) EBITDA represents income from operations plus depreciation and amortization,
adjusted for non-cash items related to gains/losses on asset dispositions
and writedowns, and compensation expense related to stock option activity
(deferred compensation).
(2) Comparable sales figures are not available for Chesapeake Bagel for the
twelve and twenty-four week periods ended June 15, 1997, since the Company
did not acquire the franchise rights until May 1997.
10
<PAGE>
OPERATING RESULTS
TWELVE WEEKS ENDED JUNE 15, 1997 AND JUNE 16, 1996
REVENUES
Total revenues decreased by $4.6 million for the twelve weeks ended June 15,
1997, a decrease of 4.0% over the same period in 1996 due to the sale of 100
Company-operated restaurants to AFDC.
RESTAURANT SALES. The Company reported restaurant sales of $91.5 million
during the twelve weeks ended June 15, 1997, compared to $100.7 million during
the same period of 1996. The decrease in restaurant sales of $9.2 million or
9.1% was attributable to the sale of 100 Company-operated restaurants to AFDC on
the first day of the second quarter of 1997. The overall sales decrease was
offset by an increase in comparable sales per restaurant of 4.8% for the
quarter. The increase in comparable sales per restaurant was primarily due to
effective promotional activities run during the quarter, increases in sales at
re-imaged and renovated restaurants and certain minor menu price increases taken
during the latter part of 1996 and early part of 1997.
REVENUES FROM FRANCHISING. Revenues from franchising increased $4.5 million
or 38.5% during the second fiscal quarter of 1997 over the same period of a year
ago. Franchise royalty revenue increased $2.3 million or 22.5% and franchise
fees increased $2.2 million or 146.7%. The increase in franchise royalty
revenue was attributable to several factors, including royalty revenues recorded
for 100 restaurants franchised in connection with the AFDC transaction and 158
franchise Chesapeake Bagel restaurants acquired from The American Bagel Company,
an increase in the number of Popeyes and Churchs franchised restaurants and
comparable sales increases for domestic and international franchised
restaurants. The increase in franchise fees was primarily attributable to
franchise fees recorded in connection with the AFDC transaction. The Company
recorded franchise fees totaling $2.5 million related to this transaction. As a
part of the same transaction, the Company sold to the franchisee the rights to
develop an additional 100 franchised restaurants over the next ten years.
REVENUES FROM MANUFACTURING. Revenues from manufacturing decreased 28.6% or
$0.6 million for the twelve weeks ended June 15, 1997, compared to the twelve
weeks ended June 16, 1996. The decrease in revenues was primarily attributable
to the decrease in sales of smallwares. The Company sold its distribution
business during the first half of 1996.
OTHER REVENUES. Other revenues for the quarter ended June 15, 1997 were up
$0.7 million or 36.8% over the same period of a year ago. The increase in other
revenues was primarily attributable to interest income earned on the net
proceeds from the refinancing transaction and net proceeds from the sale of 100
Company-operated restaurants to AFDC.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Cost of sales amounted to $29.7 million, or 32.5%
of restaurant sales, during the second fiscal quarter ended June 15, 1997,
compared to $33.3 million, or 33.1% of restaurant sales, for the corresponding
period in 1996. The $3.6 million or 10.8% decrease was primarily due to the
decrease in restaurant sales during the second fiscal quarter of 1997, compared
to the second fiscal quarter of 1996. Restaurant cost of sales as a percentage
of sales decreased slightly for the second quarter of 1997 compared to the
second quarter of 1996 due to small menu price increases taken in late 1996 and
early 1997, usage reductions in paper items and shortening and favorable pricing
on certain non-poultry food items.
11
<PAGE>
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses during the
second fiscal quarter of 1997 decreased $3.7 million or 7.7% below the
corresponding period during 1996. As a percentage of restaurant sales,
operating expenses for the twelve weeks ended June 15, 1997 were 48.4%, compared
to 47.7% during the twelve weeks ended June 16, 1996. Personnel expenses
decreased $1.6 million or 5.8% during the second fiscal quarter of 1997 below
the second fiscal quarter of 1996. As a percentage of sales, personnel expenses
were 28.3% during the second fiscal quarter of 1997, compared to 27.3% during
the same period of a year ago. The decrease in personnel expenses was due
primarily to the sale of the 100 Company-operated restaurants to AFDC partially
offset by an increase in the Federal minimum wage rate which was effective
October 1, 1996 and an increase in sales at the remaining Company-operated
restaurants. Approximately 86% of the Company's restaurant labor force are
hourly employees whose wages are impacted by an increase in the Federal minimum
wage rate. Other operating expenses during the second fiscal quarter of 1997
were down $1.6 million from the prior year, primarily due to the sale of
restaurants to AFDC.
