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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 30, 2001
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 000-32369
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AFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 58-2016606
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Six Concourse Parkway, Suite 1700 30328-5352
Atlanta, Georgia (Zip Code)
(Address of principal executive
offices)
(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:
Title of each class
-------------------
Common stock, $0.01 par value per share
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. Yes [_] No [X]
The aggregate market value of the voting common stock of the registrant
held by non-affiliates of the registrant as of February 8, 2002 is
$604,868,628.
As of February 8, 2002, there were 30,649,850 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting to be held May 15, 2002 are incorporated by reference in Part III.
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AFC ENTERPRISES, INC.
INDEX TO FORM 10-K
PART I
Item 1. Business............................................................... 1
Item 2. Properties............................................................. 15
Item 3. Legal Proceedings...................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.. 18
Item 6. Selected Consolidated Financial Data................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............. 49
Item 8. Consolidated Financial Statements and Supplementary Data............... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 51
Item 11. Executive Compensation................................................. 51
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 51
Item 13. Certain Relationships and Related Transactions......................... 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 52
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 and Exchange Act of 1934, as amended. Statements
regarding future events and developments and our future performance, as well as
management's expectations, beliefs, plans, estimates or projections relating to
the future, are forward-looking statements within the meaning of theses laws.
These forward-looking statements are subject to a number of risks and
uncertainties. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are:
the cost of our principal food products, labor shortages or increased labor
costs, our ability to franchise new units, failure of our franchisees,
expansion into new markets, changes in consumer preferences and demographic
trends, the level of competition in the foodservice industry, fluctuations in
quarterly results, increased government regulation, loss of senior management,
growth of our franchise system, supply and delivery shortages or interruptions,
payment of bonuses related to our Long Term Employee Success Plan, currency,
economic and political factors that affect our international operations,
inadequate protection of our intellectual property, market saturation due to
new unit openings, liabilities for environmental contamination and limitations
as a result of our indebtedness.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors the May Affect Results of Operations and
Financial Condition" for a more complete discussion of these risks and
uncertainties. You should not place undue reliance on any forward-looking
statements, since those statements speak only as of the date they are made and
our actual results could differ from those statements.
General
We operate, develop and franchise quick service restaurants, bakeries and
cafes, or QSRs, primarily under the trade names Popeyes Chicken & Biscuits,
Church's Chicken, Cinnabon, Seattle's Best Coffee and Torrefazione Italia
Coffee. Popeyes and Church's are the second and third largest chicken QSR
concepts in the world, based on system-wide units and sales. Our Cinnabon brand
is the worldwide leader in the QSR cinnamon roll bakery category. Seattle's
Best Coffee is a leading alternative to the current market leader in the
specialty coffee category, based upon its number of wholesale accounts and its
expanding retail cafe presence. As of December 30, 2001, we operated and
franchised 3,857 restaurants, bakeries and cafes in 47 states, the District of
Columbia, Puerto Rico and 33 foreign countries. We also sell our premium
specialty coffees through wholesale and retail distribution channels under our
Seattle Coffee brands. Our system-wide sales totaled approximately $2.6 billion
in 2001. Our total restaurants, bakeries and cafes by brand as of December 30,
2001 were as follows:
Domestic International
------------------- -------------------
Company- Company-
Operated Franchised Operated Franchised Total
-------- ---------- -------- ---------- -----
Popeyes........................... 96 1,231 -- 293 1,620
Church's.......................... 397 845 -- 275 1,517
Cinnabon.......................... 152 270 -- 122 544
Seattle Coffee.................... 74 49 3 50 176
--- ----- --- --- -----
Total........................... 719 2,395 3 740 3,857
=== ===== === === =====
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Brand Profiles
Popeyes(R) Chicken & Biscuits. Founded in New Orleans, Louisiana in 1972,
our Popeyes brand is the market leader in the Cajun segment of the QSR
industry. Popeyes' leading position is driven by its signature Cajun fried
chicken. As of December 30, 2001, Popeyes had 1,620 restaurants worldwide.
Popeyes is currently the second-largest chicken QSR concept in the world,
measured by number of units and system-wide sales, which were approximately
$1.3 billion in fiscal year 2001. Popeyes' specialty menu consists of fresh,
hand-battered, bone-in fried chicken available in two flavors, New Orleans
Spicy and Louisiana Mild, and a wide assortment of award-winning signature
Cajun cuisine side dishes, including red beans and rice, Cajun rice, Cajun
fries and buttermilk biscuits. Popeyes is positioned as a premium fried chicken
concept for customers who seek its full flavor and special blend of seasonings
and spices. We are also known for our Popeyes Louisiana Legends portion of the
menu that consists of jambalaya, etouffee and chicken and seafood gumbo served
over rice, which complements Popeyes' core menu items with a collection of one
of a kind dishes steeped in Louisiana heritage. Popeyes' spicy fried chicken
and other Cajun menu offerings have also proven to be popular internationally,
particularly in Asia.
We intend to evolve the Popeyes brand into a Cajun restaurant company
featuring our New Orleans style fried chicken that will enable us to shape and
lead the growing Cajun food segment of the QSR industry. We intend to
accomplish this by re-imaging substantially all of our company-operated Popeyes
restaurants to our Heritage exterior and interior design, based on Popeyes' New
Orleans, Louisiana roots, over the next four years, and requiring all of our
franchisees to re-image their restaurants similarly in accordance with their
franchise agreements. Popeyes restaurants are generally constructed in
traditional stand-alone and in-line locations, as well as in non-traditional
formats such as airports, malls, food courts, military bases and travel
centers.
As of December 30, 2001, Popeyes restaurants were located in 42 states, the
District of Columbia, Puerto Rico and 20 foreign countries. Our 96 company-
operated Popeyes restaurants were located in Georgia, Illinois, Louisiana,
North Carolina, South Carolina and Tennessee. Over 70% of our 1,231 domestic
franchised Popeyes restaurants were located in California, Florida, Georgia,
Illinois, Louisiana, Maryland, Mississippi, Texas and Virginia. Over 60% of our
293 international franchised Popeyes restaurants were located in Korea.
In 1999, Popeyes began testing two new Cajun cuisine restaurant concepts.
The first was Cajun Kitchen, a Popeyes Creation(TM), a quick casual dining
concept, and the second was Cajun Cafe by Popeyes(TM), a mall food court
concept. We are testing our Cajun Kitchen restaurant in the Chicago area, and
operate a Cajun Cafe in New Orleans, Louisiana, and in Atlanta, Georgia.
Church's Chicken(TM). Founded in San Antonio, Texas in 1952, our Church's
brand is one of the oldest QSR systems in the U.S. As of December 30, 2001,
Church's had 1,517 restaurants worldwide, and is currently the third largest
chicken QSR concept in the world, measured by number of units and system-wide
sales, which were approximately $900.0 million in fiscal year 2001. Church's
restaurants focus on serving traditional Southern fried chicken in a simple,
no-frills restaurant setting. Church's menu items also include other Southern
specialties, including fried okra, coleslaw, mashed potatoes and gravy, corn on
the cob, jalapeno peppers and honey butter biscuits. For guests on-the-go,
Church's has Tender Crunchers(TM) and Krispy Tenders(TM), two portable and easy
to eat items that include signature dipping sauces. Church's is positioned as
the New Value Leader in the chicken QSR category, providing simple meals with
large portions at low prices for price conscious consumers. We plan to re-image
substantially all of our company-operated Church's restaurants to more
contemporary designs over the next three years, and to require all of our
franchisees to re-image their restaurants similarly in accordance with their
franchise agreements. Church's restaurants are traditionally found in urban
areas where they attempt to establish a reputation as a neighborhood
restaurant. With its small footprint and a simple operating system,
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Church's has expanded into non-traditional formats such as convenience stores,
and will continue this expansion. Church's has been popular internationally,
particularly in Asia and Puerto Rico, operating under the Church's and Texas
Chicken(R) brand names.
As of December 30, 2001, Church's restaurants were located in 27 states,
Puerto Rico and eight foreign countries. Our 397 company-operated Church's
restaurants were concentrated primarily in Alabama, Arizona, Georgia,
Louisiana, Mississippi, Oklahoma, Tennessee and Texas. Over 78% of our 845
domestic franchised Church's restaurants were located in Alabama, California,
Florida, Georgia, Illinois, Louisiana, Michigan, Mississippi, New York, Ohio
and Texas. Over 90% of our 275 international franchised Church's restaurants
were located in Canada, Indonesia, Mexico, Puerto Rico and Taiwan.
Cinnabon(R). Founded in Seattle, Washington in 1985, our Cinnabon brand is
the leading cinnamon roll bakery QSR concept in the world. As of December 30,
2001, Cinnabon had 544 bakeries worldwide. System-wide sales in fiscal year
2001 were $205.8 million. Cinnabon has built a reputation for serving fresh,
aromatic, oven-hot cinnamon rolls made with Indonesian cinnamon and topped with
a sweet, rich cream cheese-based frosting. The classic Cinnabon roll laid the
foundation for Cinnabon's high standards and commitment to premium fresh
products. Some of Cinnabon's new product offerings include the Caramel
Pecanbon(R), Caramel Frosted Applebon(R) and CinnabonStix(TM). CinnabonStix is
a portable product that complements Cinnabon's other products and is targeted
to on-the-go consumers. In addition to baked goods, Cinnabon offers a variety
of proprietary beverages, including the Mochalatta Chill(R), a mocha-flavored
cold coffee beverage, and Seattle's Best Coffee, which is served in
approximately 300 bakeries. We believe that the low ticket, impulse purchase
nature of the business, as well as the small footprint and operationally simple
business model, are attractive features of this brand. Our Cinnabon bakeries
are located in high traffic venues such as shopping malls, airports, train
stations and travel plazas. We plan to re-image substantially all of our
company-operated Cinnabon bakeries over the next three years to our new
Heritage exterior and interior design, and will require all of our franchisees
to similarly re-image their bakeries in accordance with their franchise
agreements.
As of December 30, 2001, Cinnabon bakeries were located in 40 states, the
District of Columbia, Puerto Rico and 15 foreign countries. Our 152 company-
operated Cinnabon bakeries were concentrated primarily in California, Illinois,
Ohio, Pennsylvania and Washington. Our 270 domestic franchised Cinnabon
bakeries were concentrated primarily in Arizona, Florida, Illinois, Maryland,
Minnesota, Nevada, New Jersey, New York, North Carolina and Texas. Our 122
international franchised Cinnabon bakeries were located primarily in Canada,
Japan, Korea, the Philippines, Saudi Arabia, Thailand, the United Kingdom and
Venezuela.
Seattle Coffee. Seattle Coffee Company was created as a result of combining
Seattle's Best Coffee, Inc. and Torrefazione Italia, Inc. in May 1994. As of
December 30, 2001, we had 176 cafes in the Seattle Coffee system, 155 of which
are Seattle's Best Coffee cafes and 21 of which are Torrefazione Italia Coffee
cafes, and 4,208 wholesale accounts with approximately 7,200 points of
distribution. Our coffee cafes are located in 18 states and eight foreign
countries.
