S-1 1 d844520ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on April 6, 2015.

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Bojangles’, Inc.

 

 

(Exact name of registrant as specified in its charter)

 

Delaware 5812 45-2988924

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

9432 Southern Pine Boulevard,

Charlotte, NC 28273

(704) 527-2675

 

 

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Eric M. Newman, Esq.

Executive Vice President, General Counsel and Secretary

Bojangles’, Inc.

9432 Southern Pine Boulevard,

Charlotte, NC 28273

(704) 527-2675

 

 

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

(Copies of all communications, including communications sent to agent for service)

 

Barry M. Abelson, Esq.

John P. Duke, Esq.

Scott R. Jones, Esq.

Pepper Hamilton LLP

3000 Logan Square

Philadelphia, PA 19103

(215) 981-4000

 

Marc D. Jaffe, Esq.

Ian D. Schuman, Esq.

Stelios G. Saffos, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022-4834

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  ¨     Accelerated filer   ¨

Non-accelerated filer

  x     (Do not check if a smaller reporting company)   Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)

 

Amount of

Registration Fee

Common Stock, par value $0.01 per share

  $100,000,000   $11,620

 

 

(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the aggregate offering price of additional shares of common stock that the underwriters have the option to purchase.

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 the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

Subject to Completion
Preliminary Prospectus dated April 6, 2015

PROSPECTUS

                 Shares
Bojangles’, Inc.

 

Common Stock

 

 

This is Bojangles’, Inc.’s initial public offering. All of the shares of our common stock offered hereby are being sold by selling stockholders named in this prospectus. We will not receive any proceeds from the sale of shares in this offering.
We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares. After pricing the offering, we expect that the shares will trade on the NASDAQ Global Select Market under the symbol “BOJA.”
We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements.
Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 18 of this prospectus.

 

 

 

     Per Share        Total  
Public offering price    $           $     
Underwriting discounts(1)    $           $     
Proceeds, before expenses, to the selling stockholders    $           $     

 

  (1)

See “Underwriting” beginning on page 128 of this prospectus for additional information regarding underwriting compensation.

The underwriters may also exercise their option to purchase up to an additional                  shares from the selling stockholders, at the initial public offering price, less the underwriting discount, for 30 days after the date of this prospectus. We will not receive any proceeds from exercise of the underwriters’ option to purchase additional shares from the selling stockholders.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about                     , 2015.

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch   Wells Fargo Securities     Jefferies   

 

 

 

Barclays   Goldman, Sachs & Co.     Piper Jaffray   
William Blair   KeyBanc Capital Markets     RBC Capital Markets   

 

 

The date of this prospectus is                     , 2015.


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Market and Industry Data and Forecasts

  ii   

Basis of Presentation

  ii   

Trademarks and Copyrights

  v   

Prospectus Summary

  1   

The Offering

  10   

Summary Historical Consolidated and Other Financial Data

  12   

Risk Factors

  18   

Cautionary Note Regarding Forward-Looking Statements

  42   

Use of Proceeds

  44   

Dividend Policy

  45   

Capitalization

  46   

Dilution

  48   

Selected Historical Consolidated Financial Data

  50   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  52   

Business

  74   

Management

  92   

Executive and Director Compensation

  99   

Certain Relationships and Related Party Transactions

  108   

Principal and Selling Stockholders

  111   

Description of Capital Stock

  114   

Shares Eligible for Future Sale

  122   

Material U.S. Federal Income Tax Consequences To Non-U.S. Holders

  124   

Underwriting

  128   

Legal Matters

  136   

Experts

  136   

Where You Can Find More Information

  136   

Index to Consolidated Financial Statements

  F-1   

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                 , 2015 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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MARKET AND INDUSTRY DATA AND FORECASTS

Certain market and industry data included in this prospectus is derived from information provided by third-party market research firms, including Technomic, Inc., or Technomic, The NPD CREST® and Mintel Group Ltd., or Mintel, or third-party financial or analytics firms, including The Buxton Company, or Buxton, that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third-party forecasts in conjunction with our assumptions about our markets. Neither we nor the selling stockholders have independently verified such third-party information. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

Certain data are also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus. Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

BASIS OF PRESENTATION

In this prospectus, unless the context otherwise requires:

 

    “we,” “us,” “our,” the “company” or “Bojangles’,” refers collectively to Bojangles’, Inc., a Delaware corporation, incorporated in 2011, the issuer of the common stock in this offering, and its subsidiaries;

 

    “Intermediate” refers to our direct, wholly owned subsidiary, BHI Intermediate Holding Corp.;

 

    “Restaurants” refers to Bojangles’ Restaurants, Inc., which is Intermediate’s direct wholly-owned subsidiary;

 

    “BJRD” refers to BJ Restaurant Development, LLC, which is Intermediate’s direct wholly-owned subsidiary;

 

    “BJGA” refers to BJ Georgia, LLC, which is Intermediate’s direct wholly-owned subsidiary;

 

    “BIL” refers to Bojangles’ International, LLC, which is Restaurant’s and BJRD’s direct wholly-owned subsidiary;

 

    “our restaurant system” or “our system” refers to both company-operated and franchised restaurants, and the number of restaurants presented in our restaurant system, unless otherwise indicated, is as of December 28, 2014;

 

    “our restaurants,” or results or statistics attributable to one or more restaurants without expressly identifying them as company-operated, franchised or both, refers to our company-operated restaurants only;

 

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    when referring to “system-wide” financial metrics, we are referring to such financial metrics at the restaurant-level for company-operated restaurants plus those reported to us by our franchisees;

 

    “average check” refers to company restaurant revenues from company-operated restaurants divided by company-operated restaurant transactions;

 

    “dayparts” refers to five dayparts consisting of breakfast as open to 11:00 a.m., lunch as 11:00 a.m. to 2:00 p.m., snack as 2:00 p.m. to 5:00 p.m., dinner as 5:00 p.m. to 8:00 p.m., and after dinner as 8:00 p.m. to close; and

 

    “aided brand awareness” refers to when a survey respondent indicates recognition of a specific brand from a list of possible names presented by those conducting the survey instead of indicating recognition of a specific brand without being offered a list of potential responses.

We use a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. Fiscal 2011, fiscal 2012, fiscal 2013 and fiscal 2014 ended on December 25, 2011, December 30, 2012, December 29, 2013 and December 28, 2014, respectively.

In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Approximately every five or six years, a 53-week fiscal year occurs. Fiscal 2012 was a 53-week fiscal year. Fiscal 2011, fiscal 2013 and fiscal 2014 were 52-week fiscal years.

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base (as applicable, system-wide, franchised or company-operated restaurants). A new restaurant enters our comparable restaurant base on the first full day of the month after being open for 15 months using a mid-month convention.

System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchised restaurants, as reported by franchisees. While we do not record franchised restaurant sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.

We measure system-wide, franchised and company-operated average unit volumes, or AUVs, on a fiscal year basis and on a trailing twelve-months, or TTM, basis for non-fiscal year-end periods. Annual AUVs are calculated using the following methodology: first, we determine the domestic free-standing restaurants with both a drive-thru and interior seating that have been open for a full 12 month period (excluding express units); and second, we calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV calculation. This methodology is similar for each TTM period in addition to the fiscal year end.

Restaurant contribution is defined as company restaurant revenues less company food and supplies costs, restaurant labor costs and operating costs. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant revenues.

We calculate restaurant-level cash flow as restaurant contribution (excluding pre-opening expense) less equipment capital lease payments. Our equipment capital leases have terms of 60 months.

We define fully capitalized return as year one restaurant contribution (excluding pre-opening expense) plus rent expense less an estimated rent expense for a ground lease assuming a capitalization rate of 8% divided by total new restaurant investment cost (excluding land cost and pre-opening costs). As many of our restaurant competitors do not purchase the land for new restaurants, we believe calculating a fully capitalized return assuming a ground lease allows for a calculation of fully capitalized return that is more comparable to our competitors.

 

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We calculate cash-on-cash return by dividing year one restaurant-level cash flow by upfront cash investment costs (which include upfront cash equipment investments and exclude preopening costs).

The restaurant industry is divided into two segments: full service and limited service. Full service is comprised of the casual dining, mid-scale and fine dining sub-segments. Limited service, or LSR, is comprised of the quick-service restaurant, or QSR, and fast-casual sub-segments. “QSRs” are defined by Technomic as traditional “fast-food” restaurants with average check sizes of $3.00-$8.00. “Fast-casual” is defined by Technomic as a limited or self-service format with average check sizes of $8.00-$12.00 that offers food prepared to order within a generally more upscale and developed establishment. Our restaurants combine elements of both QSRs and fast-casual restaurants. Our restaurants’ convenient locations and format, drive-thru service and average check are attributes that we share with QSRs (rather than with the fast-casual segment generally), while the quality of our food, the freshness of our ingredients and our traditional cooking methods (as opposed to utilizing microwaves) are attributes that we generally share with fast-casual restaurants.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements. Certain other amounts that appear in this prospectus may not sum due to rounding.

Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. dollars.

We use certain financial measures that are neither required by, nor presented in accordance with, United States generally accepted accounting principles, or GAAP. Please refer to the sections entitled “Summary Historical Consolidated and Other Financial Data,” beginning on page 12, and “Selected Historical Consolidated Financial Data,” beginning on page 50, as well as the discussion below, under the heading “Presentation of Combined Operating Results for Fiscal 2011,” for further discussions regarding our use of such non-GAAP financial measures.

Unless otherwise specifically stated, the historical financial information presented in this prospectus is presented for the following entities:

 

    with respect to financial information regarding each of the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014, Bojangles’, Inc. and its consolidated subsidiaries;

 

    with respect to financial information regarding the twenty-two week period ended December 25, 2011, BHI Intermediate Holding Corp. and its consolidated subsidiaries; and

 

    with respect to financial information regarding the thirty-week period ended July 24, 2011, BHI Exchange, Inc. and its consolidated subsidiaries.

In addition, all pro forma and pro forma as adjusted financial information presented in this prospectus presents information with respect to Bojangles’, Inc. and its consolidated subsidiaries.

Presentation of Combined Operating Results for Fiscal 2011

On August 18, 2011, with an effective date of July 25, 2011, BHI Intermediate Holding Corp., or Intermediate, a wholly owned subsidiary of Bojangles’, Inc., acquired all of the outstanding capital stock of BHI Exchange, Inc., a Delaware corporation, or Predecessor, which owned, directly or indirectly, all of the outstanding equity interests in Restaurants, BJRD, BJGA and BIL, or, collectively, the Operating Entities. As a

 

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result of the acquisition and certain post-acquisition activity, Predecessor merged with and into Intermediate, with Intermediate as the surviving corporation. GAAP in the United States requires operating results prior to the acquisition, including for the thirty weeks ended July 24, 2011, to be presented as the results of Predecessor and its consolidated subsidiaries in our historical financial statements. Operating results subsequent to the acquisition, including for the twenty-two weeks ended December 25, 2011, are presented as the results of Intermediate and its consolidated subsidiaries in our historical financial statements. The presentation of combined Predecessor and Intermediate operating results (which is simply the arithmetic sum of the Predecessor and Intermediate amounts) is a non-GAAP presentation, which is provided as a convenience solely for the purpose of facilitating comparisons of the combined results with other fiscal periods presented. The combined operating results are not intended to represent what our operating results for fiscal 2011 would have been had the acquisition occurred at, or prior to, the beginning of fiscal 2011. The financial data and operating results for Intermediate include the impacts of applying purchase accounting. We do not believe that the overall impact of accounting adjustments made in connection with the acquisition, including, for example, fair value and useful life adjustments to depreciable and intangible assets, is meaningful for the purposes for which we have included financial data for Predecessor for the thirty weeks ended July 24, 2011, financial data for Intermediate for the twenty-two weeks ended December 25, 2011 and combined operating results for Predecessor and Intermediate for fiscal 2011.

Bojangles’, Inc. holds all of the outstanding equity interests in Intermediate and Intermediate holds all of the outstanding equity interests of the Operating Entities. Neither Bojangles’, Inc. nor Intermediate have material assets other than the capital stock or other equity interests of Intermediate and the Operating Entities, respectively, and both Bojangles’, Inc. and Intermediate conduct substantially all of their operations directly through the Operating Entities. Similarly, prior to the merger of Predecessor with and into Intermediate, Predecessor held all of the outstanding equity interests in the Operating Entities, had no material assets other than the capital stock or other equity interests of the Operating Entities and conducted substantially all of its operations directly through the Operating Entities. As a result, the historical consolidated statement of operations of Predecessor and Intermediate are substantially the same as those of Bojangles’, Inc. and its consolidated subsidiaries.

TRADEMARKS AND COPYRIGHTS

“Bojangles’®,” “Bojangles’ Express®,” “It’s Bo Time®,” “Bo-Smart®,” configuration of “Big Bo Box®,” “Bojangles’ Famous Chicken ’n Biscuits®,” “Chicken Supremes™,” “Bojangles’ Cajun Pintos®,” “Bojangles’ Dirty Rice®,” “Legendary Iced Tea®,” “Tailgate Everything®,” “Cajun Filet Biscuit™,” “Bojo®,” “Cheddar Bo™,” “Bo-Tato Rounds®,” “Bo-Berry Biscuits®,” “Bojangles’ Seasoned Fries™,” “Roasted Chicken Bites™” and other trademarks or service marks of Bojangles’ appearing in this prospectus are the property of Bojangles’ or its subsidiaries. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this prospectus are listed without their ©, ®, sm and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names, trademarks and service marks. This prospectus contains additional trade names, trademarks, and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. You should carefully read this entire prospectus, including the matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our stock. Some of the statements in this prospectus constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” Please see “Market and Industry Data and Forecasts” for important information as to how we determined our competitive position and other industry data set forth in this prospectus.

It’s Bo Time!

Bojangles’ is a highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from our Southern recipes. Over the last 38 years, we believe Bojangles’ has become an iconic brand with a cult-like following due to our famous, made-from-scratch biscuits baked every 20 minutes, our fresh, never-frozen bone-in fried chicken, our unique fixin’s and our Legendary Iced Tea. We believe we offer fast-casual quality food combined with quick-service speed, convenience and value. While we serve our full menu of craveable food across all dayparts, we are especially known by customers for our breakfast offerings and generate, on average, over $650,000 annually per company-operated restaurant before 11:00 a.m. In fiscal 2014, our 254 company-operated and 368 franchised restaurants, primarily located in the Southeastern United States, generated over $1 billion in system-wide sales, representing $406.8 million in company restaurant revenues and $628.6 million in franchise sales which contributed $23.7 million in franchise royalty and other franchise revenues. Over this same period, our restaurants generated a system-wide AUV of $1.8 million, which we believe is among the highest in the QSR and fast-casual segments. Our mission is to win the hearts of our customers by delivering quality and service all day, every day, and we believe our passionate team members and culture are fundamental to our success. The excitement for our brand and enthusiasm of our customers can be best summarized by our famous tagline…“It’s Bo Time!”

Since our founding in Charlotte, North Carolina in 1977, our core menu centered on “chicken ’n biscuits” has remained largely unchanged. We believe our variety of fresh, flavorful and Southern-inspired items appeals to a broad customer demographic across our five dayparts: breakfast, lunch, snack, dinner and after dinner. Bojangles’ is known for its breakfast menu, which is served all day, every day, and includes our top selling Cajun Filet Biscuit. We also offer hand-breaded, bone-in chicken marinated for at least 12 hours, Chicken Supremes, Homestyle Chicken Tenders, sandwiches and wraps, as well as unique fixin’s including our Seasoned Fries, Bo-Tato Rounds, Cajun Pintos and Dirty Rice. Our Bo-Smart menu features items such as salads, grilled chicken sandwiches, roasted chicken bites and fat-free green beans. In addition to our individual menu items, we offer combos and family meals that appeal to large parties, as well as our Big Bo Box, which is perfect for tailgating events. Our food is complemented by our Legendary Iced Tea that is steeped the old-fashioned way, providing a rich flavor that our customers crave. Our high-quality, handcrafted food also represents a great value with an average check of only $6.68 for company-operated restaurants in fiscal 2014. We believe our distinct menu with fresh, made-from-scratch offerings combined with a compelling average check creates an attractive value proposition for our customers.

Our craveable menu, value proposition, multiple dayparts and culture have helped us to deliver strong and consistent financial and operating performance, as illustrated by the following:

 

    Delivered 19 consecutive quarters of system-wide comparable restaurant sales growth through our fiscal quarter ended December 28, 2014, including 7.0% for the fiscal quarter ended December 28, 2014;

 

 

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    Grew our system-wide and company-operated restaurant count at a compounded annual growth rate, or CAGR, of 7.0% and 9.0%, respectively, from fiscal 2011 to fiscal 2014;

 

    Expanded our total revenues from $299.9 million in fiscal 2011 to $430.5 million in fiscal 2014, representing a CAGR of 12.8%;

 

    Grew net income from $4.6 million in fiscal 2011 to $26.1 million in fiscal 2014; and

 

    Increased Adjusted EBITDA from $45.4 million in fiscal 2011 to $68.9 million in fiscal 2014, representing a CAGR of 14.9%.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of Adjusted EBITDA and a reconciliation of the differences between Adjusted EBITDA and net income.

 

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Our Industry

We operate within the LSR segment of the U.S. restaurant industry, which includes QSR and fast-casual restaurants. According to Technomic, 2013 sales for the total LSR category increased 3.6% from 2012 to $231

 

 

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billion. We offer fast-casual quality food combined with quick-service speed, convenience and value across multiple dayparts. According to Technomic, sales for the total QSR segment grew 2.3% from 2012 to $197 billion in 2013, and are projected to grow to $235 billion by 2018, representing a CAGR of 3.6%. Total sales in the fast-casual segment grew 11.4% from 2012 to $35 billion in 2013, and are projected to grow to $54 billion by 2018, representing a CAGR of 9.3%. We believe our differentiated, high-quality menu, including our extensive breakfast offerings that deliver great value all day, every day, positions us to compete successfully against both QSR and fast-casual concepts, providing us with a large addressable market.

We believe that we are well-positioned to benefit from a number of culinary and demographic trends in the United States:

 

    Growing Breakfast Daypart: According to The NPD CREST® foodservice market research, morning meal was the fastest growing daypart compared to the lunch, supper and p.m. snack dayparts for calendar year 2013 compared to calendar year 2012. The U.S. restaurant breakfast market is forecasted to grow from $27.4 billion in 2013 to $35.7 billion in 2018, representing a CAGR of 5.4%, according to Mintel. Several factors are driving growth in the breakfast daypart, including more extensive menu offerings and consumers’ desire for value, portability and convenience. Consumers’ breakfast eating habits tend to be more habitual than other meals because breakfast is part of many consumers’ morning routines.

 

    Increasing Chicken Category: In 2013, the chicken menu category for LSRs grew 4.0% from 2012, outpacing the broader LSR category, and is projected to grow by 3.5% in 2014, according to Technomic.

 

    Population Growth in Our Markets: Since 2000, population growth in our key markets has exceeded the U.S. national average. According to the U.S. Census Bureau, growth in the Georgia, North Carolina, South Carolina, Virginia and Tennessee populations from 2000 to 2013 was on average 18.8%, as compared to 12.0% population growth in the U.S. over that same period.

The “Bo Difference”

We believe the following strengths differentiate us and serve as the foundation for our continued growth.

Iconic Brand with Loyal, Cult-Like Following. Since opening our first restaurant in North Carolina in 1977, we believe we have become an iconic brand with a cult-like following by consistently delivering differentiated, craveable food. In North Carolina and South Carolina, we enjoy approximately 95% aided brand awareness and we have among the highest number of free-standing restaurants in the LSR category. We believe our “Bo Fanatics,” which is our term for our most loyal customers, visit us multiple times per week and promote our brand through word of mouth and engagement on social media. We support our brand through high profile sponsorships of sporting events and venues, such as the Bojangles’ Southern 500, as well as endorsements from celebrities who are fans of Bojangles’. We believe our iconic brand and cult-like following have driven our 19 consecutive quarters of system-wide comparable restaurant sales growth and support our ability to grow our restaurant base in existing and new markets.

High-Quality, Craveable Food. We are committed to maintaining the integrity of our traditional, Southern food. We believe our customers crave the unique flavor of our food and the variety of our menu, which includes our signature breakfast biscuits, bone-in fried chicken, Chicken Supremes, Homestyle Chicken Tenders, sandwiches and wraps, unique fixin’s, and our Bo-Smart menu. We use high-quality ingredients prepared the old-fashioned way and do not have microwaves in our restaurants. As an example of our commitment to quality, all of our specially trained biscuit makers follow 48 steps in preparing our made-from-scratch, buttermilk

 

 

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biscuits, which are baked fresh every 20 minutes. We prepare eggs, sausage and cured country ham on the griddle for our breakfast menu served all day. For our unique fixin’s, we prepare our famous Dirty Rice and Cajun Pintos on the stove-top, and our Seasoned Fries are made with our special blend of seasonings. Finally, we steep our Legendary Iced Tea to ensure a rich brewed flavor that our customers crave. This commitment to offering high-quality food with unique flavor that we believe customers cannot find at other restaurants has earned us deep customer loyalty and a high frequency of visits.

Diversified Daypart Mix. We have a diversified daypart mix that supports AUVs that are among the highest in the QSR and fast-casual segments:

 

    Our Famous Breakfast: While many of our competitors do not offer breakfast, in fiscal 2014, we generated 38% of our company restaurant revenues before 11:00 a.m., or an average of over $650,000 annually per company-operated restaurant. Our strong breakfast results make us a leader in the fastest growing daypart in the industry. Furthermore, we believe breakfast has broad customer appeal and is the most habitual daypart, which drives repeat business and customer loyalty.

 

    Our Craveable Menu for Lunch, Snack, Dinner and After Dinner: In fiscal 2014, we generated 62% of our company restaurant revenues from 11:00 a.m. to closing, which is typically 11:00 p.m. We believe Bojangles’ menu, focused on high-quality, craveable items, is distinct in the LSR industry and provides an attractive value proposition for lunch, snack, dinner and after dinner. Our Big Bo Box, family and tailgate meals cater to group occasions and drive sales during these dayparts. Additionally, our customers can order our famous breakfast items all day, which we believe differentiates us from our peers and delivers great value at all hours.

Unique Value Proposition: Fast-Casual Quality Food with QSR Speed, Convenience and Value. Everything we do is driven by our intense focus on delivering a compelling value proposition to our customers. We believe that our concept is uniquely positioned as it combines elements of both fast-casual restaurants (quality and food preparation) and QSR (speed, convenience and value). Our value proposition is a key element of our long track record of delivering strong comparable restaurant sales and successful market expansion:

 

    High-Quality Ingredients: We cook our food using high-quality ingredients. For example, our menu features our famous biscuits, which are made from fresh buttermilk, and our bone-in fried chicken, which is fresh and never-frozen. Our menu also includes items such as our Country Ham Biscuit, made from traditionally dry-cured country ham and our Sausage Biscuit, made from high-quality sausage with a blend of seasonings prepared especially for Bojangles’. Our Legendary Iced Tea is steeped the old-fashioned way and is never made from concentrates or poured from bottles or cans.

 

    Traditional Food Preparation: We prepare our food the old-fashioned way, and never in a microwave. Our restaurant kitchens are specifically designed for our employees to prepare our food in a traditional manner; for example, our bone-in chicken is hand-breaded and is marinated for at least 12 hours. Many of our menu items are made-from-scratch and are cooked in the oven, on the griddle or on the stove-top.

 

    Compelling Speed and Convenience: We locate our restaurants in places that are easily accessible and convenient to customers’ homes, places of work and daily commutes. We also strive to deliver our food quickly to our customers, whether in our restaurants or through our drive-thru. We believe our customers appreciate our speed and convenience, as evidenced by 80% of our company restaurant revenues in fiscal 2014 generated via drive-thru and carry-out.

 

    Attractive Price Point: Our average check was $6.68 for company-operated restaurants in fiscal 2014. We believe this average check is lower than any fast-casual and most QSR restaurant concepts.

 

 

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Compelling Hybrid System that Provides Capital Efficient Growth. Our hybrid system captures the earnings power of a company-operated model with strong unit economics and the capital efficiency of a franchised model. As of December 28, 2014, 41% of our restaurant base was company-operated and 59% was franchised.

 

    Company-Operated: As of December 28, 2014, we had 254 company-operated restaurants, which has grown from 196 as of the end of fiscal 2011, representing a CAGR of 9.0%. In fiscal 2014, our company-operated restaurants generated $406.8 million in revenues, which increased from $281.9 million in fiscal 2011. This sales growth contributed to our restaurant contribution increase from $44.3 million in fiscal 2011 to $72.6 million in fiscal 2014, representing a CAGR of 17.9%. With approximately 41% of the restaurant base operated by the company, we are aligned with our franchisees and take a leadership role in executing brand and operational initiatives. Our company-operated restaurants have achieved strong performance, thereby illustrating to franchisees the potential of our brand and generating significant credibility within our franchise base.

 

    Franchised: As of December 28, 2014, our franchisees operated 368 restaurants, which has grown from 312 as of fiscal 2011, representing a CAGR of 5.7%. Royalties and franchise fees totaled $23.7 million in fiscal 2014, which increased from $18.0 million in fiscal 2011. We believe royalties and fees generated from our franchise base provide us with significant, predictable cash flow to invest in executing our strategies. Our approximately 90 franchise entities are important partners in our system-wide growth as they allow us to expand the Bojangles’ brand in new and existing markets in a capital efficient manner.

Highly Productive Restaurant Base with Strong Unit Economics. We believe our differentiated customer value proposition generates strong restaurant-level financials and attractive returns on investment. In fiscal 2014, our system-wide AUV was $1.8 million, which we believe is among the highest in the QSR and fast-casual segments. Our new company-operated restaurant model targets strong cash flows and compelling cash-on-cash returns. Unlike some other restaurant concepts, we primarily utilize build-to-suit developments and equipment financing leases for our new company-operated restaurants, which require minimal upfront investment for construction and equipment costs. Our new company-operated restaurant model is based on a year one AUV of $1.5 million, restaurant-level cash flow of approximately $110,000 and average upfront cash equipment investment of approximately $85,000. Given our build-to-suit strategy that minimizes our upfront cash investment, our new company-operated restaurant model delivers, on average, a less than one year payback on cash investment. On average, we have exceeded this target for our new company-operated restaurants over the past three fiscal years. We believe that our strong productivity, attractive restaurant-level financials and low cash investment provide a platform for continued profitable company growth and compelling returns on our new restaurants. See “Business—Construction” for more information.

Strong Management Team Driving Culture Based on People. We have a highly experienced management team with over 380 years of cumulative experience in the restaurant industry. Our president and chief executive officer Clifton Rutledge, who joined us in January 2014, brings 35 years of restaurant industry experience, most recently with Whataburger Restaurants LLC. Mr. Rutledge leads our management and field operating teams, who also bring deep experience to their relevant areas including operations, franchising, marketing, human resources, real estate, supply chain, finance and legal. Our leadership team is committed to instilling our strong culture, which is based on trust, servant leadership and total commitment in all that we do. Our values of hard work, teamwork, harmony, listening and respect underlie everything that we do, both in our interactions with each other and with customers. We view our restaurant-level employees as the true heroes of our business, working daily to deliver our high-quality food with a strong sense of pride in our brand. We believe our strong management team and commitment to a culture based on people and integrity are key drivers of our success as a differentiated restaurant concept and position us well for long-term growth.

 

 

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Spreading the “Bo-Buzz”

We plan to pursue the following strategies to continue to grow our revenues and profits.

Continue to Open New Company-Operated and Franchised Restaurants. We believe we are in the early stages of our growth story. We have expanded our system-wide restaurant count from 508 restaurants as of the end of fiscal 2011 to 622 restaurants as of the end of fiscal 2014, representing a CAGR of 7.0%. In fiscal 2014, we opened 24 company-operated restaurants and 28 franchised restaurants, contributing to annual system-wide unit growth of 7.8%. In fiscal 2015, we expect to open 22 to 25 new company-operated restaurants and 28 to 32 new franchised restaurants. Over the long-term, we plan to continue growing the number of Bojangles’ system-wide restaurants by approximately 7% to 8% annually, while maintaining a similar proportion of company-operated and franchised units. Given the strength of our brand, existing restaurant base and new unit economics, we believe we can continue opening restaurants in our core North Carolina and South Carolina markets. Additionally, given the performance of our more than 200 company-operated and franchised restaurants in adjacent markets, we believe there is a significant opportunity to continue to grow in our existing footprint. Based on our experience and research conducted for us by Buxton, we believe the total restaurant potential in our current footprint of ten states is more than 1,400 locations, and across the United States we believe the total restaurant potential is more than 3,500 locations.

Drive Comparable Restaurant Sales. We have generated 19 consecutive quarters of system-wide comparable restaurant sales growth. We plan to continue delivering comparable restaurant sales growth through the following strategies:

 

    Attract New Customers Through Expanded Brand Awareness: We expect to attract new customers as Bojangles’ becomes more widely known due to new restaurant openings and marketing efforts focused on broadening the reach and appeal of our brand. We expect consumers will become more familiar with Bojangles’ as we continue to penetrate our markets, which we believe will benefit our existing restaurant base. Our marketing strategy centers on our “It’s Bo Time” campaign, which highlights the craveability and made-from-scratch quality of our food. We also utilize social media community engagement and public relations to increase the reach of our brand. Additionally, our system will benefit from increased contributions to our marketing and various co-op advertising funds as we continue to grow our restaurant base.

 

    Increase Existing Customer Frequency: We are striving to increase customer frequency by providing “Bo-Size Service,” a service experience and environment that “compliments” the quality of our food and models our culture. We expect to accomplish this by enhancing customer engagement, while also improving throughput, order execution and quality. Additionally, we have recently implemented a customer experience measurement system, which provides us with real-time feedback and customers’ insights to enhance our service experience. We believe that always striving for excellent customer service will create an experience and environment that will support increased existing customer visits.

 

    Continue to Grow Dayparts: Over the past three years, we generated positive company-operated comparable restaurant sales growth across each of our dayparts. We believe we have an opportunity to complement our strong and growing breakfast daypart with our lunch, snack, dinner and after dinner dayparts. We expect to drive growth across these dayparts through optimized labor and management allocation, enhanced menu offerings, innovative merchandising and marketing campaigns, such as our Big Bo Box packaging and Tailgate Everything campaign, which have successfully driven growth in our post-breakfast dayparts. We plan to continue introducing and marketing limited time offers to increase occasions across our dayparts as well as to educate customers on our lunch and dinner offerings.

 

 

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Continue to Enhance Profitability. We focus on expanding our profitability while also investing in personnel and infrastructure to support our future growth. We will seek to further enhance margins over the long-term by maintaining fiscal discipline and leveraging fixed costs. We constantly focus on restaurant-level operations, including cost controls, while ensuring that we do not sacrifice the quality and service for which we are known. Additionally, as our restaurant base grows, we believe we will be able to leverage support costs as general and administrative expenses grow at a slower rate than our revenues.

Risk Factors

Before you invest in our common stock, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors.” Risks relating to our business include the following, among others:

 

    our vulnerability to changes in consumer preferences and economic conditions;

 

    our ability to open new restaurants in new and existing markets and expand our franchise system;

 

    our ability to generate comparable restaurant sales growth;

 

    our restaurants and our franchisees’ restaurants may close due to financial or other difficulties;

 

    new menu items, advertising campaigns and restaurant designs and remodels may not generate increased sales or profits;

 

    anticipated future restaurant openings may be delayed or cancelled;

 

    increases in the cost of chicken, pork, wheat, corn and other products;

 

    our ability to compete successfully with other quick-service and fast-casual restaurants; and

 

    our reliance on our franchisees, who may be adversely impacted by economic conditions and who may incur financial hardships, be unable to obtain credit, need to close their restaurants or declare bankruptcy.

Corporate and Other Information

We opened our first store in Charlotte, North Carolina in 1977 and have since expanded our system-wide restaurants to 622 across ten states, the District of Columbia and Roatan Island, Honduras as of December 28, 2014.

In 1990, Bojangles’ Restaurants, Inc., or Restaurants, acquired the assets of the then Bojangles’ business and operated as a private company under various sponsors until 2011. In 2011, BHI Holding Corp., a Delaware corporation controlled by various funds managed by Advent, acquired all of the issued and outstanding capital stock of Predecessor, the then parent company of Restaurants, through a wholly-owned subsidiary of BHI Holding Corp., BHI Intermediate Holding Corp., or Intermediate, from our prior sponsor. Subsequently, with the acquisition, BHI Exchange, Inc. merged with and into Intermediate, with Intermediate as the surviving corporation. As a result of the merger, BHI Holding Corp. became the direct owner of all of the issued and outstanding equity interests of Intermediate, and the indirect owner of all of the issued and outstanding equity interests of Restaurants, BJRD, BJGA and BIL. In fiscal 2014, BHI Holding Corp. was renamed Bojangles’, Inc.

