CARROLS RESTAURANT GROUP, INC. - Annual Report: 2016 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 3, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-33174
CARROLS RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 16-1287774 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
968 James Street, Syracuse, New York | 13203 |
(Address of principal executive office) | (Zip Code) |
Registrant’s telephone number, including area code: (315) 424-0513
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: | Name on each exchange on which registered: |
Common Stock, par value $.01 per share | The NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o | Accelerated filer | x |
Non-accelerated filer | o | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of March 4, 2016 Carrols Restaurant Group, Inc. had 35,827,660 shares of its common stock, $.01 par value, outstanding. The aggregate market value of the common stock held by non-affiliates as of June 28, 2015 of Carrols Restaurant Group, Inc. was $357,079,380.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for Carrols Restaurant Group, Inc's 2016 Annual Meeting of Stockholders, which is expected to be filed pursuant to Regulation 14A no later than 120 days after the conclusion of Carrols Restaurant Group, Inc.'s fiscal year ended January 3, 2016 are incorporated by reference into Part III of this annual report.
CARROLS RESTAURANT GROUP, INC.
FORM 10-K
YEAR ENDED JANUARY 3, 2016
Page | ||
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PART I—FINANCIAL INFORMATION
PART I
Throughout this Annual Report on Form 10-K, we refer to Carrols Restaurant Group, Inc. as “Carrols Restaurant Group” and, together with its consolidated subsidiary, as “we”, “our” and “us” unless otherwise indicated or the context otherwise requires. Any reference to “Carrols” refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware corporation, and its consolidated subsidiary, unless otherwise indicated or the context otherwise requires. Any reference to “Carrols LLC” refers to Carrols' direct subsidiary, Carrols LLC, a Delaware limited liability company, unless otherwise indicated or the context otherwise requires. Any reference to “Fiesta Restaurant Group” or “Fiesta” refers to our former indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc., a Delaware corporation, and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.
We use a 52 or 53 week fiscal year ending on the Sunday closest to December 31. Our fiscal years ended January 1, 2012, December 30, 2012, December 29, 2013, and December 28, 2014 each contained 52 weeks. Our fiscal year ended January 3, 2016 contained 53 weeks.
In this Annual Report on Form 10-K, we refer to information, forecasts and statistics regarding the restaurant industry and to information, forecasts and statistics from Nation's Restaurant News, the U.S. Census Bureau and the U.S. Department of Agriculture. Any reference to BKC in this Annual Report on Form 10-K refers to Burger King Worldwide, Inc. and its wholly-owned subsidiaries, including Burger King Corporation, and its parent company Restaurant Brands International, Inc. Unless otherwise indicated, information regarding BKC in this Annual Report on Form 10-K has been made publicly available by BKC.
Forward-Looking Statements
This 2015 Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature or that depend upon or refer to future events or conditions are forward-looking statements. These statements are often identified by the words “may”, “might”, “will”, “should”, “anticipate”, “believe”, “expect”, “intend”, “estimate”, “hope”, “plan” or similar expressions. In addition, expressions of our strategies, intentions or plans are also forward-looking statements. These statements reflect management's current views with respect to future events and are subject to risks and uncertainties, both known and unknown. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected or implied in the forward-looking statements. We have identified significant factors that could cause actual results to differ materially from those stated or implied in the forward-looking statements. For more information, please see Item 1A-Risk Factors. We believe important factors that could cause actual results to differ materially from our expectations include the following, in addition to other risks and uncertainties discussed herein:
• | Effectiveness of the Burger King® advertising programs and the overall success of the Burger King brand; |
• | Increases in food costs and other commodity costs; |
• | Competitive conditions; |
• | Our ability to integrate any restaurants we acquire; |
• | Regulatory factors; |
• | Environmental conditions and regulations; |
• | General economic conditions, particularly in the retail sector; |
• | Weather conditions; |
• | Fuel prices; |
• | Significant disruptions in service or supply by any of our suppliers or distributors; |
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• | Changes in consumer perception of dietary health and food safety; |
• | Labor and employment benefit costs, including the effects of healthcare reform; |
• | The outcome of pending or future legal claims or proceedings; |
• | Our ability to manage our growth and successfully implement our business strategy; |
• | Our inability to service our indebtedness; |
• | Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors; |
• | The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties; |
• | Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if our products cause injury, ingredient disclosure and labeling laws and regulations, reports of cases of food borne illnesses such as “mad cow” disease, and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as negative publicity regarding food quality, illness, injury or other health concerns; and |
• | Other factors discussed under Item 1A - "Risk Factors" and elsewhere herein. |
ITEM 1. BUSINESS
Overview
Our Company
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 50 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and have operated Burger King restaurants since 1976. As of January 3, 2016, we owned and operated 705 Burger King restaurants located in 16 Northeastern, Midwestern and Southeastern states. Burger King restaurants feature the popular flame-broiled Whopper® sandwich, as well as a variety of hamburgers, chicken and other specialty sandwiches, french fries, salads, breakfast items, hot dogs, snacks, smoothies, frappes and other offerings. We believe that our size, seasoned management team, extensive operating infrastructure, experience and proven operating disciplines differentiate us from many of our competitors as well as many other Burger King operators.
According to BKC, as of December 31, 2015 there were a total of 15,003 Burger King restaurants, of which approximately 100% were franchised and 7,355 were located in the United States and Canada. Burger King is the second largest hamburger restaurant chain in the world (as measured by number of restaurants) and we believe that the Burger King brand is one of the world's most recognized consumer brands. Burger King restaurants have a distinctive image and are generally located in high-traffic areas throughout the United States. Burger King restaurants are designed to appeal to a broad spectrum of consumers, with multiple day-part meal segments targeted to different groups of consumers. We believe that the competitive attributes of Burger King restaurants include significant brand recognition, convenience of location, quality, speed of service and price.
Our Burger King restaurants are typically open seven days per week and generally have operating hours ranging from 6:00 am to midnight on Sunday to Wednesday and to 2:00 am on Thursday to Saturday.
Our existing restaurants consist of one of several building types with various seating capacities. Our typical freestanding restaurant contains approximately 2,800 to 3,200 square feet with seating capacity for 90 to 100 customers, has drive-thru service windows and has adjacent parking areas. The building types for recently constructed or remodeled Burger King restaurants utilize 2,600 square feet and typically have seating capacity for 60 to 70 customers. As of January 3, 2016, almost all of our restaurants were freestanding. We operate our restaurants under franchise agreements with BKC.
On May 7, 2012, we completed the spin-off of Fiesta Restaurant Group, which included the Pollo Tropical and Taco Cabana restaurant businesses which we refer to as the "spin-off".
On May 30, 2012, we acquired 278 Burger King restaurants ("the 2012 acquired restaurants") from BKC, which we refer to as the "2012 acquisition", including BKC's assignment of its right of first refusal on franchise restaurant transfers in 20 states as follows: Connecticut (except Hartford county), Delaware, Indiana, Kentucky, Maine, Maryland, Massachusetts (except for Middlesex, Norfolk and Suffolk counties), Michigan, New Hampshire, New Jersey, New
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York (except for Bronx, Kings, Nassau, New York, Queens, Richmond, Suffolk and Westchester counties), North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington DC and West Virginia, (the "ROFR") pursuant to an operating agreement with BKC dated May 30, 2012, and as amended on January 26, 2015 and December 17, 2015, which we refer to as the "operating agreement". In addition, pursuant to the operating agreement, BKC granted us, on a non-exclusive basis, franchise pre-approval to acquire restaurants from Burger King franchisees in the 20 states covered by the ROFR until we operate 1,000 Burger King restaurants. Newly constructed or acquired restaurants beyond 1,000 or acquisitions in states not subject to the ROFR would be subject to BKC's customary approval process. The amended operating agreement requires us to remodel 455 Burger King restaurants to BKC's "20/20" restaurant image by December 31, 2016.
As of January 3, 2016, we were operating 246 of the 2012 acquired restaurants. In 2014 we acquired an additional 123 restaurants from other franchisees in five separate transactions, which we refer to as the "2014 acquired restaurants". Additionally, in 2015 we acquired 55 restaurants from other franchisees in eight separate transactions, which we refer to as the "2015 acquired restaurants". All of our other Burger King restaurants are referred to as our "legacy restaurants".
For the fiscal year ended January 3, 2016, our restaurants generated total revenues of $859.0 million and our comparable restaurant sales increased 7.4%. Our average annual restaurant sales for all restaurants were approximately $1,297,000 per restaurant.
Our Competitive Strengths
We believe we have the following competitive strengths:
Largest Burger King Franchisee in the United States. We are the largest Burger King franchisee in the United States based on number of restaurants, and are well positioned to leverage the scale and marketing of one of the most recognized brands in the restaurant industry. We believe the geographic dispersion of our restaurants provides us with stability and enhanced growth opportunities in many of the markets in which we operate. We also believe that our large number of restaurants increases our ability to effectively manage the awareness of the Burger King brand in certain markets through our ability to influence local advertising and promotional activities.
Operational Expertise. We have been operating Burger King restaurants since 1976 and have developed sophisticated information and operating systems that enable us to measure and monitor key metrics for operational performance, sales and profitability that may not be available to other restaurant operators. Our focus on leveraging our operational expertise, infrastructure and systems allows us to optimize the performance of our restaurants and restaurants that we may acquire. Our size and history with the Burger King brand enable us to effectively track operating metrics and leverage best practices across our organization. We believe that our experienced management team, operating culture, effective operating systems and infrastructure enable us to operate more efficiently than many other Burger King operators, resulting in higher restaurant margins and improved overall financial results.
Consistent Operating History and Financial Strength. We believe that the quality and sophistication of our restaurant operations have driven our strong restaurant level performance. Comparable restaurant sales for our restaurants have generally outperformed the Burger King system. Our strong restaurant level operations coupled with our financial management capabilities have resulted in consistent and stable cash flows. We have demonstrated our ability to prudently manage financial leverage through a variety of economic cycles. We believe that our cash flow from operations and the availability of revolving credit borrowings under our amended senior credit facility will be used to fund our ongoing operations and capital expenditures.
Distinct Brand with Global Recognition, Innovative Marketing and New Product Development. As a Burger King franchisee, we benefit from, and rely on, BKC's extensive marketing, advertising and product development capabilities to drive sales and generate increased restaurant traffic. Over the years, BKC has launched innovative and creative multimedia advertising campaigns that highlight the popular relevance of the Burger King brand. BKC has also introduced promotions that leverage both value and premium menu offerings as well as providing a platform for new premium sandwich offerings. We believe these campaigns continue to positively impact the brand today as BKC focuses on a well-balanced promotional mix and remains committed to focusing on fewer but more impactful new product launches and limited time offers, both of which continue to show positive trends. BKC is also aggressively
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working with franchisees throughout the system to encourage the renovation and remodeling of restaurants to BKC's 20/20 image, which we believe will continue to increase customer traffic and restaurant sales.
Strategic Relationship with Burger King Corporation. We believe that the structure of the 2012 acquisition strengthens our well-established relationship with BKC and further aligns our common interests to grow our business. We intend to continue to expand by making acquisitions, including acquisitions resulting from the exercise of the ROFR obtained in the 2012 acquisition as well as other negotiated acquisitions under our pre-approval rights. The consideration to BKC associated with the 2012 acquisition included an equity interest in Carrols Restaurant Group, which is now approximately 20.8%. Since the 2012 acquisition, two of BKC's senior executives have served on our Board of Directors. Jose Cil, Executive Vice President and President, Burger King, of Restaurant Brands International Inc., the indirect parent company of BKC, and Alexandre Macedo, BKC's President of North America, currently serve on our board of directors. Our restaurants represent approximately 9.6% of the Burger King locations in North America as of January 3, 2016. We believe that the combination of our rights under the operating agreement, BKC's equity interest and its board level representation will continue to reinforce the alignment of our common interests with BKC for the long term.
Multiple Growth Levers. We believe our historical track record of acquiring and integrating restaurants and our commitment to remodel our restaurants provides multiple avenues to grow our business. With more than 50 years of restaurant operating experience, we have successfully grown our business through acquisitions. We have experienced increases in comparable restaurant sales, increased restaurant-level profitability and improved operating metrics at the restaurants we have acquired in the last four years. In addition, we have remodeled a total of 396 restaurants to BKC’s 20/20 restaurant image as of January 3, 2016 which we believe has improved the guests’ overall experience and increased customer traffic.
Experienced Management Team with a Proven Track Record. We believe that our senior management team's extensive experience in the restaurant industry and its long and successful history of developing, acquiring, integrating and operating quick-service restaurants provide us with a competitive advantage. Our management team has a successful history of integrating acquired restaurants, and over the past 20 years, we have significantly increased the number of Burger King restaurants we own and operate, largely through acquisitions. Our operations are overseen by our Chief Executive Officer, Dan Accordino, who has over 40 years of Burger King and quick-service restaurant experience and nine Regional Directors that have an average of 27 years of Burger King restaurant experience. Ninety-six district managers that have an average tenure of 19 years in the Burger King system support the Regional Directors. Our operations management is further supported by our infrastructure of financial, information systems, real estate, human resources and legal professionals.
Our Business Strategies
Our primary business strategies are as follows:
Increase Restaurant Sales and Customer Traffic. BKC has identified and implemented a number of strategies to increase brand awareness, increase market share, improve overall operations and drive sales. These strategies are central to our strategic objectives to deliver profitable growth.
• | Products. The strength of the BKC menu has been built on a distinct flame-grilled cooking platform to make better tasting hamburgers. We believe that BKC intends to continue to optimize the menu by focusing on core products, such as the flagship Whopper® sandwich, while maintaining a balance between value promotions and premium limited time offerings to drive sales and traffic. Recent product innovation has included a multi-tier balanced marketing approach to value and premium offerings, pairing value promotions, such as the $1.49 10-piece chicken nugget promotion, with 2 for $5 premium limited time offerings, such as the X-Long Pulled Pork sandwich, Grilled Chicken Burger and X-Long Jalapeno Cheeseburger. In 2016 promotional initiatives have included a 5 for $4 value offering and the introduction of grilled hot dogs. There have also been a number of enhancements to food preparation procedures to improve the quality of BKC's existing products. These new menu platforms and quality improvements form the backbone of BKC's strategy to appeal to a broader consumer base and to increase restaurant sales. |
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• | Image. We believe that re-imaged restaurants increase curb appeal and result in increased restaurant sales. We have remodeled 396 restaurants to BKC's 20/20 restaurant image which features a fresh, sleek, eye-catching design. The restaurant redesign incorporates easy-to-navigate digital menu boards in the dining room, streamlined merchandising at the drive-thru and flat screen televisions in the dining area. We believe the restaurant remodeling plan has improved our guests' dining experience and increased customer traffic. As of January 3, 2016 we have a total of 432 restaurants with the 20/20 restaurant image, which includes restaurants converted prior to our acquisition. |
• | Advertising and Promotion. We believe that we will continue to benefit from BKC's advertising support of its menu items, product enhancement and reimaging initiatives. BKC has established a data driven marketing process which has focused on driving restaurant sales and traffic, while targeting a broad consumer base with more inclusive messaging. This strategy uses multiple touch points to advertise our products, including digital advertising, social media and on-line video in addition to traditional television advertising. BKC has a food-centric marketing strategy which focuses consumers on the food offerings, the core asset, and balances value promotions and premium limited time offerings to drive profitable restaurant sales and traffic. |
• | Operations. We believe that improving restaurant operations and enhancing the customer experience are key components to increasing the profitability of our restaurants. We believe we will benefit from BKC's ongoing initiatives to improve food quality, simplify restaurant level execution and monitor operational performance, all of which are designed to improve the customer experience and increase customer traffic. |
Strategically Remodel to Elevate Brand Profile and Increase Profit Potential. Over the next year, we plan to strategically remodel an additional 85 to 95 more locations to BKC's 20/20 image. Over the past four years, our restaurants remodeled to BKC's 20/20 image have generated an average sales lift of approximately 10% to 12% and have resulted in an attractive return on investment. We believe there are opportunities to increase profitability by remodeling additional restaurants including restaurants that we have acquired or may acquire in the future.
Selectively Acquire and Develop Additional Burger King Restaurants. As of January 3, 2016, we operated 705 Burger King restaurants, making us one of the largest Burger King franchisees in the world. We acquired the ROFR in the 2012 acquisition and were granted certain pre-approval rights to acquire additional franchised restaurants and to develop new restaurants. Due to the number of restaurants and franchisees in the Burger King system and our historical success in acquiring and integrating restaurants, we believe that there is considerable opportunity for future growth. There are more than 2,000 Burger King restaurants we do not own in states in which we have the ROFR and pre-approval rights. Furthermore, we believe there are additional Burger King restaurants in states not subject to the ROFR that could be attractive acquisition candidates, subject to BKC's customary approval. We believe that the assignment of the ROFR and the pre-approval to acquire and develop additional restaurants provide us with the opportunity to significantly expand our ownership of Burger King restaurants in the future. While we may evaluate and discuss potential acquisitions of additional restaurants from time to time, we currently have no understandings, commitments or agreements with respect to any material acquisitions. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing, if necessary, on acceptable terms or at all.
Improve Profitability of Restaurants We Acquire by Leveraging Our Existing Infrastructure and Best-Practices. For acquired restaurants, we believe we can realize benefits from economies of scale, including leveraging our existing infrastructure across a larger number of restaurants. Additionally, we believe that our skilled management team, sophisticated information technology, operating systems and training and development programs support our ability to enhance operating efficiencies at any restaurants we may acquire. We have demonstrated our ability to increase the profitability of acquired restaurants and we believe, over time, that we will improve profitability and operational efficiency at the restaurants we have and may acquire.
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Restaurant Economics
Selected restaurant operating data for our restaurants is as follows:
Year Ended | |||||||||||
December 29, 2013 | December 28, 2014 | January 3, 2016 | |||||||||
Average annual sales per restaurant (all restaurants) (1) | $ | 1,176,806 | $ | 1,190,505 | $ | 1,274,372 | |||||
Legacy restaurants | $ | 1,263,104 | $ | 1,276,737 | 1,376,600 | ||||||
Restaurants acquired in 2012 | $ | 1,084,442 | $ | 1,102,482 | 1,214,315 | ||||||
Restaurants acquired in 2014 and 2015 | $ | 1,136,522 | 1,170,472 | ||||||||
Average sales transaction | $ | 6.11 | $ | 6.40 | $ | 6.64 | |||||
Drive-through sales as a percentage of total sales | 65.0 | % | 65.3 | % | 66.0 | % | |||||
Day-part sales percentages: | |||||||||||
Breakfast | 12.6 | % | 12.9 | % | 13.2 | % | |||||
Lunch | 33.3 | % | 33.2 | % | 32.8 | % | |||||
Dinner | 20.4 | % | 20.4 | % | 20.4 | % | |||||
Afternoon and late night | 33.6 | % | 33.5 | % | 33.6 | % |
(1) | Average annual sales per restaurant are derived by dividing restaurant sales by the average number of restaurants operating during the period on a 52-week basis. |
Restaurant Capital Costs
The initial cost of the franchise fee, equipment, seating, signage and other interior costs of a standard new Burger King restaurant currently is approximately $380,000 (which excludes the cost of the land, building and site improvements). In the markets in which we primarily operate, the cost of land generally ranges from $600,000 to $800,000 and the cost of building and site improvements generally ranges from $825,000 to $925,000.
With respect to development of freestanding restaurants, we generally seek to acquire the land to construct the building, and thereafter enter into an arrangement to sell and leaseback the land and building under a long-term lease. Historically, we have been able to acquire and finance many of our locations under such leasing arrangements. Where we are unable to purchase the underlying land, we enter into a long-term lease for the land and fund the construction of the building from cash generated from our operations or with borrowings under our senior credit facility rather than through long-term leasing arrangements.
The cost of developing and equipping new restaurants can vary significantly and depends on a number of factors, including the local economic conditions and the characteristics of a particular site. Accordingly, the cost of opening new restaurants in the future may differ substantially from, and may be significantly higher than, both the historical cost of restaurants previously opened and the estimated costs above.
BKC's 20/20 restaurant design draws inspiration from its signature flame-grilled cooking process and incorporates a variety of innovative elements to a backdrop that evokes the industrial look of corrugated metal, brick, wood and concrete. The cost of remodeling a restaurant to the 20/20 image varies depending upon the age and condition of the restaurant and the amount of new equipment needed and can range from $250,000 to $650,000 per restaurant with a projected cost of approximately $480,000 per restaurant in 2016 and an average cost of $380,000 over the past three years. The total cost of a remodel has increased over time due to the replacement of certain kitchen equipment at the time of the remodel which is incremental to the cost to upgrade to the 20/20 design. Pursuant to the operating agreement, as amended, we agreed to remodel 455 Burger King restaurants to BKC's 20/20 restaurant image by December 31, 2016. In connection with the acquisition of 64 Burger King restaurants in 2014, we entered into an agreement with BKC to remodel 46 of the restaurants acquired over a five-year period beginning in 2014. We have remodeled a total of 396 restaurants as of January 3, 2016 and we plan to remodel approximately 85 to 95 additional restaurants in 2016. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent and Future Events Affecting our Results of Operations".
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Site Selection
We believe that the location of our restaurants is a critical component of each restaurant's success. We evaluate potential new sites on many critical criteria including accessibility, visibility, costs, surrounding traffic patterns, competition and demographic characteristics. Our senior management determines the acceptability of all acquisition prospects and new sites, based upon analyses prepared by our real estate, financial and operations professionals.
Seasonality
Our business is moderately seasonal due to regional weather conditions. Due to the location of our restaurants, sales are generally higher during the summer months than during the winter months.
Restaurant Locations
The following table details the locations of our 705 Burger King restaurants as of January 3, 2016:
State | Total Restaurants | |
Illinois | 19 | |
Indiana | 91 | |
Kentucky | 20 | |
Maine | 4 | |
Massachusetts | 1 | |
Michigan | 44 | |
New Jersey | 10 | |
New York | 133 | |
North Carolina | 158 | |
Ohio | 86 | |
Pennsylvania | 37 | |
South Carolina | 32 | |
Tennessee | 27 | |
Vermont | 5 | |
Virginia | 36 | |
West Virginia | 2 | |
Total | 705 |
Operations
Management Structure
We conduct substantially all of our executive management, finance, marketing and operations support functions from our corporate headquarters in Syracuse, New York. Carrols Restaurant Group is led by our Chief Executive Officer and President, Daniel T. Accordino, who has over 40 years of Burger King and quick-service restaurant experience at our company.
Our operations for our restaurants are overseen by nine Regional Directors that have an average of over 27 years of Burger King restaurant experience. Ninety-six district managers support the Regional Directors in the management of our restaurants.
A district manager is responsible for the direct oversight of the day-to-day operations of an average of approximately seven to eight restaurants. Typically, district managers have previously served as restaurant managers at one of our restaurants. Regional directors, district managers and restaurant managers are compensated with a fixed salary plus an incentive bonus based upon the performance of the restaurants under their supervision, and for our regional directors and district managers, the combined performance of all of our restaurants. Typically, our restaurants are staffed with hourly employees who are supervised by a salaried manager and one to three salaried assistant managers.
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Training
We maintain a comprehensive training and development program for all of our personnel and provide both classroom and in-restaurant training for our salaried and hourly personnel. The program emphasizes system-wide operating procedures, food preparation methods and customer service standards. BKC's training and development programs are also available to us as a franchisee.
Management Information Systems
Our sophisticated management information systems provide us with the ability to efficiently and effectively manage our restaurants and to ensure consistent application of operating controls at our restaurants. Our size affords us the ability to maintain an in-house staff of information technology and restaurant systems professionals dedicated to continuously enhancing our systems. In addition, these capabilities allow us to integrate restaurants that we acquire and achieve greater economies of scale and operating efficiencies.
We typically replace the POS systems at restaurants we acquire shortly after acquisition and implement our POS, labor and inventory management systems. Our restaurants employ touch-screen POS systems that are designed to facilitate accuracy and speed of order taking. These systems are user-friendly, require limited cashier training and improve speed-of-service through the use of conversational order-taking techniques. The POS systems are integrated with PC-based applications at the restaurant and hosted systems at our corporate office that are designed to facilitate financial and management control of our restaurant operations.
Our restaurant systems provide daily tracking and reporting of traffic counts, menu item sales, labor and food data including costs and inventories, and other key operating metrics for each restaurant. We communicate electronically with our restaurants on a continuous basis via a high-speed data network, which enables us to collect this information for use in our corporate management systems in near real-time. Our corporate headquarters manages systems that support all of our accounting, operating and reporting systems. We also operate a 24-hour, seven-day help desk at our corporate headquarters that enables us to provide systems and operational support to our restaurant operations as required. Among other things, our restaurant information systems provide us with the ability to:
• | monitor labor utilization and sales trends on a real-time basis at each restaurant, enabling the restaurant manager to effectively manage to our established labor standards on a timely basis; |
• | reduce inventory shrinkage using restaurant-level quantity-based inventory management systems and daily reporting of inventory variances; |
• | analyze sales and product mix data to help restaurant managers forecast production levels; |
• | monitor day-part drive-thru speed of service at each of our restaurants; |
• | allow the restaurant manager to produce day-part labor schedules based on the restaurant's historical sales patterns; |
• | systematically communicate human resource and payroll data to our administrative offices for efficient centralized management of labor costs and payroll processing; |
• | employ centralized control over price, menu and inventory management activities at the restaurant utilizing the remote management capabilities of our systems; |
• | take advantage of electronic commerce including our ability to place orders with suppliers and to integrate detailed invoice, receiving and product data with our inventory and accounting systems; |
• | provide analyses, reporting and tools to enable all levels of management to review a wide-range of financial, product mix and operational data; and |
• | systematically analyze and report on detailed transactional data to help detect and identify potential theft. |
Critical information from our systems is available in near real-time to our restaurant managers, who are expected to react quickly to trends or situations in their restaurant. Our district managers also receive near real-time information for their respective restaurants and have access to key operating data on a remote basis using our corporate intranet-based reporting. Management personnel at all levels, from the restaurant manager through senior management, utilize key restaurant performance indicators that are also included in our restaurant-level incentive bonus plans.
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Burger King Franchise Agreements
Each of our Burger King restaurants operates under a separate franchise agreement with BKC. Our franchise agreements with BKC generally require, among other things, that all restaurants comply with specified design criteria and operate in a prescribed manner, including utilization of the standard Burger King menu. In addition, our Burger King franchise agreements generally require that our restaurants conform to BKC's current image and provide for remodeling of our restaurants during the tenth year of the agreements to conform to such current image, which may require significant expenditures. These franchise agreements with BKC generally provide for an initial term of 20 years and currently have an initial franchise fee of $50,000. In the event that we terminate any franchise agreement and close the related BKC restaurant prior to the expiration of its term, we generally are required to pay BKC an amount based on the net present value of the royalty stream that would have been realized by BKC had such franchise agreement not been terminated. Any franchise agreement, including renewals, can be extended at our discretion for an additional 20-year term, with BKC's approval, provided that, among other things, the restaurant meets the current Burger King operating and image standards and that we are not in default under the terms of the franchise agreement. The franchise agreement fee for subsequent renewals is currently $50,000. BKC may terminate any of the franchise agreements if an act of default is committed by us under these agreements and such default is not cured. Defaults under the franchise agreements include, among other things, our failure to operate such Burger King restaurant in accordance with the operating standards and specifications established by BKC (including failure to use equipment, uniforms or decor approved by BKC), our failure to sell products approved or designated by BKC, our failure to pay royalties or advertising and sales promotion contributions as required, our unauthorized sale, transfer or assignment of such franchise agreement or the related restaurant, certain events of bankruptcy or insolvency with respect to us, conduct by us or our employees that has a harmful effect on the Burger King restaurant system, conviction of us or our executive officers for certain indictable offenses, our failure to maintain a responsible credit rating or the acquisition by us of an interest in any other hamburger restaurant business. At January 3, 2016, we were not in default under any of the franchise agreements with BKC.
