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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 16, 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 X No ____
---
As of May 31, 2000, there were 39,440,823 shares of the registrant's Common
Stock outstanding.
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AFC ENTERPRISES, INC.
INDEX
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Page
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For the Sixteen
Week Periods Ended April 16, 2000 and April 18, 1999............................. 3
Condensed Consolidated Balance Sheets - April 16, 2000 and
December 26, 1999................................................................ 4
Condensed Consolidated Statements of Cash Flows - For the Sixteen
Week Periods Ended April 16, 2000 and April 18, 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 6. Exhibits and Reports on Form 8-K.................................................. 20
(a) Exhibits.......................................................... 20
(b) Current Reports on Form 8-K....................................... 20
SIGNATURE................................................................................... 20
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PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
AFC Enterprises, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
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16 Weeks Ended
4/16/00 4/18/99
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Revenues:
Restaurant sales......................................... $ 173,597 $ 170,502
Franchise revenues....................................... 25,449 21,851
Wholesale revenues....................................... 15,762 13,779
Manufacturing revenues................................... 2,398 2,418
Other revenues........................................... 3,062 2,714
---------- -----------
Total revenues......................................... 220,268 211,264
---------- -----------
Costs and expenses:
Restaurant cost of sales................................. 50,538 51,623
Restaurant operating expenses............................ 89,119 87,735
Wholesale cost of sales.................................. 7,794 6,896
Wholesale operating expenses............................. 4,667 3,625
Manufacturing cost of sales.............................. 2,313 2,135
General and administrative............................... 33,536 33,580
Depreciation and amortization............................ 12,663 15,385
---------- -----------
Total costs and expenses............................... 200,630 200,979
---------- -----------
Income from operations...................................... 19,638 10,285
Other expenses:
Interest, net............................................ 10,746 10,619
---------- -----------
Net income (loss) from continuing
operations before income taxes........................... 8,892 (334)
Income tax expense (benefit)............................. 3,797 (100)
---------- -----------
Net income (loss) from continuing
operations............................................... 5,095 (234)
Discontinued operations:
Income from operations of Chesapeake
Bagel Bakery, net of income taxes........................ - 84
---------- -----------
Net income (loss) attributable to
common stock............................................. $ 5,095 $ (150)
========== ===========
Basic earnings per common share:
Net income (loss) from continuing operations............. $ 0.13 $ -
Discontinued operations.................................. - -
---------- -----------
Net income (loss)........................................ $ 0.13 $ -
========== ===========
Earnings per common share assuming dilution:
Net income (loss) from continuing operations............. $ 0.12 $ -
Discontinued operations.................................. - -
---------- -----------
Net income (loss)........................................ $ 0.12 $ -
========== ===========
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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)
4/16/00 12/26/99
----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
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Assets:
Current assets:
Cash and cash equivalents................................................. $ 23,042 $ 22,496
Accounts and notes receivable, net of allowance for
doubtful accounts of $1,646 in 2000 and $809 in 1999.................... 16,035 19,457
Income taxes, current..................................................... 423 453
Inventories............................................................... 15,925 16,781
Deferred income taxes..................................................... 1,398 790
Prepaid expenses and other................................................ 3,994 2,750
---------- ----------
Total current assets.................................................. 60,817 62,727
---------- ----------
Long-term assets:
Notes receivable, net..................................................... 3,178 3,436
Deferred income taxes..................................................... 5,993 9,132
Property and equipment, net of accumulated depreciation
of $143,596 in 2000 and $139,594 in 1999................................ 265,118 263,282
Other assets.............................................................. 16,616 18,442
Intangible assets, net.................................................... 199,648 204,870
---------- ----------
Total long-term assets................................................ 490,553 499,162
---------- ----------
Total assets......................................................... $ 551,370 $ 561,889
========== ==========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable.......................................................... $ 24,785 $ 32,800
Current portion of long-term debt and capital
lease obligations....................................................... 14,496 17,634
Bank overdrafts........................................................... 17,935 19,216
Accrued expenses and other................................................ 29,228 25,320
---------- ----------
Total current liabilities............................................. 86,444 94,970
---------- ----------
Long-term liabilities:
Long-term debt, net of current portion.................................... 94,464 97,205
Acquisition line of credit................................................ 62,000 62,000
10.25% Subordinated notes payable......................................... 161,980 166,980
