<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 July 9, 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 August 18, 2000, there were 39,507,750 shares of the registrant's Common
Stock outstanding.
<PAGE>
AFC ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For the
Twelve and Twenty-eight Week Periods Ended July 9, 2000
and July 11, 1999........................................ 3
Condensed Consolidated Balance Sheets - July 9, 2000 and
December 26, 1999........................................ 4
Condensed Consolidated Statements of Cash Flows - For the
Twenty-eight Week Periods Ended July 9, 2000 and
July 11, 1999............................................ 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 12
PART 2 OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 23
(a) Exhibits.................................... 23
(b) Current Reports on Form 8-K................. 23
SIGNATURE............................................................. 23
</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 28 Weeks Ended
7/9/00 7/11/99 7/9/00 7/11/99
------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales........................................ $ 128,234 $ 129,750 $ 302,098 $ 300,508
Franchise revenues...................................... 20,333 17,699 45,782 39,550
Wholesale revenues...................................... 12,281 11,259 27,776 24,782
Other revenues.......................................... 2,485 2,157 5,547 4,871
---------- ---------- ---------- ----------
Total revenues........................................ 163,333 160,865 381,203 369,711
---------- ---------- ---------- ----------
Costs and expenses:
Restaurant cost of sales................................ 37,529 39,839 88,163 91,560
Restaurant operating expenses........................... 66,097 65,536 155,485 153,511
Wholesale cost of sales................................. 5,849 5,585 13,547 12,385
Wholesale operating expenses............................ 3,556 2,767 7,945 6,114
General and administrative.............................. 22,948 23,298 56,493 56,914
Depreciation and amortization........................... 9,510 9,829 22,107 25,127
---------- ---------- ---------- ----------
Total costs and expenses.............................. 145,489 146,854 343,740 345,611
---------- ---------- ---------- ----------
Income from operations.................................... 17,844 14,011 37,463 24,100
Other expenses:
Interest, net........................................... 7,711 7,601 18,457 18,220
---------- ---------- ---------- ----------
Net income from continuing
operations before income taxes.......................... 10,133 6,410 19,006 5,880
Income tax expense........................................ 4,326 2,835 8,115 2,647
---------- ---------- ---------- ----------
Net income from continuing
operations.............................................. 5,807 3,575 10,891 3,233
Discontinued operations:
Income from operations of Chesapeake
Bagel Bakery, net of income taxes....................... - 56 - 140
Income (loss) from operations of Ultrafryer,
net of income taxes..................................... (59) 106 (48) 214
---------- ---------- ---------- ----------
Net income................................................ $ 5,748 $ 3,737 $ 10,843 $ 3,587
========== ========== ========== ==========
Basic earnings per common share:
Net income from continuing operations................... $ 0.15 $ 0.09 $ 0.27 $ 0.08
Net income (loss) from discontinued operations.......... - 0.01 - 0.01
---------- ---------- ---------- ----------
Net income.............................................. $ 0.15 $ 0.10 $ 0.27 $ 0.09
========== ========== ========== ==========
Earnings per common share assuming dilution:
Net income from continuing operations................... $ 0.13 $ 0.08 $ 0.25 $ 0.07
Net income (loss) from discontinued operations.......... - 0.01 - 0.01
---------- ---------- ---------- ----------
Net income.............................................. $ 0.13 $ 0.09 $ 0.25 $ 0.08
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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3
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
AFC Enterprises, Inc. and subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
<S> <C> <C>
7/9/00 12/26/99
--------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents............................................. $ 13,834 $ 22,496
Accounts and notes receivable, net of allowance....................... 14,931 19,457
Income taxes, current................................................. - 453
Inventories........................................................... 14,934 16,781
Deferred income taxes................................................. 1,033 790
Prepaid expenses and other............................................ 4,473 2,750
------------ ------------
Total current assets........................................... 49,205 62,727
------------ ------------
Long-term assets:
Notes receivable, net of allowance.................................... 7,526 3,436
Deferred income taxes................................................. 3,488 9,132
Property and equipment, net of accumulated depreciation and
amortization of $148,158 in 2000 and $139,594 in 1999................ 264,107 263,282
Assets under contractual agreement, net............................... 7,826 -
Other assets.......................................................... 14,544 18,442
Intangible assets, net................................................ 191,740 204,870
------------ ------------
Total long-term assets......................................... 489,231 499,162