In order to obtain a successor franchise agreement with BKC, a franchisee is typically required to make capital improvements to the restaurant to bring it up to BKC's current image standards. The cost of these improvements may vary widely depending upon the magnitude of the required changes and the degree to which we have made interim improvements to the restaurant. At January 3, 2016, we had 36 franchise agreements due to expire in 2016, 49 franchise agreements due to expire in 2017 and 29 franchise agreements due to expire in 2018. In recent years, the historical costs of improving our Burger King restaurants in connection with franchise renewals generally have ranged from $250,000 to $650,000 per restaurant. The average cost of our remodels to the 20/20 image in 2015 was approximately $450,000 per restaurant. The cost of remodels can vary depending upon the age and condition of the restaurant and the amount of new equipment needed. The cost of capital improvements made in connection with future franchise agreement renewals may differ substantially from past franchise renewals depending on the current image requirements established from time to time by BKC.
We believe that we will be able to satisfy BKC's normal franchise agreement renewal criteria. Accordingly, we believe that renewal franchise agreements will be granted on a timely basis by BKC at the expiration of our existing franchise agreements. Historically, BKC has granted all of our requests for successor franchise agreements. However, there can be no assurance that BKC will grant these requests in the future.
We evaluate the performance of our Burger King restaurants on an ongoing basis. Such evaluation depends on many factors, among other things, including our assessment of the anticipated future operating results of the subject restaurants and the cost of required capital improvements that we would need to commit for such restaurants. If we determine that a Burger King restaurant is under-performing, or that we do not anticipate an adequate return on the capital required to renew the franchise agreement, we may elect to close such restaurant. We may also relocate (offset) a restaurant within its trade area and build a new Burger King restaurant as part of the franchise renewal process. In 2015, we closed 23 restaurants. We currently do not expect to close any restaurants in 2016, excluding any relocation of existing restaurants. Our determination to close these restaurants is subject to further evaluation and may change. We may also elect to close additional restaurants in the future.
In addition to the initial franchise fee, we generally pay BKC a monthly royalty. The royalty rate for new restaurants and for successor franchise agreements is 4.5% of sales. Royalty payments for restaurants acquired from other franchisees are based on the terms of existing franchise agreements being acquired, and may be less than 4.5%. The royalty rate was increased from 3.5% to 4.5% of sales in 2000, and generally for restaurants that were in existence
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in 2000, becomes effective upon the renewal of the franchise agreement. Burger King royalties, as a percentage of our restaurant sales, were 4.2% in 2015, 2014 and 2013. We anticipate our Burger King royalties, as a percentage of our restaurant sales, will be 4.2% in 2016 as a result of the terms outlined above.
We also generally contribute 4% of restaurant sales from our Burger King restaurants to fund BKC's national and regional advertising. BKC engages in substantial national and regional advertising and promotional activities and other efforts to maintain and enhance the Burger King brand. From time to time we supplement BKC's marketing with our own local advertising and promotional campaigns. See “- Advertising, Products and Promotion” below.
Our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing Burger King restaurants, we cannot assure you that franchises granted by BKC to third parties will not adversely affect any Burger King restaurants that we operate.
Except as permitted by the operating agreement, we are required to obtain BKC's consent before we acquire existing Burger King restaurants from other franchisees or develop new Burger King restaurants. BKC also has the right of first refusal to purchase any Burger King restaurant that is being offered for sale by a franchisee. However, pursuant to the operating agreement, BKC assigned the ROFR to us in 20 states and granted us franchise pre-approval to build new restaurants or acquire restaurants from franchisees until the date that we operate 1,000 restaurants. Historically, BKC has approved substantially all of our acquisitions of restaurants from other franchisees.
Advertising, Products and Promotion
BKC's marketing strategy is characterized by its HAVE IT YOUR WAY® service, TASTE IS KING® tag line, flame grilling, generous portions and competitive prices. Burger King restaurants feature flame-grilled hamburgers, the most popular of which is the Whopper® sandwich, a large, flame-grilled hamburger garnished with mayonnaise, lettuce, onions, pickles and tomatoes. The basic menu of all Burger King restaurants also includes a variety of hamburgers, chicken and other specialty sandwiches, french fries, soft drinks, salads, breakfast items, snacks, and other offerings. BKC and its franchisees have historically spent between 4% and 5% of their respective sales on marketing, advertising and promotion to sustain high brand awareness. BKC's marketing initiatives are designed to reach a diverse consumer base and BKC has continued to introduce a number of new and enhanced products to broaden menu offerings and drive customer traffic in all day parts.
We are generally required to contribute 4% of restaurant sales to an advertising fund utilized by BKC for its advertising, promotional programs and public relations activities. BKC's advertising programs consist of national campaigns supplemented by local advertising. BKC's advertising campaigns are generally carried on television, radio and in circulated print media (national and regional newspapers and magazines). As a percentage of our restaurant sales advertising expense was 3.8% in 2015, 4.0% in 2014 and 4.5% in 2013. For 2016 we anticipate advertising expense to range between 4.2% and 4.4% of restaurant sales.
The efficiency and quality of advertising and promotional programs can significantly affect the quick-service restaurant businesses. We believe that one of the major advantages of being a Burger King franchisee is the value of the extensive national and regional advertising and promotional programs conducted by BKC. In addition to the benefits derived from BKC's advertising spending, we sometimes supplement BKC's advertising and promotional activities with our own local advertising and promotions, including the purchase of additional television, radio and print advertising. The concentration of our Burger King restaurants in many of our markets permits us to leverage advertising in those markets. We also utilize promotional programs, such as combination value meals and discounted prices, targeted to our customers, in order to create a flexible and directed marketing program.
In connection with BKC's 2011 initiatives to support the installation of digital menu boards, the introduction of new menu items and enhancements to the quality of our food preparation, BKC reduced the required advertising contribution by $5,400 per restaurant per year through 2015, for those restaurants whose expenditures included a digital menu board, and $3,000 per restaurant per year through 2015, for those restaurants whose expenditures excluded a digital menu board.
Suppliers
We are a member of a national purchasing cooperative, Restaurant Services, Inc., which we refer to as "RSI", created for the Burger King system. RSI is a non-profit independent purchasing cooperative that is responsible for
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sourcing our products and related supplies and managing relationships with approved distributors for the Burger King system. We use our purchasing power to negotiate directly with certain other vendors, to obtain favorable pricing and terms for supplying our restaurants. For our restaurants, we are required to purchase all of our foodstuffs, paper goods and packaging materials from BKC-approved suppliers at prices negotiated by RSI. We currently utilize three distributors, Maines Paper & Food Service, Inc., Reinhart Food Service L.L.C. and MBM Food Service Inc., to supply our restaurants with the majority of our foodstuffs and, as of January 3, 2016, such distributors supplied 39%, 33% and 28%, respectively, of our restaurants. We may purchase non-food items, such as kitchen utensils, equipment maintenance tools and other supplies, from any suitable source so long as such items meet BKC product uniformity standards. All BKC-approved distributors are required to purchase foodstuffs and supplies from BKC-approved manufacturers and purveyors. BKC is responsible for monitoring quality control and supervision of these manufacturers and conducts regular visits to observe the preparation of foodstuffs, and to run various tests to ensure that only quality foodstuffs are sold to its approved suppliers. In addition, BKC coordinates and supervises audits of approved suppliers and distributors to determine continuing product specification compliance and to ensure that manufacturing plant and distribution center standards are met. Although we believe that we have alternative sources of supply available to our restaurants, in the event any distributor or supplier for our restaurants was unable to service us, this could lead to a disruption of service or supply at our restaurants until a new distributor or supplier is engaged, which could have an adverse effect on our business.
Quality Assurance
Our operational focus is closely monitored to achieve a high level of customer satisfaction via speed of service, order accuracy and quality of service. Our senior management and restaurant management staffs are principally responsible for ensuring compliance with BKC's required operating procedures. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct. In order to maintain compliance with these operating standards and specifications, we distribute to our restaurant operations management team detailed reports measuring compliance with various customer service standards and objectives, including feedback obtained directly from our customers through instructions given to them at the point of sale. The customer feedback is monitored by an independent agency and us and consists of evaluations of speed of service, quality of service, quality of our menu items and other operational objectives including the cleanliness of our restaurants. We also have our own staff that handle customer inquiries and complaints. The level of customer satisfaction is a key metric in our restaurant-level incentive bonus plans.
We operate in accordance with quality assurance and health standards mandated by federal, state and local governmental laws and regulations. These standards include food preparation rules regarding, among other things, minimum cooking times and temperatures, maximum time standards for holding prepared food, food handling guidelines and cleanliness. To maintain these standards, under BKC's oversight third-party firms conduct unscheduled inspections and follow-up inspections of our restaurants and report their findings to us. In addition, restaurant managers conduct internal inspections for taste, quality, cleanliness and food safety on a regular basis.
Trademarks
As a franchisee of Burger King, we also have contractual rights to use certain BKC-owned trademarks, service marks and other intellectual property relating to the Burger King concept. We have no proprietary intellectual property other than the Carrols logo and trademark.
Government Regulation
Various federal, state and local laws affect our business, including various health, sanitation, fire and safety standards. Restaurants to be constructed or remodeled are subject to state and local building code and zoning requirements. In connection with the development and remodeling of our restaurants, we may incur costs to meet certain federal, state and local regulations, including regulations promulgated under the Americans with Disabilities Act.
We are subject to the federal Fair Labor Standards Act and various other federal and state laws governing such matters as:
• | minimum wage requirements; |
• | unemployment compensation; |
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• | overtime; and |
• | other working conditions and citizenship requirements. |
A significant number of our food service personnel are paid at rates related to the federal, and where applicable, state minimum wage and, accordingly, increases in the minimum wage have increased and in the future will increase wage rates at our restaurants.
The Patient Protection and Affordable Care Act (the “Act”) required businesses employing fifty or more full-time equivalent employees to offer health care benefits to those full-time employees or be subject to an annual penalty. Those benefits must be provided under a health care plan which provides a certain minimum scope of health care services. The Act also limits the portion of the cost of the benefits which we can require employees to pay. Based on our enrollment history to date, approximately 15% of our approximately 1,300 eligible hourly employees have opted for coverage under our medical plan.
We are also subject to various federal, state and local environmental laws, rules and regulations. We believe that we conduct our operations in substantial compliance with applicable environmental laws and regulations. Our costs for compliance with environmental laws or regulations have not had a material adverse effect on our results of operations, cash flows or financial condition in the past.
Industry and Competition
The Restaurant Market. Restaurant sales historically have closely tracked several macroeconomic indicators and we believe that “away-from-home” food consumption will increase due to these trends in recent years. Historically, unemployment has been inversely related to restaurant sales and, as the unemployment rate decreases and disposable income increases, restaurant sales have increased. According to the U.S. Department of Agriculture, 2014 was the first year food away from home dollars surpassed at-home dining, with 50.1% of food dollars spent on food away from home and with total expenditures increasing 4.8% from 2013.
Quick-Service Restaurants. We operate in the hamburger category of the quick-service restaurant segment of the restaurant industry. Quick-service restaurants are distinguished by high speed of service and efficiency, convenience, limited menu and service, and value pricing. According to Nation's Restaurant News, 2014 U.S. foodservice sales for the Top 100 restaurant chains increased 4.6% from 2013 to $232.2 billion. Of this amount, the hamburger category represented $73.8 billion, or 31.8%, making it the largest category of the quick-service segment.
The restaurant industry is highly competitive with respect to price, service, location and food quality. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and prepared food counters in supermarkets, grocery stores, cafeterias and other purveyors of moderately priced and quickly prepared foods.
We believe that:
• | product quality and taste; |
• | brand recognition; |
• | convenience of location; |
• | speed of service; |
• | menu variety; |
• | price; and |
• | ambiance |
are the most important competitive factors in the quick-service restaurant segment and that our restaurants effectively compete in each category. We believe our largest competitors are McDonald's and Wendy's.
Employees
As of January 3, 2016, we employed approximately 20,350 persons of which approximately 150 were administrative personnel and approximately 20,200 were restaurant operations personnel. None of our employees are
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are unionized or covered by collective bargaining agreements. We believe that our overall relations with our employees are good.
Availability of Information
We file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
We make available at no cost through our website (www.carrols.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as well as other reports relating to us that are filed or furnished to the SEC, as soon as reasonably practicable after electronically filing such material with the SEC. The reference to our website address is a textual reference only, meaning that it does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as other information and data included in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, consolidated financial condition or results of operations.
Risks Related to Our Business
Intense competition in the restaurant industry could make it more difficult to profitably 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 restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and prepared food counters in grocery stores, supermarkets, cafeterias and other purveyors of moderately priced and quickly prepared food. Our largest competitors are McDonald's and Wendy's restaurants.
Due to competitive conditions, we, as well as certain of the other major quick-service restaurant chains, have offered select food items and combination meals at discounted prices. These pricing and marketing strategies have had, and in the future may have, a negative impact on our sales and earnings.
Factors applicable to the quick-service restaurant segment may adversely affect our results of operations, which may cause a decrease in earnings and revenues.
The quick-service restaurant segment is highly competitive and can be materially adversely affected by many factors, including:
• | changes in local, regional or national economic conditions; |
• | changes in demographic trends; |
• | changes in consumer tastes; |
• | changes in traffic patterns; |
• | increases in fuel prices and utility costs; |
• | consumer concerns about health, diet and nutrition; |
• | increases in the number of, and particular locations of, competing restaurants; |
• | changes in discretionary consumer spending; |
• | inflation; |
• | increases in the cost of food, such as beef, chicken, produce and packaging; |
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• | increased labor costs, including healthcare, unemployment insurance and minimum wage requirements; |
• | the availability of experienced management and hourly-paid employees; and |
• | regional weather conditions. |
We are highly dependent on the Burger King system and our ability to renew our franchise agreements with BKC. The failure to renew our franchise agreements or Burger King's failure to compete effectively would materially adversely affect our results of operations.
Due to the nature of franchising and our agreements with BKC, our success is, to a large extent, directly related to the success of the Burger King system including its financial condition, advertising programs, new products, overall quality of operations and the successful and consistent operation of Burger King restaurants owned by other franchisees. We cannot assure you that Burger King will be able to compete effectively with other restaurants. As a result, any failure of Burger King to compete effectively would likely have a material adverse effect on our operating results.
Under each of our franchise agreements with BKC, we are required to comply with operational programs established by BKC. For example, our franchise agreements with BKC require that our restaurants comply with specified design criteria. In addition, BKC generally has the right to require us during the tenth year of a franchise agreement to remodel our restaurants to conform to the then-current image of Burger King, which may require the expenditure of considerable funds. In addition we may not be able to avoid adopting menu price discount promotions or permanent menu price decreases instituted by BKC that may be unprofitable.
Our franchise agreements typically have a 20-year term after which BKC's consent is required to receive a successor franchise agreement. Our franchise agreements with BKC that are set to expire over the next three years are as follows: 36 in 2016, 49 in 2017 and 29 in 2018.
We cannot assure you that BKC will grant each of our future requests for successor franchise agreements, and any failure of BKC to renew our franchise agreements could adversely affect our operating results. In addition, as a condition of approval of a successor franchise agreement, BKC may require us to make capital improvements to particular restaurants to bring them up to Burger King current image standards, which may require us to incur substantial costs.
In addition, our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing restaurants, we cannot assure you that franchises granted by BKC to third parties will not adversely affect any restaurants that we operate.
Additionally, as a franchisee, we have no control over the Burger King brand. If BKC does not adequately protect the Burger King brand and other intellectual property, our competitive position and operating results could be harmed.
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Our strategy includes pursuing acquisitions of additional Burger King restaurants and we may not find Burger King restaurants that are suitable acquisition candidates or successfully operate or integrate any Burger King restaurants we may acquire.
As part of our strategy, we intend to pursue the acquisition of additional Burger King restaurants. Pursuant to the operating agreement between BKC and Carrols LLC, dated as of May 30, 2012, as amended on January 26, 2015 and December 17, 2015, BKC assigned to us its ROFR under its franchise agreements with its franchisees to purchase all of the assets of a restaurant or all or substantially all of the voting stock of the franchisee, whether direct or indirect, on the same terms proposed between such franchisee and a third party purchaser in 20 states as follows: Connecticut (except Hartford county), Delaware, Indiana, Kentucky, Maine, Maryland, Massachusetts (except for Middlesex, Norfolk and Suffolk counties), Michigan, New Hampshire, New Jersey, New York (except for Bronx, Kings, Nassau, New York, Queens, Richmond, Suffolk and Westchester counties), North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington DC, and West Virginia. In addition, pursuant to the operating agreement, BKC granted us, on a non-exclusive basis, franchise pre-approval to, among other things, acquire restaurants from Burger King franchisees in the DMAs until the date that we operate 1,000 Burger King restaurants. As part of the franchise pre-approval, BKC granted us pre-approval for acquisitions of restaurants from franchisees in the 20 states above subject to and in accordance with the terms of the operating agreement. Although we believe that opportunities for future acquisitions may be available from time to time, competition for acquisition candidates may exist or increase in the future. Consequently, there may be fewer acquisition opportunities available to us at an attractive acquisition price. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate additional restaurants without substantial costs, delays or operational or financial problems. In the event we are able to acquire additional restaurants, the integration and operation of the acquired BKC restaurants may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing, if necessary, on acceptable terms or at all. Both our senior credit facility and the indenture governing the $200 million of 8% Senior Secured Second Lien Notes due 2022 (the "Notes") contain restrictive covenants that may prevent us from incurring additional debt to acquire additional Burger King restaurants.
We are required to make substantial capital expenditures in connection with the remodeling of our restaurants.
The remodeling of our Burger King restaurants pursuant to the agreed upon remodel plan set forth in the amended operating agreement as well as other remodeling commitments we have made to BKC in connection with our acquisitions may be substantially costlier than we currently anticipate. We may also incur substantial capital expenditures as a result of acquiring restaurants, including restaurants acquired by exercising the ROFR. If we are required to make greater than anticipated capital expenditures in connection with either or both of these activities, our business, financial condition and cash flows could be adversely affected. In addition, if we do not complete the required number of restaurant remodels contemplated in the amended operating plan, a suspension of our ROFR could occur. In addition, we may be required to obtain additional financing to fund the remodeling of our Burger King restaurants pursuant to the agreed upon remodel plan and there can be no assurance we will be able to obtain additional financing to fund our remodeling plans on acceptable terms or at all.
We may experience difficulties in integrating restaurants acquired by us into our existing business.
The acquisition of a significant number of restaurants will involve the integration of those acquired restaurants with our existing business. The difficulties of integration include:
• | coordinating and consolidating geographically separated systems and facilities; |
• | integrating the management and personnel of the acquired restaurants, maintaining employee morale and retaining key employees; |
• | implementing our management information systems; and |
• | implementing operational procedures and disciplines to control costs and increase profitability. |
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business and the loss of key personnel. The diversion of management's attention and any delays or difficulties encountered in connection with the acquisition of restaurants and integration of acquired restaurants' operations could have an adverse effect on our business, results of operations and financial condition.
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Achieving the anticipated benefits of the acquisition of additional restaurants will depend in part upon whether we can integrate any acquired restaurants in an efficient and effective manner. We may not accomplish this integration process smoothly or successfully. If management is unable to successfully integrate acquired restaurants, the anticipated benefits of the acquisition may not be realized.
In our evaluation of our recent and potential acquisitions, assumptions are made as to our ability to increase sales as well as improve restaurant-level profitability particularly in the areas of food, labor and cash controls as well as other operating expenses. If we are not able to make such improvements in these operational areas as planned, the acquired restaurants' targeted profitability levels will be affected which could cause an adverse effect on our overall financial results and financial condition.
We could be adversely affected by food-borne illnesses, as well as widespread negative publicity regarding food quality, illness, injury or other health concerns.
Negative publicity about food quality, illness, injury or other health concerns (including health implications of obesity) or similar issues stemming from one restaurant or a number of restaurants could materially adversely affect us, regardless of whether they pertain to our own restaurants, other Burger King restaurants, or to restaurants owned or operated by other companies. For example, health concerns about the consumption of beef, chicken or eggs or by specific events such as the outbreak of “mad cow” disease could lead to changes in consumer preferences, reduce consumption of our products and adversely affect our financial performance. These events could also reduce available supply or significantly raise the price of beef, chicken or eggs.
In addition, we cannot guarantee that our operational controls and employee training will be effective in preventing food-borne illnesses, food tampering and other food safety issues that may affect our restaurants. Food-borne illness or food tampering incidents could be caused by customers, employees or food suppliers and transporters and, therefore, could be outside of our control. Any publicity relating to health concerns or the perceived or specific outbreaks of food-borne illnesses, food tampering or other food safety issues attributed to one or more of our restaurants, could result in a significant decrease in guest traffic in all of our restaurants and could have a material adverse effect on our results of operations. In addition, similar publicity or occurrences with respect to other restaurants or restaurant chains could also decrease our guest traffic and have a similar material adverse effect on our business.
We may incur significant liability or reputational harm if claims are brought against us or the Burger King brand.
We may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-related illness, injuries suffered in our premises or other food quality, health or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and overtime compensation issues and, in the case of quick service restaurants, alleging that they have failed to disclose the health risks associated with high fat or high sodium foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by governmental authorities or our employees, among others, based upon these and other matters. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one or a number of our locations could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any such cases may materially and adversely affect our operations by increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations.
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Changes in consumer taste could negatively impact our business.
We obtain a significant portion of our revenues from the sale of hamburgers and various types of sandwiches. If consumer preferences for these types of foods change, it could have a material adverse effect on our operating results. The quick-service restaurant segment is characterized by the frequent introduction of new products, often supported by substantial promotional campaigns, and is subject to changing consumer preferences, tastes, and eating and purchasing habits. Our success depends on BKC's ability to anticipate and respond to changing consumer preferences, tastes and dining and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. BKC may be forced to make changes to our menu items in order to respond to changes in consumer tastes or dining patterns, and we may lose customers who do not prefer the new menu items. In recent years, numerous companies in the quick-service restaurant segments have introduced products positioned to capitalize on the growing consumer preference for food products that are, or are perceived to be, promoting good health, nutritious, low in calories and low in fat content. If BKC does not continually develop and successfully introduce new menu offerings that appeal to changing consumer preferences or if the Burger King system does not timely capitalize on new products, our operating results could suffer. In addition, any significant event that adversely affects consumption of our products, such as cost, changing tastes or health concerns, could adversely affect our financial performance.
If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our business.
Our financial performance depends on our continuing ability to offer fresh, quality food at competitive prices. If a significant disruption in service or supply by our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on us.
We are a member of a national purchasing cooperative, Restaurant Services, Inc., which serves as the purchasing agent for approved distributors to the Burger King system. We are required to purchase all of our foodstuffs, paper goods and packaging materials from BKC-approved suppliers. We currently utilize three distributors for our restaurants, Maines Paper & Food Service, Inc., Reinhart Food Service L.L.C. and MBM Food Service Inc., to supply our restaurants in various geographical areas. As of January 3, 2016, such distributors supplied 39%, 33% and 28%, respectively of our restaurants. Although we believe that we have alternative sources of supply, in the event any distributors or suppliers are unable to service us, this could lead to a disruption of service or supply until a new distributor or supplier is engaged, which could have an adverse effect on our business.
If labor costs increase, we may not be able to make a corresponding increase in our prices and our operating results may be adversely affected.
Wage rates for a number of our employees are either at or slightly above the federal and or state minimum wage rates. As federal and/or state minimum wage rates increase, we may need to increase not only the wage rates of our minimum wage employees but also the wages paid to the employees at wage rates which are above the minimum wage, which will increase our costs. The extent to which we are not able to raise our prices to compensate for increases in wage rates, including increases in state unemployment insurance costs or other costs including mandated health insurance, could have a material adverse effect on our operating results. In addition, even if minimum wage rates do not increase, we may still be required to raise wage rates in order to compete for an adequate supply of labor for our restaurants.
The efficiency and quality of our competitors' advertising and promotional programs and the extent and cost of our advertising could have a material adverse effect on our results of operations and financial condition.
The success of our restaurants depends in part upon the effectiveness of the advertising campaigns and promotions by BKC. If our competitors increase spending on advertising and promotion, or the cost of television or radio advertising increases, or BKC's or our advertising and promotions are less effective than our competitors', there could be a material adverse effect on our results of operations and financial condition.
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Our business is regional and we therefore face risks related to reliance on certain markets as well as risks for other unforeseen events.
At January 3, 2016, 19% of our restaurants were located in New York, 31% were located in Indiana, Ohio and Michigan and 27% of our restaurants were located in North Carolina and South Carolina. Therefore, the economic conditions, state and local government regulations, weather conditions or other conditions affecting New York, Indiana, Ohio, Michigan, North Carolina and South Carolina and other unforeseen events, including terrorism and other international conflicts may have a material impact on the success of our restaurants in those locations.
Many of our restaurants are located in regions that may be susceptible to severe weather conditions such as harsh winter weather. As a result, adverse weather conditions in any of these areas could damage these restaurants, result in fewer guest visits to these restaurants and otherwise have a material adverse impact on our business.
We cannot assure you that the current locations of our restaurants will continue to be economically viable or that additional locations will be acquired at reasonable costs.
The location of our restaurants has significant influence on their success. We cannot assure you that current locations will continue to be economically viable or that additional locations can be acquired at reasonable costs. In addition, the economic environment where restaurants are located could decline in the future, which could result in reduced sales in those locations. We cannot assure you that new sites will be profitable or as profitable as existing sites.
Economic downturns may adversely impact consumer spending patterns.
The U.S. economy has in the past experienced significant slowdown and volatility due to uncertainties related to availability of credit, difficulties in the banking and financial services sectors, softness in the housing market, diminished market liquidity, falling consumer confidence and high unemployment rates. Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants. In particular, where our customers' disposable income is reduced (such as by job losses, credit constraints and higher housing, tax, energy, interest or other costs) or where the perceived wealth of customers has decreased (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions), our restaurants have in the past experienced, and may in the future experience, lower sales and customer traffic as customers choose lower-cost alternatives or other alternatives to dining out. The resulting decrease in our customer traffic or average sales per transaction has had an adverse effect in the past, and could in the future have a material adverse effect, on our business.
The loss of the services of our senior management could have a material adverse effect on our business, financial condition or results of operations.
Our success depends to a large extent upon the continued services of our senior management who have substantial experience in the restaurant industry. We believe that it could be difficult to replace our senior management with individuals having comparable experience. Consequently, the loss of the services of members of our senior management could have a material adverse effect on our business, financial condition or results of operations.
Government regulation could adversely affect our financial condition and results of operations.
