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<SEC-DOCUMENT>0000931763-98-000800.txt : 19980331
<SEC-HEADER>0000931763-98-000800.hdr.sgml : 19980331
ACCESSION NUMBER: 0000931763-98-000800
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971228
FILED AS OF DATE: 19980330
SROS: NONE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AFC ENTERPRISES INC
CENTRAL INDEX KEY: 0001041379
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812]
IRS NUMBER: 582016606
STATE OF INCORPORATION: MN
FISCAL YEAR END: 1229
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 333-29731
FILM NUMBER: 98578076
BUSINESS ADDRESS:
STREET 1: SIX CONCOUSE PARKWAY SUITE 1700
CITY: ATLANTA
STATE: GA
ZIP: 30328
BUSINESS PHONE: 7703919500
MAIL ADDRESS:
STREET 1: SIX CONCOUSE PARKWAY SUITE 1700
CITY: ATLANTA
STATE: GA
ZIP: 30328
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
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)
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
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 ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Not applicable
The aggregate market value of the common stock of AFC Enterprises, Inc. held by
non-affiliates of AFC Enterprises, Inc. is not applicable as the common stock of
AFC Enterprises, Inc. is privately held.
As of March 15, 1998, there were 34,448,604 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index is contained in Part IV herein on page 61.
<PAGE>
AFC ENTERPRISES, INC.
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 24
Item 3. Legal Proceedings................................................ 26
Item 4. Submission of Matters to a Vote of Security Holders.............. 26
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholders Matters.......................................... 27
Item 6. Selected Consolidated Financial Data............................. 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 31
Item 8. Financial Statements and Supplementary Data...................... 46
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............... 47
Item 11. Executive Compensation........................................... 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 58
Item 13. Certain Relationships and Related Transactions................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................... 61
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities 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 this section.
GENERAL
AFC Enterprises, Inc., a Minnesota corporation and its wholly-owned
subsidiary, AFC Properties, Inc., a Georgia corporation, (collectively "AFC" or
the "Company"), is the second largest quick-service chicken restaurant company
in the world, operating and franchising quick-service restaurants ("QSRs") under
the primary trade names of Popeyes Chicken and Biscuits(R) ("Popeyes") and
Churchs Chicken(R) ("Churchs"). The Company also franchises and operates quick-
service bagel bakery restaurants under the primary trade name of Chesapeake
Bagel Bakery ("Chesapeake" or "CBB"). Total restaurants by brand as of December
28, 1997 were as follows:
<TABLE>
<CAPTION>
Popeyes Churchs CBB Total
------- ------- --- -----
<S> <C> <C> <C> <C>
Domestic franchised..................... 830 590 154 1,574
Domestic Company-operated............... 119 480 1 600
International (all franchised).......... 182 286 - 468
----- ----- --- -----
Total...................... 1,131 1,356 155 2,642
===== ===== === =====
</TABLE>
The Company's principal executive offices are located at Six Concourse
Parkway, Suite 1700, Atlanta, Georgia 30328-5352 and its telephone number is
(770) 391-9500.
RESTAURANT LOCATIONS
As of December 28, 1997, the Company's 2,642 systemwide restaurants were
located in 45 states, the District of Columbia and 23 foreign countries.
Popeyes restaurants were located in 40 states, the District of Columbia and 18
foreign countries. The 119 Company-operated Popeyes restaurants are concentrated
primarily in the states of Texas, Louisiana and Georgia. Over 70% of the 830
domestic franchised Popeyes restaurants are located in the states of Texas,
Louisiana, Florida, California, Illinois, Maryland and Mississippi. Over 60% of
the 182 international franchised Popeyes restaurants are located in Korea.
Churchs restaurants were located in 29 states and seven foreign countries. The
480 Company-operated Churchs restaurants are concentrated primarily in the
states of Texas, Louisiana, Georgia, Alabama, Florida, Mississippi and Arizona.
Almost 60% of the 590 domestic franchised Churchs restaurants are located in
Texas, California, Louisiana, Georgia, Florida, Michigan and Illinois. Over 70%
of the 286 international franchised Churchs restaurants are in Canada, Puerto
Rico and Indonesia. Chesapeake restaurants are located in 31 states and the
District of Columbia. The Company-operated Chesapeake restaurant is in the state
of Georgia. The 154 franchised Chesapeake restaurants are concentrated primarily
in the District of Columbia, Maryland and Virginia.
3
<PAGE>
STRATEGY
The Company has adopted a global strategy to increase revenues and profits
by the franchise development of its existing Popeyes, Churchs and Chesapeake
brands and the acquisition of additional branded concepts. The Company's
strategy is to (i) deliver world class service and support to its franchisees by
capitalizing on the Company's size, state-of-the-art technology and leadership
position, (ii) promote franchisee development of traditional and non-traditional
formats in new and existing markets and (iii) provide new and existing
franchisees with investment opportunities in high value/high growth branded
concepts outside of the quick-service chicken restaurant industry. The Company
believes that by following this strategy it will become Franchisor of Choice(TM)
which, when combined with the Company's market leadership position, superior
brand awareness and strong franchisee relationships, will result in continued
growth. To reflect this strategy, the Company changed its name in October 1996
from America's Favorite Chicken Company to AFC Enterprises, Inc.
COMPANY STRENGTHS
LEADING MARKET POSITION. The Company is the second largest quick-service
chicken restaurant company in the world, with 2,487 Popeyes and Churchs
restaurants located in the United States and 23 foreign countries. In 1998, the
Company expects to franchise and open over 200 new chicken restaurants in the
U.S. and over 100 new chicken restaurants internationally. At December 28,
1997, the Popeyes system included 949 domestic restaurants and the Churchs
system included 1,070 domestic restaurants. From industry data gathered at the
end of 1997, the Company believes that the Popeyes system generated
approximately 8.0% of sales in the domestic quick-service chicken restaurant
industry, while the Churchs system generated approximately 6.0% of sales in that
industry.
HIGH BRAND AWARENESS. With Popeyes' New Orleans style fried chicken and
Churchs' traditional Southern fried chicken, management believes Popeyes and
Churchs have achieved a high level of positive brand awareness with both
franchisees and consumers. Over Popeyes' 25 years of operation and Churchs' 45
years of operation, the Company's restaurants have become two of the most highly
recognized brand names in the QSR industry. Management believes that the
Company's reputation for offering a unique selection of high quality food
products and value pricing, combined with a high level of customer service, has
created a valuable franchise with strong brand name recognition and customer
loyalty.
STRONG FRANCHISEE RELATIONSHIPS. The Company enjoys strong relationships
with its franchisees as a result of its ongoing efforts to develop the Popeyes
and Churchs brands globally and develop the Chesapeake brand in the United
States by (i) investing capital to re-image and renovate Company-operated
restaurants in each of the systems, (ii) providing strong operational, marketing
and technological support to franchisees, (iii) delivering operating
efficiencies and economies of scale to franchisees and (iv) promoting
restaurants within non-traditional formats. Additionally, the Company
4
<PAGE>
seeks to provide new investment opportunities to its franchisees by acquiring
and franchising high value/high growth branded concepts. The number of total
franchised restaurants for all brands has grown from 1,162 at year-end 1992 to
2,042 at December 28, 1997, and the number of commitments to open new franchised
restaurants has increased to 1,715 at December 28, 1997, compared with 372
commitments at year-end 1992.
SIGNIFICANT OPERATIONAL EFFICIENCIES. By virtue of its size and leadership
position in the quick-service restaurant industry, the Company benefits from
significant operational efficiencies. The Company's large number of
restaurants, centralized corporate management structure and ongoing
implementation of state-of-the-art management information systems enable the
Company to (i) tightly control restaurant and corporate-level costs, (ii)
capture economies of scale by leveraging its existing corporate overhead
structure and (iii) continuously monitor point-of-sale data in its Company-
operated restaurants to more efficiently manage restaurant operations. The
Company and its franchisees have experienced substantial levels of savings as a
result of the Company's size and related bargaining power, particularly with
respect to food, beverage and paper goods, and advertising and marketing
programs. In addition, the Company has achieved reductions in its general
corporate overhead expenses. These operational efficiencies have contributed to
the improvement of the Company's EBITDA margin from 8.0% in fiscal 1993 to 15.3%
in fiscal 1997.
STRONG MANAGEMENT TEAM. The Company's management team, led by Frank J.
Belatti and Dick R. Holbrook, has overseen a period of increasing total revenues
and EBITDA, as defined, from fiscal 1993 to fiscal 1997. Mr. Belatti and Mr.
Holbrook previously held senior executive positions at Hospitality Franchise
Systems, Inc. and, prior to that, at Arby's, Inc., and each has substantial
experience in the franchising and operation of restaurant service and hotel
enterprises. With an average of more than 19 years of experience in the QSR and
related industries, the Company's top eight executives have substantial
expertise in developing brand awareness and enjoy an excellent reputation in the
industry. Members of the Company's management team possess a diverse skill base
that includes brand marketing, restaurant operations, product and concept
development and technology systems integration.
OPERATING STRATEGY
RE-IMAGE AND RENOVATE EXISTING RESTAURANTS. The Company believes that
significant opportunities exist to increase the Company's revenues and gain
efficiencies in its current markets by re-imaging and renovating franchised and
Company-operated Popeyes and Churchs restaurants. Substantially all of the
costs of re-imaging and renovating franchised restaurants is borne by the
franchisee. By the end of 1999, the Company expects to substantially complete
its initiative to (i) add new signage, new decor, contemporary lighting and,
where appropriate, drive-thru service and (ii) improve the efficiencies of its
restaurant operating systems, including the installation of energy efficient
equipment at all of its Company-operated Popeyes and Churchs restaurants.
Partly as a result of its re-imaging and renovation efforts, Popeyes and Churchs
5
<PAGE>
systemwide comparable restaurant sales have increased every year since the
implementation of this program in 1994. The Company, in cooperation with its
franchisees, intends to begin transforming all Chesapeake restaurants with a new
image, format and brand positioning during fiscal 1998. The transformations will
begin in the Washington, D.C./Baltimore area and then throughout the remainder
of the system. The Company hopes to complete such transformations by the end of
1998.
