<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
(As amended December 23, 1998)
Filed Pursuant to Section 13 or 15(d) of the Securities Act of 1934
Date of Report (Date of earliest event reported) October 15, 1998
----------------
AFC ENTERPRISES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota - 58-2016606
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
Six Concourse Parkway, Suite 1700, Atlanta, Georgia 30328-5352
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 391-9500
----------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 7 is hereby amended as follows:
Item 7. Financial Statements and Exhibits
---------------------------------
(a) Financial statements of business acquired.
The following historical financial statements are included in this
report:
1. Audited consolidated balance sheets of Cinnabon International,
Inc. and subsidiary as of March 30, 1997 and March 29, 1998 and
the related consolidated statements of operations, shareholders'
deficiency and cash flows for each of the three years in the
period ended March 29, 1998, with report of independent auditors.
2. Unaudited consolidated financial statements of Cinnabon
International, Inc. and subsidiary for the six months ended
September 27, 1998.
(b) Pro forma financial information.
1. Pro forma consolidated balance sheet as of September 6, 1998.
2. Pro forma consolidated statement of operations for the year ended
December 28, 1997.
3. Pro forma consolidated statement of operations for the thirty-six
week period ended September 6, 1998.
4. Notes to the pro forma consolidated financial statements.
(c) Exhibit index.
23.1 Consent of Independent Auditors.
1
<PAGE>
SIGNATURES
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.
By: /s/ Gerald J. Wilkins
-------------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: December 23, 1998
2
<PAGE>
Cinnabon International, Inc. and Subsidiary
Consolidated Financial Statements
and Other Financial Information
Years Ended March 31, 1996, March 30, 1997, and March 29, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors...................................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-5
Consolidated Statements of Shareholders' Deficiency................. F-6
Consolidated Statements of Cash Flows............................... F-7
Notes to Consolidated Financial Statements.......................... F-8
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
Cinnabon International, Inc.
We have audited the accompanying consolidated balance sheets of Cinnabon
International, Inc. and subsidiary (the Company) as of March 30, 1997 and March
29, 1998, and the related consolidated statements of operations, shareholders'
deficiency, and cash flows for each of the three years in the period ended March
29, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated July 10,
1998, which report contained an explanatory paragraph regarding the Company's
ability to continue as a going concern, the Company (as discussed in Note 17)
has completed its agreement and plan of merger with AFC Enterprises, Inc.,
resulting in net proceeds of $67 million. Therefore, the conditions that raised
substantial doubt about whether the Company will continue as a going concern no
longer exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cinnabon
International, Inc. and subsidiary as of March 30, 1997 and March 29, 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 29, 1998, in conformity with generally
accepted accounting principles.
July 10, 1998,
except Note 17, as to which the date is
October 15, 1998 /s/ERNST & YOUNG LLP
F-2
<PAGE>
Cinnabon International, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 30, MARCH 29,
1997 1998
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,221,580 $ 1,737,820
Accounts receivable 1,333,020 1,030,340
Inventories 518,257 785,314
Income tax receivable - 1,350,000
Prepaid expenses 1,755,523 409,576
---------------------------------
Total current assets 5,828,380 5,313,050
Property and equipment:
Building and equipment - -
Equipment, furniture, and fixtures 25,196,046 22,516,797
Leasehold improvements 17,798,197 20,514,475
---------------------------------
42,994,243 43,031,272
Less accumulated depreciation and amortization (14,058,638) (18,215,754)
28,935,605 24,815,518
Construction in progress 467,116 222,525
Other assets:
Investment in partnership - -
Intangibles, net of accumulated amortization 12,448,343 11,966,934
Deposits and other 8,094,485 9,275,963
---------------------------------
Total other assets 20,542,828 21,242,897
---------------------------------
Total assets $ 55,773,929 $ 51,593,990
=================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
MARCH 30, MARCH 29,
1997 1998
-------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 9,945,054 $ 8,673,165
Income taxes payable 2,385,197 214,316
Current portion of long-term indebtedness 54,386 4,279,386
-------------------------------
Total current liabilities 12,384,637 13,166,867
Long-term indebtedness, net of
current portion 47,883,018 51,982,486
Other noncurrent liabilities 8,267,573 9,711,068
Shareholders' deficiency:
Redeemable preferred stock:
Class A, $0.01 par value:
Authorized shares - 7,000,000 6,033,343 6,761,408
Issued and outstanding shares - 7,000,000
Class B, $0.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - 2,000,000 1,723,812 1,931,831
Preferred stock dividends payable 4,132,835 4,920,803
Common stock:
Class A, $0.01 par value:
Authorized shares - 18,500,000
Issued and outstanding shares - 14,183,851 and
14,258,598, respectively 142,586 141,839
Additional paid-in capital 2,047,926 159,991
Accumulated deficit (26,841,801) (37,182,303)
-------------------------------
Total shareholders' deficiency (12,761,299) (23,266,431)
-------------------------------
Total liabilities and shareholders' deficiency $ 55,773,929 $ 51,593,990
===============================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Cinnabon International, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 30, MARCH 29,
1996 1997 1998
---------------------------------------------------
<S> <C> <C> <C>
Bakery sales $64,878,857 $73,848,111 $ 76,021,182
Franchise royalties and fees 2,754,336 2,791,944 3,243,441
---------------------------------------------------
67,633,193 76,640,055 79,264,623
Cost of sales:
Product 15,187,834 18,042,683 18,039,871
Labor 19,985,483 23,704,790 23,575,954
Other direct costs 6,350,647 4,967,153 5,185,488
Occupancy costs 9,094,999 13,521,889 15,684,947
Depreciation and amortization 2,958,031 4,418,405 5,504,847
Preopening amortization 483,714 884,640 673,043
---------------------------------------------------
54,060,708 65,539,580 68,664,150
---------------------------------------------------
Gross profit 13,572,485 11,100,475 10,600,473
Corporate general and administrative expenses 9,124,010 9,434,235 9,599,105
Depreciation and intangible amortization 988,863 2,032,463 1,248,230
Provision for write-down of bakery assets - 333,196 4,834,515
Reorganization charges - - 1,011,281
---------------------------------------------------
Income (loss) from continuing operations before
interest, income taxes, and other items 3,459,612 (699,419) (6,092,658)
Interest expense, net 3,903,590 4,321,323 5,499,070
---------------------------------------------------
Loss from continuing operations before
income taxes and other items (443,978) (5,020,742) (11,591,728)
Income tax (benefit) on continuing operations 77,509 102,196 (1,251,226)
---------------------------------------------------
Loss from continuing operations before other items (521,487) (5,122,938) (10,340,502)
Discontinued operations (Note 3):
Income (loss) from operations (net of tax of
$347,000 in 1997) (1,070,465) 672,530 -
Gain on sale (net of tax of $2,489,551) - 1,877,428 -
Extraordinary item - write-off of debt issuance costs
(net of tax benefit of $452,626) - (878,626) -
---------------------------------------------------
Net loss $(1,591,952) $(3,451,606) $(10,340,502)
===================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Cinnabon International, Inc. and Subsidiary
Consolidated Statements of Shareholders' Deficiency
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK
REDEEMABLE STOCK (PAR VALUE)
--------------------------
PREFERRED DIVIDENDS PAID-IN ACCUMULATED
STOCK PAYABLE CLASS A CAPITAL DEFICIT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 26, 1995 $6,357,475 $2,688,180 $146,230 $5,687,101 $(21,798,243)
Net loss - - - - (1,591,952)
Preferred dividends accrued - 701,291 - (701,291) -
Preferred stock accretion 637,332 - - (637,332) -
Purchase of common stock - - (275) (78,730) -