MANUFACTURING COST OF SALES. Manufacturing cost of sales was down $0.7
million or 41.2% for the second twelve weeks of 1997 compared to the second
twelve weeks of 1996. The decrease was primarily due to the sale of the
distribution business during 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company incurred general and
administrative expenses of $18.8 million, or 16.8% of total revenues for the
twelve-week period ended June 15, 1997, compared to $19.3 million, or 16.6%, for
the comparable period in 1996. The decrease in general and administrative
expenses during the second fiscal quarter of 1997 versus the second fiscal
quarter of 1996 was primarily attributable to a one-time charge to compensation
expense recorded in 1996 for discounts on officer notes receivable. Decreases
in professional fees and informational technology expenses offset a $0.8
million writeoff of software costs recorded during the second quarter of 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization amounted to $8.0
million for the twelve-week period ended June 15, 1997, compared to $6.9 million
for the corresponding period in 1996. The increase was primarily attributable
to the depreciation of fixed assets placed in service during the period from
June 16, 1996 to June 15, 1997. Fixed assets as of June 15, 1997 totaled $192.4
million, compared to $179.9 million as of June 16, 1996. In addition,
depreciation adjustments were recorded during the quarter for decreases in the
estimated useful lives of certain computer equipment. Partially offsetting the
increases was a decrease in depreciation expense associated with the sale of 100
restaurants to AFDC. Depreciation and amortization for the twelve weeks ended
June 15, 1997 also includes goodwill writeoffs of $0.3 million recorded for
Company-operated restaurants that have closed. As a percentage of total
revenues, depreciation and amortization was 7.2% at June 15, 1997, versus 5.9%
at June 16, 1996.
INTEREST EXPENSE. Interest expense for the twelve week period ended June 15,
1997 was $4.5 million, compared to $3.7 million for the twelve week period
ended June 16, 1996. The $0.8 million increase in interest expense was due to
higher levels of debt outstanding during the second quarter of 1997 as compared
with the second quarter of 1996. In addition, capital lease obligations
outstanding during the second quarter of 1997 were substantially higher than
those during the comparable period of a year ago.
INCOME TAXES. The Company's effective tax rate was 40.3% for the twelve weeks
ended June 15, 1997, which was not materially different than the effective tax
rate of 40.1% for the comparable period of a year ago.
12
<PAGE>
EXTRAORDINARY LOSS. During the second quarter of 1996 the Company completed a
refinancing whereby it sold 21.1 million shares of its common stock for $70.0
million. Proceeds from the sale of stock were used, in part, to retire $65.0
million of the Company's existing debt. As a result, the Company recognized an
extraordinary loss on the early retirement of debt (net of income taxes) in the
amount of $4.5 million during the twelve week period ended June 16, 1996.
TWENTY-FOUR WEEKS ENDED JUNE 15, 1997 AND JUNE 16, 1996
REVENUES
Total revenues increased 2.7%, or $6.0 million, during the twenty-four weeks
ended June 15, 1997 as compared to the twenty-four weeks ended June 16, 1996.
RESTAURANT SALES. Restaurant sales decreased 0.2%, or $0.4 million, from the
prior year. Comparable sales increases of 6.2% for the year nearly offset sales
decreases attributable to the AFDC restaurants sold on the first day of the
second quarter of 1997. Factors contributing to the increase in comparable
sales include the continuation of the restaurant re-imaging and renovation
program, new product introductions and food promotions.
REVENUES FROM FRANCHISING. Revenues from franchising increased $7.0 million
or 31.3% from the prior year. Franchise royalty revenue increased $3.5 million
or 17.8% and franchise fees increased $3.5 million or 129.6%. The increase in
franchise royalty revenue was attributable to several factors including royalty
revenues recorded for 100 restaurants franchised in connection with the AFDC
transaction and 158 franchise Chesapeake Bagel restaurants acquired from The
American Bagel Company, an increase in the number of franchised Popeyes and
Churchs restaurants and comparable sales increases for domestic and
international franchised restaurants. Factors contributing to the increase in
comparable sales, among other things, include the continuation of the franchise
restaurant re-imaging program, new product introductions and promotional
activities. The increase in franchise fees was primarily attributable to
franchise fees of $2.5 million recorded in connection with the AFDC transaction
and franchise fees of $1.2 million recorded in connection with the sale of 47
California restaurants to a franchisee.