------------ ------------
Total assets................................................... $ 538,436 $ 561,889
============ ============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable...................................................... $ 21,620 $ 32,800
Current portion of long-term debt and capital lease obligations....... 13,688 17,634
Short-term borrowings................................................. 10,666 -
Bank overdrafts....................................................... 12,567 19,216
Accrued expenses and other............................................ 24,490 25,320
------------ ------------
Total current liabilities...................................... 83,031 94,970
------------ ------------
Long-term liabilities:
Long-term debt, net of current portion................................ 91,744 97,205
Acquisition line of credit............................................ 62,000 62,000
10.25% Subordinated notes payable..................................... 150,000 166,980
Capital lease obligations, net of current portion..................... 3,115 4,272
Other liabilities..................................................... 36,333 35,663
------------ ------------
Total long-term liabilities.................................... 343,192 366,120
------------ ------------
Total liabilities............................................. 426,223 461,090
------------ ------------
Shareholders' equity:
Common stock.......................................................... 395 394
Capital in excess of par value........................................ 154,297 153,280
Accumulated deficit................................................... (35,041) (45,884)
Treasury stock........................................................ (186) -
Notes receivable - officers........................................... (7,252) (6,991)
------------ ------------
Total shareholders' equity..................................... 112,213 100,799
------------ ------------
Total liabilities and shareholders' equity.................... $ 538,436 $ 561,889
============ ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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4
<PAGE>
================================================================================
AFC Enterprises, Inc. and subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
28 Weeks Ended
7/9/00 7/11/99
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income................................................. $ 10,843 $ 3,587
---------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.............................. 22,191 25,481
Provision for deferred income taxes........................ 5,401 839
Compensation expense from stock options.................... 868 590
Other...................................................... 2,215 1,676
Decrease (increase) in operating assets.................... 717 (501)
Decrease in operating liabilities.......................... (12,548) (14,808)
----------- ------------
Total adjustments.......................................... 18,844 13,277
----------- ------------
Net cash provided by operating activities.................. 29,687 16,864
----------- ------------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment....... 3,708 1,217
Investment in property and equipment...................... (19,774) (22,072)
Proceeds from sale of turnkey development................. 2,604 706
Investments in turnkey development........................ (1,275) (1,411)
Proceeds from sale of Ultrafryer.......................... 550 -
Investment in Pinetree goodwill........................... - (100)
Investment in SCC goodwill................................ - (858)
Notes receivable additions................................ - (234)
Payments received on notes................................ 378 2,419
----------- ------------
Net cash used in investing activities..................... (13,809) (20,333)
----------- ------------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt, net................. (7,399) (5,894)
Net borrowings under short-term revolver.................. 10,666 6,300
Principal payments for capital lease obligations.......... (3,764) (4,375)
Increase (decrease) in bank overdrafts, net............... (6,649) 4,270
Principal payments for Senior Subordinated Notes.......... (16,980) -
Notes and interest receivable - officers payments......... 25 43
Notes receivable - officers interest additions............ (226) (203)
Issuance of common stock.................................. 30 9
Treasury stock............................................ (186) -
Debt issuance costs....................................... (57) (40)
----------- ------------
Net cash provided (used in) financing activities.......... (24,540) 110
------------ ------------
Net decrease in cash and cash equivalents................. (8,662) (3,359)
Cash and cash equivalents at beginning of the period...... 22,496 17,066
----------- ------------
Cash and cash equivalents at end of the period............ $ 13,834 $ 13,707
=========== ============
Supplemental Cash Flow Information:
Cash payments (refund) for income taxes................... $ 1,894 $ (239)
Cash payments for interest................................ 16,912 16,745
Noncash investing and financing activities:
Capital lease obligations incurred........................ 12 100
Additions to notes receivable............................. 4,445 -
Terminations of capital leases and future obligations..... 1,533 -
Issuance of common stock, options and warrants............ - 814
See accompanying notes to condensed consolidated financial statements.
