<PAGE>
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 14, 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 JULY 29, 1998, THERE WERE 36,287,439 SHARES OF THE REGISTRANT'S COMMON
STOCK OUTSTANDING.
<PAGE>
AFC ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For the Twelve and
Twenty-four Week Periods Ended June 14, 1998 and June 15, 1997 ................ 3
Condensed Consolidated Balance Sheets - June 14, 1998 and
December 28, 1997 ............................................................. 4
Condensed Consolidated Statements of Cash Flows - For the Twenty-four
Week Periods Ended June 14, 1998 and June 15, 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 ............................................... 17
(a) Exhibits ....................................................... 17
(b) Current Reports on Form 8-K .................................... 17
SIGNATURE ................................................................................... 17
</TABLE>
<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
6/14/98 6/15/97 6/14/98 6/15/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales ............................................. $ 110,631 $ 91,546 $ 207,658 $ 194,727
Revenues from franchising .................................... 14,793 16,219 28,644 29,403
Revenues from wholesale and manufacturing ................... 11,490 1,453 12,809 3,057
Other revenues ............................................... 2,333 2,258 4,383 3,997
--------- --------- --------- ---------
Total revenues ............................................. 139,247 111,476 253,494 231,184
--------- --------- --------- ---------
Costs and expenses:
Restaurant cost of sales ..................................... 35,858 29,753 66,799 62,971
Restaurant operating expenses ................................ 55,375 44,323 102,922 96,021
Wholesale and manufacturing cost of sales .................... 6,050 955 6,688 1,979
Wholesale and manufacturing operating expenses ............... 2,800 274 3,075 518
General and administrative ................................... 20,941 18,549 40,934 38,605
Depreciation and amortization ................................ 10,779 7,984 19,438 15,087
Gain on sale of assets from AFDC transaction ................. -- (5,319) -- (5,319)
--------- --------- --------- ---------
Total costs and expenses ................................... 131,803 96,519 239,856 209,862
--------- --------- --------- ---------
Income from operations ......................................... 7,444 14,957 13,638 21,322
Other expenses:
Interest, net ................................................ 7,039 4,173 13,105 7,364
--------- --------- --------- ---------
Net income before income taxes ................................. 405 10,784 533 13,958
Income tax expense ........................................... (174) (4,350) (229) (5,612)
--------- --------- --------- ---------
Net income ..................................................... 231 6,434 304 8,346
Preferred stock dividends ...................................... -- 951 -- 2,240
--------- --------- --------- ---------
Net income attributable to common stock ........................ $ 231 $ 5,483 $ 304 $ 6,106
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements
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AFC Enterprises, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
6/14/98 12/28/97
- --------------------------------------------------------------- -----------------------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents ............................... $ 12,400 $ 32,964
Accounts and current notes receivable, net .............. 14,408 8,305
Income taxes, current ................................... -- 998
Inventories ............................................. 12,763 4,447
Deferred income taxes ................................... 531 662
Prepaid expenses and other .............................. 2,052 1,539
--------- ---------
Total current assets ........................ 42,154 48,915
--------- ---------
Long-term assets:
Notes receivable, net ................................... 3,568 4,477
Deferred income taxes ................................... 6,536 1,481
Property and equipment, net ............................. 235,647 207,807
Other assets ............................................ 18,397 17,049
Intangible assets, net .................................. 179,576 100,273
--------- ---------
Total long-term assets ...................... 443,724 331,087
--------- ---------
Total assets ............................. $ 485,878 $ 380,002
========= =========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable ........................................ $ 29,051 $ 22,123
Current portion of long-term debt and capital
lease obligations ................................. 13,034 10,994
Bank overdrafts ......................................... 10,324 9,707
Income taxes payable .................................... 1,689 --
Accrued expenses and other .............................. 21,586 23,923
--------- ---------
Total current liabilities ................... 75,684 66,747
--------- ---------
Long-term liabilities:
Long-term debt, net of current portion .................. 42,581 45,150
Acquisition line of credit .............................. 68,000 --
10.25% Subordinated notes payable ....................... 175,000 175,000
Capital lease obligations, net of current portion ....... 11,454 12,738
Other liabilities ....................................... 37,852 31,908
--------- ---------
Total long-term liabilities ................. 334,887 264,796
--------- ---------
Total liabilities ........................ 410,571 331,543
--------- ---------
Shareholders' equity:
Common stock ............................................ 363 344
Capital in excess of par value .......................... 128,540 101,840
Accumulated deficit ..................................... (49,019) (49,323)
Notes receivable - officers ............................. (4,577) (4,402)
--------- ---------
Total shareholders' equity .................. 75,307 48,459
--------- ---------
Total liabilities and shareholders'
equity................................... $ 485,878 $ 380,002
========= =========
</TABLE>
See accompanying notes to financial statements.