INCREASE DOMESTIC FRANCHISED RESTAURANTS. The Company believes that
significant opportunities exist to increase the number of domestic franchised
restaurants operated by both new and existing franchisees and that growth
through franchising can provide significant additional revenue growth at
relatively low levels of capital expenditures by the Company. The Company
intends to target restaurant growth in markets where it has or can achieve
sufficient penetration to justify television advertising because sales at
restaurants in the Company's media efficient markets are generally 5% to 10%
higher than sales in non-media efficient markets. The number of domestic
franchised restaurants has increased from approximately 9903 at the beginning of
1993, to 1,574 at December 28, 1997, and the Company anticipates that domestic
franchisees will open over 200 new restaurants in 1998, many of which will be in
the Company's target markets.
CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to
aggressively pursue selected growth opportunities by (i) expanding its existing
brands to new domestic and international markets, (ii) promoting the development
of new points of distribution and (iii) acquiring additional branded concepts to
provide franchisees with a broad range of investment opportunities, thereby
generating a larger and more diversified stream of franchise revenues to the
Company. These initiatives include the following:
. NON-TRADITIONAL FORMATS. In response to new marketing opportunities
and consumer demand, the Company intends to continue to promote the
expansion of the number and type of non-traditional formats from which
it sells Popeyes, Churchs and Chesapeake food products. In addition to
the traditional stand-alone models, the Company has franchised and
opened Popeyes, Churchs and Chesapeake restaurants within community
shopping plazas, convenience stores, mall food courts, airports and
other transportation centers and grocery stores. For example, the
Company has opened both franchised and Company-operated restaurants in
various locations of The Kroger Co., one of the nation's largest
supermarket operators.
. CO-BRANDING INITIATIVES. The Company intends to selectively enter into
co-branding arrangements in which Popeyes and Churchs restaurants
share facilities with other QSRs. Management believes that co-branding
represents an attractive revenue growth opportunity that provides
brand awareness in new markets and faster opening times (as
restaurants are constructed within existing QSR facilities), together
with reduced costs of entry and lower ongoing capital expenditures.
The Company has entered
6
<PAGE>
into several such arrangements including franchising Churchs
restaurants in 93 Cara Operations Limited Harvey's hamburger
restaurants in Canada and in 61 White Castle hamburger restaurants
throughout the Midwest, Southeast and Northeast.
. EXPANSION IN INTERNATIONAL MARKETS. Management believes that
international expansion is an attractive growth opportunity due to (i)
advantageous per unit economics, resulting largely from lower food
and/or labor costs and less QSR competition abroad, (ii) foreign
economies with an expanding group of QSR consumers and (iii) well
established markets for quick-service chicken restaurants in over 80
countries around the world. The Company's international operations
have increased from 172 franchised restaurants in 14 foreign countries
at the beginning of 1993, to 468 franchised restaurants in 23 foreign
countries at December 28, 1997. Additionally, commitments to develop
international franchised restaurants have risen from 161 at the
beginning of 1993, to 799 at December 28, 1997. The Company
anticipates that international franchisees will open over 100 new
restaurants in 1998.
. NEW BRANDED CONCEPTS. Management intends to identify and acquire
additional high value/high growth brands which would benefit from the
Company's operating efficiency, management experience, state-of-the-
art technology, service commitment to franchisees and shared
administrative infrastructure. In line with this strategy, in May 1997
the Company acquired all of the intangible assets relating to the
franchise business of Chesapeake, comprising 158 franchised bagel
bakery restaurants concentrated in Washington, D.C., Maryland and
Virginia. Additionally, in March 1998, the Company acquired 100% of
Seattle Coffee Company's common stock. This transaction included the
acquisition of 58 Company-operated and 10 franchised cafes under the
Seattle's Best and Torrefazione Italia brands.
INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. The
Company's customized management information systems, typically not affordable by
smaller QSR chains, provide both the Company and its franchisees with the
ability to quickly capitalize on restaurant sales enhancement and profit
opportunities. The Company utilizes its management information systems to (i)
minimize waste and control labor costs, (ii) efficiently schedule labor, (iii)
effectively manage inventory and (iv) analyze product mix and various
promotional programs using point-of-sale information. For example, the Company
has installed a new point-of-sale FasFax(TM) system in its Company-operated
restaurants, as part of an ongoing program that was completed in July 1997.
This touch-screen cash register system provides management with real time
information on customer trends, sales mix, inventory management and product
pricing. The Company intends to demonstrate to new and existing franchisees the
efficiencies afforded by this system and other new technologies. Management
also believes that additional opportunities exist to improve operational
efficiencies and will
7
<PAGE>
continue to implement a "back office" automation system to better manage food
and labor costs. In 1998, management intends to launch AFC Online, an intranet
for franchisees that will provide operational support, a restaurant development
roadmap, a business planning template, marketing information and certain other
relevant information on a 24 hours a day, seven days a week basis.
MAINTAIN HIGH QUALITY PRODUCTS, SUPERIOR CUSTOMER SERVICE AND STRONG
COMMUNITY RELATIONS. The Company seeks to ensure overall customer satisfaction
through consistency in food quality, service and restaurant appearance. The
Company maintains rigorous and ongoing quality control procedures over suppliers
and distributors to ensure that its product specifications are maintained. In
addition, the Company has taken an important leadership role in the
neighborhoods and communities it serves. Through its involvement in Habitat for
Humanity, the United Negro College Fund and the Hispanic Association of Colleges
and Universities, among others, the Company has established a meaningful
presence in the local communities it serves, while building customer loyalty and
brand awareness.
FRANCHISOR OF CHOICE(TM). The Company has adopted the Franchisor of Choice
global strategy, which will be implemented by (i) promoting distinctly
positioned brands, currently Popeyes, Churchs and Chesapeake, with other branded
concepts to be acquired in the future, (ii) developing multi-unit development
territories, (iii) providing high quality service and support to franchisees,
(iv) providing franchisees with alternative formats in innovative market
settings, (v) redesigning business processes to provide additional support to
franchisees, including a multi-million dollar investment in new technology, (vi)
eliminating barriers to growth for existing and new franchisees through new
financial and real estate support mechanisms and (vii) providing on-site or
field support including site selection, construction expertise, multi-national
supply and distribution, marketing, operations and training.
BRANDS
The Company franchises and operates restaurants catering to different
segments of the QSR industry.
POPEYES CHICKEN AND BISCUITS. Popeyes Chicken and Biscuits was founded in
New Orleans in 1972 and is the market leader in the Cajun segment of the QSR
industry. With more than 1,100 restaurants worldwide, Popeyes was the second
largest quick-service chicken restaurant chain in 1997, in terms of sales.
Popeyes specialty menu item is fresh, hand-battered, bone-in fried chicken sold
in two flavors--New Orleans Spicy and Louisiana Mild. Popeyes chicken is
complemented with a wide assortment of spicy and signature Cajun cuisine side
dishes, including red beans and rice, Cajun rice, Cajun fries and fresh,
buttermilk biscuits. Popeyes is positioned as a premium fried chicken for
customers who seek its full flavor and specialty blend of seasonings and spices.
Popeyes is also known for its "limited time offers" of unique items that
complement its base menu. Popeyes restaurants are generally found in urban
areas in traditional standalone locations,
8
<PAGE>
as well as in non-traditional formats such as airports and other travel centers,
supermarkets and mass merchandisers.
The following table sets forth selected restaurant data regarding Popeyes
Company-operated and franchised restaurants.
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------------------------------------
December 26, December 25, December 31, December 29, December 28,
1993 1994 1995 1996 1997
------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Total Company and franchised restaurants
open at beginning of period.................. 807 814 907 964 1,021
------------ ----------- --------- ---------- -----------
COMPANY RESTAURANTS:
Open at beginning of period.................. 115 110 113 117 120
Opened or acquired........................... 1 1 6 1 1
Closed....................................... (3) (1) (2) (6) (3)
Sold to franchisees.......................... (3) - - (1) (2)
Acquired from franchisees.................... - 3 - 9 3
------------ ----------- --------- ---------- -----------
Open at end of period........................ 110 113 117 120 119
------------ ----------- --------- ---------- -----------
Net Sales (in thousands)..................... $ 84,138 $ 87,690 $ 93,686 $ 92,145 $ 97,006
Percentage increase/(decrease)
in comparable sales....................... 0.8% 4.2% 2.2% (2.4)% 4.7%
DOMESTIC FRANCHISED RESTAURANTS
Open at beginning of period................. 654 659 740 772 774
Opened or acquired........................... 30 117 60 51 77
Closed....................................... (28) (33) (28) (41) (20)
Acquired from Company........................ 3 - - 1 2
Sold to Company.............................. - (3) - (9) (3)
------------ ----------- --------- ---------- -----------
Open at end of period........................ 659 740 772 774 830
------------ ----------- --------- ---------- -----------
Net sales (in thousands)..................... $ 484,589 $ 526,464 $ 566,526 $ 584,598 $ 630,466
Percentage increase in comparable sales...... 0% 1.2% 0.9% 1.4% 3.4%
INTERNATIONAL FRANCHISED RESTAURANTS
Open at beginning of period.................. 38 45 54 75 127
Opened or acquired........................... 9 11 39 58 59
Closed....................................... (2) (2) (18) (6) (4)
------------ ----------- --------- ---------- -----------
Open at end of period........................ 45 54 75 127 182
------------ ----------- --------- ---------- -----------
Net sales (in thousands)..................... $ 32,662 $ 35,726 $ 50,628 $ 85,365 $ 125,454
Percentage increase/(decrease)
in comparable sales....................... (10.3)% (2.2)% 11.6% 4.3% 1.3%
Total Company and franchised
restaurants open at end of period............ 814 907 964 1,021 1,131
============ =========== ========= ========== ===========
</TABLE>
9
<PAGE>
CHURCHS CHICKEN. Churchs Chicken, founded in San Antonio, Texas in 1952,
is one of the United States' oldest QSR chains and has approximately 1,350
restaurants worldwide, making Churchs the second largest quick-service chicken
restaurant chain, in terms of number of outlets. Churchs restaurants focus on
serving traditional Southern fried chicken in a simple, no frills restaurant
setting. Churchs menu items also include other Southern specialties including
fried okra, coleslaw, mashed potatoes and gravy, corn on the cob and honey
butter biscuits. Churchs is positioned as a value-oriented brand, providing
simple, traditional meals to price conscious consumers. Churchs restaurants are
traditionally found in urban areas where the reputation of a "neighborhood"
restaurant has been established. With its small footprint and a simple
operating system, Churchs is rapidly expanding into non-traditional formats such
as convenience stores, grocery stores and co-branding locations.