</TABLE>
================================================================================
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, cafes and bakeries
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 3).
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 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,
cafes and bakeries operated by the Company, franchise royalty and fee income
earned from franchised restaurant, cafe and bakery 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 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 "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 3), 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, non-cash items related to gains/losses on
asset dispositions and write-downs and compensation expense related to stock
option activity.
<TABLE>
<CAPTION>
Revenues:
12 Weeks Ended 28 Weeks Ended
07/09/00 07/11/99 07/09/00 07/11/99
--------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Chicken...................... $ 125,655 $ 126,002 $ 293,468 $ 288,911
Coffee....................... 19,120 17,096 43,238 37,765
Bakery....................... 16,176 15,825 39,092 38,709
Corporate.................... 2,382 1,942 5,405 4,326
--------- --------- --------- ---------
Total Revenues............. $ 163,333 $ 160,865 $ 381,203 $ 369,711
========= ========= ========= =========
</TABLE>
================================================================================
7
<PAGE>
Operating Income:
<TABLE>
<CAPTION>
12 Weeks Ended 28 Weeks Ended
07/09/00 07/11/99 07/09/00 07/11/99
--------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Chicken...................... $ 29,200 $ 26,185 $ 66,437 $ 58,407
Coffee....................... 2,466 1,966 4,440 3,649
Bakery....................... 894 1,054 2,807 2,581
Corporate.................... (4,552) (4,859) (12,992) (14,340)
--------- -------- -------- --------
Total Operating Income..... 28,008 24,346 60,692 50,297
Adjustments to reconcile to
income from operations:
Depreciation and
amortization................ (9,510) (9,829) (22,107) (25,127)
Compensation expense
related to stock options... (421) (274) (868) (590)
Gain/(loss) on fixed asset
and other write-offs....... (233) (232) (254) (480)
--------- -------- -------- --------
Income from operations..... $ 17,844 $ 14,011 $ 37,463 $ 24,100
========= ======== ======== ========
</TABLE>
There were no material changes to the Company's total assets by reportable
segment as of July 9, 2000 from the amounts disclosed in the Company's
consolidated financial statements for the fiscal year ended December 26, 1999.
3. Divestitures
Chesapeake Bagel Bakery
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:
12 Weeks 28 Weeks
Ended Ended
07/11/99 07/11/99
-------- --------
Total revenues............................... $ 643 $1,636
========= ======
Income from operations before income taxes... 102 254
Income tax expense........................... (46) (114)
--------- ------
Income from operations, net of income taxes.. $ 56 $ 140
========= ======
================================================================================
8
<PAGE>
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 a $4.4 million note 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:
<TABLE>
<CAPTION>
12 Weeks Ended 28 Weeks Ended
07/09/00 07/11/99 07/09/00 07/11/99
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Total revenues.................. $ 980 $ 2,000 $ 3,378 $ 4,418
========= ========= ========= =========
Income (loss) from operations
before income taxes........... (102) 194 (84) 390
Income tax (expense) benefit.... 43 (88) 36 (176)
--------- --------- --------- ---------
Income (loss) from operations,
net of income taxes........... $ (59) $ 106 $ (48) $ 214
========= ========= ========= =========
</TABLE>
4. Change in Accounting Estimate
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 $0.5 million
decrease in depreciation expense for the second quarter of 2000, resulting in a
$0.3 million after tax increase in net income for the same period. For the
twenty-eight week period ended July 9, 2000, depreciation expense decreased $1.1
million, resulting in a $0.7 million after tax increase in net income for the
same period.
