UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
Amendment No. 110-K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 29, 2013January 1, 2017
OR
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| ¨ | 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) |
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| Delaware | 16-1287774 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| 968 James Street, Syracuse, New York | 13203 |
(Address of principal executive office)offices) | (Zip Code) |
Registrant’s telephone number, including area code: (315) 424-0513
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class: | Name onof 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):
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| Large accelerated filer | o | Accelerated filer | x |
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| 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 24, 20143, 2017 Carrols Restaurant Group, Inc. had 23,710,91036,202,380 shares of its common stock, $.01 par value, outstanding. The aggregate market value of the common stock held by non-affiliates as of June 30, 2013July 3, 2016 of Carrols Restaurant Group, Inc. was $142,651,309.
$421,171,436.
DOCUMENTS INCORPORATED BY REFERENCE
None.Portions of the registrant's definitive Proxy Statement for Carrols Restaurant Group, Inc's 2017 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 1, 2017 are incorporated by reference into Part III of this annual report.
EXPLANATORY NOTECARROLS RESTAURANT GROUP, INC.
FORM 10-K
YEAR ENDED JANUARY 1, 2017
We filed ourPART I—FINANCIAL INFORMATION
PART I
Throughout this Annual Report on Form 10-K, for the fiscal year ended December 29, 2013 (“2013 Form 10-K”) with the Securities and Exchange Comission (the "SEC") on March 3, 2014. We are filing this Amendment No. 1 on Form 10-K/A solely for the purpose of including in the 2013 Form 10-K the Part III information not previously included in the 2013 Form 10-K.
This Amendment No. 1 on Form 10-K/A hereby amends and restates in their entirety Items 10 through 14 of Part III of the 2013 Form 10-K as well as the cover page to update the number of shares of our common stock outstanding and to remove the statement that information is being incorporated by reference from our definitive proxy statement.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment No.1 on Form 10-K/A also contains new certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Accordingly, Subsection (a) (3) of Item 15 of Part IV has also been amended and restated in its entirety to include the currently dated certifications as exhibits, and to reference the financial statements and financial statement schedule previously filed with the 2013 Form 10-K.
No attempt has been made in this Amendment No. 1 on Form 10-K/A to modify or update the other disclosures presented in the 2013 Form 10-K. This Amendment No. 1 on Form 10-K/A does not reflect events occurring after the filing of the 2013 Form 10-K. Accordingly, this Amendment No. 1 on Form 10-K/A should be read in conjunction with the 2013 Form 10-K and the Company’s other filings with the SEC.
PRESENTATION OF INFORMATION
Throughout this Amendment No. 1 on Form 10-K/A, we refer to Carrols Restaurant Group, Inc. as “Carrols Restaurant Group” and, together with its consolidated subsidiaries,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 subsidiaries,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
We refer to our former indirect wholly-owned subsidiary, Fiestarestaurants acquired over the past three years in 2014, 2015 and 2016 as our "acquired restaurants". All of our other restaurants, including restaurants acquired prior to 2014, are referred to as our "legacy restaurants".
We use a 52 or 53 week fiscal year ending on the Sunday closest to December 31. Our fiscal years ended December 30, 2012, December 29, 2013, December 28, 2014 and January 1, 2017 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 Group, Inc., a Delaware corporation,News, the U.S. Census Bureau and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.U.S. Department of Agriculture. Any reference to BKC in this Amendment No. 1Annual Report on Form 10-K/A10-K refers to Burger King Worldwide, Inc. and its wholly-owned subsidiaries, including Burger King Corporation.Corporation, and its parent company Restaurant Brands International, Inc. Unless otherwise indicated, information regarding BKC in this Amendment No. 1Annual Report on Form 10-K/A10-K has been made publicly available by BKC.
OnThis 2016 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. Words such as “may”, “might”, “will”, “should”, “anticipate”, “believe”, “expect”, “intend”, “estimate”, “hope”, “plan” or similar expressions are intended to identify such forward-looking statements. In addition, expressions of our strategies, intentions or plans are also forward-looking statements. These statements reflect management's best judgment based on 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. Actual results could differ materially from those stated or implied in these forward-looking statements as a result of a number of factors, included but not limited to, the factors discussed in 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;
Changes in consumer perception of dietary health and food safety;
Labor and employment benefit costs, including the effects of minimum wage increases, healthcare reform and changes in the Fair Labor Standards Act;
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 1, 2017, we owned and operated 753 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, 2016 there were a total of 15,738 Burger King restaurants, of which almost all were franchised and 7,387 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 2,600 square feet with seating capacity for 60 to 70 customers, has drive-thru service windows and has adjacent parking areas. As of January 1, 2017, almost all of our restaurants were freestanding. We operate our restaurants under franchise agreements with BKC.