Internationally, Churchs has been very popular in the Far East, operating under
the brand name Texas Chicken(TM).
10
<PAGE>
The following table sets forth selected restaurant data regarding Churchs
Company-operated and franchised restaurants.
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------------------
December 26, December 25, December 31, December 29, December 28,
1993 1994 1995 1996 1997
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Total Company and franchised restaurants
open at beginning of period................. 1,078 1,078 1,165 1,219 1,257
------------- ------------ ------------ ------------- -------------
COMPANY RESTAURANTS:
Open at beginning of period................. 608 605 604 589 622
Opened or acquired.......................... 1 4 2 - 75
Closed...................................... (1) (2) (9) (13) (1)
Sold to franchisees......................... (6) (4) (8) (10) (148)
Acquired from franchisees................... 3 1 - 56 0
------------- ------------ ------------ ------------- -------------
Open at end of period....................... 605 604 589 622 480
------------- ------------ ------------ ------------- -------------
Net Sales (in thousands).................... $ 295,608 $ 314,165 $ 333,021 $ 338,135 $ 306,176
Percentage increase in comparable sales..... 4.6 % 6.2 % 5.6 % 4.3 % 5.2 %
DOMESTIC FRANCHISED RESTAURANTS
Open at beginning of period................. 336 327 333 364 367
Opened or acquired.......................... 11 23 27 76 93
Closed...................................... (23) (20) (4) (27) (186)
Acquired from Company....................... 6 4 8 10 148
Sold to Company............................. (3) (1) - (56) 0
------------- ------------ ------------ ------------- -------------
Open at end of period....................... 327 333 364 367 590
------------- ------------ ------------ ------------- -------------
Net sales (in thousands).................... $ 144,611 $ 150,844 $ 167,953 $ 187,512 $ 268,179
Percentage increase in comparable sales..... 3.3 % 2.8 % 2.5 % 5.1 % 2.9 %
INTERNATIONAL FRANCHISED RESTAURANTS
Open at beginning of period................. 134 146 228 266 268
Opened or acquired.......................... 14 87 52 41 32
Closed...................................... (2) (5) (14) (39) (14)
------------- ------------ ------------ ------------- -------------
Open at end of period....................... 146 228 266 268 286
------------- ------------ ------------ ------------- -------------
Net sales (in thousands).................... $ 112,410 $ 125,252 $ 146,772 $ 150,349 $ 149,633
Percentage increase/(decrease)
in comparable sales....................... (4.4)% 3.4 % 0.9 % (2.1)% 2.6 %
Total Company and franchised
restaurants open at end of period........... 1,078 1,165 1,219 1,257 1,356
============= ============ ============ ============= =============
</TABLE>
11
<PAGE>
CHESAPEAKE. On May 5, 1997, the Company acquired all of the intangible
assets of the franchise business of Chesapeake from The American Bagel Company.
Located primarily in Washington, D.C., Maryland and Virginia, Chesapeake
currently franchises 154 bagel restaurants and has development agreements for
over 200 additional restaurants, of which approximately 20 restaurants are
expected to open in 1998. In 1997, Chesapeake was the fourth largest bagel
company in the world and the world's largest "made from scratch" bagel company.
"Made from scratch" means that the bagels are prepared fresh at each location
each day. Chesapeake restaurants offer a variety of freshly made items,
including a wide assortment of bagels and other baked goods, sandwiches, salads,
fountain drinks and specialty coffees. Several of the restaurants have viewing
areas that allow customers to experience the bagel making process. The
acquisition of Chesapeake gives the Company a presence in the growing bagel
segment of the QSR industry, provides a platform to expand into the growing
bakery cafe segment and diversifies its current brand portfolio, supporting the
Company's Franchisor of Choice(TM) global strategy.
MANUFACTURING OPERATIONS
ULTRAFRYER SYSTEMS. The Company's Ultrafryer Systems ("Ultrafryer")
division (f.k.a. Far West Products) is a manufacturer of restaurant equipment
and is located in San Antonio, Texas. Ultrafryer's focus is to provide equipment
for Company-operated and franchised Popeyes and Churchs restaurants domestically
and internationally, as well as other QSR customers. Ultrafryer's main product
is the Ultrafryer(TM) gas fryer.
SITE SELECTION
The Company has an extensive domestic site selection process for the
establishment of new Popeyes, Churchs and Chesapeake restaurant locations,
commencing with an overall market plan for each intended area of development
compiled by the Company and the relevant area developer, if any. This market
plan divides each such area into trading areas based on a detailed computer
analysis taking into account such factors as competitor locations, locations of
shopping centers and other commercial draws, natural and other boundaries,
residential and workplace populations and customer profile information that
measures propensities and demand for various restaurant segments as well as for
individual brands. Once a market plan is established for a particular area,
local real estate managers of the Company or area developers together with local
real estate brokers focus on the most desirable sites in each designated trade
area, taking into account such factors as visibility, ready accessibility
(particularly for evening drive-time traffic), parking, signage and adaptability
of any current structure, as well as a determination of the availability of the
site and the costs relating thereto. A thorough analysis of each site, including
the foregoing types of information, photographs of the site and neighboring
area, and a proposed layout and site elevations, as well as other materials,
must be submitted to the Company for approval. In addition, leases must contain
certain terms and provisions and are subject to the approval of the Company. The
Company emphasizes free-standing pad sites and end-cap locations with ample
parking and easy dinner-time access
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<PAGE>
from high traffic roads. Highly visible signage consistent with trade dress and
local laws and regulations is also aggressively pursued.
The Company's involvement in the international site selection process is
less significant due to the relative size and sophistication of the Company's
international franchisees, who independently conduct extensive site
investigations. International sites are often located in highly concentrated
urban areas and are built with a multi-floor layout to accommodate the higher
percentage of dine-in customers.
FRANCHISE DEVELOPMENT
The Company's global strategy includes the opening of substantially all new
restaurants through franchising additional restaurants to new and existing
franchisees. The Company enjoys strong relationships with its franchisees as a
result of its ongoing efforts to (i) develop Popeyes and Churchs globally and
Chesapeake in the U.S. by investing capital to re-image and renovate Company-
operated restaurants in each of the systems, (ii) provide strong operational,
marketing and technological support to franchisees, (iii) deliver operating
efficiencies and economies of scale to its franchisees and (iv) promote the
expansion of points of distribution to non-traditional formats and new markets
for existing brands, and by acquiring and franchising high value/high growth
branded concepts.
DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide
for the development of a specified number of restaurants within a defined
domestic geographic territory in accordance with a schedule of restaurant
opening dates. Development schedules generally cover three to five years and
typically have benchmarks for the number of restaurants to be opened and in
operation at six- to twelve-month intervals. Area developers currently pay a
development fee of $10,000 for the first restaurant to be developed and $5,000
for each additional restaurant to be developed under the same development
agreement. Such development fees are non-refundable and paid when the area
development agreement is executed. The Company currently offers exclusive and
non-exclusive development agreements. Under exclusive development agreements,
developers are granted a geographic area (the "Development Area") to develop a
Popeyes, Churchs or Chesapeake restaurant within which the Company agrees to
neither open nor grant the right to open to anyone other than the developer
another Popeyes, Churchs or Chesapeake restaurant (as the case may be) until 60
days after the expiration of the development schedule set out in the development
agreement subject, to the other terms of such agreement. The Development Area
generally does not include military bases, public transportation facilities,
toll road plazas, universities, recreational theme parks and the interior
structural confines of shopping malls, even though such facilities may be
located within a given Development Area. If a developer fails to comply with the
development schedule contained in its development agreement, or otherwise
defaults under the development agreement or under any other agreement with the
Company, the Company may, among other things (i) terminate or reduce the
territorial exclusivity in the Development Area or reduce the size of the
Development Area, (ii) terminate the development agreement, (iii) reduce the
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<PAGE>
number of restaurants that the developer can develop under the development
agreement, (iv) accelerate the development schedule, (v) withhold site approval
or (vi) refuse to permit the opening of restaurants under construction. Under
non-exclusive development agreements, the developer is not afforded any
territorial exclusivity and the Company reserves the right to establish or
franchise any restaurants in proximity to the development territory described
under such agreement.
INTERNATIONAL DEVELOPMENT AGREEMENTS. The Company enters into development
agreements with qualifying parties to develop Popeyes or Churchs franchised
restaurants in jurisdictions outside of the United States ("International
Development Rights"). International Development Rights may include one or more
countries or limited geographic areas within a particular country. The terms of
the development agreements for International Development Rights are, in most
respects, similar to domestic development agreements. International development
agreements also require the payment of a non-refundable "territorial fee" for
granting development rights in the new country as well as a pre-payment of a
portion of the franchise fee for each franchised restaurant to be developed
under the agreement. International development agreements also include
additional provisions necessary to address the multi-national nature of the
transaction (including foreign currency exchange, taxation matters and
international dispute resolution provisions) and are also subject to
modifications necessary to comply with the requirements of applicable local
laws, such as laws relating to technology transfers, export/import matters and
franchising.
FRANCHISE AGREEMENTS. Once a site has been approved by the Company and the
property has been acquired by the developer either by purchase or lease, the
Company and the area developer enter into a franchise agreement under which the
area developer becomes the franchisee for the specific restaurant to be
developed at such site. Current franchise agreements typically provide for
payment of a franchise fee of $15,000 per restaurant. Franchise fees for mass
merchandise locations (including department stores and supermarkets) are
generally $10,000 for the first location and $5,000 for each additional mass
merchandise location under the same development agreement. In addition, the
Popeyes and Churchs franchise agreements require franchisees to pay a 5% royalty
on net restaurant sales and a 3% (with respect to Popeyes) and 4% (with respect
to Churchs) national advertising fund contribution (reduced to a maximum of 1%
if a local advertising co-operative is formed). The Chesapeake franchise
agreements require franchisees to pay a 4% royalty on net restaurant sales and a
2% national advertising fund contribution. Certain of the Company's older
franchise and area development agreements provide for lower royalties and
reduced franchise and area development fees. Such older forms of agreements
constitute a decreasing percentage of all franchise agreements.
