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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 September 6, 1998
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 -
AFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 58-2016606
(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 X No
------- -------
As of October 21, 1998, there were 39,083,982 shares of the registrant's Common
Stock outstanding.
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AFC ENTERPRISES, INC.
INDEX
Page
----
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For
the Twelve and Thirty-six Week Periods Ended
September 6, 1998 and September 7, 1997........................ 3
Condensed Consolidated Balance Sheets - September 6, 1998
and December 28, 1997 ......................................... 4
Condensed Consolidated Statements of Cash Flows - For
the Thirty-six Week Periods Ended September 6, 1998 and
September 7, 1997 ............................................. 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 ............................... 20
(a) Exhibits ........................................... 20
(b) Current Reports on Form 8-K ........................ 20
SIGNATURE ................................................................ 20
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
9/6/98 9/7/97 9/6/98 9/7/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales............................................ $112,364 $ 89,846 $320,022 $284,573
Revenues from franchising.................................... 16,077 14,996 44,721 44,399
Revenues from wholesale and manufacturing................... 11,651 1,591 24,460 4,648
Other revenues.............................................. 2,348 2,062 6,731 6,059
-------- -------- -------- --------
Total revenues.................................. 142,440 108,495 395,934 339,679
-------- -------- -------- --------
COSTS AND EXPENSES:
Restaurant cost of sales.................................... 36,362 29,820 103,161 92,791
Restaurant operating expenses............................... 57,676 44,354 160,598 140,375
Wholesale and manufacturing cost of sales................... 6,108 1,025 12,796 3,004
Wholesale and manufacturing operating expenses.............. 2,686 330 5,761 848
General and administrative.................................. 19,337 17,901 60,271 56,506
Depreciation and amortization............................... 10,296 8,388 29,734 23,475
Gain on sale of assets from AFDC transaction................ - - - (5,319)
-------- -------- -------- --------
Total costs and expenses........................ 132,465 101,818 372,321 311,680
-------- -------- -------- --------
INCOME FROM OPERATIONS............................................ 9,975 6,677 23,613 27,999
OTHER EXPENSES:
Interest, net............................................... 7,071 5,610 20,176 12,974
-------- -------- -------- --------
NET INCOME BEFORE INCOME TAXES.................................... 2,904 1,067 3,437 15,025
Income tax expense.......................................... (1,177) (409) (1,406) (6,021)
-------- -------- -------- --------
NET INCOME........................................................ 1,727 658 2,031 9,004
Preferred stock dividends................................... - - - 2,240
-------- -------- -------- --------
NET INCOME ATTRIBUTABLE TO COMMON STOCK........................... $ 1,727 $ 658 $ 2,031 $ 6,764
======== ======== ======== ========
See accompanying notes to financial statements.
=====================================================================================================================
</TABLE>
3
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<TABLE>
<CAPTION>
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AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
9/6/98 12/28/97
- ------------------------------------------------------------------ ---------------------
(Unaudited)
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................... $ 11,557 $ 32,964
Accounts and current notes receivable, net.................. 15,399 8,305
Income taxes, current....................................... 3,608 998
Inventories................................................. 13,073 4,447
Deferred income taxes....................................... 392 662
Prepaid expenses and other.................................. 2,027 1,539
-------- --------
Total current assets............................ 46,056 48,915
-------- --------
LONG-TERM ASSETS:
Notes receivable, net....................................... 3,433 4,477
Deferred income taxes....................................... 4,262 1,481
Property and equipment, net................................. 239,827 207,807
Other assets................................................ 18,718 17,049
Intangible assets, net...................................... 175,646 100,273
-------- --------
Total long-term assets.......................... 441,886 331,087
-------- --------
Total assets................................. $487,942 $380,002
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable............................................ $ 25,973 $ 22,123
Current portion of long-term debt and capital
lease obligations..................................... 13,442 10,994
Short-term borrowings....................................... 7,000 -
Bank overdrafts............................................. 9,491 9,707
Accrued expenses and other.................................. 23,566 23,923
-------- --------
Total current liabilities....................... 79,472 66,747
-------- --------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion...................... 40,434 45,150
Acquisition line of credit.................................. 68,000 -
10.25% Subordinated notes payable........................... 175,000 175,000
Capital lease obligations, net of current portion........... 10,056 12,738
Other liabilities........................................... 37,422 31,908
-------- --------
Total long-term liabilities..................... 330,912 264,796
-------- --------
Total liabilities............................ 410,384 331,543
-------- --------
SHAREHOLDERS' EQUITY:
Common stock................................................ 363 344
Capital in excess of par value.............................. 129,154 101,840
Accumulated deficit......................................... (47,292) (49,323)
Notes receivable - officers................................. (4,667) (4,402)
-------- --------
Total shareholders' equity...................... 77,558 48,459
-------- --------
Total liabilities and shareholders' equity... $487,942 $380,002
======== ========
See accompanying notes to financial statements.