--------------------------------------------------------------------------
Balance at March 31, 1996 6,994,807 3,389,471 145,955 4,269,748 (23,390,195)
Net loss - - - - (3,451,606)
Preferred dividends accrued - 743,364 - (743,364) -
Preferred stock accretion 762,348 - - (762,348) -
Issuance of common stock - - 227 49,773 -
Purchase of common stock - - (3,596) (765,883) -
--------------------------------------------------------------------------
Balance at March 30, 1997 7,757,155 4,132,835 142,586 2,047,926 (26,841,801)
Net loss - - - (10,340,502)
Preferred dividends accrued - 787,968 - (787,968) -
Preferred stock accretion 936,084 - - (936,084) -
Purchase of common stock - - (747) (163,883) -
--------------------------------------------------------------------------
Balance at March 29, 1998 $8,693,239 $4,920,803 $141,839 $ 159,991 $(37,182,303)
==========================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Cinnabon International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 30, MARCH 29,
1996 1997 1998
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,591,952) $ (3,451,606) $(10,340,502)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 9,027,583 7,335,508 7,263,554
Imputation of interest 863,005 988,140 1,131,420
Provision for write-down of bakery assets - 333,196 3,919,365
Accrued interest 426,004 473,443 538,553
Extraordinary item, net of tax - 878,626 -
Gain on sale of restaurant division, net of tax - (1,877,428) -
Loss on disposition of assets 18,962 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,563,624) 2,344,683 (622,517)
(Increase) decrease in inventories (170,379) (82,825) 186,861
(Increase) decrease in prepaid expenses 200,432 (614,322) 893,885
Increase in deposits and other (407,490) (1,071,658) (720,201)
(Increase) decrease in accounts payable and accrued expenses 4,581,179 (3,844,977) (1,271,889)
Increase (decrease) in income taxes payable (1,549) 263,183 (3,510,881)
Increase (decrease) in other noncurrent liabilities (1,025,000) 950,147 (9,302)
Increase in deferred rent - 200,000 321,377
----------------------------------------------
Net cash provided by (used in) operating activities 10,357,171 2,824,110 (2,220,277)
INVESTING ACTIVITIES
Purchases of property and equipment and construction in progress (16,605,111) (13,520,814) (5,476,582)
Proceeds from sale of assets - 25,406,338 65,155
Goodwill (333,524) (376,519) (250,000)
Preopenings addition (977,222) (933,975) (220,981)
----------------------------------------------
Net cash provided by (used in) investing activities (17,915,857) 10,575,030 (5,882,408)
FINANCING ACTIVITIES
Proceeds from borrowings 8,064,161 46,575,000 7,840,001
Principal payments on borrowings (3,524,253) (57,834,466) (54,085)
Proceeds from issuance of common stock - 50,000 -
Purchase of common stock (79,005) (769,479) (164,630)
Increase in debt issuance costs (183,229) (730,172) (2,361)
Deferred debt expense - - -
Selling costs - - -
----------------------------------------------
Net cash provided by (used in) financing activities 4,277,674 (12,709,117) 7,618,925
----------------------------------------------
Net increase (decrease) in cash (3,281,012) 690,023 (483,760)
Cash at beginning of year 4,812,569 1,531,557 2,221,580
----------------------------------------------
Cash at end of year $ 1,531,557 $ 2,221,580 $ 1,737,820
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 4,148,315 $ 3,900,763 $ 4,683,519
==============================================
Income taxes $ 152,842 $ 215,634 $ 2,309,478
==============================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY
Installment note receivable from buyer on sale of restaurant division $ 0 $ 6,885,367 $ 0
=============================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements
March 29, 1998
1. DESCRIPTION OF BUSINESS
On October 9, 1990, an investor, along with the existing shareholders of
Restaurants Unlimited, Inc. (RUI), formed RU Corporation, which acquired all the
outstanding shares of RUI through RU Corporation's wholly owned subsidiary,
Restaurants Unlimited Acquisition Corporation (RUAC). On June 3, 1994, two
investor groups acquired the shares of the then-controlling shareholder of RU
Corporation. In April 1996, RU Corporation entered into a contract to sell the
restaurant business (the business of development and operation of restaurants)
to Restaurants Acquisition, Inc., a company formed by the restaurant business
management group, led by RU Corporation's then-chairman. This transaction was
completed on August 7, 1996, at which time RU Corporation changed the legal
names of the various entities as follows: RU Corporation to Cinnabon
International, Inc. and subsidiary (the Company); RUI to Cinnabon Holdings,
Inc.; the existing subsidiary company Cinnabon, Inc. remained unchanged.
Following such transactions, the Company refinanced its senior and subordinated
debt with new debt instruments, as described in Note 4, at which time Cinnabon
Holdings, Inc. was merged into Cinnabon, Inc.
During the year ended March 29, 1998, the Company undertook steps to materially
reorganize its overhead infrastructure. Related to this reorganization, the
Company incurred expenses of approximately $1.0 million, of which the majority
represented severance compensation for released executives.
The Company operates 223 cinnamon roll retail bakeries located throughout the
United States. The Company also offers franchise rights to investors to own and
operate retail establishments for the sale of cinnamon rolls and beverages. At
March 29, 1998, Cinnabon had franchised 144 bakeries.
The Company reports financial information on a 52-/53-week fiscal year ending on
the last Sunday of March.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
All significant intercompany balances and transactions have been eliminated in
consolidation.
F-8
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future
as more information becomes known, which could impact the amounts reported and
disclosed herein. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts of financial instruments have been determined using
available market information, requiring management judgment for some estimates.
Accordingly, these estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. For cash, accounts receivable,
inventories, accounts payable and accrued expenses, long-term indebtedness, and
redeemable preferred stock, carrying value is considered a reasonable estimate
of fair value.
INVENTORIES
Inventories of food, beverages, and paper products are carried at the lower of
average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed by the
straight-line method, based on the assets' estimated useful lives. Leasehold
improvements are amortized using the straight-line method over the lease period
or useful life of the improvements, whichever is shorter. The estimated useful
lives of the major classes of assets are:
Equipment, furniture, and fixtures 3 to 10 years
Leasehold improvements 5 to 7 years
Approximately $260,000 of new equipment and bulk purchase items carried for
future sale to franchises are included in deposits and other. New equipment is
transferred to property and equipment and begins depreciating upon placement
into service.
F-9
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES
Consolidated intangibles consist of the following at:
<TABLE>
<CAPTION>
MARCH 30, 1997
ACCUMULATED
COST AMORTIZATION NET COST
------------------------------------------------
<S> <C> <C> <C>
Trademarks $ - $ - $ 0
Debt issuance costs 914,536 (232,570) 681,966
Goodwill 13,576,864 (1,810,487) 11,766,377
$14,491,400 $(2,043,057) $12,448,343
================================================
MARCH 29, 1998
------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET COST
------------------------------------------------
Trademarks $ 150,000 $ (15,000) $ 135,000
Debt issuance costs 916,894 (550,570) 366,324
Goodwill 13,676,864 (2,211,254) 11,465,610
$14,743,758 $(2,776,824) $11,966,934
================================================
</TABLE>
Trademarks: Trademarks are amortized on a straight-line basis over 10 years.
Debt Issuance Costs: Debt issuance costs are amortized over the terms of the
related debt using the level yield or straight-line method. Debt issuance costs
relate to the refinancing of senior and subordinated debt, as described in Note
4.
Goodwill: Goodwill is amortized on a straight-line basis over 35 years.
FRANCHISE ROYALTIES AND FEES
Franchise license fees are recognized when all material services and conditions
required by the franchise agreements have been met. Franchise royalties are
based on a percentage of franchisee sales and are accrued on a monthly basis.
