<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 March 21, 1999
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 May 4, 1999, there were 39,303,582 shares of the registrant's Common Stock
outstanding.
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AFC ENTERPRISES, INC.
INDEX
Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For the
Twelve Week Periods Ended March 21, 1999 and March 22, 1998.... 3
Condensed Consolidated Balance Sheets - March 21, 1999 and
December 27, 1998.............................................. 4
Condensed Consolidated Statements of Cash Flows - For the
Twelve Week Periods Ended March 21, 1999 and March 22, 1998.... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
PART 2 OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
(a) Exhibits................................................ 21
(b) Current Reports on Form 8-K............................. 21
SIGNATURE................................................................. 21
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PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
AFC Enterprises, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands)
12 Weeks Ended
3/21/99 3/22/98
- -------------------------------------------------------------------------------
Revenues:
Restaurant sales................................... $127,348 $ 97,027
Franchise revenues................................. 16,397 13,851
Wholesale revenues................................. 10,171 -
Manufacturing revenues............................. 1,813 1,319
Other revenues..................................... 2,027 2,050
-------- --------
Total revenues................................... 157,756 114,247
-------- --------
Costs and expenses:
Restaurant cost of sales........................... 38,457 30,941
Restaurant operating expenses...................... 66,028 47,627
Wholesale cost of sales............................ 5,062 -
Wholesale operating expenses....................... 2,709 -
Manufacturing cost of sales........................ 927 638
General and administrative......................... 25,903 20,188
Depreciation and amortization...................... 11,648 8,659
-------- --------
Total costs and expenses......................... 150,734 108,053
-------- --------
Income from operations............................... 7,022 6,194
Other expenses:
Interest, net...................................... 8,009 6,066
-------- --------
Net income (loss) before income taxes............... (987) 128
Income tax benefit (expense)....................... 395 (55)
-------- --------
Net income (loss).................................... $ (592) $ 73
======== ========
See accompanying notes to condensed consolidated financial statements.
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3
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AFC Enterprises, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
3/21/99 12/27/98
- --------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents............................ $ 16,386 $ 17,066
Accounts and current notes receivable, net........... 15,677 16,728
Income taxes, current................................ 1,181 3,327
Inventories.......................................... 13,376 13,182
Deferred income taxes................................ 3,804 4,577
Prepaid expenses and other........................... 2,304 2,344
-------- --------
Total current assets............................. 52,728 57,224
-------- --------
Long-term assets:
Notes receivable, net................................ 3,939 4,066
Deferred income taxes................................ 6,336 4,416
Property and equipment, net.......................... 260,981 263,141
Other assets......................................... 19,232 19,498
Intangible assets, net............................... 208,639 208,120
-------- --------
Total long-term assets........................... 499,127 499,241
-------- --------
Total assets..................................... $551,855 $556,465
======== ========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable..................................... $ 30,506 $ 40,579
Current portion of long-term debt
and capital lease obligations...................... 14,911 14,406
Bank overdrafts...................................... 10,446 6,248
Short-term borrowings................................ 6,000 7,000
Accrued expenses and other........................... 30,314 23,047
-------- --------
Total current liabilities........................ 92,177 91,280
-------- --------
Long-term liabilities:
Long-term debt, net of current portion............... 85,510 87,744
Acquisition line of credit........................... 68,000 68,000
10.25% Subordinated notes payable.................... 175,000 175,000
Capital lease obligations, net of current portion.... 7,303 8,561
Other liabilities.................................... 36,372 37,963
-------- --------
Total long-term liabilities...................... 372,185 377,268
-------- --------
Total liabilities................................ 464,362 468,548
-------- --------
Shareholders' equity:
Common stock......................................... 393 392
Capital in excess of par value....................... 151,889 151,632
Accumulated deficit.................................. (58,561) (57,969)
Notes receivable - officers.......................... (6,228) (6,138)
-------- --------
Total shareholders' equity....................... 87,493 87,917
-------- --------
Total liabilities and shareholders' equity.... $551,855 $556,465
======== ========
See accompanying notes to condensed consolidated financial statements.