We roast and blend our Seattle's Best and Torrefazione Italia specialty
coffees in our 30,000 square foot automated roasting facility on Vashon Island,
near Seattle, Washington. We believe that our roasting and packaging facility
may be one of the most technologically advanced in the U.S., and has the
capacity to roast almost 12 million pounds of green coffee beans per year. We
select our coffee beans from the highest quality Arabica beans, which come from
the finest growing regions of the world. As of December 30, 2001, we operated
19 regional wholesale offices throughout the U.S.
Seattle's Best Coffee(R). Seattle's Best Coffee is one of the oldest brands
in the domestic specialty coffee business. Seattle's Best Coffee was founded in
1970 and opened its first retail cafe
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in 1983 in Bellevue Square, a regional mall located in Seattle, Washington.
Management adopted a strategy of using retail stores to support and build brand
awareness in order to drive wholesale sales. This strategy generally has
remained unchanged. Seattle's Best Coffee markets several coffee house blends
under names such as Seattle's Best Blend(R), Post Alley Blend(R), Saturday's
Blend(R), Portside Blend(R) and Henry's Blend(R). Each blend has a unique
flavor, allowing Seattle's Best Coffee to appeal to a broad range of taste
preferences.
As of December 30, 2001, our 56 domestic company-operated Seattle's Best
Coffee cafes were located primarily in California, Illinois, Oregon and
Washington. Currently, Seattle's Best Coffee is also being sold in
approximately 300 Cinnabon bakeries. Our 49 domestic franchised cafes were
located primarily in California, Georgia, Oregon, Texas and Washington. Our 50
international franchised cafes were located primarily in Japan, the Philippines
and Saudi Arabia. We have 26 franchised coffee cafes in Japan. Our Seattle's
Best Coffee cafes are typically located in high traffic venues such as central
business districts and shopping centers. More recently, we have begun to
franchise our Seattle's Best Coffee cafes for operation in airports, which we
believe will provide our Seattle Coffee brand with both wholesale and retail
opportunities, and increase brand awareness due to the heavy customer traffic
at these venues. In addition, we plan to re-image substantially all of our
company-operated Seattle's Best Coffee cafes over the next three years, and to
require all of our franchisees to re-image their cafes similarly in accordance
with their franchise agreements.
Torrefazione Italia(R) Coffee. Our Torrefazione Italia Coffee brand was
founded in 1986, when Umberto Bizzarri brought his family's recipes for
blending and roasting traditional coffees from Perugia, Italy to Seattle,
Washington. These classic Italian coffees are known for their full bodied,
highly aromatic and intense flavor. Our Torrefazione Italia Coffee brand takes
its name from the Italian word torrefazione, which means "the place where
coffee is roasted." Torrefazione Italia Coffee has adopted a strategy of
capitalizing on its Italian heritage, and using its retail locations to support
and build brand awareness in order to drive wholesale sales of its ultra-
premium brand coffees. As part of this strategy, Torrefazione Italia Coffee
cafes are designed to present consumers with an Italian coffee experience that
we refer to as the Warmth of Italy(TM). Torrefazione Italia Coffee is
positioned at the upper end of the quality and price range, and is marketed to
reflect the traditions and blending expertise of the Bizzarri family, with
names like Venezia(TM), Milano(TM), Perugia(TM) and Napoli(TM). We emphasize
the Italian experience by serving Torrefazione Italia Coffee at our cafe
locations using handpainted ceramic cups imported from Deruta, Italy. The
Torrefazione Italia Coffee cafes are designed to accommodate those who are on-
the-go as well as those who wish to relax and sip their coffee while listening
to classical music. Our Torrefazione Italia Coffee retail cafes are located in
metropolitan cities such as Boston, Chicago, Dallas, Portland, San Francisco,
Seattle and Vancouver, and are located in venues such as urban, central
business districts, office complexes and high-end malls. Substantially all of
our Torrefazione Italia Coffee cafes will be re-imaged over the next three
years to accommodate additional food products and to strengthen their Italian
image.
Wholesale Coffee Operations
Our Seattle's Best and Torrefazione Italia wholesale coffee operations sell
our coffee primarily to supermarkets and other foodservice retailers, including
hotel chains, fine restaurants, specialty coffee retailers, espresso carts and
theaters. Some of our major wholesale accounts include Eddie Bauer, Hilton
Hotels, Royal Caribbean Cruise Lines, Sodexho, Aramark and Alaska Airlines. We
believe that consumers have a strong interest in purchasing whole bean
specialty coffee for home consumption and that the increasing presence of our
specialty coffees in retail cafes and key foodservice accounts throughout the
country will help drive the long term growth of our coffee bean sales through
supermarkets. Our Seattle's Best Coffee is also distributed to supermarkets
throughout the Pacific Northwest and other parts of the country. This brand has
achieved a high degree of penetration in the Pacific Northwest with settings in
most major supermarkets, including QFC, Safeway, Albertson's
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and Ralph's. In addition, we successfully introduced Torrefazione Italia Coffee
into supermarkets in 1995, and this brand is now carried in several high-end
chains and independent supermarkets in Oregon and Western Washington.
Strategy
Our primary objective is to be the Franchisor of Choice--the recognized
leader in offering quality franchising opportunities to existing and potential
franchisees. We also will continue to promote brand awareness of our existing
portfolio of brands, increase market penetration of our existing brands
domestically and internationally, primarily by franchising additional units,
and we will acquire additional branded concepts. The following are the key
elements of this strategy:
Be the Franchisor of Choice(R). Currently, we offer franchisees investment
opportunities in highly recognizable brands that are uniquely positioned in
their categories, possess strong growth characteristics, and offer attractive
returns on investment, together with exceptional franchisee support systems and
services. We intend to be the recognized leader in offering these
opportunities. We believe that, as a result of this strategy, franchisees will
prefer to partner with us, rather than with other franchisors, making us the
Franchisor of Choice.
Growth Primarily Through Franchising. As the Franchisor of Choice, we plan
to open new restaurants, bakeries and cafes predominantly through franchising.
We believe that our focus on franchising can provide us with higher profit
margins and returns on investment, while significantly reducing the capital
required by us to operate our brands. As of December 30, 2001, we had
development commitments from existing and new franchisees to open 2,390 new
restaurants, bakeries and cafes. Substantially all of our new units to be
opened over the next several years will come from these commitments, as well as
additional commitments that we expect to obtain in the future. We also plan to
sell a significant number of our company-operated units over the next several
years to new and existing franchisees who commit to develop additional units
within a particular market or markets in order to fully penetrate their
markets.
Model Markets Program. For each of our brands, we will continue to own and
operate units in one or more markets. Our objective is to concentrate on
operating fewer units and in fewer markets overall, in order to focus our
resources on establishing operational and marketing best practices for each of
our brands, thereby creating model markets. The best practices established in
each of these model markets will then be shared with the franchisees of each of
our brands. Additionally, we will use these model markets to further improve
and enhance each of our brands by continuing menu development, product
innovation and testing of new operating systems, equipment, technologies,
venues and facility designs. We believe that the benefits and results from our
model markets program will further enhance our relationships with our
franchisees by providing them with greater returns on their investment, while
at the same time optimizing our own returns on investment from our company-
operated units.
Promote Our Uniquely Positioned Brands. We continually promote and refresh
the image of our brands in order to increase consumer awareness and increase
sales. In the fourth quarter of 2000, we implemented a new re-imaging program
that is designed to update the image of our brands. This will reinforce the
unique positioning of our brands and enhance the customer experience. We plan
to have substantially all of our restaurants, bakeries and cafes re-imaged by
the end of 2005. Each of our franchisees is contractually required to similarly
re-image its restaurants, bakeries, and cafes every seven years. The program
involves implementing new logos, packaging, uniforms, menu boards, menu items
and trade dress that we have recently developed in order to emphasize the image
of each brand. At the same time, we will continue to develop and test new
products in order to generate consumer interest, address changing consumer
preferences and strengthen our brands' positions. For example, Church's offers
a permanent value menu, which is
5
designed to strengthen Church's brand position of offering simple meals with
large portions at low prices. Finally, we are accelerating our three-tiered
marketing strategy, which consists of television and radio advertising, print
advertisements and signage, and point-of-purchase materials.
Expand Our Penetration in New Geographic Territories and Within Existing
Markets, and Develop New Channels of Distribution. Currently, the domestic and
international markets for our brands are substantially under-penetrated. We are
increasing the number of our restaurants, bakeries and cafes in new and
existing markets. In 2002, we plan to franchise and open 175 new Popeyes and
Church's restaurants in the U.S. and 90 new restaurants internationally. We
plan to franchise and open 55 new Cinnabon bakeries and 30 new Seattle Coffee
cafes in the U.S., and 65 new bakeries and 35 new cafes internationally. In
addition, we are expanding the number and type of non-traditional formats in
which our Popeyes and Church's chicken restaurants are located, including
convenience stores, mall food courts, airports and other transportation
centers. We also are aggressively expanding the wholesale distribution of our
Seattle Coffee brands to make them available wherever specialty coffee is sold,
including in regional and national supermarkets, airports, upscale restaurants,
hotels and resorts, cruise lines and corporate offices. Finally, we plan to
serve Seattle's Best Coffee in a substantial number of our Cinnabon bakeries
that do not already serve it, and to offer a selection of Cinnabon products in
the bakery case at Seattle Coffee cafes as complementary crave foods and
beverages. By offering each brand exclusively at the other's bakery or cafe, we
believe we will be able to further penetrate existing markets, open new
markets, increase the demand for both brands' products, and further
differentiate each brand from their competitors.
Expand Internationally. We plan to continue entering into franchise
development agreements with qualified partners to develop restaurants, bakeries
and cafes internationally. We believe that we have the opportunity to establish
or further expand a leading market position in a number of countries, due to
the appeal of our highly recognizable American brands, as well as a lack of
significant competition for our brands in these markets. We also believe that
international development is attractive to foreign investors due to strong per
unit economics resulting largely from higher average unit volumes, lower food
costs, lower labor costs and less QSR competition than we and our franchisees
experience in the U.S. We believe that the demand for premium specialty coffees
in international markets is particularly strong. In addition, a substantial
number of countries around the world have established markets for quick service
restaurants, bakeries and cafes and an expanding group of QSR consumers. Our
international operations have increased from 346 franchised units in Puerto
Rico and 17 foreign countries at the end of 1995, to 740 franchised units in
Puerto Rico and 33 foreign countries at December 30, 2001. Additionally,
commitments to develop international franchised units have increased from 502
at the end of 1995 to 1,052 at December 30, 2001.
Acquire Additional Branded Concepts. We plan to use our knowledge,
experience, franchisee relationships and support systems and services to
acquire, develop and expand additional branded concepts. Our objective is to
acquire brands that are highly recognizable and uniquely positioned in their
markets, possess strong growth characteristics, are well-suited to franchising
and offer attractive returns on investment.
