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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from..............to..............
Commission file number ...........
AFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 58-2016606
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Six Concourse Parkway, Suite 1700
Atlanta, Georgia 30328-5352
(Address of principal executive offices) (Zip Code)
(770) 391-9500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Not applicable.
The aggregate market value of the common stock of AFC Enterprises, Inc. held by
non-affiliates of AFC Enterprises, Inc. is not applicable as the common stock of
AFC Enterprises, Inc. is privately held.
As of March 29, 1999, there were 39,233,441 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index is contained in Part IV herein on page 61.
AFC ENTERPRISES, INC.
INDEX TO FORM 10-K
PART I
Item 1. Business................................................. 1
Item 2. Properties............................................... 20
Item 3. Legal Proceedings........................................ 23
Item 4. Submission of Matters to a Vote of Security Holders...... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters.................................. 24
Item 6. Selected Consolidated Financial Data..................... 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 28
Item 8. Consolidated Financial Statements and Supplementary Data. 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant....... 46
Item 11. Executive Compensation................................... 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................ 58
Item 13. Certain Relationships and Related Transactions........... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................... 61
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. Such forward-looking
statements relate to the plans, objectives and expectations of the Company for
future operations. In light of the risks and uncertainties inherent in any
discussion of the Company's expected future performance or operations, the
inclusion of forward-looking statements in this report should not be regarded as
a representation by the Company or any other person that these will be realized.
Such performance could be materially affected by a number of factors, including
without limitation those factors set forth in this section.
GENERAL
AFC Enterprises, Inc., a Minnesota corporation and its wholly-owned
subsidiaries (collectively "AFC" or the "Company"), are principally engaged in
the operation, development and franchising of quick-service restaurants,
bakeries and cafes ("QSRs") under the primary trade names of Popeyes Chicken and
Biscuits ("Popeyes"), Churchs Chicken ("Churchs"), Cinnabon Bakeries
("Cinnabon"), Seattle's Best Coffee and Torrefazione Italia ("Seattle Coffee")
and Chesapeake Bakery Cafes ("Chesapeake"). Total restaurants, bakeries and
cafes by brand as of December 27, 1998 were as follows:
Domestic International
------------------------ ------------------------
Company- Company-
Operated Franchised Operated Franchised Total
-------- ---------- -------- ---------- ------
Popeyes......... 171 899 - 222 1,292
Churchs......... 491 615 - 293 1,399
Cinnabon........ 212 140 - 17 369
Seattle Coffee.. 57 11 2 1 71
Chesapeake...... 4 103 - - 107
------- ---------- -------- ---------- -----
Total...... 935 1,768 2 533 3,238
======= ========== ======== ========== -----
The Company is also engaged in the business of selling premium brand
coffees through wholesale and retail distribution channels. In addition, the
Company has a small manufacturing plant that produces gas fryers and other
custom-fabricated restaurant equipment for sale to Company-operated and
franchised chicken restaurants and to other restaurant operators.
The Company's principal executive offices are located at Six Concourse
Parkway, Suite 1700, Atlanta, Georgia 30328-5352 and its telephone number is
(770) 391-9500.
1
BRAND PROFILES
The Company franchises and operates restaurants, bakeries and cafes
catering to different segments of the QSR industry.
POPEYES CHICKEN AND BISCUITS. Popeyes Chicken and Biscuits was founded in
New Orleans in 1972 and is the market leader in the Cajun segment of the QSR
industry. With 1,292 restaurants worldwide as of December 27, 1998, Popeyes was
the second largest quick-service chicken restaurant chain in 1998, in terms of
sales. System-wide sales for fiscal year 1998 totaled $954.3 million. Popeyes
specialty menu item is fresh, hand-battered, bone-in fried chicken sold in two
flavors--New Orleans Spicy(TM) and Louisiana Mild(TM). Popeyes chicken is
complemented with a wide assortment of signature Cajun cuisine side dishes,
including red beans and rice, Cajun rice, Cajun fries and fresh buttermilk
biscuits. Popeyes is positioned as a premium fried chicken for customers who
seek its full flavor and specialty blend of seasonings and spices. Popeyes is
also known for its unique items that complement its core menu, including its
Louisiana Legends (TM) menu of jambalaya, crawfish etoufee' and chicken and
seafood gumbo. Popeyes spicy fried chicken and other Cajun menu offerings have
also proven to be popular in Far East countries. Popeyes restaurants are
generally found in urban areas in traditional stand-alone locations, as well as
in non-traditional formats such as airports and other travel centers and
supermarkets.
CHURCHS CHICKEN. Churchs Chicken, founded in San Antonio, Texas in 1952, is
one of the United States' oldest QSR chains and as of December 27, 1998 had
1,399 restaurants worldwide, making Churchs the second largest quick-service
chicken restaurant chain, in terms of number of outlets. Total system-wide sales
for fiscal year 1998 totaled $755.1 million. Churchs restaurants focus on
serving traditional Southern fried chicken in a simple, no frills restaurant
setting. Churchs menu items also include other Southern specialties including
fried okra, coleslaw, mashed potatoes and gravy, corn on the cob and honey
butter biscuits. Churchs is positioned as a value-oriented brand, providing
simple, traditional meals to price conscious consumers. Churchs restaurants are
traditionally found in urban areas where their reputation as a "neighborhood"
restaurant has been established. With its small footprint and a simple operating
system, Churchs is rapidly expanding into non-traditional formats such as
convenience stores, grocery stores and co-branding locations. Internationally,
Churchs has been very popular in the Far East, operating under the brand name
Texas Chicken(TM).
CINNABON. On October 15, 1998, the Company acquired Cinnabon International,
Inc. ("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. The Company acquired CII for $64.0
million in cash. Founded in Seattle, Washington in 1985, Cinnabon International,
Inc. is the leading cinnamon roll bakery retailer in North America. Located in
high traffic shopping malls, airports, train stations, travel plazas and
supermarkets, Cinnabon bakeries serve fresh cinnamon rolls made with Indonesian
cinnamon and topped with a sweet, rich cream cheese-based frosting. Cinnabon has
built a reputation for offering fresh, aromatic, oven-hot cinnamon rolls at
affordable prices. Continually evolving and improving since
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the original Cinnabon opened in Seattle in 1985, today's product offerings are
built upon the foundation recipe begun by "CinnaMom" Jerilyn Brusseau. After
nine arduous months of testing and re-testing more than 200 recipes, Jerilyn
invented the original Classic Roll. The Classic Roll laid the foundation for
Cinnabon's high standards and commitment to quality and freshness. Some of the
Company's successful new product offerings include the Pecanbon and the
Berrybon. In addition to the cinnamon roll related products, the Company offers
a variety of proprietary beverages including the Mochalatta Chill and Vareva
Orange Juice.
SEATTLE COFFEE. On March 18, 1998, the Company acquired all of Seattle
Coffee Company's ("SCC") common stock for an adjusted purchase price of
approximately $68.8 million plus the assumption of approximately $4.8 million of
debt. Seattle Coffee Company was created as a result of combining Seattle's Best
Coffee, Inc. and Torrefazione Italia, Inc. in May 1994. Seattle's Best Coffee is
one of the oldest companies in the specialty coffee business in the United
States. Currently, SCC has more than 5,000 wholesale accounts, 59 Company-
operated cafes and twelve franchised cafes.
Founded by Jim Stewart in 1969 in Coupeville on Whidbey Island, Washington,
the coffee roasting operation was moved to a store in Seattle in 1971. In 1983,
the first Stewart Brothers Coffee retail store was opened in Bellevue Square, a
regional mall and management adopted a strategy of using retail stores to
promote the brand name and drive wholesale sales. This strategy has remained
basically unchanged to the present. SCC's brand name was changed from Stewart
Brothers Coffee to Seattle's Best Coffee ("SBC") in the 1980s, after being
honored by Seattle's leading chefs as "Seattle's best coffee." SBC markets
several "coffee house blends" under names such as Seattle's Best Blend, Post
Alley, Saturday's, Grand Central and Henry's. Each blend has a unique flavor
profile, allowing SBC to meet a full range of taste preferences.
Torrefazione Italia ("TI") was founded in 1986 by Umberto Bizzarri and Dawn
Zervas. Like SBC, TI has opened retail locations to support and build brand
awareness for its primary business of wholesaling premium brand coffees. TI
presents a classic Italian coffee experience. TI coffees are positioned at the
highest end of the quality and price range and are marketed with an Italian
image. With names such as Venezia, Milano, Perugia and Napoli, these coffees are
the creations of the Bizzarri family. The Italian heritage is enhanced by
serving TI coffees in hand-painted ceramics imported from Deruta, Italy. The TI
cafes project the brand's European flavor and 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 classic music.
CHESAPEAKE. On May 5, 1997, the Company acquired all of the intangible
assets of the franchise business of Chesapeake from The American Bagel Company.
Located primarily in Washington, D.C., Maryland and Virginia, Chesapeake
operates four Company-operated bagel bakeries and franchises 103 bagel bakeries.
System-wide sales for the year totaled $61.5 million in 1998. Chesapeake bagel
bakeries offer a variety of freshly made items, including a wide assortment of
bagels and other baked goods,
3
sandwiches, salads, fountain drinks and specialty coffees. Several of the
restaurants have viewing areas that allow customers to experience the bagel
making process. The acquisition of Chesapeake gives the Company a presence in
the bagel and sandwich segment of the QSR industry.
WHOLESALE OPERATIONS
SEATTLE COFFEE. Seattle Coffee roasts and blends specialty coffees in its
28,000 square foot automated roasting facility on Vashon Island, near Seattle.