Franchisees also participate in limited marketing programs sponsored by the
Company.
F-10
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREOPENING COSTS
Costs incurred in preparation of opening new bakeries are deferred and amortized
on a straight-line basis over a 12-month period. At March 30, 1997 and March
29, 1998, preopening costs of $885,000 and $91,980, respectively, were included
in prepaid expenses.
ADVERTISING COSTS
Advertising costs, including promotional materials, placement of advertisements,
and media production costs, are charged to expense as incurred. Total
advertising expenses for the years ended March 31, 1996, March 30, 1997, and
March 29, 1998 were $2,346,255, $2,390,837, and $2,174,649, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
INCOME TAXES
The provision for income taxes is computed based on the pretax loss reported in
the financial statements. The provision differs from income taxes currently
payable because certain items of income and expense are recognized in different
periods for financial statement and tax return purposes. Deferred income taxes
have been recorded using the liability method.
STOCK COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-
Based Compensation." SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements and encourages (but does not require) application of
the fair value recognition provisions in the Statement. SFAS No. 123 does not
rescind or interpret the existing accounting rules for employee stock-based
arrangements as outlined in Accounting Principle Board Opinion No. 25 (APB No.
25), but does require the pro forma amounts of net income that would have been
reported had the Company elected to
F-11
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
follow the fair value recognition provisions of SFAS No. 123. The Company
intends to continue to apply the provisions of APB No. 25 in recognizing
compensation expense related to its stock-based compensation arrangements and
has adopted the disclosure provision of the Statement. The pro forma effect on
net income is not material to the Company's financial position or results of its
operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This Statement establishes standards
for related disclosures about operating segments, products and services,
geographic areas, and major customers. Operating segments are components of an
enterprise that are evaluated regularly by the Chief Executive Officer in
deciding how to allocate resources and in assessing performance. For the
Company, adoption of this Statement is required in fiscal year 1999. Management
does not believe that adoption of this Statement will have a material impact on
the Company's financial disclosures.
3. WRITE-DOWN OF BAKERY ASSETS
In accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cashflows estimated to be generated by those assets are less than
the carrying amounts of those assets. During 1998, the Company closed 21
bakeries and identified 10 additional bakeries for which leases are not expected
to be renewed or that are in the process of negotiating a release from existing
lease obligations or where the investment in intangible assets is not expected
to be fully realized from projected net cashflows of the bakeries over their
remaining lives. The Company's analysis of the above events and circumstances
indicated that approximately $4.0 million worth of assets may be impaired and,
as such, the Company has reduced the net book to the estimated net realizable
value of $1.4 million. However, there can be no assurance that the $1.4 million
net realizable value of these assets will be recoverable. In addition, the
Company estimates that approximately $0.8 million in costs will be incurred in
1999 to vacate the above locations.
F-12
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. SALE OF RESTAURANT DIVISION
On August 7, 1996, the Company sold its restaurant division to Restaurants
Acquisition Inc. The sale resulted in a gain of approximately $1.9 million, net
of tax and before write-off of debt issuance costs. Proceeds from the sale
included cash of approximately $25.4 million and an installment note of
approximately $6.9 million included in deposits and other. Of the proceeds,
$24.5 million was used to pay down existing long-term debt. Subsequent to this
transaction, the Company refinanced its senior debt, resulting in an
extraordinary loss of $878,626, net of tax, which resulted from the write-off of
the unamortized debt issuance costs on the retired debt. The results of the
restaurant division have been classified as discontinued operations in the
accompanying financial statements. The restaurant division's fiscal 1997
revenues through the date of sale were approximately $33.9 million. For fiscal
1996, the restaurant division's revenues were approximately $89.2 million.
5. LONG-TERM INDEBTEDNESS
Consolidated long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
MARCH 30, MARCH 29,
1997 1998
----------------------------
<S> <C> <C>
CINNABON, INC.
Senior Term Loan A $22,000,000 $22,000,000
Senior Term Loan B 11,200,000 18,500,000
Acquisition loan - -
Revolving credit line 325,000 865,000
Insurance notes - -
Senior subordinated loans 10,000,000 10,000,000
Notes payable 411,389 357,304
Note payable to developer - -
Equipment lease obligation - -
CINNABON INTERNATIONAL, INC.
Junior subordinated notes, including 4,001,015 4,539,568
----------------------------
accrued interest
47,937,404 56,261,872
Less current portion (54,386) (4,279,386)
----------------------------
$47,883,018 $51,982,486
============================
</TABLE>
F-13
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM INDEBTEDNESS (CONTINUED)
CINNABON, INC.
Senior Bank Loan Facilities: In connection with a refinancing on November 22,
1996, Cinnabon, Inc. entered into Senior Term Loan A in the original amount of
$22,000,000 and Senior Term Loan B, a $21,000,000 growth facility, of which
$18,500,000 was outstanding as of March 29, 1998. Both Senior Term Loan A and
Senior Term Loan B require quarterly installments beginning July 1, 1998, and
the loans mature March 31, 1999, with an option to extend through March 31,
2002. In addition, Cinnabon Inc. has available a revolving credit line of
$2,000,000, which can be drawn upon for general working capital purposes that
expires March 31, 1998. As of March 30, 1997, and for the year ended March 29,
1998, the Company was out of compliance with certain debt covenants.
Subsequent to year-end, the Company entered into a bridge financing loan
agreement (Note 17) that resulted in a bridge financing loan of $3 million,
agreement by current debt holders to waive existing covenant defaults through
March 29, 1998, and the resetting of future covenants and extending the maturity
dates of the Senior Term Loan A, Senior Term Loan B, and the Cinnabon, Inc.
revolving credit line. The Company is in compliance with the revised covenants
as of the end of the most recent fiscal quarter-end, June 29, 1998.
In accordance with the bridge financing loan, both Senior Term Loan A and Senior
Term Loan B require payments of $2,000,000 at December 31, 1998 and $100,000 at
January 29, 1999, and mature on March 31, 1999. The Cinnabon, Inc. revolving
credit line expires March 31, 1999. Amounts available under the revolving
credit line are reduced by outstanding letters of credit of $850,000 at March
29, 1998.
Borrowings can be converted under Senior Term Loans A and B to either "current
base rate" or "Eurodollar advances" at the option of Cinnabon, Inc. Senior Term
Loan A bears interest using a base rate of 1.0% over the current base rate and
using the Eurodollar rate of 2.75% over the current Eurodollar rate. Senior
Term Loan B bears interest using a base rate of 1.5% over the current base rate
and using the Eurodollar rate of 3.0% over the current Eurodollar rate. The
revolving credit line bears interest using a base rate of 0.5% over the current
base rate.
F-14
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM INDEBTEDNESS (CONTINUED)
The effective borrowing rates at March 30, 1997 and March 29, 1998 were
approximately 9.4% and 8.6%, respectively. The senior bank loan facilities are
collateralized by substantially all property, equipment, and common shares of
Cinnabon, Inc. This debt is senior to all debt of all companies.
Senior Subordinated Loans: In connection with the partial change in ownership
on June 3, 1994, Cinnabon International entered into a subordinated loan with
ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P. in the amount of $10,000,000, bearing interest at 11%.
Effective January 1, 1998, the accrued interest on the loan converted to accrued
interest loan of $367,000, bearing interest at 13% (included in accounts payable
and accrued expenses). Both loans are payable on June 30, 2002 and are secured
by the shares of Cinnabon, Inc. on a subordinated basis to the pledge granted on
the senior bank loan facilities. In addition, in conjunction with the change in
ownership in 1994, warrants were issued to the lenders to purchase up to an
aggregate of 647,385 shares of the Company's Class A common stock at an exercise
price of $2.2025 per share.
