Popeye's 2014 Annual Report Download - page 80

Popeyes Louisiana Kitchen, Inc.
Notes to Consolidated Financial Statements
For Fiscal Years 2014, 2013, and 2012 — (Continued)
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employees are subject to the same contribution and vesting schedules. Under the Plan, non-highly compensated employees may
contribute up to 75.0% of their eligible compensation to the Plan on a pre-tax basis up to statutory limitations. Highly compensated
employees are limited to 5.0% of their eligible compensation. The Company may make both voluntary and matching contributions
to the Plan. The Company expensed approximately $0.4 million, $0.5 million, and $0.4 million, during 2014, 2013, and 2012,
respectively, for its contributions to the Plan.
Note 15 — Commitments and Contingencies
Supply Contracts. Supplies are generally provided to Popeyes franchised and company-operated restaurants, pursuant to supply
agreements negotiated by Supply Management Services, Inc. (“SMS”), a not-for-profit purchasing cooperative of which the
Company is a member. The Company and its franchisees hold membership interests in SMS in proportion to the number of
restaurants they own. At December 28, 2014, the Company held one of five board seats. The operations of SMS are not included
in the Consolidated Financial Statements.
The principal raw material for a Popeyes restaurant operation is fresh chicken. Company-operated and franchised restaurants
purchase their chicken from suppliers who service PLKI and its franchisees from various plant locations. These costs are
significantly impacted by increases in the cost of fresh chicken, which can result from a number of factors, including increases in
the cost of grain, disease, declining market supply of fast-food sized chickens and other factors that affect availability.
In order to ensure favorable pricing for fresh chicken purchases and to maintain an adequate supply of fresh chicken for the
Popeyes system, SMS has entered into chicken purchasing contracts with chicken suppliers. The contracts, which pertain to the
vast majority of our system-wide purchases for Popeyes are “cost-plus” contracts that utilize prices based upon the cost of feed
grains plus certain agreed upon non-feed and processing costs. In order to stabilize pricing for the Popeyes system, SMS has entered
into commodity pricing agreements for certain commodities including corn and soy, which impact the price of poultry and other
food cost.
The Company has entered into long-term beverage supply agreements with certain major beverage vendors. Pursuant to the
terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based
upon the dollar volume of purchases for company-operated restaurants and franchised restaurants, respectively, which will vary
according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup.
Formula and Supply Agreements with Former Owner. Under a 2010 Royalty and Supply Agreement (the "2010 Agreement")
with Diversified Foods and Seasonings, L.L.C. (“Diversified”), the Company had the worldwide exclusive rights to the Popeyes
recipes and formulas (the "formulas") the Company uses in the preparation on many of its core menu items. Under the 2010
Agreement the Company also purchased certain proprietary spices and other products made exclusively by Diversified. The 2010
Agreement required the Company to pay Diversified an annual royalty for the use of the formulas of approximately $3.1 million
until March 2029.
In June 2014, the Company purchased the formulas from Diversified for $43.0 million. In connection with the formula purchase,
the Company and Diversified terminated the 2010 Agreement and replaced it with a new 2014 Supply Agreement (the "New Supply
Agreement"). The new supply agreement provides that the Company agrees to utilize, and to require its franchisees to utilize
Diversified as the exclusive supplier of certain agreed upon core products in the continental United States. The term of the new
supply agreement continues until March 2034, unless earlier terminated in accordance with the terms of the agreement. See Note
6 for additional detail.
The Company expensed approximately $1.4 million under the 2010 Agreement during 2014. During 2013 and 2012, the
Company expensed approximately $3.1 million under this agreement.
Business Process Services. Certain accounting and information technology services are provided to the Company under an
agreement with third party provider which expires April 30, 2015 unless renewed under an automatic annual renewal option. At
December 28, 2014, future minimum payments under this contract are approximately $0.6 million during 2015. During 2014,
2013 and 2012, the Company expensed $1.8 million, $1.7 million, and $1.5 million, respectively, under this agreement.
Information Technology Outsourcing. Certain information technology services are provided to the Company under Managed
Information Technology Services Agreements with certain third party providers. At December 28, 2014, future minimum payments
under these contracts are $0.3 million in 2015. During 2014, 2013, and 2012, the Company expensed $1.6 million, $2.6 million,
and $2.4 million, respectively, under these agreement.