Management believes that the roasting and packaging facility may be one of the
most technically advanced in the U.S., for its capacity. Seattle Coffee selects
its coffee beans from the best quality Arabica beans from the finest growing
regions of the world, which have been prepared by growers and producers who take
great care with their coffees. Seattle Coffee is one of a few specialty coffee
roasters in the U.S. that travels to the producing countries to purchase green
coffee beans. Management believes this buying strategy will be increasingly
important to ensure supply of the highest quality green beans, as the demand for
specialty coffee expands in the U.S. and around the world.
Seattle Coffee's wholesale sales are made primarily to other food service
retailers, supermarkets and to its own coffee cafes. Food service wholesale
sales are targeted to such food service providers as hotel chains, fine
restaurants, specialty coffee retailers, espresso carts, delis, and theaters,
among others. Seattle Coffee has opened 14 regional offices to support the
expansion of its wholesale food service sales. Seattle Coffee has been
successful in initiating strategic alliances with multi-market retailers such as
Books-A-Million, Eddie Bauer, Mrs. Fields Cookies and Albertson's Supermarkets.
In addition, Alaska Airlines recently announced that it will serve Seattle's
Best Coffee on all of its flights beginning in April, 1999.
Seattle's Best Coffee whole bean bulk and pre-packaged coffee is
distributed to supermarkets throughout the Pacific Northwest and other parts of
the country. The brand has achieved a high degree of penetration in the Pacific
Northwest with settings in most major supermarkets, including QFC, Safeway,
Albertson's and others. SCC initiated the entry of Torrefazione Italia into
supermarkets in late 1995 and the brand is now carried in selected high-end
chains and independents in Western Washington and Oregon. The prospects for
growth in the supermarket channel appear to be significant. Management believes
that the increasing presence of its brands in retail cafes and key food service
accounts around the country will, in turn, stimulate opportunities for long-term
growth of bean sales through supermarkets. Seattle Coffee operates 14 regional
wholesale offices throughout the U.S. and one in Canada.
MANUFACTURING OPERATIONS
ULTRAFRYER SYSTEMS. The Company's Ultrafryer Systems ("Ultrafryer")
division (f.k.a. Far West Products) is a manufacturer of restaurant equipment
and is located in San Antonio, Texas. Ultrafryer's focus is to provide
equipment for Company-operated
4
and franchised Popeyes and Churchs restaurants domestically and internationally,
as well as other QSR customers. Ultrafryer's main product is the Ultrafryer(TM)
gasfryer.
RESTAURANT LOCATIONS
As of December 27, 1998, the Company's 3,238 systemwide restaurants were
located in 47 states, the District of Columbia and 24 foreign countries.
POPEYES. Popeyes restaurants are located in 39 states, the District of
Columbia and 18 foreign countries. The 171 Company-operated Popeyes restaurants
are located in the states of Texas, Louisiana, Georgia, North Carolina and South
Carolina. Over 70% of the 899 domestic franchised Popeyes restaurants are
located in the states of Texas, Louisiana, Florida, California, Illinois,
Maryland, Mississippi and Georgia. Over 65% of the 222 international franchised
Popeyes restaurants are located in Korea.
CHURCHS. Churchs restaurants are located in 29 states and nine foreign
countries. The 491 Company-operated Churchs restaurants are concentrated
primarily in the states of Texas, Louisiana, Georgia, Oklahoma, Alabama,
Florida, Mississippi and Arizona. Almost 65% of the 615 domestic franchised
Churchs restaurants are located in Texas, California, Louisiana, Georgia,
Florida, Michigan, New York and Illinois. Over 95% of the 293 international
franchised Churchs restaurants are in Canada, Puerto Rico, Indonesia, Taiwan and
the Philippines.
CINNABON. Cinnabon bakery cafes are located in 40 states and three foreign
countries. The 212 Company-operated Cinnabon bakeries are heavily concentrated
in the states of California, Washington, Florida, Illinois, Ohio, Texas,
Massachusetts, Michigan and Pennsylvania. The 140 domestic franchised Cinnabon
bakeries are heavily concentrated in the states of Minnesota, Massachusetts,
Illinois, Arizona, California, Nevada, New Jersey and New York. The 17
international franchised Cinnabon restaurants are open in Canada, Mexico and
Saudi Arabia.
SEATTLE COFFEE. Seattle Coffee cafes are located in eight states and two
foreign countries. The 57 Seattle Coffee domestic Company-operated cafes are
located primarily in the states of Washington, Oregon, California and Illinois.
There are two Seattle Coffee Company-operated cafes in Canada. The 11 franchised
Seattle Coffee cafes are located primarily in Washington and Oregon. There is
one international franchised Seattle Coffee cafe in Saudi Arabia.
CHESAPEAKE. Chesapeake bagel bakeries are located in 23 states and the
District of Columbia. The four Company-operated Chesapeake bagel bakeries are in
the states of Georgia and Maryland. The 103 franchised Chesapeake bagel bakeries
are concentrated primarily in Virginia, Maryland, Pennsylvania, Florida and the
District of Columbia.
5
STRATEGY
GLOBAL STRATEGY. The Company has adopted a global strategy to increase
revenues and profits by (i) the franchise development of its existing Popeyes,
Churchs, Cinnabon, Seattle Coffee and Chesapeake brands and (ii) the multiple-
channel distribution of specialty coffee products, penetrating both at-home and
away-from-home consumption. The Company's strategy is to (i) deliver world class
service and support to its franchisees by capitalizing on the Company's size,
state-of-the-art technology and leadership position, (ii) promote franchisee
development of traditional and non-traditional formats in new and existing
markets, (iii) provide new and existing franchisees with investment
opportunities in high value/high growth branded concepts and (iv) expand
wholesale and retail channels of distribution for its specialty coffees. The
Company believes that by following this strategy it will become Franchisor of
Choice(TM) which, when combined with the Company's market leadership position,
superior brand awareness, strong franchisee relationships and expanding channels
of distribution will result in continued growth.
INCREASE DOMESTIC FRANCHISED RESTAURANTS, BAKERIES AND CAFES. The Company
believes that significant opportunities exist to increase the number of domestic
franchised restaurants, bakeries and cafes operated by both new and existing
franchisees and that growth through franchising can provide significant
additional revenue growth at relatively low levels of capital expenditures by
the Company. The Company intends to target restaurant growth in markets where it
has or can achieve sufficient penetration to justify television advertising
because sales at restaurants, bakeries and cafes in the Company's media
efficient markets are generally 5% to 10% higher than sales in non-media
efficient markets. The number of domestic franchised restaurants, bakeries and
cafes has increased from approximately 990 at the beginning of 1993, to 1,768 at
December 27, 1998. Domestic franchised restaurant openings during fiscal year
1998 are as follows:
Fiscal Year
1998
-----------
Popeyes............. 83
Churchs............. 51
Cinnabon............ 3
Seattle Coffee...... 1
Chesapeake.......... 10
-----------
Total........... 148
===========
INCREASE INTERNATIONAL FRANCHISED RESTAURANTS, BAKERIES AND CAFES.
Management believes that international expansion is an attractive growth
opportunity due to (i) advantageous per unit economics, resulting largely from
lower food and/or labor costs and less QSR competition abroad, (ii) foreign
economies with an expanding group of QSR consumers and (iii) well established
markets for quick-service restaurants, bakeries and cafes in a substantial
number of countries around the world. The Company's international operations
have increased from 172 franchised restaurants in 14 foreign
6
countries at the beginning of 1993, to 533 franchised restaurants, bakeries and
cafes in 24 foreign countries at December 27, 1998. Additionally, commitments to
develop international franchised restaurants have risen from 161 at the
beginning of 1993, to 815 at December 27, 1998. International franchised
restaurant openings during fiscal year 1998 are as follows:
Fiscal Year
1998
-----------
Popeyes.............. 46
Churchs.............. 25
Cinnabon............. 2
Seattle Coffee....... 1
-----------
Total............. 74
===========
INCREASE SPECIALTY COFFEE WHOLESALE BUSINESS. The Company's goal is to
develop Seattle's Best Coffee and Torrefazione Italia into nationally recognized
brand names in the premium segment of the specialty coffee industry. Quality
restaurants, hotels, offices, specialty retailers, clubs, universities and other
places where people consume food and beverages are now potential outlets for
specialty coffee. Supermarkets will remain the dominant source of coffee for
home consumption and specialty coffee's share of this market is expanding
rapidly. Management anticipates significant growth in specialty coffee
distribution through retail, wholesale food service and grocery over the next
few years.
CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to
aggressively pursue selected growth opportunities by (i) expanding its existing
brands to new domestic and international markets, (ii) promoting the development
of new points of distribution, (iii) expanding the channels of distribution for
its specialty coffees and (iv) acquiring additional branded concepts to provide
franchisees with a broad range of investment opportunities, thereby generating a
larger and more diversified stream of franchise revenues to the Company. These
initiatives include the following:
. NON-TRADITIONAL FORMATS. In response to new marketing opportunities
and consumer demand, the Company intends to continue to promote the
expansion of the number and type of non-traditional formats from which
it sells Popeyes, Churchs, Chesapeake, Cinnabon and Seattle Coffee
food products. In addition to the traditional stand-alone models, the
Company has franchised and opened Popeyes, Churchs, Cinnabon, Seattle
Coffee and Chesapeake restaurants, bakeries and cafes within community
shopping plazas, convenience stores, mall food courts, airports and
other transportation centers and grocery stores.
. CO-BRANDING INITIATIVES. The Company intends to selectively enter into
co-branding arrangements in which Popeyes and Churchs restaurants
share facilities with other QSRs. Management believes that co-branding
represents an attractive revenue growth opportunity that provides
brand
7
awareness in new markets and faster opening times (as restaurants are
constructed within existing QSR facilities), together with reduced
costs of entry and lower ongoing capital expenditures. The Company has
entered into several such arrangements including franchising Churchs
restaurants in 91 Cara Operations Limited Harvey's hamburger
restaurants in Canada and in 76 White Castle hamburger restaurants
throughout the Midwest, Southeast and Northeast.
