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As filed with the Securities and Exchange Commission on June 20, 1997
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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AFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Minnesota 5812 58-2016606
(State or other jurisdiction of (Primary Standard Industrial (Employer
incorporation or organization) Classification Code Identification No.)
Number)
</TABLE>
Six Concourse Parkway, Suite 1700
Atlanta, Georgia 30328-5352
(770) 391-9500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Samuel N. Frankel
Executive Vice President, General Counsel and Secretary
AFC Enterprises, Inc.
Six Concourse Parkway, Suite 1700
Atlanta, Georgia 30328-5352
(770) 391-9500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
Timothy F. Sylvester, Esq. Allan J. Tanenbaum, Esq.
Riordan & McKinzie Cohen Pollock Merlin
300 South Grand Avenue Axelrod & Tanenbaum
29th Floor 2100 Riveredge Parkway, Suite 300
Los Angeles, California 90071 Atlanta, Georgia 30328
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
----------------
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [_]
----------------
CALCULATION OF REGISTRATION FEE
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=============================================================================================================================
PROPOSED
AMOUNT TO MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 1/4% Senior Subordinated Notes due May 15, 2007... $175,000,000 100% $175,000,000 $53,031
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</TABLE>
(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
AFC ENTERPRISES, INC.
CROSS-REFERENCE SHEET
Pursuant to Rule 404(a) and Item 501(b) of Regulation S-K
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FORM S-4 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
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<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................... Outside Front Cover Page; Cross-Reference
Sheet; Inside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................. Inside Front Cover Page; Available
Information; Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.................................. Prospectus Summary; Risk Factors; The
Company; Summary Unaudited Pro Forma
Consolidated Financial Information;
Selected Historical Consolidated Financial
Data
4. Terms of the Transaction............................... The Exchange Offer; Description of New
Notes; Certain Federal Income Tax
Considerations; Plan of Distribution
5. Pro Forma Financial Information........................ Selected Historical Consolidated Financial
Data; Summary Unaudited Pro Forma
Consolidated Financial Information;
Consolidated Financial Statements; Pro
Forma Consolidated Financial Statements
6. Material Contacts with the Company Being
Acquired............................................... *
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
Be Underwriters........................................ *
8. Interests of Named Experts and Counsel................. Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities......... *
10. Information with Respect to S-3 Registrants............ *
11. Incorporation of Certain Information by
Reference.............................................. *
12. Information with Respect to S-2 or S-3
Registrants............................................ *
13. Incorporation of Certain Information by
Reference.............................................. *
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants............................ Inside Front Cover Page; Prospectus
Summary; The Company; Capitalization;
Summary Unaudited Pro Forma
Consolidated Financial Information;
Selected Historical Consolidated Financial
Data and Unaudited Pro Forma Information;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Consolidated
Financial Statements; Pro Forma
Consolidated Financial Statements
15. Information with Respect to S-3 Companies.............. *
16. Information with Respect to S-2 or S-3
Companies.............................................. *
17. Information with Respect to Companies Other
Than S-3 or S-2 Companies.............................. *
18. Information if Proxies, Consents or
Authorizations are to be Solicited..................... *
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................................ Inside Front Cover Page; The Exchange
Offer; Management; Executive
Compensation; Ownership of Capital
Stock; Certain Transactions; Description of
New Notes
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* Inapplicable
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion dated June __, 1997
PROSPECTUS
AFC Enterprises, Inc.
Offer to Exchange its unrestricted
10 1/4% Senior Subordinated Notes due May 15, 2007,
which have been registered under the Securities Act,
for any and all of its outstanding restricted
10 1/4% Senior Subordinated Notes due May 15, 2007
The Exchange Offer will expire at 5:00 P.M., New York City time, on ,
1997, unless extended.
----------------
AFC Enterprises, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus (the "Prospectus") and
the accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount
of its unrestricted 10 1/4% Senior Subordinated Notes due May 15, 2007 (the "New
Notes") which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a registration statement (the "Registration
Statement") of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding restricted 10 1/4% Senior Subordinated Notes due May 15, 2007
(the "Old Notes"), of which $175.0 million principal amount is outstanding as of
the date hereof.
The Company will accept for exchange any and all validly tendered Old Notes
prior to 5:00 P.M., New York City time, on , 1997, unless
extended (the "Expiration Date"). Old Notes may be tendered only in integral
multiples of $1,000. Tenders of Old Notes may be withdrawn at any time prior to
5:00 P.M., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain customary
conditions. In the event the Company terminates the Exchange Offer and does not
accept for exchange any Old Notes, the Company will promptly return the Old
Notes to the holders thereof. The Company will not receive any proceeds from
the Exchange Offer. See "The Exchange Offer."
The New Notes will be obligations of the Company evidencing the same debt as
the Old Notes, and will be entitled to the benefits of the same indenture (the
"Indenture"). See "Description of New Notes". The form and terms of the New
Notes are the same as the form and terms of the Old Notes in all material
respects except that the New Notes have been registered under the Securities Act
and hence do not include certain rights to registration thereunder and do not
contain transfer restrictions or terms with respect to the special interest
payments applicable to the Old Notes. The Old Notes were issued on May 21, 1997
pursuant to an offering exempt from registration under the Securities Act. See
"The Exchange Offer".
Continued on following page
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF THE OLD NOTES ON , 1997.
SEE "RISK FACTORS" ON PAGE 20 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS OFFERING.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
(Continuation of cover page)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Exchange and Registration Rights Agreement,
dated as of May 21, 1997 (the "Registration Rights Agreement"), by and among the
Company and the Initial Purchasers (as defined herein), a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The Exchange Offer is intended to satisfy the Company's obligations under
the Registration Rights Agreement to register the Old Notes under the Securities
Act. Once the Exchange Offer is consummated, the Company will have no further
obligations to register any of the Old Notes not tendered by the holders of the
Old Notes (the "Holders") for exchange. See "Risk Factors--Consequences to Non-
Tendering Holders of Old Notes".
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof without compliance with the registration and
prospectus delivery provisions of the Securities Act. However, any Holder who
is an "affiliate" of the Company or who intended to participate in the Exchange
Offer for the purpose of distributing the New Notes (i) cannot rely on the
interpretation by the staff of the Commission set forth in the above referenced
no-action letters, (ii) cannot tender its Old Notes in the Exchange Offer, and
(iii) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the Old Notes,
unless such sale or transfer is made pursuant to an exemption from such
requirements. See "Risk Factors--Consequences to Non-Tendering Holders of Old
Notes". In addition, each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and not acquired directly from the
Company. The Company has agreed that for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution." EXCEPT AS
DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR AN OFFER TO
RESELL, RESALE OR OTHER TRANSFER OF NEW NOTES.
Old Notes were initially represented by a two Global Old Notes (as defined
herein) in fully registered form, each registered in the name of a nominee of
The Depository Trust Company ("DTC"), as depository. The New Notes exchanged
for Old Notes represented by the Global Old Notes may be initially represented
by one or more global securities ("Global New Note") in fully registered form,
each registered in the name of the nominee of DTC. The Global New Note will be
exchangeable for New Notes in registered form, in denominations of $1,000 and
integral multiples thereof as described herein. The New Notes in global form
will trade in The Depository Trust Company's Same-Day Funds Settlement System,
and secondary market trading activity in such New Notes will therefore settle in
immediately available funds. See "Description of New Notes--Form, Denomination
and Book-Entry Procedures".
The New Notes will bear interest at a rate equal to 10 1/4% per annum from
their date of issuance. Interest on the New Notes is payable semi-annually on
May 15 and November 15 of each year, commencing November 15, 1997. Holders
whose Old Notes are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the New Notes.
Such interest will be paid with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange will cease to accrue interest
upon cancellation of the Old Notes and issuance of the New Notes.
2
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(Continuation of cover page)
The New Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after May 15, 2002, at the redemption prices set forth
herein, together with accrued and unpaid interest, if any, to the date of
redemption. Subject to certain requirements, up to 40% in aggregate principal
amount of New Notes originally issued will be redeemable, at the option of the
Company, at any time or times prior to May 15, 2000 from the net proceeds of one
or more public offerings of capital stock of the Company, at a redemption price
of 110.25% of the principal amount thereof, plus accrued and unpaid interest (if
any) to the date of redemption; provided that, following such redemption, at
least $100 million in principal amount of New Notes remain outstanding. At any
time prior to May 15, 2002, the New Notes may also be redeemed in whole, but not
in part, at the option of the Company, upon the occurrence of a Change of
Control (as defined herein) at a redemption price equal to 100% of the principal
amount thereof plus the Applicable Premium (as defined herein) as of, and
accrued and unpaid interest (if any) to, the date of redemption. Upon the
occurrence of a Change of Control, each holder of the New Notes may require the
Company to repurchase all or a portion of such holder's New Notes at 101% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the date of repurchase. See "Description of New Notes".
The Old Notes are and the New Notes will be, senior subordinated, unsecured
obligations of the Company and will be subordinated in right of payment to all
existing and future Senior Indebtedness (as defined herein) of the Company
(which includes the New Credit Facility (as defined herein)) and will rank pari
passu in right of payment with all unsecured senior subordinated Indebtedness of
the Company and will rank senior in right of payment to any future indebtedness
of the Company that may be subordinated to the New Notes.
Prior to this offering, there has been no public market for the Old Notes.
Following completion of the Exchange Offer, the Company does not intend to list
the New Notes on a national securities exchange or to seek approval for
quotation through the Nasdaq National Market. The Initial Purchasers have
informed the Company that they currently intend to make a market in the New
Notes. However, the Initial Purchasers are not obligated to do so and any such
market making may be discontinued at any time without notice. Therefore, no
assurance can be given as to whether an active trading market will develop or be
maintained for the New Notes. As the Old Notes were issued and the New Notes
are being issued to a limited number of institutions who typically hold similar
securities for investment, the Company does not expect that an active public
market for the New Notes will develop. In addition, resales by certain holders
of the Old Notes or the New Notes of a substantial percentage of the aggregate
principal amount of such notes could constrain the ability of any market maker
to develop or maintain a market for the New Notes. To the extent that a market
for the New Notes should develop, the market value of the New Notes will depend
on prevailing interest rates, the market for similar securities and other
factors, including the financial condition, performance and prospects of the
Company. Such factors might cause the New Notes to trade at a discount from
face value. See "Risk Factors--Absence of Public Market". The Company has
agreed to pay the expenses of the Exchange Offer.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
SAMUEL N. FRANKEL, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, AFC
ENTERPRISES, INC., SIX CONCOURSE PARKWAY, SUITE 1700, ATLANTA, GEORGIA 30328-
5352, TELEPHONE NUMBER (770) 391-9500.
3
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-4 (together with all
amendments thereto, the "Registration Statement") under the Securities Act for
the registration of the New Notes offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
New Notes offered hereby, reference is made to the Registration Statement and to
the exhibits and schedules filed therewith. Statements contained in this
Prospectus concerning the contents of any contract or other document are not
necessarily complete. With respect to each such contract or other document
filed with the Commission as an exhibit to the Registration Statement, reference
is made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
Upon consummation of the Exchange Offer, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder (the "Exchange Act") for a
period following the effectiveness of the Registration Statement. The
Registration Statement, the exhibits and schedules forming a part thereof and
the reports and other information filed by the Company with the Commission in
accordance with the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may also be obtained upon written request from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The SEC also maintains a World Wide
Web site (http://www.sec.gov) that contains reports, proxy and other information
regarding registrants that file electronically with the SEC.
The Indenture provides that, following the filing date of this Registration
Statement and for so long as any of the New Notes are outstanding, the Company
will file with the Commission the periodic reports required to be filed with the
Commission under the Exchange Act, whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act. The Company will also, within 15
days of filing each such report with the Commission, provide the Trustee and the
holders of the New Notes with annual reports containing the information required
to be contained in Form 10-K promulgated under the Exchange Act, quarterly
reports containing the information required to be contained in Form 10-Q
promulgated under the Exchange Act, and from time to time such other information
as is required to be contained in Form 8-K promulgated under the Exchange Act.
If filing such reports with the Commission is prohibited by the Exchange Act,
the Company will also provide copies of such reports to prospective purchasers
of the New Notes upon written request.
4
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Consolidated Financial Statements and the notes
thereto and the Pro Forma Consolidated Financial Statements and the notes
thereto, each of which is included elsewhere in this Prospectus. All references
to the Company's international operations include franchised restaurants in
Puerto Rico. As used herein, the terms "AFC" and "Company" refer to AFC
Enterprises, Inc., a Minnesota corporation formed in July 1992, and its
subsidiary.
THE COMPANY
The Company is the second-largest quick-service chicken restaurant company
in the world, franchising and operating quick-service restaurants ("QSRs") under
the primary trade names of Popeyes Chicken & Biscuits(R) ("Popeyes") and Churchs
Chicken(R) ("Churchs"). At March 23, 1997, the AFC system included over 2,300
franchised and Company-operated restaurants, with operations in 21 countries and
annual systemwide sales of over $1.4 billion. For the 52-week period ended
March 23, 1997, the Company generated total revenues and EBITDA (as defined
herein) of $510.4 million and $67.1 million, respectively.
The Company commenced operations in November 1992 following the
reorganization of its predecessor. In connection with the plan of
reorganization, a new management team headed by Frank J. Belatti, former
President and Chief Operating Officer of Hospitality Franchise Systems, Inc.
and, prior to that, of Arby's, Inc., took control of Company operations. This
management team has engineered a dramatic improvement in the Company's financial
performance, franchise commitments and brand quality, including the following:
. Growth in total revenues and franchising revenues at compound annual
rates of 4.9% and 11.3%, respectively, from 1993 to 1996;
. An increase in comparable restaurant sales for every year from 1993 to
1996;
. Growth in EBITDA at a compound annual rate of 23.1% from 1993 to 1996,
and an improvement in EBITDA margin from 8.0% to 12.9% over the same
period;
. An increase in the number of outstanding franchise commitments from
372 at year-end 1992 to 1,398 at March 23, 1997;
. An increase in international franchised restaurants from 172 in 14
foreign countries at year-end 1992 to 409 restaurants in 20 foreign
countries at March 23, 1997; and
. The re-imaging and renovation of 367 franchised restaurants and 387
Company-operated restaurants, with demonstrable subsequent increases
in average unit volume.
The Company has adopted a global strategy to increase revenues and profits
by the franchise development of its existing Popeyes and Churchs brands and the
acquisition of additional branded concepts. The Company's strategy is to (i)
deliver world class service and support to its franchisees by capitalizing on
the Company's size, state-of-the-art technology and leadership position, (ii)
promote franchisee development of traditional and non-traditional formats in new
and existing markets and (iii) provide new and existing franchisees with
investment opportunities in high value/high growth branded concepts outside of
the quick-service chicken restaurant industry. The Company believes that by
following this strategy it will become Franchisor of Choice(TM) which, when
combined with the Company's market leadership position, superior brand awareness
and strong franchisee relationships, will result in continued growth. To
reflect this strategy, the Company changed its name in October 1996 from
America's Favorite Chicken Company to AFC Enterprises, Inc.
1
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The Company believes it is well-positioned to take advantage of the
anticipated growth in the QSR industry in general and the quick-service chicken
segment of the industry in particular. According to Technomic, Inc.
("Technomic"), an independent research organization, the estimated domestic
sales at QSRs reached approximately $102.7 billion in 1996, representing growth
of 5.3% over 1995. Additionally, according to the Consumer Reports on Eating
Share Trends ("CREST"), an independent research organization, the chicken
segment of the QSR industry, representing 7.6% of industry sales in 1996, is the
fourth largest category of QSRs, after hamburgers, pizza and sandwiches. Sales
in the QSR chicken segment were approximately $8.6 billion in 1996, a 6.3%
increase over 1995. Through its Popeyes and Churchs brands, the Company is
second largest in the domestic quick-service chicken restaurant market, with a
market share exceeding 14% of industry sales for the three-month period ended
February 28, 1997, over five times the sales of the Company's next largest
competitor.
COMPANY STRENGTHS
LEADING MARKET POSITION. The Company is the second largest quick-service
chicken restaurant company in the world, with 2,330 Popeyes and Churchs
restaurants located in the United States and 20 foreign countries. In 1997, the
Company expects to franchise and open over 200 new restaurants in the U.S. and
approximately 90 new restaurants internationally (opening restaurants in eight
new foreign countries). At March 23, 1997, the Popeyes system included 901
domestic restaurants and the Churchs system included 1,020 domestic restaurants.
For the three months ended February 28, 1997, the Popeyes system generated 8.2%
of sales in the domestic quick-service chicken restaurant industry, while the
Churchs system generated 6.1% of sales in that industry, in each case according
to CREST.
HIGH BRAND AWARENESS. With Popeyes' New Orleans style fried chicken and
Churchs' traditional Southern fried chicken, management believes that Popeyes
and Churchs have achieved a high level of positive brand awareness with both
franchisees and consumers. Over Popeyes' 25 years of operation and Churchs' 45
years of operation, the Company's restaurants have become two of the most highly
recognized brand names in the QSR industry. Management believes that the
Company's reputation for offering a unique selection of high quality food
products and value pricing, combined with a high level of customer service, has
created a valuable franchise with strong brand name recognition and customer
loyalty.
STRONG FRANCHISEE RELATIONSHIPS. The Company enjoys strong relationships
with its franchisees as a result of its ongoing efforts to revitalize Popeyes
and Churchs globally by (i) investing capital to re-image and renovate Company-
operated restaurants in both systems, (ii) providing strong operational,
marketing and technological support to franchisees, (iii) delivering operating
efficiencies and economies of scale to franchisees and (iv) promoting the
expansion of restaurants within non-traditional formats. Additionally, the
Company seeks to provide new investment opportunities to franchisees by
acquiring and franchising high value/high growth branded concepts. The number
of franchised restaurants has grown from 1,162 at year-end 1992 to 1,637 at
March 23, 1997, representing a compound annual growth rate ("CAGR") of 8.4%, and
the number of commitments to open new franchised restaurants has increased to
1,398 at March 23, 1997, compared with 372 commitments at year-end 1992,
representing a CAGR of 36.6%.
SIGNIFICANT OPERATIONAL EFFICIENCIES. By virtue of its size and leadership
position in the quick-service chicken restaurant industry, the Company benefits
from significant operational efficiencies. The Company's large number of
restaurants, centralized corporate management structure and ongoing
implementation of state-of-the-art management information systems enable the
Company to (i) tightly control restaurant and corporate-level costs, (ii)
capture economies of scale by leveraging its existing corporate overhead
structure and (iii) continuously monitor point-of-sale data in Company-operated
restaurants to more efficiently manage restaurant operations. The Company and
its franchisees have experienced substantial levels of savings as a result of
the Company's size and related bargaining power, particularly with respect to
food, beverage and paper goods, and advertising and marketing
2
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programs. In addition, the Company has achieved reductions in its general
corporate overhead expenses. These operational efficiencies have contributed to
the improvement of the Company's EBITDA margin from 8.0% in fiscal 1993 to 12.9%
in fiscal 1996.
STRONG MANAGEMENT TEAM. The Company's management team, led by Frank J.
Belatti and Dick R. Holbrook, has overseen a period of increasing total revenues
and EBITDA at CAGRs of 4.9% and 23.1%, respectively, from fiscal 1993 to fiscal
1996. Mr. Belatti and Mr. Holbrook previously held senior executive positions
at Hospitality Franchise Systems, Inc. and, prior to that, at Arby's, Inc., and
each has substantial experience in the franchising and operation of restaurant
service and hotel enterprises. With an average of more than 18 years of
experience in the QSR and related industries, the Company's top seven executives
have substantial expertise in developing brand awareness and enjoy an excellent
reputation in the industry. Members of the Company's management team possess a
diverse skill base that includes brand marketing, restaurant operations, product
and concept development and technology systems integration.
OPERATING STRATEGY
RE-IMAGE AND RENOVATE EXISTING RESTAURANTS. The Company believes that
significant opportunities exist to increase the Company's revenues and gain
efficiencies in its current markets by re-imaging and renovating franchised and
Company-operated Popeyes and Churchs restaurants. By the end of 1997, the
Company expects to complete its three year initiative to (i) add new signage,
new decor, contemporary lighting and, where appropriate, drive-thru service and
(ii) improve the efficiencies of its restaurant operating systems, including the
installation of energy efficient equipment at all of its restaurants. Partly as
a result of its re-imaging and renovation efforts, Popeyes and Churchs
systemwide comparable sales have increased every year since the implementation
of this program in 1994.
INCREASE FRANCHISED RESTAURANTS. The Company believes that significant
opportunities exist to increase the number of franchised restaurants operated by
both new and existing franchisees and that growth through franchising can
provide significant additional revenue growth at relatively low levels of
capital expenditures by the Company. The Company intends to target restaurant
growth in markets where it has or can achieve sufficient penetration to justify
television advertising ("media efficient markets") because sales at restaurants
in the Company's media efficient markets are generally 5% to 10% higher than
sales in non-media efficient markets. The number of restaurants systemwide has
increased at a CAGR of 5.1%, from approximately 1,885 at year-end 1992 to 2,330
at March 23, 1997, and the Company anticipates that domestic franchisees will
open over 200 new restaurants in 1997, many of which will be in the Company's
target markets.
CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to
aggressively pursue selected growth opportunities by (i) expanding its existing
brands to new domestic and international markets, (ii) promoting the development
of new points of distribution and (iii) acquiring additional branded concepts to
provide franchisees with a broad range of investment opportunities, thereby
generating a larger and more diversified stream of franchise revenues to the
Company. These initiatives include the following:
. NON-TRADITIONAL FORMATS. In response to new marketing opportunities
and consumer demand, the Company intends to continue to promote the
expansion of the number and type of non-traditional formats from which
it sells Popeyes and Churchs food products. In addition to the
traditional stand-alone models, the Company has franchised and opened
Popeyes and Churchs restaurants within community shopping plazas,
convenience stores, mall food courts, airports and other
transportation centers and grocery stores. For example, the Company
recently opened both franchised and Company-operated restaurants in
various locations of The Kroger Co., one of the nation's largest
supermarket operators.
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<PAGE>
. CO-BRANDING INITIATIVES. The Company intends to selectively enter into
co-branding arrangements in which Popeyes and Churchs restaurants
share facilities with other QSRs. Management believes that co-branding
represents an attractive revenue growth opportunity that provides
brand awareness in new markets and faster opening times (as
restaurants are constructed within existing QSR facilities), together
with reduced costs of entry and lower ongoing capital expenditures.
The Company has entered into two such arrangements and currently
franchises Churchs restaurants in 93 Cara Operations Limited Harvey's
hamburger restaurants in Canada and in 41 White Castle System, Inc.
("White Castle") hamburger restaurants throughout the Midwest,
Southeast and Northeast. In addition, White Castle has signed
commitments to open 15 additional Churchs restaurants within its
existing White Castle hamburger restaurants during 1997.
. EXPANSION IN INTERNATIONAL MARKETS. Management believes that
international expansion is an attractive growth opportunity due to (i)
advantageous per unit economics, resulting largely from lower food
and/or labor costs and less QSR competition abroad, (ii) fast-growing
foreign economies with an expanding group of QSR consumers and (iii)
well established markets for quick-service chicken restaurants in over
80 countries around the world. The Company's international operations
have increased from 172 franchised restaurants in 14 foreign countries
at year-end 1992, to 409 franchised restaurants in 20 foreign
countries at March 23, 1997. Additionally, commitments to develop
international franchised restaurants have risen from 161 at year-end
1992 to 831 at March 23, 1997.
. NEW BRANDED CONCEPTS. Management intends to identify and acquire
additional high value/high growth brands which would benefit from the
Company's operating efficiency, management experience, state-of-the-
art technology, service commitment to franchisees and shared
administrative infrastructure. In line with this strategy, the
Company recently acquired all of the intangible assets related to the
franchise business of Chesapeake Bagel Bakery, comprising 158
franchised bagel bakeries and restaurants concentrated in Washington,
D.C., Maryland and Virginia.
INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. The
Company's customized management information systems, typically not affordable by
smaller QSR chains, provide both the Company and its franchisees with the
ability to quickly capitalize on restaurant sales enhancement and profit
opportunities. The Company utilizes its management information systems to (i)
minimize waste and control labor costs, (ii) efficiently schedule labor, (iii)
effectively manage inventory and (iv) analyze product mix and various
promotional programs using point-of-sale information. For example, the Company
has installed a new point-of-sale FasFax(TM) system in over 80% of its Company-
operated restaurants, as part of an ongoing program scheduled for completion in
July 1997. This touch-screen cash register system provides management with real
time information on customer trends, sales mix, inventory management and product
pricing. The Company intends to demonstrate to new and existing franchisees the
efficiencies afforded by this system and by other new technologies. Management
also believes that additional opportunities exist to improve operational
efficiencies and will continue to implement a "back office" automation system to
better manage food and labor costs. In 1997, management intends to launch AFC
Online, an intranet for franchisees that will provide operational support, a
restaurant development roadmap, a business planning template, marketing
information and certain other relevant information on a 24 hours a day, seven
days a week basis.
MAINTAIN HIGH QUALITY PRODUCTS, SUPERIOR CUSTOMER SERVICE AND STRONG
COMMUNITY RELATIONS. The Company seeks to ensure overall customer satisfaction
through consistency in food quality, service and restaurant appearance. The
Company maintains rigorous and ongoing quality control procedures over suppliers
and distributors to ensure that its product specifications are maintained. In
addition, the
4
<PAGE>
Company has taken an important leadership role in the neighborhoods and
communities it serves. Through its involvement in Habitat for Humanity, the
United Negro College Fund and the Hispanic Association of Colleges and
Universities, among others, the Company has established a meaningful presence in
the local communities it serves, while building customer loyalty and brand
awareness.
RECENT DEVELOPMENTS
AFDC TRANSACTION. On March 24, 1997, the Company closed a transaction (the
"AFDC Transaction") with Atlanta Franchise Development Company, LLC ("AFDC") in
which the Company sold or leased 100 Company-operated Churchs restaurants and
certain related assets in eight domestic markets to AFDC, which is now the
Company's largest domestic franchisee. In connection with the AFDC Transaction,
AFDC committed to (i) re-image and renovate all 100 restaurants, (ii) develop
100 additional Churchs restaurants and (iii) install new point-of-sale systems
at all of its restaurants. The Company received approximately $19.9 million in
cash from AFDC, along with a warrant to acquire a 5.0% equity interest in AFDC.
See "Summary Unaudited Pro Forma Consolidated Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Management believes it is unlikely that the Company will complete
another sale of this magnitude in the foreseeable future.
CHESAPEAKE BAGEL BAKERY ACQUISITION. On May 5, 1997, the Company acquired
from The American Bagel Company all of the intangible assets related to the
franchise business of Chesapeake Bagel Bakery ("Chesapeake Bagel"), a bagel
bakery and restaurant chain. As a result of this acquisition, the Company
became franchisor of 158 franchised Chesapeake Bagel restaurants located
primarily in Washington, D.C., Maryland and Virginia. The net purchase price
paid by the Company for Chesapeake Bagel was approximately $11.8 million, plus a
potential earn out of up to $3.5 million, contingent on the opening of a
significant number of Chesapeake Bagel restaurants over the next five years.
This acquisition represents the Company's first step in its long term strategy
of acquiring additional successful franchising concepts. The Company believes
that the financial impact of the Chesapeake Bagel acquisition will not be
material to the Company in the near-term.
THE REFINANCING
The sale and issuance by the Company of the Old Notes were part of two
integrated transactions that refinanced a substantial portion of the Company's
long-term debt. Contemporaneously with the consummation of the offering of the
Old Notes, the Company entered into the New Credit Facility (as defined herein),
which provides the Company with available borrowings of up to $175 million,
including a $50 million, five-year term loan (the "Term Loan"), a $25 million
revolving credit facility (the "Revolving Facility") and a $100 million
acquisition facility (the "Acquisition Facility"). Proceeds from the offering
of the Old Notes and the Term Loan were used by the Company to repay its
existing bank indebtedness, to redeem all outstanding shares of the Company's
10% Cumulative Exchangeable Redeemable Preferred Stock (the "10% Preferred
Stock"), to repay certain outstanding capital leases (collectively, the
"Refinancing") and portions of such proceeds will be used by the Company for
working capital and general corporate purposes. See "Use of Proceeds".
Management believes that the Refinancing has provided the Company with the
financial flexibility to support its growth plan, to further improve operating
efficiencies and to facilitate the execution of its global strategy.
GENERAL
The Company's principal executive offices are located at Six Concourse
Parkway, Suite 1700, Atlanta, Georgia 30328-5352 and its telephone number is
(770) 391-9500.
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<PAGE>
TERMS OF NEW NOTES
The Exchange Offer applies to up to $175 million aggregate principal amount
of the Company's Old Notes. The New Notes will be obligations of the Company
evidencing the same debt as the Old Notes and will be entitled to the benefits
of the same Indenture. See "Description of New Notes". The form and terms of
the New Notes are the same as the form and terms of the Old Notes in all
material respects except that the New Notes have been registered under the
Securities Act and hence do not include certain rights to registration
thereunder and do not contain transfer restrictions or terms with respect to the
special interest payments applicable to the Old Notes. See "Description of New
Notes".
<TABLE>
<S> <C>
NEW NOTES OFFERED.......... Up to $175 million aggregate principal amount of
the Company's unrestricted 10 1/4% Senior
Subordinated Notes due May 15, 2007.
MATURITY DATE.............. May 15, 2007.
INTEREST PAYMENT DATES..... May 15 and November 15 of each year, commencing
November 15, 1997.
OPTIONAL REDEMPTION........ Except as set forth below, the New Notes will not
be redeemable prior to May 15, 2002. On or after
such date, the New Notes will be subject to
redemption, at the option of the Company, in whole
or in part, at any time prior to maturity, at the
redemption prices set forth herein, plus accrued
and unpaid interest (if any) to the date of
redemption.
At any time, or from time to time, prior to May
15, 2000, up to 40% in aggregate principal amount
of New Notes originally issued will be redeemable,
at the option of the Company, from the net
proceeds of one or more public offerings of
capital stock of the Company at a redemption price
equal to 110.25% of the principal amount thereof,
plus accrued and unpaid interest (if any) to the
date of redemption; provided that (i) notice of
redemption is mailed within 60 days following the
corresponding public offering and (ii) following
such redemption, at least $100 million in
principal amount of New Notes remain outstanding.
See "Description of New Notes--Optional
Redemption".
At any time on or prior to May 15, 2002, the New
Notes may also be redeemed in whole, but not in
part, at the option of the Company, upon the
occurrence of a Change of Control (but in no event
more than 90 days after the occurrence of such
Change of Control), at a redemption price equal to
100% of the principal amount thereof plus the
Applicable Premium as of, and accrued but unpaid
interest (if any) to the Redemption Date (subject
to the right of holders on the relevant record
date to receive interest due on the relevant
interest payment date). See "Description of New
Notes--Optional Redemption".
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
Holder of the New Notes may require the Company to
repurchase all or a portion of the New Notes held
by such holder at 101% of the principal amount
thereof, plus accrued and unpaid interest (if any)
to the date of repurchase. See "Description of New
Notes--Offer to Purchase Upon Change of Control".
RANKING.................... The New Notes will be unsecured and will rank
subordinate in right of payment to all existing
and future Senior Indebtedness (as defined herein)
of the Company, including all Indebtedness (as
defined herein) and other liabilities under the
New Credit Facility and the Company's capital
lease obligations. The New Notes will rank pari
passu in right of payment with any future senior
subordinated Indebtedness of the Company. On the
pro forma basis described herein, as of March 23,
1997, the Company would have had $235.3 million of
Indebtedness, including $60.3 million of Senior
Indebtedness, and a maximum remaining available
borrowing capacity of $110.7 million under the New
Credit Facility, which, if borrowed, would be
Senior Indebtedness. See "Description of New
Notes--Subordination" and "--Certain Covenants--
Limitation on Indebtedness and Subsidiary
Preferred Stock".
RESTRICTIVE COVENANTS...... The Indenture will restrict, among other things,
the ability of the Company and its Subsidiaries
(as defined herein) (i) to incur additional
Indebtedness and subsidiary preferred stock, (ii)
to pay dividends make certain investments and make
other restricted payments, (iii) to permit
Subsidiaries to incur Guaranties (as defined
herein) of Indebtedness, (iv) to sell assets and
to use the proceeds of asset sales, (v) to pledge
assets to secure pari passu or subordinate
Indebtedness, (vi) to transfer existing assets to
Subsidiaries, (vii) to create consensual
restrictions on the ability of its Subsidiaries to
make certain payments to the Company, (viii) to
create indebtedness which is subordinate to Senior
Indebtedness but senior to the New Notes, (ix) to
merge or consolidate with or transfer all or
substantially all of its assets to, or to acquire
the stock or assets of, another entity or (x) to
engage in certain transactions with affiliates.
All of these restrictions, however, are subject to
a number of important exceptions and
qualifications. See "Description of New Notes--
Certain Covenants".
EXCHANGE OFFER; REGISTRATION
RIGHTS..................... Holders of New Notes are not entitled to any
exchange rights with respect to the New Notes.
Holders of Old Notes are entitled to certain
exchange rights pursuant to the Registration
Rights Agreement. Under the Registration Rights
Agreement, the Company is required
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
to offer to exchange the Old Notes for the New
Notes having substantially identical terms which
have been registered under the Securities Act.
This Exchange Offer is intended to satisfy such
obligation. The form and terms of the New Notes
are the same as the form and terms of the Old
Notes in all material respects except that the New
Notes have been registered under the Securities
Act and hence do not include certain rights to
registration thereunder and do not contain
transfer restrictions or terms with respect to the
special interest payments applicable to the Old
Notes. Once the Exchange Offer is consummated,
the Company will have no further obligations to
register any of the Old Notes not tendered by the
Holders for exchange.
See "Risk Factors--Consequences to Non-Tendering
Holders of Old Notes".
USE OF PROCEEDS............ The Company will not receive any proceeds from the
Exchange Offer.
</TABLE>
ABSENCE OF PUBLIC MARKET; TRANSFER RESTRICTIONS
There is no public market for the New Notes, and the New Notes will not be
listed on any securities exchange. The Company has been advised by the Initial
Purchasers that, following completion of the Offering, the Initial Purchasers
intend to make a market in the New Notes; however, any market making may be
discontinued at any time without notice. If an active public market does not
develop, the market price and liquidity of the New Notes may be adversely
affected. In addition, the sale of the New Notes has not been registered under
the Securities Act. Accordingly, the New Notes may not be offered or sold other
than pursuant to an effective registration statement or an exemption from the
registration requirements of the Securities Act. See "Risk Factors--Absence of
Public Market; Transfer Restrictions".
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
THE EXCHANGE OFFER......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, $175 million in aggregate
principal amount of Old Notes were outstanding.
The Company will issue the New Notes to Holders on
or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by Holders
thereof without compliance with the registration
and prospectus delivery provisions of the
Securities Act provided that such New Notes are
acquired in the ordinary course of such holders'
business and such holders have no arrangement with
any person to participate in the distribution of
such New Notes. However, the Company does not
intend to request the Commission to consider, and
the Commission has not considered, the Exchange
Offer in a no-action letter and there can be no
assurance that the Commission would make a similar
determination with respect to the Exchange Offer.
However, any Holder who is an "affiliate" of the
Company or who intends to participate in the
Exchange Offer for the purpose of distributing the
New Notes (i) cannot rely on the interpretation by
the staff of the Commission set forth in the above
referenced no-action letters, (ii) cannot tender
its Old Notes in the Exchange Offer, and (iii)
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any sale or transfer of the Old
Notes, unless such sale or transfer is made
pursuant to an exemption from such requirements.
See "Risk Factors--Consequences to Non-Tendering
Holders of Old Notes".
Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of New Notes received in exchange for Old Notes
where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
other trading activities and not acquired directly
from the Company. The Company has agreed that for
a period of 180 days after the Expiration Date, it
will make this Prospectus available to any broker-
dealer for use in connection with any such resale.
See "Plan of Distribution".
EXPIRATION DATE............ 5:00 p.m., New York City time, on ________ __,
1997, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended.
INTEREST ON THE NEW NOTES;
ACCRUED INTEREST ON THE OLD
NOTES..................... The New Notes will bear interest from their
issuance date. Holders whose Old Notes are
accepted for exchange will receive, in cash,
accrued interest thereon to, but excluding, the
issuance date of the New Notes. Such interest
will be paid with the first interest payment on
the New Notes. Interest on the Old Notes accepted
for exchange will cease to accrue upon
cancellation of the Old Notes and issuance of the
New Notes. Holders of Old Notes whose Old Notes
are not exchanged will receive the accrued
interest payable on _______ __, 1997 on such date
in accordance with the terms of the Indenture.
CONDITION TO THE EXCHANGE
NOTES..................... The Exchange Offer is subject to certain
customary conditions. The conditions are limited
and relate in general to proceedings which have
been instituted or laws which have been adopted
that might impair the ability of the Company to
proceed with the Exchange Offer. As of ________
__, 1997, none of these events had occurred, and
the Company believes their occurrence to be
unlikely. If any such conditions do exist prior
to the Expiration Date, the Company may (i) refuse
to accept any Old Notes and return all previously
tendered Old Notes, (ii) extend the Exchange Offer
or (iii) waive such conditions. See "The Exchange
Offer--Conditions".
PROCEDURES FOR TENDERING OLD
NOTES..................... Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Old Notes to be exchanged and any other
required documentation to United States Trust
Company of New York, as Exchange Agent, at the
address set forth herein and therein or effect a
tender of such Old Notes pursuant to the
procedures for book-entry transfer as provided for
herein. By executing the Letter of Transmittal,
each Holder will represent to the Company that,
among other
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
things, the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such
New Notes, whether or not such person is the
Holder, that neither the Holder nor any such other
person has an arrangement or understanding with
any person to participate in the distribution of
such New Notes and that neither the Holder nor any
such person is an "affiliate," as defined in Rule
405 under the Securities Act, of the Company.
Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a
result of market-making activities or other
trading activities and not acquired directly from
the Company, must acknowledge that it will deliver
a prospectus in connection with any resale of such
New Notes. See "The Exchange Offer--Procedures
for Tendering" and "Plan of Distribution".
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS......... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Old Notes in the
Exchange Offer should contact such registered
Holder promptly and instruct such registered
Holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must, prior
to completing and executing the Letter of
Transmittal and delivering its Old Notes, either
make appropriate arrangements to register
ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the
registered Holder. The transfer of registered
ownership may take considerable time and may not
be able to be completed prior to the Expiration
Date. See "The Exchange Offer--Procedures for
Tendering".
GUARANTEED DELIVERY
PROCEDURES................ Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to United
States Trust Company of New York, as Exchange
Agent, or cannot complete the procedure for book-
entry transfer, prior to the Expiration Date must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures".
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES..... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
Any Old Notes not accepted for exchange will be
returned without expense to the tendering Holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
See "The Exchange Offer--Terms of the Exchange
Offer".
CERTAIN TAX CONSIDERATIONS. The exchange pursuant to the Exchange Offer will
not be a taxable event for Federal income tax
purposes. See "Certain Federal Income Tax
Considerations".
EXCHANGE AGENT............. United States Trust Company of New York is serving
as Exchange Agent in connection with the Exchange
Offer.
</TABLE>
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<PAGE>
RISK FACTORS
Holders of the Old Notes should consider carefully all of the information
set forth in this Prospectus, and in particular, the information set forth on
page 20 under "Risk Factors" before tendering the Old Notes in exchange for the
New Notes.
ADDITIONAL INFORMATION
For additional information regarding the New Notes, see "Description of New
Notes" and "Certain Federal Income Tax Consequences".
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<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary historical consolidated financial
information for the Company for the periods and the dates indicated. The
balance sheet data and statement of operations data as of and for the years
ended December 26, 1993, December 25, 1994, December 31, 1995 and December 29,
1996 set forth below have been derived from the financial statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants. The balance sheet data and statement of operations data as of and
for the twelve weeks ended March 24, 1996 and March 23, 1997 have been derived
from the unaudited financial statements of the Company and, in the opinion of
the Company, include all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation. Interim results are
not necessarily indicative of financial results of the Company for the full
fiscal year. The information contained in the tables below should be read in
conjunction with and is qualified in its entirety by (i) "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
(ii) the audited and unaudited Consolidated Financial Statements for the Company
and the notes thereto, each of which is included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED(1) TWELVE WEEKS ENDED
---------------------------------------------------------- -------------------------
DECEMBER DECEMBER DECEMBER DECEMBER MARCH 24, MARCH 23,
26, 1993 25, 1994 31, 1995 29, 1996 1996 1997
---------- ---------- ---------- ---------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales............... $ 379,745 $ 401,855 $ 426,707 $ 430,280 $ 94,460 $103,181
Revenues from franchising...... 37,198 41,581 47,916 51,336 10,637 13,184
Revenues from manufacturing.... 7,718 12,026 9,969 11,431 3,793 1,604
Other revenues................. 9,029 8,252 8,583 8,262 1,851 1,826
---------- ---------- ---------- ---------- -------- --------
Total revenues............... $ 433,690 $ 463,714 $ 493,175 $ 501,309 $110,741 $119,795
Costs and expenses:
Restaurant cost of sales....... 118,997 133,893 139,286 142,199 30,561 33,218
Restaurant operating expenses.. 207,303 206,862 216,934 215,464 47,705 51,698
Manufacturing cost of sales.... 8,401 11,705 9,816 10,924 3,146 1,024
General and administrative..... 65,837 72,249 75,916 72,672 18,158 20,300
Depreciation and amortization.. 24,892 25,438 28,665 30,904 6,795 7,103
Executive compensation
award(2)...................... -- -- 10,647 -- -- --
---------- ---------- ---------- ---------- -------- --------
Total costs and expenses..... $ 425,430 $ 450,147 $ 481,264 $ 472,163 $106,365 $113,343
---------- ---------- ---------- ---------- -------- --------
Income from operations........... $ 8,260 $ 13,567 $ 11,911 $ 29,146 $ 4,376 $ 6,452
========== ========== ========== ========== ======== ========
OTHER FINANCIAL DATA:
EBITDA(3)........................ $ 34,731 $ 43,435 $ 55,460 $ 64,756 $ 11,993 $ 14,310
EBITDA margin(4)................. 8.0% 9.4% 11.2% 12.9% 10.8% 11.9%
Capital expenditures(5):
Maintenance capital
expenditures.................. $ 6,808 $ 5,050 $ 5,483 $ 6,010 $ 1,175 $ 1,146
Re-images and renovation....... 2,985 10,267 15,502 15,342 4,570 2,234
New restaurant development..... 1,831 1,999 2,272 3,215 798 206
Other.......................... 5,979 3,496 1,739 9,384 2,126 3,081
---------- ---------- ---------- ---------- -------- --------
Total capital expenditures... $ 17,603 $ 20,812 $ 24,996 $ 33,951 $ 8,669 $ 6,667
</TABLE>
(Continued on following page)
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED(1) TWELVE WEEKS ENDED
---------------------------------------------------------- -------------------------
DECEMBER DECEMBER DECEMBER DECEMBER MARCH 24, MARCH 23,
26, 1993 25, 1994 31, 1995 29, 1996 1996 1997
---------- ---------- ---------- ---------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATE (AT END OF
PERIOD):
Total assets..................... $ 348,852 $ 327,494 $ 328,645 $ 340,674 $324,324 $338,245
Total debt and capital lease
obligations.................... 201,810 193,646 204,025 151,793 204,401 153,712
Mandatorily redeemable preferred
stock.......................... 41,647 43,897 46,468 59,956 47,111 61,245
Total shareholders' equity
(deficit)...................... 4,591 (6,707) (21,665) 37,902 (23,832) 38,807
RESTAURANT DATA (UNAUDITED)(6):
Systemwide restaurant sales:
Popeyes........................ $ 601,389 $ 649,881 $ 710,840 $ 762,108 $162,684 $184,505
Churchs........................ 552,629 590,261 647,746 675,995 146,744 161,452
---------- ---------- ---------- ---------- -------- --------
Total systemwide sales....... $1,154,018 $1,240,142 $1,358,586 $1,438,103 $309,428 $345,957
========== ========== ========== ========== ======== ========
Systemwide restaurants open, end
of period:
Popeyes........................ 814 907 964 1,021 966 1,037
Churchs........................ 1,078 1,165 1,219 1,257 1,226 1,293
---------- ---------- ---------- ---------- -------- --------
Total systemwide restaurants. 1,892 2,072 2,183 2,278 2,192 2,330
========== ========== ========== ========== ======== ========
Systemwide percentage change in
comparable restaurant sales:
Popeyes........................ (0.4)% 1.4% 1.6% 1.1% 1.5% 4.9%
Churchs........................ 2.4 4.8 3.9 2.8 5.9 6.8
Total commitments outstanding,
end of period(7)................ 668 1,047 1,083 1,319 1,178 1,398
</TABLE>
_______________
(1) The Company has a 52/53-week fiscal year ending on the last Sunday in
December which normally consists of 13 four-week periods. The fiscal year
ended December 31, 1995 included 53 weeks of operations.
(2) In 1995, the Board of Directors granted a special bonus of $10.0 million to
the senior management group of the Company payable in cash or common stock
at the election of the recipient. In 1996, this bonus was paid to the
senior management group in shares of common stock, with no cash payments
being made by the Company with respect to the bonus. Also in 1995, the
vesting of stock options for certain senior executives was accelerated,
resulting in an additional $647,000 of compensation expense.
(3) EBITDA represents income from operations plus depreciation and amortization,
adjusted for non-cash items related to gains/losses on asset dispositions
and writedowns, compensation expense related to stock option activity
(deferred compensation), the executive compensation award (see Note 2) and
non-cash officer notes receivable items related to the executive
compensation award. EBITDA should not be construed as a substitute for
income from operations or a better indicator of liquidity than cash flow
from operating activities, which is determined in accordance with generally
accepted accounting principles. EBITDA is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. In addition, management believes that certain investors may
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs. See the Consolidated Statements of Cash
Flows of the Company and the related notes to the Consolidated Financial
Statements thereto included elsewhere in this Prospectus.
(4) EBITDA margin represents EBITDA divided by total revenues.
(5) Capital expenditures (excluding expenditures funded through capital leases)
have been segregated into the following categories to provide additional
information:
. Maintenance capital expenditures -- represents day-to-day expenditures
--------------------------------
related to restaurant equipment replacements and general restaurant
capital improvements.
. Reimages and renovation -- represents significant restaurant renovations
-----------------------
and upgrades pursuant to the Company's re-imaging and renovation
activities with respect to Company-operated restaurants.
. New restaurant development -- represents new Company-operated restaurant
--------------------------
construction and development.
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. Other -- represents capital expenditures at various corporate offices
-----
and new restaurant equipment such as fryers and security systems.
(6) Represents restaurant sales for all franchised and Company-operated
restaurants. Sales information for franchised restaurants are as reported
by franchisees or, in some instances, estimated by the Company based on
other data, and is unaudited.
(7) Commitments represent commitments to open franchised restaurants, as set
forth in development agreements. On a historical basis, a number of such
commitments have not resulted in restaurant openings. There can be no
assurance that parties to development agreements will open their respective
number of restaurants.
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SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary unaudited pro forma consolidated
financial information for the Company for the periods and dates indicated. The
pro forma statement of operations and other financial data have been presented
assuming that (i) the closing of the offering of the Old Notes and the
application of the proceeds therefrom and from the Term Loan and (ii) the AFDC
Transaction were each completed at the beginning of the indicated periods. The
pro forma balance sheet data was prepared assuming the transactions described
above were completed at the end of the indicated periods. The pro forma
financial information is provided for informational purposes only and does not
purport to be indicative of the Company's financial condition or results of
operations that actually would have occurred had such transactions been
completed for the periods or as of the dates presented or that may be obtained
in the future. See the Pro Forma Consolidated Financial Statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED TWELVE WEEKS ENDED
-------------- ---------------------------
DECEMBER 29, MARCH 24, MARCH 23,
1996 1996 1997
-------------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales.................................................. $375,910 $ 83,479 $ 90,919
Revenues from franchising......................................... 53,783 11,131 13,736
Revenues from manufacturing....................................... 11,431 3,793 1,604
Other revenues.................................................... 8,841 1,985 1,960
-------- -------- --------
Total revenues.................................................. 449,965 100,388 108,219
Costs and expenses:
Restaurant cost of sales.......................................... 123,692 26,809 29,264
Restaurant operating expenses..................................... 188,087 41,829 45,165
Manufacturing cost of sales....................................... 10,924 3,146 1,024
General and administrative........................................ 71,009 17,746 19,962
Depreciation and amortization..................................... 29,059 6,378 6,712
-------- -------- --------
Total cost and expenses......................................... 422,771 95,908 102,127
Income from operations.............................................. 27,194 4,480 6,092
Interest expense.................................................... 25,059 5,846 5,741
-------- -------- --------
Net income (loss) before income taxes and extraordinary item........ 2,135 (1,366) 351
Income tax (provision) benefit...................................... (811) 459 (133)
-------- -------- --------
Net income (loss) before extraordinary item......................... $ 1,324 $ (907) $ 218
======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1)........................................................... $ 60,959 $ 11,680 $ 13,559
EBITDA margin(2).................................................... 13.5% 11.6% 12.5%
EBITDA / Interest expense........................................... 2.43X 2.00X 2.36X
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets........................................................ $369,698 $362,689 $364,101
Total debt and capital lease obligations............................ 235,255 233,715 235,289
Total shareholders' equity.......................................... 42,479 31,987 43,390
</TABLE>
(Footnotes on following page)
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<PAGE>
________________
(1) EBITDA represents income from operations plus depreciation and amortization,
adjusted for non-cash items related to gains/losses on asset dispositions
and writedowns, compensation expense related to stock option activity
(deferred compensation), and non-cash officer notes receivable items related
to the executive compensation award (see Note 2 to Summary Historical
Consolidated Financial Information). EBITDA should not be construed as a
substitute for income from operations or a better indicator of liquidity
than cash flow from operating activities, which is determined in accordance
with generally accepted accounting principles. EBITDA is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditure and working capital
requirements. In addition, management believes that certain investors may
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs. See the Consolidated Statements of Cash
Flows of the Company and the related notes to the Consolidated Financial
Statements thereto included elsewhere in this Prospectus.
(2) EBITDA margin represents EBITDA divided by total revenues.
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<PAGE>
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including without limitation, certain statements under the sections
"Summary", "Summary Historical Consolidated Financial Information", "Summary
Unaudited Pro Forma Consolidated Financial Information", "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business" and Pro Forma Consolidated Financial Statements and the notes thereto
located elsewhere herein regarding the Company's financial position, business
strategy, prospects and other related matters, may constitute such forward-
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Actual results could
differ materially from the Company's expectations as a result of a number of
factors, including without limitation those set forth below and those located
elsewhere in this Prospectus.
RISK FACTORS
In evaluating the Exchange Offer, Holders of the Old Notes should
carefully consider the following factors in addition to the other information
contained in this Prospectus.
HISTORY OF OPERATING LOSSES; BANKRUPTCY OF PREDECESSOR
The Company reported net losses for four of its previous five fiscal years,
including a net loss of $8.8 million for the fiscal year ended December 31,
1995. While the Company showed net income of approximately $3.4 million and of
approximately $1.9 million for the fiscal year ended December 29, 1996 and for
the twelve-week period ended March 23, 1997, respectively, there can be no
assurance that the Company's recent results of operations are indicative of its
future results of operations or that its recent profitability will continue in
the Company's current fiscal year or on a sustained basis. In November 1992,
the Company acquired its core business operations out of the bankruptcy
reorganization of its predecessor. See "Business--The Company", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto.
SUBSTANTIAL LEVERAGE
As a result of the offering of the Old Notes and the borrowing of funds
under the New Credit Facility, the Company has incurred substantial indebtedness
and debt service obligations (including obligations under capital and operating
leases). In addition, the Company expects that it may incur additional
indebtedness to finance the expansion of its business, subject to the
restrictions found in the New Credit Facility and the Indenture. As of March
23, 1997, on a pro forma basis after giving effect to the Refinancing, the
Company's total consolidated indebtedness would have been $235.3 million, of
which $60.3 million would have been senior to the New Notes, and the Company
would have had a maximum remaining available borrowing capacity under the New
Credit Facility of $110.7 million, which, if borrowed, would be senior to the
New Notes.
The level of the Company's indebtedness could have important consequences
to holders of the New Notes, including: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to debt service and will
not be available for other purposes, (ii) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures or acquisitions may be limited and (iii) the Company's level of
indebtedness could limit its flexibility in reacting to changes in its operating
environment and economic conditions generally.