Capital lease obligations, net of current portion......................... 3,583 4,272
Other liabilities......................................................... 36,834 35,663
---------- ----------
Total long-term liabilities........................................... 358,861 366,120
---------- ----------
Total liabilities..................................................... 445,305 461,090
---------- ----------
Shareholders' equity:
Common stock.............................................................. 395 394
Capital in excess of par value............................................ 153,738 153,280
Accumulated deficit....................................................... (40,789) (45,884)
Treasury stock............................................................ (150) -
Notes receivable officers................................................. (7,129) (6,991)
---------- ----------
Total shareholders' equity............................................ 106,065 100,799
---------- ----------
Total liabilities and shareholders' equity............................ $ 551,370 $ 561,889
========== ==========
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)
16 Weeks Ended
4/16/00 4/18/99
-----------------------------------------------------------------------------------------------------------------
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Cash flows provided by (used in) operating activities:
Net income.................................................................. $ 5,095 $ (150)
------------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................ 12,663 15,508
Provision for deferred income taxes...................................... 2,531 (1,147)
Compensation expense from stock options.................................. 447 316
Other.................................................................... 1,717 844
Decrease in operating assets............................................. 1,260 2,254
Decrease in operating liabilities........................................ (3,853) (7,287)
------------- ----------
Total adjustments...................................................... 14,765 10,488
------------- ----------
Net cash provided by operating activities.................................... 19,860 10,338
------------- ----------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment......................... 2,534 823
Investment in property and equipment........................................ (9,427) (11,904)
Proceeds from sale of turnkey development................................... 1,705 -
Investments in turnkey development.......................................... (875) -
Investment in Pinetree goodwill............................................. - (99)
Investment in SCC goodwill.................................................. - (858)
Notes receivable additions.................................................. - (30)
Payments received on notes.................................................. 237 987
------------- ----------
Net cash used in investing activities....................................... (5,826) (11,081)
------------- ----------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt, net.................................. (4,771) (3,535)
Net borrowings under short-term revolver................................... - (1,000)
Principal payments for capital lease obligations........................... (2,182) (2,535)
Increase (decrease) in bank overdrafts, net................................ (1,281) 5,711
Principal payments for Senior Subordinated Notes........................... (5,000) -
Notes and interest receivable - officers payments.......................... 24 20
Notes receivable - officers interest additions............................. (128) (116)
Issuance of common stock................................................... 12 4
Treasury stock............................................................. (150) -
Debt issuance costs........................................................ (12) (42)
------------- ----------
Net cash used in financing activities...................................... (13,488) (1,493)
------------- ----------
Net increase (decrease) in cash and cash equivalents....................... 546 (2,236)
Cash and cash equivalents at beginning of the period....................... 22,496 17,066
------------- ----------
Cash and cash equivalents at end of the period............................. $ 23,042 $ 14,830
============= ==========
Supplemental Cash Flow Information:
Cash payments for income taxes............................................. $ 799 1,245
Cash payments for interest................................................. 5,208 4,273
Noncash investing and financing activities:
Capital lease obligations incurred....................................... 12 100
Terminations of capital leases and future obligations.................... 861 -
Issuance of common stock, options and warrants........................... - 814
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. 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, cafes and bakeries
under the primary trade names of Popeyes Chicken & Biscuits(R) ("Popeyes"),
Church's Chicken(R) ("Church's"), Seattle's Best(R) ("SBC"), Torrefazione
Italia(R) ("TI") and Cinnabon(R) ("Cinnabon"). The Company also operates a
wholesale coffee business and a manufacturing plant ("Ultrafryer") that produces
proprietary gas fryers and other custom-fabricated restaurant equipment for sale
to distributors, franchisees and other food service operators.
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. 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 with 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.
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,
================================================================================
6
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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 Churchs' operations to form its
chicken segment. The Company previously aggregated the operations of Chesapeake
Bagel Bakery ("Chesapeake") and CII to form its bakery segment; however, with
the sale of Chesapeake in the third quarter of 1999 (See Note 3), the bakery
segment only includes Cinnabon's operations. Chesapeake's operations have been
classified as discontinued operations in the accompanying financial statements.
The Company's coffee segment consists of SCC's operations, which includes its
wholesale operations.
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 primarily 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.