. NEW DISTRIBUTION CHANNELS. Management intends to aggressively pursue
new and expanded distribution channels for its premium coffee
products. Marketing efforts will be aimed at developing key accounts
with such food service providers as espresso carts, quality
restaurants, hotels, independent coffee cafes, delis, theaters,
colleges, corporate offices and general merchandise retailers.
Marketing efforts will also be aimed at developing strategic alliances
with larger hotel chains, quality restaurant chains and specialty
retailers doing business in multiple regions or on a national basis.
Management believes that significant opportunities exist to expand its
distribution channels into regional and national supermarkets.
. NEW BRANDED CONCEPTS. Management has identified and acquired
additional high value/high growth brands which it believes will
benefit from the Company's operating efficiency, management
experience, state-of-the-art technology, service commitment to
franchisees and shared administrative infrastructure. In line with
this strategy, in May 1997 the Company acquired all of the intangible
assets relating to the franchise business of Chesapeake Bagel. In
March 1998, the Company acquired Seattle Coffee Company and its two
specialty coffee brands Seattle's Best Coffee and Torrefazione Italia.
Further, in October 1998, the Company acquired Cinnabon International.
Management currently plans to focus on integrating and growing these
concepts but intends to continue to seek out additional high
value/high growth brands to acquire, operate and franchise in the
future.
INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. The
Company's customized management information systems, typically not affordable by
smaller QSR chains, provide both the Company and its franchisees with the
ability to quickly capitalize on restaurant sales enhancement and profit
opportunities. The Company utilizes its management information systems to (i)
minimize waste and control labor costs, (ii) effectively manage inventory and
(iii) analyze product mix and various promotional programs using point-of-sale
information. In 1998, management launched AFC Online, an intranet for
franchisees that provides operational support, a restaurant development roadmap,
a business planning template, marketing information and certain other relevant
information on a 24 hours a day, seven days a week basis.
MAINTAIN HIGH QUALITY PRODUCTS, SUPERIOR CUSTOMER SERVICE AND STRONG
COMMUNITY RELATIONS. The Company seeks to ensure overall customer satisfaction
8
through consistency in food quality, service and restaurant appearance. The
Company maintains rigorous and ongoing quality control procedures over suppliers
and distributors to ensure that its product specifications are maintained. In
addition, the Company has taken an important leadership role in the
neighborhoods and communities it serves. Through its involvement in Habitat for
Humanity, the United Negro College Fund and the Hispanic Association of Colleges
and Universities, among others, the Company has established a meaningful
presence in the local communities it serves, while building customer loyalty and
brand awareness.
FRANCHISOR OF CHOICE(TM). The Company has adopted the Franchisor of
Choice(TM) global strategy, which will be implemented by (i) promoting
distinctly positioned brands, currently Popeyes, Churchs, Cinnabon, Seattle's
Best Coffee, Torrefazione Italia and Chesapeake with other branded concepts to
be acquired in the future, (ii) developing multi-unit development territories,
(iii) providing high quality service and support to franchisees, (iv) providing
franchisees with alternative formats in innovative market settings, (v)
redesigning business processes to provide additional support to franchisees,
including a multi-million dollar investment in new technology, (vi) eliminating
barriers to growth for existing and new franchisees through new financial and
real estate support mechanisms and (vii) providing on-site or field support
including site selection, construction expertise, multi-national supply and
distribution, marketing, operations and training.
SITE SELECTION
The Company has an extensive domestic site selection process for the
establishment of new Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake
restaurant, bakery and cafe locations, commencing with an overall market plan
for each intended area of development compiled by the Company and the relevant
area developer, if any. The Company emphasizes free-standing pad sites and end-
cap locations with ample parking and easy dinner-time access from high traffic
roads for its Popeyes and Churchs brands. Cinnabon, Seattle Coffee and
Chesapeake brands emphasize mall food courts, in-line shopping centers,
transportation facilities and office buildings.
The Company's involvement in the international site selection process is
less significant due to the relative size and sophistication of the Company's
international franchisees, who independently conduct extensive site
investigations. International sites are often located in highly concentrated
urban areas and are built with a multi-floor layout to accommodate the higher
percentage of dine-in customers.
FRANCHISE DEVELOPMENT
The Company's global strategy includes the opening of substantially all new
restaurants, bakeries and cafes through franchising additional restaurants,
bakeries and cafes to new and existing franchisees. The Company enjoys strong
relationships with its franchisees as a result of its ongoing efforts to (i)
develop Popeyes, Churchs, Cinnabon
9
and Seattle Coffee globally and Chesapeake in the U.S. by investing capital to
re-image and renovate Company-operated restaurants in each of the systems, (ii)
provide strong operational, marketing and technological support to franchisees,
(iii) deliver operating efficiencies and economies of scale to its franchisees
and (iv) promote the expansion of points of distribution to non-traditional
formats and new markets for existing brands, and by acquiring and franchising
high value/high growth branded concepts.
DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide
for the development of a specified number of restaurants, bakeries and cafes
within a defined domestic geographic territory in accordance with a schedule of
restaurant opening dates. Development schedules generally cover three to five
years and typically have benchmarks for the number of restaurants, bakeries and
cafes to be opened and in operation at six-month to twelve-month intervals. Area
developers currently pay a development fee of $10,000 for the first restaurant
to be developed and $5,000 for each additional restaurant to be developed under
the same development agreement. Such development fees are non-refundable and
paid when the area development agreement is executed.
INTERNATIONAL DEVELOPMENT AGREEMENTS. The Company enters into development
agreements with qualifying parties to develop Popeyes, Churchs, Cinnabon or
Seattle Coffee franchised restaurants, bakeries and cafes in jurisdictions
outside of the United States ("International Development Rights"). International
Development Rights may include one or more countries or limited geographic areas
within a particular country. The terms of the development agreements for
International Development Rights are, in most respects, similar to domestic
development agreements. International development agreements also require a pre-
payment of a portion of the franchise fee for each franchised restaurant to be
developed under the agreement. International development agreements also include
additional provisions necessary to address the multi-national nature of the
transaction (including foreign currency exchange, taxation matters and
international dispute resolution provisions) and are also subject to
modifications necessary to comply with the requirements of applicable local
laws, such as laws relating to technology transfers, export/import matters and
franchising.
FRANCHISE AGREEMENTS. Once a site has been approved by the Company and the
property has been acquired by the developer either by purchase or lease, the
Company and the area developer enter into a franchise agreement under which the
area developer becomes the franchisee for the specific restaurant to be
developed at such site. Current franchise agreements typically provide for
payment of a franchise fee of $15,000 per restaurant. Franchise fees for mass
merchandise locations (including department stores and supermarkets) are
generally $10,000 for the first location and $5,000 for each additional mass
merchandise location under the same development agreement. In addition, the
Popeyes and Churchs franchise agreements require franchisees to pay a 5% royalty
on net restaurant sales and a 3% (with respect to Popeyes) and 4% (with respect
to Churchs) national advertising fund contribution (reduced to a maximum of 1%
if a local advertising co-operative is formed). The Cinnabon franchise
agreements require franchisees to pay a 5% royalty on net restaurant sales and a
1.5% national advertising
10
fund contribution. Franchise agreements for Seattle Coffee franchisees require a
3% royalty on net restaurant sales and a 2% national advertising fund
contribution. The Chesapeake franchise agreements require franchisees to pay a
4% royalty on net restaurant sales and a 1% to 2% national advertising fund
contribution. Certain of the Company's older franchise and area development
agreements provide for lower royalties and reduced franchise and area
development fees. Such older forms of agreements constitute a decreasing
percentage of all franchise agreements.
All of the Company's franchise agreements require that each restaurant
operates in accordance with the operating procedures, adheres to the menu
established by the Company and meets applicable quality, service and cleanliness
standards. The Company may terminate the franchise rights of any franchisee who
does not comply with such standards. The Company is specifically authorized to
take accelerated action if any franchised restaurant presents a health risk. The
Company believes that maintaining superior food quality, a clean and pleasant
environment and excellent customer service are critical to the reputation and
success of the Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake systems
and it intends to aggressively enforce applicable contractual requirements.
Franchisees may contest such terminations.
The terms of international franchise agreements are substantially similar
to domestic franchise agreements, except that such agreements may be modified to
reflect the multi-national nature of the transaction and to comply with the
requirements of applicable local laws. In addition, royalty rates may differ
from domestic franchise agreements due to the relative size and sophistication
of international franchisees. The international developer is required to
partially pre-pay a franchise fee up to $30,000 at the time the development
agreement is entered into, along with a development fee up to $10,000 for each
development commitment.
TURNKEY DEVELOPMENT. In order to expedite development of domestic
franchised restaurants, the Company may build restaurants in certain markets,
which will be subsequently sold to qualifying franchisees as franchised
restaurants ("Turnkey Units"). In 1997, the Company entered into an agreement
with Banco Popular De Puerto Rico to provide up to $15 million in revolving
construction financing to AFC and permanent financing to qualifying franchisees
for these Turnkey units. As of December 27, 1998, the Company has eleven turnkey
sites in various stages of development.
MARKETING AND COMMUNITY ACTIVITY
Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake products are
marketed to their respective customer bases using a predominantly three-tiered
marketing strategy. First, electronic media (local TV and radio) create
awareness for the products and spark consumer interest in particular product
offerings. Second, print media (newspaper ads, free-standing inserts and direct
mail) generate trial by offering a purchase incentive--often a coupon--to buy a
new product or promotional item. Finally, signage and point-of-purchase
materials at Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake
restaurants, bakeries and cafes support the promotional activity.
11
Each of the brands offers consumers a new program each month to maintain
consumer product interest. New product introductions and "limited time only"
promotional items also play major sales building roles and create regular repeat
customers.