 

 

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Our principal executive offices are located at 9432 Southern Pine Boulevard, Charlotte, NC 28273 and our telephone number is (704) 527-2675. Our internet website address is www.bojangles.com. Information on, or accessible through, our website is not part of or incorporated into this prospectus or the registration statement of which it forms a part.

The following chart illustrates our organizational structure upon completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock)(1):

 

LOGO

 

(1) Does not include any outstanding stock options or shares reserved for issuance under our equity incentive plans.

Our Sponsor

Following the closing of this offering, funds managed by Advent International Corporation, or Advent, are expected to own approximately     % of our outstanding common stock, or     %, if the underwriters’ option to purchase additional shares is fully exercised. As a result, Advent will be able to exert significant voting influence over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock” and “Principal and Selling Stockholders.”

Founded in 1984, Advent International is one of the largest and most experienced global private equity investors. Since inception, the firm has invested in more than 290 companies in 39 countries and today has $34 billion in assets under management. With offices on four continents, Advent has established a globally integrated team of over 180 investment professionals across North America, Europe, Latin America and Asia. The firm focuses on investments across five core sectors, including business and financial services; healthcare; industrial; retail, consumer and leisure; and technology, media and telecom. Advent is committed to partnering with management teams to deliver sustained revenue and earnings growth for its portfolio companies.

 

 

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Certain of our principal stockholders, including Advent, may acquire or hold interests in businesses that compete directly with us, or may pursue acquisition opportunities which are complementary to our business, making such an acquisition unavailable to us. Our amended and restated certificate of incorporation will contain provisions renouncing any interest or expectancy held by our directors affiliated with Advent in certain corporate opportunities. For further information, see “Risk Factors—Risks Relating to this Offering and Ownership of Our Common Stock—The interests of Advent may conflict with ours or yours in the future.”

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenues during our last fiscal year, we qualify as an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company, among other things:

 

    we may present only two years of audited financial statements and only two years of related disclosure in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

 

    we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

    we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

 

    we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions for up to five years or until such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt securities over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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THE OFFERING

 

Issuer

Bojangles’, Inc.

 

Common stock offered by the selling stockholders

                shares.

 

Common stock to be outstanding immediately after this offering

                shares.

 

Option to purchase additional shares

The underwriters have a 30-day option to purchase up to                 additional shares from the selling stockholders at the public offering price less underwriting discounts and commissions.

 

Use of proceeds

The selling stockholders will receive all of the proceeds, after deducting underwriting discounts, from this offering. We will not receive any proceeds from this offering. See “Use of Proceeds” for additional information.

 

Dividend policy

Following the closing of this offering, we do not plan to pay a regular dividend on our common stock. The declaration and payment of all future dividends, if any, will be at the discretion of our board of directors, and will depend upon our financial condition, earnings, contractual conditions, including legal requirements and restrictions imposed by our credit agreement or applicable laws and other factors that our board may deem relevant. See “Dividend Policy.”

 

Symbol

We have applied to have our common stock approved for listing on the NASDAQ Global Select Market, or NASDAQ, under the symbol “BOJA.”

 

Principal stockholders

Upon closing of this offering, Advent will beneficially own a controlling interest in us. We intend to avail ourselves of the controlled company exemption under the corporate governance rules of NASDAQ. See “Management—Director Independence and Controlled Company Status.”

 

Risk factors

Investing in our common stock involves a high degree of risk. For a discussion of risks you should carefully consider before investing in our common stock, see “Risk Factors” beginning on page 18 of this prospectus.

After giving effect to the conversion of our Series A preferred stock into common stock in connection with the closing of this offering, the number of shares of common stock to be outstanding after this offering is based on                 shares outstanding as of                     , 2015 and excludes:

 

                    shares of common stock issuable upon the exercise of options to purchase common stock outstanding as of                     , 2015 at a weighted average exercise price of $         per share; and

 

                    shares of common stock reserved for issuance under our equity incentive plan, which will be in effect upon the closing of this offering.

 

 

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Except as otherwise indicated, all information in this prospectus assumes:

 

    that the underwriters will not exercise their option to purchase up to an additional                 shares;

 

    an             -for-             common stock split to be effected one day prior to the closing of this offering;

 

    the conversion of all outstanding shares of our Series A preferred stock into                 shares of our common stock, at a conversion rate of one share of Series A preferred stock into one share of common stock, immediately prior to the closing of this offering; and

 

    the adoption of our amended and restated certificate of incorporation and amended and restated bylaws to be effective upon the closing of this offering.

 

 

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SUMMARY HISTORICAL CONSOLIDATED AND OTHER FINANCIAL DATA

The following table contains summary historical consolidated financial and other data as of and for the fiscal years ended December 29, 2013 and December 28, 2014, derived from our audited consolidated financial statements included elsewhere in this prospectus, and summary historical consolidated financial and other data as of and for the fiscal year ended December 30, 2012 derived from our audited consolidated financial statements not included in this prospectus. The information below is only a summary and should be read in conjunction with the information contained under the headings “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    

Fiscal Year Ended(1)

 
    

2012

    

2013

    

2014

 
    

(Dollar amounts in thousands,

except per share data)

 

Statement of Operations Data:

        

Revenues

        

Company restaurant revenues

   $ 328,370       $ 353,592       $ 406,788   

Franchise royalty revenues

     19,539         20,572         22,746   

Other franchise revenues

     860         998         938   
  

 

 

    

 

 

    

 

 

 

Total revenues

  348,769      375,162      430,472   
  

 

 

    

 

 

    

 

 

 

Company restaurant operating expenses

Food and supplies costs

  108,972      118,563      133,191   

Restaurant labor costs

  95,732      99,378      112,506   

Operating costs

  68,499      75,160      88,476   

Depreciation and amortization

  8,361      9,011      9,713   
  

 

 

    

 

 

    

 

 

 

Total company restaurant operating expenses

  281,564      302,112      343,886   
  

 

 

    

 

 

    

 

 

 

Operating income before other operating expenses

  67,205      73,050      86,586   
  

 

 

    

 

 

    

 

 

 

Other operating expenses

General and administrative

  25,480      27,478      32,107   

Depreciation and amortization

  2,154      2,177      2,372   

Impairment

  321      653      484   

Loss (gain) on disposal of property and equipment

  161      (579   60   
  

 

 

    

 

 

    

 

 

 

Total other operating expenses

  28,116      29,729      35,023   
  

 

 

    

 

 

    

 

 

 

Operating income

  39,089      43,321      51,563   
  

 

 

    

 

 

    

 

 

 

Loss on debt extinguishment

  (10,838   —       —    

Amortization of deferred debt issuance costs

  (1,509   (681   (733

Interest income

  4      3      2   

Interest expense

  (15,157   (8,401   (9,123
  

 

 

    

 

 

    

 

 

 

Income before income taxes

  11,589      34,242      41,709   

Income taxes

  3,931      9,915      15,589   
  

 

 

    

 

 

    

 

 

 

Net income

$ 7,658    $ 24,327    $ 26,120   
  

 

 

    

 

 

    

 

 

 

Pro Forma Net Income and Per Share Data:

Pro forma net income(2)

$                 $                

Pro forma net income per share(2)

Basic

$                 $                

Diluted

$                 $                

Weighted average shares used in computing pro forma net income per share(3)

Basic

Diluted

 

 

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Fiscal Year Ended(1)

 
    

2012

    

2013

    

2014

 
    

(Dollar amounts in thousands,

except per share data)

 

Consolidated Statement of Cash Flows Data:

        

Net cash provided by operating activities

   $ 32,934       $ 37,930       $ 41,643   

Net cash used in investing activities

     (7,823      (8,619      (10,669

Net cash used in financing activities

     (21,511      (29,461      (26,229

Other Supplemental Metrics:

        

Number of restaurants

        

Company-operated

     211         225         254   

Franchised

     327         352         368   

System-wide

     538         577         622   

Comparable restaurant sales growth(4)

        

Company-operated

     8.4      4.5      4.0

Franchised

     6.2      1.4      5.0

System-wide

     7.0      2.5      4.6

System-wide average unit volumes

   $ 1,716       $ 1,728       $ 1,774   

Restaurant contribution(5)

   $ 55,167       $ 60,491       $ 72,615   

as a percentage of company restaurant revenues

     16.8      17.1      17.9

EBITDA(6)

   $ 38,766       $ 54,509       $ 63,648   

Adjusted EBITDA(6)

   $ 54,630       $ 60,458       $ 68,885   

as a percentage of total revenues

     15.7      16.1      16.0

Cash capital expenditures(7)

   $ 7,213       $ 9,431       $ 7,495   

 

    

As of December 28, 2014

 
    

Actual

    

Pro Forma(8)

    

Pro Forma As

Adjusted(8)

 
    

(Dollar amounts in thousands)

 

Balance Sheet Data—Consolidated (at period end):

        

Cash and cash equivalents

   $ 13,201       $                    $                

Property and equipment, net

     42,478         

Total assets

     552,643         

Total debt(9)

     252,758         

Total stockholders’ equity

     137,752         

 

(1) We use a 52- or 53-week fiscal year ending on the last Sunday of each calendar year. Fiscal 2012, fiscal 2013 and fiscal 2014 ended on December 30, 2012, December 29, 2013 and December 28, 2014, respectively. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Approximately every five or six years a 53-week fiscal year occurs. Fiscal 2013 and fiscal 2014 were 52-week fiscal years. Fiscal 2012 was a 53-week fiscal year.

 

(2) We have not presented historical basic and diluted earnings per share because our capital structure prior to the offering makes the presentation of earnings per share not meaningful as we do not have any shares of common stock outstanding. We have accordingly presented pro forma basic and diluted net income per share for the fiscal years ended December 29, 2013 and December 28, 2014, which consists of our historical net income divided by the basic and diluted pro forma weighted average number of shares of common stock outstanding after giving effect to (i) the conversion of all of our then outstanding shares of Series A preferred stock into                  shares of our common stock immediately prior to the closing of this offering, and (ii) an                  -for-                  common stock split, to be effected one day prior to the closing of this offering.

 

 

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Pro forma net income per share does not reflect (i) the estimated expenses of this offering or (ii) compensation and expenses for our board of directors and other costs related to operating as a public company.

 

(3) The following is a reconciliation of historical to pro forma weighted average shares used in computing pro forma net income per share for fiscal 2013 and fiscal 2014:

 

    

Fiscal Year Ended

    

2013

  

2014

Weighted average shares used in computing pro forma net income per share:

     

Outstanding shares of common stock

     

Shares of common stock issuable upon conversion of preferred stock

     

Shares of common stock following this offering

     

Dilution related to outstanding stock options

     
  

 

  

 

Total

  

 

  

 

 

(4) Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. A new restaurant enters our comparable restaurant base the first full day of the month after being open for 15 months using a mid-month convention. System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchised restaurants, as reported by franchisees. While we do not record franchised restaurant sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.

 

(5) Restaurant contribution is neither required by, nor presented in accordance with, GAAP, and is defined as company restaurant revenues less company food and supplies costs, restaurant labor costs and operating costs. Restaurant contribution is a supplemental measure of operating performance of our restaurants and our calculation thereof may not be comparable to that reported by other companies. Restaurant contribution has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Management believes that restaurant contribution is an important tool for investors because it is a widely-used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant contribution as a key metric to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods and to evaluate our restaurant financial performance compared with our competitors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of restaurant contribution and other key performance indicators.

A reconciliation of restaurant contribution to company restaurant revenues is provided below:

 

    

Fiscal Year Ended

 
    

2012

    

2013

    

2014

 
    

(Dollar amounts in thousands)

 

Company restaurant revenues

   $ 328,370       $ 353,592       $ 406,788   
  

 

 

    

 

 

    

 

 

 

Food and supplies costs

  (108,972   (118,563   (133,191

Restaurant labor costs

  (95,732   (99,378   (112,506

Operating costs

  (68,499   (75,160   (88,476
  

 

 

    

 

 

    

 

 

 

Restaurant contribution

$ 55,167    $ 60,491    $ 72,615   
  

 

 

    

 

 

    

 

 

 

 

 

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(6) EBITDA represents company net income before interest expense (net of interest income), provision for income taxes and depreciation and amortization. Adjusted EBITDA represents company net income before interest expense (net of interest income), provision for income taxes, depreciation and amortization, items that we do not consider representative of our ongoing operating performance and certain non-cash items, as identified in the reconciliation table below.

EBITDA and Adjusted EBITDA as presented in this prospectus are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.

 

 

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The following table sets forth reconciliations of net income to EBITDA and Adjusted EBITDA:

 

    

Fiscal Year Ended

 
    

2012

    

2013

    

2014

 
    

(Dollar amounts in thousands)

 

Net income

   $ 7,658       $ 24,327       $ 26,120   

Income taxes

     3,931         9,915         15,589   

Interest expense, net

     15,153         8,398         9,121   

Depreciation and amortization(a)

     12,024         11,869         12,818   
  

 

 

    

 

 

    

 

 

 

EBITDA

  38,766      54,509      63,648   

Non-cash rent(b)

  1,409      1,336      1,513   

Stock-based compensation(c)

  1,560      838      1,420   

Preopening expenses(d)

  622      1,112      1,358   

Sponsor and board member fees and other expenses(e)

  727      1,071      1,059   

Certain professional, transaction and other costs(f)

  204      159      805   

Impairment and dispositions(g)

  504      886      557   

Loss on debt extinguishment(h)

  10,838      —       —    

One-time franchise equipment expenses(i)

  —       547      —    

Gain from termination of a vendor contract(j)

  —       —       (1,475
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

$ 54,630    $ 60,458    $ 68,885   
  

 

 

    

 

 

    

 

 

 

 

  (a) Includes amortization of deferred debt issuance costs.

 

  (b) Includes deferred rent, which represents the extent to which our rent expense has been above or below our cash rent payments, amortization of favorable (unfavorable) leases and closed store reserves for rent net of cash payments.

 

  (c) Includes non-cash, stock-based compensation.

 

  (d) Includes expenses directly associated with the opening of new company-operated restaurants and incurred prior to the opening of a new company-operated restaurant.

 

  (e) Includes (i) reimbursement of expenses to our sponsor (approximately $74 thousand in 2012, $27 thousand in 2013, and $61 thousand in 2014), (ii) compensation and expense reimbursement to members of our board, and (iii) certain non-recurring executive search firm fees incurred on behalf of our board.

 

  (f) Includes certain professional fees and transaction costs related to financing transactions, acquisitions and initial public offering expenses, third-party consultants for one-time projects; and certain executive relocation costs.

 

  (g) Includes loss (gain) on disposal of property and equipment, impairment and cash proceeds on disposals from disposition of property and equipment.

 

  (h) Our term loan was refinanced in October 2012 resulting in a loss on debt extinguishment of approximately $10.8 million, including an approximately $1.7 million loss on the early termination of the corresponding interest rate swap agreement.

 

  (i) Includes the cost of the purchase of equipment for franchisees in connection with a one-time initiative which was completed in fiscal 2013.

 

 

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  (j) Represents the elimination of a gain from the termination of a contract with a beverage vendor in fiscal 2014.

 

(7) Cash capital expenditures represents cash for purchases of property and equipment.

 

(8) Pro forma balance sheet data as of December 28, 2014 give effect to the conversion of our outstanding shares of Series A preferred stock into                 shares of common stock in connection with the closing of this offering.

Pro forma as adjusted balance sheet data as of December 28, 2014 give effect to this offering as if it had been consummated on December 28, 2014, and assume the deduction of estimated offering expenses payable by us, which amount to approximately $        .

 

(9) Total debt consists of borrowings under our credit facility (as discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Obligations” below) and capital lease obligations. See our audited consolidated financial statements included elsewhere in this prospectus, which includes all liabilities.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider each of the following risk factors, as well as other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before investing in our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

We are vulnerable to changes in consumer preferences and economic conditions that could harm our business, financial condition, results of operations and cash flow.

Food service businesses depend on consumer discretionary spending and are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. Factors such as traffic patterns, weather, fuel prices, local demographics and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, inflation or increased food or energy costs could harm the restaurant industry in general and our locations in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on pricing that could harm our business, financial condition, results of operations and cash flow. There can be no assurance that consumers will continue to regard Southern-inspired, chicken-based or fried food favorably or that we will be able to develop new menu items that appeal to consumer preferences. Our business, financial condition and results of operations depend in part on our ability to anticipate, identify and respond to changing consumer preferences and economic conditions. In addition, the restaurant industry is currently under heightened legal and legislative scrutiny related to menu labeling and resulting from the perception that the practices of restaurant companies have contributed to nutritional, caloric intake, obesity or other health concerns of their guests. If we are unable to adapt to changes in consumer preferences and trends, we may lose customers and our revenues may decline.

Our growth strategy depends in part on opening new restaurants in existing and new markets and expanding our franchise system. We may be unsuccessful in opening new company-operated or franchised restaurants or establishing new markets, which could adversely affect our growth.

One of the key means to achieving our growth strategy will be through opening new restaurants and operating those restaurants on a profitable basis. We opened 24 new company-operated restaurants in fiscal 2014 and plan to open 22 to 25 new company-operated restaurants in fiscal 2015. Our franchisees opened 28 new franchise operated restaurants in fiscal 2014 and plan to open 28 to 32 in fiscal 2015. Our ability to open new restaurants is dependent upon a number of factors, many of which are beyond our control, including our and our franchisees’ ability to:

 

    identify available and suitable restaurant sites;

 

    compete for restaurant sites;

 

    reach acceptable agreements regarding the lease or purchase of locations;

 

    obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs, which includes access to build-to-suit leases and equipment financing leases at favorable interest and capitalization rates;

 

    respond to unforeseen engineering or environmental problems with leased premises;

 

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    avoid the impact of inclement weather, natural disasters and other calamities;

 

    hire, train and retain the skilled management and other employees necessary to meet staffing needs;

 

    obtain, in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively to any changes in local, state or federal law and regulations that adversely affect our and our franchisees’ costs or ability to open new restaurants; and

 

    control construction and equipment cost increases for new restaurants.

There is no guarantee that a sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new restaurants or sign new franchisees, or if existing franchisees do not open new restaurants, or if restaurant openings are significantly delayed, our revenues or earnings growth could be adversely affected and our business negatively affected.

As part of our longer term growth strategy, we may enter into geographic markets in which we have little or no prior operating or franchising experience through company-operated restaurant growth and through franchise development agreements. The challenges of entering new markets include: difficulties in hiring experienced personnel; unfamiliarity with local real estate markets and demographics; consumer unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than in our existing markets. Consumer recognition of our brand has been important in the success of company-operated and franchised restaurants in our existing markets. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy and operating costs than existing restaurants, thereby affecting our overall profitability. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants. Expanding our franchise system could require the implementation, expense and successful management of enhanced business support systems, management information systems and financial controls as well as additional staffing, franchise support and capital expenditures and working capital.

Due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existing restaurants. The operating results and comparable restaurant sales for our restaurants could be adversely affected due to close proximity with our other restaurants and market saturation.

New restaurants, once opened, may not be profitable or may close, and the increases in average restaurant revenues and comparable restaurant sales that we have experienced in the past may not be indicative of future results.

Some of our restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. In new markets, the length of time before average sales for new restaurants stabilize is less predictable and can be longer as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. In addition, our average restaurant revenues and comparable restaurant sales may not increase at the rates achieved over the past several years. Our ability to operate new restaurants profitably and increase average restaurant revenues and comparable restaurant sales will depend on many factors, some of which are beyond our control, including:

 

    consumer awareness and understanding of our brand;

 

    general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use;

 

    consumption patterns and food preferences that may differ from region to region;

 

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    changes in consumer preferences and discretionary spending;

 

    difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets;

 

    increases in prices for commodities, including chicken and other proteins;

 

    inefficiency in our labor costs as the staff gains experience;

 

    competition, either from our competitors in the restaurant industry or our own restaurants;

 

    temporary and permanent site characteristics of new restaurants;

 

    changes in government regulation; and

 

    other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

If our new restaurants do not perform as planned or close, our business and future prospects could be harmed. In addition, an inability to achieve our expected average restaurant revenues would have a material adverse effect on our business, financial condition and results of operations.

Opening new restaurants in existing markets may negatively impact sales at our and our franchisees’ existing restaurants.

The consumer target area of our and our franchisees’ restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we or our franchisees’ already have restaurants could adversely impact sales at these existing restaurants. Existing restaurants could also make it more difficult to build our and our franchisees’ consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our or our franchisees’ existing restaurants. However, we cannot guarantee there will not be significant impact in some cases and we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity to effectively serve our customers. Sales cannibalization between our restaurants may become significant in the future as we continue to expand our operations and could affect our sales growth, which could, in turn, materially and adversely affect our business, financial condition and results of operations.

Our sales growth and ability to achieve profitability could be adversely affected if comparable restaurant sales are less than we expect.

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a mid-month convention, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement our initiatives to build sales. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.

Our marketing programs may not be successful, and our new menu items, advertising campaigns and restaurant designs and remodels may not generate increased sales or profits.

We incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns and restaurant designs and remodels to raise brand awareness and attract and retain customers. These

 

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initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising and other initiatives than we are able to. Should our competitors increase spending on marketing and advertising and other initiatives or our marketing funds decrease for any reason, or should our advertising, promotions, new menu items and restaurant designs and remodels be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.

Changes in food and supplies costs, especially for chicken, could adversely affect our business, financial condition and results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in food and supplies costs. We are susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal economic fluctuations, weather conditions, global demand, food safety concerns, infectious diseases, fluctuations in the U.S. dollar, product recalls and government regulations. The costs of many basic foods for humans and animals, including wheat and cooking oil, have increased markedly in recent years, resulting in upward pricing pressures on almost all of our raw ingredients, including chicken (especially limited service restaurant-sized chickens) and pork. Food prices for a number of our key ingredients escalated markedly at various points in fiscal 2013 and fiscal 2014, and we expect that there will be additional pricing pressures on some of those ingredients in fiscal 2015. As a result of such pricing pressures, we are expecting significant increases in the costs of certain ingredients for items on our menu, including bone-in chicken, Chicken Supremes and Homestyle Chicken Tenders and Cajun Filets in fiscal 2015. Weather related issues, such as freezes or drought, may also lead to temporary spikes in the prices of some ingredients such as produce or meats. Any increase in the prices of the ingredients most critical to our menu, such as chicken, pork and wheat, would adversely affect our operating results. Alternatively, in the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items rather than paying the increased cost for the ingredients. Any such changes to our available menu may negatively impact our restaurant traffic, business and comparable restaurant sales during the shortage and thereafter. We have implemented menu price increases in the past to significantly offset the higher prices of food and supply costs. We may not be able to offset all or any portion of increased food and supply costs through higher menu prices in the future. If we or our franchisees implement further menu price increases in the future to protect our margins, restaurant traffic could be materially adversely affected, at both company-operated and franchised restaurants.

Our principal food product is chicken. In fiscal 2012, fiscal 2013 and fiscal 2014, the cost of chicken and other proteins included in our product cost was approximately 41%, 42% and 44%, respectively, of our food and supplies cost from company-operated restaurants. Material increases in the cost of chicken and other proteins could materially adversely affect our business, operating results and financial condition. Changes in the cost and availability of chicken can result from a number of factors, including seasonality, increases in the cost of grain, disease and other factors that affect availability, greater international demand for domestic chicken products, decreased numbers of size and choice chickens, especially limited service restaurant-sized chickens, increased costs for larger-sized chickens, which must be purchased if we are unable to purchase sufficient quantities of limited service restaurant-sized chickens, and increased transportation costs.

A major driver of the price of corn, which is the primary feed source for chicken, has been the increasing demand for corn by the ethanol industry as an alternative fuel source, as most ethanol plants in the United States use corn as the primary source of grain to make ethanol. This increased demand on the nation’s corn crop has had and may continue to have an adverse impact on chicken prices. While we have some supply agreements that allow us to lock in prices of certain raw ingredients for certain periods of time, we currently do not make extensive use of futures contracts or other financial risk management strategies with respect to potential price fluctuations in the cost of chicken, pork or other raw ingredients, food and supplies.

Wheat is an ingredient in some of our principal food products. Changes in the cost and availability of wheat may be affected by a number of factors, including economic and industry conditions, crop disease, weed control, water availability, various planting/growing/harvesting problems, and severe weather conditions such as

 

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drought, floods or frost that are difficult to anticipate and which cannot be controlled. Demand for food products made from wheat flour is affected by changes in consumer tastes, demographic trends and national, regional and local economic conditions.

Another of our principal food products is pork. Material increases in the cost of pork could materially adversely affect our business, operating results and financial condition. Changes in the cost of pork can result from a number of factors, including seasonality, increases in the cost of grain, disease and viruses and other factors that affect availability and greater international demand for domestic pork products.

We may not be able to compete successfully with other quick-service and fast-casual restaurants. Intense competition in the restaurant industry could make it more difficult to expand our business and could also have a negative impact on our operating results if customers favor our competitors or we are forced to change our pricing and other marketing strategies.

The food service industry, and particularly its quick-service and fast-casual segments, is intensely competitive. In addition, the Southeastern United States, the primary market in which we compete, consists of what we believe to be the most competitive Southern-inspired quick-service and fast-casual market in the United States. We expect competition in this market and each of our other markets to continue to be intense because consumer trends are favoring limited service restaurants that offer healthier menu items made with better quality products, and many limited service restaurants are responding to these trends. Competition in our industry is primarily based on price, convenience, quality of service, brand recognition, restaurant location and type and quality of food. If our company-operated and franchised restaurants cannot compete successfully with other quick-service and fast-casual restaurants in new and existing markets, we could lose customers and our revenues could decline. Our company-operated and franchised restaurants compete with national and regional quick-service and fast-casual restaurant chains for customers, restaurant locations and qualified management and other staff. Compared with us, some of our competitors have substantially greater financial and other resources, have been in business longer, have greater brand recognition or are better established in the markets where our restaurants are located or are planned to be located. Any of these competitive factors may materially adversely affect our business, financial condition or results of operations.

The financial performance of our franchisees can negatively impact our business.

As 59% of our restaurants are franchised as of December 28, 2014, our financial results are dependent in part upon the operational and financial success of our franchisees. We receive royalties, franchise fees, contributions to our marketing development fund and co-op advertising funds, and other fees from our franchisees. We have established operational standards and guidelines for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are responsible for ensuring the success of our entire system of restaurants and for taking a longer term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may not be able to secure adequate financing to open or continue operating their Bojangles’ restaurants. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy. We also anticipate that we and our franchisees will be financially impacted by the implementation of the health care reform legislation. If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease in the royalty revenues. Closure of franchised restaurants would reduce our royalty revenues and could negatively impact margins, since we may not be able to reduce fixed costs which we continue to incur.

We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.

Franchisees are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of their restaurants. We provide training and support to franchisees, and

 

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set and monitor operational standards, but the quality of franchised restaurants may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other restaurant personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly, which would reduce our royalty revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.

The challenging economic environment may affect our franchisees, with adverse consequences to us.

We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. As of December 28, 2014, our top three franchisees operated 141 of our franchised restaurants and accounted for approximately 45% of our royalty revenues in fiscal 2013 and fiscal 2014. Due to the continuing challenging economic environment, it is possible that some franchisees could file for bankruptcy or become delinquent in their payments to us, which could have a significant adverse impact on our business due to loss or delay in payments of royalties, contributions to our marketing development fund and co-op advertising funds and other fees. Bankruptcies by our franchisees could prevent us from terminating their franchise agreements so that we can offer their territories to other franchisees, negatively impact our market share and operating results as we may have fewer well-performing restaurants, and adversely impact our ability to attract new franchisees.

Although we have developed criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the developers and franchisees we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise arrangements. Moreover, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other restaurant personnel. The failure of developers and franchisees to open and operate franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition, results of operations and cash flows.

Franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their agreements with us, or be able to find suitable sites on which to develop them. Franchisees may not be able to negotiate acceptable lease or purchase terms for restaurant sites, obtain the necessary permits and government approvals or meet construction schedules. Any of these problems could slow our growth and reduce our franchise revenues. Additionally, our franchisees typically depend on financing from banks and other financial institutions, which may not always be available to them, in order to construct and open new restaurants. For these reasons, franchisees operating under development agreements may not be able to meet the new restaurant opening dates required under those agreements. Also, as of December 28, 2014, we sublease certain restaurants and equipment to nine franchisees which comprise 14 restaurants and lease land, building and equipment we own to one of our franchisees. If any such franchisees cannot meet their financial obligations under their subleases, or otherwise fail to honor or default under the terms of their subleases, we would be financially obligated under a master lease and could be adversely affected.

Our system-wide restaurant base is geographically concentrated in the Southeastern United States, and we could be negatively affected by conditions specific to that region.

Our company-operated and franchised restaurants in the Southeastern United States represent approximately 98% of our system-wide restaurants as of December 28, 2014. Our company-operated and franchised restaurants in North Carolina and South Carolina represent approximately 66% of our system-wide restaurants as of December 28, 2014. Approximately 80% of our company-operated restaurants are located in North Carolina and South Carolina. Adverse changes in demographic, unemployment, economic, regulatory or

 

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weather conditions in the Southeastern United States have had, and may continue to have, material adverse effects on our business. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by these adverse conditions compared to other chain restaurants with a national footprint.

In addition, our competitors could open additional restaurants in North Carolina and South Carolina, where we have significant concentration with over 400 of our system restaurants, which could result in reduced market share for us and may adversely impact our profitability.

Negative publicity could reduce sales at some or all of our restaurants.

We may, from time to time, be faced with negative publicity relating to food quality, the safety, sanitation and welfare of our restaurant facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing and other policies, practices and procedures, employee relationships and welfare or other matters at one or more of our restaurants. Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held to be responsible. In addition, the negative impact of adverse publicity relating to one restaurant may extend far beyond the restaurant involved, especially due to the high geographic concentration of many of our restaurants, to affect some or all of our other restaurants, including our franchised restaurants. The risk of negative publicity is particularly great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis and negative publicity from our franchised restaurants may also significantly impact company-operated restaurants. A similar risk exists with respect to food service businesses unrelated to us, if customers mistakenly associate such unrelated businesses with our operations. Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. These types of employee claims could also be asserted against us, on a co-employer theory, by employees of our franchisees. A significant increase in the number of these claims or an increase in the number of successful claims could materially adversely affect our business, financial condition, results of operations and cash flows.

Food safety and quality concerns may negatively impact our business and profitability, our internal operational controls and standards may not always be met and our employees may not always act professionally, responsibly and in our and our customers’ best interests. Any possible instances of food-borne illness could reduce our restaurant sales.

Incidents or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene and cleanliness failures or improper employee conduct at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation as well as our business, revenues and profits. Similar incidents or reports occurring at limited service restaurants unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

We cannot guarantee to consumers that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food processors makes it difficult to monitor food safety compliance and may increase the risk that food-borne illness would affect multiple locations rather than single restaurants. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our company-operated or franchised restaurants could negatively affect sales at all of our restaurants if highly publicized, especially due to the high geographic concentration of many of our restaurants. This risk exists even if it were later determined that the

 

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illness was wrongly attributed to one of our restaurants. A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impacts on their operations, and we cannot assure you that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants. Additionally, even if food-borne illnesses were not identified at our restaurants, our restaurant sales could be adversely affected if instances of food-borne illnesses at other restaurant chains were highly publicized. In addition, our restaurant sales could be adversely affected by publicity regarding other high-profile illnesses such as avian flu that customers may associate with our food products.

We rely on only one company to distribute substantially all of our food and supplies to company-operated and franchised restaurants, and on a limited number of companies, and, in some cases, a sole company, to supply certain products, supplies and ingredients to our distributor. Failure to receive timely deliveries of food or other supplies could result in a loss of revenues and materially and adversely impact our operations.

Our and our franchisees’ ability to maintain consistent quality menu items and prices significantly depends upon our ability to acquire quality food products, including chicken and related items, from reliable sources in accordance with our specifications on a timely basis. Shortages or interruptions in the supply of food products caused by unanticipated demand, problems in production or distribution, contamination of food products, an outbreak of poultry or pork diseases, inclement weather or other conditions could materially adversely affect the availability, quality and cost of ingredients, which would adversely affect our business, financial condition, results of operations and cash flows. We have contracts with a limited number of suppliers, and, in some cases, a sole supplier, for certain products, supplies and ingredients. Certain menu items and ingredients are provided to us and our franchisees by single suppliers for various proteins and a single supplier for spices. We have limited rights to access the exclusive formulas used for us by one of the single-source suppliers. In addition, one company, of which we are the majority portion of its business, distributes most of the products we receive from suppliers to company-operated and franchised restaurants. If that distributor or any supplier fails to perform as anticipated or seeks to terminate agreements with us, or if there is any disruption in any of our supply or distribution relationships for any reason, our business, financial condition, results of operations and cash flows could be materially adversely affected. If we or our franchisees temporarily close a restaurant or remove popular items from a restaurant’s menu due to a supply shortage, that restaurant may experience a significant reduction in revenues during the time affected by the shortage and thereafter if our customers change their dining habits as a result.