In connection with the 1996 refinancing, the senior bank loan facilities were
structured to provide $9,800,000 of additional borrowing capacity for growth.
The overall transaction resulted in an extraordinary loss on the refinancing of
$878,626, net of tax, which represents unamortized debt issuance costs on the
retired term loans.
Both the senior bank loan facilities and the senior subordinated loan agreements
contain restrictive covenants related principally to additional borrowings,
purchase of capital assets, certain transactions with affiliates, sales of
assets, and payment of dividends on common stock and preferred stock. Both
agreements require the Company to maintain various defined financial ratios and
are subject to specific prepayment penalties. As of March 30, 1997 and for the
year then ended March 29, 1998, the Company was out of compliance with certain
debt covenants. The bank and senior subordinated lenders have waived these
covenants as of May 22, 1998 in conjunction with the bridge financing loan
agreement (Note 16) and replaced them with new covenants that the Company is in
compliance with.
CINNABON INTERNATIONAL
Junior Subordinated Notes: In connection with the acquisition of the
predecessor company, the Company entered into subordinated notes with the
selling shareholders in
F-15
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM INDEBTEDNESS (CONTINUED)
the aggregate amount of $2,000,000. The notes bear interest at 13.5%, payable
semiannually, with the principal being due on December 31, 2002. The payment on
the notes is subordinated to the Cinnabon, Inc. Senior Term Loans A and B,
revolving credit line, and the senior subordinated loans, and the senior loan
agreements contain restrictions on payment of interest based on specified
earnings targets and covenants restricting principal payments. Cumulative
accrued interest of $2,539,568 is included in the note balance at March 29, 1998
and is not expected to be paid until note maturity.
Maturities of consolidated long-term indebtedness are as follows:
<TABLE>
<CAPTION>
CINNABON CINNABON
YEAR ENDING MARCH INTERNATIONAL INC. CONSOLIDATED
----------------- -----------------------------------------
<S> <C> <C> <C>
1999 $ - $ 4,279,386 $ 4,279,386
2000 - 37,259,386 37,259,386
2001 - 93,532 93,532
2002 - 90,000 90,000
2003 4,539,568 10,000,000 14,539,568
-----------------------------------------
$4,539,568 $51,722,304 $56,261,872
=========================================
</TABLE>
OTHER
Consolidated net interest expense was $3,903,590, $4,321,323, and $5,499,070,
excluding amortization of debt issuance costs of $484,046, $355,519, and
$318,000 and interest income of $218,362, $528,419, and $881,302 for the years
ended March 31, 1996, March 30, 1997, and March 29, 1998, respectively.
Included in interest expense was junior subordinated debt interest of $426,004,
$473,443, and $538,553 and accreted interest on deferred signing bonuses of
$863,005, $988,140, and $1,131,420 for the years ended March 31, 1996, March 30,
1997, and March 29, 1998, respectively.
6. REDEEMABLE PREFERRED STOCK
On October 9, 1990, in connection with the acquisition described in Note 1, the
Company issued 7,000,000 shares of Class A and 2,000,000 shares of Class B
convertible preferred stock at $1 per share. The Class A and Class B preferred
stocks have a liquidation value of $9,000,000. Class A and Class B preferred
shares provide cumulative dividends at 6%, compounded on an annual basis. Both
are subject to payment restrictions under the
F-16
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. REDEEMABLE PREFERRED STOCK (CONTINUED)
Company senior and subordinated debt agreements. At the option of the Company,
Class B preferred shares are exchangeable into newly created 6% junior
subordinated notes, due in 2002 at $1 principal amount per share. When no
shares of Class B preferred remain outstanding, Class A preferred shares may be
exchanged for 6% junior subordinated notes provided that the aggregate amount of
both Class A and Class B to be exchanged shall not exceed $4,900,000 to any one
holder of preferred stock.
At the date of issuance, the dividend rate on the preferred shares was
considered below market. The principal has been discounted to impute an overall
dividend rate of 14.5%. The imputed dividends are being accreted against the
paid-in capital.
Class A and Class B preferred stocks carry a mandatory redemption date of the
date which is the earliest to occur of: (a) the date that the percentage of the
issued and outstanding shares of the Company's common stock held in the
aggregate by the two institutional equity investors and their respective
permitted assignees is less than 66.67% of the aggregate percentage of the
issued and outstanding shares of common stock, so held on the closing date; (b)
there exists a default in the due observance of or performance of any of the
covenants and agreements contained in Sections 8(a) and 8(b) of the
Restructuring and Subscription Agreement dated as of March 22, 1994 and as
amended dated August 7, 1996 among the institutional investors and the other
parties signatory thereto; and (c) December 31, 2002.
Both Class A and Class B preferred stocks may be redeemed for cash at the option
of the Company at any time subject to credit agreement restrictions. The Class
B preferred stock is senior in all respects to the Class A preferred stock. No
dividends may be paid on common stock, and no common stock may be redeemed until
all preferred stock dividends have been paid in full, except certain stock of
employees terminating their employment with the Company.
Contractual provisions have been made for conversion of Class A and Class B
preferred stocks into Class A common stock in the event of an initial public
offering of stock by the Company.
Common Stock: Of the 18,500,000 shares of Class A common stock authorized,
647,385 shares have been reserved for issuance upon conversion of the warrants
held by the senior subordinated lenders.
F-17
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS
1990 AND 1992 STOCK OPTION PLANS
Effective October 9, 1990, the Company formed the 1990 RU Corporation Stock
Option Plan (the 1990 Plan), a nonqualified plan. Regular full-time employees
are eligible to participate in the 1990 Plan. Options vest on a straight-line
basis with the passage of time over a 48-month period. In addition, the 1992 RU
Corporation stock option plan (the 1992 Plan) was formed to cover the issuance
of 100,000 shares for one employee. There was no activity in the 1990 and 1992
Plans during the year ended March 29, 1998. The total available options for
both plans at March 29, 1998 was 505,405.
<TABLE>
<CAPTION>
COMMON STOCK VESTED AND
CLASS A OPTIONS PRICE RANGE EXERCISABLE
---------------------------------------------------------
<S> <C> <C> <C>
Balance, March 31, 1996 497,528 $.82 to $2.2025 497,528
Forfeited (85,292) $.82 to $1.13
---------------------
Balance, March 30, 1997 412,236 $.82 to $2.2025 412,236
---------------------
Balance, March 29, 1998 412,236 $.82 to $2.2025 412,236
=====================
</TABLE>
1994 STOCK OPTION PLAN
Effective June 3, 1994, the Company formed the 1994 RU Corporation Stock Option
Plan (the 1994 Plan), a nonqualified plan. Regular full-time employees and
consultants are eligible to participate in the 1994 Plan. A portion of the
options vested upon issuance, while the majority of the options are earned over
a five-year period, based on the Company meeting certain earnings before
interest, taxes, and depreciation and amortization targets or achieving a net
equity target valuation at the end of five years. No options were earned in
1998 as a result of the Company not meeting certain earnings targets. The total
available options at March 29, 1998 were 2,381,766. All options have been
granted at a price of $2.2025.
<TABLE>
<CAPTION>
VESTED AND
OPTIONS EXERCISABLE
-------------------------------
<S> <C> <C>
Balance, March 31, 1996 1,704,273 280,438
Forfeited (995,035)
---------------
Balance, March 30, 1997 709,238 280,438
Forfeited (368,759)
---------------
Balance, March 29, 1998 340,479 182,719
===============
</TABLE>
F-18
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. LEASES
The Company leases bakery and office facilities under terms of operating leases
expiring at various dates through 2008. Certain of these leases provide for
minimum rentals, plus additional rentals based on a percentage of gross sales
varying from 5% to 22%. Leases generally provide for payment of utilities,
insurance, taxes, and maintenance and contain renewal options for periods
ranging from two to fifteen years. Certain leases provide for scheduled rent
increases. In these cases, rent expense is recognized on a straight-line basis
over the term of the lease.