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4
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AFC Enterprises, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
12 Weeks Ended
3/21/99 3/22/98
- --------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net income............................................... $ (592) $ 73
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 11,648 8,659
Deferred compensation and other........................ 254 819
Other.................................................. (330) 311
(Increase) decrease in operating assets................ 1,725 (5,494)
Increase (decrease) in operating liabilities........... (4,725) 4,855
------- --------
Total adjustments.................................. 8,572 9,150
------- --------
Net cash provided by operating activities................ 7,980 9,223
------- --------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment...... 823 268
Investment in property and equipment..................... (9,089) (5,072)
Investment in Pinetree goodwill.......................... - (21,859)
Investment in Pinetree property and equipment............ - (8,737)
Investment in SCC goodwill............................... (858) (28,545)
Investment in SCC property and equipment................. - (14,586)
Notes receivable additions............................... (30) (82)
Payments received on notes ............................. 684 572
------- --------
Net cash used in investing activities.................... (8,470) (78,041)
------- --------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt, net................ (1,406) (1,185)
Net borrowings under Acquisition line of credit.......... - 59,000
Proceeds from subordinated notes......................... - -
Net borrowings under short-term revolver................. (1,000) -
Principal payments for capital lease obligations......... (1,919) (1,541)
Increase (decrease) in bank overdrafts, net.............. 4,198 3,534
Notes receivable - officers payments..................... - 1
Notes receivable - officers interest..................... (67) (65)
Issuance of common stock ................................ - -
Debt issuance costs ..................................... 4 (35)
------- --------
Net cash provided by (used in) financing activities...... (190) 59,709
------- --------
Net decrease in cash and cash equivalents................ (680) (9,109)
Cash and cash equivalents at beginning of the period..... 17,066 32,964
------- --------
Cash and cash equivalents at end of the period........... $16,386 $ 23,855
======= ========
Supplemental Cash Flow Information:
Cash payments for income taxes.......................... $(1,393) $ 300
Cash payments for interest.............................. 3,943 1,641
Noncash investing and financing activities:
Capital lease obligations incurred.................... - 1,294
Issuance of common stock, options and warrants........ 814 25,496
See accompanying notes to condensed consolidated financial statements.
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5
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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of AFC
Enterprises, Inc., a Minnesota corporation, and its wholly-owned subsidiaries,
AFC Properties, Inc., a Georgia corporation, Seattle Coffee Company, a
Washington corporation, and Cinnabon International, Inc., a Delaware
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 is primarily a multi-concept quick-service restaurant company. The
Company 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 1998, the Company
added Seattle Coffee Company ("SCC"), which operates and franchises cafes under
the "Seattle's Best" and "Torrefazione Italia" brands (collectively "Seattle
Coffee") and operates a wholesale coffee business. Also in 1998, the Company
acquired Cinnabon International, Inc. ("CII"), an operator and franchisor of
retail cinnamon roll bakeries under the Cinnabon trade name ("Cinnabon"). The
Company also operates a manufacturing plant that produces proprietary gas fryers
and other custom-fabricated restaurant equipment for sale to distributors and
franchisees and used internally at Company-operated restaurants.
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 1999 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 27, 1998, which are contained in the Company's Form
10-K, filed with the Securities and Exchange Commission on March 29, 1999 and
are incorporated herein by reference.
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6
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SCC Contingent Earn-out Payment
The SCC acquisition agreement contained a contingent earn out payable to
former SCC shareholders. Actual payment to former SCC shareholders was
contingent upon SCC operations achieving a level of earnings, as defined in the
acquisition agreement, over a 52-week period from September 29, 1997 to
September 27, 1998 (the "Contingency Period"). Based on SCC's operating results
during the Contingency Period that ended on September 27, 1998, the Company paid
approximately $0.9 million in cash and issued 70,141 shares of AFC's common
stock to former SCC shareholders during the first quarter of 1999 as a
contingent payment pursuant to the provision in the agreement mentioned above.
2. Segment and Geographic Information
The Company operates exclusively in the food service and beverage industry.
Substantially all revenues result from the sale of menu products at restaurants,
bakeries and cafes operated by the Company, franchise royalty and fee income
earned from franchised restaurant, bakery and cafe operations and wholesale
revenues from the sale of coffee products. The Company's reportable segments
are based on specific products and services within the food service and beverage
industry. The Company combined Popeyes' and Churchs' domestic operations to
form its chicken segment. The Company also aggregated the operations of
Chesapeake and CII to form its bakery cafe segment. The Company's coffee
segment consists of SCC's domestic operations, which includes wholesale
operations. The international segment is comprised of the Company's
international franchised operations, which mainly consists of Popeyes and
Churchs international franchised restaurants.
The "other" segment includes the Company's manufacturing division,
Ultrafryer. The "corporate" component of operating income includes revenues
from 1) interest income from notes receivable and rental revenue from leasing
and sub-leasing agreements with franchisees and third parties, less 2) corporate
general and administrative expenses.
Operating income (loss) represents each segment's earnings before income
taxes, depreciation, amortization, non-cash items related to gains/losses on
asset dispositions and write-downs and compensation expense related to stock
option activity ("EBITDA" as defined by the Company).