Our level of indebtedness could materially and adversely affect our business, financial condition and results of operations.

The total debt outstanding under our credit facility and capital lease obligations at December 28, 2014 was $252.8 million and we had no borrowings outstanding under our revolving credit facility. Our indebtedness could have significant effects on our business, such as:

 

    limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

 

    requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;

 

    making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions;

 

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    placing us at a competitive disadvantage compared with our competitors that have less debt; and

 

    exposing us to risks inherent in interest rate fluctuations because our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.

Our agreements relating to our term loan and revolving credit facility contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to (i) incur additional indebtedness, (ii) issue preferred stock, (iii) create liens on assets, (iv) engage in mergers or consolidations, (v) sell assets, (vi) make investments, loans, or advances, (vii) make certain acquisitions, (viii) engage in certain transactions with affiliates, (ix) authorize or pay dividends, (ix) change our lines of business or fiscal year and (x) not exceed pre-determined maximum cash capital expenditures. In addition, our term loan and revolving credit facility requires us to maintain, on a consolidated basis, a minimum fixed charge coverage ratio, not to exceed a maximum total lease adjusted leverage ratio and not to exceed a maximum cash capital expenditure limit. Our ability to borrow under our revolving credit facility depends on our compliance with these tests. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet these tests. We cannot assure you that we will meet these tests in the future, or that our lenders will waive any failure to meet these tests.

The failure to comply with our debt covenants or the volatile credit and capital markets could have a material adverse effect on our financial condition.

Our ability to manage our debt is dependent on our level of positive cash flow from company-operated and franchised restaurants, net of costs. An economic downturn may negatively impact our cash flows. Credit and capital markets can be volatile, which could make it more difficult for us to refinance our existing debt or to obtain additional debt or equity financings in the future. Such constraints could increase our costs of borrowing and could restrict our access to other potential sources of future liquidity. Our failure to comply with the debt covenants in our term loan and revolving credit facility or to have sufficient liquidity to make interest and other payments required by our debt could result in a default of such debt and acceleration of our borrowings, which would have a material adverse effect on our business and financial condition. The lack of availability or access to build-to-suit leases and equipment financing leases could result in a decreased number of new restaurants and have a negative impact on our growth.

If the interest rate swaps entered into in connection with our credit facility prove ineffective, it could result in volatility in our operating results, including potential losses, which could have a material adverse effect on our results of operations and cash flows.

We entered into three interest rate swap contracts with one of our lenders under our current credit agreement to exchange our variable interest rate payment commitments for fixed interest rate payments on our term loans. The first swap agreement fixed our interest rate with respect to a notional amount of $87.5 million, with an effective date of November 30, 2012 and a termination date of November 30, 2015, under which we pay interest at a fixed 0.44% and receive interest at the one-month LIBOR rate. The second swap agreement fixed our interest rate with respect to a notional amount of $50.0 million, with an effective date of November 30, 2015 and a termination date of September 29, 2017, under which we pay interest at a fixed 1.3325% and receive interest at the one-month LIBOR rate. The third swap agreement fixed our interest rate with respect to a notional amount of

 

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$25 million, with an effective date of May 31, 2013 and a termination date of May 31, 2017, under which we pay interest at a fixed 0.70125% and receive interest at the one-month LIBOR rate. Early termination of these interest rate swap contracts may result in payments by us, which could have a material adverse effect on our results of operations and cash flow.

We record the swaps at fair value, and are currently designated as an effective cash flow hedge under ASC 815, Derivatives and Hedging. Each fiscal quarter, we measure hedge effectiveness using the “hypothetical derivative method” and record in earnings any gains or losses resulting from hedge ineffectiveness. The hedge provided by our swaps could prove to be ineffective for a number of reasons, including early retirement of our term loan, as is allowed under the credit facility, or in the event the counterparty to the interest rate swaps are determined in the future to not be creditworthy. Any determination that the hedge created by the swaps is ineffective could have a material adverse effect on our results of operations and cash flows and result in volatility in our operating results. In addition, any changes in relevant accounting standards relating to the swaps, especially ASC 815, Derivatives and Hedging, could materially increase earnings volatility.

A prolonged economic downturn could materially affect us in the future.

The restaurant industry is dependent upon consumer discretionary spending. The recession from late 2007 to mid-2009 reduced consumer confidence to historic lows, impacting the public’s ability and desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly reduced home values, investment losses, bankruptcies and reduced access to credit, resulting in lower levels of customer traffic and lower average check sizes in our restaurants. If the economy experiences another significant decline, our business, results of operations and ability to comply with the terms of our term loan and revolving credit facility could be materially adversely affected and may result in a deceleration of the number and timing of new restaurant openings by us and our franchisees. Deterioration in customer traffic or a reduction in average check size would negatively impact our revenues and profitability and could result in reductions in staff levels, additional impairment charges and potential restaurant closures.

The interests of our franchisees may conflict with ours or yours in the future and we could face liability from our franchisees or related to our relationship with our franchisees.

Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under the franchise agreement and the terms and conditions of the franchisee/franchisor relationship. This may lead to disputes with our franchisees and we expect such disputes to occur from time to time in the future as we continue to offer franchises. Such disputes may result in legal action against us. To the extent we have such disputes, the attention, time and financial resources of our management and our franchisees will be diverted from our restaurants, which could have a material adverse effect on our business, financial condition, results of operations and cash flows even if we have a successful outcome in the dispute.

In addition, various state and federal laws govern our relationship with our franchisees and our potential sale of a franchise. A franchisee and/or a government agency may bring legal action against us based on the franchisee/franchisor relationships that could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.

Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.

We and our franchisees rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security

 

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breaches, viruses and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us or our franchisees to litigation or to actions by regulatory authorities.

We are continuing to expand, upgrade and develop our information technology capabilities, including in the implementation of a new point-of-sale system for company-operated restaurants. If we are unable to successfully upgrade or expand our technological capabilities, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. Additionally, unforeseen problems with our new point-of-sale system may affect our operational abilities and internal controls and we may incur additional costs in connection with such upgrades and expansion.

If we or our franchisees are unable to protect our customers’ credit and debit card data, we could be exposed to data loss, litigation, liability and reputational damage.

In connection with credit and debit card sales, we and our franchisees transmit confidential credit and debit card information by way of secure private retail networks. Although we and our franchisees use private networks, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit and debit card sales, and our and our franchisees’ security measures and those of our and our franchisees’ technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person were able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our and our franchisees’ operations. Any security breach could expose us and our franchisees to risks of data loss, litigation and liability and could seriously disrupt our and our franchisees’ operations and any resulting negative publicity could significantly harm our reputation.

The failure to enforce and maintain our trademarks and protect our other intellectual property could materially adversely affect our business, including our ability to establish and maintain brand awareness.

We have registered Bojangles’® and certain other names used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office. The Bojangles’® trademark is also registered in some form in approximately 25 foreign countries. Our current brand campaign, “It’s Bo Time” has also been approved for registration with the United States Patent and Trademark Office. In addition, the Bojangles’ logo, website name and address and Facebook and Twitter accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and develop our branded products. If our efforts to protect our intellectual property are not adequate, or if any third-party misappropriates or infringes on our intellectual property, whether in print, on the Internet or through other media, the value of our brands may be harmed, which could have a material adverse effect on our business, including the failure of our brands and branded products to achieve and maintain market acceptance. There can be no assurance that all of the steps we have taken to protect our intellectual property in the United States and in foreign countries will be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.

We or our suppliers maintain the seasonings and additives for our chicken, biscuits and other offerings, as well as certain standards, specifications and operating procedures, as trade secrets or confidential information. We may not be able to prevent the unauthorized disclosure or use of our trade secrets or information, despite the existence of confidentiality agreements and other measures. While we try to ensure that the quality of our brand and branded products is maintained by all of our franchisees, we cannot be certain that these franchisees will not take actions that adversely affect the value of our intellectual property or reputation. If any of our trade secrets or information were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.

 

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Third-party claims with respect to intellectual property assets, if decided against us, may result in competing uses or require adoption of new, non-infringing intellectual property, which may in turn adversely affect sales and revenues.

There can be no assurance that third parties will not assert infringement or misappropriation claims against us, or assert claims that our rights in our trademarks, service marks, trade dress and other intellectual property assets are invalid or unenforceable. Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If our rights in any intellectual property were invalidated or deemed unenforceable, it could permit competing uses of intellectual property which, in turn, could lead to a decline in restaurant revenues. If the intellectual property became subject to third-party infringement, misappropriation or other claims, and such claims were decided against us, we may be forced to pay damages, be required to develop or adopt non-infringing intellectual property or be obligated to acquire a license to the intellectual property that is the subject of the asserted claim. There could be significant expenses associated with the defense of any infringement, misappropriation, or other third-party claims.

We depend on our executive officers, the loss of whom could materially harm our business.

We rely upon the accumulated knowledge, skills and experience of our executive officers. Our executive officers have cumulative experience of more than 45 years with us and 100 years in the food service industry. If they were to leave us or become incapacitated, we might suffer in our planning and execution of business strategy and operations, impacting our brand and financial results. We also do not maintain any key man life insurance policies for any of our employees.

Matters relating to employment and labor law may adversely affect our business.

Various federal and state labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements and other wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws, including mandating increases in minimum wages, changes in exempt and non-exempt status, or mandated benefits such as health insurance could materially affect our business, financial condition, operating results or cash flow. Additionally, the implementation of the Patient Protection and Affordable Care Act of 2010, or the PPACA, will negatively impact our margins. Furthermore, if our or our franchisees’ employees unionize, it could materially affect our business, financial condition, operating results or cash flow.

We are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination, harassment, wrongful termination, or violation of wage and labor laws. Such claims could also be asserted against us by employees of our franchisees. Moreover, claims asserted against franchisees may at times be made against us as a franchisor. These claims may divert our financial and management resources that would otherwise be used to benefit our operations. The ongoing expense of any resulting lawsuits, and any substantial settlement payment or damage award against us, could adversely affect our business, brand image, employee recruitment, financial condition, operating results or cash flows.

Restaurant companies have been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal and state workplace and employment laws. Proceedings of this nature are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.

Our business is subject to the risk of litigation by employees, consumers, suppliers, franchisees, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies, including us, have been subject to lawsuits, including class action

 

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lawsuits, alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked. Though we do not believe any lawsuits in which we are currently involved will have a material adverse effect on our financial position, results of operations, liquidity or capital resources, we may in the future be subject to lawsuits that could have such an effect.

Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food-borne illness or accidents in our restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters.

Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and result in increases in our insurance premiums. In addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could adversely affect our business and results of operations.

If we or our franchisees face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.

Labor is a primary component in the cost of operating our company-operated and franchised restaurants. If we or our franchisees face labor shortages or increased labor costs because of increased competition for employees, higher employee-turnover rates, unionization of restaurant workers, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our and our franchisees’ operating expenses could increase and our growth could be adversely affected.

We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage and increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. The federal minimum wage has been $7.25 per hour since July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised in the future. We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also, reduced margins of franchisees could make it more difficult to sell franchises. If menu prices are increased by us and our franchisees to cover increased labor costs, the higher prices could adversely affect transactions which could lower sales and thereby reduce our margins and the royalties that we receive from franchisees.

In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators, management personnel and other employees. Qualified individuals needed to fill these positions can be in short supply in some geographic areas. In addition, limited service restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced any significant problems in recruiting employees, our and our franchisees’ ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could increase our and our franchisees’ labor costs and have a

 

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material adverse effect on our business, financial condition, results of operations or cash flows. If we or our franchisees are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected. Competition for these employees could require us or our franchisees to pay higher wages, which could also result in higher labor costs.

We are locked into long-term and non-cancelable leases and may be unable to renew leases at the end of their terms.

Many of our restaurant leases are non-cancelable and typically have initial terms up to between 15 and 20 years and three renewal terms of five years each that we may exercise at our option. Even if we close a restaurant, we are required to perform our obligations under the applicable lease, which could include, among other things, a provision for a closed restaurant reserve when the restaurant is closed, which would impact our profitability, and payment of the base rent, property taxes, insurance and maintenance for the balance of the lease term. In addition, in connection with leases for restaurants that we will continue to operate, we may, at the end of the lease term and any renewal period for a restaurant, be unable to renew the lease without substantial additional cost, if at all. As a result, we may close or relocate the restaurant, which could subject us to construction and other costs and risks. Additionally, the revenues and profit, if any, generated at a relocated restaurant may not equal the revenues and profit generated at the existing restaurant.

We and our franchisees are subject to extensive government regulations that could result in claims leading to increased costs and restrict our ability to operate or sell franchises.

We and our franchisees are subject to extensive government regulation at the federal, state and local government levels. These include, but are not limited to, regulations relating to the preparation and sale of food, zoning and building codes, franchising, land use and employee, health, sanitation and safety matters. We and our franchisees are required to obtain and maintain a wide variety of governmental licenses, permits and approvals. Difficulty or failure in obtaining them in the future could result in delaying or canceling the opening of new restaurants. Local authorities may suspend or deny renewal of our governmental licenses if they determine that our operations do not meet the standards for initial grant or renewal. This risk would be even higher if there were a major change in the licensing requirements affecting our types of restaurants.

The PPACA requires employers such as us to provide adequate and affordable health insurance for all qualifying employees or pay a monthly per-employee fee or penalty for non-compliance beginning in fiscal 2015. We are evaluating the impact the new law will have on our operations, and although we cannot predict with certainty the financial impact of the legislation, the law’s individual mandate will increase our costs in providing health insurance for our employees, which could impact our results of operations beginning in fiscal 2015.

We are also subject to regulation by the Federal Trade Commission and subject to state laws that govern the offer, sale, renewal and termination of franchises and our relationship with our franchisees. The failure to comply with these laws and regulations in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on franchise sales, fines or the requirement that we make a rescission offer to franchisees, any of which could affect our ability to open new restaurants in the future and thus could materially adversely affect our business and operating results. Any such failure could also subject us to liability to our franchisees.

Compliance with environmental laws may negatively affect our business.

We are subject to federal, state and local laws and regulations, including those concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant fines and penalties for non-compliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries

 

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and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. Environmental conditions relating to the presence of hazardous substances at prior, existing or future restaurant sites could materially adversely affect our business, financial condition and results of operations. Further, environmental laws and regulations, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial condition and results of operations.

Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our results of operations.

Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming our menu offerings, including our buttermilk biscuits, legendary sweet tea and bone-in fried chicken. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings.

The PPACA establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus. Specifically, the PPACA amended the Federal Food, Drug and Cosmetic Act to, as of December 1, 2015, require chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires covered restaurants to, as of December 1, 2015, provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information. The PPACA further permits the United States Food and Drug Administration to require covered restaurants to make additional nutrient disclosures, such as disclosure of trans-fat content. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings.

Furthermore, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants.

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes. Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to limit or eliminate trans-fats and sodium in our menu offerings or switch to higher cost ingredients or may hinder our ability to operate in certain markets. Some jurisdictions have banned certain cooking ingredients, such as trans-fats, which a limited number of our menu products contain in small, but measurable amounts, or have discussed banning certain products, such as large sodas. Removal of these products and ingredients from our menus could affect product tastes, customer satisfaction levels, and sales volumes, whereas if we fail to comply with these laws or regulations, our business could experience a material adverse effect.

We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends in eating habits. The imposition of additional menu-labeling laws could have an adverse effect on our results of operations and financial position, as well as on the restaurant industry in general.

 

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We may become subject to liabilities arising from environmental laws that could likely increase our operating expenses and materially and adversely affect our business and results of operations.

We are subject to federal, state and local laws, regulations and ordinances that:

 

    govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as waste handling and disposal practices for solid and hazardous wastes; and

 

    impose liability for the costs of cleaning up, and damage resulting from, sites of past spills, disposals or other releases of hazardous materials.

In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated liabilities, including liabilities for clean-up costs and personal injury or property damage, relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. If we are found liable for the costs of remediating contamination at any of our properties, our operating expenses would likely increase and our results of operations would be materially adversely affected. See “Business—Environmental Matters.” Some of our leases provide for indemnification of our landlords for environmental contamination, clean-up or owner liability.

We are exposed to the risk of natural disasters, unusual weather conditions, pandemic outbreaks, political events, war and terrorism that could disrupt business and result in lower sales, increased operating costs and capital expenditures.

Our headquarters, company-operated and franchised restaurant locations, third-party sole distributor and its facilities, as well as certain of our vendors and customers, are located in areas which have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. Adverse weather conditions or other extreme changes in the weather, including resulting electrical and technological failures, especially such events which occur in North Carolina or South Carolina, as a result of the concentration of our restaurants, may disrupt our and our franchisees’ business and may adversely affect our and our franchisees’ ability to obtain food and supplies and sell menu items. Our business may be harmed if our or our franchisees’ ability to obtain food and supplies and sell menu items is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our and our franchisees’ revenues, properties or operations. Such events could result in physical damage to one or more of our or our franchisees’ properties, the temporary closure of some or all of our company-operated restaurants, franchised restaurants and third-party sole distributor, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of goods and supplies to our company-operated and franchised restaurants and third-party sole distributor, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices, all of which would increase the cost of doing business. These events also could have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or any combination thereof, could adversely affect our operations.

Because of our international franchised restaurants, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws.

We currently have three franchised locations located outside the United States. The U.S. Foreign Corrupt Practices Act, and other similar anti-bribery and anti-kickback laws and regulations, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We cannot assure you that we will be successful in preventing our franchisees or other agents from taking actions in violation of these laws or regulations. Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.

 

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Risks Related to this Offering and Ownership of Our Common Stock

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

Following the closing of this offering, Advent will indirectly beneficially own approximately     % of our outstanding common stock, or     % if the underwriters’ option to purchase additional shares is fully exercised. As a result, Advent will indirectly beneficially own shares sufficient for majority votes over all matters requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.

This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Advent may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of us. Also, Advent may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering. As a result, the market price of our common stock could decline or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Principal and Selling Stockholders” and “Description of Capital Stock—Anti-Takeover Provisions of Delaware Law and Certain Charter and Bylaw Provisions.”

The interests of Advent may conflict with ours or yours in the future.

Advent engages in a range of investing activities, including investments in restaurants and other consumer-related companies in particular. In the ordinary course of its business activities, Advent may engage in activities where its interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will contain provisions renouncing any interest or expectancy held by our directors affiliated with Advent in certain corporate opportunities. Accordingly, the interests of Advent may supersede ours, causing them or their affiliates to compete against us or to pursue opportunities instead of us, for which we have no recourse. Such actions on the part of Advent and inaction on our part could have a material adverse effect on our business, financial condition and results of operations. In addition, Advent may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in us, even though such transactions might involve risks to you, such as debt financed acquisitions.

As a controlled company, we will not be subject to all of the corporate governance rules of NASDAQ.

Upon the listing of our common stock on NASDAQ in connection with this offering, we will be considered a “controlled company” under the rules of NASDAQ. Controlled companies are exempt from NASDAQ corporate governance rules requiring that listed companies have (i) a majority of the board of directors consist of “independent” directors under the listing standards of NASDAQ, (ii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting NASDAQ requirements and (iii) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of NASDAQ. Following this offering, we intend to use some or all of these exemptions. As a result, we may not have a majority of independent directors, our nomination and corporate governance committee and compensation committee may not consist entirely of independent directors and such committees may not be subject to annual performance evaluations. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ. See “Management.”

 

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Bojangles’, Inc. is a holding company with no operations and relies on its operating subsidiaries to provide it with funds necessary to meet its financial obligations and to pay dividends.

Bojangles’, Inc. is a holding company with no material direct operations. Bojangles’, Inc.’s principal assets are the equity interests it indirectly holds in its operating subsidiaries which own our operating assets. As a result, Bojangles’, Inc. is dependent on loans, dividends and other payments from its operating subsidiaries to generate the funds necessary to meet its financial obligations and to pay dividends on its common stock. Its subsidiaries are legally distinct from Bojangles’, Inc. and may be prohibited or restricted from paying dividends, including the restrictions contained in our term loan and revolving credit facility described below, or otherwise making funds available to us under certain conditions. Although Bojangles’, Inc. does not expect to pay dividends on its common stock for the foreseeable future, if it is unable to obtain funds from its subsidiaries, it may be unable to, or its board may exercise its discretion not to, pay dividends.

We do not anticipate paying any dividends on our common stock in the foreseeable future.

We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock because we intend to use cash flow generated by operations to grow our business. Our term loan and revolving credit facility restrict our ability to pay cash dividends on our common stock. We may also enter into other credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our common stock. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it. See “Dividend Policy.”

As a public company, we incur significant costs to comply with the laws and regulations affecting public companies which could harm our business and results of operations.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and the listing requirements of NASDAQ, and other applicable securities rules and regulations. These rules and regulations have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time consuming and costly, particularly after we cease to be an “emerging growth company” as defined in the JOBS Act. For example, these rules and regulations could make it more difficult and more costly for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers. Our management and other personnel will devote a substantial amount of time to these compliance initiatives. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. We will need to hire more employees in the future to comply with these requirements, which will increase our costs and expenses.

Our management team and other personnel devote a substantial amount of time to new compliance initiatives and we may not successfully or efficiently manage our transition to a public company. To comply with the requirements of being a public company, including the Sarbanes-Oxley Act, we will need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff, which would require us to incur additional expenses and harm our results of operations.

Our management does not have experience managing a public company and our current resources may not be sufficient to fulfill our public company obligations.

Following the closing of this offering, we will be subject to various regulatory requirements, including those of the SEC and NASDAQ. These requirements include record keeping, financial reporting and corporate governance rules and regulations. Our management team does not have experience in managing a public

 

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company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our increased reporting obligations and we may be unable to hire, train or retain necessary staff and may be reliant on engaging outside consultants or professionals to overcome our lack of experience or employees. Our business could be adversely affected if our internal infrastructure is inadequate, we are unable to engage outside consultants or are otherwise unable to fulfill our public company obligations.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, or one or more of the analysts who cover our company downgrade our stock, our stock price could decline. As a result, you may not be able to sell shares of our common stock at prices equal to or greater than the initial public offering price.

No market currently exists for our common stock and we cannot assure you that an active market will develop for such stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock has been determined through negotiations among us, the selling stockholders and the representatives of the underwriters and may not be indicative of the market price of our common stock after this offering or to any other established criteria of the value of our business. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on NASDAQ or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all.

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved. We may take advantage of some of these exemptions. If we do, we do not know if some investors will find our common stock less attractive as a result. The result may be a less-active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the

 

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adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We could remain an “emerging growth company” for up to five years or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.

We have not previously been required to assess the effectiveness of our internal controls over financial reporting and we may identify deficiencies when we are required to do so.

Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC. We have not previously been subject to this requirement, and, in connection with the implementation of the necessary procedures and practices related to internal controls and over financial reporting, we may identify deficiencies. We may not be able to remediate any future deficiencies in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404(a) thereof. In addition, failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders, and you may lose all or part of your investment.

Shares of our common stock sold in this offering may experience significant volatility on NASDAQ. An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock or cause it to be highly volatile or subject to wide fluctuations. The market price of our common stock may fluctuate or may decline significantly in the future and you could lose all or part of your investment. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

    variations in our quarterly or annual operating results;

 

    changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;

 

    the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock;

 

    additions or departures of key management personnel;

 

    any increased indebtedness we may incur in the future;

 

    announcements by us or others and developments affecting us;

 

    actions by institutional stockholders;

 

    litigation and governmental investigations;

 

    legislative or regulatory changes;

 

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    judicial pronouncements interpreting laws and regulations;

 

    changes in government programs;

 

    changes in market valuations of similar companies;

 

    speculation or reports by the press or investment community with respect to us or our industry in general;

 

    announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and

 

    general market, political and economic conditions, including local conditions in the markets in which we operate.

These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including recently. In addition, in the past, following periods of volatility in the overall market and decreases in the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or by offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Opening new company-operated restaurants in existing and new markets could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for new company-operated restaurants through a combination of additional issuances of equity, corporate indebtedness, leases and cash from operations.

Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing, or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us. See “Description of Capital Stock.”

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

After this offering, we will have                  shares of common stock outstanding. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following closing of this offering, approximately     % of our outstanding common stock, or     % if the underwriters exercise their option

 

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to purchase additional shares in full, will be beneficially owned by Advent, and can be resold into the public markets in the future in accordance with the requirements of Rule 144. See “Shares Eligible For Future Sale.”

We and the selling stockholders, our officers, directors and holders of substantially all of our outstanding capital stock and other securities have agreed, subject to specified exceptions, not to directly or indirectly:

 

    sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-l(h) under the Exchange Act, or

 

    otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock, or securities exchangeable or exercisable for or convertible into shares of common stock currently or hereafter owned either of record or beneficially, or

 

    publicly announce an intention to do any of the foregoing for a period of 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters.

This restriction terminates after the close of trading of the common stock on and including the 180th day after the date of this prospectus. The representatives of the underwriters may, in their sole discretion and at any time or from time to time before the termination of the 180-day period release all or any portion of the securities subject to lock-up agreements. See “Underwriting—No Sales of Similar Securities.”

The market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.

Pursuant to our stockholders’ agreement, certain of our stockholders may require us to file registration statements under the Securities Act at our expense, covering resales of our common stock held by them or piggyback on a registration statement in certain circumstances. Any such sales, or the prospect of any such sales, could materially impact the market price of our common stock. For a further description of our stockholders’ agreement, see “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

The future issuance of additional common stock in connection with our incentive plan, acquisitions or otherwise will dilute all other stockholdings.

After this offering, we will have an aggregate of                  shares of common stock authorized but unissued and not reserved for issuance under our incentive plan. We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. Any common stock, issued in connection with our incentive plan, the exercise of outstanding stock options, or otherwise, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

You will incur immediate dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate dilution of $         per share, representing the difference between the assumed initial public offering price of $         per share (the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus) and our pro forma as adjusted net tangible book value per share after giving effect to this offering. See “Dilution.”

 

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Delaware law and our organizational documents, as well as our existing and future debt agreements, may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third-party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of incorporation and bylaws that will be effective upon closing of this offering may make it more difficult for, or prevent a third-party from, acquiring control of us without the approval of our board of directors. Among other things, these provisions:

 

    provide for a classified board of directors with staggered three-year terms;

 

    do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

    delegate the sole power of a majority of the board of directors to fix the number of directors;

 

    provide the power of our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

    authorize the issuance of “blank check” preferred stock without any need for action by stockholders;

 

    eliminate the ability of stockholders to call special meetings of stockholders;

 

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

    provide that a     % supermajority vote will be required to amend or repeal provisions relating to, among other things, the classification of the board of directors, the filling of vacancies on the board of directors and the advance notice requirements for stockholder proposals and director nominations.

In addition, our term loan and revolving credit facility imposes, and we anticipate that documents governing our future indebtedness may impose, limitations on our ability to enter into change of control transactions. Thereunder, the occurrence of a change of control transaction could constitute an event of default permitting acceleration of the indebtedness, thereby impeding our ability to enter into certain transactions.

The foregoing factors, as well as the significant common stock ownership by Advent could impede a merger, takeover, or other business combination, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock. See “Description of Capital Stock.”

Our organizational documents designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our amended and restated certificate of incorporation and amended and restated bylaws will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on our

 

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behalf, (B) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (C) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (D) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning.

Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.

You should understand that the following important factors, in addition to those discussed herein under the caption “Risk Factors,” could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

    our vulnerability to changes in consumer preferences and economic conditions;

 

    our ability to open new restaurants in new and existing markets and expand our franchise system;

 

    our ability to generate comparable restaurant sales growth;

 

    our restaurants and our franchisees’ restaurants may close due to financial or other difficulties;

 

    new menu items, advertising campaigns and restaurant designs and remodels may not generate increased sales or profits;

 

    anticipated future restaurant openings may be delayed or cancelled;

 

    increases in the cost of chicken, pork, wheat, corn and other products;

 

    our ability to compete successfully with other quick-service and fast-casual restaurants;

 

    our reliance on our franchisees, who may be adversely impacted by economic conditions and who may incur financial hardships, be unable to obtain credit, need to close their restaurants or declare bankruptcy;

 

    our ability to support our franchise system;

 

    our limited degree of control over the actions of our franchisees;

 

    our potential responsibility for certain acts of our franchisees;

 

    our vulnerability to conditions in the Southeastern United States;

 

    negative publicity, whether or not valid;

 

    concerns about food safety and quality and about food-borne illnesses, including adverse public perception due to the occurrence of avian flu, swine flu or other food-borne illnesses;

 

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    our dependence upon frequent and timely deliveries of restaurant food and other supplies;

 

    our reliance upon a limited number of suppliers for substantially all of our restaurant food and other supplies;

 

    our reliance upon just one third-party distributor for substantially all of our restaurant food and other supplies;

 

    the adverse impact of economic conditions on our operating results and financial condition, on our ability to comply with the terms and covenants of our debt agreements and on our ability to pay or to refinance our existing debt or to obtain additional financing;

 

    our ability to protect our name and logo and other intellectual property;

 

    loss of the abilities, experience and knowledge of our existing directors and officers;

 

    matters relating to employment and labor laws;

 

    labor shortages or increases in labor costs;

 

    the impact of litigation, including wage and hour class action lawsuits;

 

    our ability and the ability of our franchisees to renew leases at the end of their terms;

 

    the impact of federal, state or local government regulations relating to the preparation and sale of food, zoning and building codes, and employee wages and benefits, environmental and other matters;

 

    the fact that we are considered a “controlled company” and exempt from certain corporate governance rules primarily relating to board independence, and we may use some or all of these exemptions;

 

    the fact that we are a holding company with no operations and will rely on our operating subsidiaries to provide us with funds;

 

    our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

    potential conflicts of interest with Advent;

 

    changes in accounting standards; and

 

    other risks described in the “Risk Factors” section of this prospectus.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. In addition, all forward-looking statements speak only as of the date of this prospectus. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise other than as required under the federal securities laws.

 

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USE OF PROCEEDS

All of the shares of our common stock offered hereby are being sold by selling stockholders named in this prospectus. See “Principal and Selling Stockholders.” Accordingly, we will not receive any proceeds from the sale of shares in this offering, including the sale of any shares by the selling stockholders if the underwriters exercise their option to purchase additional shares. We have agreed to pay the expenses of the selling stockholders related to this offering other than the underwriting discounts and commissions.

 

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DIVIDEND POLICY

On May 15, 2013, we paid a cash dividend of $50.0 million on shares of our Series A preferred stock, which we refer to as the 2013 Dividend. On April 11, 2014, we paid a cash dividend of $50.0 million on shares of our Series A preferred stock, which we refer to as the 2014 Dividend.

We have not declared, and currently do not plan to declare in the foreseeable future, dividends on our common stock. Instead, we anticipate that all of our earnings in the foreseeable future, if any, will be used for the operation and growth of our business.

Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial position, our results of operations, our liquidity, legal requirements, restrictions that may be imposed by the terms of current and future financing instruments and other factors deemed relevant by our board of directors. Our credit facility also restricts our ability to pay cash dividends on our common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Obligations.”

 

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CAPITALIZATION

The following sets forth our cash and cash equivalents and capitalization as of December 28, 2014:

 

    on an actual basis;

 

    on a pro forma basis giving effect to the conversion of our outstanding shares of Series A preferred stock into                  shares of common stock, at a conversion rate of one share of Series A preferred stock into one share of common stock, in connection with the closing of this offering; and

 

    on a pro forma as adjusted basis to further reflect the closing of this offering, including the estimated offering expenses payable by us.

All of the shares of common stock offered by this prospectus are being sold by the selling stockholders. We will not receive any of the proceeds from the sale of                  shares by the selling stockholders in this offering, including from any exercise by the underwriters of their option to purchase                  additional shares from the selling stockholders.

You should read this table in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus.