The Company now offers franchise agreements which provide for an area of
limited exclusivity (the "Protected Area") surrounding the Popeyes, Churchs and
Chesapeake franchise in which the Company may neither develop nor grant to
others the right to develop another Popeyes, Churchs or Chesapeake restaurant
(as the case may be), except that the Company generally excepts from such
Protected Area certain specified locations. The Protected Area generally
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<PAGE>
consists of an area equal to the lesser of (i) a one-mile radius from the
franchised restaurant or (ii) an area surrounding the franchised restaurant,
encompassing a population (residential and/or daytime commercial) of 50,000
people. The Protected Area does not include (i) enclosed shopping malls, (ii)
existing franchised restaurants and/or franchised restaurants for which
franchise agreements were previously granted or (iii) alternative venues,
including transportation facilities, toll roads and major thoroughfares,
educational facilities, institutional dining facilities, governmental
facilities, military bases, amusement parks and other locations, even though
such facilities may be located within the Protected Area.
All of the Company's franchise agreements require that each restaurant
operates in accordance with the operating procedures, adheres to the menu
established by the Company and meets applicable quality, service and cleanliness
standards. The Company may terminate the franchise rights of any franchisee who
does not comply with such standards. The Company is specifically authorized to
take accelerated action if any franchised restaurant presents a health risk. The
Company believes that maintaining superior food quality, a clean and pleasant
environment and excellent customer service are critical to the reputation and
success of the Popeyes, Churchs and Chesapeake systems and it intends to
aggressively enforce applicable contractual requirements. Franchisees may
contest such terminations.
The terms of international franchise agreements are substantially similar
to domestic franchise agreements, except that such agreements may be modified to
reflect the multi-national nature of the transaction and to comply with the
requirements of applicable local laws. In addition, royalty rates may differ
from domestic franchise agreements due to the relative size and sophistication
of international franchisees. The international developer is required to
partially pre-pay a franchise fee (typically $20,000) at the time the
development agreement is entered into, along with a development fee (usually
$5,000 to $10,000 for each development commitment).
TURNKEY DEVELOPMENT. In order to expedite development of domestic
franchised restaurants, the Company may build restaurants in certain markets,
which will be subsequently sold to qualifying franchisees as franchised
restaurants ("Turnkey Units"). In 1997, the Company entered into an agreement
with Banco Popular De Puerto Rico to provide up to $15 million in revolving
construction financing to AFC and permanent financing to qualifying franchisees
for these Turnkey units. The Company expects to have up to 30 sites in various
stages of development during 1998 under the Turnkey Program.
15
<PAGE>
MARKETING AND COMMUNITY ACTIVITY
Popeyes, Churchs and Chesapeake products are marketed to their respective
customer bases using a three-tiered marketing strategy. First, electronic media
(local TV and radio) create awareness for the products and spark consumer
interest in particular product offerings. Second, print media (newspaper ads,
free-standing inserts and direct mail) generate trial by offering a purchase
incentive--often a coupon--to buy a new product or promotional item. Finally,
signage and point-of-purchase materials at Popeyes, Churchs and Chesapeake
restaurants support the promotional activity. Each of Popeyes, Churchs and
Chesapeake offer consumers a new program each month to maintain consumer product
interest. New product introductions and "limited time only" promotional items
also play major sales building roles and create regular repeat customers.
Both franchised and Company-operated Popeyes, Churchs and Chesapeake
restaurants contribute to a national advertising fund to pay for the development
of marketing materials and to a local advertising fund to support programs in
their local markets. For the fiscal year ended December 28, 1997, the Company
contributed approximately $20.1 million to the Popeyes, Churchs and Chesapeake
advertising funds.
AFC is also heavily involved in community activities and support programs
that often have an educational theme. Through The AFC Foundation, Inc., a non-
profit foundation, the Company has agreed to sponsor and help construct 200
homes worldwide through Habitat For Humanity, a non-profit sponsor of housing
construction for the poor. In addition, the Company supports the United Negro
College Fund and the Hispanic Association of Colleges and Universities with
promotional fund raisers. Both brands also sponsor Adopt-A-School programs.
COMPETITION
The QSR industry is intensely competitive with respect to price, customer
service, concept, location, convenience and food quality. The industry is mature
and competition can be expected to increase. In addition, there are many well
established food service competitors with substantially greater financial and
other resources than the Company. Franchised and Company-operated restaurants
compete with a number of national and regional restaurant chains, as well as
with locally-owned restaurants offering low-priced and medium-priced foods.
Convenience stores, grocery stores, delicatessens, food counters, cafeterias and
other purveyors of moderately priced and quickly prepared foods also compete
with the Company. The Company's primary competitor in the quick-service chicken
restaurant market is KFC, which has a majority of the quick-service chicken
restaurant market. The Company's next largest competitors in the quick-service
chicken restaurant market are a number of regional chicken restaurant chains.
From recently gathered industry data, management believes that Company sales are
over five times the sales of the Company's next largest chicken QSR competitor.
Other QSR competitors include hamburger, pizza, sandwich and Chinese
16
<PAGE>
food QSRs, other purveyors of carry-out food and convenience dining
establishments, including national restaurant chains.
The Company believes that product quality, taste, name recognition,
convenience of location, speed of service, menu variety, price and ambiance are
the most important competitive factors in the QSR industry and that its
restaurants effectively compete in such categories. The Company regularly
monitors its competitors' prices and adjusts its prices and marketing strategy
in light of existing conditions.
MANAGEMENT INFORMATION SYSTEMS
In 1994, the Company entered into a ten-year outsourcing agreement with IBM
Global Services, a division of IBM ("IGS"). Under this agreement, IGS is in the
process of customizing the Company's management information systems. Typically
not affordable by smaller quick-service restaurant chains, the IGS management
information system provides the Company with the ability to quickly capitalize
on restaurant sales enhancement and profit opportunities. The Company utilizes
its management information systems to (i) minimize waste and control labor
costs, (ii) efficiently schedule labor, (iii) effectively manage inventory and
(iv) analyze product mix and various promotional programs using point-of-sale
information. The IGS agreement allowed the Company to complete the
implementation of a new point-of-sale FasFax(TM) system in each of its Company-
operated restaurants in July 1997. This touch-screen cash register system allows
for a significant increase of timely information on customer trends, sales mix,
inventory management and product pricing. The Company intends to demonstrate to
new and existing franchisees the efficiencies afforded by the FasFax(TM) system
and other new technologies. Management believes that the IGS agreement has
provided the Company with a number of additional opportunities to improve
operational efficiencies. In that regard, the Company will continue to implement
a "back office" automation system to better control food and labor costs. In
1998, management intends to launch AFC Online, an intranet for franchisees that
will provide operational support, a restaurant development roadmap, a business
planning template, marketing information and certain other relevant information
on a 24 hours a day, seven days a week basis. Finally, the IGS agreement has
allowed the Company's numerous departments to join a common computer network
using a common infrastructure. See Notes 9 and 14 to the Company's Consolidated
Financial Statements.
YEAR 2000 ISSUES
In the process of customizing the Company's management information systems,
the Company established procedures to ensure that its new systems were year 2000
compliant. In addition, during 1997 the Company formalized a plan to analyze all
of its financial and operating computer systems to ensure any corrective action
necessary to eliminate problems before the beginning of the year 2000. This plan
includes analyses of existing systems, new systems to be implemented in 1998 and
1999, systems used by its vendors and customers that are needed for the proper
functioning of the Company's systems and all other known Company processes that
use computer systems to function.
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<PAGE>
While the analysis phase of the plan has not been completed as of December 28,
1997, the Company believes that, with the completion of its system upgrades, a
significant portion of the potential year 2000 issues will be resolved. Although
the analysis is not yet complete, the Company believes that the cost, if any, to
make other systems year 2000 compliant will not be material to its results of
operations.
SUPPLIERS
Franchisees are generally required to purchase all ingredients, products,
materials, supplies, and other items necessary in the operation of their
businesses solely from suppliers who (i) demonstrate, to the continuing
satisfaction of the Company, the ability to meet the Company's standards and
specifications for such items, (ii) possess adequate quality controls and
capacity to supply franchisees' needs promptly and reliably and (iii) have been
approved in writing by the Company. Notwithstanding the above, Company-operated
restaurants are obligated by various agreements to serve certain Coca-Cola(R) or
Dr Pepper(R) beverages exclusively. The Company also has an agreement with
Diversified Foods and Seasonings, Inc. ("Diversified"), which terminates in
March 2029, under which the Company is required to purchase certain proprietary
products made exclusively by Diversified. Moreover, Diversified is the sole
supplier of certain proprietary products for the Popeyes system. Diversified
sells only to Company approved distributors who in turn sell to franchised and
Company-operated restaurants. In the fiscal year ended December 28, 1997, the
Popeyes system purchased approximately $32.2 million of proprietary products
made by Diversified. The Company recently settled an action brought by
Diversified relating to the Diversified supply agreement. See "Item 3. Legal
Proceedings". The Popeyes and Churchs systems purchase fresh chicken from 14
suppliers from 33 plant locations.
Supplies are generally provided to franchised and Company-operated
restaurants in the Popeyes and Churchs systems pursuant to supply agreements
negotiated by Popeyes Operators Purchasing Cooperative Association, Inc.
("POPCA") and Churchs Operators Purchasing Association, Inc. ("COPA"),
respectively, each a not-for-profit corporation that was created for the purpose
of consolidating the collective purchasing power of the franchised and Company-
operated restaurants and negotiating favorable terms therefor. COPA also
purchases certain ingredients and supplies for Chesapeake franchised and
Company-operated restaurants in order to further leverage the collective buying
power of AFC. The purchasing cooperatives are not obligated to purchase, and do
not bind their members to commitments to purchase, any supplies. Membership in
each cooperative is open to all franchisees. Since 1995, the Company's franchise
agreements have required that each franchisee joins its respective purchasing
cooperative as a member. All Company-operated Popeyes and Churchs restaurants
are members of POPCA or COPA, as the case may be. Substantially all of the
Company's domestic franchisees participate in POPCA or COPA.
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<PAGE>
TRADEMARKS AND LICENSES
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including the
marks Popeyes(R), Churchs(R), Popeyes Chicken and Biscuits(R), Chesapeake Bagel
Bakery(R) and each brand's logo utilized by the Company and its franchisees in
virtually all Popeyes, Churchs and Chesapeake restaurants domestically. The
Company also has trademark applications pending for a number of additional
marks, including Gotta Love It(TM), Day of Dreams(TM) and Franchisor of
Choice(TM). In addition, the Company has registered or made application to
register the marks (or, in certain cases, the marks in connection with
additional words or graphics) in approximately 100 foreign countries, although
there can be no assurance that any mark is registrable in every country
registration is sought. The Company considers its intellectual property rights
to be important to its business and actively defends and enforces them.