Revenues:
3/21/99 3/22/98
-------- --------
(in thousands)
Chicken................. $118,320 $107,807
Coffee.................. 15,268 -
Bakery cafe............. 18,101 933
International........... 2,428 2,171
Other................... 1,899 2,482
Inter-segment revenues.. (247) (1,146)
Corporate............... 1,987 2,000
-------- --------
Total Revenues........ $157,756 $114,247
======== ========
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7
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Inter-segment revenues represent Ultrafryer sales to Company-operated
restaurants and SCC coffee sales to CII Company-operated bakeries. These
revenues are eliminated in consolidation.
Operating Income (Loss)(EBITDA):
3/21/99 3/22/98
-------- --------
(in thousands)
Chicken.......................... $ 22,356 $ 20,252
Coffee........................... 1,355 -
Bakery cafe...................... 1,604 (380)
International.................... 971 1,261
Other............................ 208 340
Corporate........................ (7,382) (6,084)
-------- --------
Total Operating Income......... $ 19,112 $ 15,389
======== ========
Adjustments to reconcile to
Income from operations:
Depreciation and amortization.... $(11,648) $ (8,659)
Compensation expense related to
stock options.................. (254) (819)
Gain/(loss) on fixed asset
write-offs..................... (188) 283
-------- --------
Income from operations......... $ 7,022 $ 6,194
======== ========
There have been no material changes to the Company's total assets by
reportable segment at March 21, 1999 from the amounts disclosed in the Company's
consolidated financial statements for the fiscal year ended December 27, 1998.
3. CII Acquisition
On October 15, 1998, the Company acquired CII, the operator and franchisor
of 363 retail cinnamon roll bakeries operating in 39 states, Canada and Mexico.
Two hundred and eleven of the retail cinnamon roll bakeries are Company-operated
and are located within the United States. In connection with the acquisition,
which was accounted for as a purchase, CII became a wholly-owned subsidiary of
AFC through the merger of AFC Franchise Acquisition Corp. into CII (the
"Acquisition").
The Company acquired CII for $64.0 million in cash. The Company obtained
$44.7 million of the cash consideration from its 1997 Credit Facility as amended
and restated. The remaining $19.3 million cash consideration was funded with
the proceeds from the sale of approximately 2.8 million shares of AFC common
stock to certain "qualified" investors who are existing AFC shareholders and
option holders.
The Company accounted for this acquisition as a purchase in accordance with
APB 16. The allocation of the purchase price resulted in the Company recording
goodwill in the amount of approximately $43.7 million, which is being amortized
on a straight-line basis over a forty-year period. The Company is in the
process of analyzing the fair values of the tangible and intangible assets
acquired from CII, which may result in a purchase price adjustment to the
current amounts initially recorded on the acquisition date. The Company
anticipates completing this process by mid 1999.
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8
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The Company is also in the process of developing an exit plan involving
CII's corporate headquarters in Seattle, Washington. The exit plan will include
severance, relocation and integration costs. At March 21, 1999, the Company has
not recorded a liability to recognize this anticipated liability since the plan
has not been finalized. The Company expects to finalize the plan within a year
from the acquisition date and record the related liability at that time. The
liability will be accounted for as a purchase price adjustment, which will
increase goodwill recorded as a result of the CII acquisition.
Pro Forma Financial Information
The following unaudited pro forma results of operations for the twelve
weeks ended March 22, 1998 assumes the acquisition of CII occurred as of the
beginning of the period (in thousands).
12 Weeks
Ended
3/22/98
--------
Total revenues.................... $132,306
========
Net loss.......................... $ (6,308)
========
The twelve weeks ended March 22, 1998 include CII's operations for the
three-month period ended March 29, 1998 since the Company acquired SCC in
October 1998.
These pro forma results have been prepared for comparative purposes only
and include certain adjustments that result in (i) an increase in amortization
expense related to the recording of CII goodwill, (ii) an increase in interest
expense related to the Term Loan B debt used to partially fund the acquisition,
(iii) a decrease in interest expense related to CII debt that was paid off at
the time of the acquisition and (iv) a decrease in amortization expense related
to the write-off of CII's intangible assets at the time of the acquisition.
These results do not purport to be indicative of the results of operations which
actually would have resulted had the acquisition been in effect at the beginning
of the respective periods or of future results of operations of the consolidated
entities.
================================================================================
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. Such
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in any discussion of the Company's expected future performance or
operations, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that
these will be realized. Such performance could be materially affected by a
number of factors, including without limitation those factors set forth in 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-week periods ended March 21, 1999 and March 22, 1998.