We are subject to extensive laws and regulations relating to the development and operation of restaurants, including regulations relating to the following:
• | zoning; |
• | requirements relating to labeling of caloric and other nutritional information on menu boards, advertising and food packaging; |
• | the preparation and sale of food; |
• | employer/employee relationships, including minimum wage requirements, overtime, working and safety conditions, and citizenship requirements; |
• | health care; and |
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• | federal and state laws that prohibit discrimination and laws regulating design and operation of, and access to, facilities, such as the Americans With Disabilities Act of 1990. |
In the event that legislation having a negative impact on our business is adopted, it could have a material adverse impact on us. For example, substantial increases in the minimum wage or state or Federal unemployment taxes could adversely affect our financial condition and results of operations. Local zoning or building codes or regulations can cause substantial delays in our ability to build and open new restaurants. Any failure to obtain and maintain required licenses, permits and approvals could also adversely affect our operating results.
Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our results of operations.
We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous substances or other regulated materials, release of pollutants into the air, soil and water, and the remediation of contaminated sites.
Failure to comply with environmental laws could result in the imposition of fines or penalties, restrictions on operations by governmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for alleged personal injury or damages to property or natural resources. Some environmental laws impose strict, and under some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on current and prior owners or operators of the sites, as well as those entities that send regulated materials to the sites. We cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. Therefore, our costs of complying with current and future environmental, health and safety laws could adversely affect our results of operations.
We are subject to all of the risks associated with leasing property subject to long-term non-cancelable leases.
The leases for our restaurant locations (except for certain acquired restaurants which have an underlying lease term of less than 20 years) generally have initial terms of 20 years, and typically provide for renewal options in five year increments as well as for rent escalations. Generally, our leases are “net” leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. We generally cannot cancel our leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be obligated to perform our monetary obligations under the applicable lease including, among other things, paying all amounts due for the balance of the lease term. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all, which could cause us to close restaurants in desirable locations.
An increase in food costs could adversely affect our operating results.
Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs. Changes in the price or availability of certain food products could affect our ability to offer broad menu and price offerings to guests and could materially adversely affect our profitability and reputation. The type, variety, quality and price of beef, chicken, produce and cheese can be subject to change and to factors beyond our control, including weather, governmental regulation, availability and seasonality, each of which may affect our food costs or cause a disruption in our supply. Additionally, more extreme weather patterns in recent years have resulted in lower than normal levels of rainfall in key agricultural states such as California, impacting the price of water and the corresponding prices of food commodities grown in states facing drought conditions. Our food distributors or suppliers also may be affected by higher costs to produce and transport commodities used in our restaurants, higher minimum wage and benefit costs and other expenses that they pass through to their customers, which could result in higher costs for goods and services supplied to us. Although RSI is able to contract for certain food commodities for periods up to one year, the pricing and availability of some commodities used in our operations are not locked in for periods of longer than one week or at all. We do not currently use financial instruments to hedge our risk to market fluctuations in the price of beef, produce and other food products. We may not be able to anticipate and react to changing food costs through menu price adjustments in the future, which could negatively impact our results of operations.
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Security breaches of confidential guest information in connection with our electronic processing of credit and debit card transactions may adversely affect our business.
A significant amount of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their customers was compromised. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our guests' credit or debit card information. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may have a material adverse effect on us and our restaurants.
We depend on information technology and any material failure of that technology could impair our ability to efficiently operate our business.
We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants, procurement and payment to other significant suppliers, collection of cash, and payment of other financial obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations. Significant capital investments might be required to remediate any problems.
Carrols is currently a guarantor under 30 Fiesta restaurant property leases and the primary lessee on five Fiesta restaurant property leases, and any default under such property leases by Fiesta may result in substantial liabilities to us.
Carrols currently is a guarantor under 30 Fiesta restaurant property leases. The Separation and Distribution Agreement, which we refer to as the "separation agreement", dated as of April 24, 2012 and entered into in connection with the spin-off among Carrols, Fiesta and us provides that the parties will cooperate and use their commercially reasonable efforts to obtain the release of such guarantees. Unless and until any such guarantees are released, Fiesta agrees to indemnify Carrols for any losses or liabilities or expenses that it may incur arising from or in connection with any such lease guarantees.
Carrols is currently a primary lessee of five Fiesta restaurants which it subleases to Fiesta. The separation agreement provides that the parties will cooperate and use their commercially reasonable efforts to cause Fiesta or a subsidiary of Fiesta to enter into a new master lease or individual leases with the lessor with respect to the Fiesta restaurants where Carrols is currently a lessee. The separation agreement provides that until such new master lease or such individual leases are entered into, (i) Carrols will perform its obligations under the master lease for the five Fiesta restaurants where it is a lessee and (ii) the parties will cooperate and use their commercially reasonable efforts to enter into with the lessor a non-disturbance agreement or similar agreement which shall provide that Fiesta or one of its subsidiaries shall become the lessee under such master lease with respect to such Fiesta restaurants and perform Carrols' obligations under such master lease in the event of a breach or default by Carrols.
Such guarantees may never be released and a new master lease with respect to the five Fiesta properties where Carrols is the primary lessee may never be entered into by Fiesta. Any losses or liabilities that may arise in connection such guarantees or the master lease where Carrols is not able to receive indemnification from Fiesta may result in substantial liabilities to us and could have a material adverse effect on our business.
Risks Related to Our Common Stock
The market price of our common stock may be highly volatile or may decline regardless of our operating performance.
The trading price of our common stock may fluctuate substantially. The price of our common stock that will prevail in the market may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. The fluctuations could cause a loss of all or part of an investment in our common stock. Factors that could cause fluctuation in the trading price of our common stock may include, but are not limited to the following:
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• | price and volume fluctuations in the overall stock market from time to time; |
• | significant volatility in the market price and trading volume of companies generally or restaurant companies; |
• | actual or anticipated variations in the earnings or operating results of our company or our competitors; |
• | actual or anticipated changes in financial estimates by us or by any securities analysts who might cover our stock or the stock of other companies in our industry; |
• | market conditions or trends in our industry and the economy as a whole; |
• | announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures and our ability to complete any such transaction; |
• | announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; |
• | capital commitments; |
• | changes in accounting principles; |
• | additions or departures of key personnel; |
• | sales of our common stock, including sales of large blocks of our common stock or sales by our directors and officers; and |
• | events that affect BKC. |
In addition, if the market for restaurant company stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry or related industries even if these events do not directly affect us.
In the past, following periods of volatility in the market price of a company's securities, class action securities litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our business, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
The concentrated ownership of our capital stock by insiders will likely limit our stockholders' ability to influence corporate matters.
Our executive officers, directors and BKC together beneficially own approximately 25.0% of our outstanding common stock as of March 4, 2016 (assuming conversion of the Series A Preferred Stock). Due to the issuance of Series A Preferred Stock to BKC in connection with our 2012 acquisition, BKC beneficially owns approximately 20.8% of our common stock as of March 4, 2016 (assuming conversion of the Series A Preferred Stock). Our executive officers and directors (excluding directors affiliated with BKC) together beneficially own approximately 5.3% of our common stock outstanding as of March 4, 2016 (excluding conversion of the Series A Preferred Stock). As a result, our executive officers, directors and BKC, if they act as a group, will be able to significantly influence matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions such as mergers and acquisitions. The directors will have the authority to make decisions affecting our capital structure, including the issuance of additional debt and the declaration of dividends. BKC may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of us that other stockholders may view as beneficial, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately depress the market price of our common stock.
We do not expect to pay any cash dividends for the foreseeable future, and the indenture governing the Notes and the senior credit facility limit our ability to pay dividends to our stockholders.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. The absence of a dividend on our common stock may increase the volatility of the market price of our common stock or make it more likely that the market price of our common stock will decrease in the event of adverse economic conditions or adverse developments affecting our company. Additionally, the indenture governing the Notes and our
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senior credit facility limit, and the debt instruments that we may enter into in the future may limit our ability to pay dividends to our stockholders.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We cannot assure you that these analysts will publish research or reports about us or that any analysts that do so will not discontinue publishing research or reports about us in the future. If one or more analysts who cover us downgrade our stock, our stock price could decline rapidly. If analysts do not publish reports about us or if one or more analysts cease coverage of our stock, we could lose visibility in the market, which in turn could cause our stock price to decline.
Provisions in our restated certificate of incorporation and amended and restated bylaws, as amended, or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Delaware corporate law and our restated certificate of incorporation and amended and restated bylaws, as amended, contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
• | require that special meetings of our stockholders be called only by our board of directors or certain of our officers, thus prohibiting our stockholders from calling special meetings; |
• | deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding shares of common stock will be able to elect all of our directors; |
• | authorize the issuance of “blank check” preferred stock that our board could issue to dilute the voting and economic rights of our common stock and to discourage a takeover attempt; |
• | provide that approval of our board of directors or a supermajority of stockholders is necessary to make, alter or repeal our amended and restated bylaws and that approval of a supermajority of stockholders is necessary to amend, alter or change certain provisions of our restated certificate of incorporation; |
• | establish advance notice requirements for stockholder nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; |
• | divide our board into three classes of directors, with each class serving a staggered 3-year term, which generally increases the difficulty of replacing a majority of the directors; |
• | provide that directors only may be removed for cause by a majority of the board or by a supermajority of our stockholders; and |
• | require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing. |
Risks Related to Our Indebtedness
Our substantial indebtedness could adversely affect our financial condition.
As a result of our substantial indebtedness, a significant portion of our cash flow will be required to pay interest and principal on our outstanding indebtedness, and we may not generate sufficient cash flow from operations, or have future borrowings available under our senior credit facility, to enable us to repay our indebtedness, including the Notes, or to fund other liquidity needs. As of January 3, 2016, we had approximately $209.2 million of total indebtedness outstanding consisting of $200.0 million of Notes, $1.2 million of lease financing obligations and $8.0 million of capital leases and other debt. At January 3, 2016, we had $16.6 million of borrowing availability under our senior credit facility (after reserving $13.4 million for letters of credit issued under our senior credit facility, which included amounts for anticipated claims from our renewals of workers' compensation and other insurance policies), which would effectively rank senior to the Notes. On February 12, 2016, we entered into an amendment to our senior credit facility
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to increase revolving credit borrowings by $25 million to $55 million (including $20.0 million available for letters of credit).
Our substantial indebtedness could have important consequences to our stockholders. For example, it could:
• | make it more difficult for us to satisfy our obligations with respect to the Notes and our other debt; |
• | increase our vulnerability to general adverse economic and industry conditions; |
• | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and related interest, including indebtedness we may incur in the future, thereby reducing the availability of our cash flow to fund working capital, capital expenditures (including restaurant remodeling obligations under the operating agreement) and other general corporate purposes; |
• | restrict our ability to acquire additional restaurants; |
• | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
• | increase our cost of borrowing; |
• | place us at a competitive disadvantage compared to our competitors that may have less debt; and |
• | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes. |
We expect to use cash flow from operations and revolving credit borrowings under our senior credit facility to meet our current and future financial obligations, including funding our operations, debt service, possible future acquisitions and capital expenditures (including restaurant remodeling). Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, which could result in our being unable to repay indebtedness, or to fund other liquidity needs. If we do not have enough money, we may be forced to reduce or delay our business activities and capital expenditures (including our restaurant remodeling obligations), sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including our senior credit facility and the Notes, on or before maturity. We cannot make any assurances that we will be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future indebtedness, including the agreements for our senior credit facility, may limit our ability to pursue any of these alternatives.
Despite current indebtedness levels and restrictive covenants, we may still be able to incur more debt or make certain restricted payments, which could further exacerbate the risks described above.
We and our subsidiaries may be able to incur additional debt in the future, including debt that may be secured on a first lien basis or pari passu with the Notes. Although our senior credit facility and the indenture governing the Notes contain restrictions on our ability to incur indebtedness, those restrictions are subject to a number of exceptions. In addition, if we are able to designate some of our restricted subsidiaries under the indenture governing the Notes as unrestricted subsidiaries, those unrestricted subsidiaries would be permitted to borrow beyond the limitations specified in the indenture governing the Notes and engage in other activities in which restricted subsidiaries may not engage. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover, although our senior credit facility and the indenture governing the Notes contain restrictions on our ability to make restricted payments, including the declaration and payment of dividends, we are able to make such restricted payments under certain circumstances. Adding new debt to current debt levels or making restricted payments could intensify the related risks that we and our subsidiaries now face.
The agreements governing our debt agreements restrict our ability to engage in some business and financial transactions and contain certain other restrictive terms.
Our debt agreements, such as the indenture governing the Notes and our senior credit facility, restrict our ability in certain circumstances to, among other things:
• | incur additional debt; |
• | pay dividends and make other distributions on, redeem or repurchase, capital stock; |
• | make investments or other restricted payments; |
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• | enter into transactions with affiliates; |
• | engage in sale and leaseback transactions; |
• | sell all, or substantially all, of our assets; |
• | create liens on assets to secure debt; or |
• | effect a consolidation or merger. |
On February 12, 2016 we entered into an amendment to our senior credit facility to increase revolving credit borrowings by $25 million to $55 million and reduced the interest rate for revolving credit borrowings. At January 3, 2016, we were in compliance with such covenants under our senior credit facility. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet these tests.
These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise, growing our business or competing effectively. In addition, our senior credit facility required us to maintain specified financial ratios and satisfy other financial tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet these tests.
A breach of any of these covenants or other provisions in our debt agreements could result in an event of default, which if not cured or waived, could result in such debt becoming immediately due and payable. This, in turn, could cause our other debt to become due and payable as a result of cross-acceleration provisions contained in the agreements governing such other debt. In the event that some or all of our debt is accelerated and becomes immediately due and payable, we may not have the funds to repay, or the ability to refinance, such debt. In addition, in the event that the Notes become immediately due and payable, the holders of the Notes would not be entitled to receive any payment in respect of the Notes until all of our senior debt has been paid in full.
We may not have the funds necessary to satisfy all of our obligations under our senior credit facility, the Notes or other indebtedness in connection with certain change of control events.
Upon the occurrence of specific kinds of change of control events, the indenture governing the Notes requires us to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof, plus accrued and unpaid interest (and additional interest, if any) to the date of repurchase. However, it is possible that we will not have sufficient funds, or the ability to raise sufficient funds, at the time of the change of control to make the required repurchase of the Notes. In addition, restrictions under our senior credit facility may not allow us to repurchase the Notes upon a change of control. If we could not refinance such debt or otherwise obtain a waiver from the holders of such debt, we would be prohibited from repurchasing the Notes, which would constitute an event of default under the indenture. Certain important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a “Change of Control” under the indenture.
In addition, our senior credit facility provides that certain change of control events constitute an event of default under such senior credit facility. Such an event of default entitles the lenders thereunder to, among other things, cause all outstanding debt obligations under the senior credit facility to become due and payable and to proceed against the collateral securing such senior credit facility. Any event of default or acceleration of the senior credit facility will likely also cause a default under the terms of our other indebtedness.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of January 3, 2016, we owned 21 and leased 684 Burger King restaurant properties including three restaurants located in mall shopping centers and 21 co-branded locations. Thirteen of the 21 restaurant properties owned at January 3, 2016 were acquired in 2015 and we expect to sell those properties in sale-leaseback transactions in 2016 although there can be no assurance that all such transactions will be competed in 2016 or at all.
We typically enter into leases (including renewal options) ranging from 20 to 40 years. The average remaining term for all leases, including options, was approximately 21.8 years at January 3, 2016. Generally, we have been able
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to renew leases, upon or prior to their expiration, at the prevailing market rates, although there can be no assurance that this will continue to occur.
Most of our Burger King restaurant leases are coterminous with the related franchise agreements. We believe that we generally will be able to renew at commercially reasonable rates the leases whose terms expire prior to the expiration of that location's Burger King franchise agreement, although there can be no assurance that this will occur.
Most leases require us to pay utility and water charges and real estate taxes. Certain leases also require contingent rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some of our mall locations, we are also required to pay certain other charges such as a pro rata share of the mall's common area maintenance costs, insurance and security costs.
In addition to the restaurant locations set forth under Item 1. “Business-Restaurant Locations”, we own a building with approximately 25,300 square feet at 968 James Street, Syracuse, New York, which houses our executive offices and most of our administrative operations for our Burger King restaurants. We also lease seven small regional offices that support the management of our Burger King restaurants.
ITEM 3. LEGAL PROCEEDINGS
Litigation. On August 21, 2012 Alan Vituli, our former chairman and chief executive officer, filed an action in the Superior Court of the State of Delaware against us and Carrols. On October 1, 2013, Mr. Vituli filed an amended and supplemental complaint (the "Amended Complaint") which, among other things, added Fiesta, now an independent public company, but our indirect wholly-owned subsidiary for the time period at issue in the Amended Complaint, as a defendant. The Amended Complaint alleges, among other things, breach of Mr. Vituli's employment agreement with us, fraud, and fraudulent inducement in connection with Mr. Vituli’s departure as chief executive officer, chairman, and director of Carrols Restaurant Group and Carrols and as non-executive chairman and director of Fiesta, that he was wrongfully deprived of observer rights on the board of directors of Carrols Restaurant Group after his departure from such board and that he was underpaid a portion of his bonus for fiscal 2011. The relief sought by Mr. Vituli includes damages in excess of $3.55 million in the aggregate, unspecified consequential and punitive damages, attorney’s fees and costs and various requests for declaratory judgment. We filed a Motion for Summary Judgment seeking to dismiss the claims raised by Mr. Vituli. The Court’s decision on our Motion for Summary Judgment dismissed all but two claims, and Fiesta was removed as a defendant. The two remaining claims are the claim of fraudulent inducement in connection with Mr. Vituli’s departure as chief executive officer, chairman, and director of Carrols Restaurant Group and Carrols and as non-executive chairman and director of Fiesta and the claim of an additional bonus payment for 2011. We believe that that all of the remaining claims raised by Mr. Vituli are without merit. We will vigorously contest and defend against this action and Mr. Vituli’s claims.
We are a party to various other litigation matters that arise in the ordinary course of business. We do not believe that the outcome of any of these matters meet the disclosure or recognition standards, nor will they have a material adverse effect on our consolidated financial statements.
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ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The NASDAQ Global Market under the symbol “TAST”. On March 4, 2016, there were 35,827,660 shares of our common stock outstanding held by 595 holders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers, and registered clearing agencies. The closing price of our common stock on March 4, 2016 was $14.12.
The following table sets forth the range of high and low closing prices of our common stock for the periods indicated, as reported by The NASDAQ Global Market:
Common Stock Price | |||||||
High | Low | ||||||
Year Ended January 3, 2016 | |||||||
First Quarter | $ | 8.80 | $ | 7.20 | |||
Second Quarter | 10.72 | 8.17 | |||||
Third Quarter | 13.68 | 10.19 | |||||
Fourth Quarter | 12.67 | 11.00 | |||||
Year Ended December 28, 2014 | |||||||
First Quarter | $ | 7.95 | $ | 5.75 | |||
Second Quarter | 7.56 | 6.26 | |||||
Third Quarter | 7.68 | 6.56 | |||||
Fourth Quarter | 7.86 | 6.97 |
Dividends
We did not pay any cash dividends during the fiscal years 2015 or 2014.We currently intend to continue to retain all available funds to fund the development and growth of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, we are a holding company and conduct all of our operations through our direct and indirect subsidiaries. As a result, for us to pay dividends, we need to rely on dividends or distributions to us from Carrols and indirectly from subsidiaries of Carrols. The indenture governing the Notes and our senior credit facility limit, and debt instruments that we and our subsidiaries may enter into in the future may limit, our ability to pay dividends to our stockholders.
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Stock Performance Graph
The following graph compares from December 31, 2010 the cumulative total stockholder return on our common stock over the cumulative total returns of The NASDAQ Composite Index and a peer group, The S&P SmallCap 600 Restaurants Index. We have elected to use the S&P SmallCap 600 Restaurant Index in compiling our stock performance graph because we believe the S&P SmallCap 600 Restaurant Index represents a comparison to competitors with similar market capitalization as us. The following graph is based on the closing price of our common stock from December 31, 2010 through December 31, 2015.
![](https://www.sec.gov/Archives/edgar/data/0000809248/000080924816000134/tast-201601_chartx06466.jpg)
* $100 invested on 12/31/2010 in stock or index, including reinvestment of dividends.
12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | |||||||||||||
Carrols Restaurant Group, Inc. | $ | 100.00 | $ | 155.93 | $ | 289.34 | $ | 319.82 | $ | 369.17 | $ | 568.03 | ||||||
NASDAQ Composite | $ | 100.00 | $ | 100.53 | $ | 116.92 | $ | 166.19 | $ | 188.78 | $ | 199.95 | ||||||
S&P SmallCap 600 Restaurants | $ | 100.00 | $ | 97.32 | $ | 121.50 | $ | 182.66 | $ | 233.14 | $ | 224.29 |
ITEM 6. SELECTED FINANCIAL DATA
The information in the following table should be read together with "Financial Statements and Supplementary Data," and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Reported amounts below present the historical operating results and cash flows of Fiesta for periods prior to May 7, 2012 as discontinued operations. On May 30, 2012, we acquired 278 restaurants from BKC. In 2014, we acquired 123 restaurants from other franchisees in five separate transactions and in 2015, we acquired 55 restaurants from other franchisees in eight separate transactions. The results of operations of
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the acquired restaurants are included in our consolidated operating results beginning the day following the closing of the respective acquisitions. These historical results are not necessarily indicative of the results to be expected in the future. Our fiscal years ended January 1, 2012, December 30, 2012, December 29, 2013, December 28, 2014 each contained 52 weeks. The fiscal year ended January 3, 2016 contained 53 weeks.
Year Ended | |||||||||||||||||||
January 1, 2012 | December 30, 2012 | December 29, 2013 | December 28, 2014 | January 3, 2016 | |||||||||||||||
(In thousands of dollars, except share and per share data) | |||||||||||||||||||
Statements of operations data: | |||||||||||||||||||
Restaurant sales | $ | 347,518 | $ | 539,608 | $ | 663,483 | $ | 692,755 | $ | 859,004 | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of sales | 103,860 | 172,698 | 201,532 | 209,664 | 240,322 | ||||||||||||||
Restaurant wages and related expenses (1) | 109,155 | 169,857 | 208,404 | 219,718 | 267,950 | ||||||||||||||
Restaurant rent expense | 22,665 | 37,883 | 47,198 | 48,865 | 58,096 | ||||||||||||||
Other restaurant operating expenses (1) | 53,389 | 88,883 | 106,508 | 113,586 | 135,874 | ||||||||||||||
Advertising expense | 14,424 | 22,257 | 29,615 | 27,961 | 32,242 | ||||||||||||||
General and administrative (1)(2) | 20,982 | 36,085 | 37,228 | 40,001 | 50,515 | ||||||||||||||
Depreciation and amortization | 16,058 | 26,321 | 33,594 | 36,923 | 39,845 | ||||||||||||||
Impairment and other lease charges | 1,293 | 977 | 4,462 | 3,541 | 3,078 | ||||||||||||||
Other expense (income) (3) | (720 | ) | (717 | ) | 17 | 47 | (126 | ) | |||||||||||
Total operating expenses | 341,106 | 554,244 | 668,558 | 700,306 | 827,796 | ||||||||||||||
Income (loss) from operations | 6,412 | (14,636 | ) | (5,075 | ) | (7,551 | ) | 31,208 | |||||||||||
Interest expense | 7,353 | 12,764 | 18,841 | 18,801 | 18,569 | ||||||||||||||
Loss on extinguishment of debt | 1,244 | 1,509 | — | — | 12,635 | ||||||||||||||
Income (loss) from continuing operations before income taxes | (2,185 | ) | (28,909 | ) | (23,916 | ) | (26,352 | ) | 4 | ||||||||||
Provision (benefit) for income taxes | (1,661 | ) | (10,093 | ) | (10,397 | ) | 11,765 | — | |||||||||||
Net income (loss) from continuing operations | (524 | ) | (18,816 | ) | (13,519 | ) | (38,117 | ) | 4 | ||||||||||
Income (loss) from discontinued operations, net of income taxes | 11,742 | (72 | ) | — | — | — | |||||||||||||
Net income (loss) | $ | 11,218 | $ | (18,888 | ) | $ | (13,519 | ) | $ | (38,117 | ) | $ | 4 | ||||||
Per share data: | |||||||||||||||||||
Basic and diluted net income (loss) per share: | |||||||||||||||||||
Continuing operations | $ | (0.02 | ) | $ | (0.83 | ) | $ | (0.59 | ) | $ | (1.23 | ) | $ | 0.00 | |||||
Discontinued operations | $ | 0.54 | $ | 0.00 | $ | — | $ | — | $ | — | |||||||||
Weighted average shares used in computing net income (loss) per share: | |||||||||||||||||||
Basic | 21,677,837 | 22,580,468 | 22,958,963 | 30,885,275 | 34,958,847 | ||||||||||||||
Diluted | 21,677,837 | 22,580,468 | 22,958,963 | 30,885,275 | 44,623,251 |
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Year Ended | |||||||||||||||||||
January 1, 2012 | December 30, 2012 | December 29, 2013 | December 28, 2014 | January 3, 2016 | |||||||||||||||
(In thousands of dollars, except restaurant weekly sales data) | |||||||||||||||||||
Other financial data: | |||||||||||||||||||
Net cash provided from operating activities | $ | 33,448 | $ | 18,207 | $ | 21,581 | $ | 14,707 | $ | 70,702 | |||||||||
Total capital expenditures | 27,771 | 37,642 | 50,486 | 52,010 | 56,848 | ||||||||||||||
Net cash used for investing activities | 25,961 | 65,908 | 50,486 | 68,003 | 103,429 | ||||||||||||||
Net cash provided from (used for) financing activities | 2,943 | 69,301 | (1,083 | ) | 66,215 | 33,780 | |||||||||||||
Operating Data: | |||||||||||||||||||
Restaurants (at end of period) | 298 | 572 | 564 | 674 | 705 | ||||||||||||||
Average number of restaurants | 301.2 | 455.6 | 563.8 | 581.9 | 662.1 | ||||||||||||||
Average annual sales per restaurant (4) | 1,153,778 | 1,184,286 | 1,176,806 | 1,190,505 | 1,274,372 | ||||||||||||||
Adjusted EBITDA (5) | 25,448 | 24,972 | 34,271 | 36,008 | 76,737 | ||||||||||||||
Adjusted net income (loss) (5) | 1,333 | (13,529 | ) | (10,753 | ) | (10,408 | ) | 16,885 | |||||||||||
Restaurant-Level EBITDA (5) | 44,025 | 52,415 | 70,226 | 72,961 | 124,520 | ||||||||||||||
Change in comparable restaurant sales (6) | (1.4 | )% | 7.1 | % | 1.0 | % | 0.6 | % | 7.4 | % | |||||||||
Balance sheet data (at end of period): | |||||||||||||||||||
Total assets | $ | 458,392 | $ | 346,256 | $ | 329,481 | $ | 364,573 | $ | 427,256 | |||||||||
Working capital | (11,620 | ) | 7,478 | (21,974 | ) | (13,554 | ) | (26,259 | ) | ||||||||||
Debt: | |||||||||||||||||||
Senior and senior subordinated debt | 267,375 | 150,000 | 150,000 | 150,000 | 200,000 | ||||||||||||||
Capital leases | 1,144 | 10,295 | 9,336 | 8,694 | 8,006 | ||||||||||||||
Lease financing obligations | 10,064 | 1,197 | 1,200 | 1,190 | 1,193 | ||||||||||||||
Total debt | $ | 278,583 | $ | 161,492 | $ | 160,536 | $ | 159,884 | $ | 209,199 | |||||||||
Stockholders’ equity | $ | 59,157 | $ | 90,173 | $ | 77,204 | $ | 106,535 | $ | 107,999 |
(1) | The year ended January 1, 2012 included $458 of acquisition expenses in general and administrative expenses. For the year ended December 30, 2012 acquisition and integration expenses were included as follows: $1,800 in restaurant wages and related expenses, $2,585 in other restaurant operating expenses and $1,657 in general and administrative expenses. Acquisition expenses of $1,915 and $1,168 were included in general and administrative expense for the years ended December 28, 2014 and January 3, 2016, respectively. |
(2) | General and administrative expenses include stock-based compensation expense for the year ended January 1, 2012, December 30, 2012, December 29, 2013, December 28, 2014 and January 3, 2016 of $1,037, $925, $1,205, $1,180 and $1,438, respectively. |
(3) | In fiscal 2011, we recorded other income of $0.7 million which included a gain of $0.3 million related to the sale of a non-operating Burger King property, gains of $0.3 million related to property insurance recoveries from fires at two Burger King restaurants and a gain of $0.1 million related to a business interruption insurance recovery from storm damage at a Burger King restaurant. In fiscal 2012, we recorded net gains of $0.7 million related to property insurance recoveries from fires at two restaurants. |
(4) | Average annual sales per restaurant are derived by dividing restaurant sales by the average number of restaurants operating during the period on a 52-week basis. |
(5) | EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are non-GAAP financial measures. EBITDA represents net income or loss from operations, before provision or benefit for income taxes, interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges, acquisition costs, EEOC litigation and settlement costs, stock compensation expense and loss on extinguishment of debt. Restaurant-Level EBITDA represents income or loss from operations adjusted to exclude general and administrative expenses, depreciation and amortization, impairment and other lease charges, and other income or expense. Adjusted net income represents net income or loss adjusted to exclude loss on extinguishment of debt, impairment and other lease charges, acquisition costs and the establishment of a valuation allowance on our net deferred income tax assets in 2014. |
We are presenting Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) because we believe that they provide a more meaningful comparison than EBITDA and net income or loss of our core business operating results, as well as with those of other similar companies. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and other income or expense, which are not directly related to restaurant-level operations. Management believes that Adjusted EBITDA and Restaurant-Level EBITDA, when viewed with our results of operations in accordance with GAAP and the accompanying reconciliations on page 42, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that
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Adjusted EBITDA and Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or loss, income or loss from operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. For the reconciliation between net income or loss to EBITDA, Adjusted EBITDA and Adjusted net income and the reconciliation of income or loss from operations to Restaurant-Level EBITDA, see page 42.
EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) have important limitations as analytical tools. These limitations include the following:
• | EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment; |
• | EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt; |
• | Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and |
• | EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges and acquisition and integration costs) have recurred and may reoccur. |
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Reconciliations of EBITDA, Adjusted EBITDA and Adjusted net income (loss) to net income (loss) from continuing operations, and Restaurant-Level EBITDA to income (loss) from operations are as follows:
Year Ended | |||||||||||||||||||
Reconciliation of EBITDA and Adjusted EBITDA: | January 1, 2012 | December 30, 2012 | December 29, 2013 | December 28, 2014 | January 3, 2016 | ||||||||||||||
Net income (loss) from continuing operations | $ | (524 | ) | $ | (18,816 | ) | $ | (13,519 | ) | $ | (38,117 | ) | $ | 4 | |||||
Provision (benefit) for income taxes | (1,661 | ) | (10,093 | ) | (10,397 | ) | 11,765 | — | |||||||||||
Interest expense | 7,353 | 12,764 | 18,841 | 18,801 | 18,569 | ||||||||||||||
Depreciation and amortization | 16,058 | 26,321 | 33,594 | 36,923 | 39,845 | ||||||||||||||
EBITDA | 21,226 | 10,176 | 28,519 | 29,372 | 58,418 | ||||||||||||||
Impairment and other lease charges | 1,293 | 977 | 4,462 | 3,541 | 3,078 | ||||||||||||||
Acquisition and integration costs | 458 | 6,042 | — | 1,915 | 1,168 | ||||||||||||||
EEOC litigation and settlement costs | 190 | 5,343 | 85 | — | — | ||||||||||||||
Stock compensation expense | 1,037 | 925 | 1,205 | 1,180 | 1,438 | ||||||||||||||
Loss on extinguishment of debt | 1,244 | 1,509 | — | — | 12,635 | ||||||||||||||
Adjusted EBITDA | $ | 25,448 | $ | 24,972 | $ | 34,271 | $ | 36,008 | $ | 76,737 |
Reconciliation of Restaurant-Level EBITDA: | |||||||||||||||||||
Income (loss) from continuing operations | $ | 6,412 | $ | (14,636 | ) | $ | (5,075 | ) | $ | (7,551 | ) | $ | 31,208 | ||||||
Add: | |||||||||||||||||||
Restaurant-level integration costs | — | 4,385 | — | — | — | ||||||||||||||
General and administrative expenses | 20,982 | 36,085 | 37,228 | 40,001 | 50,515 | ||||||||||||||
Depreciation and amortization | 16,058 | 26,321 | 33,594 | 36,923 | 39,845 | ||||||||||||||
Impairment and other lease charges | 1,293 | 977 | 4,462 | 3,541 | 3,078 | ||||||||||||||
Other expense (income) | (720 | ) | (717 | ) | 17 | 47 | (126 | ) | |||||||||||
Restaurant-Level EBITDA | $ | 44,025 | $ | 52,415 | $ | 70,226 | $ | 72,961 | $ | 124,520 |
Reconciliation of Adjusted net income (loss): | |||||||||||||||||||
Net income (loss) | $ | (524 | ) | $ | (18,816 | ) | $ | (13,519 | ) | $ | (38,117 | ) | $ | 4 | |||||
Add: | |||||||||||||||||||
Loss on extinguishment of debt | 1,244 | 1,509 | — | — | 12,635 | ||||||||||||||
Impairment and other lease charges | 1,293 | 977 | 4,462 | 3,541 | 3,078 | ||||||||||||||
Acquisition and integration costs (7) | 458 | 6,042 | — | 1,915 | 1,168 | ||||||||||||||
Income tax effect of adjustments (8) | (1,138 | ) | (3,241 | ) | (1,696 | ) | (2,073 | ) | — | ||||||||||
Valuation allowance for deferred taxes | — | — | — | 24,326 | — | ||||||||||||||
Adjusted net income (loss) | $ | 1,333 | $ | (13,529 | ) | $ | (10,753 | ) | $ | (10,408 | ) | $ | 16,885 | ||||||
Diluted adjusted net earnings (loss) per share (9) | $ | 0.06 | $ | (0.60 | ) | $ | (0.47 | ) | $ | (0.34 | ) | $ | 0.38 |
(6) | Restaurants are included in comparable restaurant sales after they have been open or owned for 12 months. Comparable restaurant sales are on a 53-week basis for the year ended January 3, 2016. |
(7) | Acquisition and integration costs for the periods presented include primarily legal and professional fees incurred in connection with acquisitions as well as restaurant-level integration costs in 2012. |
(8) | The income tax effect of the adjustments for impairment and other lease charges and acquisition and integration costs and, for the years ended December 30, 2012 and January 1, 2012, loss on extinguishment of debt, was calculated using an effective income tax rate of 38%. Adjustments for the year ended January 3, 2016 are not tax-effected due to the valuation allowance on all of our net deferred tax assets. |
(9) | Diluted adjusted net earnings (loss) per share is calculated based on Adjusted net income (loss) and the dilutive weighted average common shares outstanding for each respective period. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January 3, 2016 contained 53 weeks and the fiscal years ended December 28, 2014 and December 29, 2013 each contained 52 weeks.
Introduction
We are a holding company and conduct all of our operations through our direct and indirect subsidiaries, Carrols and Carrols LLC, and have no assets other than the shares of capital stock of Carrols, our direct wholly-owned subsidiary. The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying consolidated financial statement footnotes appearing elsewhere in this Annual Report on Form 10-K. The overview provides our perspective on the individual sections of MD&A, which include the following:
Company Overview—a general description of our business and our key financial measures.
Recent and Future Events Affecting Our Results of Operations—a description of recent events that affect, and future events that may affect, our results of operations.
Results of Operations—an analysis of our results of operations for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 including a review of the material items and known trends and uncertainties.
Liquidity and Capital Resources—an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.
Application of Critical Accounting Policies—an overview of accounting policies requiring critical judgments and estimates.
Company Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 50 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and have operated Burger King restaurants since 1976. As of January 3, 2016, we operated 705 Burger King restaurants in 16 states. During the year ended January 3, 2016 we acquired 55 Burger King restaurants in eight separate transactions, which we refer to as the "2015 acquired restaurants". During the year ended December 28, 2014 we acquired 123 Burger King restaurants in five separate transactions, which we refer to as the “2014 acquired restaurants”. On May 30, 2012, we acquired 278 restaurants from BKC, which we refer to as the “2012 acquired restaurants”, including BKC’s assignment of its right of first refusal on franchisee restaurant sales in 20 states (the “ROFR”). As of January 3, 2016 we were operating 246 of the 2012 acquired restaurants. All of our other Burger King restaurants are referred to as our "legacy restaurants".
The following is an overview of the key financial measures discussed in our results of operations:
• | Restaurant sales consist of food and beverage sales at our restaurants, net of discounts and excluding sales tax collected. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant development and the closures of restaurants. Restaurants, including restaurants we acquire, are included in comparable restaurant sales after they have been open or owned for 12 months. For comparative purposes, where applicable, the calculation of the changes in comparable restaurant sales is based either on a 53-week or 52-week year. |
• | Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. |
• | Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are |
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subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and federal and state unemployment insurance.
• | Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases and the amortization of favorable and unfavorable leases, reduced by the amortization of deferred gains on sale-leaseback transactions. |
• | Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC, utilities, repairs and maintenance, real estate taxes and credit card fees. |
• | Advertising expense includes all marketing and promotional expenses including advertising payments to BKC based on a percentage of sales as required under our franchise agreements. |
• | General and administrative expenses are comprised primarily of (1) salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, (2) legal, auditing and other professional fees, (3) acquisition costs and (4) stock-based compensation expense. |
• | EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss). EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are non-GAAP financial measures. EBITDA represents net income or loss from operations, before provision or benefit for income taxes, interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges, acquisition costs, EEOC litigation and settlement costs, stock compensation expense and loss on extinguishment of debt. Restaurant-Level EBITDA represents income or loss from operations adjusted to exclude general and administrative expenses, depreciation and amortization, impairment and other lease charges, and other income or expense. Adjusted net income represents net income or loss adjusted to exclude loss on extinguishment of debt, impairment and other lease charges, acquisition costs and the establishment of a valuation allowance on our net deferred income tax assets in 2014. |
We are presenting Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) because we believe that they provide a more meaningful comparison than EBITDA and net income or loss of our core business operating results, as well as with those of other similar companies. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and other income or expense, which are not directly related to restaurant-level operations. Management believes that Adjusted EBITDA and Restaurant-Level EBITDA, when viewed with our results of operations in accordance with GAAP and the accompanying reconciliations on page 42, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA and Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or loss, income or loss from operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. For the reconciliation between net income or loss to EBITDA, Adjusted EBITDA and Adjusted net income and the reconciliation of income or loss from operations to Restaurant-Level EBITDA, see page 42.
EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income have important limitations as analytical tools. These limitations include the following:
• | EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment; |
• | EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt; |
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• | Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and |
• | EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges and acquisition costs) have recurred and may reoccur. |
• | Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights from our acquisitions of Burger King restaurants and the amortization of franchise fees paid to BKC. |
• | Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries. At January 3, 2016, there are $2.1 million of lease charges accrued for closed locations. |
• | Interest expense consists primarily of interest expense associated with our $200.0 million of 8% Senior Secured Second Lien Notes due 2022 (the "8% Notes"), our prior 11.25% Senior Secured Second Lien Notes due 2018 (the "11.25% Notes"), amortization of deferred financing costs and interest on revolving credit borrowings under our senior credit facility. |
Recent and Future Events Affecting our Results of Operations
Refinancing of Indebtedness and Amendment to Our Senior Credit Facility
On April 29, 2015, we issued $200 million of 8% Notes and used a portion of the net proceeds to repurchase and redeem all of our $150 million of outstanding 11.25% Notes tendered pursuant to a cash tender offer and redemption and to pay related fees and expenses. We received net proceeds of approximately $35.2 million which were used for working capital and general corporate purposes, capital expenditures to remodel our restaurants and subsequent restaurant acquisitions.
On February 12, 2016, we entered into an amendment to our senior credit facility to increase revolving credit borrowings by $25 million to $55 million (including $20.0 million available for letters of credit). The amendment also extended the maturity date of the senior credit facility to February 12, 2021 and reduced the interest rate for revolving credit borrowings to, at our option, (i) the alternate base rate plus the applicable margin of 1.75% to 2.75% based on our adjusted leverage ratio, or (ii) the LIBOR rate plus the applicable margin of 2.75% to 3.75% based on our adjusted leverage ratio (all as defined under the amended credit agreement).
See "—Liquidity and Capital Resources" for a discussion of the 8% Notes and our senior credit facility, as amended.
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Burger King Restaurant Acquisitions
From the beginning of 2014 through January 3, 2016, we have acquired 178 restaurants from other franchisees in the following transactions ($ in thousands):
Closing Date | Number of Restaurants | Purchase Price | Number of Fee-Owned Restaurants | Market Location | ||||||||
April 30, 2014 | (1) | 4 | $ | 681 | Fort Wayne, Indiana | |||||||
June 30, 2014 | (1) | 4 | 3,819 | 1 | Pittsburgh, Pennsylvania | |||||||
July 22, 2014 | 21 | 8,609 | Rochester, New York and Southern Tier of Western New York | |||||||||
October 8, 2014 | (1) | 30 | 20,330 | 12 | Wilmington and Greenville, North Carolina | |||||||
November 4, 2014 | 64 | 18,761 | Nashville, Tennessee; Indiana and Illinois | |||||||||
March 31, 2015 | 4 | 794 | Northern Vermont | |||||||||
August 4, 2015 | (1) | 5 | 663 | Charlotte, North Carolina | ||||||||
October 1, 2015 | (1) | 5 | 5,044 | 1 | Wheeling, West Virginia | |||||||
October 20, 2015 | 1 | 709 | Kalamazoo, Michigan | |||||||||
November 17, 2015 | 2 | 618 | Evansville, Indiana | |||||||||
November 17, 2015 | 6 | 10,945 | 5 | Evansville, Indiana | ||||||||
December 1, 2015 | (1) | 23 | 26,175 | 10 | Detroit, Michigan | |||||||
December 8, 2015 | 9 | 7,802 | Northern New Jersey | |||||||||
178 | $ | 104,950 | 29 |
(1) | Acquisitions resulting from the exercise of our ROFR. |
The 2015 acquisitions included 16 fee-owned properties of which three have been subsequently sold in sale-leaseback transactions in 2015 for net proceeds of $4.3 million. The remaining 13 acquired fee-owned properties valued at $18.3 million are expected to be sold in sale-leaseback transactions in 2016, although there can be no assurance that all of such transactions will be completed in 2016 or at all.
The pro forma impact on the results of operations for the 2015 acquisitions is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2015 acquired restaurants. The following table summarizes certain pro forma financial information related to our 2015 operating results (a 53-week fiscal year):
Year Ended | |||
January 3, 2016 | |||
Restaurant sales | $ | 918,456 | |
Income from operations | $ | 37,651 | |
Adjusted EBITDA | $ | 84,162 |
On February 23, 2016, we acquired 12 restaurants in central Pennsylvania through the exercise of our ROFR for $7.1 million.
Capital Expenditures and Remodeling Commitment with BKC
On December 17, 2015, we and BKC entered into the Second Amendment to Operating Agreement (the "Amendment"), which amended the operating agreement and a subsequent amendment to the operating agreement, previously entered into between us and BKC in connection with our acquisition of 278 Burger King restaurants from BKC in 2012. As amended, the operating agreement requires that we will remodel to BKC's current 20/20 image a
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cumulative total of 455 restaurants by December 31, 2016. As of January 3, 2016 we had remodeled a total of 378 restaurants associated with this requirement. In addition, under a separate agreement we have agreed to remodel 46 restaurants acquired in 2014 over a five year period beginning in 2014 and at January 3, 2016 we had remodeled a total of 18 restaurants associated with this agreement. At January 3, 2016 we had 432 restaurants with the 20/20 restaurant image including restaurants we have acquired. The Amendment also requires us to open new restaurants totaling at least 10% of the number of restaurants that we acquire in 2016 and 2017 by December 31, 2017.
In 2016, we anticipate that total capital expenditures will range from $75 million to $85 million, although the actual amount of capital expenditures may differ from these estimates. Capital expenditures in 2016 include remodeling 80 to 90 restaurants to the BKC 20/20 image standard at an approximate average cost of $480,000 per restaurant, rebuilding 4 to 6 restaurants and the construction of 6 to 8 new restaurants, of which 4 to 5 restaurants will be relocated within their respective markets, at an average cost of $1,200,000 per restaurant, which excludes the cost of land. Capital expenditures in 2016 also include approximately $6 million for the replacement of restaurant-level back of house systems and equipment, approximately $8 million for ongoing restaurant maintenance capital expenditures and the carryover of approximately $13 million for remodeling projects begun in the fourth quarter of 2015. We will review on an ongoing basis our future remodel and development plans in relation to our available capital resources and alternate investment opportunities.
Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant in relation to its cash flow and future occupancy costs, and with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations.
In 2015, we closed 23 restaurants and sold one restaurant. We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their contractual lease term. We currently do not anticipate closing any restaurants in 2016, other than restaurants relocated within their market area. Our determination of whether to close restaurants in the future is subject to further evaluation and may change.
We do not believe that the future impact on our results of operations due to restaurant closures will be material, although there can be no assurance in this regard.
Valuation of Deferred Income Tax Assets
We perform an assessment of positive and negative evidence regarding the realization of our net deferred income tax assets as required by ASC 740. Under ASC 740, the weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC 740 also prescribes that objective historical evidence, in particular that our three-year cumulative loss position, be given greater weight than subjective evidence, including our forecasts of future taxable income, which include assumptions that cannot be objectively verified. We considered all available positive and negative evidence and have determined, based on the required weight of that evidence under ASC 740, that a valuation allowance was needed for all of our net deferred income tax assets at January 3, 2016 and December 28, 2014. We recorded income tax expense of $24.3 million in 2014 associated with the initial establishment of this valuation reserve. During the year ended January 3, 2016, we established an additional valuation allowance of $3.0 million related to the change in our net deferred income tax assets in 2015.
We believe that it is likely that our federal net operating loss carryforwards included in our deferred tax assets will be utilized in the future as they do not begin to expire until 2033, although no assurance of this can be provided. However, the valuation allowance on our net deferred tax assets was required based on the relevant accounting literature which does not permit us to consider our projection of future taxable income as more persuasive evidence than our recent operating losses when assessing recoverability.
As of January 3, 2016, we had federal net operating loss carryforwards of approximately $50.6 million. As a result of the net deferred tax asset valuation allowance established in 2014, we did not record any income tax expense in 2015 and do not anticipate recognizing any income tax expense or benefit in 2016.
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Effect of Minimum Wage Increases
Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2016 and in many cases have also approved additional increases for future periods. Most notably, New York State has increased the minimum wage applicable to our business to $9.75 an hour in 2016 (from $8.75 an hour in 2015) with subsequent annual increases reaching $15.00 an hour by July 1, 2021. We had 133 restaurants in New York State at January 3, 2016. We typically attempt to offset the effects of wage inflation, at least in part, through periodic menu price increases. However, no assurance can be given that we will be able to offset these wage increases in the future.
Results of Operations
The following table sets forth, for the years ended January 3, 2016, December 28, 2014, and December 29, 2013 selected operating results as a percentage of total restaurant sales:
Year Ended | ||||||||
January 3, 2016 | December 28, 2014 | December 29, 2013 | ||||||
Costs and expenses (all restaurants): | ||||||||
Cost of sales | 28.0 | % | 30.3 | % | 30.4 | % | ||
Restaurant wages and related expenses | 31.2 | % | 31.7 | % | 31.4 | % | ||
Restaurant rent expense | 6.8 | % | 7.1 | % | 7.1 | % | ||
Other restaurant operating expenses | 15.8 | % | 16.4 | % | 16.1 | % | ||
Advertising expense | 3.8 | % | 4.0 | % | 4.5 | % | ||
General and administrative expenses | 5.9 | % | 5.8 | % | 5.6 | % |
Fiscal 2015 compared to Fiscal 2014
In 2015, we acquired 55 restaurants from other franchisees, closed 23 restaurants and sold one restaurant.
Restaurant Sales. Total restaurant sales in 2015 increased 24.0% to $859.0 million from $692.8 million in 2014. Comparable restaurant sales (on a 53-week basis) increased 7.4% due to an increase in average check of 3.5% and increase in customer traffic of 3.9%. The effect of menu price increases in 2015 was approximately 2.9%. Comparable restaurant sales (on a 53-week basis) increased 6.6% at our legacy restaurants and increased 8.5% at our 2012 acquired restaurants. Sales from the restaurants we acquired in 2014 and 2015 were $157.6 million in 2015. The extra week in 2015 had restaurant sales of $16 million.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales unless otherwise noted). Cost of sales decreased to 28.0% in 2015 from 30.3% in 2014 due primarily to lower commodity costs (1.5%), which included a 9.4% decrease in beef prices compared to the prior year, the continued improvement in restaurant-level food and cash controls at our acquired restaurants (0.4%) and the effect of menu price increases.
Restaurant wages and related expenses decreased to 31.2% in 2015 from 31.7% in 2014 due to leveraging fixed labor costs from higher sales volumes and lower workers compensation claims (0.2%), partially offset by higher restaurant-level incentive bonus accruals.
Restaurant rent expense decreased to 6.8% in 2015 from 7.1% in 2014 due in part to the closure of 36 restaurants with lower sales volumes since the beginning of 2014 and the effect of higher sales volumes on fixed rental costs.
Other restaurant operating expenses decreased to 15.8% in 2015 from 16.4% in 2014 due primarily to lower utility costs (0.3%), lower general liability insurance claims and the effect of higher sales volumes on fixed operating costs.
Advertising expense decreased to 3.8% in 2015 from 4.0% in 2014 due primarily to reduced spending for additional local advertising in many of our markets.
Restaurant-Level EBITDA. As a result of the factors above and the acquisition of 178 restaurants in 2014 and 2015, and an additional $4.4 million from the extra week in 2015, excluding general and administrative costs of $0.4
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million in the extra week, Restaurant-Level EBITDA increased to $124.5 million in 2015 compared to $73.0 million in 2014. For a reconciliation between income (loss) from operations to Restaurant-Level EBITDA see page 42.
Year ended | ||||||||||||||
January 3, 2016 | % (1) | December 28, 2014 | % (1) | |||||||||||
(in thousands of dollars) | ||||||||||||||
Restaurant Sales: | ||||||||||||||
Legacy restaurants | $ | 392,754 | $ | 367,828 | ||||||||||
2012 acquired restaurants | 308,700 | 290,945 | ||||||||||||
2014 and 2015 acquired restaurants | 157,550 | 33,982 | ||||||||||||
Total | $ | 859,004 | $ | 692,755 | ||||||||||
Restaurant-Level EBITDA and Margin: | ||||||||||||||
Legacy restaurants | $ | 65,509 | 16.7 | % | $ | 48,701 | 13.2 | % | ||||||
2012 acquired restaurants | 41,584 | 13.5 | % | 22,022 | 7.6 | % | ||||||||
2014 and 2015 acquired restaurants | 17,427 | 11.1 | % | 2,238 | 6.6 | % | ||||||||
Total | $ | 124,520 | 14.5 | % | $ | 72,961 | 10.5 | % |
(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for each respective group of restaurants.
Restaurant-Level EBITDA margin increased by 3.5% at our legacy restaurants due to lower commodity costs, lower utility costs and leveraging fixed operating costs from a 6.6% increase in comparable restaurant sales in 2015.
Restaurant-Level EBITDA margin increased 5.9% at our 2012 acquired restaurants due to similar factors as our legacy restaurants including leveraging higher sales volumes from a comparable restaurant sales increase of 8.5% in 2015, as well as the closure of 24 underperforming restaurants acquired in 2012 since the beginning of 2014 and the continued improvement in food and cash controls.
Restaurant-Level EBITDA margin for our 2014 and 2015 acquired restaurants was 11.1% in 2015 and was higher than in 2014 due primarily to similar factors as our other restaurants including leveraging higher sales volumes from a comparable restaurant sales increase in 2015 of 5.9% for the 2014 acquired restaurants and continued improvement in food and cash controls.
General and Administrative Expenses. General and administrative expenses increased $10.5 million in 2015 to $50.5 million and, as a percentage of total restaurant sales, increased to 5.9% in 2015 from 5.8% in 2014 due to higher administrative bonuses of $6.7 million and incremental field management and training costs associated with the 2014 and 2015 acquired restaurants.
Adjusted EBITDA. As a result of the factors above Adjusted EBITDA more than doubled to $76.7 million in 2015 from $36.0 million in 2014. For a reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see page 42.
Depreciation and Amortization. Depreciation and amortization expense increased to $39.8 million in 2015 from $36.9 million in 2014 due primarily our restaurant remodeling initiatives and the restaurants acquired in 2014 and 2015.
Impairment and Other Lease Charges. Impairment and other lease charges were $3.1 million in 2015 and were comprised of $1.6 million of estimated future rent payments and other lease related charges due to the closure of underperforming restaurants, $0.2 million of initial impairment charges associated with two underperforming restaurants and $1.3 million of impairment charges associated with capital expenditures at previously impaired restaurants.
Interest Expense. Interest expense decreased to $18.6 million in 2015 from $18.8 million in 2014 due to our refinancing in the second quarter of 2015. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 8.9% in 2015 compared to 11.2% in 2014.
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Income Taxes. Due to the valuation allowance established in 2014 on all of our deferred income tax assets as discussed above, we did not record any income tax expense in 2015.
Loss on Extinguishment of Debt. A loss on extinguishment of debt of $12.6 million was recorded in the second quarter of 2015 in connection with the refinancing of our 11.25% Notes. The loss on extinguishment of debt included the tender and redemption premium and other transaction costs associated with the repurchase and redemption of the 11.25% Notes of approximately $9.8 million and the write-off of $2.8 million of previously deferred financing costs related to the 11.25% Notes.
Net Income (Loss). As a result of the above, net income was four thousand dollars in 2015, or $0.00 per diluted share, compared to a net loss of $38.1 million in 2014, or $1.23 per diluted share.
Fiscal 2014 Compared to Fiscal 2013
In 2014, we acquired 123 restaurants from other franchisees, opened one new restaurant which was relocated within its market area and closed thirteen restaurants, excluding the relocated restaurant.