FORMULA AGREEMENT. The Company has a formula licensing agreement, as
amended (the "Formula Agreement"), with Alvin C. Copeland ("Copeland"), the
former owner of the Popeyes and Churchs restaurant systems, and Diversified,
which calls for the worldwide exclusive licensing to the Popeyes system of the
spicy fried chicken formula and certain other ingredients used in Popeyes
products. The Company recently settled an action brought by Copeland and
Diversified in connection with the Formula Agreement. See "Item 3. Legal
Proceedings". The Formula Agreement provides for monthly royalty payments of
$237,500 until April 1999, and, thereafter, monthly royalty payments of $254,166
until March 2029.
KING FEATURES AGREEMENTS. The Company currently has a number of domestic
and international agreements with The Hearst Corporation, King Features
Syndicate Division ("King Features") under which the Company has the exclusive
license to use the image and likeness of the cartoon character "Popeye" (and
certain companion characters such as "Olive Oyl") in connection with the
operation of franchised and Company-operated Popeyes restaurants worldwide.
Under the current agreements, the Company is obligated to pay to King Features a
royalty of 0.1% of the first $1 billion of Popeyes systemwide sales and 0.05%
for the next $2 billion of such sales. The King Features agreements
automatically renew annually.
ACQUISITION STRATEGY
One of the Company's core strategies is to grow through the acquisition of
additional high value/high growth franchiseable concepts, leveraging the
implementation of such concepts over its existing franchise system
infrastructure. In that regard, the 1997 Credit Facility (see Note 8 in the
footnotes to the Consolidated Financial Statements) includes a $100 million
Acquisition Facility. To implement this strategy successfully, the Company will
be dependent on its ability to identify and acquire such concepts and to
successfully integrate the operation of such concepts into the Company. There
can be no assurance that the Company will be able to identify
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<PAGE>
appropriate concepts or that such concepts will be available on terms and at
prices that will be attractive and profitable to the Company.
EXPANSION; DEPENDENCE ON FRANCHISEES AND DEVELOPERS
The Company's global strategy will depend heavily on growing its franchise
operations. At December 28, 1997, the Company franchised 1,574 Popeyes, Churchs
and Chesapeake restaurants domestically and 468 Popeyes and Churchs restaurants
internationally. The Company's success is dependent upon its franchisees and the
manner in which they develop and operate Popeyes, Churchs and Chesapeake
restaurants. As the Company expands it will also need to find new franchisees
who are capable of promoting the Company's strategy. The opening and success of
franchised restaurants will depend on various other factors, including the
availability of suitable sites, the negotiation of acceptable lease or purchase
terms for new locations, permitting and regulatory compliance, the ability to
meet construction schedules, the financial and other capabilities of the
Company's franchisees and developers, the ability of the Company to manage this
anticipated expansion and hire and train personnel, and general economic and
business conditions. Not all of the foregoing factors are within the control of
the Company or its franchisees or developers.
INTERNATIONAL OPERATIONS
As of December 28, 1997, the Company franchises 468 restaurants to
franchisees in 23 foreign countries and plans to expand its foreign franchising
program significantly in the future. There are no Chesapeake operations outside
the U.S. The Company does not own any property, operate any restaurants or have
equity ownership in any companies that are located in foreign countries.
Included in the Company's revenues are foreign franchise royalties and other
fees that are based, in part, on sales generated by its foreign franchised
restaurants, including a significant number of franchised restaurants in Asia.
Therefore, the Company is exposed, to a limited degree, to changes in
international economic conditions and currency fluctuations. The Company has not
historically and did not at the end of 1997 maintain any hedges against foreign
currency fluctuations. Losses recorded by the Company during the past three
years related to foreign currency fluctuations have not been material to the
Company's results of operations. For fiscal years 1995, 1996 and 1997, royalties
and other revenues from foreign franchisees represented 2.2%, 2.4% and 2.4%,
respectively, of total revenues of the Company.
FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants. Multi-unit
food service chains such as Popeyes, Churchs and Chesapeake can also be
adversely affected by publicity resulting from food quality, illness, injury or
other health concerns or operating issues stemming from just one restaurant or a
limited number of restaurants.
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Dependence on frequent deliveries of fresh food products also subjects food
service businesses such as the Company to the risk that shortages or
interruptions in supply caused by adverse weather or other conditions could
adversely affect the availability, quality and cost of ingredients. In addition,
material changes in, or the Company's or its franchisees' failure to comply
with, applicable Federal, state and local government regulations, and such
factors as inflation, increased food, labor and employee benefits costs, such as
the recent, Federally-mandated increase in the minimum wage, regional weather
conditions and the unavailability of experienced management and hourly employees
may also adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular.
FLUCTUATIONS IN COST OF CHICKEN
The Company's and its franchisees' principal raw material is fresh chicken.
For both fiscal years ended December 29, 1996 and December 28, 1997,
approximately 60% of the Company's restaurant cost of sales were attributable to
the purchase of fresh chicken. As a result, the Company is significantly
affected by increases in the cost of chicken, which can be affected by, among
other factors, the cost of grain and overseas demand for chicken products. Due
to extremely competitive conditions in the QSR industry, following increases in
raw material costs such as chicken, the Company has generally not raised retail
prices sufficiently to pass all such costs on to the consumer. While the
Company's purchase agreements with its fresh chicken suppliers generally provide
for a "ceiling", or highest price, and a "floor", or lowest price, that the
Company will pay for chicken over the contract term, the ceilings are generally
set at prices well above the current market price, exposing the Company to a
risk of price increases. Additionally, such supply contracts are generally for
one to two years, thereby exposing the Company to regular cost increases if the
price of fresh chicken continues to rise.
INSURANCE
The Company carries property, liability, business interruption, crime, and
workers' compensation insurance policies, which it believes are customary for
businesses of its size and type. Franchisees are also required to maintain
certain minimum standards of insurance with insurance companies satisfactory to
the Company pursuant to their franchise agreements, including commercial general
liability insurance, workers' compensation insurance, all risk property and
casualty insurance and automobile insurance. Under the current form of franchise
agreement, such insurance must be issued by insurers approved by the Company.
SEASONALITY
The Company has historically experienced the strongest operating results at
Popeyes, Churchs and Chesapeake restaurants during the summer months while
operating results have been somewhat lower during the winter season. Certain
holidays and inclement winter 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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REGULATION
The Company is subject to various Federal, state and local laws affecting
its business, including various health, sanitation, fire and safety standards.
Newly constructed or remodeled restaurants are subject to state and local
building code and zoning requirements. In connection with the remodeling and
alteration of the Company's restaurants, the Company may be required to expend
funds to meet certain Federal, state and local regulations, including
regulations requiring that remodeled or altered restaurants be accessible to
persons with disabilities. Difficulties or failures in obtaining the required
licenses or approvals could delay or prevent the opening of new restaurants in
particular areas.
The Company is also subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. A significant number of
the Company's food service personnel are paid at rates related to the Federal
minimum wage and increases in the minimum wage, including those recently enacted
by the Federal government, have increased the Company's labor costs.
Certain states and the Federal Trade Commission require franchisors such as
the Company to transmit specified disclosure statements to potential franchisees
before granting a franchise. Additionally, some states require franchisors to
register their franchise with the state before it may offer a franchise. The
Company believes that its Uniform Franchise Offering Circulars (together with
any applicable state versions or supplements) comply with both the Federal Trade
Commission guidelines and all applicable state laws regulating franchising in
those states in which it has offered franchises. The Company is also subject to
various Federal, local and state laws regulating the discharge of pollutants
into the environment. The Company believes that it conducts its operations in
substantial compliance with applicable environmental laws and regulations as
well as other applicable laws and regulations governing its operations.
ENVIRONMENTAL MATTERS
Approximately 200 of the Company's owned and leased properties are known or
suspected to have been used by prior owners or operators as retail gas stations,
and a few of these properties may have been used for other environmentally
sensitive purposes. Many of these properties previously contained underground
storage tanks ("USTs") and some of these properties may currently contain
abandoned USTs. As a result of the use of oils and solvents typically associated
with automobile repair facilities and gas stations, it is possible that
petroleum products and other contaminants may have been released at these
properties into the soil or groundwater. Under applicable Federal and state
environmental laws, the Company, as the current owner or operator of these
sites, may be jointly and severally liable for the costs of investigation and
remediation of any such contamination. As a result, after an analysis of its
property portfolio, including testing of soil and groundwater at a
representative sample of its facilities, the Company believes it has accrued
adequate reserves for environmental remediation liabilities.
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While the Company is currently not subject to any administrative or court order
requiring remediation at any of its properties, the Company is considering
active remediation at a limited number of facilities containing USTs.
EMPLOYEES AND PERSONNEL
As of December 28, 1997, the Company employed approximately 1,800 full-time
salaried employees and approximately 9,600 full-time and part-time hourly
employees. Of the Company's full-time salaried employees, 70 are involved in
overseeing restaurant operations, 1,300 are involved in the management of
individual restaurants and all remaining salaried employees are responsible for
corporate administration, franchise administration and business development.
None of the Company's employees are covered by a collective bargaining
agreement. The Company believes that the dedication of its employees is critical
to its success, and that its relationship with its employees is good.
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ITEM 2. PROPERTIES
The Company either owns or leases the land and buildings for its Company-
operated restaurants. In addition, in certain circumstances, the Company owns
or leases land and buildings which it then leases or subleases to its
franchisees and third parties. While the Company expects to continue to lease
many of its sites in the future, the Company also may purchase the land and/or
buildings for restaurants to the extent acceptable terms are available. The
majority of the Company's restaurants are located in retail community shopping
centers and freestanding, well-trafficked locations.
Restaurants leased to the Company are typically leased under "triple net"
leases that require the Company to pay real estate taxes, maintenance costs and
insurance premiums and, in some cases, to pay percentage rent based on sales in
excess of specified amounts. Generally, the Company's leases have initial terms
of 20 years with options to renew for two additional five-year periods. Typical
leases or subleases by the Company to franchisees are triple net to the
franchisee, provide for a minimum rent, based upon prevailing market rental
rates, and have a term that usually coincides with the term of the franchise
agreement for the location, often being 20 years with renewal options. Such
leases are typically cross-defaulted against the corresponding franchise
agreement for that site.