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4
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AFC Enterprises, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
24 Weeks Ended
6/14/98 6/15/97
- --------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net income ......................................... $ 304 $ 8,346
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 19,438 15,087
Deferred compensation ............................ 1,222 645
Other ............................................ 1,169 (1,753)
Provision for deferred income taxes .............. (4,520) 4,112
(Increase) decrease in operating assets .......... (8,857) 1,150
Increase (decrease) in operating liabilities ..... (1,177) 2,613
--------- ---------
Total adjustments ............................ 7,275 21,854
--------- ---------
Net cash provided by operating activities .......... 7,579 30,200
--------- ---------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment 379 17,473
Investment in property and equipment ............... (8,013) (18,881)
Investment in Chesapeake intangible asset .......... -- (14,142)
Investment in Pinetree goodwill .................... (23,707) --
Investment in Pinetree property and equipment ...... (16,281) --
Investment in SCC goodwill ......................... (28,537) --
Investment in SCC property and equipment ........... (15,639) --
Notes receivable additions ......................... (83) (2,186)
Payments received on notes ......................... 1,240 2,169
--------- ---------
Net cash used in investing activities .............. (90,641) (15,567)
--------- ---------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt ............... (2,555) (127,213)
Proceeds from long-term debt ....................... -- 50,000
Proceeds from subordinated notes ................... -- 175,000
Net borrowings under Acquisition line of credit .... 68,000 --
Principal payments for capital lease obligations ... (3,349) (3,213)
Increase (decrease) in bank overdrafts, net ........ 618 (3,604)
Notes receivable - officers ........................ -- (202)
Notes receivable - officers payments ............... 1 19
Notes receivable - officers interest ............... (134) (128)
Redemption of 10% preferred stock .................. -- (62,196)
Issuance of common stock ........................... 1 6
Debt issuance costs ................................ (84) (9,441)
--------- ---------
Net cash provided by (used in) financing activities 62,498 19,028
--------- ---------
Net increase (decrease) in cash and cash equivalents (20,564) 33,661
Cash and cash equivalents at beginning of the period 32,964 19,216
--------- ---------
Cash and cash equivalents at end of the period ..... $ 12,400 $ 52,877
========= =========
Supplemental Cash Flow Information:
Cash payments for income taxes .................... $ 2,127 $ 1,318
Cash payments for interest ........................ 12,649 7,194
Noncash investing and financing activities:
Capital lease obligations and notes payable
incurred ....................................... 3,546 10,838
Issuance of common stock, options and warrants .. 25,497 --
See accompanying notes to financial statements.
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5
<PAGE>
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. ACQUISITION FACILITY
The Company drew down $9.0 million from its acquisition facility during the
second quarter to fund the conversion of restaurant properties acquired from
Pinetree Foods, Inc. into Company-operated Popeyes restaurants. The outstanding
balance at June 14, 1998 was $68.0 million.
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6
<PAGE>
3. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This standard requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement with the same prominence as other financial
statements. FAS 130 is effective for fiscal years beginning after December 15,
1997. Presently, the Company does not have any items which are considered to be
components of comprehensive income, and therefore, FAS 130 does not impact the
Company's financial statements at this time.
Statement of Financial Accounting Standards No. 132
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employer's Disclosure about Pensions and Other Post-Retirement Benefits" ("FAS
132") was issued. FAS 132 revises employer's disclosures about pension and
other post-retirement benefit plans. It does not change the measurement or
recognition of those plans. This statement is effective for fiscal years
beginning after December 15, 1997 and will only impact the presentation of
financial statement disclosures for such periods.
================================================================================
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
these 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 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 Consolidated Statements of Operations for
the twelve and twenty-four week periods ended June 14, 1998 and June 15, 1997.