In order to satisfy the Company's obligations under the New Notes, its
capital and operating leases, its obligations under the New Credit Facility and
certain other indebtedness presently outstanding, the Company will be required
to generate substantial operating cash flow. The ability of the Company to meet
debt service, rental and other obligations or to refinance any such obligation
will depend on the future performance of the Company, which will be subject to
prevailing economic
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<PAGE>
conditions and to financial, business and other factors beyond the control of
the Company. In addition, on the fifth anniversary of the closing of the New
Credit Facility, the balances outstanding under the New Credit Facility will
become due. While the Company believes that, based on current levels of
operations and completion of its current business plan, it will be able to meet
its debt service, rental and other obligations or to refinance such
indebtedness, there can be no assurances with respect thereto, including with
respect to the Company's ability to refinance borrowings under the New Credit
Facility at the maturity of the obligations arising thereunder. See "Summary
Unaudited Pro Forma Consolidated Financial Information" for information
regarding the operating cash flow and debt service obligations of the Company.
SUBORDINATION OF THE NOTES
The Old Notes are, and the New Notes will be, unsecured senior subordinated
obligations of the Company and will be subordinate in right of payment to all
existing and future senior indebtedness of the Company, which will include all
present and future borrowings under the New Credit Facility. Subject to certain
limitations, the Indenture will permit the Company to incur additional
indebtedness, including Senior Indebtedness. See "Description of New Notes".
In the event of a liquidation, dissolution, reorganization or any similar
proceeding regarding the Company, the assets of the Company will be available to
pay obligations on the New Notes only after Senior Indebtedness of the Company
has been paid in full, and, following the repayment of Senior Indebtedness,
there may not be sufficient assets remaining to pay amounts due on all or any of
the New Notes. In addition, the Company may not pay the principal of, premium,
if any, or interest on the New Notes or purchase, redeem or otherwise retire the
New Notes, if any principal, premium, if any, or interest on any Senior
Indebtedness is not paid when due (whether at final maturity, upon redemption,
acceleration or otherwise) unless such payment default has been cured or waived
or such Senior Indebtedness has been repaid in full. In addition, if any non-
payment default exists with respect to Designated Senior Indebtedness (as
defined herein), the Company is prohibited from making any payments on the New
Notes for a specified period of time, unless such default is cured or waived or
such Designated Senior Indebtedness has been repaid in full. If the Company
fails to make any payment on the New Notes when due or within any applicable
grace period, whether or not on account of the payment blockage provisions
referred to above, such failure would constitute an event of default under the
Indenture and would generally entitle the holders of the New Notes to accelerate
the maturity thereof. Notwithstanding such acceleration, the seniority in right
of payment of other indebtedness of the Company may prevent collection under the
New Notes. See "Description of New Notes--Subordination".
In addition, although the Indenture limits the incurrence of certain
secured Indebtedness that will be pari passu or subordinate to the New Notes,
the Indenture permits the Company to pledge any or all of its assets to secure
Senior Indebtedness, such as the indebtedness of the Company under the New
Credit Facility. The New Credit Facility is secured by substantially all of the
Company's assets. See "Description of New Credit Facility".
RESTRICTIONS UNDER NEW CREDIT FACILITY
The New Credit Facility contains, among other things, certain financial and
other covenants, including covenants requiring the Company to maintain certain
financial ratios, restricting the ability of the Company to incur indebtedness
or to create or suffer to exist certain liens and restricting the amount of
capital expenditures which it may incur in any fiscal year. Additionally, the
New Credit Facility must be repaid completely in five years from the closing of
the New Credit Facility. Compliance with such provisions may limit the ability
of the Company to expand its business, and the ability of the Company to comply
with such provisions and to repay or refinance the New Credit Facility may be
affected by events beyond its control. A failure to make any required payment
under the New Credit Facility or a failure to comply with any of the financial
and operating covenants included in the New Credit Facility would result in an
event of default thereunder, permitting the lenders to elect to
20
<PAGE>
accelerate the maturity of the indebtedness thereunder. Any such acceleration
could also result in the acceleration of any other indebtedness of the Company.
Additionally, the Company's ability to make scheduled interest payments and/or
principal payments, if then due, on the New Notes may be prohibited during the
existence of a default under the New Credit Facility or such other indebtedness.
See "Description of New Notes--Subordination" and "--Certain Covenants". If the
lenders under the New Credit Facility accelerate the maturity of the
indebtedness thereunder, there can be no assurance that the Company will have
sufficient resources to satisfy its obligations under the New Credit Facility
and its other indebtedness, including the New Notes.
ABILITY TO EFFECT REPURCHASE OF THE NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined herein), the Company
will be required to make an offer to repurchase the New Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase. Certain events involving a Change of Control
will result in an event of default under the New Credit Facility and may result
in an event of default under other, future indebtedness of the Company. An
event of default under the New Credit Facility or other future Senior
Indebtedness could trigger the subordination provisions of the New Notes, which
could prohibit the Company from repurchasing the New Notes or could require
payment in full of such Senior Indebtedness before repurchase of the New Notes.
See "Description of New Notes--Offer to Purchase Upon Change of Control". There
can be no assurance that the Company would have sufficient resources to
repurchase the New Notes and pay its other obligations if the indebtedness under
the New Credit Facility or other future Senior Indebtedness were accelerated
upon the occurrence of a Change of Control.
COMPETITION
The restaurant industry, and particularly the QSR segment, is intensely
competitive with respect to price, quality, name recognition, service and
location. Numerous well established QSR competitors possess substantially
greater financial, marketing, personnel and other resources than the Company.
In addition, the QSR industry is characterized by the frequent introduction of
new products, accompanied by substantial promotional campaigns. The Company
must respond to various factors affecting the restaurant industry, including
changes in consumer preferences, tastes and eating habits, demographic trends
and traffic patterns, increases in food and labor costs, competitive pricing and
national, regional and local economic conditions. In recent years, a number of
companies in the QSR industry have introduced products, including non-fried
chicken products, which were developed to capitalize on a growing consumer
preference for food products which are, or are perceived to be, healthful,
nutritious, low in calories and low in fat content. It can be expected that the
Company will be subject to increasing competition from companies whose products
or marketing strategies address these consumer preferences. There can be no
assurance that consumers will continue to regard the Company's products
favorably, as compared to such competitive products, or that the Company will be
able to continue to compete successfully in the QSR marketplace. In addition,
the Company's chief competitor in the chicken segment of the QSR industry, KFC
Corporation ("KFC"), is larger, better capitalized and has greater access to
financing at favorable rates, all of which may affect the Company's competitive
abilities. See "Business--Competition".
FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants. Multi-unit
food service chains such as Popeyes and Churchs can also be adversely affected
by publicity resulting from food quality, illness, injury or other health
concerns or operating issues stemming from just one restaurant or a limited
number of restaurants. Dependence on frequent deliveries of fresh food products
also subjects food service businesses such as the Company to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, material
21
<PAGE>
changes in, or the Company's or its franchisees' failure to comply with,
applicable Federal, state and local government regulations, and such factors as
inflation, increased food, labor and employee benefits costs, such as the
recent, Federally-mandated increase in the minimum wage, regional weather
conditions and the unavailability of experienced management and hourly employees
may also adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular. See "Business--
Regulation".
FLUCTUATIONS IN COST OF CHICKEN
The Company's and its franchisees' principal raw material is fresh chicken.
For the fiscal year ended December 29, 1996, and for the twelve-week period
ended March 23, 1997, approximately 57.9% and 60.2%, respectively, of the
Company's restaurant cost of sales were attributable to the purchase of fresh
chicken. As a result, the Company is significantly affected by increases in the
cost of chicken, which can be affected by, among other factors, the cost of
grain and overseas demand for chicken products. Due to extremely competitive
conditions in the QSR industry, following increases in raw material costs such
as chicken, the Company has generally not raised retail prices sufficiently to
pass all such costs on to the consumer. While the Company's purchase agreements
with its fresh chicken suppliers generally provide for a "ceiling", or highest
price, and a "floor", or lowest price, that the Company will pay for chicken
over the contract term, the ceilings are generally set at prices well above the
current market price, exposing the Company to a significant risk of price
increases. Additionally, such supply contracts are generally for one to two
years, thereby exposing the Company to regular cost increases if the price of
fresh chicken continues to rise. For example, in 1996 chicken prices for the
Company rose approximately 8.9%, an increase that, due to competitive
conditions, the Company elected to absorb almost entirely. The Company's
recently executed chicken supply contracts for 1997 established higher floors
and ceilings than contained in its previous contracts. Any future material
change which causes an increase in the price of chicken could have a material
impact on the operations and profitability of the Company and its franchisees.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments and Outlook--Cost of Chicken".
EXPANSION; DEPENDENCE ON FRANCHISEES AND DEVELOPERS
The Company's global strategy will depend heavily on growing its franchise
operations. At March 23, 1997, the Company franchised 1,228 Popeyes and Churchs
restaurants domestically and 409 restaurants internationally. The Company's
success is dependent upon its franchisees and the manner in which they develop
and operate Popeyes and Churchs restaurants. As the Company expands it will
also need to find new franchisees who are capable of promoting the Company's
strategy. There can be no assurance that the Company will be able to achieve
these goals, manage the expansion of the Company's operations effectively and
efficiently and maintain Company growth. The opening and success of franchised
restaurants will depend on various other factors, including the availability of
suitable sites, the negotiation of acceptable lease or purchase terms for new
locations, permitting and regulatory compliance, the ability to meet
construction schedules, the financial and other capabilities of the Company's
franchisees and developers, the ability of the Company to manage this
anticipated expansion and hire and train personnel, and general economic and
business conditions. Not all of the foregoing factors are within the control of
the Company or its franchisees or developers. Further, there can be no
assurance that franchisees or developers will have the business abilities or
sufficient access to financial resources necessary to open the restaurants
required by their agreements or will successfully develop or operate their
restaurants in a manner consistent with the Company's concepts and standards.
See "Business--Franchise Development".
The Company's continued expansion will also require the implementation of
enhanced operational, financial and management information systems and will
require additional management, operational and financial resources. Failure to
implement these systems and provide these resources could have a material
adverse effect on the Company's results of operations and financial condition.
There can be no assurance that the Company will be able to manage its expanding
operations
22
<PAGE>
effectively or that it will be able to maintain or accelerate its current growth
in revenue. In addition, there can be no assurance of the viability or
popularity of the Popeyes or Churchs concepts in new geographic regions or
particular local markets. See "Business--Franchise Development".
INTERNATIONAL OPERATIONS
At March 23, 1997, the Company's franchisees operated 409 Popeyes and
Churchs restaurants in 20 foreign countries. Management presently intends to
expand the Company's non-U.S. franchise operations significantly over the next
several years. Although the Company does not currently own or participate in
the ownership of any material non-U.S. operations, its revenues from foreign
franchisees (consisting mainly of royalties payable in U.S. dollars based on a
percentage of net sales) is nevertheless exposed to the adverse effects on its
franchisees' results of operations, currency exchange rates and changes in the
local economies in which its franchisees operate. Additionally, the Company may
in the future consider participating in the equity of joint ventures that hold a
franchise from the Company, which would increase its exposure to local currency
and operational risks as well as other business risks associated with operations
in foreign countries (including limits on the repatriation of cash, the risk of
asset expropriation and other political and legal risks of operating in foreign
countries). The Company does not currently maintain any hedges against foreign
currency fluctuations. For the twelve-week period ended March 23, 1997,
royalties and other revenues from foreign franchisees represented 2.1% of total
revenues for that period.
Each of the Company's international franchisees is generally responsible
for significantly greater geographic territories and significantly more
restaurants than the Company's domestic franchisees. As a result, the Company's
foreign operations are more closely tied to the success of a smaller number of
operating entities than its U.S. franchisees. Although the Company believes its
international franchisees have the economic and operating resources to operate
successfully, there can be no assurance that any or all of them will do so. The
failure of any significant franchisee could have a material effect on the
Company's operations.
ACQUISITION STRATEGY
One of the Company's core strategies is to grow through the acquisition of
additional high value/high growth franchising concepts, leveraging the
implementation of such concepts over its existing franchise system
infrastructure. In that regard, the New Credit Facility includes a $100 million
Acquisition Facility. To implement this strategy successfully, the Company will
be dependent on its ability to identify and acquire such concepts and to
successfully integrate the operation of such concepts into the Company. There
can be no assurance that the Company will be able to identify appropriate
concepts or that such concepts will be available on terms and at prices that
will be attractive and profitable to the Company. Further, the Company has no
history of integrating new franchising concepts into its operations. Any
inability of the Company to successfully franchise or operate additional newly
acquired branded concepts could materially and adversely affect the Company's
operating results.
NET OPERATING LOSS CARRYFORWARDS
As of December 29, 1996, the Company has recognized net operating losses
("NOLs") and tax credit carryforwards in the amounts of $29.7 million and $4.6
million, respectively, against its net deferred tax liabilities. These amounts
have been estimated after application of "discharge of indebtedness" income tax
laws and regulations applicable to the transactions in which the Company
acquired its current business from a debtor in a bankruptcy reorganization
proceeding. The Internal Revenue Service ("IRS") has not yet reviewed the
Company's income tax positions with respect to the application of income tax
laws and regulations regarding discharge of indebtedness. If the IRS challenges
the Company's positions, it is possible that all or a portion of the Company's
NOLs and tax credit carryforwards that the Company believes existed on November
5, 1992 (consisting of approximately $34 million of NOLs and $2.3 million of tax
credits), could be eliminated. Should such
23
<PAGE>
NOLs and tax credit carryforwards be eliminated, an adjustment will be made to
the Company's intangible assets which were created at the time of the emergence
from bankruptcy. Additionally, although the Company would not owe any tax
liability through 1995, additional tax would be owed for 1996, and income in
1997 and future years would not be offset with existing NOLs or tax credit
carryforwards.
In addition, the bankruptcy reorganization proceeding constituted an
"ownership change" under Section 382 of the Internal Revenue Code of 1986, as
amended ("Section 382"). As a result, future utilization of these pre-November
5, 1992 NOLs and tax credit carryforwards (if any) is subject to an annual limit
of approximately $4 million of NOLs or $1.4 million of credits (but not both).
Moreover, because of changes in the ownership of the stock of the Company since
1992, it is possible that a subsequent "ownership change" has occurred and, if
an ownership change has not yet occurred, one will occur during 1997. Any NOLs
or tax credit carryforwards existing at the time of such an ownership change
would also be subject to annual limits on future utilization under Section 382.
However, the Company believes that the Section 382 limitations will not prevent
the ultimate utilization of any existing NOLs and tax credit carryforwards
(arising both before and after November 5, 1992) before they expire.
GOVERNMENT REGULATION
The restaurant industry is subject to numerous Federal, state and local
government regulations, including those relating to the preparation and sale of
food and those relating to building and zoning requirements. The Company and
its developers and franchisees are also subject to laws governing their
relationships with employees, including minimum wage requirements, overtime,
working and safety conditions and citizenship requirements. In addition, the
Company is subject to regulation by the Federal Trade Commission and must comply
with certain state laws which govern the offer, sale and termination of
franchises and the refusal to renew franchises. The failure to obtain or retain
food licenses or approvals to sell franchises, or an increase in the minimum
wage rate, employee benefits costs (including costs associated with mandated
health insurance coverage) or other costs associated with employees, could
adversely affect the Company and its area developers and franchisees. See
"Business--Regulation".
ENVIRONMENTAL MATTERS
Approximately 200 of the Company's owned and leased properties are known or
suspected to have been used by prior owners or operators as retail gas stations,
and a few of these properties may have been used for other environmentally
sensitive purposes. Many of these properties previously contained underground
storage tanks ("USTs") and some of these properties may currently contain
abandoned USTs. As a result of the use of oils and solvents typically
associated with automobile repair facilities and gas stations, it is possible
that petroleum products and other contaminants may have been released at these
properties into the soil or groundwater. Under applicable Federal and state
environmental laws, the Company, as the current owner or operator of these
sites, may be jointly and severally liable for the costs of investigation and
remediation of any such contamination. As a result, after an analysis of its
property portfolio, including testing of soil and groundwater at a
representative sample of its facilities, the Company accrued a reserve of
approximately $6.0 million for environmental remediation liabilities. While the
Company is currently not subject to any administrative or court order requiring
remediation at any of its properties, the Company is considering active
remediation at a limited number of facilities containing USTs. There can be no
assurance that the actual costs of remediation will not eventually materially
exceed the amount presently accrued. Further, there can be no assurance that
the Company will not be subject to environmental remediation liability for other
environmental conditions at its properties that are unrelated to USTs.
24
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success is highly dependent on the efforts and abilities of
Frank J. Belatti, the Company's Chairman of the Board and Chief Executive
Officer, Dick R. Holbrook, the Company's President and Chief Operating Officer,
and Samuel N. Frankel, the Company's Executive Vice President, Secretary and
General Counsel, and certain other members of the Company's senior management.
The loss of the services of any of these individuals could have a material
adverse effect on the Company. The Company does not carry key man life
insurance on any of its officers. See "Management".
CONTROL BY PRINCIPAL STOCKHOLDER
Freeman Spogli & Co. Incorporated ("FS&Co.") and certain affiliates control
approximately 52.3% of the voting securities of the Company. As a result,
FS&Co. has the ability to control the Company's management, policies and
financing decisions. See "Ownership of Common Stock" and "Management".
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes are being offered to the Holders of the Old Notes. Prior to
this Exchange Offer, there has been no public market for the Old Notes. The
Company does not intend to apply for listing of the New Notes on any securities
exchange or for quotation through the Nasdaq National Market. The Initial
Purchasers have informed the Company that they currently intend to make a market
in the New Notes. However, the Initial Purchasers are not obligated to do so
and any such market making may be discontinued at any time without notice.
Therefore, no assurance can be given as to whether an active trading market will
develop or be maintained for the New Notes. As the Old Notes were issued and
the New Notes are being issued to a limited number of institutions who typically
hold similar securities for investment, the Company does not expect that an
active public market for the New Notes will develop. In addition, resales by
certain holders of the Old Notes or the New Notes of a substantial percentage of
the aggregate principal amount of such notes could constrain the ability of any
market maker to develop or maintain a market for the New Notes. To the extent
that a market for the New Notes should develop, the market value of the New
Notes will depend on prevailing interest rates, the market for similar
securities and other factors, including the financial condition, performance and
prospects of the Company. Such factors might cause the New Notes to trade at a
discount from face value.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES AND REQUIREMENTS FOR TRANSFER
OF NEW NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its Old Notes in the Exchange Offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to the Company that such an
exemption is available.
25
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. AFC will not receive any
cash proceeds from the issuance of the New Notes offered in the Exchange Offer.
In consideration for issuing the New Notes as contemplated in this Prospectus,
the Company will receive in exchange Old Notes in like principal amount, the
form and terms of which are the same in all material respects as the form and
terms of the New Notes except that the New Notes have been registered under the
Securities Act and do not contain transfer restrictions or terms with respect to
the special interest payments applicable to the Old Notes. The Old Notes
surrendered in exchange for New Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the New Notes will not result in any
increase in the indebtedness of the Company.
Net proceeds from the issuance and sale of the Old Notes were approximately
$164.3 million. Such proceeds, together with $50.0 million in borrowings under
the Term Loan, were used (i) to repay all outstanding amounts due ($125.9
million at March 23, 1997) under the Company's existing credit facilities (which
terminate on October 11, 2001 and which accrued interest at rates ranging from
8.3% to 10.0% during the fiscal year ended December 29, 1996), (ii) to redeem
all of the Company's 10% Preferred Stock ($61.2 million at March 23, 1997) and
(iii) to repay certain capitalized lease obligations (approximately $12.8
million outstanding at March 23, 1997) and portions of such proceeds will be
used by the Company for working capital and general corporate purposes.
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company as of March 23, 1997, (ii) the adjustments necessary thereto to give
effect to (a) the closing of the offering of the Old Notes and the application
of the net proceeds therefrom and from the borrowings under the Term Loan and
(b) the AFDC Transaction and (iii) the pro forma consolidated capitalization of
the Company following such adjustments. This table should be read in
conjunction with "Use of Proceeds", "Selected Historical Consolidated Financial
Information" and "Summary Unaudited Pro Forma Consolidated Financial
Information", each of which is included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 23, 1997
-----------------------------------------
PRO
ACTUAL ADJUSTMENTS FORMA
---------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt and capital
lease obligations........................................ $ 13,289 $ (8,625)(2) $ 4,664
-------- --------- --------
Long-term debt and capital lease obligations:
Existing credit facilities.............................. 119,014 (119,014)(3) --
New Credit Facility:
Term Loan............................................. -- 48,000 (3) 48,000
Revolving Facility(1)................................. -- -- --
Acquisition Facility(1)............................... -- -- --
Capitalized lease obligations........................... 20,541 (13,784)(3) 6,757
Other long-term debt.................................... 868 -- 868
The Old Notes........................................... -- 175,000 (3) 175,000
-------- --------- --------
Total long-term debt and capital lease
obligations(1)....................................... 140,423 90,202 230,625
-------- --------- --------
10% Preferred Stock....................................... 61,245 (61,245)(3) --
-------- --------- --------
Shareholders' equity:
Common stock............................................ 344 (4) -- 344
Capital in excess of par value.......................... 99,811 (4) -- 99,811
Notes receivable-officers, including accrued
interest............................................... (3,888) -- (3,888)
Accumulated deficit..................................... (57,460) 4,583 (5) (52,877)
-------- --------- --------
Total shareholders' equity............................ 38,807 4,583 43,390
-------- --------- --------
Total capitalization...................................... $253,764 $ 24,915 $278,679
======== ========= ========
</TABLE>
- --------------
(1) After the Refinancing, the Company has not drawn any funds from the
Revolving Facility or the Acquisition Facility and the Company has full
availability thereunder, except to the extent of $14.3 million in replacement
letters of credit outstanding under its existing credit facilities and other
letters of credit. See "Description of New Credit Facility".
(2) Reflects the following:
<TABLE>
<S> <C>
Current portion New Credit Facility........................ $ 2,000
Less: Current portion of capital lease obligations paid (3,750)
Less: Current portion of existing credit facilities paid (6,875)
-------
$(8,625)
=======
</TABLE>
(3) Reflects the issuance of the Old Notes and New Credit Facility borrowings,
and the application of the proceeds to the repayment of the Company's existing
credit facilities, certain capital lease obligations and 10% Preferred Stock.
(4) Amounts do not include approximately 2,007,000 shares of common stock
issuable upon exercise of employee stock options at a weighted average exercise
price of $0.84 per share.
(5) Reflects the resulting income associated with the AFDC Transaction
consisting of $2.5 million of franchise fees and approximately $5.3 million of
gain on the sale of net assets, net of related income tax effects of
approximately $3.1 million, and the loss related to the write-off of debt
issuance costs on retired debt of $0.2 million, net of related income tax
effects of $0.1 million, computed using an effective combined Federal and state
effective tax rate of 40.0%.
27
<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Old Notes were issued and sold by the Company on May 21, 1997 to
Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp. and Donaldson, Lufkin &
Jenrette Securities Corporation (collectively, the "Initial Purchasers"), who
subsequently resold the Old Notes to (a) "qualified institutional buyers" (in
reliance on Rule 144A under the Securities Act) and (b) non-U.S. persons outside
the United States in reliance on Regulation S under the Securities Act. In
connection with the issuance and sale of the Old Notes, the Company and the
Initial Purchasers entered into the Registration Rights Agreement pursuant to
which the Company agreed to use its best efforts to cause a registration
statement with respect to the Exchange Offer to become effective within 180 days
of May 21, 1997, the date of issuance of the Old Notes. However, in the event
that any change in applicable law or applicable interpretations of the staff of
the Commission does not permit the Company to effect the Exchange Offer, the
Company has agreed to use its best efforts (i) to file within 30 days after the
time such obligation to file arises and 60 days of May 21, 1997, a shelf
registration statement (the "Shelf Registration Statement") with respect to the
resale of the Old Notes, (ii) to cause to become effective the Shelf
Registration Statement within 120 days of its filing date and (iii) to keep the
Shelf Registration Statement effective for a two-year period or until there are
no Old Notes outstanding, whichever comes first.
The Exchange Offer is being made by AFC to satisfy its obligations pursuant
to the Registration Rights Agreement. The form and terms of the New Notes are
the same as the form and terms of the Old Notes in all material respects except
that the New Notes have been registered under the Securities Act and hence do
not include certain rights to registration thereunder and do not contain
transfer restrictions or terms with respect to the special interest payments
applicable to the Old Notes. Once the Exchange Offer is consummated, AFC will
have no further obligations to register any of the Old Notes not tendered by the
Holders for exchange. See "Risk Factors--Consequences to Non-Tendering Holders
of Old Notes". A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Based on interpretations by the staff of the Commission set forth in
several no-action letters issued to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by holders thereof without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no such arrangement with any
person to participate in the distribution of such New Notes. However, the
Company does not intend to request the Commission to consider, and the
Commission has not considered, the Exchange Offer in a no-action letter and
there can be no assurance that the Commission would make a similar determination
with respect to the Exchange Offer. However, any Holder who is an "affiliate"
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing the New Notes (i) cannot rely on the interpretation by
the staff of the Commission set forth in the above referenced no-action letters,
(ii) cannot tender its Old Notes in the Exchange Offer, and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements. See "Risk
Factors--Consequences to Non-Tendering Holders of Old Notes".
In addition, each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities and
not acquired directly from the Company, must acknowledge that it will deliver a
copy of this Prospectus in connection with any resale of such New Notes. See
"Plan of Distribution".
28
<PAGE>
Except as aforesaid, this Prospectus may not be used for an offer to
resell, resale or other transfer of New Notes.
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, the Company will
accept any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue $1,000
principal amount of New Notes in exchange for each $1,000 principal outstanding
Old Notes accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000.
As of May 21, 1997, there was $175.0 million aggregate principal amount of
the Old Notes outstanding and one registered Holder of Old Notes. This
Prospectus, together with the Letter of Transmittal, is being sent to such
registered Holder as of , 1997.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depository. The New Notes also will be issued and
transferable in book-entry form through DTC. See "Description of New Notes--
Form, Denomination and Book-Entry Procedures."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay the expenses, other than
certain applicable taxes, of the Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean , 1997, unless the
Company in its sole discretion, extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent and the record Holders of Old Notes of any extension by oral or
written notice, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. Such notice may
state that the Company is extending the Exchange Offer for a specified period of
time or on a daily basis until 5:00 p.m., New York City time, on the date on
which a specified percentage of Old Notes are tendered.
The Company reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if any of the conditions
set forth herein under "--Conditions" shall have occurred and shall not have
been waived by the Company by giving oral or written notice of such delay,
29
<PAGE>
extension, amendment or termination to the Exchange Agent. Any such delay in
acceptance, extension, amendment or termination will be followed as promptly as
practicable by oral or written notice thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment in a manner reasonably calculated
to inform the Holders of such amendment and the Company will extend the Exchange
Offer for a period of five to 10 business days, depending upon the significance
of the amendment and the manner of disclosure to Holders of the Old Notes, if
the Exchange Offer would otherwise expire during such five to 10 business day
period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
ACCRUED INTEREST ON THE NEW NOTES AND THE OLD NOTES
The New Notes will bear interest at a rate equal to 10 1/4% per annum from
their date of issuance. Interest on the New Notes is payable semi-annually on
May 15 and November 15 of each year, commencing on November 15, 1997. Holders
whose Old Notes are accepted for exchange will receive, in cash, accrued
interest thereon to, but excluding, the date of issuance of the New Notes. Such
interest will be paid with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange will cease to accrue upon
cancellation of the Old Notes and issuance of the New Notes. Holders of Old
Notes whose Old Notes are not exchanged will receive the accrued interest
payable on November 15, 1997.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by Instruction [__] of the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile, together
with the Old Notes and any other required documents, to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedure for such transfer. Although delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at DTC, the Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received or confirmed by the Exchange Agent at its
address set forth in "--Exchange Agent" below prior to 5:00 p.m., New York City
time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for such Holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Holders. Instead of delivery by mail, it is recommended that Holders use an
overnight or hand delivery service. In all cases, sufficient time
30
<PAGE>
should be allowed to assure timely delivery. No Letter of Transmittal or Old
Notes should be sent to the Company.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
ANY BENEFICIAL HOLDER WHOSE OLD NOTES ARE REGISTERED IN THE NAME OF ITS
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND WHO WISHES
TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT SUCH
REGISTERED HOLDER TO CONSENT AND/OR TENDER ON ITS BEHALF. IF SUCH BENEFICIAL
HOLDER WISHES TO TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER MUST, PRIOR TO
COMPLETING AND EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING ITS OLD NOTES,
EITHER MAKE APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP OF THE OLD NOTES IN
SUCH HOLDER'S NAME OR OBTAIN A PROPERLY COMPLETED BOND POWER FROM THE REGISTERED
HOLDER. THE TRANSFER OF RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or a commercial bank or trust company having an office or correspondent in the
United States (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers signed as the name of the
registered Holder or Holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders of Old Notes, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
31
<PAGE>
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of such Holder's business, that such Holder has no
arrangement with any person to participate in the distribution of such New
Notes, and that such Holder is not an "affiliate", as defined under Rule 405 of
the Securities Act, of the Company. If the Holder is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities and
not acquired directly from the Company, such Holder by tendering will
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder of the Old Notes, the certificate number or
numbers of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s) representing
the Old Notes to be tendered in proper form for transfer (or a confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer (or confirmation of a book-entry transfer into
the Exchange Agent's account at DTC of Old Notes delivered electronically) and
all other documents required by the Letter of Transmittal are received by the
Exchange Agent within five New York Stock Exchange trading days after the
Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent
to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer
32
<PAGE>
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes into the name of the person withdrawing the tender,
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes
which have been tendered but which are not accepted for payment will be returned
to the Holder thereof without cost to such Holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes, if any of the
following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder, violates
applicable law or any applicable interpretation of the Commission; or
(b) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the sole judgment of the Company, might impair the ability of the Company to
proceed with the Exchange Offer; or
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the sole judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer.
If any such conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "--Withdrawal of Tenders") or (iii) waive certain of such conditions
with respect to the Exchange Offer and accept all properly tendered Old Notes
which have not been withdrawn or revoked. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver in
a manner reasonably calculated to inform Holders of Old Notes of such waiver.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition to the foregoing conditions, if, because of any change in
applicable law or applicable interpretations thereof by the Commission, the
Company is not permitted to complete the Exchange Offer, then the Company shall
file a Shelf Registration Statement. Thereafter, the Company's obligation to
consummate the Exchange Offer shall be terminated.
33
<PAGE>
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Registered or Certified Mail: By Overnight Courier:
United States Trust Company of New United States Trust Company of New
York York
P.O. Box 844 Cooper Station 770 Broadway
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust
Operations
By Hand: By Facsimile:
United States Trust Company of New (212) 420-6152
York Attention: Customer Service
111 Broadway
New York, New York 10006-1906 Confirm by telephone:
Attention: Corporate Trust Operations (800) 548-6565
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the Prospectus and related documents to the beneficial owners of the
Old Notes, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, are estimated in the aggregate to be approximately
$100,000, and include fees and expenses of the Exchange Agent and Trustee under
the Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered Holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
34
<PAGE>
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value as reflected in the Company's accounting records on the date
of the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized upon consummation of the Exchange Offer. The issuance costs incurred
in connection with the Exchange Offer will be capitalized and amortized over the
term of the New Notes.
35
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information for the Company for the periods and the dates indicated. The
balance sheet data and statement of operations data as of and for the eight
weeks ended December 27, 1992 and the balance sheet data and statement of
operations data as of and for the years ended December 26, 1993, December 25,
1994, December 31, 1995 and December 29, 1996 set forth below have been derived
from the financial statements of the Company, which have been audited by Arthur
Andersen LLP, independent public accountants. The balance sheet data and
statement of operations data as of and for the twelve weeks ended March 23, 1997
and March 24, 1996 and for the 44-week period from December 30, 1991 through
November 4, 1992 have been derived from the unaudited financial statements of
the Company and, in the opinion of the Company, include all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation. Interim results are not necessarily indicative of financial
results of the Company for the full fiscal year. This Selected Historical
Consolidated Financial Information should be read in conjunction with, and is
qualified in its entirety by (i) "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and (ii) the audited and
unaudited Consolidated Financial Statements for the Company and the notes
thereto, each of which is included elsewhere in this Prospectus.
FRESH START ACCOUNTING PRINCIPLES AS PRESCRIBED BY AICPA STATEMENT OF
POSITION 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE, WERE USED TO RECORD ASSETS ACQUIRED AND LIABILITIES ASSUMED BY
THE COMPANY UPON THE EMERGENCE FROM BANKRUPTCY ON NOVEMBER 5, 1992. SUCH
ACCOUNTING RESULTS IN AN ADJUSTED BASIS IN THE CARRYING VALUES OF ASSETS AND
LIABILITIES, WHICH AFFECTS DEPRECIATION AND AMORTIZATION REPORTED IN ALL PERIODS
SUBSEQUENT TO NOVEMBER 5, 1992. IN ADDITION, INCLUDED IN GENERAL AND
ADMINISTRATIVE EXPENSES FOR THE PERIOD DECEMBER 30, 1991 THROUGH NOVEMBER 4,
1992 ARE APPROXIMATELY $9.7 MILLION OF REORGANIZATION EXPENSES WHICH ARE NON-
RECURRING. ACCORDINGLY, THE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
PRESENTED FOR PERIODS OR DATES BEFORE NOVEMBER 5, 1992 ARE NOT COMPARABLE IN ALL
MATERIAL RESPECTS WITH PERIODS OR DATES PRESENTED AFTER NOVEMBER 5, 1992.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED(1)
-------------------------- -------------------------------------------------------------
DECEMBER NOVEMBER
30, 1991 5, 1992
THROUGH THROUGH
NOVEMBER DECEMBER
4, 1992 27, 1992 DECEMBER DECEMBER DECEMBER DECEMBER
(44 WEEKS) (8 WEEKS) 26, 1993 25, 1994 31, 1995 29, 1996
---------- ---------- ----------- ----------- ----------- ------------
(UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Restaurant sales............. $323,109 $ 54,004 $ 379,745 $ 401,855 $ 426,707 $ 430,280
Revenues from franchising.... 31,645 5,386 37,198 41,581 47,916 51,336
Revenues from manufacturing.... 6,836 1,801 7,718 12,026 9,969 11,431
Other revenues................. 8,211 1,484 9,029 8,252 8,583 8,262
-------- -------- ---------- ---------- ---------- ----------
Total revenues.............. 369,801 62,675 433,690 463,714 493,175 501,309
Costs and expenses:
Restaurant cost of sales..... 115,462 16,788 118,997 133,893 139,286 142,199
Restaurant operating expenses 166,496 30,488 207,303 206,862 216,934 215,464
Manufacturing cost of sales.. 6,051 1,919 8,401 11,705 9,816 10,924
General and administrative... 62,741 12,437 65,837 72,249 75,916 72,672
Depreciation and amortization 25,755 3,788 24,892 25,438 28,665 30,904
Executive compensation
award(2).................... -- -- -- -- 10,647 --
-------- -------- ---------- ---------- ---------- ----------
Total costs and expenses.... 376,505 65,420 425,430 450,147 481,264 472,163
Income (loss) from operations.. (6,704) (2,745) 8,260 13,567 11,911 29,146
Interest expense............... (22,105) (2,754) (19,246) (19,172) (23,707) (16,132)
-------- -------- ---------- ---------- ---------- ----------
Net income (loss) before
income taxes and
extraordinary loss............ (28,809) (5,499) (10,986) (5,605) (11,796) 13,014
Income tax
benefit/(expense)............. 8,073 1,948 3,216 553 2,969 (5,163)
-------- -------- ---------- ---------- ---------- ----------
Net income (loss)
before extraordinary
loss.......................... (20,736) (3,551) (7,770) (5,052) (8,827) 7,851
Extraordinary loss,
net of taxes(3)............... -- -- (277) -- -- (4,456)
-------- -------- ---------- ---------- ---------- ----------
Net income (loss).............. (20,736) (3,551) (8,047) (5,052) (8,827) 3,395
Mandatorily redeemable
preferred stock
dividends..................... -- (647) (4,460) (4,467) (4,555) (5,272)
<CAPTION>
TWELVE WEEKS ENDED
-----------------------
MARCH 24, MARCH 23,
1996 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Restaurant sales............. $ 94,460 $103,181
Revenues from franchising.... 10,637 13,184
Revenues from manufacturing.... 3,793 1,604
Other revenues................. 1,851 1,826
-------- --------
Total revenues.............. 110,741 119,795
Costs and expenses:
Restaurant cost of sales..... 30,561 33,218
Restaurant operating expenses 47,705 51,698
Manufacturing cost of sales.. 3,146 1,024
General and administrative... 18,158 20,300
Depreciation and amortization 6,795 7,103
Executive compensation
award(2).................... -- --
-------- --------
Total costs and expenses.... 106,365 113,343
Income (loss) from operations.. 4,376 6,452
Interest expense............... (5,208) (3,278)
-------- --------
Net income (loss) before
income taxes and
extraordinary loss............ (832) 3,174
Income tax
benefit/(expense)............. 246 (1,262)
-------- --------
Net income (loss)
before extraordinary
loss.......................... (586) 1,912
Extraordinary loss,
net of taxes(3)............... -- --
-------- --------
Net income (loss).............. (586) 1,912
Mandatorily redeemable
preferred stock
dividends..................... (1,030) (1,289)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED(1)
-------------------------- -------------------------------------------------------------
DECEMBER NOVEMBER
30, 1991 5, 1992
THROUGH THROUGH
NOVEMBER DECEMBER
4, 1992 27, 1992 DECEMBER DECEMBER DECEMBER DECEMBER
(44 WEEKS) (8 WEEKS) 26, 1993 25, 1994 31, 1995 29, 1996
---------- ---------- ----------- ----------- ----------- ------------
(UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C>
Mandatorily redeemable
preferred stock
accretion................... -- (280) (1,967) (2,250) (2,571) (9,532)
-------- -------- ---------- ---------- ---------- ----------
Net income (loss)
attributable to
common shares............... $(20,736) $ (4,478) $ (14,474) $ (11,769) $ (15,953) $ (11,409)
======== ======== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(4).................... $ 23,911 $ 1,119 $ 34,731 $ 43,435 $ 55,460 $ 64,756
EBITDA margin(5)............. 6.5% 1.8% 8.0% 9.4% 11.2% 12.9
Capital expenditures(6):
Maintenance capital
expenditures............... $ 4,294 $ 2,246 $ 6,808 $ 5,050 $ 5,483 $ 6,010
Re-images and
renovation................. 3,750 1,955 2,985 10,267 15,502 15,342
New restaurant
development................ 1,035 116 1,831 1,999 2,272 3,215
Other....................... 1,831 84 5,979 3,496 1,739 9,384
-------- -------- ---------- ---------- ---------- ----------
Total capital
expenditures.............. $ 10,910 $ 4,401 $ 17,603 $ 20,812 $ 24,996 $ 33,951
Ratio of earnings to
fixed charges(7)........... -- -- -- -- -- 1.29
BALANCE SHEET DATA: (at end of
period)
Total assets................. $374,766 $ 348,852 $ 327,494 $ 328,645 $ 340,674
Total debt and capital
lease obligations........... 215,248 201,810 193,646 204,025 151,793
Mandatorily redeemable
Preferred Stock............. 39,680 41,647 43,897 46,468 59,956
Total shareholders'
equity (deficit)............ 18,598 4,591 (6,707) (21,665) 37,902
RESTAURANT DATA (UNAUDITED)(8):
Systemwide restaurant sales:
Popeyes...................... $494,117 $ 89,090 $ 601,389 $ 649,881 $ 710,840 $ 762,108
Churchs...................... 458,707 79,047 552,629 590,261 647,746 675,995
-------- -------- ---------- ---------- ---------- ----------
Total systemwide
sales..................... $952,824 $168,137 $1,154,018 $1,240,142 $1,358,586 $1,438,103
======== ======== ========== ========== ========== ==========
Systemwide restaurants
open, end of period:
Popeyes...................... 810 807 814 907 964 1,021
Churchs...................... 1,079 1,078 1,078 1,165 1,219 1,257
-------- -------- ---------- ---------- ---------- ----------
Total systemwide
restaurants............... 1,889 1,885 1,892 2,072 2,183 2,278
======== ======== ========== ========== ========== ==========
Systemwide percentage
change in comparable
restaurant sales:
Popeyes..................... 0.7% 2.7% (0.4)% 1.4% 1.6% 1.1
Churchs..................... 5.9 5.3 2.4 4.8 3.9 2.8
Total commitments outstanding,
end of period(9).............. 383 372 668 1,047 1,083 1,319
<CAPTION>
TWELVE WEEKS ENDED
-----------------------
MARCH 24, MARCH 23,
1996 1997
--------- ---------
(UNAUDITED)
<S>............................ <C> <C>
Mandatorily redeemable
preferred stock
accretion................... (643) --
-------- --------
Net income (loss)
attributable to
common shares............... $ (2,259) $ 623
======== ========
OTHER FINANCIAL DATA:
EBITDA(4).................... $ 11,993 $ 14,310
EBITDA margin(5)............. 10.8% 11.9%
Capital expenditures(6):
Maintenance capital
expenditures............... $ 1,175 $ 1,146
Re-images and
renovation................. 4,570 2,234
New restaurant
development................ 798 206
Other....................... 2,126 3,081
-------- --------
Total capital
expenditures.............. $ 8,669 $ 6,667
Ratio of earnings to
fixed charges(7)........... -- 1.49x
BALANCE SHEET DATA: (at end of
period)
Total assets................. $324,324 $338,245
Total debt and capital
lease obligations........... 204,401 153,712
Mandatorily redeemable
Preferred Stock............. 47,111 61,245
Total shareholders'
equity (deficit)............ (23,832) 38,807
RESTAURANT DATA (UNAUDITED)(8):
Systemwide restaurant sales:
Popeyes...................... $162,684 $184,505
Churchs...................... 146,744 161,452
-------- --------
Total systemwide
sales..................... $309,428 $345,957
======== ========
Systemwide restaurants
open, end of period:
Popeyes...................... 966 1,037
Churchs...................... 1,226 1,293
-------- --------
Total systemwide
restaurants............... 2,192 2,330
======== ========
Systemwide percentage
change in comparable
restaurant sales:
Popeyes..................... 1.5% 4.9%
Churchs..................... 5.9 6.8
Total commitments outstanding,
end of period(9).............. 1,178 1,398
</TABLE>
_______________
(1) The Company has a 52/53-week fiscal year ending on the last Sunday in
December which normally consists of 13 four-week periods. The fiscal year
ended December 31, 1995 included 53 weeks of operations.
(2) In 1995, the Board of Directors granted a special bonus of $10.0 million to
the senior management group of the Company payable in cash or common stock
at the election of the recipient. In 1996, the bonus was paid to the
executives in shares of common stock, with no cash payments being made by
the Company with respect to the bonus. Also in 1995, the vesting of stock
options for certain senior executives was accelerated resulting in an
additional $647,000 of compensation expense.
(3) The extraordinary loss recorded in fiscal years 1993 and 1996 represents the
loss associated with the prepayment of certain debt obligations of the
Company, net of related income tax effects.
(4) EBITDA represents income from operations plus depreciation and amortization;
adjusted for non-cash items related to gains/losses on asset dispositions
and writedowns, compensation expense related to stock option activity
(deferred compensation), the executive compensation award (see Note 2) and
non-cash officer notes receivable items related to the executive
compensation award. EBITDA should not be construed as a substitute for
income from operations or as a better indicator of liquidity than cash flow
from operating activities, which is determined in accordance with
37
<PAGE>
generally accepted accounting principles. EBITDA is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditure and working capital
requirements. In addition, management believes that certain investors find
EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs. See the Consolidated Statements of Cash
Flows of the Company and the related Notes to the Consolidated Financial
Statements thereto included herein.
(5) EBITDA margin represents EBITDA divided by total revenues.
(6) Capital expenditures (excluding expenditures funded through capital leases)
have been segregated into the following categories to provide additional
information:
. Maintenance capital expenditures--represents day to day expenditures
related to restaurant equipment replacements and general restaurant
capital improvements.
. Re-images and renovation--represents significant restaurant renovations
and upgrades pursuant to the Company's re-imaging and renovation
activities.
. New restaurant development--represents new Company-operated restaurant
construction and development.
. Other--represents capital expenditures, at various corporate offices and
new restaurant equipment such as fryers and security systems.
(7) The Company had a deficiency of earnings to fixed charges for the 44-week
period from December 30, 1991 through November 4, 1992, the eight-week
period from November 5, 1992 through December 27, 1992, and for the fiscal
years December 26, 1993, December 25, 1994 and December 31, 1995, and for
the twelve-week period ended March 24, 1996 of approximately $28,809,000,
$5,641,000, $11,128,000, $5,869,000, $12,284,000 and $881,000, respectively.
Earnings consist of income (loss) before taxes, plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest
expense, amortization of debt issuance cost and debt discount, preferred
stock dividend requirements and accretion (including related tax effects),
and one-third of rent expense on operating leases considered representative
of the interest factor attributable to rent expense.
(8) Represents restaurant sales for all franchised and Company-operated
restaurants. Sales information for franchised restaurants is as reported by
franchisees or, in some instances, estimated by the Company based on other
data, and is unaudited.
(9) Commitments represent commitments to open franchised restaurants, as set
forth in development agreements. On a historical basis, a number of such
commitments have not resulted in restaurant openings. There can be no
assurance that parties to development agreements will open their respective
number of restaurants.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial
condition and results of operations of the Company for the fiscal years ended
December 25, 1994, December 31, 1995 and December 29, 1996 and the twelve weeks
ended March 24, 1996 and March 23, 1997. This discussion and analysis should be
read in conjunction with, and is qualified in its entirety by, the sections
entitled (i) "Selected Historical Consolidated Financial Information", (ii)
"Summary Unaudited Pro Forma Consolidated Financial Information", (iii)
Consolidated Financial Statements and the notes thereto and (iv) the Pro Forma
Consolidated Financial Statements and the notes thereto, each of which is
included elsewhere in this Prospectus.
GENERAL
The Company is the second largest quick-service chicken restaurant company
in the world, franchising and operating QSRs under the brands Popeyes and
Churchs. As of March 23, 1997, the AFC system included over 2,300 restaurants
in 21 countries, with systemwide sales of over $1.4 billion.
SYSTEMWIDE SALES
The following table sets forth systemwide sales figures for the fiscal
years ended December 25, 1994, December 31, 1995 and December 29, 1996 and the
twelve weeks ended March 24, 1996 and March 23, 1997. Sales data for franchised
restaurants are as reported by franchisees (or, in some instances, estimated by
the Company based on other information) and are unaudited. Sales increases can
generally be attributed to increases in the number of restaurants and comparable
restaurant sales increases.
<TABLE>
<CAPTION>
SYSTEMWIDE SALES
FISCAL YEAR ENDED TWELVE WEEKS ENDED
------------------------------------------ ---------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, MARCH 24, MARCH 23,
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Popeyes domestic:
Company-operated......... $ 87,690 $ 93,686 $ 92,145 $ 21,233 $ 22,137
Franchised............... 526,465 566,526 584,598 125,610 135,972
Churchs domestic:
Company-operated......... 314,165 333,021 338,135 73,227 81,044
Franchised............... 150,844 167,953 190,939 40,701 46,508
International (all franchised):
Popeyes.................. 35,726 50,628 85,365 15,841 26,396
Churchs.................. 125,252 146,772 146,921 32,816 33,900
Total Company-operated.......... $ 401,855 $ 426,707 $ 430,280 $ 94,460 $103,181
Total Franchised................ 838,287 931,879 1,007,823 214,968 242,776
---------- ---------- ---------- -------- --------
Total systemwide sales... $1,240,142 $1,358,586 $1,438,103 $309,428 $345,957
========== ========== ========== ======== ========
</TABLE>
39
<PAGE>
RESTAURANTS
From December 25, 1994 to March 23, 1997 the number of restaurants
systemwide increased from 2,072 to 2,330, or 12.5%. The number of franchised
restaurants is unaudited. The following table sets forth the number of
franchised and Company-operated restaurants open as of the periods indicated.
<TABLE>
<CAPTION>
SYSTEMWIDE SALES
FISCAL YEAR ENDED TWELVE WEEKS ENDED
------------------------------------------ ---------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, MARCH 24, MARCH 23,
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Popeyes domestic:
Company-operated..... 113 117 120 118 119
Franchised........... 740 772 774 771 782
Churchs domestic:
Company-operated..... 604 589 622 580 574
Franchised........... 333 364 367 376 446
International (all franchised):
Popeyes.............. 54 75 127 77 136
Churchs.............. 228 266 268 270 273
Total Company- 717 706 742 698 693
operated............
Total Franchised..... 1,355 1,477 1,536 1,494 1,637
----- ----- ----- ----- -----
Total systemwide
restaurants........ 2,072 2,183 2,278 2,192 2,330
===== ===== ===== ===== =====
</TABLE>
COMPARABLE SALES
The table below sets forth comparable sales increases (decreases) for
franchised and Company operated restaurants for the fiscal years ended December
25, 1994, December 31, 1995, December 29, 1996 and the twelve weeks ended March
24, 1996 and March 23, 1997. The Company includes in the comparable restaurant
sales analysis only those franchised and Company-operated restaurants that have
been in operation for a minimum of thirteen periods. Comparable sales data for
franchised restaurants are from data as reported by franchisees (or estimated by
the Company based on other information) and are unaudited.
40
<PAGE>
<TABLE>
<CAPTION>
SYSTEMWIDE COMPARABLE SALES
FISCAL YEAR ENDED TWELVE WEEKS ENDED
------------------------------------------ ---------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, MARCH 24, MARCH 23,
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Popeyes domestic:
Company-operated... 4.2% 2.2% (2.4)% 0.1% 4.8%
Franchised......... 1.2 0.9 1.4 1.1 4.4
Churchs domestic:
Company-operated... 6.2 5.6 4.3 8.3 8.2
Franchised......... 2.8 2.5 5.1 7.9 6.2
International (all
franchised):
Popeyes............ (2.2) 11.6 4.3 10.2 4.7
Churchs............ 3.4 0.9 (2.1) (1.7) 4.0
Total systemwide
comparable sales.......... 3.O 2.7 1.9 3.6 5.8
</TABLE>
RECENT DEVELOPMENTS AND OUTLOOK
AFDC TRANSACTION
On March 24, 1997 the Company closed the AFDC Transaction whereby the
Company sold the rights to operate 100 previously Company-operated restaurants
in eight domestic markets to AFDC. The Company also sold the land, building and
equipment for 51 of these restaurants, and it sold the building and equipment
and leased the land for 49 of the restaurants to AFDC. The Company received
approximately $19.9 million in cash, along with a warrant to acquire, for
nominal consideration, a 5.0% equity interest in AFDC. As a result of this
transaction, the Company recorded $2.5 million in franchise fees and
approximately $5.3 million of gain associated with the sale of the property in
the second quarter of 1997. Included in the $19.9 million payment was $1.0
million representing the development fees on an additional 100 restaurants which
will be developed by AFDC over the next ten years. These development fees were
deferred and will be taken into income as the restaurants open.
During 1996, these restaurants contributed $54.4 million in sales and $5.0
million in income to operations to the Company. Based upon 1996 sales figures,
the Company would have received approximately $2.4 million in royalty fees and
$0.6 million in rental income from AFDC during 1996 had these restaurants been
franchised units. See "Summary Unaudited Pro Forma Consolidated Financial
Information". Management estimates that the Company's capital expenditures will
be reduced by approximately $7.0 million in 1997 because the planned re-imaging
and renovation of these restaurants will be funded by AFDC. Management believes
it is unlikely that the Company will originate another sale of restaurants of
this magnitude in the foreseeable future.
CHESAPEAKE BAGEL ACQUISITION
On May 5, 1997, the Company acquired from The American Bagel Company the
franchise business and rights to Chesapeake Bagel. As a result of this
acquisition, the Company became the franchisor of 158 franchised Chesapeake
Bagel restaurants located primarily in Washington D.C., Maryland and Virginia.
The net purchase price of the acquisition was approximately $11.8 million, plus
a potential earn out of up to $3.5 million, contingent upon the number of
restaurants which open in the future out of the existing pool of franchise
commitments. Substantially all of the purchase price will be allocated to
intangible assets including franchise rights, trademarks and goodwill. Based
upon 1996 unaudited financial information received from Chesapeake Bagel,
royalty revenue and operating income generated from this acquisition would have
been approximately $2.0 million and $0.6 million,
41
<PAGE>
respectively, had Chesapeake Bagel been owned by the Company in 1996. While
there can be no assurance related to future results, management expects
Chesapeake Bagel to contribute a small operating gain or loss in 1997, but
believes that development of this brand, if successful, could generate
significant operating income in the future and is important to its overall
objective of becoming Franchisor of Choice(TM).