Revenues:
16 Weeks Ended
4/16/00 4/18/99
--------- ---------
(in thousands)
Chicken..................... $167,813 $162,910
Coffee...................... 24,119 20,670
Bakery...................... 22,915 22,884
Other....................... 3,471 2,662
Inter-segment revenues...... (1,073) (244)
Corporate................... 3,023 2,382
-------- --------
Total Revenues............ $220,268 $211,264
======== ========
Inter-segment revenues represent Ultrafryer sales to Company-operated
restaurants which are eliminated in consolidation.
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7
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Operating Income:
16 Weeks Ended
4/16/00 4/18/99
--------- ---------
(in thousands)
Chicken......................... $ 37,241 $ 32,777
Coffee.......................... 1,975 1,873
Bakery.......................... 1,974 1,708
Other........................... 85 283
Corporate....................... (8,507) (10,408)
-------- --------
Total Operating Income........ 32,768 26,233
Adjustments to reconcile to
Income from operations:
Depreciation and amortization... (12,663) (15,385)
Compensation expense
related to stock options...... (447) (316)
Gain/(loss) on fixed asset and
other write-offs.............. (20) (247)
-------- --------
Income from operations........ $ 19,638 $ 10,285
======== ========
There were no material changes to the Company's total assets by
reportable segment as of April 16, 2000 from the amounts disclosed in the
Company's consolidated financial statements for the fiscal year ended December
26, 1999.
3. Chesapeake Bagel Bakery Divestiture
In connection with the sale of Chesapeake in July 1999, the results of
Chesapeake have been classified as discontinued operations in the accompanying
financial statements. The following amounts relate to Chesapeake's operations
for the respective period:
For Sixteen
Weeks Ended
April 18, 1999
---------------
Total revenues................ $ 993
======
Income from operations before
income taxes................. 152
Income tax expense............ (68)
------
Income from operations, net of
income taxes................. $ 84
======
4. Change in Accounting Estimate
Church's and Popeyes
During the second quarter of 1999, the Company re-estimated the useful
lives of its buildings, equipment and leasehold improvements at Church's and
Popeyes Company-operated
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8
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restaurant locations. The Company analyzed historical data regarding restaurant
operations, actual lives of restaurant properties and property leasing
arrangements. Based on this analysis, the Company revised its estimated useful
lives for certain fixed asset categories.
This change in accounting estimate resulted in an estimated $1.9
million decrease in depreciation expense for the first quarter of 2000,
resulting in a $1.1 million after tax increase in net income for the same
period.
Cinnabon and Seattle Coffee
During the third quarter of 1999, the Company re-estimated the useful
lives of its equipment and leasehold improvements at Cinnabon bakeries and
Seattle Coffee cafes. The Company analyzed historical data regarding bakery and
cafe operations and property leasing arrangements. Based on this analysis, the
Company revised its estimated useful lives for certain fixed asset categories.
This change in accounting estimate resulted in an estimated $0.7
million decrease in depreciation expense for the first quarter of 2000,
resulting in a $0.4 million after tax increase in net income for the same
period.
5. Basic and Diluted Earnings Per Share
The Company has adopted the Financial Accounting Standards Board Statement
No. 128, "Earnings per Share" which requires the dilutive effect of stock
options to be excluded from the calculation of basic earnings per share.
The following represents a reconciliation from basic earnings per share to
diluted earnings per share:
(In thousands, except per 16 Weeks Ended
share amounts) 4/16/00 4/18/99
--------- ---------
Net income (loss) from continuing operations........ $ 5,095 $ (234)
Discontinued operations............................. - 84
-------- --------
Net income (loss) attributable to common stock...... $ 5,095 $ (150)
======== ========
Denominator for basic earnings per share-
Weighted average shares.......................... 39,448 39,254
Effect of dilutive securities - employee
stock options.................................... 3,117 3,184
-------- --------
Denominator for diluted earnings per share-
weighted average shares adjusted for
dilutive securities.............................. 42,565 42,438
======== ========
Basic earnings per common share:
Net income (loss) from continuing operations..... $ 0.13 $ -
Discontinued operations.......................... - -
-------- --------
Net income (loss)................................ $ 0.13 $ -
======== ========
9
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Earnings per common share - assuming dilution:
Net income (loss) from continuing operations..... $ 0.12 $ -
Discontinued operations.......................... - -
-------- --------
Net income (loss)................................ $ 0.12 $ -
======== ========
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10
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Item 7. 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.