Both franchised and Company-operated Popeyes, Churchs, Cinnabon, Seattle
Coffee and Chesapeake restaurants, bakeries and cafes contribute to a national
advertising fund to pay for the development of marketing materials. Franchised
and Company-operated Popeyes, Churchs and Chesapeake restaurants and bakeries
also contribute to local advertising funds to support programs in their local
markets. For the fiscal year ended December 27, 1998, the Company contributed
approximately $21.7 million to these various advertising funds.
AFC is also heavily involved in community activities and support programs
that often have an educational theme. Through The AFC Foundation, Inc., a non-
profit foundation, the Company has sponsored and helped construct 200 homes
worldwide through Habitat For Humanity, a non-profit sponsor of housing
construction for the poor. In addition, the Company supports the United Negro
College Fund and the Hispanic Association of Colleges and Universities with
promotional fund raisers. The Company also sponsors Adopt-A-School programs.
COMPETITION
The restaurant industry, and particularly the quick service restaurant
("QSR") segment, is intensely competitive with respect to price, quality, name
recognition, service and location. Other QSR competitors include chicken,
hamburger, pizza, Mexican, sandwich and Chinese food QSRs, other purveyors of
carry-out food and convenience dining establishments, including national
restaurant chains. Numerous well-established QSR competitors possess
substantially greater financial, marketing, personnel and other resources than
AFC. In addition, the QSR industry is characterized by the frequent introduction
of new products, accompanied by substantial promotional campaigns. AFC must
respond to various factors affecting the restaurant industry, including changes
in consumer preferences, tastes and eating habits, demographic trends and
traffic patterns, increases in food and labor costs, competitive pricing and
national, regional and local economic conditions. In recent years, a number of
companies in the QSR industry have introduced products, including non-fried
chicken products, which were developed to capitalize on a growing consumer
preference for food products which are, or are perceived to be, healthful,
nutritious, low in calories and low in fat content. It can be expected that AFC
will be subject to increasing competition from companies whose products or
marketing strategies address these consumer preferences. There can be no
assurance that consumers will continue to regard AFC's products favorably, as
compared to such competitive products, or that AFC will be able to continue to
compete successfully in the QSR marketplace. In addition, AFC's chief
competitors in the chicken segment of the QSR industry, KFC Corporation ("KFC"),
and in the specialty coffee business, Starbucks, are larger, better capitalized
and have greater access to financing at favorable rates, all of which may affect
AFC's competitive abilities.
12
Chesapeake bagel bakeries and Cinnabon bakeries compete with other QSR's,
bagel bakeries and traditional bakeries in the bagel and cinnamon roll business.
While national chains such as Einstein/Noah Bagels, Big City Bagels and others
compete directly with the Company for the sale of bagels and other bakery
products, there are few direct competitors in cinnamon rolls. Cinnabon is one of
the leaders in the cinnamon roll segment of the QSR business and is the only
national cinnamon roll retailer in North America.
SCC's whole bean coffees compete directly with specialty coffees sold at
retail through supermarkets, specialty retailers, and a growing number of
specialty coffee stores. SCC's coffee beverages compete directly with all
restaurant and beverage outlets that serve coffee and a growing number of
espresso kiosks, carts, and coffee cafes. Both SCC's whole bean coffees and its
coffee beverages compete indirectly with all other coffees on the market,
including specialty retail companies such as Starbucks, and conventional coffee
from several large companies such as Kraft General Foods, Procter & Gamble, and
Nestle.
SUPPLIERS
Franchisees are generally required to purchase all ingredients, products,
materials, supplies, and other items necessary in the operation of their
businesses solely from suppliers who (i) demonstrate, to the continuing
satisfaction of the Company, the ability to meet the Company's standards and
specifications for such items, (ii) possess adequate quality controls and
capacity to supply franchisees' needs promptly and reliably and (iii) have been
approved in writing by the Company.
SUPPLY CONTRACTS. Notwithstanding the above, Popeyes and Churchs Company-
operated restaurants are obligated by various agreements to serve certain Coca-
Cola(R) or Dr Pepper(R) beverages exclusively. The Company also has an agreement
with Diversified Foods and Seasonings, Inc. ("Diversified"), which terminates in
March 2029, under which the Company is required to purchase certain proprietary
products made exclusively by Diversified. Moreover, Diversified is the sole
supplier of certain proprietary products for the Popeyes system. Diversified
sells only to Company approved distributors who in turn sell to franchised and
Company-operated restaurants. In the fiscal year ended December 27, 1998, the
Popeyes system purchased approximately $40.7 million of proprietary products
made by Diversified. The Popeyes and Churchs systems purchase fresh chicken from
14 suppliers from 33 plant locations.
With respect to SCC's wholesale operations, SCC's principal raw material is
green coffee beans. The Company typically enters 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. At December 27, 1998, the Company had commitments to
purchase approximately 5.3 million pounds of green coffee beans at a total cost
of approximately $7.7 million. The contract terms cover a period from January
1999 to September 1999. SCC purchases 50% of its green coffee beans from two
suppliers and purchases the remaining 50% from
13
15 other suppliers. To the extent the two major suppliers cannot meet SCC's
coffee orders, SCC has the option of ordering its coffee from the other fifteen
suppliers.
PURCHASING COOPERATIVES. Supplies are generally provided to franchised and
Company-operated restaurants in the Popeyes and Churchs systems pursuant to
supply agreements negotiated by Popeyes Operators Purchasing Cooperative
Association, Inc. ("POPCA") and Churchs Operators Purchasing Association, Inc.
("COPA"), respectively, each a not-for-profit corporation that was created for
the purpose of consolidating the collective purchasing power of the franchised
and Company-operated restaurants and negotiating favorable terms. COPA also
purchases certain ingredients and supplies for Cinnabon and Chesapeake
franchised and Company-operated restaurants, bakeries and cafes in order to
further leverage the collective buying power of AFC. Currently, the Company
purchases cinnamon for Cinnabon products from one supplier. The purchasing
cooperatives are not obligated to purchase, and do not bind their members to
commitments to purchase any supplies. Membership in each cooperative is open to
all franchisees. Since 1995, the Company's chicken restaurant franchise
agreements have required that each franchisee joins its respective purchasing
cooperative as a member. All Company-operated Popeyes and Churchs restaurants
are members of POPCA or COPA, as the case may be. Substantially all of the
Company's domestic chicken restaurant franchisees participate in POPCA or COPA.
SCC CAFES. SCC's Company-operated and franchised cafes purchase all their
coffee from SCC's wholesale distribution centers. The cafes purchase non-coffee
food and supply items from Unisource Worldwide, Inc., a large food service
supply distributor.
TRADEMARKS AND LICENSES
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including the
marks "Popeyes", "Popeyes Chicken and Biscuits", "Churchs", "Cinnabon World
Famous Cinnamon Roll", "Seattle's Best Coffee", "Torrefazione Italia",
"Chesapeake Bagel Bakery", "Ultrafryer" and each brand's logo utilized by the
Company and its franchisees in virtually all Popeyes, Churchs, Cinnabon, Seattle
Coffee and Chesapeake restaurants, bakeries and cafes domestically. The Company
also has trademark registrations pending for a number of additional marks,
including "Gotta Love It", "Day of Dreams", "Love That Chicken From Popeyes",
"New Age of Opportunity" and "Franchisor of Choice". In addition, the Company
has registered or made application to register the marks (or, in certain cases,
the marks in connection with additional words or graphics) in approximately 150
foreign countries, although there can be no assurance that any mark is
registrable in every country registration is sought. The Company considers its
intellectual property rights to be important to its business and actively
defends and enforces them.
FORMULA AGREEMENT. The Company has a perpetual formula licensing agreement,
as amended (the "Formula Agreement"), with Alvin C. Copeland, the former
14
owner of the Popeyes and Churchs restaurant systems, and Diversified, which
calls for the worldwide exclusive licensing to the Popeyes system of the spicy
fried chicken formula and certain other ingredients used in Popeyes products.
The Formula Agreement provides for monthly royalty payments of $237,500 until
April 1999 and, thereafter, monthly royalty payments of $254,166 until March
2029.
KING FEATURES AGREEMENTS. The Company currently has a number of domestic
and international agreements with The Hearst Corporation, King Features
Syndicate Division ("King Features") under which the Company has the exclusive
license to use the image and likeness of the cartoon character "Popeye" (and
certain companion characters such as "Olive Oyl") in connection with the
operation of franchised and Company-operated Popeyes restaurants worldwide.
Under such agreements, the Company is obligated to pay to King Features a
royalty of 0.1% of the first $1 billion of Popeyes systemwide sales and 0.05%
for the next $2 billion of such sales. The King Features agreements
automatically renew annually.
YEAR 2000 ISSUES
In the process of customizing the Company's management information systems,
the Company established procedures to ensure that its new systems were year 2000
compliant. In addition, during 1997 the Company formalized a plan to analyze all
of its financial and operating computer systems to ensure any corrective action
necessary to eliminate problems before the beginning of the year 2000. This plan
includes analyses of existing systems, new systems to be implemented in 1998 and
1999, systems used by its vendors and customers that are needed for the proper
functioning of the Company's systems and all other known Company processes that
use computer systems to function. While the analysis phase of the plan has not
been completed as of December 27, 1998, the Company believes that, with the
completion of its system upgrades, a significant portion of the potential year
2000 issues will be resolved. Although the analysis is not yet complete, the
Company believes that the cost, if any, to make other systems year 2000
compliant will not be material to its results of operations. See "Item 7.
Management's Discussion and Analysis - Year 2000".
