<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 October 1, 2000
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 ___ No X
---
As of November 7, 2000, there were 39,509,063 shares of the registrant's Common
Stock outstanding.
<PAGE>
AFC ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For the
Twelve and Forty Week Periods Ended October 1, 2000
and October 3, 1999......................................... 3
Condensed Consolidated Balance Sheets - October 1, 2000 and
December 26, 1999........................................... 4
Condensed Consolidated Statements of Cash Flows - For the
Forty Week Periods Ended October 1, 2000 and
October 3, 1999............................................. 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
PART 2 OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........... 24
Item 6. Exhibits and Reports on Form 8-K.............................. 24
(a) Exhibits............................................. 24
(b) Current Reports on Form 8-K.......................... 24
SIGNATURE............................................................... 24
</TABLE>
<PAGE>
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
AFC Enterprises, Inc. and subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
10/01/00 10/03/99 10/01/00 10/03/99
--------------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales........................................... $ 126,096 $128,474 $ 428,194 $ 428,982
Franchise revenues......................................... 21,444 19,213 67,226 58,763
Wholesale revenues......................................... 12,755 11,736 40,531 36,518
Other revenues............................................. 2,660 2,143 8,207 7,014
---------- -------- --------- -----------
Total revenues........................................ 162,955 161,566 544,158 531,277
---------- -------- --------- -----------
Costs and expenses:
Restaurant cost of sales................................... 34,952 37,607 123,115 129,167
Restaurant operating expenses.............................. 67,743 67,575 223,228 221,086
Wholesale cost of sales.................................... 6,395 5,544 19,942 17,929
Wholesale operating expenses............................... 3,656 2,973 11,601 9,087
General and administrative................................. 20,121 20,787 76,614 77,701
Depreciation and amortization.............................. 9,663 8,346 31,770 33,473
---------- -------- --------- -----------
Total costs and expenses.............................. 142,530 142,832 486,270 488,443
---------- -------- --------- -----------
Income from operations........................................ 20,425 18,734 57,888 42,834
Other expenses:
Interest, net.............................................. 7,590 7,823 26,047 26,043
---------- -------- --------- -----------
Net income from continuing
operations before income taxes........................... 12,835 10,911 31,841 16,791
Income tax expense......................................... 5,481 4,934 13,596 7,581
---------- -------- --------- -----------
Net income from continuing
operations............................................... 7,354 5,977 18,245 9,210
Discontinued operations:
(Loss) from operations of Chesapeake
Bagel Bakery, net of income taxes.......................... - (537) - (397)
(Loss) on sale of Chesapeake Bagel
Bakery, net of income taxes................................ - (1,742) - (1,742)
Income (loss) from operations of Ultrafryer,
net of income taxes........................................ (4) 93 (52) 307
---------- -------- --------- -----------
Net income.................................................... $ 7,350 $ 3,791 $ 18,193 $ 7,378
========== ======== ========= ===========
Basic earnings per common share:
Net income from continuing operations...................... $ 0.19 $ 0.15 $ 0.46 $ 0.23
Net income (loss) from discontinued operations............. - (0.05) - (0.04)
---------- -------- --------- -----------
Net income................................................. $ 0.19 $ 0.10 $ 0.46 $ 0.19
========== ======== ========= ===========
Earnings per common share assuming dilution:
Net income from continuing operations...................... $ 0.17 $ 0.14 $ 0.43 $ 0.21
Net income (loss) from discontinued operations............. - (0.05) - (0.04)
---------- -------- --------- -----------
Net income................................................. $ 0.17 $ 0.09 $ 0.43 $ 0.17
========== ======== ========= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
================================================================================
3
<PAGE>
AFC Enterprises, Inc, and subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
10/01/00 12/26/99
----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.................................................. $ 14,680 $ 22,496
Accounts and notes receivable, net of allowance
for doubtful accounts of $808 in 2000 and $438 in 1999.................. 15,037 19,457
Income taxes, current...................................................... - 453
Inventories................................................................ 15,906 16,781
Deferred income taxes...................................................... 800 790
Prepaid expenses and other................................................. 3,930 2,750
--------- ----------
Total current assets............................................. 50,353 62,727
--------- ----------
Long-term assets:
Notes receivable, net of allowance
for doubtful accounts of $210 in 2000 and $371 in 1999................... 7,179 3,436
Deferred income taxes...................................................... 1,256 9,132
Property and equipment, net of accumulated depreciation and
amortization of $154,333 in 2000 and $139,594 in 1999................. 266,348 263,282
Assets under contractual agreement, net.................................... 7,732 -
Other assets............................................................... 13,704 18,442
Intangible assets, net..................................................... 189,693 204,870
--------- ----------
Total long-term assets........................................... 485,912 499,162
--------- ----------
Total assets................................................... $ 536,265 $ 561,889
========= ==========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable........................................................... $ 22,034 $ 32,800
Current portion of long-term debt and capital
lease obligations..................................................... 13,209 17,634
Current portion of acquisition line of credit.............................. 9,300 -
Short-term borrowings...................................................... 6,758 -
Bank overdrafts............................................................ 13,905 19,216
Accrued expenses and other................................................. 26,539 25,320
--------- ----------
Total current liabilities........................................ 91,745 94,970
--------- ----------
Long-term liabilities:
Long-term debt, net of current portion..................................... 89,021 97,205
Acquisition line of credit, net of current portion......................... 52,700 62,000
