UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 27, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission
files number
000-32369
AFC
Enterprises, Inc.
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Minnesota
(State or other jurisdiction
of
incorporation or organization)
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58-2016606
(I.R.S. Employer
Identification No.)
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5555 Glenridge Connector, NE, Suite 300
Atlanta, Georgia
(Address of principal
executive offices)
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30342
(Zip
Code)
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Registrants telephone number, including area code:
(404) 459-4450
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Title of each class
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Name of each exchange on which registered
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Common stock, $0.01 par value per share
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Nasdaq Global Market
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Securities registered pursuant to Section 12(g) of the
Exchange Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted to its web site, if any, every
Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to post such
files). Yes o No o
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 registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller
reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
rule 12b-2). Yes o No þ
As of July 12, 2009 (the last day of the registrants
second quarter for 2009), the aggregate market value of the
registrants voting common stock held by non-affiliates of
the registrant, based on the closing sale price as reported on
the Nasdaq Global Market System, was approximately $161,823,534.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at
February 19, 2010
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Common stock, $0.01 par value per share
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25,455,917 shares
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Documents incorporated by reference: Portions
of our 2010 Proxy Statement are incorporated herein by reference
in Part III of this Annual Report.
AFC
ENTERPRISES, INC.
INDEX TO
FORM 10-K
PART I.
AFC Enterprises, Inc. (AFC or the
Company) develops, operates, and franchises quick-service
restaurants (QSRs or restaurants) under
the trade names
Popeyes®
Chicken & Biscuits and
Popeyes®
Louisiana Kitchen (collectively Popeyes). Within
Popeyes, we manage two business segments: franchise operations
and company-operated restaurants. Financial information
concerning these business segments can be found in Note 21
to our Consolidated Financial Statements.
Popeyes
Profile
Popeyes was founded in New Orleans, Louisiana in 1972 and is the
worlds second largest quick-service chicken concept based
on the number of units. Within the QSR industry, Popeyes
distinguishes itself with a unique New Orleans style
menu that features spicy chicken, chicken sandwiches, chicken
tenders, fried shrimp and other seafood, red beans and rice and
other regional items. Popeyes is a highly differentiated QSR
brand with a passion for its New Orleans heritage and flavorful
authentic food.
As of December 27, 2009, we operated and franchised 1,943
Popeyes restaurants in 44 states, the District of Columbia,
Puerto Rico, Guam and 27 foreign countries. The map below shows
the concentration of our domestic restaurants, by state.
As of December 27, 2009, of our 1,539 domestic franchised
restaurants, approximately 70% were concentrated in Texas,
California, Louisiana, Florida, Illinois, Maryland, New York,
Georgia, Virginia and Mississippi. Of our 367 international
franchised restaurants, approximately 60% were located in Korea,
Canada, Turkey, and Indonesia. Of our 37 company-operated
restaurants, approximately 90% were concentrated in Louisiana
and Tennessee.
Financial information concerning our domestic and international
operations can be found in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report on
Form 10-K.
Our
Business Strategy
Our business strategy, announced at the beginning of 2008,
capitalizes on our strengths as a highly franchised restaurant
system. The model provides diverse and reliable earnings with
steady cash flow, and low capital spending requirements. The
cash flow provided by our model has primarily been used to pay
down debt and repurchase stock to enhance shareholder value.
With the successful launch of this new long-term growth
strategy, during 2009 and 2008, we re-directed capital and
resources to fund strategic growth initiatives, reduced our long
term debt by $50.2 million, repurchased 2.1 million
shares of our common stock for $19 million, and
refranchised 27 company-operated restaurants.
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Our strategic plan is built on the foundation of aligning and
collaborating with our stakeholders, and is focused on the four
pillars. We believe our execution of these strategies gained
traction in 2009, making Popeyes more competitive and better
positioned to gain market share and accelerate long-term growth
as the consumer environment improves.
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Build the Popeyes Brand offering a
distinctive brand and menu with superior food at affordable
prices.
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In 2009, Popeyes promoted its flavorful
Bonafide®
chicken and seafood offerings at value price points, supported
by its successful new Louisiana Fast advertising campaign and
national media. These marketing initiatives delivered strong
positive guest counts resulting in positive full year same-store
sales.
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In 2010, Popeyes will continue to promote its core chicken and
seafood offerings and periodically introduce new innovative
products. Popeyes will continue the use of national advertising
to efficiently expand media reach and build additional brand
awareness.
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Run Great Restaurants improving
restaurant operations and Popeyes guest experience by
delighting the guest with service as distinctive as our
food.
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Popeyes restaurants steadily improved our Guest Experience
Monitor (GEM) scores, with Overall Delighted and
Intent to Return scores at the end of 2009 up
significantly since the beginning of the year.
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With newly required drive-thru equipment substantially in place
throughout the system, we are rolling out a new speed of service
training program system-wide in the first half of 2010.
Longer-term, we believe an increase in speed of service will
provide a significant benefit to Popeyes customers and
restaurant sales performance.
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In 2009, we successfully completed our re-franchising strategy
with the sale of company-operated restaurants in Atlanta and
Nashville. Going forward, the Company intends to own and operate
its remaining company-operated restaurants in New Orleans and
Memphis, which are high volume, profitable stores.
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Strengthen Unit Economics lowering
restaurant operating costs and improving profitability while
maintaining excellent food quality for our guests.
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In 2009, Popeyes restaurants benefited from a 3 percent
decrease in commodity costs which translated to approximately a
100 basis point improvement in restaurant operating
margins. This overall benefit was partially offset, however, by
increases in national minimum wage.
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During 2009, we also completed a diagnostic analysis of our
supply chain system, identifying significant cost-savings
opportunities in packaging, shipping, and sourcing alternatives
which will benefit the entire system in 2010 and beyond.
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Ramp Up New Unit Growth building more
restaurants across the U.S. and abroad with superior
profits and investment returns.
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We are generating a strong pipeline of current and new franchise
developers to open new restaurants and enter new markets, and
will be better positioned to accelerate new unit development as
the economy recovers.
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Our site modeling software investment is helping to strengthen
real-estate site selection by identifying higher quality sites
with higher sales volume potential and more attractive returns
for our franchise owners.
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Our build-out costs remain competitive. In January of this year,
QSR Magazine named Popeyes as one of the 10 great franchise
deals. The magazine stated, Popeyes is a good deal because
the build-out cost is reasonable for a drive-thru, stand-alone
building.
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The following features of the Company are material to the
execution of our initiatives and business strategies discussed
above.
Our
Agreements with Popeyes Franchisees
As discussed above, our strategy places a heavy emphasis on
increasing the number of restaurants in the Popeyes system
through franchising activities. As of December 27, 2009, we
had 347 franchisees operating restaurants within the Popeyes
system, and several preparing to become operators. The largest
of our domestic franchisees operates 162 restaurants and the
largest of our international franchisees operates 97
restaurants. The following discussion describes the standard
arrangements we enter into with our Popeyes franchisees.
Domestic Development Agreements. Our
domestic franchise development agreements provide for the
development of a specified number of Popeyes restaurants within
a defined geographic territory. Generally, these agreements call
for the development of the restaurants over a specified period
of time, usually three to five years, with targeted opening
dates for each restaurant. Our Popeyes franchisees currently pay
a development fee of $7,500 per restaurant. These development
fees are typically paid when the agreement is executed, and are
typically non-refundable.
International Development
Agreements. Our international franchise
development agreements are similar to our domestic franchise
development agreements, though the development time frames can
be longer with development fees of up to $20,000 for each
restaurant developed. Depending on the market, limited
sub-franchising
rights may also be granted.
Domestic Franchise Agreements. Once we
execute a development agreement, we enter into a franchise
agreement with our franchisee that conveys the right to operate
a specific Popeyes restaurant at a site to be selected by the
franchisee and approved by us within 180 days from the
execution of the franchise agreement. Our current franchise
agreements generally provide for payment of a franchise fee of
$30,000 per location.
These agreements generally require franchisees to pay a 5%
royalty on net restaurant sales. In addition, franchisees must
contribute to national and local advertising funds. Payments to
the advertising funds are generally 4% of net restaurant sales.
Some of our institutional and older franchise agreements provide
for lower royalties and advertising fund contributions. These
agreements constitute a decreasing percentage of our total
outstanding franchise agreements.
International Franchise Agreements. The
terms of our international franchise agreements are
substantially similar to those included in our domestic
franchise agreements, except that these agreements may be
modified to reflect the multi-national nature of the transaction
and to comply with the requirements of applicable local laws.
Our current international franchise agreements generally provide
for payment of a franchise fee of up to $30,000 per location. In
addition, the effective royalty rates may differ from those
included in domestic franchise agreements, and may be lower due
to the greater number of restaurants required to be developed by
our international franchisees.
All of our franchise agreements require that our franchisees
operate restaurants in accordance with our defined operating
procedures, adhere to the menu established by us, and meet
applicable quality, service, health and cleanliness standards.
We may terminate the franchise rights of any franchisee who does
not comply with these standards and requirements.
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Site
Selection
For new domestic restaurants, we assist our franchisees in
identifying and obtaining favorable sites consistent with the
overall market plan for each development area. Domestically, we
primarily emphasize freestanding sites with drive-thrus and
end-cap, in-line strip-mall sites with ample parking
and easy access from high traffic roads.
Each international market has its own factors that lead to venue
and site determination. In international markets, we use
different venues including freestanding, in-line, food court and
other nontraditional venues. Market development strategies are a
collaborative process between Popeyes and our franchisees so we
can leverage local market knowledge.
Suppliers
and Purchasing Cooperative
Suppliers. Our franchisees are required
to purchase all ingredients, products, materials, supplies and
other items necessary in the operation of their businesses
solely from suppliers who have been approved by us. These
suppliers are required to meet or exceed strict quality control
standards, and they must possess adequate capacity to supply our
franchisees reliably.
Purchasing Cooperative. Supplies are
generally provided to our domestic franchised and
company-operated restaurants pursuant to supply agreements
negotiated by Supply Management Services, Inc.
(SMS), a
not-for-profit
purchasing cooperative. We, our Popeyes franchisees and the
owners of
Cinnabon®
bakeries hold membership interests in SMS in proportion to the
number of restaurants owned. As of December 27, 2009, we
held one of seven seats on the SMS board of directors. Our
Popeyes franchise agreements require that each domestic
franchisee join SMS.
Supply Agreements. The principal raw
material for a Popeyes restaurant operation is fresh chicken.
Company-operated and franchised restaurants purchase their
chicken from suppliers who service the Popeyes system. In order
to ensure favorable pricing and to secure an adequate supply of
fresh chicken, SMS has entered into supply agreements with
several chicken suppliers. These contracts, which pertain to the
vast majority of our system-wide purchases, are
cost-plus contracts with prices based partially upon
the cost of feed grains plus certain agreed upon non-feed and
processing costs.
We have entered into long-term beverage supply arrangements with
certain major beverage vendors. These contracts are customary in
the QSR industry. Pursuant to the terms of these arrangements,
marketing rebates are provided to the owner/operator of Popeyes
restaurants based upon the volume of beverage purchases.
We also have a long-term agreement with an exclusive supplier of
certain proprietary products for the Popeyes system. This
supplier sells these products to our approved distributors, who
in turn sell them to our franchised and company-operated Popeyes
restaurants.
Marketing
and Advertising
Each domestic Popeyes restaurant, company-operated or
franchised, contributes to an advertising fund that supports
(1) branding and marketing initiatives, including the
development of marketing materials that are used throughout our
domestic restaurant system and (2) local marketing
programs. We act as agent for the fund and coordinate its
activities. We and our Popeyes franchisees made contributions to
the advertising fund of approximately $67.7 million in
2009, $61.2 million in 2008, and $57.6 million in 2007.
During 2009 and 2008, the Company and the majority of Popeyes
franchisees contributed additional funds above those required
under applicable franchise agreements in support of the
Companys shift in advertising funds from local media to
national media advertising.
Fiscal
Year and Seasonality
Our fiscal year is composed of 13 four-week accounting periods
and ends on the last Sunday in December. The first quarter of
our fiscal year has four periods, or 16 weeks. All other
quarters have three periods, or 12 weeks.
Seasonality has little effect on our operations.
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Employees
As of February 21, 2010, we had approximately
1,000 hourly employees working in our company-operated
restaurants. Additionally, we had approximately
40 employees involved in the management of our
company-operated restaurants, composed of restaurant managers,
multi-unit
managers and field management employees. We also had
approximately 160 employees responsible for corporate
administration, franchise services and business development.
None of our employees is covered by a collective bargaining
agreement. We believe that the dedication of our employees is
critical to our success and that our relationship with our
employees is good.
Intellectual
Property and Other Proprietary Rights
We own a number of trademarks and service marks that have been
registered with the U.S. Patent and Trademark Office, or
for which we have made application to register, including the
marks AFC, AFC Enterprises,
Popeyes, Popeyes Chicken &
Biscuits, and the brand logo for Popeyes and Popeyes
Louisiana Kitchen. In addition, we have registered, or made
application to register, one or more of these marks and others,
or their linguistic equivalents, in foreign countries in which
we do business, or are contemplating doing business. There is no
assurance that we will be able to obtain the registration for
the marks in every country where registration has been sought.
We consider our intellectual property rights to be important to
our business and we actively defend and enforce them.
Copeland Formula Agreement. We have a
formula licensing agreement with the estate of Alvin C.
Copeland, the founder of Popeyes. Under this agreement, we have
the worldwide exclusive rights to the Popeyes fried chicken
recipe and certain other ingredients used in Popeyes
products. The agreement provides that we pay the estate of
Mr. Copeland approximately $3.1 million annually
through March 2029.
King Features Agreements. We have
several agreements with the King Features Syndicate Division
(King Features) of Hearst Holdings, Inc. under which
we have the non-exclusive license to use the image and likeness
of the cartoon character Popeye in the United
States. Popeyes locations outside the United States have the
non-exclusive use of the image and likeness of the cartoon
character Popeye and certain companion characters.
We are obligated to pay King Features a royalty of approximately
$1.0 million annually, as adjusted for fluctuations in the
Consumer Price Index, plus twenty percent of our gross revenues
from the sale of products outside of the Popeyes restaurant
system, if any. These agreements extend through June 30,
2010 and we are presently discussing extensions of these
agreements with King Features.
International
Operations
We continue to expand our international operations through
franchising. As of December 27, 2009, we have 367
franchised international restaurants. During 2009, franchise
revenues from these operations represented approximately 10.9%
of our total franchise revenues. For each of 2009, 2008, and
2007, international revenues represented 6.3%, 5.7%, and 4.5%,
of total revenues, respectively.
Insurance
We carry property, general liability, business interruption,
crime, directors and officers liability, employment
practices liability, environmental and workers
compensation insurance policies, which we believe are customary
for businesses of our size and type. Pursuant to the terms of
their franchise agreements, our franchisees are also required to
maintain certain types and levels of insurance coverage,
including commercial general liability insurance, workers
compensation insurance, all risk property and automobile
insurance.
Competition
The foodservice industry, and particularly the QSR industry, is
intensely competitive with respect to price, quality, name
recognition, service and location. We compete against other
QSRs, including chicken, hamburger, pizza, Mexican and sandwich
restaurants, other purveyors of carry-out food and convenience
dining establishments,
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including national restaurant and grocery chains. Many of our
competitors possess substantially greater financial, marketing,
personnel and other resources than we do.
Government
Regulation
We are subject to various federal, state and local laws
affecting our business, including various health, sanitation,
labor, fire and safety standards. Newly constructed or remodeled
restaurants are subject to state and local building code and
zoning requirements. In connection with the re-imaging and
alteration of our company-operated restaurants, we may be
required to expend funds to meet certain federal, state and
local regulations, including regulations requiring that
remodeled or altered restaurants be accessible to persons with
disabilities. Difficulties or failures in obtaining the required
licenses or approvals could delay or prevent the opening of new
restaurants in particular areas.
We are also subject to the Fair Labor Standards Act and various
other laws governing such matters as minimum wage requirements,
overtime and other working conditions and citizenship
requirements. A significant number of our foodservice personnel
are paid at rates related to the federal minimum wage, and
increases in the minimum wage have increased our labor costs.
Many states and the Federal Trade Commission, as well as certain
foreign countries, require franchisors to transmit specified
disclosure documents to potential franchisees before granting a
franchise. Additionally, some states and certain foreign
countries require us to register our franchise disclosure
documents before we may offer a franchise.
We have franchise agreements related to the operation of
restaurants located on various U.S. military bases abroad
which are with certain governmental agencies and are subject to
renegotiation of profits or termination at the election of the
U.S. government. During 2009, royalty revenues from these
restaurants were approximately $1.2 million.
Environmental
Matters
We are subject to various federal, state and local laws
regulating the discharge of pollutants into the environment. We
believe that we conduct our operations in substantial compliance
with applicable environmental laws and regulations. Certain of
our current and formerly owned
and/or
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. Certain of these properties previously
contained underground storage tanks (USTs) and some
of these properties may currently contain abandoned USTs. It is
possible that petroleum products and other contaminants may have
been released at these properties into the soil or groundwater.
Under applicable federal and state environmental laws, we, as
the current or former owner or operator of these sites, may be
jointly and severally liable for the costs of investigation and
remediation of any such contamination, as well as any other
environmental conditions at our properties that are unrelated to
USTs. We have obtained insurance coverage that we believe is
adequate to cover any potential environmental remediation
liabilities.
Available
Information
We file our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports with the Securities and
Exchange Commission (the SEC). You may obtain copies
of these documents by visiting the SECs Public Reference
Room at 100 F. Street, N.E., Washington, DC 20549, by calling
the SEC at
1-800-SEC-0330
or by accessing the SECs website at
http://www.sec.gov.
In addition, as soon as reasonably practicable after such
materials are filed with, or furnished to, the SEC, we make
copies of these documents (except for exhibits) available to the
public free of charge through our web site at www.afce.com or by
contacting our Secretary at our principal offices, which are
located at 5555 Glenridge Connector, NE, Suite 300,
Atlanta, Georgia 30342, telephone number
(404) 459-4450.
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Certain statements we make in this filing, and other written
or oral statements made by or on our behalf, may constitute
forward-looking statements within the meaning of the
federal securities laws. Words or phrases such as should
result, are expected to, we
anticipate, we estimate, we
project, we believe, or similar expressions
are intended to identify forward-looking statements. These
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our
historical experience and our present expectations or
projections. We believe that these forward-looking statements
are reasonable; however, you should not place undue reliance on
such statements. Such statements speak only as of the date they
are made, and we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of
future events, new information or otherwise. The following risk
factors and others that we may add from time to time, are some
of the factors that could cause our actual results to differ
materially from the expected results described in our
forward-looking statements.
If we
are unable to compete successfully against other companies in
the QSR industry or develop new products that appeal to consumer
preferences, we could lose customers and our revenues may
decline.
The QSR industry is intensely competitive with respect to price,
quality, brand recognition, menu offerings, service and
location. If we are unable to compete successfully against other
foodservice providers, we could lose customers and our revenues
may decline. We compete against other QSRs, including chicken,
hamburger, pizza, Mexican and sandwich restaurants, other
purveyors of carry out food, convenience dining establishments
and other home meal replacement alternatives, including national
restaurant and grocery store chains. Many of our competitors
possess substantially greater financial, marketing, personnel
and other resources than we do. There can be no assurance that
consumers will continue to regard our products favorably, that
we will be able to develop new products that appeal to consumer
preferences, or that we will be able to continue to compete
successfully in the QSR industry.
Continued
disruptions in the financial markets may adversely affect the
availability and cost of credit and the slower economy may
impact consumer spending patterns.
The ability of our franchisees and prospective franchisees to
obtain financing for development of new restaurants or
reinvestment in existing restaurants depends in part upon
financial and economic conditions which are beyond their
control. If our franchisees are unable to obtain financing on
acceptable terms to develop new restaurants or reinvest in
existing restaurants, our business and financial results could
be adversely affected.
Disruptions in the financial markets and the slower economy may
also adversely affect consumer spending patterns. There can be
no assurances that governmental or other responses to the
challenging credit environment will restore consumer confidence,
stabilize the markets or increase liquidity and the availability
of credit. Declines in or displacement of our guests
discretionary spending could reduce traffic in our systems
restaurants
and/or limit
our ability to raise prices.
Because
our operating results are closely tied to the success of our
franchisees, the failure or loss of one or more franchisees,
operating a significant number of restaurants, could adversely
affect our operating results.
Our operating results are dependent on our franchisees and, in
some cases, on certain franchisees that operate a large number
of restaurants. How well our franchisees operate their
restaurants and their desire to maintain their franchise
relationship with us is outside of our direct control. In
addition, economic conditions and the availability of credit may
have an adverse impact on our franchisees. Any failure of these
franchisees to operate their restaurants successfully or the
loss of these franchisees could adversely impact our operating
results. As of December 27, 2009, we had 347 franchisees
operating restaurants within the Popeyes system and several
preparing to become operators. The largest of our domestic
franchisees operates 162 Popeyes restaurants; and the largest of
our international franchisees operates 97 Popeyes restaurants.
Typically, each of our international franchisees is responsible
for the development of significantly more restaurants than our
domestic franchisees. As a result, our international operations
are more closely tied to the success of a smaller number of
franchisees than our domestic operations.
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There can be no assurance that our domestic and international
franchisees will operate their franchises successfully or
continue to maintain their franchise relationships with us.
If our
franchisees are unable or unwilling to open a sufficient number
of restaurants, our growth strategy could be at
risk.
As of December 27, 2009, we franchised 1,576 restaurants
domestically and 367 restaurants in Puerto Rico, Guam and 27
foreign countries. Our growth strategy is significantly
dependent on increasing the number of our franchised
restaurants. If our franchisees are unable to open a sufficient
number of restaurants, our growth strategy could be
significantly impaired.
Our ability to successfully open additional franchised
restaurants will depend on various factors, including the
availability of suitable sites, the negotiation of acceptable
leases or purchase terms for new locations, permitting and
regulatory compliance, the ability to meet construction
schedules, the financial and other capabilities of our
franchisees, and general economic and business conditions. Many
of the foregoing factors are beyond the control of our
franchisees. Further, there can be no assurance that our
franchisees will successfully develop or operate their
restaurants in a manner consistent with our concepts and
standards, or will have the business abilities or access to
financial resources necessary to open the restaurants required
by their agreements. Historically, there have been many
instances in which Popeyes franchisees have not fulfilled their
obligations under their development agreements to open new
restaurants.
Changes
in consumer preferences and demographic trends could result in a
loss of customers and reduce our revenues.
Foodservice businesses are often affected by changes in consumer
tastes, national, regional and local economic conditions,
discretionary spending priorities, demographic trends, traffic
patterns and the type, number and location of competing
restaurants. In addition, the restaurant industry is currently
under heightened legal and legislative scrutiny related to menu
labeling and resulting from the perception that the practices of
restaurant companies have contributed to nutritional, caloric
intake, obesity, or other health concerns of their guests. If we
are unable to adapt to changes in consumer preferences and
trends, we may lose customers and our revenues may decline.
Adverse
publicity related to food safety and quality could result in a
loss of customers and reduce our revenues.
We and our franchisees are, from time to time, the subject of
complaints or litigation from guests alleging illness, injury or
other food quality, health or operational concerns. Adverse
publicity resulting from these allegations may harm our
reputation or our franchisees reputation, regardless of
whether the allegations are valid or not, whether we are found
liable or not, or whether those concerns relate only to a single
restaurant or a limited number of restaurants or many
restaurants. We are also subject to potentially negative
publicity from various sources, including social media sites,
which are beyond the control of the Company. Additionally, some
animal rights organizations have engaged in confrontational
demonstrations at certain restaurant companies across the
country. As a
multi-unit
restaurant company, we can be adversely affected by the
publicity surrounding allegations involving illness, injury, or
other food quality, health or operational concerns. Complaints,
litigation or adverse publicity experienced by one or more of
our franchisees could also adversely affect our business as a
whole. If we have adverse publicity due to any of these
concerns, we may lose customers and our revenues may decline.
If the
cost of chicken increases, our cost of sales will increase and
our operating results could be adversely affected.
The principal raw material for Popeyes is fresh chicken. Any
material increase in the costs of fresh chicken could adversely
affect our operating results. Our company-operated and
franchised restaurants purchase fresh chicken from various
suppliers who service us from various plant locations. These
costs are significantly affected by increases in the cost of
chicken, which can result from a number of factors, including
increases in the cost of grain, disease, declining market supply
of fast-food sized chickens and other factors that affect
availability. Because our purchasing agreements for fresh
chicken allow the prices that we pay for chicken to fluctuate, a
rise in the prices of
8
chicken products could expose us to cost increases. If we fail
to anticipate and react to increasing food costs by adjusting
our purchasing practices or increasing our sales prices, our
cost of sales may increase and our operating results could be
adversely affected.
Instances
of food-borne illness or avian flu could adversely affect the
price and availability of poultry and other foods and create
negative publicity which could result in a decline in our
sales.
Instances of food-borne illness or avian flu could adversely
affect the price and availability of poultry and other foods. As
a result, Popeyes restaurants could experience a significant
increase in food costs if there are additional instances of
avian flu or food-borne illnesses. In addition to losses
associated with higher prices and a lower supply of our food
ingredients, instances of food-borne illnesses could result in
negative publicity for us. This negative publicity, as well as
any other negative publicity concerning food products we serve,
may reduce demand for our food and could result in a decrease in
guest traffic to our restaurants. A decrease in guest traffic to
Popeyes restaurants as a result of these health concerns or
negative publicity could result in a decline in our sales.
If we
face labor shortages or increased labor costs, our growth and
operating results could be adversely affected.
Our success depends in part upon our and our franchisees
ability to attract, motivate and retain a sufficient number of
qualified employees, including restaurant managers and crew
members, necessary to keep pace with our expansion schedule.
Additionally, as of February 21, 2010, we employed
approximately 1,000 hourly employees in our
company-operated restaurants. Labor is a primary component in
the cost of operating our restaurants. If we or our franchisees
face labor shortages or increased labor costs because of
increased competition for employees, higher employee turnover
rates, increases in the federal minimum wage or increases in
other employee benefits costs (including costs associated with
health insurance coverage), operating expenses could increase
and our growth could be adversely affected.
Currency,
economic, political and other risks associated with our
international operations could adversely affect our operating
results.
We also face currency, economic, political, and other risks
associated with our international operations. As of
December 27, 2009, we had 367 franchised restaurants in
Puerto Rico, Guam and 27 foreign countries. Business at these
operations is conducted in the respective local currency. The
amount owed to us is based on a conversion of the royalties and
other fees to U.S. dollars using the prevailing exchange
rate. In particular, the royalties are based on a percentage of
net sales generated by our foreign franchisees operations.
Consequently, our revenues from international franchisees are
exposed to the potentially adverse effects of our
franchisees operations, currency exchange rates, local
economic conditions, political instability and other risks
associated with doing business in foreign countries. We expect
that our franchise revenues generated from international
operations will increase in the future, thus increasing our
exposure to changes in foreign economic conditions and currency
fluctuations.