Our acquisition of 278 Burger King restaurants on May 7,30, 2012 from BKC, which we refer to as the "distribution date""2012 acquisition", we completed the spin-offincluded BKC's assignment of Fiesta Restaurant Group from Carrols Restaurant Groupits right of first refusal on franchise restaurant transfers in the form of a pro rata dividend of all of the issued20 states as follows: Connecticut (except Hartford county), Delaware, Indiana, Kentucky, Maine, Maryland, Massachusetts (except for Middlesex, Norfolk and outstanding common stock of Fiesta Restaurant GroupSuffolk 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 our stockholders whereby each stockholder of our common stock of recordan operating agreement with BKC dated May 30, 2012, and as amended on AprilJanuary 26, 2012,2015 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 also required us to remodel 455 Burger King restaurants to BKC's "20/20" restaurant image by December 31, 2016 and at December 31, 2016 we had complied with this remodel requirement.
In 2016, we acquired 56 restaurants in seven separate transactions, in 2015 we acquired 55 Burger King restaurants in eight separate transactions and in 2014 we acquired 123 Burger King restaurants in five separate transactions. On February 28, 2017, we acquired 43 Burger King restaurants located in and around the Cincinnati, Ohio market.
For the fiscal year ended January 1, 2017, our restaurants generated total revenues of $943.6 million and our comparable restaurant sales increased 2.3%. Our average annual restaurant sales for all restaurants were approximately $1,312,000 per restaurant.
Our Competitive Strengths
We believe we have the following competitive strengths:
Largest Burger King Franchisee in the United States. spin-off record dateWe 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. ", received one shareWe 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 Fiestaour 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 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 strengthened our well-established relationship with BKC and has further aligned 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 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, common stock for every one sharewhich is now approximately 20.6%. 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 10.2% of the Burger King locations in North America as of January 1, 2017. 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 stock held,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 489 restaurants to BKC’s 20/20 restaurant image as of January 1, 2017 which we referbelieve has improved our guests’ overall experience and increased customer traffic. At January 1, 2017 we had 547 restaurants with the BKC 20/20 image, which includes restaurants converted prior to as the "spin-off". As a result of the spin-off, Fiesta Restaurant Group is now an independent company whose common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI.” Carrols Restaurant Group’s common stock continues to trade on The NASDAQ Global Market under the symbol “TAST.”our acquisition.
On March 26, 2012,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 Carrols LLC entered intooperate, 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 asset purchase agreement,average of 27 years of Burger King restaurant experience. Our 107 district managers that have an average tenure of 17 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 amended on May 30, 2012, with BKC pursuant to whichfollows:
Selectively Acquire and Develop Additional Burger King Restaurants. As of January 1, 2017, we through Carrols LLC, agreed to purchase 278 of BKC’s company-ownedoperated 753 Burger King restaurants, which we refer to as the "acquired BKC restaurants", located in Ohio, Indiana, Kentucky, Pennsylvania, North Carolina, South Carolina and Virginia, which we refer to as the "2012acquisition". As partmaking us one of the consideration paid to BKClargest Burger King franchisees in the world. We acquired the ROFR in the 2012 acquisition on May 30, 2012,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 issued 100 shares of our Series A Convertible Preferred Stock,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 referhave the ROFR and pre-approval rights. Furthermore, we believe there are additional Burger King restaurants in states not subject to as "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. On February 28, 2017, we completed the acquisition of 43 restaurants in and around the Cincinnati, Ohio market from a franchisee in a negotiated transaction. 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.Series A Preferred Stock", 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 BKC. The 2012 acquisition was consummated on May 30, 2012.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.
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. Recentproduct 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 Cheeseburger. In 2016, BKC introduced the flame-grilled hot dogs, Grilled Dogs, as a permanent menu item and promotional initiatives have included 2 for $4 breakfast Croissan'wich and 2 for $10 Whopper meal deal. 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.
Image. We believe that re-imaged restaurants increase curb appeal and result in increased restaurant sales. We have remodeled 489 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 1, 2017 we have a total of 547 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 re-imaging 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 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. In 2017, we plan to remodel an additional 20 to 25 more locations to BKC's 20/20 image as well as rebuild 5 to 7 restaurants and construct 7 to 15 new restaurants (including relocations of 2 to 3 existing restaurants). We believe there are opportunities to increase profitability by remodeling additional restaurants including restaurants that we have acquired or may acquire in the future.