10.25% Subordinated notes payable.......................................... 150,000 166,980
Capital lease obligations, net of current portion.......................... 2,787 4,272
Other liabilities.......................................................... 30,241 35,663
--------- ----------
Total long-term liabilities...................................... 324,749 366,120
--------- ----------
Total liabilities.............................................. 416,494 461,090
--------- ----------
Shareholders' equity:
Common stock............................................................... 395 394
Capital in excess of par value............................................. 154,827 153,280
Accumulated deficit........................................................ (27,691) (45,884)
Treasury stock............................................................. (213) -
Notes receivable - officers................................................ (7,547) (6,991)
--------- ---------
Total shareholders' equity....................................... 119,771 100,799
--------- ----------
Total liabilities and shareholders' equity..................... $ 536,265 $ 561,889
========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
================================================================================
4
<PAGE>
AFC Enterprises, Inc. and subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
40 Weeks Ended
10/1/00 10/3/99
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income........................................................... $ 18,193 $ 7,378
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 31,854 33,935
Deferred tax expense............................................ 7,866 2,308
Compensation expense from stock options......................... 1,121 863
Other........................................................... 3,126 6,861
Decrease (increase) in operating assets......................... 29 (2,919)
Decrease in operating liabilities............................... (15,295) (12,742)
-------- --------
Total adjustments.......................................... 28,701 28,306
-------- --------
Net cash provided by operating activities............................ 46,894 35,684
-------- --------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment.................. 6,419 2,251
Investment in property and equipment................................. (32,385) (37,249)
Proceeds from sale of turnkey development............................ 3,610 1,416
Investments in turnkey development................................... (2,370) (2,131)
Proceeds from sales of discontinued operations....................... 550 2,312
Investment in Pinetree goodwill...................................... - (102)
Investment in SCC goodwill........................................... - (858)
Notes receivable additions........................................... - (1,052)
Payments received on notes........................................... 594 2,695
-------- --------
Net cash used in investing activities................................ (23,582) (32,718)
-------- --------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt, net............................ (10,035) (10,359)
Net borrowings under short-term revolver............................. 6,758 5,612
Principal payments for capital lease obligations..................... (4,874) (6,219)
Increase (decrease) in bank overdrafts, net.......................... (5,311) 4,730
Principal payments for subordinated notes............................ (16,980) -
Notes receivable - officers.......................................... (171) (181)
Notes and interest receivable - officers payments.................... 26 44
Notes receivable - officers interest additions....................... (323) (294)
Issuance of common stock............................................. 52 177
Treasury stock purchases............................................. (213) -
Debt issuance costs.................................................. (57) (43)
-------- --------
Net cash used in financing activities................................ (31,128) (6,533)
-------- --------
Net decrease in cash and cash equivalents............................ (7,816) (3,567)
Cash and cash equivalents at beginning of the period................. 22,496 17,066
-------- --------
Cash and cash equivalents at end of the period....................... $ 14,680 $ 13,499
======== ========
Supplemental Cash Flow Information:
Cash interest paid................................................. $ 21,757 $ 20,283
Cash paid for income taxes......................................... 4,361 624
Noncash investing and financing activities:
Capital lease obligations incurred............................ 12 100
Notes receivable additions.................................... 4,582 1,500
Terminations of capital leases and future obligations......... 1,606 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
===============================================================================
5
<PAGE>
AFC Enterprises, Inc. and subsidiaries
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. and Seattle Coffee Company ("SCC"), both Georgia
corporations, and Cinnabon International, Inc. ("CII"), 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, bakeries and cafes
under the primary trade names of Popeyes Chicken & Biscuits(R) ("Popeyes"),
Church's Chicken(R) ("Church's"), Seattle's Best Coffee(R) ("SBC"), Torrefazione
Italia(R) ("TI") and Cinnabon(R) ("Cinnabon"). The Company also operates a
wholesale coffee business. During the second quarter the Company sold its
manufacturing division ("Ultrafryer") that produces proprietary gas fryers and
other custom-fabricated restaurant equipment for sale to distributors,
franchisees and other food service operators (See Note 4).
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q and
Article 10 of regulation S-X. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements are not included. 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 to conform to the 2000 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 26, 1999, which are contained in the Company's Form
10-K, filed with the Securities and Exchange Commission on March 27, 2000 and
are incorporated herein by reference.
================================================================================
6
<PAGE>
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. In 2000, the Company began aggregating its domestic and international
operations in its reportable segments and, as such, restated the corresponding
items of segment information for 1999. The Company combines Popeyes' and
Church's operations to form its chicken segment. The Company's coffee segment
consists of SCC's operations, which includes its wholesale operations. The
Company's bakery segment includes Cinnabon's operations.
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.
Previously, the Company's manufacturing division, Ultrafryer, was included
in an "other" segment; however, with the sale of Ultrafryer in the second
quarter of 2000 (See Note 4), the "other" segment and the associated inter-
segment revenues have been eliminated. Ultrafryer's operations have been
classified as discontinued operations in the accompanying financial statements.