Twelve Weeks Ended
----------------------
March 21, March 22,
1999 1998
---------- ----------
Revenues:
Restaurant sales................... 80.8% 84.9%
Franchise revenues................. 10.4 12.1
Wholesale revenues................. 6.4 -
Manufacturing revenues............. 1.1 1.2
Other revenues..................... 1.3 1.8
----- -----
Total revenues.................. 100.0% 100.0%
----- -----
Costs and expenses:
Restaurant cost of sales (1)....... 30.2% 31.9%
Restaurant operating expenses (1).. 51.8 49.1
Wholesale cost of sales (2)........ 49.5 -
Wholesale operating costs (2)...... 26.7 -
Manufacturing cost of sales (3).... 50.0 46.2
General and administrative......... 16.4 17.8
Depreciation and amortization...... 7.4 7.6
Total costs and expenses........ 95.6 94.7
Income from operations............... 4.4 5.3
Interest expense, net................ 5.1 5.3
Net income (loss) before taxes....... (0.7) -
Income tax expense (benefit)......... 0.3 -
Net income (loss).................... (0.4)% -%
10
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- ------------
(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants.
(2) Expressed as a percentage of wholesale revenues.
(3) Expressed as a percentage of manufacturing revenues.
Selected Financial Data
The following table sets forth certain financial information and other
restaurant, bakery and cafe data relating to Company-operated and franchised
restaurants, bakeries and cafes (as reported to the Company by franchisees) for
the twelve week periods ended March 21, 1999 and March 22, 1998:
Twelve Weeks Ended
-------------------------------
March 21, March 22, % Change
1999 1998 1998-1999
--------- --------- ---------
(dollars in millions)
EBITDA, as defined (1)......................... $ 19.1 $ 15.4 24.0%
EBITDA margin.................................. 12.1% 13.5% (10.0)%
Capital Expenditures (2)....................... $ 9.1 $ 5.8 57.3%
Restaurant, bakery and cafe data (unaudited):
Systemwide sales (3):
Popeyes...................................... $236.7 $199.4 18.7%
Churchs...................................... 178.9 167.9 6.6
Cinnabon..................................... 32.5 N/A N/A
Seattle Coffee............................... 6.2 N/A N/A
Chesapeake................................... 11.8 14.8 (20.1)
------ ------
Total..................................... $466.2 $382.1 22.0%
====== ======
Systemwide openings:
Popeyes...................................... 25 90(4) (72.2)%
Churchs...................................... 25 19 31.6
Cinnabon..................................... 6 N/A
Seattle Coffee............................... 4 N/A
Chesapeake................................... 1 6 (83.3)
------ ------
Total..................................... 61 115 (47.0)%
====== ======
Systemwide units open, end of period:
Popeyes...................................... 1,298 1,214 6.9%
Churchs...................................... 1,416 1,368 3.5
Cinnabon..................................... 364 N/A N/A
Seattle Coffee............................... 75 N/A N/A
Chesapeake................................... 101 143 (29.4)
------ ------
Total..................................... 3,254 2,725 19.4%
====== ======
11
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Twelve Weeks Ended
---------------------
March 21, March 22,
1999 1998
--------- ---------
Systemwide percentage change in
comparable restaurant sales (3)
Popeyes domestic................. 7.5% 3.3%
Churchs domestic................. 1.8 4.4
Popeyes international............ (3.9) (11.9)
Churchs international............ (1.4) (2.2)
- ------------
(1) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for items related to gains/losses on asset
dispositions and write-downs and compensation expense related to stock
option activity (deferred compensation).
(2) Excludes fixed assets added in connection with the Seattle Coffee and
Pinetree acquisitions and capital expenditures made to convert the Pinetree
restaurants to Popeyes Company-operated restaurants.
(3) Prior year sales figures for Cinnabon and Seattle Coffee are not comparable
since these acquisitions occurred during 1998.
(4) Includes the conversion of 66 Hardees restaurants to Popeyes Company-
operated restaurants.
For the Twelve Weeks Ended March 21, 1999 and March 22, 1998
Certain items relating to prior periods have been reclassified to conform with
current presentation.
Revenues
Total revenues increased $43.5 million or 38.1% during the twelve weeks
ended March 21, 1999, as compared to the twelve weeks ended March 22, 1998.
Restaurant Sales. Restaurant sales were up 31.3% or $30.4 million over the
prior year, primarily due to sales generated by Company-operated restaurants
acquired during 1998.