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
----------------- -----------------
June 14, June 15, June 14, June 15,
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales.................... 79.4% 82.1% 81.9% 84.2%
Revenues from franchising........... 10.6 14.5 11.3 12.7
Wholesale/mfg. revenues............. 8.3 1.3 5.1 1.3
Other revenues...................... 1.7 2.1 1.7 1.8
Total revenues................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant cost of sales (1)........ 32.4% 32.5% 32.2% 32.3%
Restaurant operating expenses (1)... 50.1 48.4 49.6 49.3
Wholesale/mfg. cost of sales (2).... 52.7 65.7 52.2 64.7
Wholesale/mfg. operating costs (2).. 24.4 18.9 24.0 16.9
General and administrative.......... 15.0 16.6 16.1 16.7
Depreciation and amortization....... 7.7 7.2 7.7 6.5
Gain/loss on sale of assets from
AFDC transaction................... - (4.8) - (2.3)
Total costs and expenses......... 94.7 86.6 94.6 90.8
Income from operations................ 5.3 13.4 5.4 9.2
Interest expense, net................. 5.0 3.7 5.2 3.2
Net income before taxes............... 0.3 9.7 0.2 6.0
Income tax expense.................... (0.1) (3.9) (0.1) (2.4)
Net income............................ 0.2% 5.8% 0.1% 3.6%
</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 twenty-four week
periods ended June 14, 1998 and June 15, 1997:
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
---------------------------------- ----------------------------------
June 14, June 15, % change June 14, June 15, % change
1998 1997 97-98 1998 1997 97-98
-------- -------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
EBITDA, as defined (1)............ $ 18.9 $ 19.6 (3.4) % $ 34.3 $ 34.0 1.0 %
EBITDA margin..................... 13.6 % 17.6 % (22.7) % 13.5 % 14.7 % (7.9) %
Capital Expenditures (2).......... $ 6.3 $ 18.2 (65.7) % $ 12.0 $ 29.4 (59.1) %
Restaurant data (unaudited):
Systemwide restaurant sales (3):
Popeyes......................... $ 217.9 $ 195.8 11.3 % $ 417.3 $ 380.3 9.7 %
Churchs......................... 175.8 170.4 3.1 343.7 331.9 3.5
Chesapeake...................... 14.9 9.0 N/A 29.9 9.0 N/A
Seattle Coffee.................. 6.8 N/A N/A 6.8 N/A N/A
-------- -------- -------- --------
Total...................... $ 415.4 $ 375.2 10.7 % $ 797.7 $ 721.2 10.6 %
======== ======== ======== ========
Systemwide restaurant openings:
Popeyes......................... 18 26 (30.8) % 108 50 116.0 %
Churchs......................... 21 28 (25.0) 40 66 (39.4)
Chesapeake...................... 1 7 (85.7) 7 7 -
Seattle Coffee.................. 5 - N/A 5 - N/A
-------- -------- -------- --------
Total...................... 45 61 (26.2) % 160 123 30.1 %
======== ======== ======== ========
Systemwide restaurants open,
end of period:
Popeyes......................... 1,230 1,060 16.0 %
Churchs......................... 1,377 1,318 4.5
Chesapeake...................... 133 163 (18.4)
Seattle Coffee.................. 73 N/A N/A
-------- --------
Total...................... 2,813 2,541 10.7 %
======== ========
Systemwide change in comp-
arable restaurant sales (3)
Popeyes......................... 2.1 % 1.9 % 1.6 % 3.2 %
Churchs......................... 2.3 5.4 2.6 6.0
</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) Current and prior year sales figures for Chesapeake and Seattle Coffee are
not comparable since these acquisitions occurred during the second quarter
of 1997 and the first quarter of 1998, respectively.
9
<PAGE>
For the Twelve Weeks Ended June 14, 1998 and June 15, 1997
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues increased 24.9% or $27.8 million during the twelve weeks ended
June 14, 1998, as compared to the twelve weeks ended June 15, 1997.
RESTAURANT SALES. Restaurant sales increased 20.8% or $19.1 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 second quarter of
1998 were $8.8 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 these cafes during the second quarter
of 1998 were $5.6 million. The remaining sales increase was due to an increase
in comparable sales for Company-operated restaurants of 4.1% for the quarter.