Operating income primarily represents each segment's earnings before income
taxes, depreciation, amortization, gains/losses on asset dispositions and write-
downs and compensation expense related to stock option activity.
Revenues:
12 Weeks Ended 40 Weeks Ended
10/01/00 10/03/99 10/01/00 10/03/99
--------- --------- --------- ---------
(in thousands)
Chicken........... $ 122,299 $ 124,535 $ 415,767 $ 413,446
Coffee............ 19,883 18,329 63,121 56,129
Bakery............ 18,129 16,769 57,221 55,471
Corporate......... 2,644 1,933 8,049 6,231
--------- --------- --------- ---------
Total Revenues.. $ 162,955 $ 161,566 $ 544,158 $ 531,277
========= ========= ========= =========
================================================================================
7
<PAGE>
Operating Income:
12 Weeks Ended 40 Weeks Ended
10/01/00 10/03/99 10/01/00 10/03/99
--------- --------- --------- ---------
(in thousands)
Chicken..................... $ 27,794 $ 26,509 $ 94,231 $ 84,916
Coffee...................... (89) 2,365 4,351 6,052
Bakery...................... 2,250 1,694 5,057 4,267
Corporate................... 439 (2,986) (12,553) (17,356)
--------- --------- --------- ---------
Total Operating Income.... 30,394 27,582 91,086 77,879
Adjustments to reconcile to
income from operations:
Depreciation and
amortization............. (9,663) (8,346) (31,770) (33,473)
Compensation expense
related to stock options.. (253) (273) (1,121) (863)
Gain/(loss) on fixed asset
and other write-offs...... (53) (229) (307) (709)
--------- --------- --------- ---------
Income from operations.... $ 20,425 $ 18,734 $ 57,888 $ 42,834
========= ========= ========= =========
There were no material changes to the Company's total assets by reportable
segment as of October 1, 2000 from the amounts disclosed in the Company's
consolidated financial statements for the fiscal year ended December 26, 1999.
3. Basic and Diluted Earnings Per Share
The following represents a reconciliation of the Company's basic and
diluted earnings per share as required by the Financial Accounting Standards
Board Statement No. 128 "Earnings per Share" (in thousands):
12 Weeks Ended 40 Weeks Ended
10/01/00 10/03/99 10/01/00 10/03/99
-------- -------- -------- --------
Net income (loss) from:
continuing operations.... $ 7,354 $ 5,977 $ 18,245 $ 9,210
discontinued operations.. (4) (2,186) (52) (1,832)
-------- -------- -------- --------
Net income................. $ 7,350 $ 3,791 $ 18,193 $ 7,378
======== ======== ======== ========
================================================================================
8
<PAGE>
12 Weeks Ended 40 Weeks Ended
10/01/00 10/03/99 10/01/00 10/03/99
-------- -------- -------- --------
Denominator for basic earnings
per share - weighted
average shares...................... 39,507 39,388 39,477 39,318
Effect of dilutive securities -
employee stock options.............. 3,199 3,412 3,239 3,498
-------- -------- -------- --------
Denominator for diluted earnings per
share - weighted average shares
adjusted for dilutive securities.... 42,706 42,800 42,716 42,816
======== ======== ======== ========
4. Divestiture
Ultrafryer
On May 11, 2000, AFC's Board of Directors approved the sale of Ultrafryer,
the Company's restaurant equipment manufacturing division, to an investor group
led by Ultrafryer's chief operating officer. The sale closed on June 1, 2000.
The Company received $550,000 in cash and $4.6 million in notes receivable from
the Buyer. The Company's estimated $0.4 million before tax gain on the sale has
been deferred for financial reporting purposes and included in other liabilities
on the balance sheet. The estimated income tax expense to be applied to the gain
on the sale is $0.2 million.
The results of Ultrafryer have been classified as discontinued operations
in the accompanying financial statements. The following amounts relate to
Ultrafryer's operations for the respective periods:
12 Weeks Ended 40 Weeks Ended
10/01/00 10/03/99 10/01/00 10/03/99
-------- --------- --------- ---------
(in thousands)
Total revenues.................. $ (6) $ 2,380 $ 3,372 $ 6,798
======== ========= ========= =========
Income (loss) from operations
before income taxes............ (7) 170 (91) 560
Income tax (expense) benefit.... 3 (77) 39 (253)
-------- --------- --------- ---------
Income (loss) from operations,
net of income taxes............ $ (4) $ 93 $ (52) $ 307
======== ========= ========= =========
================================================================================
9
<PAGE>
5. Assets Under Contractual Agreement
In the second quarter, AFC transferred certain long-lived assets to a
company owned by a former AFC employee in exchange for shares of preferred stock
of that company. Concurrent with the transfer of assets, which consisted of
restaurant equipment for twelve Popeyes restaurants, the company became a
Popeyes franchisee. In compliance with certain accounting rules, AFC cannot
remove these assets from its books and records, and as such, AFC has classified
these assets under the category "Assets Under Contractual Agreement" in the
accompanying balance sheet. Consequently, AFC did not record an investment for
the shares of preferred stock received in the transaction. At October 1, 2000,
these assets included the following (in thousands):
Equipment, net................................... $2,234
Goodwill allocable to assets, net................ 5,498
------
Total............................................ $7,732
======
================================================================================
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. Such
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in any discussion of the Company's expected future performance or
operations, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that
these will be realized. Such performance could be materially affected by a
number of factors, including without limitation those factors set forth in the
"Item 1. Business" 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 and forty-week periods ended October 1, 2000 and October 3,
1999.