Chicken
Sales at Company-operated chicken restaurants increased 9.2% or $8.9
million from the prior year. The increase was primarily attributable to sales
generated by Company-operated restaurants opened and acquired from March 22,
1998 to March 21, 1999. The average number of Company-operated chicken
restaurants open during the twelve weeks ended March 22, 1998 was 627, while the
average number of Company-operated chicken restaurants open during the twelve
weeks ended March 21, 1999 was 661. The remaining sales increase was due to an
increase in comparable sales for Company-operated chicken restaurants open for
at least one year of 2.6% for the first quarter of 1999.
12
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Bakery Cafe
Sales at Company-operated bakery cafes were up $16.5 million from the prior
year. Sales increased due to the acquisition of the Cinnabon bakery cafes in
October 1998. Sales for the Cinnabon bakeries during the first quarter of 1999
were $16.4 million.
Seattle Coffee
The Seattle Coffee cafes were acquired at the end of the first quarter of
1998. Sales generated by the cafes were included in the Company's Consolidated
Statements of Operations beginning on the first day of the second quarter of
1998. Sales generated by the SCC cafes during the first quarter of 1999 were
$5.0 million.
Franchise Revenues. Franchise revenues increased $2.5 million or 18.0%
from the prior year.
Chicken
Domestic revenues from franchising for chicken restaurants increased $1.6
million or 14.8% from the prior year. Franchise royalty revenues increased $1.5
million or 14.6%. The increase in franchise royalty revenue was partly
attributable to a 102 increase or 7.1% increase in the average number of chicken
franchised restaurants open during the first quarter of 1999 as compared to the
first quarter of 1998. The remaining increase was attributable to an increase
in comparable sales for domestic franchised restaurants of 6.1% for the first
quarter of 1999. Franchise fee income for the first quarter of 1999 was up $0.1
million over the prior year.
Bakery Cafe
Revenues from franchising for bakery cafes during 1998 increased $0.6
million or 84.0% from the prior year, primarily due to the acquisition of the
Cinnabon bakeries in October 1998. Royalty revenues for Cinnabon bakeries were
$0.8 million during the first quarter of 1999. Royalty revenues for Chesapeake
bakeries were down $0.1 million for the first twelve weeks of 1999 versus the
first twelve weeks of 1998 as a result of the closing of 58 domestic franchised
Chesapeake bakeries during 1998. Franchise fee income for bakery cafes for the
first quarter of 1999 was down $0.1 million from the first quarter of 1998.
Seattle Coffee
Franchise royalty revenue for Seattle Coffee franchised cafes totaled $37
thousand during the first quarter of 1999. There were a total of 11 Seattle
Coffee domestic franchised cafes as of March 21, 1999.
13
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International
International franchise revenues were up $0.3 million or 11.8% from the
prior year. International franchise royalty revenue increased $0.3 million,
despite the fact that international comparable sales were down 2.4% for the
first quarter of 1999 compared to the first quarter of 1998. Currency exchange
rates were favorable during the first quarter of 1999, while they were extremely
unfavorable during the first quarter of 1998. This factor, along with a 5.5%
increase in the average number of franchised international restaurants from the
first quarter of 1998 to the first quarter of 1999, led to the increase in
international franchise royalties for the quarter.
Wholesale Revenues. The Company's wholesale revenues consist of sales of
premium brand coffee from its roasting and distribution operations to food
service retailers, supermarkets and its own coffee cafes. Wholesale revenues
for the twelve weeks ended March 22, 1998 were zero, since Seattle Coffee was
acquired at the end of the first quarter of 1998. Wholesale revenues for the
twelve weeks ended March 21, 1999 were $10.2 million.
Manufacturing Revenues. Manufacturing revenues consist of sales of
proprietary fryers and other custom-fabricated restaurant equipment to
distributors and franchisees. Manufacturing revenues increased $0.5 million
from the first quarter of 1998 to the first quarter of 1999.
Operating Costs and Expenses
Restaurant Cost of Sales. Restaurant cost of sales for 1999 increased
24.6% or $7.6 million from the prior year. The increase was primarily
attributable to the increase in restaurant sales. Expressed as a percentage of
restaurant sales, cost of sales were 30.2% for the twelve weeks ended March 21,
1999, versus 31.9% for the twelve weeks ended March 22, 1998. The decrease in
this percentage is primarily due to (i) favorable pricing obtained for chicken
purchases due to a market decline in poultry prices, (ii) selective menu price
increases taken during 1998 and (iii) favorable sales mixes.
Restaurant Operating Expenses. Restaurant operating expenses for the
twelve weeks ended March 21, 1999 increased $18.4 million or 38.7% from the
corresponding period in 1998. The increase in restaurant operating expenses was
primarily due to the increase in the number of Company-operated restaurants.