REVENUES FROM FRANCHISING. Revenues from franchising decreased $1.4 million
or 8.8% from the prior year. Franchise royalty revenue increased $1.3 million
or 10.2%. The increase in franchise royalty revenue was primarily attributable
to an increase in the number of franchised restaurants from 1,947 at June 15,
1997 to 2,083 at June 14, 1998. Franchise fee income decreased $2.7 million or
72.6% for the twelve weeks ended June 14, 1998, compared to the twelve weeks
ended June 15, 1997. Franchise fee income for the twelve weeks ended June 15,
1997 included franchise fees of $2.5 million recorded in connection with the
sale of 100 Company-operated Churchs restaurants to the Atlanta Franchise
Development Corporation ("AFDC") on March 24, 1997. AFDC subsequently became
the Company's largest domestic franchisee.
WHOLESALE AND MANUFACTURING REVENUES. Wholesale and manufacturing revenues
increased $10.0 million for the twelve weeks ended June 14, 1998, as compared to
the twelve weeks ended June 15, 1997. The increase was primarily attributable
to the acquisition of SCC and its wholesale coffee operations. Wholesale coffee
revenues totaled $9.7 million during the second quarter of 1998.
10
<PAGE>
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Restaurant cost of sales for the first quarter of
1998 increased 20.5% or $6.1 million from the prior year. This percentage
increase approximates the percentage increase in restaurant sales. Expressed as
a percentage of restaurant sales, cost of sales were 32.4% for the twelve weeks
ended June 14, 1998 and 32.5% for the twelve weeks ended June 15, 1997.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the twelve
weeks ended June 14, 1998 increased $11.0 million or 24.9% from the
corresponding period in 1997. 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 recently acquired from Pinetree. These restaurants
experienced significant conversion activities during the quarter. Restaurant
operating expenses as a percentage of restaurant sales were 50.1% for the second
quarter of 1998, compared to 48.4% for the second quarter of 1997. Restaurant
operating expenses for the quarter as a percentage of restaurant sales were over
70% at the 66 Pinetree restaurants. It is anticipated that this percentage will
decrease during the remainder of 1998 at the Pinetree restaurants.
WHOLESALE AND MANUFACTURING COST OF SALES. Wholesale and manufacturing cost
of sales increased $5.1 million for the twelve weeks ended June 14, 1998,
compared to the twelve weeks ended June 15, 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 65.7% for the second quarter of 1997 to
52.7% during the second 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 June 15,
1997 to $2.8 million for the twelve weeks ended June 14, 1998. Wholesale and
manufacturing operating costs as a percentage of wholesale and manufacturing
revenues increased from 18.9% for the twelve weeks ended June 15, 1997 to 24.4%
for the twelve weeks ended June 14, 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 16.6% for the twelve weeks
ended June 15, 1997 to 15.0% for the twelve weeks ended June 14, 1998. Part of
the decrease in this percentage was due to a decrease in asset writeoffs.
General and administrative expenses for the twelve weeks ended June 15, 1997
included one-time software writeoffs totaling $0.8 million. 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 twelve weeks ended June 14, 1998, causing the overall percentage for the
Company to decrease from the prior year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $2.8
million or 35.0% from the prior year. Overall, net fixed assets of $235.6
million as of
11
<PAGE>
June 14, 1998 were up 22.5% over net fixed assets of $192.4 million at June 15,
1997. Net intangible assets as of June 14, 1998 totaling $179.6 million were up
73.2% over net intangible assets as of June 15, 1997 totaling $103.7 million.
Depreciation and amortization as a percentage of total revenues increased from
7.2% for the twelve weeks ended June 15, 1997 to 7.7% for the twelve weeks ended
June 14, 1998. The increase in this percentage was primarily due to an increase
in intangible assets resulting from the Pinetree and SCC acquisitions during the
first quarter of 1998.
GAIN ON SALE OF ASSETS FROM AFDC TRANSACTION. The Company recorded a $5.3
million pre-tax gain associated with the sale of property to AFDC during the
second quarter of 1997. In connection with the AFDC transaction, the Company
sold the land, building and equipment for 51 of its restaurants, and it sold the
building and equipment and leased the land for 49 of its restaurants.
NET INTEREST EXPENSE. Interest expense, net of capitalized interest and
interest income earned on short-term investments, for the twelve weeks ended
June 14, 1998 was $7.0 million, compared to $4.1 million for the twelve weeks
ended June 15, 1997. The $2.9 million increase in interest expense was due to
higher levels of average debt outstanding and higher effective interest rates
during the second quarter of 1998 as compared with the second quarter 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 facility during the first half
of 1998. The refinancing transaction also led to higher effective interest rates
during the twelve weeks ended June 14, 1998 compared to the twelve weeks ended
June 15, 1997.