CARROLS RESTAURANT GROUP, INC.
FROM 10-K/ARestaurant Economics
YEAR ENDED DECEMBER 29, 2013Selected restaurant operating data for our restaurants is as follows:
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| | December 28, 2014 | | January 3, 2016 | | January 1, 2017 |
| Average annual sales per restaurant (all restaurants) (1) | $ | 1,190,505 |
| | $ | 1,274,372 |
| | $ | 1,311,516 |
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| Legacy restaurants | $ | 1,193,429 |
| | $ | 1,300,126 |
| | $ | 1,340,141 |
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| Acquired restaurants | $ | 1,136,522 |
| | $ | 1,170,472 |
| | $ | 1,235,452 |
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| Average sales transaction | $ | 6.40 |
| | $ | 6.64 |
| | $ | 6.85 |
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| Drive-through sales as a percentage of total sales | 65.3 | % | | 66.0 | % | | 67.0 | % |
| Day-part sales percentages: | |
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| Breakfast | 12.9 | % | | 13.2 | % | | 13.8 | % |
| Lunch | 33.2 | % | | 32.8 | % | | 32.4 | % |
| Dinner | 20.4 | % | | 20.4 | % | | 20.4 | % |
| Afternoon and late night | 33.5 | % | | 33.6 | % | | 33.4 | % |
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| (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 $400,000 (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 $500,000 to $900,000 and the cost of building and site improvements generally ranges from $850,000 to $1,025,000.
With respect to development of freestanding restaurants, if we acquire the land to construct the building, we seek to 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 followed by construction of the building using cash generated from our operations or with borrowings under our senior credit facility.
The cost of securing real estate and 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 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 BKC 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 $550,000 per restaurant in 2017 and an average cost of $450,000 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 BKC 20/20 design. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent and Future Events Affecting our Results of Operations".
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 753 Burger King restaurants as of January 1, 2017:
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| State | | |
| Illinois | 19 |
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| Indiana | 87 |
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| Kentucky | 20 |
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| Maine | 11 |
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| Massachusetts | 1 |
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| Michigan | 54 |
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| New Jersey | 10 |
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| New York | 131 |
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| North Carolina | 160 |
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| Ohio | 92 |
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| Pennsylvania | 65 |
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| South Carolina | 32 |
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| Tennessee | 27 |
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| Vermont | 5 |
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| Virginia | 36 |
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| West Virginia | 3 |
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| Total | 753 |
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PART IIIOperations
Item 10. Directors, Executive Officers and Corporate Governance.Management Structure
Principal Occupation, Business Experience, Qualifications and Directorships of the Members of the Board of Directors
Our board of directors is divided into three classes of directors, with the classes as nearly equal in number as possible, each serving staggered three-year terms, except for our two Class A directors as described below. The terms of officeWe conduct substantially all of our Class I, Class IIexecutive management, finance, marketing and Class III directors are:
Class I director, whose term will expire at the Annual Meeting of Stockholders to be heldoperations support functions from our corporate headquarters in 2016 and when his successor is duly elected and qualify;
Class II directors, whose term will expire at the Annual Meeting of Stockholders to be held in 2014 and when their successors are duly elected and qualify; and
Class III directors whose term will expire at the Annual Meeting of Stockholders to be held in 2015 and when their successors are duly elected and qualify.
As further described below, the terms of the Series A Preferred Stock issued to BKC in connection with the 2012 acquisition provide that BKC is entitled to elect two Class A directors subject to certain conditions. Each Class A director, in his capacity as a member of our board of directors, is afforded the same rights and privileges as the other members of our board of directors, including, without limitation, rights to indemnification, insurance, notice, information and the reimbursement of expenses.
The following table sets forth information with respect to each of the members of our board of directors, including the Class of such director and the year in which each such director’s term will expire.
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| Name | | Age | | Year Became a Director | | Year Term Expires and Class |
| Daniel T. Accordino | | 63 | | 1993 | | 2016 Class I |
| Clayton E. Wilhite (1) (2) (3) | | 68 | | 1997 | | 2014 Class II |
| Joel M. Handel (1) (3) (4) | | 78 | | 2006 | | 2014 Class II |
| David S. Harris (1) (2) (4) | | 53 | | 2012 | | 2015 Class III |
| Manuel A. Garcia III (2) | | 70 | | 2013 | | 2015 Class III |
| Daniel Schwartz | | 33 | | 2012 | | 2014 Class A |
| Alexandre Macedo | | 36 | | 2013 | | 2014 Class A |
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Corporate Governance and Nominating Committee.