Site Selection
We employ a site identification and new unit development process that
enables us to identify and obtain favorable sites for new domestic restaurants,
bakeries and cafes, commencing with an overall market plan for each intended
area of development, which we develop together with our franchisees. For our
Popeyes and Church's brands, we emphasize free-standing pad sites and end-cap
locations with ample parking and easy dinner-time access from high traffic
roads. For our Cinnabon and Seattle Coffee brands, we emphasize high traffic
venues such as malls, in-line
6
shopping centers, transportation facilities, central business districts,
airports and office buildings. International sites are often located in densely
populated urban areas, and are generally built with a multi-floor layout
because of the scarcity of real estate and the higher percentage of dine-in
customers in international markets.
Franchise Development
Our strategy includes the opening of substantially all of our new
restaurants, bakeries and cafes through our franchise programs with new and
existing franchisees. The following discussion describes the standard
arrangements we enter into with our franchisees.
Domestic Development Agreements. Our domestic franchise development
agreements provide for the development of a specified number of restaurants,
bakeries and cafes within a defined geographic territory in accordance with a
schedule of unit opening dates. These development schedules generally cover
three to five years and typically have benchmarks for the number of
restaurants, bakeries and cafes to be opened and in operation at six-month and
twelve-month intervals. Our Popeyes franchisees currently pay a development fee
of $7,500 per unit. Our Church's franchisees currently pay a development fee of
$10,000 for the first unit to be developed, or $5,000 in the case of a
convenience store unit, and then a reduced fee ranging from $3,750 to $7,500
for each additional unit to be developed under the same development agreement,
depending upon the type of venue. Our Cinnabon franchisees currently pay a
development fee of $5,000 per unit. Our Seattle Best Coffee franchisees
currently pay a development fee of $10,000 for the first unit and $5,000 for
each additional unit to be developed under the same development agreement.
These development fees typically are paid when the development agreement is
executed and are non-refundable.
International Development Agreements. We enter into franchise development
agreements with qualified parties to develop restaurants, bakeries and cafes
outside of the U.S. We may grant international development rights in one or
more countries or in limited geographic areas within a particular country. Our
international franchisees currently pay a franchise fee of up to $45,000 for
each unit to be developed, generally depending upon the brand. The other terms
of our international development agreements are, in most respects, similar to
those included in our domestic development agreements. However, our
international franchisees are also required to prepay up to $15,000 per unit in
franchise fees at the time their franchise development agreement is signed.
International development agreements also include additional provisions
necessary to address the multinational nature of the transaction, including
foreign currency exchange and taxation matters, as well as international
dispute resolution provisions, and are modified as necessary to comply with
applicable local laws relating to technology transfers, export/import matters
and franchising.
Franchise Agreements. Once we execute a development agreement and approve
the related site, and the property is secured by our franchisee, we and our
franchisee enter into a franchise agreement under which our franchisee has the
right to operate the specific unit to be developed at the site. Our current
franchise agreements provide for payment of the following franchise fees.
Popeyes franchisees pay $30,000 per location. Church's franchisees pay $15,000
per location for free-standing units and $10,000 per location for units opened
in convenience stores or travel plazas. Cinnabon franchisees pay $30,000 for
the first unit, $20,000 per location for any second or third unit and $15,000
per unit for any additional units developed under a single development
agreement. Seattle Coffee franchisees pay $20,000 per location for cafes in
traditional locations, and $10,000 per location for cafes developed in captive
locations that are developed under the same development agreement. In addition,
our Popeyes and Church's franchise agreements generally require franchisees to
pay a 5% royalty on net restaurant sales and a 3%, with respect to Popeyes, and
4%, with respect to Church's, national advertising fund contribution (reduced
to a maximum of 1% if a local advertising co-operative is formed). Our Cinnabon
franchise agreements generally require
7
franchisees to pay a 5% royalty on net restaurant sales and a national
advertising fund contribution of up to 3% of net sales. Our Seattle Coffee
franchise agreements generally require franchisees to pay a 4% royalty on net
restaurant sales and a national advertising fund contribution of up to 3% of
net sales. Our Seattle Coffee franchisees are required to purchase coffee
exclusively from us. Some of our older franchise agreements provide for lower
royalties and advertising fund contributions. These older agreements constitute
a decreasing percentage of our total outstanding franchise agreements.
All of our franchise agreements require that each franchisee operate its
restaurant, bakery and cafe units in accordance with our defined operating
procedures, adhere to the menu established by us and meet applicable quality,
service, health and cleanliness standards. The agreements also typically
require that each franchisee must re-image its units to the then current image
of the brand every seven years. We may terminate the franchise rights of any
franchisee who does not comply with these standards and requirements. We
believe that maintaining superior food and beverage quality, a clean and
pleasant environment and excellent customer service are critical to the
reputation and success of our Popeyes, Church's, Cinnabon and Seattle Coffee
systems, and we intend to aggressively enforce these contractual requirements.
Our franchisees may contest this enforcement, and when necessary, contest our
termination of franchise rights.
The terms of our international franchise agreements are substantially
similar to those included in our domestic franchise agreements, except that
international franchisees must prepay up to $15,000 in franchise fees at the
time their related franchise development agreement is executed, and these
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 those included in domestic franchise
agreements, and generally are slightly lower due to the number of units
required to be developed by our international franchisees.
Turnkey Development. Since 1998, in order to expedite development of our
domestic franchised restaurants, we have from time to time purchased or leased
sites and built units in certain markets for subsequent resale to qualified
franchisees. We sold two turnkey units in 1999, eight turnkey units in 2000 and
seven turnkey units in 2001.
AFC Loan Guarantee Program. In March 1999, we implemented a program to
assist current franchisees, new franchisees and our managers in obtaining the
financing needed to purchase or develop franchised units at competitive rates,
provided they meet certain financial and operational criteria. Under the
program, we will guarantee up to 20% of each qualified franchisee's loan
amount, typically for a three-year period. This program is available for
Popeyes, Church's and Cinnabon franchisees, and the qualifications vary
depending upon the type of franchise to be developed. As of December 30, 2001,
we have an agreement with one national lender to participate in the program,
and we anticipate entering into agreements with several other national lenders
in the future. As we add additional lenders we may modify the terms and
conditions under which our franchise partners may participate in the program.
Under our agreement with our current lender, the total amount of funding
provided to franchisees under this program is limited to $10.0 million. In the
event any of these franchisees default on their loan obligations, our aggregate
liability under the program will not exceed $1.0 million. As of December 30,
2001, $4.2 million was borrowed by certain of our franchisees under this
program, of which we are contingently liable for $0.5 million in the event of
default.
Management Information Systems
In 1998, we launched AFC On-Line, a website exclusively for franchisees that
provides operational support, a restaurant development roadmap, a business
planning template, marketing information and other relevant information. The
website allows us to maintain close ties and engage in system-wide
communications with our franchisees.
8
Marketing
We generally market our Popeyes, Church's, Cinnabon and Seattle Coffee food
and beverage products to customers using a three-tiered marketing strategy
consisting of television and radio advertising, print advertisement and
signage, and point-of-purchase materials. Each of our brands frequently offers
new programs that are intended to generate and maintain consumer interest,
address changing consumer preferences, and enhance the position of our brands.
New product introductions and "limited time only" promotional items also play a
major role in building sales and creating repeat customers.
As part of our marketing strategy, we will continue to develop new and
enhanced advertising campaigns for each of our brands. In 2001, we launched a
new media strategy for Church's that is targeted towards the specific
demographics of its customers. The advertising campaign delivers shorter
messages more frequently, and closer to the purchase decision.
Sales at restaurants located in markets in which we utilize television
advertising are generally 5% to 10% higher than the sales generated by
restaurants that are located in other markets. Consequently, we intend to
target growth of our Popeyes and Church's restaurants primarily in markets
where we have or can achieve sufficient unit concentration to justify the
expense of television advertising.
We and our franchisees contribute to a national advertising fund to pay for
the development of marketing materials and also contribute to local advertising
funds to support programs in our local markets. In markets where there is
sufficient unit concentration to effect such savings, we and our franchisees
have experienced significant savings in our marketing programs through our
advertising cooperatives. For the last four years, our Popeyes franchisees have
contributed more to the national advertising fund than they have been required
to contribute under the terms of their respective franchise agreements. In
fiscal year 2001, we and our franchisees contributed approximately $82 million
to these various advertising funds.
Community Activity
We believe strongly in supporting the communities we serve. Through the non-
profit AFC Foundation, Inc., we have sponsored and helped construct more than
300 homes worldwide in conjunction with Habitat for Humanity, a nonprofit
builder of housing for the poor. In addition, each of our brands is involved in
various community support programs. For example, Popeyes promotes music
education. Church's sponsors summer camp programs through the Boys and Girls
Clubs. Cinnabon encourages reading awareness through its Reading Rewards
Program. Seattle Coffee is involved in saving our water from pollution and
contamination through the Water Keeper's Alliance. We also support the United
Negro College Fund and the Hispanic Association of Colleges and Universities
with promotional fund-raisers, and sponsor Adopt-A-School programs. In 2001, we
contributed approximately $800,000 to these programs in the aggregate and our
franchisees' employees contributed thousands of volunteer hours. Through our
involvement with these programs, we have established a meaningful presence in
the communities we serve while, we believe, building customer loyalty and
positive brand awareness.
New Age of Opportunity(R)
Through our New Age of Opportunity management program we make diversity a
part of our business strategy. We believe the New Age of Opportunity program
gives us an important competitive advantage by focusing on the following four
areas:
. expanding franchise ownership opportunities for minorities and women;
. cultivating new supplier relationships for minorities and women;
9
. attracting and developing outstanding employees; and
. enhancing the quality of life for people through meaningful community
service.
Diversity enables us to look at a situation from all angles and provides us
with the capacity to better understand our communities, our employees, our
customers, our suppliers and our businesses, and provides us with the vision to
meet emerging trends with creative ideas. As a testimonial to the success of
this program, women and minorities now constitute approximately 50% of the
total number of our franchisees, 36% of our board of directors and 30% of our
officers.
Suppliers
Our 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 have been approved by us in writing.
These suppliers must demonstrate to our continuing satisfaction the ability to
meet our standards and specifications for these items, and possess adequate
quality controls and capacity to supply our franchisees' needs promptly and
reliably.
Supply Agreements. We have entered into agreements that commit our company-
operated restaurants and bakeries to serve certain Coca-Cola and Dr. Pepper
fountain beverages exclusively. We also have a long-term agreement with
Diversified Foods and Seasonings, Inc., under which we have designated
Diversified as the sole supplier of certain proprietary products for the
Popeyes system. Diversified sells these products to our approved distributors,
who in turn sell them to our franchised and company-operated Popeyes
restaurants. In 2001, the Popeyes system purchased from its distributors
approximately $50.2 million of proprietary products made by Diversified.