The following table sets forth the locations by state of the Popeyes
Company-operated restaurants as of December 28, 1997:
<TABLE>
<CAPTION>
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -----
<S> <C> <C> <C>
Texas.......................... 19 40 59
Louisiana...................... 3 36 39
Georgia........................ 2 19 21
-- -- ---
Total Popeyes................ 24 95 119
== == ===
</TABLE>
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<PAGE>
The following table sets forth the locations by state of the Churchs
Company-operated restaurants as of December 28, 1997:
<TABLE>
<CAPTION>
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -----
<S> <C> <C> <C>
Texas................... 147 99 246
Georgia................. 32 17 49
Louisiana............... 21 19 40
Alabama................. 23 11 34
Arizona................. 15 9 24
Florida................. 21 2 23
Mississippi............. 11 5 16
Oklahoma................ 15 1 16
Tennessee............... 11 1 12
New Mexico.............. 5 2 7
Missouri................ 6 - 6
Arkansas................ 4 1 5
Kansas.................. 2 - 2
--- --- ---
Total Churchs......... 313 167 480
=== === ===
</TABLE>
The following table sets forth the locations by state of the Chesapeake
Company-operated restaurants as of December 28, 1997:
<TABLE>
<CAPTION>
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -----
<S> <C> <C> <C>
Georgia............................... - 1 1
-------- -------- -----
Total Chesapeake..................... - 1 1
======== ======== =====
</TABLE>
The Company's headquarters are located in approximately 102,000 square feet
of leased and subleased office space in Atlanta, Georgia. The leased space,
covering approximately 87,000 square feet, is subject to extensions through
2013, and the subleased space is subject to extensions through 2003. The
company's Popeyes division will be relocating to another facility in Atlanta,
Georgia starting July 1, 1998. The Company believes that its existing
headquarters provides sufficient space to support its current needs. The
Company's accounting and computer facilities and its Ultrafryer Systems
manufacturing facilities are located in San Antonio, Texas and are housed in
three buildings that are located on approximately 16 acres of land owned by the
Company.
Substantially all of the properties and assets of the Company are pledged
as collateral against the Company's bank credit facility (See Note 8 to the
Company's Consolidated Financial Statements).
25
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In June 1996, the Company was named as a defendant to a certain lawsuit
commenced by Alvin C. Copeland and Diversified against Flavorite Laboratories,
Inc. ("Flavorite") alleging misappropriation of certain trade secrets and
tortious interference with contractual relations, among other things, with
respect to the formula used in the preparation of Popeyes fried chicken products
and the supply of certain ingredients used in such products. In June 1997, this
lawsuit was settled and, among other things, the parties agreed (a) to extend
the term of the existing Diversified supply agreement until March 2029, subject
to further renewal, and (b) that the Formula Agreement will be extended through
March 2029 at the monthly royalty rate in effect in 1999. See "Item 1.
Business --Suppliers" and "--Trademarks and Licenses".
In July 1997, CP Partnerships ("CP") filed a complaint against the Company
alleging patent infringement regarding the design of the proprietary gas fryer
manufactured by its Ultrafryer Systems division. Due to the early stages of
this dispute, the ultimate liability, if any, to the Company cannot be
quantified. It is management's belief that the final outcome will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
While the Company is party to a number of other pending legal proceedings
that have arisen in the ordinary course of its business, management does not
believe that the Company is a party to any pending legal proceeding, the
resolution of which would have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
26
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCK-HOLDER MATTERS
There is no established public trading market for the common stock of the
Company. As of March 15, 1998, the number of record holders of the Company's
common stock was 34,448,604.
The Company has not declared or paid cash dividends to its shareholders.
The Company anticipates that all of its earnings in the near future will be
retained for the development and expansion of its business and, therefore, does
not anticipate paying dividends on its common stock in the foreseeable future.
Declaration of dividends on the common stock will depend, among other things,
upon levels of indebtedness, future earnings, the operating and financial
condition of the Company, its capital requirements and general business
conditions. The agreements governing the Company's indebtedness contain
provisions which restrict the ability of the Company to pay dividends on its
common stock. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
27
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information for the Company for the periods and the dates indicated. The
balance sheet data and statement of operations data for the years ended December
26, 1993, December 25, 1994, December 31, 1995, December 29, 1996 and December
28, 1997 set forth below have been derived from the financial statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants. This selected historical consolidated financial information should
be read in conjunction with, and is qualified in its entirety by (i)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and (ii) the audited Consolidated Financial Statements for the
Company and the notes thereto, each of which is included elsewhere in this
report.
<TABLE>
<CAPTION>
Year Ended (1)
----------------------------------------------------------------------
December 26, December 25, December 31, December 29, December 28,
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Restaurant sales........ $ 379,745 $ 401,855 $ 426,707 $ 430,280 $ 403,285
Revenues from
franchising............ 37,198 41,581 47,916 51,336 63,650
Revenues from
manufacturing.......... 7,718 12,026 9,969 11,431 7,647
Other revenues.......... 9,029 8,252 8,320 8,005 8,766
------------ ------------ ------------ ------------ ------------
Total revenues......... 433,690 463,714 492,912 501,052 483,348
COSTS AND EXPENSES:
Restaurant cost of sales 118,997 133,893 139,286 142,199 131,374
Restaurant operating
expenses............... 207,303 206,862 215,391 212,579 197,803
Manufacturing cost of
sales.................. 8,401 11,705 7,273 8,867 5,032
General and
administrative......... 65,837 72,249 80,002 77,614 80,485
Executive compensation
award (2).............. - - 10,647 - -
Depreciation and
amortization........... 24,892 25,438 28,665 30,904 33,803
Gain on sale of fixed
assets from
AFDC transaction....... - - - - (5,319)
------------ ------------ ------------ ------------ ------------
Total costs and
expenses............ 425,430 450,147 481,264 472,163 443,178
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS..... 8,260 13,567 11,648 28,889 40,170
OTHER EXPENSES:............
Interest, net........... 19,246 19,172 23,444 15,875 20,645
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
INCOME
TAXES AND EXTRAORDINARY
LOSS................... (10,986) (5,605) (11,796) 13,014 19,525
Income tax (expense)
benefit................ 3,216 553 2,969 (5,163) (8,525)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS....... (7,770) (5,052) (8,827) 7,851 11,000
Extraordinary loss, net
of taxes (3)............... (277) - - (4,456) -
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS).......... (8,047) (5,052) (8,827) 3,395 11,000
8% Preferred Stock
dividends................. 4,460 4,467 4,555 1,316 -
10% Preferred Stock
dividends
payable in kind........... - - - 3,956 2,240
Accelerated accretion of
8% Preferred
Stock discount upon
retirement............... - - - 8,719 -
Accretion of 8% Preferred
Stock discount............ 1,967 2,250 2,571 813 -
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS)
ATTRIBUTABLE
TO COMMON STOCK........... $ (14,474) $ (11,769) $ (15,953) $ (11,409) $ 8,760
============ ============ ============ ============ ============
OTHER FINANCIAL DATA:
EBITDA, as defined (4).. $ 34,731 $ 43,435 $ 55,342 $ 64,866 $ 74,017
EBITDA margin (5)....... 8.0% 9.4% 11.2% 12.9% 15.3%
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
(USED IN):
Operating activities.... 27,011 22,673 28,031 47,801 52,515
Investing activities.... (9,462) (11,493) (20,114) (29,388) (35,782)
Financing activities.... (19,147) (17,530) (10,721) (12,806) (2,985)
Cash capital
expenditures (6)
Maintenance capital
expenditures......... $ 6,808 $ 5,050 $ 5,483 $ 6,010 $ 7,756
Re-images and
renovation............ 2,985 10,267 15,502 15,342 13,356
New restaurant
development........... 1,831 1,999 2,272 3,215 4,588
Other.................. 5,979 3,496 1,739 9,384 16,436
Total cash capital
------------ ------------ ------------ ------------ ------------
expenditures....... $ 17,603 $ 20,812 $ 24,996 $ 33,951 $ 42,136
RATIO OF EARNINGS TO FIXED
CHARGES (7)............... - - - 1.29% 1.64%
BALANCE SHEET DATA:
Total assets............ $ 348,852 $ 327,494 $ 328,645 $ 339,668 $ 380,002
Total debt and capital
lease
obligations............. 201,810 193,646 204,025 151,793 243,882
Mandatorily redeemable
preferred
stock................... 41,647 43,897 46,468 59,956 -
Total shareholders equity
(deficit).............. 4,591 (6,707) (21,665) 37,902 48,459
RESTAURANT DATA
(UNAUDITED) (8):
Systemwide restaurant
sales (in thousands):
Popeyes................ $ 601,389 $ 649,880 $ 710,840 $ 762,108 $ 853,078
Churchs................ 552,629 590,261 647,746 675,996 723,988
Chesapeake Bagel....... - - - - 50,878
------------ ------------ ------------ ------------ ------------
Total................. $1,154,018 $ 1,240,141 $ 1,358,586 $ 1,438,104 $ 1,627,944
============ ============ ============ ============ ============
Systemwide restaurant
units:
Popeyes................ 814 907 964 1,021 1,131
Churchs................ 1,078 1,165 1,219 1,257 1,356
Chesapeake Bagel....... - - - - 155
------------ ------------ ------------ ------------ ------------
Total................. 1,892 2,072 2,183 2,278 2,642
============ ============ ============ ============ ============
Systemwide percentage
change
in comparable
restaurant sales(9):
Popeyes................ (0.4)% 1.4% 1.6% 1.1% 3.3%
Churchs................ 2.4% 4.8% 3.9% 2.8% 3.9%
Total commitments
outstanding,
end of period (10).... 668 1,047 1,083 1,319 1,715
</TABLE>
(1) The company has a 52/53-week fiscal year ending on the last Sunday in
December which normally consists of 13 four-week periods. The fiscal year
ended December 31, 1995 included 53 weeks of operations.
(2) During 1995, the Board of Directors granted a special award of $10.0
million to the CEO of the Company and his designees contingent upon the
happening of certain events related to a recapitalization of the Company.
See "Item 11. Executive Compensation -- Note (2)". The award became payable
at the time of the Recapitalization. This award was paid in 1996 in
approximately 3.0 milion shares of the Company's common stock valued at
$3.317 per share, the market value of the Company's common stock at the
date of issuance. As a result of the Recapitalization, certain senior
executive officers became fully vested in certain stock options pursuant to
the terms of the 1992 Stock Option Plan resulting in a recognition of
$647,000 of compensation expense in 1995.