Our
operating results and same-store sales may fluctuate
significantly and could fall below the expectations of
securities analysts and investors, which could cause the market
price of our common stock to decline.
Our quarterly operating results and same-store sales have
fluctuated significantly in the past and may continue to
fluctuate significantly in the future as a result of a variety
of factors, many of which are outside of our control. If our
quarterly results or same-store sales fluctuate or fall below
the expectations of securities analysts and investors, the
market price of our common stock could decline.
Factors that may cause our quarterly results or same-store sales
to fluctuate include the following:
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the opening of new restaurants by us or our franchisees;
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|
|
the closing of restaurants by us or our franchisees;
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|
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volatility of gasoline prices;
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9
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increases in labor costs;
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increases in the cost of commodities and paper products;
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the ability of our franchisees to meet their future commitments
under development agreements;
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consumer concerns about food quality or food safety;
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the level of competition from existing or new competitors in the
QSR industry;
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inclement weather patterns; and
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economic conditions generally, and in each of the markets in
which we, or our franchisees, are located.
|
Accordingly, results for any one quarter are not indicative of
the results to be expected for any other quarter or for the full
year, and same-store sales for any future period may decrease.
We are
subject to government regulation, and our failure to comply with
existing regulations or increased regulations could adversely
affect our business and operating results.
We are subject to numerous federal, state, local and foreign
government laws and regulations, including those relating to:
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the preparation and sale of food;
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franchising;
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building and zoning requirements;
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environmental protection;
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information security and data protection;
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minimum wage, overtime, immigration, unions and other labor
issues;
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compliance with the Americans with Disabilities Act; and
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working and safety conditions.
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If we fail to comply with existing or future regulations, we may
be subject to governmental or judicial fines or sanctions, or we
could suffer business interruption or loss. In addition, our
capital expenses could increase due to remediation measures that
may be required if we are found to be noncompliant with any of
these laws or regulations.
We are also subject to regulation by the Federal Trade
Commission and to state and foreign laws that govern the offer,
sale and termination of franchises and the refusal to renew
franchises. The failure to comply with these regulations in any
jurisdiction or to obtain required approvals could result in a
ban or temporary suspension on future franchise sales or fines
or require us to make a rescission offer to franchisees, any of
which could adversely affect our business and operating results.
Shortages
or interruptions in the supply or delivery of fresh food
products could adversely affect our operating
results.
We and our franchisees are dependent on frequent deliveries of
fresh food products that meet our specifications. Shortages or
interruptions in the supply of fresh food products caused by
unanticipated demand, natural disasters, problems in production
or distribution, declining number of distributors, inclement
weather or other conditions could adversely affect the
availability, quality and cost of ingredients, which would
adversely affect our operating results.
If any
member of our senior management left us, our operating results
could be adversely affected, and we may not be able to attract
and retain additional qualified management
personnel.
We are dependent on the experience and industry knowledge of the
members of our senior management team. If, for any reason, our
senior executives do not continue to be active in management or
if we are unable to attract and
10
retain qualified new members of senior management, our operating
results could be adversely affected. We cannot guarantee that we
will be able to attract and retain additional qualified senior
executives as needed. We have employment agreements with certain
executives; however, these agreements do not ensure their
continued employment with us.
We may
not be able to adequately protect our intellectual property,
which could harm the value of our Popeyes brand and branded
products and adversely affect our business.
We depend in large part on our Popeyes brand and branded
products and believe that they are very important to the conduct
of our business. We rely on a combination of trademarks,
copyrights, service marks, trade secrets and similar
intellectual property rights to protect our Popeyes brand and
branded products. The success of our expansion strategy depends
on our continued ability to use our existing trademarks and
service marks in order to increase brand awareness and further
develop our branded products in both domestic and international
markets. We also use our trademarks and other intellectual
property on the Internet. If our efforts to protect our
intellectual property are not adequate, or if any third party
misappropriates or infringes on our intellectual property,
either in print or on the Internet, the value of our Popeyes
brand may be harmed, which could have a material adverse effect
on our business, including the failure of our Popeyes brand and
branded products to achieve and maintain market acceptance.
We franchise our restaurants to various franchisees. While we
try to ensure that the quality of our Popeyes brand and branded
products is maintained by all of our franchisees, we cannot be
certain that these franchisees will not take actions that
adversely affect the value of our intellectual property or
reputation.
We have registered certain trademarks and have other trademark
registrations pending in the U.S. and foreign
jurisdictions. The trademarks that we currently use have not
been registered in all of the countries in which we do business
and may never be registered in all of these countries. We cannot
be certain that we will be able to adequately protect our
trademarks or that our use of these trademarks will not result
in liability for trademark infringement, trademark dilution or
unfair competition.
There can be no assurance that all of the steps we have taken to
protect our intellectual property in the U.S. and foreign
countries will be adequate. In addition, the laws of some
foreign countries do not protect intellectual property rights to
the same extent as the laws of the U.S. Further, through
acquisitions of third parties, we may acquire brands and related
trademarks that are subject to the same risks as the brand and
trademarks we currently own.
Our
2005 Credit Facility, as amended and restated, may limit our
ability to expand our business, and our ability to comply with
the repayment requirements, covenants, tests and restrictions
contained in the 2005 Credit Facility may be affected by events
that are beyond our control.
The 2005 Credit Facility, as amended and restated in August
2009, contains financial and other covenants, including
covenants which require us to maintain various financial ratios,
limit our ability to incur additional indebtedness, restrict the
amount of capital expenditures that may be incurred, restrict
the payment of cash dividends and limit the amount of debt which
can be loaned to our franchisees or guaranteed on their behalf.
This facility also limits our ability to engage in mergers or
acquisitions, sell certain assets, repurchase our stock and
enter into certain lease transactions. The 2005 Credit Facility,
as amended and restated, includes customary events of default,
including, but not limited to, the failure to maintain the
financial ratios described above, the failure to pay any
interest, principal or fees when due, the failure to perform
certain covenant agreements, inaccurate or false representations
or warranties, insolvency or bankruptcy, change of control, the
occurrence of certain ERISA events and judgment defaults. The
restrictive covenants in our 2005 Credit Facility, as amended
and restated, may limit our ability to expand our business, and
our ability to comply with these provisions may be impacted by
events beyond our control. A failure to comply with any of the
financial and operating covenants included in the 2005 Credit
Facility, as amended and restated, would result in an event of
default, permitting the lenders to accelerate the maturity of
outstanding indebtedness. This acceleration could also result in
the acceleration of other indebtedness that we may have
outstanding at that time. Were we to default on the terms and
conditions of the 2005 Credit Facility, as amended and restated,
and the debt were accelerated by the facilitys lenders,
such developments would have a material adverse impact on our
financial condition and our liquidity.
11
Additionally, future debt maturities under the 2005 Credit
Facility, as amended and restated, include payments of
approximately $19.5 million in 2012 and approximately
$56.9 million in 2013. The current financial environment
has resulted in diminished and more expensive credit
availability, and could make it more difficult for us to
refinance our amended and restated credit facility in the
future. A lack of availability and increased cost of refinancing
could have a material adverse impact on our financial condition
and our liquidity.
Because
certain of our current or former properties were used as retail
gas stations in the past, we may incur substantial liabilities
for remediation of environmental contamination at our
properties.
Certain of our currently or formerly owned
and/or
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. Certain of these properties previously
contained underground storage tanks, and some of these
properties may currently contain abandoned underground storage
tanks. It is possible that petroleum products and other
contaminants may have been released at these properties into the
soil or groundwater. Under applicable federal and state
environmental laws, we, as the current or former owner or
operator of these sites, may be jointly and severally liable for
the costs of investigation and remediation of any contamination,
as well as any other environmental conditions at our properties
that are unrelated to underground storage tanks. If we are found
liable for the costs of remediation of contamination at any of
these properties, our operating expenses would likely increase
and our operating results would be materially adversely
affected. We have obtained insurance coverage for the next five
years that we believe will be adequate to cover any potential
environmental remediation liabilities. However, there can be no
assurance that the actual costs of any potential remediation
liabilities will not materially exceed the amount of our policy
limits.
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Item 1B.
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UNRESOLVED
STAFF COMMENTS
|
None.
12
We own, lease or sublease the land and buildings for our
company-operated restaurants. In addition, we own, lease or
sublease land and buildings which we lease or sublease to our
franchisees and third parties.
The following table sets forth the locations by state of our
domestic company-operated restaurants as of December 27,
2009:
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Land and
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Land and/or
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Buildings Owned
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Buildings Leased
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Total
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Louisiana
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3
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21
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24
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Tennessee
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2
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7
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9
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Mississippi
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0
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3
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3
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Arkansas
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0
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1
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1
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Total
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5
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32
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37
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We typically lease our restaurants under triple net
leases that require us to pay minimum rent, real estate taxes,
maintenance costs and insurance premiums and, in some cases,
percentage rent based on sales in excess of specified amounts.
Generally, our leases have initial terms of 20 years, with
options to renew for one or more additional periods, although
the terms of our leases vary depending on the facility.
Within our franchise operations segment, our typical restaurant
leases or subleases to franchisees are triple net to the
franchisee, that require them to pay minimum rent (based upon
prevailing market rental rates), real estate taxes, maintenance
costs and insurance premiums, as well as percentage rents based
on sales in excess of specified amounts. The subleases have a
term that usually coincides with the term of the underlying base
lease for the location. These leases are typically
cross-defaulted with the corresponding franchise agreement for
that site. As of December 27, 2009, we leased 12
restaurants and subleased 57 restaurants to franchisees.
Additionally, we leased three properties to unrelated third
parties. Of the restaurants leased or subleased to franchisees,
37 were located in Texas.
As of December 27, 2009, we owned three other properties
and leased one additional surplus property.
As discussed in Note 10 to the Consolidated Financial
Statements, all owned property is pledged as security under our
2005 Credit Facility, as amended and restated.
As of December 27, 2009, we leased office space in a
facility located in Atlanta, Georgia that is the headquarters
for the Company. This lease is subject to extensions through
2016.
We believe that our leased and owned facilities provide
sufficient space to support our corporate and operational needs.
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Item 3.
|
LEGAL
PROCEEDINGS
|
We are a defendant in various legal proceedings arising in the
ordinary course of business, including claims resulting from
slip and fall accidents, employment-related claims,
claims from guests or employees alleging illness, injury or
other food quality, health or operational concerns and claims
related to franchise matters. We have established adequate
reserves to provide for the defense and settlement of such
matters, and we believe their ultimate resolution will not have
a material adverse effect on our financial condition or our
results of operations.
13
|
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Item 4A.
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EXECUTIVE
OFFICERS
|
The following table sets forth the name, age (as of the date of
this filing) and position of our current executive officers:
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Name
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Age
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Position
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Cheryl A. Bachelder
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53
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President and Chief Executive Officer
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H. Melville Hope, III
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48
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Senior Vice President and Chief Financial Officer
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Richard H. Lynch
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55
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Chief Marketing Officer
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Harold M. Cohen
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46
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|
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Senior Vice President, General Counsel, Chief
Administrative Officer and Corporate Secretary
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Ralph W. Bower
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47
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Chief Operating Officer
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Cheryl A. Bachelder, age 53, has served as our Chief
Executive Officer and as President of Popeyes since November
2007. Ms. Bachelder has served on the Board of AFC
Enterprises, Inc. since November 2006 and on the Board of True
Value Corporation since July 2006. From January 2001 to
September 2003, she was the President and Chief Concept Officer
for KFC Corporation in Louisville, Kentucky. While at KFC, she
was responsible for leading its U.S. restaurants, including
operations and all other functional areas of the business. From
June 1995 to December 2000, Ms Bachelder served as Vice
President, Marketing and Product Development for Dominos
Pizza, Inc.
H. Melville Hope, III, age 48, has served
as our Chief Financial Officer since December 2005. From
February 2004 until December 2005, Mr. Hope served as
our Senior Vice President, Finance and Chief Accounting Officer.
From April 2003 to February 2004, Mr. Hope was our Vice
President of Finance. Prior to joining AFC, he was an
independent consultant in Atlanta, Georgia from January 2003 to
April 2003. From April 2002 to January 2003, Mr. Hope was
Chief Financial Officer for First Cambridge HCI Acquisitions,
LLC, a real estate investment firm, located in Birmingham,
Alabama. From November 2001 to April 2002, Mr. Hope was a
financial and business advisory consultant in Atlanta, Georgia.
From July 1984 to July 2001, Mr. Hope was an accounting,
auditing and business advisory professional for
PricewaterhouseCoopers, LLP in Atlanta, Georgia, in Savannah,
Georgia and in Houston, Texas where he was admitted to the
partnership in 1998.
Richard H. Lynch, age 55, has served as our Chief
Marketing Officer effective March 1, 2008, following his
consultancy as interim CMO. Mr. Lynch served as Principal
of Go LLC, a marketing consulting firm specializing in
restaurant and food retail from July 2003 to February 2008,
where he developed brand strategy and innovation plans for
concepts including Burger King, Ruby Tuesday, and Buffalo Wild
Wings. From November 1982 to June 2003, Mr. Lynch served as
Executive Vice President at Campbell Mithun Advertising where he
led the development of brand architecture and positioning for
brands such as Dominos Pizza, Martha Stewart Everyday and
Betty Crocker.
Harold M. Cohen, age 46, has served as our Senior
Vice President of Legal Affairs, Corporate Secretary and General
Counsel since September 2005. Mr. Cohen has served as our
Chief Administrative Officer since May 2008. Mr. Cohen has
been General Counsel of Popeyes, a division of AFC Enterprises,
Inc., since January 2005. He also has served as Vice President
of AFC since July 2000. From April 2001 to December 2004, he
served as Deputy General Counsel of AFC. From August 1995 to
June 2000, he was Corporate Counsel for AFC.
Ralph W. Bower, age 47, was appointed to the
position of our Chief Operating Officer effective March 2009.
From February 2008 to March 2009, Mr. Bower served as our
chief operations officer. From February 2006 to January 2008,
Mr. Bower was the KFC operations leader responsible for
more than 1,300 KFC franchised restaurants in the western United
States. Prior to this position, he led KFC company operations in
Pennsylvania, New Jersey and Delaware. From February 2002 to
February 2003, Mr. Bower directed the guest satisfaction
function for KFC. Before joining KFC, Mr. Bower was Vice
President of Operations for Western Ohio Pizza, a franchisee of
Dominos Pizza, overseeing operations in Dayton, OH, and
Indianapolis, IN.
14
PART II.
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Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock currently trades on the Nasdaq Global Market
under the symbol AFCE.
The following table sets forth the high and low per share sales
prices of our common stock, by quarter, for fiscal years 2009
and 2008.
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2009
|
|
2008
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(Dollars per share)
|
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High
|
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Low
|
|
High
|
|
Low
|
|
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First Quarter
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|
$
|
7.09
|
|
|
$
|
3.72
|
|
|
$
|
11.35
|
|
|
$
|
7.07
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|
Second Quarter
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|
$
|
7.37
|
|
|
$
|
4.96
|
|
|
$
|
10.68
|
|
|
$
|
7.79
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|
Third Quarter
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|
$
|
9.10
|
|
|
$
|
6.26
|
|
|
$
|
9.56
|
|
|
$
|
6.43
|
|
Fourth Quarter
|
|
$
|
9.13
|
|
|
$
|
7.58
|
|
|
$
|
6.45
|
|
|
$
|
2.85
|
|
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Share
Repurchases
As originally announced on July 22, 2002, and subsequently
amended and expanded, the Companys Board of Directors has
approved a share repurchase program. As of December 27,
2009, the remaining shares that may be repurchased under the
program was approximately $38.9 million. See Note 13
to our Consolidated Financial Statements.
During fiscal 2009, no shares of common stock were repurchased
or retired. During fiscal year 2008, we repurchased and retired
2,120,401 shares of our common stock for approximately
$19.0 million under our share repurchase program, primarily
under an accelerated share repurchase program.
Pursuant to the terms of the Companys 2005 Credit
Facility, as amended and restated, the Company is subject to a
repurchase limit of approximately $47.3 million for the
remainder of fiscal 2010.
Shareholders
of Record
As of February 21, 2010, we had 117 shareholders of
record of our common stock.
Dividend
Policy
We anticipate that we will retain any future earnings to support
operations and to finance the growth and development of our
business, and we do not expect to pay cash dividends in the
foreseeable future. Any future determination relating to our
dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including
future earnings, capital requirements, financial conditions,
plans for share repurchases, future prospects and other factors
that the board of directors may deem relevant. Other than a
special cash dividend, we have never declared or paid cash
dividends on our common stock. Additionally, our 2005 Credit
Facility, as amended and restated, restricts the extent to which
we may declare or pay a cash dividend.
15
Stock
Performance Graph
The following stock performance graph compares the performance
of our common stock to the Standard & Poors 500
Stock Index (S&P 500 Index) and a peer group
index for the period from December 26, 2004 through
December 27, 2009 and further assumes the reinvestment of
all dividends.
Comparison
of Cumulative Five Year Total Return
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|
Company Name / Index
|
|
|
12/26/2004
|
|
|
12/25/2005
|
|
|
12/31/2006
|
|
|
12/30/2007
|
|
|
12/28/2008
|
|
|
12/27/2009
|
AFC Enterprises, Inc.
|
|
|
$
|
100
|
|
|
|
$
|
123
|
|
|
|
$
|
142
|
|
|
|
$
|
84
|
|
|
|
$
|
35
|
|
|
|
$
|
67
|
|
S&P 500 Index
|
|
|
$
|
100
|
|
|
|
$
|
107
|
|
|
|
$
|
122
|
|
|
|
$
|
129
|
|
|
|
$
|
78
|
|
|
|
$
|
103
|
|
Peer Group Index
|
|
|
$
|
100
|
|
|
|
$
|
114
|
|
|
|
$
|
143
|
|
|
|
$
|
161
|
|
|
|
$
|
129
|
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
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Our Peer Group Index is composed of the following quick service
restaurant companies: CKE Restaurants Inc., Jack In the Box
Inc., Papa Johns International Inc., Sonic Corp., Wendys
International Inc. (included through
9/29/08,
when it was acquired by Triarc Companies, Inc.), and YUM! Brands
Inc.
16
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The following data was derived from our Consolidated Financial
Statements. Such data should be read in conjunction with our
Consolidated Financial Statements and the notes thereto and our
Managements Discussion and Analysis of Financial
Condition and Results of Operations at Item 7 of this
Annual Report.
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|
|
|
|
|
|
(Dollars in millions, except per
share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Summary of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by company-operated restaurants
|
|
$
|
57.4
|
|
|
$
|
78.3
|
|
|
$
|
80.0
|
|
|
$
|
65.2
|
|
|
$
|
60.3
|
|
Franchise revenues(2)
|
|
|
86.0
|
|
|
|
84.6
|
|
|
|
82.8
|
|
|
|
82.6
|
|
|
|
77.5
|
|
Rent and other revenues
|
|
|
4.6
|
|
|
|
3.9
|
|
|
|
4.5
|
|
|
|
5.2
|
|
|
|
5.6
|
|
|
|
|
Total revenues
|
|
|
148.0
|
|
|
|
166.8
|
|
|
|
167.3
|
|
|
|
153.0
|
|
|
|
143.4
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant employee, occupancy and other expenses
|
|
|
29.5
|
|
|
|
41.4
|
|
|
|
40.7
|
|
|
|
33.7
|
|
|
|
30.5
|
|
Restaurant food, beverages and packaging
|
|
|
18.9
|
|
|
|
27.1
|
|
|
|
27.3
|
|
|
|
21.3
|
|
|
|
20.6
|
|
Rent and other occupancy expenses
|
|
|
2.6
|
|
|
|
2.4
|
|
|
|
2.3
|
|
|
|
2.7
|
|
|
|
3.2
|
|
General and administrative expenses(3)
|
|
|
56.0
|
|
|
|
53.9
|
|
|
|
47.2
|
|
|
|
45.4
|
|
|
|
65.5
|
|
Depreciation and amortization
|
|
|
4.4
|
|
|
|
6.3
|
|
|
|
6.9
|
|
|
|
6.4
|
|
|
|
7.3
|
|
Other expenses (income), net(4)
|
|
|
(2.1
|
)
|
|
|
(4.6
|
)
|
|
|
(2.7
|
)
|
|
|
(1.8
|
)
|
|
|
23.2
|
|
|
|
|
Total expenses
|
|
|
109.3
|
|
|
|
126.5
|
|
|
|
121.7
|
|
|
|
107.7
|
|
|
|
150.3
|
|
|
|
|
Operating profit (loss)
|
|
|
38.7
|
|
|
|
40.3
|
|
|
|
45.6
|
|
|
|
45.3
|
|
|
|
(6.9
|
)
|
Interest expense, net(5)
|
|
|
8.4
|
|
|
|
8.1
|
|
|
|
8.7
|
|
|
|
11.1
|
|
|
|
6.8
|
|
|
|
|
Income (loss) before income taxes
|
|
|
30.3
|
|
|
|
32.2
|
|
|
|
36.9
|
|
|
|
34.2
|
|
|
|
(13.7
|
)
|
Income tax expense
|
|
|
11.5
|
|
|
|
12.8
|
|
|
|
13.8
|
|
|
|
12.0
|
|
|
|
(5.3
|
)
|
|
|
|
Net income (loss)
|
|
$
|
18.8
|
|
|
$
|
19.4
|
|
|
$
|
23.1
|
|
|
$
|
22.2
|
|
|
$
|
(8.4
|
)
|
|
|
|
Earnings per common share, basic
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
|
$
|
0.81
|
|
|
$
|
0.75
|
|
|
$
|
(0.29
|
)
|
Earnings per common share, diluted
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
|
$
|
0.80
|
|
|
$
|
0.74
|
|
|
$
|
(0.29
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25.3
|
|
|
|
25.6
|
|
|
|
28.6
|
|
|
|
29.5
|
|
|
|
29.1
|
|
Diluted
|
|
|
25.4
|
|
|
|
25.7
|
|
|
|
28.8
|
|
|
|
29.8
|
|
|
|
29.1
|
|
Summary of cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special cash dividend
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
0.7
|
|
|
$
|
0.7
|
|
|
$
|
352.9
|
|
Share repurchases
|
|
|
|
|
|
|
19.0
|
|
|
|
39.4
|
|
|
|
20.3
|
|
|
|
19.5
|
|
Year-end balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
116.6
|
|
|
$
|
132.0
|
|
|
$
|
155.0
|
|
|
$
|
163.1
|
|
|
$
|
212.7
|
|
Total debt(6)
|
|
|
82.6
|
|
|
|
119.2
|
|
|
|
132.8
|
|
|
|
134.0
|
|
|
|
191.4
|
|
|
(1) Factors that impact the comparability of revenues
for the years presented include:
|
|
|
|
(a)
|
The effects of restaurant openings, closings, unit conversions,
franchisee sales and same-store sales (see Summary of
System-Wide Data later in this Item 6).
|
|
|
|
|
(b)
|
On January 26, 2009, the Company completed the
re-franchising of 3 company-operated restaurants in its
Nashville, Tennessee market resulting in a decrease in 2009
revenues of $3.1 million (net of franchise royalties
earned) as compared to 2008.
|
|
|
|
|
(c)
|
On June 8, 2009, the Company completed the re-franchising
of 13 company-operated restaurants in its Atlanta, Georgia
market resulting in a decrease in 2009 revenues of
$6.8 million (net of franchise royalties earned) as
compared to 2008.
|
17
|
|
|
|
(d)
|
On September 8, 2008, the Company completed the
re-franchising and sale of 11 company-operated restaurants
in its Atlanta, Georgia market resulting in a decrease in 2008
revenues of approximately $4.0 million (net of franchise
royalties earned) as compared to 2007; and a decrease in 2009
revenue of $9.2 million (net of franchise royalties earned)
compared to 2008.
|
|
|
|
|
(e)
|
During the third quarter of 2005, the company-operated
restaurants in the City of New Orleans were adversely affected
by Hurricane Katrina. The timing of restaurant closures and
re-openings resulted in: a decrease in company-operated
restaurant sales of approximately $9.9 million in 2006 as
compared to 2005; and an increase in company-operated restaurant
sales of approximately $13.1 million in 2007 as compared to
2006.
|
|
|
|
|
(f)
|
The Companys fiscal year ends on the last Sunday in
December. The 2006 fiscal year consisted of 53 weeks. All
other fiscal years presented consisted of 52 weeks each.
The 53rd week in 2006 increased sales by company-operated
restaurants by approximately $1.2 million and increased
franchise revenues by approximately $1.3 million.
|
|
|
|
|
(g)
|
On May 1, 2006, the Company completed an acquisition of 13
franchised restaurants from a Popeyes franchisee in the Memphis
and Nashville, Tennessee markets. The results of operations of
the acquired restaurants are included in the consolidated
financial statements since that date. The acquired units
increased 2006 revenues by approximately $10.0 million (net
of lost franchise revenues attributable to these restaurants)
and increased 2007 revenues by approximately $5.3 million
as compared to 2006 (net of lost franchise revenues attributable
to these restaurants).
|
|
|
(h)
|
The consolidated financial results include the accounts of the
Company and the accounts of any franchisee entity deemed a
variable interest entity (VIE) where we are the
primary beneficiary. During 2006 and 2005, the consolidation of
a VIE increased sales by company-operated restaurants by
approximately $1.2 million and $2.7 million,
respectively.
|
|
|
|
(2) |
|
Franchise revenues are principally composed of royalty payments
from franchisees that are determined based on franchise net
restaurant sales and are generally 5% of franchise net
restaurant sales. While franchise sales are not recorded as
revenue by the Company, management believes they are important
in understanding the Companys financial performance
because these sales are indicative of the Companys health,
given the Companys strategic focus on growing its overall
business through franchising. Total franchisee sales were
$1.716 billion in 2009, $1.663 billion in 2008,
$1.651 billion in 2007, $1.661 billion in 2006, and
$1.552 billion in 2005. Fiscal year 2006 included a
53rd week
which increased franchisee sales by approximately
$27.9 million. All other fiscal years presented consisted
of 52 weeks. |
|
(3) |
|
During 2005, general and administrative expenses included
approximately $8.3 million relating to corporate
restructuring charges as well as stay bonuses and severance
costs paid to the Companys former Chief Executive Officer,
former Chief Financial Officer and former General Counsel. |
|
(4) |
|
Factors that impact the comparability of other expenses (income)
for the years presented include: |
|
|
|
|
(a)
|
During 2009 there were no significant expenses (income)
associated with shareholder litigation. During 2008, 2007, 2006,
and 2005, our expenses (income) associated with litigation
related costs (proceeds) were approximately
$(12.9) million, $(0.9) million, $(0.3) million,
and $21.8 million, respectively. The substantially higher
costs in 2005 relate to the settlement of certain shareholder
litigation. The substantially higher income in 2008 relates to
recoveries from claims against certain director and officers
liability insurance policies.
|
|
|
|
|
(b)
|
During 2009 the Company sold ten real estate properties for a
gain of approximately $3.6 million.
|
|
|
|
|
(c)
|
During 2009, 2008, 2007, 2006, and 2005, impairments and
disposals of fixed assets were approximately $0.6 million,
$9.5 million, $1.9 million, $0.1 million, and
$5.8 million, respectively. Of the 2008 impairments,
$9.2 million was associated with the re-franchising of
company-operated restaurants in Atlanta, Georgia and Nashville,
Tennessee. Of the 2005 impairments, $4.1 million was due to
the adverse effects of Hurricane Katrina, $0.6 million of
which were subsequently reversed due to adjustments to damage
estimates in 2006.
|
18
|
|
|
|
(d)
|
During 2006 and 2005, our expenses (income), net associated with
hurricane related costs (other than impairments of long-lived
assets) associated with Hurricane Katrina were approximately
$0.7 million and $(2.5) million, respectively. During
2007, the Company also recognized approximately
$4.8 million of income from insurance proceeds related to
property damage and business interruption claims.
|
|
|
|
(5) |
|
During 2009, we expensed $1.9 million as a component of
Interest expense, net in connection with the third amendment and
restatement of the 2005 Credit Facility. See Note 10 for a
description of the amendment and restatement transaction. |
|
(6) |
|
Total debt includes the long-term and current portions of our
debt facilities, capital lease obligations, outstanding lines of
credit, and other borrowings. |
Summary
of System-Wide Data
The following table presents financial and operating data for
the Popeyes restaurants we operate and those that we franchise.