Consolidated 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 sixteen- week periods ended April 16, 2000 and April 18, 1999.
Sixteen Weeks Ended
-----------------------
April 16, April 18,
2000 1999
--------- ---------
Revenues:
Restaurant sales.................................. 78.8% 80.7%
Franchise revenues................................ 11.5 10.4
Wholesale revenues................................ 7.2 6.5
Manufacturing revenues............................ 1.1 1.1
Other revenues.................................... 1.4 1.3
--------- ---------
Total revenues............................... 100.0% 100.0%
--------- ---------
Costs and expenses:
Restaurant cost of sales (1)...................... 29.1% 30.3%
Restaurant operating expenses (1)................. 51.3 51.4
Wholesale cost of sales (2)....................... 49.4 50.0
Wholesale operating costs (2)..................... 29.7 26.1
Manufacturing cost of sales (3)................... 95.8 91.7
General and administrative........................ 15.2 15.9
Depreciation and amortization..................... 5.8 7.3
Total costs and expenses..................... 91.1 95.1
Income from operations................................. 8.9 4.9
Interest expense, net.................................. 4.9 5.0
Income (loss) from continuing
operations before taxes........................... 4.0 (0.1)
Income tax expense (benefit)........................... 1.7 -
Net income (loss) from continuing
operations........................................ 2.3 (0.1)%
Loss on discontinued operations, net (4)............... - -
Net income (loss)...................................... 2.3% (0.1)%
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(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants, bakeries and cafes.
(2) Expressed as a percentage of wholesale revenues.
(3) Expressed as a percentage of manufacturing revenues.
(4) Represents Chesapeake's operations.
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 sixteen-week periods ended April 16, 2000 and April 18, 1999:
Sixteen Weeks Ended
-------------------------------
April 16, April 18, % Change
2000 1999 1999-2000
--------- -------- ---------
(dollars in millions)
EBITDA, as defined (1).......................... $ 32.8 $ 26.5 23.6 %
EBITDA margin................................... 14.9% 12.5% 19.1 %
Capital Expenditures............................ $ 9.4 $ 11.9 (21.0)%
Restaurant, bakery and cafe data (unaudited):
System-wide sales:
Popeyes.................................... $357.9 $318.6 12.3 %
Church's................................... 261.3 241.8 8.1
Cinnabon................................... 48.0 43.2 11.2
Seattle Coffee retail...................... 10.9 8.3 31.2
Seattle Coffee wholesale................... 15.8 13.8 14.5
Ultrafryer manufacturing................... 2.6 2.5 4.0
--------- --------
Total................................. $696.5 $628.2 10.9 %
========= ========
System-wide openings:
Popeyes.................................... 36 36 - %
Church's................................... 32 35 (8.6)
Cinnabon................................... 14 9 55.6
Seattle Coffee............................. 6 5 20.0
--------- --------
Total................................. 88 85 3.5 %
========= ========
System-wide units open,
end of period:
Popeyes.................................... 1,420 1,308 8.6 %
Church's................................... 1,515 1,425 6.3
Cinnabon................................... 403 366 10.1
Seattle Coffee............................. 104 76 36.8
--------- --------
Total................................. 3,442 3,175 8.4 %
========= ========
12
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Sixteen Weeks Ended
----------------------
April 16, April 18,
2000 1999
--------- ---------
System-wide percentage change in
comparable restaurant sales:
Popeyes domestic............................ 4.2 % 6.8 %
Church's domestic........................... 1.3 1.6
Cinnabon domestic........................... (0.3) 6.6
Seattle Coffee domestic..................... 1.9 2.6
Popeyes international....................... (0.2) (3.7)
Church's international...................... (2.1) (0.5)
Cinnabon international...................... 1.6 n/a
(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.
For the Sixteen Weeks Ended April 16, 2000 and April 18, 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 and manufacturing operations. Our system-wide sales increase of $68.3
million in the first 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
offset by net comparable sales decreases in our Church's international markets,
mainly Taiwan and the Philippines, resulting in lower sales volumes in the first
quarter 2000 compared to the same period in 1999. At the end of April 16, 2000,
we had 3,442 system-wide units versus 3,175 system-wide units in the prior year
quarter ended April 18, 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
First quarter 2000 sales at our Company-operated chicken restaurants of
$144.3 million increased $2.0 million over the same period in 1999. The
increased revenue growth in 2000 was due to comparable sales increases within
our chicken brands.