Restaurant operating expenses as a percentage of restaurant sales were 51.8% for
the twelve weeks ended March 21, 1999, compared to 49.1% for the twelve weeks
ended March 22, 1998. The 2.7 point increase in this percentage was primarily
attributable to higher restaurant operating costs incurred by the bakery cafe
and Seattle Coffee segments. Restaurant operating expenses as a percentage of
restaurant sales were 61.7% and 57.0% for the bakery cafe and Seattle Coffee
segments, respectively, for the twelve weeks ended March 21, 1999. Rent expense
as a percentage of sales for bakery cafe and Seattle Coffee segments was
approximately 9 percentage points higher than that for the chicken restaurant
segment.
14
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This caused occupancy costs as a percentage of total company sales to increase
by 2.9 percentage points.
Wholesale Cost of Sales. Wholesale cost of sales represent the cost of
coffee beans and the direct overhead used to roast and blend specialty coffee
blends. Wholesale cost of sales were $5.0 million, which as a percentage of
wholesale revenues was 49.5%.
Wholesale Operating Expense. Wholesale operating costs represent the
overhead incurred in connection with the distribution of specialty coffee
blends. Wholesale operating costs were $2.7 million, which as a percentage of
wholesale revenues was 26.7%.
Manufacturing Cost of Sales. Manufacturing cost of sales represent the
cost of raw materials and direct labor used to manufacture the restaurant
equipment sold to franchisees and third parties and direct and indirect
manufacturing overhead applied during the manufacturing process. Manufacturing
cost of sales as a percentage of manufacturing revenues increased from 46.2%
during the first quarter of 1998 to 50.0% during the first quarter of 1999.
General and Administrative Expenses. General and administrative expenses
increased $5.6 million or 27.6% during the first quarter of 1999 compared to the
same period of a year ago. The increase was primarily attributable to general
and administrative expenses incurred by the Seattle Coffee and Cinnabon
operations, which totaled $3.6 million combined. As a percentage of total
revenues, general and administrative expenses decreased from 17.8% for the
twelve weeks ended March 22, 1998 to 16.4% for the twelve weeks ended March 21,
1999. The decrease in this percentage was primarily attributable to the
acquisitions of Seattle Coffee and Cinnabon. Seattle Coffee's general and
administrative expenses as a percentage of revenues was 11.3% for the twelve
weeks ended March 21, 1999. Cinnabon's general and administrative expenses as a
percentage of revenues was 10.6% for the twelve weeks ended March 21, 1999.
Depreciation and Amortization. Depreciation and amortization for the first
quarter of 1999 increased $3.0 million or 34.5% from the prior year.
Depreciation and amortization as a percentage of total revenues decreased from
7.6% in 1998 to 7.4% in 1999. Depreciation and amortization attributable to
Seattle Coffee and Cinnabon tangible and intangible assets totaled $2.8 million
for the first quarter of 1999. Overall, net property and equipment of $261.0
million as of March 21, 1999 was up 12.6% over net property and equipment of
$231.8 million at March 22, 1998. Net intangible assets as of March 21, 1999
were $208.6 million, versus net intangible assets of $178.4 million as of
March 22, 1998.
Income from Operations. Income from operations for the first quarter of
1999 increased $0.9 million or 14.8% from the first quarter of 1998. Income
from operations for chicken restaurants increased $1.0 million or 6.4%.
Increases in restaurant sales at
15
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Company-operated and franchised chicken restaurants led to higher restaurant
operating profits and royalty income, respectively.
Net Interest Expense. Interest expense, net of capitalized interest, for
the twelve weeks ended March 21, 1999 was $8.0 million, compared to $6.1 million
for the twelve weeks ended March 22, 1999. The $1.9 million increase in interest
expense was due to higher levels of average debt outstanding. The increase in
average debt outstanding was primarily attributable to borrowings made under the
Company's acquisition and revolving loan facilities during 1998 and borrowings
made under the new Tranche B term loan.
Income Taxes. The Company's effective tax rate for the twelve weeks ended
March 21, 1999 was 40%, compared to 43% for the twelve weeks ended March 22,
1998. A reconciliation of the Federal statutory rate to the Company's effective
tax rate began with a federal tax benefit rate of (35.0)% for fiscal year 1998
and a federal tax expense rate of 35.0% for fiscal year 1997. The tax benefit
rate for 1998 was reduced for non-deductible amortization expense related to
acquired goodwill.
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 twelve weeks ended March
21, 1999 and March 22, 1998 was $8.0 million and $9.2 million, respectively.