EXPANSION; DEPENDENCE ON FRANCHISEES AND DEVELOPERS
The Company's global strategy will depend heavily on growing its franchise
operations. At December 27, 1998, the Company franchised 1,768 Popeyes, Churchs,
Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes
domestically and 533 Popeyes, Churchs, Cinnabon and Seattle Coffee restaurants,
bakeries and cafes internationally. The Company's success is dependent upon its
franchisees and the manner in which they develop and operate Popeyes, Churchs,
Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes. As the
Company expands it will also need to find new franchisees who are capable of
promoting the Company's strategy. The opening and success of franchised
restaurants, bakeries and cafes will depend on various other factors, including
the availability of suitable sites, the negotiation of acceptable
15
lease or purchase terms for new locations, permitting and regulatory compliance,
the ability to meet construction schedules, the financial and other capabilities
of the Company's franchisees and developers, the ability of the Company to
manage this anticipated expansion and hire and train personnel, and general
economic and business conditions. Not all of the foregoing factors are within
the control of the Company or its franchisees or developers.
INTERNATIONAL OPERATIONS
As of December 27, 1998, the Company franchised 533 restaurants, bakeries
and cafes to franchisees in 24 foreign countries and plans to expand its foreign
franchising program significantly in the future. There are no Chesapeake
operations outside the U.S. The Company currently operates two Seattle Coffee
cafes and a wholesale distribution center that are located in Canada. The
Company operates no other restaurants outside of the U.S. Included in the
Company's revenues are foreign franchise royalties and other fees that are
based, in part, on sales generated by its foreign franchised restaurants,
bakeries and cafes, including a significant number of franchised restaurants in
Asia. Therefore, the Company is exposed, to a limited degree, to changes in
international economic conditions and currency fluctuations. The Company has not
historically and did not at the end of 1998 maintain any hedges against foreign
currency fluctuations, although management entered into a foreign currency
hedging agreement in February 1999 with respect to the Korean Won. Losses
recorded by the Company during the past three years related to foreign currency
fluctuations have not been material to the Company's results of operations. For
fiscal years 1998, 1997 and 1996, royalties and other revenues from foreign
franchisees represented 1.9%, 2.4% and 2.4%, respectively, of total revenues of
the Company.
FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants, bakeries
and cafes. Multi-unit food service chains such as Popeyes, Churchs, Cinnabon,
Seattle Coffee and Chesapeake can also be adversely affected by publicity
resulting from food quality, illness, injury or other health concerns or
operating issues stemming from just one restaurant or a limited number of
restaurants. Dependence on frequent deliveries of fresh food products also
subjects food service businesses such as the Company to the risk that shortages
or interruptions in supply caused by adverse weather or other conditions could
adversely affect the availability, quality and cost of ingredients. In addition,
material changes in, or the Company's or its franchisees' failure to comply
with, applicable Federal, state and local government regulations, and such
factors as inflation, increased food, labor and employee benefits costs, such as
Federally-mandated increases in the minimum wage, regional weather conditions
and the unavailability of experienced management and hourly employees may also
adversely affect the food service industry in general and the Company's results
of operations and financial condition in particular.
16
FLUCTUATIONS IN COST OF CHICKEN
The Company's and its franchisees' principal raw material is fresh chicken.
For fiscal years ended December 27, 1998 and December 28, 1997, approximately
50% and 60%, respectively of the Company's restaurant cost of sales were
attributable to the purchase of fresh chicken. As a result, the Company is
significantly affected by increases in the cost of chicken, which can be
affected by, among other factors, the cost of grain, the price for other
alternative domestic meats and overseas demand for chicken products. Due to
extremely competitive conditions in the QSR industry, following increases in raw
material costs such as chicken, the Company has generally not raised retail
prices sufficiently to pass all such costs on to the consumer.
The market price for chicken changes on a weekly basis. While the Company's
purchase agreements with its fresh chicken suppliers in 1998 and prior generally
provided for a "ceiling", or highest price, and a "floor", or lowest price, that
the Company would pay for chicken over the contract term, the ceilings were
generally set at prices well above the current market price, exposing the
Company to a risk of price increases. Additionally, such supply contracts were
generally for one to two years, thereby exposing the Company to regular cost
increases if the price of fresh chicken continued to rise. In order (i) to
ensure favorable pricing for the Company's chicken purchases in the future, (ii)
to reduce volatility in chicken prices and (iii) to maintain an adequate supply
of fresh chicken, the Company has or will enter into two types of chicken
purchasing arrangements with its suppliers. The first of these contracts is a
grain-based "cost-plus" pricing arrangement that provides chicken prices based
upon the cost of feed grains, such as corn and soybean meal, plus certain agreed
upon non-feed and processing costs. The other contract is similar to the grain
based "cost-plus" arrangement but contains price provisions which limit how far
up or down prices may move in any year. Both contracts have terms ranging from
three to five years with provisions for certain annual price adjustments as
defined in the contracts.
AVAILABILITY AND COST OF GREEN COFFEE BEANS
The supply and prices of green coffee beans are volatile. Although most
coffee beans trade in the commodity market (the "C market"), coffee beans of the
quality sought by Seattle Coffee tends to trade on a negotiated basis at a
premium above the C market coffee pricing, depending upon the supply and demand
at the time of purchase. Availability and price can be affected by many factors
in producing countries, including weather and political and economic conditions.
17
INSURANCE
The Company carries property, liability, business interruption, crime, and
workers' compensation insurance policies, which it believes are customary for
businesses of its size and type. Franchisees are also required to maintain
certain minimum standards of insurance with insurance companies satisfactory to
the Company pursuant to their franchise agreements, including commercial general
liability insurance, workers' compensation insurance, all risk property and
casualty insurance and automobile insurance. Under the current form of franchise
agreement, such insurance must be issued by insurers approved by the Company.
SEASONALITY
The Company has historically experienced the strongest operating results at
Popeyes, Churchs and Chesapeake restaurants and bakeries during the summer
months while operating results have been somewhat lower during the winter
season. Cinnabon and Seattle Coffee have traditionally experienced the strongest
operating results during the Christmas holiday shopping season between
Thanksgiving and Christmas. Certain holidays and inclement winter weather reduce
the volume of consumer traffic at quick-service restaurants and may impair the
ability of certain restaurants to conduct regular operations for short periods
of time.
REGULATION
The Company is subject to various Federal, state and local laws affecting
its business, including various health, sanitation, fire and safety standards.
Newly constructed or remodeled restaurants, bakeries and cafes are subject to
state and local building code and zoning requirements. In connection with the
remodeling and alteration of the Company's restaurants, bakeries and cafes, the
Company 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 restaurants, bakeries and cafes in
particular areas.
The Company is also subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. A significant number of
the Company's food service personnel are paid at rates related to the Federal
minimum wage and increases in the minimum wage, including those recently enacted
by the Federal government, have increased the Company's labor costs.
Certain states and the Federal Trade Commission require franchisors such as
the Company to transmit specified disclosure statements to potential franchisees
before granting a franchise. Additionally, some states require franchisors to
register their franchise with the state before it may offer a franchise. The
Company believes that its Uniform Franchise Offering Circulars (together with
any applicable state versions or supplements) comply with both the Federal Trade
Commission guidelines and all
18
applicable state laws regulating franchising in those states in which it has
offered franchises. The Company is also subject to various Federal, state and
local laws regulating the discharge of pollutants into the environment. The
Company believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations as well as other applicable laws
and regulations governing its operations.
ENVIRONMENTAL MATTERS
Approximately 200 of the Company's owned and leased properties are known or
suspected to have been used by prior owners or operators as retail gas stations,
and a few of these properties may have been used for other environmentally
sensitive purposes. Many of these properties previously contained underground
storage tanks ("USTs") and some of these properties may currently contain
abandoned USTs. As a result of the use of oils and solvents typically associated
with automobile repair facilities and gas stations, it is possible that
petroleum products and other contaminants may have been released at these
properties into the soil or groundwater. Under applicable Federal and state
environmental laws, the Company, as the current owner or operator of these
sites, may be jointly and severally liable for the costs of investigation and
remediation of any such contamination. As a result, after an analysis of its
property portfolio, including testing of soil and groundwater at a
representative sample of its facilities, the Company believes it has accrued
adequate reserves for environmental remediation liabilities. The Company is
currently not subject to any administrative or court order requiring remediation
at any of its properties.
EMPLOYEES AND PERSONNEL
As of December 27, 1998, the Company employed approximately 2,805 full-time
salaried employees and approximately 15,274 full-time and part-time hourly
employees. Of the Company's full-time salaried employees, 130 are involved in
overseeing restaurant operations, 2,086 are involved in the management of
individual restaurants, bakeries and cafes and all remaining salaried employees
are responsible for corporate administration, franchise administration and
business development. None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that the dedication of its
employees is critical to its success, and that its relationship with its
employees is good.
19
ITEM 2. PROPERTIES
The Company either owns or leases the land and buildings for its Company-
operated restaurants. In addition, in certain circumstances, the Company owns or
leases land and buildings which it then leases or subleases to its franchisees
and third parties. While the Company expects to continue to lease many of its
sites in the future, the Company also may purchase the land and/or buildings for
restaurants to the extent acceptable terms are available. The majority of the
Company's restaurants are located in retail community shopping centers and
freestanding, well-trafficked locations.
Restaurants leased to the Company are typically leased under "triple net"
leases that require the Company to pay real estate taxes, maintenance costs and
insurance premiums and, in some cases, to pay percentage rent based on sales in
excess of specified amounts. Generally, the Company's leases have initial terms
of 20 years with options to renew for two additional five-year periods. Typical
leases or subleases by the Company to franchisees are triple net to the
franchisee, provide for a minimum rent, based upon prevailing market rental
rates, and have a term that usually coincides with the term of the franchise
agreement for the location, often being 20 years with renewal options. Such
leases are typically cross-defaulted against the corresponding franchise
agreement for that site.