========================================================================================
</TABLE>
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<TABLE>
<CAPTION>
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AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
36 Weeks Ended
9/6/98 9/7/97
- -----------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income................................................ $ 2,031 $ 9,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 29,734 23,475
Deferred compensation................................... 1,833 915
Other................................................... 1,785 (1,148)
Provision for deferred income taxes..................... (2,108) 4,112
(Increase) decrease in operating assets................. (13,124) 9,685
Increase (decrease) in operating liabilities............ (4,327) (160)
--------- ---------
Total adjustments................................... 13,793 36,879
--------- ---------
Net cash provided by operating activities................. 15,824 45,883
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Proceeds from disposition of property and equipment....... 379 18,517
Investment in property and equipment...................... (17,877) (27,184)
Investment in Chesapeake intangible asset................. - (14,159)
Investment in Pinetree goodwill........................... (23,783) -
Investment in Pinetree property and equipment............. (19,586) -
Investment in SCC goodwill................................ (26,829) -
Investment in SCC property and equipment.................. (14,586) -
Notes receivable additions................................ (1,893) (2,537)
Payments received on notes .............................. 1,556 2,899
--------- ---------
Net cash used in investing activities..................... (102,619) (22,464)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments of long-term debt...................... (3,946) (127,268)
Proceeds from long-term debt.............................. - 50,000
Proceeds from subordinated notes.......................... - 175,000
Net borrowings under Acquisition line of credit........... 68,000 -
Net borrowings under Revolving line of credit............. 7,000 -
Principal payments for capital lease obligations.......... (5,163) (23,554)
Increase (decrease) in bank overdrafts, net............... (216) (3,684)
Notes receivable - officers, net.......................... (199) (378)
Redemption of 10% preferred stock......................... - (62,197)
Issuance of common stock ................................. 4 6
Debt issuance costs ...................................... (92) (9,941)
--------- ---------
Net cash provided by (used in) financing activities....... 65,388 (2,016)
--------- ---------
Net increase (decrease) in cash and cash equivalents...... (21,407) 21,403
Cash and cash equivalents at beginning of the period...... 32,964 19,216
--------- ---------
Cash and cash equivalents at end of the period............ $ 11,557 $ 40,619
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes .......................... $ 6,115 $ 2,044
Cash payments for interest .............................. 15,531 8,774
Noncash investing and financing activities:
Capital lease obligations incurred .................... 3,546 18,849
Issuance of common stock, options and warrants ........ 25,497 -
See accompanying notes to financial statements.
===================================================================================
</TABLE>
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AFC ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of AFC
Enterprises, Inc., a Minnesota corporation, and its wholly-owned subsidiaries,
AFC Properties, Inc., a Georgia corporation and Seattle Coffee Company, a
Washington corporation. All significant intercompany balances and transactions
are eliminated in consolidation. The consolidated entity is referred to herein
as "AFC" or "the Company".
Nature of Operations and Basis of Presentation
AFC Enterprises, Inc. operates and franchises quick-service restaurants
under the primary trade names of Popeyes Chicken & Biscuits ("Popeyes"), Churchs
Chicken ("Churchs") and Chesapeake Bagel Bakery ("Chesapeake"). In addition,
effective March 18, 1998, AFC acquired all of the common stock of Seattle Coffee
Company, which operates and franchises cafes under the Seattle's Best and
Torrefazione Italia brands and operates a wholesale coffee business.
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 1998 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 28, 1997, which are contained in the Company's Form
10-K, filed with the Securities and Exchange Commission on March 30, 1998 and
are incorporated herein by reference.
2. SUBSEQUENT ACQUISITION
Cinnabon International, Inc.
On October 15, 1998, the Company acquired Cinnabon International, Inc.
("CII"), the operator and franchisor of 358 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. Two hundred and fourteen of the
retail cinnamon roll bakeries are Company-operated and are located within the
United States. In connection with the acquisition, which will be
================================================================================
6
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accounted for as a purchase, CII will become a wholly-owned subsidiary of AFC
through the merger of AFC Franchise Acquisition Corp. into CII (the
"Acquisition").
The Company acquired CII for $64.0 million in cash. The Company obtained
$50.0 million of the cash consideration from its 1997 Credit Facility, which was
amended to add a $50.0 million Tranche B term loan. The remaining $14.0 million
cash consideration was funded with the proceeds from the sale of approximately
2.8 million shares of AFC common stock to certain "qualified" investors who are
existing AFC shareholders and option holders. The shares were sold at a price
of $7.75 per share and proceeds from the sale totaled approximately $21.7
million.