Available cash and cash equivalents, net of bank overdrafts, as of March 21,
1999 was $5.9 million, compared to $10.6 million at March 22, 1998. The
Company's working capital deficit as of March 21, 1999 and March 22, 1998 was
approximately $37.5 million and $31.1 million, respectively.
For the twelve weeks ended March 21, 1999 the Company invested in various
capital projects totaling $9.1 million. During this period the Company invested
$5.7 million in new restaurant locations and $3.4 million in other capital
assets to update, replace and extend the lives of restaurant equipment and
facilities and complete other projects. These 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 1997 Credit Facility and other sources of liquidity, will
be adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments under the Senior
Subordinated Notes and the 1997 Credit Facility.
16
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates on
debt and changes in commodity prices. In addition, a portion of the Company's
receivables are denominated in foreign currency, which exposes it to exchange
rate movements. Historically, the Company has not utilized hedging contracts to
manage its exposure to foreign currency rate fluctuations since the market risk
associated with international receivables was not determined to be significant.
However, during the first quarter of 1999 the Company entered into a foreign
currency hedging agreement with respect to the Korean Won.
The Company's net exposure to interest rate risk consists of its Senior
Subordinated Notes and borrowings under its 1997 Credit Facility. The Senior
Subordinated Notes bear interest at a fixed rate of 10.25%. The aggregate
balance outstanding under the Senior Subordinated Notes as of March 21, 1999 was
$175.0 million. Should interest rates increase or decrease, the estimated fair
value of these notes would decrease or increase, respectively. As of March 21,
1999, the fair value of the Senior Subordinated Notes exceeded the carrying
amount by approximately $7.0 million. The Company's 1997 Credit Facility has
borrowings made pursuant to it that bear interest rates that are benchmarked to
US and European short-term interest rates. The balances outstanding under the
1997 Credit Facility as of March 21, 1999 totaled $166.9 million. The impact on
the Company's annual results of operations of a hypothetical one-point interest
rate change on the outstanding balances under the 1997 Credit Facility would be
approximately $1.7 million. This assumes no change in the volume or composition
of the debt at March 21, 1999.
The Company and its franchisees purchase certain commodities such as
chicken, potatoes, flour, cooking oil and coffee beans. These commodities are
generally purchased based upon market prices established with vendors. These
purchase arrangements may contain contractual features that limit the price paid
by establishing certain price floors or ceilings. The Company's and its
franchisees principal raw material is fresh chicken. The purchase of fresh
chicken accounts for half of the Company's restaurant cost of sales. In order
(i) to ensure favorable pricing for the Company's chicken purchases in the
future, (ii) to reduce volatility in chicken prices and (iii) to maintain an
adequate supply of fresh chicken, the Company has or will enter into two types
of chicken purchasing arrangements with its suppliers. The first of these
contracts is a grain-based "cost-plus" pricing arrangement that provides chicken
prices based upon the cost of feed grains, such as corn and soybean meal, plus
certain agreed upon non-feed and processing costs. The other contract contains
price provisions which limit the movement of prices up or down in any year and
is based on the industry benchmark price (referred to as "Georgia Dock"). Both
contracts have terms ranging from three to five years with provisions for
certain annual price adjustments as defined in the contracts.
SCC's principal raw material is green coffee beans. The supply and prices
of green coffee beans are volatile. Although most coffee beans trade in the
commodity
17
<PAGE>
market (the "C market"), coffee beans of the quality sought by Seattle Coffee
tends to trade on a negotiated basis at a premium above the C market coffee
pricing, depending upon the supply and demand at the time of purchase.
Availability and price can be affected by many factors in producing countries,
including weather and political and economic conditions. The Company typically
enters into supply contracts to purchase a pre-determined quantity of green
coffee beans at a fixed price per pound. These contracts usually cover periods
up to a year as negotiated with the individual supplier.
Year 2000
The Company relies to a large extent on computer technology to carry out
its day-to-day operations. The Company is currently working to resolve the
potential impact of the Year 2000 on the processing of date-sensitive
information by the Company's information technology ("IT") systems and non-IT
systems that are reliant on computer technology. The Year 2000 problem is the
result of computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This problem could result in a system failure or miscalculations
causing disruptions of operations, including, but not limited to, a temporary
inability to process transactions or engage in normal business activities.
The Company has adopted a Year 2000 plan that includes five phases. These
phases are: 1) inventory 2) assess 3) remediate 4) test and 5) maintain.
Although the pace of the work varies among IT and non-IT systems and the phases
are often conducted in parallel, the inventory and assess phases have been
substantially completed as of March 21, 1999 and the remediation phase is in
progress. Under the Company's current plan, remediation and testing of IT
systems is scheduled to be completed by the end of its third quarter of 1999.