Minimum annual future rental commitments under existing noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH
-----------------
<S> <C>
1999 $ 8,156,267
2000 7,257,951
2001 6,647,486
2002 5,989,531
2003 4,868,728
Thereafter 6,391,436
-----------
$39,311,399
===========
</TABLE>
Rent expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 30, MARCH 30, MARCH 29,
1996 1997 1998
-------------------------------------------
<S> <C> <C> <C>
Minimum rent $ 8,552,907 $7,948,537 $9,525,581
Percentage rent 3,399,594 466,040 463,127
-------------------------------------------
$11,952,501 $8,414,577 $9,988,708
===========================================
</TABLE>
F-19
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of March 30, 1997 and March
29, 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 30, MARCH 29,
1997 1998
--------------------------------
<S> <C> <C>
Deferred tax assets:
Accruals for book purposes in excess of tax $ 3,938,000 $ 4,722,000
Tip credit carryforwards 1,437,000 1,991,000
AMT credit carryforward - 592,000
Net operating loss carryforwards 178,000 2,077,000
--------------------------------
Total deferred tax assets 5,553,000 9,382,000
Valuation allowance for deferred tax assets (4,250,000) (7,102,000)
--------------------------------
Net deferred tax assets 1,303,000 2,280,000
Deferred tax liabilities:
Deferred gain on installment note (1,084,000) (1,144,000)
Fixed-asset basis differences - (897,000)
Other, net (219,000) (239,000)
--------------------------------
Total deferred tax liabilities (1,303,000) (2,280,000)
--------------------------------
Net deferred tax asset $ 0 $ 0
================================
</TABLE>
A summary of the components of the loss before income taxes and other items for
the years ended March 31, 1996, March 30, 1997, and March 29, 1998 is as
follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 30, 1997 MARCH 29, 1998
--------------------------------------------------------------------------------------
INCOME RELATED TAX INCOME RELATED TAX INCOME RELATED TAX
(LOSS) AMOUNTS (LOSS) AMOUNTS (LOSS) AMOUNTS
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loss from continuing operations
before income taxes and other
items $ (443,978) $ 77,509 $(5,020,742) $ 102,196 $(11,591,728) $(1,251,226)
Discontinued operations:
Income from operations Gain on (1,041,850) 28,615 1,019,530 347,000 - -
sale - - 4,366,979 2,489,551 - -
Extraordinary item - - (1,331,252) (452,626) - -
--------------------------------------------------------------------------------------
Loss before income tax $ 1,485,828 $106,124 $ (965,485) $2,486,121 $(11,591,728) $(1,251,226)
======================================================================================
</TABLE>
F-20
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
A reconciliation of the federal income tax on the total loss, with the effective
tax rate for the years ended March 31, 1996, March 30, 1997, and March 29, 1998,
is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 30, 1997 MARCH 29, 1998
---------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax benefit at U.S. statutory rates $(505,182) (34.0)% $ (328,100) (34.0)% $(3,941,188) (34.0)%
Permanent differences:
Nondeductible expense 35,700 2.4 12,637 1.3 23,867 0.2
Amortization of goodwill 178,325 12.0 76,743 8.0 76,743 0.6
Goodwill on sale of
restaurant division - - 3,590,716 371.9 - -
Tip credits - - (346,000) (35.8) - -
FICA tax add back (456,720) (30.7) - - - -
State income taxes, net of
federal benefit 70,042 4.7 305,065 31.6 (50,000) (0.4)
Change in valuation allowance 799,000 53.7 (909,000) (94.2) 2,852,000 24.6
Other, net (15,041) (1.0) 84,060 8.7 (212,648) (1.8)
---------------------------------------------------------------------------
$ 106,124 7.1% $2,486,121 257.5% $(1,251,226) (10.8)%
===========================================================================
</TABLE>
At March 29, 1998, the Company has net operating loss carryforwards (NOLs) of
approximately $6,109,000, which, if not utilized, will begin expiring in the
year 2008. In addition, the Company has tip credit carryforwards of
approximately $2,000,000 and Alternative Minimum Tax (AMT) credit carryforwards
of approximately $600,000. Utilization of NOLs, tip credits, and AMT credits
may be limited in any given year by AMT restrictions, depending upon each year's
AMT calculation.
11. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution 401(k) salary deferral plan
eligible to full-time employees over 21 years old with over one year of service.
The Company matches employee contributions at the rate of 25% on the first 6% of
salary contributed. Contributions by the Company to the plan totaled $220,439,
$69,218, and $73,775 for the plan years ended December 31, 1996, 1997, and 1998,
respectively.
12. OTHER RELATED-PARTY TRANSACTIONS
Cinnabon provides administrative services for four bakeries owned by
shareholders. Fees recorded from these shareholders totaled $178,910, $144,098,
and $146,010 for the years ended March 31, 1996, March 30, 1997, and March 29,
1998, respectively.
F-21
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES
In consideration for continuing management consulting services, the Company has
entered into an agreement with the majority shareholders for an annual
management fee of $200,000, payable in monthly payments through June 3, 1999,
and renewable annually thereafter.
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of business which have not been finally adjudicated. In
management's opinion, these actions, when finally concluded and determined, will
not have a material adverse effect upon the financial position of the Company.
Subsequent to March 29, 1998, the Company has entered into commitments to open
two new bakeries at an estimated cost of $400,000.
14. OTHER NONCURRENT LIABILITIES
Employment agreements provide for the payment of signing bonuses of
approximately $70,000 annually for 1992 and 1993 and approximately $800,000
annually for 1994 through 2003. The payment dates of such bonuses are
contingent upon and restricted by certain governing debt covenants. The bonuses
were accrued at October 10, 1990 and totaled $3,236,092, which represented the
present value of the liability using a discount of 14.5%. The present value of
the liability at March 30, 1997 and March 29, 1998 was $7,802,908 and
$8,934,328, respectively, and is included in other noncurrent liabilities. No
payments have been made to date. Actual payments due at March 30, 1997 and
March 29, 1998 were $4,111,632 and $5,429,496, respectively, excluding any
prepayment premium.
15. IMPACT OF YEAR 2000 (UNAUDITED)
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This is commonly referred to as the "Year
2000 problem." The Company has completed an assessment and has begun modifying
and replacing portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company currently expects conversion of its systems to be complete
F-22
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
by the end of 1998 and does not anticipate this project to have a significant
effect on operations. As of March 29, 1998, there have been no significant
expenditures related to the Year 2000 problem.
The Company has initiated communications with its significant vendors and
customers to determine the extent to which the Company could be vulnerable to
those parties' failure to remediate their own Year 2000 issues. There is no
guarantee that the systems of other companies on which the Company relies will
be timely converted and would not have a material impact on the Company;
however, after review of vendor systems, the Company anticipates no material
adverse effect.
16. LIQUIDITY
The Company has incurred net losses of $10.3 million and $ 3.5 million for the
years ended March 29, 1998 and March 30, 1997, respectively. Additionally, at
March 31, 1998, the Company had a working capital deficiency of $7.9 million and
a shareholders' deficiency of $23.3 million. The Company has financed its
operations to date through bank lines of credit and other borrowings. On August
13, 1998 the Company entered into an agreement and plan of merger with AFC
Enterprises, Inc., a Minnesota corporation (the buyer) and AFC Franchise
Acquisition Corp., a Delaware corporation. This transaction was completed on
October 15, 1998, at which time the Company became a wholly owned subsidiary of
AFC Enterprises, Inc. See Note 17 for details of the transaction.