================================================================================
9
<PAGE>
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 of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(In thousands, except per 12 Weeks Ended 28 Weeks Ended
share amounts) 07/09/00 07/11/99 07/09/00 07/11/99
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income from
continuing operations................... $ 5,807 $ 3,575 $ 10,891 $ 3,233
Gain (loss) from discontinued operations.. (59) 162 (48) 354
--------- --------- --------- ---------
Net income................................ $ 5,748 $ 3,737 $ 10,843 $ 3,587
========= ========= ========= =========
Denominator for basic earnings
per share - weighted
average shares.......................... 39,485 39,331 39,464 39,287
Effect of dilutive securities -
employee stock options.................. 3,225 3,511 3,257 3,535
--------- --------- --------- ---------
Denominator for diluted earnings per
share - weighted average shares
adjusted for dilutive securities........ 42,710 42,842 42,721 42,822
========= ========= ========= =========
Basic earnings per common share:
Net income from
continuing operations.................. $ 0.15 $ 0.09 $ 0.27 $ 0.08
Discontinued operations................. - 0.01 - 0.01
--------- --------- --------- ---------
Net income.............................. $ 0.15 $ 0.10 $ 0.27 $ 0.09
========= ========= ========= =========
Dilutive earnings per common share:
Net income from
continuing operations.................. $ 0.13 $ 0.08 $ 0.25 $ 0.07
Discontinued operations................. - 0.01 - 0.01
--------- --------- --------- ---------
Net income.............................. $ 0.13 $ 0.09 $ 0.25 $ 0.08
========= ========= ========= =========
</TABLE>
6. 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 their books and records, and as such, AFC has
classified these assets under the category
================================================================================
10
<PAGE>
"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 July 9, 2000, these assets included the
following:
Equipment, net.................................... $2,294
Goodwill allocable to assets, net................. 5,532
------
Total............................................. $7,826
======
================================================================================
11
<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 twenty-eight week periods ended July 9, 2000 and July 11,
1999.
12 Weeks Ended 28 Weeks Ended
--------------- ------------------
July 9, July 11, July 9, July 11,
2000 1999 2000 1999
------ ------- -------- -------
Revenues:
Restaurant sales........................ 78.5% 80.7% 79.2% 81.3%
Franchise revenues...................... 12.4 11.0 12.0 10.7
Wholesale revenues...................... 7.5 7.0 7.3 6.7
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)............ 29.3% 30.7% 29.2% 30.6%
Restaurant operating expenses (1)....... 51.5 50.5 51.6 51.0
Wholesale cost of sales (2)............. 47.6 49.6 48.6 50.0
Wholesale operating costs (2)........... 29.0 24.6 28.8 24.6
General and administrative.............. 14.0 14.5 14.7 15.2
Depreciation and amortization........... 5.8 6.1 5.8 6.8
Total costs and expenses............. 89.1 91.3 90.2 93.3
Income from operations.................... 10.9 8.7 9.8 6.7
Interest expense, net..................... 4.7 4.7 4.8 4.9
Net income from continuing operations
before taxes........................ 6.2 4.0 5.0 1.8
Income tax expense........................ (2.6) (1.8) (2.1) (0.7)
Net income from continuing operations..... 3.6 2.2 2.9 1.1
Loss on discontinued operations, net (3).. - - - -
Net income................................ 3.6% 2.2% 2.9% 1.1%
(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).
12
<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 twenty-eight week periods ended July 9, 2000 and July 11,
1999:
<TABLE>
<CAPTION>
12 Weeks Ended 28 Weeks Ended
----------------------------- -----------------------------
July 9, July 11, % change July 9, July 11, % change
2000 1999 99-00 2000 1999 99-00
------- -------- -------- ------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
EBITDA, as defined (1)......................... $ 28.0 $ 24.3 15.2% $ 60.7 $ 50.3 20.7%
EBITDA margin.................................. 17.1% 15.1% 2.0 pts. 15.9% 13.6% 2.3 pts.