The following table sets forth the locations by state of the Popeyes
Company-operated restaurants as of December 27, 1998:
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -------
Texas......................... 21 40 61
Louisiana..................... 3 36 39
Georgia....................... 2 44 46
North Carolina................ - 17 17
South Carolina................ - 8 8
-------- -------- -------
Total Popeyes............... 26 145 171
======== ======== =======
20
The following table sets forth the locations by state of the Churchs
Company-operated restaurants as of December 27, 1998:
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -----
Texas.......................... 151 96 247
Georgia........................ 34 17 51
Louisiana...................... 20 18 38
Alabama........................ 25 10 35
Arizona........................ 15 9 24
Florida........................ 22 2 24
Oklahoma....................... 17 2 19
Mississippi.................... 11 4 15
Tennessee...................... 13 1 14
New Mexico..................... 5 2 7
Missouri....................... 6 - 6
Arkansas....................... 4 1 5
Nevada......................... 2 2 4
Kansas......................... 2 - 2
-------- -------- -----
Total Churchs................ 327 164 491
======== ======== =====
The following table sets forth the locations by state of the SCC Company-
operated restaurants as of December 27, 1998:
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -----
Washington.................... - 27 27
California.................... - 10 10
Illinois...................... - 9 9
Oregon........................ - 5 5
Massachusetts................. - 3 3
Georgia....................... - 1 1
Texas......................... - 1 1
Virginia...................... - 1 1
-------- -------- -----
Total SCC.................. - 57 57
======== ======== =====
21
The following table sets forth the locations by state of the Cinnabon
Company-operated restaurants as of December 28, 1997:
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -------
California..................... - 46 46
Washington..................... - 24 24
Florida........................ - 15 15
Illinois....................... - 15 15
Ohio........................... - 12 12
Texas.......................... - 10 10
Massachusetts.................. - 9 9
Michigan....................... - 8 8
Pennsylvania................... - 8 8
Indiana........................ - 7 7
Wisconsin...................... - 7 7
New Jersey..................... - 6 6
Hawaii......................... - 4 4
Maryland....................... - 4 4
Nevada......................... - 4 4
Kentucky....................... - 3 3
North Carolina................. - 3 3
Oregon......................... - 3 3
Virginia....................... - 3 3
Georgia........................ - 2 2
Iowa........................... - 2 2
Missouri....................... - 2 2
New York....................... - 2 2
Tennessee...................... - 2 2
Alabama........................ - 1 1
Colorado....................... - 1 1
Connecticut.................... - 1 1
Delaware....................... - 1 1
Kansas......................... - 1 1
Montana........................ - 1 1
Nebraska....................... - 1 1
New Hampshire.................. - 1 1
New Mexico..................... - 1 1
South Carolina................. - 1 1
South Dakota................... - 1 1
------- ------- -------
Total Cinnabon............ - 212 212
======= ======= =======
22
The following table sets forth the locations by state of the Chesapeake
Company-operated restaurants as of December 27, 1998:
Land
Land and and/or
Building Building
Owned Leased Total
-------- -------- -----
Georgia...................... - 3 3
Maryland..................... - 1 1
-------- -------- -----
Total Chesapeake........ - 4 4
======== ======== =====
The Company's headquarters are located in approximately 102,000 square feet
of leased and subleased office space in Atlanta, Georgia. The leased space,
covering approximately 87,000 square feet, is subject to extensions through
2013, and the subleased space is subject to extensions through 2003. The
Company's Popeyes division relocated to another facility in Atlanta, Georgia on
July 1, 1998. The Company's Churchs division will be relocating to another
facility in Atlanta, Georgia in April 1999. The Company believes that its
existing headquarters provides sufficient space to support its current needs.
The Company's wholly-owned subsidiaries, SCC and Cinnabon both lease office
space in Seattle, Washington. SCC has four distribution facilities that service
SCC's coffee wholesale operations. Two of the distribution centers are located
in the Seattle, Washington area. The other two facilities are located in
Portland, Oregon and Chicago, Illinois. The Company's accounting and computer
facilities and its Ultrafryer Systems manufacturing facilities are located in
San Antonio, Texas and are housed in three buildings that are located on
approximately 16 acres of land owned by the Company.
Substantially all of the properties and assets of the Company are pledged
as collateral against the Company's bank credit facility (See Note 8 to the
Company's Consolidated Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
In July 1997, CP Partnership ("CP") filed a complaint against the Company
alleging patent infringement regarding the design of the proprietary gas fryer
manufactured by the Company's manufacturing division. This case was segregated
into a patent infringement claim and a contract claim. In August 1998, the Court
dismissed CP's patent infringement claim. CP has appealed this judgment. In
November 1998, the Company settled the contract claim for an immaterial amount.
It is management's belief that the final outcome of the patent infringement
claim will not have an adverse effect on the Company's consolidated financial
position or results of operations.
While the Company is party to a number of other pending legal proceedings
that have arisen in the ordinary course of its business, management does not
believe that the Company is a party to any pending legal proceeding, the
resolution of which would have a material adverse effect on the Company's
financial condition or results of operations.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of the
Company. As of March 29, 1999, the number of record holders of the Company's
common stock was 100.
The Company has not declared or paid cash dividends to its shareholders.
The Company anticipates that all of its earnings in the near future will be
retained for the development and expansion of its business and, therefore, does
not anticipate paying dividends on its common stock in the foreseeable future.
Declaration of dividends on the common stock will depend upon, among other
things, levels of indebtedness, future earnings, the operating and financial
condition of the Company, its capital requirements and general business
conditions. The agreements governing the Company's indebtedness contain
provisions, which restrict the ability of the Company to pay dividends on its
common stock. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
On October 15, 1998, the Company sold 2,795,703 shares of its common stock
to "qualified investors" who are existing shareholders and option holders at a
price of $7.75 per share. The Company received approximately $20.3 million in
cash and $1.3 million in notes receivable from certain shareholders and option
holders. All of these unregistered securities were issued by AFC pursuant to the
limited offering exception under Rule 506 of Regulation D. Cash proceeds from
the sale of stock was used to fund a portion of the purchase price to acquire
Cinnabon International, Inc. and to pay $1.0 million in stock issuance costs in
connection with the stock offering. The $1.0 million in stock issuance costs was
paid to Freeman Spogli and Co., Inc. ("FS"), an affiliate of the Company's
majority shareholder. A second affiliate of FS purchased the majority of shares
under this offering.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information for the Company for the periods and the dates indicated. The
balance sheet data and statement of operations data for the years ended December
25, 1994, December 31, 1995, December 29, 1996, December 28, 1997 and December
27, 1998 set forth below have been derived from the financial statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants. This selected historical consolidated financial information should
be read in conjunction with, and is qualified in its entirety by (i)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and (ii) the audited Consolidated Financial Statements for the
Company and the notes thereto, each of which is included elsewhere in this
report.
Year Ended (1)
------------------------------------------------------------------------
December 27, December 28, December 29, December 31, December 25,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
REVENUES:
Restaurant sales....................... $ 488,574 $ 403,285 $ 430,280 $426,707 $401,855
Franchise revenues..................... 66,606 64,055 51,336 47,916 41,581
Wholesale revenues..................... 36,411 - - - -
Manufacturing revenues................. 7,561 7,647 8,222 9,969 12,026
Other revenues......................... 9,939 8,766 8,005 8,320 8,252
----------- ------------ ------------ ------------ ------------
Total revenues........................ 609,091 483,753 497,843 492,912 463,714
COSTS AND EXPENSES:
Restaurant cost of sales............... 155,627 131,374 142,199 139,286 133,893
Restaurant operating expenses.......... 246,448 197,324 211,275 214,703 206,212
Wholesale cost of sales................ 18,466 - - - -
Wholesale operating expenses........... 8,313 - - - -
Manufacturing cost of sales............ 5,802 6,381 7,201 9,180 11,414
General and administrative............. 89,457 79,541 76,071 78,095 72,540
Executive compensation award (2)....... - - - 10,647 -
Depreciation and amortization.......... 46,078 33,803 30,904 28,665 25,438
Impairment of Chesapeake intangible.... 6,800 - - - -
Charges for restaurant closings........ 9,183 479 1,304 688 650
Provision for software write-offs...... 5,000 - - - -
Gain on sale of fixed assets from
AFDC transaction...................... - (5,319) - - -
----------- ------------ ------------ ------------ ------------
Total costs and expenses.............. 591,174 443,583 468,954 481,264 450,147
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS.................... 17,917 40,170 28,889 11,648 13,567
OTHER EXPENSES:...........................