Restaurant Sales. Total restaurant sales in 2014 increased 4.4% to $692.8 million from $663.5 million in 2013. Comparable restaurant sales (on a 52-week basis) increased 0.6% due to an increase in average check of 4.5%, which was partially offset by a decrease in customer traffic of 3.9%. The effect of menu price increases in 2014 was approximately 2.1%. Comparable restaurant sales (on a 52-week basis) increased 0.7% at our legacy restaurants and increased 0.5% at our 2012 acquired restaurants. Sales from the restaurants we acquired in 2014 were $34.0 million in 2014.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales unless otherwise noted). Cost of sales decreased to 30.3% in 2014 from 30.4% in 2013 due primarily to the effect of menu price increases (0.7%), improvement in restaurant-level food and cash controls at our 2012 acquired restaurants (0.5%), and higher vendor rebates, substantially offset by higher beef commodity costs (1.4%). Cost of sales, as a percentage of restaurant sales for our 2012 acquired restaurants, decreased to 30.5% in 2014 from 31.4% in 2013 in spite of a 22% increase in beef commodity costs.
Restaurant wages and related expenses increased to 31.7% in 2014 from 31.4% in 2013 due primarily to labor rate increases on relatively flat comparable restaurant sales and, to a lesser extent, higher restaurant wages, as a percentage of restaurant sales, at the 2014 acquired restaurants.
Restaurant rent expense was 7.1% in 2014 and 2013 due primarily to relatively flat restaurant sales.
Other restaurant operating expenses increased to 16.4% in 2014 from 16.1% in 2013 due primarily to higher general liability insurance claims (0.2%) and higher utility costs (0.1%).
Advertising expense decreased to 4.0% in 2014 from 4.5% in 2013 due primarily to reduced spending for additional local advertising in certain markets.
Restaurant-Level EBITDA. As a result of the factors above and the acquisition of 123 restaurants in 2014, Restaurant-Level EBITDA increased to $73.0 million in 2014 compared to $70.2 million in 2013. For a reconciliation between Restaurant-Level EBITDA and loss from operations see page 42.
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Year ended | ||||||||||||||
December 28, 2014 | % (1) | December 29, 2013 | % (1) | |||||||||||
(in thousands of dollars) | ||||||||||||||
Restaurant Sales: | ||||||||||||||
Legacy restaurants | $ | 367,828 | $ | 368,081 | ||||||||||
2012 acquired restaurants | 290,945 | 295,402 | ||||||||||||
2014 acquired restaurants | 33,982 | — | ||||||||||||
Total | $ | 692,755 | $ | 663,483 | ||||||||||
Restaurant-Level EBITDA and Margin: | ||||||||||||||
Legacy restaurants | $ | 48,701 | 13.2 | % | $ | 52,894 | 14.4 | % | ||||||
2012 acquired restaurants | 22,022 | 7.6 | % | 17,332 | 5.9 | % | ||||||||
2014 acquired restaurants | 2,238 | 6.6 | % | — | — | % | ||||||||
Total | $ | 72,961 | 10.5 | % | $ | 70,226 | 10.6 | % |
(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for each respective group of restaurants.
Restaurant-Level EBITDA margin decreased 1.2% at our legacy restaurants due primarily to higher beef costs, higher labor rates and higher unemployment taxes. Restaurant-Level EBITDA margin increased 1.7% at our 2012 acquired restaurants due primarily to improvements in food and cash controls noted above and the closure of fourteen lower-volume restaurants since the beginning of 2013, partially offset by higher beef costs.
General and Administrative Expenses. General and administrative expenses increased $2.8 million in 2014 to $40.0 million and, as a percentage of total restaurant sales, increased to 5.8% in 2014 from 5.6% in 2013. The increase in general and administrative expenses was due primarily to $1.9 million of acquisition and integration costs related to the 2014 acquisitions, higher district manager salaries and related training and travel costs of $1.0 million primarily related to the acquisition of 123 restaurants in 2014, offset by lower administrative bonuses of $2.7 million. General and administrative expenses in 2014 also were higher than 2013 due to amounts earned under the Transition Services Agreement of $3.4 million in 2013 for transitional services to Fiesta which ended in the fourth quarter of 2013.
Adjusted EBITDA. As a result of the factors above Adjusted EBITDA was $36.0 million in 2014 compared to $34.3 million in 2013. For a reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see page 42.
Depreciation and Amortization. Depreciation and amortization expense increased to $36.9 million in 2014 from $33.6 million in 2013 due primarily our restaurant remodeling initiatives in 2014 and 2013 and our restaurant acquisitions in 2014.
Impairment and Other Lease Charges. Impairment and other lease charges were $3.5 million in 2014 and were comprised of $1.0 million of estimated future rent payments and other lease related charges due to the closure of underperforming restaurants, $1.4 million of initial impairment charges associated with nine underperforming restaurants and $1.1 million of impairment charges associated with capital expenditures at previously impaired restaurants.
Interest Expense. Interest expense was $18.8 million in both 2014 and 2013. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 11.2% in 2014 compared to 11.3% in 2013.
Provision (Benefit) for Income Taxes. Although we had a pretax loss, we recorded income tax expense of $11.8 million due to the establishment of a valuation allowance on our net deferred tax assets of $24.3 million, as discussed above.
Net Loss. As a result of the foregoing, net loss was $38.1 million in 2014, or $1.23 per diluted share, compared to a net loss of $13.5 million in 2013, or $0.59 per diluted share.
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Reconciliations of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted net income (loss) and income (loss) from operations to Restaurant-Level EBITDA for the years ended January 3, 2016, December 28, 2014, and December 29, 2013 are as follows (in thousands):
Year Ended | |||||||||||
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Reconciliation of EBITDA and Adjusted EBITDA: | |||||||||||
Net income (loss) | $ | 4 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Provision (benefit) for income taxes | — | 11,765 | (10,397 | ) | |||||||
Interest expense | 18,569 | 18,801 | 18,841 | ||||||||
Depreciation and amortization | 39,845 | 36,923 | 33,594 | ||||||||
EBITDA | 58,418 | 29,372 | 28,519 | ||||||||
Impairment and other lease charges | 3,078 | 3,541 | 4,462 | ||||||||
Acquisition costs (1) | 1,168 | 1,915 | — | ||||||||
EEOC litigation and settlement costs | — | — | 85 | ||||||||
Stock compensation expense | 1,438 | 1,180 | 1,205 | ||||||||
Loss on extinguishment of debt | 12,635 | — | — | ||||||||
Adjusted EBITDA | $ | 76,737 | $ | 36,008 | $ | 34,271 |
Reconciliation of Restaurant-Level EBITDA: | |||||||||||
Income (loss) from operations | $ | 31,208 | $ | (7,551 | ) | $ | (5,075 | ) | |||
Add: | |||||||||||
General and administrative expenses | 50,515 | 40,001 | 37,228 | ||||||||
Depreciation and amortization | 39,845 | 36,923 | 33,594 | ||||||||
Impairment and other lease charges | 3,078 | 3,541 | 4,462 | ||||||||
Other expense (income) | (126 | ) | 47 | 17 | |||||||
Restaurant-Level EBITDA | $ | 124,520 | $ | 72,961 | $ | 70,226 |
Reconciliation of Adjusted net income (loss): | |||||||||||
Net income (loss) | $ | 4 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Add: | |||||||||||
Loss on extinguishment of debt | 12,635 | — | — | ||||||||
Impairment and other lease charges | 3,078 | 3,541 | 4,462 | ||||||||
Acquisition costs (1) | 1,168 | 1,915 | — | ||||||||
Income tax effect of adjustments (2) | — | (2,073 | ) | (1,696 | ) | ||||||
Valuation allowance for deferred taxes | — | 24,326 | — | ||||||||
Adjusted net income (loss) | $ | 16,885 | $ | (10,408 | ) | $ | (10,753 | ) | |||
Diluted adjusted net earnings (loss) per share (3) | $ | 0.38 | $ | (0.34 | ) | $ | (0.47 | ) |
(1) | Acquisition costs for the periods presented include primarily legal and professional fees incurred in connection with the 2015 and 2014 acquisitions of $1.2 million and $1.9 million, respectively, were included in general and administrative expense. |
(2) | The income tax effect of the adjustments for impairment and other lease charges and acquisition costs was calculated using an effective income tax rate of 38%. Adjustments for the year ended January 3, 2016 are not tax-effected due to the valuation allowance on all of our net deferred tax assets. |
(3) | Diluted adjusted net earnings (loss) per share is calculated based on Adjusted net income (loss) and the diluted weighted average common shares outstanding for the respective periods. |
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Liquidity and Capital Resources
We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:
• | restaurant operations are primarily conducted on a cash basis; |
• | rapid turnover results in a limited investment in inventories; and |
• | cash from sales is usually received before related liabilities for food, supplies and payroll become due. |
On April 29, 2015, we issued $200 million of 8% Notes and used a portion of the net proceeds to repurchase and redeem all of our outstanding 11.25% Notes tendered pursuant to a cash tender offer and redemption and to pay related fees and expenses. We received net proceeds of approximately $35.2 million which are being used for working capital and general corporate purposes, capital expenditures to remodel our restaurants and Burger King restaurant acquisitions.
On February 12, 2016, we entered into an amendment to our senior credit facility to increase revolving credit borrowings by $25 million to $55 million (including $20.0 million available for letters of credit). The amendment also extended the maturity date of the senior credit facility to February 12, 2021 and reduces by .25% the interest rate for revolving credit borrowings to, at our option, (i) the alternate base rate plus the applicable margin of 1.75% to 2.75% based on our adjusted leverage ratio, or (ii) the LIBOR rate plus the applicable margin of 2.75% to 3.75% based on our adjusted leverage ratio (all as defined under the amended credit agreement). At February 12, 2016, the Company's LIBOR rate margin was 2.75% based on our Adjusted Leverage Ratio at the end of fiscal 2015.
Interest payments under our debt obligations, capital expenditures, including our commitment to BKC to remodel restaurants in 2016, payments of royalties and advertising to BKC and payments related to our lease obligations represent significant liquidity requirements for us as well as any discretionary expenditures for the acquisition of additional Burger King restaurants. We believe cash generated from our operations and availability of revolving credit borrowings under our amended senior credit facility will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.
Operating activities. Net cash provided from operating activities for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 was $70.7 million, $14.7 million and $21.6 million, respectively. Net cash provided by operating activities in 2015 increased by $56.0 million compared to 2014 due primarily to an increase in net income of $38.1 million and $15.1 million in cash provided from the change in the components of working capital, due in part by higher incentive bonus accruals at January 3, 2016.
Net cash provided from operating activities in 2014 decreased by $6.9 million compared to 2013 due primarily to payments of $6.3 million received from Fiesta Restaurant Group in 2013 for administrative services that were discontinued in 2013 and $1.7 million of non-recurring net income tax refunds in 2013.
Investing activities. Net cash used for investing activities from continuing operations for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 was $103.4 million, $68.0 million and $50.5 million, respectively.
As discussed above, in 2015, we acquired 55 Burger King® restaurants from other franchisees in eight separate acquisitions for an aggregate cash purchase price of $52.8 million. In 2014, we acquired 123 Burger King® restaurants from other franchisees in five separate acquisitions for an aggregate cash purchase price of $52.2 million.
Capital expenditures are a large component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants, including expenditures associated with our commitments to BKC to remodel restaurants to the 20/20 image and franchise agreement renewals; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants, and from time to time, to support BKC’s initiatives; and (4) corporate and restaurant information systems, including expenditures for our point-of-sale software for restaurants that we acquire.
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The following table sets forth our capital expenditures for the periods presented (dollar amounts in thousands):
Year Ended January 3, 2016: | ||||
New restaurant development | $ | 574 | ||
Restaurant remodeling | 41,582 | |||
Other restaurant capital expenditures | 10,772 | |||
Corporate and restaurant information systems | 3,920 | |||
Total capital expenditures | $ | 56,848 | ||
Year Ended December 28, 2014: | ||||
New restaurant development | $ | 1,696 | ||
Restaurant remodeling | 38,197 | |||
Other restaurant capital expenditures | 6,720 | |||
Corporate and restaurant information systems | 5,397 | |||
Total capital expenditures | $ | 52,010 | ||
Year Ended December 29, 2013: | ||||
New restaurant development | $ | 3,166 | ||
Restaurant remodeling | 37,450 | |||
Other restaurant capital expenditures | 7,203 | |||
Corporate and restaurant information systems | 2,667 | |||
Total capital expenditures | $ | 50,486 |
Investing activities also included sale-leaseback transactions related to our restaurant properties, primarily related to fee-owned properties acquired in 2014 and 2015 restaurant acquisitions, the net proceeds from which were $9.1 million in 2015, $19.6 million in 2014 and $3.1 million in 2013. We also had expenditures related to the purchase of restaurant properties to be sold in future sale-leaseback transactions of $3.5 million in 2015, $3.4 million in 2014 and $3.1 million in 2013. The net proceeds from these sales were used to fund our remodeling initiatives and other cash requirements or to reduce outstanding borrowings under our senior credit facility.
Investing activities in 2014 also included the release of $20.0 million of restricted cash that was previously required as collateral for our obligations under our senior credit facility.
Financing activities. Net cash provided from financing activities for the year ended January 3, 2016 was $33.8 million, due primarily to the refinancing of our notes in the second quarter as discussed above.
Net cash provided from financing activities for the year ended December 28, 2014 was $66.2 million, due primarily from a Public Offering of our common stock which generated net cash proceeds of $67.3 million, net of related expenses.
Net cash used for financing activities for the year ended December 29, 2013 was $1.1 million primarily related to principal payments on capital leases.
8% Senior Secured Second Lien Notes. The 8% Notes mature and are payable on May 1, 2022. Interest is payable semi-annually on May 1 and November 1 commencing November 1, 2015. The 8% Notes are guaranteed jointly and severally by our subsidiaries and are secured by second-priority liens on substantially all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).
The 8% Notes are redeemable at our option in whole or in part at any time after May 1, 2018 at a price of 104% of the principal amount plus accrued and unpaid interest, if any, if redeemed before May 1, 2019, 102% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2019 but before May 1, 2020 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2020. Prior to May 1, 2018, we may redeem some or all of the 8% Notes at a redemption price of 100% of the principal amount of each 8% Note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, the indenture governing the 8% Notes also provides that we may redeem up to 35% of the 8% Notes using the proceeds of certain equity offerings completed before May 1, 2018.
The 8% Notes are jointly and severally guaranteed, unconditionally and in full by our subsidiaries which are directly or indirectly 100% owned by us. Separate condensed consolidating information is not included because Carrols Restaurant Group is a holding company that has no independent assets or operations. There are no significant restrictions
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on our ability or any of the guarantor subsidiaries' ability to obtain funds from its respective subsidiaries. All consolidated amounts in our financial statements are representative of the combined guarantors.
The indenture governing the 8% Notes includes certain covenants, including limitations and restrictions on our and our subsidiaries who are guarantors under such indenture to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting certain subsidiaries; enter into transaction with affiliates; or merge, consolidate or sell substantially all of our assets.
The indenture governing the 8% Notes and the security agreement provide that any capital stock and equity interests of any of our subsidiaries will be excluded from the collateral to the extent that the par value, book value or market value of such capital stock or equity interests exceeds 20% of the aggregate principal amount of the 8% Notes then outstanding.
The indenture governing the 8% Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under the 8% Notes and the indenture governing the 8% Notes if there is a default under any of our indebtedness having an outstanding principal amount of $20.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. We were in compliance as of January 3, 2016 with the restrictive covenants of the indenture governing the 8% Notes.
Senior Credit Facility. On May 30, 2012, we entered into a senior credit facility, which was amended on February 12, 2016 to provide for aggregate revolving credit borrowings of up to $55.0 million (including $20.0 million available for letters of credit) and to extend the maturity date to February 12, 2021. The amended senior credit facility also provides for potential incremental borrowing increases of up to $25.0 million, in the aggregate. There were no revolving credit borrowings outstanding under the amended senior credit facility at January 3, 2016. After reserving $13.4 million for letters of credit issued under the amended senior credit facility, which included requirements associated with the 2016 renewals of workers’ compensation and other insurance policies, $41.6 million was available for revolving credit borrowings under the amended senior credit facility at February 12, 2016.
Effective on February 12, 2016, borrowings under the senior credit facility will bear interest at a rate per annum, at our option, of:
(i) the Alternate Base Rate plus the applicable margin of 1.75% to 2.75% based on the our Adjusted Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 2.75% to 3.75% based on the our Adjusted Leverage Ratio.
At February 12, 2016, our LIBOR rate margin was 2.75% based on our Adjusted Leverage Ratio at the end of fiscal 2015.
Prior to the February 12, 2016 amendment, we entered into the second amendment to the senior credit facility on April 29, 2015 which allowed for aggregate revolving credit borrowings of up to $30.0 million (including $20.0 million available for letters of credit) and matured on April 29, 2020. Revolving credit borrowings bore interest, at our option, of (i) the Alternate Base Rate plus the applicable margin of 2.00% to 2.75% based on our Adjusted Leverage Ratio, or (ii) the LIBOR Rate plus the applicable margin of 3.00% to 3.75% based on our Adjusted Leverage ratio. At January 3, 2016, our LIBOR rate margin was 3.50% based on our Adjusted Leverage Ratio at that date.
On December 19, 2014, we entered into the first amendment to the senior credit facility which provided for the release of $20.0 million of cash collateral, originally deposited on May 30, 2012 in an account with the Administrative Agent.
Our obligations under the amended senior credit facility are guaranteed by our subsidiaries and are secured by first priority liens on substantially all of our assets and those of our subsidiaries, including a pledge of all of the capital stock and equity interests of our subsidiaries.
Under the amended senior credit facility, we are required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).
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The amended senior credit facility contains certain covenants, including without limitation, those limiting our and our subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the amended senior credit facility requires us to meet certain financial ratios, including a Fixed Charge Coverage Ratio, Adjusted Leverage Ratio and First Lien Leverage Ratio (all as defined under the amended senior credit facility). We were in compliance with the covenants under its senior credit facility at January 3, 2016.
The amended senior credit facility contains customary default provisions, including that the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon the occurrence of a change of control.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of January 3, 2016 (in thousands):
Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 Years | |||||||||||||||
Long-term debt obligations, including interest (1) | $ | 304,000 | $ | 16,000 | $ | 32,000 | $ | 32,000 | $ | 224,000 | ||||||||||
Capital lease obligations, including interest (2) | 9,544 | 1,943 | 3,892 | 3,228 | 481 | |||||||||||||||
Operating lease obligations (3) | 701,803 | 57,305 | 108,781 | 101,826 | 433,891 | |||||||||||||||
Lease financing obligations, including interest (4) | 1,984 | 104 | 211 | 217 | 1,452 | |||||||||||||||
Total contractual obligations | $ | 1,017,331 | $ | 75,352 | $ | 144,884 | $ | 137,271 | $ | 659,824 |
(1) | Our long term debt at January 3, 2016 included $200.0 million of Notes. Total interest payments on our Notes of $104.0 million for all years presented are included at the coupon rate of 8%. |
(2) | Includes total interest of $1.5 million for all years presented. |
(3) | Represents the aggregate minimum lease payments under operating leases. Many of our leases also require contingent rent based on a percentage of sales in addition to the minimum base rent and require expenses incidental to the use of the property all of which have been excluded from this table. |
(4) | Includes total interest of $0.8 million for all years presented. |
We have not included obligations under our postretirement medical benefit plans in the contractual obligations table as our postretirement plan is not required to be funded in advance, but is funded as retiree medical claims are paid. Also excluded from the contractual obligations table are payments we may make for workers' compensation, general liability and employee healthcare claims for which we pay all claims, subject to annual stop-loss limitations both for individual claims and claims in the aggregate. The majority of our recorded liabilities related to self-insured employee health and insurance plans represent estimated reserves for incurred claims that have yet to be filed or settled. The total of these liabilities was $8.7 million at January 3, 2016.
Future restaurant remodeling obligations to BKC have also been excluded from the table above as well as contractual obligations related to royalties and advertising payable to BKC.
Long-Term Debt Obligations. Refer to Note 8 of our consolidated financial statements for details of our long-term debt.
Lease Guarantees. As of January 3, 2016, we are a guarantor under 30 Fiesta restaurant property leases, with lease terms expiring on various dates through 2030, and we are the primary lessee on five Fiesta restaurant property leases, which we sublease to Fiesta. We are fully liable for all obligations under the terms of the leases in the event that Fiesta fails to pay any sums due under the lease, subject to indemnification provisions of the separation and distribution agreement entered into in connection with the spin-off.
The maximum potential liability for future rental payments we could be required to make under these leases at January 3, 2016 was $31.7 million. The obligations under these leases will generally continue to decrease over time
46
as these operating leases expire. No payments have been made to date and none are expected to be required to be made in the future. We have not recorded a liability for those guarantees in accordance with ASC 460 - Guarantees as Fiesta has indemnified us for all such obligations and we did not believe it was probable we would be required to perform under any of the guarantees or direct obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our consolidated balance sheet.
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Wages paid in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates. Accordingly, changes in the Federal and state hourly minimum wage rates directly affect our labor costs. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to offset such inflationary cost increases in the future.
Application of Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Significant Accounting Policies” footnote in the notes to our consolidated financial statements. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.
Sales recognition at our restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls and generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of the fair market values of acquired restaurant assets and liabilities, insurance liabilities, the valuation of deferred income tax assets, the valuation of goodwill and intangible assets for impairment, assessing impairment of long-lived assets, accrued occupancy costs and lease accounting matters. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.
Acquisition Accounting. We account for business combinations under the acquisition method of accounting in accordance with ASC 805, "Business Combinations" ("ASC 805"). As required by ASC 805, assets acquired and liabilities assumed in a business combination are recorded at their respective fair values as of the business combination date. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, favorable and unfavorable leases and intangible assets. We use available information to make these fair value determinations and, when necessary, engage an independent valuation specialist to assist in the fair value determination of favorable or unfavorable leases and intangible assets.
Insurance liabilities. The amount of liability we record for claims related to insurance requires us to make judgments about the amount of expenses that will ultimately be incurred. We are insured for certain losses related to workers’ compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss insurance limitations both for individual claims and claims in the aggregate. We record insurance liabilities based on historical trends, which are continually monitored, and adjust accruals as warranted by changing circumstances. Since there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical claims experience and loss reserves, current claim data, and the severity of the claims, differences between actual future events and prior estimates and
47
assumptions could result in adjustments to these liabilities. As of January 3, 2016, we had $8.7 million accrued for these insurance claims.
Evaluation of Goodwill. We must evaluate our recorded goodwill for impairment on an ongoing basis. We have elected to conduct our annual impairment review of goodwill at our fiscal year end and we have determined that we currently have one reporting unit at our most recent measurement date. We may first assess the qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In reviewing goodwill for impairment, we compare the net book value of the reporting unit to its estimated fair value. In determining the estimated fair value of the reporting unit, we employ a combination of a discounted cash flow analysis and a market-based approach. Assumptions include our anticipated growth rates and the weighted average cost of capital. The results of these analyses are corroborated with other value indicators where available, such as comparable company earnings multiples. This annual evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting units including projections regarding future operating results and market values. Our impairment test at January 3, 2016 indicated the estimated fair value of our reporting unit exceeded the carrying value by over $100 million. This estimate may differ from actual future events and if this estimate or related projections change in the future, we may be required to record impairment charges for this asset.
Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.
Impairment of Burger King Franchise Rights. We assess the potential impairment of Burger King franchise rights associated with our Burger King restaurant acquisitions on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment by comparing the aggregate undiscounted future cash flows from those acquired restaurants with the respective carrying value of the aggregate franchise rights for each Burger King acquisition. In determining future cash flows, significant estimates are made by us with respect to future operating results of the acquired restaurants including sales trends, labor rates, commodity costs and other operating cost assumptions over their remaining franchise life. If acquired franchise rights are determined to be impaired, the impairment charge is measured by calculating the amount by which the franchise rights carrying amount exceeds its fair value. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets. We did not record any Burger King franchise rights impairment charges during the years ended January 3, 2016, December 28, 2014 or December 29, 2013.
Accrued occupancy costs. We make estimates of accrued occupancy costs pertaining to closed restaurant locations on an ongoing basis. Changes in accrued occupancy costs pertaining to closed restaurant locations will be included in Impairment and Other Lease Charges in our statements of comprehensive income (loss). These estimates require assessment and continuous evaluation of a number of factors such as the remaining contractual period under our lease obligations, the amount of sublease income we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future events and prior estimates could result in adjustments to these accrued costs.
Lease Accounting. Judgments made by management for our lease obligations include the length of the lease term, which includes the determination of renewal options that are reasonably assured. The lease term can affect the classification of a lease as capital or operating for accounting purposes, the term over which related leasehold improvements for each restaurant are amortized, and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
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We also must evaluate sales of our restaurants which occur in sale-leaseback transactions to determine the proper accounting for the proceeds of such sales either as a sale or a financing. This evaluation requires certain judgments in determining whether clauses in the lease or any related agreements constitute continuing involvement. For those sale-leasebacks that are accounted for as financing transactions, we must estimate our incremental borrowing rate, or another rate in cases where the incremental borrowing rate is not appropriate to utilize, for purposes of determining interest expense and the resulting amortization of the lease financing obligation. Changes in the determination of the incremental borrowing rates or other rates utilized in connection with the accounting for lease financing transactions could have a significant effect on the interest expense and underlying balance of the lease financing obligations.
Income Taxes. We perform an assessment of positive and negative evidence regarding the realization of our net deferred income tax assets as required by ASC 740. Under ASC 740, the weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC 740 also prescribes that objective historical evidence, in particular the our three-year cumulative loss position, be given greater weight than subjective evidence, including our forecasts of future taxable income, which include assumptions that cannot be objectively verified. We consider all available positive and negative evidence and have determined, based on the required weight of that evidence under ASC 740, that a valuation allowance was needed for all of its net deferred income tax assets at January 3, 2016 and December 28, 2014. We recorded income tax expense of $24.3 million in 2014 relative to this valuation reserve. During the year ended January 3, 2016, we established an additional valuation allowance of $3.0 million related to changes in our net deferred income tax assets.
We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion, in order to assess whether such conclusion remains appropriate in future periods.
We must also make estimates of certain items that relate to current and deferred tax liabilities. These estimates include employer tax credits for items such as the Work Opportunity Tax Credit, as well as estimates of tax depreciation based on methods anticipated to be used on our tax returns. These estimates are made based on the best available information at the time of the estimate and historical experience.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risk associated with fluctuations in interest rates, primarily limited to the senior credit facility. At January 3, 2016, there were no outstanding revolving credit borrowings under the senior credit facility. A 1% change in interest rates would have resulted in a nominal change to interest expense for the year ended January 3, 2016.
Borrowings under the senior credit facility prior to the February 12, 2016 amendment bore interest at a rate per annum, at the Company’s option, of
(i) the Alternate Base Rate plus the applicable margin of 2.00% to 2.75% based on the Company’s Adjusted Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 3.00% to 3.75% based on the Company’s Adjusted Leverage Ratio.
At January 3, 2016 the Company's LIBOR rate margin was 3.50% based on the Company's Adjusted Leverage Ratio at that date.