POTENTIAL ACQUISITION
In June 1997 the Company entered into an agreement acquire all of the
restaurant assets and properties of a Mexican food QSR chain in the Western
United States for a purchase price of approximately $24.0 million plus a
potential deferred payment of approximately $1.0 million. The completion of
this acquisition is subject to the satisfaction of a number of conditions,
including, among others, the completion by the Company of its due diligence
investigation of the seller and the Company's ability to secure third party
financing. There can be no assurance that this acquisition will be consummated
by the Company or, if consummated, that the terms of this acquisition will not
materially vary from the terms set forth in the agreement.
COST OF CHICKEN
The most significant and volatile component of the Company's cost structure
is the price it pays for fresh chicken. The price paid for fresh chicken is
comprised of two factors: (i) the wholesale poultry price, which is driven off
of the industry benchmark price (referred to as "Georgia Dock"), and (ii) the
amount paid to distributors for processing and delivering the product to the
restaurants. To reduce its exposure to increasing chicken prices, the Company
has entered into certain pricing agreements with its suppliers and distributors
which establish a price range for chicken purchased during the term of the
agreement. During 1995, these agreements did not have a material impact on the
Company's operating results. During 1996, however, market prices for chicken
exceeded the contractual range for a significant part of the year. The average
Georgia Dock for the year was $0.618 per pound while the average maximum amount
paid under the contracts was $0.603 per pound. The total amount saved through
these agreements during 1996 was approximately $1.9 million. During the first
quarter of 1997, the average Georgia Dock was an estimated $0.629 per pound
while the highest price paid by the Company for most of the quarter was $0.603
per pound, resulting in savings of approximately $0.8 million for the quarter.
Virtually all of the above contracts expired by the end of the Company's
first fiscal quarter of 1997 and new contracts have been established for the
remainder of 1997 and the first fiscal quarter of 1998. Projected chicken
prices for 1997 remain high, restricting the ability of the Company to enter
into chicken supply agreements as favorable as those obtained in 1996. In that
regard, the ceilings established for the 1997 and 1998 agreements are
approximately $0.650 to $0.660 per pound. As a result, prices paid for chicken
in 1997 may exceed 1996 levels. In anticipation of this and certain pressures
on labor costs, as described below, the Company selectively increased menu
prices on its products in December 1996 and plans to initiate further minor
price increases in 1997. The Company does not believe, in the current
competitive environment, that menu price increases will completely offset these
potential cost increases.
RESTAURANT LABOR COSTS
On March 23, 1997, the Company employed approximately 11,100 hourly-paid
restaurant employees. All of these employees are paid the Federal minimum wage
or wages based upon the Federal minimum wage. As a result, increases in the
Federal minimum wage rate have an impact on the Company's labor costs. On
October 1, 1996, the Federal minimum wage rate increased from $4.25 to $4.75 per
hour and will increase again on September 1, 1997 to $5.15 per hour. The
increase in restaurant labor costs in 1996 related to the 1996 increase was
approximately $1.2 million. The expected effect on restaurant labor costs of
the combined increases in 1996 and 1997 is estimated to
42
<PAGE>
be approximately $3.9 million during 1997. As stated above, these increases
will be partially offset by minor increases in menu prices.
OPERATING RESULTS
REVENUES
The Company's revenues consist primarily of four elements: (i) restaurant
sales at Company-operated restaurants, (ii) revenues from franchising, (iii)
revenues from manufacturing and (iv) other revenues.
RESTAURANT SALES. The Company's restaurant sales consist of gross cash
register receipts at Company-operated restaurants, net of sales tax.
REVENUES FROM FRANCHISING. The Company earns franchise revenues through
three types of agreements: (i) domestic development agreements, (ii)
international development agreements and (iii) franchise agreements. Domestic
development fees, international development fees and franchise fees are recorded
as deferred revenues when received and are recognized as revenue when the
restaurants covered by the fees are opened and/or all material services or
conditions relating to the fees have been substantially performed or satisfied
by the Company. The Company's standard franchise agreement also includes the
payment of a royalty fee based on net restaurant sales of franchisees. The
Company benefits from increases in franchised restaurant sales since it collects
a percentage of sales as royalties from franchisees. The royalty percentages
vary by franchisee, depending on the franchise agreement, with an average
royalty of approximately 4.4%. See "Business--Franchise Development".
REVENUES FROM MANUFACTURING. The Company's revenues from manufacturing
consist primarily of sales of fryers and other custom-fabricated restaurant
equipment from its manufacturing business to distributors and franchisees.
OTHER REVENUES. The Company's other revenues consist of net rental income
from properties owned and leased by the Company which are leased or subleased to
franchisees and third parties and interest income earned on notes receivable
from franchisees and third parties.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. The Company's cost of sales consists of food and
paper costs (including napkins, straws, plates, take-out bags and boxes). The
primary elements affecting cost of sales are sales volumes and chicken prices.
Other factors such as the Company's menu pricing, product mix, the amount of
dark meat purchased and promotional activities can also materially affect the
level of cost of sales as well as cost of sales as a percentage of restaurant
sales. Chicken prices are seasonal and are normally higher during the summer
months when demand for chicken is at its peak.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses are comprised
of personnel expenses, occupancy expenses, marketing expenses and other
operating expenses incurred at the restaurant level.
MANUFACTURING COST OF SALES. Manufacturing cost of sales represent the
cost of raw materials and direct labor used to manufacture the restaurant
equipment sold to franchisees and third parties and direct manufacturing
overhead applied during the manufacturing process.
GENERAL AND ADMINISTRATIVE. The Company's general and administrative
expenses consist of personnel expenses, occupancy expenses and other expenses
incurred at the corporate level. Corporate level expenses are primarily
incurred at the corporate offices of the Company in Atlanta,
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Georgia and San Antonio, Texas along with those incurred by field executives
located throughout the United States.
DEPRECIATION AND AMORTIZATION. The Company's depreciation consists of the
depreciation of buildings, leasehold improvements and equipment owned by the
Company, and amortization consists mainly of the amortization of intangible
assets.
RESULTS OF OPERATIONS
The following table presents selected revenues and expenses from the
Company's unaudited Consolidated Statements of Operations for the twelve weeks
ended March 24, 1996 and March 23, 1997 and the audited Consolidated Statements
of Operations for the fiscal years ended December 25, 1994, December 31, 1995
and December 29, 1996. Amounts are in millions and, accordingly, may differ
from amounts reported elsewhere in this Prospectus due to rounding. Percentage
increases and decreases presented in the table and presented throughout the
discussion set forth below are calculated based on the amounts reported in the
table below.
HISTORICAL REVENUES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED(1) TWELVE WEEKS ENDED
------------------------------------------------------------------ ---------------------------------
DECEMBER 25, DECEMBER 31, % CHANGE DECEMBER 29, % CHANGE MARCH 24, MARCH 23, % CHANGE
1994 1995 1994-1995 1996 1995-1996 1996 1997 1996-1997
------------ ------------ --------- ------------ --------- --------- --------- ---------
(unaudited)
(in millions, except for percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Restaurant sales...... $401.8 $426.7 6.2% $430.3 0.8% $ 94.5 $103.2 9.2%
Revenues from
franchising.......... 41.6 47.9 15.1 51.3 7.1 10.6 13.2 24.5
Revenues from
manufacturing........ 12.0 10.0 (16.7) 11.4 14.0 3.8 1.6 (57.9)
Other revenues........ 8.3 8.6 3.6 8.3 (3.5) 1.8 1.8 0.0
------ ------ ----- ------ ----- ------ ------ -----
Total revenues....... 463.7 493.2 6.4 501.3 1.6 110.7 119.8 8.2
COSTS AND EXPENSES:
Restaurant cost of
sales................ 133.9 139.3 4.0 142.2 2.1 30.6 33.2 8.5
Restaurant operating
expenses............. 206.9 216.9 4.8 215.5 (0.6) 47.7 51.7 8.4
Manufacturing cost of
sales................ 11.7 9.8 (16.2) 10.9 11.2 3.1 1.0 (67.7)
General and
administrative(2).... 72.2 86.6 19.9 72.7 (16.1) 18.1 20.3 12.2
Depreciation and
amortization......... 25.4 28.7 13.0 30.9 7.7 6.8 7.1 4.4
------ ------ ----- ------ ----- ------ ------ -----
Total cost and
expenses............ 450.1 481.3 6.9 472.2 (1.9) 106.3 113.3 6.6
------ ------ ----- ------ ----- ------ ------ -----
Income from operations $ 13.6 $ 11.9 (12.5) $ 29.1 144.5 $ 4.4 $ 6.5 47.7
====== ====== ===== ====== ===== ====== ====== =====
</TABLE>
_______________
(1) The Company has a 52/53-week fiscal year ending on the last Sunday in
December, which normally consists of 13 four-week periods. The fiscal year
ended December 31, 1995 included 53 weeks of operations.
(2) Includes executive compensation award of $10.6 million for the fiscal year
ended December 31, 1995.
44
<PAGE>
TWELVE WEEKS ENDED MARCH 23, 1997 AND MARCH 24, 1996
REVENUES
Total revenues increased by $9.1 million for the twelve weeks ended March
23, 1997, an increase of 8.2% over the same period in 1996.
RESTAURANT SALES. The Company reported restaurant sales of $103.2 million
during the twelve weeks ended March 23, 1997, compared to $94.5 million during
the same period of 1996. The increase in restaurant sales of $8.7 million or
9.2% is attributable primarily to an increase in comparable sales per restaurant
of 7.4%. The increase in comparable sales per restaurant is primarily due to
effective promotional activities run during the quarter, increases in sales at
re-imaged and renovated restaurants and certain minor menu price increases taken
during 1996. In addition, revenues for the first twelve weeks of 1997 include
four weeks of revenues for 47 restaurants that were acquired from franchisees
during late 1996. These restaurants were subsequently refranchised during the
first fiscal quarter of 1997.
REVENUES FROM FRANCHISING. Revenues from franchising increased $2.6
million or 24.5% during the first fiscal quarter of 1997 over the same period of
a year ago. Franchise royalty revenue increased $1.3 million or 13.8% and
franchise fees increased $1.3 million or 108.3%. The increase in franchise
royalty revenue was attributable to several factors, including an increase in
the number of franchised restaurants, a comparable sales increase of 4.8% for
domestic franchised restaurants and a comparable sales increase of 4.2% for
international franchised restaurants. At March 23, 1997, franchisees operated
1,637 restaurants, including 1,228 domestic restaurants and 409 international
restaurants. This compares to a total of 1,494 franchised restaurants at March
24, 1996, including 1,147 domestic restaurants and 347 international
restaurants.
The increase in franchise fees was primarily attributable to franchise fees
recorded for the sale of 47 Company-operated restaurants to a franchisee during
the first fiscal quarter of 1997. The Company recorded franchise fees totaling
$1.2 million related to this transaction. As a part of the same transaction,
the Company sold to the franchisee the rights to develop an additional 100
franchised restaurants in the state of California.
REVENUES FROM MANUFACTURING. Revenues from manufacturing decreased 57.9%,
or $2.2 million, for the twelve weeks ended March 23, 1997 compared to the
twelve weeks ended March 24, 1996. The decrease in revenues is primarily
attributable to the decrease in sales of smallwares. As part of the Company's
initiative to de-emphasize its manufacturing operations, the Company sold its
distribution business during the first fiscal quarter of 1996.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Cost of sales amounted to $33.2 million, or
32.2% of restaurant sales, during the first fiscal quarter ended March 23, 1997,
compared to $30.6 million, or 32.4% of restaurant sales, for the corresponding
period in 1996. The $2.6 million or 8.5% increase is primarily due to the
increase in restaurant sales during the first fiscal quarter of 1997, compared
to the first fiscal quarter of 1996.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses during the
first fiscal quarter of 1997 increased $4.0 million or 8.4% over the
corresponding period during 1996. As a percentage of restaurant sales,
operating expenses for the twelve weeks ended March 23, 1997 were 50.1%,
compared to 50.5% during the twelve weeks ended March 24, 1996. Personnel
expenses increased $2.3 million during the first fiscal quarter of 1997 over the
first fiscal quarter of 1996. As a percentage of sales, personnel expenses were
28.9% during the first fiscal quarter of 1997, compared to 29.1% during the same
period of a year ago. The increase in personnel expenses was due primarily to
the increase in sales and an increase in the Federal minimum wage rate effective
October 1, 1996 from
45
<PAGE>
$4.25 per hour to $4.75 per hour. Approximately 86% of the Company's restaurant
labor force are hourly employees whose wages are impacted by such an increase.
The Federal minimum wage rate is scheduled to increase again to $5.15 per hour
on September 1, 1997. Occupancy expenses increased $0.3 million during the
twelve weeks ended March 23, 1997, but as a percentage of sales remained at
4.0%. Marketing expenses increased $0.8 million and increased as a percentage
of sales to 7.7% during the first twelve weeks of 1997, compared to 7.5% during
the first twelve weeks of 1996. Marketing and promotional activities during the
first fiscal quarter of 1997 are related to the increase in comparable sales.
Other operating expenses during the first fiscal quarter of 1997 were up $0.6
million over the prior year, but as a percentage of sales were 9.6%, versus 9.8%
during the same period of a year ago.
MANUFACTURING COST OF SALES. Manufacturing cost of sales was down $2.1
million or 67.7% for the first twelve weeks of 1997 compared to the first twelve
weeks of 1996. The decrease was primarily due to the decrease in revenues from
manufacturing during the first twelve weeks of 1997 versus the first twelve
weeks of 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company incurred general and
administrative expenses of $20.3 million, or 16.9% of total revenues for the
twelve-week period ended March 23, 1997, compared to $18.1 million, or 16.4%,
for the comparable period in 1996. The increase in general and administrative
expenses as a percentage of revenues during the first fiscal quarter of 1997
versus the first fiscal quarter of 1996 is primarily attributable to an increase
in the accrual for corporate bonuses based on the improvement in the Company's
operating performance, compensation expense recorded for performance stock
options issued in 1996 and certain insurance accruals.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization amounted to
$7.1 million for the twelve-week period ended March 23, 1997, compared to $6.8
million for the corresponding period in 1996. The increase is primarily
attributable to the depreciation of fixed assets placed in service during the
period from March 24, 1996 to March 23, 1997. Fixed assets as of March 23, 1997
totaled $193.0 million, compared to $177.1 million as of March 24, 1996. See --
"Liquidity and Capital Resources." As a percentage of restaurant sales,
depreciation and amortization was 6.9% at March 23, 1997, versus 7.2% at March
24, 1996.
YEARS ENDED DECEMBER 29, 1996 (52 WEEKS) AND DECEMBER 31, 1995 (53 WEEKS)
REVENUES
Total revenues increased 1.6%, or $8.1 million, during the fiscal year
ended December 29, 1996, as compared to the fiscal year ended December 31, 1995.
RESTAURANT SALES. Restaurant sales increased 0.8%, or $3.6 million, from
the prior year. The increase in total restaurant sales is attributable to
several factors including an increase in comparable sales and an increase in the
number of Company-operated restaurants. The increase in restaurant sales from
1995 to 1996 was adversely affected by the fact that 1995 had 53 weeks of sales
activity, while 1996 had 52 weeks of sales activity. Comparable sales, computed
without regard to the extra week, increased by 2.9% for the year. Factors
contributing to the increase in comparable sales include the continuation of the
restaurant re-imaging and renovation program, new product introductions and food
promotions. At December 29, 1996, the Company operated 742 restaurants,
consisting of 120 Popeyes and 622 Churchs restaurants. This compares to a total
of 706 restaurants, with 117 Popeyes and 589 Churchs restaurants, at December
31, 1995.
REVENUES FROM FRANCHISING. Revenues from franchising increased $3.4
million or 7.1% from the prior year. Franchise royalty revenue increased $2.6
million or 6.3% and franchise fees increased $0.8 million or 12.5%. The
increase in franchise royalty revenue was attributable to several factors
including an increase in the number of franchised restaurants and a comparable
sales increase of 2.3% for domestic franchised restaurants. At December 29,
1996, franchisees operated 1,536 restaurants,
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<PAGE>
including 1,141 domestic restaurants and 395 international restaurants. This
compares to a total of 1,477 franchised restaurants at December 31, 1995,
including 1,136 domestic restaurants and 341 international restaurants. Factors
contributing to the increase in comparable sales, among other things, include
the continuation of the franchised restaurant re-imaging program, new product
introductions and promotional activities. The increase in franchise fees was
primarily attributable to the increase in the number of franchised restaurant
openings. Franchised restaurant openings for the fiscal year ended December 29,
1996 totaled 230, compared to franchised restaurant openings for the fiscal year
ended December 31, 1995 of 178.
REVENUES FROM MANUFACTURING. Revenues from manufacturing increased 14.0%,
or $1.4 million, for the fiscal year ended December 29, 1996 compared to the
fiscal year ended December 31, 1995. The increase in revenues is primarily
attributable to an increase in sales of proprietary fryers to franchised
restaurants and others in the QSR industry. This increase was partially offset
by a decrease in sales of smallwares. The Company sold its distribution
business during the first fiscal quarter of 1996.
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Cost of sales increased 2.1% or $2.9 million
from the prior year. Approximately $1.2 million or 0.8% of the increase was due
to higher restaurant sales during 1996. The remaining $1.7 million or 1.3%
increase is primarily attributable to higher chicken prices. The Company's
chicken prices per pound averaged $0.551 during fiscal year 1995, while the
price paid by the Company during fiscal 1996 reached as high as $0.600 per
pound. Expressed as a percentage of restaurant sales, cost of sales were 33.0%
for the year ended December 29, 1996 and 32.6% for the year ended December 31,
1995.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses decreased
$1.4 million or 0.6% from the corresponding period in 1995. Restaurant
operating expenses as a percentage of restaurant sales were 50.1% for fiscal
year 1996, compared to 50.8% for fiscal year 1995. Personnel expenses were down
$2.7 million or 2.2% from the prior year. Personnel expenses expressed as a
percentage of restaurant sales was 28.3% for the year ended December 29, 1996
and 29.1% for the year ended December 31, 1995. The decrease in personnel
expenses is primarily due to reductions in medical insurance and workers'
compensation costs. Management implemented a number of changes to the Company's
insurance programs during 1995 and 1996, which resulted in a decrease in
insurance claims and premiums during 1996. Partially offsetting this decrease
was an increase in personnel expenses due to the increase in minimum wage
levels. Marketing expenses were up $1.6 million or 5.0% over the prior year,
primarily due to an increase in food discount promotions used during 1996 to
stimulate sales.
MANUFACTURING COST OF SALES. Manufacturing cost of sales increased 11.2%,
or $1.1 million, for the year ended December 29, 1996 compared to the year ended
December 31, 1995. The increase is primarily attributable to the increase in
revenues from manufacturing during 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
including the executive compensation award, decreased $13.9 million or 16.1%
during fiscal year 1996 compared to fiscal year 1995. As a percentage of total
revenues, general and administrative expenses decreased from 17.6% for the
fiscal year 1995 to 14.5% for the fiscal year 1996. The decrease was a result
of a one-time non-cash charge recorded during fiscal year 1995, as well as
reductions in medical insurance costs and information technology costs. In
1995, the Company recorded a one-time charge related to a special compensation
award of $10.0 million payable in cash or common stock, at the election of the
recipient, to the senior management group of the Company in recognition of
exemplary performance provided to the Company since 1992. Medical insurance
costs in 1996 were $1.0 million less than the prior year due to reductions in
medical claims and premiums paid as a result of a new medical insurance program
put in place during late 1995. Operating expenses related to the management
information systems contract with IBM Global Services ("IGS") decreased $2.0
million in 1996 compared to 1995,
47
<PAGE>
as old management information systems were replaced by more efficient new
systems. Operating expenses under the information technology contract are
scheduled to decline as new equipment and systems are installed.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.2 million or 7.7% from the prior year. Depreciation and amortization as a
percentage of restaurant sales increased from 6.7% to 7.2% from the fiscal year
ended December 31, 1995 to the fiscal year ended December 29, 1996. The
increase is primarily due to an increase in depreciation, driven by fixed asset
additions made during 1996 totaling $46.4 million.
YEARS ENDED DECEMBER 31, 1995 (53 WEEKS) AND DECEMBER 25, 1994 (52 WEEKS)
REVENUES
Total revenues increased 6.4%, or $29.5 million, during the fiscal year
ended December 31, 1995 compared to the fiscal year ended December 25, 1994.
RESTAURANT SALES. Restaurant sales increased $24.9 million or 6.2% from
the prior year. The increase in total restaurant sales is attributable to
several factors including an increase in comparable sales and the inclusion of
an additional week of operating activity in the Statement of Operations for
fiscal year ended December 31, 1995. Fiscal year 1995 contained 53 weeks of
operating activity, compared to 52 weeks for fiscal year 1994. Comparable
sales, computed without regard to the extra week during 1995, increased 5.3% for
the year. Factors contributing to the increase in comparable sales include the
continuation of the restaurant re-imaging and renovation program, new product
introductions and promotional activities. Partially offsetting these increases
was a decrease in restaurant sales due to a reduction in the number of Company-
operated restaurants during 1995. As of December 31, 1995, the Company operated
706 restaurants compared to 717 restaurants as of December 25, 1994. The
decrease in Company-operated restaurants during this period is attributable to
the closing of underperforming restaurants and the sale of certain Company-
operated restaurants to franchisees.
REVENUES FROM FRANCHISING. Revenues from franchising increased $6.3
million or 15.1% from the prior year. Franchise royalty revenue increased $3.9
million or 10.4% and franchise fees increased $2.4 million or 60.0%. The
increase in franchise royalty revenue was attributable to several factors
including an increase in the number of franchised restaurants, a comparable
sales increase of 1.2% for domestic franchised restaurants and a comparable
sales increase of 0.9% for international franchised restaurants. At December
31, 1995, franchisees operated 1,477 restaurants, including 1,136 domestic
restaurants and 341 international restaurants. This compares to a total of
1,355 franchised restaurants at December 25, 1994, including 1,073 domestic
restaurants and 282 international restaurants. Factors contributing to the
increase in comparable sales include the new product introductions and
promotional activities.
The increase in franchise fees was primarily attributable to the increase
in the average franchise fee recognized as a result of new franchised restaurant
openings during 1995 and franchise fees recognized for certain terminated
franchise agreements.
REVENUES FROM MANUFACTURING. Revenues from manufacturing decreased 16.7%,
or $2.0 million, for the year ended December 31, 1995 compared to the year ended
December 25, 1994. The decrease is primarily attributable to the decrease in
revenues from sales of equipment and smallwares to franchisees. During 1994
significant revenues were recognized related to sales of restaurant equipment
and smallwares to a large group of franchisees in Southern California. The
franchisees converted restaurants formerly operated under a different brand name
to Popeyes restaurants during 1994.
48
<PAGE>
OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Cost of sales increased 4.0% or $5.4 million
from the prior year. The increase was primarily due to higher restaurant sales
in fiscal year 1995 compared to fiscal year 1994. Cost of sales as a percentage
of restaurant sales fell from 33.3% for fiscal year 1994 to 32.6% for fiscal
year 1995.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the year
ended December 31, 1995 increased $10.0 million or 4.8% from the year ended
December 25, 1994. Restaurant operating expenses as a percentage of restaurant
sales were 50.8% and 51.5% for the years ending December 31, 1995 and December
25, 1994, respectively. The increase in restaurant operating expenses was
primarily attributable to the increase in restaurant sales, which were up 6.2%
from the prior year. Personnel expenses increased $6.2 million or 5.2% as a
result of the increased sales volumes. Personnel expenses as a percentage of
sales fell from 29.4% of sales for the year ended December 25, 1994 to 29.1% for
the year ended December 31, 1995. Marketing expenses increased $3.1 million or
10.8%, primarily due to an increase in food discount promotions. These
promotions contributed largely to the comparable sales increase from 1994 to
1995. Marketing expenses as a percentage of restaurant sales were 7.5% for the
1995 fiscal year, compared to 7.2% for the 1994 fiscal year.
MANUFACTURING COST OF SALES. Manufacturing cost of sales decreased 16.2%,
or $1.9 million, for the year ended December 31, 1995 compared to the year ended
December 25, 1994. The decrease is primarily attributable to the decrease in
revenues from manufacturing during 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
including the executive compensation award, increased $14.4 million or 19.9%
during fiscal year 1995 compared to fiscal year 1994. General and
administrative expenses as a percentage of total revenues were 17.6% for the
year ended December 31, 1995, compared to 15.6% for the year ended December 25,
1994. The increase from fiscal 1994 to fiscal 1995 was primarily due to the
Company recording a one-time charge during fiscal year 1995, a favorable legal
settlement recorded during 1994 and an increase in information technology costs.
During fiscal 1995, the Company recorded a one-time charge related to a non-cash
special stock compensation award of $10.0 million to the senior management
group, payable in the form of cash or shares of common stock, at the election of
the recipient, of the Company in recognition of exemplary performance provided
to the Company since 1992. During fiscal 1994, the Company reached an agreement
with a former owner of the Company in which both parties agreed to release
certain claims against the other party. As a result of the agreement, the
Company recorded favorable legal settlements of $1.2 million during 1994.
Information technology expenses during 1995 were $1.0 million over those during
the prior year, primarily due to an increase in activities related to the
modernization of the Company's management information systems.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$3.3 million or 13.0% from the prior year. Depreciation and amortization as a
percentage of restaurant sales was 6.7% for the fiscal year ended December 31,
1995 and 6.3% for the fiscal year ended December 25, 1994. The increase is
primarily due to an increase in depreciation, driven by fixed asset additions
made during 1995 totaling approximately $39.0 million.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company has financed its business activities primarily with funds
generated from operating activities, proceeds from the sale of shares of common
stock and proceeds from long-term debt and a revolving line of credit.
49
<PAGE>
Net cash provided by operating activities for the fiscal years ended
December 25, 1994, December 31, 1995 and December 29, 1996 and the twelve weeks
ended March 24, 1996 and March 23, 1997 was $22.7 million, $28.0 million, $47.8
million and $6.4 million and $7.5 million, respectively. Increases in net cash
provided by operating activities for the above periods were primarily
attributable to increases in income from operations. Cash and cash equivalents
as of March 23, 1997 were $14.8 million, compared to $19.2 million as of
December 29, 1996 and $13.6 million as of December 31, 1995.
The Company's working capital deficit as of March 23, 1997 and as of
December 29, 1996 and December 31, 1995 was approximately $24.8 million, $23.2
million and $26.6 million, respectively. Generally, while restaurant businesses
acquire inventory and supplies through trade payables, they do not carry
significant investments in accounts receivable or inventory and sell most
products for cash. As a result, restaurant businesses frequently operate with a
working capital deficit since inventories are sold prior to the payment of the
trade payables related to those inventories. Although the Company does carry
accounts receivables from franchisees for royalty fees, it, like many of its
competitors, normally operates with a working capital deficit.
CAPITAL EXPENDITURES
During the Company's fiscal years ended December 31, 1995 and December 29,
1996 and the twelve weeks ended March 23, 1997, the Company invested $25.0
million, $34.0 million and $6.7 million, respectively, in various capital
projects as described below.
The cost per restaurant for the re-imaging and renovation program is
between $70,000 and $125,000. Significant sales increases have been experienced
in restaurants that have been re-imaged. As of March 23, 1997, this program was
over 65% completed (taking into account the AFDC Transaction) with the remainder
of the Company-operated restaurants scheduled for completion during 1997.
During 1995, 1996 and the first fiscal quarter of 1997, the Company invested
$15.5 million, $15.3 million and $2.2 million, respectively, in the re-imaging
and renovation program.
During 1995, 1996 and the first fiscal quarter of 1997, the Company
invested $0.3 million, $3.2 million and $2.6 million, respectively, in new
management information systems. In addition, the Company entered into
significant capital lease arrangements in connection with upgrading its
management information systems. Total information technology asset additions
financed through capital leases for fiscal years 1995 and 1996 and the first
fiscal quarter of 1997 were $9.1 million, $12.1 million and $4.5 million,
respectively.
In addition, during 1995, 1996 and the first fiscal quarter of 1997, the
Company invested $9.2 million, $15.5 million and $1.9 million in other capital
assets to update, replace and extend the lives of restaurant equipment and
facilities, construct a small number of new restaurant facilities and complete
other minor projects.
INFORMATION TECHNOLOGY AGREEMENT
The Company entered into an agreement with IGS commencing in August 1994,
for a ten-year term, to outsource the Company's information technology,
programming and computer operations. This agreement allows the Company to
update its corporate and restaurant systems with state-of-the-art computer
hardware and software. IGS purchases the hardware and software, performs
applications development and maintains and provides administrative, management
and support functions. Future minimum payments under the remaining term of this
agreement, exclusive of payments included as capital lease payments for systems
installed to date, approximates $60.0 million as of March 23, 1997.
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<PAGE>
EQUITY AND DEBT TRANSACTIONS
Concurrently with the issuance of the Old Notes, the Company executed a New
Credit Facility, which provides the Company with available borrowings of up to
$175 million, including the $50 million Term Loan, the $25 million Revolving
Facility and the $100 million Acquisition Facility. Proceeds from the Old Notes
and the Term Loan were used by the Company to complete the Refinancing and
portions of such proceeds will be used by the Company for working capital and
general corporate purposes. In connection with this Exchange Offer, it is
anticipated that the Old Notes will be exchanged for New Notes with
substantially identical terms as the Old Notes. See "Use of Proceeds" and
"Capitalization". Management believes that the Refinancing provides the Company
with the financial flexibility to support its growth plan, to further improve
operating efficiencies and to facilitate the execution of its global strategy.
For more information related to the payment terms, interest rates,
restrictive covenants and other provisions of the New Credit Facility and the
New Notes, see "Description of New Credit Facility" and "Description of New
Notes".
The Company has entered into significant commitments under capital leases
for the acquisition of assets, primarily related to the upgrading of its
management information systems. Capital lease obligations outstanding as of
December 25, 1994, December 31, 1995, December 29, 1996 and March 23, 1997 were
$3.1 million, $14.7 million, $23.6 million and $26.8 million, respectively.
Approximately $12.8 million in capitalized leases has been repaid as a result of
the Refinancing.
The Company's ability to make scheduled payments of principal and interest
on its indebtedness or to refinance its indebtedness (including the New Notes)
depends on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. Based upon the current level of operations and
anticipated growth, management of the Company believes that available cash flow,
together with available borrowings under the New Credit Facility and other
sources of liquidity, will be adequate to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled payments
under the New Notes and the New Credit Facility. There can be no assurance that
the Company's business will generate sufficient cash flow from operations or
that future borrowings will be available in an amount sufficient to enable the
Company to service its indebtedness, including the New Notes, or to make
necessary capital expenditures, or that any refinancing would be available on
commercially reasonable terms or at all. See "Risk Factors".
IMPACT OF INFLATION
The Company believes that, over time, it has generally been able to pass
along inflationary increases in its costs, through increased prices of its menu
items. Accordingly, the effects of inflation on the Company's net income
historically have not been, nor are such effects expected to be, materially
adverse. Due to competitive pressures, however, increases in prices of menu
items often lag inflationary increases in costs. See "Risk Factors--
Fluctuations in Cost of Chicken".
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BUSINESS
THE COMPANY
The Company is the second largest quick-service chicken restaurant company
in the world, operating and franchising QSRs under the primary trade names of
Popeyes and Churchs. At March 23, 1997, the AFC system included over 2,300
restaurants in 21 countries, with systemwide sales of over $1.4 billion:
<TABLE>
<CAPTION>
POPEYES CHURCHS TOTAL
------- ------- -----
<S> <C> <C> <C>
Domestic franchised.............. 782 446 1,228
Company operated................. 119 574 693
International (all franchised)... 136 273 409
----- ----- -----
Total......................... 1,037 1,293 2,330
===== ===== =====
</TABLE>
For the 52-week period ended March 23, 1997, the Company generated total
revenues and EBITDA of $510.4 million and $67.1 million, respectively.
The Company commenced operations in November 1992 following the
reorganization of its predecessor (pursuant to a plan of reorganization approved
by the United States Bankruptcy Court for the Western District of Texas, Austin
Division, on October 22, 1992). In connection with the plan of reorganization,
a new management team headed by Frank J. Belatti, former President and Chief
Operating Officer of Hospitality Franchise Systems, Inc. and, prior to that, of
Arby's, Inc., took control of Company operations. This management team has
engineered a dramatic improvement in the Company's financial performance,
franchise commitments and brand quality, including the following:
. Growth in total revenues and franchising revenues at compound annual
rates of 4.9% and 11.3% respectively, from 1993 to 1996;
. An increase in comparable restaurant sales for every year from 1993 to
1996;
. Growth in EBITDA at a compound annual rate of 23.1% from 1993 to 1996,
and an improvement in EBITDA margin from 8.0% to 12.9% over the same
period;
. An increase in the number of outstanding franchise commitments from
372 at year-end 1992 to 1,398 at March 23, 1997;
. An increase in international franchised restaurants from 172 in 14
foreign countries at year-end 1992 to 409 restaurants in 20 foreign
countries at March 23, 1997; and
. The re-imaging and renovation of 367 franchised restaurants and 387
Company-operated restaurants, with demonstrable subsequent increases
in average unit volume.
The Company has adopted a global strategy to increase revenues and profits
by the franchise development of its existing Popeyes and Churchs brands and the
acquisition of additional branded concepts. The Company's strategy is to (i)
deliver world class service and support to its franchisees by capitalizing on
the Company's size, state-of-the-art technology and leadership position, (ii)
promote franchisee development of traditional and non-traditional formats in new
and existing markets and (iii) provide new and existing franchisees with
investment opportunities in high value/high growth branded concepts outside of
the quick-service chicken restaurant industry. The Company believes that by
following this strategy it will become Franchisor of Choice(TM) which, when
combined with the Company's market leadership position, superior brand awareness
and strong franchisee relationships,
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will result in continued growth. To reflect this strategy, the Company changed
its name in October 1996 from America's Favorite Chicken Company to AFC
Enterprises, Inc.
FAR WEST PRODUCTS. The Company's Far West Products division ("Far West")
is a manufacturer of restaurant equipment and is located in San Antonio, Texas.
Far West's primary focus is to provide equipment for Popeyes and Churchs
restaurants to the Company and its franchisees, both domestically and
internationally, as well as for other QSR customers. The main product of Far
West is the Ultrafryer(TM) gas fryer. Far West sales for the Company's fiscal
year ended December 29, 1996 were approximately $11.4 million.
INDUSTRY OVERVIEW
Since 1972, the percentage of the average family's food budget spent on
meals consumed "away from home" has grown from approximately 37% of the food
budget to approximately 47% in 1995, according to Technomic. The QSR industry
now includes hamburger, pizza, chicken, Mexican food, fish/seafood, ice
cream/yogurt, donuts, bagels and various types of sandwiches. The QSR industry
has experienced significant growth in both revenues and number of restaurants in
recent years. Technomic estimates that sales at QSRs reached approximately
$102.7 billion in 1996. Industry-wide sales have grown at a CAGR of 5.1%
between 1993 and 1996. In 1997, the sales in the QSR industry are projected to
grow at 5.6%, according to Technomic.
According to CREST, the chicken segment of the QSR industry is the fourth
largest category of QSRs, after the hamburger, pizza and sandwich segments,
representing 7.6% of QSR industry sales in 1996. Within the United States,
quick-service chicken restaurants generated $8.6 billion in sales in 1996,
representing a 6.3% increase over 1995 sales. Based on Technomic data, in the
past the average annual unit volume for the chicken QSR segment has exceeded the
QSR industry average. While some QSR chicken chains are pursuing roasted and
rotisserie chicken, fried chicken (bone-in and chicken tenders) continues to
account for over 80% of chicken meals at all quick-service chicken restaurants.
In the Company's markets, KFC provides the most significant competition.
According to CREST, for the three-month period ended February 28, 1997, the
Company's market share for the Popeyes and Churchs brands was 8.2% and 6.1%,
respectively, of sales in the quick-service chicken restaurant industry.
Growth and profitability in the QSR industry in general and the quick-
service chicken restaurant industry in particular have been, and are expected to
continue to be, driven by companies that dynamically respond to consumers'
desire for value and convenience. Industry participants have developed new
"intercept marketing" and distribution initiatives to target consumers in high-
traffic non-traditional formats, as shown by the growth in the number of
restaurants in convenience stores, malls, strip shopping centers, office
buildings and supermarkets. In addition, successful companies in the QSR
industry have leveraged their brands and operational expertise into new markets.
Over the past five years, the QSR industry has experienced strong growth in
international markets where, management believes, consumers have developed a
taste for American branded fast food products. The chicken segment of the QSR
industry, in particular, is expected by management to witness significant growth
in demand in the Pacific Rim.
COMPANY STRENGTHS
LEADING MARKET POSITION. The Company is the second largest quick-service
chicken restaurant company in the world, with 2,330 Popeyes and Churchs
restaurants located in the United States and 20 foreign countries. In 1997, the
Company expects to franchise and open over 200 new restaurants in the U.S. and
approximately 90 new restaurants internationally (opening restaurants in eight
new foreign countries). At March 23, 1997, the Popeyes system included 901
domestic restaurants and the Churchs system included 1,020 domestic restaurants.
For the three-month period ended February 28, 1997, the Popeyes system generated
8.2% of sales in the domestic quick-service chicken
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restaurant industry, while the Churchs system generated 6.1% of sales in that
industry, in each case according to CREST.
HIGH BRAND AWARENESS. With Popeyes' New Orleans style fried chicken and
Churchs' traditional Southern fried chicken, management believes Popeyes and
Churchs have achieved a high level of positive brand awareness with both
franchisees and consumers. Over Popeyes' 25 years of operation and Churchs' 45
years of operation, the Company's restaurants have become two of the most highly
recognized brand names in the QSR industry. Management believes that the
Company's reputation for offering a unique selection of high quality food
products and value pricing, combined with a high level of customer service, has
created a valuable franchise with strong brand name recognition and customer
loyalty.
STRONG FRANCHISEE RELATIONSHIPS. The Company enjoys strong relationships
with its franchisees as a result of its ongoing efforts to revitalize Popeyes
and Churchs globally by (i) investing capital to re-image and renovate Company-
operated restaurants in both systems, (ii) providing strong operational,
marketing and technological support to franchisees, (iii) delivering operating
efficiencies and economies of scale to franchisees and (iv) promoting
restaurants within non-traditional formats. Additionally, the Company seeks to
provide new investment opportunities to its franchisees by acquiring and
franchising high value/high growth branded concepts. The number of franchised
restaurants has grown from 1,162 at year-end 1992 to 1,637 at March 23, 1997,
representing a CAGR of 8.4%, and the number of commitments to open new
franchised restaurants has increased to 1,398 at March 23, 1997, compared with
372 commitments at year-end 1992, representing a CAGR of 36.6%.
SIGNIFICANT OPERATIONAL EFFICIENCIES. By virtue of its size and leadership
position in the quick-service chicken restaurant industry, the Company benefits
from significant operational efficiencies. The Company's large number of
restaurants, centralized corporate management structure and ongoing
implementation of state-of-the-art management information systems enable the
Company to (i) tightly control restaurant and corporate-level costs, (ii)
capture economies of scale by leveraging its existing corporate overhead
structure and (iii) continuously monitor point-of-sale data in its Company-
operated restaurants to more efficiently manage restaurant operations. The
Company and its franchisees have experienced substantial levels of savings as a
result of the Company's size and related bargaining power, particularly with
respect to food, beverage and paper goods, and advertising and marketing
programs. In addition, the Company has achieved reductions in its general
corporate overhead expenses. These operational efficiencies have contributed to
the improvement of the Company's EBITDA margin from 8.0% in fiscal 1993 to 12.9%
in fiscal 1996.
STRONG MANAGEMENT TEAM. The Company's management team, led by Frank J.
Belatti and Dick R. Holbrook, has overseen a period of increasing total revenues
and EBITDA at CAGRs of 4.9% and 23.1%, respectively, from fiscal 1993 to fiscal
1996. Mr. Belatti and Mr. Holbrook previously held senior executive positions
at Hospitality Franchise Systems, Inc. and, prior to that, at Arby's, Inc., and
each has substantial experience in the franchising and operation of restaurant
service and hotel enterprises. With an average of more than 18 years of
experience in the QSR and related industries, the Company's top seven executives
have substantial expertise in developing brand awareness and enjoy an excellent
reputation in the industry. Members of the Company's management team possess a
diverse skill base that includes brand marketing, restaurant operations, product
and concept development and technology systems integration.
OPERATING STRATEGY
RE-IMAGE AND RENOVATE EXISTING RESTAURANTS. The Company believes that
significant opportunities exist to increase the Company's revenues and gain
efficiencies in its current markets by re-imaging and renovating franchised and
Company-operated Popeyes and Churchs restaurants. By the end of 1997, the
Company expects to complete its three year initiative to (i) add new signage,
new decor, contemporary lighting and, where appropriate, drive-thru service and
(ii) improve the efficiencies of its restaurant operating systems, including the
installation of energy efficient equipment at all of its
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restaurants. Partly as a result of its re-imaging and renovation efforts,
Popeyes and Churchs systemwide comparable restaurant sales have increased every
year since the implementation of this program in 1994.
INCREASE FRANCHISED RESTAURANTS. The Company believes that significant
opportunities exist to increase the number of franchised restaurants operated by
both new and existing franchisees and that growth through franchising can
provide significant additional revenue growth at relatively low levels of
capital expenditures by the Company. The Company intends to target restaurant
growth in markets where it has or can achieve sufficient penetration to justify
television advertising because sales at restaurants in the Company's media
efficient markets are generally 5% to 10% higher than sales in non-media
efficient markets. The number of restaurants systemwide has increased at a CAGR
of 5.1%, from approximately 1,885 at year-end 1992 to 2,330 at March 23, 1997,
and the Company anticipates that domestic franchisees will open over 200 new
restaurants in 1997, many of which will be in the Company's target markets.
CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to
aggressively pursue selected growth opportunities by (i) expanding its existing
brands to new domestic and international markets, (ii) promoting the development
of new points of distribution and (iii) acquiring additional branded concepts to
provide franchisees with a broad range of investment opportunities, thereby
generating a larger and more diversified stream of franchise revenues to the
Company. These initiatives include the following:
. NON-TRADITIONAL FORMATS. In response to new marketing opportunities
and consumer demand, the Company intends to continue to promote the
expansion of the number and type of non-traditional formats from which
it sells Popeyes and Churchs food products. In addition to the
traditional stand-alone models, the Company has franchised and opened
Popeyes and Churchs restaurants within community shopping plazas,
convenience stores, mall food courts, airports and other
transportation centers and grocery stores. For example, the Company
recently opened both franchised and Company-operated restaurants in
various locations of The Kroger Co., one of the nation's largest
supermarket operators.
. CO-BRANDING INITIATIVES. The Company intends to selectively enter into
co-branding arrangements in which Popeyes and Churchs restaurants
share facilities with other QSRs. Management believes that co-branding
represents an attractive revenue growth opportunity that provides
brand awareness in new markets and faster opening times (as
restaurants are constructed within existing QSR facilities), together
with reduced costs of entry and lower ongoing capital expenditures.
The Company has entered into two such arrangements and currently
franchises Churchs restaurants in 93 Cara Operations Limited Harvey's
hamburger restaurants in Canada and in 41 White Castle hamburger
restaurants throughout the Midwest, Southeast and Northeast. In
addition, White Castle has signed commitments to open 15 additional
Churchs restaurants within its existing White Castle hamburger
restaurants during 1997.
. EXPANSION IN INTERNATIONAL MARKETS. Management believes that
international expansion is an attractive growth opportunity due to (i)
advantageous per unit economics, resulting largely from lower food
and/or labor costs and less QSR competition abroad, (ii) fast-growing
foreign economies with an expanding group of QSR consumers and (iii)
well established markets for quick-service chicken restaurants in over
80 countries around the world. The Company's international operations
have increased from 172 franchised restaurants in 14 foreign countries
at year-end 1992, to 409 franchised restaurants in 20 foreign
countries at March 23, 1997. Additionally, commitments to develop
international franchised restaurants have risen from 161 at year-end
1992 to 831 at March 23, 1997.
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. NEW BRANDED CONCEPTS. Management intends to identify and acquire
additional high value/high growth brands which would benefit from the
Company's operating efficiency, management experience, state-of-the-
art technology, service commitment to franchisees and shared
administrative infrastructure. In line with this strategy, the
Company recently acquired all of the intangible assets relating to the
franchise business of Chesapeake Bagel, comprising 158 franchised
bagel bakeries restaurants concentrated in Washington, D.C., Maryland
and Virginia.
INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. The
Company's customized management information systems, typically not affordable by
smaller QSR chains, provide both the Company and its franchisees with the
ability to quickly capitalize on restaurant sales enhancement and profit
opportunities. The Company utilizes its management information systems to (i)
minimize waste and control labor costs, (ii) efficiently schedule labor, (iii)
effectively manage inventory and (iv) analyze product mix and various
promotional programs using point-of-sale information. For example, the Company
has installed a new point-of-sale FasFax(TM) system in over 80% of its Company-
operated restaurants, as part of an ongoing program scheduled for completion in
July 1997. This touch-screen cash register system provides management with real
time information on customer trends, sales mix, inventory management and product
pricing. The Company intends to demonstrate to new and existing franchisees the
efficiencies afforded by this system and other new technologies. Management
also believes that additional opportunities exist to improve operational
efficiencies and will continue to implement a "back office" automation system to
better manage food and labor costs. In 1997, management intends to launch AFC
Online, an intranet for franchisees that will provide operational support, a
restaurant development roadmap, a business planning template, marketing
information and certain other relevant information on a 24 hours a day, seven
days a week basis.
MAINTAIN HIGH QUALITY PRODUCTS, SUPERIOR CUSTOMER SERVICE AND STRONG
COMMUNITY RELATIONS. The Company seeks to ensure overall customer satisfaction
through consistency in food quality, service and restaurant appearance. The
Company maintains rigorous and ongoing quality control procedures over suppliers
and distributors to ensure that its product specifications are maintained. In
addition, the Company has taken an important leadership role in the
neighborhoods and communities it serves. Through its involvement in Habitat for
Humanity, the United Negro College Fund and the Hispanic Association of Colleges
and Universities, among others, the Company has established a meaningful
presence in the local communities it serves, while building customer loyalty and
brand awareness.
FRANCHISOR OF CHOICE(TM). The Company has adopted the Franchisor of
Choice(TM) global strategy, which will be implemented by (i) promoting
distinctly positioned brands, currently Popeyes, Churchs and, in May 1997,
Chesapeake Bagel, with other branded concepts to be acquired in the future, (ii)
developing multi-unit development territories, (iii) providing high quality
service and support to franchisees, (iv) providing franchisees with alternative
formats in innovative market settings, (v) redesigning business processes to
provide additional support to franchisees, including a multi-million dollar
investment in new technology, (vi) eliminating barriers to growth for existing
and new franchisees through new financial and real estate support mechanisms and
(vii) providing on-site or field support including site selection, construction
expertise, multinational supply and distribution, marketing, operations and
training.
BRANDS
The Company franchises and operates restaurants catering to different
segments of the QSR industry.
POPEYES CHICKEN AND BISCUITS. Popeyes Chicken and Biscuits was founded in
New Orleans in 1972 and is the market leader in the Cajun segment of the QSR
industry. With more than 1,025 restaurants worldwide, Popeyes was the second
largest quick-service chicken restaurant chain in 1996, in terms of sales.
Popeyes specialty menu item is fresh, hand-battered, bone-in fried chicken sold
in
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two flavors--New Orleans Spicy(TM) and Louisiana Mild(TM). Popeyes chicken is
complemented with a wide assortment of spicy and signature Cajun cuisine side
dishes, including red beans and rice, Cajun rice, Cajun fries and fresh,
buttermilk biscuits. Popeyes is positioned as a premium fried chicken for
customers who seek its full flavor and specialty blend of seasonings and spices.
Popeyes is also known for its "limited time offers" of unique items that
complement its base menu. Popeyes restaurants are generally found in urban
areas in traditional standalone locations, as well as in non-traditional formats
such as airports and other travel centers, supermarkets and mass merchandisers.
CHURCHS CHICKEN. Churchs Chicken, founded in San Antonio, Texas in 1952,
is one of the United States' oldest QSR chains and has approximately 1,300
restaurants worldwide, making Churchs the second largest quick-service chicken
restaurant chain, in terms of number of outlets. Churchs restaurants focus on
serving traditional Southern fried chicken in a simple, no frills restaurant
setting. Churchs menu items also include other Southern specialties including
fried okra, coleslaw, mashed potatoes and gravy, corn on the cob and honey
butter biscuits. Churchs is positioned as a value-oriented brand, providing
simple, traditional meals to price conscious consumers. Churchs restaurants are
traditionally found in urban areas where the reputation of a "neighborhood"
restaurant has been established. With its small footprint and a simple
operating system, Churchs is rapidly expanding into non-traditional formats such
as convenience stores, grocery stores and co-branding locations.
Internationally, Churchs has been very popular in the Far East, operating under
the brand name Texas Chicken(TM). In 1996, Churchs was the first U.S. based QSR
to open a restaurant in Vietnam.
CHESAPEAKE BAGEL. On May 5, 1997, the Company acquired from The American
Bagel Company all of the intangible assets of the franchise business of
Chesapeake Bagel. Located primarily in Washington, D.C., Maryland and Virginia,
Chesapeake Bagel currently franchises 158 bagel bakeries and restaurants and has
development agreements for over 225 additional restaurants, of which
approximately 50 stores are expected to open in 1997. Founded in 1981 in
Washington, D.C., Chesapeake Bagel had total systemwide sales of $95 million in
1996. In 1996, Chesapeake Bagel was the fourth largest bagel company in the
world and the world's largest "made from scratch" bagel company. "Made from
scratch" means that the bagels are prepared fresh at each location each day.
Chesapeake Bagel bakeries and restaurants offer a variety of freshly made items,
including a wide assortment of bagels and other baked goods, sandwiches, salads,
fountain drinks and specialty coffees. Several of the restaurants have viewing
areas that allow customers to experience the bagel making process. The
acquisition of Chesapeake Bagel gives the Company a presence in the rapidly
growing bagel segment of the QSR industry and diversifies its current brand
portfolio, supporting the Company's Franchisor of Choice(TM) global strategy.
SITE SELECTION
The Company has an extensive domestic site selection process for the
establishment of new Popeyes and Churchs restaurant locations, commencing with
an overall market plan for each intended area of development compiled by the
Company and the relevant area developer, if any. This market plan divides each
such area into trading areas based on a detailed computer analysis taking into
account such factors as competitor locations, locations of shopping centers and
other commercial draws, natural and other boundaries, residential and workplace
populations and customer profile information that measures propensities and
demand for various restaurant segments as well as for individual brands. Once a
market plan is established for a particular area, local real estate managers of
the Company or area developer together with local real estate brokers focus on
the most desirable sites in each designated trade area, taking into account such
factors as visibility, ready accessibility (particularly for evening drive-time
traffic), parking, signage and adaptability of any current structure, as well as
a determination of the availability of the site and the costs relating thereto.
A thorough analysis of each site, including the foregoing types of information,
photographs of the site and neighboring area, and a proposed layout and site
elevations, as well as other materials, must be submitted to the Company for
approval. In addition, leases must contain certain terms and provisions and are
subject to the approval of the Company. The Company emphasizes free-standing
pad sites and end-cap locations with
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ample parking and easy dinner-time access from high traffic roads. Highly
visible signage consistent with trade dress and local laws and regulations is
also aggressively pursued.
The Company's involvement in the international site selection process is
less significant due to the relative size and sophistication of the Company's
international franchisees, who independently conduct extensive site
investigations. International sites are often located in highly concentrated
urban areas and are built with a multi-floor layout to accommodate the higher
percentage of dine-in customers.
FRANCHISE DEVELOPMENT
The Company's global strategy includes the opening of substantially all new
restaurants through franchising additional restaurants to new and existing
franchisees. The Company enjoys strong relationships with its franchisees as a
result of its ongoing efforts to (i) revitalize Popeyes and Churchs globally by
investing capital to re-image and renovate Company-operated restaurants in both
systems, (ii) provide strong operational, marketing and technological support to
franchisees, (iii) deliver operating efficiencies and economies of scale to its
franchisees and (iv) promote the expansion of points of distribution to non-
traditional formats and new markets for existing brands, and by acquiring and
franchising high value/high growth branded concepts.
DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide
for the development of a specified number of restaurants within a defined
domestic geographic territory in accordance with a schedule of restaurant
opening dates. Development schedules generally cover three to five years and
typically have benchmarks for the number of restaurants to be opened and in
operation at six- to twelve-month intervals. Area developers currently pay a
development fee of $10,000 for the first restaurant to be developed and $5,000
for each additional restaurant to be developed under the same development
agreement. Such development fees are non-refundable and paid when the area
development agreement is executed. The Company currently offers exclusive and
non-exclusive development agreements. Under exclusive development agreements,
developers are granted a geographic area (the "Development Area") to develop a
Popeyes or Churchs restaurant within which the Company agrees to neither open
nor grant the right to open to anyone other than the developer another Popeyes
or Churchs restaurant (as the case may be) until 60 days after the expiration of
the development schedule set out in the development agreement subject, to the
other terms of such agreement. The Development Area generally does not include
military bases, public transportation facilities, toll road plazas,
universities, recreational theme parks and the interior structural confines of
shopping malls, even though such facilities may be located within a given
Development Area. If a developer fails to comply with the development schedule
contained in its development agreement, or otherwise defaults under the
development agreement or under any other agreement with the Company, the Company
may, among other things (i) terminate or reduce the territorial exclusivity in
the Development Area or reduce the size of the Development Area, (ii) terminate
the development agreement, (iii) reduce the number of restaurants that the
developer can develop under the development agreement, (iv) accelerate the
development schedule, (v) withhold site approval or (vi) refuse to permit the
opening of restaurants under construction. Under non-exclusive development
agreements, the developer is not afforded any territorial exclusivity and the
Company reserves the right to establish or franchise any restaurants in
proximity to the development territory described under such agreement.
TURNKEY DEVELOPMENT. In order to expedite development of domestic
franchised restaurants, the Company may build restaurants in certain markets
which will be subsequently sold to qualifying franchisees as franchised
restaurants ("Turnkey Units"). The Company is in discussions with a lender to
provide up to $15 million in revolving construction financing to AFC and
permanent financing to qualifying franchisees for these Turnkey Units.
INTERNATIONAL DEVELOPMENT AGREEMENTS. The Company enters into development
agreements with qualifying parties to develop Popeyes or Churchs franchised
restaurants in jurisdictions outside of the United States ("International
Development Rights"). International Development Rights may include
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one or more countries or limited geographic areas within a particular country.
The terms of the development agreements for International Development Rights
are, in most respects, similar to domestic development agreements.
International development agreements also require the payment of a negotiated
"territorial fee" for granting development rights in the new country as well as
a pre-payment of a portion of the franchise fee for each franchised restaurant
to be developed under the agreement. International development agreements also
include additional provisions necessary to address the multi-national nature of
the transaction (including foreign currency exchange, taxation matters and
international dispute resolution provisions) and are also subject to
modification necessary to comply with the requirements of applicable local laws,
such as laws relating to technology transfers, export/import matters and
franchising.
FRANCHISE AGREEMENTS. Once a site has been approved by the Company and the
property has been acquired by the developer either by purchase or lease, the
Company and the area developer enter into a franchise agreement under which the
area developer becomes the franchisee for the specific restaurant to be
developed at such site. Current franchise agreements typically provide for
payment of a franchise fee of $15,000 per restaurant. Franchise fees for mass
merchandise locations (including department stores and supermarkets) are
generally $10,000 for the first location and $5,000 for each additional mass
merchandise location under the same development agreement. In addition, the
Popeyes and Churchs franchise agreements require franchisees to pay a 5% royalty
on net restaurant sales and a 3% (with respect to Popeyes) and 4% (with respect
to Churchs) national advertising fund contribution (reduced to a maximum of 1%
if a local advertising co-operative is formed). Certain of the Company's older
franchise and area development agreements provide for lower royalties and
reduced franchise and area development fees. Such older forms of agreements
constitute a decreasing percentage of all franchise agreements.
Since March 1997, the Company has offered franchise agreements which
provide for an area of limited exclusivity (the "Protected Area") surrounding
the Popeyes or Churchs franchise in which the Company may neither develop nor
grant to others the right to develop another Popeyes or Churchs restaurant (as
the case may be), except that the Company generally excepts from such Protected
Area certain specified locations. The Protected Area generally consists of an
area equal to the lesser of (i) a one-mile radius from the franchised restaurant
or (ii) an area surrounding the franchised restaurant, encompassing a population
(residential and/or daytime commercial) of 50,000 people. The Protected Area
does not include (i) enclosed shopping malls, (ii) existing franchised
restaurants and/or franchised restaurants for which franchise agreements were
previously granted or (iii) alternative venues, including transportation
facilities, toll roads and major thoroughfares, educational facilities,
institutional dining facilities, governmental facilities, military bases,
amusement parks and other locations, even though such facilities may be located
within the Protected Area.
All of the Company's franchise agreements require that each restaurant
operates in accordance with the operating procedures, adheres to the menu
established by the Company and meets applicable quality, service and cleanliness
standards. The Company may terminate the franchise rights of any franchisee who
does not comply with such standards. The Company is specifically authorized to
take accelerated action if any franchised restaurant presents a health risk.
The Company believes that maintaining superior food quality, a clean and
pleasant environment and excellent customer service are critical to the
reputation and success of the Popeyes and Churchs systems and it intends to
aggressively enforce applicable contractual requirements. Franchisees may
contest such terminations.
The terms of international franchise agreements are substantially similar
to domestic franchise agreements, except that such agreements may be modified to
reflect the multinational nature of the transaction and to comply with the
requirements of applicable local laws. The international developer is required
to partially pre-pay a franchise fee (typically $35,000) at the time the
development agreement is entered into, along with a development fee (usually
$5,000 to $10,000 for each development commitment).
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MARKETING AND COMMUNITY ACTIVITY
Popeyes and Churchs products are marketed to their respective customer
bases using a three-tiered marketing strategy. First, electronic media (local
TV and radio) create awareness for the products and spark consumer interest in
particular product offerings. Second, print media (newspaper ads, free-standing
inserts and direct mail) generate trial by offering a purchase incentive--often
a coupon--to buy a new product or promotional item. Finally, signage and point-
of-purchase materials at Popeyes and Churchs restaurants support the promotional
activity. Both Popeyes and Churchs offer consumers a new program each month to
maintain consumer product interest. New product introductions and "limited time
only" promotional items also play major sales building roles and create regular
repeat customers.
Both franchised and Company-operated Popeyes and Churchs restaurants
contribute to a national advertising fund to pay for the development of
marketing materials and to a local advertising fund to support programs in their
local markets. For the fiscal year ended December 29, 1996, the Company
contributed approximately $21.5 million to the Popeyes and Churchs advertising
funds.
Both Popeyes and Churchs are also heavily involved in community activities
and support programs that often have an educational theme. Through The AFC
Foundation, Inc., a non-profit foundation, the Company has agreed to sponsor and
help construct 200 homes worldwide through Habitat For Humanity, a non-profit
sponsor of housing construction for the poor. In addition, the Company supports
the United Negro College Fund and the Hispanic Association of Colleges and
Universities with promotional fund raisers. Both brands also sponsor Adopt-A-
School programs.
COMPETITION
The QSR industry is intensely competitive with respect to price, customer
service, concept, location, convenience and food quality. The industry is
mature and competition can be expected to increase. In addition, there are many
well established food service competitors with substantially greater financial
and other resources than the Company. Franchised and Company-operated
restaurants compete with a number of national and regional restaurant chains, as
well as with locally-owned restaurants offering low-priced and medium-priced
foods. Convenience stores, grocery stores, delicatessens, food counters,
cafeterias and other purveyors of moderately priced and quickly prepared foods
also compete with the Company. The Company's primary competitor in the quick-
service chicken restaurant market is KFC, which has a majority of the quick-
service chicken restaurant market. The Company's next largest competitors in
the quick-service chicken restaurant market are a number of regional chicken
restaurant chains. According to data provided by CREST, Company sales are over
five times the sales of the Company's next largest competitor. Other QSR
competitors include hamburger, pizza, sandwich and Chinese food QSRs, other
purveyors of carry-out food and convenience dining establishments, including
national restaurant chains.
The Company believes that product quality, taste, name recognition,
convenience of location, speed of service, menu variety, price and ambiance are
the most important competitive factors in the QSR industry and that its
restaurants effectively compete in such categories. The Company regularly
monitors its competitors' prices and adjusts its prices and marketing strategy
in light of existing conditions.
MANAGEMENT INFORMATION SYSTEMS
In 1994, the Company entered into a ten-year outsourcing agreement with
IGS. Under this agreement, IGS is in the process of customizing the Company's
management information systems. Typically not affordable by smaller quick-
service restaurant chains, the IGS management information system provides the
Company with the ability to quickly capitalize on restaurant sales enhancement
and profit opportunities. The Company utilizes its management information
systems to (i) minimize waste and control labor costs, (ii) efficiently schedule
labor, (iii) effectively manage inventory and
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(iv) analyze product mix and various promotional programs using point-of-sale
information. The IGS agreement has allowed the Company to implement a new
point-of-sale FasFax(TM) system in over 80% of its Company-operated restaurants,
as an ongoing program scheduled for completion in July 1997. This touch-screen
cash register system allows for a significant increase of timely information on
customer trends, sales mix, inventory management and product pricing. The
Company intends to demonstrate to new and existing franchisees the efficiencies
afforded by the FasFax(TM) system and other new technologies. Management
believes that the IGS agreement has provided the Company with a number of
additional opportunities to improve operational efficiencies. In that regard,
the Company will continue to implement a "back office" automation system to
better control food and labor costs. In 1997, management intends to launch AFC
Online, an intranet for franchisees that provides operational support, a
restaurant development roadmap, a business planning template, marketing
information and certain other relevant information on a 24 hours a day, seven
days a week basis. Finally, the IGS agreement has allowed the Company's numerous
departments to join a common computer network using a common infrastructure. See
Notes 9 and 14 to the Company's Consolidated Financial Statement.
SUPPLIERS
Franchisees are generally required to purchase all ingredients, products,
materials, supplies, and other items necessary in the operation of their
business solely from suppliers who (i) demonstrate, to the continuing
satisfaction of the Company, the ability to meet the Company's standards and
specifications for such items, (ii) possess adequate quality controls and
capacity to supply franchisees' needs promptly and reliably and (iii) have been
approved in writing by the Company. Notwithstanding the above, Company-operated
restaurants are obligated by various agreements to serve certain Coca-Cola(R) or
Dr Pepper(R) beverages exclusively. The Company also has an agreement with
Diversified Foods and Seasonings, Inc. ("Diversified") which terminates in March
2029 under which the Company is required to purchase certain proprietary
products made exclusively by Diversified. Moreover, Diversified is the sole
supplier of certain proprietary products for the Popeyes system. Diversified
sells only to Company approved distributors who in turn sell to franchised and
Company-operated restaurants. In the fiscal year ended December 29, 1996, the
Popeyes system purchased approximately $29.4 million of proprietary products
made by Diversified. The Company recently settled an action brought by
Diversified relating to the Diversified supply agreement. See "--Litigation".
The Popeyes and Churchs systems purchase fresh chicken from 16 suppliers from 37
plant locations.
Supplies are generally provided to franchised and Company-operated
restaurants in the Popeyes and Churchs systems pursuant to supply agreements
negotiated by Popeyes Operators Purchasing Cooperative Association, Inc.
("POPCA") and Churchs Operators Purchasing Association, Inc. ("COPA"),
respectively, each a not-for-profit corporation that was created for the purpose
of consolidating the collective purchasing power of the franchised and Company-
operated restaurants and negotiating favorable terms therefor. The purchasing
cooperatives are not obligated to purchase, and do not bind their members to
commitments to purchase, any supplies. Membership in each cooperative is open
to all franchisees. Since 1995, the Company's franchise agreements have
required that each franchisee joins its respective purchasing cooperative as a
member. All Company-operated Popeyes and Churchs restaurants are members of
POPCA or COPA, as the case may be. Substantially all of the Company's domestic
franchisees participate in POPCA or COPA.
TRADEMARKS AND LICENSES
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including the
marks Popeyes(R), Churchs(R), Popeyes Chicken and Biscuits(R) and each brand's
logo utilized by the Company and its franchisees in virtually all Popeyes and
Churchs restaurants domestically. The Company also has trademark applications
pending for a number of additional marks, including Gotta Love It(TM), Day of
Dreams(TM) and Franchisor of Choice(TM). In addition, the Company has registered
or made application to register the marks (or, in certain cases, the marks in
connection with additional words or graphics) in approximately 100 foreign
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countries, although there can be no assurance that any mark is registrable in
every country registration is sought. The Company considers its intellectual
property rights to be important to its business and actively defends and
enforces them.
FORMULA AGREEMENT. The Company has entered into a formula licensing
agreement, as amended (the "Formula Agreement"), with Alvin C. Copeland, the
former owner of the Popeyes and Churchs restaurant systems, and Diversified,
which calls for the worldwide exclusive licensing to the Company of the spicy
fried chicken formula and whatever additional recipes and formulas for other
Popeyes products that Alvin C. Copeland may own, if any. The Formula Agreement
provides for monthly royalty payments of $237,500 until April 1999, and
thereafter, monthly royalty payments of $254,166 until March 2029. The Company
recently settled an action brought in connection with the Formula Agreement.
See "--Litigation".
KING FEATURES AGREEMENTS. The Company currently has a number of domestic
and international agreements with The Hearst Corporation, King Features
Syndicate Division ("King Features") under which the Company has the exclusive
license to use the image and likeness of the cartoon character "Popeye" (and
certain companion characters such as "Olive Oyl") in connection with the
operation of franchised and Company-operated Popeyes restaurants worldwide.
Under the current agreements, the Company is obligated to pay to King Features a
royalty of 0.1% of the first $1 billion of Popeyes systemwide sales and 0.05%
for the next $2 billion of such sales. The King Features agreements
automatically renew annually.
SEASONALITY
The Company's performance varies from period to period as the result of the
general seasonal trends characteristic of the QSR industry. The Company has
historically experienced the strongest operating results at both Popeyes and
Churchs restaurants during the summer months while operating results have been
somewhat lower during the winter season. In particular, Popeyes has experienced
a slight slowdown in operations from October to December and Churchs has
experienced a minor decrease in sales after the Christmas holidays. The holiday
season and inclement winter weather reduce the volume of consumer traffic at
QSRs and may impair the ability of restaurants to conduct regular operations.
The impact of these seasonal effects may be increased as the Company expands
more broadly from its base in the south and southwest of the United States to
locations throughout the country and overseas.
REGULATION
The Company is subject to various Federal, state and local laws affecting
its business, including various health, sanitation, fire and safety standards.
Newly constructed or remodeled restaurants are subject to state and local
building code and zoning requirements. In connection with the remodeling and
alteration of the Company's restaurants, the Company may be required to expend
funds to meet certain Federal, state and local regulations, including
regulations requiring that remodeled or altered restaurants be accessible to
persons with disabilities. Difficulties or failures in obtaining the required
licenses or approvals could delay or prevent the opening of new restaurants in
particular areas.
The Company is also subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. A significant number of
the Company's food service personnel are paid at rates related to the Federal
minimum wage and increases in the minimum wage, including those recently enacted
by the Federal government, have increased and, in the fall of 1997, will again
increase the Company's labor costs.
Certain states and the Federal Trade Commission require franchisors such as
the Company to transmit specified disclosure statements to potential franchisees
before granting a franchise. Additionally, some states require franchisors to
register their franchise with the state before it may offer
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a franchise. The Company believes that its Uniform Franchise Offering Circulars
(together with any applicable state versions or supplements) comply with both
the Federal Trade Commission guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises. The Company is
also subject to various Federal, local and state laws regulating the discharge
of pollutants into the environment. The Company believes that it conducts its
operations in substantial compliance with applicable environmental laws and
regulations as well as other applicable laws and regulations governing its
operations.
ENVIRONMENTAL MATTERS
Approximately 200 of the Company's owned and leased properties are known or
suspected to have been used by prior owners or operators as retail gas stations,
and a few of these properties may have been used for other environmentally
sensitive purposes. Many of these properties previously contained underground
storage tanks ("USTs") and some of these properties may currently contain
abandoned USTs. As a result of the use of oils and solvents typically
associated with automobile repair facilities and gas stations, it is possible
that petroleum products and other contaminants may have been released at these
properties into the soil or groundwater. Under applicable Federal and state
environmental laws, the Company, as the current owner or operator of these
sites, may be jointly and severally liable for the costs of investigation and
remediation of any such contamination. As a result, after an analysis of its
property portfolio, including testing of soil and groundwater at a
representative sample of its facilities, the Company accrued a reserve of
approximately $6.0 million for environmental remediation liabilities. While the
Company is currently not subject to any administrative or court order requiring
remediation at any of its properties, the Company is considering active
remediation at a limited number of facilities containing USTs.
INSURANCE
The Company carries property, liability, business interruption, crime, and
workers' compensation insurance policies, which it believes are customary for
businesses of its size and type. Franchisees are also required to maintain
certain minimum standards of insurance with insurance companies satisfactory to
the Company pursuant to their franchise agreements, including commercial general
liability insurance, workers' compensation insurance, all risk property and
casualty insurance and automobile insurance. Under the current form of
franchise agreement, such insurance must be issued by insurers approved by the
Company.
PROPERTIES AND LEASING
The Company either owns or leases the land and buildings for its Company-
operated restaurants. In addition, in certain circumstances, the Company owns
or leases land and buildings which it then leases or subleases to its
franchisees and third parties. While the Company expects to continue to lease
many of its sites in the future, the Company also may purchase the land and/or
buildings for restaurants to the extent acceptable terms are available. The
majority of the Company's restaurants are located in retail community shopping
centers and freestanding, well-trafficked locations.
Restaurants leased to the Company are typically leased under "triple net"
leases that require the Company to pay real estate taxes, maintenance costs and
insurance premiums and, in some cases, to pay percentage rent based on sales in
excess of specified amounts. Generally, the Company's leases have initial terms
of 20 years with options to renew for two additional five-year periods. Typical
leases or subleases by the Company to franchisees are triple net to the
franchisee, provide for a minimum rent, based upon prevailing market rental
rates, and have a term that usually coincides with the term of the franchise
agreement for the location, often being 20 years with renewal options. Such
leases are typically cross-defaulted against the corresponding franchise
agreement for that site.
The Company's headquarters are located in an approximately 102,000 square
feet of leased and subleased office space in Atlanta, Georgia. The leased
space, covering approximately 87,000
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square feet, is subject to extensions through 2013, and the subleased space is
subject to extensions through 2003. The Company believes that its existing
headquarters provides sufficient space to support its current needs. The
Company's accounting and computer facilities and its Far West Products
manufacturing facilities are located in San Antonio, Texas and are housed in
three buildings that are located on approximately 16 acres of land owned by the
Company.
The New Credit Facility is secured by substantially all of the properties
and assets of the Company.
EMPLOYEES AND PERSONNEL
As of March 23, 1997, the Company employed approximately 2,000 full-time
salaried employees and approximately 11,100 full-time and part-time hourly
employees. Of the Company's full-time employees, 65 are involved in overseeing
restaurant operations, 1,450 are involved in the management of individual
restaurants and all remaining employees are responsible for corporate
administration and business development. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes that the
dedication of its employees is critical to its success, and that its
relationship with its employees is good.
LITIGATION
In June 1996, the Company was named as a defendant to a certain lawsuit
commenced by Alvin C. Copeland and Diversified against Flavorite Laboratories,
Inc. ("Flavorite") alleging misappropriation of certain trade secrets and
tortious interference with contractual relations, among other things, with
respect to the formula used in the preparation of Popeyes fried chicken products
and the supply of certain ingredients used in such products. In June 1997, this
lawsuit was settled and, among other things, the parties agreed (a) to extend
the term of the existing Diversified supply agreement until March 2029, subject
to further renewal, and (b) that the Formula Agreement will be extended through
March 2029 at the monthly royalty rate in effect in 1999. See "--Suppliers" and
"--Trademarks and Licenses".
While the Company is party to a number of other pending legal proceedings
that have arisen in the ordinary course of its business, management does not
believe that the Company is a party to any pending legal proceeding, the
resolution of which would have a material adverse effect on the Company's
financial condition.
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OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock ("Common Stock") as of June 15, 1997, by
each person who is known by the Company to own beneficially more than 5.0% of
the Common Stock, by each director of the Company, by each of the Named
Executive Officers (as defined herein) and by all directors and officers of the
Company, as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES OF COMMON
NAME(1) OF COMMON STOCK STOCK
- ------------------------------------------------------------- ---------------- ----------
<S> <C> <C>
Freeman Spogli & Co. Incorporated(2)(3)...................... 18,993,066 54.7%
Canadian Imperial Bank of Commerce(4)........................ 6,312,724 18.2%
PENMAN Private Equity and Mezzanine Fund, L.P.(5)............ 2,110,341 6.1%
ML IBK Positions, Inc.(6).................................... 2,050,000 5.9%
Frank J. Belatti(7)(8)....................................... 2,378,652 6.8%
Dick R. Holbrook(7)(9)....................................... 1,012,610 2.9%
Samuel N. Frankel(7)(10)..................................... 933,750 2.7%
William M. Van Epps(7)(11)................................... 76,659 *
Hala R. Moddelmog(7)(12)..................................... 61,774 *
Mark J. Doran(3)............................................. --
Paul Farrar(13).............................................. --
Matt L. Figel(14)............................................ --
Todd M. Halloran(3).......................................... --
Kelvin J. Pennington(5)...................................... --
John M. Roth(3).............................................. --
Ronald P. Spogli(3).......................................... --
William M. Wardlaw(3)........................................ --
Directors and officers as a group (15) persons (15).......... 25,613,582 73.8%
</TABLE>
- --------------
* Less than 1.0% of outstanding shares of Common Stock.
(1) The persons named in this table have sole voting power and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and the
information contained in this table and these notes.
(2) The shares shown as beneficially owned by FS&Co. are held of record as
follows: 18,259,483 shares owned by FS Equity Partners III, L.P. ("FSEP
III") and 733,583 shares owned by FS Equity Partners International, L.P.
("FSEP International"). FS Capital Partners, L.P. ("FS Capital"), an
affiliate of FS&Co., is the sole general partner of FSEP III. FS Holdings,
Inc. ("FSHI") is the sole general partner of FS Capital. The sole general
partner of FSEP International is FS&Co. International, L.P. ("FS&Co.
International"). The sole general partner of FS&Co. International is FS
International Holdings Limited ("FS International Holdings"), an affiliate
of FS&Co. As the general partners of FS Capital (which is the general
partner of FSEP III) and FS&Co. International (which is the general partner
of FSEP International), respectively, FSHI and FS International Holdings
have the sole power to vote and dispose of the shares of the Company held by
each of FSEP III and FSEP International, respectively.
(3) Messrs. Spogli, Roth and Wardlaw, each of whom is a member of the Board, and
Mr. Bradford M. Freeman, Mr. J. Frederick Simmons and Mr. Charles P.
Rullman, Jr. are the sole directors, officers and shareholders of FS&Co.,
FSHI and FS International Holdings, and as such may be deemed to be the
beneficial owners of the shares indicated as beneficially owned by FS&Co.
Messrs. Doran and Halloran, each of whom is a member of the Board, are
affiliated with FS&Co. The business address of each of FS&Co. and its
general partners, FSHI and its sole directors, officers and shareholders, FS
Capital and FSEP III is 11100 Santa Monica Boulevard, Suite 1900, Los
Angeles,
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California 90025. The business address of each of FS International
Holdings, FS&Co. International and FSEP International is c/o Paget-Brown &
Company, Ltd., West Winds Building, Third Floor, P.O. Box 1111, Grand
Cayman, George Town, Cayman Islands, B.W.I. The business address of Messrs.
Doran and Halloran is 599 Lexington Avenue, 18th Floor, New York, New York
10022.
(4) The business address for Canadian Imperial Bank of Commerce is BCE Place,
Bay Street, P.O. Box 500, Toronto, Ontario MBJ258.
(5) Mr. Pennington, who is a member of the Board, and Mr. Lawrence C. Manson,
Jr. are general partners of PENMAN Asset Management, L.P. ("PENMAN Asset"),
the general partner of PENMAN Private Equity and Mezzanine Fund, L.P.
("PENMAN Equity"), and as such may be deemed to be the beneficial owners of
the shares indicated as beneficially owned by PENMAN. The business address
of PENMAN Equity, PENMAN Asset and each of its general partners is 333 West
Wacker Drive, Suite 700, Chicago, Illinois 60606.
(6) The business address of ML IBK Positions, Inc. is c/o Merrill Lynch & Co.,
Inc., Corporate Credit Division, World Financial Center, South Tower, 7th
Floor, New York, New York 10080.
(7) The business address of the Company's executive officers is c/o AFC
Enterprises, Inc., Six Concourse Parkway, Suite 1700, Atlanta, Georgia
30328.
(8) Includes 1,048,683 shares of Common Stock issuable with respect to options
exercisable within 60 days as of June 15, 1997.
(9) Includes 352,610 shares of Common Stock issuable with respect to options
exercisable within 60 days as of June 15, 1997.
(10) Includes 273,750 shares of Common Stock issuable with respect to options
exercisable within 60 days as of June 15, 1997.
(11) Includes 41,959 shares of Common Stock issuable with respect to options
exercisable within 60 days as of June 15, 1997.
(12) Includes 27,074 shares of Common Stock issuable with respect to options
exercisable within 60 days as of June 15, 1997.
(13) Mr. Farrar's mailing address is c/o Canadian Imperial Bank of Commerce, BCE
Place, Bay Street, P.O. Box 500, Toronto, Ontario MBJ258.
(14) Mr. Figel's business address is c/o Doramar Capital, 300 South Grand
Avenue, Suite 2900, Los Angeles, California 90071.
(15) Includes 18,993,066 shares of Common Stock held by affiliates of FS&Co.,
2,110,341 shares of Common Stock held by an affiliate of PENMAN Equity and
1,774,856 shares of Common Stock issuable with respect to options granted
to certain executive officers that are exercisable within 60 days as of
June 15, 1997.
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MANAGEMENT
The directors, executive officers and senior management of the Company are
listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- --------------------------------------------------------
<S> <C> <C>
Frank J. Belatti 49 Chairman, Chief Executive Officer and Director
Dick R. Holbrook 44 President, Chief Operating Officer and Director
Samuel N. Frankel 59 Executive Vice President, Secretary, General Counsel
and
Director
Gerald J. Wilkins 39 Chief Financial Officer
Jon Luther 53 President of Popeyes Chicken & Biscuits
Hala R. Moddelmog 41 President of Churchs Chicken
William M. Van Epps 49 President of Chesapeake Bagel
Mark J. Doran 33 Director
Paul Farrar 62 Director
Matt L. Figel 37 Director
Todd M. Halloran 35 Director
Kelvin J. Pennington 39 Director
John M. Roth 38 Director
Ronald P. Spogli 49 Director
William M. Wardlaw 50 Director
</TABLE>
Mr. Belatti has served as the Chairman, Chief Executive Officer and a
director of the Company since it commenced operations in November 1992 following
the reorganization of its predecessor. Prior to joining the Company, from 1990
to 1992, Mr. Belatti was employed by Hospitality Franchise Systems, Inc., the
franchisor for Ramada and Howard Johnson hotels ("HFS"), as President and Chief
Operating Officer of HFS. From 1989 to 1990, Mr. Belatti was President and
Chief Operating Officer of Arby's, Inc. ("Arby's") and from 1985 to 1989 he
served as the Executive Vice President of Marketing at Arby's. From 1986 to
1990, Mr. Belatti also served as President of Arby's Franchise Association
Service Corporation ("AFA"), which created and developed the marketing programs
and new product development for the Arby's system. Mr. Belatti received the
1996 International Foodservice Management Association Silver Plate award for
excellence and achievement in the foodservice industry and is also the 1997
Golden Chain Award winner. He also received the NAACP's Walter White award and
the President's Award for private sector initiatives. Mr. Belatti also serves
as Chairman of The AFC Foundation, Inc., as well as a member of the Board of
Directors for The Hank Aaron Chasing the Dream Foundation, Inc., The Schenck
School, APEX Museum and The Urban League. Mr. Belatti is also a member of the
Executive Steering Committee for Habitat for Humanity.
Mr. Holbrook joined the Company in November 1992 as Executive Vice
President and Chief Operating Officer and assumed the role of President and
Chief Operating Officer in August 1995. He has been a director of the Company
since 1995. From 1991 to 1992, Mr. Holbrook served as Executive Vice President
of Franchise Operations for HFS. From 1972 to 1991, Mr. Holbrook served in
various management positions with Arby's, starting as a crew member and working
his way up to Assistant Restaurant Manager, Restaurant Manager, District
Manager, Regional Director of Operations, Vice President of Operations
Development and Training and Senior Vice President of Franchise Operations.
Mr. Frankel has served as Executive Vice President since 1996, and as
Secretary and General Counsel of the Company as well as a director of the
Company since 1992. Prior to 1996, Mr. Frankel
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spent 25 years with Frankel, Hardwick, Tanenbaum & Fink, P.C., an Atlanta,
Georgia law firm specializing in commercial transactions and business law,
including franchising, licensing and distributorship relationships. Mr. Frankel
is a member of the Board of Directors of Colonial Bank, Hank Aaron Enterprises,
Inc., and The Hank Aaron Chasing the Dream Foundation, Inc.
Mr. Wilkins has served as the Chief Financial Officer of the Company since
1995. From 1993 to 1995, Mr. Wilkins was Vice President of International
Business Planning at KFC International in Louisville, Kentucky. Mr. Wilkins
also served in senior management positions with General Electric Corporation
from 1985 to 1993, including Assistant Treasurer of GE Capital Corporation from
1989 to 1992. He has also worked with the AT&T Corporation and Peat Marwick,
Mitchell & Co.
Mr. Luther has served as President of Popeyes Chicken & Biscuits since
1997. Prior to joining the Company, Mr. Luther was President of CA One Services,
Inc., a subsidiary of Delaware North Enterprises, Inc. in Buffalo, New York from
1992 to 1997. From 1987 to 1992, Mr. Luther served as President of Benchmark
Services, Inc.
Ms. Moddelmog has served as President of Churchs Chicken since 1996. From
1993 to 1996, Ms. Moddelmog was Vice President of Marketing and then Senior Vice
President/General Manager for the Churchs brand. From 1990 to 1993, Ms.
Moddelmog was Vice President of Product Marketing and Strategic Planning at AFA
in Atlanta. Prior to joining AFA, Ms. Moddelmog was a marketing manager for
BellSouth Services in Atlanta from 1989 to 1990.
Mr. Van Epps is President of Chesapeake Bagel, a position he assumed in
April 1997. He served as President--Worldwide Business Development since 1996.
From 1995 to 1996 Mr. Van Epps served as President--International and he was
Senior Vice President--International from 1993 to 1995. From 1988 to 1993, Mr.
Van Epps was Vice President of Marketing and International at Western Sizzlin,
Inc. From 1984 to 1988, Mr. Van Epps was President of Mid-American Restaurant
Systems and the President of Intercontinental Foodservice from 1982 to 1984.
Mr. Van Epps was with PepsiCo Foodservice International from 1977 to 1982, in a
variety of positions, including: Senior Managing Director for Asia, Australia,
New Zealand, and South Africa, based in Sydney, Australia; Senior Marketing
Director; and Senior Director of Corporate Marketing Services for Pizza Hut Inc.
Mr. Doran joined FS&Co. in 1988. Previously, Mr. Doran was employed in the
high yield department of Kidder, Peabody & Co. Incorporated. Mr. Doran became a
director of the Company in April 1996 and is also a member of the Boards of
Directors of EnviroSource, Inc. and Brylane Inc.
Mr. Farrar served as a Senior Vice President of Canadian Imperial Bank of
Commerce in Toronto, Canada from 1986 to 1993 and has been retired for the past
three and one-half years. Mr. Farrar became a director of the Company in 1992.
Mr. Farrar also serves as a member of the Boards of Directors for Consumers
Packaging, Inc., Anchor Glass Container Corporation, Adelaide Capital Corp, and
Pendaries Petroleum, Ltd.
Mr. Figel founded Doramar Capital, a private investment firm, in January
1997. From October 1986 to December 1996, Mr. Figel was employed by FS&Co. Mr.
Figel became a director of the Company in April 1996 and is also a member of the
Boards of Directors of Buttrey Food and Drug Stores Company and Calmar Inc.
Mr. Halloran joined FS&Co. in 1995. From 1990 to 1995, Mr. Halloran was
employed by Goldman, Sachs & Co. in its Mergers and Acquisitions Department,
most recently as a Vice President. Mr. Halloran joined the Board in April 1996
and is also a member of the Board of Directors of The Pantry, Inc.
Mr. Pennington has served as Managing General Partner of PENMAN Asset
Management, L.P., the general partner of PENMAN Private Equity and Mezzanine
Fund, L.P., in Chicago, Illinois since 1992. Mr. Pennington became a director of
the Company in May 1996. Mr. Pennington also serves as
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a member of the Boards of Directors for LSC Acquisition Corp., MainStreet
Healthcare Corporation and TRIAD Holdings, Inc.
Mr. Roth joined FS&Co. in March 1988 and became a general partner in March
1993. From 1984 to 1988, Mr. Roth was employed by Kidder, Peabody & Co.
Incorporated, his most recent position being a Vice President in the Merger and
Acquisition Group. Mr. Roth became a director of the Company in April 1996 and
is also a member of the Boards of Directors of EnviroSource, Inc., Brylane Inc.,
Calmar Inc. and Asbury Automotive Group L.L.C.
Mr. Spogli is a founding partner of FS&Co. He became a director of the
Company in April 1996. Mr. Spogli is the Chairman of the Board and a director of
EnviroSource, Inc. and also serves on the Boards of Directors of Buttrey Food
and Drug Stores Company, Brylane Inc. and Calmar Inc.
Mr. Wardlaw joined FS&Co. in March 1988 and became a general partner in
January 1991. From 1984 to 1988, Mr. Wardlaw was a principal of the law firm of
Riordan & McKinzie. Mr. Wardlaw became a director of the Company in April 1996
and is also a member of the Boards of Directors of Buttrey Food and Drug Stores
Company and Calmar Inc.
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EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Chief Executive Officer and the other four of the Company's most
highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 (the "Named Executive Officers") during the fiscal years ended
December 25, 1994, December 31, 1995 and December 29, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1)(2) COMPENSATION(8)
- ------------------------------ ---- -------- ----------- ------------------
<S> <C> <C> <C> <C>
Frank J. Belatti.............. 1996 $430,000 $ 515,045 $32,943
Chief Executive Officer 1995 437,693 5,041,713(3) 43,360
1994 400,000 585,500 42,371
Dick R. Holbrook.............. 1996 $300,000 $ 220,000 $13,643
President and Chief 1995 240,577 2,414,970(4) 16,735
Operating Officer 1994 210,000 200,500 16,735
Samuel N. Frankel............. 1996 $275,000 $ 200,000 $32,745
Executive Vice President, 1995 -- 2,389,220(5) 14,495
Secretary and General 1994 -- -- 14,495
Counsel
William M. Van Epps........... 1996 $196,720 $ 100,000 $ 6,108(9)
President of Chesapeake 1995 170,385 187,838(6) 5,680(9)
Bagel 1994 143,654 58,500 4,027
Hala R. Moddelmog............. 1996 $178,079 $ 80,000 $ 3,071(9)
President of Churchs 1995 135,872 167,350(7) 2,754(9)
Chicken 1994 99,231 27,500 1,735
</TABLE>
______________
(1) The bonus amounts shown for 1996 for all Named Executive Officers other
than Mr. Van Epps and Ms. Moddelmog reflect annual payments that were based
solely on Company performance during 1996 as determined using performance
objectives established for fiscal year 1996. The amounts shown for Mr. Van
Epps and Ms. Moddelmog were largely (but not exclusively) based on
performance objectives established for their individual business segments
for fiscal year 1996.
(2) During 1995, the Board of Directors granted a special executive
compensation award of $10.0 million to the senior management group in
recognition of exemplary performance provided to the Company since 1992.
This award was paid in shares of the Common Stock, at a fair market value
of $3.317 per share of the date of issuance.
(3) Mr. Belatti's bonus for 1995 comprised of a cash distribution of $630,206
and a stock distribution of 1,329,969 shares of Common Stock having a fair
market value of $4,411,507.
(4) Mr. Holbrook's bonus for 1995 comprised of a cash distribution of $225,750
and a stock distribution of 660,000 shares of Common Stock having a fair
market value of $2,189,220.
(5) Mr. Frankel became employed as Executive Vice President of the Company as
of January 1, 1996. His 1995 bonus and split dollar life insurance
compensation was paid to or on behalf of Mr. Frankel in 1995 and 1994 as
compensation for his services as a consultant to the Company in 1995 and
1994. Mr. Frankel's bonus for 1995 comprised of a cash distribution of
$200,000 and a stock distribution of 660,000 shares of Common Stock having
a fair market value of $2,189,220.
(6) Mr. Van Epps' bonus for 1995 comprised of a cash distribution of $72,738
and a stock distribution of 34,700 shares of Common Stock having a fair
market value of $115,100.
(7) Ms. Moddelmog's bonus for 1995 comprised of a cash distribution of $52,250
and a stock distribution of 34,700 shares of Common Stock having a fair
market value of $115,100.
70
<PAGE>
(8) The amounts shown under All Other Compensation reflect life insurance
premiums paid by the Company with respect to split dollar life insurance
policies for the benefit of the Messrs. Belatti, Holbrook and Frankel. The
Company also paid $4,633, $4,532 and $4,027 in life insurance premiums in
1996, 1995 and 1994, respectively, for the split dollar life insurance
policy for the benefit of Mr. Van Epps. The Company also paid $1,735 in
life insurance premiums in 1996, 1995 and 1994 for the split dollar life
insurance policy for the benefit of Ms. Moddelmog.
(9) Includes matching contributions by the Company into the qualified employee
benefit plan under Section 401(k) of the Code on behalf of (i) Mr. Van Epps
of $1,475 and $1,148 for 1996 and 1995, respectively, and (ii) Ms.
Moddelmog of $1,336 and $1,019 for 1996 and 1995, respectively.
EMPLOYMENT AGREEMENTS
BELATTI AGREEMENT
Mr. Belatti and the Company entered into an employment agreement on
November 5, 1992, as amended on November 5, 1995 (the "Belatti Agreement"). The
Belatti Agreement contains customary employment terms and provides for a current
annual base salary of $480,000, subject to annual adjustment by the Board of
Directors, an annual incentive bonus, stock options, fringe benefits,
participation in all Company-sponsored benefit plans and such other compensation
as may be approved by the Board of Directors. The term of the Belatti Agreement
terminates on November 5, 1998, unless earlier terminated or otherwise renewed,
pursuant to the terms thereof. Pursuant to the terms of the Belatti Agreement,
if Mr. Belatti's employment is terminated without cause or if written notice not
to renew his employment is given by the Company, Mr. Belatti would be entitled
to, among other things, one to two-and-one-half times his base annual salary,
depending on his length of service at such termination date, and the bonus
payable to him for the fiscal year in which such termination occurs. Under the
Belatti Agreement, upon (i) a change of control of the Company, (ii) a
significant reduction in Mr. Belatti's responsibilities, title or duties or
(iii) the relocation of the Company's principal office more than 45 miles from
its current location (except to Atlanta, Georgia), Mr. Belatti may terminate his
employment and would be entitled to receive, among other things, the same
severance pay he would have received had his employment been terminated by the
Company without cause.
HOLBROOK AGREEMENT
Mr. Holbrook and the Company entered into an employment agreement on
November 5, 1992, as amended on November 5, 1995 (the "Holbrook Agreement").
The Holbrook Agreement contains customary employment terms and provides for a
current annual base salary of $325,000, subject to annual adjustment by the
Board of Directors, an annual incentive bonus, stock options, fringe benefits,
participation in all Company-sponsored benefit plans and such other compensation
as may be approved by the Board of Directors. The term of the Holbrook
Agreement terminates on November 5, 1998, unless earlier terminated or otherwise
renewed, pursuant to the terms thereof. Pursuant to the Holbrook Agreement, if
Mr. Holbrook's employment is terminated without cause or if written notice not
to renew his employment is given by the Company, he would be entitled to, among
other things, one to two-and-one-half times his base annual salary, depending on
his length of service at such termination date, and the bonus payable to him for
the fiscal year in which such termination occurs. Under the Holbrook Agreement,
upon (i) a change of control of the Company, (ii) a significant reduction in Mr.
Holbrook's responsibilities, title or duties not approved by Mr. Belatti or
(iii) the Company relocates its principal office more than 45 miles from its
current location (except to Atlanta, Georgia), Mr. Holbrook may terminate his
employment and would be entitled to receive, among other things, the same
severance pay he would have received had his employment been terminated by the
Company without cause.
71
<PAGE>
FRANKEL AGREEMENT
Mr. Frankel and the Company entered into an employment agreement on
December 5, 1995 (the "Frankel Agreement"). The Frankel Agreement contains
customary employment terms and provides for a base annual salary of $300,000,
subject to annual adjustment by the Board of Directors, and for an annual
incentive bonus. The term of the Frankel Agreement terminates on December 5,
1998, unless earlier terminated or otherwise renewed pursuant to the terms
thereof. Pursuant to the Frankel Agreement, if Mr. Frankel's employment is
terminated without cause or if written notice not to renew is given by the
Company, he would be entitled to, among other things, two-and-one-half times his
base annual salary, and the bonus payable to him for the fiscal year in which
such termination occurs. Under the Frankel Agreement, upon (i) a change of
control of the Company, (ii) a significant reduction in Mr. Frankel's
responsibilities, title or duties not approved by Mr. Belatti or (iii) the
relocation of the Company's principal office more than 45 miles from its current
location (except to Atlanta, Georgia), Mr. Frankel may terminate his employment
and would be entitled to receive, among other things, the same severance pay he
would receive if he was terminated by the Company without cause.
OPTION PLANS
1992 NONQUALIFIED STOCK OPTION PLAN
The 1992 Nonqualified Stock Option Plan (the "1992 Option Plan"), provides
for the grant of options to purchase shares of Common Stock to selected officers
of the Company. Options under the 1992 Option Plan are not intended to qualify
for treatment as incentive stock options under Section 422A of the Internal
Revenue Code of 1986, as amended ("Section 422A"). Options under the 1992
Option Plan became exercisable at various dates beginning on January 1, 1994.
If not exercised, options under the 1992 Option Plan will expire 15 years after
their issuance (if not sooner due to termination of employment). If the
employment of an optionee under the 1992 Option Plan is terminated for any
reason, the Company may be required to repurchase the shares of Common Stock
acquired by such optionee pursuant to such plan. Up to 1,808,864 shares of
Common Stock have been reserved for issuance under the 1992 Option Plan. Prior
to April 1996, options with respect to 669,334, 200,000, 170,000, 35,000 and
35,000 shares of Common Stock were issued to Messrs. Belatti, Holbrook, Frankel
and Van Epps and Ms. Moddelmog, respectively, at an exercise price of $0.10. On
April 11, 1996, this exercise price was adjusted to $0.08 per share and
additional options with respect to 196,849, 58,860, 50,000, 10,300 and 10,300
shares of Common Stock were issued to Messrs. Belatti, Holbrook, Frankel and Van
Epps and Ms. Moddelmog, respectively, also at an exercise price of $0.08 per
share. As of April 29, 1997, options with respect to 1,724,944 shares of Common
Stock were outstanding under the 1992 Option Plan, of which options with respect
to 1,503,618 shares of Common Stock were exercisable.
1996 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN--EXECUTIVE
Certain senior executives of the Company are eligible to participate in the
Company's 1996 Nonqualified Performance Stock Option Plan--Executive (the
"Executive Performance Option Plan"). Up to 1,425,000 shares of Common Stock
may be issued under the Executive Performance Option Plan. Under the Executive
Performance Option Plan, participants may be granted options to purchase shares
of Common Stock at an option price determined by the Board of Directors of the
Company. Options under the Executive Performance Option Plan are not intended
to qualify for treatment as incentive stock options under Section 422A. The
Executive Performance Option Plan is administered by the compensation committee
of the Board of Directors (the "Compensation Committee"). All options granted
under the Executive Performance Option Plan may vest over five years commencing
on the first anniversary of the date of grant according to performance criteria
relating to the Company's earnings on a fiscal year basis. Pursuant to the
Executive Performance Option Plan, on April 26, 1996 the Company granted options
with respect to 800,000, 400,000 and 225,000 shares of Common Stock to Messrs.
Belatti, Holbrook and Frankel, respectively, at an exercise price of $3.317 per
share.
72
<PAGE>
All options granted under the Executive Performance Option Plan will expire
ten years from the date of grant unless terminated earlier due to certain
circumstances. The exercisability of options under the Executive Performance
Option Plan may be accelerated, at the discretion of the Compensation Committee.
Additionally, the Executive Performance Option Plan provides that, at any time
prior to five years after the date of grant of an option, the Company may elect
to repurchase all or any portion of the shares of Common Stock acquired by the
participant by the exercise of the options for a period of six months after the
date of termination of the participant's employment. The purchase price for
such repurchased shares shall be their "fair market value" thereof, as
determined by the Board of Directors. As of April 29, 1997, options with
respect to 1,425,000 shares of Common Stock were outstanding under the Executive
Performance Option Plan, of which options with respect to 285,000 shares were
exercisable.
1996 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN--GENERAL
Certain officers and key employees not covered by the Executive Performance
Option Plan are eligible to receive options to purchase Common Stock under the
Company's 1996 Nonqualified Performance Stock Option Plan--General ("General
Performance Option Plan"). Up to 1,288,295 options to purchase shares of Common
Stock are issuable under the General Performance Option Plan. Options under the
General Performance Option Plan are not intended to qualify for treatment as
incentive stock options under Section 422A. Pursuant to the General Performance
Option Plan, on April 26, 1996, the Company granted options with respect to
100,000 shares of Common Stock to each of Mr. Van Epps and Mrs. Moddelmog at an
exercise price of $3.317 per share. The General Performance Option Plan has a
number of terms that are substantially similar to terms found in the Executive
Performance Option Plan. All options granted under the General Performance
Option Plan may vest over five years commencing on the first anniversary of the
date of grant according to a performance criteria relating to the Company's
earnings. Such options expire ten years from the date of grant unless
terminated earlier due to certain circumstances. Additionally, the General
Performance Option Plan restricts employees from transferring any shares of
Common Stock received on the exercise of options under the General Performance
Option Plan prior to the fifth anniversary of the date of the grant. Following
such fifth anniversary, the Company has a right of first refusal with respect to
any proposed transfer of such shares of Common Stock. Finally, the General
Performance Option Plan contains provisions relating to certain "tag-along" and
"drag-along" rights should the FS Entities (as defined herein) find a third-
party buyer for all of the Common Stock held thereby. As of April 29, 1997,
options to purchase 1,095,400 shares of Common Stock were outstanding under the
General Performance Option Plan, of which options to purchase 219,080 shares of
Common Stock were exercisable.
1996 NONQUALIFIED STOCK OPTION PLAN
Certain officers and key employees are eligible to receive options to
purchase Common Stock under the Company's 1996 Nonqualified Stock Option Plan
(the "1996 Option Plan"). The 1996 Option Plan authorizes the Company to issue
up to 1,808,863 options to purchase shares of Common Stock. Options under the
1996 Option Plan are not intended to qualify for treatment as incentive stock
options under Section 422A. On April 11, 1996, options to purchase 90,000,
55,000 and 35,000 shares of Common Stock were granted to Messrs. Belatti,
Holbrook and Frankel, respectively, at an exercise price of $3.317 per share.
On April 26, 1996, options to purchase 5,000 shares of Common Stock were granted
under the 1996 Option Plan to Mr. Van Epps and Ms. Moddelmog also at an exercise
price of $3.317 per share. The 1996 Option Plan contains many of the same
provisions of the Executive Performance Option Plan and the General Performance
Option Plan. All options granted under the 1996 Option Plan vest in 25%
increments upon each of the first, second, third and fourth anniversaries of the
date of grant and expire seven years from the date of grant, unless terminated
earlier due to certain circumstances. The 1996 Option Plan includes the same
repurchase rights found in the Executive Performance Option Plan and the General
Performance Option Plan. Additionally, the 1996 Option Plan contains the
transfer restrictions, rights of first refusal and "tag-along" and "drag-along"
rights as found in the General Performance Option Plan. As of April 29, 1997,
options with respect to 320,200 shares
73
<PAGE>
of Common Stock were outstanding under the 1996 Option Plan, of which options to
purchase 57,500 shares of Common Stock were exercisable.
The following table sets forth information concerning the number and value
of securities underlying unexercised options held by each of the Named Executive
Officers at December 29, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN OR EXPIRATION -----------------------------
NAME GRANTED (#) FISCAL YEAR BASE PRICE DATE 5% 10%
- ---------------------- ----------- ------------ ---------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Frank J. Belatti...... 800,000 31.7% $3.317 4/26/06 $1,668,835 $4,229,155
90,000 28.1 3.317 4/26/03 121,532 283,221
Dick R. Holbrook...... 400,000 15.9 3.317 4/26/06 834,417 2,114,577
55,000 17.2 3.317 4/26/03 74,269 173,079
Samuel N. Frankel..... 225,000 8.9 3.317 4/26/06 469,360 1,189,450
35,000 10.9 3.317 4/26/03 47,262 110,141
William M. Van Epps... 100,000 4.0 3.317 4/26/06 208,604 528,644
5,000 1.6 3.317 4/26/03 6,752 15,734
Hala R. Moddelmog..... 100,000 4.0 3.317 4/26/06 208,604 528,644
5,000 1.6 3.317 4/26/03 6,752 15,734
</TABLE>
- -------------
(1) Option grants to the Named Executive Officers set forth in the table were
granted under the Executive Performance Option Plan, with respect to
Messrs. Belatti, Holbrook and Frankel, the General Performance Stock Option
Plan, with respect to Mr. Van Epps and Ms. Moddelmog, and the 1996 Option
Plan, with respect to each Named Executive Officer.
(2) These columns indicate the hypothetical gains of "option spreads" of the
outstanding options granted, based on assumed annual compound stock
appreciation rates of 5% and 10% over the options' terms. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Commission
and do not represent the Company's estimate or projection of the future
prices or market value of Common Stock.
The following table sets forth information concerning the number and value
of securities underlying unexercised options held by each of the Named Executive
Officers as of December 29, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 29, 1996 (#) AT DECEMBER 29, 1996 ($)(1)(2)
ACQUIRED ON VALUE ---------------------------- ------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Frank J. Belatti...... -- -- 1,026,193/730,000 4,479,640/1,192,090
Dick R. Holbrook...... -- -- 338,860/375,000 1,391,288/612,375
Samuel N. Frankel..... -- -- 265,000/215,000 1,144,885/351,095
William M. Van Epps... -- -- 31,001/119,299 86,235/305,841
Hala R. Moddelmog..... -- -- 25,048/125,252 57,244/334,832
</TABLE>
- -------------
(1) Because there is no established public trading market for Common Stock, the
Board of Directors of the Company must, under certain circumstances,
determine the fair market value of the Common Stock. The Company believes
that the fair market value of the Common Stock was $4.95 per share as of
December 29, 1996.
74
<PAGE>
(2) Values for "in-the-money" outstanding options represent the positive spread
between the respective exercise prices of the outstanding options and the
fair market value of the underlying Common Stock of $4.95 per share as
described in Note 1.
STOCK BONUS PLANS
Officers, key employees and certain consultants of the Company were also
eligible to receive shares of Common Stock under the Company's 1996 Employee
Stock Bonus Plan--Executive (the "Executive Bonus Plan") and the 1996 Stock
Bonus Plan--General (the "General Bonus Plan"). On April 26, 1996, an aggregate
of 2,649,969 shares of Common Stock were issued under the Executive Bonus Plan
and an aggregate of 364,803 shares of Common Stock were issued under the General
Bonus Plan at a fair market value of $3.317 per share. On such date, Messrs.
Belatti, Holbrook and Frankel were issued 1,329,969, 660,000 and 660,000 shares
of Common Stock, respectively, under the Executive Bonus Plan and Mr. Van Epps
and Ms. Moddelmog were each issued 34,700 shares of Common Stock under the
General Bonus Plan. Under each such plan, at any time prior to five years after
the date of grant of Common Stock bonuses, the Company has the option, in
certain circumstances, to repurchase all or any portion of the shares of Common
Stock acquired by the plan participant for a period of six months after the date
of termination of the participant's employment. The price for such repurchase
will be the fair market value of the shares as determined by the Board of
Directors, except for termination of employment other than death or disability
under the General Bonus Plan. In such instances, the repurchase price shall be
a certain fraction of the fair market value, depending on the length of
employment by such employee. This repurchase option terminates upon the
Company's initial public offering of Common Stock or a change of control with
respect to the Company. In addition, shares issued under the General Bonus Plan
are also subject to the same transfer restrictions, rights of first refusal and
"tag-along" and "drag-along" rights that are found in the General Option Plan.
No further shares are available for issuance under either the Executive Bonus
Plan or the General Bonus Plan.