(4) Member of the Finance Committee.
Daniel T. Accordino has been Chief Executive Officer ofSyracuse, New York. Carrols Restaurant Group since January 1, 2012. Mr. Accordino has been President and a director of Carrols Restaurant Group since February 1993 and was Chief Operating Officer of Carrols Restaurant Group from February 1993 to December 2011. Before that, Mr. Accordino served as Executive Vice President - Operations from December 1986 and as Senior Vice President of Carrols from April 1984. From 1979 to April 1984, he was Vice President of Carrols responsible for restaurant operations, having previously served as Assistant Director of Restaurant Operations. Mr. Accordino has been an employee of ours since 1972.
Mr. Accordino’s experience asis led by our Chief Executive Officer since January 1, 2012, as a director and President since 1993, past experience as our Chief Operating Officer from 1993 to 2011 and as an employee of the Company in various capacities since 1972 gives him outstanding skills and insight into our challenges as well as extensive knowledge of the restaurant industry. Mr. Accordino brings to the board significant leadership, management, operational, financial and brand management experience.
Clayton E. Wilhite has served as our non-executive Chairman of the board of directors since January 2012 and as a director since July 1997. Since January 1998, Mr. Wilhite has been with CFI Group Worldwide LLC, and was Managing Partner of its North American Group from May 1998 to December 2004 and Managing Partner of CFI Worldwide LLC from January 2005, until his retirement on December 31, 2007. Mr. Wilhite continues to be a Senior Partner and shareholder of CFI Group Worldwide LLC. From September 1998 through December 2008, Mr. Wilhite served on the board of directors of CFI Group Worldwide LLC, an international management consulting firm specializing in measuring customer satisfaction. Between 1996 and 1998, he was the Chairman of Thurloe Holdings, L.L.C. From August 1996 through our acquisition of Pollo Tropical, Inc., Mr. Wilhite served on the board of directors of Pollo Tropical, Inc. Before 1996, Mr. Wilhite was with the advertising firm of D’Arcy Masius Benton & Bowles, Inc. having served
as its Vice Chairman from 1995 to 1996, as President of DMB&B/North America from 1988 to 1995, and as Chairman and Managing Director of DMB&B/St. Louis from 1985 to 1988.
Mr. Wilhite brings valuable leadership, and strategic skills from 20 years as a CEO or COO in the management consulting, consumer marketing and advertising agency businesses. In addition, having served as the non-executive Chairman of our board of directors since January 2012, on our board of directors since 1997 and on the Pollo Tropical board prior to its acquisition by us, he brings consumer based insights to our strategic planning process.
Joel M. Handel has served as a director since 2006. Since October 2013, Mr. Handel has been a partner in the law firm Schnader Harrison Segal and Lewis, LLP. From November 2008 until joining Schnader Harrison Segal and Lewis, LLP, Mr. Handel was a partner in the law firm Seyfarth Shaw LLP. From 2001 until joining Seyfarth Shaw, Mr. Handel was a partner in the law firm of Brown Raysman Millstein Felder & Steiner LLP which merged with and became a part of Thelen Reid Brown Raysman & Steiner on December 1, 2006. From 1976 to 2001 he was managing partner of the law firm of Baer Marks & Upham LLP.
Mr. Handel has over 30 years' experience as a partner in several major law firms and has a formal background and training in accounting and tax law. He has represented numerous public corporations and has been involved with numerous mergers and acquisitions and other corporate transactions and has significant expertise related to the business, financial, and legal issues facing public companies.
David S. Harris has served as a director since May 7, 2012. He has served as President of Grant Capital, Inc., a private investment company, since January 2002. From May 2001 until December 2001, Mr. Harris served as a Managing Director in the investment banking division of ABN Amro Securities LLC. From September 1997 until May 2001, Mr. Harris served as a Managing Director and Sector Head of the Retail, Consumer and Leisure Group of ING Barings LLC, a financial institution. From 1986 to 1997, Mr. Harris served in various capacities as a member of the investment banking group of Furman Selz LLC. Mr. Harris is a director of Rex American Resources Corporation, a retailer of consumer electronics and appliances, and Steiner Leisure Limited, a worldwide provider in the fields of beauty, wellness and education. Mr. Harris serves on the Audit Committee and the Compensation Committee of Steiner Leisure Limited and is the Chairman of the Compensation Committee of Steiner Leisure Limited. Mr. Harris serves on the Audit Committee, Compensation Committee and Nomination/Corporate Governance Committee of Rex American Resources Corporation and is the Chairman of the Audit Committee of Rex American Resources Corporation.