The data presented is unaudited. Data for franchised restaurants
is derived from information provided by our franchisees. We
present this data because it includes important operational
measures relevant to the QSR industry.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Global system-wide sales increase(1)
|
|
|
1.8
|
%
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
|
|
7.0
|
%
|
|
|
4.8
|
%
|
Total domestic same-store sales increase (decrease)
|
|
|
0.6
|
%
|
|
|
(2.2
|
)%
|
|
|
(2.3
|
)%
|
|
|
1.6
|
%
|
|
|
3.3
|
%
|
International same-store sales increase (decrease)
|
|
|
1.9
|
%
|
|
|
4.1
|
%
|
|
|
1.1
|
%
|
|
|
(3.2
|
)%
|
|
|
(4.2
|
)%
|
Total global same-store sales increase (decrease)(2)
|
|
|
0.7
|
%
|
|
|
(1.7
|
)%
|
|
|
(2.0
|
)%
|
|
|
1.1
|
%
|
|
|
2.6
|
%
|
Company-operated restaurants (all domestic)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants at beginning of year
|
|
|
55
|
|
|
|
65
|
|
|
|
56
|
|
|
|
32
|
|
|
|
56
|
|
New restaurant openings
|
|
|
0
|
|
|
|
1
|
|
|
|
5
|
|
|
|
3
|
|
|
|
1
|
|
Restaurant conversions, net(3)
|
|
|
(16
|
)
|
|
|
(11
|
)
|
|
|
1
|
|
|
|
12
|
|
|
|
2
|
|
Permanent closings
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(7
|
)
|
Temporary (closings)/re-openings, net(4)
|
|
|
0
|
|
|
|
3
|
|
|
|
6
|
|
|
|
12
|
|
|
|
(20
|
)
|
|
|
|
Restaurants at end of year
|
|
|
37
|
|
|
|
55
|
|
|
|
65
|
|
|
|
56
|
|
|
|
32
|
|
|
|
|
Franchised restaurants (domestic and international)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants at beginning of year
|
|
|
1,867
|
|
|
|
1,840
|
|
|
|
1,822
|
|
|
|
1,796
|
|
|
|
1,769
|
|
New restaurant openings
|
|
|
95
|
|
|
|
139
|
|
|
|
119
|
|
|
|
139
|
|
|
|
122
|
|
Restaurant conversions, net(3)
|
|
|
16
|
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
(2
|
)
|
Permanent closings
|
|
|
(79
|
)
|
|
|
(117
|
)
|
|
|
(106
|
)
|
|
|
(93
|
)
|
|
|
(95
|
)
|
Temporary (closings)/re-openings, net(4)
|
|
|
7
|
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
(8
|
)
|
|
|
2
|
|
|
|
|
Restaurants at end of year
|
|
|
1,906
|
|
|
|
1,867
|
|
|
|
1,840
|
|
|
|
1,822
|
|
|
|
1,796
|
|
|
|
|
Total system restaurants
|
|
|
1,943
|
|
|
|
1,922
|
|
|
|
1,905
|
|
|
|
1,878
|
|
|
|
1,828
|
|
|
|
|
New franchised restaurant openings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
39
|
|
|
|
72
|
|
|
|
77
|
|
|
|
97
|
|
|
|
71
|
|
International
|
|
|
56
|
|
|
|
67
|
|
|
|
42
|
|
|
|
42
|
|
|
|
51
|
|
|
|
|
Total new franchised restaurant openings
|
|
|
95
|
|
|
|
139
|
|
|
|
119
|
|
|
|
139
|
|
|
|
122
|
|
|
|
|
Franchised restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
1,539
|
|
|
|
1,527
|
|
|
|
1,518
|
|
|
|
1,503
|
|
|
|
1,451
|
|
International
|
|
|
367
|
|
|
|
340
|
|
|
|
322
|
|
|
|
319
|
|
|
|
345
|
|
|
|
|
Restaurants at end of year
|
|
|
1,906
|
|
|
|
1,867
|
|
|
|
1,840
|
|
|
|
1,822
|
|
|
|
1,796
|
|
|
|
|
|
(1) |
|
Fiscal year 2006 consisted of 53 weeks. All other fiscal
years presented consisted of 52 weeks each. The 53rd week
in 2006 contributed approximately 1.8% to global system-wide
sales growth. Excluding the impact of the 53rd week in 2006,
global system-wide sales growth in 2007 was approximately 2.1%. |
|
(2) |
|
New restaurants are included in the computation of same-store
sales after they have been open 15 months. Unit conversions
are included immediately upon conversion. |
|
(3) |
|
Unit conversions include the sale or purchase of
company-operated restaurants to/from a franchisee. |
|
(4) |
|
Temporary closings are presented net of re-openings. Most
temporary closings arise due to the re-imaging or the rebuilding
of older restaurants. In 2005, there were significant temporary
closings related to Hurricane Katrina. |
19
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis should be read in
conjunction with our Selected Financial Data, our Consolidated
Financial Statements and our Risk Factors that are included
elsewhere in this filing.
Our discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such
as our plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from
those anticipated in these forward-looking statements, as a
result of a number of factors including those factors set forth
in Item 1A. of this Annual Report and other factors
presented throughout this filing.
Nature of
Business
AFC develops, operates, and franchises quick-service restaurants
under the trade names
Popeyes®
Chicken & Biscuits and
Popeyes®
Louisiana Kitchen (collectively Popeyes) in
44 states, the District of Columbia, Puerto Rico, Guam, and
27 foreign countries. Popeyes has two reportable business
segments: franchise operations and company-operated restaurants.
Financial information concerning these business segments can be
found at Note 21 to our Consolidated Financial Statements.
Management
Overview of 2009 Results:
Our fiscal year 2009 results and highlights include the
following:
|
|
|
|
|
Reported net income was $18.8 million, or $0.74 per diluted
share, compared to $19.4 million, or $0.76 per diluted
share, last year. Adjusted earnings per diluted share were $0.74
in 2009, compared to $0.65 in 2008, an increase of
14 percent. Adjusted earnings per diluted share is a
supplemental non-GAAP measure of performance. Please see
Non-GAAP Financial Measures in this Item 7
for a definition of adjusted earnings per diluted share and a
reconciliation to the most comparable GAAP measure.
|
|
|
|
Total system-wide sales increased 1.8 percent compared to a
0.6 percent increase last year.
|
|
|
|
Global same-store sales increased 0.7 percent compared to a
1.7 percent decrease last year. Total domestic same-store
sales increased 0.6 percent, compared to a 2.2 percent
decrease last year, outpacing both the QSR and chicken QSR
categories. International same-store sales increased
1.9 percent, compared to a 4.1 percent increase last
year, the third consecutive year of positive same-store sales.
|
|
|
|
The Popeyes system opened 95 restaurants globally and entered
two new countries, Malaysia and Egypt. 81 restaurants were
permanently closed, resulting in net openings of 14 restaurants,
which exceeded our previous guidance of 0-10 net openings.
|
|
|
|
We successfully completed our re-franchising strategy with the
sale of our 27 company-operated restaurants in Atlanta and
Nashville. The year over year impact of re-franchising was
favorable to operating profit by approximately
$1.7 million, including franchise fees and royalties,
general and administrative savings, and lower depreciation and
amortization.
|
|
|
|
Outstanding debt was reduced by $36.6 million to
$82.6 million.
|
|
|
|
On August 14, 2009, we entered into a third amendment and
restatement to the 2005 Credit Facility to, among other things,
extend the maturity dates of our revolving credit facility and
term loan by two years to May 2012 and May 2013, respectively.
For a discussion of the terms see Long Term Debt
within this Item 7.
|
2009
Same-Store Sales
During 2009, total domestic same-store sales increased 0.6%
resulting from the Companys strategy of advertising more
compelling price points and using more efficient media. In 2009,
we promoted our famous
Bonafide®
bone-in chicken and seafood offerings at compelling price points
for both the single and family-user. These promotions, supported
by national media advertising, delivered positive guest counts.
According to independent data, Popeyes domestic same-store
sales outpaced both the QSR and chicken QSR categories. We
20
remain focused on increasing traffic by offering distinctive
Louisiana food, compelling value, and an improved guest
experience. For additional information on our business
strategies, see the discussion under the heading Our
Business Strategy in Item 1 to this Annual Report on
Form 10-K.
Within our international operations, same-store sales increased
by 1.9% during fiscal 2009 due primarily to strong sales in
Korea, Canada, Turkey and overseas U.S. military bases,
partially offset by negative performance in Latin America and
the Middle East. Similar to the U.S., we are working with our
international franchisees to implement distinctive new products
and core menu value promotions to drive traffic gains in the
restaurants.
As it concerns our expected same-store sales results for 2010,
see the discussion under the heading Operating and
Financial Outlook for 2010 later in this Item 7.
2009 Unit
Growth
During 2009, our global restaurant system grew by 21 net
restaurants. In 2009, we opened 95 new franchised restaurants,
offset by 79 permanent closures of franchised restaurants and 2
permanent closures of company-operated restaurants. In addition,
our year-end restaurant count for 2009 includes 7 net
re-opened restaurants.
As it concerns our expected openings and closings for 2010, see
the discussion under the heading Operating and Financial
Outlook for 2010 later in this Item 7.
Factors
Affecting Comparability of Consolidated Results of Operations:
2009, 2008, and 2007
For 2009, 2008, and 2007, the following items and events affect
comparability of reported operating results:
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|
|
|
During 2009 we re-franchised 13 company-operated
restaurants in Atlanta, Georgia, and during 2008 we
re-franchised 11 company-operated restaurants in Atlanta,
Georgia. In 2009 we also re-franchised 3 company-operated
restaurants in Nashville, Tennessee. The re-franchising resulted
in a decrease in 2009 revenues of $19.1 million (net of
franchise royalties earned) as compared to 2008 and a decrease
in 2008 revenues of $4.0 million (net of franchise
royalties earned) as compared to 2007.
|
|
|
|
During 2009 we sold 10 real estate properties for a gain of
approximately $3.6 million.
|
|
|
|
During 2008 and 2007, our income associated with litigation
related proceeds was $12.9 million and $0.9 million,
respectively.
|
|
|
|
During 2009, 2008 and 2007, impairments and disposals of fixed
assets were $0.6 million, $9.5 million and
$1.9 million, respectively.
|
|
|
|
During 2007, we recognized approximately $4.8 million of
income from insurance proceeds related to property damage and
business interruption claims associated with Hurricane Katrina.
|
Comparisons
of Fiscal Years 2009 and 2008
Sales by
Company-Operated Restaurants
Sales by company-operated restaurants were $57.4 million in
2009, a $20.9 million decrease from 2008. The decrease was
due to:
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|
|
|
|
The successful re-franchising and sales of
11 company-operated restaurants in the Atlanta, Georgia
market in the third quarter of 2008, 3 company-operated
restaurants in the Nashville, Tennessee market in the first
quarter of 2009, and 13 company-operated restaurants in the
Atlanta, Georgia market in the second quarter of 2009.
|
The operating profit impact of re-franchising the
company-operated restaurants was favorable during 2009 when
compared to 2008 by approximately $1.7 million.
21
Franchise
Revenues
Franchise revenues have three basic components: (1) ongoing
royalty payments that are determined based on a percentage of
franchisee sales; (2) franchise fees associated with new
restaurant openings; and (3) development fees associated
with the opening of new franchised restaurants in a given
market. Royalty revenues are the largest component constituting
more than 90% of franchise revenues.
Franchise revenues were $86.0 million in 2009, a
$1.4 million increase from 2008. The increase was primarily
due to a net $2.8 million increase in royalties, primarily
from new franchised restaurants and an increase in franchise
same-store sales during 2009, partially offset by a
$1.4 million reduction in franchise fees.
Rent and
Other Revenues
Rent and other revenues are primarily composed of rental income
associated with properties leased or subleased to franchisees
and is recognized on the straight-line basis over the lease
term. Rent and other revenues were $4.6 million in 2009, a
$0.7 million increase from 2008, due primarily to an
increase in the number of leased or subleased properties as a
result of the re-franchising and sale of company-operated
restaurants in the Atlanta, Georgia and Nashville, Tennessee
markets.
Restaurant
Employee, Occupancy and Other Expenses
Restaurant employee, occupancy and other expenses were
$29.5 million in 2009, an $11.9 million decrease from
2008. This decrease was principally due to a reduction in the
number of company-operated restaurants as discussed above.
Restaurant employee, occupancy and other expenses were
approximately 51% and 53% of sales from company-operated
restaurants in 2009 and 2008, respectively. This 2% improvement
was primarily attributable to lower business insurance expense,
utility costs, other net operating costs, and the re-franchising
of company-operated restaurants.
Restaurant
Food, Beverages and Packaging
Restaurant food, beverages and packaging expenses were
$18.9 million in 2009, an $8.2 million decrease from
2008. This decrease was principally due to a reduction in the
number of company-operated restaurants as discussed above.
Restaurant food, beverages and packaging expenses were
approximately 33% and 35% of sales from company-operated
restaurants in 2009 and 2008, respectively. This 2% improvement
was primarily attributable to lower commodity costs and the
re-franchising of company-operated restaurants.
Rent and
Other Occupancy Expenses
Rent and other occupancy expenses were $2.6 million in
2009, a $0.2 million increase from 2008.
General
and Administrative Expenses
General and administrative expenses were $56.0 million in
2009, a $2.1 million increase from 2008. The increase was
primarily due to:
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|
|
|
|
a $2.0 million increase in bad debt expense,
|
|
|
|
a $0.8 million increase in personnel expense, primarily
related to employee incentive accruals, and
|
|
|
|
a $0.4 million increase due to $1.4 million net of
national media advertising expenses, partially offset by
non-recurring marketing expenses incurred during 2008,
|
partially offset by:
|
|
|
|
|
a $0.8 million decrease in business conference and travel
expenses, and
|
|
|
|
a $0.3 million decrease in professional fees and other net
general and administrative costs.
|
General and administrative expenses were approximately 3.2% and
3.1% of system-wide sales in 2009 and 2008, respectively.
22
Depreciation
and Amortization
Depreciation and amortization was $4.4 million in 2009, a
$1.9 million decrease from 2008. The decrease was
principally due to certain fully depreciated information
technology assets in 2009 and the reclassification and
subsequent sale of certain company-operated assets in our
Atlanta, Georgia and Nashville, Tennessee markets as
Assets held for sale in 2008, resulting in the
discontinuation of depreciation on these assets.
Other
Expenses (Income), Net
Other expenses (income), net was $2.1 million of income in
2009 as compared to $4.6 million of income in 2008.
The income in 2009 primarily resulted from $3.6 million in
gain on the sale of real estate properties partially offset by a
$0.4 million loss on insurance recoveries related to asset
damages, a $0.2 million impairment of a company-operated
restaurant in Memphis, Tennessee and $0.9 million in other
net expenses associated with the closure and disposal of
company-operated restaurants and assets.
The income in 2008 resulted primarily from $12.9 million in
recoveries from directors and officers insurance claims,
$0.9 million in gain on the sale of assets and
$0.5 million in insurance recoveries related to property
damages, partially offset by $9.5 million in impairments
and disposals of fixed assets, including $0.6 million in
goodwill impairment and $2.4 million in impairment of
re-acquired franchise rights.
See Note 17 to our Consolidated Financial Statements for a
description of Other expenses (income), net for 2009 and 2008.
Operating
Profit
On a consolidated basis, operating profit was $38.7 million
in 2009, a $1.6 million decrease when compared to 2008.
Fluctuations in the various components of revenue and expense
giving rise to this change are discussed above. The following is
a general discussion of the fluctuations in operating profit by
business segment.
Operating profit for each reportable segment includes operating
results directly allocable to each segment plus a 5%
inter-company royalty charge from franchise operations to
company-operated restaurants.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
|
|
(Dollars in millions)
|
|
2009
|
|
|
2008
|
|
|
Fluctuation
|
|
|
Percent
|
|
|
|
|
Franchise operations
|
|
$
|
36.8
|
|
|
$
|
38.9
|
|
|
$
|
(2.1
|
)
|
|
|
(5.4
|
)%
|
Company-operated restaurants
|
|
|
4.2
|
|
|
|
3.1
|
|
|
|
1.1
|
|
|
|
35.5
|
%
|
|
|
|
Operating profit before unallocated expenses
|
|
|
41.0
|
|
|
|
42.0
|
|
|
|
(1.0
|
)
|
|
|
(2.4
|
)%
|
Less unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4.4
|
|
|
|
6.3
|
|
|
|
1.9
|
|
|
|
30.2
|
%
|
Other expenses (income), net
|
|
|
(2.1
|
)
|
|
|
(4.6
|
)
|
|
|
(2.5
|
)
|
|
|
(54.3
|
)%
|
|
Total
|
|
$
|
38.7
|
|
|
$
|
40.3
|
|
|
$
|
(1.6
|
)
|
|
|
(4.0
|
)%
|
|
The $2.1 million decrease in operating profit associated
with our franchise operations was principally due to lower
franchise fees and an increase in general and administrative
expenses as discussed above, partially offset by higher royalty
revenues from new franchised restaurants and an increase in
franchise same-store sales during 2009.
The $1.1 increase in operating profit associated with our
company-operated restaurants was principally due to higher
restaurant operating profit margins as discussed above and lower
general and administrative support costs, partially offset by
the impact of refranchising restaurants in the Atlanta, Georgia
and Nashville, Tennessee markets.
Fluctuations in Depreciation and amortization and Other expenses
(income), net are discussed above.
Interest
Expense, Net
Interest expense, net was $8.4 million in 2009, a
$0.3 million increase from 2008. The increase results
primarily from the $1.9 million expensed in connection with
the third amendment and restatement of the 2005
23
Credit Facility, partially offset by lower average debt balances
as compared to 2008. A schedule of the components of interest
expense, net can be found at Note 18 to our Consolidated
Financial Statements.
Income
Tax Expense
In 2009, we had an income tax expense of $11.5 million
compared to $12.8 million in 2008. Our effective tax rate
for 2009 was 38.0% compared to 39.8% for 2008 (see a
reconciliation of these effective rates in Note 19 to our
Consolidated Financial Statements). The effective tax rate for
2009 was unfavorably impacted by 0.4% associated with
limitations on deductibility of executive compensation. The
effective tax rate for 2008 was unfavorably impacted by 0.7%
associated with the impairment of non-deductible goodwill. Other
differences between the effective tax rate and the statutory tax
rate are principally attributable to estimated tax reserves,
other permanent differences and inter-period allocations.
Comparisons
of Fiscal Years 2008 and 2007
Sales by
Company-Operated Restaurants
Sales by company-operated restaurants were $78.3 million in
2008, a $1.7 million decrease from 2007. The decrease was
primarily due to:
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|
|
|
|
a $4.2 million decrease due to the re-franchising and sale
on September 8, 2008 of 11 company-operated
restaurants in our Atlanta, Georgia market, and
|
|
|
|
a $4.0 million decrease due to a 5.6% decrease in
same-store sales in fiscal 2008 as compared to fiscal 2007,
|
partially offset by:
|
|
|
|
|
a $3.5 million increase due to the opening of new
company-operated restaurants and the acquisition of one
restaurant during the second quarter of 2007 which was
previously owned by a franchisee, and
|
|
|
|
a net $3.0 million increase due primarily to the timing and
duration of temporary restaurant closures during both 2008 and
2007.
|
Franchise
Revenues
Franchise revenues were $84.6 million in 2008, a
$1.8 million increase from 2007. The increase in revenue
was primarily due to a net $3.1 million increase in
royalties and fees, primarily from new franchised restaurants
and termination fees realized during 2008, partially offset by a
2.1% decrease in domestic franchise same-store sales.
Rent and
Other Revenues
Rent and other revenues were $3.9 million in 2008, a
$0.6 million decrease from 2007, primarily as a result of a
reduction in the number of leased or subleased properties.
Restaurant
Employee, Occupancy and Other Expenses
Restaurant employee, occupancy and other expenses were
$41.4 million in 2008, a $0.7 million increase from
2007. Restaurant employee, occupancy and other expenses were
approximately 53% and 51% of sales from company-operated
restaurants in 2008 and 2007, respectively. The 2% increase as a
percent of sales resulted primarily from (1) a 1% increase
in restaurant management personnel costs due primarily to
manager positions which were unfilled during 2007; (2) a
0.5% increase in utilities costs; and (3) a 0.5% increase
in insurance costs and other net operating expenses.
Restaurant
Food, Beverages and Packaging
Restaurant food, beverages and packaging expenses were
$27.1 million in 2008, a $0.2 million decrease from
2007. Restaurant food, beverages and packaging expenses were
approximately 35% and 34% of sales from company-operated
restaurants in 2008 and 2007, respectively, increasing primarily
due to higher costs during 2008 for poultry, wheat, shortening
and other commodities.
24
Rent and
Other Occupancy Expenses
Rent and other occupancy expenses were $2.4 million in
2008, a $0.1 million increase from 2007.
General
and Administrative Expenses
General and administrative expenses were $53.9 million in
2008, a $6.7 million increase from 2007. The increase was
primarily due to:
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|
|
|
|
a $2.4 million increase due to marketing and menu
initiatives including national media advertising, new menu board
development, product research and other marketing related costs,
|
|
|
|
a $1.5 million increase in international expenses including
salary and personnel related costs, travel and other net general
and administrative costs,
|
|
|
|
a $1.0 million increase due to higher domestic salary,
employee relocation and other personnel related costs,
|
|
|
|
a $0.8 million increase in stock-based compensation
expense, and
|
|
|
|
a $1.0 million increase in travel, business conference
expenses and other net general and administrative costs.
|
General and administrative expenses were approximately 3.1% and
2.7% of system-wide sales in 2008 and 2007, respectively.
Depreciation
and Amortization
Depreciation and amortization was $6.3 million in 2008, a
$0.6 million decrease from 2007. The decrease was
principally due to the reclassification of certain
company-operated assets as Assets held for sale,
resulting in the discontinuation of depreciation on these
assets, and the related sale of the 11 company-operated
restaurants in our Atlanta, Georgia market.
Other
Expenses (Income), Net
Other expenses (income), net was $4.6 million of income in
2008 as compared to $2.7 million of income in 2007.
The income in 2008 resulted primarily from $12.9 million in
recoveries from directors and officers insurance claims,
$0.9 million in gain on the sale of assets and
$0.5 million in insurance recoveries related to property
damages, partially offset by $9.5 million in impairments
and disposals of fixed assets, including $0.6 million in
goodwill impairment and $2.4 million in impairment of
re-acquired franchise rights.
The income in 2007 resulted primarily from $4.8 million in
insurance recoveries related to property damage and business
interruption claims and $0.9 million in litigation related
proceeds, partially offset by $1.9 million in impairments
and disposals of fixed assets and $0.8 million of costs
related to restaurant closures.
See Note 17 to our Consolidated Financial Statements for a
description of Other expenses (income), net for 2008 and 2007.
25
Operating
Profit
On a consolidated basis, operating profit was $40.3 million
in 2008, a $5.3 million decrease when compared to 2007.
Fluctuations in the various components of revenue and expense
giving rise to this change are discussed above. The following is
a general discussion of the fluctuations in operating profit by
business segment.
During the fourth quarter 2008, the Company changed the basis in
which it measures reportable segment profit or loss in order to
improve the alignment between its strategy to re-franchise its
company-operated restaurants and the basis management uses to
allocate resources and assess performance. Operating profit for
each reportable segment includes operating results directly
allocable to each segment plus a 5% inter-company royalty charge
from franchise operations to company-operated restaurants.
Previously reported results have been reclassified to conform to
current years presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
Fluctuation
|
|
|
Percent
|
|
|
|
|
Franchise operations
|
|
$
|
38.9
|
|
|
$
|
45.1
|
|
|
$
|
(6.2
|
)
|
|
|
(13.7
|
)%
|
Company-operated restaurants
|
|
|
3.1
|
|
|
|
4.7
|
|
|
|
(1.6
|
)
|
|
|
(34.0
|
)%
|
|
|
|
Operating profit before unallocated expenses
|
|
|
42.0
|
|
|
|
49.8
|
|
|
|
(7.8
|
)
|
|
|
(15.7
|
)%
|
Less unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6.3
|
|
|
|
6.9
|
|
|
|
0.6
|
|
|
|
8.7
|
%
|
Other expenses (income), net
|
|
|
(4.6
|
)
|
|
|
(2.7
|
)
|
|
|
1.9
|
|
|
|
70.4
|
%
|
|
Total
|
|
$
|
40.3
|
|
|
$
|
45.6
|
|
|
$
|
(5.3
|
)
|
|
|
(11.6
|
)%
|
|
The $6.2 million decrease in operating profit associated
with our franchise operations was principally due to higher
costs for domestic franchise operations support and field
training, salary and other personnel related costs; marketing
and menu initiatives including national media advertising, new
menu board development, product research and other marketing
related activities; stock-based compensation expense; and an
increase in travel, business conference expenses and other net
general and administrative costs partially offset by higher net
operating profit from international franchising activities and
gains on the sale of real estate assets.
The $1.6 million decrease in operating profit associated
with our company-operated restaurants was principally due to the
re-franchising and sale of 11 company-operated restaurants
in our Atlanta, Georgia market, a decrease in same-store sales
in fiscal 2008 as compared to fiscal 2007, and increases in
operating expense.
Fluctuations in Depreciation and amortization and Other expenses
(income), net are discussed above.
Interest
Expense, Net
Interest expense, net was $8.1 million in 2008, a
$0.6 million decrease from 2007 resulting primarily from
lower average debt balances and lower average interest rates on
debt as compared to 2007.