3. REVOLVING FACILITY
The Company utilized its revolving facility during the third quarter to fund
capital expenditures and Turnkey development. The outstanding balance at
September 6, 1998 was $7.0 million.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. The
statement is effective for all quarters of fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities in the financial statements at fair
value. Management does not believe the implementation of this recent accounting
pronouncement, if applicable, will have a material effect on its consolidated
financial statements.
================================================================================
7
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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
these will be realized. Such performance could be materially affected by a
number of factors, including without limitation those factors set forth in "Item
1 - Business" of the Company's Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table presents selected revenues and expenses as a percentage
of total revenues for the Company's Condensed Consolidated Statements of
Operations for the twelve and thirty-six week periods ended September 6, 1998
and September 7, 1997.
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
----------------- -----------------
Sept. 6, Sept. 7, Sept. 6, Sept. 7,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales.................... 78.9% 82.8% 80.8% 83.7%
Revenues from franchising........... 11.3 13.8 11.3 13.1
Wholesale/mfg. revenues............. 8.2 1.5 6.2 1.4
Other revenues...................... 1.6 1.9 1.7 1.8
Total revenues................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant cost of sales (1)........ 32.4% 33.2% 32.2% 32.6%
Restaurant operating expenses (1)... 51.3 49.4 50.2 49.3
Wholesale/mfg. cost of sales (2).... 52.4 64.4 52.3 64.6
Wholesale/mfg. operating costs (2).. 23.1 20.7 23.6 18.2
General and administrative.......... 13.6 16.5 15.2 16.6
Depreciation and amortization....... 7.2 7.7 7.5 6.9
Gain/loss on sale of assets from
AFDC transaction................... - - - (1.6)
Total costs and expenses......... 93.0 93.8 94.0 91.8
Income from operations................ 7.0 6.2 6.0 8.2
Interest expense, net................. 5.0 5.2 5.1 3.8
Net income before taxes............... 2.0 1.0 0.9 4.4
Income tax expense.................... (0.8) (0.4) (0.4) (1.8)
Net income............................ 1.2% 0.6% 0.5% 2.6%
</TABLE>
(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants.
(2) Expressed as a percentage of wholesale and manufacturing revenues.
8
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial information and other
restaurant data relating to Company-operated and franchised restaurants (as
reported to the Company by franchisees) for the twelve and thirty-six week
periods ended September 6, 1998 and September 7, 1997:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------------- ----------------------------------
Sept. 6, Sept. 7, % change Sept. 6, Sept. 7, % change
1998 1997 97-98 1998 1997 97-98
-------- -------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
EBITDA, as defined (1)............ $ 21.2 $ 15.7 35.0 % $ 55.5 $ 49.6 11.7 %
EBITDA margin..................... 14.9% 14.5% 2.8 % 14.0% 14.6% (4.1)%
Capital Expenditures (2).......... $ 8.9 $ 16.9 (47.5)% $ 20.9 $ 46.3 (54.9)%
Restaurant data (unaudited):
Systemwide restaurant sales (3):
Popeyes......................... $229.4 $204.8 12.0 % $ 646.7 $ 585.1 10.5 %
Churchs......................... 178.8 171.1 4.5 522.5 503.0 3.9
Chesapeake...................... 14.6 17.5 (16.8) 44.1 26.5 66.3
Seattle Coffee.................. 7.4 N/A N/A 14.2 N/A N/A
------ ------ -------- --------
Total.......................... $430.2 $393.4 9.3 % $1,227.5 $1,114.6 10.1 %
====== ====== ======== ========
Systemwide restaurant openings:
Popeyes......................... 30 35 (14.3) 138 85 62.4 %
Churchs......................... 17 27 (37.0) 57 93 (38.7)
Chesapeake...................... - 10 (100.0) 7 17 (58.8)
Seattle Coffee.................. 1 - N/A 6 - N/A
------ ------ -------- --------
Total.......................... 48 72 (33.3) 208 195 6.7 %
====== ====== ======== ========
Systemwide restaurants open,
end of period:
Popeyes......................... 1,261 1,092 15.5 %
Churchs......................... 1,386 1,332 4.0
Chesapeake...................... 116 161 (27.9)
Seattle Coffee.................. 73 N/A N/A
-------- --------
Total.......................... 2,836 2,585 9.7 %
======== ========
Systemwide change in comp-
arable restaurant sales (3)
Popeyes......................... 3.0% 1.9% 2.0% 2.7%
Churchs......................... 4.9 1.6 3.1 4.4
Chesapeake...................... 0.1 N/A N/A N/A
Seattle Coffee.................. N/A N/A N/A N/A
</TABLE>
(1) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for items related to gains/losses on asset
dispositions and writedowns and compensation expense related to stock
option activity (deferred compensation).
(2) Excludes fixed assets added in connection with the Seattle Coffee and
Pinetree acquisitions and capital expenditures made to convert the Pinetree
restaurants to Popeyes Company-operated restaurants.