Capital Expenditures........................... $ 10.8 $ 10.4 3.8% $ 20.2 $ 22.3 (9.4)%
Restaurant, bakery and cafe data (unaudited):
System-wide sales:
Popeyes...................................... $283.5 $243.2 16.6% $ 641.4 $ 561.9 14.2%
Church's..................................... 201.1 190.9 5.3 462.4 432.7 6.9
Cinnabon..................................... 37.5 32.1 16.8 85.5 75.3 13.6
Seattle Coffee............................... 23.6 18.0 31.1 50.0 39.9 25.3
------ ------ -------- --------
Total....................................... $545.7 $484.2 12.7% $1,239.3 $1,109.8 11.7%
====== ====== ======== ========
System-wide unit openings:
Popeyes...................................... 29 29 -% 65 65 -%
Church's..................................... 25 40 (37.5) 57 75 (24.0)
Cinnabon..................................... 12 10 20.0 26 19 36.8
Seattle Coffee............................... 13 4 225.0 19 9 111.1
------ ------ -------- --------
Total....................................... 79 83 (4.8)% 167 168 (0.6)%
====== ====== ======== ========
System-wide units open,
end of period:
Popeyes...................................... 1,440 1,328 8.4%
Church's..................................... 1,531 1,458 5.0
Cinnabon..................................... 412 373 10.5
Seattle Coffee............................... 114 79 44.3
-------- --------
Total....................................... 3,497 3,238 8.0%
======== ========
System-wide percentage change in
comparable unit sales:
Popeyes domestic............................. 3.6% 6.1% 3.9% 6.5%
Church's domestic............................ 0.4 1.8 0.9 1.7
Cinnabon domestic............................ 4.6 0.2 1.7 3.8
Seattle Coffee domestic...................... (2.2) 3.7 0.2 3.3
Popeyes international........................ 4.7 (7.1) 1.7 (5.2)
Church's international....................... (2.8) (0.4) (2.1) (0.2)
Cinnabon international....................... 7.9 - 4.2 -
</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.
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For the Twelve Weeks Ended July 9, 2000 and July 11, 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 $61.5 million in the
second 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 second quarter 2000
compared to the same period in 1999. At the end of July 9, 2000, we had 3,497
system-wide units versus 3,238 system-wide units in the prior year quarter ended
July 11, 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
Second quarter 2000 sales at our Company-operated chicken restaurants of
$107.3 million decreased $2.1 million over the same period in 1999. The decrease
in revenue was due to a net reduction of 30 Company-operated units compared to
the prior year and a comparable sales decrease of 0.8% 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 offset by a comparable sales increase
of 0.7% within our Popeye's brand.
Bakery
Sales at our Company-operated Cinnabon bakeries decreased $0.2 million in
the second quarter of 2000 compared to the same period in 1999. The decrease was
primarily due to seven less bakeries being open during the second quarter of
2000 compared to the same period in the prior year. The decrease in sales due to
fewer bakeries was offset by a 4.0% increase in comparable sales for the
quarter.
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Coffee
Sales from our Company-operated cafes increased $0.6 million in the second
quarter 2000 over the same period in 1999. Our quarterly sales growth was mainly
due to new unit growth offset by a 2.9% comparable sales decrease in the second
quarter.
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.
Chicken
Royalty revenue for the second quarter 2000 from our franchised chicken
restaurants of $17.0 million increased $1.9 million over the same period in
1999. The growth in royalty revenue was driven by comparable sales growth and
new unit expansion. At July 9, 2000, we had 2,325 domestic and international
franchised chicken restaurants open compared to 2,110 restaurants open at July
11, 1999. Franchise fee revenue decreased by $0.1 million in the second quarter
2000 primarily due to less unit openings compared to the second quarter of 1999.
Bakery
Royalty revenue from our franchised Cinnabon bakeries increased by $0.3
million for the second quarter 2000 compared to the same period in 1999. This
increase was primarily due to comparable sales and new unit growth. At July 9,
2000, we had 219 domestic and international franchised bakeries open versus 173
bakeries open at July 11, 1999. Franchise fee revenue for the quarter increased
$0.2 million versus the comparable period in the 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 second quarter compared to the same period in the prior year.
This increase was primarily due to new unit growth. At July 9, 2000, we had 41
domestic and international franchised cafes open versus 13 cafes open at July
11, 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.
Wholesale Revenues. Our wholesale revenues come from sales of premium
specialty coffee to food service retailers and supermarkets. In the second
quarter 2000,
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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 increased $0.1 million in
the second quarter over the same period in 1999, resulting mainly from a 2.5%
reduction in average poultry prices.