In connection with the issuance of shares of Common Stock under the
Executive Bonus Plan and the General Bonus Plan, the Company offered to loan the
participating employee an amount sufficient to pay for the employee's tax
obligation resulting from the issuance of shares of Common Stock to such
employee. If accepted by the employee, such loan would be evidenced by a
promissory note which will be due on December 31, 2003 and accrues interest at
6.25% per annum. Such notes are secured by the pledge of the shares issued to
the employee. As of March 23, 1997, under the Executive Bonus Plan and the
General Bonus Plan, Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms.
Moddelmog had issued promissory notes to the Company in the outstanding
principal amounts of $1,985,178, $985,149, $985,149, $51,795 and $51,795,
respectively. Subsequent to March 23, 1997, the Company additionally loaned
Messrs. Belatti, Holbrook and Frankel $93,548, $44,879 and $44,879,
respectively, with respect to the above.
OTHER EMPLOYEE BENEFIT PLANS
On April 19, 1994, the Company adopted a nonqualified retirement,
disability and death benefit plan ("Retirement Plan") for certain officers.
Retirement benefits under the Retirement Plan are unfunded. Annual benefits are
equal to 30.0% of the executive's average base compensation for the five years
preceding retirement. The benefits are payable in 120 equal monthly
installments following the executive officer's retirement date. Death benefits
under the Retirement Plan cover certain executive officers and are up to five
times the officer's base compensation at the time of employment. The Company
has the discretion to increase the employee's death benefits. Death benefits
are funded by split dollar life insurance arrangements. The projected benefit
obligation and recorded plan liability relating to the Retirement Plan was
approximately $1 million on December 29, 1996. The Company also provides post-
retirement medical benefits (including dental coverage) for certain retirees and
their spouses. This benefit begins on the date of retirement and ends after 120
months or upon the death of both parties.
75
<PAGE>
CERTAIN TRANSACTIONS
In April 1996, FSEP III and FSEP International (collectively, the "FS
Entities") acquired from the Company 21,103,407 shares of Common Stock, for an
aggregate purchase price of $70.0 million. In connection with such stock
purchase, 535,152 of the 560,000 outstanding shares of the Company's 8%
Redeemable Cumulative Preferred Stock ("8% Preferred Stock") were exchanged into
an equal number of shares of 10% Preferred Stock including 360,545 shares held
by Canadian Imperial Bank of Commerce and 60,000 shares held by ML IBK
Positions, Inc. In May 1996, the FS Entities sold an aggregate of 2,110,341
shares of Common Stock to PENMAN Equity for an aggregate purchase price of $7.0
million. In August 1996, the remaining 24,848 shares of the 8% Preferred Stock
then outstanding were exchanged for an equal number of shares of 10% Preferred
Stock.
In April 1996, the FS Entities, the Company, Messrs. Belatti, Holbrook and
Frankel along with certain other holders of Common Stock, entered into a
stockholders agreement ("Stockholders Agreement") whereby (i) the shareholders
were granted the pro rata right to acquire any additional securities to be
issued by the Company, (ii) the FS Entities granted certain "tag-along" rights
to the other shareholders and, in turn, were granted certain "drag-along" rights
with respect to the sale of their shares of Common Stock or 10% Preferred Stock
(collectively, "Capital Stock"), (iii) various transfer restrictions were agreed
upon by the shareholders, (iv) certain rights of first offer prior to any
transfer of shares of Capital Stock were agreed to and (v) certain Board
representation rights of the FS Entities, the Chief Executive Officer of the
Company, and the holders of 10% Preferred Stock were established. This
Stockholders Agreement was amended in May 1996 to include PENMAN Equity and
again in August 1996 to include two new shareholders.
In April 1996, in connection with the issuance of shares of Common Stock
under the Executive Bonus Plan and General Bonus Plan, Messrs. Belatti,
Holbrook, Frankel and Van Epps and Ms. Moddelmog borrowed $1,985,178, $985,149,
$985,149, $51,795 and $51,795, respectively, from the Company to cover certain
income tax liabilities arising as a result the issuance of shares of Common
Stock in connection with their 1995 executive bonuses. Each officer delivered a
promissory note to the Company with respect to the amount borrowed thereby and
each such promissory note is due on December 31, 2003 with a simple interest
rate of 6.25% per annum. In connection with these notes, each such officer also
entered into a pledge agreement with the Company whereby each note is secured by
the pledge of shares of Common Stock issued thereto under either the Executive
Bonus Plan or the General Bonus Plan. As of March 23, 1997, under the Executive
Bonus Plan and the General Bonus Plan, Messrs. Belatti, Holbrook, Frankel and
Van Epps and Ms. Moddelmog had issued promissory notes to the Company in the
outstanding principal amounts of $1,985,178, $985,149, $985,149, $51,795 and
$51,795, respectively. Subsequent to March 23, 1997, the Company additionally
loaned Messrs. Belatti, Holbrook and Frankel $93,548, $44,879 and $44,879,
respectively, with respect to the above.
In 1996, the Company received legal services from Frankel, Hardwick,
Tanenbaum & Fink, P.C., a law firm associated with Mr. Frankel, the Company's
Executive Vice President, Secretary and General Counsel and a member of the
Company's Board of Directors. During the Company's fiscal year ended December
29, 1996, the total amount paid to this law firm was approximately $448,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's executive committee of the Board of Directors oversees
compensation matters. Messrs. Belatti and Frankel, two Named Executive
Officers, serve on the executive committee but neither Mr. Belatti nor Mr.
Frankel participated in matters regarding his own compensation.
76
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
The Company has entered into a $175 million credit facility with Goldman
Sachs Credit Partners L.P. ("GSCP") and Canadian Imperial Bank of Commerce (the
"New Credit Facility") provided by a syndicate of financial institutions. The
New Credit Facility consists of: (i) the $50 million Term Loan, already funded
in full on May 21, 1997, (ii) the $100 million Acquisition Facility and (iii)
the $25 million Revolving Facility. The proceeds of the Term Loan, along with
the proceeds of the Old Notes, were or will be used to repay the company's
existing credit facilities, to redeem all of the Company's 10% Preferred Stock
and to repay certain capitalized lease obligations.
The New Credit Facility bears interest, at the Company's election, at
either (i) a defined base rate plus 1.25% per annum or (ii) LIBOR plus 2.25% per
annum, subject to reduction based on the achievement of certain leverage ratio
levels commencing on the first anniversary of the closing of the New Credit
Facility. In addition, the Company paid arrangement and facility fees
aggregating $3.5 million at closing and is obligated to pay commitment fees of
0.5% per annum (subject to reduction based on the achievement of certain
leverage ratio levels, commencing on the first anniversary of the closing of the
New Credit Facility) on the unused portions of the Acquisition Facility and the
Revolving Facility from time to time, as well as a customary annual agent's fee.
Fees relating to the issuance of letters of credit under the Revolving Facility
will include a fee equal to the then applicable spread over LIBOR plus a
fronting fee of 0.25% per annum (payable to the issuing institution) based on
the face amount of letters of credit, plus standard issuance and administrative
charges.
The New Credit Facility has a term of five years and all amounts
outstanding are payable on the expiration date. The Company is also required to
make scheduled annual amortization payments on the Term Loan as follows:
<TABLE>
<CAPTION>
Year Term Loan Payments
---- ------------------
<S> <C>
1997 $ 2,000,000
1998 5,000,000
1999 8,000,000
2000 10,000,000
2001 10,000,000
2002 $15,000,000
-----------
$50,000,000
===========
</TABLE>
The Company may borrow under the Acquisition Facility from time to time
through the second anniversary of the closing. Amounts outstanding under the
Acquisition Facility on the second anniversary of the closing will be converted
to a term loan due in full on the fifth anniversary of the closing. In
addition, the Company will be required to make scheduled annual amortization
payments on the term portion of the Acquisition Facility.
In addition to the scheduled amortization, the Company is required to make
prepayments on the New Credit Facility under certain conditions, including
without limitation, upon certain asset sales or issuance of debt or equity
securities. The Company is also required to make annual prepayments on the New
Credit Facility in an amount equal to a percentage of excess cash flow (as
defined).
The New Credit Facility is secured by a first priority security interest in
substantially all of the Company's assets (subject to certain exceptions). Any
future material subsidiaries of the Company will be required to guarantee the
New Credit Facility and the Company will be required to pledge the stock of such
subsidiaries to secure the facility.
The New Credit Facility contains certain financial covenants, including,
but not limited to, covenants related to minimum fixed charge coverage, minimum
cash interest coverage and maximum
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leverage. In addition, the New Credit Facility contains other affirmative and
negative covenants relating to, among other things, limitations on capital
expenditures, other indebtedness, liens, investments, guarantees, restricted
junior payments (dividends, redemptions and payments on subordinated debt),
mergers and acquisitions, sales of assets, leases and transactions with
affiliates. The New Credit Facility contains customary events of default,
including certain changes of control of the Company.
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
CAPITAL LEASES
As of March 23, 1997, the Company had approximately $9.3 million in capital
lease obligations outstanding. These capital leases relate to the Company's
management information systems, certain real property and menu boards and will
be due and payable at scheduled maturities through 2015. These capital leases
constitute Senior Indebtedness.
OTHER NOTES
As of March 23, 1997, the Company had approximately $1 million in
outstanding indebtedness primarily relating to mortgages of real property. Most
of these obligations are secured by the underlying real property relating
thereto, bear interest at rates ranging from 9.0% to 12.75% with scheduled
maturities ranging from May 1997 to December 2001 and constitute Senior
Indebtedness. On the release of any real property security for any such
obligation, such real property will become security for the New Credit Facility.
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DESCRIPTION OF NEW NOTES
The Old Notes were and the New Notes will be issued under the Indenture
dated as of May 21, 1997 (the "Indenture"), between AFC Enterprises, Inc., as
issuer (the "Company"), and United States Trust Company of New York, as trustee
(the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Upon the
effectiveness of this Registration Statement filed under the Securities Act with
respect to the New Notes, the Indenture will be subject to and governed by the
Trust Indenture Act of 1939, as amended. The following summaries of certain
material provisions of the Indenture do not purport to be complete, and where
reference is made to particular provisions of the Indenture, such provisions,
including the definitions of certain terms, are incorporated by reference as a
part of such summaries or terms, which are qualified in their entirety by such
reference. The definitions of certain capitalized terms used in the following
summary are set forth below under "--Certain Definitions". Capitalized terms
not otherwise defined herein or elsewhere in the Prospectus shall have the
meaning ascribed to such terms in the Indenture.
GENERAL
The New Notes will mature on May 15, 2007, and will be initially limited to
$175 million aggregate principal amount. Each New Note will bear interest at
the rate set forth on the cover page hereof from the date of issuance, or from
the most recent interest payment date to which interest has been paid, payable
semiannually on May 15 and November 15 of each year, commencing November 15,
1997, to the person in whose name the New Note (or any predecessor Note) is
registered at the close of business on the May 1st or November 1st next
preceding such interest payment date. Interest will be computed on the basis of
a 360-day year of twelve, 30-day months. The Indenture will permit the Company,
subject to compliance with the covenants contained therein, to issue additional
New Notes (all of which will have the same terms, including interest rate,
maturity and redemption provisions, as the New Notes initially being issued
hereunder, the "Additional New Notes"); provided, however, that (i) the
aggregate principal amount of all Notes Outstanding may not exceed $250 million
and (ii) no New Note may be issued at a price that would cause such New Note to
have "original issue discount" within the meaning of Section 1273 of the
Internal Revenue Code.
Principal of and premium, if any, and interest on the New Notes will be
payable, and the New Notes will be exchangeable and transferable, at the office
or agency of the Company in The City of New York (which initially will be the
corporate trust office of the Trustee); provided, however, that payment of
interest may be made at the option of the Company by check mailed to the person
entitled thereto as shown on the New Note Register. No service charge will be
made for any registration of transfer or exchange or redemption of New Notes,
except for certain taxes or other governmental charges that may be imposed in
connection with any registration of transfer or exchange.
The Old Notes and the New Notes will be considered collectively to be a
single class for all purposes under the Indenture, including, without
limitation, waivers, amendments, redemptions and Offers to Purchase, and for
purposes of this "Description of New Notes" all reference herein to "New Notes"
shall be deemed to refer collectively to any Old Notes and the New Notes, unless
the context otherwise requires.
The New Notes will not be entitled to the benefit of any sinking fund.
SUBORDINATION
The New Notes will be unsecured senior subordinated indebtedness of the
Company ranking pari passu with all other existing and future senior
subordinated indebtedness of the Company. The payment of all Obligations in
respect of the New Notes will be subordinated, as set forth in the Indenture, in
right of payment to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness.
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Upon any payment or distribution of assets of the Company to creditors upon
any liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors, marshaling of assets and liabilities or any bankruptcy,
insolvency or similar proceedings of the Company, the holders of Senior
Indebtedness of the Company will be entitled to receive payment in full of all
principal, premium (if any), interest, penalties, reimbursement or indemnity
amounts, fees and expenses in respect of such Senior Indebtedness (including, as
provided below, any post-petition interest, whether or not an allowed claim)
including all amounts due or to become due on all such Senior Indebtedness, or
provision will be made for payment in cash or Cash Equivalents or otherwise in a
manner satisfactory to the holders of such Senior Indebtedness, before the
Holders of the New Notes are entitled to receive any Securities Payments (other
than payments in Permitted Junior Securities).
The Company may not make any Securities Payments (other than payments in
Permitted Junior Securities) if there has occurred and is continuing a default
in the payment of the principal of and premium (if any) or interest on Senior
Indebtedness of the Company or if there has occurred and is continuing any event
of default with respect to Senior Indebtedness of the Company which has resulted
in such Senior Indebtedness becoming or being declared due and payable prior to
the date on which it would otherwise have become due and payable (a "Senior
Payment Default"). In addition, if any default (other than a Senior Payment
Default), with respect to any Designated Senior Indebtedness of the Company
permitting after notice or lapse of time (or both) the holders thereof (or a
trustee on behalf thereof) to accelerate the maturity thereof (a "Senior
Nonmonetary Default") has occurred and is continuing and the Company and the
Trustee have received written notice thereof from the representative of the
Designated Senior Indebtedness (the "Representatives"), then the Company may not
make any Securities Payments (other than payments in Permitted Junior
Securities) for a period (a "blockage period") commencing on the date the
Company and the Trustee receive such written notice and ending on the earlier of
(x) 179 days after such date and (y) the date, if any, on which the Senior
Indebtedness of the Company to which such default relates is discharged or such
default is waived or otherwise cured.
In any event, not more than one blockage period may be commenced during any
period of 360 consecutive days. No Senior Nonmonetary Default that existed or
was continuing on the date of commencement of any blockage period with respect
to the Senior Indebtedness of the Company will be, or can be, made the basis for
the commencement of a subsequent blockage period, unless such default has been
cured for a period of not less than 90 consecutive days. In the event that,
notwithstanding the foregoing, the Company makes any Securities Payment (other
than Permitted Junior Securities) to the Trustee or any Holder of a New Note
prohibited by the subordination provisions, then and in such event such
Securities Payment will be required to be paid over and delivered forthwith to
the holders of the Senior Indebtedness of the Company.
"Senior Indebtedness" means with respect to the Company (x) Indebtedness
created pursuant to the Bank Facility, (y) Indebtedness of the types referred to
in clauses (i), (ii), (iv), (v) and (vii) of the definition of Indebtedness,
whether incurred on or prior to the date of the Indenture or thereafter Incurred
and (z) Guaranties by the Company of any Indebtedness of the type referred to in
the foregoing clause (y); provided, however, the following shall not constitute
Senior Indebtedness: (1) any Indebtedness owed to a Person when such Person is a
Subsidiary of the Company, (2) any Indebtedness which by the terms of the
instrument creating or evidencing the same is expressly made pari passu or
subordinate in right of payment to the New Notes, (3) any Indebtedness Incurred
in violation of the Indenture to the extent of such violation, (4) any
Indebtedness which is subordinate in right of payment in any respect to any
other Indebtedness of the Company or (5) any Indebtedness constituting trade
payables or state or Federal taxes. For purposes of this definition,
"Indebtedness" includes any obligation to pay principal, premium (if any),
interest, penalties, reimbursement or indemnity amounts, fees and expenses
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-petition interest is allowed in such proceeding).
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"Securities Payment" means any payment or distribution of any kind, whether
in cash, property or securities (including any payment or distribution
deliverable by reason of the payment of any other Indebtedness subordinated to
the New Notes) on account of the principal of and premium (if any) or interest
on the New Notes or on account of the purchase or redemption or other
acquisition of New Notes by the Company or any Subsidiary of the Company. In
the event that, notwithstanding the foregoing, the Trustee or the Holder of any
New Note receives any Securities Payment before all Senior Indebtedness of the
Company is paid in full or payment thereof is provided for in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of such Senior
Indebtedness, then and in such event such Securities Payment will be required to
be paid over or delivered forthwith to the holders of Senior Indebtedness for
application to the payment of all Senior Indebtedness of the Company remaining
unpaid, to the extent necessary to pay such Senior Indebtedness in full.
"Permitted Junior Securities" means any payment or distribution in the form
of equity securities or subordinated securities of the Company or any successor
obligor provided for by a plan of reorganization or readjustment that, in the
case of any such subordinated securities, are subordinated in right of payment
to all Senior Indebtedness that may at the time be outstanding to at least the
same extent as the New Notes are so subordinated as provided in the Indenture.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness under
the Bank Facility and (ii) any other Senior Indebtedness (a) which at the time
of determination exceeds $20 million in aggregate principal amount or funding
commitments, (b) which is specifically designated in the instrument evidencing
such Senior Indebtedness as "Designated Senior Indebtedness" by the Company and
(c) as to which the Trustee has been given written notice of such designation.
As of March 23, 1997, after giving effect to the Refinancing, the Company's
total consolidated indebtedness would have been $235.3 million, of which $60.3
million would have been senior to the New Notes, and the Company would have had
a maximum remaining available borrowing capacity under the New Credit Facility
of $110.7 million, which, if borrowed, would be senior to the New Notes.
In the event the Company creates a Subsidiary Guarantor, the Subsidiary
Guaranty of the New Notes shall be subordinated to all Senior Indebtedness of
the Subsidiary on substantially the same basis as the New Notes are subordinated
to all Senior Indebtedness of the Company.
OPTIONAL REDEMPTION
The New Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after May 15, 2002 at the Redemption Prices (expressed
as percentages of the principal amount thereof) set forth below together with
accrued and unpaid interest to the Redemption Date, if redeemed during the 12-
month period beginning on May 15 of the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- -----------
<S> <C>
2002.................. 105.125%
2003.................. 103.416%
2004.................. 101.708%
2005 and thereafter... 100.000%
</TABLE>
At any time, or from time to time, prior to May 15, 2000, up to 40% in
aggregate principal amount of New Notes originally issued under the Indenture
will be redeemable, at the option of the Company, from the net proceeds of one
or more Public Offerings of Capital Stock (other than Redeemable Interests) of
the Company, at a Redemption Price equal to 110.25% of the principal amount
thereof, together with accrued but unpaid interest (if any) to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date to receive interest due on an Interest
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Payment Date that is on or prior to the Redemption Date); provided, however,
that the notice of redemption with respect to any such redemption is mailed
within 60 days following the closing of the corresponding public offering; and
provided, further, that following such redemption at least $100 million in
aggregate principal amount of New Notes remain outstanding.
At any time on or prior to May 15, 2002, the New Notes may also be redeemed
as a whole but not in part at the option of the Company upon the occurrence of a
Change of Control, (but in no event more than 90 days after the occurrence of
such Change of Control) at a redemption price equal to 100% of the principal
amount thereof plus the Applicable Premium as of, and accrued but unpaid
interest, if any, to the Redemption Date (subject to the right of Holders on the
relevant record date to receive interest due on the relevant interest payment
date).
"Applicable Premium" means, with respect to a New Note at any Redemption
Date, the greater of (i) 5.125% of the principal amount of such New Note (which
represents the redemption premium otherwise payable on May 15, 2002) and (ii)
the excess of (A) the sum of the present values at such time of (1) the
redemption price of such New Note at May 15, 2002 as set forth in the table
above plus (2) all scheduled interest payments (excluding accrued interest for
which the scheduled payment date has not yet occurred) due on such New Note
through May 15, 2002, computed in each case using a discount rate equal to the
Treasury Rate plus 50 basis points, over (B) the principal amount of such New
Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to May 15, 2002; provided, however, that if the
period from the Redemption Date to May 15, 2002, is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given, except
that if the period from the Redemption Date to May 15, 2002, is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee not more than 60 days
prior to the Redemption Date by such method as the Trustee shall deem fair and
appropriate; provided, however, that New Notes will not be redeemed in amounts
less than the minimum authorized denomination of $1,000. Notice of redemption
shall be mailed by first class mail not less than 30 days nor more than 60 days
prior to the Redemption Date to each Holder of New Notes to be redeemed at its
registered address. If any New Note is to be redeemed in part only, the notice
of redemption that relates to such New Note shall state the portion of the
principal amount thereof to be redeemed. A New Note in a principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original New Note. On and after the Redemption
Date, interest will cease to accrue on New Notes or portions thereof called for
redemption.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (a "Change of Control Offer") to purchase all Outstanding New
Notes at a purchase price (the "Change of Control Purchase Price") equal to 101%
of their principal amount plus accrued and unpaid interest, if any, to the date
of purchase; provided, however, that an installment of interest whose Stated
Maturity is on or prior to the date of purchase shall be payable to the Holders
of such New Notes, or of one or more predecessor New Notes, registered as such
at the close of business on the relevant record date.
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Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice will state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). The Change of Control Offer is required to remain open for at
least 20 Business Days and until the close of business on the Change of Control
Payment Date.
The Change of Control provision of the New Notes may in certain
circumstances make it more difficult to takeover or discourage a takeover of the
Company and, as a result, may make removal of incumbent management more
difficult. The Change of Control provision, however, is not the result of the
Company's knowledge of any specific effort to accumulate the Company's stock or
to obtain control of the Company by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the Change of Control provision is a result
of negotiations between the Company and the Initial Purchasers.
The New Credit Facility will provide that certain change of control events
with respect to the Company would constitute a default thereunder. In such
circumstances, the subordination provisions in the Indenture could restrict
payments to the Holders of the New Notes. Finally, the Company's ability to pay
cash to the Holders of the New Notes in connection with a Change of Control may
be limited to the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required purchases.
The provisions of the Indenture would not necessarily afford Holders of the
New Notes protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect the Holders.
If an offer is made to repurchase the New Notes pursuant to a Change of
Control Offer, the Company will comply with all tender offer rules under state
and Federal securities laws, including, but not limited to, Section 14(e) under
the Exchange Act and Rule 14(e) thereunder, to the extent applicable to such
offer.
CERTAIN COVENANTS
The Indenture will provide that all of the following restrictive covenants
will be applicable to the Company.
LIMITATION ON INDEBTEDNESS AND SUBSIDIARY PREFERRED STOCK
The Company shall not Incur any Indebtedness, and shall not permit any of
its Subsidiaries to Incur any Indebtedness or Preferred Stock (excluding in each
case Permitted Indebtedness), except that the Company or a Subsidiary Guarantor
may Incur Indebtedness if at the time of such Incurrence and after giving effect
thereto on a pro forma basis the Company's Consolidated EBITDA Ratio for the
four (4) full fiscal quarters immediately preceding such event, taken as one
period calculated on the assumption that such Indebtedness had been Incurred on
the first day of such four quarter period, is greater than or equal to
2.00:1.00.
Without regard to the foregoing limitations, the Company and its
Subsidiaries may Incur the following ("Permitted Indebtedness"):
(i) Indebtedness of the Company under the New Notes (other than any
Additional New Notes);
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(ii) Indebtedness of the Company under the Bank Facility, provided
that the aggregate principal amount at any time outstanding thereunder
shall not exceed the maximum commitment provided thereunder at such time;
(iii) Indebtedness of the Company or any of its Subsidiaries
outstanding on the Issue Date;
(iv) Indebtedness of the Company or any of its Subsidiaries
consisting of Permitted Hedging Agreements;
(v) Indebtedness of any Wholly Owned Subsidiaries of the Company
owed to and held by the Company or owed to and held by another Wholly Owned
Subsidiary;
(vi) Indebtedness or Preferred Stock Incurred by a Person prior to
the time (A) such Person became a Subsidiary of the Company or (B) such
Person is amalgamated, merged or consolidated with or into the Company or a
Subsidiary of the Company, which Indebtedness or Preferred Stock was not
Incurred in anticipation of such transaction and was outstanding prior to
such transaction; provided, however, that (1) such Person is or becomes a
Subsidiary Guarantor and (2) after giving pro forma effect in the
calculation of the Consolidated EBITDA Ratio to (x) such transaction and
(y) any Refinancing of Indebtedness or Preferred Stock that occurs
concurrently with such transaction, and treating any Indebtedness or
Preferred Stock of such acquired Person as having been Incurred at the time
of such transaction, the Company could Incur at least $1.00 of additional
Indebtedness pursuant to the ratio test specified in the first paragraph of
this covenant;
(vii) Indebtedness of the Company or a Subsidiary Guarantor Incurred
in exchange for or to renew, extend, refinance, replace or refund
(collectively "Refinance") any outstanding Indebtedness Incurred (x)
pursuant to the ratio test set forth in the first paragraph of this
covenant or (y) pursuant to clauses (i), (iii) (other than Indebtedness
proposed to be repaid with the proceeds of the New Notes) or (vi) above;
provided, however, that such Indebtedness does not exceed the principal
amount of Indebtedness so Refinanced plus the amount of any premium
required to be paid or reasonably determined by the Company to be necessary
to accomplish such Refinancing plus the amount of the fees and expenses of
the Company reasonably incurred in connection with such Refinancing; and
provided, further, that Indebtedness the proceeds of which are used to
Refinance the New Notes, Indebtedness which is pari passu to the New Notes
or a Subsidiary Guaranty, or Indebtedness which is subordinate in right of
payment to the New Notes or a Subsidiary Guaranty shall only be permitted
if (A) in the case of any Refinancing of Indebtedness which is pari passu
to the New Notes or a Subsidiary Guaranty, the Refinancing Indebtedness is
made pari passu to the New Notes or such Subsidiary Guaranty, or
subordinated to the New Notes or such Subsidiary Guaranty, and, in the case
of any Refinancing of Indebtedness which is subordinated to the New Notes
or a Subsidiary Guaranty, the Refinancing Indebtedness is made subordinated
to the New Notes or such Subsidiary Guaranty, to substantially the same
extent as, or a greater extent than, the New Notes or such Subsidiary
Guaranty are subordinated to Senior Indebtedness of the Company or such
Subsidiary as described under the subordination provisions described under
"Subordination" above and (B) such Refinancing Indebtedness (x) does not
have a final Stated Maturity earlier than the final Stated Maturity of the
Refinanced Indebtedness or permit redemption or other retirement of such
Indebtedness (including pursuant to an offer to purchase by the Company) at
the option of the holder thereof prior to the final Stated Maturity of the
Indebtedness being Refinanced, other than a redemption or other retirement
at the option of the holder of such Indebtedness on terms and in
circumstances that are substantially similar to those on and in which the
Indebtedness being Refinanced may be redeemed or otherwise retired and (y)
does not have a Weighted Average Life less than the Weighted Average Life
of the Indebtedness being Refinanced;
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(viii) Indebtedness of any Subsidiary Guarantor consisting of a
Guaranty of the New Notes or any Senior Indebtedness of the Company
Incurred in compliance with this covenant;
(ix) Indebtedness of the Company or any of its Subsidiaries in
connection with one or more trade or standby letters of credit (not
constituting Guaranties of Indebtedness), or performance, surety,
indemnity, statutory or similar bonds, in each case issued in the ordinary
course of business or pursuant to self-insurance obligations;
(x) Indebtedness of the Company or any of its Subsidiaries
represented by property, liability and workers' compensation insurance
(which may be in the form of letters of credit);
(xi) Indebtedness of the Company (including Guaranties) relating to
"turnkey" store construction programs in an aggregate principal amount not
to exceed $25 million at any time outstanding; and
(xii) Indebtedness of the Company and the Subsidiary Guarantors, in
addition to Indebtedness otherwise permitted to be incurred pursuant to
clauses (i) through (xi) above, that does not exceed $35 million in
aggregate principal amount at any time outstanding.
For purposes of determining compliance with this "Limitation on
Indebtedness and Subsidiary Preferred Stock" covenant, in the event that an item
of Indebtedness meets the criteria of more than one of the types of Indebtedness
the Company or a Subsidiary is permitted to Incur pursuant to the foregoing
clauses (i) through (xii) or pursuant to the first paragraph of this covenant,
the Company shall have the right, in its sole discretion, to classify such item
of Indebtedness and shall only be required to include the amount and type of
such Indebtedness under the clause permitting the Indebtedness as so classified.
LIMITATION ON ISSUANCES OF GUARANTIES OF INDEBTEDNESS BY SUBSIDIARIES
The Company will not permit any Subsidiary, directly or indirectly, to
Incur a Guaranty of any Indebtedness unless such Subsidiary simultaneously
executes and delivers a supplemental indenture providing for a Subsidiary
Guaranty of the New Notes.
LIMITATION ON RESTRICTED PAYMENTS
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly:
(i) declare or pay any dividend, or make any distribution, of any
kind or character (whether in cash, property or securities) in respect of
the Capital Stock of the Company or to the holders thereof in their
capacity as such (excluding any dividends or distributions (x) to the
extent payable in shares of the Capital Stock of the Company (other than
Redeemable Interests) or in options, warrants or other rights to acquire
the Capital Stock of the Company (other than Redeemable Interests), (y) to
the extent paid by a Subsidiary to another Subsidiary or to the Company and
(z) which are paid in cash on a pro rata basis by a Subsidiary to holders
of both minority and majority interests in such Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value (a) any
Capital Stock of the Company (other than the Company's 10% Preferred Stock)
or any Capital Stock of or other ownership interests in any Subsidiary or
any Affiliate or Related Person of the Company or (b) any options, warrants
or rights to purchase or acquire shares of Capital Stock of the Company or
any Capital Stock of or other ownership interests in any Subsidiary or any
Affiliate or Related Person of the Company (excluding, in each case of (a)
and (b), the purchase, redemption, acquisition or retirement by any
Subsidiary of any of its Capital Stock, other ownership interests or
options, warrants or rights to purchase such Capital Stock or other
ownership interests, in each case, owned by the Company or a Wholly Owned
Subsidiary);
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(iii) make any Investment other than a Permitted Investment; or
(iv) redeem, defease, repurchase, retire or otherwise acquire or
retire for value prior to any scheduled maturity, repayment or sinking fund
payment, Indebtedness of the Company that is subordinate in right of
payment to the New Notes
(each of the transactions described in clauses (i) through (iv) being a
"Restricted Payment"), if both before and after giving effect to such Restricted
Payment:
(1) an Event of Default, or an event that with the lapse of time or
the giving of notice, or both, would constitute an Event of Default, shall
have occurred and be continuing;
(2) the Company would, if such Restricted Payment had been made at
the beginning of the most recently ended four full fiscal quarter period
for which internal financial statements are available immediately preceding
the date of such Restricted Payment, not have been permitted to Incur at
least $1.00 of additional Indebtedness pursuant to the Consolidated EBITDA
Coverage Ratio test set forth in the first paragraph under "--Limitation on
Indebtedness and Subsidiary Preferred Stock" above; or
(3) the aggregate of all Restricted Payments (excluding Restricted
Payments permitted by clauses (ii) and (iii) of the next succeeding
paragraph) from the date of the Indenture (the amount so expended, if other
than in cash, determined in good faith by the Board of Directors) exceeds
the sum, without duplication, of: (a) 50% of the aggregate Consolidated Net
Income (or, in case Consolidated Net Income shall be negative, less 100% of
such deficit) for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the date of the
Indenture to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment; (b) 100% of the aggregate net proceeds, including the
fair market value of property other than cash (as determined in good faith
by a resolution of the Board of Directors), received by the Company after
the Issue Date from the issuance and sale of Capital Stock (other than
Redeemable Interests) of the Company and options, warrants or other rights
to acquire Capital Stock (other than Redeemable Interests and Indebtedness
convertible into Capital Stock) of the Company and the principal amount of
Indebtedness and Redeemable Interests of the Company that has been
converted into Capital Stock (other than Redeemable Interests) of the
Company after the date of the Indenture; provided that any such net
proceeds received by the Company from an employee stock ownership plan
financed by loans from the Company or a Subsidiary of the Company shall be
included only to the extent such loans have been repaid with cash on or
prior to the date of determination.
The foregoing covenant will not be violated by reason of:
(i) the payment of any dividend within 60 days after declaration
thereof if at the declaration date such payment would have complied with
the foregoing covenant;
(ii) any Refinancing of Indebtedness permitted pursuant to clause
(vii) of the definition of Permitted Indebtedness or in exchange for or in
an amount not in excess of the amount of the net cash proceeds of a
substantially concurrent sale (other than to a Subsidiary or employee stock
ownership plan financed by loans from the Company or a Subsidiary of the
Company) of Capital Stock (other than Redeemable Interests) of the Company;
provided, however, that the amount of any such net cash proceeds that are
utilized for any such purchase, redemption or other acquisition or
retirement for value shall be excluded from Clause (3)(b) in the foregoing
paragraph;
(iii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any options, warrants or
rights to purchase or acquire shares
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of Capital Stock of the Company in exchange for, or in an amount not in
excess of the net cash proceeds of, the substantially concurrent sale
(other than to a Subsidiary or employee stock ownership plan financed by
loans from the Company or a Subsidiary of the Company) of Capital Stock
(other than Redeemable Interests) of the Company; provided, however, that
the amount of any such net cash proceeds that are utilized for any such
purchase, redemption or other acquisition or retirement for value shall be
excluded from Clause (3)(b) in the foregoing paragraph;
(iv) the purchase of Capital Stock of the Company, or options,
warrants or rights to purchase or acquire shares of Capital Stock of the
Company, from employees or former employees of the Company or its
Subsidiaries (or their estates or beneficiaries thereof) upon death,
disability, retirement or termination of employment in an amount not to
exceed $2 million in any fiscal year (plus the amounts, if any, paid
pursuant to the exercise by Messrs. Belatti, Holbrook or Frankel of
certain repurchase rights described under "Executive Compensation--Option
Plans"); provided, however, that the net cash proceeds received from the
sale of qualified Capital Stock of the Company to employees of the Company
or its Subsidiaries during such fiscal year shall be added to the
limitation set forth in this clause (iv) and, any excess of such net cash
proceeds received in each fiscal year over the total gross proceeds used to
make purchases which qualify under this clause (iv) for such fiscal year
shall be added to the limitation in the next fiscal year; provided,
further, that the amount of any such net cash proceeds that are utilized
for any such purchase shall be excluded from clause (3)(b) in the foregoing
paragraph; and
(v) the purchase or redemption of subordinated Indebtedness pursuant
to asset sale or change of control of provisions contained in the Indenture
or other governing instrument relating thereto; provided, however, that (a)
no offer or purchase obligation may be triggered in respect of such
Indebtedness unless a corresponding obligation also arises for the New
Notes and (b) in all events, no repurchase or redemption of such
Indebtedness may be consummated unless and until the Company shall have
satisfied all repurchase obligations with respect to any required purchase
offer made with respect to the New Notes.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company may not, directly or indirectly, enter into any transaction (or
series of related transactions) after the date of the Indenture with any
Affiliate or Related Person unless (i) such Affiliate or Related Person is (both
before and after such transaction) (a) a Wholly Owned Subsidiary of the Company
or (b) another Subsidiary of the Company the minority interests in which are not
held by any Affiliate or Related Person; or (ii) where the total consideration
given or to be provided by the Company or such Subsidiary in or pursuant to such
transaction (or series) (including cash, the fair value of non-cash property and
the assumption of Indebtedness) (a) will be no more than $1 million, the Chief
Executive Officer, the Chief Operating Officer or the Chief Financial Officer
certifies in an Officer's Certificate that the terms of the transaction (or
series) are in the best interests of the Company and are no less favorable to
the Company than those that could be obtained in a comparable arm's-length
transaction with an entity that is not an Affiliate or Related Person, (b) will
be in excess of $1 million but no more than $5 million, a majority of the
disinterested members of the Board of Directors determines in its good faith
judgment that the terms of the transaction are in the best interests of the
Company and are no less favorable to the Company than those that could be
obtained in a comparable arm's-length transaction with an entity that is not an
Affiliate or a Related Person; or (c) will be in excess of $5 million, (1) the
Company complies with the foregoing clause (b) and (2) the Company obtains a
written opinion addressed to the Board of Directors prior to consummation of
such transaction (or series) from a nationally recognized investment banking
firm (which may not be an Affiliate or Related Person of the Company) that the
terms of the transaction (or series) are fair to the Company from a financial
point of view.
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Notwithstanding the foregoing limitation, the Company and its Subsidiaries
may enter into or suffer to exist the following: (i) any transaction pursuant to
any contract in existence on the Closing Date; (ii) any Restricted Payment
permitted to be made pursuant to the provisions of "--Limitation on Restricted
Payments" above; (iii) any transaction or series of transactions between the
Company and one or more of its Subsidiaries or between two or more of its
Subsidiaries (provided that no more than 5% of the equity interest in any such
Subsidiary is owned, directly or indirectly (other than by direct or indirect
ownership of an equity interest in the Company), by any Affiliate or Related
Person of the Company other than a Subsidiary); (iv) the payment of compensation
(including amounts paid pursuant to employee benefit plans) for the personal
services of officers, directors and employees of the Company or any of its
Subsidiaries in the ordinary course of business; (v) loans or advances for
travel expenses, relocation expenses and other amounts in the ordinary course of
business; (vi) loans to employees to purchase Capital Stock of the Company or
pay income taxes in respect of awards of Capital Stock in the ordinary course of
business not in excess of $2.5 million at any time outstanding (exclusive of
loans outstanding on the Issue Date); and (vii) sales of Capital Stock (other
than Redeemable Interests) of the Company, when such sales are exclusively for
cash.
LIMITATION ON ASSET DISPOSITIONS
The Company may not make and may not permit any Subsidiary to make any
Asset Disposition unless: (i) the Company receives consideration at the time of
such disposition at least equal to the fair market value of the shares or the
assets disposed of, as determined in good faith by the Board of Directors for
any transaction (or series of transactions) involving in excess of $1 million;
(ii) at least 75% of the consideration received by the Company consists of (x)
cash or Cash Equivalents, (y) the assumption of Indebtedness or other
liabilities reflected on the consolidated balance sheet of the Company in
accordance with GAAP (excluding Indebtedness or any other liabilities
subordinate in right of payment to the New Notes) and release from all liability
on such Indebtedness or other liabilities assumed or (z) any combination thereof
(except that this clause (ii) shall not apply to any sale of all or a portion of
the Company's Far West equipment manufacturing division); and (iii) 100% of the
Net Available Proceeds from such Asset Disposition (including from the sale of
any marketable Cash Equivalents received therein) are applied by the Company
within one year from the later of the date of such Asset Disposition or the
receipt of such Net Available Proceeds, (A) first, to repayment of Senior
Indebtedness of the Company then outstanding under any agreements or instruments
which would require such application or which would prohibit payments pursuant
to clause (C) following; (B) second, to the repayment of Senior Indebtedness of
the Company then outstanding, if so elected by the Company, provided that the
amount of such Senior Indebtedness outstanding, or permitted to be borrowed
under the relevant facility or agreement, is permanently reduced in an amount
equal to the amount so prepaid; (C) third, to the extent Net Available Proceeds
are not applied to Senior Indebtedness as specified in clause (A) or (B), to
purchases of Outstanding New Notes pursuant to an Offer to Purchase (to the
extent such an offer is not prohibited by the terms of any Senior Indebtedness
then outstanding) at a purchase price equal to 100% of their principal amount
plus accrued interest to the date of purchase (the "Offer Price") (subject to
the rights of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the purchase
date) and, to the extent required by the terms thereof, any other Indebtedness
of the Company that is pari passu with the New Notes on a pro rata basis at a
price no greater than 100% of the principal amount thereof plus accrued interest
to the date of purchase; and (D) fourth, to the extent of any remaining Net
Available Proceeds following completion of such Offer to Purchase, to any other
use as determined by the Company which is not otherwise prohibited by the
Indenture.
Notwithstanding the foregoing, the Company will not be required to comply
with the provisions of the Indenture described in clause (iii) of the preceding
paragraph (x) if the Net Available Proceeds (less any amounts ("Reinvested
Amounts") that are invested within 360 days from the later of the date of the
related Asset Disposition and the receipt of such Net Available Proceeds in
assets that will be used in the Franchising Business (determined by the Board of
Directors in good faith)) are less than $5 million (such lesser amount to be
carried forward on a cumulative basis for purposes of determining
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the application of this paragraph) or (y) to the extent the Company elects to
redeem the New Notes with the Net Available Proceeds pursuant to the first
paragraph under "Optional Redemption".
Any Offer to Purchase required by the provisions described above will be
effected by the sending of the written terms and conditions thereof (the "Offer
Document"), by first class mail, to Holders of the New Notes within 30 days
after the date which is one year after the later of the date of such Asset
Disposition or the receipt of the related Net Available Proceeds. The form of
the Offer to Purchase and the requirements that a Holder must satisfy to tender
any New Note pursuant to such Offer to Purchase are substantially the same as
those described above under "Offer to Purchase Upon Change of Control".
LIMITATION ON DISPOSITIONS OF ASSETS TO SUBSIDIARIES
The Company will not sell, convey, lease, transfer or otherwise contribute
or dispose of a substantial portion of its assets or property (including any
shares of Capital Stock of any Subsidiary of the Company, but excluding the
granting in the ordinary course of business of licenses to trademarks owned or
licensed by the Company) existing on the Issue Date (each referred to for the
purpose of this covenant as a "disposition") to any Subsidiary of the Company,
other than dispositions (a) made in the ordinary course of business, (b)
intercompany loans and cash equity contributions, including, without limitation,
any such loans or contributions for the purpose of effecting the payment of any
tax owed by any such Subsidiary to any governmental entity), (c) of trade or
other receivables and assets relating to trade and (d) permitted by the covenant
described under "--Limitation on Restricted Payments".
Notwithstanding the foregoing, the Company may make a disposition of a
substantial portion of its assets or property existing on the Issue Date to any
Subsidiary of the Company; provided, however, that such Subsidiary shall have
executed and delivered to the Trustee (i) a supplemental indenture providing for
a Subsidiary Guaranty substantially in the form prescribed by the Indenture and
(ii) certain opinions of counsel as to, among other things, the enforceability
of such Subsidiary Guaranty.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
The Company will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Indebtedness unless (i) such Indebtedness is pari passu or
subordinated in right of payment to the New Notes and (ii) such Indebtedness (A)
has a final Stated Maturity which (1) in the case of Indebtedness that is pari
passu in right of payment with the New Notes, is not earlier than the final
Stated Maturity of the New Notes and (2) in the case of Indebtedness which is
subordinate in right of payment to the New Notes, is later than the final Stated
Maturity of the New Notes and (B) has a Weighted Average Life which (1) in the
case of Indebtedness that is pari passu in right of payment to the New Notes, is
not shorter than the Weighted Average Life of the New Notes and (2) in the case
of Indebtedness that is subordinate in right of payment to the New Notes, is
longer than the Weighted Average Life of the New Notes.
LIMITATIONS CONCERNING DISTRIBUTIONS BY SUBSIDIARIES
The Company may not, and may not permit any Subsidiary to, suffer to exist
any consensual encumbrance or restriction on the ability of such Subsidiary (i)
to pay, directly or indirectly, dividends or make any other distributions in
respect of its Capital Stock or other ownership interests or pay any
Indebtedness or other obligation owed to the Company or any other Subsidiary;
(ii) to make loans or advances to the Company or any other Subsidiary; or (iii)
to sell, lease or transfer any of its property or assets to the Company or any
Wholly Owned Subsidiary, except, in any such case, any encumbrance or
restriction: (a) pursuant to the New Notes, the Indenture or any other agreement
in effect on the date of the Indenture, (b) pursuant to the Bank Facility,
including any Guaranties of or Liens securing the Senior Indebtedness Incurred
thereunder, (c) pursuant to an agreement relating to any Indebtedness Incurred
by a Person prior to the time (A) such Person became a Subsidiary of the
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Company or (B) such Person is amalgamated, merged or consolidated with a
Subsidiary of the Company, which Indebtedness was not Incurred in anticipation
of such transaction and was outstanding prior to such transaction, (d) pursuant
to an agreement which has been entered into for the pending sale or disposition
of all or substantially all of the Capital Stock, other ownership interests or
assets of such Subsidiary; provided that such restriction terminates upon
consummation or abandonment of such disposition and upon termination of such
agreement, (e) pursuant to customary non-assignment provisions in leases or
other agreements entered into in the ordinary course of business, (f) pursuant
to purchase money obligations for property acquired in the ordinary course of
business or liens in connection therewith that impose restrictions of the nature
described in clause (iii) above on the property so acquired or (g) pursuant to
an agreement effecting a refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (a), (b) or (c) above; provided, however, that
the provisions relating to such encumbrance or restriction contained in such
renewal, extension, refinancing or refunding agreement are no more restrictive
in any material respect than the provisions contained in the agreement it
replaces, as determined in good faith by the Board of Directors.
LIMITATION ON CERTAIN LIENS
(a) The Company may not, and may not permit any Subsidiary to, Incur any
Lien on property or assets of the Company or such Subsidiary to secure
Indebtedness that is pari passu or subordinate in right of payment to the New
Notes without making, or causing such Subsidiary to make, effective provision
for securing the New Notes (and, if the Company so determines, any other
Indebtedness of the Company or of such Subsidiary that is not pari passu with or
subordinated in right of payment to the New Notes), so that (i) in the case of a
Lien securing Indebtedness that is pari passu with the New Notes the Lien
securing the New Notes is senior in priority or pari passu with the Lien
securing such other Indebtedness and (ii) in the case of a Lien securing
Indebtedness that is subordinated in right of payment to the New Notes the Lien
securing the New Notes is senior in priority to the Lien securing such other
Indebtedness.
(b) Notwithstanding the foregoing, any security interest granted by the
Company or any Subsidiary to secure the New Notes created pursuant to paragraph
(a) above shall provide by its terms that such security interest shall be
automatically and unconditionally released and discharged upon the release by
the holders of the Indebtedness of the Company or any Subsidiary described in
paragraph (a) above of their security interest (including any deemed release
upon payment in full of all obligations under such Indebtedness), at a time when
(A) no other Indebtedness that is pari passu or subordinated in right of payment
to the New Notes has been secured by such property or assets of the Company or
any such Subsidiary or (B) the holders of all such other Indebtedness which is
secured by such property or assets of the Company or any such Subsidiary release
their security interest in such property or assets (including any deemed release
upon payment in full of all obligations under such Indebtedness).
PROVISION OF FINANCIAL INFORMATION
Whether or not the Company is required to be subject to Section 13(a) or
15(d) of the Exchange Act, or any successor provision thereto, to the extent
permitted by the Commission the Company will file with the Commission the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to such Section 13(a) or 15(d) or
any successor provision thereto if the Company were so required, such documents
to be filed with the Commission on or prior to the respective dates (the
"Required Filing Dates") by which the Company would have been required so to
file such documents if the Company were so required. The Company shall also in
any event (a) within 15 days of each Required Filing Date (i) transmit by mail
to all Holders, as their names and addresses appear in the Security Register,
without cost to such Holders, and (ii) file with the Trustee, copies of the
annual reports, quarterly reports and other documents which the Company files
with the Commission pursuant to such Section 13(a) or 15(d) or any successor
provisions thereto or would have been required to file with the Commission
pursuant to such Section 13(a) or 15(d) or any successor provisions thereto if
the Company were required to comply
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with such Sections and (b) if filing such documents by the Company with the
Commission is not permitted by the Commission promptly upon written request
supply copies of such documents to any prospective Holder.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not, directly or indirectly (including through
transactions by Subsidiaries), in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, transfer, lease or otherwise dispose of all or substantially all
of the properties and assets of the Company and the Subsidiaries on a
consolidated basis to any Person or group of affiliated Persons unless:
(i) either (A) the Company shall be the continuing corporation or (B) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance, transfer,
lease or disposition the properties and assets of the Company substantially as
an entirety (the "Surviving Entity") shall be a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and shall, in either case, expressly assume
all the obligations of the Company under the New Notes and the Indenture;
(ii) immediately before and immediately after giving effect to such
transaction on a pro forma basis, no Default or Event of Default shall have
occurred and be continuing; and
(iii) immediately before and immediately after giving effect to such
transaction on a pro forma basis, except in the case of the consolidation or
merger of any Subsidiary with or into the Company or a Wholly Owned Subsidiary
of the Company, the Company or the Surviving Entity could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the
Consolidated EBITDA Ratio test in the first paragraph of the "--Limitation on
Indebtedness and Subsidiary Preferred Stock" covenant.
In connection with any consolidation, merger, transfer or lease
contemplated hereby, the Company shall deliver, or cause to be delivered, to the
Trustee, in the form and substance reasonably satisfactory to the Trustee, an
Officer's Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, transfer or lease and the supplemental indenture in
respect thereto comply with the provisions described herein and that all
conditions precedent herein provided for or relating to such transaction have
been complied with.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such a consolidation or into which the Company is merged
or to which such transfer is made shall succeed to, shall be substituted for and
may exercise every right and power of the Company under the New Notes and the
Indenture, with the same effect as if such successor corporation had been named
as the Company therein. In the event of any transaction (other than a lease)
described and listed in the immediately preceding paragraphs in which the
Company is not the continuing corporation, the successor Person formed or
remaining shall succeed to, be substituted for and may exercise every right and
power of the Company, and the Company shall be discharged from all obligations
and covenants under the New Notes and the Indenture.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Registration Rights Agreement without charge from the Initial Purchasers or
the Company.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the definition of any other capitalized term used
herein for which no definition is provided.
"Affiliate" shall mean, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any officer or
director of any such Person or other Person or with respect to any natural
Person, any person having a relationship with such Person by blood, marriage or
adoption not more remote than first cousin. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Disposition" shall mean any transfer, conveyance, sale, lease or
other disposition by the Company or any of its Subsidiaries (including a
consolidation or merger or other sale of any Subsidiary with, into or to another
Person in a transaction in which such Subsidiary ceases to be a Subsidiary of
the Company), of (i) shares of Capital Stock (other than directors' qualifying
shares) or other ownership interests of a Subsidiary or (ii) the property or
assets of the Company or any Subsidiary representing a division or line of
business or (iii) other assets or rights of the Company or any Subsidiary
outside of the ordinary course of business, but excluding in each case in clause
(i), (ii) and (iii), (s) a disposition by a Subsidiary of the Company to the
Company or a Wholly Owned Subsidiary or a Subsidiary Guarantor or by the Company
or a Subsidiary to a Wholly Owned Subsidiary or a Subsidiary Guarantor, (t) the
disposition of all or substantially all of the assets of the Company on a
consolidated basis in a manner permitted pursuant to the provisions described
above under "Consolidation, Merger and Sale of Assets" of the Company, (u) any
disposition that constitutes a Restricted Payment or Permitted Investment that
is permitted pursuant to the provisions described under "Certain Covenants--
Limitation on Restricted Payments", (v) sale-leaseback transactions completed
within one year following the acquisition of the subject assets, (w) sales,
leases or transfers of restaurant properties to franchisees pursuant to the
Company's "turnkey" development programs, (x) sales, leases or transfers of
franchises and related assets and properties repossessed or reacquired by the
Company from franchisees and subsequently resold to new franchisees all in the
ordinary course of business, (y) sales or dispositions of (1) obsolete equipment
or other assets in the ordinary course of business and (2) restaurant-related
properties and assets that are no longer in operation and are surplus to the
Company's needs in the ordinary course of business in an amount not in excess of
$5 million in any twelve month period, and (z) exchanges of properties or assets
for other properties or assets (other than cash or cash equivalents) that (1)
are useful in the business of the Company and its Subsidiaries as then being
conducted and (2) have a fair market value at least equal to the fair market
value of the assets or properties being exchanged (as evidenced by a Board
Resolution in the case of transactions having a fair market value in excess of
$1 million) in the ordinary course of business.
"Bank Facility" shall mean that certain Credit Agreement, dated as of May
21, 1997, among the Company, Goldman Sachs Credit Partners L.P. as syndication
agent and arranging agent, Canadian Imperial Bank of Commerce as administrative
agent, and the lenders listed therein, as the same may be amended, supplemented
or otherwise modified from time to time (including by any extension of the
maturity thereof) or as the same may be renewed, extended, refinanced, replaced
or refunded in one or more successive transactions (including any such
transaction that changes the amount available thereunder, replaces such
agreement or document, or provides for other agents or lenders).
"Board of Directors" shall mean the Board of Directors of the Company or
any committee of such Board of Directors duly authorized to act under the
Indenture.