(3) Prior year twelve-week and current and prior year thirty-six week sales
figures for Chesapeake and current and prior year twelve and thirty-six
week sales figures for Seattle Coffee are not comparable since these
acquisitions occurred during the second quarter of 1997 and the first
quarter of 1998, respectively.
9
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FOR THE TWELVE WEEKS ENDED SEPTEMBER 6, 1998 AND SEPTEMBER 7, 1997
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues increased 31.3% or $33.9 million during the twelve weeks ended
September 6, 1998, as compared to the twelve weeks ended September 7, 1997.
RESTAURANT SALES. Restaurant sales increased 25.1% or $22.5 million from the
prior year. The increase was primarily attributable to sales generated by
Company-operated restaurants acquired during the first quarter of 1998. On
February 10, 1998, the Company acquired all of the restaurant properties
operated by Pinetree Foods, Inc. ("Pinetree") and during the first and second
quarters of 1998 converted these properties into 66 Popeyes Company-operated
restaurants. Sales generated by these restaurants during the third quarter of
1998 were $9.2 million. On March 18, 1998, the Company acquired all of Seattle
Coffee Company's (SCC's) common stock, resulting in the acquisition of 58
Company-operated cafes. Since the acquisition, five additional Company-operated
SCC cafes have opened. Sales generated by the SCC cafes during the third
quarter of 1998 were $6.0 million. The remaining sales increase was due to an
increase in comparable sales for Company-operated restaurants of 6.2% for the
quarter.
REVENUES FROM FRANCHISING. Revenues from franchising increased $1.1 million
or 7.2% from the prior year. Franchise royalty revenue increased $1.0 million
or 7.6% from the prior year. The increase in franchise royalty revenue was
primarily attributable to a 5.8% increase in the average number of franchised
restaurants open during the third quarter of 1998 as compared to the third
quarter of 1997. The remaining increase was attributable to an increase in
comparable sales for franchised restaurants of 2.6% for the quarter. Franchise
fee income increased $0.1 million or 4.1% for the twelve weeks ended September
6, 1998, compared to the twelve weeks ended September 7, 1997.
WHOLESALE AND MANUFACTURING REVENUES. Wholesale and manufacturing revenues
increased $10.1 million for the twelve weeks ended September 6, 1998, as
compared to the twelve weeks ended September 7, 1997. The increase was
primarily attributable to the acquisition of SCC and its wholesale coffee
operations. Wholesale coffee revenues totaled $10.0 million during the third
quarter of 1998.
10
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OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Restaurant cost of sales for the first quarter of
1998 increased 21.9% or $6.5 million from the prior year. The increase was
primarily attributable to the increase in restaurant sales. Expressed as a
percentage of restaurant sales, cost of sales were 32.4% for the twelve weeks
ended September 6, 1998 and 33.2% for the twelve weeks ended September 7, 1997.
The decrease in this percentage is primarily due to selective menu price
increases taken during 1998.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the twelve
weeks ended September 6, 1998 increased $13.3 million or 30.0% from the
corresponding period in 1997, primarily due to a 25.1% increase in restaurant
sales. Restaurant operating costs increased disproportionately to the increase
in restaurant sales over the same period, primarily due to unusually high
restaurant operating costs incurred at the 66 Popeyes restaurants acquired from
Pinetree. Restaurant operating expenses as a percentage of restaurant sales
were 51.3% for the third quarter of 1998, compared to 49.4% for the third
quarter of 1997. Restaurant operating expenses for the quarter as a percentage
of restaurant sales were 74.9% at the 66 Pinetree restaurants, primarily due to
high labor, training and occupancy costs. Management is currently evaluating
the profitability of the acquired Pinetree restaurants to determine whether
certain of the restaurants should be closed and/or whether certain tangible and
intangible assets recorded in connection with the acquisition and subsequent
conversion of the restaurants should be written down or written off.
WHOLESALE AND MANUFACTURING COST OF SALES. Wholesale and manufacturing cost
of sales increased $5.1 million for the twelve weeks ended September 6, 1998,
compared to the twelve weeks ended September 7, 1997. The increase was
primarily attributable to the acquisition of SCC's wholesale and manufacturing
operations. Wholesale and manufacturing cost of sales as a percentage of
wholesale and manufacturing revenues decreased from 64.4 % for the third quarter
of 1997 to 52.4% during the third quarter of 1998. The decrease in this
percentage was primarily due to the inclusion of SCC's operations in the
Company's cost of sales mix.
WHOLESALE AND MANUFACTURING OPERATING COSTS. Wholesale and manufacturing
operating costs increased from $0.3 million for the twelve weeks ended September
7, 1997 to $2.7 million for the twelve weeks ended September 6, 1998. Wholesale
and manufacturing operating costs as a percentage of wholesale and manufacturing
revenues increased from 20.7% for the twelve weeks ended September 7, 1997 to
23.1% for the twelve weeks ended September 6, 1998. The dollar and percentage
increases for the quarter over the prior year were due to the acquisition of
SCC's wholesale and manufacturing operations.
GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of total revenues,
general and administrative expenses decreased from 16.5% for the twelve weeks
ended September 7, 1997 to 13.6% for the twelve weeks ended September 6, 1998.
The decrease in this percentage was primarily attributable to a decrease in
corporate bonus
11
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expense. Corporate bonus expense for the third quarter of 1998 was $1.6 million
less than for the third quarter of 1997. Also contributing to the decrease in
this percentage was the acquisition of SCC's operations. SCC's general and
administrative expenses as a percentage of SCC revenues was 10.5% for the twelve
weeks ended September 6, 1998, causing the overall percentage for the Company to
decrease from the prior year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.9
million or 22.7% from the prior year. Overall, net fixed assets of $239.8
million as of September 6, 1998 were up 19.5% over net fixed assets of $200.7
million at September 7, 1997. Net intangible assets as of September 6, 1998
totaling $175.6 million were up 71.8% over net intangible assets as of September
7, 1997 totaling $102.3 million. Depreciation and amortization as a percentage
of total revenues decreased from 7.7% for the twelve weeks ended September 7,
1997 to 7.2% for the twelve weeks ended September 6, 1998.
NET INTEREST EXPENSE. Interest expense, net of capitalized interest and
interest income earned on short-term investments, for the twelve weeks ended
September 6, 1998 was $7.1 million, compared to $5.6 million for the twelve
weeks ended September 7, 1997. The $1.5 million increase in interest expense
was due to higher levels of average debt outstanding during the third quarter of
1998 as compared with the third quarter of 1997. The increase in average debt
outstanding was primarily attributable to borrowings made under the Company's
acquisition and revolving loan facilities during the first three quarters of
1998.
INCOME TAXES. The Company's effective tax rate for the twelve weeks ended
September 6, 1998 was 40.5%, compared to an effective tax rate of 38.3% for the
twelve weeks ended September 7, 1997. The increase in the effective tax rate is
primarily attributable to amortization of SCC goodwill, which is not deductible
for federal income tax purposes.
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1998 AND SEPTEMBER 7, 1997
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues increased $56.3 million or 16.6% during the thirty-six weeks
ended September 6, 1998, as compared to the thirty-six weeks ended September 7,
1997.
RESTAURANT SALES. Restaurant sales increased 12.5%, or $35.5 million, from
the prior year. The increase was primarily attributable to sales generated by
the Pinetree and SCC restaurants/cafes acquired during the first quarter of
1998. Sales totaled $22.1 million and $11.6 for the Pinetree restaurant units
and the SCC cafes, respectively for the thirty-six weeks ended September 6,
1998. The remaining sales increase was due to an increase in comparable sales
for Company-operated restaurants of 4.7% for the thirty-six
12
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weeks ended September 6, 1998. Partially offsetting these increases was a
decrease in sales of $12.3 million due to the sale of 100 Company-operated
Churchs restaurants to Atlanta Franchise Development Corporation ("AFDC") during
the second quarter of 1997.
REVENUES FROM FRANCHISING. Revenues from franchising increased $0.3 million
or 0.7% from the prior year. Franchise royalty revenue increased $4.3 million
or 11.7% from the prior year. The increase in franchise royalty revenue was
primarily attributable to an increase in the number of franchised restaurants.
During the thirty-six weeks ended September 6, 1998 and September 7, 1997,
franchised restaurants on average numbered 2,074 and 1,818, respectively.
Franchise fee income decreased $4.0 million or 50.5% for the thirty-six weeks
ended September 6, 1998, compared to the thirty-six weeks ended September 7,
1997. Franchise fee income for the thirty-six weeks ended September 7, 1997
included franchise fees of $2.5 million recorded in connection with the sale of
100 Company-operated Churchs restaurants to AFDC during the second quarter of
1997 and $1.2 million recorded in connection with the sale of 47 Company-
operated Churchs restaurants to Royal Capital Corporation during the first
quarter of 1997.
WHOLESALE AND MANUFACTURING REVENUES. Wholesale and manufacturing revenues
increased $19.8 million for the thirty-six weeks ended September 6, 1998, as
compared to the thirty-six weeks ended September 7, 1997. The increase was
attributable to the acquisition of SCC and its wholesale coffee operations.