12 Weeks Ended 40 Weeks Ended
-------------- --------------
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
------ ------ ------ ------
Revenues:
Restaurant sales...................... 77.4% 79.5% 78.7% 80.7%
Franchise revenues.................... 13.2 11.9 12.4 11.1
Wholesale revenues.................... 7.8 7.3 7.4 6.9
Other revenues........................ 1.6 1.3 1.5 1.3
Total revenues.................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant cost of sales (1).......... 27.7% 29.3% 28.8% 30.1%
Restaurant operating expenses (1)..... 53.4 52.5 52.0 51.4
Wholesale cost of sales (2)........... 50.1 47.2 49.2 49.1
Wholesale operating costs (2)......... 28.7 25.3 28.6 24.9
General and administrative............ 12.4 12.8 14.1 14.6
Depreciation and amortization......... 5.9 5.2 5.8 6.3
Total costs and expenses.......... 87.5 88.4 89.4 91.9
Income from operations.................... 12.5 11.6 10.6 8.1
Interest expense, net..................... 4.7 4.8 4.8 4.9
Net income from continuing operations
before taxes............................ 7.8 6.8 5.8 3.2
Income tax expense........................ (3.4) (3.1) (2.5) (1.4)
Net income from continuing operations..... 4.4 3.7 3.3 1.8
Loss on discontinued operations, net (3).. - (1.4) - (0.3)
Net income................................ 4.4% 2.3% 3.3% 1.5%
(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants, bakeries and cafes.
(2) Expressed as a percentage of wholesale revenues.
(3) Represents both Ultrafryer (2000 and 1999) and Chesapeake (1999).
11
<PAGE>
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 and forty week periods ended October 1, 2000 and October 3,
1999:
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
------------------------------------ -------------------------------------
Oct. 1, Oct. 3, % change Oct. 1, Oct. 3, % change
2000 1999 99-00 2000 1999 99-00
---------- ---------- ---------- ---------- ---------- ----------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
EBITDA, as defined (1)....................... $ 30.4 $ 27.6 10.2% $ 91.1 $ 77.9 17.0%
EBITDA margin................................ 18.7% 17.1% 1.6pts. 16.7% 14.7% 2.0pts.
Capital Expenditures......................... $ 12.6 $ 15.2 (17.1)% $ 32.8 $ 37.4 (12.3)%
Restaurant, bakery and cafe data (unaudited):
System-wide sales:
Popeyes.................................... $ 289.9 $ 255.5 13.5% $ 931.2 $ 817.4 13.9%
Church's................................... 201.2 188.5 6.7 663.6 621.2 6.8
Cinnabon................................... 42.5 35.6 19.4 128.1 111.0 15.4
Seattle Coffee Retail...................... 12.1 8.0 51.5 34.3 23.0 48.8
Seattle Coffee Wholesale................... 12.8 11.7 8.7 40.5 36.5 11.0
---------- ---------- ---------- ----------
Total..................................... $ 558.5 $ 499.3 11.8% $ 1,797.7 $ 1609.1 11.7%
========== ========== ========== ==========
System-wide unit openings:
Popeyes.................................... 28 33 (15.2)% 93 98 (5.1)%
Church's................................... 19 26 (27.0) 76 101 (24.8)
Cinnabon................................... 16 10 60.0 42 29 44.8
Seattle Coffee............................. 12 11 9.1 31 20 55.0
---------- ---------- ---------- ----------
Total..................................... 75 80 (6.3)% 242 248 (2.4)%
========== ========== ========== ==========
System-wide units open, end of period:
Popeyes...................................... 1,464 1,358 7.8%
Church's..................................... 1,534 1,477 3.9
Cinnabon..................................... 421 394 6.9
Seattle Coffee............................... 125 90 38.9
---------- ----------
Total....................................... 3,544 3,319 6.8%
========== ==========
System-wide percentage change in
comparable unit sales:
Popeyes domestic............................. 3.1% 3.5% 3.7% 5.5%
Church's domestic............................ 0.7 0.3 0.8 1.0
Cinnabon domestic............................ 7.7 1.9 3.5 3.1
Seattle Coffee domestic...................... (0.4) 4.1 0.0 3.1
Popeyes international........................ 2.2 (2.7) 2.2 (4.1)
Church's international....................... (0.8) (5.0) (1.7) (1.8)
Cinnabon international....................... 9.0 7.2 5.6 n/a
</TABLE>
(1) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for items related to gains/losses on asset
dispositions and write-downs and compensation expense related to stock
option activity.
12
<PAGE>
For the Twelve Weeks Ended October 1, 2000 and October 3, 1999
Certain items relating to prior periods have been reclassified to conform with
current presentation.