The principal raw material for our Popeyes and Church's systems is fresh
chicken. Our Popeyes and Church's systems purchase fresh chicken from
approximately 11 suppliers who service us from 34 plant locations. In 1999,
2000 and 2001, approximately 47%, 46% and 50% of the cost of sales for Popeyes
and Church's were attributable to the purchase of fresh chicken. Our cost of
sales is significantly affected by increases in the cost of chicken, which can
result from a number of factors, including increases in the cost of grain,
disease and other factors that affect availability, and greater international
demand for domestic chicken products.
In order to ensure favorable pricing for our chicken purchases in the
future, reduce volatility in chicken prices, and maintain an adequate supply of
fresh chicken, our purchasing cooperative has entered into two types of chicken
purchasing contracts with chicken suppliers. The first is a grain-based "cost-
plus" pricing contract that utilizes prices that are based upon the cost of
feed grains, such as corn and soybean meal, plus certain agreed upon non-feed
and processing costs. The other is a market-priced formula contract based on
the "Georgia whole bird market value." Under this contract, we and our
franchisees pay the market price plus a premium for the cut specifications for
our restaurants. The market-priced contracts have maximum and minimum prices
that we and our franchisees will pay for chicken during the term of the
contract. Both contracts have terms ranging from three to five years, with
provisions for certain annual price adjustments.
Our principal raw material in our Seattle Coffee operations is green coffee
beans. We typically enter into supply contracts to purchase a pre-determined
quantity of green coffee beans at a fixed price per pound. These contracts
usually cover periods up to a year, as negotiated with the individual supplier.
In 2001, we purchased 62% of our green coffee beans from five suppliers and the
remaining 38% from 27 other suppliers. If the five major suppliers cannot meet
our coffee orders, we have the option of ordering our coffee from the other
suppliers or adding new suppliers. As of December 30, 2001, we had commitments
to purchase green coffee beans at a total cost of $12.6 million through
December 2002.
10
The supply and prices of green coffee beans are volatile. Although most
coffee beans trade in the commodity market, the prices of the coffee beans of
the quality that we use tend to trade on a negotiated basis at a premium above
the commodity market prices. The supply and prices of coffee beans can be
affected by many factors, including weather, political and economic conditions
in producing countries.
Purchasing Cooperative. Supplies are generally provided to our franchised
and company-operated restaurants, bakeries and, to a lesser degree, cafes,
pursuant to supply agreements that until recently were negotiated by Popeyes
Operators Purchasing Cooperative Association, Inc. and Church's Operators
Purchasing Association, Inc., each a not-for-profit corporation. These
corporations were created for the purpose of consolidating our purchasing power
collectively with our franchisees in order to negotiate more favorable terms.
In January 2000, our purchasing cooperatives were combined into one purchasing
and logistical service cooperative, Supply Management Services, Inc. Our
purchasing cooperative, which is open to all of our franchisees, is not
obligated to purchase and cannot require its members to purchase any supplies.
Since 1995, our Popeyes and Church's franchise agreements have required that
each franchisee join the purchasing cooperative as a member. Substantially all
of our domestic franchisees purchase through the cooperative.
Through our purchasing cooperatives, we and our franchisees have experienced
substantial savings as a result of our size and related bargaining power,
particularly with respect to food, beverage and paper goods. In the future, we
also expect to experience savings in the procurement of additional items such
as restaurant supplies, insurance, administrative services and communications
equipment.
Seattle Coffee Cafes. Our company-operated and franchised coffee cafes
purchase their coffee exclusively from us, and their non-coffee food and supply
items either directly from us or from approved suppliers and distributors.
Intellectual Property and Other Proprietary Rights
We own a number of trademarks and service marks that have been registered
with the U.S. Patent and Trademark Office, including the marks "AFC," "AFC
Enterprises," "Popeyes," "Popeyes Chicken & Biscuits," "Church's," "Cinnabon,"
"World Famous Cinnamon Roll," "Seattle's Best Coffee," "Torrefazione Italia"
and each brand's logo, as well as the trademark "Franchisor of Choice." We also
have registered trademarks for a number of additional marks, including "Gotta
Love It," "Day of Dreams," "Love That Chicken From Popeyes" and "New Age of
Opportunity." In addition, we have registered or made application to register
one or more of the marks (or, in certain cases, the marks in connection with
additional words or graphics) in approximately 150 foreign countries, although
there can be no assurance that we can obtain the registration for the marks in
every country where registration has been sought. We consider our intellectual
property rights to be important to our business and actively defend and enforce
them.
Formula Agreement. We have a perpetual formula licensing agreement with
Alvin C. Copeland, the founder of Popeyes, the former owner of the Popeyes and
Church's restaurant systems, and the owner of Diversified Food and Seasonings.
Under this agreement, we have the worldwide exclusive rights to the Popeyes
spicy fried chicken recipe and certain other ingredients produced by
Diversified, which are used in Popeyes products. The agreement provides that we
pay Mr. Copeland monthly payments of $254,166 until March 2029.
King Features Agreements. We have several agreements with the King Features
Syndicate Division of The Hearst Corporation under which we have the exclusive
right to use the image and likeness of the cartoon character "Popeye," and
other companion characters such as "Olive Oyl," in connection with Popeyes
restaurants worldwide. Under these agreements, we are obligated to pay to
11
King Features a royalty of 0.1% on the first $1.0 billion of Popeyes annual
system-wide sales and 0.05% on the next $2.0 billion of annual sales. The total
annual royalties payable under these agreements are capped at $2.0 million per
year. The King Features agreements automatically renew annually, unless we are
in default or we elect not to renew.
Competition
The foodservice industry, and particularly the QSR industry, is intensely
competitive with respect to price, quality, name recognition, service and
location. We compete against other QSRs, including chicken, hamburger, pizza,
Mexican and sandwich restaurants, other purveyors of carryout food and
convenience dining establishments, including national restaurant chains. Many
of our competitors possess substantially greater financial, marketing,
personnel and other resources than we do. In particular, KFC, our primary
competitor in the chicken segment of the QSR industry, has far more units,
greater brand recognition and greater financial resources, all of which may
affect our ability to compete.
Our Cinnabon bakeries compete directly with national chains located in malls
and transportation centers such as Auntie Anne's, The Great American Cookie
Company, T.J. Cinnamon's and Mrs. Fields, as well as numerous regional and
local companies. Our Cinnabon bakeries also compete indirectly with other QSRs,
traditional bakeries, donut shops, ice cream and frozen yogurt shops and
pretzel and cookie companies.
Our Seattle Coffee brands compete directly with specialty coffees sold at
retail through supermarkets, specialty retailers, and a growing number of
specialty coffee cafes. Seattle Coffee also competes directly with all
restaurant and beverage outlets that serve coffee, including Starbucks, and a
growing number of espresso kiosks, carts and coffee cafes. Starbucks has far
more units, greater brand recognition and greater financial resources than we
do, all of which may affect our ability to compete with Starbucks. Our Seattle
Coffee brands compete indirectly with all other coffees on the market,
including those marketed and sold by companies such as Kraft Foods, Procter &
Gamble and Nestle.
International Operations
As of December 30, 2001, we franchised 740 restaurants, bakeries and cafes
in Puerto Rico and 33 foreign countries, and plan to expand our foreign
franchising program significantly in the future. We currently operate three
coffee cafes in Canada. We do not currently operate any other units outside of
the U.S. Foreign franchise royalties and other fees that are based, in part, on
sales generated by our foreign franchised restaurants, bakeries and cafes,
including a significant number of franchised restaurants in Asia, make up part
of our revenues. Currently, we have limited exposure to changes in
international economic conditions and currency fluctuations. We have not
historically maintained any hedges against foreign currency fluctuations,
although since the beginning of 1999, we have entered into foreign currency
hedging agreements with respect to the Korean Won. Our losses during the past
three years related to foreign currency fluctuations have not been material to
our results of operations. For 1999, 2000 and 2001, royalties and other
revenues from foreign franchisees represented 1.7%, 2.2% and 2.5%,
respectively, of our total revenues.
Insurance
We carry property, general liability, business interruption, crime,
directors and officers, employees practices liability, environmental and
workers' compensation insurance policies, which we believe are customary for
businesses of our size and type. Pursuant to the terms of their franchise
agreements, our franchisees are also required to maintain certain minimum
standards of insurance with insurance companies that are satisfactory to us,
including commercial general liability insurance, workers' compensation
insurance, all risk property and casualty insurance and automobile insurance.
12
Government Regulation
We are subject to various federal, state and local laws affecting our
business, including various health, sanitation, fire and safety standards.
Newly constructed or remodeled restaurants, bakeries and cafes are subject to
state and local building code and zoning requirements. In connection with the
re-imaging and alteration of our restaurants, bakeries and cafes, we may be
required to expend funds to meet certain federal, state and local regulations,
including regulations requiring that remodeled or altered restaurants, bakeries
and cafes be accessible to persons with disabilities. Difficulties or failures
in obtaining the required licenses or approvals could delay or prevent the
opening of new units in particular areas.
We are also subject to the Fair Labor Standards Act and various other laws
governing such matters as minimum wage requirements, overtime and other working
conditions and citizenship requirements. A significant number of our
foodservice personnel are paid at rates related to the federal minimum wage,
and increases in the minimum wage have increased our labor costs.
Many states and the Federal Trade Commission, as well as certain foreign
countries, require franchisors to transmit specified disclosure statements to
potential franchisees before granting a franchise. Additionally, some states
and certain foreign countries require us to register our franchise offering
documents before we may offer a franchise. We believe that our uniform
franchise offering circulars, together with any applicable state versions or
supplements, and franchising procedures comply in all material respects with
both the Federal Trade Commission guidelines and all applicable state laws
regulating franchising in those states in which we have offered franchises. We
also believe that our international disclosure statements, franchise offering
documents and franchising procedures comply with the laws of the foreign
countries in which we have offered franchises.
Environmental Matters
We are subject to various federal, state and local laws regulating the
discharge of pollutants into the environment. We believe that we conduct our
operations in substantial compliance with applicable environmental laws and
regulations, as well as other applicable laws and regulations governing our
operations. However, approximately 140 of our 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, and some of these properties may currently
contain abandoned underground storage tanks. 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,
we, as the current owner or operator of these sites, may be jointly and
severally liable for the costs of investigation and remediation of any
contamination, as well as any other environmental conditions at our properties
that are unrelated to underground storage tanks. As a result, after an analysis
of our property portfolio and an initial assessment of our properties,
including testing of soil and groundwater at a representative sample of our
facilities, we have obtained insurance coverage that we believe will be
adequate to cover any potential environmental remediation liabilities. We are
currently not subject to any administrative or court order requiring
remediation at any of our properties.