SCC's wholesale revenues totaled $19.7 million during the thirty-six weeks ended
September 6, 1998.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Restaurant cost of sales for the first three
quarters of 1998 increased 11.2% or $10.4 million from the prior year. The
increase was due to a 12.5% increase in restaurant sales. Expressed as a
percentage of restaurant sales, cost of sales were 32.2% for the thirty-six
weeks ended September 6, 1998 and 32.6% for the thirty-six weeks ended September
7, 1997. The decrease in this percentage is primarily due to selective menu
price increases taken during 1998.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the thirty-
six weeks ended September 6, 1998 increased $20.2 million or 14.4% from the
corresponding period in 1997. The increase in restaurant operating expenses was
primarily due to the increase in restaurant sales. Restaurant operating
expenses as a percentage of restaurant sales were 50.2% for the first three
quarters of 1998, compared to 49.3% for the first three quarters of 1997. The
increase in this percentage was primarily attributable to high restaurant
operating costs incurred by the recently acquired Pinetree restaurants.
Restaurant operating expenses as a percentage of restaurant sales at the 66
Pinetree restaurants was 72.2% for the thirty-six weeks ended September 6, 1998,
primarily due to high labor, training and occupancy costs. Management is
13
<PAGE>
currently evaluating the profitability of the acquired Pinetree restaurants to
determine whether certain of the restaurants should be closed and/or whether
certain tangible and intangible assets recorded in connection with the
acquisition and subsequent conversion of the restaurants should be written down
or written off.
WHOLESALE AND MANUFACTURING COST OF SALES. Wholesale and manufacturing cost
of sales increased $9.8 million for the thirty-six weeks ended September 6,
1998, compared to the thirty-six weeks ended September 7, 1997. The increase
was due to the acquisition of SCC's wholesale and manufacturing operations.
Wholesale and manufacturing cost of sales as a percentage of wholesale and
manufacturing revenues decreased from 64.6% for the first three quarters of 1997
to 52.3% for the first three quarters of 1998. The decrease in this percentage
was primarily due to the inclusion of SCC's operations in the Company's cost of
sales mix.
WHOLESALE AND MANUFACTURING OPERATING COSTS. Wholesale and manufacturing
operating costs increased from $0.8 million for the thirty-six weeks ended
September 7, 1997 to $5.7 million for the thirty-six weeks ended September 6,
1998. Wholesale and manufacturing operating costs as a percentage of wholesale
and manufacturing revenues increased from 18.2% for the thirty-six weeks ended
September 7, 1997 to 23.6% for the thirty-six weeks ended September 6, 1998.
These increases were due to the acquisition of SCC's wholesale and manufacturing
operations.
GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of total revenues,
general and administrative expenses decreased from 16.6% for the thirty-six
weeks ended September 7, 1997 to 15.2% for the thirty-six weeks ended September
6, 1998. The decrease in this percentage was primarily attributable to
decreases in corporate bonus expense and fixed asset writeoffs. Corporate bonus
expense for the thirty-six week period ended September 6, 1998 was $3.1 million
less than that for the same period of a year ago. Writedowns associated with
fixed assets during the first three quarters of 1998 were $1.3 million less than
for the first three quarters of 1997. Also contributing to the decrease in this
percentage was the acquisition of SCC's operations. SCC's general and
administrative expenses as a percentage of SCC revenues was 12.0% for the
thirty-six weeks ended September 6, 1998, causing the overall percentage for the
Company to decrease from the prior year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the first
three quarters of 1998 increased $6.3 million or 26.7% from the prior year.
Overall, net fixed assets of $239.8 million as of September 6, 1998 were up
19.5% over net fixed assets of $200.7 million at September 7, 1997. Net
intangible assets as of September 6, 1998 totaling $175.6 million were up 71.8%
over net intangible assets as of September 7, 1997 totaling $102.3 million.
Depreciation and amortization as a percentage of total revenues increased from
6.9% for the thirty-six weeks ended September 7, 1997 to 7.5% for the thirty-six
weeks ended September 6, 1998. The increase in this percentage was primarily due
to an increase in tangible and intangible assets added due to the Chesapeake
acquisition in 1997 and Pinetree and SCC acquisitions in 1998.
14
<PAGE>
GAIN ON SALE OF ASSETS FROM AFDC TRANSACTION. During the second quarter of
1997, the Company recorded a $5.3 million pre-tax gain associated with the sale
of 100 Company-operated restaurants to AFDC.
NET INTEREST EXPENSE. Interest expense, net of capitalized interest and
interest income earned on short-term investments, for the thirty-six weeks ended
September 6, 1998 was $20.2 million, compared to $13.0 million for the thirty-
six weeks ended September 7, 1997. The $7.2 million increase in interest
expense was due to higher levels of average debt outstanding and higher
effective interest rates during the first three quarters of 1998 as compared
with the first three quarters of 1997. The increase in average debt outstanding
was primarily attributable to the refinancing transaction completed during the
second quarter of 1997 and to borrowings made under the Company's acquisition
and revolving loan facilities during the first three quarters of 1998. The
refinancing transaction also led to higher effective interest rates during the
thirty-six weeks ended September 6, 1998 compared to the thirty-six weeks ended
September 7, 1997.