Sales
System-wide Sales. System-wide sales include sales from all restaurants,
bakeries and cafes, whether operated by us or our franchisees, and coffee
wholesale operations. Our system-wide sales increase of $59.2 million in the
third quarter of 2000 was primarily due to new unit growth within our chicken,
bakery and cafe brands, positive comparable sales growth in our domestic markets
and coffee wholesale revenue growth. The overall increase was reduced by net
comparable sales decreases in our Church's international markets, mainly Taiwan
and Canada, resulting in lower sales volumes in the third quarter 2000 compared
to the same period in 1999. At the end of the quarter ended October 1, 2000, we
had 3,544 system-wide units versus 3,319 system-wide units in the prior year
quarter ended October 3, 1999.
Restaurant Sales. Restaurant sales include sales from our Company-operated
restaurants, bakeries and cafes. The chicken segment includes both our Popeyes
and Church's brands. The bakery segment includes our Cinnabon brand, and the
coffee segment is comprised of our SBC and TI operations.
Chicken
Third quarter 2000 sales at our Company-operated chicken restaurants of
$103.0 million decreased $3.7 million over the same period in 1999. The decrease
in revenue was due to a reduction of 34 Company-operated units compared to the
prior year and a comparable sales decrease of 0.7% within our Church's brand.
The reduction in units resulted from sales and transfers of restaurants to
franchisees and is tied to our strategy of selling selected Company-operated
restaurants to existing and new franchisees coupled with an agreement to develop
additional restaurants. The decrease was minimized by a comparable sales
increase of 1.2% within our Popeye's brand.
Bakery
Sales at our Company-operated Cinnabon bakeries increased $0.9 million in
the third quarter of 2000 compared to the same period in 1999. The increase in
sales was due to an 8.3% increase in comparable sales for the quarter.
Coffee
Sales at our Company-operated cafes increased $0.2 million in the third quarter
2000 over the same period in 1999. Our quarterly sales growth was mainly due to
new unit growth offset by a 1.0% comparable sales decrease in the third quarter.
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Franchise Revenues. Franchise revenues include royalties and franchise and
development fees received from restaurants, bakeries and cafes operated by our
franchisees. Royalties are based on a percent of sales, while franchise and
development fees represent initial fixed fees depending on the type of franchise
and location. Franchise and development fees are recorded as revenue when the
respective franchised restaurant, bakery or cafe opens or the development
agreement is terminated due to a franchisee default. Other types of franchise
fees include transfer fees and extension fees. The company collects a transfer
fee when a franchised unit is transferred from one franchisee to another
franchisee. The transfer fees are recorded as revenue upon the effective date of
the transfer. Extension fees represent fees a franchisee pays the Company in
extending its franchise agreement with the Company and is recognized as revenue
upon the effective date of the extension.
Chicken
Royalty revenue for the third quarter 2000 from our franchised chicken
restaurants of $17.3 million increased $1.8 million over the same period in
1999. The growth in royalty revenue was driven by comparable sales and new unit
growth. At October 1, 2000, we had 2,356 domestic and international franchised
chicken restaurants open compared to 2,159 restaurants open at October 3, 1999.
Franchise fee revenue decreased by $0.5 million in the third quarter 2000
primarily due to less unit openings compared to the third quarter of 1999. The
decrease due to fewer unit openings was in part offset by transfer and extension
franchise fees collected in the third quarter.
Bakery
Royalty revenue from our franchised Cinnabon bakeries increased by $0.3
million for the third quarter 2000 compared to the same period in 1999. This
increase was primarily due to comparable sales and new unit growth. At October
1, 2000, we had 228 domestic and international franchised bakeries open versus
201 bakeries open at October 3, 1999. Franchise fee revenue for the quarter
increased $0.1 million versus the comparable period in prior year. The increase
resulted from international bakery openings in 2000 exceeding bakery openings in
1999.
Coffee
Royalty revenue from our franchised Seattle Coffee cafes increased by $0.2
million for the third quarter compared to the same period in prior year. This
increase was primarily due to new unit and comparable sales growth. At October
1, 2000, we had 53 domestic and international franchised cafes open versus 17
cafes open at October 3, 1999. Franchise fee revenue for the quarter increased
$0.2 million over prior year. The increase resulted from franchised cafe
openings in 2000 exceeding franchised cafe openings in 1999.
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Wholesale Revenues. Our wholesale revenues come from sales of premium
specialty coffee to food service retailers and supermarkets. In the third
quarter 2000, wholesale revenues increased by $1.0 million over the same period
in 1999 mainly due to an increase in the number of wholesale accounts.
Operating Profit
Company-operated Restaurant Operating Profit. Company-operated restaurant
operating profit is the revenue from Company-operated restaurant, bakery and
cafe sales less the related operating costs of those restaurants, bakeries and
cafes.
Chicken
Our Company-operated restaurant operating profit in the third quarter
equaled the same amount as in the corresponding period in 1999. Despite the
reduction in units in 2000 resulting from sales and transfers of restaurants to
franchisees, our chicken segment completely offset decreases in operating profit
related to sales and transfers in 2000 by controlling restaurant operating costs
and capitalizing on slightly lower average poultry prices.
Operating profit from Company-operated chicken restaurants as a percent of
restaurant sales was 19.4% and 18.7% in the twelve weeks ended October 1, 2000
and October 3, 1999, respectively.
Bakery
Operating profit at our Company-operated Cinnabon bakeries increased by
$0.2 million in the third quarter as compared to the same period in 1999. The
increase was primarily due comparable sales growth.