 

    

As of December 28, 2014

 
    

Actual

   

Pro Forma

    

Pro

Forma As
Adjusted

 
    

(Dollar amounts in thousands)

 

Cash and cash equivalents(1)

   $ 13,201      $                    $                
  

 

 

   

 

 

    

 

 

 

Debt:

Revolving credit facility

$ —     $      $     

Term loans

  228,249      228,249      228,249   

Capital lease obligations

  24,509      24,509      24,509   
  

 

 

   

 

 

    

 

 

 

Total debt(2)

  252,758      252,758      252,758   
  

 

 

   

 

 

    

 

 

 

Stockholders’ equity:

Preferred stock, $0.01 par value per share(3)

  172,691   

Common stock, $0.01 par value per share(4)

  —    

Additional paid-in capital

  (56,220

Retained earnings

  21,135   

Accumulated other comprehensive income

  146   
  

 

 

   

 

 

    

 

 

 

Total stockholders’ equity(1)

  137,752   
  

 

 

   

 

 

    

 

 

 

Total capitalization(1)

$ 390,510    $      $     
  

 

 

   

 

 

    

 

 

 

 

 

(1) Pro forma as adjusted cash and cash equivalents, pro forma as adjusted total stockholders’ equity and pro forma as adjusted total capitalization also give effect to the payment of estimated offering expenses payable by us, which amount to approximately $            .

 

(2) See our audited consolidated financial statements included elsewhere in this prospectus which includes all liabilities.

 

(3) The number of shares of Series A preferred stock shown as issued and outstanding in the table above is based on the number of shares of Series A preferred stock issued and outstanding as of December 28, 2014:                  shares authorized,                  shares issued and outstanding actual;                  shares authorized,                  shares issued and outstanding pro forma and pro forma as adjusted.

 

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(4) The number of shares of common stock shown as issued and outstanding in the table above is based on the number of shares of common stock outstanding as of December 28, 2014:                  shares authorized, shares issued and outstanding actual;                  shares authorized,                  shares issued and outstanding pro forma;                  shares authorized,                  shares issued and outstanding pro forma as adjusted.

 

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DILUTION

If you purchase our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price in this offering per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock upon closing of this offering. Net tangible book value represents the book value of our total tangible assets less the book value of our total liabilities. Pro forma net tangible book value per share represents our net tangible book value divided by the number of shares of common stock issued and outstanding after giving effect to the conversion of all of our outstanding shares of Series A preferred stock into                 shares of our common stock immediately prior to the closing of this offering. Pro forma as adjusted net tangible book value per share represents our net tangible book value divided by the number of shares of common stock issued and outstanding after giving effect to the pro forma adjustment described above, and the payment of estimated offering expenses by us in connection with the sale of common stock in this offering.

Our net tangible book value as of December 28, 2014, was approximately $         million. Our pro forma net tangible book value as of December 28, 2014 was $         million, or $         per share of common stock. After giving effect to the pro forma adjustments described above, our pro forma as adjusted net tangible book value as of December 28, 2014, would have been $         million, or $         per share. This represents an immediate and substantial dilution of $         per share to new investors purchasing common stock in this offering. The following table illustrates this dilution per share:

 

Assumed initial public offering price per share

$                

Pro forma net tangible book value (deficit) per share as of December 28, 2014

$                

Decrease in pro forma net tangible book value (deficit) per share attributable to the payment of estimated offering expenses

Pro forma as adjusted net tangible book value (deficit) per share after giving effect to the payment of estimated offering expenses

Dilution in pro forma as adjusted net tangible book value (deficit) per share to new investors in this offering

$     

Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to             , or approximately     % of the total shares of common stock outstanding after this offering, which will increase the number of shares held by new investors to             , or approximately     % of the total shares of common stock outstanding after this offering.

The following table summarizes, on a pro forma as adjusted basis as of December 28, 2014, the number of shares of common stock purchased from the selling stockholders and the total consideration and the average price per share paid by our existing stockholders and by the new investors in this offering, at an assumed initial public offering price of $         per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus).

 

    

Shares Purchased

   

Total Consideration

   

Average

Price

Per Share

 
    

Number

  

Percentage

   

Amount

    

Percentage

   
    

(Dollar amounts in thousands, except per share data)

 

Existing stockholders

                   $                                 $                

New investors

                                  
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

           $                 $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

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The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the total consideration paid by new investors and the average price per share paid by new investors by $         million and $         per share, respectively. An increase (decrease) of one million in the number of shares offered in this offering would increase (decrease) total consideration paid by new investors and the average price per share paid by new investors by $         million and $         per share, respectively.

If the underwriters’ option to purchase additional shares is fully exercised, the total consideration paid by new investors and the average price per share paid by new investors would be approximately $         million and $         per share, respectively.

The number of shares outstanding in the table above is based on the number of shares outstanding as of December 28, 2014, after giving effect to the conversion of all outstanding shares of our Series A preferred stock into                  shares of our common stock in connection with the closing of this offering. The discussion and tables above do not include the following shares:

 

                     shares of common stock issuable upon the exercise of options to purchase common stock outstanding as of                     , 2015 at a weighted average exercise price of $         per share; and

 

                     shares of common stock reserved for issuance under our equity incentive plan, which will be in effect upon the closing of this offering.

New investors may experience further dilution to the extent any of our outstanding options are exercised, any additional options are granted and exercised or any additional shares of our common stock are otherwise issued.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table contains selected historical consolidated financial data as of and for the fiscal years ended December 29, 2013 and December 28, 2014, derived from our audited consolidated financial statements included elsewhere in this prospectus, and as of and for the fiscal year ended December 30, 2012, derived from our audited consolidated financial statements not included in this prospectus. The statement of operations data for the thirty weeks ended July 24, 2011 are derived from the unaudited consolidated financial statements of our predecessor, BHI Exchange, Inc., which are not included in this prospectus. The statement of operations data for the twenty-two weeks ended December 25, 2011 are derived from the audited consolidated financial statements of our wholly owned subsidiary, BHI Intermediate Holding Corp., which are not included in this prospectus. You should read these tables in conjunction with the information contained under the headings “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus.

 

    For the
thirty weeks
ended
July 24, 2011(2)
    For the
twenty-two
weeks ended
December 25,
2011(2)
   

Fiscal Year Ended(1)

 
     

2011(2)

   

2012

   

2013

   

2014

 
    (Predecessor)     (Intermediate)     (combined)                    
   

(Dollar amounts in thousands)

 

Statement of Operations Data:

           

Revenues

         

Company restaurant revenues

  $ 156,706      $ 125,202      $ 281,908      $ 328,370      $ 353,592      $ 406,788   

Franchise royalty revenues

    9,743        7,623        17,366        19,539        20,572        22,746   

Other franchise revenues

    415        208        623        860        998        938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  166,864      133,033      299,897      348,769      375,162      430,472   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Company restaurant operating expenses

Food and supplies costs

  50,961      41,604      92,565      108,972      118,563      133,191   

Restaurant labor costs

  47,809      36,686      84,495      95,732      99,378      112,506   

Operating costs

  34,240      26,266      60,506      68,499      75,160      88,476   

Depreciation and amortization

  4,779      3,452      8,231      8,361      9,011      9,713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total company restaurant operating expenses

  137,789      108,008      245,797      281,564      302,112      343,886   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before other operating expenses

  29,075      25,025      54,100      67,205      73,050      86,586   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses

General and administrative

  16,253      11,735      27,988      25,480      27,478      32,107   

Depreciation and amortization

  3,751      932      4,683      2,154      2,177      2,372   

Impairment

  —       —       —       321      653      484   

(Gain) loss on disposal of property and equipment

  (627   (34   (661   161      (579   60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

  19,377      12,633      32,010      28,116      29,729      35,023   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  9,698      12,392      22,090      39,089      43,321      51,563   

Loss on debt extinguishment

  (2,570   —       (2,570   (10,838   —       —    

Amortization of deferred debt issuance costs

  (567   (629   (1,196   (1,509   (681   (733

Interest income

  16      7      23      4      3      2   

Interest expense

  (4,320   (6,102   (10,422   (15,157   (8,401   (9,123
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

  2,257      5,668      7,925      11,589      34,242      41,709   

Income taxes

  774      2,553      3,327      3,931      9,915      15,589   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

$ 1,483    $ 3,115    $ 4,598    $ 7,658    $ 24,327    $ 26,120   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Statement of Cash Flows Data:

Net cash provided by operating activities

$ 32,934    $ 37,930    $ 41,643   

Net cash used in investing activities

  (7,823   (8,619   (10,669

Net cash used in financing activities

  (21,511   (29,461   (26,229

 

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Fiscal Year Ended(1)

 
    

2012

    

2013

    

2014

 

Balance Sheet Data—Consolidated (at fiscal year end):

        

Cash and cash equivalents

   $ 8,606       $ 8,456       $ 13,201   

Property and equipment, net

     35,411         42,022         42,478   

Total assets

     535,121         541,336         552,643   

Total debt(3)

     195,460         221,840         252,758   

Total stockholders’ equity

     184,932         160,603         137,752   

 

(1) Fiscal 2011, fiscal 2013 and fiscal 2014 were 52-week fiscal years. Fiscal 2012 was a 53-week fiscal year. The information shown for fiscal 2011 is the arithmetic sum of the columns for the thirty week and twenty-two week periods ended July 24, 2011 and December 25, 2011, respectively, and has not been prepared in accordance with GAAP.

 

(2) Effective as of July 25, 2011, BHI Intermediate Holding Corp., or Intermediate, acquired all of the outstanding capital stock of BHI Exchange, Inc., or Predecessor. GAAP in the United States requires operating results prior to the acquisition, including for the thirty weeks ended July 24, 2011, to be presented as the results of Predecessor and its consolidated subsidiaries in our historical financial statements. Operating results subsequent to the acquisition, including for the twenty-two weeks ended December 25, 2011, are presented as the results of Intermediate and its consolidated subsidiaries in our historical financial statements. The presentation of combined Predecessor and Intermediate operating results (which is simply the arithmetic sum of the Predecessor and Intermediate amounts) is a non-GAAP presentation, which is provided as a convenience solely for the purpose of facilitating comparisons of the combined results with other fiscal periods presented. The combined operating results are not intended to represent what our operating results for fiscal 2011 would have been had the acquisition occurred at, or prior to, the beginning of fiscal 2011. The financial data and operating results for Intermediate include the impacts of applying purchase accounting. We do not believe that the overall impact of accounting adjustments made in connection with the acquisition, including, for example, fair value and useful life adjustments to depreciable and intangible assets, is meaningful for the purposes for which we have included financial data for Predecessor for the thirty weeks ended July 24, 2011, financial data for Intermediate for the twenty-two weeks ended December 25, 2011 and combined operating results for Predecessor and Intermediate for fiscal 2011. See “Basis of Presentation—Presentation of Combined Operating Results for Fiscal 2011.”

 

(3) Total debt consists of borrowings under our credit facility and capital lease obligations. See our audited consolidated financial statements included elsewhere in this prospectus which includes all liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the “Selected Historical Consolidated Financial Data,” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements.

We use a 52- or 53-week fiscal year ending on the last Sunday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Every five or six years a 53-week fiscal year occurs which may cause our revenues, expenses, and other results of operations to be higher due to an additional week of operations. Fiscal 2013 and fiscal 2014, which were 52-week years, ended on December 29, 2013 and December 28, 2014, respectively. Fiscal 2012, which was a 53-week year, ended on December 30, 2012.

Overview

Bojangles’ is a highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from our Southern recipes. In our 622 system-wide restaurants, we offer fast-casual quality food and preparation combined with quick-service speed, convenience and value. Over the last 38 years, we believe Bojangles’ has become an iconic brand with a cult-like following in North Carolina and South Carolina and beyond due to our craveable “chicken ’n biscuits.” Our menu appeals to a broad customer demographic across our five dayparts: breakfast, lunch, snack, dinner and after dinner. We are especially known for our breakfast menu, which is served all day, every day. Our high-quality, handcrafted food represents a great value with an average check of only $6.68 for company-operated restaurants in fiscal 2014. We believe our distinct menu, combined with our attractive price point offers our customers a compelling value proposition.

We increased our system-wide restaurant count from 538 restaurants as of the end of fiscal 2012 to 622 as of the end of fiscal 2014, representing a compounded annual growth rate of 7.5%. Specifically, our company-operated restaurants increased from 211 to 254 and our franchised restaurants increased from 327 to 368 over the same period. As a result, our system-wide sales grew from $866.5 million to $1.0 billion, representing a 9.3% CAGR, our company restaurant revenues grew from $328.4 million to $406.8 million, representing an 11.3% CAGR, and our franchise royalty and other franchise revenues grew from $20.4 million to $23.7 million, representing a 7.8% CAGR. Additionally, we grew our operating income from $39.1 million to $51.6 million, representing a 14.9% CAGR, our net income from $7.7 million to $26.1 million and our Adjusted EBITDA from $54.6 million to $68.9 million, representing a 12.3% CAGR, over the same period. See “Summary Historical Consolidated and Other Financial Data” for a discussion of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of the differences between Adjusted EBITDA and net income.

Outlook

We plan to pursue the following strategies to continue to grow our revenues and profits.

Continue to Open New Company-Operated and Franchised Restaurants. We believe we are in the early stages of our growth story. In fiscal 2014, we opened 24 company-operated restaurants and 28 franchised restaurants, contributing to annual system-wide unit growth of 7.8%. In fiscal 2015, we expect to open 22 to 25 new company-operated restaurants and 28 to 32 new franchised restaurants. Over the long-term, we plan to

 

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continue growing the number of Bojangles’ system-wide restaurants by approximately 7% to 8% annually, while maintaining a similar proportion of company-operated and franchised units. Based on our experience and research conducted for us by Buxton, a customer analytics research firm, we believe the total restaurant potential in our current footprint of ten states is more than 1,400 locations, and across the United States we believe the total restaurant potential is more than 3,500 locations.

Drive Comparable Restaurant Sales. We plan to continue delivering comparable restaurant sales growth by attracting new customers through expanding our brand awareness with new restaurant openings and marketing efforts, increasing existing customer frequency by providing an enhanced service experience and continuing to grow across each of our dayparts.

Continue to Enhance Profitability. We focus on improving our profitability while also investing in personnel and infrastructure to support our future growth. We will seek to further enhance margins over the long-term by maintaining fiscal discipline and leveraging fixed costs.

Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company restaurant revenues, franchise royalty and other franchise revenues, system-wide AUVs, comparable restaurant sales, new restaurant openings and net income. In addition, we also evaluate EBITDA and Adjusted EBITDA, and restaurant contribution and restaurant contribution margin which are considered to be non-GAAP financial measures.

Company Restaurant Revenues

Company restaurant revenues consist of sales of food and beverages in company-operated restaurants. Company restaurant revenues in a period are influenced by several factors, including the number of operating weeks in such period, the number of open restaurants and comparable restaurant sales growth.

Seasonal factors cause our revenues to fluctuate from quarter to quarter. Our revenues per restaurant are typically lower in the first quarter. As a result, our quarterly and annual operating results and key performance indicators may fluctuate significantly.

Franchise Royalty and Other Franchise Revenues

Franchise royalty and other franchise revenues represents royalty income, and initial and renewal franchise fees. While we expect the majority of our total revenue growth will be driven by company-operated restaurants, our franchised restaurants and growth in franchise royalty and other franchise revenues remain an important part of our financial success.

System-wide Average Unit Volumes

We measure system-wide AUVs on a fiscal year basis and on a TTM basis for each non-fiscal year-end period for system-wide restaurants. Annual AUVs are calculated using the following methodology: first, we determine the domestic free-standing restaurants with both a drive-thru and interior seating that have been open for a full 12 month period (excluding express units); and second, we calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV calculation. This methodology is similar for each TTM period outside the fiscal year end.

 

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Comparable Restaurant Sales

Comparable restaurant sales reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base the first full day of the month after being open for 15 months using a mid-month convention. While we do not record franchised sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.

 

    

Fiscal Year Ended

 
    

2012

   

2013

   

2014

 

Comparable Restaurant Sales:

      

Company-Operated

     8.4     4.5     4.0

Franchised

     6.2     1.4     5.0

Total System-wide

     7.0     2.5     4.6

New Restaurant Openings

The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open new company-operated restaurants, we incur preopening costs. System-wide, some of our new restaurants open with an initial start-up period of higher than normal sales volume, which subsequently decreases to stabilized levels. New company-operated restaurants typically experience normal inefficiencies such as higher food and supplies, labor and other direct operating costs and, as a result, restaurant contribution margins are typically lower during the start-up period of operations. In addition, new restaurants typically have high occupancy costs compared to existing restaurants. When entering new markets, we may be exposed to longer start-up times and lower contribution margins than reflected in our average historical experience.

Restaurant openings, closures and refranchised

 

    

Fiscal Year Ended

 
    

2012

    

2013

    

2014

 

Company-operated restaurant activity:

        

Beginning of period

     196         211         225   

Openings

     14         18         24   

Closures

     (4      (2      (3

Refranchised

     5         (2      8   
  

 

 

    

 

 

    

 

 

 

End of period

  211      225      254   
  

 

 

    

 

 

    

 

 

 

Franchised restaurant activity:

Beginning of period

  312      327      352   

Openings

  26      28      28   

Closures

  (6   (5   (4

Refranchised

  (5   2      (8
  

 

 

    

 

 

    

 

 

 

End of period

  327      352      368   
  

 

 

    

 

 

    

 

 

 

Total system-wide restaurant activity:

Beginning of period

  508      538      577   

Openings

  40      46      52   

Closures

  (10   (7   (7
  

 

 

    

 

 

    

 

 

 

End of period

  538      577      622   
  

 

 

    

 

 

    

 

 

 

In fiscal 2014, we and our franchisees opened 52 restaurants of which 24 were company-operated and 28 were franchised. From time to time we and our franchisees may close or relocate restaurants. A relocation

 

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results in a closure and an opening. For fiscal 2014, we closed three company-operated restaurants, of which two were relocations, and our franchisees closed four restaurants, of which one was a relocation. In fiscal 2015, we and our franchisees plan to open 51 to 57 restaurants, of which 22 to 25 will be company-operated restaurants and 28 to 32 will be franchised restaurants.

Net Income, EBITDA and Adjusted EBITDA

We consider net income to be a key performance indicator that shows the overall health of our entire business. We typically utilize net income in conjunction with the non-GAAP financial measures EBITDA and Adjusted EBITDA when assessing the operational strength and the performance of our business. The following table sets forth reconciliations of net income to EBITDA and Adjusted EBITDA:

 

(Dollar amounts in thousands)

 

BHI Exchange, Inc.

and subsidiaries

30 Weeks Ended

July 24, 2011

(Predecessor)(a)

   

BHI Intermediate

Holding Corp.

and subsidiaries

22 Weeks Ended

December 25, 2011

(Intermediate)(a)

   

Combined

Fiscal Year

Ended 2011(a)

   

Fiscal Year Ended

 
       

2012(l)

   

2013

   

2014

 

Net income

  $ 1,483      $ 3,115      $ 4,598      $ 7,658      $ 24,327      $ 26,120   

Income taxes

    774        2,553        3,327        3,931        9,915        15,589   

Interest expense, net

    4,304        6,095        10,399        15,153        8,398        9,121   

Depreciation and amortization(b)

    9,097        5,013        14,110        12,024        11,869        12,818   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  15,658      16,776      32,434      38,766      54,509      63,648   

Non-cash rent(c)

  497      598      1,095      1,409      1,336      1,513   

Stock-based compensation(d)

  —       —       —       1,560      838      1,420   

Preopening expenses(e)

  337      92      429      622      1,112      1,358   

Sponsor and board member fees and expenses(f)

  398      181      579      727      1,071      1,059   

Certain professional, transaction and other costs(g)

  5,169      3,308      8,477      204      159      805   

Impairment and dispositions(h)

  (205   (19   (224   504      886      557   

Loss on debt extinguishment(i)

  2,570      —       2,570      10,838      —       —    

One-time franchise equipment expenses(j)

  —       —       —       —       547      —    

Gain from termination of a vendor contract(k)

  —       —       —       —       —       (1,475
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

$ 24,424    $ 20,936    $ 45,360    $ 54,630    $ 60,458    $ 68,885   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) See “Basis of Presentation—Presentation of Combined Operating Results for Fiscal 2011.”

 

(b) Includes amortization of deferred debt issuance costs.

 

(c) Includes deferred rent, which represents the extent to which our rent expense has been above or below our cash rent payments, amortization of favorable (unfavorable) leases and closed store reserves for rent net of cash payments.

 

(d) Includes non-cash, stock-based compensation.

 

(e) Includes expenses directly associated with the opening of new company-operated restaurants and incurred prior to the opening of a new company-operated restaurant.

 

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(f) Includes (i) reimbursement of expenses to our sponsor (approximately $74 thousand in 2012, $27 thousand in 2013, and $61 thousand in 2014), (ii) fees to our prior sponsor in 2011, (iii) compensation and expense reimbursement to members of our board, and (iv) certain non-recurring executive search firm fees incurred on behalf of our board.

 

(g) Includes certain professional fees and transaction costs related to financing transactions, acquisitions and initial public offering expenses, third-party consultants for one-time projects and certain executive relocation costs.

 

(h) Includes loss (gain) on disposal of property and equipment, impairment and cash proceeds on disposals from disposition of property and equipment.

 

(i) Our term loan was refinanced in October 2012 resulting in a loss on debt extinguishment of approximately $10.8 million, including an approximately $1.7 million loss on the early termination of the corresponding interest rate swap agreement.

 

(j) Includes the cost of the purchase of equipment for franchisees in connection with a one-time initiative which was completed in fiscal 2013.

 

(k) Represents the elimination of a gain from the termination of a contract with a beverage vendor in fiscal 2014.

 

(l) Fiscal 2012 was a 53-week fiscal year.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company restaurant revenues less food and supplies costs, restaurant labor costs, and operating costs. We expect restaurant contribution to increase based on new company-operated restaurants we open and our comparable restaurant sales growth. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant revenues. Fluctuations in restaurant contribution margin can be attributed to company comparable restaurant sales growth, sales volumes of new company restaurants opened, and changes in company food and supplies costs, restaurant labor costs and operating costs.

Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. We believe that restaurant contribution and restaurant contribution margin are important tools for investors as they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We use restaurant contribution and restaurant contribution margin as key metrics to evaluate profitability and performance of our restaurants across periods and to evaluate our restaurant financial performance compared to our competitors.

 

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The following table reconciles on a historical basis for the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014, our restaurant contribution to the line item on its consolidated statements of operations and comprehensive income entitled “Company restaurant revenues,” which we believe is the most directly comparable GAAP measure on our consolidated statements of operations and comprehensive income.

 

    

Fiscal Year Ended

 

(Dollar amounts in thousands)

  

2012(1)

   

2013

   

2014

 

Company restaurant revenues

   $ 328,370      $ 353,592      $ 406,788   

Food and supplies costs(2)

     (108,972     (118,563     (133,191

Restaurant labor costs

     (95,732     (99,378     (112,506

Operating costs

     (68,499     (75,160     (88,476
  

 

 

   

 

 

   

 

 

 

Restaurant contribution(2)

$ 55,167    $ 60,491    $ 72,615   
  

 

 

   

 

 

   

 

 

 

Restaurant contribution margin(2)

  16.8   17.1   17.9

 

(1) Fiscal 2012 was a 53-week fiscal year.

 

(2) Fiscal 2014 includes a one-time reduction in food and supplies costs of approximately $1.5 million resulting from the termination of a vendor contract. For further discussion of this reduction in food and supplies costs, see Note 18 to our consolidated financial statements contained elsewhere in this prospectus.

Non-GAAP Financial Measures

Restaurant contribution, restaurant contribution margin, EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures. We use these measures in addition to net income and operating income to assess our performance and believe it is important for investors to be able to evaluate the company using the same measures used by our management. We believe these measures are important indicators of our operational strength and the performance of our business. These measures as calculated by the company are not necessarily comparable to similarly titled measures reported by other companies. In addition, these measures have limitations as analytical tools and should not be viewed in isolation or as substitutes for GAAP measures of earnings. Some of these limitations are as follows:

 

    these measures do not reflect changes in, or cash requirement for, our working capital needs;

 

    these measures do not reflect our interest burden, or the cash requirements necessary to service interest or principal payments on our debt, which includes capital lease obligations;

 

    these measures do not reflect our income tax expense or the cash requirement to pay our taxes;

 

    these measures do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    although depreciation is a non-cash charge, the assets being depreciated and amortized will often require replacement in the future, and these measures do not reflect any cash requirements for such replacements; and

 

    other companies may calculate these measures differently, so they may not be comparable.

Key Financial Definitions

Total Revenues

Our revenues are derived from two primary sources: company restaurant revenues and franchise revenues. Franchise revenues are comprised of franchise royalty revenues and, to a lesser extent, other franchise revenues which include initial and renewal franchisee fees.

 

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Food and Supplies Costs

Food and supplies costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants. The components of food and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs.

Restaurant Labor Costs

Restaurant labor costs, including preopening labor, consist of company-operated restaurant-level management and hourly labor costs, including salaries, wages, payroll taxes, workers’ compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect restaurant labor costs at our company-operated restaurants to grow due to inflation and as our company restaurant revenues grows. Factors that influence labor costs include minimum wage and employer payroll tax legislation, health care costs and the performance of our restaurants. The Patient Protection and Affordable Care Act will increase health care costs for our restaurants beginning in fiscal 2015.

Operating Costs

Restaurant operating costs include all other company-operated restaurant-level operating expenses, such as repairs and maintenance, utilities, credit and debit card processing, occupancy expenses and other restaurant operating costs. In addition, our advertising costs are included in operating costs and are comprised of our company-operated restaurants’ portion of spending on all advertising which includes, but is not limited to, television, radio, social media, billboards, point-of-sale materials, sponsorships, and creation of media, such as commercials and marketing campaigns.

Company Restaurant Depreciation and Amortization

Company restaurant depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets at the restaurant level.

General and Administrative Expenses

General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including compensation and benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. We expect we will incur incremental general and administrative expenses as a result of this offering and as a public company.

Other Depreciation and Amortization

Other depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets not directly located at company-operated restaurants.

Impairment

Long-lived assets such as property, equipment and intangible assets are reviewed on a unit-by-unit basis for impairment. When circumstances indicate a carrying value of the assets may not be recoverable, an appropriate impairment is recorded.

(Gain) loss on Disposal of Property and Equipment

(Gain) loss on disposal of property and equipment includes the (gain) loss on disposal of assets related to retirements and replacements or write-off of leasehold improvements, equipment and other fixed assets. These (gains) losses are related to normal disposals in the ordinary course of business and gains from insurance proceeds.

 

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Amortization of Deferred Debt Issuance Costs

Deferred debt issuance costs are amortized over the term of the related debt on the effective interest method.

Interest Expense

Interest expense primarily consists of interest on our debt outstanding under our credit facility and capital lease obligations.

Income Taxes

Income taxes represent federal, state, and local current and deferred income tax expense.

Results of Operations

Fiscal Year 2013 Compared to Fiscal Year 2014

Our operating results for the fiscal years ended December 29, 2013 and December 28, 2014 are compared below:

 

    

Fiscal Year Ended

 
    

2013

   

2014

   

Increase/

(Decrease)

   

Percentage

Change

 
    

(Dollar amounts in thousands)

 

Statement of Operations Data:

        

Revenues

        

Company restaurant revenues

   $ 353,592      $ 406,788      $ 53,196        15.0

Franchise royalty revenues

     20,572        22,746        2,174        10.6

Other franchise revenues

     998        938        (60     (6.0 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

  375,162      430,472      55,310      14.7
  

 

 

   

 

 

   

 

 

   

Company restaurant operating expenses:

Food and supplies costs

  118,563      133,191      14,628      12.3

Restaurant labor costs

  99,378      112,506      13,128      13.2

Operating costs

  75,160      88,476      13,316      17.7

Depreciation and amortization

  9,011      9,713      702      7.8
  

 

 

   

 

 

   

 

 

   

Total company restaurant operating expenses

  302,112      343,886      41,774      13.8
  

 

 

   

 

 

   

 

 

   

Operating income before other operating expenses

  73,050      86,586      13,536      18.5
  

 

 

   

 

 

   

 

 

   

Other operating expenses:

General and administrative

  27,478      32,107      4,629      16.8

Depreciation and amortization

  2,177      2,372      195      9.0

Impairment

  653      484      (169   (25.9 )% 

(Gain) loss on disposal of property and equipment

  (579   60      639      n/m   
  

 

 

   

 

 

   

 

 

   

Total other operating expenses

  29,729      35,023      5,294      17.8
  

 

 

   

 

 

   

 

 

   

Operating income

  43,321      51,563      8,242      19.0

Amortization of deferred debt issuance costs

  (681   (733   (52   7.6

Interest income

  3      2      (1   n/m   

Interest expense

  (8,401   (9,123   (722   8.6
  

 

 

   

 

 

   

 

 

   

Income before income taxes

  34,242      41,709      7,467      21.8

Income taxes

  9,915      15,589      5,674      57.2
  

 

 

   

 

 

   

 

 

   

Net income

$ 24,327    $ 26,120    $ 1,793      7.4
  

 

 

   

 

 

   

 

 

   

 

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n/m = not meaningful

Company Restaurant Revenues

Company restaurant revenues increased $53.2 million, or 15.0%, in fiscal 2014 compared to fiscal 2013. The growth in company restaurant revenues was primarily due to an increase in comparable company restaurant sales of $13.5 million, or 4.0%, composed of increases in price, mix and transactions at our comparable restaurants, and an increase in the non-comparable restaurant base (net additions of 29 company-operated restaurants as of December 28, 2014 compared to December 29, 2013) accounting for $39.7 million.

Franchise Royalty Revenues

Franchise royalty revenues increased $2.2 million in fiscal 2014 compared to fiscal 2013. The increase was primarily due to an additional 16 franchised restaurants at December 28, 2014 compared to December 29, 2013 and franchised comparable restaurant sales growth of 5.0%.

Food and Supplies Costs

Food and supplies costs increased $14.6 million in fiscal 2014 compared to fiscal 2013. This increase was primarily driven by an increase in company restaurant revenues. For fiscal 2014, food and supplies costs as a percentage of company restaurant revenues were 32.7% compared to 33.5% in fiscal 2013. This percentage decrease was primarily due to a $1.5 million gain associated with the termination of a beverage vendor contract which was recognized as an offset to food and supplies costs. Additionally, our menu price increase more than offset our commodity cost increases.

Restaurant Labor Costs

Company-operated restaurant labor increased $13.1 million in fiscal 2014 compared to fiscal 2013, primarily due to higher company restaurant revenues. As a percentage of company restaurant revenues, restaurant labor costs decreased to 27.7% from 28.1%. This decrease was primarily driven by an increase in comparable restaurant sales which resulted in leveraging certain fixed labor expenses.

Operating Costs

Operating costs increased $13.3 million in fiscal 2014 compared to fiscal 2013, primarily due to higher company restaurant revenues. As a percentage of company restaurant revenues, operating costs increased to 21.7% for fiscal 2014 from 21.3% in fiscal 2013. This increase was primarily attributable to new company-operated restaurants having higher occupancy costs as a percentage of company restaurant revenues, partially offset by leveraging comparable restaurant sales growth.

Restaurant Depreciation and Amortization

Restaurant depreciation and amortization increased $0.7 million in fiscal 2014 compared to fiscal 2013, due primarily to the increased number of company-operated restaurants. As a percentage of company restaurant revenues, depreciation and amortization was 2.4% and 2.5% in fiscal 2014 and fiscal 2013, respectively.

General and Administrative Expenses

General and administrative expenses increased $4.6 million in fiscal 2014 compared to fiscal 2013. The increase is due primarily to additional positions added to support an increased number of restaurants in our system, increased stock-based compensation expense of $0.6 million and employee relocation cost increase of $0.7 million. As a percentage of total revenues, general and administrative expenses were 7.5% and 7.3% in fiscal 2014 and fiscal 2013, respectively.

 

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Interest Expense

Interest expense increased $0.7 million in fiscal 2014 compared to fiscal 2013. The increase was due primarily to an amendment to our credit facility in May 2013 borrowing an additional $50.0 million partially offset by a reduction in our interest rate, and another amendment in April 2014 borrowing an additional $50.0 million, partially offset by repayment of $21.4 million in fiscal 2014.

Income Taxes

Income taxes increased $5.7 million in fiscal 2014 compared to fiscal 2013. For fiscal 2014, our effective income tax rate was 37.4%, compared to an effective tax rate of 29.0% for fiscal 2013. The lower effective income tax rate in fiscal 2013 was primarily due to a state income tax rate reduction enacted by the State of North Carolina which resulted in a deferred income tax benefit.