INCOME TAXES. The Company's effective tax rate for the thirty-six weeks
ended September 6, 1998 was 40.9%, compared to an effective tax rate of 40.1%
for the thirty-six weeks ended September 7, 1997. The increase in the effective
tax rate is primarily attributable to amortization of SCC goodwill, which is not
deductible for federal income tax purposes.
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.
Net cash provided by operating activities for the thirty-six week periods
ended September 6, 1998 and September 7, 1997 was $15.8 million and $45.9
million, respectively. Available cash and cash equivalents, net of bank
overdrafts, as of September 6, 1998 was $2.1 million, compared to $23.3 million
at December 28, 1997. The Company's working capital deficit as of September 6,
1998 and December 28, 1997 was approximately $33.4 million and $17.8 million,
respectively. The decrease in available cash and cash equivalents, net of bank
overdrafts from December 28, 1997 to September 6, 1998 was primarily due to the
acquisitions of Pinetree and SCC.
On February 10, 1998 the Company acquired the assets of Pinetree Foods,
Inc. ("Pinetree") based in Asheville, North Carolina. The assets of Pinetree
included 81 restaurant units located primarily in North Carolina, South Carolina
and Georgia. The assets were acquired in cash for a total purchase price of
approximately $24.0 million. The Company borrowed $16.0 million under its
$100.0 million acquisition facility in order to complete the transaction. The
Company has converted 66 of these restaurants into Company-operated Popeyes
15
<PAGE>
restaurants. The Company has spent or will spend approximately $16.0 million to
convert these restaurants. Funds to convert these restaurants have or will be
provided primarily by the Company's acquisition facility and short-term
borrowings under its revolving line of credit. As of September 6, 1998, the
Company had borrowed $9.0 million under its acquisition facility and $7.0
million under its revolving line of credit to convert these restaurants. To
date, the Company had spent a total of $13.3 million to convert these
restaurants to Company-operated Popeyes restaurants and $2.1 million to install
point of sale and back office systems in these restaurants.
On March 18, 1998, the Company acquired all of SCC's common stock for an
adjusted purchase price of approximately $68.5 million plus the assumption of
approximately $5.0 million of debt. In order to complete the transaction, the
Company obtained $43.0 million in cash from its acquisition facility and issued
$25.5 million in AFC common stock, options and warrants. Included in the
purchase price is a contingent payment of $1.9 million, based upon SCC
operations achieving a level of earnings, as defined in the agreement, over a
52-week period from October 1, 1997 to September 30, 1998.
During the thirty-six weeks ended September 6, 1998 the Company invested in
various capital projects totaling $20.9 million. During this period the Company
invested $4.9 million in new restaurant locations, $2.6 million in its re-
imaging and renovation program and $3.3 million in new management information
systems. In addition, during the first thirty-six weeks of 1998, the Company
invested $10.1 million in other capital assets to update, replace and extend the
lives of restaurant equipment and facilities and complete other projects.
Approximately $3.3 million of the above capital projects were financed through
capital lease obligations or note payable obligations. The remaining capital
projects were financed primarily through cash flows provided from normal
operating activities and internal funds.
On October 15, 1998, the Company acquired Cinnabon International, Inc.
("CII"), the operator and franchisor of 358 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. Two hundred and fourteen of the
retail cinnamon roll bakeries are Company-operated and are located within the
United States. In connection with the acquisition, which will be accounted for
as a purchase, CII will become a wholly-owned subsidiary of AFC through the
merger of AFC Franchise Acquisition Corp. into CII (the "Acquisition").
The Company acquired CII for $64.0 million in cash. The Company obtained
$50.0 million of the cash consideration from its 1997 Credit Facility, which was
amended to add a $50.0 million Tranche B term loan (see below). The remaining
$14.0 million cash consideration was funded with the proceeds from the sale of
approximately 2.8 million shares of AFC common stock to certain "qualified"
investors who are existing AFC shareholders and option holders. The shares were
sold at a price of $7.75 per share and proceeds from the sale totaled
approximately $21.7 million.
In connection with the acquisition of CII, the Company amended its existing
1997 Credit Facility (see "Item 8 - Financial Statements and Supplementary Data,
Footnote 8" of the Company's Annual Report on Form 10-K) to add a $50.0 million
Tranche B term loan. The terms of the amended 1997 Credit Facility remained
substantially unchanged with respect to security interests, covenants and events
of default. At the election of the Company, the Tranche B term loan will bear
interest at (i) a defined base rate plus 1.75% per annum or (ii) LIBOR plus
2.75% per annum, subject to reduction based on the achievement of certain
leverage ratio levels. Principal repayments under the term loan are due in
quarterly installments of $0.1 million commencing December 31, 1998 and
increasing to $3.8 million beginning September 30, 2002. The Tranche B term loan
matures on June 30, 2004. As of September 6, 1998, total amounts outstanding
under the Company's 1997 Credit Facility included: Tranche A term loan - $45.5
million; Acquisition Facility - $68.0 million; and Revolving Facility - $7.0
million.