Income
Tax Expense
In 2008, we had an income tax expense of $12.8 million
compared to $13.8 million in 2007. Our effective tax rate
for 2008 was 39.8% compared to 37.4% for 2007 (see a
reconciliation of these effective rates in Note 19 to our
Consolidated Financial Statements). The prior years
effective tax rate benefited from the reversal of tax reserves
due to the expiration of the statute of limitation. Had the
statute not expired during the prior year, the effective tax
rate for fiscal 2007 would have been 38.5%. The effective tax
rate for 2008 was unfavorably impacted by 0.7% associated with
the impairment of non-deductible goodwill. Other differences
between the effective tax rate and the statutory tax rate are
principally attributable to estimated tax reserves, other
permanent differences and inter-period allocations.
Liquidity
and Capital Resources
We finance our business activities primarily with:
|
|
|
|
|
Cash flows generated from our operating activities, and
|
26
|
|
|
|
|
Borrowings under our 2005 Credit Facility, as amended and
restated.
|
Based primarily upon our generation of cash flows from
operations, coupled with our existing cash reserves
(approximately $4.1 million available as of
December 27, 2009), and available borrowings under our 2005
Credit Facility, as amended and restated (approximately
$46.7 million available as of December 27, 2009), we
believe that we will have adequate cash flow (primarily from
operating cash flows) to meet our anticipated future
requirements for working capital, various contractual
obligations and expected capital expenditures for 2010.
On August 14, 2009, the Company entered into the third
amendment and restatement to the 2005 Credit Facility. The terms
of the third amendment and restatement gave the Company more
flexibility regarding cash usage and delayed the timing of more
restrictive total leverage ratio covenant requirements.
Key term changes in the amended and restated facility include
the following:
|
|
|
|
|
The term loan and revolving credit facility maturity dates were
extended by two years to May 2013 and May 2012,
respectively.
|
|
|
|
The Company must maintain a Total Leverage Ratio of 3.00 to 1 or
less through the end of the first quarter of 2012 and 2.75 to 1
or less thereafter.
|
See Note 10 for a discussion of the debt amendment and
restatement transaction.
Our franchise model provides diverse and reliable cash flows.
Net cash provided by operating activities of the Company was
$23.2 million and $29.7 million for 2009 and 2008,
respectively. The decrease in cash provided by operating
activities was primarily attributable to: (1) litigation
related proceeds received in 2008 (see Note 17 to our
Consolidated Financial Statements) and (2) increases in
general and administrative expenses; partially offset by
(3) higher franchise revenues; (4) lower income tax
payments; and (5) timing of interest payments. See our
Companys Consolidated Statements of Cash Flows in our
Consolidated Financial Statements.
During 2009, the Company received a payment of
$10.2 million under the terms of a receivable which was
recorded as a component of Other long-term assets,
net in the Consolidated balance sheet as of
December 28, 2008. During 2009, the Company realized
$7.1 million in combined cash proceeds from the
re-franchising of 13 company-operated restaurants in the
Atlanta, Georgia market and the sale of nine properties. These
proceeds were used to make debt prepayments during 2009.
Our cash flows and available borrowings allow us to pursue our
growth strategies. Our priorities in the use of available cash
are:
|
|
|
|
|
reinvestment in core business activities that promote the
Companys strategic initiatives,
|
|
|
|
reduction of long-term debt, and
|
|
|
|
repurchase of shares of our common stock (subject to the
restrictions under our 2005 Credit Facility, as amended and
restated).
|
Our investment in core business activities includes our
obligation to maintain our company-operated restaurants, and
provide marketing plans and operations support to our franchise
system.
Information regarding capital spending is discussed under the
heading entitled Capital Expenditures within this Item 7.
Under the terms of the Companys 2005 Credit Facility, as
amended and restated, at the end of each fiscal year the Company
is subject to mandatory prepayments on term loan borrowings of
Consolidated Excess Cash Flow, as defined in the 2005 Credit
Facility, as amended and restated, less the amount of
(1) any voluntary prepayments and (2) the amount by
which revolving loan commitments are permanently reduced in
connection with repayments and mandatory prepayments of the
revolving loans under the 2005 Credit Facility, as amended and
restated, when the Companys Total Leverage Ratio equals or
exceeds the amounts set forth below:
|
|
|
Total Leverage Ratio
|
|
Prepayment
|
|
|
> 2.00 to 1.0
|
|
50% of the Consolidated Excess Cash Flow
|
£
2.00 to 1.0
|
|
25% of the Consolidated Excess Cash Flow
|
|
27
Total Leverage Ratio is defined as the ratio of the
Companys Consolidated Total Indebtedness to Consolidated
EBITDA for the four immediately preceding fiscal quarters.
Consolidated Total Indebtedness means, as at any date of
determination, the aggregate principal amount of Indebtedness of
the Company and its Subsidiaries. For fiscal 2009, the Company
is subject to a mandatory prepayment of approximately
$0.3 million (25% of Consolidated Excess Cash Flow), which
is recorded as a component of Current debt maturities in the
Consolidated Balance Sheet as of December 27, 2009.
Pursuant to the 2005 Credit Facility, as amended and restated,
the Company is subject to a Total Leverage Ratio requirement of
£3.00
to 1.0 at December 27, 2009,
£
3.00 to 1.0 through the first fiscal quarter of 2012 and
£
2.75 to 1.0 thereafter. As of December 27, 2009, the
Companys Total Leverage Ratio was 1.95 to 1.0. In 2010,
the Company intends to apply cash realized from operations to
make voluntary debt prepayments or repurchase shares of our
common stock, subject to the restrictions in the Credit
Facility, as amended and restated.
Future debt maturities under the 2005 Credit Facility, as
amended and restated, include four designated quarterly payments
of approximately one fourth of the outstanding principal,
beginning in the
3rd
quarter of 2012. See the Contractual Obligations table within
this Item 7. The Company intends to refinance the 2005
Credit Facility, as amended and restated, in advance of these
maturities at a cost and interest rate that reflect market
conditions.
During fiscal 2009, we paid principal on term loan borrowings
under our 2005 Credit Facility, as amended and restated, in the
amount of $35.9 million, including a $2.8 million
mandatory prepayment of Consolidated Excess Cash Flow on behalf
of fiscal 2008. The Company also paid $0.5 million under
the revolving credit facility. As of December 27, 2009, the
Company had no outstanding borrowings under the revolving credit
facility.
The Company did not repurchase any shares of our common stock
during 2009. The remaining value of shares that may be
repurchased under the Companys share repurchase program
was $38.9 million. Pursuant to the terms of the
Companys 2005 Credit Facility, as amended and restated,
the Company is subject to a repurchase limit of approximately
$47.3 million for the remainder of fiscal 2010. The Company
is permitted to resume its common stock repurchase program once
the Total Leverage Ratio is less than 1.75 to 1. As of
December 27, 2009, the Companys Total Leverage Ratio
was 1.95 to 1.
Operating
and Financial Outlook for 2010
We project global same-store sales to be in the range of
negative 1.0 to positive 2.0 percent for 2010, given the
continuing challenges of the global economic environment and
increased competition on value within the restaurant industry.
With our stronger new opening pipeline, Popeyes projects our
global new openings to be in the range of
110-130
restaurants in 2010. Similar to the past few years, we will
continue to close underperforming restaurants and enforce higher
operating standards throughout the system. As a result, we
project system-wide unit closings to be approximately 100
restaurants, yielding 10-30 net restaurant openings in 2010.
Popeyes restaurant closures typically have sales significantly
lower than the system average.
We expect our fiscal 2010 general and administrative expense
rate to be consistent with last years rate of
3.1-3.2
percent of system-wide sales, among the lowest in the restaurant
industry. During 2010, we will continue to tightly manage
general and administrative expenses and invest in our
international business and core initiatives of our strategic
plan, including new product innovation to drive traffic,
operational tools and training to improve speed of service, and
productivity initiatives to strengthen restaurant profitability.
We believe these strategic investments are essential and
beneficial for the long-term growth of the brand.
We expect 2010 diluted earnings per share to be in the range of
$0.73-$0.77, compared to $0.74 last year.
Long-Term
Guidance
Over the course of the next five years, we believe execution of
our Strategic Plan will deliver on an average annualized basis
the following results: same-store sales growth of 1 to 3
percent; net new unit growth of 4 to 6 percent; and earnings per
diluted share growth of 13 to 15 percent.
28
Contractual
Obligations
The following table summarizes our contractual obligations, due
over the next five years and thereafter, as of December 27,
2009:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
|
|
(In millions)
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
after
|
|
|
Total
|
|
|
|
|
Long-term debt, excluding capital leases(1)
|
|
$
|
1.3
|
|
|
$
|
1.0
|
|
|
$
|
19.7
|
|
|
$
|
57.1
|
|
|
$
|
0.3
|
|
|
$
|
1.6
|
|
|
$
|
81.0
|
|
Interest on long-term debt, excluding capital leases(1)
|
|
|
5.7
|
|
|
|
5.6
|
|
|
|
5.5
|
|
|
|
2.1
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
19.6
|
|
Leases(2)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
4.8
|
|
|
|
4.5
|
|
|
|
4.3
|
|
|
|
55.5
|
|
|
|
81.1
|
|
Copeland formula agreement(3)
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
43.1
|
|
|
|
58.6
|
|
King Features agreements(3)
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Information technology outsourcing(3)
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Business process services(3)
|
|
|
1.0
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
Total(4)
|
|
$
|
18.9
|
|
|
$
|
17.4
|
|
|
$
|
34.5
|
|
|
$
|
66.8
|
|
|
$
|
7.9
|
|
|
$
|
100.7
|
|
|
$
|
246.2
|
|
|
|
|
|
(1) |
|
For variable rate debt, the Company estimated average
outstanding balances for the respective periods and applied
interest rates in effect at December 27, 2009. See
Note 10 to our Consolidated Financial Statements for
information concerning the terms of our 2005 Credit Facility, as
amended and restated, and the 2005 interest rate swap agreements. |
|
(2) |
|
Of the $81.1 million of minimum lease payments,
$76.7 million of those payments relate to operating leases
and the remaining $4.4 million of payments relate to
capital leases. See Note 11 to our Consolidated Financial
Statements. |
|
(3) |
|
See Note 16 to our Consolidated Financial Statements. |
|
(4) |
|
We have not included in the contractual obligations table
approximately $4.9 million for unrecognized tax benefits
for various tax positions we have taken. These liabilities may
increase or decrease over time as a result of tax examinations,
and given the status of the examinations, we cannot reliably
estimate the amount or period of cash settlement, if any, with
the respective taxing authorities. These liabilities also
include amounts that are temporary in nature and for which we
anticipate that over time there will be no net cash outflow. |
Share
Repurchase Program
As originally announced on July 22, 2002, and subsequently
amended and expanded, the Companys board of directors has
approved a share repurchase program of up to
$215.0 million. The program, which is open-ended, allows
the Company to repurchase shares of its common stock from time
to time. During 2008 and 2007 the Company repurchased and
retired 2,120,401 shares and 2,496,030 shares of
common stock for $19.0 million and $39.4 million,
respectively, under this program. There were no share
repurchases under the program in 2009.
The remaining value of shares that may be repurchased under the
program is $38.9 million. Pursuant to the terms of the
Companys 2005 Credit Facility, as amended and restated,
the Company is subject to a repurchase limit of approximately
$47.3 million for the remainder of fiscal 2010. The Company
may resume its common stock repurchase program once the Total
Leverage Ratio is less than 1.75 to 1.
Capital
Expenditures
Our capital expenditures consist of re-imaging activities
associated with company-operated restaurants, new restaurant
construction and development, equipment replacements, the
purchase of new equipment for our company-operated restaurants,
investments in information technology, accounting systems and
improvements at our corporate offices. Capital expenditures
related to re-imaging activities consist of significant
renovations, upgrades and improvements, which on a per
restaurant basis typically cost between $70,000 and $160,000.
Capital expenditures associated with new restaurant construction
and rebuilding activities typically cost, on a per restaurant
basis, between $0.7 million and $1.0 million.
During 2009, we invested approximately $1.4 million in
various capital projects, comprised of $0.3 million for
information technology hardware and software including new
restaurant site modeling software, and $1.1 million in
other capital assets to maintain, replace and extend the lives
of company-operated QSR equipment and facilities.
29
During 2008, we invested approximately $2.7 million in
various capital projects, comprised of $0.7 million in new
restaurant locations, $0.4 million for information
technology hardware and software including new restaurant site
modeling software, and $1.6 million in other capital assets
to repair and rebuild damaged restaurants, and to maintain,
replace and extend the lives of company-operated QSR equipment
and facilities.
During 2007, we invested approximately $10.4 million in
various capital projects, comprised of $6.3 million in new
restaurant locations (including $0.4 million for the
acquisition of a previously franchised location),
$0.9 million in the repair and replacement of property and
equipment damaged by Hurricane Katrina, $0.6 million for
information technology hardware and software, $0.3 million
in our re-imaging program, and $2.3 million in other
capital assets to repair and rebuild damaged restaurants, and to
maintain, replace and extend the lives of company-operated QSR
equipment and facilities.
Substantially all of our capital expenditures have been financed
using cash provided from operating activities and borrowings
under our bank credit facilities.
As to capital expenditures during 2010 (which we expect to be
primarily for equipment replacements and upgrades, and
information technology system upgrades), we expect such costs to
range from $3.0 million to $4.0 million and to be
funded from operating cash flows. These expenditures are
discretionary in nature and would likely have minimal impact on
the business if not made.
Off-Balance
Sheet Arrangements
The Company has no significant Off-Balance Sheet Arrangements.
Long Term
Debt
2005 Credit Facility. On May 11,
2005, and as amended and restated on April 14, 2006,
April 27, 2007 and August 14, 2009, the Company
entered into a bank credit facility (the 2005 Credit
Facility) with a group of lenders, which consisted of a
$60.0 million, five-year revolving credit facility and a
six-year $190.0 million term loan.
On August 14, 2009, the Company entered into the third
amendment and restatement to the 2005 Credit Facility. Key terms
of the amended and restated facility include the following:
|
|
|
|
|
The term loan and revolving credit facility maturity dates were
extended by two years to May 2013 and May 2012,
respectively.
|
|
|
|
The revolving credit facility commitment was reduced from
$60.0 million to $48.0 million.
|
|
|
|
The applicable interest rate for the term loan and revolving
credit facility was set at LIBOR plus 4.50%, with a minimum
LIBOR of 2.50%.
|
|
|
|
The Company must maintain a Total Leverage Ratio of 3.00 to 1 or
less through the end of first quarter of 2012 and 2.75 to 1 or
less thereafter.
|
|
|
|
The Company must prepay (i) 50% of Consolidated Excess Cash
Flow (as defined in the 2005 Credit Facility) for such fiscal
year if the Total Leverage Ratio is greater than 2.00 to 1 on
the last day of such fiscal year or (ii) 25% of
Consolidated Excess Cash Flow for such year if the Total
Leverage Ratio is equal to or less than 2.00 to 1.
|
|
|
|
The Company is permitted to resume its common stock repurchase
program once the Total Leverage Ratio is less than 1.75 to 1. As
of December 27, 2009, the Companys Total Leverage
Ratio was 1.95 to 1.
|
|
|
|
To reduce interest rate risk, derivative instruments are
required to be maintained on no less than 30% of the outstanding
debt (see discussion below under the heading Interest Rate
Swap Agreements).
|
In connection with the third amendment, the Company expensed
$1.9 million, which is reported as a component of
Interest expense, net. Additionally, the Company
capitalized approximately $1.8 million of fees related to
the new amendment as debt issuance costs which will be amortized
over the remaining life of the facility utilizing the effective
interest method.
30
The revolving credit facility and term loan bear interest based
upon alternative indices (LIBOR, Federal Funds Effective Rate,
Prime Rate and a Base CD rate) plus an applicable margin as
specified in the facility. The margins on the revolving credit
facility may fluctuate because of changes in certain financial
leverage ratios and the Companys compliance with
applicable covenants of the 2005 Credit Facility. The Company
also pays a quarterly commitment fee of 0.625% on the unused
portions of the revolving credit facility.
As of December 27, 2009, the Company had no loans
outstanding under its revolving credit facility. Under the terms
of the revolving credit facility, the Company may obtain other
short-term borrowings of up to $10.0 million and letters of
credit up to $25.0 million. Collectively, these other
borrowings and letters of credit may not exceed the amount of
unused borrowings under the 2005 Credit Facility. As of
December 27, 2009, the Company had $1.3 million of
outstanding letters of credit. Availability for short-term
borrowings and letters of credit under the revolving credit
facility was $46.7 million.
The 2005 Credit Facility is secured by a first priority security
interest in substantially all of the Companys assets. The
2005 Credit Facility contains financial and other covenants,
including covenants requiring the Company to maintain various
financial ratios, limiting its ability to incur additional
indebtedness, restricting the amount of capital expenditures
that may be incurred, restricting the payment of cash dividends,
and limiting the amount of debt which can be loaned to the
Companys franchisees or guaranteed on their behalf. This
facility also limits the Companys ability to engage in
mergers or acquisitions, sell certain assets, repurchase its
common stock and enter into certain lease transactions. The 2005
Credit Facility includes customary events of default, including,
but not limited to, the failure to pay any interest, principal
or fees when due, the failure to perform certain covenant
agreements, inaccurate or false representations or warranties,
insolvency or bankruptcy, change of control, the occurrence of
certain ERISA events and judgment defaults.
In addition to the scheduled payments of principal on the term
loan, at the end of each fiscal year, the Company is subject to
mandatory prepayments in those situations when consolidated cash
flows for the year, as defined pursuant to the terms of the
facility, exceed specified amounts. Whenever any prepayment is
made, subsequent scheduled payments of principal are ratably
reduced. The Company was subject to a mandatory prepayment of
approximately $0.3 million and $2.8 million for fiscal
year 2009 and 2008, respectively, which is recorded as a
component of Current debt maturities in the
Consolidated Balance Sheets.
As of December 27, 2009, the Company was in compliance with
the financial and other covenants of the 2005 Credit Facility,
as amended and restated. As of December 27, 2009 and
December 28, 2008, the Companys weighted average
interest rate for all outstanding indebtedness under the 2005
Credit Facility was 7.2% and 5.8%, respectively.
Interest Rate Swap Agreements. In
accordance with the 2005 Credit Facility, as amended and
restated, the Company uses interest rate swaps to fix the
interest rate exposure on a portion of its outstanding term
loan. As interest rate swaps are terminated, the effective
portion of the termination loss is amortized as interest expense
over the unexpired term of the swap.
As required by the third amendment and restatement to the 2005
Credit Facility, on September 10, 2009, the Company entered
into new interest rate swap agreements limiting the interest
rate exposure on $30.0 million of the term loan debt to a
fixed rate of 7.40%. The term of the swap agreements expires
August 31, 2011.
Net interest expense associated with these agreements was
$1.3 million in 2009. Net interest income associated with
these agreements was zero and $1.5 million for 2008, and
2007, respectively. The agreements are accounted for as an
effective cash flow hedge. The changes in fair value are
recognized in Accumulated other comprehensive loss in the
Consolidated Balance Sheets. At December 27, 2009 and
December 28, 2008, the fair value of the agreement was a
liability to the Company of approximately $0.1 million and
$0.5 million, respectively, which was recorded as a
component of Deferred credits and other long-term
liabilities.
Impact of
Inflation
Inflation of the costs of food, labor, fuel and energy impact
our operating expenses. However, we are able to effectively
manage inflationary cost increases due to rapid inventory
turnover.
31
Tax
Matters
We are continuously involved in U.S., state and local tax audits
for income, franchise, property and sales and use taxes. In
general, the statute of limitations remains open with respect to
tax returns that were filed for each tax year after 2005.
However, upon notice of a pending tax audit, we often agree to
extend the statute of limitations to allow for complete and
accurate tax audits to be performed. The U.S. federal tax
years 2004 through 2008 are open to audit, with tax years 2004
and 2005 currently under examination. In general, the state tax
years open to audit range from 2004 through 2008.
Market
Risk
We are exposed to market risk from changes in certain commodity
prices, foreign currency exchange rates and interest rates. All
of these market risks arise in the normal course of business, as
we do not engage in speculative trading activities. The
following analysis provides quantitative information regarding
these risks.
Commodity Market Risk. We are exposed
to market risk from changes in poultry and other commodity
prices. Fresh chicken is the principal raw material for our
Popeyes operations, constituting more than 40% of our combined
Restaurant food, beverages and packaging costs.
These costs are significantly affected by fluctuations in the
cost of chicken, which can result from a number of factors,
including increases in the cost of grain, disease, declining
market supply of fast-food sized chickens and other factors that
affect availability, and greater international demand for
domestic chicken products. We are affected by fluctuations in
the cost of other commodities including shortening, wheat, gas
and utility prices. Our ability to recover increased costs
through higher pricing is limited by the competitive environment
in which we operate.
In order to ensure favorable pricing for fresh chicken purchases
and to maintain an adequate supply of fresh chicken for the
Popeyes system, Supply Management Services, Inc. (a
not-for-profit
purchasing cooperative of which we are a member) has entered
into chicken purchasing contracts with chicken suppliers. The
contracts, which pertain to the vast majority of our system-wide
purchases for Popeyes are cost-plus contracts that
utilize prices based upon the cost of feed grains plus certain
agreed upon non-feed and processing costs. In order to stabilize
pricing for the Popeyes system, Supply Management Services, Inc.
has entered into commodity pricing agreements for first half of
2010 for certain commodities including corn and soy, which
impact the price of poultry and other food cost.
Foreign Currency Exchange Rate Risk. We
are exposed to foreign currency exchange risk from the potential
changes in foreign currency rates that directly impact our
royalty revenues and cash flows from our international franchise
operations. In 2009, franchise revenues from these operations
represented approximately 10.9% of our total franchise revenues.
For each of 2009, 2008, and 2007, foreign-sourced revenues
represented approximately 6.3%, 5.7%, and 4.5%, of our total
revenues, respectively. All other things being equal, for the
fiscal year ended December 27, 2009, operating profit would
have decreased by approximately $0.4 million if all foreign
currencies had uniformly weakened 10% relative to the
U.S. Dollar.
As of December 27, 2009, approximately $1.1 million of
our accounts receivable were denominated in foreign currencies.
During 2009 the net loss from the exchange rate was
insignificant. Our international franchised operations are in 27
foreign countries with approximately 30% or our revenues from
international royalties originating from restaurants in Korea
and Canada.
Interest Rate Risk. Our net exposure to
interest rate risk consists of our borrowings under our 2005
Credit Facility, as amended and restated. Borrowings made
pursuant to that facility include interest rates that are
benchmarked to U.S. and European short-term floating
interest rates. As of December 27, 2009, the balances
outstanding under our 2005 Credit Facility, as amended and
restated, totaled $78.3 million. There would be no impact
on our annual results of operations of a hypothetical one-point
interest rate change on the outstanding balances under our 2005
Credit Facility, as amended and restated, since we have an
interest rate floor that is more than 2.0% above the applicable
LIBOR base rate.
However the impact of a hypothetical one-point interest rate
change on the outstanding balances under our 2005 Credit
Facility, as amended and restated, above the interest rate floor
would be approximately $0.5 million, taking into
consideration our interest rate swap agreements.
32
Critical
Accounting Policies and Estimates
Our significant accounting policies are presented in Note 2
to our Consolidated Financial Statements. Of our significant
accounting policies, we believe the following involve a higher
degree of risk, judgment
and/or
complexity. These policies involve estimations of the effect of
matters that are inherently uncertain and may significantly
impact our quarterly or annual results of operations or
financial condition. Changes in the estimates and judgments
could significantly affect our results of operations, financial
condition and cash flows in future years.
Impairment of Long-Lived Assets. We
evaluate property and equipment for impairment during the fourth
quarter of each year or when circumstances arise indicating that
a particular asset may be impaired. For property and equipment
at company-operated restaurants, we perform our annual
impairment evaluation on an individual restaurant basis. We
evaluate restaurants using a two-year history of operating
losses as our primary indicator of potential impairment.
We evaluate recoverability based on the restaurants
forecasted undiscounted cash flows for the expected remaining
useful life of the unit, which incorporate our best estimate of
sales growth and margin improvement based upon our plans for the
restaurant and actual results at comparable restaurants. The
carrying values of restaurant assets that are not considered
recoverable are written down to their estimated fair market
value, which we generally measure by discounting estimated
future cash flows.
Estimates of future cash flows are highly subjective judgments
and can be significantly impacted by changes in the business or
economic conditions. The discount rate used in the fair value
calculations is our estimate of the required rate of return that
a third party would expect to receive when purchasing a similar
restaurant and the related long-lived assets. We believe the
discount is commensurate with the risks and uncertainty inherent
in the forecasted cash flows.
Impairment of Goodwill and
Trademarks. We evaluate goodwill and
trademarks for impairment on an annual basis (during the fourth
quarter of each year) or more frequently when circumstances
arise indicating that a particular asset may be impaired. Our
goodwill impairment evaluation includes a comparison of the fair
value of our reporting units with their carrying value. Our
reporting units are our business segments. Intangible assets,
including goodwill, are allocated to each reporting unit. The
estimated fair value of each reporting unit is the amount for
which the reporting unit could be sold in a current transaction
between willing parties. We estimate the fair value of our
reporting units using a discounted cash flow model or market
price, if available. The operating assumptions used in the
discounted cash flow model are generally consistent with the
reporting units past performance and with the projections
and assumptions that are used in our current operating plans.
Such assumptions are subject to change as a result of changing
economic and competitive conditions. The discount rate is our
estimate of the required rate of return that a third-party buyer
would expect to receive when purchasing a business from us that
constitutes a reporting unit. We believe the discount rate is
commensurate with the risks and uncertainty inherent in the
forecasted cash flows. If a reporting units carrying value
exceeds its fair value, goodwill is written down to its implied
fair value. The Company follows a similar analysis for the
evaluation of trademarks, but that analysis is performed on a
company-wide basis.
During the fourth quarter of fiscal year 2009, we performed our
annual assessment of recoverability of goodwill and trademarks
and determined that no impairment was indicated. Our
Company-operated restaurants segment has goodwill of
$2.2 million as of the end of 2009. The assumptions used in
determining fair value for this reporting unit reflect our
belief that the remaining goodwill of this business segment is
not impaired. While our operating assumptions reflect what we
believe are reasonable and achievable growth rates, failure to
realize these growth rates could result in future impairment of
the recorded goodwill. If we believe the risks inherent in the
business increase, the resulting change in the discount rate
could also result in future impairment of the recorded goodwill.
Allowances for Accounts and Notes Receivable and
Contingent Liabilities. We reserve a
franchisees receivable balance based upon pre-defined
aging criteria and upon the occurrence of other events that
indicate that we may or may not collect the balance due. In the
case of notes receivable, we perform this evaluation on a
note-by-note
basis, whereas this analysis is performed in the aggregate for
accounts receivable. We provide for an allowance for
uncollectibility based on such reviews. See Note 2 to the
Consolidated Financial Statements for information concerning our
allowance account for both accounts receivable and notes
receivable.