Commodity Price Risk
We are exposed to market price fluctuations in beef and other food product prices caused by weather, market conditions and other factors which are not considered predictable or within our control. Given the historical volatility of beef and other food product prices, this exposure can impact our food and beverage costs. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in
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nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of Carrols Restaurant Group, Inc. required by this Item are described in Item 15 of this Annual Report on Form 10-K and are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of January 3, 2016.
Changes in Internal Control over Financial Reporting. No changes occurred in our internal control over financial reporting during the fourth quarter of 2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our senior management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the effectiveness of its internal control over financial reporting as of January 3, 2016 based on the criteria set forth in a report entitled Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that, as of January 3, 2016, our internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the effectiveness of our internal control over financial reporting and their report is included herein.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Carrols Restaurant Group, Inc.
Syracuse, NY
We have audited the internal control over financial reporting of Carrols Restaurant Group, Inc. and subsidiary (the "Company") as of January 3, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended January 3, 2016 of the Company and our report dated March 9, 2016 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.
/s/ Deloitte & Touche LLP |
Rochester, NY |
March 9, 2016 |
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ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2016 Annual Meeting of Stockholders.
We have adopted a written code of ethics applicable to our directors, officers and employees in accordance with the rules of The NASDAQ Stock Market and the SEC. We make our code of ethics available free of charge through our internet website, www.carrols.com. We will disclose on our website amendments to or waivers from our code of ethics in accordance with all applicable laws and regulations.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2016 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2016 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2016 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2016 Annual Meeting of Stockholders.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) (1) Financial Statements - Carrols Restaurant Group, Inc. and Subsidiary
Page | ||
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY | ||
Financial Statements: | ||
(a) (2) Financial Statement Schedule
Schedule | Description | Page | |
II |
Schedules other than those listed are omitted for the reason that they are not required, not applicable, or the required information is shown in the financial statements or notes thereto.
(a) (3) Exhibits
EXHIBIT INDEX
Exhibit | |
Number | Description |
2.1 | Asset Purchase Agreement, dated as of March 26, 2012, among Carrols Restaurant Group, Inc., Carrols LLC and Burger King Corporation (incorporated by reference to Exhibit 2.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on March 28, 2012) |
2.2 | Asset Purchase Agreement dated as of August 22, 2014 between Carrols LLC and Heartland Illinois Food Corp. (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on November 6, 2014) |
2.3 | Asset Purchase Agreement dated as of August 22, 2014 between Carrols LLC and Heartland Indiana LLC (incorporated by reference to Exhibit 10.2 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on November 6, 2014) |
2.4 | Asset Purchase Agreement dated as of August 22, 2014 between Carrols LLC and Heartland Midwest LLC (incorporated by reference to Exhibit 10.3 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on November 6, 2014) |
3.1 | Form of Restated Certificate of Incorporation of Carrols Restaurant Group, Inc. (incorporated by reference to Exhibit 3.1 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as amended (Registration No. 333-137524)) |
3.2 | Form of Amended and Restated Bylaws of Carrols Restaurant Group, Inc. (incorporated by reference to Exhibit 3.2 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as amended (Registration No. 333-137524) |
3.3 | Amendment to Carrols Restaurant Group, Inc. Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on January 6, 2012) |
3.4 | Carrols Restaurant Group, Inc. Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
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Exhibit | |
Number | Description |
4.1 | Form of Registration Agreement by and among Carrols Restaurant Group, Inc., Atlantic Restaurants, Inc., Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to Exhibit 10.24 to Carrols Corporation's 1996 Annual Report on Form 10-K) |
4.2 | Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 10, 2012) |
4.3 | Form of Registration Rights Agreement between Carrols Restaurant Group Inc. and Burger King Corporation (incorporated by reference to Exhibit 4.2 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on March 28, 2012) |
4.4 | Indenture governing the 11.25% Senior Secured Second Lien Notes due 2018, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
4.5 | Form of 11.25% Senior Secured Second Lien Note due 2018 (incorporated by reference to Exhibit 4.4) |
4.6 | Registration Rights Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the guarantors named therein and Wells Fargo Securities, LLC (incorporated by reference to Exhibit 4.3 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
4.7 | Supplemental Indenture, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.4 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015) |
4.8 | Indenture governing the 8% Senior Secured Second Lien Notes due 2022, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015) |
4.9 | Form of 8% Senior Secured Second Lien Notes due 2022 (incorporated by reference to Exhibit 4.8) |
4.10 | Registration Rights Agreement, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein and Wells Fargo Securities, LLC (incorporated by reference to Exhibit 4.3 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015) |
10.1 | Carrols Corporation Retirement Savings Plan dated April 1, 1999 (incorporated by reference to Exhibit 10.29 to Carrols Corporation's 1999 Annual Report on Form 10-K) † |
10.2 | Carrols Corporation Retirement Savings plan July 1, 2002 Restatement (incorporated by reference to Exhibit 10.29 to Carrols Corporation's September 29, 2002 Quarterly Report on Form 10-Q) † |
10.3 | Addendum incorporating EGTRRA Compliance Amendment to Carrols Corporation Retirement Savings Plan dated September 12, 2002 (incorporated by reference to Exhibit 10.30 to Carrols Corporation's September 29, 2002 Quarterly Report on Form 10-Q) † |
10.4 | First Amendment, dated as of January 1, 2004, to Carrols Corporation Retirement Savings Plan (incorporated by reference to Exhibit 10.35 to Carrols Corporation's December 31, 2003 Annual Report on Form 10-K) † |
10.5 | 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.27 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as amended (Registration No. 333-137524)) † |
10.6 | Amendment to Carrols Restaurant Group, Inc. 2006 Stock Incentive Plan, dated as of March 24, 2010 (incorporated by reference to Appendix A of Carrols Restaurant Group, Inc.'s Definitive Proxy Statement filed on April 28, 2011) † |
10.7 | Amendment to Carrols Restaurant Group, Inc. 2006 Stock Incentive Plan, dated as of April 11, 2011 (incorporated by reference to Appendix A of Carrols Restaurant Group, Inc.'s Definitive Proxy Statement filed on April 28, 2011) † |
10.8 | Form of Change of Control/Severance Agreement (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group Inc.'s Current Report on Form 8-K filed on June 7, 2013) † |
10.9 | Form of Change of Control and Severance Agreement (incorporated by reference to Exhibit 10.2 to Carrols Restaurant Group Inc.'s Current Report on Form 8-K filed on June 7, 2013) † |
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Exhibit | |
Number | Description |
10.10 | Form of Agreement, by and among Carrols Restaurant Group, Inc., Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners, II, L.P., BIB Holdings (Bermuda) Ltd., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to Exhibit 10.31 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as amended (Registration No. 333-137524)) |
10.11 | Form of Amendment No. 1 to Registration Agreement, by and among Carrols Restaurant Group, Inc., Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners, II, L.P., BIB Holdings (Bermuda) Ltd., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to Exhibit 10.32 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as amended (Registration No. 333-137524)) |
10.12 | Employment Agreement dated as of December 22, 2011 among Carrols Restaurant Group, Inc., Carrols LLC and Daniel T. Accordino (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on December 27, 2011) † |
10.13 | First Amendment to Employment Agreement, dated as of September 6, 2013, among Carrols Restaurant Group, Inc., Carrols LLC and Daniel T. Accordino (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on September 11, 2013) † |
10.14 | Amended and Restated Carrols Corporation and Subsidiaries Deferred Compensation Plan dated December 1, 2008 (incorporated by reference to Exhibit 10.23 to Carrols Restaurant Group's and Carrols Corporation's 2008 Annual Report on Form 10-K) † |
10.15 | Separation and Distribution Agreement dated as of April 24, 2012 among Carrols Restaurant Group, Inc., Carrols Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012) |
10.16 | Tax Matters Agreement dated as of April 24, 2012 among Carrols Restaurant Group, Inc., Carrols Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to Exhibit 10.2 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012) |
10.17 | Employee Matters Agreement dated as of April 24, 2012 among Carrols Restaurant Group, Inc., Carrols Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to Exhibit 10.3 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012) |
10.18 | Transition Services Agreement dated as of April 24, 2012 among Carrols Restaurant Group, Inc., Carrols Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to Exhibit 10.4 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012) |
10.19 | Second Lien Security Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as collateral agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
10.20 | First Lien Security Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the guarantors named therein, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.2 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
10.21 | Amendment No. 1 to Asset Purchase Agreement, dated as of May 30, 2012, among Carrols Restaurant Group, Inc., Carrols LLC and Burger King Corporation (incorporated by reference to Exhibit 10.3 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
10.22 | Operating Agreement, dated as of May 30, 2012, between Carrols LLC and Burger King Corporation (incorporated by reference to Exhibit 10.4 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
10.23 | Credit Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the guarantors named therein, the lenders named therein and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.6 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012) |
10.24 | First Amendment to Credit Agreement dated as of December 19, 2014 among Carrols Restaurant Group, Inc., the guarantors named therein, the lenders named therein and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on December 22, 2014) |
56
Exhibit | |
Number | Description |
10.25 | First Amendment to Operating Agreement dated as of January 26, 2015, between Carrols LLC and Burger King Corporation (incorporated by reference to Exhibit 10.25 to Carrols Restaurant Group, Inc.'s Annual Report on Form 10-K filed on March 4, 2015) |
10.26 | Second Lien Security Agreement, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as collateral agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015) |
10.27 | Second Amendment to Credit Agreement and First Amendment to Security Agreement, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein, the lenders named therein and Wells Fargo Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015) |
10.28 | Third Amendment to Credit Agreement dated as of February 12, 2016 among Carrols Restaurant Group, Inc., the guarantors named therein, the lenders named therein and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on February 17, 2016) |
10.29 | Second Amendment to Operating Agreement dated as of December 17, 2015 between Carrols LLC and Burger King Corporation # |
14.1 | Carrols Restaurant Group, Inc. and Carrols Corporation Code of Ethics (incorporated by reference to Exhibit 14.1 to Carrols Restaurant Group Inc.’s and Carrols Corporation’s 2006 Annual Report on Form 10-K) |
21.1 | List of Subsidiaries # |
23.1 | Consent of Deloitte & Touche LLP # |
31.1 | Chief Executive Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.# |
31.2 | Chief Financial Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.# |
32.1 | Chief Executive Officer's Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.# |
32.2 | Chief Financial Officer's Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.# |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
# | Filed herewith. |
† | Compensatory plan or arrangement |
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Carrols Restaurant Group, Inc.
Syracuse, NY
We have audited the accompanying consolidated balance sheets of Carrols Restaurant Group, Inc. and subsidiary (the "Company") as of January 3, 2016 and December 28, 2014, and the related consolidated statements of comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years in the period ended January 3, 2016. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 3, 2016 and December 28, 2014, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 3, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP |
Rochester, NY |
March 9, 2016 |
F-1
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars, except share and per share amounts)
January 3, 2016 | December 28, 2014 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash | $ | 22,274 | $ | 21,221 | |||
Trade and other receivables | 6,161 | 4,034 | |||||
Inventories | 7,126 | 7,785 | |||||
Prepaid rent | 4,168 | 3,164 | |||||
Prepaid expenses and other current assets | 5,266 | 3,009 | |||||
Refundable income taxes | — | 2,416 | |||||
Total current assets | 44,995 | 41,629 | |||||
Property and equipment, net (Note 3) | 220,114 | 179,383 | |||||
Franchise rights, net (Note 4) | 118,881 | 102,900 | |||||
Goodwill (Note 4) | 20,438 | 17,793 | |||||
Franchise agreements, at cost less accumulated amortization of $8,471 and $7,502, respectively | 15,467 | 14,602 | |||||
Favorable leases, net (Note 4) | 5,652 | 4,725 | |||||
Other assets | 1,709 | 3,541 | |||||
Total assets | $ | 427,256 | $ | 364,573 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Current portion of long-term debt (Note 8) | $ | 1,435 | $ | 1,272 | |||
Accounts payable | 20,436 | 19,239 | |||||
Accrued interest | 2,672 | 2,170 | |||||
Accrued payroll, related taxes and benefits | 27,582 | 17,321 | |||||
Accrued real estate taxes | 5,117 | 4,908 | |||||
Other liabilities | 14,012 | 10,273 | |||||
Total current liabilities | 71,254 | 55,183 | |||||
Long-term debt, net of current portion and deferred financing costs (Note 8) | 202,042 | 154,252 | |||||
Lease financing obligations | 1,193 | 1,190 | |||||
Deferred income—sale-leaseback of real estate (Note 7) | 12,589 | 15,108 | |||||
Accrued postretirement benefits (Note 16) | 3,060 | 3,121 | |||||
Unfavorable leases, net (Note 4) | 12,004 | 13,027 | |||||
Other liabilities (Note 6) | 17,115 | 16,157 | |||||
Total liabilities | 319,257 | 258,038 | |||||
Commitments and contingencies (Note 13) | |||||||
Stockholders’ equity (Note 11): | |||||||
Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—100 shares | — | — | |||||
Voting common stock, par value $.01; authorized—100,000,000 shares, issued—35,508,660 and 35,222,667 shares, respectively, and outstanding—35,039,890 and 34,827,240 shares, respectively | 350 | 348 | |||||
Additional paid-in capital | 139,083 | 137,647 | |||||
Accumulated deficit | (30,958 | ) | (30,962 | ) | |||
Accumulated other comprehensive loss (Note 16) | (335 | ) | (357 | ) | |||
Treasury stock, at cost | (141 | ) | (141 | ) | |||
Total stockholders’ equity | 107,999 | 106,535 | |||||
Total liabilities and stockholders’ equity | $ | 427,256 | $ | 364,573 |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(In thousands of dollars, except share and per share amounts)
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Restaurant sales | $ | 859,004 | $ | 692,755 | $ | 663,483 | |||||
Costs and expenses: | |||||||||||
Cost of sales | 240,322 | 209,664 | 201,532 | ||||||||
Restaurant wages and related expenses | 267,950 | 219,718 | 208,404 | ||||||||
Restaurant rent expense (Note 7) | 58,096 | 48,865 | 47,198 | ||||||||
Other restaurant operating expenses | 135,874 | 113,586 | 106,508 | ||||||||
Advertising expense | 32,242 | 27,961 | 29,615 | ||||||||
General and administrative (including stock-based compensation expense of $1,438, $1,180, and $1,205, respectively) | 50,515 | 40,001 | 37,228 | ||||||||
Depreciation and amortization | 39,845 | 36,923 | 33,594 | ||||||||
Impairment and other lease charges (Note 5) | 3,078 | 3,541 | 4,462 | ||||||||
Other expense (income) | (126 | ) | 47 | 17 | |||||||
Total operating expenses | 827,796 | 700,306 | 668,558 | ||||||||
Income (loss) from operations | 31,208 | (7,551 | ) | (5,075 | ) | ||||||
Interest expense | 18,569 | 18,801 | 18,841 | ||||||||
Loss on extinguishment of debt (Note 8) | 12,635 | — | — | ||||||||
Income (loss) before income taxes | 4 | (26,352 | ) | (23,916 | ) | ||||||
Provision (benefit) for income taxes (Note 9) | — | 11,765 | (10,397 | ) | |||||||
Net income (loss) | $ | 4 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Basic and diluted net income (loss) per share (Note 12): | $ | 0.00 | $ | (1.23 | ) | $ | (0.59 | ) | |||
Shares used in computing net income (loss) per share: | |||||||||||
Basic weighted average common shares outstanding | 34,958,847 | 30,885,275 | 22,958,963 | ||||||||
Diluted weighted average common shares outstanding | 44,623,251 | 30,885,275 | 22,958,963 | ||||||||
Other comprehensive income (loss), net of tax: | |||||||||||
Net income (loss) | $ | 4 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Change in postretirement benefit obligations (Note 16) | 22 | (1,059 | ) | 33 | |||||||
Comprehensive income (loss) | $ | 26 | $ | (39,176 | ) | $ | (13,486 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(In thousands of dollars, except share and per share amounts)
Retained | Accumulated | |||||||||||||||||||||||||||||
Additional | Earnings | Other | Total | |||||||||||||||||||||||||||
Common Stock | Preferred | Paid-In | (Accumulated | Comprehensive | Treasury | Stockholders' | ||||||||||||||||||||||||
Shares | Amount | Stock | Capital | Deficit) | Income (Loss) | Stock | Equity | |||||||||||||||||||||||
Balance at December 31, 2012 | 22,748,241 | $ | 227 | $ | — | $ | 68,056 | $ | 21,362 | $ | 669 | $ | (141 | ) | $ | 90,173 | ||||||||||||||
Stock-based compensation | — | — | — | 1,205 | — | — | — | 1,205 | ||||||||||||||||||||||
Vesting of non-vested shares and excess tax benefits | 300,093 | 3 | — | (3 | ) | — | — | — | — | |||||||||||||||||||||
Distribution of Fiesta Restaurant Group's net assets (Note 1) | — | — | — | — | (688 | ) | — | — | (688 | ) | ||||||||||||||||||||
Net loss | — | — | — | — | (13,519 | ) | — | — | (13,519 | ) | ||||||||||||||||||||
Change in postretirement benefit obligations, net of tax of $30 (Note 16) | — | — | — | — | — | 33 | — | 33 | ||||||||||||||||||||||
Balance at December 29, 2013 | 23,048,334 | 230 | — | 69,258 | 7,155 | 702 | (141 | ) | 77,204 | |||||||||||||||||||||
Stock-based compensation | — | — | — | 1,180 | — | — | — | 1,180 | ||||||||||||||||||||||
Vesting of non-vested shares and excess tax benefits | 278,906 | 3 | — | (3 | ) | — | — | — | — | |||||||||||||||||||||
Issuance of common stock (Note 11) | 11,500,000 | 115 | — | 67,212 | — | — | — | 67,327 | ||||||||||||||||||||||
Net loss | — | — | — | — | (38,117 | ) | — | — | (38,117 | ) | ||||||||||||||||||||
Change in postretirement benefit obligations (Note 16) | — | — | — | — | — | (1,059 | ) | — | (1,059 | ) | ||||||||||||||||||||
Balance at December 28, 2014 | 34,827,240 | 348 | — | 137,647 | (30,962 | ) | (357 | ) | (141 | ) | 106,535 | |||||||||||||||||||
Stock-based compensation | — | — | — | 1,438 | — | — | — | 1,438 | ||||||||||||||||||||||
Vesting of non-vested shares and excess tax benefits | 212,650 | 2 | — | (2 | ) | — | — | — | — | |||||||||||||||||||||
Net income | — | — | — | — | 4 | — | — | 4 | ||||||||||||||||||||||
Change in postretirement benefit obligations (Note 16) | — | — | — | — | — | 22 | — | 22 | ||||||||||||||||||||||
Balance at January 3, 2016 | 35,039,890 | $ | 350 | $ | — | $ | 139,083 | $ | (30,958 | ) | $ | (335 | ) | $ | (141 | ) | $ | 107,999 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(In thousands of dollars)
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Cash flows provided from operating activities: | |||||||||||
Net income (loss) | $ | 4 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided from operating activities: | |||||||||||
Loss on disposals of property and equipment | 364 | 537 | 925 | ||||||||
Stock-based compensation | 1,438 | 1,180 | 1,205 | ||||||||
Impairment and other lease charges | 3,078 | 3,541 | 4,462 | ||||||||
Depreciation and amortization | 39,845 | 36,923 | 33,594 | ||||||||
Amortization of deferred financing costs | 874 | 1,007 | 1,004 | ||||||||
Amortization of deferred gains from sale-leaseback transactions | (2,535 | ) | (1,793 | ) | (1,799 | ) | |||||
Deferred income taxes | — | 11,548 | (6,284 | ) | |||||||
Loss on extinguishment of debt | 12,635 | — | — | ||||||||
Changes in other operating assets and liabilities | |||||||||||
Refundable income taxes | 2,416 | 177 | (2,379 | ) | |||||||
Accounts receivable | (2,127 | ) | (1,094 | ) | 3,653 | ||||||
Accounts payable | 2,054 | 2,194 | (2,691 | ) | |||||||
Accrued interest | 502 | 30 | 2 | ||||||||
Accrued payroll, related taxes and benefits | 10,261 | (700 | ) | 2,780 | |||||||
Other | 1,893 | (726 | ) | 628 | |||||||
Net cash provided from operating activities | 70,702 | 14,707 | 21,581 | ||||||||
Cash flows used for investing activities: | |||||||||||
Capital expenditures: | |||||||||||
New restaurant development | (574 | ) | (1,696 | ) | (3,166 | ) | |||||
Restaurant remodeling | (41,582 | ) | (38,197 | ) | (37,450 | ) | |||||
Other restaurant capital expenditures | (10,772 | ) | (6,720 | ) | (7,203 | ) | |||||
Corporate and restaurant information systems | (3,920 | ) | (5,397 | ) | (2,667 | ) | |||||
Total capital expenditures | (56,848 | ) | (52,010 | ) | (50,486 | ) | |||||
Acquisition of restaurants, net of cash acquired (Note 2) | (52,750 | ) | (52,200 | ) | — | ||||||
Proceeds from sales of other assets | 534 | 54 | — | ||||||||
Decrease in restricted cash balance (Note 8) | — | 20,000 | — | ||||||||
Properties purchased for sale-leaseback | (3,513 | ) | (3,412 | ) | (3,144 | ) | |||||
Proceeds from sale-leaseback transactions | 9,148 | 19,565 | 3,144 | ||||||||
Net cash used for investing activities | (103,429 | ) | (68,003 | ) | (50,486 | ) | |||||
Cash flows provided from (used for) financing activities: | |||||||||||
Proceeds from issuance of 8% senior secured second lien notes | 200,000 | — | — | ||||||||
Redemption of 11.25% senior secured second lien notes | (159,771 | ) | — | — | |||||||
Financing costs associated with issuance of debt | (5,169 | ) | (62 | ) | (8 | ) | |||||
Proceeds from public stock offering, net of expenses | — | 67,327 | — | ||||||||
Borrowings under senior credit facility | — | 59,000 | — | ||||||||
Repayments under senior credit facility | — | (59,000 | ) | — | |||||||
Principal payments on capital leases | (1,280 | ) | (1,050 | ) | (1,075 | ) | |||||
Net cash provided from (used for) financing activities | 33,780 | 66,215 | (1,083 | ) | |||||||
Net increase (decrease) in cash | 1,053 | 12,919 | (29,988 | ) | |||||||
Cash, beginning of period | 21,221 | 8,302 | 38,290 | ||||||||
Cash, end of period | $ | 22,274 | $ | 21,221 | $ | 8,302 |
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Supplemental disclosures: | |||||||||||
Interest paid on long-term debt | $ | 17,088 | $ | 17,659 | $ | 17,731 | |||||
Interest paid on lease financing obligations | $ | 104 | $ | 103 | $ | 101 | |||||
Accruals for capital expenditures | $ | 3,779 | $ | 4,683 | $ | 524 | |||||
Income taxes refunded, net | $ | 2,416 | $ | 41 | $ | 1,733 | |||||
Capital lease obligations acquired or incurred | $ | 615 | $ | 1,459 | $ | 116 | |||||
Non-cash assets acquired | $ | — | $ | — | $ | 858 | |||||
Non-cash reduction of capital lease assets and obligation | $ | — | $ | 1,055 | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
1. Basis of Presentation
Business Description. At January 3, 2016 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated, as franchisee, 705 restaurants under the trade name “Burger King®” in 16 Northeastern, Midwestern and Southeastern states.
Basis of Consolidation. Carrols Restaurant Group is a holding company and conducts all of its operations through its wholly-owned subsidiary, Carrols Corporation (“Carrols”) and Carrols' wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company. The consolidated financial statements presented herein include the accounts of Carrols Restaurant Group and its wholly-owned subsidiary Carrols.
Unless the context otherwise requires, Carrols Restaurant Group, Carrols and Carrols LLC are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January 3, 2016 contained 53 weeks and the fiscal years ended December 28, 2014 and December 29, 2013 each contained 52 weeks.
Spin-Off. On May 7, 2012, the Company completed the spin-off of Fiesta Restaurant Group, Inc. ("Fiesta"), a wholly owned subsidiary of Carrols, through a pro-rata dividend to the stockholders of Carrols Restaurant Group of all of the outstanding shares of Fiesta's common stock (the "Spin-off"). As a result of the Spin-off, in addition to net asset distributions in 2012, Carrols made a net asset distribution of $0.7 million in 2013 related to income taxes for the periods prior to the Spin-off.
In connection with the Spin-off, on April 24, 2012 Carrols Restaurant Group and Carrols entered into several agreements with Fiesta that govern the Company’s post Spin-off relationship with Fiesta, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement. Amounts earned by Carrols under the Transition Services Agreement were $3.4 million during the year ended December 29, 2013.
Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, the evaluation for impairment of goodwill, long-lived assets and franchise rights, lease accounting matters, the valuation of assets and liabilities acquired and the valuation of deferred income tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Inventories. Inventories, primarily consisting of food and paper, are stated at the lower of cost or market.
Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed in service. Property and equipment is recorded at cost. Repair and maintenance activities are expensed as incurred.
F-6
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
Owned buildings | 9 | to | 30 years |
Equipment | 3 | to | 7 years |
Computer hardware and software | 3 | to | 7 years |
Assets subject to capital leases | Shorter of useful life or lease term |
Leasehold improvements are depreciated over the shorter of their estimated useful lives or the underlying lease term. In circumstances where an economic penalty would be presumed by the non-exercise of one or more renewal options under the lease, the Company includes those renewal option periods when determining the lease term. For significant leasehold improvements made during the latter part of the lease term, the Company amortizes those improvements over the shorter of their useful life or the expected lease term. The expected lease term would consider the exercise of renewal options if the value of the improvements would imply that an economic penalty would be incurred without the renewal of the option. Building costs incurred for new restaurants on leased land are depreciated over the lease term, which is generally a period of twenty years.
Business Combinations. The Company allocates the purchase price of an acquired business to its net identifiable assets and liabilities based on the estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The Company uses all available information to estimate fair values of identifiable intangible assets and property acquired. In making these determinations, the Company may engage an independent third party valuation specialist to assist with the valuation of certain leasehold improvements, franchise rights and favorable and unfavorable leases.
On May 30, 2012, the Company acquired 278 Burger King restaurants from BKC, including BKC's assignment of its right of first refusal on franchise restaurant transfers in 20 states as follows: Connecticut (except Hartford county), Delaware, Indiana, Kentucky, Maine, Maryland, Massachusetts (except for Middlesex, Norfolk and Suffolk counties), Michigan, New Hampshire, New Jersey, New York (except for Bronx, Kings, Nassau, New York, Queens, Richmond, Suffolk and Westchester counties), North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington DC and West Virginia, (the "ROFR") pursuant to an operating agreement with BKC dated May 30, 2012, and as amended on January 26, 2015 and December 17, 2015.
Franchise Rights. For its restaurant acquisitions prior to 2002, the Company generally allocated to franchise rights, an intangible asset, the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets acquired. For acquisitions subsequent to 2002, the Company determined the fair value of franchise rights based upon the acquired restaurants' future earnings, discounting those earnings using an appropriate market discount rate and subtracting a contributory charge for net working capital, property and equipment and assembled workforce to determine the fair value attributable to these franchise rights. Amounts allocated to franchise rights for each acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.
Franchise Agreements. Fees for initial franchises and renewals are amortized using the straight-line method over the term of the agreement, which is generally twenty years.
Goodwill. Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized but is tested for impairment at least annually as of the fiscal year end.