Fiscal Year 2012 Compared to Fiscal Year 2013

Our operating results for the fiscal years ended December 30, 2012 and December 29, 2013 are compared below:

 

    

Fiscal Year Ended

 
    

2012(1)

   

2013

   

Increase/

(Decrease)

   

Percentage

Change

 
    

(Dollar amounts in thousands)

 

Statement of Operations Data:

        

Revenues:

        

Company restaurant revenues

   $ 328,370      $ 353,592      $ 25,222        7.7

Franchise royalty revenues

     19,539        20,572        1,033        5.3

Other franchise revenues

     860        998        138        16.0
  

 

 

   

 

 

   

 

 

   

Total revenues

  348,769      375,162      26,393      7.6
  

 

 

   

 

 

   

 

 

   

Company restaurant operating expenses:

Food and supplies costs

  108,972      118,563      9,591      8.8

Restaurant labor costs

  95,732      99,378      3,646      3.8

Operating costs

  68,499      75,160      6,661      9.7

Depreciation and amortization

  8,361      9,011      650      7.8
  

 

 

   

 

 

   

 

 

   

Total company restaurant operating expenses

  281,564      302,112      20,548      7.3
  

 

 

   

 

 

   

 

 

   

Operating income before other operating expenses

  67,205      73,050      5,845      8.7
  

 

 

   

 

 

   

 

 

   

Other operating expenses:

General and administrative

  25,480      27,478      1,998      7.8

Depreciation and amortization

  2,154      2,177      23      1.1

Impairment

  321      653      332      103.4

Loss (gain) on disposal of property and equipment

  161      (579   (740   n/m   
  

 

 

   

 

 

   

 

 

   

Total other operating expenses

  28,116      29,729      1,613      5.7
  

 

 

   

 

 

   

 

 

   

Operating income

  39,089      43,321      4,232      10.8

Loss on debt extinguishment

  (10,838   —       10,838      n/m   

Amortization of deferred debt issuance costs

  (1,509   (681   828      (54.9 )% 

Interest income

  4      3      (1   (25.0 )% 

Interest expense

  (15,157   (8,401   6,756      (44.6 )% 
  

 

 

   

 

 

   

 

 

   

Income before income taxes

  11,589      34,242      22,653      195.5

Income taxes

  3,931      9,915      5,984      152.2
  

 

 

   

 

 

   

 

 

   

Net income

$ 7,658    $ 24,327    $ 16,669      217.7
  

 

 

   

 

 

   

 

 

   

 

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(1) Fiscal year 2012 was a 53-week year.

n/m = not meaningful

Company Restaurant Revenues

Company restaurant revenues increased $25.2 million, or 7.7%, in fiscal 2013 compared to fiscal 2012. The growth in company restaurant revenues was primarily due to an increase in comparable company restaurant sales of $13.8 million, or 4.5%, which was primarily due to an increase in price and mix at our comparable restaurants and an increase in the non-comparable restaurant base (net additions of 14 company-operated restaurants as of December 29, 2013 compared to December 30, 2012), accounting for $11.4 million.

Franchise Royalty Revenues

Franchise royalty revenues increased $1.0 million in fiscal 2013 compared to fiscal 2012. The increase was primarily due to an additional 25 franchised restaurants at December 29, 2013 compared to December 30, 2012 and franchised comparable restaurant sales growth of 1.4%.

Food and Supplies Costs

Food and supplies costs increased $9.6 million in fiscal 2013 compared to fiscal 2012. This increase was primarily driven by an increase in company restaurant revenues. In fiscal 2013, food and supplies costs as a percentage of company restaurant revenues were 33.5% compared to 33.2% in fiscal 2012. The increase in percentage was due primarily to slightly higher commodity costs.

Restaurant Labor Costs

Restaurant labor costs increased $3.6 million in fiscal 2013 compared to fiscal 2012, primarily due to higher company restaurant revenues. As a percentage of company restaurant revenues, restaurant labor costs decreased from 29.2% in fiscal 2012 to 28.1% in fiscal 2013. This decrease was primarily driven by an increase in comparable company restaurant sales which resulted in leveraging certain fixed labor expenses and a decrease in group health insurance expenses of approximately $1.0 million due to lower year-over-year medical claims.

Operating Costs

Operating costs increased $6.7 million in fiscal 2013 compared to fiscal 2012, primarily due to higher company restaurant revenues. As a percentage of company restaurant revenues, operating costs increased to 21.3% in fiscal 2013 from 20.9% in fiscal 2012. This increase was primarily attributable to an increase in overall marketing expense and our new company-operated restaurants having higher occupancy costs as a percentage of company restaurant revenues.

Restaurant Depreciation and Amortization

Restaurant depreciation and amortization increased $0.7 million in fiscal 2013 compared to fiscal 2012, primarily due to the increased number of company-operated restaurants. As a percentage of company restaurant revenues, depreciation and amortization was 2.5% in both fiscal 2013 and fiscal 2012.

General and Administrative Expenses

General and administrative expenses increased $2.0 million in fiscal 2013 compared to fiscal 2012. The increase was primarily due to additional positions added to support an increased number of restaurants in our system as of December 29, 2013 compared to December 30, 2012. As a percentage of total revenues, general and administrative expenses were 7.3% in both fiscal 2013 and fiscal 2012.

 

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Loss on Debt Extinguishment

Loss on debt extinguishment was $10.8 million in fiscal 2012. Our term loan debt was refinanced in October 2012, resulting in a loss on debt extinguishment of $10.8 million, including a $1.7 million loss on the early termination of the corresponding interest rate swap agreement.

Interest Expense

Interest expense decreased $6.8 million in fiscal 2013 compared to fiscal 2012. The decrease was primarily due to a favorable borrowing rate resulting from the refinancing of our term loan debt in October 2012 and repayment of $25.4 million in fiscal 2013, partially offset by a new $50.0 million term loan we borrowed in May 2013.

Income Taxes

Income taxes increased $6.0 million in fiscal 2013 compared to fiscal 2012. In fiscal 2013, our effective income tax rate was 29.0% compared to an effective income tax rate of 33.9% in fiscal 2012. The lower effective income tax rate in fiscal 2013 was primarily due to a state income tax rate reduction enacted by the State of North Carolina which resulted in a deferred income tax benefit.

Liquidity and Capital Resources

Our primary requirements for liquidity and capital are new company-operated restaurants, existing restaurant capital investments (remodels and maintenance), information technology investments, principal and interest payments on our term debt and capital lease obligations, operating lease obligations and working capital and general corporate needs. Our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale, therefore, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Our restaurants do not require significant inventories or receivables. We do have accounts receivable from our franchisees primarily related to royalty revenues.

Our growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and the nature of our lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance and capacity addition in our existing restaurants as well as information technology and other general corporate expenditures. We estimate that the land, building and equipment of a new company-operated restaurant requires an average investment of $2.1 million, including approximately $0.6 million for land, approximately $1.2 million for building construction, which includes the building, site and soft costs, and approximately $0.3 million for equipment. We primarily utilize build-to-suit developments and equipment financing leases for our new company-operated restaurants, requiring minimal upfront cash investment. Each new restaurant typically requires an upfront cash investment of approximately $85,000, and we target a less than one year payback on our cash investment. While we currently utilize a build-to-suit development strategy, our new restaurant strategy may change over time.

We currently expect our capital expenditures for 2015 will range between $13.0 million and $14.0 million excluding approximately $1.3 million to $1.5 million of restaurant preopening costs for new restaurants that are not capitalized. These capital estimates are based on average new restaurant capital expenditures of $85,000 each for the opening of 22 to 25 new company-operated restaurants as well as investments to remodel and improve our existing restaurants, for a new point of sale system and for general corporate purposes.

We believe that cash and cash equivalents and expected cash flow from operations are adequate to fund debt service requirements, capital lease obligations, operating lease obligations, capital expenditures and working capital needs for the next 12 months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flow from operations and our ability to manage costs and working capital successfully.

 

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The following table presents summary cash flow information for the periods indicated (in thousands):

 

    

Fiscal Year Ended

 
    

2012(1)

    

2013

    

2014

 

Net cash provided by (used in)

        

Operating activities

   $ 32,934       $ 37,930       $ 41,643   

Investing activities

     (7,823      (8,619      (10,669

Financing activities

     (21,511      (29,461      (26,229
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash

$ 3,600    $ (150 $ 4,745   
  

 

 

    

 

 

    

 

 

 

 

(1) Fiscal 2012 was a 53-week year.

Operating Activities

Net cash provided by operating activities increased from $37.9 million for fiscal 2013 to $41.6 million for fiscal 2014. The increase was primarily attributable to an increase in cash generated from our operations due to the net increase in company-operated restaurants, franchise royalty revenues and an increase in comparable restaurant sales.

Net cash provided by operating activities increased from $32.9 million in fiscal 2012 to $37.9 million in fiscal 2013. The increase was primarily attributable to an increase in cash generated from our operations due to the net increase in company-operated restaurants, franchise royalty revenues, and an increase in comparable restaurant sales.

Investing Activities

Net cash used in investing activities increased from $8.6 million for fiscal 2013 to $10.7 million for fiscal 2014. The increase was primarily attributable to the acquisition of the assets of eight Bojangles’ restaurants from a franchisee in April 2014 for the purchase price of approximately $3.8 million of which approximately $0.6 million was deferred, a reduction in proceeds from disposition of property and equipment of approximately $0.8 million, offset by a decrease in purchases of property and equipment of approximately $1.9 million.

Net cash used in investing activities increased from $7.8 million in fiscal 2012 to $8.6 million in fiscal 2013. The increase was primarily attributable to an increase in purchases of property and equipment of approximately $2.2 million, partially offset by an increase in proceeds from the disposition of property and equipment of approximately $0.8 million. The $2.2 million increase in purchases of property and equipment is primarily related to a new point-of-sale system and new restaurant equipment. Fiscal 2012 and fiscal 2013, included $0.6 million and $0, respectively, for the purchase of franchised restaurants.

Financing Activities

Net cash used in financing activities decreased from $29.5 million for fiscal 2013 to $26.2 million for fiscal 2014. This decrease was primarily due to a decrease in principal payments on long-term debt offset by an increase of principal payments on capital lease obligations of approximately $0.5 million.

Net cash used in financing activities increased from $21.5 million in fiscal 2012 to $29.5 million in fiscal 2013. This was primarily due to a $50.0 million dividend paid in fiscal 2013 offset by borrowings, net of repayments, on long-term debt increasing by $35.6 million, a reduction in capital lease obligation principal payments of $2.3 million, a reduction of $2.3 million in debt issuance costs, and a reduction of $1.7 million for the termination costs of an interest rate swap agreement compared to fiscal 2012.

 

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Debt and Other Obligations

Credit Agreement

On October 9, 2012, we entered into a credit agreement with several financial institutions. The credit agreement is secured by substantially all of our assets and originally provided for borrowings under a term loan of $175.0 million, and a revolving credit facility of $25.0 million, with a maturity date of October 9, 2017. In May 2013, we amended the credit agreement to provide for an additional $50.0 million term loan, the proceeds of which were used to fund a distribution to the holders of our Series A preferred stock. In April 2014, we further amended the credit agreement to provide for an additional $50.0 million term loan, the proceeds of which were also used to fund a distribution to the holders of our Series A preferred stock, and to extend the maturity date to October 9, 2018. We had $228.2 million of outstanding term loans and no outstanding borrowings under our revolving credit facility as of December 28, 2014.

Borrowings under the credit agreement are allowed under base rate and Eurodollar rate loans. Base rate loans bear interest at the higher of (1) the Bank of America prime rate, (2) the Federal Funds Rate plus 0.50%, or (3) the LIBOR rate for one-month loans plus 1.00% and an applicable rate. Eurodollar rate loans may be entered or converted into one-, two-, three-, or six-month periods and are charged interest at the LIBOR rate on the effective date for the period selected, plus an applicable rate. As of December 28, 2014, all of our outstanding term loan debt was in one-month Eurodollar loans with an interest rate of approximately 2.91%.

Debt Covenants

Our credit agreement contains various covenants that, among other things, do not allow the company to exceed a maximum consolidated total lease adjusted leverage ratio, require the company to maintain a minimum consolidated fixed charge coverage ratio, and place certain limitations on cash capital expenditures. We were in compliance with all of the covenants under our credit agreement as of December 28, 2014.

Hedging Arrangements

In connection with our credit agreement, we have three variable-to-fixed interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR as of December 28, 2014. On November 1, 2012, the company entered into the first interest rate swap contract with an effective date of November 30, 2012 and a notional amount of $87.5 million, under which the company pays interest at a fixed 0.44% and receives interest at the one-month LIBOR rate and has a termination date of November 30, 2015. On May 17, 2013, the company entered into a second interest rate swap contract with a notional amount of $50.0 million, with an effective date of November 30, 2015 and a fixed interest rate of 1.3325% and receives the one-month LIBOR rate and has a termination date of September 29, 2017. Also on May 17, 2013, the company entered into a third interest rate swap contract with an effective date of May 31, 2013 and a notional amount of $25.0 million, with interest fixed at 0.70125% and receives the one-month LIBOR rate and has a termination date of May 31, 2017.

 

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Contractual Obligations

The table below summarizes our contractual commitments to make future payments pursuant to our long-term debt and other obligations including operating lease obligations, capital lease obligations, marketing commitments and financing obligations under build-to-suit leases outstanding as of December 28, 2014, our most recent fiscal year-end for which a balance sheet is presented. The table does not include any new transactions after the fiscal year ended December 28, 2014 including, but not limited to, new operating and capital leases, new marketing commitments and new financing obligations under build-to-suit leases:

 

    

Payments Due by Period

 

(Amounts in thousands)

  

Total

    

Less than

1 year

    

1-3 years

    

3-5 years

    

More than

5 years

 

Long-term debt

   $ 228,249       $ —        $ 40,269       $ 187,980       $ —    

Interest on long-term debt(1)

     26,064         7,213         14,558         4,293         —    

Operating leases

     313,139         31,281         60,634         55,876         165,348   

Capital leases

     30,596         5,842         10,560         6,826         7,368   

Marketing commitments(2)

     6,209         2,392         2,444         1,373         —    

Financing obligations under build-to-suit leases

     937         937         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 605,194    $ 47,665    $ 128,465    $ 256,348    $ 172,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes estimated interest payments calculated based on current interest rates as of December 28, 2014. Interest includes interest and fees under our credit facility and our interest rate swaps.

 

(2) Includes commitments for various marketing sponsorships and expenses.

Off-Balance Sheet and Other Arrangements

We have guaranteed through 2018 $0.2 million of debt from a previous credit facility which was assumed by a franchisee. We may be required to perform this guarantee in the event of default or nonperformance of this franchisee. We have determined that default by the franchisee is unlikely due to timely and consistent payments, and have therefore not recorded a liability for the debt assumed by this franchisee on our consolidated balance sheets. The carrying value of debt covered by this additional guarantee by us was approximately $0.2 million at December 29, 2013 and December 28, 2014.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers. This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. This update is effective in fiscal periods beginning after December 15, 2016 and early application is not permitted. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation—Stock Compensation (Topic 718). The new guidance provides new criteria for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

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Critical Accounting Policies and Use of Estimates

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments due to the sensitivity of the methods and assumptions used. Our significant accounting policies are described in Note 1 to our consolidated financial statements contained elsewhere in this prospectus.

Franchise Fee and Royalty Accounting

We grant franchises to individual restaurant operators in exchange for initial franchise license fees and continuing royalty payments. We account for initial franchisee fees in accordance with FASB ASC 952, Franchisors. Franchise license fees are deferred when received and recognized as revenues when substantial performance of all franchisor obligations have been achieved or the franchise development agreement is terminated. The commencement of operations by the franchisee indicates substantial performance has occurred. If substantial performance of our obligations has not been completed, revenues are not recognized and the amount received is deferred until all material services or conditions have been satisfied by us or the franchise development agreement is terminated. Continuing royalty income is recognized as revenues on an accrual basis and is based on a percentage of monthly sales, generally ranging from 3% to 4% for franchisees operating within the United States of America, and 5% for franchisees with operations in other countries.

Allowance for Doubtful Accounts

We maintain allowances, which management believes are adequate to absorb estimated losses to be incurred in realizing the recorded amounts of its accounts receivable. These allowances are determined by management based primarily on an analysis of collectability of individual accounts and historical trends.

Goodwill and Intangible Assets Not Subject to Amortization

The excess of the purchase price over the estimated fair value of the net assets acquired, including identified intangibles in a business combination is recorded as goodwill. In addition to goodwill, our indefinite-lived intangible asset consists of the Bojangles’ brand. We do not amortize our goodwill and brand. We perform an impairment test for goodwill and our brand annually as of December 1 and when a triggering event occurs or change in circumstances indicates that impairment might exist. Such events or circumstances may be a significant change in business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy or disposition.

Our impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that the fair value is less than its carrying amount, and if required, followed by a two-step process of determining the fair value and comparing it to the carrying value of the net assets. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value exceeds its carrying value, it is not necessary to perform the two-step goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to the two-step process in any period. We can resume the qualitative assessment in any subsequent period. When performing the two-step process, if the fair value exceeds its carrying value, no further analysis or write-down of goodwill is required. If the fair value is less than the carrying value of its net assets, the

 

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estimated fair value is allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value. Our impairment review for our brand consists of a qualitative assessment similar to goodwill and, if necessary, a comparison of the fair value of our brand with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, our brand is not considered impaired.

The estimated fair value is the amount for which the business could be sold in market. We estimate the fair value using a combination of market earnings multiples and discounted cash flow methodologies. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth of our business, the useful life over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

We determined the fair value of our goodwill and the fair value of our brand and both were substantially in excess of their respective carrying values when we performed our annual goodwill and brand impairment tests as of December 1, 2014. As such, we have determined that no impairment to our goodwill or our brand occurred during the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014.

Long-Lived Assets

We state the value of our long-lived assets at cost, minus accumulated depreciation and amortization. We calculate depreciation using the straight-line method over the estimated useful lives of the related assets. We amortize our leasehold improvements using the straight-line method over the shorter of the lease term (including reasonably assured renewal periods) or the estimated useful lives of the related assets. We expense repairs and maintenance as incurred, but capitalize major improvements and betterments.

Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of a long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:

 

    bankruptcy proceedings or other significant financial distress;

 

    significant negative industry or economic trends;

 

    knowledge of transactions involving the sale of similar property at amounts below our carrying value; or

 

    our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.”

We recorded impairment charges of $0.3 million, $0.7 million and $0.5 million due to underperforming restaurants during the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014, respectively. The impaired assets had no value at December 28, 2014.

 

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See Note 1 of the accompanying audited consolidated financial statements included elsewhere in this prospectus for additional information about accounting for long-lived assets.

Leases

We lease restaurant land and buildings, certain restaurant, office and point-of-sale equipment, office space and vehicles under operating and capital leases. Accounting for leased properties requires compliance with technical accounting rules and significant judgment by management. Application of these accounting rules and assumptions made by management will determine whether we are considered the owner for accounting purposes or whether the lease is accounted for as an operating lease or as a capital lease.

The lease term for all types of leases begins on the date we become legally obligated for the rent payments or we take possession of the building or land, whichever is earlier.

Additionally, we review leases for which we are involved in construction to determine whether build-to-suit and sale-leaseback criteria are met. For those leases that trigger specific build-to-suit accounting, we are considered the accounting owner of the construction project and in such cases, developer’s construction costs are capitalized, including the value of costs incurred up to the date we execute our lease and costs incurred during the remainder of the construction period, as such costs are incurred. During the construction period an offsetting liability is recognized as a financing lease obligation for the construction costs incurred by the developer. The construction period begins when we execute our lease agreement with the property owner and continues until the space is substantially complete and ready for its intended use.

Once construction is complete, we are required to perform a sale-leaseback analysis to determine if we can remove the developer’s assets and associated financing obligations from the balance sheet. If, in such cases, we maintain any form of “continuing involvement” in the property, it would preclude us from derecognizing the asset and associated financing obligations following the completion of construction. In those cases, we will continue to account for the asset as if we are the legal owner, and the financing obligation similar to other debt, until the lease expires or is modified to remove the continuing involvement that prohibits derecognition. If there is no “continuing involvement” and de-recognition is permitted, we would be required to account for the lease as either operating or capital.

Rent expense for operating leases that contain scheduled rent increases is recognized on a straight line basis over the term of the respective lease. Favorable lease assets and unfavorable lease liabilities were recorded in connection with the acquisition of the company by Advent and other stockholders in 2011. We amortize favorable and unfavorable leases on a straight line basis over the remaining term of the leases. Upon early termination of a lease, the write off of the favorable or unfavorable lease carrying value associated with the lease is recognized as a loss or gain in the consolidated statements of operations and comprehensive income.

Certain leases contain rent escalation clauses based on escalation terms. The excess of cumulative rent expense over cumulative rent payments made on leases with fixed escalation terms is recognized as deferred rent liability in the accompanying balance sheets. Contingent rentals are generally based on sales levels in excess of stipulated amounts, and thus are not considered minimum lease payments at lease inception. We recognize contingent rent expense when it is deemed probable.

If the lease is classified as a capital lease, we record the present value of the minimum lease payments and a related capital lease obligation on our consolidated balance sheet. The asset is then amortized over the lesser of the economic life of the asset or the lease term. Rent payments for these properties are not recorded as rent expense, but rather are recognized as a reduction of the capital lease obligation and as interest expense.

 

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Stock-Based Compensation

We record the stock-based awards on the fair value of the shares at the date of grant, net of estimated forfeitures, less the amount that the employee is required to pay. In order to calculate our stock options’ fair values and the associated compensation costs for share-based awards, we utilize the Black-Scholes-Merton option pricing model, and we have developed estimates of various inputs including expected term, expected volatility and risk-free interest rate. These assumptions generally require significant judgment. The forfeiture rate is based on historical rates and reduces the compensation expense recognized. The expected term for options granted is derived using the “simplified” method, in accordance with SEC guidance. Expected volatility is estimated using publicly-traded peer companies in our market category. Volatility is calculated with reference to the historical daily closing equity prices of our peer companies, prior to the grant date, over a period equal to the expected term. We calculate the risk-free interest rate using the implied yield for a U.S. Treasury security with constant maturity and a remaining term equal to the expected term of our employee stock options. We do not anticipate paying any cash dividends for the foreseeable future and therefore use an expected dividend yield of zero for option valuation purposes.

The following table summarizes the assumptions relating to our stock options for the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014.

 

    

Fiscal Year Ended

    

2012

  

2013

  

2014

Risk-free interest rates

   0.93% to 1.14%    1.05% to 1.12%    1.72% to 1.98%

Expected term

   5.2 to 6.0 years    6.11 years    5.75 to 6.49 years

Expected dividend yield

   0%    0%    0%

Expected volatility

   36.28% to 37.67%    34.70% to 36.09%    32.00% to 34.90%

If in the future we determine that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected life, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase in stock-based compensation expense determined at the date of grant. Stock-based compensation expense affects our general and administrative expenses.

Prior to our IPO, it was necessary to estimate the fair value of the common stock underlying our equity awards when computing fair value calculations under the Black-Scholes-Merton option pricing model. The fair value of our common stock was assessed on each grant date by our board of directors. Given the absence of an active market for our common stock, our board of directors estimated our common stock’s fair value based on an analysis of a number of objective and subjective factors that they believed that market participants would consider in valuing it, including the following:

 

    financial metrics, including, but not limited to, our results of operations;

 

    the valuation of our common stock by an unrelated third-party valuation firm for all stock options awarded in fiscal 2014;

 

    the hiring of key personnel;

 

    the fact that the option grants involved illiquid securities in a private company;

 

    the risks inherent in the development and expansion of our food and services; and

 

    the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given prevailing market conditions.

 

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Before our IPO, we historically granted stock options with exercise prices not less than the fair value of our common stock underlying such stock options, as determined on the date of grant by our board of directors, with input from our management and from an independent third-party valuation expert for stock options awarded in fiscal 2014 only.

We granted 10,090, 400 and 3,217 stock options to employees, officers and board members during the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014, respectively. Stock option holders forfeited 0, 75 and 1,136.5 stock options during the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014, respectively. Stock-based compensation expense of approximately $1.6 million, $0.8 million and $1.4 million for the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014, respectively, is included in general and administrative expenses in the consolidated statements of operations and comprehensive income.

Fair Value Measurements

Fair value is the price the company would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For those assets and liabilities recorded or disclosed at fair value, we determine fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets or liabilities, we determine fair value based upon the quoted market price of similar assets or liabilities or the present value of expected future cash flows considering the risks involved, including counterparty performance risk, if appropriate, and using discount rates appropriate for the duration. The fair values are assigned a level within the fair value hierarchy depending on the source of the inputs into the calculation.

 

Level 1

Inputs based upon quoted prices in active markets for identical assets or liabilities.

Level 2

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3

Inputs that are unobservable for the asset or liability.

Derivative Instruments and Hedging Activities

We use interest-rate-related derivative instruments to manage our exposure related to changes in interest rates on our variable-rate debt instruments. We do not enter into derivative instruments for any purpose other than cash flow hedging. For all hedging relationships, we formally document the hedging relationship and risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. We also formally assess, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of the hedged transactions.

We recognize all derivative instruments as either assets or liabilities in the consolidated balance sheets at their fair values. The fair value of interest rate swaps is determined using an income approach using the following significant inputs: the term of the swaps, the notional amount of the swaps, and the rate on the fixed leg of the swaps.

For derivative instruments designated in a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

 

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We discontinue hedge accounting prospectively when we determine that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge.

In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we continue to carry the derivative at fair value on the consolidated balance sheets and recognize any subsequent changes in its fair value in earnings.

Quantitative and Qualitative Disclosure about Market Risk

Inflation Risk

The primary inflationary factors affecting our operations are food and supplies, labor costs, energy costs and materials used in the construction of new company-operated restaurants. Increases in the minimum wage directly affect our labor costs and the PPACA will increase our health insurance costs beginning in fiscal 2015. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increase in the costs of labor and material which results in higher rent expense on new restaurants.

Interest Rate Risk

Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. We are exposed to market risk from changes in interest rates on our debt, which bears interest at variable rates. As of December 28, 2014, we had outstanding borrowings of $228.2 million under our credit facility. As of December 28, 2014, $112.5 million of our outstanding borrowings under the credit facility was covered by interest rate swaps that effectively fix the interest rate on those borrowings for certain periods of time. A 1.00% increase in the effective interest rate applied to these borrowings would result in a pre-tax interest expense increase of $1.2 million on an annualized basis.

Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. Our credit facility debt has floating interest rates. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for our floating rate debt. Our floating rate debt requires payments based on a variable interest rate index such as LIBOR. Therefore, increases in interest rates may reduce our net income by increasing the cost of our debt. However, we seek to mitigate our floating interest rate risk on our credit facility long-term debt by entering into fixed pay interest rate derivatives on a portion of the credit facility long-term debt as discussed above under “—Debt and Other Obligations—Hedging Arrangements.”

Commodity Market Risk

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing, promotional mix, or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase food and supplies costs as a percentage of company restaurant revenues and customers may react negatively to increases in our menu prices which could adversely impact customer traffic and revenues.

 

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Credit Risk

Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows.

Certain financial instruments potentially subject the company to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. We place our cash and cash equivalents with high-credit, quality financial institutions. The balances in these accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

Concentration of credit risk with respect to receivables is primarily limited to franchisees, which are primarily located in the Southeastern United States. Royalty revenues from three franchisees accounted for approximately 46%, 45% and 45% of our total franchise royalty revenues for the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014, respectively. Royalty and franchise fee accounts receivable from three franchisees accounted for approximately 44%, 44% and 44% of our gross royalty and franchise fee accounts receivable as of December 30, 2012, December 29, 2013 and December 28, 2014, respectively. We continually evaluate and monitor the credit history of our franchisees and believe we have an adequate allowance for bad debts.

 

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BUSINESS

Company Overview

It’s Bo Time!

Bojangles’ is a highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from our Southern recipes. Over the last 38 years, we believe Bojangles’ has become an iconic brand with a cult-like following due to our famous, made-from-scratch biscuits baked every 20 minutes, our fresh, never-frozen bone-in fried chicken, our unique fixin’s and our Legendary Iced Tea. We believe we offer fast-casual quality food combined with quick-service speed, convenience and value. While we serve our full menu of craveable food across all dayparts, we are especially known by customers for our breakfast offerings and generate, on average, over $650,000 annually per company-operated restaurant before 11:00 a.m. In fiscal 2014, our 254 company-operated and 368 franchised restaurants, primarily located in the Southeastern United States, generated over $1 billion in system-wide sales, representing $406.8 million in company restaurant revenues and $628.6 million in franchise sales which contributed $23.7 million in franchise royalty and other franchise revenues in fiscal 2014. Over this same period, our restaurants generated a system-wide AUV of $1.8 million, which we believe is among the highest in the QSR and fast-casual segments. Our mission is to win the hearts of our customers by delivering quality and service all day, every day, and we believe our passionate team members and culture are fundamental to our success. The excitement for our brand and enthusiasm of our customers can be best summarized by our famous tagline…“It’s Bo Time!”

Since our founding in Charlotte, North Carolina in 1977, our core menu centered on “chicken ’n biscuits” has remained largely unchanged. We believe our variety of fresh, flavorful and Southern-inspired items appeals to a broad customer demographic across our five dayparts: breakfast, lunch, snack, dinner and after dinner. Bojangles’ is known for its breakfast menu, which is served all day, every day, and includes our top selling Cajun Filet Biscuit. We also offer hand-breaded, bone-in chicken marinated for at least 12 hours, Chicken Supremes, Homestyle Chicken Tenders, sandwiches and wraps, as well as unique fixin’s including our Seasoned Fries, Bo-Tato Rounds, Cajun Pintos and Dirty Rice. Our Bo-Smart menu features items such as salads, grilled chicken sandwiches, roasted chicken bites and fat-free green beans. In addition to our individual menu items, we offer combos and family meals that appeal to large parties, as well as our Big Bo Box, which is perfect for tailgating events. Our food is complemented by our Legendary Iced Tea that is steeped the old-fashioned way, providing a rich flavor that our customers crave. Our high-quality, handcrafted food also represents a great value with an average check of only $6.68 for company-operated restaurants in fiscal 2014. We believe our distinct menu with fresh, made-from-scratch offerings combined with a compelling average check creates an attractive value proposition for our customers.

Our craveable menu, value proposition, multiple dayparts and culture have helped us to deliver strong and consistent financial and operating performance, as illustrated by the following:

 

    Delivered 19 consecutive quarters of system-wide comparable restaurant sales growth through our fiscal quarter ended December 28, 2014, including 7.0% for the fiscal quarter ended December 28, 2014;

 

    Grew our system-wide and company-operated restaurant count at a compounded annual growth rate, or CAGR, of 7.0% and 9.0%, respectively, from fiscal 2011 to fiscal 2014;

 

    Expanded our total revenue from $299.9 million in fiscal 2011 to $430.5 million in fiscal 2014, representing a CAGR of 12.8%;

 

    Grew net income from $4.6 million in fiscal 2011 to $26.1 million in fiscal 2014; and

 

    Increased Adjusted EBITDA from $45.4 million in fiscal 2011 to $68.9 million in fiscal 2014, representing a CAGR of 14.9%.

 

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of Adjusted EBITDA and a reconciliation of the differences between Adjusted EBITDA and net income.

 

LOGO

 

LOGO

 

LOGO

Our Industry

We operate within the LSR segment of the U.S. restaurant industry, which includes QSR and fast-casual restaurants. According to Technomic, 2013 sales for the total LSR category increased 3.6% from 2012 to $231 billion. We offer fast-casual quality food combined with quick-service speed, convenience and value across multiple dayparts. According to Technomic, sales for the total QSR segment grew 2.3% from 2012 to $197 billion in 2013, and are projected to grow to $235 billion by 2018, representing a CAGR of 3.6%. Total sales in the fast-casual segment grew 11.4% from 2012 to $35 billion in 2013, and are projected to grow to $54 billion by 2018, representing a CAGR of 9.3%. We believe our differentiated, high-quality menu, including our extensive breakfast offerings that deliver great value all day, every day, positions us to compete successfully against both QSR and fast-casual concepts, providing us with a large addressable market.

 

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We believe that we are well-positioned to benefit from a number of culinary and demographic trends in the United States:

 

    Growing Breakfast Daypart: According to The NPD CREST® foodservice market research, morning meal was the fastest growing daypart compared to the lunch, supper and p.m. snack dayparts for calendar year 2013 compared to calendar year 2012. The U.S. restaurant breakfast market is forecasted to grow from $27.4 billion in 2013 to $35.7 billion in 2018, representing a CAGR of 5.4%, according to Mintel. Several factors are driving growth in the breakfast daypart, including more extensive menu offerings and consumers’ desire for value, portability and convenience. Consumers’ breakfast eating habits tend to be more habitual than other meals because breakfast is part of many consumers’ morning routines.