INCOME TAXES. The Company's effective tax rate for the twelve weeks ended
June 14, 1998 was 43.0%, compared to an effective tax rate of 40.3% for the
twelve weeks ended June 15, 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 TWENTY-FOUR WEEKS ENDED JUNE 14, 1998 AND JUNE 15, 1997
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues increased $22.3 million or 9.7% during the twenty-four weeks
ended June 14, 1998, as compared to the twenty-four weeks ended June 15, 1997.
RESTAURANT SALES. Restaurant sales increased 6.6%, or $12.9 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 during the first half
12
<PAGE>
of 1998 at the 66 Pinetree restaurant units were $12.9 million and at the SCC
cafes were $5.6 million. Partially offsetting these increases was a decrease in
sales of $12.3 million due to the sale of 100 Company-operated restaurants to
AFDC during the second quarter of 1997. The remaining sales increase was due to
an increase in comparable sales for Company-operated restaurants of 3.8% for the
first half of the year.
REVENUES FROM FRANCHISING. Revenues from franchising decreased $0.8 million
or 2.6% from the prior year. Franchise royalty revenue increased $3.3 million or
14.1% from the prior year. The increase in franchise royalty revenue was
primarily attributable to an increase in the number of franchised restaurants
from 1,947 to 2,083 from June 15, 1997 to June 14, 1998. Franchise fee income
decreased $4.0 million or 64.5% for the twenty-four weeks ended June 14, 1998,
compared to the twenty-four weeks ended June 15, 1997. Franchise fee income for
the twenty-four weeks ended June 15, 1997 included franchise fees of $2.5
million recorded in connection with the sale of 100 Company-operated Churchs
restaurants to AFDC and $1.2 million recorded in connection with the sale of 47
Company-operated Churchs restaurants to Royal Capital Corporation.
WHOLESALE AND MANUFACTURING REVENUES. Wholesale and manufacturing revenues
increased $9.8 million for the twenty-four weeks ended June 14, 1998, as
compared to the twenty-four weeks ended June 15, 1997. The increase was
attributable to the acquisition of SCC and its wholesale coffee operations.
SCC's wholesale revenues totaled $9.7 million during the second quarter of 1998.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Restaurant cost of sales for the first two
quarters of 1998 increased 6.1% or $3.8 million from the prior year. The
increase was due to a 6.6% increase in restaurant sales. Expressed as a
percentage of restaurant sales, cost of sales were 32.2% for the twenty-four
weeks ended June 14, 1998 and 32.3% for the twenty-four weeks ended June 15,
1997.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the twenty-
four weeks ended June 14, 1998 increased $6.9 million or 7.2% from the
corresponding period in 1997. The increase in restaurant operating expenses was
due to the increase in restaurant sales. Restaurant operating expenses as a
percentage of restaurant sales were 49.6% for the first two quarters of 1998,
compared to 49.3% for the first two quarters of 1997. The increase in this
percentage was primarily attributable to high restaurant operating costs
incurred by the recently acquired Pinetree restaurants. Partially offsetting
this increase were decreases attributable to lower utility costs resulting from
the installation of more energy efficient gas fryers in Company-operated
restaurants and lower asset writeoffs.
WHOLESALE AND MANUFACTURING COST OF SALES. Wholesale and manufacturing cost
of sales increased $4.7 million for the twenty-four weeks ended June 14, 1998,
compared to the twenty-four weeks ended June 15, 1997. The increase was due to
the
13
<PAGE>
acquisition of SCC's wholesale and manufacturing operations. Wholesale and
manufacturing cost of sales as a percentage of wholesale and manufacturing
revenues decreased from 64.7% for the first two quarters of 1997 to 52.2% for
the first two 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 $0.5 million for the twenty-four weeks ended June
15, 1997 to $3.1 million for the twenty-four weeks ended June 14, 1998.
Wholesale and manufacturing operating costs as a percentage of wholesale and
manufacturing revenues increased from 16.9% for the twenty-four weeks ended June
15, 1997 to 24.0% for the twenty-four weeks ended June 14, 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 16.7% for the twenty-four
weeks ended June 15, 1997 to 16.1% for the twenty-four weeks ended June 14,
1998. Part of the decrease in this percentage was due to a decrease in asset
writeoffs. General and administrative expenses for the twenty-four weeks ended
June 15, 1997 included one-time software writeoffs totaling $0.8 million. 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 twenty-four weeks ended June 14, 1998, causing the
overall percentage for the Company to decrease from the prior year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the first
two quarters of 1998 increased $4.4 million or 28.8% from the prior year.