17. SUBSEQUENT EVENTS
BRIDGE FINANCING LOAN AGREEMENT
On May 22, 1998, Cinnabon Inc. issued $3 million in loans payable to various
existing lenders and common stockholders (the Bridge Financing Loans). The
Bridge Financing Loans are subordinate to the Company's senior bank loan
facilities and senior subordinated loans, but senior to other indebtedness of
the Company.
F-23
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
17. SUBSEQUENT EVENTS (CONTINUED)
The Bridge Financing Loans bear interest at 10% and are payable in full on
December 31, 1999 or upon a change of control of the Company. In addition,
holders of Bridge Financing Loans are entitled to receive additional interest,
referred to as premium interest, based upon various types of change of control.
Premium interest is dependent on proceeds received from a sale of the Company in
excess of the senior loan facilities.
ASSIGNMENT OF THE RESTAURANT ACQUISITION INC. NOTE RECEIVABLE
As part of the consideration paid on the Junior Subordinated Notes, the Company
has agreed to assign the Restaurants Acquisition Inc. Note Receivable (Note 4)
to the Junior Subordinated Note holders upon completion of the proposed sale of
the Company.
SALE OF COMPANY
On August 13, 1998, the Company entered into an agreement and plan of merger
with AFC Enterprises, Inc., a Minnesota corporation (the buyer) and AFC
Franchise Acquisition, Corp., a Delaware corporation. This transaction was
completed on October 15, 1998, at which time the Company became a wholly owned
subsidiary of AFC Enterprises, Inc.
In accordance with the agreement and plan of merger, the buyer made available
$64.0 million to repay existing obligations of the Company. The Company used
the funds to satisfy the following obligations (including accrued interest of
approximately $1.6 million) at closing, senior bank loan facilities ($41.2
million), senior subordinated loans ($11.5 million), revolving credit line
($1.15 million), Bridge Financing Loans ($3.1 million), and other notes payable
($0.3 million). After selling expenses of approximately $1.7 million and
consideration for common and preferred stockholders of $0.5 million, the Company
paid $3.1 million in premium interest on the Bridge Financing Loans and $1.45
million in additional consideration to preferred stockholders. After
distribution of proceeds, the remaining obligations on junior subordinated notes
($1.9 million), deferred signing bonuses ($4.6 million), and preferred stock and
related dividends ($9.4 million) were forgiven by the holders.
F-24
<PAGE>
Cinnabon International, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
17. SUBSEQUENT EVENTS (CONTINUED)
After completion of the transaction, the Company holds no direct obligations,
funded or otherwise, for long-term debt. The new parent company, AFC
Enterprises, Inc., will finance any future obligations of the Company. Any such
obligation is anticipated to be treated as an intercompany obligation to AFC
Enterprises, Inc. In addition, each holder of common stock and preferred stock
received a merger consideration of $0.01 per share outstanding; all shares held
in treasury were canceled and retired. All vested option holders received $0.01
per share, with all nonvested options being canceled and retired. All warrants
outstanding were canceled and retired. The Company NOL carryforwards, tip
credits, and AMT credits will be subject to certain limitations of Section 382
of the United States tax code. No adverse tax effects are anticipated as a
result of this transaction.
F-25
<PAGE>
CINNABON INTERNATIONAL, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - September 27, 1998....................................... 2
Condensed Consolidated Statements of Operations - For the Six Months
Ended September 27, 1998 and September 28, 1997................................................ 3
Condensed Consolidated Statements of Cash Flows - For the Six Months
Ended September 27, 1998 and September 28, 1997............................................... 4
Notes to Condensed Consolidated Financial Statements............................................ 5
</TABLE>
<PAGE>
===============================================================================
CINNABON INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
9/27/98
- -------------------------------------------------------------------------------- -----------------
(Unaudited)
<S> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 2,655
Accounts receivable, net.................................................. 773
Income taxes receivable................................................... 1,745
Inventories............................................................... 712
Prepaid expenses and other................................................ 369
----------
Total current assets.......................................... 6,254
----------
LONG-TERM ASSETS:
Property and equipment, net............................................... 23,127
Other assets.............................................................. 9,830
Intangible assets, net.................................................... 11,990
----------
Total long-term assets........................................ 44,947
----------
Total assets............................................... $ 51,201
==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 4,452
Current portion of long-term debt......................................... 4,279
Income taxes payable...................................................... 289
Accrued expenses and other................................................ 4,110
----------
Total current liabilities..................................... 13,130
----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion.................................... 55,553
Other liabilities......................................................... 10,359
----------
Total long-term liabilities................................... 65,912
----------
Total liabilities.......................................... 79,042
----------
SHAREHOLDERS' DEFICIENCY:
Redeemable preferred stock................................................ 14,600
Common stock.............................................................. 142
Additional paid in capital................................................ 103
Accumulated deficit....................................................... (42,686)
----------
Total shareholders' equity.................................... (27,841)
----------
Total liabilities and shareholders' deficiency............. $ 51,201
==========
See notes to condensed consolidated financial statements.
=============================================================================================================
</TABLE>
2
<PAGE>
================================================================================
CINNABON INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
9/27/98 9/28/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Bakery sales....................................................... $ 34,109 $ 34,747
Revenues from franchising.......................................... 1,771 1,496
-------- --------
Total revenues................................................... 35,880 36,243
-------- --------
COSTS AND EXPENSES:
Cost of sales...................................................... 32,126 32,305
General and administrative......................................... 4,800 4,768
Depreciation and amortization...................................... 664 663
Provision for write-down of bakery assets.......................... 55 164
-------- --------
Total costs and expenses......................................... 37,645 37,900
-------- --------
LOSS FROM OPERATIONS................................................. (1,765) (1,657)
OTHER EXPENSES:
Interest, net...................................................... 2,779 2,743
-------- --------
NET LOSS BEFORE INCOME TAXES......................................... (4,544) (4,400)
Income tax expense................................................. (31) (50)
-------- --------
NET LOSS............................................................. $ (4,575) $ (4,450)
======== ========
</TABLE>
See notes to condensed consolidated financial statements
================================================================================
3
<PAGE>
CINNABON INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
9/27/98 9/28/97
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss........................................................ $ (4,575) $ (4,450)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................................. 3,451 3,568
Other......................................................... 694 697
(Increase) decrease in operating assets....................... (577) 676
Increase (decrease) in operating liabilities.................. (31) (3,836)
------------- ---------------
Total adjustments......................................... 3,537 1,105
------------- ---------------
Net cash used in operating activities........................... (1,038) (3,345)
------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investment in property and equipment............................ (1,141) (3,853)
Investment in intangible ...................................... (60) (50)
----------- ---------------
Net cash used in investing activities........................... (1,201) (3,903)
------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments of long-term debt............................ (2) (2)
Proceeds from long-term debt.................................... 3,573 7,529
Equity contributions, net of expenses........................... - (80)
Debt issuance costs ............................................ (414) (2)
------------- ---------------
Net cash provided by (used in) financing activities............. 3,157 7,445
------------- ---------------
Net increase (decrease) in cash and cash equivalents............ 918 197
Cash and cash equivalents at beginning of the period............ 1,737 2,222
------------- ---------------
Cash and cash equivalents at end of the period.................. $ 2,655 $ 2,419
============= ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes................................. $ 48 $ 2,265
Cash payments for interest..................................... 1,835 2,102
</TABLE>
See notes to condensed consolidated financial statements.