Mr. Harris brings significant experience with the strategic, financial and operational issues of retail companies in connection with his service on the boards of a number of public and private companies.
Manuel A. Garcia has served as a director since November 15, 2013. Mr. Garcia has served as Chairman of the Board of Directors of Chef Creations, Inc. a privately owned supplier and manufacturer of ready-to-eat custom food products since 1998 and has served as a director since 1998. Mr. Garcia has served as President and Chief Executive Officer of Atlantic Coast Management, Inc., a privately owned operator of various restaurants in the Orlando, Florida area, since 1996. Mr. Garcia previously served on the Board of Directors of BKC from 2003 until October 2010. From 1969 until 2000 Mr. Garcia operated Burger King® restaurants as a franchisee eventually owning and operating a total of 67 Burger King® restaurants.
Mr. Garcia brings significant experience with the strategic, financial and operational issues of restaurant companies and Burger King® restaurant operations in connection with his service on the board of Burger King Corporation, his ownership and operation of Burger King® restaurants, and his service on boards of a number of public and private restaurant companies.
Daniel Schwartz has served as a Class A director since the closing of the 2012 acquisition on May 30, 2012. Mr. Schwartz has served as the Chief Executive Officer of BKC since June 2013. Mr. Schwartz joined BKC in October 2010 as Executive Vice President, Deputy Chief Finance Officer and was appointed Executive Vice President and Chief Financial Officer in December 2010, effective January 1, 2011. Since January 2008, Mr. Schwartz has been a partner with 3G Capital, where he was responsible for managing 3G Capital’s private equity business prior to joining BKC. He joined 3G Capital in January 2005 as an analyst and worked with the firm’s public and private equity investments until November 2010. From March 2003 until January 2005, Mr. Schwartz worked for Altair Capital Management, a hedge fund located in Stamford, Connecticut and served as an analyst in the mergers and acquisitions group at Credit Suisse First Boston from June 2001 to March 2003.
Mr. Schwartz brings significant experience with the strategic, financial and operational issues of restaurant companies in connection with his employment as an executive officer of BKC.
Alexandre Macedo has served as a Class A director since October 25, 2013 in connection with the issuance of the Series A Preferred Stock to BKC. Mr. Macedo was appointed President of North America of BKC in April 2013. Mr. Macedo joined BKC in 2011 as Senior Vice President Marketing, North America, and later was General Manager of the North America Franchise Business. Prior to joining BKC, Mr. Macedo was a founder and partner of True Marketing, a Brazilian based marketing consulting firm from 2008 to 2011. Prior to this, he was head of the Brahma Beer business unit at AmBev from 2003 through 2007. Mr. Macedo received an MBA from Insead in 2003 and BS from NYU Stern School of Business in 1998.
Mr. Macedo brings significant experience with the strategic, financial and operational issues of restaurant companies in connection with his employment as an executive officer of BKC.
Information Regarding Executive Officers
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| | | | |
Name | | Age | | Position |
Daniel T. Accordino | | 63 | | Chief Executive Officer and President |
Paul R. Flanders | | 57 | | Vice President, Chief Financial Officer and Treasurer |
William E. Myers | | 58 | | Vice President, General Counsel and Secretary |
Timothy J. LaLonde | | 57 | | Vice President, Controller |
Gerald J. DiGenova | | 57 | | Vice President, Human Resources |
Richard G. Cross | | 51 | | Vice President, Real Estate |
For biographical information regarding Daniel T. Accordino, please see "—, Principal Occupation, Business Experience, Qualifications and Directorships of the Members of the Board of Directors".
Paul R. Flanders has been Vice President, Chief Financial Officer and Treasurer since April 1997. From May 7, 2012 until July 16, 2012, Mr. Flanders also served as the Interim Chief Financial Officer of Fiesta Restaurant Group. Before joining us, he was Vice President-Corporate Controller of Fay’s Incorporated, a retail chain, from 1989 to 1997, and Vice President-Corporate Controller for Computer Consoles, Inc., a computer systems manufacturer, from 1982 to 1989. Mr. Flanders was also associated with the accounting firm of Touche Ross & Co. from 1977 to 1982.
William E. Myers has been General Counsel and Secretary since May 7, 2012. He was appointed Vice President in July 2001. Mr. Myers served as Associate General Counsel from March 2001 through May 7, 2012. Before joining us, Mr. Myers was engaged in private practice beginning in 1982.