Employees
As of December 30, 2001, we had 10,684 hourly employees working in our
restaurant, bakery and cafe operations. Additionally, we had 1,307 salaried
employees involved in the management of individual restaurants, bakeries and
cafes, and 98 multi-unit managers and field management employees. We had 684
employees responsible for corporate administration, franchise administration
and business development, and 79 employees responsible for coffee roasting and
distribution. None of our employees is covered by a collective bargaining
agreement. We believe that the dedication of our employees is critical to our
success, and that our relationship with our employees is good.
13
Executive Officers of the Registrant
The following provides information about our executive officers as of
February 20, 2002.
Frank J. Belatti, age 54, has served as Chairman of the Board and Chief
Executive Officer since we commenced operations in November 1992, following the
reorganization of our predecessor. From 1990 to 1992, Mr. Belatti was employed
as President and Chief Operating Officer of HFS, the franchisor of hotels for
Ramada and Howard Johnson. From 1989 to 1990, Mr. Belatti was President and
Chief Operating Officer of Arby's, Inc., and from 1985 to 1989 he served as the
Executive Vice President of Marketing at Arby's. From 1986 to 1990, Mr. Belatti
also served as President of Arby's Franchise Association Service Corporation,
which created and developed the marketing programs and new product development
for the Arby's system. Mr. Belatti received the 1999 Entrepreneur Award from
the International Franchise Association. Mr. Belatti serves as a member of the
board of directors of RadioShack Corporation and Galyan's Trading Company, Inc.
Dick R. Holbrook, age 49, has served as President and Chief Operating
Officer since August 1995. From November 1992 to July 1995, Mr. Holbrook served
as Executive Vice President and Chief Operating Officer. He has been a director
since April 1996. From 1991 to 1992, Mr. Holbrook served as Executive Vice
President of Franchise Operations for HFS. From 1972 to 1991, Mr. Holbrook
served in various management positions with Arby's, most recently as Senior
Vice President of Franchise Operations.
Gerald J. Wilkins, age 43, has served as Chief Financial Officer since
December 1995 and as an Executive Vice President since December 2000. He has
been a director since May 2001. From 1993 to December 1995, Mr. Wilkins served
as Vice President of International Business Planning at KFC International, Inc.
Mr. Wilkins also served in senior management positions with General Electric
Corporation from 1985 to 1993, including Assistant Treasurer of GE Capital
Corporation from 1989 to 1992. Mr. Wilkins serves on the board of directors of
Zoo Atlanta and the board of trustees for The Lovett School.
Allan J. Tanenbaum, age 55, has served as Senior Vice President--Legal
Affairs, General Counsel and Secretary since February 2001. From June 1996 to
February 2001, Mr. Tanenbaum was a shareholder in Cohen Pollock Merlin Axelrod
& Tanenbaum, P.C., an Atlanta, Georgia law firm, and prior to June 1996, for 25
years, a shareholder in Frankel, Hardwick, Tanenbaum & Fink, P.C. Mr. Tanenbaum
serves on the board of directors of The Hank Aaron Chasing The Dream
Foundation, Inc. and represents the State Bar of Georgia in the House of
Delegates of the American Bar Association.
Jon Luther, age 58, has served as President of Popeyes Chicken & Biscuits
since March 1997. From February 1992 to March 1997, Mr. Luther was President of
CA One Services, Inc., a subsidiary of Delaware North Companies, Inc., a
foodservice company.
Hala Moddelmog, age 46, has served as President of Church's Chicken since
August 1995. From May 1993 to July 1995, Ms. Moddelmog was Vice President of
Marketing and then Senior Vice President and General Manager for Church's. From
1990 to 1993, Ms. Moddelmog was Vice President of Product Marketing and
Strategic Planning at Arby's Franchise Association Service Corporation.
Gregg A. Kaplan, age 45, has served as President of Cinnabon since October
1998. From March 1998 to September 1998, he served as President of our Bakery
Cafe Group, and from June 1996 to March 1998, served as Vice President of
Strategic Development. From December 1990 to January 1996, Mr. Kaplan served in
various positions at Shoney's, Inc., a restaurant operations company, most
recently as Senior Vice President of Marketing.
14
Steven Schickler, age 49, has served as President of Seattle Coffee since
November 2000. From December 1998 to October 2000, Mr. Schickler served as the
President and Chief Executive Officer of Frozfruit Company, Inc., a frozen
novelty marketer and manufacturer. From June 1994 to December 1998, Mr.
Schickler served as Chairman of the Board and Chief Executive Officer of
Guernsey Bel, a food ingredients manufacturer. From June 1985 to July 1994, Mr.
Schickler served in a variety of executive positions with Dreyer's Grand Ice
Cream.
Item. 2 PROPERTIES
Facilities
We either own, lease, license or sublease the land and buildings for our
company-operated restaurants, bakeries and cafes. In addition, we own, lease,
license or sublease land and buildings, which we lease or sublease to our
franchisees and third parties. While we expect to continue to lease many of our
sites in the future, we also may purchase the land or buildings for
restaurants, bakeries and cafes to the extent acceptable terms are available.
We typically lease our restaurants under "triple net" leases that require us
to pay minimum rent, real estate taxes, maintenance costs and insurance
premiums and, in some cases, percentage rent based on sales in excess of
specified amounts. Bakeries and cafes are typically leased under standard
retail lease terms for malls, community shopping centers and office buildings.
Generally, our leases have initial terms ranging from five to 20 years, with
options to renew for one or more additional periods, although the terms of our
leases generally vary depending on the facility. Our typical leases or
subleases to Popeyes or Church's franchisees are triple net to the franchisee,
provide for minimum rent, based upon prevailing market rental rates, as well as
percentage rent based on sales in excess of specified amounts, and have a term
that usually coincides with the term of the franchise agreement for the
location, often 20 years with renewal options. These leases are typically
cross-defaulted with the corresponding franchise agreement for that site.
15
The following table sets forth the locations by state of our domestic
company-operated restaurants, bakeries and cafes as of December 30, 2001:
Land and Land and/or
Building Building
Owned Leased Total
-------- ----------- -----
Texas................................................ 142 79 221
Georgia.............................................. 32 55 87
Louisiana............................................ 22 57 79
California........................................... -- 52 52
Washington........................................... -- 43 43
Arizona.............................................. 19 6 25
Alabama.............................................. 23 1 24
Illinois............................................. 1 23 24
Tennessee............................................ 13 5 18
Ohio................................................. -- 14 14
Mississippi.......................................... 10 1 11
Oklahoma............................................. 11 -- 11
North Carolina....................................... -- 10 10
Massachusetts........................................ -- 9 9
Pennsylvania......................................... -- 9 9
Colorado............................................. -- 8 8
Indiana.............................................. -- 7 7
New Mexico........................................... 5 2 7
Oregon............................................... -- 7 7
Arkansas............................................. 5 1 6
Maryland............................................. -- 6 6
Missouri............................................. 6 -- 6
Florida.............................................. -- 5 5
New Jersey........................................... -- 5 5
Wisconsin............................................ -- 5 5
Virginia............................................. -- 4 4
Kansas............................................... 2 1 3
South Carolina....................................... -- 3 3
District of Columbia................................. -- 2 2
Iowa................................................. -- 2 2
Delaware............................................. -- 1 1
Kentucky............................................. -- 1 1
Montana.............................................. -- 1 1
Nevada............................................... -- 1 1
New Hampshire........................................ -- 1 1
New York............................................. -- 1 1
--- --- ---
Total.............................................. 291 428 719
=== === ===
Our headquarters is located in approximately 75,000 square feet of leased
office space in Atlanta, Georgia. This lease is subject to extensions through
2013. We lease approximately 30,000 square feet in another facility located in
Atlanta, Georgia that is the headquarters for our Popeyes brand. This lease is
subject to extensions through 2015. We also lease approximately 25,000 square
feet of office space in a third facility located in Atlanta, Georgia that is
the headquarters for our Church's brand. This lease is subject to extensions
through 2016. Cinnabon is currently located in our Atlanta headquarters
location. Seattle Coffee leases approximately 27,000 square feet of office
space in Seattle, Washington that is subject to extension through 2014 and has
three distribution
16
facilities that service our coffee wholesale operations. One distribution
center is located in the Seattle, Washington area and the other two facilities
are located in Chicago, Illinois and Portland, Oregon. Seattle Coffee is
currently attempting to sublease its prior headquarters, 19,000 square feet of
office space in Seattle, Washington subject to a lease that expires in 2005. We
lease approximately 30,000 square feet for our roasting facility on Vashon
Island, near Seattle, Washington. This lease is subject to extensions through
2018. Our accounting and computer facilities are located in San Antonio, Texas
and are housed in three buildings that are located on approximately 16 acres of
land that we own. We believe that our existing headquarters and other leased
and owned facilities provide sufficient space to support our corporate and
coffee wholesale operational needs.
Item 3. LEGAL PROCEEDINGS
We are a defendant in various legal proceedings arising in the ordinary
course of our business, including claims resulting from "slip and fall"
accidents, employment-related claims and claims from guests or employees
alleging illness, injury or other food quality, health or operational concerns.
To date, none of these legal proceedings has had a material effect on us and,
as of the date of this filing, we are not a party to any legal proceeding that
we believe to be material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
Part II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On February 7, 2001, we effected a two-for-three stock split on all
outstanding shares of stock.
On March 2, 2001, our Common Stock began trading under the symbol "AFCE"
and is quoted on The Nasdaq National Market. Prior to that time, there was no
public market for our common stock. The table below sets forth, for the fiscal
year periods indicated, the high and low sales prices per share of our common
stock as reported on The Nasdaq National Market.
Price Range
-------------
High Low
------ ------
Fiscal Year 2001
First Quarter, ended April 22, 2001............................ $23.50 $16.13
Second Quarter, ended July 15, 2001............................ $25.00 $18.90
Third Quarter, ended October 7, 2001........................... $23.75 $18.93
Fourth Quarter, ended December 30, 2001........................ $29.18 $22.00
The number of shareholders of record of our common stock as of February 8,
2002 was 145.
We have never declared or paid cash dividends on our common stock and do
not anticipate paying dividends on our common stock in the foreseeable future.
Declaration of dividends on our common stock will depend upon, among other
things, levels of indebtedness, future earnings, our operating and financial
condition, our capital requirements and general business conditions. Our bank
credit facility and senior subordinated notes indenture currently prohibit us
from declaring or paying any cash dividends or other distribution of any
shares of our capital stock.
We registered 10,781,250 shares of our common stock, par value $0.01 per
share, for sale to the public at a purchase price of $17.00 per share, of
which 3,136,328 shares were sold by us, and 7,644,922 shares were sold by
certain selling shareholders. Goldman, Sachs & Co., Credit Suisse First Boston
Corporation and Deutsche Banc Alex. Brown Inc. acted as managing underwriters
for the offering. The offering was completed on March 2, 2001, at which point
all of the securities registered had been sold. The aggregate offering price
of the shares sold by us was $53,317,576, and the aggregate offering price of
the shares sold by the selling shareholders was $129,963,674.