Operating profit from Company-operated Cinnabon bakeries as a percent of
bakery sales was 17.8% and 17.6% in the twelve weeks ended October 1, 2000 and
October 3, 1999, respectively.
Coffee
Operating profit at our Company-operated Seattle Coffee cafes grew by $0.1
million in the third quarter 2000 as compared to the same period in 1999. The
increase was primarily due to new unit growth.
Operating profit from Company-operated Seattle Coffee cafes as a percent of
cafe sales was 13.5% and 11.9% in the twelve weeks ended October 1, 2000 and
October 3, 1999, respectively.
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Wholesale Coffee Operating Profit. Wholesale coffee operating profit is the
difference between coffee sales to wholesale accounts and the related operating
costs of our wholesale operations, which includes the cost of coffee beans and
the direct overhead used to roast, blend and distribute specialty coffee blends.
offee
Wholesale coffee operating profit of $2.7 million in the third quarter of
2000 decreased by $0.5 million versus the comparable period in 1999. The
decrease was primarily due to higher distribution costs in 2000 versus 1999.
Wholesale coffee operating profit as a percent of wholesale sales was 21.2%
and 27.4% in the twelve weeks ended October 1, 2000 and October 3, 1999,
respectively.
Expenses
General and Administrative Expenses. General and administrative expenses of
$20.3 million for the third quarter decreased by $0.5 million versus the same
period in 1999. The decrease was primarily due to a $3.1 million reduction in
corporate expenses resulting mainly from the reversal of an environmental
reserve, which was replaced with a third party environmental insurance policy
providing the same coverage. The decrease in the environmental reserve was in
part offset by a one-time, non-recurring $2.4 million increase in Seattle
Coffee's general and administrative expenses due to 1) severance, relocation and
recruiting expenses and 2) SBC concept development related expenses.
Depreciation and Amortization. Depreciation and amortization increased by
$1.3 million in the third quarter compared to the same period the prior year.
The increase in expense was primarily due to depreciation expense from capital
expenditure additions of $32.8 million made throughout 2000 .
Income from Operations. Income from operations increased $1.7 million or
9.0% in the third quarter as compared to the same period in 1999. The growth in
income from operations was due to new unit growth, wholesale and franchise
revenue increases, positive comparable sales and lower general and
administrative expenses. The increase was partially offset by lower restaurant
sales and increased depreciation expense.
Net Interest Expense. Interest expense for the third quarter of $7.6
million was $0.2 million less than the comparable period in prior year. The
decrease in expense was primarily attributable to less capital lease obligations
due to amortization and lower interest on the Subordinated Notes due to the
repurchase of $25.0 million face value of Notes made between late 1999 and early
2000.
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For the Forty Weeks Ended October 1, 2000 and October 3, 1999
Certain items relating to prior periods have been reclassified to conform with
current presentation.
Sales
System-wide Sales. Our system-wide sales increase of $188.7 million in the
forty week period ended October 1, 2000 was primarily due to new unit growth
within our chicken, bakery and cafe brands, positive comparable sales growth in
our domestic markets and certain international franchised markets and coffee
wholesale revenue growth. The overall increase was partially offset by a
comparable sales decrease in our Church's international markets, specifically
Taiwan and Canada. At the end of October 1, 2000, we had 3,544 system-wide units
versus 3,319 system-wide units at the end of October 3, 1999.
Restaurant Sales
Chicken
For the 40-weeks ended October 1, 2000, sales at our Company-operated
chicken restaurants of $354.6 million decreased $3.8 million over the same
period in 1999 due primarily to fewer Company-operated restaurants in the
period. Additionally, Church's comparable sales decreased 0.4%, while Popeyes
posted an increase in comparable sales of 0.7%. Thirty-one Church's and Popeyes
Company-operated restaurants were either sold or transferred to franchisees
during this period.
Bakery
Sales at our Company-operated Cinnabon bakeries increased $0.4 million in
2000 compared to the same period in 1999. The increase was primarily due to a
4.1% increase in comparable sales for the forty-week period ended October 1,
2000.
Coffee
Sales at our Company-operated cafes increased $1.9 million in 2000 over the
same period in 1999 mainly due to new unit growth.
Franchise Revenues
Chicken
Royalty revenue in 2000 from our franchised chicken restaurants of $55.8
million increased $6.4 million over the same period in 1999. The growth in
royalty revenue was due to comparable sales and new unit growth. At October 1,
2000, we had 2,356
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domestic and international franchised chicken restaurants open compared to 2,159
restaurants open at October 3, 1999. Franchise fee revenue decreased by $0.3
million in 2000 primarily due to less unit openings compared to 1999. The
decrease due to fewer unit openings was partially offset by transfer and
extension franchise fees collected in the third quarter.
Bakery
Royalty revenue from our franchised Cinnabon bakeries increased by $0.8
million for the forty weeks ended October 1, 2000 compared to the same period in
1999. This increase was primarily due to comparable sales increases and new unit
growth. At October 1, 2000, we had 228 domestic and international franchised
bakeries open versus 201 bakeries open at October 3, 1999. Franchise fee revenue
for the period increased $0.5 million versus the comparable period in the prior
year due to increased bakery openings over prior year.