REVENUES FROM MANUFACTURING. Revenues from manufacturing decreased 29.5%, or
$1.3 million for the twenty-four weeks ended June 15, 1997 versus the twenty-
four weeks ended June 16, 1996. The decrease was primarily attributable to a
decrease in sales of smallwares. The Company sold its distribution business
during the first half of 1996.
OTHER REVENUES. Other revenues for the twenty-four weeks ended June 15, 1997
were up $0.7 million or 18.9% over the same period of a year ago. The increase
in other revenues was primarily attributable to interest income earned on the
net proceeds from the refinancing transaction and net proceeds from the sale of
100 restaurants to AFDC.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Cost of sales for the year decreased 1.4% or $0.9
million from the prior year. The decrease was primarily attributable to usage
reductions in paper items and shortening and favorable pricing on certain non-
poultry food items. Expressed as a percentage of restaurant sales, cost of
sales were 32.4% for the twenty-four weeks ended June 15, 1997 compared to 32.8%
for the twenty-four weeks ended June 16, 1996.
13
<PAGE>
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the twenty-
four weeks ending June 15, 1997 increased $0.3 million or 0.3% from the
corresponding period in 1996. Restaurant operating expenses as a percentage of
restaurant sales were 49.3% for the first half of 1997, compared to 49.1% for
the first half of 1996. Personnel expenses were up $0.7 million or 1.3% from
the prior year. Personnel expenses expressed as a percentage of restaurant
sales was 28.6% for the twenty-four weeks ended June 15, 1997 and 28.2% for the
twenty-four weeks ended June 16, 1996. The increase in personnel costs was
primarily due to an increase in the minimum wage levels effective October 1,
1996. Marketing expenses were up $0.7 million or 4.9% over the prior year,
primarily due to an increase in food discount promotions used during 1997 to
stimulate sales. Other costs for the year through June 15, 1997 were $1.0
million or 5.3% less than for the same period a year ago. The decrease in other
costs was primarily due to the costs associated with the 100 restaurants sold to
AFDC.
MANUFACTURING COST OF SALES. Manufacturing cost of sales decreased 39.4% or
$1.3 million, for the twenty-four weeks ended June 15, 1997 compared to the
twenty-four weeks ended June 16, 1996. The decrease was primarily attributable
to the decrease in revenues during the first half of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.6 million or 4.3% during the first half of 1997 compared to the
first half of 1996. As a percentage of total revenues, general and
administrative expenses increased from 16.6% for the first half of 1996 to 16.9%
for the first half of 1997. The increase in general and administrative expenses
was primarily attributable to asset writedowns recorded during the first half of
1997 totaling $1.1 million. Asset writedowns included writeoffs of software
costs in the amount of $0.8 million. Marketing costs were up $0.4 million over
the prior year due to increased advertising costs incurred to attract new
franchisees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.4
million or 10.3% from the prior year. Depreciation and amortization as a
percentage of total revenues increased from 6.0% to 6.5% from the twenty-four
weeks ended June 16, 1996 to the twenty-four weeks ended June 15, 1997. The
increase was primarily due to fixed asset additions made during the last half of
1996 totaling $26.9 million and the first half of 1997 totaling $29.4 million.
INTEREST EXPENSE. Interest expense for the twenty-four week period ended
June 15, 1997 was $7.8 million, compared to $8.9 million for the twenty-four
week period ended June 16, 1996. The $1.1 million decrease in interest expense
was due to lower levels of debt outstanding during the first half of 1997 as
compared with the first half of 1996. During the second quarter of 1996 the
Company completed a refinancing in which it issued 21.1 million shares of common
stock for $70.0 million. The proceeds were used, in part, to retire $65.0
million in outstanding debt. The decrease in interest expense resulting from
the refinancing was partially offset by increases in interest expense
attributable to the refinancing transaction completed during the second quarter
of 1997 and higher levels of capital lease obligations outstanding during the
second quarter of 1997.