Through December 30, 2001, we incurred the following expenses in connection
with the offering:
Underwriting discounts and commissions paid by us................ $3,732,230
Other expenses (accounting, legal, printing, etc.)............... 3,580,772
----------
Total expenses................................................. $7,313,002
==========
We did not receive any of the proceeds from the sale of the shares sold by
the selling shareholders. The net offering proceeds to us through December 30,
2001 after deducting the total expenses above were $46,004,574. None of the
net proceeds of the offering were paid by us, directly or indirectly, to any
director, officer, general partner of ours nor were any proceeds paid by us to
any associate of such persons or to any person owning ten percent or more of
any class of our equity securities or to any of our affiliates.
18
We used these proceeds to repay approximately $48.0 million of the $62.0
million outstanding under the $100.0 million acquisition facility of our bank
credit facility, which was the intended use of proceeds described in the
prospectus related to the offering.
19
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present our consolidated selected financial data. The
selected historical consolidated statement of operations data for each of the
years ended, and the selected historical consolidated balance sheet data as of
December 28, 1997, December 27, 1998, December 26, 1999, December 31, 2000 and
December 30, 2001, have been derived from our audited consolidated financial
statements. Those consolidated financial statements and the notes to those
statements have been audited by Arthur Andersen LLP, independent public
accountants.
You should read the selected consolidated financial data set forth below in
conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Fiscal Year Ended(1)
----------------------------------------------------------------
December 28, December 27, December 26, December 31, December 30,
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per share data)
Consolidated statement
of operations data:
Revenues:
Restaurant sales........ $403,182 $487,441 $560,440 $567,436 $506,955
Franchise revenues...... 61,716 64,211 77,463 90,367 106,273
Wholesale revenues...... -- 36,411 50,716 56,720 64,795
Other revenues.......... 8,713 9,891 9,397 10,697 14,554
-------- -------- -------- -------- --------
Total revenues......... $473,611 $597,954 $698,016 $725,220 $692,577
Costs and expenses:
Restaurant cost of
sales.................. $131,332 $155,165 $167,979 $162,478 $148,017
Restaurant operating
expenses............... 197,227 245,161 287,066 292,508 257,784
Wholesale cost of
sales.................. -- 19,064 24,371 27,356 32,037
Wholesale operating
expenses............... -- 8,070 12,325 16,147 19,620
General and
administrative(2)...... 77,048 84,726 96,535 102,419 108,043
Depreciation and
amortization(3)........ 33,244 45,162 42,126 41,812 41,321
Charges for restaurant
closings, excluding
Pine Tree.............. 479 311 835 1,943 1,217
Charges for Pine Tree
restaurant
closings(4)............ -- 8,547 3,600 5,406 1,487
Charges for asset write-
offs from re-imaging... -- -- -- 1,692 1,852
Software write-offs..... -- 5,000 3,830 -- --
Restructuring charges
(5).................... -- -- -- -- 1,169
Charges for other asset
write-offs............. -- 965 1,179 1,633 1,625
Net loss (gain) on sale
of fixed assets(6)..... (5,319) -- -- (9,766) (7,345)
-------- -------- -------- -------- --------
Total costs and
expenses.............. $434,011 $572,171 $639,846 $643,628 $606,827
-------- -------- -------- -------- --------
Income from continuing
operations............. $ 39,600 $ 25,783 $ 58,170 $ 81,592 $ 85,750
Other expenses:
Interest, net........... $ 20,645 $ 30,786 $ 34,007 $ 33,871 $ 23,190
-------- -------- -------- -------- --------
Net income (loss) from
continuing operations
before income taxes.... 18,955 (5,003) 24,163 47,721 62,560
Income tax expense
(benefit).............. 8,276 (1,643) 10,008 19,999 24,676
-------- -------- -------- -------- --------
Net income (loss) from
continuing operations.. $ 10,679 $ (3,360) $ 14,155 $ 27,722 $ 37,884
-------- -------- -------- -------- --------
20
Fiscal Year Ended(1)
-----------------------------------------------------------------
December 28, December 27, December 26, December 31, December 30,
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per share data)
Extraordinary (loss) on
early extinguishment of
debt, net of income tax
(7).................... -- -- (126) (207) (1,003)
Discontinued operations:
Income (loss) from
operations of
Chesapeake Bagel, net
of income taxes........ $ (7) $ (5,893) $ (638) $ -- $ --
Income (loss) on sale of
Chesapeake Bagel, net
of income taxes........ -- -- (1,742) --- --
Income (loss) from
operations of
Ultrafryer, net of
income taxes........... 328 607 436 (51) --
-------- --------- -------- -------- --------
Net gain (loss) from
discontinued
operations............. $ 321 $ (5,286) $ (1,944) $ (51) $ --
-------- --------- -------- -------- --------
Net income (loss)....... $ 11,000 $ (8,646) $ 12,085 $ 27,464 $ 36,881
Preferred stock
dividends and
accretion.............. 2,240 -- -- -- --
-------- --------- -------- -------- --------
Net income (loss)
attributable to common
stock.................. $ 8,760 $ (8,646) $ 12,085 $ 27,464 $ 36,881
======== ========= ======== ======== ========
Basic earnings per
common share:
Net income (loss) from
continuing operations.. $ 0.47 $ (0.14) $ 0.54 $ 1.05 $ 1.28
Net income (loss)....... $ 0.38 $ (0.35) $ 0.46 $ 1.04 $ 1.25
Weighted average basic
shares outstanding
(000s)................. 22,961 24,371 26,231 26,323 29,517
Diluted earnings per
common share:
Net income (loss) from
continuing operations.. $ 0.43 $ (0.14) $ 0.50 $ 0.97 $ 1.21
Net income (loss)....... $ 0.35 $ (0.35) $ 0.42 $ 0.96 $ 1.18
Weighted average diluted
shares outstanding
(000s)................. 24,721 24,371 28,419 28,746 31,327
Other financial data:
EBITDA(8)............... $ 72,857 $ 86,632 $111,209 $126,004 $127,426
EBITDA margin........... 15.4 % 14.5 % 15.9 % 17.4 % 18.4 %
Cash capital
expenditures........... $ 42,136 $ 38,925 $ 53,278 $ 51,489 $ 56,011
Proceeds from the sale
of fixed assets........ $ -- $ -- $ 4,644 $ 24,508 $ 35,277
Cash flows provided by
(used in):
Operating activities.... $ 53,959 $ 45,983 $ 54,759 $ 62,305 $ 71,329
Investing activities.... (37,226) (188,733) (47,378) (24,781) (21,694)
Financing activities.... (2,985) 126,852 (1,951) (36,405) (60,424)
December 28, December 27, December 26, December 31, December 30,
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Consolidated balance
sheet data:
Cash and cash
equivalents, net of
bank overdrafts........ $ 23,257 $ 10,818 $ 3,280 $ 4,200 $ 1,170
Total assets............ 380,002 556,465 561,889 539,449 523,214
Total debt and capital
lease obligations...... 243,882 360,711 348,091 313,132 209,379
Total shareholders'
equity................. 48,459 87,917 100,799 129,567 223,721
21
- --------
(1) Our fiscal years ended December 28, 1997, December 27, 1998, December 26,
1999, December 31, 2000 and December 30, 2001 are referred to as years
1997, 1998, 1999, 2000 and 2001, respectively. Our fiscal year consists of
52 or 53 weeks and ends on the last Sunday in December of each year. Fiscal
year 2000 included 53 weeks. All other years shown included 52 weeks.
(2) General and administrative expenses for 2000 were impacted favorably by a
net decrease in expenses of $1.6 million (pre-tax) primarily related to the
elimination of an environmental reserve. The impact of the elimination of
the reserve was partially offset by an increase in expenses at Seattle
Coffee related to one-time, non-recurring personnel and concept development
expenses.
(3) As a result of fresh start accounting principles that were used to record
assets acquired and liabilities assumed by us in November 1992 following
the reorganization of our predecessor, our operating results reflect the
amortization of intangible asset value in an amount of $5.7 million per
year.
(4) In 1998, we closed 14 of the former Pine Tree locations that we had
previously converted to company-operated Popeyes restaurants. In 1999, we
closed an additional five of the converted Popeyes restaurants, and in 2000
we accrued for the closure of an additional eight, which were subsequently
closed in 2001. In 2001, we closed one converted Popeyes restaurant.
(5) Restructuring charges represent severance and other termination benefits
paid to terminated employees primarily as a result of a restructuring of
Seattle Coffee's operations in late 2001.
(6) In 1997, we recorded $2.5 million in franchise fees and a pre-tax $5.3
million gain that were associated with our sale of 100 previously company-
operated Church's restaurants. In 2000, we recorded an aggregate pre-tax
$9.8 million net gain that was associated with our sale of 23 previously
company-operated Church's restaurants, 36 previously company-operated
Popeyes restaurants and 11 previously company-operated Cinnabon bakeries.
In 2001, we recorded an aggregate pre-tax $7.3 million net gain that was
associated with our sale of 71 previously company-operated Church's
restaurants, 27 previously company-operated Popeyes restaurants and 36
previously company-operated Cinnabon bakeries.
(7) In 1999, 2000 and 2001, we recorded an extraordinary loss of approximately
$0.1 million, $0.2 million and $1.0 million, net of income taxes, related
to the repurchases of our senior subordinated notes.
(8) EBITDA represents income from operations plus depreciation and
amortization, adjusted for non-cash items related to gains/losses on asset
dispositions and write-downs and compensation expense related to stock
option activity. EBITDA is not a measure of performance under generally
accepted accounting principles, and should not be considered as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles, or as a measure of profitability or
liquidity. We have included information concerning EBITDA as one measure of
our cash flow and historical ability to service debt. We believe investors
find this information useful. EBITDA as defined may not be comparable to
similarly-titled measures reported by other companies.
22
Summary of System-wide Data
The following table presents financial and operating data for the
restaurants, bakeries and cafes that we operate or franchise. The data
presented in this table is unaudited. Sales information for franchised units is
reported by franchisees or, in some cases, estimated by us based on other data.