Coffee
Royalty revenue from our franchised coffee cafes increased by $0.6 million
for the 40-weeks ended October 1, 2000 compared to the same period in the prior
year due primarily to new unit and comparable sales growth. At October 1, 2000,
we had 53 franchised cafes open versus 17 cafes open at October 3, 1999. During
the same period, franchise fee revenue increased $0.5 million versus the prior
year due to increased cafe openings.
Wholesale Revenues. In the 40-week period ended October 1, 2000, wholesale
revenues increased by $4.0 million over the same period in 1999 due to an
increase in the number of wholesale accounts.
Operating Profit
Chicken
Our Company-operated restaurant operating profit increased $2.3 million or
3.3% in the 40-week period ended October 1, 2000 over the same period in 1999
due primarily to a 2.8% reduction in poultry prices.
Operating profit from Company-operated chicken restaurants as a percent of
restaurant sales was 20.1% and 19.3% in the forty weeks ended October 1, 2000
and October 3, 1999, respectively.
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Bakery
Operating profit at our Company-operated Cinnabon bakeries grew by $0.3
million or 3.7% in the 40-weeks ended October 1, 2000 as compared to the same
period in 1999 due primarily to comparable sales growth.
Operating profit from Company-operated Cinnabon bakeries as a percent of
bakery sales was 15.6% and 15.2% in the forty weeks ended October 1, 2000 and
October 3, 1999, respectively.
Coffee
Operating profit at our Company-operated Seattle Coffee cafes grew by $0.3
million or 14.6% in the 40-weeks ended October 1, 2000 as compared to the same
period in 1999 due primarily to new unit growth.
Operating profit from Company-operated Seattle Coffee cafes as a percent of
cafe sales was 12.4% and 11.9% in the forty weeks ended October 1, 2000 and
October 3, 1999, respectively.
Wholesale Coffee Operating Profit
Coffee
Wholesale coffee operating profit of $9.0 million for the 40-weeks ended
October 1, 2000 decreased by $0.5 million versus the comparable period in 1999.
The decrease was primarily due to higher distribution costs in 2000 versus 1999.
Wholesale coffee operating profit as a percent of wholesale sales was 22.2%
and 26.0% in the forty weeks ended October 1, 2000 and October 3, 1999,
respectively.
Expenses
General and Administrative Expenses. General and administrative expenses of
$76.5 million for the 40-weeks ended October 1, 2000 decreased by $1.1 million
versus the same period in 1999 due to decreases in our chicken segment and
corporate general and administrative expenses. The decrease in our chicken
segment's expenses was due to sales and transfers of Company-operated units to
franchised units, which tend to be higher in supporting Company operations
versus franchised operations. The decrease in corporate expenses was due to the
reversal of an environmental reserve, which was replaced by a third party
environmental insurance policy providing the same coverage. The overall decrease
in our chicken segment and corporate expenses was partially offset by increases
in general and administrative expenses at Cinnabon and Seattle Coffee due to
operational growth and one-time, non-recurring personnel and concept development
expenses incurred at Seattle Coffee.
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Depreciation and Amortization. Depreciation and amortization decreased by
$1.7 million in the 40-week period ended October 1, 2000 compared to the same
period in the prior year due to the re-estimation of useful lives of certain
buildings, equipment and leasehold improvements in 1999, which resulted in a
$3.0 million decrease in depreciation expense partially offset by higher
depreciation expense from capital additions of $32.8 million.
Income from Operations. Income from operations increased $15.1 million or
35.1% in the 40-week period ended October 1, 2000 as compared to the same period
in 1999. The growth in income from operations was due to new unit growth,
wholesale and franchise revenue increases, positive comparable sales, and lower
depreciation expense. The increase was in part reduced by a decrease in
restaurant sales.
Net Interest Expense. Interest expense for the 40-week period ended October
1, 2000 of $26.0 million equaled the amount in the comparable period in the
prior year. A $0.4 million decrease in capital lease obligations interest
expense due to amortization was offset by a $0.4 million increase in debt cost
amortization due to the write-off of debt issuance costs in connection with
repurchases of $17.0 million of our Senior Subordinated Notes.
Liquidity and Capital Resources
Cash for Operations
We finance our business activities primarily with funds generated from
operating activities and a revolving line of credit.
Net cash provided by operating activities for the forty weeks ended October 1,
2000 and October 3, 1999 was $46.9 million, and $35.7 million, respectively.
Available cash and cash equivalents, net of bank overdrafts, as of October 1,
2000 was $0.8 million, compared to $3.3 million at December 26, 1999.
Additionally, we meet our short-term needs using our revolving line of
credit. Typically, we maintain a low current ratio, .55 at October 1, 2000
versus .66 at December 26, 1999.
Based upon our current level of operations and anticipated growth, we
believe that available cash flow, together with the available borrowings under
our Senior Secured Credit Facility will be adequate to meet our anticipated
twelve to eighteen month requirements for working capital, capital expenditures
and scheduled payments under our Senior Subordinated Notes and our Senior
Secured Credit Facility.