Timothy J. LaLonde has been Vice President, Controller since July 1997. Before joining us, he was a controller at Fay’s Incorporated, a retailing chain, from 1992 to 1997. Prior to that, he was a Senior Audit Manager with the accounting firm of Deloitte & Touche LLP, where he was employed since 1978.
Gerald J. DiGenova has been Vice President, Human Resources since July 2001. Mr. DiGenova was Director of Human Resources from January 1996 until June 2001. Mr. DiGenova served as Director of Safety and Risk Management from 1992 until December 1995 and Personnel Manager from January 1985 until January 1992. Mr. DiGenova has been an employee of ours since 1973, when he began as an hourly restaurant team member.
Richard G. Cross has been Vice President, Real Estate since July 2001. Mr. Cross was Director of Real Estate from 1994 until July 2001. Mr. Cross served as a Real Estate Manager from 1993 until 1994 and as a Real Estate Representative from 1987 until 1993. Mr. Cross joined us in May 1984 and held various positions in the Purchasing Department until 1987.
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon a review of the filings furnished to us pursuant to Rule 16a-3(e) promulgated under the Exchange Act, and on representations from our executive officers and directors and persons who beneficially own more than 10% of our common stock, all filing requirements of Section 16(a) of the Exchange Act were complied with in a timely manner during the fiscal year ended December 29, 2013.
Code of Ethics
We have adopted written codes of ethics applicable to our directors, officers and employees in accordance with the rules of the SEC and the NASDAQ listing standards. We make our codes of ethics available free of charge on the investor relations section of our website at www.carrols.com. We will disclose on our website amendments to or waivers from our codes of ethics in accordance with all applicable laws and regulations.
Audit Committee
Our Audit Committee consists of Messrs. Wilhite, Harris and Handel, with Mr. Harris serving as the Chairman of the Audit Committee. All three current members of the Audit Committee satisfy the independence requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act”, and Rule 5605 of the NASDAQ listing standards. Each member of our Audit Committee is financially literate. In addition, Mr. Harris serves as our Audit Committee “financial expert” within the meaning of Item 407 of Regulation S-K of the Securities Act of 1933, as amended, which we refer to as the “Securities Act”, and has the financial sophistication required under the NASDAQ listing standards.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
Overview
Our Compensation Committee has responsibility for determining and approving the compensation programs for our Chief Executive Officer, which we refer to as the “CEO”, and our other executive officers named in the Summary Compensation Table, which we refer to as the “Named Executive Officers”. As described below, the principal elements of our compensation programs include base salary, annual bonus, long-term incentives including restricted stock and the ability to defer the receipt of current compensation. Our CEO recommends to the Compensation Committee the base salary, annual bonus and long-term incentive compensation for the other Named Executive Officers.
Objectives of Compensation Program
The primary objectives of our executive compensation programs are to enable us to attract and retain executives with the requisite qualifications and experience to achieve our business objectives. We accomplish this by utilizing compensation programs that encourage, recognize and reward individual performance and tie a portion of compensation to long-term company performance. Our programs were designed to permit flexibility in establishing compensation for each individual based upon job responsibilities, individual performance and our results. Our programs were also designed to provide incentives to improve short term performance, achieve long-term sustainable growth in earnings and align the interests of our executive team with our stockholders.
While the Compensation Committee is primarily responsible for the overall oversight of our executive compensation, the CEO, with the assistance of other members of management, provides recommendations with respect to compensation for the other executive officers.
The Compensation Committee believes that the CEO’s input is valuable in determining the compensation of other executive officers given his day to day role in Carrols Restaurant Group and his responsibility in establishing and implementing our strategic plans. Therefore, while the Compensation Committee has been and will be primarily responsible for determining executive compensation, the CEO will continue to provide his input and recommendations to the Compensation Committee with respect to compensation for the other executive officers.
Elements of Our Compensation Programs
Our executive compensation program has consisted of short-term compensation (salary and annual incentive bonus) and long-term compensation (stock options or, beginning in the 2011 fiscal year, restricted stock) to achieve our goal of improving earnings and achieving long term sustainable growth in revenues and earnings which we believe constitutes alignment with stockholders’ interests.
The Role of Stockholder Say-on-Pay Votes
Our board of directors, Compensation Committee, and management value the opinions of our stockholders. We provide our stockholders with the opportunity to cast an advisory vote to approve Named Executive Officer compensation every three years, or Say-on-Pay. Although the advisory Say-On-Pay vote is non-binding, our Compensation Committee has considered the outcome of the vote when making compensation decisions for Named Executive Officers. At our annual meeting of stockholders held in June 2011, approximately 90.55% of the stockholders who voted on the Say-on-Pay proposal voted in favor of the proposal. Our Compensation Committee believes that this evidenced our stockholders’ support for our approach to executive compensation. Our next Say-on-Pay proposal will be voted at our 2014 annual meeting of stockholders. Our Compensation Committee will continue to consider the outcome of our Say-on-Pay votes when making future compensation decisions for our Named Executive Officers.