(3) The extraordinary loss recorded in fiscal years 1993 and 1996 represents
the loss associated with the prepayment of certain debt obligations of the
company, net of related income tax effects.
(4) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for non-cash items related to gains/losses on asset
dispositions and write-downs, compensation expense related to stock option
activity (deferred compensation), the executive compensation award (see
Note 2) and non-cash officer notes receivable items related to the
executive compensation award. EBITDA, as defined, should not be construed
as a substitute for income from operations or as a better indicator of
liquidity than cash flow from operating activities, which is determined in
accordance with generally accepted accounting principles. EBITDA, as
defined, is included herein to provide additional information with respect
to the ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. In addition, management
believes that certain investors find EBITDA, as defined, to be a useful
tool for measuring the ability of the Company to service its debt. EBITDA,
as defined, is not necessarily a measure of the Company's ability to fund
its cash needs. See the Consolidated Statements of Cash Flows of the
Company and the related Notes to the Consolidated Financial Statements
thereto attached.
(5) EBITDA margin represents EBITDA, as defined, divided by total revenues.
29
<PAGE>
(6) Capital expenditures (excluding expenditures funded through capital leases)
have been segregated into the following categories to provide additional
information:
. Maintenance capital expenditures-represents day to day expenditures
related to restaurant equipment replacements and general restaurant
capital improvements.
. Re-images and renovation-represents significant restaurant renovations
and upgrades pursuant to the Company's re-imaging and renovation
activities.
. New restaurant development-represents new Company-operated restaurant
construction and development.
. Other-represents capital expenditures, at various corporate offices
and new restaurant equipment such as fryers and security systems.
(7) The company had a deficiency of earnings to fixed charges for the fiscal
years December 26, 1993, December 25, 1994 and December 31, 1995, of
approximately $11,128,000, $5,869,000 and $12,284,000, respectively.
Earnings consist of income (loss) before taxes, plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest
expense, amortization of debt issuance cost and debt discount, preferred
stock dividend requirements and accretion (including related tax effects),
and one-third of rent expense on operating leases considered representative
of the interest factor attributable to rent expense.
(8) Represents restaurant sales for all franchised and Company-operated
restaurants. Sales information for franchised restaurants is as reported by
franchisees or, in some instances, estimated by the Company based on other
data, and is unaudited.
(9) Comparable sales figures are not provided for Chesapeake Bagel for the
periods presented, since the Company did not acquire the franchise rights
until May 1997.
(10) Commitments represent commitments to open franchised restaurants, as set
forth in development agreements. On a historical basis, a number of such
commitments have not resulted in restaurant openings. There can be no
assurance that parties to development agreements will open their respective
number of restaurants.
30
<PAGE>
ITEMS 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K 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 this filing.
ACQUISITIONS AND DIVESTITURES
AFDC TRANSACTION
On March 24, 1997 the Company closed a transaction (the "AFDC Transaction")
with Atlanta Franchise Development Company ("AFDC") whereby the Company sold the
rights to operate 100 previously Company-operated Churchs restaurants in eight
domestic markets to AFDC, which is now the Company's largest domestic
franchisee. The Company also sold the land, building and equipment for 51 of
these restaurants, and it sold the building and equipment and leased the land
for 49 of the restaurants to AFDC. The Company received approximately $19.9
million in cash, along with a warrant to acquire, for nominal consideration, a
5.0% equity interest in AFDC. In connection with the AFDC Transaction, AFDC has
committed to (i) re-image and renovate all 100 restaurants, (ii) develop 100
additional Churchs restaurants and (iii) install new point-of-sale systems at
all of its restaurants. As a result of this transaction, the Company recorded
$2.5 million in franchise fees and approximately $5.3 million of gain associated
with the sale of the property in the second quarter of 1997. Included in the
$19.9 million payment was $1.0 million representing the development fees on the
additional 100 Churchs restaurants which will be developed by AFDC over the next
ten years. These development fees were deferred and will be taken into income as
the restaurants open.
During 1996, these restaurants contributed $54.4 million in sales and $5.0
million in income to operations to the Company. Based upon 1996 sales figures,
the Company would have received approximately $2.4 million in royalty fees and
$0.6 million in rental income from AFDC during 1996 had these restaurants been
franchised units. The Company's capital expenditures were reduced by
approximately $11.0 million in 1997 because the planned re-imaging and
renovation of these restaurants will be funded by AFDC. Management believes it
is unlikely that the Company will originate another sale of restaurants of this
magnitude in the foreseeable future.
31
<PAGE>
CHESAPEAKE BAGEL ACQUISITION
On May 5, 1997, the Company acquired the franchise business and rights of
Chesapeake Bagel from The American Bagel Company. As a result of this
acquisition, the Company became the franchisor of 158 franchised Chesapeake
restaurants located primarily in Washington D.C., Maryland and Virginia. The net
purchase price of the acquisition was approximately $11.8 million, plus a
potential earn out of up to $3.5 million, contingent upon the number of
restaurants which open over the next five years out of the existing pool of
franchise commitments. Substantially all of the purchase price was allocated to
intangible assets including franchise rights and trademarks. Based upon 1996
unaudited financial information received from Chesapeake ,royalty revenue and
operating income generated from this acquisition would have been approximately
$2.0 million and $0.6 million, respectively, had Chesapeake been owned by the
Company in 1996.
PINETREE FOODS ACQUISITION
On February 10, 1998 the Company acquired the assets of Pinetree Foods,
Inc. ("Pinetree") based in Asheville, North Carolina. The assets of Pinetree
included 81 franchised restaurant units located primarily in North Carolina,
South Carolina and Georgia. The assets were acquired in cash for a total
purchase price of $24.3 million, with a significant portion of the purchase
price allocated to an intangible asset - goodwill. The Company borrowed $16.0
million under its $100.0 million acquisition facility in order to complete the
transaction. A majority of the restaurant units will be converted from their
current franchised brand into Company-operated Popeyes. The remaining
restaurant units will be closed. The acquisition will provide Popeyes with an
opportunity to grow in geographical areas in which it formerly had little or no
presence.
SEATTLE COFFEE COMPANY ACQUISITION
On March 18, 1998, the Company acquired all of Seattle Coffee Company's
("SCC") common stock for a purchase price of approximately $70 million plus the
assumption of approximately $5 million of debt. The Company paid approximately
$41 million in cash funded by its Acquisition Facility (See Note 8 to the
consolidated financial statements) and approximately $29 million in AFC common
stock. Included in the purchase price is a contingent payment up to $3.8
million, based upon SCC operations achieving a level of earnings, as defined in
the agreement, over a 52-week period from October 1, 1997 to September 30, 1998.
SCC has two wholly-owned operating subsidiaries, Seattle's Best Coffee,
Inc. and Torrefazione Italia, Inc. As a result of the merger, AFC will acquire
(i) a coffee roasting and packaging facility, (ii) 58 Company-operated cafes
32
<PAGE>
and 10 franchised cafes under the Seattle's Best and Torrefazione Italia brands,
(iii) a wholesale business (including 13 offices) and more than 5,000 wholesale
accounts and (iv) a soon-to-be-opened Chicago distribution center.
OPERATING RESULTS
REVENUES
The Company's revenues consist primarily of four elements: (i) restaurant
sales at Company-operated restaurants, (ii) revenues from franchising, (iii)
revenues from manufacturing and (iv) other revenues.
RESTAURANT SALES. The Company's restaurant sales consist of gross cash
register receipts at Company-operated restaurants, net of sales tax.
REVENUES FROM FRANCHISING. The Company earns franchise revenues through
three types of agreements: (i) domestic development agreements, (ii)
international development agreements and (iii) franchise agreements. Domestic
development fees, international development fees and franchise fees are recorded
as deferred revenues when received and are recognized as revenue when the
restaurants covered by the fees are opened and/or all material services or
conditions relating to the fees have been substantially performed or satisfied
by the Company. The Company's standard franchise agreement also includes the
payment of a royalty fee based on net restaurant sales of franchisees. The
Company benefits from increases in franchised restaurant sales since it collects
a percentage of sales as royalties from franchisees. The royalty percentages
vary by franchisee, depending on the franchise agreement, with an average
royalty of approximately 4.4%. See "Item 1. Business--Franchise Development".
REVENUES FROM MANUFACTURING. The Company's revenues from manufacturing
consist primarily of sales of proprietary fryers and other custom-fabricated
restaurant equipment from its manufacturing business to distributors and
franchisees.
OTHER REVENUES. The Company's other revenues consist of net rental income
from properties owned and leased by the Company which are leased or subleased to
franchisees and third parties and interest income earned on notes receivable
from franchisees and third parties.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. The Company's cost of sales consists of food and
paper costs (including napkins, straws, plates, take-out bags and boxes). The
primary elements affecting cost of sales are sales volumes and chicken prices.
Other factors such as the Company's menu pricing, product mix, the amount of
dark meat purchased and promotional activities can also materially affect the
level of cost of sales as well as cost of
33
<PAGE>
sales as a percentage of restaurant sales. Chicken prices are seasonal and are
normally higher during the summer months when demand for chicken is at its peak.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses are comprised
of personnel expenses, occupancy expenses, marketing expenses and other
operating expenses incurred at the restaurant level.
MANUFACTURING COST OF SALES. Manufacturing cost of sales represent the
cost of raw materials and direct labor used to manufacture the restaurant
equipment sold to franchisees and third parties and direct manufacturing
overhead applied during the manufacturing process.
GENERAL AND ADMINISTRATIVE. The Company's general and administrative
expenses consist of personnel expenses, occupancy expenses and other expenses
incurred at the corporate level. Corporate level expenses are primarily incurred
at the corporate offices of the Company in Atlanta, Georgia and San Antonio,
Texas along with those incurred by field executives located throughout the
United States.
DEPRECIATION AND AMORTIZATION. The Company's depreciation consists of the
depreciation of buildings, leasehold improvements and equipment owned by the
Company, and amortization consists mainly of the amortization of intangible
assets.
34
<PAGE>
RESULTS OF OPERATIONS
The following table presents selected revenues and expenses as a percentage
of total revenues for the Company's audited Consolidated Statements of
Operations for the fiscal years ended December 31, 1995, December 29, 1996 and
December 28, 1997.