33
With respect to contingent liabilities, we similarly reserve for
such contingencies when we are able to assess that an expected
loss is both probable and reasonably estimable.
Leases. When determining the lease
term, we often include option periods for which failure to renew
the lease imposes a penalty in such an amount that a renewal
appears, at the inception of the lease, to be reasonably
assured. We record rent expense for leases that contain
scheduled rent increases on a straight-line basis over the lease
term, including any option periods considered in the
determination of that lease term. Contingent rentals are
generally based on sales levels in excess of stipulated amounts,
and thus are not considered minimum lease payments and are
included in rent expense as they accrue.
Deferred Tax Assets and Tax
Reserves. We make certain estimates and
judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities, which arise
from differences in the timing of recognition of revenue and
expense for tax and financial statement purposes.
We assess the likelihood that we will be able to recover our
deferred tax assets. We consider historical levels of income,
expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance. If
recovery is not likely, we increase our provision for taxes by
recording a valuation allowance against the deferred tax assets
that we estimate will not ultimately be recoverable. We carried
a valuation allowance on our deferred tax assets of
$4.7 million and $4.0 million at December 27,
2009 and December 28, 2008, respectively, based on our view
that it is more likely than not that we will not be able to take
a tax benefit for certain state operating loss carryforwards
which continue to expire.
As a matter of course, we are regularly audited by federal,
state and foreign tax authorities. Effective January 1,
2007, we adopted Financial Accounting Standards Board
(FASB) authoritative guidance which requires that a
position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely
than not (i.e., a likelihood of more than fifty percent) that
the position would be sustained upon examination by tax
authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than fifty percent
likely of being realized upon settlement. Since adopting the
guidance, we have evaluated unrecognized tax benefits, including
interest thereon, on a quarterly basis to insure that they have
been appropriately adjusted for events, including audit
settlements, which may impact our ultimate payment for such
exposures. At December 27, 2009, we had approximately
$4.9 million of unrecognized tax benefits,
$1.3 million of which, if recognized, would impact the
effective tax rate. At December 27, 2009, the Company had
approximately $0.1 million of accrued interest and
penalties related to uncertain tax positions.
See Note 19 to the Consolidated Financial Statements for a
further discussion of our income taxes.
Stock-Based Employee Compensation. At
the beginning of fiscal year 2006, we adopted the fair value
recognition provisions as required by the FASB authoritative
guidance on stock compensation, which requires the measurement
and recognition of compensation cost at fair value for all
share-based payments, including stock options, restricted stock
awards and restricted share units. We used the modified
prospective transition method and, as a result, did not
retroactively adjust results from prior periods. The fair value
of stock options with only service conditions are estimated
using a Black-Scholes option-pricing model. The fair value of
stock options with service and market conditions are valued
utilizing a Monte Carlo simulation embedded in a lattice model.
The fair value of stock-based compensation is amortized on the
graded vesting attribution method. Our option pricing models
require various highly subjective and judgmental assumptions
including risk-free interest rates, expected volatility of our
stock price, expected forfeiture rates, expected dividend yield
and expected term. If any of the assumptions used in the models
change significantly, share-based compensation expense may
differ materially in the future from that recorded in the
current period. Our specific weighted average assumptions used
to estimate the fair value of stock-based employee compensation
are documented in Note 14 to the Consolidated Financial
Statements.
Derivative Financial Instruments We use
interest rate swap agreements to reduce our interest rate risk
on our floating rate debt under the terms of the 2005 Credit
Facility, as amended and restated. We recognize all derivatives
on the balance sheet at fair value. At inception and on an
on-going basis, we assess whether each derivative that qualifies
for hedge accounting continues to be highly effective in
offsetting changes in the cash flows
34
of the hedged item. If the derivative meets the hedge criteria
as defined by certain accounting standards, changes in the fair
value of the derivative are recognized in accumulated other
comprehensive income (loss) until the hedged item is recognized
in earnings. The ineffective portion of a derivatives
change in fair value, if any, is immediately recognized in
earnings.
As a result of the use of derivative instruments, we are exposed
to risk that the counterparties will fail to meet their
contractual obligations. Recent adverse developments in the
global financial and credit markets could negatively impact the
creditworthiness of our counterparties and cause one or more of
our counterparties to fail to perform as expected. To mitigate
the counterparty credit risk, we only enter into contracts with
carefully selected major financial institutions based upon their
credit ratings and other factors, and continually assess the
creditworthiness of counterparties. To date, all counterparties
have performed in accordance with their contractual obligations.
Recent
Accounting Standards
In 2009, the Financial Accounting Standards Board
(FASB) amended the consolidation principles
associated with variable interest entities (VIEs) as defined in
the Consolidation topic of the ASC. The objective is to improve
the financial reporting of companies involved with VIEs. The
amendments replace the quantitative-based risks and rewards
calculation for determining which reporting entity, if any, has
a controlling financial interest in a VIE with an approach
focused on identifying which reporting entity has the power to
direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and
(1) the obligation to absorb losses of the entity or
(2) the right to receive benefits from the entity.
Additionally, a company is required to perform ongoing
reassessments of whether an enterprise is the primary
beneficiary of a VIE. Prior to this statement, a company was
only required to reassess the status when specific events
occurred. The new standards are effective for the Company during
the first quarter 2010. The adoption of this standard will have
no impact on our financial statements.
Accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require
adoption until a future date are expected to have no material
impact on our consolidated financial statements upon adoption.
Non-GAAP Financial
Measures
Adjusted
earnings per diluted share: Calculation and Definition
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
2009
|
|
|
|
2008
|
|
Net income
|
|
|
$
|
18.8
|
|
|
|
$
|
19.4
|
|
Other income, net
|
|
|
$
|
(2.1
|
)
|
|
|
$
|
(4.6
|
)
|
Interest expense associated with credit facility amendment
|
|
|
$
|
1.9
|
|
|
|
|
|
|
Tax effect
|
|
|
$
|
0.1
|
|
|
|
$
|
2.0
|
|
Adjusted net income
|
|
|
$
|
18.7
|
|
|
|
$
|
16.8
|
|
Adjusted earnings per diluted share
|
|
|
$
|
0.74
|
|
|
|
$
|
0.65
|
|
Weighted-average diluted shares outstanding
|
|
|
|
25.4
|
|
|
|
|
25.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
earnings per diluted share: Calculation and Definition
We define adjusted earnings for the periods presented as our
reported net income after adjusting for certain non-operating
items consisting of (i) other income, net (which for 2009
includes $3.3 million on the sale of assets partially
offset by a $0.4 million loss on insurance recoveries
related to asset damages, a $0.2 million impairment related
to restaurant closures and $0.6 million in related to
impairments and disposals of fixed assets and for 2008 includes
$12.9 million from recoveries from directors and officers
insurance claims, $0.9 million in gain on the sale of
assets and $0.5 million in insurance recoveries related to
property damages, partially offset by $9.5 million of
35
impairments of fixed assets and goodwill impairment and
$0.2 million of other expenses), (ii) interest
expenses associated with the amendment and restatement of our
2005 Credit Facility, and (iii) the tax effect of these
adjustments. Adjusted earnings per diluted share provides the
per share effect of adjusted net income on a diluted basis.
Management uses adjusted earnings and adjusted earnings per
diluted share, in addition to net income and earnings per share
to assess its performance without the effect of certain
non-operating items and believes it is important for investors
to be able to evaluate the Company using the same measures used
by management. Management believes these measures are an
important indicator of the operational strength and performance
of its business. Adjusted earnings and adjusted earnings per
diluted share as calculated by the Company are not necessarily
comparable to similarly titled measures reported by other
companies. In addition, adjusted earnings and adjusted earnings
per diluted share: (a) do not represent net income or
earnings per share as defined by GAAP and (b) should not be
considered as an alternative to net income, earnings per share
or other financial information.
Forward-Looking
Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of the federal securities laws. Statements regarding
future events and developments and our future performance, as
well as managements current expectations, beliefs, plans,
estimates or projections relating to the future, are
forward-looking statements within the meaning of these laws.
These forward-looking statements are subject to a number of
risks and uncertainties. Examples of such statements in this
Annual Report on
Form 10-K
include discussions regarding the Companys strategic plan,
the Companys plan to own and operate its current
company-operated restaurants, projections and expectations
regarding same-store sales for fiscal 2010 and beyond, the
Companys ability to improve restaurant level margins,
guidance for restaurant openings and closures, and the
Companys anticipated 2010 performance, including
projections regarding general and administrative expenses, net
earnings per diluted share and similar statements of belief or
expectations regarding future events. Among the important
factors that could cause actual results to differ materially
from those indicated by such forward-looking statements are:
competition from other restaurant concepts and food retailers,
continuing disruptions in the financial markets, the loss of
franchisees and other business partners, labor shortages or
increased labor costs, increased costs of our principal food
products, changes in consumer preferences and demographic
trends, as well as concerns about health or food quality,
instances of avian flu or other food-borne illnesses, general
economic conditions, the loss of senior management and the
inability to attract and retain additional qualified management
personnel, limitations on our business under our 2005 Credit
Facility, as amended and restated, our ability to comply with
the repayment requirements, covenants, tests and restrictions
contained in our 2005 Credit Facility, as amended and restated,
failure of our franchisees, a decline in the number of
franchised units, a decline in our ability to franchise new
units, slowed expansion into new markets, unexpected and adverse
fluctuations in quarterly results, increased government
regulation, effects of increased gasoline prices, supply and
delivery shortages or interruptions, currency, economic and
political factors that affect our international operations,
inadequate protection of our intellectual property and
liabilities for environmental contamination and the other risk
factors detailed in Item 1A of this Annual Report on
Form 10-K
and other documents we file with the Securities and Exchange
Commission. Therefore, you should not place undue reliance on
any forward-looking statements.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Information about market risk can be found in Item 7 of
this report under the heading Market Risk and is
hereby incorporated by reference into this Item 7A.
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our Consolidated Financial Statements can be found beginning on
Page F-1
of this Annual Report, and the relevant portions of those
statements and the accompanying notes are hereby incorporated by
reference into this Item 8.
36
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
|
|
(a)
|
Disclosure
Controls and Procedures
|
Disclosure controls and procedures are controls and other
procedures of a registrant designed to ensure that information
required to be disclosed by the registrant in the reports that
it files or submits under the Securities Exchange Act of 1934
(the Exchange Act) is properly recorded, processed,
summarized and reported, within the time periods specified in
the SECs rules and forms. Disclosure controls and
procedures include processes to accumulate and evaluate relevant
information and communicate such information to a
registrants management, including its principal executive
and financial officers, as appropriate, to allow for timely
decisions regarding required disclosures.
|
|
(b)
|
Our
Evaluation of AFCs Disclosure Controls and
Procedures
|
We evaluated the effectiveness of the design and operation of
AFCs disclosure controls and procedures as of the end of
our fiscal year 2009, as required by
Rule 13a-15(b)
and
15d-15(b) of
the Exchange Act. This evaluation was carried out under the
supervision and with the participation of our management,
including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO).
Based on managements assessment, the CEO and CFO concluded
that the Companys disclosure controls and procedures were
effective as of December 27, 2009 to ensure that
information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the
SECs rules and forms and accumulated and communicated to
the Companys management, including its principal executive
and principal financial officers as appropriate to allow timely
decisions regarding required disclosures.
|
|
(c)
|
Managements
Report on Internal Control Over Financial
Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a 15(f) and 15d 15(f) under
the Exchange Act. The Companys internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of the Companys financial statements for
external reporting purposes in accordance with
U.S. generally accepted accounting principles.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 27, 2009, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control-Integrated Framework. This evaluation
was carried out under the supervision and with the participation
of our management, including our CEO and CFO. Based on this
assessment, management believes that as of December 27,
2009, the Companys internal control over financial
reporting is effective.
Grant Thornton, LLP, our independent registered public
accounting firm that audited our consolidated financial
statements included in this Annual Report, has issued an audit
report on the operating effectiveness of the Companys
internal control over financial reporting. This report can be
found in section (e) below.
37
|
|
(d)
|
Changes
in Internal Control Over Financial Reporting
|
During the fourth quarter of 2009, there was no change in the
Companys internal control over financial reporting that
has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial
reporting.
|
|
(e)
|
Report
of Independent Registered Public Accounting Firm on Internal
Control over Financial Reporting
|
Board of Directors and Shareholders
AFC Enterprises, Inc.
We have audited AFC Enterprises Inc. (a Minnesota Corporation)
and subsidiarys internal control over financial reporting
as of December 27 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). AFC Enterprises, Inc. and subsidiarys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on AFC Enterprises, Inc. and
subsidiarys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, AFC Enterprises, Inc. and subsidiary maintained,
in all material respects, effective internal control over
financial reporting as of December 27, 2009, based on
criteria established in Internal Control
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of AFC Enterprises, Inc. and
subsidiary as of December 27, 2009 and December 28,
2008, and the related consolidated statements of operations,
changes in shareholders deficit, and cash flows for each
of the three fiscal years in the period ended December 27,
2009 and our report dated March 10, 2010 expressed an
unqualified opinion on those financial statements.
Atlanta, Georgia
March 10, 2010
38
|
|
Item 9B.
|
OTHER
INFORMATION
|
Amended
and Restated Employment Agreement with Henry Hope,
III
On March 9, 2010, we entered into an amended and restated
employment agreement with Henry Hope, III that provides for the
terms of Mr. Hopes employment as Chief Financial Officer
of the Company. The amended and restated employment agreement is
substantially similar to the employment agreement that it
replaces, except that the amended and restated employment
agreement (i) provides for an annual base salary of
$320,000, (ii) the target incentive pay for Mr. Hope was
increased from $159,500 to $192,000 for the 2010 fiscal year of
the Company and (iii) the termination without cause benefit
payable to Mr. Hope upon a triggering event under the employment
agreement was increased from one times Mr. Hopes base
salary plus one times Mr. Hopes target incentive pay to
1.5 times Mr. Hopes base salary plus 1.5 times Mr.
Hopes target incentive pay.
A copy of Mr. Hopes employment agreement is filed as an
exhibit to this annual report on Form 10-K.
39
PART III.
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information regarding our directors, executive officers, audit
committee and our audit committee financial expert required by
this Item 10 is included in our definitive Proxy Statement
for the 2010 Annual Meeting of Shareholders and such disclosure
is incorporated herein by reference. Biographical information on
our executive officers is contained in Item 4A of this
Annual Report on
Form 10-K
and is incorporated herein by reference.
We have adopted an Honor Code that applies to our directors and
all of our employees, including our principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of
the Honor Code is available on our website at www.afce.com.
Copies will be furnished upon request. You may mail your
requests to the following address: Attn: Office of General
Counsel, 5555 Glenridge Connector, NE, Suite 300, Atlanta
GA, 30342. If we make any amendments to the Honor Code other
than technical, administrative, or other non-substantive
amendments, or grant any waivers from the Honor Code, we will
disclose the nature of the amendment or waiver, its effective
date and to whom it applies on our website or in a report on
Form 8-K
filed with the SEC.
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
Information regarding executive compensation required by this
Item 11 is included in our definitive Proxy Statement for
the 2010 Annual Meeting of Shareholders and such disclosure is
incorporated herein by reference.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information regarding security ownership of certain beneficial
owners and management and related stockholder matters required
by this Item 12 is included in our definitive Proxy
Statement for the 2010 Annual Meeting of Shareholders and such
disclosure is incorporated herein by reference.
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information regarding certain relationships and related
transactions and director independence required by this
Item 13 is included in our definitive Proxy Statement for
the 2010 Annual Meeting of Shareholders and such disclosure is
incorporated herein by reference.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The Companys independent registered public accounting firm
is Grant Thornton LLP. Information regarding principal
accountant fees and services required by this Item 14 is
included in our definitive Proxy Statement for the 2010 Annual
Meeting of Shareholders and such disclosure is incorporated
herein by reference.
40
PART IV.
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
The following consolidated financial statements appear beginning
on
Page F-1
of the report:
|
|
|
|
|
|
|
Pages
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
We have omitted all other schedules because the conditions
requiring their filing do not exist or because the required
information appears in our Consolidated Financial Statements,
including the notes to those statements.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1(c)
|
|
Articles of Incorporation of AFC Enterprises, Inc., as amended,
dated June 24, 2002.
|
|
3
|
.2(y)
|
|
Amended and Restated Bylaws of AFC Enterprises, Inc.
|
|
4
|
.1(o)
|
|
Form of registrants common stock certificate.
|
|
10
|
.1(e)
|
|
Form of Popeyes Development Agreement, as amended.
|
|
10
|
.2(e)
|
|
Form of Popeyes Franchise Agreement.
|
|
10
|
.3(a)
|
|
Formula Agreement dated July 2, 1979 among Alvin C.
Copeland, Gilbert E. Copeland, Mary L. Copeland, Catherine
Copeland, Russell J. Jones, A. Copeland Enterprises, Inc. and
Popeyes Famous Fried Chicken, Inc., as amended to date.
|
|
10
|
.4(a)
|
|
Supply Agreement dated March 21, 1989 between New Orleans
Spice Company, Inc. and Biscuit Investments, Inc.
|
|
10
|
.5(a)
|
|
Recipe Royalty Agreement dated March 21, 1989 by and among
Alvin C. Copeland, New Orleans Spice Company, Inc. and Biscuit
Investments, Inc.
|
|
10
|
.6(a)
|
|
Licensing Agreement dated March 11, 1976 between King
Features Syndicate Division of The Hearst Corporation and A.
Copeland Enterprises, Inc.
|
|
10
|
.7(a)
|
|
Assignment and Amendment dated January 1, 1981 between A.
Copeland Enterprises, Inc., Popeyes Famous Fried Chicken, Inc.
and King Features Syndicate Division of The Hearst Corporation.
|
|
10
|
.8(a)
|
|
Letter Agreement dated September 17, 1981 between King
Features Syndicate Division of The Hearst Corporation, A.
Copeland Enterprises, Inc. and Popeyes Famous Fried Chicken, Inc.
|
|
10
|
.9(a)
|
|
License Agreement dated December 19, 1985 by and between
King Features Syndicate, Inc., The Hearst Corporation, Popeyes,
Inc. and A. Copeland Enterprises, Inc.
|
|
10
|
.10(a)
|
|
Letter Agreement dated July 20, 1987 by and between King
Features Syndicate, Division of The Hearst Corporation, Popeyes,
Inc. and A. Copeland Enterprises, Inc.
|
|
10
|
.11(n)
|
|
Amendment dated January 1, 2002 by and between Hearst
Holdings, Inc., King Features Syndicate Division and AFC
Enterprises, Inc.
|
|
10
|
.12(a)
|
|
1992 Stock Option Plan of AFC, effective as of November 5,
1992, as amended to date.*
|
|
10
|
.13(a)
|
|
1996 Nonqualified Performance Stock Option Plan
Executive of AFC, effective as of April 11, 1996.*
|
|
10
|
.14(a)
|
|
1996 Nonqualified Performance Stock Option Plan
General of AFC, effective as of April 11, 1996.*
|
41
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.15(a)
|
|
1996 Nonqualified Stock Option Plan of AFC, effective as of
April 11, 1996.*
|
|
10
|
.16(a)
|
|
Form of Nonqualified Stock Option Agreement General
between AFC and stock option participants.*
|
|
10
|
.17(a)
|
|
Form of Nonqualified Stock Option Agreement
Executive between AFC and certain key executives.*
|
|
10
|
.18(a)
|
|
1996 Employee Stock Bonus Plan Executive of AFC
effective as of April 11, 1996.*
|
|
10
|
.19(a)
|
|
1996 Employee Stock Bonus Plan General of AFC
effective as of April 11, 1996.*
|
|
10
|
.20(a)
|
|
Form of Stock Bonus Agreement Executive between AFC
and certain executive officers.*
|
|
10
|
.21(a)
|
|
Form of Stock Bonus Agreement General between AFC
and certain executive officers.*
|
|
10
|
.22(a)
|
|
Form of Secured Promissory Note issued by certain members of
management.*
|
|
10
|
.23(a)
|
|
Form of Stock Pledge Agreement between AFC and certain members
of management.*
|
|
10
|
.24(a)
|
|
Settlement Agreement between Alvin C. Copeland, Diversified
Foods and Seasonings, Inc., Flavorite Laboratories, Inc. and AFC
dated May 29, 1997.
|
|
10
|
.25(a)
|
|
Indemnification Agreement dated April 11, 1996 by and
between AFC and John M. Roth.*
|
|
10
|
.26(a)
|
|
Indemnification Agreement dated May 1, 1996 by and between
AFC and Kelvin J. Pennington.*
|
|
10
|
.27(a)
|
|
Indemnification Agreement dated April 11, 1996 by and
between AFC and Frank J. Belatti.*
|
|
10
|
.28(e)
|
|
Substitute Nonqualified Stock Option Plan, effective
March 17, 1998.*
|
|
10
|
.29(f)
|
|
Indemnification Agreement dated May 16, 2001 by and between
AFC and Victor Arias Jr.*
|
|
10
|
.30(f)
|
|
Indemnification Agreement dated May 16, 2001 by and between
AFC and Carolyn Hogan Byrd.*
|
|
10
|
.31(f)
|
|
Indemnification Agreement dated August 9, 2001 by and
between AFC and R. William Ide, III.*
|
|
10
|
.32(g)
|
|
AFC Enterprises, Inc. Employee Stock Purchase Plan.*
|
|
10
|
.33(g)
|
|
AFC Enterprises, Inc. 2002 Incentive Stock Plan.*
|
|
10
|
.34(g)
|
|
AFC Enterprises, Inc. Annual Executive Bonus Program.*
|
|
10
|
.36(p)
|
|
Indemnity Agreement dated October 14, 2004 by and between
AFC Enterprises, Inc. and Supply Management Services, Inc.
|
|
10
|
.37(p)
|
|
Indemnity Agreement dated February 5, 2004 by and between
AFC Enterprises, Inc., Cajun Operating Company and Supply
Management Services, Inc.
|
|
10
|
.38(z)
|
|
Third Amended and Restated Credit Agreement dated as of
August 14, 2009 among AFC Enterprises, Inc., the Lenders
party thereto, JPMorgan Chase Bank, NA, JP Morgan Securities
Inc. and Bank of America, N.A.
|
|
10
|
.39(i)
|
|
Fourth Amendment to the 1992 Stock Option Plan of Americas
Favorite Chicken Company.
|
|
10
|
.40(i)
|
|
Fifth Amendment to the Americas Favorite Chicken Company
1996 Nonqualified Performance Stock Option Plan
General.*
|
|
10
|
.41(i)
|
|
Amendment No. 1 to the Americas Favorite Chicken
Company 1996 Nonqualified Stock Option Plan.*
|
|
10
|
.42(i)
|
|
Second Amendment to the Americas Favorite Chicken Company
1996 Nonqualified Performance Stock Option Plan
Executive.*
|
|
10
|
.43(i)
|
|
Second Amendment to the AFC Enterprises, Inc. 2002 Incentive
Stock Plan.*
|
|
10
|
.44(i)
|
|
Indemnification Agreement between AFC and Peter Starrett dated
December 1, 2000.
|
|
10
|
.45(s)
|
|
Indemnification Agreement dated November 28, 2006 by and
between AFC and John M. Cranor, III.*
|
|
10
|
.46(s)
|
|
Indemnification Agreement dated November 28, 2006 by and
between AFC and Cheryl A. Bachelder.*
|
|
10
|
.47(t)
|
|
Popeyes Chicken and Biscuits 2006 Bonus Plan.*
|
|
10
|
.48(t)
|
|
Employment Agreement dated as of March 14, 2007 between AFC
Enterprises, Inc. and James W. Lyons.*
|
|
10
|
.49(t)
|
|
Employment Agreement dated as of March 14, 2007 between AFC
Enterprises, Inc. and Robert Calderin.*
|
42
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.50(u)
|
|
Second Amendment to Second Amended and Restated Credit Agreement
dated as of April 25, 2007.
|
|
10
|
.51(v)
|
|
Non-Qualified Stock Option Certificate for Cheryl Bachelder
(time-based vesting).*
|
|
10
|
.52(v)
|
|
Non-Qualified Stock Option Certificate for Cheryl Bachelder
(performance-based vesting).*
|
|
10
|
.53(w)
|
|
Employment Agreement dated as of October 9, 2007 between
AFC Enterprises, Inc. and Cheryl A. Bachelder.*
|
|
10
|
.54(m)
|
|
Accelerated Stock Repurchase Agreement by and between AFC
Enterprises, Inc. and J.P. Morgan Securities Inc., as agent
for JPMorgan Chase Bank, National Association, London Branch
dated March 12, 2008.
|
|
10
|
.55(x)
|
|
Amended and Restated Employment Agreement dated as of
November 12, 2008 between the Company and Harold M. Cohen.*
|
|
10
|
.56
|
|
Amended and Restated Employment Agreement dated as of
November 12, 2008 between the Company and Henry
Hope, III.*
|
|
10
|
.57(bb)
|
|
Employment Agreement effective as of February 4, 2008
between the Company and Richard Lynch.*
|
|
10
|
.58(aa)
|
|
Employment Agreement effective as of April 20, 2009 between
the Company and Ralph Bower.*
|
|
11
|
.1**
|
|
Statement regarding computation of per share earnings.
