Afton Food Group Ltd. (TSE: AFF) yesterday announced the Company’s third quarter results. Strong gains in system sales, revenues and profitability were posted for the three and nine month periods, ended September 30, 2000.
“The improvement in Afton’s performance, attributable to our March acquisition of Robin’s Foods, was balanced by strong internal growth” said Patrick Westfall, Chief Financial Officer, Afton Food Group Ltd. “For the balance of the year and throughout Fiscal 2001, we will focus on enhancing our operating profitability through disciplined, system wide cost management.”
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Afton also increased its financial flexibility during the quarter. Working capital, including $1.6 million in cash, rose moderately to $2.6 million at September 30, 2000, from $2.5 million a year earlier. The current portion of long term debt increased to $4.8 million from $843,000 a year earlier, as Afton began to service the $21.5 million facility used in funding the acquisition. Shareholders’ Equity increased by 85% to $17.5 million at September 30, 2000 from $9.5 million a year earlier.
“Management is very confident that our financial structure can accommodate further rapid growth,” said Mr. Westfall. “We have an aggressive plan to reduce long term debt and our operations continue to produce healthy levels of cash. Additionally, we believe that our shares will become increasingly valuable as more investors become aware of our exciting growth strategy.”
About Afton Food Group
Afton now operates more than 500 corporate and franchised locations coast- to-coast in Canada, with additional locations in the United States and Saudi Arabia. Afton is one of the 10 largest Quick Service Restaurant chains in Canada, whose brands include: 241 Pizza®, Robin’s Donuts®, Ruffage®, Donut Delite Cafe and Mrs. Powell’s Bakery Eatery®. These operations are expected to generate approximately $200 million in system sales and more than $30 million in revenue for Afton on an annualized basis.
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By GlobalDataFull financial results attached.
Management’s Discussion and Analysis of Afton Food Group Ltd.’s Third Quarter Results:
Results of Operations:
System sales for the three months ended September 30, 2000, have increased to in excess of $46 million (in excess of $121.5 million for the first nine months of this year), which represents an increase of 38% over the third quarter of 1999 (43% increase for the first nine months of this year). Franchise revenue for the third quarter of 2000 increased by 294% over the third quarter last year and has increased by 133% for first nine months of this year over last year. Retail sales increased 667% for the third quarter of 2000 over the third quarter last year and has increased by 531% for the first nine months over last year as result of the number of corporate stores purchased as part of the acquisition of Robin’s Foods. EBITDA rose by 91% and 38% to $2,313,431 and $5,187,710 respectively for the third quarter and for the first nine months of this year over last year. Earnings per share was $0.079 in the third quarter of 2000 compared to $0.059 in 1999 and is $0.179 for the first nine months of this year, which is down from $0.20. The EBITDA per share rose from $0.164 to $0.293 for the third quarter and from $0.509 to $0.657 for the first nine months ended. The Company believes this is a better indicator of our Company’s continued corporate growth and profitability. The decrease in the year to date earnings per share resulted from the increase in amortization expense as a result of the Robin’s acquisition and the planned deferral of franchise expansion in Western Canada during the first 6 months of the year.
Financial Position
The balance sheet has changed significantly as a result of the acquisition of Robin’s Foods Inc. The legal, financing and other costs of the acquisition have been set up as deferred financing charges on the balance sheet. Afton has a cash position of $1,571,507 as at September 30, 2000, which is 50% higher than the balance at the same time last year. Afton’s cash flow requirements from on-going operations will be provided through existing working capital, cash flow from operations, the sale of new stores and if required an unused line of credit.
Effective April 1, 2000, the Company purchased 100% of the outstanding share capital of Robin’s Foods Inc. The acquisition has been accounted for as a share purchase and the accompanying statements reflect the results of operations for the three months from the date of purchase.