Interest, net.......................... 30,786 20,645 15,875 23,444 19,172
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY LOSS........... (12,869) 19,525 13,014 (11,796) (5,605)
Income tax expense (benefit)........... (4,223) 8,525 5,163 (2,969) (553)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS...................... (8,646) 11,000 7,851 (8,827) (5,052)
Extraordinary loss, net of taxes (3)... - - (4,456) - -
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS)......................... (8,646) 11,000 3,395 (8,827) (5,052)
8% Preferred Stock dividends.............. - - 1,316 4,555 4,467
10% Preferred Stock dividends
payable in kind.......................... - 2,240 3,956 - -
Accelerated accretion of 8% Preferred
Stock discount upon retirement........... - - 8,719 - -
Accretion of 8% Preferred Stock discount.. - - 813 2,571 2,250
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCK.......................... $ (8,646) $ 8,760 $(11,409) $ (15,953) $(11,769)
============ ============ ============ ============ ============
25
Year Ended (1)
--------------------------------------------------------------------------
December 27, December 28, December 25, December 31, December 29,
1998 1997 1996 1995 1994
------------- ------------ ------------ ------------ ------------
OTHER FINANCIAL DATA:
EBITDA, as defined (4)..... $ 87,037 $ 74,017 $ 64,866 $ 55,342 $ 43,435
EBITDA margin (5).......... 14.3% 15.3% 13.0% 11.2% 9.4%
CASH FLOWS PROVIDED BY
(USED IN):
Operating activities.... 45,537 52,515 47,801 28,031 22,673
Investing activities.... (188,287) (35,782) (29,388) (20,114) (11,493)
Financing activities.... 126,852 (2,985) (12,806) (10,721) (17,530)
Cash capital expenditures (6)
Maintenance capital expenditures $ 6,059 $ 7,756 $ 6,010 $ 5,483 $ 5,050
Re-images and renovation 4,079 13,356 15,342 15,502 10,267
New restaurant development 13,749 4,588 3,215 2,272 1,999
Other 13,965 16,436 9,384 1,739 3,496
------------- ------------ ------------ ------------ ------------
Total cash capital expenditures $ 37,852 $ 42,136 $ 33,951 $ 24,996 $ 20,812
RATIO OF EARNINGS TO FIXED
CHARGES (7)............... - 1.64% 1.29% - -
BALANCE SHEET DATA:
Total assets............ $ 556,465 $ 380,002 $ 339,668 $ 328,645 $ 327,494
Total debt and capital lease
obligations............. 360,711 243,882 151,793 204,025 193,646
Mandatorily redeemable preferred
stock................... - - 59,956 46,468 43,897
Total shareholders
equity (deficit)....... 87,917 48,459 37,902 (21,665) (6,707)
RESTAURANT DATA (UNAUDITED) (8):
Systemwide restaurant sales (in
(thousands):
Popeyes................. $ 954,305 $ 853,078 $ 762,108 $ 710,840 $ 649,880
Churchs................. 755,074 723,988 675,996 647,746 590,261
Cinnabon................ 41,738 - - - -
Seattle Coffee.......... 24,887 - - - -
Chesapeake Bagel........ 61,474 50,878 - - -
------------- ------------ ------------ ------------ ------------
Total................... $ 1,837,478 $1,627,944 $1,438,104 $ 358,586 $1,240,141
============= ============ ============ ============ ============
Systemwide restaurant units:
Popeyes................. 1,292 1,131 1,021 964 907
Churchs................. 1,399 1,356 1,257 1,219 1,165
Cinnabon................ 369 - - - -
Seattle Coffee............. 71 - - - -
Chesapeake Bagel........ 107 155 - - -
------------- ------------ ------------ ------------ ------------
Total................... 3,238 2,642 2,278 2,183 2,072
============= ============ ============ ============ ============
Systemwide percentage
change
in comparable
restaurant sales (9):
Popeyes domestic........ 5.2% 3.6% 0.5% 1.2% 2.0%
Churchs domestic........ 4.6% 4.0% 4.6% 4.6% 5.1%
Popeyes international... (13.3)% 1.3% 4.3% 11.6% (2.2)%
Churchs international... (1.5)% 2.6% (2.1)% 0.9% 3.4%
Total commitments outstanding,
end of period (10) 1,757 1,715 1,319 1,083 1,047
(1) The company has a 52/53-week fiscal year ending on the last Sunday in
December, which normally consists of 13 four-week periods. The fiscal year
ended December 31, 1995 included 53 weeks of operations.
(2) During 1995, the Board of Directors granted a special award of $10.0 million
to the CEO of the Company and his designees contingent upon the happening of
certain events related to a recapitalization of the Company. See "Item 11.
Executive Compensation - Note (2)." The award became payable at the time of
the Recapitalization. This award was paid in 1996 in approximately 3.0
million shares of the Company's common stock valued at $3.317 per share, the
market value of the Company's common stock at the date of issuance. As a
result of the Recapitalization, certain
26
senior executive officers became fully vested in certain stock options
pursuant to the terms of the 1992 Stock Option Plan resulting in
recognition of $647,000 of compensation expense in 1995.
(3) The extraordinary loss recorded in fiscal 1996 represents the loss
associated with the prepayment of certain debt obligations of the Company,
net of related income tax effects.
(4) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for non-cash items related to gains/losses on asset
dispositions and write-downs, compensation expense related to stock option
activity (deferred compensation), the executive compensation award (see
Note 2 above) and non-cash officer notes receivable items related to the
executive compensation award. EBITDA, as defined, should not be construed
as a substitute for income from operations or as a better indicator of
liquidity than cash flow from operating activities, which is determined in
accordance with generally accepted accounting principles. EBITDA, as
defined, is included herein to provide additional information with respect
to the ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. In addition, management
believes that certain investors find EBITDA, as defined, to be a useful
tool for measuring the ability of the Company to service its debt. EBITDA,
as defined, is not necessarily a measure of the Company's ability to fund
its cash needs. See the Consolidated Statements of Cash Flows of the
Company and the related Notes to the Consolidated Financial Statements
thereto attached.
(5) EBITDA margin represents EBITDA, as defined, divided by total revenues.
(6) Capital expenditures (excluding expenditures funded through capital leases)
have been segregated into the following categories to provide additional
information:
. Maintenance capital expenditures-represents day to day expenditures
related to restaurant equipment replacements and general restaurant
capital improvements.
. Re-images and renovation-represents significant restaurant renovations
and upgrades pursuant to the Company's re-imaging and renovation
activities.
. New restaurant development-represents new Company-operated restaurant
construction and development.
. Other-represents capital expenditures at various corporate offices and
new restaurant equipment such as fryers and security systems.
(7) The Company had a deficiency of earnings to fixed charges for the fiscal
years December 25, 1994, December 31, 1995 and December 27, 1998 of
approximately $5,869,000, $12,284,000 and $13,139,000, respectively.
Earnings consist of income (loss) before taxes, plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest
expense, amortization of debt issuance cost and debt discount, preferred
stock dividend requirements and accretion (including related tax effects),
and one-third of rent expense on operating leases considered representative
of the interest factor attributable to rent expense.
(8) Represents restaurant sales for all franchised and Company-operated
restaurants. Sales information for franchised restaurants is as reported by
franchisees or, in some instances, estimated by the Company based on other
data, and is unaudited.
(9) Prior year sales figures for Cinnabon, Seattle Coffee, and Chesapeake are
not comparable since these acquisitions occurred during 1997 and 1998.
(10) Commitments represent commitments to open franchised restaurants, as set
forth in development agreements. On a historical basis, a number of such
commitments have not resulted in restaurant openings. There can be no
assurance that parties to development agreements will open their respective
number of restaurants.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. Such
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in any discussion of the Company's expected future performance or
operations, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that
these will be realized. Such performance could be materially affected by a
number of factors, including without limitation those factors set forth in the
"Item 1. Business" section in this filing.
ACQUISITIONS
CINNABON ACQUISITION
On October 15, 1998, the Company acquired Cinnabon International, Inc.
("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. Two hundred and eleven of the retail
cinnamon roll bakeries are Company-operated and are located within the United
States. In connection with the acquisition, CII became a wholly-owned
subsidiary of AFC through the merger of AFC Franchise Acquisition Corp. into CII
(the "Acquisition").
The Company acquired CII for $64.0 million in cash. The Company obtained
$44.7 million of the cash consideration from its 1997 Credit Facility, which was
amended to add a $50.0 million Tranche B term loan (see below). The remaining
$19.3 million cash consideration was funded with the proceeds from the sale of
approximately 2.8 million shares of AFC common stock to certain "qualified"
investors who are existing AFC shareholders and option holders. The shares were
sold at a price of $7.75 per share and net proceeds from the sale totaled
approximately $19.3 million.
RESULTS OF OPERATIONS
The following table presents selected revenues and expenses as a percentage
of total revenues for the Company's Consolidated Statements of Operations for
the fiscal years ended December 27, 1998, December 28, 1997 and December 29,
1996.
28
PERCENTAGE RESULTS OF OPERATIONS
Year Ended (1)
----------------------------------------------
December 27, December 28, December 29,
1998 1997 1996
------------ ------------ ------------
REVENUES:
Restaurant sales....................... 80.3 % 83.4 % 86.4 %
Franchise revenues..................... 10.9 13.2 10.3
Wholesale revenues..................... 6.0 - -
Manufacturing revenues................. 1.2 1.6 1.7
Other revenues......................... 1.6 1.8 1.6
-------- -------- -------
Total revenues........................ 100.0 % 100.0 % 100.0 %
-------- -------- -------
COSTS AND EXPENSES:
Restaurant cost of sales (1)........... 31.9 % 32.6 % 33.0 %
Restaurant operating expenses (1)...... 50.4 48.9 49.1
Wholesale cost of sales (2)............ 50.7 - -
Wholesale operating expenses (2)....... 22.8 - -
Manufacturing cost of sales (3)........ 76.7 83.4 87.6
General and administrative............. 14.7 16.4 15.3
Depreciation and amortization.......... 7.6 7.0 6.2
Impairment of Chesapeake intangible.... 1.1 - -
Charges for restaurant closings........ 1.5 0.1 0.3
Provision for software write-offs...... 0.8 - -
Gain on sale of fixed assets from
AFDC transaction...................... - (1.1) -
Total costs and expenses.............. 97.1 91.7 94.2
Income from operations.................. 2.9 8.3 5.8
Interest expense, net................... 5.1 4.3 3.2
Net income (loss) before extraordinary
loss and taxes......................... (2.1) 4.0 2.6
Income tax expense (benefit)............ (0.7) 1.8 1.0
Net income (loss) before
extraordinary items.................... (1.4)% 2.2 % 1.6 %
(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants.
(2) Expressed as a percentage of wholesale revenues.
(3) Expressed as a percentage of manufacturing revenues.