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP
|
|
31
|
.1
|
|
Certification Pursuant to
Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31
|
.2
|
|
Certification Pursuant to
Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certain portions of this exhibit have been granted confidential
treatment. |
|
* |
|
Management contract, compensatory plan or arrangement required
to be filed as an exhibit. |
|
** |
|
Data required by FASB authoritative guidance for Earnings per
Share, is provided in Note 20 to our Consolidated Financial
Statements in this Annual Report. |
|
(a) |
|
Filed as an exhibit to the Registration Statement of AFC on
Form S-4/A
(Registration
No. 333-29731)
on July 2, 1997 and incorporated by reference herein. |
|
(c) |
|
Filed as an exhibit to the
Form 10-Q
of AFC for the quarter ended July 14, 2002, on
August 14, 2002 and incorporated by reference herein. |
|
(d) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed May 16, 2005 and incorporated by reference
herein. |
|
(e) |
|
Filed as an exhibit to the Registration Statement of AFC on
Form S-1/A
(Registration
No. 333-52608)
on January 22, 2001 and incorporated by reference herein. |
|
(f) |
|
Filed as an exhibit to the Registration Statement of AFC on
Form S-1
(Registration
No. 333-73182)
on November 13, 2001 and incorporated by reference herein. |
|
(g) |
|
Filed as an exhibit to the Proxy Statement and Notice of 2002
Annual Shareholders Meeting of AFC on April 12, 2002 and
incorporated by reference herein. |
|
(h) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed April 16, 2003 and incorporated by reference
herein. |
|
(i) |
|
Filed as an exhibit to the
Form 10-Q
of AFC for the quarter ended April 17, 2005, on
May 27, 2005, and incorporated by reference herein. |
|
(j) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed November 5, 2004 and incorporated herein by
reference. |
|
(k) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed November 2, 2004 and incorporated herein by
reference. |
|
(l) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed January 5, 2005 and incorporated herein by
reference. |
43
|
|
|
(m) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed on August 13, 2008 and incorporated herein by
reference |
|
(o) |
|
Filed as an exhibit to the Registration Statement of AFC on
Form S-1/A
(Registration
No. 333-52608)
on February 28, 2001 and incorporated by reference herein. |
|
(p) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed on August 21, 2007 and incorporated herein by
reference. |
|
(s) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed November 29, 2006 and incorporated herein by
reference. |
|
(t) |
|
Filed as an exhibit to the
Form 10-K
of AFC for the fiscal year ended December 31, 2006 and
incorporated herein by reference. |
|
(u) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed April 30, 2007 and incorporated herein by
reference. |
|
(v) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed November 7, 2007 and incorporated herein by
reference. |
|
(w) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed October 12, 2007 and incorporated herein by
reference. |
|
(x) |
|
Filed as an exhibit to the
Form 10-Q
of AFC for the quarter ended October 5, 2008 on
November 12, 2008 and incorporated herein by reference. |
|
(y) |
|
Filed an exhibit to the
Form 8-K
of AFC filed on April 16, 2008 and incorporated herein by
reference. |
|
(z) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed on August 20, 2009 and incorporated herein by
reference. |
|
|
|
(aa) |
|
Filed as an exhibit to the
Form 8-K
of AFC filed on April 21, 2009 and incorporated herein by
reference. |
|
(bb) |
|
Filed as an exhibit to the
Form 10-K
of AFC for the fiscal year ended December 28, 2008 and
incorporated herein by reference. |
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 10th day of
March 2010.
AFC ENTERPRISES, INC.
|
|
|
|
By:
|
/s/ Cheryl
A. Bachelder
|
Cheryl A. Bachelder
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title(s)
|
|
Date
|
|
|
|
|
|
|
/s/ Cheryl
A. Bachelder
Cheryl
A. Bachelder
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
March 10, 2010
|
|
|
|
|
|
/s/ H.
Melville Hope
H.
Melville Hope
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
March 10, 2010
|
|
|
|
|
|
/s/ John
M. Cranor, III
John
M. Cranor, III
|
|
Director, Chairman of the Board
|
|
March 10, 2010
|
|
|
|
|
|
/s/ Victor
Arias, Jr.
Victor
Arias, Jr.
|
|
Director
|
|
March 10, 2010
|
|
|
|
|
|
/s/ Carolyn
H. Byrd
Carolyn
H. Byrd
|
|
Director
|
|
March 10, 2010
|
|
|
|
|
|
/s/ R.
William Ide, III
R.
William Ide, III
|
|
Director
|
|
March 10, 2010
|
|
|
|
|
|
/s/ Kelvin
J. Pennington
Kelvin
J. Pennington
|
|
Director
|
|
March 10, 2010
|
|
|
|
|
|
/s/ John
F. Hoffner
John
F. Hoffner
|
|
Director
|
|
March 10, 2010
|
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
AFC Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of
AFC Enterprises, Inc. (a Minnesota Corporation) and subsidiary
as of December 27, 2009 and December 28, 2008, and the
related consolidated statements of operations, changes in
shareholders deficit, and cash flows for each of the three
years in the periods ended December 27, 2009,
December 28, 2008, and December 30, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of AFC Enterprises, Inc. and subsidiary as of
December 27, 2009 and December 28, 2008, and the
results of its operations and its cash flows for each of the
three fiscal years in the period ended December 27, 2009 in
conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), AFC
Enterprises Inc. and subsidiarys internal control over
financial reporting as of December 27, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated March 10, 2010 expressed an unqualified opinion.
/s/ Grant Thornton LLP
Atlanta, GA
March 10, 2010
F-1
AFC
Enterprises, Inc.
Consolidated
Balance Sheets
As of December 27, 2009 and December 28, 2008
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4.1
|
|
|
$
|
2.1
|
|
Accounts and current notes receivable, net
|
|
|
9.1
|
|
|
|
9.4
|
|
Assets held for sale
|
|
|
|
|
|
|
4.5
|
|
Other current assets
|
|
|
3.9
|
|
|
|
5.2
|
|
Advertising cooperative assets, restricted
|
|
|
16.0
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
33.1
|
|
|
|
34.0
|
|
|
|
|
|
|
|
|
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
21.5
|
|
|
|
25.3
|
|
Goodwill
|
|
|
11.1
|
|
|
|
11.1
|
|
Trademarks and other intangible assets, net
|
|
|
47.6
|
|
|
|
48.2
|
|
Other long-term assets, net
|
|
|
3.3
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
83.5
|
|
|
|
98.0
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
116.6
|
|
|
$
|
132.0
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4.8
|
|
|
$
|
6.5
|
|
Other current liabilities
|
|
|
13.7
|
|
|
|
13.6
|
|
Current debt maturities
|
|
|
1.3
|
|
|
|
4.7
|
|
Advertising cooperative liabilities
|
|
|
16.0
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
35.8
|
|
|
|
37.6
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
81.3
|
|
|
|
114.5
|
|
Deferred credits and other long-term liabilities
|
|
|
17.7
|
|
|
|
19.2
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
99.0
|
|
|
|
133.7
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders deficit:
|
|
|
|
|
|
|
|
|
Preferred stock ($.01 par value; 2,500,000 shares
authorized; 0 issued and outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($.01 par value; 150,000,000 shares
authorized; 25,455,917 and 25,294,973 shares issued and
outstanding at the end of fiscal years 2009 and 2008,
respectively)
|
|
|
0.3
|
|
|
|
0.3
|
|
Capital in excess of par value
|
|
|
112.3
|
|
|
|
110.5
|
|
Accumulated deficit
|
|
|
(130.3
|
)
|
|
|
(149.1
|
)
|
Accumulated other comprehensive loss
|
|
|
(0.5
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(18.2
|
)
|
|
|
(39.3
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit
|
|
$
|
116.6
|
|
|
$
|
132.0
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-2
AFC
Enterprises, Inc.
Consolidated
Statements of Operations
For Fiscal Years 2009, 2008 and 2007
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by company-operated restaurants
|
|
$
|
57.4
|
|
|
$
|
78.3
|
|
|
$
|
80.0
|
|
Franchise revenues
|
|
|
86.0
|
|
|
|
84.6
|
|
|
|
82.8
|
|
Rent and other revenues
|
|
|
4.6
|
|
|
|
3.9
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
148.0
|
|
|
|
166.8
|
|
|
|
167.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant employee, occupancy and other expenses
|
|
|
29.5
|
|
|
|
41.4
|
|
|
|
40.7
|
|
Restaurant food, beverages and packaging
|
|
|
18.9
|
|
|
|
27.1
|
|
|
|
27.3
|
|
Rent and other occupancy expenses
|
|
|
2.6
|
|
|
|
2.4
|
|
|
|
2.3
|
|
General and administrative expenses
|
|
|
56.0
|
|
|
|
53.9
|
|
|
|
47.2
|
|
Depreciation and amortization
|
|
|
4.4
|
|
|
|
6.3
|
|
|
|
6.9
|
|
Other expenses (income), net
|
|
|
(2.1
|
)
|
|
|
(4.6
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
109.3
|
|
|
|
126.5
|
|
|
|
121.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
38.7
|
|
|
|
40.3
|
|
|
|
45.6
|
|
Interest expense, net
|
|
|
8.4
|
|
|
|
8.1
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
30.3
|
|
|
|
32.2
|
|
|
|
36.9
|
|
Income tax expense
|
|
|
11.5
|
|
|
|
12.8
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18.8
|
|
|
$
|
19.4
|
|
|
$
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share, basic:
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share, diluted:
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25.3
|
|
|
|
25.6
|
|
|
|
28.6
|
|
Diluted
|
|
|
25.4
|
|
|
|
25.7
|
|
|
|
28.8
|
|
See accompanying notes to consolidated financial statements.
F-3
AFC
Enterprises, Inc.
Consolidated
Statements of Changes in Shareholders Deficit
For Fiscal Years 2009, 2008 and 2007
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Par
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Value
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at December 31, 2006
|
|
|
29,487,648
|
|
|
$
|
0.3
|
|
|
$
|
161.7
|
|
|
$
|
(194.4
|
)
|
|
$
|
1.2
|
|
|
$
|
(31.2
|
)
|
Cumulative effect of liability for uncertain tax positions
(Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
2.6
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
|
|
|
|
|
|
23.1
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of cash flow hedge (net of tax impact
of $0.5 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
Derivative loss realized in earnings during the period (net of
tax impact of $0.1 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.1
|
|
Issuance of common stock under stock option plans
|
|
|
333,933
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Repurchases and retirement of shares
|
|
|
(2,496,030
|
)
|
|
|
|
|
|
|
(39.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(39.4
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
Special cash dividend forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
Cancellation of shares
|
|
|
(33,916
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
Issuance of restricted stock awards, net of forfeitures
|
|
|
64,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2007
|
|
|
27,356,105
|
|
|
|
0.3
|
|
|
|
127.7
|
|
|
|
(168.5
|
)
|
|
|
0.2
|
|
|
|
(40.3
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.4
|
|
|
|
|
|
|
|
19.4
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of cash flow hedge, (net of tax impact
of $0.7 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
(1.3
|
)
|
Derivative loss realized in earnings during the period, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.2
|
|
Repurchases and retirement of shares
|
|
|
(2,120,401
|
)
|
|
|
|
|
|
|
(19.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(19.0
|
)
|
Excess tax liabilities from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
Cancellation of shares
|
|
|
(31,031
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
Issuance of restricted stock awards, net of forfeitures
|
|
|
90,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 28, 2008
|
|
|
25,294,973
|
|
|
|
0.3
|
|
|
|
110.5
|
|
|
|
(149.1
|
)
|
|
|
(1.0
|
)
|
|
|
(39.3
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.8
|
|
|
|
|
|
|
|
18.8
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of cash flow hedge (net of tax impact
of $0.1 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Derivative loss realized in earnings during the period (net of
tax impact of $0.4 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.3
|
|
Cancellation of shares
|
|
|
(32,914
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
Issuance of restricted stock awards, net of forfeitures
|
|
|
193,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 27, 2009
|
|
|
25,455,917
|
|
|
$
|
0.3
|
|
|
$
|
112.3
|
|
|
$
|
(130.3
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(18.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
AFC
Enterprises, Inc.
Consolidated
Statements of Cash Flows
For Fiscal Years 2009, 2008 and 2007
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18.8
|
|
|
$
|
19.4
|
|
|
$
|
23.1
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4.4
|
|
|
|
6.3
|
|
|
|
6.9
|
|
Asset write-downs
|
|
|
0.6
|
|
|
|
9.5
|
|
|
|
1.9
|
|
Net gain on sale of assets
|
|
|
(3.3
|
)
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
(Gain) loss on insurance recoveries related to asset damages, net
|
|
|
0.4
|
|
|
|
(0.5
|
)
|
|
|
(3.2
|
)
|
Deferred income taxes
|
|
|
1.0
|
|
|
|
|
|
|
|
(0.5
|
)
|
Non-cash interest, net
|
|
|
1.9
|
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
Provision for credit losses
|
|
|
2.1
|
|
|
|
0.1
|
|
|
|
0.4
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
Stock-based compensation expense
|
|
|
1.9
|
|
|
|
2.5
|
|
|
|
1.7
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
Prepaid income taxes
|
|
|
0.9
|
|
|
|
(0.4
|
)
|
|
|
7.8
|
|
Other operating assets
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
0.3
|
|
Accounts payable and other operating liabilities
|
|
|
(4.4
|
)
|
|
|
(7.0
|
)
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
23.2
|
|
|
|
29.7
|
|
|
|
41.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1.4
|
)
|
|
|
(2.7
|
)
|
|
|
(10.0
|
)
|
Proceeds from dispositions of property and equipment
|
|
|
7.9
|
|
|
|
3.8
|
|
|
|
0.3
|
|
Property insurance proceeds
|
|
|
0.2
|
|
|
|
|
|
|
|
4.5
|
|
Acquisition of franchised restaurants
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
Proceeds from notes receivable
|
|
|
11.0
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
17.7
|
|
|
|
1.9
|
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments 2005 credit facility (term loan)
|
|
|
(35.9
|
)
|
|
|
(8.9
|
)
|
|
|
(6.9
|
)
|
Borrowings under 2005 revolving credit facility
|
|
|
|
|
|
|
20.0
|
|
|
|
9.5
|
|
Principal payments 2005 revolving credit facility
|
|
|
(0.5
|
)
|
|
|
(24.5
|
)
|
|
|
(4.5
|
)
|
Principal payments other notes
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Special cash dividend
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(0.7
|
)
|
Share repurchases
|
|
|
|
|
|
|
(19.0
|
)
|
|
|
(39.4
|
)
|
Proceeds from exercise of employee stock options
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
Debt issuance costs
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
Other, net
|
|
|
(0.5
|
)
|
|
|
(1.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(38.9
|
)
|
|
|
(34.5
|
)
|
|
|
(38.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2.0
|
|
|
|
(2.9
|
)
|
|
|
(1.7
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
2.1
|
|
|
|
5.0
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4.1
|
|
|
$
|
2.1
|
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
|
|
Note 1
|
Description
of Business
|
AFC Enterprises, Inc. (AFC or the
Company) develops, operates and franchises quick-service
restaurants under the trade name
Popeyes®
Chicken & Biscuits and
Popeyes®
Louisiana Kitchen (collectively Popeyes) in
44 states, the District of Columbia, Puerto Rico, Guam and
27 foreign countries.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation. The
consolidated financial statements include the accounts of AFC
and its wholly-owned subsidiary. All significant intercompany
balances and transactions are eliminated in consolidation.
Use of Estimates. The preparation of
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
(GAAP) requires the Companys management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities. These estimates affect the disclosure
of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during each reporting period. Actual
results could differ from those estimates.
Reclassifications. In the accompanying
consolidated financial statements and in these notes, certain
prior year amounts have been reclassified to conform to the
current years presentation.
The Company reclassified the balance sheet components of the
cooperative advertising fund previously consolidated by line
item to Advertising cooperative assets, restricted
and Advertising cooperative liabilities in its
Consolidated Balance Sheets. For fiscal year 2008,
Accounts and current notes receivable, net,
Other current assets, Advertising Cooperative
assets, restricted, Accounts Payable, and
Advertising Cooperative liabilities were
$9.4 million, $5.2 million, $12.8 million,
$6.5 million and $12.8 million, respectively.
The Company also reclassified the Decrease in restricted
cash from Cash flows provided by (used in) financing
activities to Cash flows provided by (used in)
operating activities on the Consolidated Statements of
Cash Flows. The impact of this reclassification increased
Net cash provided by operating activities and
increased Net cash used in financing activities by
$2.6 million and $1.1 million in 2008 and 2007,
respectively.
Fiscal Year. The Company has a
52/53-week fiscal year that ends on the last Sunday in December.
The 2009, 2008 and 2007 fiscal years all consisted of
52 weeks.
Codification. The Company follows
accounting standards set by the Financial Accounting and
Standards Board (FASB). The FASB sets GAAP to ensure
consistent reporting of the Companys financial condition,
operating results, and cash flows. In June 2009, the FASB
released the Accounting Standards Codification
(Codification) and the Hierarchy of Generally
Accepted Accounting Principles which re-organizes the literature
and is effective for interim and annual periods ending after
September 15, 2009. The Company adopted this standard for
the quarter ended October 4, 2009. For reporting purposes,
the Company explains its policies in plain English instead of
referencing technical accounting standards in order to improve
clarity.
Cash and Cash Equivalents. The Company
considers all money market investment instruments and
certificates of deposit with original maturities of three months
or less to be cash equivalents. Under the terms of the
Companys bank agreements, outstanding checks in excess of
the cash balances in the Companys primary disbursement
accounts create a bank overdraft liability. Bank overdrafts were
insignificant at December 27, 2009 and December 28,
2008.
Supplemental
Cash Flow Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Interest paid
|
|
$
|
6.6
|
|
|
$
|
8.9
|
|
|
$
|
7.1
|
|
Income taxes paid, net
|
|
|
8.9
|
|
|
|
13.2
|
|
|
|
5.8
|
|
Property acquired under capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
F-6
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
Accounts Receivable, Net. At
December 27, 2009 and December 28, 2008, accounts
receivable, net were $6.9 million and $8.6 million,
respectively. Accounts receivable consist primarily of amounts
due from franchisees related to royalties, and rents, amounts
due from insurance carriers, and various miscellaneous items.
The accounts receivable balance is stated net of an allowance
for doubtful accounts. The Company reserves a franchisees
receivable balance based upon pre-defined aging criteria and
upon the occurrence of other events that indicate that it may or
may not collect the balance due. During 2009, 2008 and 2007,
changes in the allowance for doubtful accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance, beginning of year
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
Provisions for loss
|
|
|
1.9
|
|
|
|
0.1
|
|
|
|
0.4
|
|
Write-offs
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
Balance, end of year
|
|
$
|
2.1
|
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
Notes Receivable, Net. At
December 27, 2009 and December 28, 2008, notes
receivable, net, were approximately $2.7 million and
$12.4 million, respectively, of which $2.2 million and
$0.8 million, respectively, was current.
At December 27, 2009, several notes aggregating
approximately $0.9 million had zero percent interest rates
and the remaining notes had fixed interest rates that ranged
from 6% to 10%. The zero percent interest rate notes are
primarily past due royalties converted from accounts receivable
and are substantially reserved for in the allowance for
uncollectible notes receivable.
Notes receivable consist primarily of consideration received in
conjunction with the sale of Company assets in three distinct
transactions: (1) the sale of 24 Popeyes company-operated
restaurants to a franchisee during 2001; (2) the sale of an
equipment manufacturing operation during 2000; and (3) the
sale of 13 Popeyes company-operated restaurants to a franchisee
during 2009. Notes receivable also include notes from
franchisees to finance certain past due franchise revenues,
rents and interest. The notes receivable balance is stated net
of an allowance for uncollectibility, which is evaluated each
reporting period on a
note-by-note
basis. The balance in the allowance account at December 27,
2009 and December 28, 2008, was approximately
$1.1 million and $0.9 million, respectively. The 2009
activity represents an increase of $0.2 million in losses
net of recoveries.
During the third quarter of 2009, the Company received a payment
of $10.2 million associated with the sale of a previously
owned operating company to an affiliate of Crescent Capital
Investments, Inc. during 2005. At December 28, 2008,
$9.3 million of the receivable was recorded in non-current
notes receivable.
Inventories. Inventories are stated at
the lower of cost
(first-in,
first-out method) or net realizable value and consist
principally of food, beverage items, paper and supplies. At
December 27, 2009 and December 28, 2008, inventories
of $0.3 million and $0.5 million, respectively, were
included as a component of Other current assets.
Assets Held for Sale. Assets held for
sale consists of property and equipment related to restaurants
and land that are marketed for re-franchising. Assets held for
sale are reported at the lower of carrying value or estimated
fair value less costs to sell. On January 26, 2009, the
Company completed the re-franchising of three company-operated
restaurants in Nashville, Tennessee for net proceeds of
$1.1 million from the sale of assets and new franchise
agreements. On June 8, 2009, the Company completed the
re-franchising of 13 company-operated restaurants in its
Atlanta, Georgia market for net proceeds of $3.5 million
from the sale of assets and new franchise agreements. The net
loss on the sale of these assets was $0.5 million.
Property and Equipment. Property and
equipment is stated at cost less accumulated depreciation.
F-7
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
Provisions for depreciation are made using the straight-line
method over an assets estimated useful life:
7-35 years for buildings; 5-15 years for equipment;
and in the case of leasehold improvements and capital lease
assets, the lesser of the economic life of the asset or the
lease term (generally 3-20 years). During 2009, 2008 and
2007, depreciation expense was approximately $3.8 million,
$5.6 million, and $6.1 million, respectively.
We evaluate property and equipment for impairment during the
fourth quarter of each year or when circumstances arise
indicating that a particular asset may be impaired. For property
and equipment at company-operated restaurants, we perform our
annual impairment evaluation on an individual restaurant basis.
We evaluate restaurants using a two-year history of
operating losses as our primary indicator of potential
impairment. We evaluate recoverability based on the
restaurants forecasted undiscounted cash flows for the
expected remaining useful life of the unit, which incorporate
our best estimate of sales growth and margin improvement based
upon our plans for the restaurant and actual results at
comparable restaurants. The carrying values of restaurant assets
that are not considered recoverable are written down to their
estimated fair market value, which we generally measure by
discounting estimated future cash flows.
Goodwill, Trademarks, and Other Intangible
Assets. Amounts assigned to goodwill arose
from the allocation of reorganization value when the Company
emerged from bankruptcy in 1992 and from business combinations
accounted for by the purchase method. Amounts assigned to
trademarks arose from the allocation of reorganization value
when the Company emerged from bankruptcy in 1992. These assets
are deemed indefinite-lived assets and are not amortized for
financial reporting purposes.
The Companys finite-lived intangible assets (primarily
re-acquired franchise rights) are amortized on a straight-line
basis over 10 to 20 years based on the remaining life of
the original franchise agreement or lease agreement.
During 2008, the Company impaired $0.6 million of its
company-operated restaurant segment goodwill in connection with
the re-franchising of its Atlanta, Georgia and Nashville,
Tennessee markets. See Assets Held for Sale discussion above.
The Company evaluates goodwill and trademarks for impairment on
an annual basis (during the fourth quarter of each year) or more
frequently when circumstances arise indicating that a particular
asset may be impaired. The impairment evaluation for goodwill
includes a comparison of the fair value of each of the
Companys reporting units with their carrying value. The
Companys reporting units are its business segments.
Goodwill is allocated to each reporting unit for purposes of
this analysis. Goodwill associated with bankruptcy
reorganization value is assigned to reporting units using a
relative fair value approach. Goodwill associated with a
business combination is allocated to the reporting unit or a
component of the reporting unit expected to benefit from the
synergies of the combination. For goodwill impairment testing
purposes, goodwill is assigned to a component of the reporting
unit associated with a business combination for a two year
period following the combination. After two years, goodwill from
a business combination is allocated to the reporting unit for
impairment evaluation purposes. The fair value of each reporting
unit is the amount for which the reporting unit could be sold in
a current transaction between willing parties. The Company
estimates the fair value of its reporting units using a
discounted cash flow model. The operating assumptions used in
the discounted cash flow model are generally consistent with the
reporting units past performance and with the projections
and assumptions that are used in the Companys current
operating plans. Such assumptions are subject to change as a
result of changing economic and competitive conditions. If a
reporting units carrying value exceeds its fair value,
goodwill is written down to its implied fair value. The Company
follows a similar analysis for the evaluation of trademarks, but
that analysis is performed on a company-wide basis. During 2009,
2008 and 2007, there was no impairment of goodwill or trademarks
identified during the Companys annual impairment testing.
Costs incurred to renew or extend the term of recognized
intangibles are expensed as incurred and reported as a component
of General and administrative expenses.
F-8
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
Debt Issuance Costs. Costs incurred
securing new debt facilities are capitalized and then amortized,
utilizing a method that approximates the effective interest
method. Absent a basis for cost deferral, debt amendment fees
are expensed as incurred. In the Companys Consolidated
Statements of Operations, the amortization of debt issuance
costs, any write-off of debt issuance costs when a debt facility
is modified or prematurely paid off, and debt amendment fees are
included as a component of Interest expense, net.
Advertising Cooperative. The Company
maintains an advertising cooperative that receives contributions
from the Company and from its franchisees, based upon a
percentage of restaurant sales, as required by their franchise
agreements. This cooperative is used exclusively for marketing
of the Popeyes brand. The Company acts as an agent for the
franchisees with regards to their contributions to the
advertising cooperative.
In the Companys consolidated financial statements,
contributions received and expenses of the advertising
cooperative are excluded from the Companys Consolidated
Statements of Operations and the Consolidated Statements of Cash
Flow. The Company reports all assets and liabilities of the
advertising cooperative as Advertising cooperative assets,
restricted and Advertising cooperative
liabilities in the Consolidated Balance Sheet. The
advertising cooperatives assets, consisting primarily of cash
and accounts receivable from the franchisees, can only be used
for selected purposes and are considered restricted. The
advertising cooperative liabilities represent the corresponding
obligation arising from the receipt of the contributions to
purchase advertising and promotional programs.
The Companys contributions to the advertising cooperative
based on company-operated restaurant sales are reflected in the
Companys Consolidated Statements of Operations as a
component of Restaurant employee, occupancy and other
expenses. Additional contributions to the advertising
cooperative for national media advertising and other marketing
related costs are expensed as a component of General and
administrative expenses. During 2009, 2008 and 2007, the
Companys advertising costs were approximately
$6.2 million, $5.4 million, and $3.5 million,
respectively.
Leases. When determining the lease
term, the Company includes option periods for which failure to
renew the lease imposes economic penalty on the Company in such
an amount that a renewal appears, at the inception of the lease,
to be reasonably assured. The lease term commences on the date
when the Company has the right to control the use of the leased
property, which can occur before the rent payments are due under
the terms of the lease.
The Company records rent expense for leases that contain
scheduled rent increases on a straight-line basis over the lease
term, including any option periods considered in the
determination of that lease term. Contingent rentals are
generally based on sales levels in excess of stipulated amounts,
and thus are not considered minimum lease payments and are
included in rent expense as they accrue.
Accumulated Other Comprehensive Income
(Loss). Comprehensive income (loss) is net
income plus the change in fair value of the Companys cash
flow hedge discussed in Note 10 plus derivative (gains) or
losses realized in earnings during the period. Amounts included
in accumulated other comprehensive income (loss) for the
Companys derivative instruments are recorded net of the
related income tax effects.
The following table gives further detail regarding the
composition of accumulated other comprehensive loss at
December 27, 2009 and December 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Net unrealized loss on an interest rate swap agreement
|
|
$
|
(0.1
|
)
|
|
$
|
(0.3
|
)
|
Unrealized loss on interest rate swaps settled in cash
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)
|
|
Total accumulated other comprehensive loss
|
|
$
|
(0.5
|
)
|
|
$
|
(1.0
|
)
|
|
The unrealized loss associated with the interest rate swaps
settled in cash will be recognized as a component of interest
expense through June 30, 2010, the remaining term of the
original hedge. See Note 10 for further discussion of the
Companys interest rate swap agreements.
F-9
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
Revenue Recognition Sales by Company-Operated
Restaurants. Revenues from the sale of food
and beverage products are recognized on a cash basis. The
Company presents sales net of sales tax and other sales related
taxes.