The Company anticipates the timely completion of this compliance assessment,
which should mitigate the Year 2000 issue.
To date, the Company has incurred approximately $0.1 million in Year 2000
costs. These costs are primarily related to fees paid to outside consultants
who helped develop a strategy to assess the Company's Year 2000 issues. The
Company estimates that the total costs of addressing the Year 2000 issue will
approximate $0.9 million, including the amount that has already been expended.
These costs will be funded through operating cash flows.
Based upon its compliance assessment, the Company does not expect the Year
2000 problem, including the cost of making the Company's IT and non-IT systems
Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods. The cost and
time estimates for the Company's Year 2000 project are based on its best
estimates. There can be no assurance that these estimates will be achieved or
that planned results will be achieved. The inability of the Company to resolve
all potential Year 2000 problems in a timely manner could have a material
adverse impact on the Company.
18
<PAGE>
During August 1994, an outsourcing agreement between the Company and IBM
Global Services ("IGS") was executed to, among other things, enhance and upgrade
the Company's corporate and restaurant hardware and software computer systems.
During the process of upgrading its systems, which is scheduled for completion
by the end of third quarter of 1999, the Company established procedures to
ensure that its new IT systems were Year 2000 compliant. The Company believes
that a significant portion of the potential Year 2000 issues will be resolved
with the completion of its IT system upgrades made in connection with the IGS
contract.
Under the Company's Franchise Awareness Program and Vendor/Supplier Letter
Program, the Company has and will initiate communications with its significant
suppliers and vendors and its franchisee community in an effort to determine the
extent to which the Company's business is vulnerable to the failure by these
third parties to remediate their Year 2000 problems. While the Company has not
been informed of any material risks associated with the Year 2000 problem with
respect to these entities, there can be no assurance that the IT and non-IT
systems of these third parties will be Year 2000 compliant on a timely basis.
The inability of these third parties to remediate their Year 2000 problems could
have a material adverse impact on the Company's financial position and results
of operations.
The Company has not yet ascertained what the impact would be on the
Company's financial position and results of operations in the event of failure
of the Company's or third parties' IT and non-IT systems due to the Year 2000
issue. The Company began developing a contingency plan in the fourth quarter of
1998 and will continue to develop such plan during the second quarter of 1999
designed to allow continued operations in the event that such failures should
occur.
Impact of Inflation
The Company believes that, over time, it has generally been able to pass
along inflationary increases in its costs through increased prices of its menu
items. Accordingly, the effects of inflation on the Company's net income
historically have not been, nor are such effects expected to be, materially
adverse. Due to competitive pressures, however, increases in prices of menu
items often lag inflationary increases in costs.
Seasonality
The Company has historically experienced the strongest operating results at
Popeyes, Churchs and Chesapeake restaurants during the summer months while
operating results have been somewhat lower during the winter season. Cinnabon
and Seattle Coffee have traditionally experienced the strongest operating
results during the Christmas holiday shopping season between Thanksgiving and
Christmas. Certain holidays and inclement winter weather reduce the volume of
consumer traffic at quick-service
19
<PAGE>
restaurants and may impair the ability of certain restaurants to conduct regular
operations for short periods of time.
20
<PAGE>
PART 2. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) In connection with the acquisition of SCC on March 18, 1998, the
Company issued 70,141 shares of AFC's Common Stock on March 18, 1999
pursuant to a contingent earn-out provision defined in the acquisition
agreement. All of these unregistered securities were issued by AFC pursuant
to the limited offering exemption under Rule 506 of Regulation D.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibit is included herewith:
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFC Enterprises, Inc.
Date: May 4, 1999 By: /s/ Gerald J. Wilkins
------------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
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STATEMENT FOR THE TWELVE WEEK PERIOD ENDED MARCH 21, 1999 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-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> MAR-21-1999
<CASH> 16,386
<SECURITIES> 0
<RECEIVABLES> 25,132
<ALLOWANCES> 5,516
<INVENTORY> 13,376
<CURRENT-ASSETS> 52,728
<PP&E> 385,150
<DEPRECIATION> 124,169
<TOTAL-ASSETS> 551,885
<CURRENT-LIABILITIES> 92,177
<BONDS> 335,813
0
0
<COMMON> 393
<OTHER-SE> 87,100
<TOTAL-LIABILITY-AND-EQUITY> 551,855
<SALES> 127,348
<TOTAL-REVENUES> 157,756
<CGS> 38,457
<TOTAL-COSTS> 150,734
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<INTEREST-EXPENSE> 8,009
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