The purchase price was allocated in the accounts based on the estimated fair value of the assets acquired less liabilities assumed as follows:
Net current assets $950,950
Capital assets $2,945,682
Other assets $389,388
Franchise agreements and trademarks $36,349,125
Bank Indebtedness $(2,805,380)
Long term liabilities $(2,079,334)
(x) Future Income taxes $(15,909,000)
Total Purchase Price $19,841,431
Purchase Price satisfied as follows:
Issuance of common shares of Afton Food Group Ltd. $(750,000)
Payment of Cash $(19,091,431)
Total satisfied $19,841,431
The acquisition of Robin’s Foods Inc. and the consolidation of the Company’s debt was financed through a combination of $21.5 million senior debt facility from Rabobank Canada, a private placement of securities comprised of $2.6 million of special warrants and $5.2 million in special warrants, a $600,000 vendor take-back note and the issuance of $750,000 of common shares to the principals of Robin’s. For further information on the acquisition of Robin’s Foods, please refer to the press release dated March 1, 2000.
Accounting Policy Change
Effective January 1, 2000, the Company adopted, retroactively by restating prior years, the new GAAP recommendations of the Canadian Institute of Chartered Accountants with respect to accounting for income taxes. The result was to increase opening retained earnings by $2,440,678 and decrease future tax liabilities by a similar amount.
Under the new liability method, future tax assets and liabilities are determined based on reporting differences between the basis of assets and liabilities used for financial statements and income tax purposes. Such differences are then measured using substantially enacted tax rates and laws that will be in effect when these differences are expected to reverse. Prior to adoption of the new recommendations, income tax expense was determined using the deferral method of tax allocation.
(x) The new policy also requires the company to record the effect that
the goodwill, which arises from the purchase of Robin's Shares, which
is non-deductible for tax purposes, will have on future income taxes.
The effect was to increase franchise agreements and record future
income taxes of $15,909,000, which, when and if exigible, would be
charged against income at the rate of $99,500 per quarter.
Detailed financial results are disclosed below and include the operations of Robin's Foods since its acquisition on March 31, 2000.
Statement of Earnings (in Cdn $'s)
For the period ended 3 Months Ended Year to Date
September 30 2000 1999 2000 1999
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System Sales 46,867,005 33,850,128 121,516,478 85,258,055
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Revenue 10,227,933 2,226,336 20,012,825 6,788,735
Cost of Sales 4,437,983 265,455 8,150,576 656,501
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Gross profit 5,789,950 1,960,881 11,862,249 6,132,234
Administration 3,476,519 751,750 6,674,539 2,374,502
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EBITDA 2,313,431 1,209,131 5,187,710 3,757,732
Interest 619,807 219,101 1,404,973 625,388
Amortization 588,657 132,945 1,257,916 399,131
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1,208,464 352,046 2,662,889 1,024,519
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Net income before
taxes 1,104,967 857,085 2,524,821 2,733,213
Income taxes 483,255 421,000 1,107,255 1,258,000
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Net earnings for
the period 621,712 436,085 1,417,566 1,475,213
Opening Retained
Earnings 5,788,004 3,843,156
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Ending Retained Earnings 7,205,570 5,318,369
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Basic earnings
per share ($) 0.079 0.059 0.179 0.20
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EBITDA per Share ($) 0.293 0.164 0.657 0.509
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Balance Sheet (in Cdn $'s)
As at September 30
------------------
2000 1999
-------------------------------------------------------------------------
Assets:
Cash 1,571,507 1,026,773
Accounts receivable 4,835,142 3,024,680
Inventory & Stores held for resale 1,104,073 217,059
Prepaid & other 470,525 490,138
Future income taxes 1,843,043 602,106
-------------------------------------------------------------------------
Total Current Assets 9,824,290 5,360,756
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Investments 120,000 120,000
Long term loans receivable 905,354 -
Capital assets 2,562,918 521,067
Deferred financing costs 1,827,938 -
Franchise rights & trademarks 50,829,658 15,408,768
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Total Long Term Assets 56,245,868 16,049,835
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Total Assets 66,070,158 21,410,591
-------------------------------------------------------------------------
Liabilities:
Accounts payable 1,643,641 711,114