Favorable and Unfavorable Leases. Favorable and unfavorable leases are due to the terms of acquired operating lease contracts being favorable or unfavorable relative to market terms of comparable leases on the acquisition date. Favorable and unfavorable leases are amortized as a component of rent expense on a straight-line basis over the remaining lease terms at the time of the acquisition.
F-7
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
Impairment of Long-Lived Assets. The Company assesses the recoverability of property and equipment, franchise rights and other intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
Deferred Financing Costs. Financing costs incurred in obtaining long-term debt and lease financing obligations are capitalized and amortized over the life of the related obligation as interest expense using the effective interest method. Long-term debt on the consolidated balance sheet is presented net of the unamortized amount of the financing costs related to long-term borrowings.
Leases. All leases are reviewed for capital or operating classification at their inception. The majority of the Company’s leases are operating leases. Many of the lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term, including any option periods included in the determination of the lease term. Contingent rentals are generally based upon a percentage of sales or a percentage of sales in excess of stipulated amounts and are generally not considered minimum rent payments but are recognized as rent expense when incurred.
Lease Financing Obligations. Lease financing obligations pertain to real estate sale-leaseback transactions accounted for under the financing method. The assets (land and building) subject to these obligations remain on the Company’s consolidated balance sheet at their historical costs and such assets (excluding land) continue to be depreciated over their remaining useful lives. The proceeds received by the Company from these transactions are recorded as lease financing obligations and the lease payments are applied as payments of principal and interest. The selection of the interest rate on lease financing obligations is evaluated at inception of the lease based on the Company’s incremental borrowing rate adjusted to the rate required to prevent recognition of a non-cash loss or negative amortization of the obligation through the end of the primary lease term.
Revenue Recognition. Revenues from Company restaurants are recognized when payment is tendered at the time of sale, net of sales discounts and excluding sales tax collected.
Income Taxes. Deferred income tax assets and liabilities are based on the difference between the financial statement and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when those differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities during the period including any changes in valuation allowances. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is necessary to reduce deferred tax assets to an amount for which realization is likely. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company and its subsidiary file a consolidated federal income tax return.
Advertising Costs. All advertising costs are expensed as incurred.
Cost of Sales. The Company includes the cost of food, beverage and paper, net of any vendor discounts and rebates, in cost of sales.
Pre-opening Costs. The Company’s pre-opening costs are expensed as incurred and generally include payroll costs associated with the opening of a new restaurant, rent and promotional costs.
Insurance. The Company is insured for workers’ compensation, general liability and medical insurance claims under policies where it pays all claims, subject to stop-loss limitations both for individual claims and in certain cases claims in the aggregate. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims based on Company experience and other methods used to measure such estimates. The Company does not discount any of its self-insurance obligations.
F-8
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. Financial instruments include cash, accounts receivable, accounts payable, and long-term debt. The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of the short-term nature of these financial instruments. The fair value of the Carrols Restaurant Group 8.0% Senior Secured Second Lien Notes due 2022 is based on a recent trading value, which is considered Level 2, and at January 3, 2016 was approximately $212.0 million.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of long-lived assets, goodwill and intangible assets. Long-lived assets and definite-lived intangible assets are measured at fair value on a nonrecurring basis using Level 3 inputs. As described in Note 5, the Company recorded long-lived asset impairment charges of $1.5 million, $2.6 million and $2.8 million during the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively.
Stock-Based Compensation. For non-vested stock awards, the fair market value of the award, determined based upon the closing value of the Company’s stock price on the grant date, is recorded to compensation expense on a straight-line basis over the requisite service period. The Company applies the Black-Scholes valuation model in determining the fair value of stock options granted to employees, which is then amortized on a straight-line basis to compensation expense over the requisite service period.
The Company has adopted an incentive stock plan under which incentive stock options, non-qualified stock options and non-vested shares may be granted to employees and non-employee directors. On an annual basis, the Company has granted incentive stock options, non-qualified stock options and/or non-vested shares under this plan. Non-vested shares granted to corporate employees generally vest 25% per year over four years and non-vested shares granted to non-employee directors generally vest at varying rates over two to five years. Forfeiture rates are based on a stratification of employees by expected exercise behavior and range from 0% to 15%. See Note 10 to the consolidated financial statements.
Gift cards. The Company sells gift cards in its restaurants that are issued under Burger King Corporation's ("BKC") gift card program. Proceeds from the sale of Burger King gift cards at the Company’s restaurants are received by BKC. The Company recognizes revenue from gift cards upon redemption by the customer.
Concentrations of Credit Risk. Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents. The Company maintains its day-to-day operating cash balances in interest-bearing transaction accounts at financial institutions, which are insured by the Federal Deposit Insurance Corporation up to $250,000. Although the Company maintains balances that exceed the federally insured limit, it has not experienced any losses related to these balances and believes its credit risk to be minimal.
Segment Information. Operating segments are components of an entity for which separate financial information is available and is regularly reviewed by the chief operating decision maker in order to allocate resources and assess performance. The Company's chief operating decision maker currently evaluates the Company's operations from a number of different operational perspectives, however resource allocation decisions are made on a total-company basis. The Company derives all significant revenues from a single operating segment. Accordingly, the Company views the operating results of its Burger King restaurants as one reportable segment.
Recently Issued Accounting Pronouncements. In April 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), which limits dispositions that qualify for discontinued operations presentation to those that represent strategic shifts
F-9
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
that have or will have a major effect on an entity’s operations and financial results. Strategic shifts could include a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of the business. ASU 2014-08 was effective for the Company during the first quarter of 2015. The adoption of this ASU has not had an impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and in August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These ASU's require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these ASU's. These ASU's are effective retrospectively for prior fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued, and retrospective application is required for each balance sheet presented. The Company early adopted these ASU's in the fourth quarter of 2015, and deferred financing costs previously recorded as an asset, other than those related to the Company's senior credit facility, in the amount of $4,529 and $3,170 for the years ended January 3, 2016 and December 28, 2014, respectively, have been reclassified as a reduction to the Company's long-term debt on the consolidated balance sheets. Additionally, the Company reclassified deferred financing costs related to lease financing obligations previously recorded as an asset in the amount of $10 and $12, for the years ended January 3, 2016 and December 28, 2014, respectively, to a reduction to lease financing obligations on the consolidated balance sheets.
In April 2015, the FASB issued ASU 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (ASU 2015-04), which allows an employer whose fiscal year-end does not coincide with a calendar month-end the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. The ASU is effective for the public business entities for annual periods beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted and the ASU should be applied prospectively. The Company early adopted this guidance during the fourth quarter of 2015. As a result of our early adoption, the date used to measure our fiscal year 2015 retirement benefit plan obligations and plan assets for all plans was December 31, 2015. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. These amendments require the acquirer to record, in the same period’s financial statements, the effect on earnings of changes to depreciation, amortization, or other income effects, if any, that results from changes to the provisional amounts, calculated as if the accounting for the acquisition activity had been completed at the acquisition date. The amendments also require an entity to separately present or disclose the portion of the amount recorded in the current-period earnings, by line item, that would have been reflected in previous reporting periods. This amendment is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company early adopted this ASU in the fourth quarter of 2015 and the adoption did not have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities to present all deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU is effective for public business entities for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company early adopted this ASU in the fourth quarter of 2015, and retrospectively applied the guidance to its prior year consolidated balance sheet. The Company reclassified current deferred tax assets of $1,642 to a reduction of non-current deferred tax liabilities on the consolidated balance sheets as of December 28, 2014.
F-10
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
Subsequent Events. The Company reviewed and evaluated subsequent events through the issuance date of the Company’s consolidated financial statements. On February 23, 2016, the Company acquired 12 Burger King restaurants located in Central Pennsylvania for $7.1 million.
2. Acquisitions
2015 Acquisitions
During the year ended January 3, 2016, the Company acquired an aggregate of 55 restaurants from other franchisees, which are referred to as the "2015 acquired restaurants", in the following transactions:
Closing Date | Number of Restaurants | Purchase Price | Number of Fee-Owned Restaurants (1) | Market Location | |||||||
March 31, 2015 | 4 | $ | 794 | Northern Vermont | |||||||
August 4, 2015 | 5 | 663 | Charlotte, North Carolina | ||||||||
October 1, 2015 | (2) | 5 | 5,044 | 1 | Wheeling, West Virginia | ||||||
October 20, 2015 | 1 | 709 | Kalamazoo, Michigan | ||||||||
November 17, 2015 | 2 | 618 | Evansville, Indiana | ||||||||
November 17, 2015 | (2) | 6 | 10,945 | 5 | Evansville, Indiana | ||||||
December 1, 2015 | (2) | 23 | 26,175 | 10 | Detroit, Michigan | ||||||
December 8, 2015 | 9 | 7,802 | Northern New Jersey | ||||||||
55 | $ | 52,750 | 16 |
(1) | The 2015 acquisitions included the purchase of 16 fee-owned properties. Three of these fee-owned properties were sold in sale-leaseback transactions during the fourth quarter of 2015 for net proceeds of $4.3 million. The remaining thirteen fee-owned properties valued at $18.3 million are expected to be sold in sale-leaseback transactions in 2016 although there can be no assurance that such transactions will be completed in 2016 or at all. |
(2) | Acquisitions resulting from the exercise of the ROFR. |
F-11
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase price for the eight 2015 acquisitions:
Inventory | $ | 544 | |
Land and buildings | 22,614 | ||
Restaurant equipment | 2,844 | ||
Restaurant equipment - subject to capital lease | 443 | ||
Leasehold improvements | 1,770 | ||
Franchise fees | 1,000 | ||
Franchise rights | 20,666 | ||
Favorable leases | 1,475 | ||
Goodwill | 2,645 | ||
Capital lease obligations for restaurant equipment | (494 | ) | |
Unfavorable leases | (324 | ) | |
Other liabilities | (433 | ) | |
Net assets acquired | $ | 52,750 |
The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2015 acquired restaurants contributed restaurant sales of $12.9 million during the year ended January 3, 2016. It is impracticable to disclose net earnings for the post-acquisition periods as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision. During the year ended January 3, 2016, acquisition costs of approximately $1.0 million related to the 2015 acquisitions were recorded in general and administrative expense.
The pro forma impact on the results of operations for the 2015 acquisitions is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the 2015 acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited proforma operating results:
Year Ended | ||||||||
January 3, 2016 | December 28, 2014 | (1) | ||||||
Restaurant sales | $ | 918,456 | $ | 862,357 | ||||
Net income (loss) | $ | 6,447 | $ | (27,252 | ) | |||
Basic and diluted net income (loss) per share | $ | 0.14 | $ | (0.88 | ) |
(1) Includes pro forma adjustments for 2014 acquisitions of restaurant sales of $100.8 million and net income of $4.8 million.
This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2015 acquired restaurants.
F-12
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
2014 Acquisitions
During the year ended December 28, 2014, the Company acquired an aggregate of 123 restaurants from other franchisees, which are referred to as the "2014 acquired restaurants", in the following transactions:
Closing Date | Number of Restaurants | Purchase Price | Number of Fee-Owned Restaurants (1) | Market Location | |||||||
April 30, 2014 | (1) | 4 | $ | 681 | Fort Wayne, Indiana | ||||||
June 30, 2014 | (1) | 4 | 3,819 | 1 | Pittsburgh, Pennsylvania | ||||||
July 22, 2014 | 21 | 8,609 | Rochester, New York and Southern Tier of Western New York | ||||||||
October 8, 2014 | (1) | 30 | 20,330 | 12 | Wilmington and Greenville, North Carolina | ||||||
November 4, 2014 | 64 | 18,761 | Nashville, Tennessee; Indiana and Illinois | ||||||||
123 | $ | 52,200 | 13 |
(1) | The 2014 acquisitions included the purchase of 13 fee-owned properties. Ten of these fee-owned properties were sold in sale-leaseback transactions during the fourth quarter of 2014 for net proceeds of $12,961 and one property was sold in a sale-leaseback transaction in 2015 for net proceeds of $1,123. |
(2) | In connection with the acquisition on November 4, 2014, the Company entered into an agreement with BKC to remodel 46 of the restaurants acquired over a five-year period beginning in 2014. |
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase price for the five 2014 acquisitions:
Inventory | $ | 1,267 | |
Land and buildings | 15,955 | ||
Restaurant equipment | 5,818 | ||
Restaurant equipment - subject to capital lease | 1,381 | ||
Leasehold improvements | 1,804 | ||
Franchise fees | 3,064 | ||
Franchise rights | 17,098 | ||
Favorable leases | 2,096 | ||
Deferred income taxes | 1,526 | ||
Other assets | 65 | ||
Goodwill | 9,631 | ||
Capital lease obligation for restaurant equipment | (1,458 | ) | |
Unfavorable leases | (5,912 | ) | |
Other liabilities | (135 | ) | |
Net assets acquired | $ | 52,200 |
The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2014 acquired restaurants and contributed restaurant sales of $144.6 million and $34.0 million in the years ended January 3, 2016 and December 28, 2014, respectively. It is impracticable to disclose net earnings for the post-acquisition periods as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision. During the years ended January 3, 2016 and December 28,
F-13
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
2014, transaction and integration costs of approximately $0.2 million and $1.9 million, respectively, related to the 2014 acquisitions were recorded in general and administrative expense.
The pro forma impact on the results of operations for the 2014 acquisitions is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the 2014 acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited proforma operating results:
Year ended | |||||||
December 28, 2014 | December 29, 2013 | ||||||
Restaurant sales | $ | 793,521 | $ | 800,264 | |||
Net income (loss) | $ | (31,364 | ) | $ | (9,964 | ) | |
Basic and diluted net loss per share | $ | (1.02 | ) | $ | (0.43 | ) |
This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2014 acquired restaurants.
Valuation Methodology
The Company engaged a third party valuation specialist to assist with the valuation of certain leasehold improvements, franchise rights and favorable and unfavorable leases. The Company estimated that the carrying value of restaurant equipment, subject to certain adjustments, and restaurant equipment subject to capital leases was equivalent to fair value of this equipment at the date of the acquisitions. The fair value determination of franchise agreements assumed for certain restaurants was based on the amounts paid for such agreements as if the terms were at market rates. The fair values of acquired land, buildings and certain leasehold improvements were determined using both the cost approach and market approach.
The fair value of the favorable and unfavorable leases acquired, as well as the fair value of land, buildings and leasehold improvements acquired, were measured using significant inputs observable in the open market. As such, the Company categorizes these as Level 2 inputs under ASC 820. The fair value of acquired franchise rights was primarily determined using the income approach.
Goodwill recorded in connection with these acquisitions was attributable to the workforce of the acquired restaurants and synergies expected to arise from cost savings opportunities. Acquired goodwill that is expected to be deductible for income tax purposes was $3,311 in 2015 and $7,221 in 2014. Deferred income tax assets are primarily due to the book and tax bases difference of net favorable and unfavorable leases.
The weighted average amortization period of the amortizable intangible assets acquired is as follows:
2015 Acquisitions | 2014 Acquisitions | ||
Favorable leases | 15.5 | 13.4 | |
Unfavorable leases | 6.5 | 15.0 | |
Franchise rights | 26.6 | 30.4 |
F-14
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
3. Property and Equipment
Property and equipment at January 3, 2016 and December 28, 2014 consisted of the following:
January 3, 2016 | December 28, 2014 | |||||||
Land | $ | 19,126 | $ | 6,316 | ||||
Owned buildings | 13,625 | 8,335 | ||||||
Leasehold improvements | 215,673 | 185,109 | ||||||
Equipment | 181,283 | 170,053 | ||||||
Assets subject to capital leases | 16,547 | 16,018 | ||||||
446,254 | 385,831 | |||||||
Less accumulated depreciation and amortization | (226,140 | ) | (206,448 | ) | ||||
$ | 220,114 | $ | 179,383 |
Assets subject to capital leases primarily pertain to buildings leased for certain restaurant locations and certain leases of restaurant equipment and had accumulated amortization at January 3, 2016 and December 28, 2014 of $9,553 and $8,168, respectively. Depreciation expense for all property and equipment for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 was $33,878, $31,372 and $28,364, respectively.
4. Intangible Assets
Goodwill. The Company is required to review goodwill for impairment annually, or more frequently, when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of the last day of the fiscal year. In performing its goodwill impairment test, the Company compared the net book value of its reporting unit to its estimated fair value, the latter determined by employing a combination of a discounted cash flow analysis and a market-based approach. There have been no recorded goodwill impairment losses during the years ended January 3, 2016, December 28, 2014 and December 29, 2013.
Goodwill at December 29, 2013 | $ | 8,162 | |
Acquisitions of restaurants (Note 2) | 9,631 | ||
Goodwill at December 28, 2014 | 17,793 | ||
Acquisitions of restaurants (Note 2) | 2,645 | ||
Goodwill at January 3, 2016 | $ | 20,438 |
Franchise Rights. Amounts allocated to franchise rights for each acquisition of Burger King restaurants are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period. The following is a summary of the Company’s franchise rights as of the respective balance sheet dates:
January 3, 2016 | December 28, 2014 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
Franchise rights | $ | 206,750 | $ | 87,869 | $ | 186,084 | $ | 83,184 |
Amortization expense related to franchise rights for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 was $4,685, $4,366 and $4,120, respectively, and the Company expects annual amortization to be $5,446 in 2016 and $5,372 in 2017, 2018, 2019 and 2020. No impairment charges were recorded related to the Company’s franchise rights for the years ended January 3, 2016, December 28, 2014 and December 29, 2013.
F-15
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
Favorable and Unfavorable Leases. Amounts allocated to favorable and unfavorable leases are being amortized using the straight-line method over the remaining terms of the underlying lease agreements as a net reduction of restaurant rent expense. The following is a summary of the Company’s favorable and unfavorable leases as of the respective balance sheet dates, which are included as assets and liabilities, respectively, on the accompanying consolidated balance sheets:
January 3, 2016 | December 28, 2014 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
Favorable leases | $ | 6,991 | $ | 1,339 | $ | 5,566 | $ | 841 | ||||||||
Unfavorable leases | $ | 15,448 | $ | 3,444 | $ | 15,267 | $ | 2,240 |
The net reduction of rent expense related to the amortization of favorable and unfavorable leases for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 was $799, $715 and $557, respectively, and the Company expects the net annual amortization to be $705 in 2016, $646 in 2017, $633 in 2018, $566 in 2019 and $492 in 2020.
5. Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions and the Company’s history of using these assets in the operation of its business. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy.
During the year ended January 3, 2016 the Company recorded other lease charges of $1.6 million associated with the closure of ten of the Company's restaurants and impairment charges of $1.5 million, consisting of approximately $1.3 million of capital expenditures at previously impaired restaurants and $0.2 million related to initial impairment charges for two underperforming restaurants.
During the year ended December 28, 2014, the Company recorded other lease charges of $1.0 million associated with the closure of three of the Company's restaurants and impairment charges of $2.6 million, consisting of approximately $1.1 million of capital expenditures at previously impaired restaurants and $1.4 million related to initial impairment charges for nine underperforming restaurants.
During the year ended December 29, 2013, the Company recorded other lease charges of $1.6 million associated with the closure of four of the Company's restaurants and impairment charges of $2.8 million, consisting of $0.9 million of capital expenditures at previously impaired restaurants and $1.9 million related to initial impairment charges for nineteen underperforming restaurants.
F-16
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
The following table presents the activity in the accrual for closed restaurant locations:
January 3, 2016 | December 28, 2014 | ||||||
Balance, beginning of year | $ | 1,721 | $ | 1,466 | |||
Provisions for restaurant closures | 1,472 | 724 | |||||
Changes in estimates of accrued costs | (95 | ) | 87 | ||||
Payments, net | (1,228 | ) | (721 | ) | |||
Other adjustments, including the effect of discounting future obligations | 218 | 165 | |||||
Balance, end of year | $ | 2,088 | $ | 1,721 |
Changes in estimates of accrued costs primarily relate to revisions to certain sublease income assumptions and costs.
6. Other Liabilities, Long-Term
Other liabilities, long-term, at January 3, 2016 and December 28, 2014 consisted of the following:
January 3, 2016 | December 28, 2014 | ||||||
Accrued occupancy costs | $ | 10,473 | $ | 9,287 | |||
Accrued workers’ compensation and general liability claims | 3,606 | 3,211 | |||||
Deferred compensation | 997 | 567 | |||||
Long-term obligation to BKC for right of first refusal | 190 | 939 | |||||
Other | 1,849 | 2,153 | |||||
$ | 17,115 | $ | 16,157 |
Accrued occupancy costs above include long-term obligations pertaining to closed restaurant locations, contingent rent, and accruals to expense operating lease rental payments on a straight-line basis over the lease term.
7. Leases
The Company utilizes land and buildings in its operations under various lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for twenty years and, in many cases, provide for renewal options and in most cases rent escalations. Certain leases require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance and utilities.
In the years ended January 3, 2016, December 28, 2014 and December 29, 2013, the Company sold seven, fifteen and two restaurant properties, respectively, in sale-leaseback transactions for net proceeds of $9,148, $19,565 and $3,144, respectively. These leases have been classified as operating leases and contain a twenty-year initial term plus renewal options.
Deferred gains from sale-leaseback transactions of restaurant properties of $16 and $373 were recognized during the years ended January 3, 2016 and December 28, 2014, respectively, and are being amortized over the term of the related leases. There were no deferred gains recognized during the year ended December 29, 2013. The amortization of deferred gains from sale-leaseback transactions was $2,535, $1,793 and $1,799 for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively.
Minimum rent commitments under capital and non-cancelable operating leases at January 3, 2016 were as follows :
Fiscal year ending: | Capital | Operating | |||||
January 1, 2017 | $ | 1,943 | $ | 57,305 | |||
December 31, 2017 | 1,943 | 55,209 | |||||
December 30, 2018 | 1,949 | 53,572 | |||||
December 29, 2019 | 1,950 | 51,998 | |||||
January 3, 2021 | 1,278 | 49,828 | |||||
Thereafter | 481 | 433,891 | |||||
Total minimum lease payments | 9,544 | $ | 701,803 | ||||
Less amount representing interest | (1,538 | ) | |||||
Total obligations under capital leases | 8,006 | ||||||
Less current portion | (1,435 | ) | |||||
Long-term obligations under capital leases | $ | 6,571 |
Total rent expense on operating leases, including contingent rent on both operating and capital leases, was as follows:
Year ended | |||||||||||
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Minimum rent on real property | $ | 53,085 | $ | 45,371 | $ | 43,650 | |||||
Contingent rent on real property | 5,011 | 3,494 | 3,548 | ||||||||
Restaurant rent expense | 58,096 | 48,865 | 47,198 | ||||||||
Administrative and equipment rent | 276 | 264 | 225 | ||||||||
$ | 58,372 | $ | 49,129 | $ | 47,423 |
F-17
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
8. Long-term Debt
Long-term debt at January 3, 2016 and December 28, 2014 consisted of the following:
January 3, 2016 | December 28, 2014 | ||||||
Collateralized: | |||||||
Carrols Restaurant Group 8% Senior Secured Second Lien Notes | $ | 200,000 | $ | — | |||
Carrols Restaurant Group 11.25% Senior Secured Second Lien Notes | — | 150,000 | |||||
Capital leases | 8,006 | 8,694 | |||||
208,006 | 158,694 | ||||||
Less: current portion | (1,435 | ) | (1,272 | ) | |||
Less: deferred financing costs | (4,529 | ) | (3,170 | ) | |||
$ | 202,042 | $ | 154,252 |
On April 29, 2015, the Company issued $200.0 million of 8.0% Senior Secured Second Lien Notes due 2022 (the "8% Notes") pursuant to an indenture dated as of April 29, 2015 governing such notes. In connection with the issuance of the 8% Notes, on April 15, 2015 the Company commenced a cash tender offer to purchase or redeem its outstanding $150 million aggregate principal amount of 11.25% Senior Secured Second Lien Notes (the "11.25% Notes"). The tender and redemption premium associated with the repurchase and redemption of the 11.25% Notes and other transactions costs of approximately $9.8 million and the write-off of $2.8 million of previously deferred financing costs related to the 11.25% Notes are reflected as loss on extinguishment of debt in the year ended January 3, 2016.
8% Notes. The 8% Notes mature and are payable on May 1, 2022. Interest is payable semi-annually on May 1 and November 1 commencing November 1, 2015. The 8% Notes are guaranteed by the Company's subsidiaries and are secured by second-priority liens on substantially all of the Company's and its subsidiaries' assets (including a pledge of all of the capital stock and equity interests of its subsidiaries).
The 8% Notes are redeemable at the option of the Company in whole or in part at any time after May 1, 2018 at a price of 104% of the principal amount plus accrued and unpaid interest, if any, if redeemed before May 1, 2019, 102% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2019 but before May 1, 2020 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2020. Prior to May 1, 2018, the Company may redeem some or all of the 8% Notes at a redemption price of 100% of the principal amount of each note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, the indenture governing the 8% Notes also provides that the Company may redeem up to 35% of the 8% Notes using the proceeds of certain equity offerings completed before May 15, 2018.
The 8% Notes are jointly and severally guaranteed, unconditionally and in full by the Company's subsidiaries which are directly or indirectly 100% owned by the Company. Separate condensed consolidating information is not included because Carrols Restaurant Group is a holding company that has no independent assets or operations. There are no significant restrictions on its ability or any of the guarantor subsidiaries' ability to obtain funds from its respective subsidiaries. All consolidated amounts in our financial statements are representative of the combined guarantors.
The indenture governing the 8% Notes includes certain covenants, including limitations and restrictions on the Company and its subsidiaries who are guarantors under such indenture to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting certain subsidiaries; enter into transaction with affiliates; or merge, consolidate or sell substantially all of the Company's assets.
The indenture governing the 8% Notes and the security agreement provide that any capital stock and equity interests of any of the Company's subsidiaries will be excluded from the collateral to the extent that the par value, book
F-18
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
value or market value of such capital stock or equity interests exceeds 20% of the aggregate principal amount of the 8% Notes then outstanding.
The indenture governing the 8% Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under the 8% Notes and the indenture governing the 8% Notes if there is a default under any of the Company's indebtedness having an outstanding principal amount of $20.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.
Senior Credit Facility. On May 30, 2012, the Company entered into a senior credit facility, which was amended on February 12, 2016 to provide for aggregate revolving credit borrowings of up to $55.0 million (including $20.0 million available for letters of credit) and to extend the maturity date to February 12, 2021. The amended senior credit facility also provides for potential incremental borrowing increases of up to $25.0 million, in the aggregate. There were no revolving credit borrowings outstanding under the amended senior credit facility at January 3, 2016. After reserving $13.4 million for letters of credit issued under the amended senior credit facility, $41.6 million was available for revolving credit borrowings under the amended senior credit facility at February 12, 2016.
Effective on February 12, 2016, borrowings under the senior credit facility will bear interest at a rate per annum, at the Company’s option, of:
(i) the Alternate Base Rate plus the applicable margin of 1.75% to 2.75% based on the Company’s Adjusted Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 2.75% to 3.75% based on the Company’s Adjusted Leverage Ratio.
At February 12, 2016, the Company's LIBOR rate margin was 2.75% based on the Company's Adjusted Leverage Ratio at the end of fiscal 2015.