Fiscal Year Ended(1)
-------------------------------------------------------------------
December 28, December 27, December 26, December 31, December 30,
1997 1998 1999 2000(1) 2001
------------ ------------ ------------ ------------ ------------
System-wide sales
(000s):
Popeyes................ $ 853,078 $ 954,305 $1,068,574 $1,230,484 $1,323,349
Church's............... 723,988 755,074 810,471 878,834 899,870
Cinnabon(2)............ -- 41,738 152,421 184,366 205,824
Seattle Coffee
retail(2)............. -- 24,887 32,587 48,518 63,718
Seattle Coffee
wholesale(2).......... -- 36,411 50,368 56,720 64,795
---------- ---------- ---------- ---------- ----------
Total................. $1,577,066 $1,812,415 $2,114,421 $2,398,922 $2,557,556
========== ========== ========== ========== ==========
System-wide unit
openings(3):
Popeyes................ 137 198 151 143 177
Church's............... 132 87 133 98 79
Cinnabon............... -- 6 46 81 121
Seattle Coffee retail.. -- 18 27 39 52
---------- ---------- ---------- ---------- ----------
Total................. 269 309 357 361 429
System-wide units open
(end of period):
Popeyes................ 1,131 1,292 1,396 1,501 1,620
Company-operated...... 119 171 175 130 96
Franchised............ 1,012 1,121 1,221 1,371 1,524
Church's............... 1,356 1,399 1,492 1,534 1,517
Company-operated...... 480 491 494 468 397
Franchised............ 876 908 998 1,066 1,120
Cinnabon............... -- 369 388 451 544
Company-operated...... -- 212 195 187 152
Franchised............ -- 157 193 264 392
Seattle Coffee retail.. -- 71 98 132 176
Company-operated...... -- 59 76 71 77
Franchised............ -- 12 22 61 99
Total company-
operated............ 599 933 940 856 722
Total franchised..... 1,888 2,198 2,434 2,762 3,135
---------- ---------- ---------- ---------- ----------
Total system-wide..... 2,487 3,131 3,374 3,618 3,857
System-wide percentage
change in comparable
restaurant sales(4):
Domestic:
Popeyes............... 3.6% 5.2 % 4.4 % 3.4 % 4.2 %
Church's.............. 4.0% 4.6 % 1.1 % 0.8 % 2.3 %
Cinnabon.............. -- -- 2.4 % 4.7 % (0.7)%
Seattle Coffee
retail............... -- -- 3.3 % 0.9 % (2.0)%
International:
Popeyes............... 1.3% (13.3)% (4.8)% (0.1)% (6.9)%
Church's.............. 2.6% (1.5)% (2.7)% (1.5)% 0.0 %
Cinnabon.............. -- -- 11.5 % 6.3 % (21.6)%
Seattle Coffee
retail............... -- -- -- -- 3.1 %
Total commitments
outstanding (end of
period)(5)............. 1,550 1,602 1,983 2,289 2,390
23
- --------
(1) The fiscal year ended December 31, 2000 included 53 weeks. The fiscal
years ended December 28, 1997, December 27, 1998, December 26, 1999 and
December 30, 2001 included 52 weeks.
(2) System-wide sales for Cinnabon and Seattle Coffee in 1998 include only
those sales generated after October 15, 1998 and March 18, 1998, their
respective dates of acquisition.
(3) System-wide unit openings include company and franchised unit openings. Of
the 429 system-wide unit openings in 2001, 26 were company unit openings
and 403 were franchised unit openings. Of the 361 system-wide unit
openings in 2000, 11 were company unit openings and 350 were franchised
unit openings. Of the 357 system-wide unit openings in 1999, 54 were
company unit openings and 303 were franchised unit openings.
(4) Restaurants, bakeries and cafes are included in the computation of
comparable sales after they have been open 12 months for all periods prior
to 2000 and 2001, and 15 months for 2000 and 2001. Prior year sales
figures used to calculate comparable sales include sales from our Cinnabon
and Seattle Coffee brands prior to our acquisition of these two businesses
in 1998. Comparable sales for 2000 is calculated by comparing the 53 weeks
of sales for 2000 to the prior 53 weeks, which includes the 52 weeks from
1999 plus the first week of 2000.
(5) Commitments represent obligations to open franchised restaurants, bakeries
and cafes under executed development agreements. Of the total commitments
outstanding as of December 30, 2001, 1,574 related to our Popeyes and
Church's brands, 522 related to our Cinnabon brand, and 294 related to our
Seattle Coffee brands.
24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations for the fiscal years ended December 26, 1999, December 31, 2000
and December 30, 2001, should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and the
notes to those statements that are included elsewhere in this filing. Our
discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth in this section
under the heading "Risk Factors That May Affect Results of Operations and
Financial Condition" and elsewhere in this filing.
General
We operate, develop and franchise quick service restaurants, bakeries and
cafes, or QSRs, primarily under the trade names Popeyes Chicken & Biscuits,
Church's Chicken, Cinnabon, Seattle's Best Coffee and Torrefazione Italia
Coffee. As of December 30, 2001, we operated and franchised 3,857 restaurants,
bakeries and cafes in 47 states, the District of Columbia, Puerto Rico and 33
foreign countries. We also sell our premium specialty coffees through wholesale
and retail distribution channels under our Seattle's Best Coffee and
Torrefazione Italia Coffee brands. Our system-wide sales totaled approximately
$2.6 billion in 2001.
We commenced operations in November 1992 following the reorganization of our
predecessor, which franchised and operated Popeyes and Church's restaurants. As
a result of the reorganization, we were required to record our assets,
including our franchise rights and goodwill, and our liabilities at their fair
market value, rather than at the historical values used by our predecessor. As
a result, we allocated a value of $115.6 million to these franchise rights and
goodwill. Accordingly, our operating results for all periods after November 5,
1992, including the operating results contained in the following discussion and
analysis, reflect the amortization of these intangible assets in an amount of
$5.7 million per year. Upon our adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets"at the beginning of
our fiscal year 2002, we will discontinue amortizing these intangible assets.
Under this accounting standard, these intangible assets must be tested for
impairment at least annually, and we plan to complete our impairment analysis
during the first quarter of 2002. An explanation of this accounting standard is
included in "Recent Accounting Pronouncements".
Acquisitions and Dispositions
Pine Tree Acquisition. On February 10, 1998, we acquired from Pine Tree
Foods, Inc. 81 leased restaurant locations, primarily located in North
Carolina, South Carolina and Georgia, for approximately $24.3 million in cash.
In addition, we recorded liabilities of approximately $4.0 million in
connection with the acquisition. Of the purchase price, $23.7 million was
allocated to goodwill. To finance this acquisition, we used existing cash and
borrowings under our existing acquisition facility. We converted 66 of these
locations into company-operated Popeyes restaurants at an additional cost of
$16.0 million, which we borrowed under our acquisition facility, and offered
the remaining 15 leaseholds for sale. We closed 14 of the 66 converted Popeyes
restaurants in 1998, an additional five in 1999, accrued for the closure of an
additional eight in 2000 (which were subsequently closed in 2001) and closed
one additional restaurant in 2001.
Chesapeake Bagel Divestiture. On August 30, 1999, we sold our Chesapeake
Bagel franchise system to New World Coffee-Manhattan Bagel, Inc. for $2.3
million in cash and a $1.5 million note receivable. As a result, restaurant
sales, franchise revenues, restaurant cost of sales,
25
restaurant operating expenses, general and administrative expenses and
depreciation and amortization related to Chesapeake's operations have been
classified as discontinued operations in our financial statements. Accordingly,
the discussions that follow include comparisons of our operating results that
have been restated to reflect our continuing operations.
Ultrafryer Divestiture. On June 1, 2000, we sold Ultrafryer, our restaurant
equipment manufacturing division, to an investor group led by Ultrafryer's
chief operating officer for $5.2 million, consisting of a $4.6 million note
receivable and $0.6 million in cash. The sale included all equipment, inventory
and intellectual property held by Ultrafryer, as well as the majority of
accounts receivable outstanding as of June 1, 2000. The buyer also assumed
certain payables outstanding as of June 1, 2000. We are leasing the building
and land used by Ultrafryer to the buyer under a lease that was executed
concurrently with the closing. As a result, manufacturing revenues,
manufacturing operating expenses, general and administrative expenses and
depreciation and amortization related to Ultrafryer's operations have been
classified as discontinued operations in our financial statements. Accordingly,
the discussions that follow include comparisons of our operating results that
have been restated to reflect our continuing operations.
Unit Conversions. During fiscal year 2000, we sold 36 of our company-
operated Popeyes restaurants, 23 of our company-operated Church's restaurants
and 11 of our company-operated Cinnabon bakeries for aggregate cash proceeds of
$25.0 million. This resulted in a one-time gain on the sale of assets of $9.8
million and $1.7 million in franchise fees. During fiscal year 2001, we sold 27
of our company-operated Popeyes restaurants, 71 of our company-operated
Church's restaurants and 36 of our company-operated Cinnabon bakeries for
aggregate cash proceeds of $34.5 million. This resulted in a one-time gain on
the sale of assets of $7.3 million and $5.8 million in franchise and conversion
fees.
Consolidated Results of Operations
Our consolidated statements of operations include items and events that
affect comparability with other periods:
. In connection with the closure of five Popeyes restaurants in 1999, the
accrual for closure of eight Popeyes restaurants in 2000 (which were
subsequently closed in 2001) and the closure of one Popeyes restaurant
in 2001 that we had previously converted subsequent to the Pine Tree
acquisition, we recorded charges of $3.6 million in 1999, $5.4 million
in 2000 and $1.5 million in 2001.
. We wrote-off expenses of $3.8 million in 1999 related to our restaurant
back office automation system that was under development, which
essentially constituted the entire cost of the system.
. General and administrative expenses for 2000 were impacted favorably by
the elimination of a $4.4 million reserve related to certain contingent
environmental liabilities, which we believed was no longer necessary due
to the very limited number of environmental claims that we had
experienced since 1993, and our purchase of a third party environmental
insurance policy that provides coverage for the same potential
liabilities. The impact of the elimination of the reserve was partially
offset by an increase of $2.8 million in general and administrative
expenses at Seattle Coffee related to one-time, non-recurring personnel
and concept development expenses.
. Restaurants, bakeries and cafes are included in the computation of
comparable sales after they have been open 12 months for all periods
prior to 2000, and 15 months for 2000 and 2001. Prior year sales figures
used to calculate comparable sales include sales from our Cinnabon and
Seattle Coffee brands prior to our acquisition of these two businesses
in 1998.
26
. Restructuring charges of $1.2 million in 2001 represent severance and
other termination benefits paid to terminated employees primarily as a
result of a restructuring of Seattle Coffee's operations in late 2001.
Certain items in the financial statements for periods prior to 2001 have
been reclassified to conform to the current presentation. These
reclassifications had no effect on our reported results of operations.
The table below presents selected revenues and expenses as a percentage of
total revenues for 1999, 2000 and 2001.