PERCENTAGE RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended (1)
------------------------------------------------------------
December 31, December 29, December 28,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Restaurant sales................... 86.6 % 85.9 % 83.4 %
Revenues from franchising.......... 9.7 10.2 13.2
Revenues from manufacturing........ 2.0 2.3 1.6
Other revenues..................... 1.7 1.6 1.8
------- ------- -------
Total revenues.................... 100.0 % 100.0 % 100.0 %
------- ------- -------
COSTS AND EXPENSES:
Restaurant cost of sales (1)....... 32.6 % 33.0 % 32.6 %
Restaurant operating expenses (1).. 50.5 49.4 49.0
Manufacturing cost of sales (2).... 73.0 77.2 65.8
General and administrative......... 16.2 15.5 16.7
Depreciation and amortization...... 5.8 6.2 7.0
Executive compensation award....... 2.2
Gain on sale of fixed assets from
AFDC transaction.................. - - (1.1)
Total costs and expenses.......... 97.6 94.2 91.7
Income from operations.............. 2.4 5.8 8.3
Interest expense, net............... 4.7 3.2 4.3
Net income before extraordinary
loss and taxes..................... (2.3) 2.6 4.0
Income tax expense/(benefit)........ (0.6) 1.0 1.8
Net income before
extraordinary items................ (1.7) % 1.6 % 2.2 %
</TABLE>
(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants.
(2) Expressed as a percentage of revenues from manufacturing.
35
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial information and other
restaurant data relating to Company-operated and franchised restaurants (as
reported to the Company by franchisees) for the fiscal years ended December
31, 1995, December 29, 1996 and December 28, 1997:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------------------------
December 31, December 29, % Change December 28, % Change
1995 1996 1995 - 1996 1997 1996 - 1997
------------ ------------ ----------- ------------ -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
EBITDA, as defined (1)....................... $ 55.3 $ 64.9 17.2 % $ 74.0 14.1 %
Capital Expenditures......................... 37.8 46.3 22.3 62.9 36.0
Restaurant data (unaudited):
Systemwide restaurant sales:
Popeyes.......................... $ 710.8 $ 762.1 7.2 % $ 853.0 11.9 %
Churchs.......................... 647.8 676.0 4.4 724.0 7.1
Chesapeake....................... N/A N/A N/A 50.9 N/A
------------ ------------ ------------
Total......................... $ 1,358.6 $ 1,438.1 5.9 % $ 1,627.9 13.2 %
============ ============ ============
Systemwide restaurant openings:
Popeyes.......................... 105 110 46.8 % 137 24.6 %
Churchs.......................... 81 117 44.4 132 12.8
Chesapeake....................... N/A N/A N/A 27 N/A
------------ ------------ ------------
Total......................... 186 227 22.0 % 296 30.4 %
============ ============ ============
Systemwide restaurants open,
end of period:
Popeyes.......................... 964 1,021 5.9 1,131 10.8 %
Churchs.......................... 1,219 1,257 3.1 1,356 7.9
Chesapeake....................... N/A N/A N/A 155 N/A
------------ ------------ ------------
Total 2,183 2,278 4.4 % 2,642 16.0 %
============ ============ ============
Systemwide percentage change in
comparable restaurant sales(2):..
Popeyes.......................... 1.6% 1.1% 3.3%
Churchs.......................... 3.9 2.8 3.9
</TABLE>
(1) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for non-cash items related to gains/losses on asset
dispositions and write-downs, compensation expense related to stock option
activity (deferred compensation), the executive compensation award and non-
cash officer notes receivable items related to the executive compensation
award.
(2) Comparable sales figures are not provided for Chesapeake for the periods
presented, since the Company did not acquire the franchise rights until May
1997.
36
<PAGE>
YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues decreased 3.5%, or $17.7 million, during the fiscal year
ended December 28, 1997, as compared to the fiscal year ended December 29, 1996.
RESTAURANT SALES. Restaurant sales decreased 6.3%, or $27.0 million, from
the prior year. The decrease was primarily attributable to the sale of the 100
AFDC restaurants. These restaurants reported restaurant sales of $43.4 million
during the last three quarters of 1996. The overall sales decrease was
partially offset by an increase in comparable sales for the remaining Company-
operated restaurants of 5.1% for the year.
REVENUES FROM FRANCHISING. Revenues from franchising increased $12.3
million or 24.0% from the prior year. Franchise royalty revenue increased $9.4
million or 21.3% and franchise fees increased $2.9 million or 40.3%. The
increase in franchise royalty revenue was attributable to several factors,
including but not limited to, royalty revenues recorded for 100 restaurants
franchised in connection with the AFDC Transaction, royalty revenues recorded
for franchised Chesapeake restaurants acquired from The American Bagel Company
in 1997, an increase in the number of franchised restaurants and comparable
sales increases for domestic and international franchised restaurants. The
increase in franchise fees was primarily attributable to franchise fees of $2.5
million recorded in connection with the AFDC Transaction.
REVENUES FROM MANUFACTURING. Revenues from manufacturing decreased 33.3%,
or $3.8 million for the fiscal year ended December 28, 1997, as compared to the
fiscal year ended December 29, 1996. The decrease was primarily attributable to
a decrease in the sale of smallwares. The Company sold its distribution
business during the first half of 1996.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Cost of sales for the year decreased 7.6% or
$10.8 million from the prior year. The decrease was primarily attributable to a
decrease in restaurant sales. Expressed as a percentage of restaurant sales,
cost of sales were 32.6% for the fiscal year ended December 28, 1997, compared
to 33.0% for the fiscal year ended December 29, 1996. The decrease in the
percentage was attributable to (i) small menu price increases taken in late 1996
and early 1997, (ii) usage reductions in paper items and shortening and (iii)
favorable pricing on certain non-poultry food items.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the
fiscal year ended December 28, 1997 decreased $14.8 million or 7.0% from the
corresponding
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period in 1996. The decrease in restaurant operating expenses was primarily
attributable to the sale of the 100 AFDC restaurants. Restaurant operating
expenses as a percentage of restaurant sales were 49.0% for 1997, compared to
49.4% for 1996. Personnel expenses expressed as a percentage of restaurant sales
was 28.6% for the 1997 fiscal year, versus 28.3% for the 1996 fiscal year. The
increase in personnel costs as a percentage of restaurant sales was primarily
due to increases in the minimum wage levels effective October 1, 1996 and
September 1, 1997. Marketing expenses expressed as a percentage of restaurant
sales was 7.7% for fiscal year 1997, versus 7.8% for fiscal year 1996. The
decrease in the percentage was primarily due to lower food discount costs. Other
restaurant operating costs expressed as a percentage of sales was 12.7% for the
1997 fiscal year, versus 13.3% for the 1996 fiscal year. The decrease in the
percentage was primarily due to decreases in utility costs resulting from the
installation of more energy efficient gas fryers in Company-operated
restaurants.
MANUFACTURING COST OF SALES. Manufacturing cost of sales decreased 43.2%
or $3.8 million, for the fiscal year ended December 28, 1997, compared to the
fiscal year ended December 29, 1996. The decrease was primarily attributable to
the decrease in manufacturing revenues during fiscal year 1997 compared to
fiscal year 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $2.9 million or 3.7% during 1997 compared to the prior year. As a
percentage of total revenues, general and administrative expenses increased from
15.5% for fiscal year 1996 to 16.7% for fiscal year 1997. The increase in
general and administrative expenses was due to a number of factors including,
but not limited to, asset writedowns of software costs, overhead costs
associated with the Chesapeake brand, an increase in franchise development
marketing costs, costs associated with acquisition activity, costs associated
with information technology initiatives, and deferred compensation expenses
related to employee stock options. Partially offsetting these increases were
decreases in legal/professional fees and insurance costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.9 million or 9.4% from the prior year. Depreciation and amortization as a
percentage of total revenues increased from 6.2% to 7.0% from the previous to
the current year. The increase was primarily due to fixed asset additions made
during this period totaling $62.9 million plus the amortization expense on the
intangible asset resulting from the Chesapeake acquisition in 1997. Partially
offsetting the increase was a decrease in depreciation expense associated with
the sale of 100 restaurants to AFDC. Overall, net fixed assets of $207.8 million
at fiscal year ended December 28, 1997 were up 9.8% over net fixed assets of
$189.2 million at fiscal year ended December 29, 1996.
NET INTEREST EXPENSE. Interest expense, net of capitalized interest, for
the year ended December 28, 1997 was $20.6 million, compared to $15.9 million
for the year ended December 29, 1996. The $4.7 million increase in interest
expense was due to higher levels of average debt outstanding and higher
effective interest rates during 1997 as compared with the prior year. The
increase in average debt outstanding was primarily
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attributable to the refinancing transaction completed during the second quarter
of 1997 (see " -Liquidity"). The refinancing transaction also led to higher
effective interest rates during 1997, versus the prior year.
INCOME TAXES. The Company's effective tax rate for the year ended December
29, 1997 was 43.9%, compared to an effective tax rate of 42.3% (including tax
benefits recorded with respect to the extraordinary loss) for the year ended
December 28, 1996.
EXTRAORDINARY LOSS. During the second quarter of 1996 the Company
completed a refinancing whereby it sold 21.1 million shares of its common stock
for $70.0 million. Proceeds from the sale of stock were used, in part, to
retire $65.0 million of the Company's existing debt. As a result, the Company
recognized an extraordinary loss on the early retirement of debt (net of income
taxes) in the amount of $4.4 million during the fiscal year ended December 29,
1996. Unamortized debt discounts written off in connection with the early
retirement of debt totaled $7.1 million.
YEARS ENDED DECEMBER 29, 1996 (52 WEEKS) AND DECEMBER 31, 1995 (53 WEEKS)
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues increased 1.6%, or $8.1 million, during the fiscal year
ended December 29, 1996, as compared to the fiscal year ended December 31, 1995.
RESTAURANT SALES. Restaurant sales increased 0.8%, or $3.6 million, from
the prior year. The increase in total restaurant sales is attributable to
several factors including an increase in comparable sales and an increase in the
number of Company-operated restaurants. Comparable sales, computed without
regard to the extra week, increased by 2.9% for fiscal year 1996. At December
29, 1996, the Company operated 742 restaurants, compared to a total of 706
restaurants at December 31, 1995. The increase in restaurant sales from 1995 to
1996 was adversely affected by the fact that 1995 had 53 weeks of sales
activity, while 1996 had 52 weeks of sales activity.
REVENUES FROM FRANCHISING. Revenues from franchising increased $3.4
million or 7.1% from the prior year. Franchise royalty revenue increased $2.6
million