===============================================================================
4
<PAGE>
CINNABON INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts
Cinnabon International, Inc., a Delaware corporation, and its wholly-owned
subsidiary, Cinnabon, Inc., a Delaware corporation. All significant intercompany
balances and transactions are eliminated in consolidation. The consolidated
entity is referred to herein as "Cinnabon" or the "Company".
Nature of Operations and Basis of Presentation
The Company operates 211 cinnamon roll retail bakeries throughout the
United States. The Company also offers franchise rights to investors to own and
operate retail establishments for the sale of cinnamon rolls and beverages. At
September 27, 1998, Cinnabon had franchised 152 bakeries.
The accompanying condensed consolidated financial statements have been
prepared pursuant Article 10 of Regulation S-X. 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.
Significant Accounting Policies
The accounting and reporting policies practiced by the Company are set
forth in Note 2 to the Company's consolidated financial statements for the
fiscal year ended March 29, 1998, which are contained in the Current Report on
Form 8-K/A dated December 23, 1998 of AFC Enterprises, Inc., filed with the
Securities and Exchange Commission and are incorporated herein by reference.
5
<PAGE>
AFC ENTERPRISES, INC.
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Pro Forma Consolidated Balance Sheet as of September 6, 1998.................... P-3
Pro Forma Consolidated Statement of Operations for the Year Ended
December 28, 1997 ............................................................. P-4
Pro Forma Consolidated Statement of Operations for the Thirty-six Week
Period Ended September 6, 1998................................................. P-5
Notes to Pro Forma Consolidated Financial Statements ........................... P-6
</TABLE>
P-1
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated financial statements have
been prepared to give effect to the Cinnabon International, Inc. ("CII")
acquisition, proceeds from the Amended and Restated Credit Agreement dated as of
October 15, 1998 (the "Refinancing") and proceeds from AFC Enterprises, Inc.'s
("AFC" or the "Company") offering of AFC common stock to "qualified" existing
shareholders and option holders ( the "Offering"). Proceeds from both the
Refinancing and Offering were used to fund the acquisition price for CII. The
unaudited pro forma consolidated balance sheet has been prepared assuming that
the transactions described above were completed on the balance sheet date
indicated. The unaudited pro forma consolidated statements of operations have
been prepared assuming the transactions described above were completed at the
beginning of the indicated periods.
The pro forma adjustments are based upon available information and contain
assumptions that management believes are reasonable under the circumstances. The
unaudited pro forma consolidated financial statements are provided for
informational purposes only and do not purport to be indicative of the Company's
financial condition or the results of operations that would actually have been
obtained had such transactions been completed for the periods or as of the dates
presented or that may be obtained in the future.
For purposes of these pro forma financial statements, CII's historical
operating results for the three months ended March 29, 1998 were incorporated in
both the pro forma consolidated statements of operations for the year ended
December 28, 1997 and for the thirty-six weeks ended September 6, 1998.
P-2
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 6, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
--------------------------------- Cinnabon
Company Cinnabon* Acquisition
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 11,557 $ 2,655 $ (64,000)
Accounts and current notes receivable, net............................ 15,399 2,518 -
Income taxes, current................................................. 1,196 - -
Inventories........................................................... 13,073 712 -
Deferred income taxes................................................. 531 - -
Prepaid expenses and other............................................ 2,027 369 -
-------------- ------------- --------------
Total current assets...................................... 43,783 6,254 (64,000)
-------------- ------------- --------------
LONG-TERM ASSETS:
Notes receivable, net................................................. 3,433 - -
Deferred income taxes................................................. 6,535 - -
Property and equipment, net........................................... 239,827 23,127
Other assets.......................................................... 18,718 9,830 (8,769)
Intangible - Cinnabon................................................. - - 43,753
Intangible assets, net................................................ 175,646 11,990 (11,990)
-------------- ------------- --------------
Total long-term assets.................................... 444,159 44,947 22,994
-------------- ------------- --------------
Total assets........................................... $ 487,942 $ 51,201 $ (41,006)
============== ============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable...................................................... $ 25,973 $ 4,452 $ 500
Current portion of long-term debt and capital
lease obligations............................................... 13,442 4,279 (4,273)
Short-term borrowings................................................. 7,000 - -
Bank overdrafts....................................................... 9,491 - -
Income taxes payable.................................................. - 289 -
Accrued expenses and other............................................ 23,566 4,110 (1,643)
-------------- ------------- --------------
Total current liabilities................................. 79,472 13,130 (5,416)
-------------- ------------- --------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion................................. 40,434 55,553 (55,549)
Acquisition line of credit............................................. 68,000 - -
10.25% Subordinated notes payable...................................... 175,000 - -
Capital lease obligations, net of current portion...................... 10,056 - -
Other liabilities...................................................... 37,422 10,359 (7,882)
-------------- ------------- --------------
Total long-term liabilities................................ 330,912 65,912 (63,431)
-------------- ------------- --------------
Total liabilities........................................ 410,384 79,042 (68,847)
-------------- ------------- --------------
REDEEMABLE PREFERRED STOCK.................................................... - 14,600 (14,600)
SHAREHOLDERS' EQUITY:
Common stock............................................................. 363 142 (142)
Capital in excess of par value........................................... 129,154 103
Treasury stock........................................................... - (929) 929
Accumulated deficit....................................................... (47,292) (41,757) 41,757
Notes receivable - shareholders........................................... - - -
Notes receivable - officers............................................... (4,667) - -
-------------- ------------- --------------
Total shareholders' equity.................................... 77,558 (42,441) 42,441
-------------- ------------- --------------
Total liabilities and shareholders' equity................. $ 487,942 $ 51,201 $ (41,006)
============== ============= ==============
<CAPTION>
Pro Forma Adjustments
----------------------
Refinancing/
Offering Pro Forma
-------------- --------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents............................................. (1) $ 68,436 (6) $ 18,648
Accounts and current notes receivable, net............................ - 17,916
Income taxes, current................................................. - 1,196
Inventories........................................................... - 13,786
Deferred income taxes................................................. - 531
Prepaid expenses and other............................................ - 2,396
-------------- --------------
Total current assets...................................... 68,436 54,473
-------------- --------------
LONG-TERM ASSETS:
Notes receivable, net................................................. - 3,433
Deferred income taxes................................................. - 6,535
Property and equipment, net........................................... - 262,955
Other assets.......................................................... (2) 887 (7) 20,665
Intangible - Cinnabon................................................. (3) - 43,753
Intangible assets, net................................................ (4) - 175,646
-------------- --------------
Total long-term assets.................................... 887 512,987
-------------- --------------
Total assets........................................... $ 69,323 $ 567,460
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable...................................................... (5) $ - 30,925
Current portion of long-term debt and capital
lease obligations............................................... (2) 500 (8) 13,948
Short-term borrowings................................................. - 7,000
Bank overdrafts....................................................... - 9,491
Income taxes payable.................................................. - 289
Accrued expenses and other............................................ (2) - 36,033
-------------- --------------
Total current liabilities................................. 500 87,686
-------------- --------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion................................. (2) 49,500 (9) 89,938
Acquisition line of credit............................................. - 68,000
10.25% Subordinated notes payable...................................... - 175,000
Capital lease obligations, net of current portion...................... - 10,056
Other liabilities...................................................... (2) - 39,899
-------------- --------------
Total long-term liabilities................................ 49,500 382,893
-------------- --------------
Total liabilities........................................ 50,000 470,579
-------------- --------------
REDEEMABLE PREFERRED STOCK.................................................... (2) - -
SHAREHOLDERS' EQUITY:
Common stock............................................................. (2) 28 (10) 391
Capital in excess of par value........................................... (2) 20,639 (10) 149,793
Treasury stock........................................................... (2) - -
Accumulated deficit....................................................... (2) - (47,292)
Notes receivable - shareholders........................................... (1,344) (11) (1,344)
Notes receivable - officers............................................... - (4,667)
-------------- --------------
Total shareholders' equity.................................... 19,323 96,881
-------------- --------------
Total liabilities and shareholders' equity................. $ 69,323 $ 567,460
============== ==============
</TABLE>
* Balance sheet as of September 27, 1998
See notes to pro forma consolidated financial statements.