Overall, net fixed assets of $235.6 million as of June 14, 1998 were up 22.5%
over net fixed assets of $192.4 million at June 15, 1997. Net intangible assets
as of June 14, 1998 totaling $179.6 million were up 73.2% over net intangible
assets as of June 15, 1997 totaling $103.7 million. Depreciation and
amortization as a percentage of total revenues increased from 6.5% for the
twenty-four weeks ended June 15, 1997 to 7.7% for the twenty-four weeks ended
June 14, 1998. The increase in this percentage was primarily due to an increase
in intangible assets resulting from the Chesapeake acquisition in 1997 and
Pinetree and SCC acquisitions in 1998.
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 twenty-four weeks
ended June 14, 1998 was $13.1 million, compared to $7.4 million for the twenty-
four weeks ended June 15, 1997. The $5.7 million increase in interest expense
was due to higher levels of average debt outstanding and higher effective
interest rates during the first half of 1998 as compared with the first half 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 facility during the first half
of 1998. The refinancing transaction also led to higher effective interest rates
during the twenty-four weeks ended June 14, 1998 compared to the twenty-four
weeks ended
14
<PAGE>
June 15, 1997.
INCOME TAXES. The Company's effective tax rate for the twenty-four weeks
ended June 14, 1998 was 43.0%, compared to an effective tax rate of 40.2% for
the twenty-four weeks ended June 15, 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 twenty-four week periods
ended June 14, 1998 and June 15, 1997 was $7.5 million and $30.2 million,
respectively. Available cash and cash equivalents, net of bank overdrafts, as
of June 14, 1998 was $2.1 million, compared to $23.3 million at December 28,
1997. The Company's working capital deficit as of June 14, 1998 and December
28, 1997 was approximately $33.5 million and $17.8 million, respectively. The
decrease in available cash and cash equivalents, net of bank overdrafts from
December 28, 1997 to June 14, 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
restaurants during the first and second quarters of 1998. The Company has spent
or will spend approximately $14.0 million to convert these restaurants. Funds
to convert these restaurants will be provided primarily by the Company's
acquisition facility. As of June 14, 1998, the Company had borrowed $9.0
million under its acquisition facility to convert these restaurants. To date,
the Company had spent a total of $10.0 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 a
purchase price of approximately $70.0 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 up to $3.8 million, based upon SCC
operations achieving a level of earnings, as defined in the
15
<PAGE>
agreement, over a 52-week period from October 1, 1997 to September 30, 1998.
During the twenty-four weeks ended June 14, 1998 the Company invested in
various capital projects totaling $12.0 million. During this period the Company
invested $2.2 million in new restaurant locations, $1.9 million in its re-
imaging and renovation program and $2.1 million in new management information
systems. In addition, during the first twenty-four weeks of 1998, the Company
invested $5.8 million in other capital assets to update, replace and extend the
lives of restaurant equipment and facilities and complete other minor 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.
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, Pinetree conversion
costs and scheduled payments under the Senior Subordinated Notes and the Senior
Secured Credit Facility.
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.
16
<PAGE>
PART 2. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(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: July 29, 1998 By: /s/ Gerald J. Wilkins
-----------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<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 14, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-14-1998
<CASH> 12,400
<SECURITIES> 0
<RECEIVABLES> 22,921
<ALLOWANCES> 4,945
<INVENTORY> 12,763
<CURRENT-ASSETS> 42,154
<PP&E> 335,296
<DEPRECIATION> 99,649
<TOTAL-ASSETS> 485,878
<CURRENT-LIABILITIES> 75,684
<BONDS> 310,069
0
0
<COMMON> 363
<OTHER-SE> 74,944
<TOTAL-LIABILITY-AND-EQUITY> 485,878
<SALES> 207,658
<TOTAL-REVENUES> 253,494
<CGS> 66,799
<TOTAL-COSTS> 173,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 550
<INTEREST-EXPENSE> 13,105
<INCOME-PRETAX> 533
<INCOME-TAX> 229
<INCOME-CONTINUING> 304
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