16
<PAGE>
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.
YEAR 2000
The Company relies to a large extent on computer technology to carry out
its day-to-day operations. The Company is currently working to resolve the
potential impact of the Year 2000 on the processing of date-sensitive
information by the Company's information technology ("IT") systems and non-IT
systems that are reliant on computer technology. The Year 2000 problem is the
result of computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This problem could result in a system failure or miscalculations
causing disruptions of operations, including, but not limited to, a temporary
inability to process transactions or engage in normal business activities.
The Company has adopted a Year 2000 plan that includes five phases. These
phases are: 1) inventory 2) assess 3) remediate 4) test and 5) maintain.
Although the pace of the work varies among the Company's IT and non-IT systems
and the phases are often conducted in parallel, the inventory and assess phases
have been substantially completed as of September 6, 1998 and the remediation
phase is in progress. Under the Company's current plan, remediation and testing
of IT systems is scheduled to be completed by the end of its third quarter of
1999. The Company anticipates the timely completion of this compliance
assessment, which should mitigate the Year 2000 issue.
To date, the Company has incurred approximately $0.1 million in Year 2000
costs. These costs are primarily related to fees paid to outside consultants
who helped develop a strategy to assess the Company's Year 2000 issues. The
Company estimates that the total costs of addressing the Year 2000 issue will
approximate $0.8 million, including the amount that has already been expended.
These costs will be funded through operating cash flows.
Based upon its compliance assessment, the Company does not expect the Year
2000 problem, including the cost of making the Company's IT and non-IT systems
Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods. The cost and
time estimates for the Company's Year 2000 project are based on its best
estimates. There can be no assurance that these estimates will be achieved or
that planned results will be achieved. The inability of the Company to resolve
all potential Year 2000 problems in a timely manner could have a material
adverse impact on the Company.
17
<PAGE>
During August 1994, an outsourcing agreement between the Company and IBM
Global Services ("IGS") was executed to, among other things, enhance and upgrade
the Company's corporate and restaurant hardware and software computer systems.
During the process of upgrading its systems, which is scheduled for completion
by the end of 1998, the Company established procedures to ensure that its new IT
systems were Year 2000 compliant. The Company believes that a significant
portion of the potential Year 2000 issues will be resolved with the completion
of its IT system upgrades made in connection with the IGS contract.
Under the Company's Franchise Awareness Program and Vendor/Supplier Letter
Program, the Company has and will be initiating communications with its
significant suppliers and vendors and its franchisee community in an effort to
determine the extent to which the Company's business is vulnerable to the
failure by these third parties to remediate their Year 2000 problems. While
the Company has not been informed of any material risks associated with the Year
2000 problem with respect to these entities, there can be no assurance that the
IT and non-IT systems of these third parties will be Year 2000 compliant on a
timely basis. The inability of these third parties to remediate their Year 2000
problems could have a material adverse impact on the Company's financial
position and results of operations.
The Company has not yet ascertained what the impact would be on the
Company's financial position and results of operations in the event of failure
of the Company's or third parties' IT and non-IT systems due to the Year 2000
issue. The Company will begin developing a contingency plan in the fourth
quarter of 1998 designed to allow continued operations in the event that such
failures should occur.
IMPACT OF INFLATION
The Company believes that, over time, it has generally been able to pass
along inflationary increases in its costs through increased prices of its menu
items. Accordingly, the effects of inflation on the Company's net income
historically have not been, nor are such effects expected to be, materially
adverse. Due to competitive pressures, however, increases in prices of menu
items often lag inflationary increases in costs.
SEASONALITY
The Company has historically experienced the strongest operating results
during the summer months while operating results have been somewhat lower during
the winter season. Certain holidays and inclement winter weather reduce the
volume of consumer traffic at quick-service restaurants and may impair the
ability of certain restaurants to conduct regular operations for short periods
of time.
18
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. The
statement is effective for all quarters of fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities in the financial statements at fair
value. Management does not believe the implementation of this recent accounting
pronouncement, if applicable, will have a material effect on its consolidated
financial statements.
19
<PAGE>
PART 2. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
We filed a Current Report on Form 8-K dated August 13, 1998 under Item
2, Acquisition or Disposition of Assets and Item 7, Financial Statement and
Exhibits, to report the Company's execution of a definitive agreement to
acquire all of the common stock of Cinnabon International, Inc.
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: October 21, 1998 By: /s/ Gerald J. Wilkins
-------------------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THIRTY-SIX WEEK PERIOD ENDED SEPTEMBER 6, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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