 

    Increasing Chicken Category: In 2013, the chicken menu category for LSRs grew 4.0% from 2012, outpacing the broader LSR category, and is projected to grow by 3.5% in 2014, according to Technomic.

 

    Population Growth in Our Markets: Since 2000, population growth in our key markets has exceeded the U.S. national average. According to the U.S. Census Bureau, growth in the Georgia, North Carolina, South Carolina, Virginia and Tennessee populations from 2000 to 2013 was on average 18.8%, as compared to 12.0% population growth in the U.S. over that same period.

The “Bo Difference”

We believe the following strengths differentiate us and serve as the foundation for our continued growth.

Iconic Brand with Loyal, Cult-Like Following. Since opening our first restaurant in North Carolina in 1977, we believe we have become an iconic brand with a cult-like following by consistently delivering differentiated, craveable food. In North Carolina and South Carolina, we enjoy approximately 95% aided brand awareness and we have among the highest number of free-standing restaurants in the LSR category. We believe our “Bo Fanatics,” which is our term for our most loyal customers, visit us multiple times per week and promote our brand through word of mouth and engagement on social media. We support our brand through high profile sponsorships of sporting events and venues, such as the Bojangles’ Southern 500, as well as endorsements from celebrities who are fans of Bojangles’. We believe our iconic brand and cult-like following have driven our 19 consecutive quarters of system-wide comparable restaurant sales growth and support our ability to grow our restaurant base in existing and new markets.

High-Quality, Craveable Food. We are committed to maintaining the integrity of our traditional, Southern food. We believe our customers crave the unique flavor of our food and the variety of our menu, which includes our signature breakfast biscuits, bone-in fried chicken, Chicken Supremes, Homestyle Chicken Tenders, sandwiches and wraps, unique fixin’s, and our Bo-Smart menu. We use high-quality ingredients prepared the old-fashioned way and do not have microwaves in our restaurants. As an example of our commitment to quality, all of our specially trained biscuit makers follow 48 steps in preparing our made-from-scratch, buttermilk biscuits, which are baked fresh every 20 minutes. We prepare eggs, sausage and cured country ham on the griddle for our breakfast menu served all day. For our unique fixin’s, we prepare our famous Dirty Rice and Cajun Pintos on the stove-top, and our Seasoned Fries are made with our special blend of seasonings. Finally, we steep our Legendary Iced Tea to ensure a rich brewed flavor that our customers crave. This commitment to offering high-quality food with unique flavor that we believe customers cannot find at other restaurants has earned us deep customer loyalty and a high frequency of visits.

 

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Diversified Daypart Mix. We have a diversified daypart mix that supports AUVs that are among the highest in the QSR and fast-casual segments:

 

    Our Famous Breakfast: While many of our competitors do not offer breakfast, in fiscal 2014, we generated 38% of our company restaurant revenues before 11:00 a.m., or an average of over $650,000 annually per company-operated restaurant. Our strong breakfast results make us a leader in the fastest growing daypart in the industry. Furthermore, we believe breakfast has broad customer appeal and is the most habitual daypart, which drives repeat business and customer loyalty.

 

    Our Craveable Menu for Lunch, Snack, Dinner and After Dinner: In fiscal 2014, we generated 62% of our company restaurant revenues from 11:00 a.m. to closing, which is typically 11:00 p.m. We believe Bojangles’ menu, focused on high-quality, craveable items, is distinct in the LSR industry and provides an attractive value proposition for lunch, snack, dinner and after dinner. Our Big Bo Box, family and tailgate meals cater to group occasions and drive sales during these dayparts. Additionally, our customers can order our famous breakfast items all day, which we believe differentiates us from our peers and delivers great value at all hours.

Unique Value Proposition: Fast-Casual Quality Food with QSR Speed, Convenience and Value. Everything we do is driven by our intense focus on delivering a compelling value proposition to our customers. We believe that our concept combines elements of both fast-casual restaurants (quality and food preparation) and QSR (speed, convenience and value). Our value proposition is a key element of our long track record of delivering strong comparable restaurant sales and successful market expansion:

 

    High-Quality Ingredients: We cook our food using high-quality ingredients. For example, our menu features our famous biscuits, which are made from fresh buttermilk, and our bone-in fried chicken, which is fresh and never-frozen. Our menu also includes items such as our Country Ham Biscuit made from traditionally dry-cured country ham and our Sausage Biscuit made from high-quality sausage with a blend of seasonings prepared especially for Bojangles’. Our Legendary Iced Tea is steeped the old-fashioned way and is never made from concentrates or poured from bottles or cans.

 

    Traditional Food Preparation: We prepare our food the old-fashioned way, and never in a microwave. Our restaurant kitchens are specifically designed for our employees to prepare our food in a traditional manner; for example, our bone-in chicken is hand-breaded and is marinated for at least 12 hours. Many of our menu items are made-from-scratch and are cooked in the oven, on the griddle or on the stove-top.

 

    Compelling Speed and Convenience: We locate our restaurants in places that are easily accessible and convenient to customers’ homes, places of work and daily commutes. We also strive to deliver our food quickly to our customers, whether in our restaurants or through our drive-thru. We believe our customers appreciate our speed and convenience, as evidenced by 80% of our company restaurant revenues in fiscal 2014 generated via drive-thru and carry-out.

 

    Attractive Price Point: Our average check was $6.68 for company-operated restaurants in fiscal 2014. We believe this average check is lower than any fast-casual and most QSR restaurant concepts.

Compelling Hybrid System that Provides Capital Efficient Growth. Our hybrid system captures the earnings power of a company-operated model with strong economics and the capital efficiency of a franchised model. As of December 28, 2014, 41% of our restaurant base was company-operated and 59% was franchised.

 

   

Company-Operated: As of December 28, 2014, we had 254 company-operated restaurants, which has grown from 196 as of the end of fiscal 2011, representing a CAGR of 9.0%. In fiscal 2014, our

 

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company-operated restaurants generated $406.8 million in revenues, which increased from $281.9 million in fiscal 2011. This sales growth contributed to our restaurant contribution increase from $44.3 million in fiscal 2011 to $72.6 million in fiscal 2014, representing a CAGR of 17.9%. With approximately 41% of the restaurant base operated by the company, we are aligned with our franchisees and take a leadership role in executing brand and operational initiatives. Our company-operated restaurants have achieved strong performance, thereby illustrating to franchisees the potential of our brand and generating significant credibility within our franchise base.

 

    Franchised: As of December 28, 2014, our franchisees operated 368 restaurants, which has grown from 312 as of fiscal 2011, representing a CAGR of 5.7%. Royalties and franchise fees totaled $23.7 million in fiscal 2014, which increased from $18.0 million in fiscal 2011. We believe royalties and fees generated from our franchise base provide us with significant, predictable cash flow to invest in executing our strategies. Our approximately 90 franchise entities are important partners in our system-wide growth as they allow us to expand the Bojangles’ brand in new and existing markets in a capital efficient manner.

Highly Productive Restaurant Base with Strong Unit Economics. We believe our differentiated customer value proposition generates strong restaurant-level financials and attractive returns on investment. In fiscal 2014, our system-wide AUV was $1.8 million, which we believe is among the highest in the QSR and fast-casual segments. Our new company-operated restaurant model targets strong cash flows and compelling cash-on-cash returns. Unlike some other restaurant concepts, we primarily utilize build-to-suit developments and equipment financing leases for our new company-operated restaurants, which requires minimal upfront investment for construction and equipment costs. Our new company-operated restaurant model is based on a year one AUV of $1.5 million, restaurant-level cash flow of approximately $110,000 and average upfront cash equipment investment of approximately $85,000. Given our build-to-suit strategy that minimizes our upfront cash investment, our new company-operated restaurant model delivers, on average a less than one year payback on cash investment. On average, we have exceeded this target for our new company-operated restaurants over the past three fiscal years. We believe that our strong productivity, attractive restaurant-level financials and low cash investment provide a platform for continued profitable company growth and compelling returns on our new restaurants. See “—Construction” for more information.

Strong Management Team Driving Culture Based on People. We have a highly experienced management team with over 380 years of cumulative experience in the restaurant industry. Our president and chief executive officer Clifton Rutledge, who joined us in January 2014, brings 35 years of restaurant industry experience, most recently with Whataburger Restaurants LLC. Mr. Rutledge leads our management and field operating teams, who also bring deep experience to their relevant areas including operations, franchising, marketing, human resources, real estate, supply chain, finance and legal. Our leadership team is committed to instilling our strong culture, which is based on trust, servant leadership and total commitment in all that we do. Our values of hard work, teamwork, harmony, listening and respect underlie everything that we do, both in our interactions with each other and with customers. We view our restaurant-level employees as the true heroes of our business, working daily to deliver our high-quality food with a strong sense of pride in our brand. We believe our strong management team and commitment to a culture based on people and integrity are key drivers of our success as a differentiated restaurant concept and position us well for long-term growth.

Spreading the “Bo-Buzz”

We plan to pursue the following strategies to continue to grow our revenues and profits.

Continue to Open New Company-Operated and Franchised Restaurants. We believe we are in the early stages of our growth story. We have expanded our system-wide restaurant count from 508 restaurants as of the end of fiscal 2011 to 622 restaurants as of the end of fiscal 2014, representing a CAGR of 7.0%. In fiscal 2014, we opened 24 company-operated restaurants and 28 franchised restaurants, contributing to annual system-wide

 

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unit growth of 7.8%. In fiscal 2015, we expect to open 22 to 25 new company-operated restaurants and 28 to 32 new franchised restaurants. Over the long-term, we plan to continue growing the number of Bojangles’ system-wide restaurants by approximately 7% to 8% annually, while maintaining a similar proportion of company-operated and franchised units. Given the strength of our brand, existing restaurant base and new unit economics, we believe we can continue opening restaurants in our core North Carolina and South Carolina markets. Additionally, given the performance of our more than 200 company-operated and franchised restaurants in adjacent markets, we believe there is a significant opportunity to continue to grow in our existing footprint. Based on our experience and research conducted for us by Buxton, a customer analytics research firm, we believe the total restaurant potential in our current footprint of ten states is more than 1,400 locations, and across the United States we believe the total restaurant potential is more than 3,500 locations.

Drive Comparable Restaurant Sales. We have generated 19 consecutive quarters of system-wide comparable restaurant sales growth. We plan to continue delivering comparable restaurant sales growth through the following strategies:

 

    Attract New Customers Through Expanded Brand Awareness: We expect to attract new customers as Bojangles’ becomes more widely known due to new restaurant openings and marketing efforts focused on broadening the reach and appeal of our brand. We expect consumers will become more familiar with Bojangles’ as we continue to penetrate our markets, which we believe will benefit our existing restaurant base. Our marketing strategy centers on our “It’s Bo Time” campaign, which highlights the craveability and made-from-scratch quality of our food. We also utilize social media community engagement and public relations to increase the reach of our brand. Additionally, our system will benefit from increased contributions to our marketing and various co-op advertising funds as we continue to grow our restaurant base.

 

    Increase Existing Customer Frequency: We are striving to increase customer frequency by providing “Bo-Size Service,” a service experience and environment that “compliments” the quality of our food and models our culture. We expect to accomplish this by enhancing customer engagement, while also improving throughput, order execution and quality. Additionally, we have recently implemented a customer experience measurement system, which provides us with real-time feedback and customers’ insights to enhance our service experience. We believe that always striving for excellent customer service will create an experience and environment that will support increased existing customer visits.

 

    Continue to Grow Dayparts: Over the past three years, we generated positive company-operated comparable restaurant sales growth across each of our dayparts. We believe we have an opportunity to complement our strong and growing breakfast daypart with our lunch, snack, dinner and after dinner dayparts. We expect to drive growth across these dayparts through optimized labor and management allocation, enhanced menu offerings, innovative merchandising and marketing campaigns, such as our Big Bo Box packaging and Tailgate Everything campaign, which have successfully driven growth in our post-breakfast dayparts. We plan to continue introducing and marketing limited time offers to increase occasions across our dayparts as well as to educate customers on our lunch and dinner offerings.

Continue to Enhance Profitability. We focus on expanding our profitability while also investing in personnel and infrastructure to support our future growth. We will seek to further enhance margins over the long-term by maintaining fiscal discipline and leveraging fixed costs. We constantly focus on restaurant-level operations, including cost controls, while ensuring that we do not sacrifice the quality and service for which we are known. Additionally, as our restaurant base grows, we believe we will be able to leverage support costs as general and administrative expenses grow at a slower rate than our revenues.

 

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Our Food

Our Menu

Our core menu centered on “chicken ’n biscuits” has remained largely unchanged since 1977. We believe we offer craveable, Southern-inspired food with unique flavor that customers cannot find at other restaurants. We prepare our food using high-quality ingredients with many of our items made-from-scratch, and we do not permit microwave ovens in any of our restaurants, ever. Our menu includes our famous, made-from-scratch, buttermilk biscuits baked fresh every 20 minutes; our fresh, never-frozen bone-in fried chicken; our unique fixin’s; our Bo-Smart menu featuring items such as salads, grilled chicken sandwiches, roasted chicken bites and fat-free green beans; our freshly baked and delicious sweets menu; and our Legendary Iced Tea. Our goal is that every menu item at Bojangles’ has a unique or special flavor that differentiates our restaurants and our brand.

Our food is offered a la carte and in combos which may be favorably priced compared to individual orders. A Bojangles’ customer may order a single piece of chicken or one of our chicken dinners with a choice of our unique fixin’s, and always accompanied by a made-from-scratch, fresh buttermilk biscuit. Our chicken, fixin’s, biscuits and Legendary Iced Tea may also be ordered in boxes or family meals, and larger combinations may be offered as tailgate specials or may be packaged in our iconic Big Bo Box. The addition of boxes, family meals and tailgate specials to our menu has helped increase our dinner and carry-out business, resulting in a higher average check and comparable restaurant sales growth.

Breakfast

We are especially known for our breakfast offering, which is served all day, every day. Each morning, our specially trained and certified biscuit makers begin preparing our made-from-scratch biscuits, which are made using fresh buttermilk and flour. Biscuit sandwiches are typically made-to-order with over 100 available combinations of chicken, ham, sausage, cheese, eggs, gravy and other fillings. Our Cajun Filet Biscuit is our most popular biscuit sandwich, featuring our marinated chicken filet and special Cajun-inspired seasonings. For our ham biscuits, we use dry-cured ham that is rubbed with salt, sugar and other ingredients and then cured for 90 days and our steak biscuits are made with breaded chopped steak. We also offer limited-time-only biscuit sandwiches utilizing the same made-from-scratch biscuit platform, including our smoked sausage biscuit, our grilled pork chop biscuit and our Cheddar-Bo, made with melted cheddar cheese. To complement our biscuits, many customers choose our Bo-Tato Rounds, which are mini seasoned hash browns fried to a golden brown, and our Bojo coffee.

Below are just a few of our breakfast biscuits served all day, every day:

 

Cajun Filet    Country Ham    Sausage    Steak    Gravy

LOGO

   LOGO    LOGO    LOGO    LOGO

Lunch, Snack, Dinner and After Dinner

Our menu centers on our fresh, never-frozen, bone-in chicken and a variety of unique fixin’s. Our bone-in chicken is marinated for at least 12 hours, and then hand-dipped and breaded before cooking. In addition to our bone-in chicken, we offer our Chicken Supremes and our Homestyle Chicken Tenders, which have a milder flavor profile, both of which are made with boneless whole breast chicken select tenderloin.

 

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To accompany our chicken, we offer our famous fixin’s including our Dirty Rice and Cajun Pintos which are cooked on the stove-top. For our Dirty Rice, we use sausage made to our specification using our exclusive blend of seasonings, and our Cajun Pintos are prepared using our exclusive ranchero style seasonings. Our Seasoned Fries are skin-on, entrée fries which are sprinkled with our special seasoning blend. In addition, we offer Southern style mac ‘n cheese made from two cheeses; fat-free green beans; cole slaw; and mashed potatoes with Cajun Gravy.

 

2 Piece Dinner Fixin’s Chicken Supremes

with Seasoned Fries

20 Piece Tailgate

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LOGO   LOGO   LOGO  

Our menu also features salads, sandwiches and wraps as well as our whole meat Roasted Chicken Bites. For our sandwiches and wraps, our customers can order grilled chicken or a Cajun Filet on a toasted bun or whole wheat wrap. Our sandwiches and wraps are served with crisp lettuce and fresh tomato, with the option of adding hickory smoked bacon, sharp American cheese and sauces such as our Bo’s special sauce. We offer three salads, made fresh daily and featuring a mix of crisp romaine and iceberg lettuce, red cabbage, grated carrots, sliced cucumber, grape tomatoes and Monterey cheddar cheese. Our customers can also add our seasoned, grilled and boneless whole breast tenderloin filets to our salads for a delicious and satisfying meal.

 

Grilled Chicken

Sandwich

Cajun Filet in a

Wheat Wrap

Grilled Chicken

Salad

Roasted Chicken

Bites

LOGO

LOGO   LOGO   LOGO  

In addition, we serve a selection of sweets including our customers’ favorite Bo-Berry Biscuit, which is a made-from-scratch sweet biscuit, freshly baked and topped with delicious icing. We also offer our cinnamon pecan twists and our signature sweet potato pie.

 

Bo-Berry Biscuit

Cinnamon Pecan

Twist

Sweet Potato Pie

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LOGO LOGO

Overall, we believe our differentiated menu of high-quality, hand-crafted food represents a great value with an average check of only $6.68 for company-operated restaurants in fiscal 2014.

 

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Properties

As of December 28, 2014, we had 254 domestic company-operated restaurants and 365 domestic franchised restaurants located in ten states, including North Carolina, South Carolina, Georgia, Virginia, Tennessee, Alabama, Florida, Maryland, Kentucky and Pennsylvania, and the District of Columbia. In addition, we currently have three international franchised restaurants in Roatan Island, Honduras.

Our Domestic Footprint

 

LOGO

 

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As of December 28, 2014, company-operated, franchised and total restaurants by jurisdiction are:

 

State

  

Company-
Operated

    

Franchised

    

Total

 

North Carolina

     141         147         288   

South Carolina

     61         60         121   

Georgia

     15         50         65   

Virginia

     —          54         54   

Tennessee

     15         28         43   

Alabama

     17         12         29   

Florida

     —          11         11   

Maryland

     5         —          5   

Kentucky

     —          1         1   

Pennsylvania

     —          1         1   

Washington DC

     —          1         1   
  

 

 

    

 

 

    

 

 

 

Domestic Total:

  254      365      619   
  

 

 

    

 

 

    

 

 

 

Honduras

  —       3      3   
  

 

 

    

 

 

    

 

 

 

International Total:

  —       3      3   
  

 

 

    

 

 

    

 

 

 

Total:

  254      368      622   
  

 

 

    

 

 

    

 

 

 

We lease the land and building for all company-operated restaurants except one. Our leases typically have terms of 15 years, with three renewal terms of five years each. Restaurant leases provide for a specified annual rent, and some leases call for additional or contingent rent based on revenues above specified levels. Our leases are “triple net leases” that require us to pay real estate taxes, insurance and maintenance costs. In addition, we lease our executive offices, consisting of approximately 44,000 square feet in Charlotte, North Carolina, for a term expiring in 2017. We believe our executive offices are suitable for near-term expansion plans and we have added, and will continue to add, additional square footage on an as-needed basis.

Restaurant Design

Our typical full-size restaurant is a modern, free-standing building which is approximately 3,800 square feet in size and can seat approximately 78 customers. Our restaurant locations are typically free-standing urban or suburban locations, and are located on approximately one acre of land and include a drive-thru window and approximately 45 parking spaces. Our restaurants are characterized by a unique exterior and interior design, color schemes, and layout, including specially designed decor and furnishings. The exterior of our current restaurant design is characterized by orange mansard roofs, tall brick towers and stucco arches. Restaurant interiors incorporate modern designs and rich colors in an effort to provide a clean and inviting environment and fun, family-friendly atmosphere.

In addition to our standard restaurants, we have 42 Bojangles’ Express locations as of December 28, 2014, which are restaurants located in or attached to another business or other structures such as shopping malls, food courts, travel plazas, grocery stores, college campuses, airports, military bases or convention centers or sports arenas, that may be as small as 800 square feet and as large as 3,800 square feet. Bojangles’ Express locations may be part of a larger structure or complex, and also includes “drive-thru only” restaurants.

Beginning in 2008, we began a revised renovation and reimaging effort to update the company-operated restaurants. From 2008 through the fiscal year ended December 28, 2014, we significantly remodeled approximately 124 company-operated units at an average cost of approximately $150,000 to create a more appealing design. As of December 28, 2014, approximately 90% of all company-operated restaurants have been remodeled or newly constructed since the beginning of fiscal 2008. The company’s new restaurants and remodels build brand loyalty with existing customers, extend the appeal of the brand to new customers, typically increase traffic and sales, and attract new franchisees to the business.

 

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Site Selection and Expansion

New Restaurant Development

We believe our restaurant model is designed to generate compelling cash flow, restaurant-level financial results and returns on invested capital, which we believe provide us with an attractive foundation for expansion. In fiscal 2013, we opened 18 new company-operated and 28 new franchised restaurants, and in fiscal 2014, we opened 24 new company-operated and 28 new franchised restaurants, contributing to annual system-wide unit growth of 7.8% in fiscal 2014. In fiscal 2015, we expect to open 22 to 25 new company-operated restaurants and 28 to 32 franchised restaurants. Over the long term, we plan to grow the number of Bojangles’ system-wide restaurants by approximately 7% to 8% annually.

Strategic Growth Plan

Our strategic plan targets opening both company-operated and franchised restaurant units, increasing comparable restaurant sales and growing AUVs. This integrated strategy seeks to expand our market share by further penetrating existing markets and growing into primarily contiguous new markets, leveraging our brand awareness. Our expansion into new markets typically follows a pattern of increasing AUVs as more consumers “discover” Bojangles’ and become loyal to our brand and food. Increasing restaurant penetration and leveraging our broader marketing programs drive the “conversion” of customers in new markets. As we penetrate existing markets and enhance our market share, more marketing dollars are available and we are able to increase our marketing spending through the use of various media types, benefiting both new and existing restaurants. When a marketing region reaches a specified level of penetration, the region is elevated to a new marketing threshold which allows for higher impact advertising and drives traffic across the region. We experience significantly higher AUVs in Designated Market Areas, or DMAs, where our restaurant density is high enough to support elevated marketing spending. Our growth strategy is to continue opening restaurants in DMAs where we have higher unit penetration. In addition, we plan to open restaurants in DMAs where we have lower unit penetration so that we can achieve the unit density required to benefit from pooled marketing dollars and increased customer awareness.

Site Selection Process

We consider the location of a restaurant to be a critical variable in its long-term success and as such, we devote significant effort to the investigation and evaluation of potential restaurant locations. Our in-house development team has significant real estate experience in the restaurant industry. We adhere to a disciplined restaurant site selection plan, which contains criteria based on a variety of factors, including population, demographics, access to “breakfast traffic,” and unit visibility. This detailed site selection plan allows us to target new restaurant locations primarily on the “going-to-work” side of the street to support breakfast sales, and near traffic light intersections on streets travelled by approximately 20,000 cars or more per day. In addition, we use a third-party data analytics tool to assist in the site selection, and acquire information from data services to support our analysis. New company-operated and franchised restaurants are reviewed and approved by our real estate committee, which includes our senior leadership team.

Construction

On average, it takes approximately one year from identification of a specific site to the opening of a new restaurant, which includes approximately four months of due diligence review of the site and three to four months of construction time. Our new restaurants are typically ground-up prototypes but may include conversions. We estimate the land, building and equipment of a new company-operated restaurant requires an average investment of approximately $2.1 million, including approximately $0.6 million for land, approximately $1.2 million for the building construction, which includes the building and site and soft costs, and approximately $0.3 million for equipment. We primarily utilize build-to-suit developments and equipment financing leases for

 

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our new company-operated restaurants, requiring minimal upfront cash investment. Each new restaurant typically requires an upfront cash equipment investment of approximately $85,000, and we target a year one cash-on-cash return of approximately 129%. This model delivers a fully capitalized return of approximately 18%. While we currently utilize a build-to-suit development strategy, our new restaurant strategy may change over time. See “Basis of Presentation.”

Restaurant Management and Operations

Service Philosophy

We are extremely focused on customer service. In fiscal 2014, we introduced Bo-Size Service, which aims to deliver a Star Service experience and environment that “compliments” the quality of our food and models our culture. Our Star Service culture includes key points of difference—“speak to me,” “act like you care,” “hurry,” “get it right” and “bring me back”—which are defined as the simple, but specific, opportunities for us to elevate the level of our service and customer satisfaction. We believe the key points of difference provide us a competitive advantage and a unique opportunity to exceed our customers’ expectations. Understanding these points of difference, developing a culture of genuine customer-service values, and implementing them properly is an essential element of new team member training.

Quality and Food Safety

We and our franchisees are focused on maintaining high food quality and food safety in each restaurant through the careful training and supervision of personnel and by following rigorous quality and cleanliness standards that have been established. Standards for food preparation and cleaning procedures are defined, monitored, and maintained by our Quality Assurance Department. In company-operated restaurants, we utilize third-party inspectors to regularly monitor restaurant performance through unannounced food safety audits. Restaurant management incentive plans provide strong motivation to meet standards. As part of our organized food quality assurance program, we have a process in place to internally check production runs of our products to ensure they meet the exact specifications given to suppliers.

Managers and Team Members

Each restaurant operates with five distinct dayparts (breakfast, lunch, snack, dinner and after dinner) and a staff of approximately 30 to 35 team members led by the unit director, assistant unit directors, and shift managers. Quality is constantly monitored by area directors at company-operated restaurants and by franchise business consultants at franchised restaurants.

Before, during and after the typical company restaurant’s 5:30 a.m. to 11:00 p.m. hours, our team members focus intensely on daily operational execution. Our hard working and dedicated team members begin food preparation at 4:30 a.m. and continue through 11:00 p.m. In the typical company restaurant, the dining room closes at 10:00 p.m. while the drive-thru remains open until 11:00 p.m. and nightly cleaning begins at 10:00 p.m. Bojangles’ has a strict pre-closing policy that keeps each member of the team focused on customer service. Each team member has responsibility for cleaning throughout the day and the entire unit is thoroughly cleaned each night. The restaurant level management team utilizes proven operational systems such as The Manager’s Walk to effectively manage each shift.

We are diligent in our team member selection processes, only hiring approximately 5% of those who began the application process in fiscal 2014. We aim to staff our restaurants with team members that are friendly, customer-focused, driven to provide high-quality food, and who are also a good fit for our culture. As of December 28, 2014, our team member base was comprised of approximately 8,600 restaurant employees and approximately 200 support center personnel. Our focus on selecting the right people has enabled us to reduce crew turnover from 209% in fiscal 2007 to 123% in fiscal 2014. Additionally, we have reduced restaurant management turnover from 45% in fiscal 2007 to 30% in fiscal 2014.

 

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The heart of our business is our people and we encourage them to possess a strong sense of pride in their jobs and to excel by participating in annual competitions that test and reward high performing restaurants and team members. Our annual ShowBo competition focuses on rewarding and recognizing the best team and involves unannounced visits to evaluate each restaurant on service, quality and cleanliness.

Our Master Biscuit Makers

Our reputation is built on our signature “chicken ’n biscuits.” Our biscuit makers are at the heart of our business, baking made-from-scratch biscuits all day, every day in our restaurants system-wide. Our biscuit makers strictly follow our 48-step biscuit recipe, which includes using fresh buttermilk, hand rolling and cutting the dough and baking biscuits fresh in the oven every 20 minutes to ensure a consistent offering for every customer. We maintain high standards for our biscuit makers and require them to be re-certified every year to make sure we are providing the best possible biscuits for our customers.

To highlight our strong sense of pride in our biscuit makers and how vital they are to our business, we encourage them to excel in annual competitions that test and reward high performers. Our annual “Master Biscuit Maker Challenge” brings together team members from across our entire system of restaurants to compete for the honor of being named one of our Champion Master Biscuit Makers. Each participant is judged on their ability to adhere to our 48-step biscuit recipe, taking into account the size, shape and color of the biscuits and time it takes to complete the process without sacrificing quality. The finalists for the competition have earned the highest scores out of hundreds of biscuit makers at the individual restaurant, area and regional levels and are invited to the final round at our headquarters in Charlotte, North Carolina. The competition serves as a reminder to all team members who the real heroes of our company are and illustrates the pride our team members have in delivering our “biscuit magic.”

Training

We ensure that new unit directors in company-operated restaurants possess the experience and passion necessary to deliver strong performance, and we support them with five to seven weeks of training in the Bojangles’ training program, including one week at our training center located in Charlotte, North Carolina and known as Bojangles’ University. Many of our new restaurants draw experienced team members from nearby locations, in addition to utilizing an “all-star” team provided by the company to support the workforce from the opening day through the early weeks of operation. Leveraging our base of existing team members ensures that new restaurants operate seamlessly from day one and cultivates Bojangles’ workplace culture, key drivers of our continued success and that of our franchisees’.

We allow our and our franchisees’ principal operating officer or partner, managers and other restaurant team members to attend optional training programs and seminars that we offer from time to time. We currently provide training in our certified company-operated restaurants and Bojangles’ University. The initial training program is approximately five to seven weeks in duration consisting of classroom instruction and on-the-job training, and is conducted approximately 10 times per year. We bear the cost of maintaining Bojangles’ University, including the overhead costs of training, staff salaries, materials and training tools. We require each trainee to complete the training program to our satisfaction in order to be certified as a Bojangles’ company-operated restaurant manager.

Franchise Program

Overview

We use a franchising strategy to increase new restaurant growth, leveraging the ownership of entrepreneurs with specific local market expertise and requiring a relatively minimal capital commitment by us. As of December 28, 2014, we had approximately 90 franchise entities that operated 368 restaurants. Our

 

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franchisees range in size from single-restaurant operators to the largest franchisee, which operated 60 restaurants as of December 28, 2014. Our existing franchise base consists of many successful, longstanding restaurant operators, 49 of which operate multiple restaurants. As of December 28, 2014, our franchisees operated restaurants in 32 DMAs primarily in ten states. Of our franchised restaurants, 350 were owned and operated by franchisees that have been with us for more than five years, some of which have developed franchised restaurants as part of multi- unit, multi-year development agreements. In addition, many of our existing franchisees continue to develop restaurants without development agreements. We also support our growth by attracting highly qualified and experienced new franchisees. We will continue to recruit new franchisees who we believe are capable of successful multi-unit development. We believe the revenues generated from our franchise base, including royalty revenues, have historically served as an important source of stable and recurring cash flows to us and, as such, we plan to expand our base of franchised restaurants.

Description of Franchise and Development Agreements

Our typical agreements for a full-size traditional unit grant a franchisee the right to operate for an initial term of 20 years with additional renewal terms that total 20 years subject to various conditions that include upgrades to the restaurant facility and brand image. Our typical express franchise agreements grant the right to operate for a period of 10 years without renewal so that we can assess at the time of expiration if the market is better served by a full-size replacement. All franchise agreements grant licenses to use the Bojangles’ trademarks, trade secrets and proprietary methods, recipes and procedures. Our obligations under the franchise agreement include an initial training program, ongoing advice and consultation in connection with operations and management of the restaurants, the development of advertising materials, as well as advice and assistance in local marketing and inspections of a franchisee’s restaurants.

The initial franchise fee for each full-size traditional unit is $25,000, and $15,000 for each express unit. Franchisees are required to pay as royalties 4% of franchise unit sales, except for certain grandfathered units that may pay a lesser percentage and international locations that pay 5%. Franchisees, except for certain grandfathered units that may pay a lesser amount and international locations that are not required to contribute, are also required to pay 1% of franchise unit sales to the Bojangles’ marketing development fund, to which we also contribute, which creates a pooled fund for the creation of marketing and advertising materials, marketing and media research, marketing promotions and a portion of our marketing employees’ salaries and expenses. Franchisees are required to sign an advertising co-operative agreement, or the co-op agreement, in connection with their franchise agreements that provides for pooled advertising funds when franchisees share a market with other franchises or us. Typically, the co-op agreement requires that when an advertising co-operative is activated, franchisees and the company units within the co-operative market must contribute up to 2% of unit sales to the co-operative. Finally, the franchise agreements require that franchisees spend from one to three percent of franchise unit sales on local marketing, depending upon whether an advertising co-operative has been activated in a franchisee’s market.