Prior to the February 12, 2016 amendment, the Company's entered into the second amendment to the senior credit facility on April 29, 2015 which allowed for aggregate revolving credit borrowings of up to $30.0 million (including $20.0 million available for letters of credit) and matured on April 29, 2020. Revolving credit borrowings bore interest, at the Company's option, of (i) the Alternate Base Rate plus the applicable margin of 2.00% to 2.75% based on the Company’s Adjusted Leverage Ratio, or (ii) the LIBOR Rate plus the applicable margin of 3.00% to 3.75% based on the Company’s Adjusted Leverage ratio. At January 3, 2016, the Company's LIBOR rate margin was 3.50% based on the Company's Adjusted Leverage Ratio at that date. After reserving $13.4 million for letters of credit issued under the senior credit facility, $16.6 million was available for revolving credit borrowings under the amended senior credit facility at January 3, 2016.
On December 19, 2014, the Company entered into the first amendment to the senior credit facility which provided for the release of $20.0 million of cash collateral, originally deposited on May 30, 2012 in an account with the Administrative Agent.
The Company’s obligations under the amended senior credit facility are guaranteed by its subsidiaries and are secured by first priority liens on substantially all of the assets of the Company and its subsidiaries, including a pledge of all of the capital stock and equity interests of its subsidiaries.
Under the amended senior credit facility, the Company is required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).
The amended senior credit facility contains certain covenants, including without limitation, those limiting the Company’s and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the amended senior credit
F-19
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
facility requires the Company to meet certain financial ratios, including a Fixed Charge Coverage Ratio, Adjusted Leverage Ratio and First Lien Leverage Ratio (all as defined under the amended senior credit facility). The Company was in compliance with the covenants under its senior credit facility at January 3, 2016.
The amended senior credit facility contains customary default provisions, including that the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon the occurrence of a change of control.
Prior Senior Secured Second Lien Notes. On May 30, 2012, the Company issued $150 million of 11.25% Senior Secured Second Lien Notes due 2018 pursuant to an indenture governing such 11.25% Notes. Interest was payable semi-annually on May 15 and November 15. The 11.25% Notes were repurchased or redeemed in connection with the issuance of the 8.0% Notes on April 29, 2015.
At January 3, 2016, principal payments required on long-term debt, including capital leases, were as follows:
2016 | $ | 1,435 | |
2017 | 1,536 | ||
2018 | 1,649 | ||
2019 | 1,766 | ||
2020 | 1,211 | ||
Thereafter | 200,409 | ||
$ | 208,006 |
The weighted average interest rate on all debt, excluding lease financing obligations, for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 was 8.9%, 11.2% and 11.3%, respectively. Interest expense on the Company’s long-term debt, excluding lease financing obligations, was $18,462, $18,694 and $18,734 for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively.
9. Income Taxes
The provision (benefit) for income taxes was comprised of the following:
Year ended | |||||||||||
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Current: | |||||||||||
Federal | $ | — | $ | — | $ | (4,325 | ) | ||||
State | — | 217 | 212 | ||||||||
— | 217 | (4,113 | ) | ||||||||
Deferred: | |||||||||||
Federal | (2,901 | ) | (11,330 | ) | (5,561 | ) | |||||
State | (58 | ) | (1,448 | ) | (1,347 | ) | |||||
(2,959 | ) | (12,778 | ) | (6,908 | ) | ||||||
Change in valuation allowance | 2,959 | 24,326 | 624 | ||||||||
Provision (benefit) for income taxes | $ | — | $ | 11,765 | $ | (10,397 | ) |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
F-20
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
The components of deferred income tax assets and liabilities at January 3, 2016 and December 28, 2014 were as follows:
January 3, 2016 | December 28, 2014 | ||||||
Deferred income tax assets: | |||||||
Deferred income on sale-leaseback of certain real estate | $ | 4,881 | $ | 5,857 | |||
Lease financing obligations | 242 | 227 | |||||
Postretirement benefit obligations | 1,229 | 1,244 | |||||
Stock-based compensation expense | 378 | 273 | |||||
Federal net operating loss carryforwards | 17,696 | 11,091 | |||||
State net operating loss carryforwards | 3,795 | 3,077 | |||||
Goodwill and other intangibles, net | 2,639 | 2,641 | |||||
Occupancy costs | 7,120 | 7,017 | |||||
Tax credit carryforwards | 13,667 | 9,498 | |||||
Accrued vacation benefits | 2,314 | 2,020 | |||||
Accrued workers compensation | 2,087 | 2,020 | |||||
Other | 1,869 | 2,074 | |||||
Gross deferred income tax assets | 57,917 | 47,039 | |||||
Less: Valuation allowance | (30,374 | ) | (27,423 | ) | |||
Net deferred income tax assets | $ | 27,543 | $ | 19,616 | |||
Deferred income tax liabilities: | |||||||
Accumulated other comprehensive income-postretirement benefits | $ | (42 | ) | $ | (34 | ) | |
Inventory and other reserves | (103 | ) | (246 | ) | |||
Property and equipment depreciation | (3,803 | ) | 4,080 | ||||
Franchise rights | (23,595 | ) | (23,416 | ) | |||
Total deferred income tax liabilities | $ | (27,543 | ) | $ | (19,616 | ) | |
Carrying value of net deferred income tax assets | $ | — | $ | — |
The Company performs an assessment of positive and negative evidence regarding the realization of its net deferred income tax assets as required by ASC 740. Under ASC 740, the weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC 740 also prescribes that objective historical evidence, in particular the Company’s three-year cumulative loss position, be given greater weight than subjective evidence, including the Company’s forecasts of future taxable income, which include assumptions that cannot be objectively verified. The Company considers all available positive and negative evidence and has determined, based on the required weight of that evidence under ASC 740, that a valuation allowance was needed for all of its net deferred income tax assets at January 3, 2016 and December 28, 2014. As a result, the Company recorded income tax expense of $24.3 million in 2014 relative to this valuation reserve. During the year ended January 3, 2016, the Company established an additional valuation allowance of $3.0 million related to changes in its net deferred income tax assets.
The Company's federal net operating loss carryforwards expire beginning in 2033. As of January 3, 2016, the Company had federal net operating loss carryforwards of approximately $50.6 million. The Company’s state net operating loss carryforwards expire beginning in 2017 through 2034.
The estimation of future taxable income for federal and state purposes and the Company's ability to realize deferred tax assets can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to future changes that could have a material impact on the consolidated financial statements. If the
F-21
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
Company determines that it is more likely than not that it will realize these deferred tax assets in the future, the Company will make an adjustment to the valuation allowance at that time.
A reconciliation of the statutory federal income tax benefit to the tax provision (benefit) applied to income from continuing operations for the years ended January 3, 2016, December 28, 2014, and December 29, 2013 was as follows:
Year ended | |||||||||||
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Statutory federal income tax benefit | $ | 1 | $ | (9,223 | ) | $ | (8,371 | ) | |||
State income taxes, net of federal benefit | 6 | (749 | ) | (656 | ) | ||||||
Change in valuation allowances | 2,959 | 24,326 | 624 | ||||||||
Employment tax credits | (2,710 | ) | (2,291 | ) | (2,298 | ) | |||||
Miscellaneous | (256 | ) | (298 | ) | 304 | ||||||
Provision (benefit) for income taxes | $ | — | $ | 11,765 | $ | (10,397 | ) |
The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At January 3, 2016 and December 28, 2014, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2012 - 2015 remain open to examination by the major taxing jurisdictions to which the Company is subject. In 2014, the Company concluded an examination of its consolidated federal income tax return for the tax years 2009 through 2012. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to uncertainties regarding the timing of examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.
10. Stock-Based Compensation
2006 Stock Incentive Plan. In 2006, the Company adopted a stock plan entitled the 2006 Stock Incentive Plan, as amended, (the “2006 Plan”) and reserved and authorized a total of 3,300,000 shares of common stock for grant thereunder. On June 9, 2011, the stockholders approved an amendment to the 2006 Plan increasing the number of shares of common stock available for issuance by an additional 1,000,000 shares. As of January 3, 2016, 1,842,167 shares were available for future grant or issuance.
On January 15, 2015, the Company granted 274,200 non-vested shares of stock to officers of the Company. These shares vest and become non-forfeitable 25% per year and are being expensed over their four-year vesting period. In addition, during 2015 the Company issued an aggregate of 21,541 non-vested shares of common stock to non-employee directors. The non-vested stock awards vest over five years at the rate of 20% on each anniversary date of the award, provided that the participant has continuously remained a director of the Company.
Stock-based compensation expense for the years ended January 3, 2016, December 28, 2014, and December 29, 2013 was $1.4 million, $1.2 million and $1.2 million, respectively.
F-22
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
A summary of all non-vested share activity for the year ended January 3, 2016 was as follows:
Shares | Weighted Average Grant Date Price | ||||
Non-vested at December 28, 2014 | 395,427 | $ | 6.68 | ||
Granted | 295,741 | 8.22 | |||
Vested | (212,650) | 7.26 | |||
Forfeited | (9,748) | 6.21 | |||
Non-vested at January 3, 2016 | 468,770 | 7.40 |
The fair value of the non-vested shares is based on the closing price of the Company's common stock on the date of grant. As of January 3, 2016, total non-vested stock-based compensation expense was approximately $2.5 million and the remaining weighted average vesting period for non-vested shares was 2.3 years.
11. Stockholder's Equity
Preferred Stock. In 2012, the Company issued to Burger King Corporation ("BKC") 100 shares of Series A Convertible Preferred Stock pursuant to a certificate of designation. These shares are convertible into 9,414,580 shares of Carrols Restaurant Group Common Stock ("Carrols Common Stock").
The Preferred Stock and the shares of Carrols Common Stock to be issued upon conversion rank senior to Carrols Common Stock with respect to rights on liquidation, winding-up and dissolution of Carrols Restaurant Group. The Preferred Stock is perpetual, will receive any dividends and amounts upon a liquidation event on an as converted basis, does not pay interest and has no mandatory prepayment features.
BKC also has certain approval and voting rights as set forth in the certificate of designation for the Preferred Stock so long as it owns greater than 10.0% of the outstanding shares of Carrols Common Stock (on an as-converted basis). The Preferred Stock will vote with the Company's common stock on an as converted basis and provides for the right of BKC to elect (a) two members to the Company's board of directors until the date on which the number of shares of common stock into which the outstanding shares of the Preferred Stock held by BKC are then convertible constitutes less than 14.5% of the total number of outstanding shares of common stock and (b) one member to the Company's board of directors until BKC owns Preferred Stock (on an as converted basis to common stock) which equals less than 10.0% of the total number of outstanding shares of common stock.
Common Stock Public Offering. On April 30, 2014, the Company completed an underwritten public offering of 10.0 million shares of common stock at a price of $6.20 per share (the "Public Offering"). The Company also issued and sold an additional 1.5 million shares of common stock pursuant to the underwriters exercise of the option to purchase additional shares at the same terms and conditions as offered in the Public Offering, for a total share issuance of 11.5 million shares. All shares were issued and sold by the Company and the net proceeds received were approximately $67.3 million in the aggregate after deducting underwriting discounts and commissions and offering expenses.
The Company used the net proceeds of the Public Offering to accelerate the remodeling of the Company's restaurants to BKC's 20/20 restaurant image and to acquire franchised Burger King restaurants.
A shelf registration statement (including a prospectus) relating to these securities was filed by the Company with the Securities and Exchange Commission (“SEC”) and was declared effective by the SEC on February 1, 2016.
12. Net Income (Loss) per Share
The Company applies the two-class method to calculate and present net income (loss) per share. The Company's non-vested share awards and Series A Convertible Preferred Stock issued to BKC contain non-forfeitable rights to dividends and are considered participating securities for purposes of computing net income (loss) per share pursuant to the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared (whether paid or unpaid) and the remaining undistributed earnings are then allocated to common stock and participating
F-23
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
securities, based on their respective rights to receive dividends. As the Company incurred net losses for the years ended December 28, 2014 and December 29, 2013 and those losses are not allocated to the participating securities under the two-class method, such method is not applicable for the aforementioned reporting periods.
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net income (loss) per share reflects additional shares of common stock outstanding, where applicable, calculated using the treasury stock method or the two-class method.
The following table sets forth the calculation of basic and diluted net income (loss) per share:
Year ended | |||||||||||
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Basic net income (loss) per share: | |||||||||||
Net income (loss) | $ | 4 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Less: Income attributable to non-vested shares | — | — | — | ||||||||
Less: Income attributable to preferred stock | (1 | ) | — | — | |||||||
Net income available to common stockholders | $ | 3 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Weighted average common shares outstanding | 34,958,847 | 30,885,275 | 22,958,963 | ||||||||
Basic net income (loss) per share | $ | 0.00 | $ | (1.23 | ) | $ | (0.59 | ) | |||
Diluted net income (loss) per share: | |||||||||||
Net income (loss) | $ | 4 | $ | (38,117 | ) | $ | (13,519 | ) | |||
Shares used in computed basic net income (loss) per share | 34,958,847 | 30,885,275 | 22,958,963 | ||||||||
Dilutive effect of preferred stock and non-vested shares | 9,664,404 | — | — | ||||||||
Shares used in computed diluted net income (loss) per share | 44,623,251 | 30,885,275 | 22,958,963 | ||||||||
Diluted net income (loss) per share | $ | 0.00 | $ | (1.23 | ) | $ | (0.59 | ) | |||
Shares excluded from diluted net income (loss) per share computation (1) | — | 9,810,007 | 10,077,503 |
(1) | Shares issuable upon conversion of preferred stock and non-vested shares were excluded from the computation of diluted net loss in periods of net loss because their effect would have been anti-dilutive. |
13. Commitments and Contingencies
Lease Guarantees. As of January 3, 2016, the Company is a guarantor under 30 Fiesta restaurant property leases, with lease terms expiring on various dates through 2030, and is the primary lessee on five Fiesta restaurant property leases, which it subleases to Fiesta. The Company is fully liable for all obligations under the terms of the leases in the event that Fiesta fails to pay any sums due under the lease, subject to indemnification provisions of the Separation and Distribution Agreement entered into in connection with the Spin-off.
The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at January 3, 2016 was $31.7 million. The obligations under these leases will generally continue to decrease over time as these operating leases expire. No payments related to these guarantees have been made by the Company to date and none are expected to be required to be made in the future. The Company has not recorded a liability for these guarantees in accordance with ASC 460 - Guarantees as Fiesta has indemnified the Company for all such obligations and the Company did not believe it was probable it would be required to perform under any of the guarantees or direct obligations.
Litigation. The Company is a party to various litigation matters that arise in the ordinary course of business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial statements.
14. Transactions with Related Parties
As part of the 2012 acquisition, the Company issued to BKC 100 shares of Series A Convertible Preferred Stock which is convertible into 9,414,580 shares of Carrols Common Stock, or 28.9% of the outstanding shares of common stock calculated on a fully diluted basis on the date of the closing of the 2012 acquisition (and 21.0% of the outstanding shares of common stock as of January 3, 2016) on a fully diluted basis. See Note 11—Stockholder's Equity for further information. As a result of the 2012 acquisition, BKC has two representatives on the Company's board of directors.
Each of the Company's restaurants operates under a separate franchise agreement with BKC. These franchise agreements generally provide for an initial term of twenty years and currently have an initial franchise fee of $50. Any franchise agreement, including renewals, can be extended at the Company's discretion for an additional 20 year term, with BKC's approval, provided that, among other things, the restaurant meets the current Burger King image standard and the Company is not in default under terms of the franchise agreement. In addition to the initial franchise fee, the Company generally pays BKC a monthly royalty at a rate of 4.5% of sales. Royalty expense was $36.2 million, $29.1 million, and $27.7 million for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively.
The Company is also generally required to contribute 4% of restaurant sales from the Company's restaurants to an advertising fund utilized by BKC for its advertising, promotional programs and public relations activities, and amounts for additional local advertising in markets that approve such advertising. Advertising expense associated with these expenditures was $32.0 million, $27.5 million and $28.9 million for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively.
As of January 3, 2016, December 28, 2014, and December 29, 2013, the Company leased 293, 311 and 295 of its restaurant locations from BKC, respectively. As of January 3, 2016, for 163 of the restaurants, the terms and conditions of the lease with BKC are identical to those between BKC and their third-party lessor. Aggregate rent under these BKC leases for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 was $28.4 million, $26.6 million, and $26.7 million, respectively. The Company believes the related party lease terms have not been significantly affected by the fact that the Company and BKC are deemed to be related parties.
As of January 3, 2016, the Company owed BKC $0.9 million associated with its purchase of the right of first refusal related to the 2012 acquisition and $5.7 million related to the payment of advertising, royalties and rent, which is remitted on a monthly basis.
15. Retirement Plans
The Company offers its salaried employees the option to participate in the Carrols Corporation Retirement Savings Plan (the “Retirement Plan”). The Retirement Plan includes a savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post-tax savings option. Participating employees may contribute up to 50% of their salary annually to either of the savings options, subject to other limitations. The employees may allocate their contributions to various investment options available under a trust established by the Retirement Plan. The Company may elect to contribute to the Retirement Plan on an annual basis. The Company's contribution is equal to 50% of the employee's contribution subject to a maximum annual amount and begins to vest after one year of service and fully vests after five years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. Expense recognized for the Company's contributions to the Retirement Plan was $463, $370 and $346 for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively.
The Company also has an Amended and Restated Deferred Compensation Plan which permits employees not eligible to participate in the Retirement Plan because they have been excluded as “highly compensated” employees (as so defined in the Retirement Plan) to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds. At January 3, 2016 and December 28, 2014, a total of $997 and $567, respectively, was deferred under this plan, including accrued interest.
16. Postretirement Benefits
The Company sponsors a postretirement medical and life insurance plan covering substantially all Burger King administrative and restaurant management personnel who retire or terminate after qualifying for such benefits.
The following was the plan status and accumulated postretirement benefit obligation (APBO) at January 3, 2016 and December 28, 2014:
January 3, 2016 | December 28, 2014 | ||||||
Change in benefit obligation: | |||||||
Benefit obligation at beginning of year | $ | 3,121 | $ | 2,370 | |||
Service cost | 127 | 85 | |||||
Interest cost | 114 | 92 | |||||
Plan participants' contributions | 101 | 89 | |||||
Actuarial loss (gain) | (214 | ) | 808 | ||||
Benefits paid | (220 | ) | (342 | ) | |||
Medicare part D prescription drug subsidy | 31 | 19 | |||||
Benefit obligation at end of year | $ | 3,060 | $ | 3,121 | |||
Change in plan assets: | |||||||
Fair value of plan assets at beginning of year | $ | — | $ | — | |||
Employer contributions | 88 | 234 | |||||
Plan participants' contributions | 101 | 89 | |||||
Benefits paid | (220 | ) | (342 | ) | |||
Medicare part D prescription drug subsidy | 31 | 19 | |||||
Fair value of plan assets at end of year | — | — | |||||
Funded status | $ | (3,060 | ) | $ | (3,121 | ) | |
Weighted average assumptions: | |||||||
Discount rate used to determine benefit obligations | 4.25 | % | 3.83 | % | |||
Discount rate used to determine net periodic benefit cost | 3.83 | % | 4.48 | % |
The discount rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical and life insurance benefits. The Company has typically used the corporate AA/Aa bond rate for this assumption. The actuarial loss in 2014 was due primarily to the Company utilizing an updated mortality table as well as increased medical and prescription drug cost trend rates.
Components of net periodic postretirement benefit income recognized in the consolidated statements of operations were:
Year ended | |||||||||||
January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
Service cost | $ | 127 | $ | 85 | $ | 89 | |||||
Interest cost | 114 | 92 | 91 | ||||||||
Amortization of net gains and losses | 163 | 104 | 135 | ||||||||
Amortization of prior service credit | (355 | ) | (355 | ) | (357 | ) | |||||
Net periodic postretirement benefit expense (income) | $ | 49 | $ | (74 | ) | $ | (42 | ) |
F-24
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
Amounts recognized in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit income, consisted of:
Year ended | |||||||
January 3, 2016 | December 28, 2014 | ||||||
Prior service credit | $ | 2,327 | $ | 2,682 | |||
Net loss | (2,218 | ) | (2,595 | ) | |||
Deferred income taxes | (444 | ) | (444 | ) | |||
Accumulated other comprehensive loss | $ | (335 | ) | $ | (357 | ) |
The estimated net loss that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit income over the next fiscal year is $142. The amount of prior service credit for the postretirement benefit plan that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit income over the next fiscal year is $355.
The following table reflects the changes in accumulated other comprehensive income for the years ended January 3, 2016 and December 28, 2014:
Year ended | |||||||
January 3, 2016 | December 28, 2014 | ||||||
Net actuarial loss (gain) | $ | (214 | ) | $ | 808 | ||
Amortization of net loss | (163 | ) | (104 | ) | |||
Amortization of prior service credit | 355 | 355 | |||||
Total recognized in accumulated other comprehensive loss | $ | (22 | ) | $ | 1,059 |
Assumed health care cost trend rates at year end were as follows:
January 3, 2016 | December 28, 2014 | December 29, 2013 | ||||||
Medical benefits cost trend rate assumed for the following year pre-65 | 7.75 | % | 8.00 | % | 7.50 | % | ||
Medical benefits cost trend rate assumed for the following year post-65 | 6.75 | % | 7.00 | % | 5.88 | % | ||
Prescription drug benefit cost trend rate assumed for the following year | 11.00 | % | 9.00 | % | 6.75 | % | ||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 3.89 | % | 3.89 | % | 5.00 | % | ||
Year that the rate reaches the ultimate trend rate | 2075 | 2075 | 2021 |
The assumed healthcare cost trend rate represents the Company's estimate of the annual rates of change in the costs of the healthcare benefits currently provided by the Company's postretirement plan. The healthcare cost trend rate implicitly considers estimates of healthcare inflation, changes in healthcare utilization and delivery patterns, technological advances and changes in the health status of the plan participants. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the health care cost trend rates would have the following effects:
1% Point Increase | 1% Point Decrease | ||||||
Effect on total of service and interest cost components | $ | 66 | $ | 47 | |||
Effect on postretirement benefit obligation | 584 | 434 |
F-25
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars except share and per share amounts)
During 2016, the Company expects to contribute approximately $100 to its postretirement benefit plan. The benefits, net of Medicare Part D subsidy receipts, expected to be paid in each year from 2015 through 2020 are $100, $126, $152, $155 and $162 respectively, and for the years 2021-2025 the aggregate amount is $890.
17. Selected Quarterly Financial Data (Unaudited)
Year Ended January 3, 2016 | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter (7) | |||||||||||||
Restaurant sales | $ | 193,170 | $ | 219,102 | (1) | $ | 217,676 | (1) | $ | 229,056 | (1) | |||||
Income (loss) from operations | (4,462) | (2) | 12,358 | (1)(2) | 11,751 | (1)(2) | 11,561 | (1)(2) | ||||||||
Net income (loss) | (9,276) | (4,977) | 7,239 | 7,018 | ||||||||||||
Basic and diluted net income (loss) per share | (0.27 | ) | (0.14 | ) | 0.16 | 0.16 | ||||||||||
Restaurants at end of period | 659 | (5) | 657 | 660 | 705 | |||||||||||
Year Ended December 28, 2014 | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
Restaurant sales | $ | 151,453 | $ | 168,583 | (3) | $ | 179,822 | (3) | $ | 192,897 | (3) | |||||
Income (loss) from operations | (6,484) | (4) | 1,597 | (3)(4) | 330 | (3)(4) | (2,994) | (3)(4) | ||||||||
Net loss | (7,429) | (1,932) | (1,721) | (27,035) | (6) | |||||||||||
Basic and diluted net loss per share | (0.32 | ) | (0.06 | ) | (0.05 | ) | (0.78 | ) | ||||||||
Restaurants at end of period | 560 | 560 | 581 | 674 |
(1) | In fiscal 2015 the Company acquired four restaurants in the second quarter, five restaurants in the third quarter and 46 restaurants in the fourth quarter (See Note 2). In fiscal 2015 the Company recorded acquisition costs related to the 2014 and 2015 acquisitions of $0.2 million in the first quarter, $0.1 million in the third quarter, and $0.8 million in the fourth quarter(See Note 2). |
(2) | In fiscal 2015 the Company recorded impairment and other lease charges of $1.6 million in the first quarter, $0.7 million in the second quarter, $0.4 million in the third quarter and $0.3 million in the fourth quarter (See Note 5). |
(3) | In fiscal 2014 the Company acquired four restaurants in the second quarter, 25 restaurants in the third quarter and 94 restaurants in the fourth quarter (See Note 2). In fiscal 2014 the Company recorded acquisition costs related to the 2014 acquisitions of $0.1 million in the first quarter, $0.2 million in the second quarter, $0.4 million in the third quarter, and $1.2 million in the fourth quarter (See Note 2). |
(4) | In fiscal 2014 the Company recorded impairment and other lease charges of $0.6 million in the first quarter, $0.4 million in the second quarter, $0.8 million in the third quarter and $1.7 million in the fourth quarter (See Note 5). |
(5) | The Company closed 15 restaurants during the first quarter of fiscal 2015. |
(6) | The Company recorded income tax expense of $24.3 million related to establishing a valuation allowance for all of the Company's net deferred tax assets in the fourth quarter of 2014 (See Note 9). |
(7) | The fourth quarter of fiscal 2015 contained 14 weeks. |
F-26
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 3, 2016, DECEMBER 28, 2014 AND DECEMBER 29, 2013
(in thousands of dollars)
Column B | Column C | Column D | Column E | |||||||||||||||||
Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to other accounts | Deductions | Balance at End of Period | |||||||||||||||
Year Ended January 3, 2016 | ||||||||||||||||||||
Deferred income tax valuation allowance | $ | 27,423 | $ | 2,959 | $ | (8 | ) | $ | — | $ | 30,374 | |||||||||
Year Ended December 28, 2014 | ||||||||||||||||||||
Deferred income tax valuation allowance | 2,687 | $ | 24,326 | $ | 410 | — | 27,423 | |||||||||||||
Year Ended December 29, 2013 | ||||||||||||||||||||
Deferred income tax valuation allowance | 2,063 | 624 | — | — | 2,687 |
F-27
SIGNATURES
Pursuant to the requirements of the Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 9th day of March 2016.
CARROLS RESTAURANT GROUP, INC. | |
/s/ Daniel T. Accordino | |
(Signature) | |
Daniel T. Accordino Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
Signature | Title | Date | ||
/s/ Daniel T. Accordino | President, Chief Executive Officer and Director | March 9, 2016 | ||
Daniel T. Accordino | ||||
/s/ Paul R. Flanders | Vice President, Chief Financial Officer and Treasurer | March 9, 2016 | ||
Paul R. Flanders | ||||
/s/ Timothy J. LaLonde | Vice President, Controller | March 9, 2016 | ||
Timothy J. LaLonde | ||||
/s/ Jose E. Cil | Director | March 9, 2016 | ||
Jose E. Cil | ||||
/s/ Hannah S. Craven | Director | March 9, 2016 | ||
Hannah S. Craven | ||||
/s/ Manuel A. Garcia III | Director | March 9, 2016 | ||
Manuel A. Garcia III | ||||
/s/ Joel M. Handel | Director | March 9, 2016 | ||
Joel M. Handel | ||||
/s/ David S. Harris | Director | March 9, 2016 | ||
David S. Harris | ||||
/s/ Alexandre Macedo | Director | March 9, 2016 | ||
Alexandre Macedo | ||||