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"Board Resolution" shall mean a copy of a resolution, certified by the
Secretary of the Company to have been duly adopted by the Board of Directors and
to be in full force and effect on the date of such certification, and delivered
to the Trustee.
"Business Day" shall mean any day other than a Saturday or Sunday or other
day on which banks in New York, New York or the city in which the Trustee's
Office is located or Atlanta, Georgia are authorized or required to be closed.
"Capital Lease Obligation" of any Person shall mean any obligations of such
Person and its Subsidiaries on a consolidated basis under any capital lease of a
real or personal property which and to the extent, in accordance with GAAP, has
been or will be recorded as a capitalized lease obligation.
"Capital Stock" of any Person shall mean any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or equity interests in the case of entities other than
corporations, whether now outstanding or issued after the date of the Indenture.
"Cash Equivalents" shall mean (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any United States domestic commercial
bank or savings and loan association having capital and surplus in excess of
$500 million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having one of the two highest rating categories obtainable from
Moody's or S&P in each case maturing within six months after the date of
acquisition, (vi) readily marketable direct obligations issued by any State of
the United States of America or any political subdivision thereof having one of
the two highest rating categories obtainable from Moody's or S&P and (vii) money
market mutual funds investing substantially all of their assets in investments
of the types permitted in clauses (i) through (vi).
"Change of Control" shall mean the occurrence of, after the date of the
Indenture, any of the following events: (a) any Person (other than a Permitted
Holder) or any Persons (other than any Permitted Holders) acting together that
would constitute a group (for purposes of Section 13(d) of the Exchange Act, or
any successor provision thereto), together with Affiliates thereof (other than
any Permitted Holders) (a "Group"), together with any Affiliates thereof (other
than any Permitted Holders) shall beneficially own (as defined in Rule 13d-3
under the Exchange Act, or any successor provision thereto) at least 50% of the
aggregate voting power of all classes of Voting Stock of the Company, (b) any
Person or Group other than Permitted Holders, becomes the beneficial owner of
more than 33 1/3% of the total voting power of the Company's Voting Stock, and
the Permitted Holders beneficially own, in the aggregate, a lesser percentage of
the total voting power of the Voting Stock of the Company than such other Person
or Group and the Permitted Holders do not otherwise have the right or ability to
elect a majority of the Board of Directors of the Company or (c) any Person
(other than a Permitted Holder) or Group (other than any Permitted Holders)
together with any Affiliates thereof (other than any Permitted Holders) shall
succeed in having a sufficient number of its nominees who are not Continuing
Directors elected to the Board of Directors of the Company such that such
nominees when added to any existing director remaining on the Board of Directors
of the Company after such election who is an Affiliate (other than any Permitted
Holder) of such Group, will constitute a majority of the Board of Directors of
the Company. "Continuing Director" shall mean any director who was a member of
the Board of Directors on the date of the issuance of the New Notes or whose
nomination for election as a director, or appointment as a director, was
approved by a majority of the Continuing Directors then in office.
"Closing Date" shall mean the date on which the New Notes are originally
issued under the Indenture.
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"Common Stock" of any Person shall mean Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated EBITDA" of any Person shall mean for any period the
Consolidated Net Income for such period increased by the sum of (i) Consolidated
Interest Expense of such Person for such period, plus (ii) Consolidated Income
Tax Expense of such Person for such period, plus (iii) the consolidated
depreciation and amortization expense deducted in determining the Consolidated
Net Income of such Person for such period, plus (iv) any other non-cash charges
to the extent deducted in computing Consolidated Net Income of such Person for
such period (excluding any such non-cash charge to the extent that it represents
an accrual of or reserve for cash expenditures in any future period); and minus
(v) any non-cash charges which increased Consolidated Net Income of such Person
for such period; provided, however, that the Consolidated Income Tax Expense and
consolidated depreciation and amortization expense of a Consolidated Subsidiary
of such Person shall be added to the Consolidated Net Income pursuant to the
foregoing only (x) to the extent and in the same proportion that the
Consolidated Net Income of such Consolidated Subsidiary was included in
calculating the Consolidated Net Income of such Person and (y) only to the
extent that the amount specified in clause (x) is not subject to restrictions
that prevent the payment of dividends or the making of distributions to such
Person.
"Consolidated EBITDA Ratio" of any Person shall mean for any period the
ratio of (i) Consolidated EBITDA of such Person for such period to (ii) the sum
of (A) Consolidated Interest Expense of such Person for such period plus (B) the
annual interest expense (including the amortization of indebtedness discount)
with respect to any Indebtedness incurred by such Person or its Consolidated
Subsidiaries since the beginning of such period to the extent not included in
clause (ii)(A) or proposed to be Incurred as part of the transaction for which
the Consolidated EBITDA Ratio is being determined, minus (C) Consolidated
Interest Expense of such Person with respect to any Indebtedness that is no
longer outstanding or that will no longer be outstanding as a result of the
transaction with respect to which the Consolidated EBITDA Coverage Ratio is
being calculated, to the extent included within clause (ii)(A), each such
calculation to be made on a pro forma basis as if the Indebtedness had been
Incurred or paid off on the first day of such period; provided, however, that in
making such computation, the Consolidated Interest Expense of such Person
attributable to interest on any Indebtedness bearing a floating interest rate
shall be computed on a pro forma basis as if the rate in effect on the date of
computation had been the applicable rate for the entire period; except that
(without duplication) to the extent any such Indebtedness has been hedged
pursuant to a Permitted Hedging Agreement, the interest rate in respect thereof
shall be the effective rate provided thereunder; and provided further that, in
the event such Person or any of its Consolidated Subsidiaries has made
acquisitions or dispositions of assets not in the ordinary course of business
(including any acquisitions of any other Persons by merger, consolidation or
purchase of Capital Stock) during or after such period, the computation of the
Consolidated EBITDA Coverage Ratio (and for the purpose of such computation, the
calculation of Consolidated Net Income, Consolidated Interest Expense,
Consolidated Income Tax Expense and Consolidated EBITDA) shall be made on a pro
forma basis as if the acquisitions or dispositions had taken place on the first
day of such period.
"Consolidated Income Tax Expense" of any Person shall mean for any period
the consolidated provision for income taxes of such Person and its Consolidated
Subsidiaries for such period determined in accordance with GAAP.
"Consolidated Interest Expense" of any Person shall mean for any period the
consolidated interest expense included in a consolidated income statement (net
of interest income) of such Person and its Consolidated Subsidiaries for such
period determined in accordance with GAAP, including for such period without
limitation or duplication (or, to the extent not so included, with the addition
of), (i) the portion of any rental obligation in respect of any Capital Lease
Obligation allocable to interest expense in accordance with GAAP; (ii) the
amortization of Indebtedness discount; (iii) any fees with
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respect to letters of credit, bankers' acceptances or similar facilities; (iv)
fees with respect to Hedging Agreements to the extent it would be permitted or
required to be recorded as an adjustment to interest expense in accordance with
GAAP; (v) any Preferred Stock dividends declared and paid or payable in cash;
and (vi) any interest capitalized in accordance with GAAP, but excluding for
such period without duplication any amortization of deferred financing fees.
"Consolidated Net Income" of any Person shall mean for any period the
consolidated net income (or loss) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with GAAP; provided that
there shall be excluded therefrom (a) the net income (or loss) of any Person
acquired by such Person or a Subsidiary of such Person in a pooling-of-interests
transaction for any period prior to the date of such transaction (subject to the
final proviso of the definition of Consolidated EBITDA Coverage Ratio when
Consolidated Net Income is being computed for purposes of calculating the
Consolidated EBITDA Coverage Ratio), (b) the net income (but not net loss) of
any Consolidated Subsidiary of such Person that is subject to restrictions that
prevent the payment of dividends or the making of distributions to such Person
to the extent of such restrictions, (c) the net income (or loss) of any Person
that is not a Consolidated Subsidiary of such Person except to the extent of the
amount of dividends or other distributions actually paid to such Person by such
other Person during such period, (d) gains or losses on asset dispositions by
such Person or its Consolidated Subsidiaries, (e) any net income (loss) of a
Consolidated Subsidiary that is attributable to a minority interest in such
Consolidated Subsidiary, (f) all extraordinary gains and extraordinary losses
and (g) the tax effect of any of the items described in clauses (a) through (f)
above.
"Consolidated Subsidiaries" of any Person shall mean all other Persons that
would be accounted for as consolidated Persons in such Person's financial
statements in accordance with GAAP.
"Default" shall mean any event which is, or after notice or the passage of
time or both, would be an Event of Default.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Franchising Business" shall mean (i) the operation of, and/or the
licensing others to operate, businesses providing products or services in a
proprietary format and subject to proprietary rights with respect to the quality
and presentation of the products or services offered and (ii) without limiting
the foregoing, each business in which the Company is engaged on the Issue Date.
"GAAP" shall mean generally accepted accounting principles in the United
States as in effect on the Issue Date, consistently applied.
"Guaranty" by any Person shall mean any obligation, contingent or
otherwise, of such Person guaranteeing any Indebtedness, or dividends or
distributions on any equity security, of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such Indebtedness, (ii) to purchase property, securities or services for the
purpose of assuring the holder of such Indebtedness of the payment of such
Indebtedness or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness (and "Guaranteed",
"Guaranteeing" and "Guarantor" shall have meanings correlative to the
foregoing); provided, however, that the Guaranty by any Person shall not include
endorsements by such person for collection or deposit, in either case, in the
ordinary course of business.
"Hedging Agreement" shall mean any interest rate, currency or commodity
swap agreement, interest rate, currency or commodity future agreement, interest
rate cap or collar agreement, interest rate, currency or commodity hedge
agreement, any put, call or other agreement relating to interest rates,
currencies or commodities or any similar agreement.
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"Incur" shall mean, with respect to any Indebtedness of any Person or any
Lien securing Indebtedness, to create, issue, incur (by conversion, exchange or
otherwise), assume, Guaranty or otherwise become liable in respect of such
Indebtedness or Lien, or the taking of any other action which would cause such
Indebtedness, in accordance with GAAP to be recorded on the balance sheet of
such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall
have meanings correlative to the foregoing); provided that, the Indebtedness of
any other Person becoming a Subsidiary of such Person will be deemed for this
purpose to have been Incurred by such Person at the time such other Person
becomes a Subsidiary of such Person; provided, however, that a change in GAAP
that results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an Incurrence of such Indebtedness.
"Indebtedness" shall mean, with respect to any Person, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, notes, debentures or other similar instruments,
(iii) all obligations for the deferred purchase price of property or services
(excluding any accounts payable and other accrued current liabilities incurred
in the ordinary course of business), (iv) all obligations of such Person in
connection with any letters of credit and acceptances issued under letter of
credit facilities, acceptance facilities or other similar facilities, now or
hereafter outstanding, (v) all Capital Lease Obligations and all obligations
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even if the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property) to the extent required to
be reflected as a liability in accordance with GAAP, but excluding accounts
payable arising in the ordinary course of business, (vi) the maximum fixed
redemption or repurchase price of Redeemable Interests of such Person at the
time of determination, (vii) all obligations under Hedging Agreements of such
Person, (viii) all Indebtedness referred to in clauses (i) through (vii) above
of other Persons and all dividends of other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness (provided that the amount of such Indebtedness under this
clause shall be limited to the amount of the fair market value of the property
of such Person subject to such Lien), (ix) all Guaranteed Indebtedness of such
Person (provided that the amount of such Guaranteed Indebtedness under this
clause shall be limited to the maximum amount for which such Person could be
liable with respect to the Indebtedness of another Person pursuant to the
relevant Guaranty), and (x) any amendment, supplement, modification, deferral,
renewal, extension or refunding of any liability of the types referred to in
clauses (i) through (x) above.
"Investment" by any Person in any other Person shall mean (i) any direct or
indirect loan, advance or other extension of credit (including any Guaranty of
Indebtedness or other obligations) or capital contribution to or for the account
of such other Person (by means of any transfer of cash or other property to any
Person or any payment for property or services for the account or use of any
Person, or otherwise), (ii) any direct or indirect purchase or other acquisition
of any Capital Stock, bond, note, debenture or other indebtedness or equity
security or evidence of Indebtedness, or any other ownership interest, issued by
such other Person, whether or not such acquisition is from such or any other
Person, (iii) any direct or indirect payment by such Person on a Guaranty of any
obligation of or for the account of such other Person or any direct or indirect
issuance by such Person of such a Guaranty or (iv) any other commitment of cash
or other property by such Person in or for the account of such other Person that
is treated as an "investment" in such other Person in accordance with GAAP.
"Issue Date" shall mean that date of original issuance of the New Notes.
"Lien" shall mean any mortgage, lien (statutory or other), pledge, security
interest, encumbrance, claim, hypothecation, assignment for security, deposit
arrangement or preference or other security agreement of any kind or nature
whatsoever. A Person shall be deemed to own subject to a Lien any property
which it has acquired or holds subject to the interest of a vendor or lessor
under
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any conditional sale agreement, capital lease or other title retention agreement
relating to Indebtedness of such Person.
"Marketable Securities" shall mean (i) Government Securities; (ii) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution, (iii)
commercial paper maturing not more than 270 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Company) with a rating
at the time as of which any investment therein is made, of "A-1" (or higher)
according to Standard & Poor's or "P-1" (or higher) according to Moody's
Investor Service, Inc., (iv) any banker's acceptances or money market deposit
accounts issued or offered by an Eligible Institution; and (v) any fund
investing exclusively investments of the types described in clauses (i) through
(iv) above.
"Material Subsidiary" shall mean a Subsidiary that, as of the end of the
most recent fiscal quarter accounted for 10% or more of the Company's
consolidated (i) total assets, (ii) shareholders' equity or (iii) operating
income (calculated for the four most recent fiscal quarters), determined in each
case in accordance with GAAP.
"Maturity" shall mean, with respect to any New Note, the date on which the
principal of such New Note becomes due and payable as provided in such New Note
or the Indenture, whether at the Stated Maturity or by declaration of
acceleration, call for redemption or otherwise.
"Moody's" shall mean Moody's Investor Service, Inc. or any successor to the
rating agency business thereof.
"Net Available Proceeds" from any Asset Disposition by the Company or any
Subsidiary shall mean cash or readily marketable cash equivalents received
(including by way of the sale, discounting or payment of a note, installment
receivable or other instrument or obligation, but excluding any other
consideration received in the form of assumption by the acquiree of Indebtedness
or other obligations relating to such properties or assets or received in any
other noncash form) therefrom by such Person, net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses Incurred and all
federal, state, provincial, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or its Subsidiaries on any Indebtedness that is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or that must, by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) amounts provided as a reserve
by such Person or its Subsidiaries, in accordance with GAAP, against (a)
liabilities under any indemnification obligations to the buyer, (b) liabilities
with respect to representations and warranties, (c) liabilities retained by the
Company or such Subsidiary, and (d) employee termination and similar costs
relating to such Asset Disposition (except to the extent and at the time any
such amounts are released from any such reserve, such amounts shall constitute
Net Available Proceeds) and (iv) all distributions and other payments made to
minority interest holders in Subsidiaries of such Person or joint ventures as a
result of such Asset Disposition.
"Obligations" shall mean any principal (including reimbursement obligations
and guarantees), premium, if any, interest (including interest accruing on or
after the filing of, or which would have accrued but for the filing of, any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post-filing interest is allowed in such proceedings), penalties,
fees, expenses, indemnifications, reimbursements, claims for rescission,
damages, gross-up payments and other liabilities payable under the documentation
governing any Indebtedness or otherwise.
"Opinion of Counsel" shall mean a written opinion of counsel to the Company
or any other Person (who may be an employee of the Company) reasonably
satisfactory to the Trustee.
"pari passu" when used with respect to the ranking of any Indebtedness of
any Person in relation to other Indebtedness of such Person, means that each
such Indebtedness (a) either (i) is not
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subordinated in right of payment to any other Indebtedness of such Person or
(ii) is subordinate in right of payment to the same Indebtedness of such Person
as is the other Indebtedness and is so subordinate to the same extent and (b) is
not subordinate in right of payment to the other Indebtedness or to any
Indebtedness of such Person as to which the other Indebtedness is not so
subordinate.
"Permitted Hedging Agreement" of any Person shall mean any Hedging
Agreement entered into in the ordinary course of business and not for
speculation or trading purposes that is designed to protect such Person against
fluctuations in interest rates or currency exchange rates or commodity prices
with respect to Indebtedness Incurred or proposed to be Incurred or assets used
in the business in the ordinary course and which in the case of agreements
relating to interest rates shall have a notional amount no greater than the
payments due with respect to the Indebtedness being hedged thereby.
"Permitted Holder" shall mean any member of senior management of the
Company, Freeman Spogli & Co. Incorporated or PENMAN Asset Management, L.P.,
and any successor entity thereof controlled by the principals of Freeman Spogli
& Co. Incorporated or PENMAN Asset Management, L.P., as the case may be, and
any entity controlled by either of them or under common control with either of
them.
"Permitted Investment" shall mean (i) any Investment in a Qualified Foreign
Joint Venture (including the purchase or acquisition of any Capital Stock of a
Qualified Foreign Joint Venture) and any Investment consisting of loans or
reimbursement obligations relating to Guaranties of Indebtedness of franchisees
pursuant to the Company's "turnkey" store construction programs, provided that
the aggregate amount of Investments under this clause (i) shall not exceed $30
million at any time outstanding, (ii) accounts receivable and other extensions
of credit in the ordinary course of business, loans and advances to employees
for travel, relocation and other corporate purposes or to make investments in
the Company's Capital Stock in each case in the ordinary course of business,
(iii) any Investment in a Subsidiary, (iv) any Investment in a Person as a
result of which such Person becomes a Subsidiary, (v) any Investment in
Marketable Securities or in stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company, (vi) Investments made as a result of the receipt of noncash
consideration from an Asset Disposition that was made pursuant to and in
compliance with the covenant described under "Certain Covenants--Limitation on
Asset Dispositions" above and (vii) Investments not otherwise permitted pursuant
to clauses (i) through (vi) above, in an amount not exceeding $5 million at any
time outstanding.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
estate, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock", as applied to the Capital Stock of any Person, shall
mean Capital Stock of such Person of any class or classes (however designated)
that ranks prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
The amount of any Preferred Stock shall be the highest of at the time of
determination (i) the liquidation value thereof, (ii) the maximum fixed
redemption price thereof and (iii) the maximum fixed repurchase price hereof.
"Qualified Foreign Joint Venture" shall mean a corporation, partnership or
other entity (x) formed to be, or currently, engaged in the Franchising Business
outside the United States as a franchise of the Company and (y) in which the
Company owns, directly or indirectly, a 10% or greater interest.
"Redeemable Interest" of any Person shall mean any equity security of or
other ownership interest in such Person that by its terms (or by the terms of
any security into which it is convertible or for which it is exchangeable) or
otherwise (including upon the occurrence of an event) matures or is
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required to be redeemed (pursuant to any sinking fund obligation or otherwise)
or is convertible into or exchangeable for Indebtedness or is redeemable at the
option of the holder thereof, in whole or in part, at any time prior to the
final Stated Maturity of the New Notes.
"Redemption Date" shall mean each date fixed for redemption pursuant to the
provisions described under "Optional Redemption".
"Refinance" shall have the meaning provided under "Certain Covenants--
Limitation on Indebtedness and Subsidiary Preferred Stock".
"Regulatory Shares" shall mean shares issued to Persons other than the
Company or a Wholly Owned Subsidiary in response to regulatory requirements of
foreign jurisdictions pursuant to a resolution of the Board of Directors, so
long as such shares do not exceed 1% of the total outstanding shares and any
owners of such shares irrevocably covenant with the Company to remit to the
Company or waive any dividends or distributions paid or payable in respect of
such shares.
"Related Person" of any Person shall mean, without limitation, any other
Person owning (a) 5% or more of the outstanding Common Stock of such Person or
(b) 5% or more of the Voting Stock of such Person.
"Restricted Payments" shall have the meaning set forth in the "Certain
Covenants--Limitation on Restricted Payments" covenant.
"S&P" shall mean Standard & Poor's Ratings Group, a division of McGraw
Hill, Inc., or any successor to the rating agency business thereof.
"Stated Maturity", when used with respect to the principal of any
Indebtedness or any installment of interest thereof, shall mean the date
specified in such Indebtedness as the fixed date on which the principal of such
Indebtedness or such installment of interest is due and payable.
"Subsidiary" of any person shall mean (i) any corporation of which more
than 50% of the outstanding shares of Capital Stock having ordinary voting power
for the election of directors is owned directly or indirectly by such Person and
(ii) any partnership, limited liability company, association, joint venture or
other entity in which such Person, directly or indirectly, has more than a 50%
equity interest, and, except as otherwise indicated herein, references to
Subsidiaries shall refer to Subsidiaries of the Company.
"Subsidiary Guaranty" shall mean an unconditional senior subordinated
guaranty of the New Notes pursuant to a supplemental indenture to the Indenture
in a form prescribed by the Indenture. Each Subsidiary Guaranty shall terminate
by its terms upon such Subsidiary ceasing to be a Subsidiary upon (i) a
disposition of all of the Capital Stock of such Subsidiary owned by the Company
to a Person other than an Affiliate of the Company or (ii) the merger,
consolidation or liquidation of such Subsidiary with another Person (other than
an Affiliate of the Company and other than in circumstances where the survivor
would be a Subsidiary).
"Subsidiary Guarantor" shall mean a subsidiary of the Company that shall
have entered into a Subsidiary Guaranty that is at the time in full force and
effect. The Company shall be entitled to designate any Subsidiary as a
Subsidiary Guarantor upon (i) execution and delivery by such Subsidiary to the
Trustee of a supplemental indenture providing for a Subsidiary Guaranty
substantially in the form prescribed by the Indenture and (ii) certain opinions
of counsel as to, among other things, the enforceability of such Subsidiary
Guaranty.
"Surviving Entity" shall have the meaning set forth under "Consolidation,
Merger and Sale of Assets".
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"Voting Stock" shall mean stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
a corporation (irrespective of whether or not at the time, stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Weighted Average Life" shall mean, as of any date, with respect to any
indebtedness security, the quotient obtained by dividing (i) the sum of the
products of the number of years from such date to the dates of each successive
scheduled principal payment (including any sinking fund payment requirements) of
such indebtedness security multiplied by the amount of such principal payment,
by (ii) the sum of all such principal payments.
"Wholly Owned Subsidiary" of any Person shall mean a Subsidiary of such
Person, all of the Capital Stock (other than Directors' qualifying shares or
Regulatory Shares) or other ownership interests of which shall at the time be
owned by such Person or by one or more Wholly Owned Subsidiaries of such Person
or by such Person and one or more Wholly Owned Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of any interest on any New Note when it
becomes due and payable and continuance of such default for a period of 30
days;
(ii) default in the payment of the principal of or premium, if any,
on any New Note at its Maturity (upon acceleration, optional redemption,
required purchase or otherwise) or a Subsidiary Guaranty issued by a
Subsidiary that is at the time a Material Subsidiary shall cease to be in
full force and effect (other than as a result of a termination pursuant to
its terms);
(iii) default in the performance of obligations described under "Offer
to Purchase Upon Change of Control", "Certain Covenants--Limitation on
Asset Dispositions" or "Consolidation, Merger and Sale of Assets";
(iv) default in the performance, or breach, of any covenant or
warranty of the Company contained in the Indenture (other than a default in
the performance, or breach, of a covenant or warranty which is specifically
dealt with in clause (i), (ii) or (iii) above) and continuance of such
default or breach for a period of 60 days after written notice (identifying
the default or breach and stating that the notice constitutes a notice of
an Event of Default) shall have been given to the Company by the Trustee or
to the Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the New Notes then outstanding;
(v) (A) one or more defaults in the payment of principal of or
premium, if any, on Indebtedness of the Company or a Subsidiary Guarantor
aggregating $5 million or more, when the same becomes due and payable at
the final maturity thereof, and such default or defaults shall have
continued after any applicable grace period and shall not have been cured
or waived or (B) Indebtedness of the Company or a Subsidiary Guarantor
aggregating $5 million or more shall have been accelerated or otherwise
declared due and payable, or required to be prepaid or repurchased (other
than by regularly scheduled prepayment) prior to the stated maturity
thereof;
(vi) one or more final judgments or orders shall be rendered against
the Company or a Subsidiary Guarantor for the payment of money, either
individually or in an aggregate amount, in excess of $5 million and shall
not be discharged and either (A) an enforcement proceeding shall have been
commenced by any creditor upon such judgment or order and such proceeding
shall not have been stayed within 5 days or (B) there shall have been a
period of 60
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consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, was not in effect; and
(vii) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or a Subsidiary Guarantor.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
have offered to the Trustee reasonable indemnity. Subject to such provisions
for the indemnification of the Trustee and certain other conditions provided in
the Indenture, the Holders of a majority in aggregate principal amount of the
Outstanding New Notes will have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee.
If an Event of Default (other than an Event of Default specified in clause
(vii) above) shall occur and be continuing, the Trustee or the Holders of not
less than 25% in principal amount of the New Notes then outstanding may declare
the principal of all New Notes due and payable; provided, however, that, so long
as any Indebtedness permitted to be incurred pursuant to the Bank Facility shall
be outstanding, no such acceleration shall be effective until the earlier of (x)
acceleration of any such Indebtedness under the Bank Facility or (y) five
business days after the giving of written notice to the Company and the
administrative agent under the Bank Facility of such acceleration. Upon the
effectiveness of such declaration, such principal and interest will be due and
payable immediately. If an Event of Default specified in clause (vii) above
occurs and is continuing, then the principal of all the New Notes shall become
due and payable without any declaration or other act on the part of the Trustee
or any Holder. After a declaration of acceleration, but before a judgment or
decree for payment of the money due has been obtained by the Trustee, the
Holders of a majority in principal amount of the Outstanding New Notes, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if (a) the Company has paid or deposited, or
caused to be paid or deposited, with the Trustee a sum sufficient to pay (i) all
sums paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, (ii) all overdue interest on all New Notes, (iii) the principal of
and premium, if any, on any New Notes that has become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the New
Notes and (iv) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate borne by the New Notes, and (b) all Events of
Default, other than the non-payment of principal of the New Notes which have
become due solely by such declaration of acceleration, have been cured or
waived.
No Holder of any New Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such Holder
has previously given to the Trustee written notice of a continuing Event of
Default and unless also the Holders of at least 25% in aggregate principal
amount of the Outstanding New Notes have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee has not received from the Holders of a majority in aggregate
principal amount of the Outstanding New Notes a direction inconsistent with such
request and has failed to institute such proceeding within 60 days. However,
such limitations do not apply to a suit instituted by a Holder of a New Note for
enforcement of payment of the principal of and premium (if any) or interest on
such New Note on or after the respective due dates expressed in such New Note.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the New Notes pursuant to the
provisions described above under "Optional Redemption", an equivalent premium
will also become and be immediately due and payable upon the acceleration of the
New Notes.
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In the event of any Event of Default specified in clause (v) above, such
Event of Default and all consequences thereof (including without limitation any
acceleration or resulting payment default) shall be annulled, waived and
rescinded, automatically and without any action by the Trustee or the Holders of
the New Notes, if, within 20 days after such Event of Default arose, (x) the
Indebtedness that is the basis for such Event of Default has been discharged,
(y) the holders thereof have rescinded or waived the acceleration, notice or
action (as the case may be) giving rise to such Event of Default or (z) if the
default that is the basis for such Event of Default has been cured.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance. The Company will be
required to deliver to the Trustee, as soon as possible and in any event within
30 days after the Company becomes aware of the occurrence of an Event of Default
or an event which, with notice or the lapse of time or both, would constitute an
Event of Default, an Officers' Certificate setting forth the details of such
Event of Default or default, and the action which the Company proposes to take
with respect thereto.
DEFEASANCE AND COVENANT DEFEASANCE OF THE INDENTURE
The Company may, at its option, and at any time, elect to have the
obligations of the Company discharged with respect to all outstanding New Notes
("defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire indebtedness represented by the outstanding New
Notes and to have satisfied its other obligations under the Indenture, except
for the following which shall survive until otherwise terminated or discharged:
(i) the rights of Holders of outstanding New Notes to receive payments in
respect of the principal of, premium, if any, and interest on such New Notes
when such payments are due, (ii) the Company's obligations with respect to the
New Notes relating to the issuance of temporary New Notes, the registration,
transfer and exchange of New Notes, the replacement of mutilated, destroyed,
lost or stolen New Notes, the maintenance of an office or agency in The City of
New York, the holding of money for security payments in trust and statements as
to compliance with the Indenture, (iii) its obligations in connection with the
rights, powers, trusts, duties and immunities of the Trustee and (iv) the
defeasance provisions of the Indenture. In addition the Company may, at its
option and at any time, elect to be released from its obligations with respect
to certain of its restrictive covenants under the Indenture ("covenant
defeasance") and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the New Notes. In
the event covenant defeasance occurs, certain events (not including non-payment,
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute Events of Default with respect to the New Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders, cash in U.S. dollars, certain U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of (and premium, if any, on) and interest on the outstanding New Notes
on the Stated Maturity (or Redemption Date, if applicable) of such principal
(and premium, if any) or installment of interest, (ii) in the case of
defeasance, the Company shall have delivered to the Trustee an Opinion of
Counsel stating that (x) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (y) since May 26, 1997,
there has been a change in the applicable United States federal income tax law,
in either case to the effect that, and based thereon such Opinion of Counsel
shall confirm that, the Holders of the outstanding New Notes will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance and will be subject to United States federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred, (iii) in the case of covenant
defeasance, the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Holders of the outstanding New Notes will not
recognize income, gain or loss for United States federal income tax purposes as
a result of such covenant defeasance and will be subject to United States
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such covenant
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defeasance had not occurred, (iv) the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that such deposit shall not cause
the Trustee or the trust so created to be subject to the Investment Company Act
of 1940 and (v) the Company must comply with certain other conditions, including
that such defeasance or covenant defeasance will not result in a breach or
violation of, or constitute a default under, the Indenture or any material
agreement or instrument to which the Company is a party or by which it is bound.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be entered into by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the Outstanding New Notes; provided,
however, that no such modification or amendment may, without the consent of the
Holder of each Outstanding New Note affected thereby: (i) change the Stated
Maturity of the principal of, or any installment of interest on, any New Note,
or reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof, or change the coin or currency in
which any New Note or any premium or the interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment after the
Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date), (ii) reduce the amount of, or change the coin or currency of,
or impair the right to institute suit for the enforcement of, the Change of
Control Purchase Price or the Offer Price referred to under "Certain Covenants--
Limitation on Asset Dispositions", (iii) reduce the percentage in principal
amount of Outstanding New Notes, the consent of whose Holders is necessary to
amend or waive compliance with certain provisions of the Indenture or to waive
certain defaults, (iv) modify any of the provisions relating to supplemental
indentures requiring the consent of Holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to increase the
percentage of Outstanding New Notes the consent of whose Holders is required for
such actions or to provide. that certain other provisions of the Indenture
cannot be modified or waived without the consent of the Holder of each New Note
affected thereby, (v) modify any of the provisions of the Indenture relating to
the subordination of the New Notes in a manner adverse to any Holder or (vi)
modify any of the provisions of the Indenture described under "Offer to Purchase
Upon Change of Control" or the provisions relating to any required Offer to
Purchase which may occur as a result of the Company making any Asset Disposition
in a manner adverse to any Holder.
In addition, modifications and amendments of the Indenture may be entered
into by the Company and the Trustee without the consent of the Holders, among
other things, to: (i) cure any ambiguity, omission, defect or inconsistency in
the New Notes or the Indenture, (ii) effect the assumption by a successor person
of the obligations of the Company under the New Notes and the Indenture; (iii)
comply with any requirements of the Commission to effect or maintain the
qualification of the Indenture under the TIA; or (iv) make any other change
which would not adversely affect the rights of any Holder in any material
respect.
The Holders of a majority in aggregate principal amount of the Outstanding
New Notes may waive compliance with certain restrictive covenants and provisions
on behalf of all Holders.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes may be issued in the form of one or more global securities
(collectively, the "Global New Note"). The Global New Note will be deposited
with, or on behalf of, the DTC and registered in the name of the DTC or its
nominee. Except as set forth below, the Global New Note may be transferred, in
whole and not in part, only to the DTC or another nominee of the DTC. Investors
may hold their beneficial interests in the Global New Note directly through the
DTC if they have an account with the DTC or indirectly through organizations
which have accounts with the DTC.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of the
transactions in those securities between Participants through electronic
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book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and the Indirect Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the Global New Note, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global New Note and (ii) ownership of such interests in the Global
New Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global New Note).
Investors in the Global New Note may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations which are Participants in such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in the Global New Note to such persons may be
limited to that extent. Because DTC can act only on behalf of the Participants,
which in turn act on behalf of the Indirect Participants and certain banks, the
ability of a person having beneficial interests in the Global New Note to pledge
such interests to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interests, may be affected by the
lack of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Notes, see "--Exchange of Book-Entry
Notes for Certificated Notes".
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NEW NOTE WILL
NOT HAVE THE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF THE NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of (and premium, if any) and interest
on the Global New Note registered in the name of DTC or its nominee will be
payable to DTC or its nominee in its capacity as the registered holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the New Notes, including the Global New Note,
are registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Company, the Initial Purchasers, the Trustee nor any agent of the Company, the
Initial Purchasers, or the Trustee has or will have any responsibility or
liability for (i) any aspect or accuracy of DTC's records or any Participant's
or Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global New Note, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global New Note, or (ii) any other matter relating to the actions and practices
of DTC or any of the Participants or the Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the New Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security as
shown on the records of DTC. Payments by the Participants and the Indirect
Participants to the beneficial owners of
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the New Notes will be governed by standing instructions and customary practices
and will not be the responsibility of DTC, the Trustee or the Company. Neither
the Company nor the Trustee will be liable for any delay by DTC or any of the
Participants in identifying the beneficial owners of the New Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
Global New Note for all purposes.
Interests in the Global New Note will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and the Participants. Transfers between Participants
in DTC will be effected in accordance with DTC's procedures and will be settled
in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes only at the direction of one or more Participants
to whose account with DTC interests in the Global New Note are credited and only
in respect of such portion of the aggregate principal amount of the New Notes as
to which such Participant or Participants has or have given such direction.
However, if any of the events described under "-- Exchange of Book-Entry Notes
for Certificated Notes" occurs, DTC reserves the right to exchange the Global
New Note for legended New Notes in certificated form and to distribute such New
Notes to its Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global New Note among accountholders in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Initial
Purchasers or the Trustee nor any agent of the Company, the Initial Purchasers
or the Trustee will have any responsibility for the performance by DTC or its
participants, indirect participants or accountholders of their respective
obligations under the rules and procedures governing their respective
operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
The Global New Note is exchangeable for definitive New Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depository for the Global New Note and the Company
thereupon fails to appoint a successor depository or (y) has ceased to be a
clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the New Notes in certificated form or (iii) there shall have occurred and be
continuing a default or an Event of Default with respect to the New Notes. In
all cases, certificated New Notes delivered in exchange for any beneficial
interests in the Global New Note will be registered in the names, and issued in
any approved denominations, requested by or on behalf of DTC (in accordance with
its customary procedures).
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture.
GOVERNING LAW
The Indenture and the New Notes will be governed by and construed in
accordance with the laws of the State of New York.
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CERTAIN INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax consequences
expected to result to Holders whose Old Notes are exchanged for New Notes in the
Exchange Offer. This summary is based upon the current provisions of the
Internal Revenue Code of 1986, as amended, applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
below. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to Holders. The discussion does not cover all
aspects of federal taxation that may be relevant to particular Holders, and it
does not address state, local, foreign or other tax laws. This summary does not
discuss all aspects of Federal income taxation that may be relevant to investors
in light of their personal investment circumstances or to certain types of
holder subject to special treatment under the Federal income tax laws (for
example, dealers in securities, financial institutions, tax-exempt
organizations, insurance companies, banks, purchasers that hold Notes as a hedge
against currency risks or as part of a straddle with other investments or as
part of a "synthetic security" or other integrated investment comprised of a
Note and one or more other investments, taxpayers subject to the alternative
minimum tax, foreign persons or purchasers that have a "functional currency"
other than the U.S. Dollar), and does not discuss the consequences to a Holder
under state, local or foreign tax laws. The Company has not and will not seek
any rulings or opinions from the IRS or counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the purchase, ownership or disposition of the
Notes which are different from those discussed herein.
HOLDERS OF THE OLD NOTES SHOULD CONSULT THEIR OWN ADVISORS AS TO HOW THEIR
OWN PARTICULAR TAX SITUATION MIGHT BE AFFECTED BY THE EXCHANGE OF OLD NOTES FOR
NEW NOTES AND THE PURCHASE, HOLDING AND DISPOSITION OF THEIR NEW NOTES.
U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of a New Note that is (i) a citizen or
resident (as defined in Section 7701(b)(1) of the Code) of the United States,
(ii) a corporation created or organized under the laws of the United States or
any political subdivision thereof or therein, (iii) an estate or trust described
in Section 7701(a)(30) of the Code or (iv) a person whose worldwide income or
gain is otherwise subject to U.S. Federal income taxation on a net income basis
(a "U.S. Holder"). Certain U.S. Federal income tax consequences relevant to a
holder other than a U.S. Holder are discussed separately below.
STATED INTEREST
In general, interest on a New Note will be taxable to a U.S. Holder as
ordinary interest income at the time it accrues or is received, in accordance
with such holder's regular method of tax accounting.
SALE, EXCHANGE OR RETIREMENT OF THE NEW NOTES
Upon the sale, exchange, retirement or other disposition (including a
redemption) of a New Note, a U.S. Holder generally will recognize gain or loss
in an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received in connection with such sale, exchange,
retirement or other disposition (other than in respect of accrued and unpaid
interest on the New Note) and (ii) such U.S. Holder's adjusted tax basis in the
New Note. If a U.S. Holder holds the New Note as a capital asset, such gain or
loss will be capital gain or loss, and will be long-term capital gain or loss if
the New Note has been held for more than one year at the time of sale, exchange,
retirement or other disposition.
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EXCHANGE OFFER
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer should not constitute a taxable exchange. As a result, (i) a U.S. Holder
should not recognize taxable gain or loss as a result of exchanging the Old
Notes for the New Notes pursuant to the Exchange Offer, (ii) the holding period
of the New Notes should include the holding period of the Old Notes exchanged
therefor and (iii) the adjusted tax basis of the New Notes should be the same as
the adjusted tax basis of the Old Notes exchanged therefore immediately before
the exchange.
The Company will be required to pay additional cash interest on the Old
Notes if it fails to comply with certain of its obligations under the
Registration Rights Agreement. Such additional interest should be taxable to a
U.S. Holder as ordinary income at the time it accrues or is received in
accordance with each such holder's regular method of tax accounting. It is
possible, however, that the IRS may take a different position, in which case a
U.S. Holder might be required to include such additional interest in income as
it accrues or becomes fixed (regardless of such holder's regular method of tax
accounting).
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the New Notes are outstanding, the Company
is required to provide the IRS with certain information, including the U.S.
Holder's name, address and taxpayer identification number, the aggregate amount
of principal and interest paid during the calendar year and the amount of tax
withheld, if any. This obligation, however, does not apply with respect to a
U.S. Holder that is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact.
A U.S. Holder of a New Note subject to the reporting requirements described
above may be subject to backup withholding at the rate of 31% with respect to
interest and principal paid on the New Notes, unless such U.S. Holder provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A U.S. Holder of a New Note who does not provide
the Company with his correct taxpayer identification number may also be subject
to penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the U.S. Holder's income tax liability, provided that the
required information is furnished to the IRS.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of a Note that is not a U.S. Holder (a "Non-
U.S. Holder").
STATED INTEREST
Subject to the discussion of backup withholding below, payments of interest
on a New Note to any Non-U.S. Holder will generally not be subject to U.S.
Federal income or withholding tax, provided that (1) the holder is not (i) an
actual or constructive owner of 10% or more of the total voting power of all
voting stock of the Company, (ii) a controlled foreign corporation related to
the Company through stock ownership, (iii) a foreign tax-exempt organization or
a foreign private foundation for U.S. Federal income tax purposes or (iv) a bank
whose receipt of interest on a New Note is described in Section 881(c)(3)(A) of
the Code, (2) such interest payments are not effectively connected with the
conduct by the Non-U.S. Holder of a trade or business within the United States
and (3) the Company or its paying agent receives (i) from the Non-U.S. Holder, a
properly completed Form W-8 (or substitute Form W-8) under penalties of perjury
which provides the Non-U.S. Holder's name and address and certifies that the
Non-U.S. Holder of the New Note is a Non-U.S. Holder or (ii) from a security
clearing organization, bank or other financial institution that holds the New
Notes in the ordinary course of its
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trade or business (a "financial institution") on behalf of the Non-U.S. Holder,
certification under penalties of perjury that such a Form W-8 (or substitute
Form W-8) has been received by it, or by another such financial institution,
from the Non-U.S. Holder, and a copy of the Form W-8 (or substitute Form W-8) is
furnished to the payor. Recently proposed Treasury Regulations would provide
alternative methods for satisfying these certification requirements, and are
proposed to be effective for payments made after December 31, 1997.
A Non-U.S. Holder that does not qualify for exemption from withholding
under the preceding paragraph generally will be subject to withholding of U.S.
Federal income tax at the rate of 30% (or lower applicable treaty rate) on
payments of interest on the New Notes.
If the payments of interest on a New Note are effectively connected with
the conduct by a Non-U.S. Holder of a trade or business in the United States,
such payments will be subject to U.S. Federal income tax on a net basis at the
rates applicable to United States persons generally (and, with respect to
corporate holders, may also be subject to a 30% branch profits tax). If
payments are subject to U.S. Federal income tax on a net basis in accordance
with the rules described in the preceding sentence, such payments will not be
subject to U.S. withholding tax so long as the holder provides the Company or
its paying agent with a properly executed Form 4224. Recently proposed Treasury
Regulations would provide alternative methods for satisfying this certification
requirement, and are proposed to be effective for payments made after December
31, 1997.
Non-U.S. Holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, exemption from or reduction of
branch profits tax, or other rules different from those described above.
SALE, EXCHANGE OR REDEMPTION OF NEW NOTES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange,
retirement or other disposition of a New Note generally will not be subject to
U.S. Federal income tax, unless (i) such gain is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business within the United States,
(ii) the Non-U.S. Holder is an individual who holds the New Notes as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition and certain other conditions are satisfied, or (iii) the
Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates.
FEDERAL ESTATE TAX
New Notes held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death will not be subject to U.S. Federal
estate tax provided that (i) the individual does not actually or constructively
own 10% or more of the total voting power of all voting stock of the Company and
(ii) income on the New Notes was not effectively connected with the conduct by
such Non-U.S. Holder of a trade or business within the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each Non-U.S. Holder
any interest that is subject to withholding or that is exempt from U.S.
withholding tax. Copies of those information returns may also be made
available, under the provisions of a specific treaty or agreement, to the tax
authorities of the country in which the Non-U.S. Holder resides.
The regulations provide that backup withholding (which generally is a
withholding tax imposed at the rate of 31% on payments to persons that fail to
furnish certain required information) and information reporting will not apply
to payments made in respect of the New Notes by the Company to a Non-U.S.
Holder, if the Holder certifies as to its non-U.S. status under penalties of
perjury or
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otherwise establishes an exemption (provided that neither the Company nor its
paying agent has actual knowledge that the holder is a United States person or
that the conditions of any other exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of New Notes to or through
the U.S. office of any broker, U.S. or foreign, will be subject to information
reporting and possible backup withholding unless the owner certifies as to its
non-U.S. status under penalty of perjury or otherwise establishes an exemption,
provided that the broker does not have actual knowledge that the holder is a
U.S. person or that the conditions of any other exemption are not, in fact,
satisfied. The payment of the proceeds from the disposition of a New Note to or
through a non-U.S. office of a non-U.S. broker that is not a U.S. related person
will not be subject to information reporting or backup withholding. For this
purpose, a "U.S. related person" is (i) a "controlled foreign corporation" for
U.S. Federal income tax purposes or (ii) a foreign person 50% or more of whose
gross income from all sources for the three-year period ending with the close of
its taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a United States trade or business.
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a Non-
U.S. Holder and the broker has no knowledge to the contrary. Backup withholding
will not apply to payments made through foreign offices of a broker that is a
U.S. person or a U.S. related person (absent actual knowledge that the payee is
a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. Federal income tax liability, provided that the requisite
procedures are followed.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities and not acquired directly from the Company. The Company has
agreed that for a period of 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 1997,
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or purchasers of any such New Notes. Any broker-dealer that resells
New Notes that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such New
Notes may be deemed to be an "underwriter" within the meaning of the Securities
Act, and any profit on any such resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by
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delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay the expenses
incident to the Exchange Offer and to the Company's performance of, or
compliance with, the Registration Rights Agreement (other than commissions or
concessions of any brokers or dealers) and will indemnify the Holders of the Old
Notes against certain liabilities, including liabilities under the Securities
Act, in connection with the Exchange Offer.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California. Principals and employees of Riordan & McKinzie are limited partners
in a partnership which is a limited partner of FSEP III.
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the reports of said firm as experts.
110
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and December 29, 1996 and
March 23, 1997 (unaudited)....................................................... F-3
Consolidated Statement of Operations for the years ended December 25, 1994 (52
weeks), December 31, 1995 (53 weeks) and December 29, 1996 (52 weeks) and
the twelve weeks ended March 24, 1996 (unaudited) and March 23, 1997 F-5
(unaudited)......................................................................
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 25, 1994, December 31, 1995 and December 29, 1996 and for the
twelve weeks ended March 23, 1997 (unaudited).................................... F-6
Consolidated Statements of Cash Flows for the years ended December 25, 1994 (52
weeks), December 31, 1995 (53 weeks) and December 29, 1996 (52 weeks) and
the twelve weeks ended March 24, 1996 (unaudited) and March 23, 1997
(unaudited)...................................................................... F-7
Notes to Consolidated Financial Statements................................................ F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AFC Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of AFC
Enterprises, Inc., (a Minnesota corporation) and subsidiary as of December 31,
1995 and December 29, 1996, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the years ended
December 25, 1994, December 31, 1995, and December 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 31, 1995 and December 29, 1996,
and the results of their operations and their cash flows for the fiscal years
ended December 25, 1994, December 31, 1995, and December 29, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 24, 1997
(except with respect to the matters discussed in
Note 18, as to which the date is June 20, 1997)
F-2
<PAGE>
AFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, MARCH 23,
1995 1996 1997
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 13,609 $ 19,216 $ 14,824
Accounts and current notes receivable, net............ 8,220 9,314 8,210
Inventories........................................... 6,115 3,961 4,102
Deferred income taxes................................. 9,656 6,997 5,640
Deposits.............................................. 3,656 4,206 4,282
Prepaid expenses and other............................ 2,653 1,415 2,295
-------- -------- ---------
Total current assets................................ 43,909 45,109 39,353
-------- -------- ---------
Long-term assets:
Notes receivable, net................................. 5,121 4,836 5,950
Property and equipment, net........................... 174,133 189,223 192,994
Other assets.......................................... 6,831 7,295 8,230
Intangible assets, net................................ 98,651 94,211 91,718
-------- -------- ---------
Total long-term assets.............................. 284,736 295,565 298,892
-------- -------- ---------
Total assets...................................... $328,645 $340,674 $338,245
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................... $ 17,628 $ 18,370 $ 17,938
Outstanding checks.................................... 8,083 10,812 9,544
Current portion of long-term debt and capital lease 9,226 11,753 13,289
obligations..........................................