29
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain financial information and other
restaurant data relating to Company-operated and franchised restaurants (as
reported to the Company by franchisees) for the fiscal years ended December 27,
1998, December 28, 1997 and December 29, 1996:
Year Ended
------------------------------------------------------------------------------------------
December 27, December 28, % Change December 29, % Change
1998 1997 1997 - 1998 1996 1996 - 1997
-------------- ------------- ------------ ----------- --------------
(dollars in millions)
EBITDA, as defined (1)................ $ 87.0 $ 74.0 17.6 % $ 64.9 14.1 %
EBITDA margin......................... 14.3 % 15.3 % (6.7) 13.0 % 17.5
Capital Expenditures (2).............. 41.5 62.9 (34.0) 46.3 36.0
Restaurant data (unaudited):
Systemwide restaurant sales (3):
Popeyes................... $ 954.3 $ 853.0 11.9% $ 762.1 11.9 %
Churchs................... 755.1 724.0 4.3 676.0 7.1
Cinnabon.................. 41.7 - N/A - N/A
Seattle Coffee............ 24.9 - N/A - N/A
Chesapeake................ 61.5 50.9 20.8 - N/A
-------- ---------- ---------
Total $1,837.5 $ 1,627.9 12.9% $ 1,438.1 13.2 %
======== ========== =========
Systemwide restaurant openings:
Popeyes................... 198 137 44.5% 110 24.6 %
Churchs................... 87 132 (34.1) 117 12.8
Cinnabon.................. 6 - N/A - N/A
Seattle Coffee............ 17 - N/A - N/A
Chesapeake................ 11 27 (59.3) - N/A
-------- ---------- ---------
Total 319 296 8.1% 227 30.4 %
======== ========== =========
Systemwide restaurants open,
end of period:
Popeyes................... 1,292 1,131 14.2 1,021 10.8 %
Churchs................... 1,399 1,356 3.2 1,257 7.9
Cinnabon.................. 369 - N/A - N/A
Seattle Coffee............ 71 - N/A - N/A
Chesapeake................ 107 155 (31.0) - N/A
-------- ---------- ---------
Total 3,238 2,642 22.6% 2,278 16.0 %
======== ========== =========
Systemwide percentage change in
comparable restaurant sales (3):
Popeyes domestic.......... 5.2 % 3.6% 0.5%
Churchs domestic.......... 4.6 4.0 4.6
Popeyes international..... (13.3) 1.3 4.3
Churchs international..... (1.5) 2.6 (2.1)
(1) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for items related to gains/losses on asset
dispositions and write-downs and compensation expense related to stock
option activity (deferred compensation).
(2) Excludes fixed assets added in connection with the Seattle Coffee, Cinnabon
and Pinetree acquisitions and capital expenditures made to convert the
Pinetree restaurants to Popeyes Company-operated restaurants.
(3) Prior year sales figures for Cinnabon, Seattle Coffee and Chesapeake and
are not comparable since these acquisitions occurred during 1997 and 1998.
30
YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues increased 25.9%, or $125.3 million, during the fiscal year
ended December 27, 1998, as compared to the fiscal year ended December 28, 1997.
RESTAURANT SALES. Restaurant sales were up 21.1% or $85.3 million over the
prior year, primarily due to sales generated by Company-operated restaurants
acquired during 1998.
Chicken
Sales at Company-operated chicken restaurants increased 10.2% or $41.1
million from the prior year. The increase was primarily attributable to sales
generated by Company-operated restaurants acquired during the first quarter of
1998. On February 10, 1998, the Company acquired all of the restaurant
properties operated by Pinetree Foods, Inc. ("Pinetree") and during the first
and second quarters of 1998 converted these properties into 66 Popeyes Company-
operated restaurants. Sales generated by these restaurants during 1998 were
$32.9 million. The remaining sales increase was due to an increase in comparable
sales for Company-operated chicken restaurants of 4.5% for the year.
Bakery Cafes
Sales at Company-operated bakery cafes were up $23.8 million from the prior
year. Sales increased primarily due to the acquisition of the Cinnabon bakery
cafes in October 1998. Sales for the Cinnabon bakeries during 1998 were $22.8
million.
Seattle Coffee
On March 18, 1998, the Company acquired all of Seattle Coffee Company's
(SCC's) common stock, resulting in the acquisition of 59 Company-operated cafes.
Sales generated by the SCC cafes during 1998 were $20.4 million.
FRANCHISE REVENUES. Franchise revenues increased $2.6 million or 4.0% from
the prior year.
Chicken
Domestic franchise royalty revenue for chicken restaurants increased $6.1
million or 14.4% from the prior year. The increase in franchise royalty revenue
was primarily
31
attributable to a 130 or 9.8% increase in the average number of chicken
franchised restaurants open during 1998 as compared to 1997. The remaining
increase was attributable to an increase in comparable sales for domestic
franchised restaurants of 5.0% for the year.
Domestic franchise fee income decreased $4.2 million or 58.3% for the year
ended December 27, 1998, compared to the year ended December 28, 1997. Franchise
fee income in the amount of $2.5 million was recorded in connection with the
sale of 100 Company-operated Churchs restaurants to the Atlanta Franchise
Development Corporation ("AFDC") during the second quarter of 1997 and $1.2
million was recorded in connection with the sale of 47 Company-operated Churchs
restaurants to the Royal Capital group during the first quarter of 1997. AFDC
and the Royal Capital group both entered into franchise agreements with the
Company to each develop 100 additional franchised restaurants. Franchise fee
income was also lower, as domestic franchise restaurant openings during 1998
were 134, versus 170 in 1997.
Bakery Cafes
Franchise royalty revenue for bakery cafes during 1998 increased $1.4 million
or 82.2% from the prior year, primarily due to the acquisition of the Cinnabon
bakeries in October 1998. Royalty revenues for Cinnabon bakeries were $1.0
million in 1998. Royalty revenues for Chesapeake bakeries were up $0.4 million
over 1997 as a result of the bakeries being owned for the entire fiscal year of
1998.
Seattle Coffee
Franchise royalty revenue for Seattle Coffee franchised cafes totaled $0.2
million during 1998. There were a total of 11 Seattle Coffee domestic
franchised cafes as of December 27, 1998.
International
International franchise revenues were down $0.6 million or 4.6% from the
prior year. International franchise royalty revenue decreased $1.4 million or
13.6%, while franchise fees increased $0.8 million or 34.2%. Royalty revenues
were down, despite an increase in the number of international franchised
restaurants, primarily due to the depressed economies in Southeast Asia.
Overall, international comparable sales were down 7.0% from the prior year.
Unfavorable currency fluctuations caused further decreases in royalty revenues
for 1998 as compared to 1997. International franchise fee income was up over the
prior year, primarily due to amounts recorded in connection with the development
of international Cinnabon bakeries and Seattle Coffee cafes in the Middle East.
WHOLESALE REVENUES. The Company's wholesale revenues consist of sales of
premium brand coffee from its roasting and distribution company to food service
32
retailers, supermarkets and its own coffee cafes. Wholesale revenues for the
year ended December 27, 1998 were $36.4 million.
MANUFACTURING REVENUES. Manufacturing revenues consist of sales of
proprietary fryers and other custom-fabricated restaurant equipment to
distributors and franchisees. Manufacturing revenues decreased $0.1 million
from fiscal year 1997 to fiscal year 1998.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Restaurant cost of sales for 1998 increased 18.5%
or $24.3 million from the prior year. The increase was primarily attributable to
the increase in restaurant sales. Expressed as a percentage of restaurant
sales, cost of sales were 31.9% for the year ended December 27, 1998 and 32.6%
for the year ended December 28, 1997. The decrease in this percentage is
primarily due to selective menu price increases taken during 1998.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the fiscal
year ended December 27, 1998 increased $49.1 million or 24.9% from the
corresponding period in 1997. The increase in restaurant operating expenses was
primarily due to the increase in the number of Company-operated restaurants.
Restaurant operating expenses as a percentage of restaurant sales were 50.4% for
fiscal year 1998, compared to 48.9% for fiscal year 1997. The increase in this
percentage was primarily attributable to high restaurant operating costs
incurred by the converted Pinetree restaurants. High labor and training costs
at the Pinetree restaurants caused personnel costs to increase by 0.8% as a
percentage of sales. High rent costs at the Pinetree restaurants caused other
restaurant operating costs to increase by 0.7% as a percentage of sales.
Management believes that the closure of the underperforming Pinetree restaurants
will help to lower these costs during 1999 and has implemented plans to reduce
restaurant operating costs at the remaining Pinetree restaurants still in
operation.
WHOLESALE COST OF SALES. Wholesale cost of sales represent the cost of
coffee beans and the direct overhead used to roast and blend specialty coffee
blends. Wholesale cost of sales were $18.5 million, which as a percentage of
wholesale revenues was 50.7%.
WHOLESALE OPERATING EXPENSE. Wholesale operating expenses represent the
overhead incurred in connection with the distribution of specialty coffee
blends. Wholesale operating expenses were $8.3 million, which as a percentage of
wholesale revenues was 22.8%.
MANUFACTURING COST OF SALES. Manufacturing cost of sales represent the cost
of raw materials and direct labor used to manufacture the restaurant equipment
sold to franchisees and third parties and direct and indirect manufacturing
overhead applied during the manufacturing process. Manufacturing cost of sales
as a percentage of manufacturing revenues decreased from 83.4% during fiscal
year 1997 to 76.7% during fiscal year 1998. The decrease in this percentage was
primarily due to a sales mix
33
consisting of more standard-configurated versus custom-configurated fryers and
certain price increases taken during fiscal year 1998 .
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $9.9 million or 12.5% during 1998 compared to the prior year. The
increase was primarily attributable to general and administrative expenses
incurred by the Seattle Coffee and Cinnabon operations, which totaled $8.8
million combined. As a percentage of total revenues, general and administrative
expenses decreased from 16.4% for fiscal year 1997 to 14.7% for fiscal year
1998. The decr