P-3
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Historical -----------------------------------------
-------------------------------- Cinnabon Refinancing/
Company Cinnabon* Acquisition Offering Pro Forma
--------- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Restaurant sales............................... $ 403,285 $ 76,021 $ - $ - $ 479,306
Revenues from franchising...................... 63,650 3,243 - - 66,893
Revenues from manufacturing.................... 7,647 - - - 7,647
Other revenues................................. 8,766 - - - 8,766
--------- --------- --------- -------- ----------
Total revenues............................... 483,348 79,264 - - 562,612
COSTS AND EXPENSES:
Restaurant cost of sales....................... 131,374 18,040 - - 149,414
Restaurant operating expenses.................. 197,803 44,446 - - 242,249
Manufacturing cost of sales.................... 5,032 - - - 5,032
General and administrative..................... 80,485 9,599 - - 90,084
Depreciation and amortization.................. 33,803 7,426 444 (12) - 41,673
Provision for write-down of bakery assets...... - 4,835 - - 4,835
Reorganization charges......................... - 1,011 - - 1,011
Gain on sale of assets from AFDC transaction... (5,319) - - - (5,319)
--------- --------- --------- -------- ----------
Total costs and expenses..................... 443,178 85,357 444 - 528,979
--------- --------- --------- -------- ----------
INCOME (LOSS) FROM OPERATIONS.................... 40,170 (6,093) (444) - 33,633
OTHER EXPENSES:
Interest, net.................................. 20,645 5,499 (5,499)(13) 4,437 (15) 25,082
--------- --------- --------- -------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES............ 19,525 (11,592) 5,055 (4,437) 8,551
Income tax (expense) benefit................... (8,525) 1,251 (2,174)(14) 1,908 (14) (7,540)
--------- --------- --------- -------- ----------
NET INCOME (LOSS)................................ $ 11,000 $ (10,341) $ 2,881 $ (2,529) $ 1,011
========= ========= ========= ======== ==========
</TABLE>
* Statement of operations for the fiscal year ended March 29, 1998
See notes to pro forma consolidated financial statements.
P-4
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------
Historical
------------------------ Cinnabon Refinancing/
Company Cinnabon* Acquisition Offering Pro Forma
------------ ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Restaurant sales............................ $ 320,022 $ 51,371 $ - $ - $ 371,393
Revenues from franchising................... 44,721 2,568 - - 47,289
Revenues from manufacturing................. 24,460 - - - 24,460
Other revenues.............................. 6,731 - - - 6,731
--------- --------- --------- --------- ---------
Total revenues............................ 395,934 53,939 - - 449,873
COSTS AND EXPENSES:
Restaurant cost of sales.................... 103,161 12,546 - - 115,707
Restaurant operating expenses............... 160,598 32,032 - - 192,630
Wholesale and manufacturing cost of sales... 12,796 - - - 12,796
wholesale and Manufacturing operating
expenses..................................... 5,761 - - - 5,761
General and administrative................... 60,271 6,685 - - 66,956
Reorganization costs and other one-time
charges..................................... - 1,332 - - 1,332
Depreciation and amortization................ 29,734 4,987 267 (12) - 34,998
Provision for write-down of bakery assets.... _ 4,160 - - 4,160
--------- --------- --------- --------- ---------
Total costs and expenses................... 372,321 61,742 267 - 434,330
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS......................... 23,613 (7,803) (267) - 15,543
OTHER EXPENSES:
Interest, net................................ 20,176 4,698 (4,698) (13) 3,105 (15) 23,281
--------- --------- --------- --------- ---------
NET INCOME BEFORE INCOME TAXES................. 3,437 (12,501) 4,431 (3,105) (7,738)
Income tax (expense) benefit................. (1,406) 1,294 (1,905) (14) 1,335 (14) (682)
--------- --------- --------- --------- ---------
NET INCOME (LOSS).............................. $ 2,031 $ (11,207) $ 2,526 $ (1,770) $ (8,420)
========= ========= ========= ========= =========
</TABLE>
* Statement of operations for the nine months ended September 27, 1998
See notes to pro forma consolidated financial statements.
P-5
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION. The pro forma consolidated balance sheet has been
prepared assuming that the CII acquisition, proceeds from the Refinancing and
proceeds from the Offering to existing "qualified" shareholders and option
holders was completed on the date of the indicated period. The pro forma
statements of operations have been prepared assuming that the transactions
described above were completed at the beginning of the indicated periods. The
following notes describe the adjustments made to the historical financial
statements:
(1) To reduce the cash account by the cash used to fund the CII purchase price
of $64.0 million.
(2) To record (i) the write-off of notes receivable, (ii) the payoff of long-
term debt and related accrued interest, (iii) the write-off of deferred
bonuses and (ii) the elimination of redeemable preferred stock and CII
shareholders' equity accounts in connection with the CII acquisition. The
decrease in other liabilities is net of an addition of $1.7 million in
liabilities incurred by the Company in connection with the CII acquisition.
(3) To reflect the goodwill resulting from the CII acquisition.
(4) To record the write off of CII's pre-acquisition intangibles in connection
with the CII acquisition.
(5) To reflect the estimated acquisition costs related to the CII acquisition.
(6) To reflect the net cash proceeds the Company received from the Refinancing
and Offering to fund the CII acquisition.
(7) To reflect the debt issuance costs capitalized related to the Refinancing.
(8) To reflect the current portion of the Tranche B term loan of $50.0 million
resulting from the Refinancing.
(9) To reflect the noncurrent portion of the Tranche B term loan of $50.0
million resulting from the Refinancing.
(10) To reflect the issuance of 2,795,703 shares of AFC Common Stock (par value
$.01) sold to existing shareholders and option holders at $7.75 pursuant to
the Offering.
(11) To reflect the notes receivable additions representing notes executed
between the Company and certain shareholder and option holders used by such
individuals to purchase AFC Common Stock related to the Offering.
(12) To reflect amortization of the goodwill established as part of the CII
acquisition less amortization included in CII's historical statement of
operations related to pre-acquisition intangibles. A forty-year life was
used to compute the amortization on goodwill resulting from the CII
acquisition.
(13) To eliminate historical CII interest expense.
P-6
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(14) To reflect income tax expense using the Company's effective income tax rate
of 43% on a consolidated basis after the CII acquisition.
(15) To reflect interest expense on the $50.0 million Refinancing used to fund a
portion of the CII acquisition. An annual interest rate of 8.75% was used
to compute interest expense. In addition to interest expense on the term
loan, (i) additional interest expense was added to reflect the amortization
of related debt costs and (ii) interest income generated from the notes
receivable from the Offering (See note 17) was netted against total
interest expense resulting from the Refinancing.
P-7
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No-333-29731) and related Prospectus of AFC Enterprises, Inc. for the
registration of Notes Due 2007, of our report dated July, 10, 1998, except note
17, as to which the date is October 15, 1998, with respect to the consolidated
financial statements of Cinnabon International, Inc. and Subsidiary included in
the Current Report on Form 8-K/A filed December 23, 1998 of AFC Enterprises,
Inc., filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Seattle, Washington
December 23, 1998