Accrued insurance expenses............................ 6,555 6,938 7,165
Accrued employee compensation......................... 16,652 6,365 6,278
Accrued employee benefit expenses..................... 6,133 6,465 4,203
Other accrued expenses................................ 5,581 7,632 5,755
Preferred stock dividends payable..................... 687 -- --
-------- -------- ---------
Total current liabilities........................... 70,545 68,335 64,172
-------- -------- ---------
Long-term liabilities:
Long-term debt, net of current portion................ 183,168 121,806 119,882
Capital lease obligations, net of current portion..... 11,631 18,234 20,541
Other liabilities..................................... 35,213 33,435 33,364
Deferred income taxes................................. 3,285 1,006 234
-------- -------- ---------
Total long-term liabilities......................... 233,297 174,481 174,021
-------- -------- ---------
Total liabilities................................. $303,842 $242,816 $238,193
-------- -------- ---------
</TABLE>
(Continued on next page)
F-3
<PAGE>
AFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, MARCH 23,
1995 1996 1997
------------ ------------ ---------
(unaudited)
<S> <C> <C> <C>
Mandatorily Redeemable Preferred Stock:
10% Cumulative Exchangeable Redeemable
Preferred Stock ($.01 par value; 0, 1,250,000
and 1,250,000 shares authorized; 0, 560,000
and 560,000 issued and outstanding; 0, 39,560
and 52,449 shares payable in kind; liquidation
value $0, $59,956 and $61,245, respectively)........ $ -- $ 59,956 $ 61,245
8% Redeemable Cumulative Preferred Stock ($.01
par value; 1,250,000, 0 and 0 shares
authorized; 560,000, 0 and 0 issued and
outstanding; liquidation value $56,000, $0 and
$0, respectively)................................... 46,468 -- --
-------- -------- --------
Total mandatorily redeemable preferred stock....... 46,468 59,956 61,245
-------- -------- --------
Shareholders' equity (deficit):
Common stock ($.01 par value; 25,000,000,
50,000,000 and 50,000,000 shares authorized;
10,000,000, 34,373,653 and 34,448,604
shares issued and outstanding at period end,
respectively)........................................ 100 344 344
Capital in excess of par value........................ 24,909 99,482 99,811
Notes receivable--officers, including accrued
interest............................................. -- (3,841) (3,888)
Accumulated deficit................................... (46,674) (58,083) (57,460)
-------- -------- --------
Total shareholders' equity (deficit)................ (21,665) 37,902 38,807
-------- -------- --------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' equity
(deficit)........................................ $328,645 $340,674 $338,245
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE WEEKS ENDED
-------------------------------------------- -------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, MARCH 24, MARCH 23,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(52 WEEKS) (53 WEEKS) (52 WEEKS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Restaurant sales.................... $401,855 $426,707 $430,280 $ 94,460 $103,181
Revenues from franchising........... 41,581 47,916 51,336 10,637 13,184
Revenues from manufacturing......... 12,026 9,969 11,431 3,793 1,604
Other revenues...................... 8,252 8,583 8,262 1,851 1,826
-------- -------- -------- -------- --------
Total revenues..................... 463,714 493,175 501,309 110,741 119,795
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Restaurant cost of sales............ 133,893 139,286 142,199 30,561 33,218
Restaurant operating expenses....... 206,862 216,934 215,464 47,705 51,698
Manufacturing cost of sales......... 11,705 9,816 10,924 3,146 1,024
General and administrative.......... 72,249 75,916 72,672 18,158 20,300
Depreciation and amortization....... 25,438 28,665 30,904 6,795 7,103
Executive compensation award........ -- 10,647 -- -- --
-------- -------- -------- -------- --------
Total costs and expenses........... 450,147 481,264 472,163 106,365 113,343
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS............... 13,567 11,911 29,146 4,376 6,452
OTHER EXPENSES:
Interest............................ 19,172 23,707 16,132 5,208 3,278
-------- -------- -------- -------- --------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY LOSS........ (5,605) (11,796) 13,014 (832) 3,174
Income tax (expense) benefit........ 553 2,969 (5,163) 246 (1,262)
-------- -------- -------- -------- --------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS.................. (5,052) (8,827) 7,851 (586) 1,912
Extraordinary loss on early
retirement of debt (net of
income tax benefit of $2,673)...... -- -- (4,456) -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS).................... (5,052) (8,827) 3,395 (586) 1,912
8% Preferred Stock dividends......... 4,467 4,555 1,316 1,030 --
10% Preferred Stock dividends
payable in kind..................... -- -- 3,956 -- 1,289
Accretion of 8% Preferred Stock
discount............................ 2,250 2,571 813 643 --
Accelerated Accretion of 8%
Preferred Stock discount upon
retirement.......................... -- -- 8,719 -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCK........................ $(11,769) $(15,953) $(11,409) $ (2,259) $ 623
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE WEEKS ENDED
-------------------------------------------- ------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, MARCH 23,
1994 1995 1996 1997
------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Common stock:
Balance at beginning of period.... $ 100 $ 100 $ 100 $ 344
Issuance of common stock.......... -- -- 244 --
-------- -------- -------- --------
Balance at end of period.......... $ 100 $ 100 $ 344 $ 344
======== ======== ======== ========
Capital in excess of par value:
Balance at beginning of period.... $ 23,443 $ 23,914 $ 24,909 $ 99,482
Issuance of common stock.......... -- -- 73,709 6
Deferred compensation............. 471 995 864 323
-------- -------- -------- --------
Balance at end of period.......... $ 23,914 $ 24,909 $ 99,482 $ 99,811
======== ======== ======== ========
Notes receivable-officers:
Balance at beginning of period.... $ -- $ -- $ -- $ (3,841)
Notes receivable additions, net
of discount...................... -- -- (3,593) --
Notes receivable payments -- -- -- 19
Interest receivable............... -- -- (194) (42)
Amortization of discount.......... -- -- (54) (24)
-------- -------- -------- --------
Balance at end of period.......... $ -- $ -- $ (3,841) $ (3,888)
======== ======== ======== ========
Accumulated deficit:
Balance at beginning of period.... $(18,952) $(30,721) $(46,674) $(58,083)
Net income (loss)................. (5,052) (8,827) 3,395 1,912
10% and 8% Preferred Stock
dividends........................ (4,467) (4,555) (5,272) (1,289)
Accretion of 8% Preferred Stock
discount......................... (2,250) (2,571) (813) --
Accelerated accretion of 8%
Preferred Stock discount......... -- -- (8,719) --
Balance at end of period.......... $(30,721) $(46,674) $(58,083) $(57,460)
======== ======== ======== ========
Total shareholders' equity
(deficit)......................... $ (6,707) $(21,665) $ 37,902 $ 38,807
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE WEEKS ENDED
-------------------------------------------- -------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, MARCH 24, MARCH 23,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(52 WEEKS) (53 WEEKS) (52 WEEKS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES:
Net income (loss).................... $ (5,052) $ (8,827) $ 3,395 $ (586) $ 1,912
-------- -------- -------- ------- -------
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization..... 25,438 28,665 30,904 6,795 7,103
Provision for credit losses....... 518 720 816 316 867
Losses on disposition and
retirement of property and
equipment........................ 3,959 3,889 3,019 731 456
Amortization of notes payable
discount......................... 2,242 2,505 7,729 584 --
Notes receivable-officers
discount......................... -- -- 877 -- --
Amortization of notes
receivable-officers discount..... -- -- (54) -- (24)
Deferred compensation............. 471 995 864 91 323
Deferred tax expense (benefit).... (3,010) (4,870) 380 (246) --
Change in operating assets and
liabilities:
(Increase) decrease in
accounts receivable.............. (3,523) 3,034 (4,137) (460) 917
(Increase) decrease in
inventories...................... 849 125 2,154 1,566 (142)
(Increase) decrease in prepaid
expenses and other............... (7,227) (2,665) 687 (3,346) (955)
(Increase) decrease in other
assets........................... (749) (995) (856) 2,417 164
Increase (decrease) in
accounts payable................. (2,390) (3,078) 1,101 (2,498) (432)
Increase (decrease) in accrued
expenses......................... 2,616 4,101 2,469 (3,938) (3,136)
Increase (decrease) in other
liabilities...................... 8,531 4,432 (1,547) 4,969 412
-------- -------- -------- ------- -------
Total adjustments................. 27,725 36,858 44,406 6,981 5,553
-------- -------- -------- ------- -------
Net cash provided by operating
activities........................ $ 22,673 $ 28,031 $ 47,801 $ 6,395 $ 7,465
-------- -------- -------- ------- -------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Proceeds from disposition of
property held for sale............ $ 9,128 $ 3,050 $ 3,158 $ 984 $ 596
Investment in property and
equipment......................... (20,812) (24,996) (33,951) (8,669) (6,667)
Notes receivable additions......... (3,319) (196) (136) -- (2,000)
Payments received on notes......... 3,510 2,028 1,541 336 206
-------- -------- -------- ------- -------
Net cash used in investing
activities........................ $(11,493) $(20,114) $(29,388) $(7,349) $(7,865)
-------- -------- -------- ------- -------
</TABLE>
F-7
<PAGE>
AFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED TWELVE WEEKS ENDED
-------------------------------------------- -------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, MARCH 24, MARCH 23,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(52 WEEKS) (53 WEEKS) (52 WEEKS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS USED IN FINANCING
ACTIVITIES:
Increase (decrease) in
outstanding checks, net........... $ (1,166) $ (151) $ 2,729 $ 77 $(1,268)
Principal payments of long-term
debt.............................. (11,503) (3,743) (69,054) (1,209) (1,293)
Principal payments for capital
lease obligations................. (381) (2,347) (3,904) (575) (1,408)
Notes receivable additions to
officers.......................... -- -- (4,663) -- --
Notes receivable-officer
payments.......................... -- -- -- -- 19
Interest receivable-officers'
notes............................. -- -- -- -- (42)
Issuance of common stock........... -- -- 70,205 -- --
Stock issuance costs............... -- -- (6,115) -- --
Preferred stock dividends paid..... (4,480) (4,480) (2,004) (1,120) --
-------- -------- -------- ------- -------
Net cash used in financing
activities........................ (17,530) (10,721) (12,806) (2,827) (3,992)
-------- -------- -------- ------- -------
Net increase (decrease) in cash
and cash equivalents.............. (6,350) (2,804) 5,607 (3,781) (4,392)
Cash and cash equivalents at
beginning of the period........... 22,763 16,413 13,609 13,609 19,216
-------- -------- -------- ------- -------
Cash and cash equivalents at end
of the period..................... $ 16,413 $ 13,609 $ 19,216 $ 9,828 $14,824
======== ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash interest paid (net of
capitalized amounts).............. $ 16,199 $ 21,940 $ 13,763 $ 3,073 $ 3,258
Cash paid for income taxes......... 1,206 1,862 2,060 450 625
NON CASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease additions............ $ 703 $ 14,049 $ 12,404 $ 1,502 $ 4,531
Retirement of 8% Preferred Stock
(See Note 15)..................... -- -- (56,000) -- --
Issuance of 10% Preferred Stock
(See Note 15)..................... -- -- 56,000 -- --
Issuance of common stock to
executives in connection with
Executive Compensation Award
(See Note 17)..................... -- -- 10,000 -- --
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following notes, insofar as they are applicable to the twelve-week
periods ended March 24, 1996 and March 23, 1997, are not audited. In the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) have been made to fairly present the unaudited consolidated
financial position, results of operations and cash flows for the twelve-week
period ended March 23, 1997, on the same basis as the audited financial
statements. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as they relate to these twelve-week
periods.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of AFC
Enterprises, Inc., a Minnesota corporation, and its wholly-owned subsidiary, AFC
Properties, Inc., a Georgia corporation. All significant intercompany balances
and transactions are eliminated in consolidation. AFC Properties, Inc. was
created in November 1996. The consolidated entity is referred to herein as
"AFC" or "the Company".
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company operates and franchises quick-service restaurants under the
primary trade names of Popeyes Chicken & Biscuits ("Popeyes") and Churchs
Chicken ("Churchs"). The following table outlines the number of restaurants
operated by the Company and franchised by brand at the end of the indicated
periods:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, MARCH 23,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Popeyes:
Domestic--Company-operated... 117 120 119
Domestic--Franchised......... 772 774 782
International--Franchised.... 75 127 136
----- ----- -----
Total...................... 964 1,021 1,037
===== ===== =====
Churchs:
Domestic--Company-operated... 589 622 574
Domestic--Franchised......... 364 367 446
International--Franchised.... 266 268 273
----- ----- -----
Total...................... 1,219 1,257 1,293
===== ===== =====
</TABLE>
A substantial portion of the domestic Company-operated restaurants are
located in the South and Southwest areas of the United States. The Company does
not currently own or operate any restaurants outside of the United States. The
Company's international franchisees operate primarily in Mexico, Canada, Puerto
Rico and numerous countries in Asia.
The Company was established in 1992 under the corporate name of America's
Favorite Chicken Company to become the successor to Al Copeland Enterprises,
Inc. ("ACE") when it emerged from bankruptcy. The amount of retained deficit of
ACE eliminated through fresh start reporting was approximately $69 million. In
October 1996, the Company changed its name to AFC Enterprises, Inc. to reflect
its planned diversification into non-chicken segments of the quick-service
restaurant industry.
F-9
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain items in the prior period financial statements, and notes thereto,
have been reclassified to conform with the current presentation. The Company
has a 52/53-week fiscal year ending on the last Sunday in December. The 1994,
1995 and 1996 fiscal years consisted of 52, 53 and 52 weeks, respectively. The
interim periods ended March 24, 1996 and March 23, 1997, each consisted of 12
weeks.
CASH AND CASH EQUIVALENTS
The Company considers all money market investment instruments and
certificates of deposit with maturities of three months or less to be cash
equivalents for the purpose of preparing the accompanying statements of cash
flows. At December 31, 1995 and December 29, 1996, cash equivalents included
$6.4 million and $10.9 million, respectively, of overnight repurchase
agreements.
The Company does not believe it is exposed to any significant credit risk
on money market investments with commercial banks, because its policy is to make
such deposits only with highly rated institutions.
Outstanding checks represent checks issued which have not yet cleared the
bank and are presented as a current liability in the accompanying financial
statements.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from franchisees
related to royalties, rents and miscellaneous equipment sales. The accounts
receivable balances are stated net of reserves for doubtful accounts.
A summary of changes in the allowance for doubtful accounts is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of period... $ 8,946 $2,093 $ 2,078
Provisions.................... 74 720 816
Recoveries.................... 66 101 1,193
Write-offs.................... (6,993) (836) (2,630)
------- ------ -------
Balance, end of period......... $ 2,093 $2,078 $ 1,457
======= ====== =======
</TABLE>
NOTES RECEIVABLE
Notes receivable consist primarily of notes from franchisees and third
parties to finance acquisitions of certain restaurants from the Company and to
finance certain past due royalties, rents, interest or other amounts due. The
Company has also provided financial support to certain franchisees in converting
their restaurants to the Popeyes concept. The current portion of notes
receivable of
F-10
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
$1,407, $556 and $1,132, as of December 31, 1995, December 29, 1996, and March
23, 1997, respectively (in thousands), are included in current accounts and
notes receivable. The notes receivable balances are stated net of reserves for
uncollectibility.
A summary of changes in the allowance for uncollectible notes is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of period... $ 8,822 $ 4,618 $ 3,371
Provisions.................... 444 -- --
Recoveries.................... -- 11 20
Write-offs.................... (4,648) (1,258) (1,520)
------- ------- -------
Balance, end of period......... $ 4,618 $ 3,371 $ 1,871
======= ======= =======
</TABLE>
INVENTORIES
Inventories, consisting primarily of food items, packaging materials, and
restaurant equipment, are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including capitalized interest
and overhead incurred throughout the construction period for certain assets.
Provisions for depreciation and amortization are made principally on the
straight-line method over the estimated useful lives of the assets or, in the
case of leases, the term of the applicable lease, if shorter. The ranges of
estimated useful lives used in computing depreciation and amortization are as
follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION NUMBER OF YEARS
- ---------------------------------------- ---------------
<S> <C>
Buildings............................... 7-20
Equipment............................... 3-8
Leasehold improvements.................. 3-15
Capital lease buildings and equipment... 3-20
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of franchise value and trademarks and
reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Goodwill") and are being amortized on a straight-line basis
ranging from 10 to 20 years.
LONG-LIVED ASSETS
Management periodically reviews the performance of restaurant properties.
If it is determined that a restaurant will be closed, a provision is made to
adjust the carrying value of the restaurant's property and equipment to net
realizable values. Property held for sale includes closed restaurant
F-11
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
properties and other corporate property held for sale and is recorded at its
estimated net realizable value.
In 1995, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". It is the Company's policy to
evaluate operating restaurant properties on a market basis and other assets such
as assets held for sale and income producing assets on an individual property
basis. The identifiable cash flows of long-lived assets and their carrying
values were compared to estimates of the recoverability of the asset values. No
significant impairment losses were recorded in 1995 or 1996 resulting from the
implementation of SFAS No. 121.
STOCK-BASED EMPLOYEE COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). This new standard defines a fair value based
method of accounting for an employee stock option or similar equity instrument.
SFAS No. 123 gives entities a choice of recognizing related compensation expense
by adopting the new fair value method or to continue to measure compensation
using the intrinsic value approach under APB No. 25. If APB No. 25 is used by
an entity, SFAS No. 123 requires supplemental disclosure to show the effects of
using SFAS No. 123 for stock option issuances effective after December 15, 1994.
The Company continues to account for stock options under APB No. 25. Had
compensation expense for all of the Company's stock option plans been determined
consistent with SFAS No. 123, the Company's net income (loss) would have been
reduced (increased) to the following pro forma amounts (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Net income (loss):
As reported.......... $(8,827) $3,395
Pro forma............ (8,827) 3,137
</TABLE>
The pro forma effect of SFAS No. 123 on the net income attributable to the
twelve-weeks ended March 24, 1996 and March 23, 1997 was immaterial.
Because the SFAS No. 123 method of accounting has not been applied to
options issued prior to December 15, 1994, the resulting pro forma compensation
expense may not be representative of that to be expected in future years. The
fair value of options granted in 1995 was calculated to be zero under the Black-
Scholes option pricing method described below; therefore, the net loss for the
year ended December 31, 1995 would not have been affected by SFAS No. 123.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: risk-free interest rate of
approximately 6.5%; expected volatility of approximately 26.0% based on the
performance of publicly traded businesses within the Company's industry;
expected lives of approximately 12 years, 10 years and 7 years for the 1992
Stock Option Plan, the 1996 Performance-based Stock Option Plan and the 1996
Stock Option Plan, respectively (See Note 11).
F-12
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
REVENUES FROM FRANCHISING
The Company generates revenues from franchising through the following
agreements with its franchisees:
FRANCHISE AGREEMENTS. In general, the Company's franchise agreements
provide for the payment of a franchise fee for each opened franchised
restaurant. The franchise agreements also generally require the franchisees to
pay a 5% royalty to the Company and an advertising fund contribution of 3% for
Popeyes and 4% for Churchs based on net restaurant sales. Certain franchise
agreements provide for lower royalties and advertising fund contributions.
DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide
for the development of a specified number of restaurants within a defined
domestic geographic territory in accordance with a schedule of restaurant
opening dates. Development schedules generally cover three to five years and
typically have benchmarks for the number of restaurants to be opened and in
operation at six to twelve month intervals. Development agreement payments are
made when the agreement is executed and are nonrefundable.
INTERNATIONAL DEVELOPMENT AGREEMENTS. International development agreements
are similar to domestic development agreements but pertain to franchised
restaurants in jurisdictions outside of the United States. In that regard,
these agreements include provisions to address the international aspects of the
franchise agreement (foreign currency exchange, taxation, dispute resolution,
etc.). These agreements generally include a territorial fee related to
establishing the franchise in a new country. International development
agreement payments and related territorial fees are received when the agreement
is executed and are nonrefundable.
Franchise fees, domestic development fees and international development
fees are recorded as deferred revenues when received and are recognized as
revenue when the restaurants covered by the fees are opened and/or all material
services or conditions relating to the fees have been substantially performed or
satisfied by the Company. Royalties, are recorded as revenues by the Company
when the restaurant sales by the franchisee occurs.
REVENUES FROM MANUFACTURING
The Company's revenues from manufacturing consist primarily of sales of
fryers and other custom-fabricated restaurant equipment from its manufacturing
business to distributors and franchisees.
OTHER REVENUES
The Company's other revenues consist of net rental income from properties
owned and leased by the Company which are leased or subleased to franchisees and
third parties and interest income earned on notes receivable from franchisees
and third parties.
SELF-INSURANCE PROGRAMS
The Company maintains insurance plans for general and auto liability
insurance, employee medical insurance and workers' compensation insurance,
except for workers' compensation liabilities in the state of Texas, where the
Company is self-insured against such liabilities. All of the Company's
insurance programs, including its self-insured liabilities, have provisions
which limit the Company's exposure on a per-incident basis.
F-13
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has established reserves with respect to the above described
programs based on the estimated total losses the Company will experience. The
portion of the reserves for the amount of claims expected to be settled during
the succeeding year are included in accrued expenses in the accompanying balance
sheets, and the balance of the reserves are included in other liabilities. The
Company's insurance reserves are partially collateralized by letters of credit
and/or cash deposits.
INTERNATIONAL OPERATIONS
As of March 23, 1997, the Company licenses franchisees to operate Churchs
and Popeyes restaurants at 409 locations in 20 foreign countries and plans to
expand its non-U.S. franchised operations significantly over the next several
years. Although the Company does not currently own any material non-U.S.
operations or participate in the equity ownership of its non-U.S. franchisees,
its revenues from foreign franchisees consisting mainly of royalties payable in
U.S. dollars (based on a percentage of net restaurant sales) are exposed to the
adverse effects on its franchisees' results of operations of currency
fluctuations and changes in the local economies in which its franchisees
operate. The Company does not currently maintain any hedges against foreign
currency fluctuations. For fiscal years 1994, 1995 and 1996 and for the twelve-
week periods ending March 24, 1996 and March 23, 1997, royalties and other
revenues from foreign franchisees represented 1.8%, 2.2%, 2.4%, 2.2% and 2.1%,
respectively, of total revenues of the Company.
2. EQUITY INVESTMENT
On April 11, 1996 ("Closing"), a private investor group (the "Investor
Group") and the Company completed a transaction in which the Investor Group
purchased approximately 21.1 million shares of AFC common stock for a purchase
price of $70.0 million (the "Equity Investment"). As a result of this purchase,
the Investor Group became the majority common shareholder of AFC with 58.3% of
the Company's common stock on a fully diluted basis.
With the proceeds from the sale of common stock, the Company retired
approximately $64.0 million of its Tranche A and B debt (See Note 8) and paid
transaction fees in the amount of approximately $6.0 million. The remaining
Tranche A and B debt was refinanced into a new term loan (See Note 8) and the
Company's 8% Preferred Stock was exchanged for new 10% Preferred Stock (See Note
15).
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments held by the Company:
CURRENT ASSETS AND CURRENT LIABILITIES. The Company's financial
instruments consist primarily of cash, accounts receivable, and accounts
payable. The carrying value approximates fair value due to the short-term
maturity of these items.
LONG-TERM NOTES RECEIVABLE. The fair value of long-term notes
receivable approximates the carrying value as management believes the
respective interest rates are commensurate with the credit and interest
rate risks involved. In addition, management has established a reserve for
doubtful note receivable accounts (See Note 1).
LONG-TERM DEBT. The fair value of the Company's long-term debt is
based on secondary market indicators. Since the Company's debt is not
quoted, estimates are based on each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying value approximates fair
value.
F-14
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. INVENTORIES
The major components of inventory are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
Food items, food preparation and
packaging materials.................. $2,396 $2,578
Restaurant equipment for resale........ 3,179 1,383
------ ------
$6,115 $3,961
====== ======
</TABLE>
5. PROPERTY AND EQUIPMENT
The major components of property and equipment are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Owned properties:
Land...................................... $ 46,770 $ 44,933
Buildings................................. 65,152 67,526
Equipment................................. 68,659 79,951
Leasehold improvements.................... 32,480 36,384
Construction work in process 1,036 4,892
Properties held for sale 2,562 5,116
Capital leases:
Building 3,965 4,238
Equipment................................. 12,448 24,336
-------- --------
233,072 267,376
Less: accumulated depreciation
and amortization.......................... 58,939 $ 78,153
-------- --------
$174,133 $189,223
======== ========
</TABLE>
Depreciation and amortization expense related to property and equipment was
approximately $19.6 million, $22.8 million and $25.0 million for the years ended
December 25, 1994, and December 31, 1995 and December 29, 1996, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Franchise value and trademarks $110,000 $110,000
Reorganization goodwill................ 5,642 5,642
Other.................................. 2,212 3,729
-------- --------
117,854 119,371
Less: accumulated amortization......... 19,203 25,160
-------- --------
$ 98,651 $ 94,211
======== ========
</TABLE>
F-15
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Amortization expense for the years ended December 25, 1994, December 31,
1995 and December 29, 1996, was approximately $5.9 million.
7. OTHER LIABILITIES
A summary of other liabilities is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Insurance......................... $11,659 $11,928
Deferred franchise revenues....... 5,327 4,743
Litigation and environmental...... 10,827 9,267
Leasehold rebates................. 2,665 2,289
Other............................. 4,735 5,208
------- -------
$35,213 $33,435
======= =======
</TABLE>
8. LONG-TERM DEBT
As a result of the Equity Investment (See Note 2), the Company's term loan
and revolving line of credit agreements with Canadian Imperial Bank of Commerce
("CIBC") were amended and restated effective April 11, 1996. In connection
therewith, the Company wrote off the unamortized balances of debt discounts
associated with the Tranche A and B term loans and other unamortized debt-
related costs. The write-off of such balances is included as an extraordinary
loss in the accompanying statements of operations. A new credit agreement was
entered into in conjunction with the Equity Investment (the "1996 Term Loan")
whereby the remaining indebtedness after repayment of approximately $64.0
million of Tranche A and B term debt was refinanced into a new term loan and
revolving credit facility. Debt issuance costs of $0.2 million were incurred
during the refinancing.
A summary of the Company's long-term debt is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------- ------------
<S>........................................ <C> <C>
Term Loans:
Tranche A (face value of $192,264)........ $184,665 $ --
Tranche B (face value of $3,748).......... 3,621 --
1996 Term Loan............................ -- 127,139
Other notes................................ 1,022 1,072
-------- --------
189,308 128,211
Less: current maturities............... 6,140 6,405
-------- --------
$183,168 $121,806
======== ========
</TABLE>
The following is a schedule of the aggregate maturities of long-term debt
as of December 29, 1996, for each of the succeeding five years and thereafter
(dollars in thousands):
F-16
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
YEAR AMOUNT
------------- --------
<S> <C>
1997......... $ 6,405
1998......... 8,997
1999......... 15,261
2000......... 25,213
2001......... 72,335
Thereafter... --
--------
$128,211
========
</TABLE>
The Company's 1996 Term Loan and certain letter of credit facilities
described below were provided by various financial institutions which hold a
majority of the preferred stock and a minority of the common stock of the
Company.
1996 TERM LOAN
The 1996 Term Loan bears interest at a rate per annum equal to either (i)
the CIBC Alternate Base Rate (as defined) plus 1.75% or (ii) the London Inter-
Bank Offering Rate (as defined) plus 2.75%, interest payable at varying dates
ranging from one to three months. At December 29, 1996 the interest rate on the
1996 Term Loan ranged from 8.28% to 10.00%. The 1996 Term Loan is secured by
substantially all of the Company's assets and contains certain covenants and
mandatory prepayment provisions. This loan also contains covenants which
include, among other provisions, the maintenance of certain financial ratios,
limitations on indebtedness and capital expenditures, and the payment of
dividends under certain conditions.
The 1996 Term Loan is payable in quarterly installments ranging from $1.3
to $7.5 million beginning July 1996, with the remaining principal due in two
installments of $14.5 and $42.6 million in July 2001 and October 2001,
respectively. The loan has certain mandatory prepayment provisions triggered by
the sale of assets and capital stock or the generation of excess cash flow, as
defined in the agreement. During the fiscal year ended December 29, 1996, there
were no prepayments required to be made by the Company under the agreement.
REVOLVING CREDIT LOANS AND LETTER-OF-CREDIT FACILITY
As part of the 1996 Term Loan agreement, the Company entered into a new
revolving credit commitment and letter-of-credit facility (the "Revolving Credit
Loans") which mature in 2001. This facility replaced the existing credit
facility under the Tranche A and B Term Loan agreement which would have matured
in 1998.
Under the terms of the Revolving Credit Loans, the Company may borrow and
obtain letters of credit up to an aggregate of $25.0 million. At December 29,
1996, there were no short-term borrowings outstanding and $11.9 million of
outstanding letters of credit leaving unused revolving credit available for
short-term borrowings and letters of credit of $9.0 and $4.1 million,
respectively. The agreement provides for a commitment fee of 0.5% per annum
applied to the average daily amount available under the revolving credit
commitment and a 2.75% per annum commitment fee applied to the undrawn face
amount of the letters of credit. The Revolving Credit Loans are governed by the
same conditions and covenants as the 1996 Term Loan and the amounts outstanding
bear interest at the same rate as the 1996 Term Loan.
F-17
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has certain additional letters of credit aggregating $4.3
million as of December 29, 1996. The aforementioned letters of credit do not
represent debt of the Company but rather are used to secure certain insurance
and utility obligations.
SUBSEQUENT EVENTS--NEW CREDIT FACILITY AND SUBORDINATED NOTES
Subsequent to December 29, 1996, the Company entered into a new debt
facility and subordinated notes which significantly changed the amounts, terms
and provisions of the aforementioned debt and letter-of-credit facilities. See
Note 18 for a further discussion of these events.
9. LEASES
The Company maintains leases covering restaurant land and building
properties, computer software, hardware and other equipment which expire on
various dates through 2015 and generally require additional payments for
property taxes, insurance and maintenance. Certain leases provide for rentals
based upon a percentage of sales by Company-operated restaurants in addition to
the minimum annual rental payments.
Future minimum payments under capital and operating leases, as of December
29, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997.......................................... $ 7,785 $ 8,858
1998.......................................... 7,558 7,779
1999.......................................... 6,228 6,232
2000.......................................... 4,039 4,829
2001.......................................... 2,203 4,092
Thereafter.................................... 3,801 12,826
------- -------
Future minimum lease payments................ 31,614 $44,616
=======
Less: amounts representing interest.......... 8,032
-------
Total obligations under capital leases....... 23,582
Less: current portion........................ 5,348
-------
Long-term obligations under capital leases... $18,234
=======
</TABLE>
Rent expense for operating leases for the fiscal years ended December 25,
1994, December 31, 1995 and December 29, 1996, amounted to $8.9 million, $10.8
million and $9.9 million, respectively, including percentage rents of $0.5, $0.6
and $0.7 million, respectively.
As of December 29, 1996, the Company leases restaurant properties with an
aggregate book value of $12.1 million to certain franchisees and others. Some
of these properties are owned by the Company and others are leased from third
parties. Rental income from these leases was approximately $6.9 million, $7.0
million and $6.4 million for the fiscal years ended in 1994, 1995 and 1996,
respectively, and was primarily based upon a percentage of restaurant sales.
The lease terms under these agreements expire on various dates through 2021.
F-18
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUBSEQUENT EVENTS--REPAYMENT OF CERTAIN CAPITAL LEASE OBLIGATIONS
Subsequent to December 29, 1996, the Company anticipates repaying certain
capital lease obligations related to information technology (approximately $11.3
million at December 29, 1996). See Note 18 for a further discussion of these
events.
10. INCOME TAXES
The components of income tax expense (benefit) included in the statements
of operations are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FOR YEARS ENDED
--------------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current income tax expense consists of:
Federal....................................... $ - $ 210 $ 363
State......................................... 54 118 42
Foreign....................................... 2,403 1,573 1,705
------ ------ ------
Total........................................ $2,457 $1,901 $2,110
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR YEARS ENDED
--------------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred income tax expense (benefit)
consists of:
Federal....................................... $(2,385) $(4,322) $ 1,857
State......................................... (625) (548) 228
Foreign....................................... -- -- (1,705)
------- ------- -------
Total........................................ (3,010) (4,870) 380
------- ------- -------
Income tax expense (benefit)................. $ (553) $(2,969) $ 2,490
======= ======= =======
</TABLE>
A reconciliation of the Federal statutory income tax rate to the Company's
effective tax rate is as follows:
F-19
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
FOR YEARS ENDED
--------------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------- ------------- ------------
<S> <C> <C> <C>
Statutory Federal income tax expense
(benefit) rate............................... (34.0)% (34.0)% 34.0%
Nondeductible expenses....................... 4.1 1.9 3.7
State/foreign income tax expense............. 18.4 5.8 4.6
Other........................................ 1.6 1.1 -
----- ----- ----
Effective income tax expense
(benefit) rate............................. (9.9)% (25.2)% 42.3%
===== ===== ====
</TABLE>
Significant components of the Company's net current deferred tax asset and
net noncurrent deferred tax liability were as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Current deferred tax asset:
Insurance accruals................................ $ 4,278 $ 4,282
Executive compensation award...................... 3,750 --
Provisions for credit losses...................... 779 547
Accrued vacation.................................. 675 684
Other nondeductible accruals...................... 174 1,484
-------- --------
Total current deferred tax asset................. 9,656 6,997
-------- --------
Noncurrent deferred tax asset (liability):
Franchise value and trademarks.................... (34,745) (32,683)
Property and equipment............................ (5,333) (6,816)
Net operating loss and tax credit carryforwards... 18,626 15,108
Insurance accruals................................ 3,435 3,536
Litigation/environmental accruals................. 3,715 3,022
Reorganization costs.............................. 4,427 4,427
Discount on long-term debt........................ (2,897) --
Provision for credit losses--notes receivable..... 1,278 708
Deferred compensation............................. 753 1,046
Capital lease obligations......................... 5,032 8,450
Deferred franchise fee revenue.................... 1,998 1,779
Other items, net.................................. 426 417
Net noncurrent deferred tax liability............ (3,285) (1,006)
-------- --------
Net deferred tax asset........................... $ 6,371 $ 5,991
======== ========
</TABLE>
Based on management's assessment, it is more likely than not that the net
deferred tax assets will be realized through future reversals of existing
temporary differences and future taxable income.
F-20
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company's net operating losses ("NOLs") expire as follows: 2004--$4.9
million; 2005--$12.4 million; 2008--$2.8 million; and 2009--$9.6 million. In
addition, the Company's $4.6 million of tax credit carryforwards expire from
2001 through 2006.
As of December 29, 1996, the Company has recognized NOLs and tax credit
carryforwards in the amounts of $29.7 million and $4.6 million, respectively,
against its net deferred tax liabilities. These amounts have been estimated
have been estimated after application of "discharge of indebtedness" income tax
laws and regulations applicable to the transactions in which the Company
acquired its current business from a debtor in a bankruptcy reorganization
proceeding. The Internal Revenue Service ("IRS") has not yet reviewed the
Company's income tax positions with respect to the application of income tax
laws and regulations regarding discharge of indebtedness. If the IRS challenges
the Company's positions, it is possible that all or a portion of the Company's
NOL's and tax credit carryforwards that the Company believes existed on November
5, 1992 (consisting of approximately $34 million of NOLs and $2.3 million of tax
credits), could be eliminated. Should such NOLs and tax credit carryforwards be
eliminated, an adjustment will be made to the Company's intangible assets which
were created at the time of the emergence from bankruptcy.
In addition, the bankruptcy reorganization proceeding constituted an
"ownership change" under Section 382 of the Internal Revenue Code of 1986, as
amended ("Section 382"). As a result, utilization of these pre-November 5, 1992
NOLs and tax credit carryforwards (if any) is subject to an annual limit of
approximately $4.0 million of NOLs or $1.4 million of credits (but not both).
Any subsequent ownership change would subject the Company to further annual
limits under Section 382 on the utilization of NOLs and tax credit carryforwards
existing at the time of such ownership change. However, the Company believes
that any Section 382 limitations will not prevent the ultimate utilization of
any existing NOLs and tax credit carryforwards (arising both before and after
November 5, 1992) before they expire.
11. STOCK OPTION PLANS
THE 1992 STOCK OPTION PLAN
The 1992 Stock Option Plan is a nonqualified stock option plan authorizing
the issuance of options to purchase approximately 1.8 million shares of the
Company's common stock. The options currently granted and outstanding allow
certain officers of the Company to purchase approximately 1.8 million shares of
common stock at $0.08 per share and are exercisable at various dates beginning
January 1, 1994. If not exercised, the options expire 15 years after the date
of issuance. The options issued in 1992 under the 1992 Stock Option Plan were
issued with option exercise prices below market value of the Company's common
stock. In prior years, compensation expense of approximately $2.4 million
related to certain options was being amortized over their respective vesting
periods of 25.0% per year. During 1995, the Company accelerated the vesting of
options granted to certain officers. In connection with this accelerated
vesting, the Company recorded approximately $0.6 million of compensation expense
in 1995 (See Note 17). For the fiscal year ended December 29, 1996, the Company
recognized an immaterial amount of compensation expense related to certain
options. As of December 29, 1996, 1,553,264 options were exercisable.
Pursuant to certain anti-dilution provisions, in April 1996, the 1992 Stock
Option Plan was amended whereby the option price was reduced from $0.10 per
share to $0.08 per share. In connection with the price reduction per share,
approximately 0.4 million additional options were issued to the officers
currently holding options under this plan.
F-21
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
THE 1996 PERFORMANCE-BASED STOCK OPTION PLAN
In April 1996, the Company executed the Nonqualified Performance Stock
Option Plan ("1996 Performance-Based Stock Option Plan"). This plan authorizes
the issuance of approximately 2.7 million options to purchase one share each of
AFC's common stock at $3.317 per share. The options currently granted and
outstanding allow certain employees of the Company to purchase approximately 2.6
million shares of common stock. Vesting, as defined in the agreement, is based
upon the Company achieving annual levels of EBITDA (as defined) over five fiscal
year periods beginning with fiscal year 1996. If not exercised, the options
expire ten years from the date of issuance. Under this plan, compensation
expense will be determined and recorded when and if the employees vest in their
respective options. During the fiscal year ended December 29, 1996, the Company
recorded approximately $0.8 million in compensation expense related to the
504,000 options which vested in 1996 under this plan. As of December 29, 1996,
approximately 504,000 options were exercisable.
THE 1996 STOCK OPTION PLAN
Also in April 1996, the Company executed the Nonqualified Stock Option Plan
("1996 Stock Option Plan"). This plan authorizes the issuance of approximately
1.8 million options. The Company granted approximately 0.2 million options in
April 1996 at $3.317 per share, which was the market value of the Company's
common stock at the date of grant. Effective December 1996, the Company granted
an additional 0.1 million options at $3.317 per share. The compensation expense
associated with the second option grant under this plan was immaterial. The
options currently granted and outstanding allow certain employees of the Company
to purchase approximately 0.3 million shares of common stock at 25% per year
beginning April 1997. If not exercised, the options expire seven years from the
date of issuance. As of December 29, 1996, no options were exercisable.
SUMMARY OF PLAN ACTIVITY
A summary of the status of the Company's three stock option plans at
December 29, 1996 and December 31, 1995 and changes during the years is
presented in the table and narrative below:
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
SHARES WTD. AVG SHARES WTD. AVG.
(000'S) EX. PRICE (000'S) EX. PRICE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 1,357 $0.10 1,397 $0.10
Granted options.................... 234 0.10 3,413 2.93
Exercised options.................. -- -- (5) 0.08
Forfeited options.................. (194) 0.10 (162) 3.32
-------- --------
Outstanding at end of year......... 1,397 0.10 4,643 2.06
======== ========
Exercisable at end of year......... 1,126 0.10 2,057 0.84
======== =======
Weighted average fair value of options
granted (See Note 1)............................................................... $1.99
</TABLE>
F-22
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. OTHER EMPLOYEE BENEFIT PLANS
PRE-TAX SAVINGS AND INVESTMENT PLAN
The Company maintains a qualified employee benefit plan under Section
401(k) of the Code for the benefit of employees meeting certain eligibility
requirements. Under the plan, employees may contribute up to 16.0% of their
eligible compensation to the plan on a pre-tax basis and the Company may make
both voluntary and matching contributions to the plan. The Company expensed
approximately $0.2 million during 1994, 1995 and 1996 for its contribution to
the plan.
EXECUTIVE RETIREMENT AND BENEFIT PLANS
During 1994, the Company adopted a nonqualified retirement, disability and
death benefit plan for certain employees. Retirement benefits under this plan
are unfunded and cover certain executive officers. Annual benefits are equal to
30.0% of the executive's average base compensation for the five years preceding
retirement. The benefits are payable in 120 equal monthly installments
following the executive officer's retirement date. Death benefits under this
plan cover certain executive officers and are up to five times the officer's
base compensation at the time of employment. The Company has the discretion to
increase the employee's death benefits. Death benefits are funded by split
dollar life insurance arrangements. The accumulated benefit obligation and the
recorded plan liability related to this plan was approximately $0.4 million,
$0.7 million and $1.0 million as of December 25, 1994, December 31, 1995 and
December 29, 1996, respectively.
Expense for the retirement plan for the years ended December 25, 1994,
December 31, 1995 and December 29, 1996, was approximately $0.3 million.
The Company's assumptions used in determining the plan cost and liabilities
include a discount rate of 8.0% per annum in 1994 and 7.5% per annum in 1995 and
1996 and a 5.0% rate of salary progression in 1994, 1995 and 1996.
The Company also provides post-retirement medical benefits (including
dental coverage) for certain retirees and their spouses. This benefit begins on
the date of retirement and ends after 120 months or upon the death of both
parties. The accumulated post-retirement benefit obligation for the plan as of
December 31, 1995 and December 29, 1996, was approximately $0.3 million, and the
net periodic expense for the medical coverage continuation plan for 1994, 1995
and 1996 was approximately $28,000, $44,000 and $71,000, respectively.
13. RELATED PARTY TRANSACTIONS
In 1994, 1995 and 1996 the Company received legal services from a law firm
associated with a member of the Company's Board of Directors. During the fiscal
years ended December 25, 1994, December 31, 1995 and December 29, 1996, the
total amount paid to this law firm was $1.3 million, $0.9 million and $0.5
million, respectively.
In April 1996, the Company loaned certain officers of the Company an
aggregate of $4.5 million to pay personal withholding tax liabilities incurred
as a result of the $10.0 million executive compensation award (See Note 17).
All the individual notes have similar terms. The notes bear interest at 6.25%
per annum with principal and interest payable at the end of the term of the note
which is approximately seven and one half years from the date of issuance. Each
note is secured by the common stock awarded to the officers. At the date of
issuance, a discount was recorded to present the notes at fair market value.
Accordingly, compensation expense was recognized in an amount of $0.9 million
for the fiscal year ended December 29, 1996. The note receivable balance, net
of the
F-23
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
unamortized discount, and interest receivable balance as of December 29, 1996
are included as a reduction to shareholders' equity in the accompanying balance
sheets and statements of shareholders' equity (deficit) since the common stock
awarded to the officers secures payment of the individual notes.
14. COMMITMENTS AND CONTINGENCIES
EMPLOYEE AGREEMENTS
The three most senior executives and the Company have entered into employment
agreements containing customary employment terms which provide for an annual
base salary, subject to annual adjustment by the Board of Directors, an annual
incentive bonus, stock options, 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 terminate in 1998, unless
earlier terminated or otherwise renewed, pursuant to the terms thereof.
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
executive would be entitled to, among other things, one to two-and-one-half
times their base annual salary and the bonus payable to the individual for the
fiscal year in which such termination occurs. Under the agreements, upon (i) a
change of control of the Company, (ii) a significant reduction in the
executive's responsibilities, title or duties or (iii) the relocation of the
Company's principal office more than 45 miles from its current location, the
executive may terminate his employment and would be entitled to receive, among
other things, the same severance pay he would have received had his employment
been terminated by the Company without cause.
CHICKEN SUPPLY CONTRACTS
The Company's and its franchisees' principal raw material is fresh chicken.
The Company maintains purchase agreements with its fresh chicken suppliers that
provide for a "ceiling", or highest price, and a "floor", or lowest price, that
the Company will pay for chicken over the contract term and the ceilings are
generally set at prices above the current market price. Such supply contracts
are generally for one to two years.
LITIGATION
In June 1996, the Company was named as a defendant to a certain lawsuit
commenced by Alvin C. Copeland and Diversified Foods and Seasonings, Inc.
("Diversified") against Flavorite Laboratories, Inc. ("Flavorite") alleging
misappropriation of certain trade secrets and tortious interference with
contractual relations, among other things, with respect to the formula used in
the preparation of Popeyes fried chicken products and the supply of certain
ingredients used in such products. Management believes such lawsuit to be
without merit and is vigorously defending such action. While the Company cannot
predict the outcome of such litigation, it does not expect such litigation to
have a materially adverse effect on the results of operations or financial
condition of the Company.
The Company has been named as a defendant in various actions arising from
its normal business activities in which damages in various amounts are claimed.
The Company has established reserves in the accompanying balance sheets to
provide for the defense and settlement of current litigation and management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the financial condition or results of operations of the
Company.
F-24
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
ENVIRONMENTAL MATTERS
Approximately 200 of the Company's owned and leased properties are known or
suspected to have been used by prior owners or operators as retail gas stations,
and a few of these properties may have been used for other environmentally
sensitive purposes. Many of these properties previously contained underground
storage tanks ("USTs") and some of these properties may currently contain
abandoned USTs. As a result of the use of oils and solvents typically
associated with automobile repair facilities and gas stations, it is possible
that petroleum products and other contaminants may have been released at these
properties into the soil or groundwater. Under applicable Federal and state
environmental laws, the Company, as the current owner or operator of these
sites, may be jointly and severally liable for the costs of investigation and
remediation of any such contamination. As a result, after an analysis of its
property portfolio, including testing of soil and groundwater at a
representative sample of its facilities, the Company accrued a reserve of
approximately $6.0 million for environmental remediation liabilities. While the
Company is currently not subject to any administrative or court order requiring
remediation at any of its properties, the Company is considering active
remediation at a limited number of facilities containing USTs.
INFORMATION TECHNOLOGY OUTSOURCING
The Company entered into an agreement with IBM Global Services, a division
of IBM ("IGS") commencing on August 1, 1994, for a ten-year term, to outsource
the Company's information technology, programming and computer operations. This
agreement allows the Company to update its corporate and restaurant systems with
state-of-the-art computer software and hardware. IGS will purchase the software
and hardware, guarantee levels of performance, maintain the operating systems
and hardware, perform applications development and maintenance, and provide
other administrative, management and support functions.
Future minimum payments under this agreement, exclusive of payments
included in Note 9 as capital lease payments for systems installed as of
December 29, 1996, are as follows at December 29, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------- ------------
<S> <C>
1997......... $10,162
1998......... 11,021
1999......... 9,621
2000......... 8,048
2001......... 6,834
Thereafter... 16,783
-------
$62,469
=======
</TABLE>
Included in the above payments to IGS are amounts related to point-of-sale
("POS") and client server software, hardware and the installation thereof
(collectively "information technology assets") which will be placed in service
after 1996. Capital leases will be established to account for these amounts as
the POS and client server systems are installed. Included in the above schedule
are payments of approximately $21.1 million for the systems to be installed
subsequent to 1996 related to these future capital leases. It is estimated that
the remaining payments due under the contract of approximately $41.4 million
will be reflected as restaurant operating or general and administrative costs
and expenses.
F-25
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Operating expenses of approximately $4.8 million, $9.0 million and $7.5
million related to the outsourcing contract have been included in the statements
of operations for the years ended December 25, 1994, December 31, 1995 and
December 29, 1996, respectively.
SUBSEQUENT EVENTS--FUTURE FINANCING OF INFORMATION TECHNOLOGY ASSETS
Subsequent to December 29, 1996, the Company anticipates that information
technology assets which will be purchased in the future will be paid through
proceeds from a new credit facility and subordinated notes. See Note 18 for a
further discussion of these events.
FORMULA AGREEMENT
The Company has entered into a formula licensing agreement, as amended,
(the "Formula Agreement"), with Alvin C. Copeland, the former owner of the
Popeyes and Churchs restaurant systems, and Diversified, which calls for the
worldwide exclusive licensing to the Company of the spicy fried chicken formula
and whatever additional recipes and formulas for other Popeyes products, that
Alvin C. Copeland may own, if any. The Formula Agreement provides for monthly
royalty payments of $237,500 until April 1999, and thereafter, monthly royalty
payments of $254,166 until March 2004 and thereafter royalty payments of 1.5% of
gross sales of certain Company-operated Popeyes Restaurants and 0.5% of gross
sales of certain franchised restaurants as long as the Company continues to use
formulas covered under the Formula Agreement. Total royalty payments were $2.7
million, $2.9 million and $2.9 million in the fiscal years ended December 25,
1994, December 31, 1995 and December 29, 1996, respectively.
SUPPLY AGREEMENTS
The Company has a supply agreement with Diversified under which the Company
is required to purchase certain propriety products made exclusively by
Diversified. This contract expires in 2004.
Supplies are generally provided to franchised and Company-operated
restaurants in the Popeyes and Churchs systems pursuant to supply agreements
negotiated by Popeyes Operators Purchasing Cooperative Association, Inc.
("POPCA") and Churchs Operators Purchasing Association, Inc. ("COPA"),
respectively, each a not-for-profit corporation that was created for the purpose
of consolidating the collective purchasing power of the franchised and Company-
operated restaurants and negotiating favorable terms therefor. The purchasing
cooperatives are not obligated to purchase, and do not bind their members to
commitments to purchase, any supplies. Membership in each cooperative is open
to all franchisees. Since 1995, the Company's franchise agreements have
required that each franchisee joins its respective purchasing cooperative as a
member. All Company-operated Popeyes and Churchs restaurants are members of
POPCA or COPA, as the case may be. Substantially all of the Company's domestic
franchisees participate in POPCA or COPA.
ADVERTISING FUNDS
In accordance with the Popeyes and Churchs franchise agreements,
advertising funds have been established (the "Advertising Funds") whereby the
Company contributes a percentage of sales (generally 5%) to the Advertising
Funds in order to pay for the costs of funding advertising and promotional
activities. In accordance with the franchise agreement, the net assets and
transactions of the Advertising Funds are not commingled with the working
capital of the Company. The net assets and transactions of the Advertising
Funds are, therefore, not included in the accompanying financial statements.
The Company's contributions to the Advertising Funds are recorded in restaurant
operating expenses in the accompanying financial statements.
F-26
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
LICENSE AGREEMENT
The Company currently has a number of domestic and international agreements
with The Hearst Corporation, King Features Syndicate Division ("King Features")
under which the Company has the exclusive license to use the image and likeness
of the cartoon character "Popeye" (and certain companion characters such as
"Olive Oyl") in connection with the operations of franchised and Company-
operated Popeyes restaurants worldwide. Under the current agreements, the
Company is obligated to pay King Features a royalty of 0.1% of the first $1.0
billion of Popeyes systemwide sales and 0.05% for the next $2.0 billion of such
sales. The King Features agreements automatically renew annually.
OTHER COMMITMENTS
The Company has guaranteed certain loans and lease obligations
approximating $1.8 million at December 29, 1996.
15. MANDATORILY REDEEMABLE PREFERRED STOCK
GENERAL
The Company has 1,250,000 shares of an authorized class of 8% redeemable
cumulative preferred stock, par value $0.01 per share (the "8% Preferred Stock")
with a stated value of $100 per share. The 8% Preferred Stock was originally
recorded at its fair value of $39.4 million. The difference between the stated
value of $56.0 million and the fair value was being accreted through November 5,
1998, (the earliest date of mandatory redemption) using the effective interest
rate method. Holders of shares of 8% Preferred Stock did not have preemptive
rights. Prior to Closing (See Note 2), each holder of the Company's 8%
Preferred Stock was offered the opportunity to exchange its shares for 10%
Cumulative Exchangeable Redeemable Preferred Stock (the "10% Preferred Stock"),
a new class of preferred stock established in 1996. Of the 560,000 outstanding
8% Preferred Stock at the time of Closing, 535,152 shares were exchanged for an
equal number of 10% Preferred Stock. In September 1996, the remaining 24,848
shares of 8% Preferred Stock were exchanged for 10% Preferred Stock. The
accretion associated with the 8% Preferred Stock was accelerated concurrently
with the exchange. As of December 29, 1996, there were no shares issued and
outstanding of the 8% Preferred Stock.
The Company has 1,250,000 authorized shares of 10% Preferred Stock with a
par value of $0.01 per share and stated value of $100 per share. This class of
preferred stock is cumulative, exchangeable and redeemable. Since the exchange
discussed herein was made at the 8% Preferred Stock's stated value, which is
equal to the 10% Preferred Stock's market value, the Company does not need to
accrete the 10% Preferred Stock. As of December 29, 1996, there were 560,000
shares issued and outstanding of the 10% Preferred Stock.
DIVIDENDS
Holders of shares of the 10% Preferred Stock are entitled to receive, when
and if declared by the Company's Board of Directors, dividends out of funds
legally available at an annual rate of $10.00 per share of 10% Preferred Stock.
The dividends are cumulative and are payable annually commencing on April 11,
1997. The dividends are payable in cash, or at the Company's option, by issuing
additional shares of 10% Preferred Stock at a rate of one share for each $100 of
dividend, provided however, that accrued and unpaid dividends must be paid in
cash for any annual period in which dividends are paid with respect to the
Company's common stock. The Company is precluded under its 1996 Term Loan from
paying cash dividends on the 10% Preferred Stock for two years from the
F-27
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
date of issuance. As such, dividends will be paid in shares of 10% Preferred
Stock through April 11, 1998. As dividends will be paid by issuing preferred
stock for the first two years from the date of issuance, dividends accrued as of
December 29, 1996 have been included in the 10% Preferred Stock balance in the
accompanying balance sheets and statements of shareholders' equity as of and for
the fiscal year ended December 29, 1996.
VOTING RIGHTS AND LIQUIDATION RIGHTS
Holders of shares of the 10% Preferred Stock are not entitled to vote on
any matter in which the holders of any voting securities of the Company shall be
entitled to vote. The 10% Preferred Stock agreement contains provisions whereby
the Preferred Shareholders can receive representation on the Company's Board of
Directors by electing one director at any annual or special meeting of
shareholders at which directors of the Company are elected. The right to elect
a director will terminate upon the occurrence of certain events as defined in
the agreement.
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, after payment or provision for payment of the debts and other
liabilities of the Company, the holders of shares of the 10% Preferred Stock
shall be entitled to receive, in cash, out of the remaining net assets of the
Company, the stated value of the preferred stock, plus any accrued dividends,
before any common stock or any other capital stock of the Company ranking junior
to the 10% Preferred Stock.
MANDATORY REDEMPTION, EXCHANGES AND REPURCHASE WITH NOTES
The 10% Preferred Stock must be redeemed by the Company on April 11, 2004,
for a price of $100 per share plus accrued and unpaid dividends as of that date.
The Company has the option under the agreement to redeem all or a portion of the
10% Preferred Stock at $100 per share plus accrued and unpaid dividends from
time to time after the original issuance date. If on the mandatory redemption
date of April 11, 2004, the funds of the Company legally available for such
redemption are insufficient to redeem all shares of 10% Preferred Stock required
to be redeemed, funds to the maximum extent legally available for such purposes
will be used to redeem the maximum number of outstanding shares of 10% Preferred
Stock. Thereafter, the Company will continue to redeem such shares, on a pro
rata basis, and as promptly as practicable after funds are legally available.
Any outstanding shares of 10% Preferred Stock will continue to accrue dividends
as set forth in the agreement and discussed above.
The Company, at its option, may from time to time require the holders of
outstanding shares of the 10% Preferred Stock to exchange such shares in whole
or, in part, for 10% Cash-Pay Subordinated Debentures (the "Exchange
Debentures") of the Company as defined in the agreement. Holders of such shares
will be entitled to receive Exchange Debentures in a principal amount equal to
(i) $100 for each outstanding share of 10% Preferred Stock exchanged plus (ii)
all accrued but unpaid dividends with respect to such shares. The Exchange
Debentures mature on April 11, 2004 and bear interest at a rate of 10% per
annum, payable annually.
SUBSEQUENT EVENTS--REPAYMENT OF 10% PREFERRED STOCK
Subsequent to December 29, 1996, the Company anticipates a repayment of all
of the outstanding shares of the 10% Preferred Stock at $100 per share. See
Note 18 for a further discussion of these events.
16. SHAREHOLDERS' EQUITY TRANSACTIONS
During 1993, the Company and its shareholders held discussions concerning
the number of common shares issued to a minority shareholder and the effects on
the shareholders' ownership
F-28
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
interests resulting from the adoption of the 1992 Stock Option Plan discussed in
Note 11. As a result of these discussions, certain stock options were granted
to the minority shareholder to purchase 250,000 common shares at $0.01 per
share. These options became exercisable at the same time the stock options
issued to the Company's officers became exercisable. In 1996, these options
were exercised by the minority shareholder.
17. EXECUTIVE COMPENSATION AWARD
During 1995, the Board of Directors granted a special award of $10.0
million to the senior management group of the Company in recognition of
exemplary performance provided to the Company since 1992. This award was paid
in 1996 pursuant to a 1996 Employee Stock Bonus Plan (General and Executive) by
issuing approximately 3.0 million shares of the Company's common stock valued at
$3.317 per share, the market value of the Company's common stock at the date of
issuance. In addition to this award, certain senior executive officers were
granted immediate vesting of certain stock options under the 1992 Stock Option
Plan resulting in a recognition of $647,000 of compensation expense in 1995.