Revenue Recognition Franchise Operations
Revenues from franchising activities include development
fees associated with a franchisees planned development of
a specified number of restaurants within a defined geographic
territory, franchise fees associated with the opening of new
restaurants, and ongoing royalty fees which are generally based
on five percent of net restaurant sales. Development fees and
franchise fees are recorded as deferred franchise revenue when
received and are recognized as revenue when the restaurants
covered by the fees are opened or all material services or
conditions relating to the fees have been substantially
performed or satisfied by the Company. The Company recognizes
royalty revenues as earned. Franchise renewal fees are
recognized when a renewal agreement becomes effective.
Rent and Other Revenues. Rent and other
revenues are composed of rental income associated with
properties leased or subleased to franchisees. Rental income is
recognized on the straight-line basis over the lease term.
Cash Consideration from Vendors. The
Company has entered into long-term beverage supply agreements
with certain major beverage vendors. Pursuant to the terms of
these arrangements, marketing rebates are provided to the
Company and its advertising fund from the beverage vendors based
upon the respective dollar volume of purchases for
company-operated restaurants and franchised restaurants. For
Company-operated restaurants, these incentives are recognized as
earned throughout the year and are classified as a reduction of
Restaurant food, beverages and packaging in the
Consolidated Statements of Operations. The incentives recognized
by company-operated restaurants were approximately
$0.7 million, $0.9 million, and $0.7 million in
2009, 2008 and 2007, respectively. Rebates earned and
contributed to the cooperative advertising fund are excluded
from the Companys Consolidated Statements of Operations.
Gains and Losses Associated With
Re-franchising. From time to time, the
Company engages in re-franchising transactions. Typically, these
transactions involve the sale of a company-operated restaurant
to an existing or new franchisee.
The Company defers gains on the sale of company-operated
restaurants when the Company has continuing involvement in the
assets sold beyond the customary franchisor role. The
Companys continuing involvement generally includes seller
financing or the leasing of real estate to the franchisee.
Deferred gains are recognized over the remaining term of the
continuing involvement. Losses are recognized immediately.
In 2009 and 2008, there were deferred gains of $0.2 million
and $0.1 million, respectively, associated with the sale of
company stores. There were no sales of company-operated
restaurants in 2007. During 2009, 2008 and 2007, previously
deferred gains of approximately $0.4 million,
$0.5 million, and $0.2 million, respectively, were
recognized in income as a component of Other expenses
(income), net in the accompanying Consolidated Statements
of Operations.
Research and Development. Research and
development costs are expensed as incurred. During 2009, 2008
and 2007, such costs were approximately $1.0 million,
$1.3 million, and $1.2 million, respectively.
Foreign Currency
Transactions. Substantially all of the
Companys foreign-sourced revenues (principally royalties
from international franchisees) are recorded in
U.S. dollars. The aggregate effects of any exchange gains
or losses are included in the accompanying Consolidated
Statements of Operations as a component of General and
administrative expenses. The net foreign currency gains
and losses were insignificant in 2009 and 2007. The net foreign
currency loss was $0.1 million in 2008.
Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective
F-10
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
tax bases and operating loss, capital loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The Company
provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be
realized.
In fiscal 2007, the Company adopted the authoritative guidance
issued by the FASB which requires that a position taken or
expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not (i.e. a
likelihood of more than fifty percent) that the position would
be sustained upon examination by tax authorities. A recognized
tax position is then measured at the largest amount of benefit
that is greater than fifty percent likely of being realized upon
settlement. Changes in judgment that result in subsequent
recognition, derecognition or change in a measurement of a tax
position taken in a prior annual period (including any related
interest and penalties) is recognized as a discrete item in the
interim period in which the change occurs. Prior to 2007, tax
liabilities had been recorded when, in managements
judgment, it was not probable that the Companys tax
position would ultimately be sustained. As a result of adopting
the new guidance, the Company recognized a $2.6 million
decrease in its liability for uncertain tax positions, which was
accounted for as an adjustment to the beginning balance of
accumulated deficit. The Company recognizes interest and
penalties related to unrecognized tax benefits as components of
Income tax expense.
See Note 19 for additional information regarding income
taxes.
Stock-Based Compensation Expense. At
the beginning of fiscal year 2006, the Company adopted the fair
value recognition provisions as required by the FASB
authoritative guidance on stock compensation, which requires the
measurement and recognition of compensation cost at fair value
for all share-based payments, including stock options,
restricted stock awards and restricted share units. The Company
used the modified prospective transition method and, as a
result, did not retroactively adjust results from prior periods.
The fair value of stock options with service and market
conditions is valued utilizing a Monte Carlo simulation embedded
in a lattice model. The fair value of all other stock options is
estimated using a Black-Scholes option-pricing model. The fair
value of stock-based compensation is amortized on the graded
vesting attribution method. The Company issues new shares for
common stock upon exercise of stock options.
The Company recorded $1.9 million ($1.2 million net of
tax), $2.5 million ($1.5 million net of tax), and
$1.7 million ($1.1 million net of tax) in total
stock-based compensation expense during 2009, 2008 and 2007,
respectively.
Subsequent Events. The Company
discloses material events that occur after the balance sheet but
before the financial statements are issued. In general, these
events are recognized if the condition existed at the date of
the balance sheet, but not recognized if the condition did not
exist at the balance sheet date. The Company discloses
non-recognized events if required to keep the financial
statements from being misleading. Management evaluated events
occurring subsequent to December 27, 2009 and determined
that no subsequent event disclosures were required.
Derivative Financial Instruments. The
Company uses interest rate swap agreements to reduce its
interest rate risk on its floating rate debt under the terms of
its 2005 amended credit facility. We recognize all derivatives
on the balance sheet at fair value. At inception and on an
on-going basis, we assess whether each derivative that qualifies
for hedge accounting continues to be highly effective in
offsetting changes in the cash flows of the hedged item. If the
derivative meets the hedge criteria as defined by certain
accounting standards, changes in the fair value of the
derivative are recognized in accumulated other comprehensive
income (loss) until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in fair
value, if any, is immediately recognized in earnings. See
Note 10 for further discussion of the Companys
interest rate swap agreements.
F-11
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
Note 3
|
Recent
Accounting Pronouncements That the Company Has Not Yet
Adopted
|
In 2009, the Financial Accounting Standards Board
(FASB) amended the consolidation principles
associated with variable interest entities (VIEs) as defined in
the Consolidation topic of the ASC. The objective is to improve
the financial reporting of companies involved with VIEs. The
amendments replace the quantitative-based risks and rewards
calculation for determining which reporting entity, if any, has
a controlling financial interest in a VIE with an approach
focused on identifying which reporting entity has the power to
direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and
(1) the obligation to absorb losses of the entity or
(2) the right to receive benefits from the entity.
Additionally, a company is required to perform ongoing
reassessments of whether an enterprise is the primary
beneficiary of a VIE. Prior to this statement, a company was
only required to reassess the status when specific events
occurred. The new standards are effective for the Company during
the first quarter 2010. The adoption of this standard will have
no impact on our financial statements.
Accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material
impact on our consolidated financial statements upon adoption.
|
|
Note 4
|
Other
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Deferred tax assets
|
|
$
|
1.7
|
|
|
$
|
1.6
|
|
Prepaid expenses and other current assets
|
|
|
2.2
|
|
|
|
3.6
|
|
|
|
|
$
|
3.9
|
|
|
$
|
5.2
|
|
|
|
|
Note 5
|
Property
and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Land
|
|
$
|
3.2
|
|
|
$
|
4.0
|
|
Buildings and improvements
|
|
|
23.6
|
|
|
|
23.2
|
|
Equipment
|
|
|
22.6
|
|
|
|
22.6
|
|
Properties held for sale and other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
49.5
|
|
|
|
49.9
|
|
Less accumulated depreciation and amortization
|
|
|
(28.0
|
)
|
|
|
(24.6
|
)
|
|
|
|
$
|
21.5
|
|
|
$
|
25.3
|
|
|
At December 27, 2009 and December 28, 2008, property
and equipment, net included capital lease assets with a gross
book value of $0.8 million and no significant accumulated
amortization.
F-12
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
Note 6
|
Trademarks
and Other Intangible Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Non-amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
42.0
|
|
|
$
|
42.0
|
|
Other
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
|
|
|
|
42.6
|
|
|
|
42.6
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Re-acquired franchise rights
|
|
|
7.1
|
|
|
|
7.1
|
|
Accumulated amortization
|
|
|
(2.1
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
5.0
|
|
|
|
5.6
|
|
|
|
|
$
|
47.6
|
|
|
$
|
48.2
|
|
|
Amortization expense was approximately $0.6 million,
$0.7 million, and $0.8 million for 2009, 2008 and
2007, respectively. For each of the upcoming five years,
estimated amortization expense is expected to be approximately
$0.6 million per year. The remaining weighted average
amortization period for these assets is 10 years.
|
|
Note 7
|
Other
Long-Term Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Noncurrent notes receivable, net
|
|
$
|
0.5
|
|
|
$
|
11.6
|
|
Debt issuance costs, net
|
|
|
1.7
|
|
|
|
1.1
|
|
Other
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
|
$
|
3.3
|
|
|
$
|
13.4
|
|
|
|
|
Note 8
|
Other
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Accrued wages, bonuses and severances
|
|
$
|
4.2
|
|
|
$
|
3.1
|
|
Accrued income taxes payable and income tax reserves
|
|
|
6.0
|
|
|
|
5.8
|
|
Accrued interest
|
|
|
0.7
|
|
|
|
1.7
|
|
Other
|
|
|
2.8
|
|
|
|
3.0
|
|
|
|
|
$
|
13.7
|
|
|
$
|
13.6
|
|
|
F-13
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
Note 9
|
Fair
Value Measurements
|
The following table reflects assets and liabilities that are
measured and carried at fair value on a recurring basis as of
December 27, 2009 and December 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Identical Asset or
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
|
|
Liability
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
Carrying
|
|
(in millions)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
|
|
December 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
3.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3.3
|
|
Advertising cooperative assets, restricted
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
|
Total assets at fair value
|
|
$
|
6.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6.9
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement (Note 10)
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
December 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
2.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.1
|
|
Advertising cooperative assets, restricted
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
|
Total assets at fair value
|
|
$
|
7.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7.5
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement (Note 10)
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
|
|
|
$
|
0.5
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
|
|
|
$
|
0.5
|
|
|
At December 27, 2009 and December 28, 2008, the fair
value of the Companys current assets and current
liabilities approximates carrying value because of the
short-term nature of these instruments. The Company believes
that it is not practicable to estimate the fair value of its
notes receivable, because there is no ready market for sale of
these instruments. The counterparties to these notes are private
business enterprises. The Company believes the fair value of its
credit facilities approximates its carrying value, as management
believes the floating rate interest and other terms are
commensurate with the credit and interest rate risks involved.
See Note 10 for a discussion of the fair value of the
Companys interest rate swap agreements.
F-14
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
Note 10
|
Long-Term
Debt and Other Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
2005 Credit Facility:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
|
|
|
$
|
0.5
|
|
Term B loan
|
|
|
78.3
|
|
|
|
114.2
|
|
Capital lease obligations
|
|
|
1.6
|
|
|
|
1.6
|
|
Other notes
|
|
|
2.7
|
|
|
|
2.9
|
|
|
|
|
|
|
|
82.6
|
|
|
|
119.2
|
|
Less current portion
|
|
|
(1.3
|
)
|
|
|
(4.7
|
)
|
|
|
|
$
|
81.3
|
|
|
$
|
114.5
|
|
|
2005 Credit Facility. On May 11,
2005, and as amended and restated, on April 14, 2006,
April 27, 2007 and August 14, 2009, the Company
entered into a bank credit facility (the 2005 Credit
Facility) with a group of lenders, which consisted of a
$60.0 million, five-year revolving credit facility and a
six-year $190.0 million term loan.
On August 14, 2009, the Company entered into the third
amendment and restatement to the 2005 Credit Facility. Key terms
of the amended and restated facility include the following:
|
|
|
|
|
The term loan and revolving credit facility maturity dates were
extended by two years to May 2013 and May 2012, respectively.
|
|
|
|
The revolving credit facility commitment was reduced from
$60.0 million to $48.0 million.
|
|
|
|
The applicable interest rate for the term loan and revolving
credit facility was set at LIBOR plus 4.50%, with a minimum
LIBOR of 2.50%.
|
|
|
|
The Company must maintain a Total Leverage Ratio of 3.00 to 1 or
less through the end of the first quarter of 2012 and 2.75 to 1
or less thereafter.
|
|
|
|
The Company must prepay (i) 50% of Consolidated Excess Cash
Flow (as defined in the 2005 Credit Facility) for such fiscal
year if the Total Leverage Ratio is greater than 2.00 to 1 on
the last day of such fiscal year or (ii) 25% of
Consolidated Excess Cash Flow for such year if the Total
Leverage Ratio is equal to or less than 2.00 to 1.
|
|
|
|
The Company is permitted to resume its common stock repurchase
program once the Total Leverage Ratio is less than 1.75 to 1. As
of December 27, 2009, the Companys Total Leverage
Ratio was 1.95 to 1.
|
|
|
|
To reduce interest rate risk, derivative instruments are
required to be maintained on no less than 30% of the outstanding
debt (see discussion below under the heading entitled
Interest Rate Swap Agreements).
|
In connection with the third amendment, the Company expensed
$1.9 million, which is reported as a component of
Interest expense, net. Additionally, the Company
capitalized approximately $1.8 million of fees related to
the new amendment as debt issuance costs which will be amortized
over the remaining life of the facility utilizing the effective
interest method.
The revolving credit facility and term loan bear interest based
upon alternative indices (LIBOR, Federal Funds Effective Rate,
Prime Rate and a Base CD rate) plus an applicable margin as
specified in the facility. The margins on the revolving credit
facility may fluctuate because of changes in certain financial
leverage ratios and the Companys compliance with
applicable covenants of the 2005 Credit Facility. The Company
also pays a quarterly commitment fee of 0.625% on the unused
portions of the revolving credit facility. As of
December 27, 2009, the Company had no loans outstanding
under its revolving credit facility. Under the terms of the
revolving credit facility, the Company
F-15
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
may obtain other short-term borrowings of up to
$10.0 million and letters of credit up to
$25.0 million. Collectively, these other borrowings and
letters of credit may not exceed the amount of unused borrowings
under the 2005 Credit Facility. As of December 27, 2009,
the Company had $1.3 million of outstanding letters of
credit. Availability for short-term borrowings and letters of
credit under the revolving credit facility was
$46.7 million.
The 2005 Credit Facility is secured by a first priority security
interest in substantially all of the Companys assets. The
2005 Credit Facility contains financial and other covenants,
including covenants requiring the Company to maintain various
financial ratios, limiting its ability to incur additional
indebtedness, restricting the amount of capital expenditures
that may be incurred, restricting the payment of cash dividends,
and limiting the amount of debt which can be loaned to the
Companys franchisees or guaranteed on their behalf. This
facility also limits the Companys ability to engage in
mergers or acquisitions, sell certain assets, repurchase its
common stock and enter into certain lease transactions. The 2005
Credit Facility includes customary events of default, including,
but not limited to, the failure to pay any interest, principal
or fees when due, the failure to perform certain covenant
agreements, inaccurate or false representations or warranties,
insolvency or bankruptcy, change of control, the occurrence of
certain ERISA events and judgment defaults.
In addition to the scheduled payments of principal on the term
loan, at the end of each fiscal year, the Company is subject to
mandatory prepayments in those situations when consolidated cash
flows for the year, as defined pursuant to the terms of the
facility, exceed specified amounts. Whenever any prepayment is
made, subsequent scheduled payments of principal are ratably
reduced. The Company was subject to a mandatory prepayment of
approximately $0.3 million and $2.8 million for fiscal
year 2009 and 2008, respectively, which is recorded as a
component of current debt maturities in the consolidated balance
sheets.
As of December 27, 2009, the Company was in compliance with
the financial and other covenants of the 2005 Credit Facility.
As of December 27, 2009 and December 28, 2008, the
Companys weighted average interest rate for all
outstanding indebtedness under the 2005 Credit Facility was 7.2%
and 5.8% respectively.
Interest Rate Swap Agreements. In
accordance with the 2005 Credit Facility, as amended and
restated, the Company uses interest rate swaps to fix the
interest rate exposure on a portion of its outstanding term
loan. As interest rate swaps are terminated, the effective
portion of the termination loss is amortized as interest expense
over the unexpired term of the swap.
As required by the third amendment and restatement to the 2005
Credit Facility, on September 10, 2009, the Company entered
into new interest rate swap agreements limiting the interest
rate exposure on $30 million of the term loan debt to a
fixed rate of 7.40%. The term of the swap agreements expires
August 31, 2011.
The Companys interest rate swap agreements are derivative
instruments that are designated as cash flow hedges. The
following tables summarize the fair value of the Companys
interest rate swap agreements and the effect on the financial
statements:
F-16
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
Fair
Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
(in millions)
|
|
Balance Sheet Location
|
|
|
12/27/09
|
|
|
12/28/08
|
|
|
|
|
Interest rate swap agreements
|
|
|
Deferred credits and other long-term liabilities
|
|
|
$
|
0.1
|
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Effect of Derivative Instruments on the Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
Recognized into AOCI
|
|
|
|
|
|
Reclassified from AOCI to Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Reclassified
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
from AOCI to Income
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest rate swap agreements, net of tax
|
|
$
|
(0.2
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(0.9
|
)
|
|
|
Interest expense, net
|
|
|
$
|
(1.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.2
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
$
|
(1.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
In 2009, net interest expense associated with these agreements
was approximately $1.3 million. In 2008 and 2007, the
Company incurred net interest income associated with these
agreements of approximately zero and $1.5 million,
respectively.
Future Debt Maturities. At
December 27, 2009, aggregate future debt maturities,
excluding capital lease obligations, were as follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
2010
|
|
$
|
1.3
|
|
2011
|
|
|
1.0
|
|
2012
|
|
|
19.7
|
|
2013
|
|
|
57.1
|
|
2014
|
|
|
0.3
|
|
Thereafter
|
|
|
1.6
|
|
|
|
|
$
|
81.0
|
|
|
The Company leases property and equipment associated with its
(1) corporate facilities; (2) company-operated
restaurants; (3) certain former company-operated
restaurants that are now operated by franchisees and the
property subleased to the franchisee; and (4) certain
former company-operated restaurants that are now subleased to a
third party.
F-17
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
At December 27, 2009, future minimum payments under capital
and non-cancelable operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
(in millions)
|
|
Leases
|
|
|
Leases
|
|
|
|
|
2010
|
|
$
|
0.2
|
|
|
$
|
5.8
|
|
2011
|
|
|
0.2
|
|
|
|
5.8
|
|
2012
|
|
|
0.2
|
|
|
|
4.6
|
|
2013
|
|
|
0.2
|
|
|
|
4.3
|
|
2014
|
|
|
0.2
|
|
|
|
4.1
|
|
Thereafter
|
|
|
3.4
|
|
|
|
52.1
|
|
|
|
|
Future minimum lease payments
|
|
|
4.4
|
|
|
|
76.7
|
|
Less amounts representing interest
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
$
|
1.6
|
|
|
$
|
76.7
|
|
|
During 2009, 2008 and 2007, rental expense was approximately
$5.5 million, $6.2 million, and $6.8 million,
respectively, including contingent rentals of $0.1 million,
$0.1 million and $0.1 million, respectively. At
December 27, 2009, the implicit rate of interest on capital
leases ranged from 8.1% to 11.3%.
The Company leases certain restaurant properties and subleases
other restaurant properties to franchisees. At December 27,
2009, the aggregate gross book value and net book value of owned
properties that were leased to franchisees was approximately
$2.5 million and $2.0 million, respectively. During
2009, 2008 and 2007, rental income from these leases and
subleases was approximately $4.6 million,
$3.9 million, and $4.5 million, respectively. At
December 27, 2009, future minimum rental income associated
with these leases and subleases, are approximately
$4.1 million in 2010, $4.0 million in 2011,
$3.5 million in 2012, and $3.1 million in 2013,
$2.3 million in 2014, and $12.7 million thereafter.
|
|
Note 12
|
Deferred
Credits and Other Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Deferred franchise revenues
|
|
$
|
3.4
|
|
|
$
|
3.9
|
|
Deferred gains on unit conversions
|
|
|
2.4
|
|
|
|
2.7
|
|
Deferred rentals
|
|
|
4.0
|
|
|
|
4.7
|
|
Above-market rent obligations
|
|
|
2.8
|
|
|
|
2.9
|
|
Deferred income taxes
|
|
|
3.3
|
|
|
|
1.9
|
|
Other
|
|
|
1.8
|
|
|
|
3.1
|
|
|
|
|
$
|
17.7
|
|
|
$
|
19.2
|
|
|
Share Repurchase Program. As originally
announced on July 22, 2002, and subsequently amended and
expanded, the Companys board of directors has approved a
share repurchase program of up to $215.0 million. The
program, which is open-ended, allows the Company to repurchase
shares of its common stock from time to time. During 2008, and
2007, the Company repurchased and retired 2,120,401 shares
and 2,496,030 shares of common stock for $19.0 million
and $39.4 million, respectively, under this program. There
were no share repurchases under the program in 2009.
The remaining value of shares that may be repurchased under the
program was $38.9 million. Pursuant to the terms of the
Companys 2005 Credit Facility as amended and restated, the
Company is subject to a repurchase limit
F-18
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
of approximately $47.3 million for the remainder of fiscal
2010. The Company is permitted to resume its common stock
repurchase program once the Total Leverage Ratio is less than
1.75 to 1.
Dividends. During 2009 the Company paid
no dividends. During 2008 and 2007, the Company paid dividends
of approximately $0.5 million and $0.7 million,
respectively, associated with vested restricted share awards.
|
|
Note 14
|
Stock
Option Plans
|
The 1996 Nonqualified Stock Option
Plan. In April 1996, the Company created the
1996 Nonqualified Stock Option Plan. This plan authorized the
issuance of approximately 4.1 million options. As of
November 13, 2002, the Company no longer grants options
from this plan. During 2009, the remaining options outstanding
under this plan expired unexercised.
The 2002 Incentive Stock Plan. In
February 2002, the Company created the 2002 Incentive Stock
Plan. This plan authorized the issuance of 4.5 million
shares of the Companys common stock. All grants have been
at prices which approximate the fair market value of the
Companys common stock at the date of grant. The options
currently granted and outstanding as of December 27, 2009
allow certain employees of the Company to purchase approximately
138,000 shares of common stock (which vest at 25% per year)
and 77,000 shares of common stock (which vest at 33.3% per
year). If not exercised, the options expire seven years from the
date of issuance. As of May 25, 2006, the Company no longer
grants options under this plan.
The 2006 Incentive Stock Plan. In May
2006, the Company created the 2006 Incentive Stock Plan. The
plan authorizes the issuance of approximately 3.3 million
shares of the Companys common stock. The plan replaced the
2002 Incentive Stock Plan and no further grants will be made
under the 2002 Incentive Stock Plan. The 2006 Incentive Stock
Plan did not increase the number of shares of stock available
for grant under the 2002 Incentive Stock Plan. Options and other
awards such as restricted stock, stock appreciation rights,
stock grants, and stock unit grants under the plan generally may
be granted to any of the Companys employees and
non-employee directors.
The options currently granted and outstanding under this plan as
of December 27, 2009 allow certain employees of the Company
to purchase approximately 260,000 shares of common stock
which vest at 25% per year and 155,000 shares of common
stock which vest at 33.3% per year.
As of December 27, 2009, an additional 200,000 options were
granted and outstanding which vest at 25% per year but are only
exercisable provided that certain performance criteria with
regard to the Companys common stock price are met before
October 31, 2012. A third of the options are exercisable if
the Companys common stock price maintains an average of
$20.00 per share for twenty consecutive trading days, a third of
the options are exercisable if the Companys common stock
price maintains an average of $25.00 per share for twenty
consecutive trading days, and a third of the options are
exercisable if the Companys common stock price maintains
an average of $30.00 per share for twenty consecutive trading
days.
As of December 27, 2009, an additional 34,000 options were
granted and outstanding which vest at 25% per year but are
exercisable provided that the Company achieves certain annual
domestic same store sales growth targets in fiscal years 2009
through 2012. If not exercised, the options under these grants
expire seven years from the date of issuance.
A Summary of Stock Option Plan
Activity. The table below summarizes the
activity within the Companys stock option plans for the
52 week period ended December 27, 2009.
F-19
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
(shares in thousands)
|
|
Shares
|
|
|
Exercise Price
|
|
|
(years)
|
|
|
(millions)
|
|
|
|
|
Stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
823
|
|
|
$
|
12.16
|
|
|
|
|
|
|
|
|
|
Granted options
|
|
|
155
|
|
|
|
8.30
|
|
|
|
|
|
|
|
|
|
Exercised options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled and expired options
|
|
|
(114
|
)
|
|
|
14.03
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
864
|
|
|
$
|
11.22
|
|
|
|
4.4
|
|
|
$
|
0.1
|
|
|
Exercisable at end of year
|
|
|
330
|
|
|
$
|
11.79
|
|
|
|
2.6
|
|
|
$
|
|
|
|
Shares available for future grants under the plans at end of year
|
|
|
2,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the above table represents the
total pre-tax intrinsic value (the difference between the
Companys closing stock price on the last trading date of
2009 and the exercise price, multiplied by the number of
options). The amount of aggregate intrinsic value will change
based on the fair market value of the Companys common
stock.
The Company recognized approximately $0.9 million,
$1.4 million, and $0.7 million, in stock-based
compensation expense associated with its stock option grants
during 2009, 2008 and 2007, respectively. As of
December 27, 2009, there was approximately
$1.0 million of total unrecognized compensation costs
related to unvested stock options which are expected to be
recognized over a weighted average period of approximately
1.7 years. The total fair value at grant date of awards
which vested during 2009, 2008 and 2007 was $0.1 million,
$1.0 million, and $0.7 million, respectively.
The weighted average grant date fair value of awards granted
during 2009, 2008 and 2007 was $4.23, $3.86 and $5.96,
respectively. The total intrinsic value of stock options
exercised during 2007 was $3.2 million. There were no
options exercised in 2009 and 2008.
During 2007, the fair value of each option with service and
market conditions was estimated on the date of grant using a
Monte Carlo simulation embedded in a lattice model. During 2009
and 2008, the fair value of all other option awards was
estimated on the date of grant using a Black-Scholes
option-pricing model. The fair value of stock-based compensation
is amortized on the graded vesting attribution method. The
following weighted average assumptions were used for the grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
Black-
|
|
|
Black-
|
|
|
Monte
|
|
|
Black-
|
|
|
|
Scholes
|
|
|
Scholes
|
|
|
Carlo
|
|
|
Scholes
|
|
|
|
|
Risk-free interest rate
|
|
|
2.6
|
%
|
|
|
2.9
|
%
|
|
|
4.2
|
%
|
|
|
4.2
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected term (in years)
|
|
|
4.50
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
7.00
|
|
Expected volatility
|
|
|
60.6
|
%
|
|
|
41.9
|
%
|
|
|
42.0
|
%
|
|
|
41.9
|
%
|
|
The risk-free interest rate is based on the United States
treasury yields in effect at the time of grant. The expected
term of options represents the period of time that options
granted are expected to be outstanding based on the vesting
period, the term of the option agreement and historical exercise
patterns. The estimated volatility is based on the historical
volatility of the Companys stock price and other factors.