Short-Term Compensation
Base Salary. The Compensation Committee annually reviews and approves the base salaries of our executive officers based upon recommendations from our CEO. Increases are not preset and typically take into account the individual’s performance, responsibilities of the position, potential to contribute to our long term objectives, management skills, future potential and periodically from competitive data. Our executive compensation plan in place was designed to compensate our CEO and executive officers, including the Named Executive Officers, with modest annual increases in base salaries combined with the opportunity to earn up to approximately double the amount of base salary in annual cash incentive bonuses based on Carrols Restaurant Group and individual performance, in order to align the interests of our CEO and the other Named Executive Officers with those of our stockholders.
Factors considered in base salary planning included our performance, budgetary and cost containment issues, competitive market data (from time to time) and current salary levels, as appropriate. At the end of the year, the CEO evaluates each of the other Named Executive Officer’s performance and expected future contributions.
For the 2013 fiscal year, the base salary of our CEO and President, Daniel T. Accordino, was determined pursuantwho 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. Our 107 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 employmentincentive 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.
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, food safety and customer service standards. BKC's training and development programs are also available to us as a franchisee through web access in all of our restaurants.
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 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 pricing, 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 and monitor key restaurant performance indicators that are also included in our restaurant-level incentive bonus plans.
Burger King Franchise Agreements
Each of our Burger King restaurants operates under a separate franchise agreement with Mr. Accordino,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 Carrols LLC, which we refersuch 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 the "employmentrequired, our unauthorized sale, transfer or assignment of such franchise agreement", which became effective on, January 1, 2012 or the “Effective Date”. Under such employment agreement,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 base salary for Mr. Accordino was $544,000 for the 2012 fiscal year and Mr. Accordino’s base salary may be increased annually at the sole discretionBurger King restaurant system, conviction of the Compensation Committee. In January 2013, Mr. Accordino received an increase of 2.9% in his base salary to $560,000. The terms of Mr. Accordino’s employment agreement and the increase in Mr. Accordino's base salary were approved by our Compensation Committee.
In January 2013, our other Named Executive Officers, Paul R. Flanders, Timothy J. LaLonde, William E. Myers and Richard G. Cross, each received an increase of 2.9%, 10.2%, 14.3% and 11.2% in their respective base salary over the levels established for the 2012 fiscal year, as recommended by our CEO and approved by our Compensation Committee.
Annual Incentive Bonus Payments. Annual cash bonuses have been an important component of our compensation program forus or our executive officers andfor certain indictable offenses, our failure to maintain a responsible credit rating or the acquisition by us of an executive bonus plan, or "Executive Bonus Plan", has been approved by the Compensation Committee. Our current Executive Bonus Plan was establishedinterest in 2012, is reviewed annually by the Compensation Committee and measures performance throughout our fiscal year. Under our Executive Bonus Plan, annual incentive bonus payments are typically paidany other hamburger restaurant business. At January 1, 2017, we were not in March based on performance for the prior fiscal year.
For the 2013 fiscal year, eachdefault under any of the Named Executive Officers was eligiblefranchise agreements with BKC.
In order to receiveobtain a maximum annual incentive bonus ranging from 60%successor franchise agreement with BKC, a franchisee is typically required to 100% of base salary, depending on their respective positions. For each Named Executive Officer, the potential bonus payments were tied, in part,make capital improvements to the levelrestaurant to bring it up to BKC's current image standards. The cost of EBITDA achieved forthese improvements may vary widely depending upon the 2013 fiscal year (as definedmagnitude of the required changes and measured under the Executive Bonus Plan) in relationdegree to our budgeted EBITDA for the 2013 fiscal year, and provided for increasing paymentswhich we have made interim improvements to the extent that certain minimum thresholds were exceeded. Each executive was also eligiblerestaurant. At January 1, 2017, we had 43 franchise agreements due to receive a bonus based on his individual attainmentexpire in 2017, 31 franchise agreements due to expire in 2018 and 30 franchise agreements due to expire in 2019. In recent years, the historical costs of specified goals and objectives established for the year, subject to certain minimum thresholds for both EBITDA and each individual's overall attainment of his goals and objectives. For each individual, 50% of his maximum potential bonus payment was tied to the level of EBITDA and 50% was tied to his individual attainment of goals and objectives.