18. SUBSEQUENT EVENTS
AFDC TRANSACTION
On March 24, 1997, the Company closed a transaction (the "AFDC
Transaction") with Atlanta Franchise Development Company, LLC ("AFDC") whereby
the Company sold or leased 100 Company-operated Churchs restaurants and certain
related assets in eight domestic markets to AFDC, which is now the Company's
largest domestic franchisee. In connection with the AFDC Transaction, AFDC
committed to (i) re-image and renovate all 100 restaurants, (ii) develop 100
additional Churchs restaurants and (iii) install new point-of-sale systems at
all of its restaurants. The Company received an aggregate of approximately
$19.9 million in cash from AFDC, along with a warrant to acquire a 5.0% equity
interest in AFDC.
CHESAPEAKE BAGEL BAKERY ACQUISITION
In February 1997, the Company entered into a letter of intent to acquire
from The American Bagel Company all of the intangible assets related to the
franchise business of Chesapeake Bagel Bakery ("Chesapeake Bagel"), a bagel
bakery and restaurant chain. The Company completed the acquisition on May 5,
1997. As a result of this acquisition, the Company became franchisor of 158
franchised Chesapeake Bagel restaurants located primarily in Washington, D.C.,
Maryland and Virginia. The net purchase price paid by the Company for
Chesapeake Bagel was approximately $11.8 million, plus a potential earn out of
up to $3.5 million, contingent on the opening of a significant number of
Chesapeake Bagel restaurants over the next five years. The financial impact of
the Chesapeake Bagel acquisition is not expected to be material to the Company
in the near-term.
PROPOSED BUSINESS ACQUISITION
In June 1997, the Company entered into an agreement to acquire all of the
assets and properties of a restaurant business that operates outside of the
quick-service chicken restaurant industry for a purchase price of approximately
$24.0 million plus a potential deferred payment of approximately $1.0 million.
The completion of this acquisition is subject to the satisfaction of a number of
conditions including the completion by the Company of its due diligence
investigation of the seller.
F-29
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LITIGATION SETTLEMENT
In June 1997, the Flavorite litigation was settled and, among other things,
the parties agreed (a) to extend the term of the existing Diversified supply
agreement until March 2029, subject to further renewal, and (b) that the Formula
Agreement will be extended through March 2029 at the monthly royalty rate in
effect in 1999.
NEW CREDIT FACILITY AND SUBORDINATED NOTES
In May 1997, the Company completed a debt offering of $175.0 million of
Senior Subordinated Notes (the "Notes") under Rule 144A of the Securities Act of
1933, as amended (the "Rule 144A Offering"). In connection with the Rule 144A
Offering, the Company also entered into a new $175.0 million Senior Secured
Credit Facility (the "New Credit Facility") whereby the Company was provided
with a $50.0 million term loan (the "Term Loan"), a $25.0 million revolving
credit facility and a $100.0 million facility to be used for future
acquisitions. The Term Loan and the Notes were funded at closing, providing
$225.0 million which will be used to repay the existing balances under the
Company's 1996 Term Loan, repay and retire the 10% Preferred Stock, repay
certain capital lease obligations, pay fees and expenses associated with the
above described transactions and provide working capital.
The Company anticipates exchanging the Notes for publicly registered notes
(the Registered Notes) pursuant to an exchange offer. The form and terms of the
Registered Notes will be the same as the form and terms of the Notes in all
material respects except that the Registered Notes will be registered under the
Securities Act and do not contain transfer restrictions or terms with respect to
the special interest payments applicable to the Notes.
The New Credit Facility contains certain financial and other covenants,
including covenants requiring the Company to maintain certain financial ratios,
restricting the ability of the Company to incur indebtedness or to create or
suffer to exist certain liens and restricting the amount of capital expenditures
which it may incur in any fiscal year. Additionally, the New Credit Facility
will have to be repaid completely in five years through annual amortization
payments.
In addition to the scheduled amortization, the Company is required to make
prepayments on the New Credit Facility under certain conditions, including upon
certain asset sales or issuance of debt or equity securities. The Company is
also required to make annual prepayments on the New Credit Facility in an amount
equal to a percentage of excess cash flow (as defined).
The New Credit Facility is secured by a first priority security interest in
substantially all of the Company's assets (subject to certain exceptions). Any
current or future material subsidiaries of the Company will be required to
guarantee the New Credit Facility and the Company will be required to pledge the
stock of such subsidiaries to secure the facility.
F-30
<PAGE>
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Pro Forma Consolidated Financial Statements (unaudited):
Pro Forma Consolidated Balance Sheet as of December 29, 1996...... P-3
Pro Forma Consolidated Statement of Operations for the year ended
December 29, 1996............................................ P-4
Pro Forma Consolidated Balance Sheet as of March 23, 1997......... P-5
Pro Forma Consolidated Statement of Operations for the twelve-
week period ended March 23, 1997............................. P-6
Pro Forma Consolidated Balance Sheet as of March 24, 1996......... P-7
Pro Forma Consolidated Statement of Operations for the twelve-week
period ended March 24, 1996.................................. P-8
Notes to Pro Forma Consolidated Financial Statements.............. P-9
</TABLE>
P-1
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated financial statements have
been prepared to give effect to the sale and issuance of the Old Notes and the
New Credit Facility and application of proceeds therefrom and the AFDC
Transaction. The unaudited pro forma consolidated balance sheets have been
prepared assuming that the transactions described above were completed on the
balance sheet dates indicated. The unaudited pro forma consolidated statements
of operations have been prepared assuming the transactions described above were
completed at the beginning of the indicated periods.
The pro forma adjustments are based upon available information and contain
assumptions that management believes are reasonable under the circumstances.
The unaudited pro forma consolidated financial statements are provided for
informational purposes only and do not purport to be indicative of the Company's
financial condition or the results of operations that would actually have been
obtained had such transactions been completed for the periods or as of the dates
presented or that may be obtained in the future.
The unaudited pro forma consolidated financial statements and related notes
should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other financial information included
elsewhere in the Prospectus.
P-2
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 29, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------
COMPANY AFDC
HISTORICAL OFFERING TRANSACTION PRO FORMA
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................... $ 19,216 $ 16,595(1) $ 19,860(10) $ 55,671(18)
Accounts and current notes receivable,
net........................................ 9,314 -- -- 9,314
Inventories................................. 3,961 -- (323)(11) 3,638
Deferred income taxes....................... 6,997 73(2) (3,124)(12) 3,946
Prepaid expenses, deposits and other........ 5,621 (3,839)(3) -- 1,782
-------- -------- -------- --------
Total current assets....................... 45,109 12,829 16,413 74,351
-------- -------- -------- --------
Long-Term Assets:
Notes receivable, net....................... 4,836 -- -- 4,836
Property and equipment, net................. 189,223 -- (10,171)(13) 179,052
Other assets................................ 7,295 10,568(4) -- 17,863
Intangible assets, net...................... 94,211 -- (615)(14) 93,596
-------- -------- -------- --------
Total long-term assets..................... 295,565 10,568 (10,786 295,347
-------- -------- -------- --------
Total assets.............................. $340,674 $ 23,397 $ 5,627 $369,698
======== ======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................ $ 18,370 $ -- $ -- $ 18,370
Outstanding checks.......................... 10,812 -- -- 10,812
Current portion of long-term debt and
capital lease obligations.................. 11,753 (7,300)(5) -- 4,453
Accrued expenses and other.................. 27,400 -- (59)(15) 27,341
-------- -------- -------- --------
Total current liabilities.................. 68,335 (7,300) (59) 60,976
-------- -------- -------- --------
Long-Term Liabilities:
Long-term debt, net of current portion...... 121,806 102,111(6) -- 223,917
Capital lease obligations, net of current
portion.................................... 18,234 (11,349)(7) -- 6,885
Other liabilities........................... 33,435 -- 1,000(16) 34,435
Deferred income taxes....................... 1,006 -- -- 1,006
-------- -------- -------- --------
Total long-term liabilities................ 174,481 90,762 1,000 266,243
-------- -------- -------- --------
Mandatorily redeemable preferred stock....... 59,956 (59,956)(8) -- --
-------- -------- -------- --------
Shareholders' Equity:
Common Stock................................ 344 -- -- 344
Capital in excess of par value.............. 99,482 -- -- 99,482
Notes receivable-officers................... (3,841) -- -- (3,841)
Accumulated (deficit) earnings.............. (58,083) (109)(9) 4,686(17) (53,506)
-------- -------- -------- ----------
Total shareholders' equity................. 37,902 (109) 4,686 42,479
-------- -------- -------- ----------
Total liabilities, mandatorily redeemable
preferred stock and shareholders'
equity................................... $340,674 $ 23,397 $ 5,627 $369,698
======== ======== ======== ========
</TABLE>
P-3
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------
COMPANY AFDC
HISTORICAL OFFERING TRANSACTION PRO FORMA
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales......................... $430,280 $ -- $(54,370)(21) $375,910
Revenues from franchising................ 51,336 -- 2,447(22) 53,783
Revenues from manufacturing.............. 11,431 -- -- 11,431
Other revenues........................... 8,262 -- 579(23) 8,841
-------- ------- -------- --------
Total revenues.......................... 501,309 -- (51,344) 449,965
-------- ------- -------- --------
Costs and Expenses:
Restaurant cost of sales................. 142,199 -- (18,507)(24) 123,692
Restaurant operating expenses............ 215,464 -- (27,377)(25) 188,087
Manufacturing cost of sales.............. 10,924 -- -- 10,924
General and administrative............... 72,672 -- (1,663)(26) 71,009
Depreciation and amortization............ 30,904 -- (1,845)(27) 29,059
-------- ------- -------- --------
Total costs and expenses................ 472,163 -- (49,392) 422,771
-------- ------- -------- --------
Income from operations................... 29,146 -- (1,952) 27,194
Interest expense......................... 16,132 8,927(19) -- 25,059
-------- ------- -------- --------
Net income (loss) before taxes........... 13,014 (8,927) (1,952) 2,135
Income tax (provision) benefit........... (5,163) 3,571(20) 781(28) (811)
-------- ------- -------- --------
Net income (loss) before
extraordinary item...................... $ 7,851 $(5,356) $ (1,171) $ 1,324
======== ======= ======== ========
Pro forma ratio of earnings to fixed
charges...................................................................................... 1.06x(35)
========
</TABLE>
P-4
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 23, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------
COMPANY AFDC
HISTORICAL OFFERING TRANSACTION PRO FORMA
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................... $ 14,824 $ 14,364(1) $ 19,860(10) $ 49,048(18)
Accounts receivable and current notes
receivable, net............................ 8,210 -- -- 8,210
Inventory................................... 4,102 -- (323)(11) 3,779
Deferred income taxes....................... 5,640 69(2) (3,124)(12) 2,585
Prepaid expenses, deposits and other........ 6,577 (4,782)(3) -- 1,795
-------- -------- -------- --------
Total current assets....................... 39,353 9,651 16,413 65,417
-------- -------- -------- --------
Long-Term Assets:
Notes receivable, net....................... 5,950 -- -- 5,950
Property and equipment, net................. 192,994 -- (10,171)(13) 182,823
Other assets................................ 8,230 10,578(4) -- 18,808
Intangible assets, net...................... 91,718 -- (615)(14) 91,103
-------- -------- -------- --------
Total long-term assets..................... 298,892 10,578 (10,786) 298,684
-------- -------- -------- --------
Total assets.............................. $338,245 $ 20,229 $ 5,627 $364,101
======== ======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable............................ $ 17,938 $ -- $ -- $ 17,938
Outstanding checks.......................... 9,544 -- -- 9,544
Current portion of long-term debt and
capital lease obligations.................. 13,289 (8,625)(5) -- 4,664
Accrued expenses and other.................. 23,401 -- (59)(15) 23,342
-------- -------- -------- --------
Total current liabilities.................. 64,172 (8,625) (59) 55,488
-------- -------- -------- --------
Long-Term Liabilities:
Long-term debt, net of current portion...... 119,882 103,986(6) -- 223,868
Capital lease obligations, net of current
portion.................................... 20,541 (13,784)(7) -- 6,757
Other liabilities........................... 33,364 -- 1,000(16) 34,364
Deferred income taxes....................... 234 -- -- 234
-------- -------- -------- --------
Total long-term liabilities................ 174,021 90,202 1,000 265,223
-------- -------- -------- --------
Mandatorily redeemable preferred stock...... 61,245 (61,245)(8) -- --
-------- -------- -------- --------
Shareholders' Equity:
Common stock................................ 344 -- -- 344
Capital in excess of par value.............. 99,811 -- -- 99,811
Notes receivable-officers................... (3,888) -- -- (3,888)
Accumulated (deficit) earnings.............. (57,460) (103)(9) 4,686(17) (52,877)
-------- -------- -------- --------
Total shareholders' equity................. 38,807 (103) 4,686 43,390
-------- -------- -------- --------
Total liabilities, mandatorily
redeemable preferred stock and
shareholders' equity...................... $338,245 $ 20,229 $ 5,627 $364,101
======== ======== ======== ========
</TABLE>
P-5
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE-WEEK PERIOD ENDED MARCH 23, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------
COMPANY AFDC
HISTORICAL OFFERING TRANSACTION PRO FORMA
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales.......................... $103,181 $ -- $(12,262)(21) $ 90,919
Revenues from franchising................. 13,184 -- 552(22) 13,736
Revenues from manufacturing............... 1,604 -- -- 1,604
Other revenues............................ 1,826 -- 134(23) 1,960
-------- -------- -------- --------
Total revenues........................... 119,795 -- (11,576) 108,219
-------- -------- -------- --------
Costs and Expenses:........................
Restaurant cost of sales.................. 33,218 -- (3,954)(24) 29,264
Restaurant operating expenses............. 51,698 -- (6,533)(25) 45,165
Manufacturing cost of sales............... 1,024 -- -- 1,024
General and administrative................ 20,300 -- (338)(26) 19,962
Depreciation and amortization............. 7,103 -- (391)(27) 6,712
-------- -------- -------- --------
Total costs and expenses................. 113,343 -- (11,216) 102,127
-------- -------- -------- --------
Income from operations..................... 6,452 -- (360) 6,092
Interest expense........................... 3,278 2,463(19) -- 5,741
-------- -------- -------- --------
Income (loss) before income taxes.......... 3,174 (2,463) (360) 351
Income tax (provision) benefit............. (1,262) 985(20) 144(28) (133)
-------- -------- -------- --------
Net income (loss) before
extraordinary item........................ $ 1,912 $(1,478) $ (216) $ 218
======== ======= ======== ========
Pro forma ratio of earnings to fixed
charges................................... 1.05x(35)
========
</TABLE>
P-6
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 24, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------
COMPANY EQUITY AFDC
HISTORICAL INVESTMENT OFFERING TRANSACTION PRO FORMA
---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 9,828 $ (1,200)(29) $ 21,487(1) $ 19,860(10) $ 49,975(18)
Accounts receivable and current
notes receivable, net..................... 8,658 -- -- -- 8,658
Inventory.................................. 4,549 -- -- (323)(11) 4,226
Deferred income taxes...................... 10,481 2,753(30) -- (3,124)(12) 10,110
Prepaid expenses, deposits and
other..................................... 7,555 -- (1,052)(3) -- 6,503
-------- -------- -------- -------- --------
Total current assets...................... 41,071 1,553 20,435 16,413 79,472
-------- -------- -------- -------- --------
Long-Term Assets:............
Notes receivable, net...................... 4,493 -- -- -- 4,493
Property and equipment, net................ 177,082 -- -- (10,171)(13) 116,911
Other assets............................... 4,376 -- 10,750(4) -- 15,126
Intangible assets, net..................... 97,302 -- -- (615)(14) 96,687
-------- -------- -------- -------- --------
Total long-term assets.................... 283,253 -- 10,750 (10,786) 283,217
-------- -------- -------- -------- --------
Total assets............................. $324,324 $ 1,553 $ 31,185 $ 5,627 $362,689
======== ======== ======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current Liabilities:.........
Accounts payable........................... $ 16,501 $ -- $ -- $ -- $ 16,501
Outstanding checks......................... 8,160 -- -- -- 8,160
Current portion of long-term debt
and capital lease obligations............. 9,488 -- (5,663)(5) -- 3,825
Accrued expenses and other................. 33,431 -- -- (59)(15) 33,372
-------- -------- -------- -------- --------
Total current liabilities................. 67,580 -- (5,663 (59) 61,858
-------- -------- -------- -------- --------
Long-Term Liabilities:.......
Long-term debt, net of current
portion................................... 182,585 (57,871)(31) 99,155(6) -- 223,869
Capital lease obligations, net of
current portion........................... 12,328 -- (6,307)(7) -- 6,021
Other liabilities.......................... 34,542 -- -- 1,000(16) 35,542
Deferred income taxes...................... 3,412 -- -- -- 3,412
-------- -------- -------- -------- --------
Total long-term liabilities............... 232,867 (57,871) 92,848 1,000 268,844
-------- -------- -------- -------- --------
Mandatorily redeemable preferred
stock...................................... 47,709 8,291(32) (56,000)(8) -- --
-------- -------- -------- -------- --------
Shareholders' Equity (deficit):
Common stock............................... 100 211(33) -- -- 311
Capital in excess of par value............. 22,900 63,789(33) -- -- 86,689
Notes receivable-officers.................. 2,100 -- -- -- 2,100
Accumulated (deficit) earnings............. (48,932) (12,867)(34) -- 4,686(17) (57,113)
-------- -------- -------- -------- --------
Total shareholders' equity
(deficit)................................ (23,832) 51,133 -- 4,686 31,987
-------- -------- -------- -------- --------
Total liabilities, mandatorily
redeemable preferred stock
and shareholders' equity................ $324,324 $ 1,553 $ 31,185 $ 5,627 $362,689
======== ======== ======== ======== ========
</TABLE>
P-7
<PAGE>
AFC ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE-WEEK PERIOD ENDED MARCH 24, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------
COMPANY AFDC
HISTORICAL OFFERING TRANSACTION PRO FORMA
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales........................... $ 94,460 $ -- $(10,981)(21) $ 83,479
Revenues from franchising.................. 10,637 -- 494(22) 11,131
Revenues from manufacturing................ 3,793 -- -- 3,793
Other revenues............................. 1,851 -- 134(23) 1,985
-------- ----- ---------- --------
Total revenues............................ 110,741 -- (10,353) 100,388
-------- ----- ---------- --------
Costs and Expenses:........................
Restaurant cost of sales................... 30,561 -- (3,752)(24) 26,809
Restaurant operating expenses.............. 47,705 -- (5,876)(25) 41,829
Manufacturing cost of sales................ 3,146 -- -- 3,146
General and administrative................. 18,158 -- (412)(26) 17,746
Depreciation and amortization.............. 6,795 -- (417)(27) 6,378
-------- ----- ---------- --------
Total costs and expenses.................. 106,365 -- (10,457) 95,908
-------- ----- ---------- --------
Income from operations..................... 4,376 -- 104 4,480
Interest expense........................... 5,208 638(19) -- 5,846
-------- ----- ---------- --------
Income (loss) before income taxes.......... (832) (638) 104 (1,366)
Income tax (provision) benefit............. 246 255(20) (42)(28) 459
-------- ----- ---------- --------
Net income (loss) before
extraordinary item........................ $ (586) $(383) $ 62 (907)
======== ===== ========== ========
Pro forma ratio of earnings to fixed
charges................................... --(35)
========
</TABLE>
P-8
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
BASIS OF PRESENTATION. The pro forma consolidated balance sheets have been
prepared assuming that the sale and issuance of the Old Notes, the New Credit
Facility and the AFDC Transaction were completed on the dates of the indicated
periods. In addition, the pro forma consolidated balance sheet as of March 24,
1996 has been prepared assuming that the Equity Investment (see Note 2 in Notes
to Consolidated Financial Statements) was also completed on March 24, 1996. The
pro forma statements of operations have been prepared assuming that the
transactions described above were completed at the beginning of the indicated
periods. The following notes describe the adjustments made to the historical
financial statements:
(1) To reflect the issuance of the Old Notes, the funding of the New
Credit Facility and the application of the proceeds therefrom as
follows:
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 23, MARCH 24,
1996 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
Issuance of the Notes........................ $ 175,000 $ 175,000 $ 175,000
Funded New Credit Facility................... 50,000 50,000 50,000
Retirement of existing credit facilities..... (127,139) (125,889) (129,845)
Repayment of mandatorily redeemable
preferred stock............................ (59,956) (61,245) (56,000)
Repayment of capital lease obligations....... (10,560) (12,752) (6,918)
Estimated offering fees and expenses......... (10,750) (10,750) (10,750)
--------- --------- ---------
Increase in cash............................. $ 16,595 $ 14,364 $ 21,487
========= ========= =========
</TABLE>
(2) Represents the income tax effect related to the write-off of debt
issuance costs associated with the retirement of existing credit
facilities (see Note 4), based on a combined Federal and state
effective tax rate of 40.0%.
(3) To record the application of prepaid capital leases in connection with
the repayment of capital lease obligations.
(4) To record the estimated offering fees and expenses of $10,750 and the
write-off of debt issuance costs associated with the retirement of
existing credit facilities of approximately $182, $172, and $0 at
December 29, 1996, March 23, 1997 and March 24, 1996, respectively.
(5) To record the net effect on current maturities of long-term debt and
capital lease obligations as follows:
<TABLE>
<CAPTION>
December 29, March 23, March 24,
1996 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current maturities of the funded portion of
the New Credit Facility..................... $ 2,000 $ 2,000 $ 2,000
Less--current maturities of retired
existing credit facilities.............. (6,250) (6,875) (6,000)
Less--current maturities of repaid
capital lease obligations............... (3,050) (3,750) (1,663)
------- ------- -------
Net effect on current maturities of long-
term debt and capital lease obligations..... $(7,300) $(8,625) $(5,663)
======= ======= =======
</TABLE>
P-9
<PAGE>
(6) To record the net effect on long-term debt in connection with the sale
and the issuance of the Old Notes and the New Credit Facility as
follows:
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 23, MARCH 24,
1996 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
Long-term portion of the funded New
Credit Facility............................ $ 48,000 $ 48,000 $ 48,000
Long-term portion of the Notes............... 175,000 175,000 175,000
Retirement of existing credit facilities..... (120,889) (119,014) (123,845)
--------- --------- ---------
Net effect on long-term debt................. $ 102,111 $ 103,986 $ 99,155
========= ========= =========
</TABLE>
(7) To record the effect on long-term capital lease obligations in
connection with the sale and the issuance of the Old Notes and New
Credit Facility and application of the prepaid capital lease balances
as follows:
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 23, MARCH 24,
1996 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
Cash proceeds used to repay capital lease
obligations................................. $ (7,510) $ (9,002) $ (5,255)
Application of prepaid capital leases........ (3,839) (4,782) (1,052)
--------- --------- ---------
Effect on long-term capital lease obligations $ (11,349) $ (13,784) $ (6,307)
========= ========= =========
</TABLE>
(8) To record the repayment of mandatorily redeemable preferred stock.
(9) Represents the effect on accumulated (deficit) earnings related to the
write-off of debt issuance costs associated with the retirement of
existing credit facilities (see Note 4), based on a combined Federal
and state effective tax rate of 40.0%.
(10) To record the net cash received at the closing of the AFDC
Transaction.
(11) To remove the inventories sold pursuant to the AFDC Transaction.
(12) Represents the income tax effect related to the income and gain
associated with the AFDC Transaction, based on a combined Federal and
state effective tax rate of 40.0%.
(13) To remove the net assets sold pursuant to the AFDC Transaction. AFC's
interest in a warrant, representing 5.0% of the net assets sold to
AFDC, has not been recorded due to immateriality.
(14) To remove the portion of Reorganization Goodwill (see Note 1 in Notes
to Consolidated Financial Statements) allocable to the restaurants
sold to AFDC.
<TABLE>
<CAPTION>
<S> <C> <C>
(15) To record the net effect on accrued expenses, deposits and other as follows:
Transaction costs associated with the AFDC Transaction.............................. $ 133
Application of accrued expenses paid at closing.................................... (192)
-----
Net effect on accrued expenses, deposits and other.................................. $ (59)
=====
</TABLE>
(16) To record deferred development fees received in connection with the
AFDC Transaction.
(17) To record income associated with the AFDC Transaction consisting of
$2.5 million of franchise fees and approximately $5.3 million of gain
on the sale of net assets, net of income taxes of approximately $3.1
million based on a combined Federal and state effective tax rate of
40.0%. This gain was not affected by the 5.0% interest in AFDC
retained by the Company through a warrant due to immateriality.
(18) Pro forma cash and cash equivalents do not include outstanding checks,
amounts to be paid related to the Chesapeake Bagel acquisition or
amounts to be paid for information technology assets to be purchased
and installed in the future.
P-10
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(19) To reflect the net effect on interest expense resulting from the sale
and issuance of the Old Notes and the funded portion of the New Credit
Facility as follows:
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 23, MARCH 24,
1996 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
Removal of historical interest expense....... $(13,993) $(2,964) $(4,272)
Removal of historical line of credit fees.... (357) (159) (101)
Removal of historical debt discount
amortization and other fees................. (1,046) (38) (613)
Interest expense on the Notes................ 17,938 4,140 4,140
Interest expense on the New Credit Facility.. 3,985 934 934
Amortization of debt issuance costs and
other fees related to the Offering and the
New Credit Facility......................... 2,400 550 550
-------- ------- -------
Net effect on interest expense............... $ 8,927 $ 2,463 $ 638
======== ======= =======
</TABLE>
The annual interest rates used within these pro forma statements were
8.09% for the New Credit Facilities and 10.25% for the Notes. A change
of 0.125% in the interest rate on the New Credit Facilities would have
an impact on pro forma interest expense of $62, $14 and $14 for the
periods ended December 29, 1996, March 23, 1997, and March 24, 1996,
respectively.
(20) To record the income tax effect resulting from the additional interest
expense outlined in (19) above, based on a combined Federal and state
effective tax rate of 40.0%.
(21) To remove the historical sales related to restaurants sold to AFDC.
(22) To reflect the effect on revenues from franchising related to the
restaurants sold to AFDC based on contractual royalty rates.
(23) To record the effect on other revenues related to rental income on
property leased to AFDC.
(24) To remove the historical cost of sales related to the restaurants sold
to AFDC.
(25) To remove the historical restaurant operating costs directly related
to the restaurants sold to AFDC.
(26) To remove the historical general and administrative expenses for
attributable personnel and personnel related expenses, including
employee benefits, travel and telephone, who are now employed by AFDC.
(27) To remove the historical depreciation directly related to the
restaurants sold to AFDC and adjust historical amortization of
Reorganization Goodwill as follows:
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 23, MARCH 24,
1996 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
Historical depreciation...................... $(1,805) $(382) $(408)
Historical amortization of Reorganization
Goodwill.................................... (40) (9) (9)
------- ----- -----
$(1,845) $(391) $(417)
======= ===== =====
</TABLE>
(28) To record the income tax effects resulting from the net AFDC
Transaction adjustments, based on a combined Federal and state
effective tax rate of 40.0%.
P-11
<PAGE>
AFC ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(29) To reflect the cash used for retirement of a portion of the Company's
existing credit facilities in connection with the Equity Investment
($1,000) and payment of debt issuance costs ($200) associated with
debt refinanced as part of the Equity Investment.
(30) To record the actual effects on income taxes related to the write-off
of debt discount in connection with the Equity Investment ($2,673),
and the effects on income taxes related to debt issuance costs paid on
the debt refinanced as part of the Equity Investment ($80), based on a
combined Federal and state effective tax rate of 40.0%.
(31) To record the net effect on long-term debt related to the Equity
Investment as follows:
<TABLE>
<S> <C>
Face value of Existing Credit Facilities repaid........................... $(65,000)
Debt discount............................................................. 7,129
--------
Net effect on long-term debt.............................................. $(57,871)
========
</TABLE>
(32) To record the accelerated accretion of the 8% Preferred Stock
associated with the Equity Investment.
(33) To reflect the issuance of common stock, net of transaction costs in
connection with the Equity Investment as follows:
<TABLE>
<S> <C>
Gross proceeds from common stock issuance................................. $ 70,000
Transaction costs......................................................... (6,000)
--------
Net proceeds applicable to common stock at par value
from common stock issuance............................................ $ 64,000
========
Net proceeds applicable to common stock at par value...................... $ 211
Net proceeds applicable to capital in excess of par value................. 63,789
--------
$ 64,000
========
</TABLE>
(34) To record the effect on accumulated deficit related to the accelerated
accretion of the 8% Preferred Stock and elimination of the debt
discount in connection with the Equity Investment as follows:
<TABLE>
<S> <C>
Accelerated accretion of the 8% Preferred Stock........................... $ (8,291)
Write-off of debt discount in connection with the Equity
Investment.............................................................. (7,129)
Debt issuance costs paid associated with debt refinanced.................. (200)
Actual income tax effect related to the write-off of debt discount........ 2,673
Income tax effect related to debt issuance costs.......................... 80
--------
Net effect on accumulated deficit......................................... $(12,867)
========
</TABLE>
(35) Pro forma earnings consist of pro forma income (loss) before taxes,
plus pro forma fixed charges (excluding capitalized interest). Fixed
charges consist of interest expense, amortization of debt issuance
cost and debt discount, and one-third of rent expense on operating
leases considered representative of the interest factor attributable
to rent expense. The Company had a pro forma deficiency of earnings to
fixed charges for the twelve-week period ended March 24, 1996 of
approximately $1,455,000. Pro forma earnings to fixed charges excludes
the effects on earnings resulting from the subsequent investment of
proceeds from the AFDC Transaction.
P-12
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.....................................................
Risk Factors...........................................................
Use of Proceeds........................................................
Capitalization.........................................................
Exchange Offer.........................................................
Selected Historical Consolidated
Financial Information.................................................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.............................................
Business...............................................................
Ownership of Common Stock..............................................
Management.............................................................
Executive Compensation.................................................
Certain Transactions...................................................
Description of New Credit Facility.....................................
Description of Certain
Other Indebtedness....................................................
Description of New Notes...............................................
Certain Federal Income
Tax Consequences......................................................
Plan of Distribution...................................................
Legal Matters..........................................................
Independent Public Accountants.........................................
Index to Consolidated Financial
Statements............................................................
Index to Pro Forma Consolidated
Financial Statements..................................................
</TABLE>
================================================================================
================================================================================
$175,000,000
AFC ENTERPRISES, INC.
10 1/4% SENIOR SUBORDINATED NOTES
DUE 2007
------------------
[LOGO OF AFC(TM) ENTERPRISES]
------------------
GOLDMAN, SACHS & CO.
CIBC WOOD GUNDY SECURITIES CORP.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
AFC Enterprises, Inc. (the "Company") is a Minnesota corporation. Section
302A.521, subd. 2, of the Minnesota Statutes requires the Company to indemnify a
person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person with respect to the Company,
against judgments, penalties, fines, including, without limitation, excise taxes
assessed against the person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of performance
by a director, officer or employee of the Company involving service as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3,
requires payment by the Company, upon written request, of reasonable expenses in
advance of final disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested majority of the Board
of Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of the Board, by special legal counsel, by the
shareholders, or by a court of competent jurisdiction.
Provisions regarding indemnification of officers and directors of the
Company are contained in Article 9 of the Company's Bylaws, as amended (Exhibit
3.2 to this Registration Statement), which is incorporated herein by reference.
The Company has entered into agreements to indemnify its directors and
certain officers in addition to the indemnification provided for in the Bylaws.
These agreements, among other things, indemnify the Company's directors and
certain of its officers to the full extent permitted by the Minnesota Statutes
for any claims, liabilities, damages, judgments, penalties, fines, settlements,
disbursements or expenses (including attorneys' fees) incurred by such person in
any action or proceeding, including any action by or in the right of the
Company, on account of services as a director or officer of the Company.
The Company's officers and directors currently are covered by officers' and
directors' liability insurance.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
3.1+ Certificate of Incorporation of AFC Enterprises, Inc. ("AFC"), as
amended to date (with Certificate of Correction attached
thereto).
3.2+ Amended and Restated Bylaws of AFC (formerly known as America's
Favorite Chicken Company), as amended to date.
4.1+ Indenture dated as of May 21, 1997 between AFC and United States
Trust Company of New York, as Trustee, with respect to the 10
1/4% Senior Subordinated Notes due 2007.
4.2+ Purchase Agreement, dated May 16, 1997, by and among AFC,
Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp. and
Donaldson, Lufkin & Jenrette Securities Corporation.
4.3+ Exchange and Registration Rights Agreement, dated as of May 21,
1997, by and among AFC, Goldman, Sachs & Co., CIBC Wood Gundy
Securities Corp. and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.4+ Credit Agreement dated as of May 21, 1997 between AFC and the
financial institutions listed therein (collectively, "Lenders"),
Goldman Sachs Capital Partners L.P., as syndication and arranging
agent, and Canadian Imperial Bank of Commerce ("CIBC"), as
administrative agent for Lenders.
4.5+ Security Agreement, dated as of May 21, 1997, by and between AFC
and CIBC, as Administrative Agent.
4.6+ Pledge Agreement, dated as of May 21, 1997, by and between AFC
and CIBC, as Administrative Agent.
4.7+ Trademark Security Agreement, dated as of May 21, 1997, by and
between AFC and CIBC, as Administrative Agent.
4.8+ Patent and Copyright Security Agreement, dated as of May 21,
1997, by and between AFC and CIBC, as Administrative Agent.
4.9+ Collateral Account Agreement, dated as of May 21, 1997, by and
between AFC and CIBC, as Administrative Agent.
4.10+ Form of Mortgage, Assignment of Rents, Security Agreement and
Fixture Filing, dated May 21, 1997, between AFC, and CIBC as
Administrative Agent.
5.1+ Opinion of Riordan & McKinzie as to the legality of securities
registered hereunder.
10.1+ Stock Purchase Agreement dated February 23, 1996 among AFC, FS
Equity Partners, L.P. III ("FSEP III"), and FS Equity Partners
International, L.P. ("FSEP International").
10.2+ Stockholders Agreement dated April 11, 1996 among FSEP III and
FSEP International, CIBC, Pilgrim Prime Rate Trust, Van Kampen
American Capital Prime Rate Income Trust, Senior Debt Portfolio,
ML IBK Positions Inc., Frank J. Belatti, Dick R. Holbrook, Samuel
N. Frankel (collectively, the "Stockholders") and AFC.
10.3+ Amendment No. 1 to Stockholders Agreement dated May 1, 1996 among
the Stockholders, AFC and PENMAN Private Equity and Mezzanine
Fund, L.P.
10.4+ Asset Purchase Agreement dated March 24, 1997 by and between AFC
and Atlanta Franchise Development Company, LLC.
10.5+ Asset Purchase Agreement dated May 5, 1997 among AFC, The
American Bagel Company d/b/a Chesapeake Bagel Bakery, Michael
Robinson, and Alan Manstof.
10.7+ Form of Development Agreement
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
10.8+ Form of Franchising Agreement
10.9+ 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. (a predecessor of AFC).
10.10+ Amendment to Formula Agreement dated March 21, 1989 by and among
Alvin Copeland, New Orleans Spice Company, Inc. and Biscuit
Investments, Inc. (a predecessor of AFC).
10.11+ Second Amendment to Formula Agreement dated March 21, 1989 by and
among Alvin C. Copeland, Biscuit Investments, Inc. and New
Orleans Spice Company, Inc.
10.12+ Information Technology Services Agreement dated as of August 22,
1994 by and between AFC and Integrated Systems Solutions
Corporation, a wholly-owned subsidiary of Information Business
Machines Corporation.
10.13+ Amendment No. 1 to the Agreement for Information Technology
Services dated July 29, 1996 between AFC and Integrated Systems
Solutions Corporation.
10.14+ Supplier Agreement dated March 21, 1989 between New Orleans Spice
Company, Inc. and Biscuit Investments, Inc.
10.15+ Recipe Royalty Agreement dated March 21, 1989 by and among Alvin
C. Copeland, New Orleans Spice Company, Inc. and Biscuit
Investments, Inc.
10.16+ Licensing Agreement dated March 11, 1976 between King Features
Syndicate Division of The Hearst Corporation and A. Copeland
Enterprises, Inc.
10.17+ 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.
10.18+ Popeye License Agreement dated January 1, 1981 between King
Features Syndicate Division of The Hearst Corporation and Popeyes
Famous Fried Chicken, Inc.
10.19+ 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.
10.20+ License Agreement dated December 19, 1985 by and between King
Features Syndicate, Inc., The Hearst Corporation, Popeyes, Inc.
and A. Copeland Enterprises, Inc.
10.21+ Letter Agreement dated July 20, 1987 by and between King Features
Syndicate, Division of The Hearst Corporation, Popeyes, Inc. and
A. Copeland Enterprises, Inc.
10.22+ Employment Agreement dated November 5, 1992 between AFC and Frank
J. Belatti.
10.23+ Amendment No. 1 to Employment Agreement dated November 5, 1995
between AFC and Frank J. Belatti.
10.24+ Employment Agreement dated as of November 5, 1992 between AFC and
Dick R. Holbrook.
10.25+ Amendment No. 1 to Employment Agreement dated November 5, 1995
between AFC and Dick R. Holbrook.
10.26+ Employment Agreement dated December 5, 1995 between AFC and
Samuel N. Frankel.
10.27+ 1992 Stock Option Plan of AFC (formerly America's Favorite
Chicken Company) effective as of November 5, 1992.
10.28+ First Amendment to 1992 Stock Option Plan dated July 19, 1993.
10.29+ Second Amendment to 1992 Stock Option Plan dated December 17,
1993.
</TABLE>
II-3
<PAGE>
Exhibit Description
Number -----------
- -------
10.30+ 1996 Nonqualified Performance Stock Option Plan (Executive) of
AFC effective as of April 11, 1996.
10.31+ 1996 Nonqualified Performance Stock Option Plan (General) of AFC
effective as of April 11, 1996.
10.32+ 1996 Nonqualified Stock Option Plan of AFC effective as of April
11, 1996.
10.33+ Form of Nonqualified Stock Option Agreement (General) between AFC
and stock option participants.
10.34+ 1996 Employee Stock Bonus Plan (Executive) of AFC effective as of
April 11, 1996.
10.35+ 1996 Employee Stock Bonus Plan (General) of AFC effective as of
April 11, 1996.
10.36+ Form of Stock Bonus Agreement (Executive) between AFC and certain
executive officers.
10.37+ Form of Stock Bonus Agreement (General) between AFC and certain
key officers and employees.
10.38+ Form of Secured Promissory Note issued to certain members of
management.
10.39+ Form of Stock Pledge Agreement between AFC and certain members of
management.
10.40+ AFC 1994 Supplemental Benefit Plan for Executive Officers dated
May 9, 1994.
10.41+ AFC 1994 Supplemental Benefit Plan for Senior and Executive Staff
Officers dated April 19, 1994.
10.42+ AFC 1994 Supplemental Benefit Plan for Senior Officers/General
Managers dated May 9, 1994.
10.43+ AFC 1994 Supplemental Benefit Plan for Designated Officers dated
May 9, 1994.
10.44+ Settlement Agreement between Alvin C. Copeland, Diversified Foods
and Seasonings, Inc., Flavorite Laboratories, Inc. and AFC dated
May 29, 1997.
10.45+ Sublease dated March 1, 1997 by and between AFC and Foresight
Software, Inc.
10.46+ Lease dated December 31, 1992 by and between Concourse VI
Associates and AFC.
10.47+ Second Amendment to Lease Agreement dated June 24, 1993 by and
between AFC and Concourse VI Associates.
10.48+ Third Amendment to Lease Agreement dated June 17, 1994 by and
between AFC and Concourse VI Associates.
10.49+ Indemnification Agreement dated April 11, 1996 by and between AFC
and William M. Wardlaw.
10.50+ Indemnification Agreement dated April 11, 1996 by and between AFC
and Ronald P. Spogli.
10.51+ Indemnification Agreement dated April 11, 1996 by and between AFC
and John M. Roth.
10.52+ Indemnification Agreement dated May 1, 1996 by and between AFC
and Kelvin J. Pennington.
10.53+ Indemnification Agreement dated April 11, 1996 by and between AFC
and Dick R. Holbrook.
10.54+ Indemnification Agreement dated April 11, 1996 by and between AFC
and Todd W. Halloran.
10.55+ Indemnification Agreement dated April 11, 1996 by and between AFC
and Samuel N. Frankel.
10.56+ Indemnification Agreement dated April 11, 1996 by and between AFC
and Matt L. Figel.
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
10.57+ Indemnification Agreement dated July 2, 1996 by and between AFC
and Paul H. Farrar.
10.58+ Indemnification Agreement dated April 11, 1996 by and between AFC
and Mark J. Doran.
10.59+ Indemnification Agreement dated April 11, 1996 by and between AFC
and Frank J. Belatti.
12.1+ Computation of ratio of earnings to fixed charges.
21.1+ Subsidiaries of AFC.
23.1+ Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP (contained at page S-1 hereto).
24.1+ Power of Attorney.
25.1+ Form T-1 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of United States Trust Company of New
York.
99.1+ Form of Letter of Transmittal with respect to the Exchange Offer.
99.2+ Form of Notice of Guaranteed Delivery.
</TABLE>
- --------------------
+ To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted as the required information is inapplicable or
not present in amounts sufficient to require submission of the schedule, or
because the information is presented in the consolidated financial statements or
related notes.
ITEM 22. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes as follows:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i)
to include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the Registration Statement; (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification
II-5
<PAGE>
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
3. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Atlanta, State
of Georgia, on June 18, 1997.
AFC Enterprises, Inc.
By: /s/ Samuel N. Frankel
------------------------------------
Samuel N. Frankel
Executive Vice President, General
Counsel and Secretary
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Frank J. Belatti and Samuel N. Frankel and each
of them, with full power to act without the other, his true and lawful attorney-
in-fact and agent, with full power of substitution and resubstitution, for him
and in this name, place and stead, in any and all capacities (unless revoked in
writing), to sign any and all amendments to the Registrant's Form S-4
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might and could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Frank J. Belatti Chief Executive Officer, June 18, 1997
- ----------------------- Chairman of the Board and Director
Frank J. Belatti (Principal Executive Officer)
/s/ Dick R. Holbrook President, Chief Operating Officer, June 18, 1997
- ----------------------- and Director
Dick R. Holbrook
/s/ Samuel N. Frankel Executive Vice President, June 18, 1997
- ----------------------- General Counsel, Secretary and
Samuel N. Frankel Director
/s/ Gerald J. Wilkins Chief Financial Officer (Principal June 18, 1997
- ----------------------- Financial and Accounting Officer)
Gerald J. Wilkins
/s/ Mark J. Doran Director June 18, 1997
- -----------------------
Mark J. Doran
II-7
<PAGE>
/s/ Paul Farrar Director June 19, 1997
- -----------------------
Paul Farrar
/s/ Matt L. Figel Director June 18, 1997
- -----------------------
Matt L. Figel
/s/ Todd M. Halloran Director June 18, 1997
- -----------------------
Todd M. Halloran
/s/ Kelvin J. Pennington Director June 18, 1997
- -----------------------
Kelvin J. Pennington
/s/ John M. Roth Director June 18, 1997
- -----------------------
John M. Roth
/s/ Ronald P. Spogli Director June 18, 1997
- -----------------------
Ronald P. Spogli
/s/ William M. Wardlaw Director June 18, 1997
- -----------------------
William M. Wardlaw
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<C> <S> <C>
3.1+ Certificate of Incorporation of AFC Enterprises,
Inc. ("AFC"), as amended to date (with
Certificate of Correction attached thereto).
3.2+ Amended and Restated Bylaws of AFC (formerly
known as America's Favorite Chicken Company),
as amended to date.
4.1+ Indenture dated as of May 21, 1997 between
AFC and United States Trust Company of New
York, as Trustee, with respect to the 10 1/4%
Senior Subordinated Notes due 2007.
4.2+ Purchase Agreement, dated May 16, 1997, by and
among AFC, Goldman, Sachs & Co., CIBC Wood
Gundy Securities Corp. and Donaldson, Lufkin &
Jenrette Securities Corporation.
4.3+ Exchange and Registration Rights Agreement,
dated as of May 21, 1997, by and among AFC,
Goldman, Sachs & Co., CIBC Wood Gundy
Securities Corp. and Donaldson, Lufkin &
Jenrette Securities Corporation.
4.4+ Credit Agreement dated as of May 21, 1997
between AFC and the financial institutions
listed therein (collectively, "Lenders"),
Goldman Sachs Capital Partners L.P., as
syndication and arranging agent, and
Canadian Imperial Bank of Commerce ("CIBC"),
as administrative agent for Lenders.
4.5+ Security Agreement, dated as of May 21, 1997,
by and between AFC and CIBC, as Administrative
Agent.
4.6+ Pledge Agreement, dated as of May 21, 1997,
by and between AFC and CIBC, as Administrative
Agent.
4.7+ Trademark Security Agreement, dated as of May
21, 1997, by and between AFC and CIBC, as
Administrative Agent.
4.8+ Patent and Copyright Security Agreement, dated
as of May 21, 1997, by and between AFC and CIBC,
as Administrative Agent.
4.9+ Collateral Account Agreement, dated as of May 21,
1997, by and between AFC and CIBC, as
Administrative Agent.
4.10+ Form of Mortgage, Assignment of Rents, Security
Agreement and Fixture Filing, dated May 21, 1997,
between AFC, and CIBC as Administrative Agent.
5.1+ Opinion of Riordan & McKinzie as to the legality
of securities registered hereunder.
10.1+ Stock Purchase Agreement dated February 23, 1996
among AFC, FS Equity Partners, L.P. III ("FSEP
III"), and FS Equity Partners International, L.P.
("FSEP International").
10.2+ Stockholders Agreement dated April 11, 1996
among FSEP III and FSEP International, CIBC,
Pilgrim Prime Rate Trust, Van Kampen American
Capital Prime Rate Income Trust, Senior Debt
Portfolio, ML IBK Positions Inc., Frank J.
Belatti, Dick R. Holbrook, Samuel N. Frankel
(collectively, the "Stockholders") and AFC.
10.3+ Amendment No. 1 to Stockholders Agreement
dated May 1, 1996 among the Stockholders, AFC
and PENMAN Private Equity and Mezzanine Fund, L.P.
10.4+ Asset Purchase Agreement dated March 24, 1997 by
and between AFC and Atlanta Franchise Development
Company, LLC.
10.5+ Asset Purchase Agreement dated May 5, 1997 among
AFC, The American Bagel Company d/b/a
Chesapeake Bagel Bakery, Michael Robinson, and
Alan Manstof.
</TABLE>
II-9
<PAGE>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
10.7+ Form of Development Agreement
10.8+ Form of Franchising Agreement
10.9+ 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. (a predecessor of AFC).
10.10+ Amendment to Formula Agreement dated March 21,
1989 by and among Alvin Copeland, New Orleans
Spice Company, Inc. and Biscuit Investments,
Inc. (a predecessor of AFC).
10.11+ Second Amendment to Formula Agreement dated
March 21, 1989 by and among Alvin C. Copeland,
Biscuit Investments, Inc. and New Orleans
Spice Company, Inc.
10.12+ Information Technology Services Agreement dated
as of August 22, 1994 by and between AFC and
Integrated Systems Solutions Corporation, a
wholly-owned subsidiary of Information Business
Machines Corporation.
10.13+ Amendment No. 1 to the Agreement for Information
Technology Services dated July 29, 1996 between
AFC and Integrated Systems Solutions Corporation.
10.14+ Supplier Agreement dated March 21, 1989 between
New Orleans Spice Company, Inc. and Biscuit
Investments, Inc.
10.15+ Recipe Royalty Agreement dated March 21, 1989 by
and among Alvin C. Copeland, New Orleans Spice
Company, Inc. and Biscuit Investments, Inc.
10.16+ Licensing Agreement dated March 11, 1976 between
King Features Syndicate Division of The Hearst
Corporation and A. Copeland Enterprises, Inc.
10.17+ 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.
10.18+ Popeye License Agreement dated January 1, 1981
between King Features Syndicate Division of The
Hearst Corporation and Popeyes Famous Fried
Chicken, Inc.
10.19+ 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.
10.20+ License Agreement dated December 19, 1985
by and between King Features Syndicate, Inc.,
The Hearst Corporation, Popeyes, Inc. and A.
Copeland Enterprises, Inc.
10.21+ Letter Agreement dated July 20, 1987 by and
between King Features Syndicate, Division of
The Hearst Corporation, Popeyes, Inc. and A.
Copeland Enterprises, Inc.
10.22+ Employment Agreement dated November 5, 1992
between AFC and Frank J. Belatti.
10.23+ Amendment No. 1 to Employment Agreement dated
November 5, 1995 between AFC and Frank J.
Belatti.
10.24+ Employment Agreement dated as of November 5,
1992 between AFC and Dick R. Holbrook.
10.25+ Amendment No. 1 to Employment Agreement dated
November 5, 1995 between AFC and Dick R.
Holbrook.
10.26+ Employment Agreement dated December 5, 1995
between AFC and Samuel N. Frankel.
II-10
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<C> <S> <C>
10.27+ 1992 Stock Option Plan of AFC (formerly America's
Favorite Chicken Company) effective as of
November 5, 1992.
10.28+ First Amendment to 1992 Stock Option Plan dated
July 19, 1993.
10.29+ Second Amendment to 1992 Stock Option Plan dated
December 17, 1993.
10.30+ 1996 Nonqualified Performance Stock Option Plan
(Executive) of AFC effective as of April 11, 1996.
10.31+ 1996 Nonqualified Performance Stock Option Plan
(General) of AFC effective as of April 11, 1996.
10.32+ 1996 Nonqualified Stock Option Plan of AFC
effective as of April 11, 1996.
10.33+ Form of Nonqualified Stock Option Agreement
(General) between AFC and stock option
participants.
10.34+ 1996 Employee Stock Bonus Plan (Executive) of
AFC effective as of April 11, 1996.
10.35+ 1996 Employee Stock Bonus Plan (General) of
AFC effective as of April 11, 1996.
10.36+ Form of Stock Bonus Agreement (Executive) between
AFC and certain executive officers.
10.37+ Form of Stock Bonus Agreement (General) between
AFC and certain key officers and employees.
10.38+ Form of Secured Promissory Note issued to certain
members of management.
10.39+ Form of Stock Pledge Agreement between AFC and
certain members of management.
10.40+ AFC 1994 Supplemental Benefit Plan for Executive
Officers dated May 9, 1994.
10.41+ AFC 1994 Supplemental Benefit Plan for Senior and
Executive Staff Officers dated April 19, 1994.
10.42+ AFC 1994 Supplemental Benefit Plan for Senior
Officers/General Managers dated May 9, 1994.
10.43+ AFC 1994 Supplemental Benefit Plan for Designated
Officers dated May 9, 1994.
10.44+ Settlement Agreement between Alvin C. Copeland,
Diversified Foods and Seasonings, Inc., Flavorite
Laboratories, Inc. and AFC dated May 29, 1997.
10.45+ Sublease dated March 1, 1997 by and between AFC
and Foresight Software, Inc.
10.46+ Lease dated December 31, 1992 by and between
Concourse VI Associates and AFC.
10.47+ Second Amendment to Lease Agreement dated June
24, 1993 by and between AFC and Concourse VI
Associates.
10.48+ Third Amendment to Lease Agreement dated June
17, 1994 by and between AFC and Concourse VI
Associates.
10.49+ Indemnification Agreement dated April 11, 1996
by and between AFC and William M. Wardlaw.
10.50+ Indemnification Agreement dated April 11, 1996
by and between AFC and Ronald P. Spogli.
10.51+ Indemnification Agreement dated April 11, 1996
by and between AFC and John M. Roth.
10.52+ Indemnification Agreement dated May 1, 1996 by
and between AFC and Kelvin J. Pennington.
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<C> <S> <C>
10.53+ Indemnification Agreement dated April 11, 1996
by and between AFC and Dick R. Holbrook.
10.54+ Indemnification Agreement dated April 11, 1996
by and between AFC and Todd W. Halloran.
10.55+ Indemnification Agreement dated April 11, 1996
by and between AFC and Samuel N. Frankel.
10.56+ Indemnification Agreement dated April 11, 1996
by and between AFC and Matt L. Figel.
10.57+ Indemnification Agreement dated July 2, 1996 by
and between AFC and Paul H. Farrar.
10.58+ Indemnification Agreement dated April 11, 1996
by and between AFC and Mark J. Doran.
10.59+ Indemnification Agreement dated April 11, 1996
by and between AFC and Frank J. Belatti.
12.1+ Computation of ratio of earnings to fixed
charges.
21.1+ Subsidiaries of AFC.
23.1+ Consent of Riordan & McKinzie (contained in
Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP (contained at
page S-1 hereto).
24.1+ Power of Attorney.
25.1+ Form T-1 Statement of Eligibility and
Qualification under the Trust Indenture
Act of 1939 of United States Trust Company of
New York.
99.1+ Form of Letter of Transmittal with respect to
the Exchange Offer.
99.2+ Form of Notice of Guaranteed Delivery.
</TABLE>
- --------------------
+ To be filed by an amendment
II-12
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this
Registration Statement on Form S-4.
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 20, 1997
S-1