Operating profit from Company-operated chicken restaurants as a percent of
restaurant sales was 20.3% and 19.8% in the second quarter ended July 9, 2000
and July 11, 1999, respectively.
Bakery
Operating profit at our Company-operated Cinnabon bakeries decreased by $0.2
million or 10.2% in the second quarter as compared to the same period in 1999.
The decrease was primarily due to a reduction in the number of Company-operated
bakeries during the same time period.
Coffee
Operating profit at our Company-operated Seattle Coffee cafes grew by $0.1
million or 14.3% in the second quarter 2000 as compared to the same period in
1999. The increase was primarily due to new unit growth.
Expenses
General and Administrative Expenses. General and administrative expenses of
$22.9 million for the second quarter decreased by $0.4 million versus the same
period in 1999. Our chicken segment posted a decrease in general and
administrative expenses in the twelve-week period ended July 9, 2000 due to
certain projects and events resulting in expense in 1999 not recurring in 2000.
The overall 2000 decrease was partially offset by an increase in general and
administrative expenses at our bakery segment due to increases in Company and
franchise operations. As a percentage of total revenues, general and
administrative expenses were 14.0% and 14.5% for the 12-week periods ended July
9, 2000 and July 11, 1999, respectively.
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Depreciation and Amortization. Depreciation and amortization decreased by
$0.3 million in the second quarter compared to the same period the prior year.
In the third quarter of 1999, we re-estimated the useful lives of certain
buildings, equipment and leasehold improvements, within our bakery and cafe
brands. The impact of the change in depreciable lives resulted in a decrease of
$0.5 million in the 12-week period ended July 9, 2000 compared to the same
period in 1999. The decrease was partially offset by capital expenditures added
in the second quarter of 2000. Depreciation and amortization as a percentage of
total revenues was 5.8% and 6.1% for the twelve weeks ended July 9, 2000 and
July 11, 1999, respectively.
Income from Operations. Income from operations increased $3.8 million or
27.3% in the second quarter 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.
Net Interest Expense. Interest expense for the second quarter 2000 of $7.7
million was $0.1 million more than the comparable period in prior year. The net
increase in expense was mainly due to the write-off of debt issuance costs in
connection with repurchases of $12.0 million of our Senior Subordinated Notes.
For the Twenty-Eight Weeks Ended July 9, 2000 and July 11, 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 $129.5 million in the
twenty-eight week period ended July 9, 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 a comparable sales decrease in our Church's international markets,
mainly Taiwan and the Philippines. At the end of July 9, 2000, we had 3,497
system-wide units versus 3,238 system-wide units at the end of July 11, 1999.
Restaurant Sales
Chicken
For the 28-weeks ended July 9, 2000, sales at our Company-operated chicken
restaurants of $251.6 million decreased $0.1 million over the same period in
1999 due primarily to fewer Company-operated restaurants during this period
versus the comparable period in 1999. Twenty-five Church's and Popeyes Company-
operated restaurants were either sold or transferred to franchisees during this
period.
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Bakery
Sales at our Company-operated Cinnabon bakeries decreased $0.5 million in
2000 compared to the same period in 1999. The decrease was primarily due to
fewer Company-operated bakeries in 2000 compared to the same period in the prior
year. The decrease in sales due to fewer bakeries was offset by a 2.4% increase
in comparable sales for the twenty-eight week period ended July 9, 2000.
Coffee
Sales at our Company-operated cafes increased $1.8 million in 2000 over the
same period in 1999 mainly due to a 0.3% comparable sales increase and new unit
growth.
Franchise Revenues
Chicken
Royalty revenue in 2000 from our franchised chicken restaurants of $38.5
million increased $4.5 million over the same period in 1999. The growth in
royalty revenue was driven by comparable sales growth and new unit expansion. At
July 9, 2000, we had 2,325 domestic and international franchised chicken
restaurants open compared to 2,110 restaurants open at July 11, 1999. Franchise
fee revenue grew by $0.1 million in 2000 primarily due to transfer fees
resulting from the transfer of units from one franchisee to another franchisee.