We often enter into development agreements with new and existing franchisees that provide for planned assigned areas of unit development on a multi-unit, multi-year basis by a franchisee. A development agreement typically provides for the opening of one restaurant per year over a five-year term, but we may grant rights to develop larger numbers of units more quickly, or may shorten the time allowed for development. Moreover, many franchisees develop on a case-by-case submittal basis rather than by formal development agreements. The development fee paid by a franchisee under a development agreement is $5,000 per each assigned unit, and this unit fee is deductible against the franchise fee for each unit developed under the terms of the development agreement. Typically, more than one franchisee and, at times, we may develop in a market to increase the rate of penetration in that market in order to increase consumer awareness and, as a result, the availability of pooled advertising funds in that market.

Franchise Owner Support

We value our franchisee relationships and provide strong support for their operations and growth initiatives to produce sustainable, long-term success. Our restaurant development team provides consultation

 

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regarding site selection and approval processes and our franchise operating team provides consultation in all aspects of operations and preopening preparation. We also have all-star teams to provide assistance for the first two units a franchisee opens. Additionally, we conduct a mandatory management training program, requiring that for at least the first restaurant, a minimum of five of each franchisee’s operating managers successfully complete a five to seven week training program prior to opening. The program consists of hands-on training in the operation and management of the restaurant and is conducted by a training manager who has been certified by us. Instructional materials for the initial training include our operations manual, wall charts, job aids, product build charts, ServSafe (food safety) book, videos and other materials we may create from time to time. For the second and subsequent restaurants, franchisees have the option of training their own managers or using our training program without payment of additional fees.

We also offer support well beyond restaurant opening. We provide ongoing leadership and assistance to the franchisee network through our franchise business consultants, or FBCs, who maintain an open dialogue with franchisees on brand initiatives through webinars and quarterly market meetings, and help franchisees to evaluate sales growth and costs initiatives. By continuing to support our franchise network and monitoring local performance, our FBCs help protect our brand. Additionally, we communicate with franchisees on at least a monthly basis, and senior company representatives meet quarterly with our franchise advisory board to discuss system-wide initiatives, share ideas and resolve issues. In addition, we provide local marketing consultation and support, and prepare marketing materials for use by all franchisees in various media including television and radio through the Bojangles’ marketing development fund.

Marketing and Advertising

We use multiple marketing channels, including television, radio, print advertising, billboard advertising, internet and social media and loyalty programs to broadly drive brand awareness and traffic to our restaurants. We advertise on local network and cable television in our primary markets, and utilize heavier cable schedules for some of our less developed markets. In fiscal 2014, we and our franchisees were active in television advertising, including cable placement, in approximately 25 DMAs of the 32 DMAs in which our system has restaurants, and we expect to add television advertising in additional DMAs in the future. In fiscal 2014, we and our franchisees utilized radio advertising in approximately 21 radio metro areas. We also sponsor arenas, race tracks, broadcast and sporting events including the Bojangles’ Coliseum in Charlotte, North Carolina, the Carolina Panthers NFL team, the Charlotte Hornets NBA team, the Fox Sports South-Atlanta Braves Television Network, the Atlantic Coast Conference basketball and football and other events and venues. In addition we are active in various charity and goodwill events and activities, including in-restaurant fundraising, auctions and events for the Muscular Dystrophy Association, Toys for Tots and St. Jude’s Children’s Hospital. We engage in one on one conversations with our consumers using social media platforms such as Facebook, YouTube, Instagram and Twitter. We also use social media as a research and customer service tool, and apply insight we gain to future marketing efforts.

We promote our restaurants and food through our “It’s Bo Time” advertising campaign, which has become synonymous with our brand. The campaign aims to deliver our message that our products are craveable and that Bojangles’ is a warm and friendly place to be. All domestic franchisees and the company contribute to the Marketing Development Fund for the development of marketing materials for use in various media, including radio and television commercials, promotions and sponsorships, marketing research as well as the cost of administration of the Fund. The company administers and may require franchisees’ participation in advertising co-operatives with other franchisees and the company to increase advertising levels based in pooled media advertising.

Purchasing and Distribution

Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We regularly inspect vendors to ensure that products purchased conform to our standards and that prices offered are

 

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competitive. Our Quality Assurance Department works with a third-party to perform comprehensive supplier audits. We negotiate and contract directly with the suppliers of our food, and we contract with our primary foodservice distributor for distribution of all of our food and supplies, excluding bone-in chicken and some dairy products. Our primary foodservice distributor delivers supplies to most of our restaurants two times per week. Our relationship with our primary foodservice distributor has been in place since 2003. We contract with two primary suppliers for our bone-in chicken which is supplied to us by various distributors. These bone-in chicken distributors typically deliver to most of our company-operated restaurants three times per week. Our franchisees are required to use an approved distributor and franchisees must purchase food and supplies from approved suppliers. In our normal course of business, we evaluate bids from multiple suppliers for various products. Poultry and other proteins are our largest product cost items and represented approximately 44% of company-operated food and supplies costs in fiscal 2014. Fluctuations in supply and prices can significantly impact our restaurant service and profit performance. We actively manage cost volatility for poultry by negotiating directly with multiple suppliers, purchasing from suppliers with what we believe are the most favorable contract terms given existing market conditions.

Intellectual Property

We have registered Bojangles® and certain other names used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office. The Bojangles® trademark is also registered in some form in approximately 25 foreign countries. Our current brand campaign tag line, It’s Bo Time®, has also been registered with the United States Patent and Trademark Office. We also have registered the configuration of our Big Bo Box as a trademark, and we continue to expand the family of Bojangles’ related trademarks, often using some derivation of “Bo” in the trademark. In addition, the Bojangles’ logo, website name and address and Facebook and Twitter accounts are our intellectual property. Our policy is to pursue and maintain registration of service marks and trademarks in those countries where permitted and where business strategy requires us to do so and to oppose vigorously any infringement or dilution of the service marks or trademarks. We or our suppliers maintain the seasonings and additives for our chicken and biscuits, and our other products, as well as certain standards, specifications and operating procedures, as trade secrets or confidential information.

Competition

We operate in the limited service restaurant industry, which is highly competitive and fragmented. The number, size and strength of competitors vary by region. Our competition includes a variety of locally owned restaurants and national and regional chains that offer dine-in, carry-out and delivery services. Our competition in the broadest perspective includes restaurants, convenience food stores, delicatessens, supermarkets and club stores. However, more specifically, we compete with fast-casual restaurants, such as Chipotle and Panera Bread Company, quick-service restaurants who serve breakfast, such as McDonald’s and Hardee’s, and chicken-specialty and Cajun quick-service restaurants, such as Chick-fil-A, Popeyes Louisiana Kitchen and Zaxby’s.

We believe competition within the fast-casual restaurant segment is based primarily on fresh ingredients and preparation of food, quality, taste, service and ambience. We also believe that QSR competition is based primarily on value, speed of service, convenience of drive-thru service, brand recognition and restaurant location. In addition, we compete with franchisors of other restaurant concepts for prospective franchisees.

Environmental Matters

We are subject to federal, state and local laws and regulations relating to environmental protection, including regulation of discharges into the air and water, storage and disposal of waste and clean-up of contaminated soil and groundwater. Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on, in or emanating from such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances, and in some cases we may have obligations imposed by indemnity provisions in our leases.

 

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We have not conducted a comprehensive environmental review of all of our properties, although for new company development, a Phase I environmental review is typically completed, and when advisable, a Phase II review, prior to the company undertaking a long-term lease. No assurance can be given that we have identified all of the potential environmental liabilities at our properties or that such liabilities will not have a material adverse effect on our financial condition.

Regulation and Compliance

We are subject to extensive federal, state and local government regulation, including those relating to, among others, public health and safety, zoning and fire codes, and franchising. Failure to obtain or retain food or other licenses and registrations or exemptions would adversely affect the operations of restaurants, or the ability to franchise. Although we have not experienced and do not anticipate any significant problems in obtaining required licenses, permits or approvals, any difficulties, delays or failures in obtaining such licenses, permits, registrations, exemptions, or approvals could delay or prevent the opening of, or adversely impact the viability of, a restaurant in a particular area.

The development and construction of additional restaurants will be subject to compliance with applicable regulations, including those relating to zoning, land use, water quality and retention, and environment. We believe federal and state environmental regulations have not had a material effect on operations, but more stringent and varied requirements of local government bodies with respect to zoning, land use and environmental factors, among others, could delay construction and increase development costs for new restaurants.

We are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986 and various federal and state laws governing such matters as minimum wages, exempt versus non-exempt, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements and other working conditions. A significant portion of the hourly staff is paid at rates consistent with the applicable federal or state minimum wage and, accordingly, increases in the minimum wage and/or changes in exempt versus non-exempt status will increase labor costs. In addition, the PPACA will increase medical costs beginning in fiscal 2015. We are also subject to the Americans with Disabilities Act, which prohibits discrimination on the basis of disability in public accommodations and employment, which may require us to design or modify our restaurants to make reasonable accommodations for disabled persons.

For a discussion of the various risks we face from regulation and compliance matters, see “Risk Factors.”

Management Information Systems

All of our company-operated restaurants use computerized point-of-sale and back office systems, which we believe are scalable to support our long term growth plans. The point-of-sale system provides a touch screen interface and integrated, high speed credit card and gift card processing. The point-of-sale system is used to collect daily transaction data from company-operated restaurants, which generates information about product mix and daily sales that we actively analyze. We are in the process of migrating our company-operated restaurants to a new point-of-sale system and during the transition there may be a period of time during which the transactional data for the restaurants migrating to the new POS system is in a format that is not easily usable for analytical purposes.

Our in-restaurant back office computer system is designed to assist in the management of our restaurants and provide labor and food cost management tools. The system also provides our support center and restaurant operations management quick access to detailed business data and reduces the time our restaurant managers spend on administrative needs. The system also provides sales, bank deposit and variance data to our finance department on a daily basis. For company-operated restaurants, we use this data to generate daily, weekly and/or period reports regarding sales and other key measures. Our new point-of-sale and back office systems are not yet available for use in franchised restaurants, but there are other systems currently in use and otherwise available that may be used by franchisees.

 

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Employees

As of December 28, 2014, we had approximately 8,800 employees, of whom approximately 8,600 were restaurant employees and approximately 200 were support center personnel. None of our employees are part of a collective bargaining agreement, and we believe our relationships with our employees are satisfactory.

Legal Proceedings

We are involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity or capital resources. A significant increase in the number of claims or an increase in amounts owing under successful claims could materially adversely affect our business, financial condition, results of operations and cash flows.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth the name, age and position of individuals who currently serve as the directors and executive officers of Bojangles’.

 

Name

  

Age

    

Position/Title

James R. Kibler

     60       Director and Non-Executive Chairman of the board

Clifton Rutledge

     50       Director, President and Chief Executive Officer

Steven J. Collins

     46       Director

Tommy L. Haddock

     64       Director

William A. Kussell

     56       Director

Steven M. Tadler

     55       Director

Christopher J. Doubrava

     30       Director

Eric M. Newman

     62       Executive Vice President, General Counsel and Secretary

M. John Jordan

     47       Senior Vice President of Finance and Chief Financial Officer

Kenneth E. Avery

     55       Senior Vice President of Company Operations and Chief Operating Officer

Our directors have been selected pursuant to the terms of a stockholders’ agreement described more fully below under “Certain Relationships and Related Party Transactions.” The terms of the stockholders’ agreement related to the election of directors will terminate upon the closing of this offering.

James R. Kibler has served as a director and non-executive chairman of the board of the company and of Restaurants since February 2014. From September 2007 to January 2014, Mr. Kibler served as chief executive officer, president and director of Restaurants and from September 2011 to July 2013 as president of the company, and from July 2013 to January 2014 as president and chief executive officer of the company. From September 1996 to April 2011, Mr. Kibler served as president of Kibler-Mitchell Enterprises, Inc., a restaurant company in Spartanburg, South Carolina. Based on his extensive management experience in the casual dining and quick-service sectors, his familiarity with us, his deep understanding of restaurant operations, and his franchisee experience, we believe Mr. Kibler is well-qualified to lead us and to serve on our board.

Clifton Rutledge has served as chief executive officer of Restaurants since January 2014 and as a director, president and chief executive officer of the company and of Restaurants since February 2014. From August 2011 to January 2014, Mr. Rutledge served as chief operations officer and senior vice president of Whataburger Restaurants, LLC, a quick-service restaurant company based in San Antonio, Texas. Mr. Rutledge served as vice president of operations and training of Whataburger from July 2008 to September 2011, as group vice president of operations of Whataburger from January 2006 to June 2008 and as group director of franchisee operations of Whataburger from 2003 to 2006. Prior to that, Mr. Rutledge worked for KFC and with TCBY in operational positions. Because of his extensive leadership experience in operational positions in the restaurant industry, we believe Mr. Rutledge is qualified to serve as our chief executive officer and president and as a director on our board.

Steven J. Collins has served as a director of the company and Restaurants since August 2011. Mr. Collins, a managing director of Advent, a private equity investment firm based in Boston, Massachusetts, serves on the board of directors of Five Below, Inc., lululemon athletica, inc. and Kirkland’s, Inc. and on the board of directors of several privately held businesses. Mr. Collins originally joined Advent in 1995. He left the company in 1997 and worked at Kirkland’s, Inc. and then attended Harvard Business School, before rejoining Advent in 2000. Our board believes Mr. Collins’ qualifications to serve as a member of our board include his experience serving as a director of various companies and significant knowledge of the retail industry.

Tommy L. Haddock has served as a director of the company since August 2011. Mr. Haddock has served as director of Restaurants since September 2007. Since 1979, Mr. Haddock has served as president and

 

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director of a franchisee of the company, Tri Arc Food Systems, Inc., which owns and operates 50 franchised Bojangles’ restaurants. Our board believes Mr. Haddock’s qualifications to serve as a member of our board include his familiarity with us, his deep understanding of restaurant operations, and his significant franchisee experience.

William A. Kussell has served as a director of the company and Restaurants since August 2011, in addition to his role as an advisor to the company. Since January 2010, Mr. Kussell has served as an operating partner of, and a consultant to, Advent, a private equity firm based in Boston, Massachusetts. From January 2008 to January 2010, Mr. Kussell served as president and chief brand officer of Dunkin’ Brands, Inc. in Canton, Massachusetts. Prior to this, from March 2006 to January 2010, Mr. Kussell served as a member of the board of directors of Dunkin’ Brands, Inc. Mr. Kussell has served as a member of the board of directors of Coffee Bean and Tea Leaf, a specialty coffee and tea retailer and café, since November 2013, as a member of the board of directors of Extended Stay America, a national hospitality business, since November 2010, and as a member of the board of directors of Modell’s Sporting Goods, a national sporting goods retailer, since November 2009. Our board believes Mr. Kussell’s qualifications to serve as a member of our board include his familiarity with us and his deep understanding of restaurant and franchisor operations.

Steven M. Tadler has served as a director of the company and Restaurants since August 2011. Since 1993, Mr. Tadler has served as managing partner of Advent, a private equity investment firm based in Boston, Massachusetts. Mr. Tadler has also served as a member of the board of directors of Advent, since 2003, as a member of the board of directors of TransUnion Corp., an information and risk management solutions company, since April 2012, and as a member of the board of directors of wTe Corporation, a metals and plastics recycling company, since 1989. Prior to this, Mr. Tadler served as a member of the board of directors of Skillsoft, a software-as-a-service company, from May 2010 to March 2014, and Dufry, a travel retail company, from May 2010 to April 2013. Our board believes Mr. Tadler’s qualifications to serve as a member of our board include his experience as an investor in and significant knowledge of the retail industry.

Christopher J. Doubrava has served as a director of the company and Restaurants since April 2014. Since January 2015, Mr. Doubrava has served as a vice president of Advent, a private equity investment firm based in Boston, Massachusetts. Prior to this, from March 2010 until December 2014, Mr. Doubrava served as an associate of Advent. From July 2007 until February 2010, Mr. Doubrava served as an analyst for Goldman Sachs & Co. in the Bank Debt Portfolio Group in New York, New York. Our board believes Mr. Doubrava’s qualifications to serve as a member of our board include his experience as an investor in and significant knowledge of the retail industry.

Eric M. Newman has served as executive vice president, general counsel and secretary of the company since December 2014, as vice president and secretary of the company from September 2011 to December 2014, as executive vice president, general counsel and secretary of Restaurants since July 1999, and previously served as senior vice president and general counsel of our predecessor company from 1991 to 1998, and as vice president and general counsel of our predecessor company from 1985 to 1991. In addition, Mr. Newman has served on the board of the Foundation of the University of North Carolina at Charlotte since 2008.

M. John Jordan has served as senior vice president of finance and chief financial officer of the company since December 2014, as vice president of the company from September 2011 to December 2014 and senior vice president of Finance and chief financial officer of Restaurants since March 2009. From 2006 to 2009, Mr. Jordan served as vice president and chief financial officer of Restaurants. Prior to this, Mr. Jordan served as vice president of The Parnell-Martin Companies LLC, a plumbing supply distribution company based in Charlotte, North Carolina from 2005 to 2006 and in various other roles, including treasurer and assistant secretary, from 1996 to 2004. Prior to this, Mr. Jordan worked with CSX Corporation and Coopers & Lybrand.

Kenneth E. Avery has served as senior vice president of company operations and chief operating officer of the company since December 2014, as senior vice president of operations and chief operating officer of

 

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Restaurants since October 2014 and previously as senior vice president of company operations of Restaurants from April 2013 to October 2014. From March 2009 to April 2013, Mr. Avery served as vice president of company operations of Restaurants. From January 2008 to March 2009, Mr. Avery served as vice president of operations support of Restaurants. From 1998 to 2007, Mr. Avery served in a variety of positions with CKE Restaurants Inc., a quick-service restaurant company, including as regional vice president, vice president and senior vice president of franchise operations.

In addition to the information presented above regarding each director’s specific experiences, qualifications, attributes and skills, we believe that all of our directors have a reputation for integrity and adherence to high ethical standards. Each of our directors has demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to us and our board. Finally, we value our directors’ experience on other company boards and board committees.

Our executive officers are appointed by our board of directors and serve until their successors have been duly appointed and qualified or their earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

Board Composition and Election of Directors

Our business and affairs are managed under the direction of our board of directors, which currently consists of seven members. Upon the closing of this offering, our amended and restated certificate of incorporation and amended and restated bylaws will provide that our board of directors will consist of a number of directors, not less than              nor more than             , to be fixed exclusively by resolution of the board of directors.

As of the closing of this offering, our amended and restated certificate of incorporation will provide for a staggered, or classified, board of directors consisting of three classes of directors, each serving staggered three-year terms, as follows:

 

    the Class I directors will be Messrs.             ,              and             , and their terms will expire at the annual general meeting of stockholders to be held in 2016;

 

    the Class II directors will be Messrs.             ,              and             , and their terms will expire at the annual general meeting of stockholders to be held in 2017; and

 

    the Class III directors will be Messrs.             ,              and             , and their terms will expire at the annual general meeting of stockholders to be held in 2018.

Upon expiration of the term of a class of directors, directors for that class will be elected for a three-year term at the annual meeting of stockholders in the year in which that term expires. Each director’s term continues until the election and qualification of his or her successor, or his or her earlier death, resignation, retirement, disqualification or removal. Any vacancies on our board of directors will be filled only by the affirmative vote of a majority of the directors then in office. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

Following the closing of this offering, our amended and restated certificate of incorporation will provide that directors may only be removed for cause. To remove a director for cause, 66 23% or more of the outstanding shares of capital stock then entitled to vote at an election of directors must vote to remove the director at an annual or special meeting. The amended and restated certificate of incorporation will also provide that, if a director is removed or if a vacancy occurs due to either an increase in the size of the board or the death, resignation, disqualification or other cause, the vacancy will be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum remain.

 

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The classification of our board of directors, together with the ability of the stockholders to remove our directors only for cause and the inability of stockholders to call special meetings, will make it more difficult for a third-party to acquire control of us. See “Description of Capital Stock—Anti-Takeover Provisions of Delaware Law and Certain Charter and Bylaw Provisions.”

Our stockholders’ agreement provides that the holders of our capital stock must agree to vote their shares in favor of the election to our board of directors of individuals designated by Advent. The stockholders’ agreement, and all of the rights and obligations of our stockholders under the agreement (except for those pertaining to registration rights), will be terminated upon the closing of this offering. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

Director Independence and Controlled Company Status

Upon the closing of this offering, Advent will continue to own a majority interest in us and we will be a “controlled company” under the rules of NASDAQ. The “controlled company” exception eliminates the requirements that we have (a) a majority of independent directors on our board and (b) compensation and nominating/corporate governance committees composed entirely of independent directors, as independence is defined in Rule 10A-3 of the Exchange Act and under NASDAQ listing standards. The “controlled company” exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of Sarbanes-Oxley and NASDAQ. We will be required to have an audit committee with at least one independent director during the 90-day period beginning on the date of effectiveness of the registration statement filed with the SEC in connection with this offering and of which this prospectus is part. After this 90-day period and until one year from the date of effectiveness of the registration statement, we will be required to have a majority of independent directors on our audit committee. Thereafter, we will be required to have an audit committee comprised entirely of independent directors. We expect to have              independent director(s) on our board upon completion of this offering. Our board of directors has determined that Messrs.             ,              and              are independent as defined under the corporate governance rules of NASDAQ.

If at any time we cease to be a “controlled company” under NASDAQ rules, our board of directors will take all action necessary to comply with the applicable NASDAQ rules, including appointing a majority of independent directors to our board of directors and establishing certain committees composed entirely of independent directors, subject to a permitted “phase-in” period.

Board Leadership Structure and Board’s Role in Risk Oversight

Our board of directors has no policy with respect to the separation of the offices of chief executive officer and non-executive chairman of the board of directors. It is the board of directors’ view that rather than having a rigid policy, the board of directors, with the advice and assistance of the nominating and corporate governance committee, and upon consideration of all relevant factors and circumstances, will determine, as and when appropriate, whether the two offices should be separate. Currently, our leadership structure separates the offices of chief executive officer and non-executive chairman of the board of directors with Mr. Rutledge serving as our chief executive officer and Mr. Kibler serving as non-executive chairman of the board. We believe this is appropriate as it provides Mr. Rutledge with the ability to focus on our day-to-day operations while allowing Mr. Kibler to lead our board of directors in its fundamental role of providing advice to, and oversight of management.

Our board of directors plays an active role in overseeing management of our risks. Our board of directors regularly reviews information regarding our credit, liquidity and operations, as well as the risks associated with each. Effective upon the closing of this offering, our compensation committee will be responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. Effective upon the closing of this offering, our audit committee will oversee management of financial risks. Effective upon the closing of this offering, our nominating and corporate governance committee will be responsible for

 

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managing risks associated with the independence of the board of directors. While each committee will be responsible for evaluating certain risks and overseeing the management of such risks, our full board of directors plans to keep itself regularly informed regarding such risks through committee reports and otherwise.

Committees of the Board of Directors

Our board of directors has established, or will establish prior to the closing of this offering, an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee will operate under a charter that will be approved by our board of directors and will be available on our website, www.bojangles.com, under the “Investor Relations” section, upon the effective date of this offering.

Audit Committee

Our audit committee oversees our corporate accounting and financial reporting process. The audit committee has the following responsibilities, among others things, as set forth in the audit committee charter that will be effective upon the closing of this offering:

 

    selecting and hiring our independent registered public accounting firm and approving the audit and non-audit services to be performed by our independent registered public accounting firm;

 

    evaluating the qualifications, performance and independence of our independent registered public accounting firm;

 

    monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

    reviewing the adequacy and effectiveness of our internal control policies and procedures;

 

    overseeing management of financial risks;

 

    preparing the audit committee report required by the SEC to be included in our annual proxy statement;

 

    discussing the scope and results of the audit with the independent registered public accounting firm and reviewing with management and the independent registered public accounting firm our interim and fiscal year-end operating results;

 

    approving related party transactions; and

 

    reviewing whistleblower complaints relating to accounting, internal accounting controls or auditing matters and overseeing the investigations conducted in connection with such complaints.

Our audit committee currently consists of Messrs. Collins, Kussell and Haddock. Upon the closing of this offering, our audit committee will be composed of Messrs.             ,              and             . Mr.              will serve as the chairperson of the audit committee. Messrs.              and              are independent for purposes of serving on the audit committee, and meet the requirements for financial literacy under the applicable rules and regulations of the SEC and NASDAQ. We expect a third new independent member to be appointed to the audit committee within one year of the effectiveness of the registration statement so that all of our audit committee members will be independent under applicable SEC and NASDAQ rules and regulations. Our board has determined that Mr.              is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication defined under the applicable rules of NASDAQ. See “—Director Independence and Controlled Company Status.”

 

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Compensation Committee

Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee has the following responsibilities, among other things, as set forth in the compensation committee’s charter that will be effective upon the closing of this offering:

 

    reviewing and approving compensation of our executive officers, including annual base salary, annual incentive bonuses, specific goals, equity compensation, employment agreements, severance and change-in-control arrangements and any other benefits, compensation or arrangements;

 

    reviewing and recommending the terms of employment agreements with our executive officers;

 

    reviewing succession planning for our executive officers;

 

    reviewing and recommending compensation goals, bonus and stock-based compensation criteria for our employees;

 

    reviewing and recommending the appropriate structure and amount of compensation for our directors;

 

    overseeing the management of risks relating to our executive compensation plans and arrangements;

 

    reviewing and discussing annually with management our “Compensation Discussion and Analysis” required by SEC rules;

 

    preparing the compensation committee report required by the SEC to be included in our annual proxy statement; and

 

    administering, reviewing and making recommendations with respect to our equity compensation plans.

Our compensation committee currently consists of Messrs. Collins, Tadler and Kibler. Upon the closing of this offering, our compensation committee will be composed of Messrs.             ,              and             . Mr.              will serve as the chairperson of the compensation committee. Our board has determined that Messrs. and are independent under applicable rules and regulations of the SEC and NASDAQ. See “—Director Independence and Controlled Company Status.”

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for making recommendations regarding candidates for directorships and the size and composition of our board. Among other matters, the nominating and corporate governance committee is responsible for the following as set forth in their charter that will be effective upon the closing of this offering:

 

    assisting our board of directors in identifying prospective director nominees and recommending nominees for each annual meeting of stockholders to our board of directors;

 

    reviewing developments in corporate governance practices and developing and recommending governance principles applicable to our board of directors;

 

    managing risks associated with the independence of the board of directors;

 

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    evaluating and making recommendations as to the size and composition of the board of directors;

 

    overseeing the evaluation of our board of directors and management; and

 

    recommending members for each board committee of our board of directors.

Our governance committee currently consists of Messrs. Kussell, Haddock and Tadler. Upon the closing of this offering, our nominating and corporate governance committee will be composed of Messrs.             ,              and             . Mr.              will serve as the chairperson of the nominating and corporate governance committee. Our board has determined that Messrs.              and              are independent under applicable rules and regulations of the SEC and NASDAQ. See “—Director Independence and Controlled Company Status.”

Director Compensation

In fiscal 2014, certain of our directors received compensation for their service as directors (as further described in “Executive and Director Compensation—Compensation of Directors”). We intend to put in place a formal director compensation policy for all of our non-employee directors following the closing of this offering.

Compensation Committee Interlocks and Insider Participation

Messrs. Collins, Tadler and Kibler served as members of the compensation committee throughout fiscal 2014. Each of Messrs. Collins and Tadler has relationships with us that require disclosure under Item 404 of Regulation S-K under the Exchange Act. See “Certain Relationships and Related Party Transactions” for more information. Mr. Kibler served as our chief executive officer during part of fiscal 2014.

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Code of Business Conduct and Ethics

Upon the closing of this offering, we will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Once it is adopted, the code of business conduct and ethics will be available on our website at www.bojangles.com. Disclosure regarding any amendments to the code, or any waivers of its requirements, will be included in a current report on Form 8-K within four business days following the effective date of the amendment or waiver, unless posting such information on our website will then satisfy the rules of NASDAQ.

Corporate Governance Guidelines

Our board of directors will adopt corporate governance guidelines that serve as a flexible framework within which our board of directors and its committees operate. These guidelines will cover a number of areas including the size and composition of the board, board membership criteria and director qualifications, director responsibilities, board agenda, roles of the non-executive chairman of the board and chief executive officer, meetings of independent directors, committee responsibilities and assignments, board member access to management and independent advisors, director communications with third parties, director compensation, director orientation and continuing education, evaluation of senior management and management succession planning. A copy of our corporate governance guidelines will be available on our website at www.bojangles.com.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

We are providing compensation disclosure that satisfies the requirements applicable to emerging growth companies, as defined in the JOBS Act. As an emerging growth company, we have opted to comply with the executive compensation rules applicable to “smaller reporting companies,” as such term is defined under the Securities Act. The table below sets forth the annual compensation earned during fiscal 2014 by our principal executive officer, our two most highly compensated executive officers, and our former president and chief executive officer (our “named executive officers”) and our chief financial officer.

2014 Summary Compensation Table

The following table sets forth information concerning the compensation of our executive officers for fiscal 2014.

 

Name and Principal Position

 

Year

   

Salary

   

Bonus

   

Option
Awards(3)

   

Non-Equity
Incentive
Plan
Compensation(4)

   

All Other
Compensation(5)(6)

   

Total

 

Clifton Rutledge(1)

    2014      $ 442,308      $ 100,000 (7)    $ 3,017,593      $ 437,500      $ 185,675      $ 4,183,076   

President and Chief

Executive Officer

             

James R. Kibler(2)

    2014      $ 50,000      $ —        $ —        $ 75,000      $ 186,918      $ 311,918   

Former President and

Chief Executive Officer

             

M. John Jordan

    2014      $ 307,553      $ —        $ —        $ 271,420      $ 15,127      $ 594,100   

Senior Vice President of

Finance and Chief

Financial Officer

             

Kenneth E. Avery

    2014      $ 272,906      $ —        $ 654,155      $ 199,375      $ 32,224      $ 1,158,660   

Senior Vice President of

Company Operations

and Chief Operating Officer

             

Eric M. Newman

    2014      $ 307,553      $ —        $ —        $ 271,420      $ 18,726      $ 597,699   

Executive Vice President,

General Counsel and

Secretary

             

 

(1) Mr. Rutledge commenced employment as chief executive officer of Restaurants on January 27, 2014. Since February 2014, Mr. Rutledge has served as president and chief executive officer of the company and of Restaurants.

 

(2) Mr. Kibler served as president and chief executive officer of the company until January 27, 2014 and as president and chief executive officer of Restaurants until January 27, 2014. From February 1, 2014 until the end of fiscal 2014, Mr. Kibler continued to provide services to the company as an employee and the non-executive chairman of our board.

 

(3) Represents the grant date fair value of options awarded during fiscal 2014, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC Topic 718).

 

(4) For more information, see below under “—Annual Cash Incentive Compensation.”

 

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(5) The values shown under the heading “All Other Compensation” for Messrs. Rutledge, Kibler, Jordan, Avery and Newman, represents the following perquisites and benefits:

 

    401(k) plan matching contribution: $0, $8,750, $8,566, $8,750 and $8,566, respectively

 

    Taxable benefit of auto allowance and gasoline: $1,685, $313, $6,349, $1,432 and $9,228, respectively

 

    Imputed life insurance: $244, $932, $212, $607 and $932, respectively

 

     With respect to Mr. Kibler, the values shown under the heading “All Other Compensation” also include compensation received by Mr. Kibler in connection with his service to the company as a director. See the discussion in the section below entitled “—Employment Arrangements” for more detail regarding Mr. Kibler’s compensation for his service to the company as a director.

 

(6) The values shown under the heading “All Other Compensation” include moving and relocation expenses for Mr. Rutledge of $143,322 in taxable moving expenses (including the gross-up) and $40,424 in nontaxable moving expenses paid to him and other third parties, and include moving and relocation expenses for Mr. Avery of $21,435 in taxable moving expenses (including the gross-up).

 

(7) In connection with Mr. Rutledge’s hiring on January 27, 2014, he was granted a signing bonus of $100,000.

Employment Arrangements

The following is a summary of the material terms of the employment agreements with our executive officers. The summary below does not contain complete descriptions of all provisions of the employment agreements of our executive officers and is qualified in its entirety by reference to such employment agreements, copies of which will be included as exhibits to the registration statement of which this prospectus forms a part. See “Where You Can Find More Information.”

Mr. Rutledge. We have entered into an employment agreement with Mr. Rutledge, dated January 27, 2014. Pursuant to this agreement, Mr. Rutledge is entitled to an annual base salary of $500,000, which is subject to increases, if any, as may be determined from time to time in the sole discretion of our board. Mr. Rutledge is eligible to earn an annual bonus of up to 75% of base salary, subject to the achievement of annual performance goals established by our board at the beginning of each applicable year. Additionally, the company paid Mr. Rutledge a signing bonus of $100,000, with $75,000 payable within two weeks following the effective date of the agreement and the remaining $25,000 payable within two weeks of Mr. Rutledge’s relocation to Charlotte, North Carolina, provided that such relocation occurred prior to the nine month anniversary of the effective date.