F-20
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
The following table summarizes the non-vested stock option
activity for the 52 week period ended December 27,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
(shares in thousands)
|
|
Shares
|
|
|
Value
|
|
|
|
|
Unvested stock options outstanding at beginning of period
|
|
|
405
|
|
|
$
|
5.41
|
|
Granted
|
|
|
155
|
|
|
|
4.23
|
|
Vested
|
|
|
(15
|
)
|
|
|
3.84
|
|
Forfeited
|
|
|
(11
|
)
|
|
|
3.89
|
|
|
Unvested stock options outstanding at end of period
|
|
|
534
|
|
|
$
|
5.15
|
|
|
Restricted
Share Awards
The Company has granted restricted shares pursuant to the 2006
Incentive Stock Plan and 2002 Incentive Stock Plan. These awards
are amortized as expense on a graded vesting basis. The Company
recognized approximately $0.7 million, $0.8 million,
and $0.6 million, in stock-based compensation expense
associated with these awards during 2009, 2008 and 2007,
respectively. During the vesting period, recipients of the
shares are entitled to dividends on such shares, provided that
such shares are not forfeited. Dividends are accumulated and
paid out at the end of the vesting period. The Company paid
dividends of approximately $0.5 million and
$0.7 million associated with vested awards during fiscal
years 2008 and 2007, respectively.
The following table summarizes the restricted share awards
activity for the 52 week period ended December 27,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
Date Fair
|
|
(share awards in thousands)
|
|
Shares
|
|
|
Value
|
|
|
|
|
Unvested restricted share awards:
|
|
|
|
|
|
|
|
|
Outstanding beginning of year
|
|
|
90
|
|
|
$
|
8.76
|
|
Granted
|
|
|
194
|
|
|
|
8.29
|
|
Vested
|
|
|
(86
|
)
|
|
|
8.80
|
|
Cancelled
|
|
|
(8
|
)
|
|
|
7.85
|
|
|
Outstanding end of year
|
|
|
190
|
|
|
$
|
8.31
|
|
|
The weighted average grant date fair value of restricted share
awards granted during 2008 and 2007 was $8.77 and $15.54,
respectively.
As of December 27, 2009, there was approximately
$1.3 million of total unrecognized compensation cost
related to unvested restricted stock awards which are expected
to be recognized over a weighted average period of approximately
1.9 years. The total fair value at grant date of awards
which vested during 2009, 2008 and 2007 was $0.8 million,
$1.7 million, and $2.3 million, respectively.
Restricted
Share Units
The Company has granted restricted stock units (RSUs) to members
of its board of directors pursuant to the 2006 Incentive Stock
Plan. Vested RSUs are convertible into shares of the
Companys common stock on a 1:1 basis at such time the
director no longer serves on the board of the Company. The
Company recognized $0.3 million, $0.3 million, and
$0.4 million in stock-based compensation expense associated
with these awards during the 2009, 2008 and 2007, respectively.
As of December 27, 2009, there was approximately
$0.1 million of total unrecognized
F-21
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
compensation cost related to unvested RSUs, which is expected to
be recognized over a weighted average period of approximately
0.4 years. The total fair value at grant date of awards
vested during 2009, 2008 and 2007 was zero, zero and
$0.1 million, respectively.
The following table summarizes the restricted share unit
activity for the 52 week period ended December 27,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
Date Fair
|
|
(share awards in thousands)
|
|
Units
|
|
|
Value
|
|
|
|
|
Unvested restricted stock units:
|
|
|
|
|
|
|
|
|
Outstanding beginning of year
|
|
|
74
|
|
|
$
|
12.70
|
|
Granted
|
|
|
51
|
|
|
|
5.86
|
|
Vested
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
125
|
|
|
$
|
9.90
|
|
|
The weighted average grant date fair value of restricted share
units granted during 2008 and 2007 was $8.02 and $19.79,
respectively.
|
|
Note 15
|
401(k)
Savings Plan
|
The Company maintains a qualified retirement plan
(Plan) under Section 401(k) of the Internal
Revenue Code of 1986, as amended, for the benefit of employees
meeting certain eligibility requirements as outlined in the Plan
document. All Company employees are subject to the same
contribution and vesting schedules. Under the Plan, non-highly
compensated employees may contribute up to 75.0% of their
eligible compensation to the Plan on a pre-tax basis up to
statutory limitations. Highly compensated employees are limited
to 5.0% of their eligible compensation beginning in 2007
(increasing from 4.0% in 2006). The Company may make both
voluntary and matching contributions to the Plan. The Company
expensed approximately $0.2 million, $0.2 million, and
$0.3 million, during 2009, 2008 and 2007, respectively, for
its contributions to the Plan.
|
|
Note 16
|
Commitments
and Contingencies
|
Supply Contracts. Supplies are
generally provided to Popeyes franchised and company-operated
restaurants pursuant to supply agreements negotiated by Supply
Management Services, Inc. (SMS), a
not-for-profit
purchasing cooperative of which the Company is a member. The
Company, its franchisees and the owners of
Cinnabon®
bakeries hold membership interests in SMS in proportion to the
number of restaurants they own. At December 27, 2009, the
Company held one of seven board seats. The operations of SMS are
not included in the Consolidated Financial Statements and the
investment is accounted for using the cost method.
The principal raw material for a Popeyes restaurant operation is
fresh chicken. Company-operated and franchised restaurants
purchase their chicken from suppliers who service AFC and its
franchisees from various plant locations. These costs are
significantly impacted by increases in the cost of fresh
chicken, which can result from a number of factors, including
increases in the cost of grain, disease, declining market supply
of fast-food sized chickens and other factors that affect
availability.
In order to ensure favorable pricing for fresh chicken purchases
and to maintain an adequate supply of fresh chicken for the
Popeyes system, SMS has entered into chicken purchasing
contracts with chicken suppliers. The contracts, which pertain
to the vast majority of our system-wide purchases for Popeyes
are cost-plus contracts that utilize prices based
upon the cost of feed grains plus certain agreed upon non-feed
and processing costs. In order to stabilize pricing for the
Popeyes system, SMS has entered into commodity pricing
agreements for the first half of 2010 for certain commodities
including corn and soy, which impact the price of poultry and
other food cost.
F-22
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
The Company has entered into long-term beverage supply
agreements with certain major beverage vendors. Pursuant to the
terms of these arrangements, marketing rebates are provided to
the Company and its franchisees from the beverage vendors based
upon the dollar volume of purchases for company-operated
restaurants and franchised restaurants, respectively, which will
vary according to their demand for beverage syrup and
fluctuations in the market rates for beverage syrup.
Formula and Supply Agreements with Former
Owner. The Company has a formula licensing
agreement with the estate of Alvin C. Copeland, the founder of
Popeyes and the primary owner of Diversified Foods and
Seasonings, Inc. (Diversified). Under this
agreement, the Company has the worldwide exclusive rights to the
Popeyes fried chicken recipe and certain other ingredients used
in Popeyes products. The agreement provides that the Company pay
the estate of Mr. Copeland approximately $3.1 million
annually until March 2029. During each of 2009, 2008 and 2007,
the Company expensed approximately $3.1 million under this
agreement. The Company also has a supply agreement with
Diversified through which the Company purchases certain
proprietary spices and other products made exclusively by
Diversified.
King Features Agreements. The Company
has several agreements with the King Features Syndicate Division
(King Features) of Hearst Holdings, Inc. under which
they have the non-exclusive license to use the image and
likeness of the cartoon character Popeye in the
United States. Popeyes locations outside the United States have
the non-exclusive use of the image and likeness of the cartoon
character Popeye and certain companion characters.
The Company is obligated to pay King Features a royalty of
approximately $1.0 million annually, as adjusted for
fluctuations in the Consumer Price Index, plus twenty percent of
the Companys gross revenues from the sale of products
outside of the Popeyes restaurant system, if any. These
agreements extend through June 30, 2010 and we are
presently discussing extensions of these agreements with King
Features.
During 2009, 2008 and 2007, payments made to King Features were
$1.1 million, $1.1 million, and $1.0 million;
respectively. A portion of these payments were made from the
Popeyes advertising cooperative (Note 2) and the
remainder by the Company.
Business Process Services. Certain
accounting and information technology services are provided to
the Company under an agreement with Convergys Corporation which
expires April 30, 2011. At December 27, 2009, future
minimum payments under this contract are $1.0 million in
2010 and $0.3 million in 2011. During 2009, 2008 and 2007,
the Company expensed $1.4 million, $1.5 million, and
$1.4 million, respectively, under this agreement.
Information Technology
Outsourcing. Certain information technology
services are provided to the Company under Managed Information
Technology Services Agreements with certain third party
providers through the end of 2012. The Information Technology
Services Agreement with IBM expired December 28, 2009. At
December 27, 2009, future minimum payments under these
contracts are $1.3 million in 2010, $1.4 million in
2011 and $1.4 million in 2012. During 2009, 2008 and 2007,
the Company expensed $2.4 million, $2.1 million, and
$2.0 million, respectively, under this agreement.
Employment Agreements. As of
December 27, 2009, the Company had employment agreements
with seven senior executives which provide for annual base
salaries ranging from $240,000 to $650,000, subject to annual
adjustment by the Board of Directors, an annual incentive bonus,
fringe benefits, participation in Company-sponsored benefit
plans and such other compensation as may be approved by the
Board of Directors. The terms of the agreements end in 2010,
unless earlier terminated or otherwise renewed pursuant to the
terms thereof and are automatically extended for successive
one-year periods following the expiration of each term unless
notice is given by the Company or the executive not to renew.
Pursuant to the terms of the agreements, if employment is
terminated without cause or if written notice not to renew
employment is given by the Company, the terminated executive
would in certain cases be entitled to, among other things, one,
one and one-half, or two times annual base salary, as
applicable, and one, one and one-half, or two times the bonus
payable, as applicable, to the individual for the fiscal year in
which such termination occurs. Under the terms of the
agreements, upon a change of control of the Company and a
significant reduction in the executives responsibilities
or duties, the executive may terminate employment
F-23
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
and would be entitled to receive the same severance pay the
executive would have received had the executives
employment been terminated without cause.
Litigation. The Company is a defendant
in various legal proceedings arising in the ordinary course of
business, including claims resulting from slip and
fall accidents, employment-related claims, claims from
guests or employees alleging illness, injury or other food
quality, health or operational concerns and claims related to
franchise matters. The Company has established adequate reserves
to provide for the defense and settlement of such matters. The
Companys management believes their ultimate resolution
will not have a material adverse effect on the Companys
financial condition or its results of operations.
Insurance Programs. The Company carries
property, general liability, business interruption, crime,
directors and officers liability, employment practices
liability, environmental and workers compensation
insurance policies which it believes are customary for
businesses of its size and type. Pursuant to the terms of their
franchise agreements, the Companys franchisees are also
required to maintain certain types and levels of insurance
coverage, including commercial general liability insurance,
workers compensation insurance, all risk property and
automobile insurance.
The Company has established reserves with respect to the
programs described above based on the estimated total losses the
Company will experience. At December 27, 2009, the
Companys insurance reserves of approximately
$1.4 million were partially collateralized by letters of
credit
and/or cash
deposits of $1.3 million.
Environmental Matters. The Company is
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.
Certain of the Companys current and formerly owned
and/or
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. Certain of these properties previously
contained underground storage tanks (USTs), and some
of these properties may currently contain abandoned USTs. 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 or former owner or operator of these
sites, may be jointly and severally liable for the costs of
investigation and remediation of any such contamination, as well
as any other environmental conditions at its properties that are
unrelated to USTs. The Company has obtained insurance coverage
that it believes is adequate to cover any potential
environmental remediation liabilities.
Foreign Operations. The Companys
international operations are limited to franchising activities.
During 2009, 2008 and 2007, such operations represented
approximately 10.9%, 11.3%, and 9.2%, of total franchise
revenues, respectively; and approximately 6.3%, 5.7%, and 4.5%,
of total revenues, respectively. At December 27, 2009,
approximately $1.3 million of the Companys accounts
receivable were related to its international franchise
operations.
Significant Franchisee. During 2009,
2008 and 2007, one domestic franchisee accounted for
approximately 9.7%, 10.0%, and 10.5%, respectively of the
Companys royalty revenues.
Geographic Concentrations. Of
AFCs domestic company-operated and franchised restaurants,
the majority are located in the southern and southwestern United
States. The Companys international franchisees operate in
Korea, Indonesia, Canada, Turkey and various countries
throughout Central America, Asia and Europe.
F-24
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
Note 17
|
Other
Expenses (Income), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net recoveries of directors and officers liability insurance
claims and shareholder litigation
|
|
$
|
|
|
|
$
|
(12.9
|
)
|
|
$
|
(0.9
|
)
|
Impairments and disposals of fixed assets
|
|
|
0.6
|
|
|
|
9.5
|
|
|
|
1.9
|
|
(Gain) loss on insurance recoveries related to asset damages, net
|
|
|
0.4
|
|
|
|
(0.5
|
)
|
|
|
(3.2
|
)
|
Income from business interruption insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
Costs related to restaurant closures
|
|
|
0.2
|
|
|
|
|
|
|
|
0.8
|
|
Net gain on sale of assets
|
|
|
(3.3
|
)
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
Other
|
|
|
|
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
|
$
|
(2.1
|
)
|
|
$
|
(4.6
|
)
|
|
$
|
(2.7
|
)
|
|
During 2009, the Company completed the re-franchising of three
company-operated restaurants in its Nashville, Tennessee market
and 13 company-operated restaurants in its Atlanta, Georgia
market for net proceeds of $4.6 million, of which
$0.5 million was recorded as a component of Franchise
revenues in the Consolidated Statements of Operations. The
net loss on the sale of these assets was $0.5 million.
During 2009, the Company sold 10 real estate properties. The
Company recognized a net gain on the sale of the related assets
of $3.6 million.
In September 2007, a federal court in Atlanta returned a
favorable decision in a lawsuit by the Company against a former
insurance carrier that provided primary liability coverage for
its directors and officers. The Company was awarded
$20 million in damages (representing the full liability of
the policy) and approximately $4 million in pre-judgment
interest. After payment of settlement amounts to the
counterparties to certain joint settlement agreements legal
expenses and fees, total related recoveries received during
fiscal years 2008 and 2007 were $12.9 million and
$0.9 million, respectively.
During 2008, the Company recognized $9.2 million in
impairment charges associated with the re-franchising of
company-operated restaurants in Atlanta, Georgia and Nashville,
Tennessee.
The Company recognized approximately $2.9 million in net
gains on insurance recoveries related to asset damages and
approximately $1.6 million in income from business
interruption insurance recoveries during 2007 resulting from
Hurricane Katrina. During 2007, the company received a total of
$6.5 million from its insurance carriers in settlement of
all claims resulting from Hurricane Katrina.
Costs related to restaurant closures include the accrual of
future lease obligations on closed facilities and other charges
associated with the closing of company-operated restaurants.
|
|
Note 18
|
Interest
Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Interest on debt, less capitalized amounts
|
|
$
|
7.5
|
|
|
$
|
8.1
|
|
|
$
|
9.0
|
|
Amortization and write-offs of debt issuance costs
|
|
|
1.3
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Other debt related charges
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.4
|
|
Interest income
|
|
|
(0.9
|
)
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
|
|
|
$
|
8.4
|
|
|
$
|
8.1
|
|
|
$
|
8.7
|
|
|
F-25
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
Total income taxes for fiscal years 2009, 2008 and 2007, were
allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Income taxes in the statements of operations, net
|
|
$
|
11.5
|
|
|
$
|
12.8
|
|
|
$
|
13.8
|
|
Income taxes charged (credited) to statements of
shareholders deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense for tax purposes less than (in excess of)
amounts recognized for financial reporting purposes
|
|
|
|
|
|
|
0.5
|
|
|
|
(0.9
|
)
|
Other comprehensive income
|
|
|
0.3
|
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
Total
|
|
$
|
11.8
|
|
|
$
|
12.6
|
|
|
$
|
12.3
|
|
|
Total U.S. and foreign income before income taxes for
fiscal years 2009, 2008 and 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
United States
|
|
$
|
24.6
|
|
|
$
|
26.6
|
|
|
$
|
31.8
|
|
Foreign
|
|
|
5.7
|
|
|
|
5.6
|
|
|
|
5.1
|
|
|
Total
|
|
$
|
30.3
|
|
|
$
|
32.2
|
|
|
$
|
36.9
|
|
|
The components of income tax expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8.7
|
|
|
$
|
10.5
|
|
|
$
|
11.9
|
|
Foreign
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
0.8
|
|
State
|
|
|
0.9
|
|
|
|
1.4
|
|
|
|
1.6
|
|
|
|
|
|
|
|
10.5
|
|
|
|
12.8
|
|
|
|
14.3
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1.0
|
|
|
|
|
|
|
|
(0.5
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
$
|
11.5
|
|
|
$
|
12.8
|
|
|
$
|
13.8
|
|
|
Applicable foreign withholding taxes are generally deducted from
royalties and certain other revenues collected from
international franchisees. Foreign taxes withheld are generally
eligible for credit against the Companys U.S. income
tax liabilities.
Reconciliations of the Federal statutory income tax rate to the
Companys effective tax rate are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
0.1
|
|
|
|
1.5
|
|
|
|
1.7
|
|
Valuation allowance
|
|
|
2.1
|
|
|
|
0.8
|
|
|
|
0.9
|
|
Provision to return adjustments
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
Adjustments to estimated tax reserves
|
|
|
0.6
|
|
|
|
1.4
|
|
|
|
(0.5
|
)
|
Non-deductible goodwill impairment
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
Other items, net
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
Effective income tax benefit rate
|
|
|
38.0
|
%
|
|
|
39.8
|
%
|
|
|
37.4
|
%
|
|
F-26
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
Provision to return adjustments include the effects of the
reconciliation of income tax amounts recorded in our
Consolidated Statements of Operations to amounts reflected on
our tax returns.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred franchise fee revenue
|
|
$
|
2.3
|
|
|
$
|
2.6
|
|
State net operating loss carry forwards
|
|
|
4.7
|
|
|
|
4.0
|
|
Deferred rentals
|
|
|
2.9
|
|
|
|
3.1
|
|
Deferred compensation
|
|
|
1.8
|
|
|
|
1.4
|
|
Property, plant and equipment
|
|
|
1.1
|
|
|
|
1.5
|
|
Allowance for doubtful accounts
|
|
|
1.0
|
|
|
|
0.5
|
|
Insurance accruals
|
|
|
0.5
|
|
|
|
0.4
|
|
Other accruals
|
|
|
1.0
|
|
|
|
1.7
|
|
Reorganization costs
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
|
Total gross deferred tax assets
|
|
|
19.3
|
|
|
|
19.2
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Franchise value and trademarks
|
|
|
(16.2
|
)
|
|
|
(15.5
|
)
|
|
|
|
Total gross deferred liabilities
|
|
|
(16.2
|
)
|
|
|
(15.5
|
)
|
Valuation allowance
|
|
|
(4.7
|
)
|
|
|
(4.0
|
)
|
|
|
|
Net deferred tax liability
|
|
$
|
(1.6
|
)
|
|
$
|
(0.3
|
)
|
|
The Company assesses quarterly the likelihood that the deferred
tax assets will be recovered. To make this assessment,
historical levels of income, expectations and risks associated
with estimates of future taxable income are considered. If
recovery is not likely, the Company increases its valuation
allowance for the deferred tax assets that it estimates will not
be recovered.
At December 27, 2009, the Company had state net operating
losses (NOLs) of approximately $90.0 million
which continue to expire. The Company established a full
valuation allowance on the deferred tax asset related to these
NOLs as it is more likely than not that such tax benefit will
not be realized. As such, the Company has established a
valuation allowance of approximately $4.7 million at
December 27, 2009 and $4.0 million at
December 28, 2008.
Included in accrued liabilities at December 27, 2009 and
December 28, 2008 are accrued income tax reserves of
$6.0 million and $5.7 million, respectively.
The amount of unrecognized tax benefits were approximately
$4.9 million as of December 27, 2009 of which
approximately $1.3 million, if recognized, would impact the
effective income tax rate. A reconciliation of the beginning and
ending amount of unrecognized tax benefits as of
December 27, 2009 is as follows (in millions):
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
Balance as of December 28, 2008
|
|
$
|
4.7
|
|
Gross additions related to current year
|
|
|
0.2
|
|
Expirations of statutes of limitation
|
|
|
|
|
|
Balance as of December 27, 2009
|
|
$
|
4.9
|
|
|
F-27
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
The Company recognizes interest and penalties related to
uncertain tax positions as a component of its income tax
expense. Interest and penalties on uncertain tax positions were
approximately $0.1 million, $0.3 million and
$0.2 million for 2009, 2008 and 2007, respectively. The
Company had approximately $1.1 million and
$1.0 million of accrued interest and penalties related to
uncertain tax positions as of December 27, 2009 and
December 28, 2008, respectively.
The Company files income tax returns in the United States and
various state jurisdictions. The U.S. federal tax years
2004 through 2008 are open to audit, with 2004 and 2005
currently under examination. The Company has unrecognized tax
benefits of approximately $0.7 million related to the
period being examined which may be recognized once the federal
income tax audit is closed. In general, the state tax years open
to audit range from 2004 through 2008.
|
|
Note 20
|
Components
of Earnings Per Share Computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net income
|
|
$
|
18.8
|
|
|
$
|
19.4
|
|
|
$
|
23.1
|
|
Denominator for basic earnings per share weighted
average shares
|
|
|
25.3
|
|
|
|
25.6
|
|
|
|
28.6
|
|
Dilutive employee stock options
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
Denominator for diluted earnings per share
|
|
|
25.4
|
|
|
|
25.7
|
|
|
|
28.8
|
|
|
F-28
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
Note 21
|
Segment
Information
|
The Company is engaged in developing, operating and franchising
Popeyes®
Chicken & Biscuits and
Popeyes®
Louisiana Kitchen quick-service restaurants. Based on its
internal reporting and management structure, the Company has
determined that it has two reportable segments: franchise
operations and company-operated restaurants. The
company-operated restaurant segment derives its revenues from
the operation of company owned restaurants. The franchise
segment consists of domestic and international franchising
activities and derives its revenues principally from
(1) ongoing royalty payments that are determined based on a
percentage of franchisee sales; (2) franchise fees
associated with new restaurant openings; (3) development
fees associated with the opening of new franchised restaurants
in a given market; and (4) rental income associated with
properties leased or subleased to franchisees. Operating profit
for each reportable segment includes operating results directly
allocable to each segment plus a 5% inter-company royalty charge
from franchise operations to company-operated restaurants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations(a)
|
|
$
|
90.6
|
|
|
$
|
88.5
|
|
|
$
|
87.3
|
|
Company-operated restaurants
|
|
|
57.4
|
|
|
|
78.3
|
|
|
|
80.0
|
|
|
|
|
|
|
$
|
148.0
|
|
|
$
|
166.8
|
|
|
$
|
167.3
|
|
|
|
|
Operating profit before unallocated expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations
|
|
$
|
36.8
|
|
|
$
|
38.9
|
|
|
$
|
45.1
|
|
Company-operated restaurants
|
|
|
4.2
|
|
|
|
3.1
|
|
|
|
4.7
|
|
|
|
|
|
|
|
41.0
|
|
|
|
42.0
|
|
|
|
49.8
|
|
Less unallocated expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4.4
|
|
|
|
6.3
|
|
|
|
6.9
|
|
Other expenses (income), net
|
|
|
(2.1
|
)
|
|
|
(4.6
|
)
|
|
|
(2.7
|
)
|
|
|
|
Operating profit
|
|
$
|
38.7
|
|
|
$
|
40.3
|
|
|
$
|
45.6
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations
|
|
$
|
0.4
|
|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
Company-operated restaurants
|
|
|
1.0
|
|
|
|
2.5
|
|
|
|
9.4
|
|
|
|
|
|
|
$
|
1.4
|
|
|
$
|
2.7
|
|
|
$
|
10.0
|
|
|
|
|
Goodwill year end
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations
|
|
$
|
8.9
|
|
|
$
|
8.9
|
|
|
$
|
8.9
|
|
Company-operated restaurants
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
2.8
|
|
|
|
|
|
|
$
|
11.1
|
|
|
$
|
11.1
|
|
|
$
|
11.7
|
|
|
|
|
Total assets year end
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations
|
|
$
|
90.3
|
|
|
$
|
98.6
|
|
|
$
|
106.6
|
|
Company-operated restaurants
|
|
|
26.3
|
|
|
|
33.4
|
|
|
|
48.4
|
|
|
|
|
|
|
$
|
116.6
|
|
|
$
|
132.0
|
|
|
$
|
155.0
|
|
|
|
|
|
(a) |
|
Franchise operations revenues excludes 5% inter-segment royalties |
F-29
AFC
ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Fiscal Years 2009, 2008 and
2007 (Continued)
|
|
Note 22
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
First(a)
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(in millions, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
47.9
|
|
|
$
|
35.7
|
|
|
$
|
31.9
|
|
|
$
|
32.5
|
|
Operating profit
|
|
|
9.9
|
|
|
|
11.4
|
|
|
|
8.9
|
|
|
|
8.5
|
|
Net income
|
|
|
5.0
|
|
|
|
6.4
|
|
|
|
3.4
|
|
|
|
4.0
|
|
Basic earnings per common share
|
|
|
0.20
|
|
|
|
0.25
|
|
|
|
0.13
|
|
|
|
0.16
|
|
Diluted earnings per common share
|
|
|
0.20
|
|
|
|
0.25
|
|
|
|
0.13
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
First(a)
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(b)
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
53.3
|
|
|
$
|
39.3
|
|
|
$
|
38.3
|
|
|
$
|
35.9
|
|
Operating profit
|
|
|
13.3
|
|
|
|
12.9
|
|
|
|
8.1
|
|
|
|
6.0
|
|
Net income
|
|
|
6.4
|
|
|
|
6.6
|
|
|
|
4.0
|
|
|
|
2.4
|
|
Basic earnings per common share
|
|
|
0.24
|
|
|
|
0.26
|
|
|
|
0.16
|
|
|
|
0.10
|
|
Diluted earnings per common share
|
|
|
0.24
|
|
|
|
0.26
|
|
|
|
0.16
|
|
|
|
0.10
|
|
|
|
|
|
(a) |
|
The Companys first quarters for 2009 and 2008 contained
sixteen weeks. The remaining quarters of 2009 and 2008 contained
twelve weeks each. |
|
(b) |
|
Significant fourth quarter adjustments and unusual or
infrequently incurred items recognized in 2008 include:
$1.1 million in asset impairments of company-operated
restaurants and $0.8 million of income recognized from
insurance proceeds related to property damage and business
interruption claims. |
F-30