INCOME TAXES. The Company's effective tax rate for the twenty-four weeks
ended June 15, 1997 was 40.2% compared to 43.4% for the corresponding period in
1996. The decrease was primarily attributable to a decrease in the impact of
permanent book/tax differences on the effective tax rate for the first half of
1997 compared to the first half of 1996.
14
<PAGE>
EXTRAORDINARY LOSS. During the second quarter of 1996 the Company completed a
refinancing whereby it sold 21.1 million shares of its common stock for $70.0
million. Proceeds from the sale of stock were used, in part, to retire $65.0
million of the Company's existing debt. As a result, the Company recognized an
extraordinary loss on the early retirement of debt (net of income taxes) in the
amount of $4.5 million during the twenty-four week period ended June 16, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business activities primarily with funds
generated from operating activities, proceeds from the sale of shares of common
stock, proceeds from long-term debt and a revolving line of credit and proceeds
from the sale of certain Company-operated restaurants. Available cash and cash
equivalents, net of bank overdrafts, as of June 15, 1997 were $45.7 million,
compared to $8.4 million as of December 29, 1996. Net cash provided by
operating activities for the twenty-four weeks ended June 15, 1997 and June 16,
1996 was $30.2 million and $25.7 million, respectively. The Company's working
capital surplus as of June 15, 1997 was $13.0 million, while it had a working
capital deficit as of December 29, 1996 of approximately $23.2 million. Both
the increase in cash and cash equivalents and the increase in the working
capital surplus carried as of June 15, 1997 were primarily due to net proceeds
received in the debt refinancing transaction.
In May 1997, the Company completed a debt offering of $175.0 million of
Senior Subordinated Notes. In connection with this debt offering, the Company
also entered into a new $175.0 million Senior Secured Credit Facility whereby
the Company was provided with a $50.0 million term loan, a $25.0 million
revolving credit facility and a $100.0 million facility to be used for future
acquisitions. Under the terms of the revolving credit facility, the Company may
borrow and obtain letters of credit up to an aggregate of $25.0 million. At
June 15, 1997, the Company had $14.3 million in outstanding letters of credit
and $10.7 million available for short term borrowings under the revolving credit
facility. Also at June 15, 1997, $100.0 million was available for borrowings
under the acquisition facility.
During the Company's twenty-four weeks ended June 15, 1997 the Company
invested in various capital projects totaling $29.4 million. During this period
the Company invested $7.4 million in its re-imaging and renovation program and
$16.1 million in new management information systems. In addition, during the
first half of 1997, the Company invested $5.9 million in other capital assets to
update, replace and extend the lives of restaurant equipment and facilities,
construct a small number of new restaurant facilities and complete other minor
projects.
Based upon the current level of operations and anticipated growth,
management of the Company believes that available cash flow, together with the
available borrowings under the Senior Secured Credit Facility and other sources
of liquidity, will be adequate to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled payments
under the Senior Subordinated Notes and the Senior Secured Credit Facility.
SEASONALITY
The Company has historically experienced the strongest operating results at
both Popeyes and Churchs restaurants during the summer months while operating
results have been somewhat lower during the winter season. The holiday season
and inclement winter weather reduce the volume of consumer traffic at quick-
service restaurants and may impair the ability of restaurants to conduct regular
operations.
15
<PAGE>
PART 2. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibit is included herewith:
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFC Enterprises, Inc.
Date: September 11, 1997 By: /s/ Gerald Wilkins
--------------------------------------
Gerald Wilkins
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE TWENTY-FOUR WEEK PERIOD ENDED JUNE 15, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUN-15-1997
<CASH> 52,877
<SECURITIES> 0
<RECEIVABLES> 17,635
<ALLOWANCES> 4,914
<INVENTORY> 3,941
<CURRENT-ASSETS> 77,074
<PP&E> 272,522
<DEPRECIATION> 80,095
<TOTAL-ASSETS> 395,515
<CURRENT-LIABILITIES> 64,087
<BONDS> 256,995
0
0
<COMMON> 344
<OTHER-SE> 43,960
<TOTAL-LIABILITY-AND-EQUITY> 395,515
<SALES> 194,727
<TOTAL-REVENUES> 231,642
<CGS> 62,971
<TOTAL-COSTS> 209,862
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,291
<INTEREST-EXPENSE> 7,822
<INCOME-PRETAX> 13,958
<INCOME-TAX> 5,612
<INCOME-CONTINUING> 8,346
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<NET-INCOME> 8,346
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