Mr. Rutledge also received a grant of stock options to purchase 2,267 shares of common stock of the company, of which 1,700 are subject to vesting over time and 567 of which are subject to performance-based vesting, at fair market value of the common stock at the time of grant. The vesting of the initial stock option grant to Mr. Rutledge is described in further detail below in the section entitled “—Long-term Equity Incentive Compensation—Outstanding Equity Awards at Fiscal 2014 Year-End.”

Mr. Rutledge is entitled to receive reimbursements for certain relocation, temporary housing and living expenses of which the company paid, including a gross up for income taxes authorized by the compensation committee, of $183,746 in the aggregate. Mr. Rutledge is also entitled to certain severance benefits, the terms of which are described below in the section entitled “—Potential Payments Upon a Termination or Change in Control.”

Mr. Rutledge is entitled to participate in all of our employee benefit plans on the same basis as such benefits are generally made available to other senior executive employees. Further, the agreement contains customary non-solicitation and non-competition covenants, which covenants remain in effect for one year following any cessation of employment with respect to Mr. Rutledge.

 

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Mr. Kibler. We entered into an employment agreement with Mr. Kibler, dated September 17, 2007, which was amended on June 23, 2011 and later terminated effective February 1, 2014, by a letter agreement pursuant to which Mr. Kibler stepped down as president and chief executive officer of the company and president and chief executive officer of Restaurants, and became non-executive chairman, effective February 1, 2014. For purposes of the table above, Mr. Kibler served as our president and chief executive officer from December 30, 2013 until January 27, 2014 and for the remainder of fiscal 2014, our employee and non-executive chairman. Under his employment agreement, as amended, Mr. Kibler was entitled to an annual base salary of $650,000 and eligible for up to 75% of his base salary under the regular bonus plan, subject to the achievement of annual performance goals established by our board at the beginning of each applicable year. In addition, we entered into a letter agreement pursuant to which Mr. Kibler stepped down as our president and chief executive officer and Restaurants’ chief executive officer and president and became non-executive chairman of the board. Under the terms of the letter agreement, Mr. Kibler is entitled to receive (i) annual compensation of $200,000 for his services from February 1, 2014 through February 1, 2015, payable in substantially equal monthly installments, (ii) an additional fee of $75,000, based on certain performance goals of the company and subject to other terms and conditions as determined by our board (and in lieu of the bonus under his terminated employment agreement) and (iii) modification of previously granted stock options where the 1,136 time-based options became fully vested on February 1, 2014 and 1,136.5, or 50%, of the performance-based options were forfeited leaving a remaining 1,136.5, or 50%, of the performance based options outstanding and unvested as of February 1, 2014.

Effective January 1, 2015 and in lieu of the remaining term of the existing letter agreement scheduled to expire on February 1, 2015 and as described above, Mr. Kibler’s annual compensation will be $100,000 and he will continue to receive benefits to the extent permissible under our applicable plans and programs, but shall be ineligible to receive a bonus.

Additionally, Mr. Kibler is entitled to reimbursement of reasonable travel and other expenses in connection with his service as our non-executive chairman and continuation of certain health benefits and is eligible to participate in the 401(k) plan. Pursuant to the terms of the letter agreement, Mr. Kibler is also subject to certain non-compete and confidentiality covenants.

The vesting of the initial stock option grant to Mr. Kibler is described in further detail below in the section entitled “—Long-term Equity Incentive Compensation—Outstanding Equity Awards at Fiscal 2014 Year-End.”

Mr. Jordan. We entered into an employment agreement with Mr. Jordan, dated May 1, 2006, which was amended and restated on September 12, 2007 and on April 27, 2011. Pursuant to the employment agreement, as amended and restated, Mr. Jordan is entitled to an annual base salary to be reviewed by the chief executive officer no less than annually. Mr. Jordan is also eligible to receive annual bonuses which are awarded by the board at its discretion. Mr. Jordan receives an automobile allowance, and is entitled to expenses incurred in the performance of his duties. Mr. Jordan is also entitled to certain severance benefits, the terms of which are described below in the section entitled “—Potential Payments Upon a Termination or Change in Control.”

Mr. Jordan is entitled to participate in our employee benefit plans and programs at the same level as other executive employees. Further, Mr. Jordan’s agreement contains a non-solicitation of employees covenant, which remains in effect for one year following any cessation of employment.

Mr. Avery. We entered into a severance agreement with Mr. Avery, dated November 28, 2007, which was amended and restated on April 27, 2011, which is described below in the section entitled “—Potential Payments Upon a Termination or Change in Control.”

Mr. Avery receives an annual base salary and is eligible to receive annual bonuses which are awarded by the board at its discretion. Mr. Avery also receives an automobile allowance of $750 per month and reimbursement of certain reasonable expenses incurred in the performance of his duties. Mr. Avery is entitled to

 

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participate in our employee benefit plans and programs at the same level as other executive employees. Mr. Avery also received reimbursements for certain relocation expenses in fiscal 2014, including a gross up for income taxes, of $21,435 in the aggregate.

Additionally, Mr. Avery received an additional grant of stock options in fiscal 2014 to purchase 500 shares of common stock of the company, all of which are subject to vesting over time, at fair market value of the common stock at the time of grant. The vesting of the stock option grant to Mr. Avery made in fiscal 2014 is described in further detail below in the section entitled “—Long-term Equity Incentive Compensation—Outstanding Equity Awards at Fiscal 2014 Year-End.”

The amended and restated severance agreement dated April 27, 2011 contains a non-solicitation of employees covenant, which remains in effect for one year following any cessation of employment.

Mr. Newman. We entered into an employment agreement with Mr. Newman, dated November 14, 2002, which was amended and restated on September 12, 2007, April 27, 2011 and August 18, 2012. Pursuant to the employment agreement, as amended and restated, Mr. Newman is entitled to an annual base salary to be reviewed by the chief executive officer no less than annually. Mr. Newman is also eligible to receive bonuses which are awarded at the discretion of our board, and is entitled to an automobile allowance of $750 per month and reimbursement of certain reasonable expenses incurred in the performance of his duties. Mr. Newman is entitled to participate in our employee benefit plans and programs at the same level as other executive employees. Further, Mr. Newman’s agreement contains a non-solicitation of employees covenant, which remains in effect for one year following any cessation of employment.

Mr. Newman is also entitled to certain severance benefits, the terms of which are described below in the section entitled “—Potential Payments Upon a Termination or Change in Control.”

Potential Payments Upon a Termination or Change in Control

Mr. Rutledge—Termination of Employment without Cause or for Good Reason. If Mr. Rutledge’s employment is terminated by us without cause or by Mr. Rutledge for good reason (as such terms are defined in Mr. Rutledge’s employment agreement), Mr. Rutledge will be entitled to an amount equal to his base salary in effect immediately prior to the date of termination, payable in equal installments over a period of 12 months following such termination of employment. The severance payments to Mr. Rutledge will be offset to the extent he receives compensation from an unrelated entity during the severance period.

Messrs. Jordan, Avery—Involuntary Termination of Employment. If the executive’s employment is terminated by us other than for cause (as such term is defined in the executive’s employment agreement or severance agreement, as applicable), by the employee as a result of a material adverse change in the nature of the executive’s responsibilities or upward reporting relationship or following a relocation of the executive’s primary office to a location more than 40 miles away from the executive’s then-current primary office, the executive will be entitled to receive an amount equal to 105% of the employee’s compensation, as defined in the employment agreement or severance agreement, as applicable, to include total base pay and bonuses received in a calendar year by the executive, utilizing the greatest amount received by the executive for any of the three calendar years immediately preceding the executive’s separation, payable in equal installments over a period of 12 months following termination of employment.

Mr. Newman—Involuntary and Voluntary Termination of Employment. If Mr. Newman’s employment is terminated by us other than for cause (as such term is defined in Mr. Newman’s employment agreement), by Mr. Newman (i) voluntarily as a result of, and within 12 months of, a change of control of us (or certain of our wholly-owned subsidiaries), (ii) at any time after August 18, 2015, (iii) as a result of a material adverse change in the nature of Mr. Newman’s responsibilities or upward reporting relationship, (iv) as a result of us relocating Mr. Newman’s primary office to a location more than 40 miles away from the his then-current primary office or

 

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(v) as a result of our intention not to renew his employment agreement for an additional one year term, then Mr. Newman will be entitled to receive an amount equal to $500,000, payable in equal installments over a period of 12 months following the termination of employment. Further, if Mr. Newman’s employment ceases for the reasons described above, Mr. Newman is entitled to an additional lump sum payment equal to $25,000 payable within 30 days of the date of termination of employment, and shall be eligible for continuation coverage under COBRA.

Annual Cash Incentive Compensation

Each of our executive officers was eligible to earn an annual cash incentive bonus in fiscal 2014 under two separate bonus plans: (i) our regular bonus plan and (ii) our stretch bonus plan. Our practice with respect to annual incentive compensation has historically been to provide an opportunity to earn bonus awards based on the achievement of company performance measures, specifically adjusted consolidated company EBITDA budget targets, for each executive officer, and a portion of Mr. Avery’s bonus is based on annual adjusted consolidated restaurant level EBITDA less restaurant level general and administrative expenses budget targets.

Our regular bonus plan and any bonus awards provided thereunder are approved by our board each year. Messrs. Rutledge, Newman and Jordan are eligible to earn a bonus equal to 75% of each such executive’s annual base compensation as of the last day of the fiscal year, based upon the company meeting or exceeding the adjusted consolidated EBITDA budget targets established for the fiscal year. If the company meets 95% but is less than 100% of the established adjusted consolidated EBITDA budget target for the fiscal year, each such executive’s bonus compensation will be set at 35% of such executive’s annual base compensation as of the last day of the fiscal year. Mr. Avery has the opportunity under the regular bonus plan to earn up to 60% of his annual base compensation at target for each fiscal year, based upon the achievement by the company of (a) adjusted consolidated EBITDA in excess of budget targets, for which he can earn 25% of his annual base compensation as of the last day of the fiscal year, (b) total restaurant operations meeting or exceeding total annual adjusted consolidated restaurant level budget (calculated by annual adjusted consolidated store level EBITDA less restaurant level general and administrative expense), for which he can earn 25% of his annual base compensation as of the last day of the fiscal year and (c) total restaurant operations exceeding total annual adjusted consolidated restaurant level budget by over $1 million, for which he can earn 10% of his annual base compensation as of the last day of the fiscal year. Based on our performance, bonuses in fiscal 2014 under the regular bonus plan were 100% of target.

Our stretch bonus plan and any bonus awards provided thereunder are approved by our board each year. Our stretch bonus plan provides the opportunity for our executive officers to earn an additional bonus up to 12.5% of such individual’s base annual compensation as of the last day of the fiscal year based upon the achievement by the company of exceeding established adjusted consolidated EBITDA budget targets before the stretch bonus is deducted by certain dollar amounts established for the fiscal year. The bonus opportunities under the stretch bonus plan in fiscal 2014 are structured as follows:

 

Excess over Adjusted Consolidated EBITDA budget before the stretch bonus

  

Bonus Payout

 

At least $1,000,000 but less than $3,000,000

     2.5% of base salary   

At least $3,000,000 but less than $4,000,000

     5.0% of base salary   

At least $4,000,000 but less than $5,000,000

     7.5% of base salary   

$5,000,000 or more

     12.5% of base salary   

Based on our performance, bonuses in fiscal 2014 under the stretch bonus plan were 12.5% of base compensation as of the last day of the fiscal year.

 

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Long-term Equity Incentive Compensation

Outstanding Equity Awards at Fiscal 2014 Year-End

The following table sets forth information concerning unexercised stock options, stock options that have not vested and stock awards that have not vested for each of the executive officers named in the Summary Compensation Table as of December 28, 2014:

 

    

Option Awards

 

Name

  

Number of
Securities
Underlying
Unexercised
Options (#)
(Exercisable)

    

Number of
Securities
Underlying
Unexercised
Options (#)
(Unexercisable)

   

Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)

    

Option
Exercise Price
($)

    

Option
Expiration
Date

 

Clifton Rutledge

     —           2,267 (1)      —         $ 3,023.09         2/6/2024   

James R. Kibler

     1,136         1,136.5 (2)      —         $ 726.90         4/16/2022   

M. John Jordan

     406.25         865.75 (3)      —         $ 726.90         4/16/2022   

Kenneth E. Avery

     243.75         56.25 (4)      —         $ 726.90         4/16/2022   
     —           500 (5)      —         $ 3,023.09         2/6/2024   

Eric M. Newman

     406.25         865.75 (6)      —         $ 726.90         4/16/2022   

 

(1) 1,700 of the option shares vest based upon continued employment, of which 680 shares vest on February 7, 2016, with the remaining 1,020 shares vesting in twelve equal quarterly installments beginning March 31, 2016. 567 of the option shares vest if we consummate a registered initial public offering on or prior to July 27, 2015, subject to continued employment.

 

(2) The option shares vest on a sliding scale based on the return on investment of the funds managed by Advent, or the Advent Holders, such that 16.7% of the option shares vest, subject to continued employment, on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than 2 times the “Aggregate Advent Investment Amount” (i.e. $162,900,210), but less than or equal to 2.5 times the Aggregate Advent Investment Amount, 50% of the option shares vest on the date on which the Advent Holders receive an aggregate amount of net cash proceeds greater than 2.5 times the Aggregate Advent Investment Amount, but less than or equal to 3 times the Aggregate Advent Investment Amount, 83.3% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than 3 times the Aggregate Advent Investment Amount, but less than or equal to 3.5 times the Aggregate Advent Investment Amount and 100% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than times 3.5 times the Aggregate Advent Investment Amount.

 

(3) 93.75 of the option shares vest in equal quarterly installments through August 18, 2015 subject to continued employment. 772 of the option shares vest, subject to continued employment, on a sliding scale based on the Advent Holders’ return on investment, such that 16.7% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than 2 times the Aggregate Advent Investment Amount, but less than or equal to 2.5 times the Aggregate Advent Investment Amount, 50% of the option shares vest on the date on which the Advent Holders receive an aggregate amount of net cash proceeds greater than 2.5 times the Aggregate Advent Investment Amount, but less than or equal to 3 times the Aggregate Advent Investment Amount, 83.3% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than 3 times the Aggregate Advent Investment Amount, but less than or equal to 3.5 times the Aggregate Advent Investment Amount and 100% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than times 3.5 times the Aggregate Advent Investment Amount.

 

(4) The option shares vest in equal quarterly installments through August 18, 2015, subject to continued employment.

 

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(5) 125 of the option shares vest on February 7, 2015 and the remaining 375 options vest in 12 equal quarterly installments commencing May 7, 2015, subject to continued employment.

 

(6) 93.75 of the option shares vest in equal quarterly installments through August 18, 2015 subject to continued employment. 772 of the option shares vest, subject to continued employment, on a sliding scale based on the Advent Holders’ return on investment, such that 16.7% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than 2 times the Aggregate Advent Investment Amount, but less than or equal to 2.5 times the Aggregate Advent Investment Amount, 50% of the option shares vest on the date on which the Advent Holders receive an aggregate amount of net cash proceeds greater than 2.5 times the Aggregate Advent Investment Amount, but less than or equal to 3 times the Aggregate Advent Investment Amount, 83.3% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than 3 times the Aggregate Advent Investment Amount, but less than or equal to 3.5 times the Aggregate Advent Investment Amount and 100% of the option shares vest on the date the Advent Holders receive an aggregate amount of net cash proceeds greater than times 3.5 times the Aggregate Advent Investment Amount.

2011 Equity Incentive Plan

All of our outstanding equity awards are governed by the BHI Holding Corp. 2011 Equity Incentive Plan, or the 2011 Plan. In November 2011, our board adopted the 2011 Plan, pursuant to which the board may grant to officers, directors, employees, and consultants various equity-based incentive awards as compensation tools to motivate our workforce, including stock options, stock appreciation rights, restricted stock, dividend equivalent or other stock based awards.

We intend to amend and restate the 2011 Plan prior to the closing of this offering; accordingly, the material terms of the amended and restated 2011 Plan are described below. The purpose of the amendment and restatement of the 2011 Plan is to increase the maximum number of shares of common stock that may be issued under the 2011 Plan.

The 2011 Plan authorizes grants to purchase up to 13,636 shares of our authorized but unissued common stock. Stock options are granted at a price determined by the board of directors or committee designated by the board at not less than the fair market value of a share on the date of grant. The term of each option shall be determined by the board of directors or committee designated by the board at the time of grant and shall be no greater than ten years. All options granted through December 28, 2014 have a term of ten years. At December 28, 2014, there were 1,140.5 additional shares available for grant under the Plan.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Since our shares are not currently publicly traded and our shares are rarely traded privately, expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.

On May 15, 2013, we paid a $500 per share dividend on our Series A preferred stock. As a result of the Series A preferred stock dividend, the board approved the reduction of the exercise prices for all outstanding stock options awarded prior to the payment of the dividend by $500 per share.

On April 11, 2014, we paid a $500 per share dividend on our Series A preferred stock. As a result of the Series A preferred stock dividend, the board approved the reduction of the exercise prices for all outstanding stock options awarded prior to the payment of the dividend by $500 per share.

After reflecting the adjustments for the dividends described above, the weighted average grant date fair value of options granted during fiscal 2012, fiscal 2013 and fiscal 2014 was $726.90, $1,456.69 and $3,042.03, respectively. The total intrinsic value of options exercised during the fiscal years ended December 30, 2012,

 

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December 29, 2013 and December 28, 2014 were $0, $0 and $0, respectively, as no options were exercised. As of December 28, 2014, there was $3,380,739 of total unrecognized compensation cost related to time based stock options, which is expected to be recognized through January 2019. The performance based stock options would not be recognized until the criteria are met.

Other Elements of Compensation

401(k) Plan

We sponsor a 40l(k) tax deferred savings plan covering employees meeting certain age and service requirements as defined in the plan. Participants can make pretax contributions with Restaurants matching certain percentages of employee contributions. The total employer matching expense related to the plan was approximately $0.6 million, $0.5 million and $0.6 million for the fiscal years ended December 30, 2012, December 29, 2013 and December 28, 2014. All employees meeting certain age and service requirements are eligible to participate in our 401(k) plan. Our executive officers are eligible to participate in these plans generally on the same basis as our other employees. Our 401(k) plan provides substantially all employees meeting certain age and service requirements with the ability to make pre-tax retirement contributions in accordance with applicable IRS limits. Matching contributions are provided in an amount equal to 50% of the first 5% of elective contributions by the employee, and vest over a five-year period. The 401(k) plan matching contributions provided to our executive officers in fiscal 2014 are reflected above in the “—Summary Compensation Table” section under the “All Other Compensation” heading.

Non-Qualified Deferred Compensation Plan

We sponsor a non-qualified deferred compensation plan for certain eligible employees. This plan allows eligible participants to defer their salary, bonuses, commissions and other performance-based compensation. Deferred compensation, net of accumulated earnings and/or losses on the participant-directed investment options, is distributable in cash at employee specified dates or upon retirement, death, disability or termination from the plan. Realized and unrealized gains and losses on these securities are recorded in the consolidated statements of operations and comprehensive income and offset changes in deferred compensation liabilities to participants. The assets of the plan are approximately $1.4 million, $1.8 million and $2.2 million as of December 30, 2012, December 29, 2013 and December 28, 2014, respectively, and are subject to the company’s creditors and are included in the accompanying consolidated balance sheets. Our executive officers are eligible to participate in the deferred compensation plan. We did not make any discretionary matching or profit sharing contributions in our 2014 fiscal year.

Post-Retirement Medical Benefit Plan

In addition, we maintain the Extended Executive Medical Coverage Program covering a certain group of employees who retire with the title of president, chief executive officer, executive vice president, senior vice president, vice president or senior director, and meet specific age and service requirements as defined in the plan. Under the terms of the plan, upon retirement and until age 65, eligible employees and their spouses may purchase continued coverage under the company’s health insurance plan after their eligibility for COBRA coverage expires. The participants must pay the full cost of the continued coverage. In addition, upon reaching the age of 65, eligible employees and their spouses will receive a $25 stipend each month for the purchase of Medicare gap insurance coverage. Our executive officers are eligible to participate in the post-retirement medical benefit plan. Mr. Kibler was eligible to participate when he was chief executive officer and president, but did not qualify under the specific age and service requirements. Mr. Newman is the only executive officer who has met the age and years of service criteria under the plan.

Other Benefits

In fiscal 2014, certain of our executive officers were provided with certain limited perquisites that we believe are commonly provided to similarly situated executives in the market in which we compete for talent and

 

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therefore are important to our ability to attract and retain top-level executive management. These perquisites include a monthly automobile allowance and reimbursement of gasoline expense, and certain business professional dues and certifications, and, in the case of Mr. Rutledge, certain relocation and temporary housing expenses and gross-up, and, in the case of Mr. Avery, certain relocation expenses and gross-up. The amounts paid to executive officers in fiscal 2014 in respect of these perquisites is reflected above in the “—Summary Compensation Table” section under the “All Other Compensation” heading.

All employees are eligible to participate in broad-based and comprehensive employee benefit programs, including medical, dental, vision, and life and disability insurance. Our executive officers are eligible to participate in the broad-based and comprehensive employee benefit programs, including medical, dental, vision, and life and disability insurance made available to other employees, generally on the same basis as our other employees.

Compensation of Directors

The following table provides compensation information for fiscal 2014 for each of our directors who is not an executive officer.

 

Name

  

Fees Earned or
Paid in Cash
for fiscal 2014

   

Non-Equity
Incentive Plan
Compensation

   

All Other
Compensation

   

Total

 

Steven J. Collins

     —          —          —          —     

Tommy L. Haddock

   $ 50,000        —          —        $ 50,000   

William A. Kussell

   $ 300,000 (1)    $ 262,500 (2)    $ 7,944 (3)    $ 570,444   

Steven M. Tadler

     —          —          —          —     

Christopher J. Doubrava

     —          —          —          —     

 

(1) Includes salary for fiscal 2014.

 

(2) Includes bonus compensation under our regular bonus plan and stretch bonus plan.

 

(3) Includes employer 401(k) match of $7,337 and taxable value of life insurance of $607.

One of our directors, Mr. Haddock, receives an annual cash retainer fee of $50,000, which is paid quarterly. In addition, Mr. Kussell, who is an employee director, received in 2014 an annual base salary of $300,000 for services, and is eligible to receive a bonus up to 75% of his 2014 annual base salary under our regular bonus plan with executives, up to an additional 12.5% of his 2014 annual base salary under his stretch bonus plan, and certain additional benefits similar to those described above in the “—Other Elements of Compensation” section. Effective January 1, 2015, Mr. Kussell’s annual compensation will be $150,000 and he will continue to receive benefits to the extent permissible under our applicable plans and programs, but shall be ineligible to receive a bonus.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following is a description of transactions since December 26, 2011, to which we have been a party, in which the amount involved in the transaction exceeds $120,000, and in which any of our directors, executive officers or to our knowledge, beneficial owners of more than 5% of our capital stock or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest, other than employment, compensation, termination and change in control arrangements with our executive officers and directors, which are described under “Executive and Director Compensation.” We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions with unrelated third parties.

Policy Concerning Related Party Transactions

We intend to adopt a written policy relating to the approval of related party transactions. Our audit committee is to review certain financial transactions, arrangements, and relationships between us and any of the following related parties to determine whether any such transaction, arrangement or relationship is a related party transaction:

 

    any of our directors, director nominees or executive officers;

 

    any beneficial owner of more than 5% of our outstanding stock; and

 

    any immediate family member of any of the foregoing.

Our audit committee will review any financial transaction, arrangement or relationship that:

 

    involves or will involve, directly or indirectly, any related party identified above and is in an amount greater than $120,000;

 

    would cast doubt on the independence of a director;

 

    would present the appearance of a conflict of interest between us and the related party; or

 

    is otherwise prohibited by law, rule or regulation.

Our audit committee will review each such transaction, arrangement or relationship to determine whether a related party has, has had or expects to have a direct or indirect material interest. Following its review, the audit committee will take such action as it deems necessary and appropriate under the circumstances, including approving, disapproving, ratifying, canceling or recommending to management how to proceed if it determines a related party has a direct or indirect material interest in a transaction, arrangement or relationship with us. Any member of the audit committee who is a related party with respect to a transaction under review will not be permitted to participate in the discussions or evaluations of the transaction; however, the audit committee member will provide all material information concerning the transaction to the audit committee. The audit committee will report its action with respect to any related party transaction to our board.

Stockholders’ Agreement

In August 2011, in connection with Advent’s investment in Bojangles’, we entered into a stockholders’ agreement with Advent, Messrs. Kibler and Kussell, Silver Sun Properties, LLC, and certain other investors. In accordance with this agreement, the holders of our capital stock agreed to vote their shares in favor of the election to our board of six original individuals designated by Advent, which subsequently increased to seven members in February 2014. Messrs. Collins, Haddock, Kibler, Kussell, Doubrava, Rutledge and Tadler are all current members of our board.

 

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In addition, our stockholders’ agreement provides certain rights to certain of our stockholders with respect to our capital stock, including tag-along rights and drag-along rights in respect of the sale of shares of our capital stock, as well as certain restrictions on the transfer of our shares. Our stockholders’ agreement also provides us with a right of first refusal to purchases of our shares if certain stockholders desire to sell their shares pursuant to a bona fide third-party offer. In our discretion, we may assign our right of first refusal to any stockholder. The rights of first refusal do not apply to issuances by us in an initial underwritten public offering of our common stock, including this offering. All provisions of our stockholders’ agreement, except the provisions relating to registration rights which are discussed below, will terminate upon the closing of this offering.

Our stockholders’ agreement contains registration rights that require us to register shares of our common stock held by the stockholders who are parties to the stockholders’ agreement in the event we register for sale, either for our own account or for the account of others, shares of our common stock in future offerings, including this offering. These stockholders will be able to participate in such registration on a pro rata basis, subject to certain terms and conditions. At least 30 days prior to the effective date of any registration statement, notice is to be given to all holders of registrable securities party to the stockholders’ agreement outlining their rights to include their shares in that registration statement, and we must register any securities which such holders request to be registered, within 20 days of receipt of notice. However, we may withdraw or cease proceeding with any such registration provided that such withdrawal or cessation applies to all equity securities originally proposed to be registered. A stockholder may withdraw any securities that it has previously elected to include in a registration statement pursuant to such registration rights. Except for the exercise of registration rights by the selling stockholders, we intend to request that each party to our stockholders’ agreement waive any right to have their shares registered in connection with this offering.

Our stockholders’ agreement also permits Advent to make an unlimited number of requests that we register all or any part of the registrable securities held by them under the Securities Act at any time after 180 days after this offering is effective. In such demand registrations, subject to certain exceptions, the other parties to the stockholders’ agreement have certain rights to participate on a pro rata basis, subject to certain conditions. Parties to stockholders’ agreement will also be able to demand registration on Form S-3 beginning twelve months after this offering under certain circumstances. By exercising these registration rights, and selling a large number of shares of our common stock, the price of our common stock could decline.

After this offering, the stockholders with these registration rights will hold an aggregate of              shares of our common stock. We will be required to bear all costs incurred in these registrations, other than underwriting discounts and commissions. The registration rights described above could result in substantial future expenses for us and adversely affect any future equity or debt offerings.

Indemnification of Officers and Directors

We intend to enter into indemnification agreements with each of our executive officers and directors. The indemnification agreements will provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted under law and our amended and restated certificate of incorporation and amended and restated bylaws. Additionally, we may enter into indemnification agreements with any new directors or executive officers that may be broader in scope than the specific indemnification provisions contained in Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws. There is no pending litigation or proceeding naming any of our directors or officers for which indemnification is being sought, and we are not aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

Agreements with Management

We and certain of our executive officers and directors have entered into employment agreements. The terms and conditions of certain of these employment agreements are more fully described in “Executive and Director Compensation—Employment Agreements.”

 

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OTHER AGREEMENTS

Agreements with Mr. Haddock and Affiliates

One of our directors, Mr. Haddock, is also one of our significant franchisees, and, through his affiliates, has a number of agreements and business arrangements with us. Mr. Haddock’s affiliates include:

(i) Tri-Arc Food Systems, Inc., or Tri-Arc, of which Mr. Haddock and his family are beneficial owners of 50% of the capital stock of Tri-Arc;

(ii) New Generation Foods, LLC, or NGF, of which certain members of Mr. Haddock’s family are beneficial owners of 100% of the membership interests of NGF;

(iii) JZF Properties, LLC, or JZF, of which certain members of Mr. Haddock’s family are beneficial owners of 100% of the membership interests of JZF; and

(iv) Cajun Jack’s, LLC, or Cajun Jack’s, of which certain members of Mr. Haddock’s family are beneficial owners of 100% of the membership interests of Cajun Jack’s.

Tri-Arc Food Systems, Inc. is one of our franchisees. Tri-Arc remits payments to us for royalties, marketing, and franchise license fees. For fiscal 2012, fiscal 2013 and fiscal 2014, we recognized royalty revenues of approximately $4.3 million, $4.3 million and $4.6 million, respectively, and franchise fee revenue of $0.1 million, $0.1 million and $0.1 million, respectively, from Tri-Arc. In addition, we reimburse Tri-Arc for shared marketing costs. Total payments to Tri-Arc for the marketing costs were approximately $0.1 million, $0.1 million and $0.1 million for fiscal 2012, fiscal 2013 and fiscal 2014, respectively.

NGF is one of our franchisees. NGF remits payments to us for royalties, marketing, and franchise license fees. For fiscal 2012, fiscal 2013 and fiscal 2014, we recognized royalty revenues of approximately $0.4 million, $0.4 million and $0.5 million and franchise fee revenues of approximately $25,000, $0 and $0, respectively, from NGF. Pursuant to a letter agreement, NGF will receive payments from us from January 29, 2014 through July 31, 2015 as an extension of a marketing support program of certain matching funds equal to approximately 1% of NGF’s gross sales. The Company paid $0.1 million under the terms of this agreement in fiscal 2014.

JZF leases a building and land to us for use as a company-operated restaurant. For fiscal 2012, fiscal 2013 and fiscal 2014, we made total rent payments of approximately $0.2 million, $0.2 million and $0.2 million, respectively, to JZF.

Cajun Jack’s is one of our franchisees. Cajun Jack’s remits payments to us for royalties, marketing, and franchise license fees. For fiscal 2012, fiscal 2013 and fiscal 2014, we recognized royalty revenues of approximately $0.1 million, $0.1 million and $0.1 million, respectively, from Cajun Jack’s.

In addition, Panthers Football, LLC, or the Panthers, is owned by family members of certain stockholders of Tri-Arc. We have marketing and sponsorship agreements with the Panthers. Total expenses incurred under these agreements for fiscal 2012, fiscal 2013 and fiscal 2014 were approximately $0.6 million, $0.6 million and $0.7 million, respectively.

In addition, MAR Real Estate, LLC, or MRE, is owned by family members of certain stockholders of Tri-Arc. MRE leases building and land to us for use as company operated restaurants. For fiscal 2013 and fiscal 2014, we made total rent payments of approximately $30,000 and $0.1 million, respectively, to MRE.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information about the beneficial ownership of our common stock as of                     , 2015, as adjusted to reflect the sale of the shares of common stock by the selling stockholders in this offering, for:

 

    each person known to us to be the beneficial owner of more than 5% of our common stock;

 

    each executive officer;

 

    each of our directors;

 

    all of our executive officers and directors as a group; and

 

    each of the selling stockholders.

Unless otherwise noted below, the address for each beneficial owner listed on the table is: c/o Bojangles’, Inc., 9432 Southern Pine Boulevard, Charlotte, NC 28273. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.

For purposes of the table below, the beneficial ownership percentages are based on a total of             shares of our common stock outstanding as of                     , 2015, after giving effect to the conversion of all outstanding shares of our preferred stock into an aggregate of             shares of our common stock.

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or restricted stock units held by that person that are currently exercisable or exercisable within 60 days of                     , 2015. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

 

 

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Shares Beneficially Owned
After this Offering

 
   

Shares Beneficially
Owned Prior to this
Offering

       

Assuming the
Underwriters’
Option
is Not Exercised

   

Assuming the
Underwriters’ Option is
Exercised in Full

 

Name and Address of Beneficial Owner

 

Number

 

Percentage
of
Class

   

Shares
Offered

 

Shares
Subject to
Underwriters’
Option

 

Number
of
Shares

 

Percentage
of
Class

   

Number
of
Shares

 

Percentage
of
Class

 

Principal and Selling Stockholders:

               

Advent International Corporation and affiliates(1)

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