Bakery
Royalty revenue from our franchised Cinnabon bakeries increased by $0.5
million for the twenty-eight weeks ended July 9, 2000 compared to the same
period in 1999. This increase was primarily due to comparable sales and new unit
growth. At July 9, 2000, we had 219 domestic and international franchised
bakeries open versus 173 bakeries open at July 11, 1999. Franchise fee revenue
for the period increased $0.3 million versus the comparable period in the prior
year due to increased bakery openings over the prior year.
Coffee
Royalty revenue from our franchised coffee cafes increased by $0.4 million
for the 28-weeks ended July 9, 2000 compared to the same period in the prior
year due primarily to new unit growth. At July 9, 2000, we had 41 franchised
cafes open versus 13 cafes open at July 11, 1999. During the same period,
franchise fee revenue increased $0.3 million versus the prior year due to
increased cafe openings.
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Wholesale Revenues. In the 28-week period ended July 9, 2000, wholesale
revenues increased by $3.0 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
4.7% in the 28-week period ended July 9, 2000 over the same period in 1999,
resulting from comparable sales growth and reduced poultry prices.
Operating profit from Company-operated chicken restaurants as a percent of
restaurant sales was 20.4% and 19.5% in the twenty-eight weeks ended July 9,
2000 and July 11, 1999, respectively.
Bakery
Operating profit at our Company-operated Cinnabon bakeries grew by $0.1
million or 1.9% in the 28-weeks ended July 9, 2000 as compared to the same
period in 1999 due primarily to comparable sales growth.
Coffee
Operating profit at our Company-operated Seattle Coffee cafes grew by $0.2
million or 13.9% in the 28-weeks ended July 9, 2000 as compared to the same
period in 1999 due primarily to comparable sales and new unit growth.
Expenses
General and Administrative Expenses. General and administrative expenses of
$55.3 million for the 28-weeks ended July 9, 2000 decreased by $0.4 million
versus the same period in 1999 due to nonrecurring expenses in 1999 and the
closing of CII's headquarters in Seattle. As a percentage of total revenues,
general and administrative expenses were 14.7% and 15.2% for the 28-week periods
ended July 9, 2000 and July 11, 1999, respectively.
Depreciation and Amortization. Depreciation and amortization decreased by
$3.0 million in the 28-week period ended July 9, 2000 compared to the same
period in the prior year due to our re-estimation of the useful lives of certain
buildings, equipment and leasehold improvements in 1999. Depreciation and
amortization as a percentage of total revenues was 5.8% and 6.8% for the twenty-
eight weeks ended July 9, 2000 and July 11, 1999, respectively.
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Income from Operations. Income from operations increased $13.4 million or
55.4% in the 28-week period ended July 9, 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.
Net Interest Expense. Interest expense for the 28-week period ended July 9,
2000 of $18.4 million was $0.2 million more than the comparable period in the
prior year 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 twenty-eight weeks ended
July 9, 2000 and July 11, 1999 was $29.7 million, and $16.9 million,
respectively. Available cash and cash equivalents, net of bank overdrafts, as of
July 9, 2000 was $1.3 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, .59 at July 9, 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 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.
Capital Expenditures
During the 28-week period ended July 9, 2000, we invested $20.2 million in
various capital projects including $4.2 million in new restaurant, bakery and
cafe locations; $3.4 million in our re-imaging and renovation program; $2.0
million in our Seattle Coffee wholesale operations; $1.8 million in new
management information systems; $6.8 million in other capital assets to update,
replace and extend the lives of restaurant, bakery and cafe equipment and
facilities; and $2.0 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.
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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 July 9, 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 July 9,
2000, the fair value of our Senior Subordinated Notes was approximately $4.5
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 July 9, 2000 totaled $174.5 million. The impact on our annual results of
operations of a hypothetical one percentage 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 July
9, 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. 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.
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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
August 23, 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.
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: August 23, 2000 By: /s/ Gerald J. Wilkins
----------------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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