13
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Bakery
Sales at our Company-operated Cinnabon bakeries decreased $0.3 million in
2000 compared to the same period in 1999. The decrease was primarily due to
three less bakeries open during the first quarter of 2000 compared to the same
period in prior year. The decrease in sales was offset by a 1.3% increase in
comparable sales for the quarter.
Coffee
Sales from our Company-operated cafes increased $1.2 million in 2000 over
the same period in 1999. Our 2000 sales growth was mainly due to a 2.5%
comparable sales increase and new unit growth.
Franchise Revenues. Franchise revenues include royalties and franchise
fees received from restaurants, bakeries and cafes operated by our franchisees.
Royalties are based on a percent of sales, while franchise 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.
Chicken
Royalty revenue for the first quarter 2000 from our franchised chicken
restaurants of $21.5 million increased $2.6 million over the same period in
1999. The growth in royalty revenue was driven by positive domestic comparable
sales and new unit expansion within our domestic and international franchise
community, offset by a comparable sales decrease experienced by our
international franchised chicken restaurants. At April 16, 2000, we had 2,272
domestic and international franchised chicken restaurants open compared to 2,066
restaurants open at April 18, 1999. Franchise fee revenue grew by $0.3 million
in the first quarter 2000 primarily due to $0.4 million in franchise fees
resulting from the transfer of 51 units from one Popeyes franchisee to another
Popeyes franchisee.
Bakery
Royalty revenue from our franchised Cinnabon bakeries increased by $0.2
million for the first quarter 2000 compared to the same period in 1999. The 2000
royalty revenue increase was primarily due to positive international comparable
sales and new unit growth, offset by negative domestic comparable sales. At
April 16, 2000, we had 206 domestic and international franchised bakeries open
versus 166 bakeries open at April 18, 1999. Franchise fee revenue for the
quarter ended April 16, 2000 increased $0.2 million versus the comparable period
in prior year. The increase resulted from international bakery openings in 2000
exceeding bakery openings in 1999 by six units.
14
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Coffee
Royalty revenue from our franchised Seattle Coffee cafes increased by $0.2
million for the quarter ended April 16, 2000 compared to the same period in
prior year. The 2000 royalty revenue increase was primarily due to new unit
growth. At April 16, 2000, we had 28 domestic and international franchised cafes
open versus 12 cafes open at April 18, 1999. Franchise fee revenue for the
quarter ended April 16, 2000 increased $0.1 million versus the comparable period
in prior year. The increase resulted from franchised cafe openings in 2000
exceeding franchised cafe openings in 1999 by six units.
Wholesale Revenues. Our wholesale revenues come from sales of premium
specialty coffee from our Seattle Coffee roasting and distribution operations to
food service retailers and supermarkets. In the first quarter 2000, wholesale
revenues increased by $2.0 million over the same period in 1999 mainly due to an
increase in the number of wholesale accounts from 4,458 accounts in 1999 to
5,016 accounts as of April 16, 2000.
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 increased $2.3 million or
8.5% in the first quarter 2000 over the same period in 1999, resulting from
positive comparable sales and a 5.0% reduction in average poultry prices.
Operating profit from Company-operated chicken restaurants as a percent of
restaurant sales was 20.5% and 19.1% in the first quarter of 2000 and 1999,
respectively.
Bakery
Operating profit at our Company-operated Cinnabon bakeries grew by $0.4
million or 11.7% in the first quarter 2000 as compared to the same period in
1999. The increase was primarily due to comparable sales increases of 1.3%.
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.
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Coffee
Wholesale coffee operating profit of $3.3 million in the first quarter 2000
grew by 1.3% over the comparable period in 1999. The increase was mainly due to
a 558 increase in the number of wholesale accounts.