Income taxes payable 592,389 377,373
Unearned revenue 428,242 282,847
Current portion-long term debt 5,072,456 842,590
-------------------------------------------------------------------------
Total Current Liabilities 7,736,728 2,213,924
-------------------------------------------------------------------------
Royalty funding 768,010 1,594,048
Long term debt 23,474,156 5,657,410
Future income taxes 16,602,255 -
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Total Long Term Liabilities 40,844,421 7,251,458
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Shareholders' Equity:
Share capital (Note 1) 7,111,633 6,361,632
Preferred shares (Note 2) 97,708 265,208
Special warrants (Note 3) 3,074,098 -
Retained earnings 7,205,570 5,318,369
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Total Shareholders' Equity 17,489,009 11,945,209
-------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity 66,070,158 21,410,591
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Statement of Cash Flows (in Cdn $'s)
For the nine months ended September 30 2000 1999
-------------------------------------------------------------------------
Operating activities
Net earnings for the period 1,417,566 1,475,213
Amortization 1,257,916 399,131
Future income taxes 800,000 -
Foreign exchange (112,734) 37,704
Net change in non-cash working capital (990,693) 975,748
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Cash provided by operations 2,372,055 2,887,796
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Investing Activities
Increase in deferred financing costs &
capital assets (1,952,145) (71,717)
Purchase of Robin's Foods Inc. (19,091,431) -
Notes from franchisees 319,861 (1,211,594)
Loans receivable - 32,700
-------------------------------------------------------------------------
Cash used in investing activities (20,723,715) (1,250,611)
-------------------------------------------------------------------------
Financing Activities
Repayment of bank indebtedness (2,805,380) -
Proceeds from equity issuance 3,074,098 -
Proceeds from new long term debt 22,303,597 6,500,000
Proceeds from convertible debt 4,732,000 -
Repayment of long-term debt (8,688,284) (7,030,497)
Decrease in deferred royalty funding (618,014) (610,397)
Redemption of preferred shares (125,625) (125,625)
-------------------------------------------------------------------------
Cash Provided by (used in) financing
activities 17,872,392 (1,266,519)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash 152,002 (33,968)
-------------------------------------------------------------------------
Decrease in cash (327,266) 336,698
Cash, beginning of year 1,898,773 690,075
-------------------------------------------------------------------------
Cash, end of period 1,571,507 1,026,773
-------------------------------------------------------------------------
Non-cash investing activities
Purchase of Robin's with issuance of
common shares (750,000) -
Non-cash financing activities
Issuance of common shares for the purchase
of Robin's 750,000 -
Notes to the Financial Statements:
1) The Company is authorized to issue an unlimited number of common
shares with no par value. As of September 30, 2000, 7,902,260 shares
have been issued for total consideration of $7,111,633.
The Company has 632,500 options issued to the Stock Option Plan for
Directors, Officers and Employees all of which have been granted. The
exercise price of these options range in price from $1.00 to $1.80. In
addition, the Company issued 100,000 stock options with an exercise
price of $1.70 as required under the Royalty Funding Agreement, these
options expired November 1, 2000. An additional 168,429 options have
been granted at an exercise price of $1.10 as part of the Robin's
Financing, these options expire on April 1, 2002.
2) The Company has 97,708 preferred shares outstanding with a value of
$1.00 per share. These shares are being redeemed at the rate of
$13,958 per month.
3) The Company has 2,471,862 special warrants outstanding. Each special
warrant entitles the holder to acquire one unit in the capital of the
Company, for no additional consideration, consisting of one common
share and one-third of one common share purchase warrant. Each whole
purchase warrant will entitle the holder to purchase one common share
at a price of $1.60 and will be exercisable until March 20, 2003 when
they expire. The special warrants will result in the issue of
2,471,862 common shares and 823,954 common share purchase warrants.
4) The Company has a series of common share purchase warrants
outstanding, which were issued in connection with the issue and sale
of $5,200,000 of subordinated debentures. The common share purchase
warrants entitle the holders to purchase $5,200,000 of common shares
at a variable exercise price of between $1.50 per share and $3.00 per
share based upon the Company's future financial performance and expire
on March 20, 2005.