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Capital Expenditures
During the 40-week period ended October 1, 2000, we invested $32.8 million
in various capital projects including $7.4 million in new restaurant, bakery and
cafe locations; $10.5 million in our re-imaging and renovation program; $1.6
million in our Seattle Coffee wholesale operations; $2.7 million in new
management information systems; $9.2 million in other capital assets to update,
replace and extend the lives of restaurant, bakery and cafe equipment and
facilities; and $1.4 million to complete other corporate projects. Essentially
all capital expenditures were financed through cash flows provided from normal
operating activities, internal funds and proceeds from the sale of our Company-
operated restaurants.
Repurchase of Subordinated Notes
During the first quarter 2000, we repurchased $5.0 million of our Senior
Subordinated Notes at a slight premium using internal cash to fund the
repurchase. In the second quarter 2000, we repurchased approximately $12.0
million of our Senior Subordinated Notes at a minor discount also using internal
cash to fund the repurchase. From time to time, we may repurchase more of the
Senior Subordinated Notes on the open market.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates on debt and
changes in commodity prices. In addition, a portion of our receivables are
denominated in foreign currency, which exposes us to foreign exchange rate
movements. We enter into hedging contracts with respect to the Korean Won to
reduce our exposure to future foreign currency exchange rate fluctuations.
Interest Rates. Our net exposure to interest rate risk relates to our
Senior Subordinated Notes and borrowings under our 1997 Credit Facility. Our
Senior Subordinated Notes bear interest at a fixed rate of 10.25%. The aggregate
balance outstanding under our Senior Subordinated Notes as of October 1, 2000
was $150.0 million. Should interest rates increase or decrease, the estimated
fair value of these notes would decrease or increase, respectively. As of
October 1, 2000, the fair value of our Senior Subordinated Notes equaled the
carrying amount. Our 1997 Credit Facility borrowings bear interest at rates that
are benchmarked to U.S. and European short-term floating-rate interest rates.
The balances outstanding under our 1997 Credit Facility as of October 1, 2000
totaled $173.0 million. The impact on our annual results of operations of a
hypothetical one-point interest rate change on the outstanding balances under
our 1997 Credit Facility would be approximately $1.7 million. This assumes no
change in the amount or composition of the debt at October 1, 2000.
Poultry Prices. We entered into two types of chicken purchasing contracts
with our suppliers in 1999. One is a grain-based "cost-plus" pricing arrangement
that is based
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upon the cost of feed grains, such as corn and soybean meal, plus certain agreed
upon non-feed and processing costs. The other is a market-priced formula
contract based on the Georgia whole bird market value, under which we pay market
plus a premium for the cut specifications for our restaurants. The market-priced
formula contracts are subject to a "ceiling", or highest price, and a "floor",
or lowest price, that we will pay over the contract term. Both contracts have
terms ranging from three to five years with provisions for certain annual price
adjustments as defined in the contracts. Throughout fiscal year 2000, we intend
to increase our purchases under such cost-plus contracts, and reduce purchases
under the market-based contracts in order to further reduce our exposure to
rising chicken prices should they occur.
Coffee Bean Prices. Our two Seattle Coffee brands' 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 market (the "C market"),
coffee beans of the quality sought by Seattle Coffee tend 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. We typically enter 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.
Extra Week in 2000
Our fiscal year calendar results in a fifty-third week every five or six
years. Fiscal year 2000 will include a fifty-third week in the fourth quarter.
This additional week will have a favorable effect on our operating results for
2000.
Year 2000
As described in detail in our 1999 Form 10-K, we adopted a Year 2000 plan
to prepare our IT systems and non-IT systems for the Year 2000 issue. As of
November 13, 2000, we have not experienced any significant Year 2000 failures
either internally or from our vendors and suppliers or franchise community.
There can be no certainty that failures or problems related to Year 2000 might
not develop in the future, but we do not believe any such failures or problems
are reasonably likely to materially disrupt our business.
Impact of Inflation
We believe that, over time, we have generally been able to pass along
inflationary increases in our costs through increased prices of our menu items,
and the effects of inflation on our net income historically have not been, and
are not expected to be, materially adverse. Due to competitive pressures,
however, increases in prices of menu items often lag inflationary increases in
costs.
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Seasonality
We have historically experienced the strongest operating results at Popeyes
and Church's restaurants during the summer months while operating results have
been somewhat lower during the winter season. Cinnabon bakeries and Seattle
Coffee cafes have traditionally experienced the strongest operating results
during the Christmas holiday shopping season between Thanksgiving and Christmas.
Certain holidays and inclement weather reduce the volume of consumer traffic at
quick-service restaurants and may impair the ability of certain restaurants,
bakeries and cafes to conduct regular operations for short periods of time.
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PART 2. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 29, 2000, AFC held a special meeting of
shareholders to vote on an Agreement and Plan of Merger, pursuant to
which AFC would become a wholly owned subsidiary of a Delaware parent
corporation. At the special meeting, the following votes were cast on
the sole issue of approving the Agreement and Plan of Merger:
35,508,675 For Approval
1,606,842 Against Approval
15,000 Abstained
2,578,228 Withheld Vote
While the requisite number of shareholders voted in favor
of the merger, because of the number of dissenting votes, the Board of
Directors of AFC has determined that the proposed merger will be
postponed indefinitely.
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: November 13, 2000 By: /s/ Gerald J. Wilkins
---------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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