Expenses
General and Administrative Expenses. General and administrative expenses
of $33.5 million for the first quarter 2000 equaled general and administrative
expenses incurred in the first quarter of 1999. Our chicken, bakery and coffee
segments all posted increases in general and administrative expenses in the
first quarter 2000 due to growth in Company and franchised operations; however,
these increases were offset by reductions in corporate general and
administrative expenses by nearly the same amount. Reductions in corporate
general and administrative expenses were mainly attributable to (i) cost
reductions related to closing Cinnabon's headquarters in Seattle in late 1999,
(ii) Y2K expenses incurred in the first quarter 1999 not recurring in the first
quarter 2000 and (iii) cost savings from our amendment to our information
technology ("IT") outsourcing contract in mid 1999. As a percentage of total
revenues, general and administrative expenses were 15.2% and 15.9% for the
sixteen-week periods ended April 16, 2000 and April 18, 1999, respectively.
Depreciation and Amortization. Depreciation and amortization decreased by
$2.7 million in the first quarter 2000 compared to the same period the prior
year. In the second quarter of 1999, we re-estimated the useful lives of certain
buildings, equipment and leasehold improvements increasing some and decreasing
others. In some cases the lives were not adjusted. The impact of our change in
depreciable lives resulted in a decrease of $2.6 million in 2000 compared to
1999. The remaining decrease was due to a reduction in capital lease
depreciation expense. Depreciation and amortization as a percentage of total
revenues was 5.8% and 7.3% for the sixteen weeks ended April 16, 2000 and April
18, 1999, respectively.
Income from Operations. Income from operations increased $9.4 million or
90.9% in the first quarter 2000 as compared to the same period in 1999. The
growth in income from operations was due to new unit growth, restaurant sales
and franchise revenue increases, positive comparable sales, and lower
depreciation expense. Our chicken brands contributed $4.1 million to the
increase in income from operations. Other contributions to the overall first
quarter 2000 increase included a $3.6 million increase in franchise revenues and
a $2.7 million decrease in depreciation expense.
Net Interest Expense. Interest expense for the first quarter 2000 of
$10.7 million was $0.1 million more than the comparable period in prior year.
The net increase in expense was mainly due to (i) $0.2 million in write-offs of
debt issuance costs in connection with repurchases of our Senior Subordinated
Notes and (ii) higher interest rates. The net increase was offset by a reduction
in average debt in the first quarter 2000
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compared to the same period in the prior year due to our repurchases of $13.0
million of our Senior Subordinated Notes and scheduled principal payments on
other debt balances.
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 sixteen weeks ended April
16, 2000 and April 18, 1999 was $19.9 million, and $10.3 million, respectively.
Available cash and cash equivalents, net of bank overdrafts, as of April 16,
2000 was $5.1 million, compared to $3.3 million at December 26, 1999. The
increase in cash and cash equivalents is mainly due to operational growth and
sales of our Company-operated restaurants.
Additionally, we meet our short-term needs using our revolving line of
credit. Typically, we maintain a low current ratio, .70 at April 16, 2000 and
.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 and other sources of liquidity, will be
adequate to meet our anticipated future requirements for working capital,
capital expenditures and scheduled payments under our Senior Subordinated Notes
and our Senior Secured Credit Facility.
Capital Expenditures
During the first quarter 2000, we invested $9.4 million in various capital
projects including $2.6 million in new restaurant, bakery and cafe locations;
$2.0 million in our re-imaging and renovation program; $0.9 million in our
Seattle Coffee wholesale operations; $0.1 million in new management information
systems; $3.4 million in other capital assets to update, replace and extend the
lives of restaurant, bakery and cafe equipment and facilities; and $0.4 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. Subsequent to April 16, 2000, we repurchased approximately $12.0
million of our Senior Subordinated Notes at a minor discount also using internal
cash to fund the repurchase.
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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 April 16, 2000 was
$162.0 million. Should interest rates increase or decrease, the estimated fair
value of these notes would decrease or increase, respectively. As of April 16,
2000, the fair value of our Senior Subordinated Notes was approximately $1.6
million lower than 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 April 16, 2000 totaled $166.4 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 April 16,
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 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. In 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,
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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 May
31, 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.
Through 1999, we incurred approximately $1.0 million in Year 2000 costs,
which were funded through operating cash flows. These costs primarily related to
fees paid to outside consultants who helped develop a strategy to assess our
Year 2000 issues. We do not anticipate incurring more costs associated with Year
2000 problems.
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.
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 to
conduct regular operations for short periods of time.
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PART 2. OTHER INFORMATION
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 31 2000 By: /s/ Gerald J. Wilkins
----------------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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