Fiscal Year Ended(1)
--------------------------------------
December 26, December 31, December 30,
1999 2000 2001
------------ ------------ ------------
Revenues:
Restaurant sales....................... 80.3% 78.2% 73.2%
Franchise revenues..................... 11.1 12.5 15.3
Wholesale revenues..................... 7.2 7.8 9.4
Other revenues......................... 1.4 1.5 2.1
----- ----- -----
Total revenues....................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Restaurant cost of sales(2)............ 30.0 28.6 29.2
Restaurant operating expenses(2)....... 51.2 51.5 50.8
Wholesale cost of sales(3)............. 48.4 48.2 49.4
Wholesale operating expenses(3)........ 24.4 28.5 30.3
General and administrative............. 13.8 14.1 15.6
Depreciation and amortization.......... 6.0 5.8 6.0
Charges for other restaurant closings,
excluding Pine Tree................... 0.1 0.3 0.2
Charges for Pine Tree restaurant
closings.............................. 0.5 0.7 0.2
Charges for asset write-offs from re-
imaging............................... -- 0.2 0.3
Software write-offs.................... 0.5 -- --
Restructuring charges.................. -- -- 0.2
Charges for other asset write-offs..... 0.2 0.2 0.2
Net loss (gain) on sale of fixed
assets................................ -- (1.3) (1.1)
----- ----- -----
Total costs and expenses............. 91.7 88.7 87.6
----- ----- -----
Income from operations................. 8.3 11.3 12.4
Interest expense, net.................. 4.9 4.7 3.3
----- ----- -----
Income from continuing operations
before income taxes................... 3.4 6.6 9.1
Income tax expense..................... 1.4 2.7 3.6
----- ----- -----
Net income from continuing operations.. 2.0 3.9 5.5
Loss on early extinguishment of debt,
net of taxes.......................... -- -- 0.1
Loss from discontinued operations, net
of taxes(4)........................... (0.3) -- --
----- ----- -----
Net income ............................ 1.7% 3.9% 5.4%
===== ===== =====
- --------
(1) The fiscal year ended December 31, 2000 included 53 weeks. The fiscal years
ended December 26, 1999 and December 30, 2001 included 52 weeks.
(2) Expressed as a percentage of restaurant sales by company-operated
restaurants, bakeries and cafes.
(3) Expressed as a percentage of wholesale revenues.
(4) Represents the operations of both Ultrafryer and Chesapeake.
27
Operating Results
System-Wide Sales
System-wide sales include sales from all restaurants, bakeries and cafes,
whether operated by us or our franchisees, and from coffee wholesale
operations.
Revenues
Our revenues consist primarily of four elements:
. restaurant sales at our company-operated restaurants, bakeries and
cafes;
. revenues from franchising;
. revenues from wholesale operations; and
. other revenues.
Restaurant Sales. Our restaurant sales consist of gross cash register
receipts at our company-operated restaurants, net of sales tax.
Revenues from Franchising. We earn franchise revenues through franchise
agreements, domestic development agreements, and international development
agreements. Our standard franchise agreement provides for the payment of a
royalty fee based on the net restaurant sales of franchisees. We therefore
benefit from increases in franchised restaurant sales. The royalty percentages
vary by franchisee, depending on the franchise agreement and the related brand,
with an average royalty of 4.5% in 2001. We record royalties as revenues when
sales occur at franchised units. In addition, we record development fees under
domestic and international development agreements, and fees for the purchase of
a franchise, as deferred revenues when received. We recognize these fees as
revenue when the restaurants for which these fees were paid are opened and all
material services or conditions relating to the fees have been substantially
performed or satisfied by us. As of December 30, 2001, prepaid development and
franchise fees are included on our balance sheet as other liabilities.
Revenues from Wholesale Operations. Our revenues from wholesale operations
consist primarily of sales of premium specialty coffee to our franchisees,
foodservice retailers, office and institutional users, supermarkets and others.
Other Revenues. Our other revenues consist of rental income from properties
owned or leased by us that we lease or sublease 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. Our restaurant cost of sales consists primarily of
food, beverage and food ingredients costs. It also includes the costs of
napkins, cups, straws, plates, take-out bags and boxes. The primary elements
affecting our chicken restaurant cost of sales are chicken prices, which are
affected by seasonality and are normally higher during the summer months, when
demand for chicken is at its peak. The primary elements affecting our bakery
and cafe costs of sales are flour and Indonesian cinnamon, and green coffee
beans. Other factors such as sales volume, our menu pricing, product mix and
promotional activities can also materially affect the level of our restaurant
cost of sales.
Restaurant Operating Expenses. Restaurant operating expenses consist of
personnel expenses, occupancy expenses, marketing expenses and other operating
expenses incurred at the restaurant level.
28
Wholesale Cost of Sales. Our wholesale cost of sales consists primarily of
the cost of green coffee beans, as well as the costs to roast, blend, warehouse
and distribute our specialty coffee blends.
Wholesale Operating Expenses. Our wholesale operating expenses consist of
personnel expenses, occupancy expenses, and other operating expenses incurred
in connection with our wholesale coffee operations.
General and Administrative Expenses
Our 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 our offices in Atlanta,
Georgia and Seattle, Washington, and at our support center in San Antonio,
Texas. Additional expenses include those incurred by field personnel located
throughout the U.S.
Depreciation and Amortization Expenses
Depreciation consists primarily of the depreciation of buildings, leasehold
improvements and equipment owned by us, and amortization consists of the
amortization of intangible assets. In addition, as a result of fresh start
accounting principles as prescribed by AICPA Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code,
that were used to record assets acquired and liabilities assumed by us in
November 1992 following the reorganization of our predecessor, our operating
results presented for all periods after November 1992 reflect the amortization
of intangible asset value in accordance with the fresh start accounting
principles in an amount of $5.7 million per year. Upon our adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" at the beginning of our fiscal year 2002, we will
discontinue amortizing these intangible assets.
Charges for Restaurant Closings
Charges for restaurant closings, including charges for Pine Tree restaurant
closings, include the write-down of restaurant, bakery and cafe assets to net
realizable value, provisions related to future rent obligations for closed
properties, and write-offs of intangible assets identified with the properties.
Charges for Asset Write-Offs from Re-imaging
Charges for asset write-offs from re-imaging include the write-off of
restaurant, bakery and cafe assets replaced by assets as part of our re-imaging
program.
Restructuring Charges
Restructuring charges represent severance and other termination benefits
paid to certain terminated employees in late 2001 pursuant primarily to a
restructuring of Seattle Coffee's operations.
Charges for Other Asset Write-Offs
Charges for other asset write-offs include the write-off of equipment assets
replaced due to normal wear.
Net (Gain) on Sale of Assets
Net gain on sale of assets includes the write-off of restaurant, bakery and
cafe assets, and related intangible assets and the liabilities incurred by us
in connection with the sale of company-operated units to franchisees.
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Comparisons of Fiscal Years Ended December 30, 2001 (52 weeks) and December 31,
2000 (53 weeks)
System-Wide Sales. System-wide sales increased by $158.6 million, or 6.6%,
to approximately $2.6 billion in 2001 from approximately $2.4 billion in 2000.
Excluding the fifty-third week in 2000, our system-wide sales in 2001 increased
by $197.7 million, or 8.4%, compared to 2000. Our system-wide sales increase
was due primarily to new franchise unit growth, an increase in comparable sales
in our domestic markets and coffee wholesale revenue growth. The overall
increase was partially offset by comparable sales decreases in Popeyes and
Cinnabon international markets. In 2001, we and our franchisees opened 243
restaurants, bakeries and cafes domestically, and 184 restaurants, bakeries and
cafes in international markets. As of December 30, 2001, there were 3,857
system-wide units open, compared to 3,618 as of December 31, 2000.
Company-Operated Unit Sales
Chicken. Company-operated chicken restaurant sales decreased by $52.2
million, or 11.3%, to $410.8 million in 2001 from $463.0 million in 2000.
Excluding the fifty-third week in 2000, our company-operated chicken restaurant
sales in 2001 decreased by $45.7 million, or 10.0%, compared to 2000. The
decrease was primarily due to a net reduction of 105 company-operated units as
of December 30, 2001. In 2001, we sold a total of 98 company-operated chicken
restaurants to franchisees. The overall decrease in sales was partially offset
by comparable sales increases at both Church's and Popeyes in 2001 of 2.8% and
4.8%, respectively. As of December 30, 2001, we had 493 company-operated
chicken restaurants open, compared to 598 as of December 31, 2000.
Bakery. Company-operated bakery sales decreased by $7.5 million, or 9.8%, to
$68.4 million in 2001 from $75.9 million in 2000. Excluding the fifty-third
week in 2000, our company-operated bakery sales in 2001 decreased by $5.6
million, or 7.5%, compared to 2000. The decrease was due primarily to a net
reduction of 35 company-operated bakeries as of December 30, 2001. In 2001, we
sold 36 units to franchisees. The overall decrease in sales was partially
offset by a 1.1% increase in comparable sales in 2001. As of December 30, 2001,
we had 152 company-operated bakeries open, compared to 187 as of December 31,
2000.
Cafe. Company-operated cafe sales decreased by $0.9 million, or 3.1%, to
$27.7 million in 2001 from $28.6 million in 2000. Excluding the fifty-third
week in 2000, our company-operated cafe sales in 2001 decreased by $0.5
million, or 1.7%, compared to 2000. The decrease was primarily due to a
reduction in comparable sales compared to the prior period in 2000. As of
December 30, 2001, we had 77 company-operated cafes open, compared to 71 as of
December 31, 2000.
Wholesale Coffee Sales. Wholesale coffee sales increased by $8.1 million, or
14.2%, to $64.8 million in 2001 from $56.7 million in 2000. Excluding the
fifty-third week in 2000, our wholesale coffee sales in 2001 increased by $8.8
million, or 15.7%, compared to 2000. The increase was due primarily to growth
in the number of points of distribution from our wholesale accounts, despite a
decrease in overall wholesale accounts. As of December 30, 2001, we had 4,208
wholesale accounts with approximately 7,200 points of distribution. As of
December 31, 2000, we had 4,300 wholesale accounts with approximately 6,350
points of distribution.
Franchise Royalties and Fees
Chicken. Chicken franchise royalty revenues increased by $8.3 million, or
11.2%, to $82.4 million in 2001 from $74.1 million in 2000. Excluding the
fifty-third week in 2000, our chicken franchise royalty revenues in 2001
increased by $9.6 million, or 13.1%, compared to 2000. The increase was due to
an increase in domestic franchise comparable sales and new unit growth,
partially offset by a decrease in international franchise comparable sales. As
of December 30,
30
2001, we had 2,644 domestic and international franchised chicken restaurants
open, compared to 2,437 as of December 31, 2000. Chicken franchise fee revenue
increased by $3.0 million, or 38.1%, to $11.0 million in 2001 from $8.0 million
in the comparable period in 2000. The increase resulted primarily from the
collection of franchise and conversion fees from the sale of 98 of our units to
existing and new franchisees in 2001. Additionally, 156 new domestic franchised
chicken restaurants were opened in 2001, compared to 162 in the comparable
period in 2000, and 95 new international franchised chicken restaurants were
opened in 2001, compared to 74 in the comparable period in 2000.
Bakery. Bakery franchise royalty revenues increased by $1.2 million, or
22.4%, to $6.8 million in 2001 from $5.6 million in 2000. Excluding the fifty-
third week in 2000, our bakery franchise royalty revenues in 2001 increased by
$1.3 million, or 24.3%, compared to 2000. The increase was due primarily to new
unit growth, offset by a decrease in domestic and international franchise
comparable sales. As of December 30, 2001, we had 392 domestic and
international franchised bakeries open, compared to 264 as of December 31,
2000. Bakery franchise fee revenue increased by $2.6 million,