Under the Executive Bonus Plan, EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment charges and stock compensation expense. The Executive Bonus Plan also provides that EBITDA will be adjusted to exclude extraordinary, unusual or non-recurring gains and losses not deemed to be in the ordinary course of business, at the Compensation Committee's reasonable discretion. The Executive Bonus Plan requires that a minimum of 85% of budgeted EBITDA must be attained before the payment of any bonus and also specifies that the portion of the bonus tied to EBITDA will be capped after the attainment of 105% of budgeted EBITDA. The EBITDA bonus is earned on a pro-rata basis at an established rate for each participant for each 1% increase in attainment of budgeted EBITDA above 85% to a maximum of 105%. For the portion of the bonus tied to goals and objectives, a minimum of 70% achievement of such goals and objectives is also required for the participant to be eligible for this portion of the bonus. Payments of the portion of the bonus tied to individual goals are determined based on the discretion of the Compensation Committee, with input from the CEO, based on evaluating achievement of each participant's goals and objectives. The determination of whether goals and objectives were met by each Named Executive Officer is not a formulaic, objective or quantifiable standard; rather, the individual performance considerations were just factors (among others) that were generally taken into account in the course of making subjective judgmentsimproving 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 compensation decision.
20/20 image in 2016 was approximately $520,000 per restaurant. The following table sets forthcost of remodels can vary depending upon the maximum bonusage and actual bonus earned for eachcondition of the Named Executive Officers under the Executive Bonus Plan for the 2013 fiscal year:
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| | | | | | | | | | | | | | | | |
| Name | | Maximum EBITDA Bonus % (1) | | Maximum Objectives Bonus % (1) | | Total Maximum Bonus % (1) | | EBITDA Bonus Rate per 1% Attainment (1) (2) | | Earned EBITDA Bonus % (1)(3) | | Earned Objectives Bonus % (1) | | Total Earned 2013 Bonus |
| Daniel T. Accordino | | 50% | | 50% | | 100% | | 2.5% | | 26.7% | | 47.5% | | $ | 415,469 |
|
| Paul R. Flanders | | 45% | | 45% | | 90% | | 2.25% | | 24.0% | | 44.1% | | 217,313 |
|
| Timothy J. LaLonde | | 30% | | 30% | | 60% | | 1.5% | | 16.0% | | 30.0% | | 99,391 |
|
| William E. Myers | | 30% | | 30% | | 60% | | 1.5% | | 16.0% | | 27.6% | | 87,230 |
|
| Richard G. Cross | | 30% | | 30% | | 60% | | 1.5% | | 16.0% | | 28.5% | | 86,803 |
|
| |
(1) | Bonus percentages stated as a percentage of individuals' base salary. |
| |
(2) | Rate, as a percentage of individual's salary, at which EBITDA bonus is earned for each 1% increase in attainment of EBITDA over minimum of 85% of budgeted EBITDA. |
| |
(3) | Based on actual attainment percentage of 95.7% to budgeted EBITDA (as adjusted).
|
For the 2013 fiscal year we generated total EBITDA (as defined and adjusted under the Executive Bonus Plan) of $34.3 million representing an attainment percentage of 95.7% of total budgeted EBITDA which was $35.8 million for the 2013 fiscal year. The following is a reconciliation of our net income (loss) as set forth in our audited consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013 to EBITDA (as adjusted) utilized in the calculation of the 2013 bonus under the Executive Bonus Plan:
|
| | | |
| Net loss | $ | (13,519 | ) |
| Benefit from income taxes | (10,397 | ) |
| Interest expense | 18,841 |
|
| Depreciation and amortization | 33,594 |
|
| EBITDA | 28,519 |
|
| Adjustments: | |
| Impairment expense | 4,462 |
|
| Stock compensation expense | 1,205 |
|
| Legal fees related to EEOC litigation | 85 |
|
| Other expense | 17 |
|
| EBITDA, as adjusted | 34,288 |
|
| Budgeted EBITDA | 35,836 |
|
| Attainment % | 95.7 | % |
Long-Term Compensation
The long-term incentive compensation utilized by us for our senior management has been an equity based compensation plan designed to create alignment of senior management’s interests with those of our long term stockholders. Based upon the recommendation of our Compensation Committeerestaurant and the approvalamount of our boardnew equipment needed. The cost of directors, beginning in fiscal year 2011 we replaced the use of stock option grants which we previously granted to our CEO and executive officers, including the Named Executive Officers, with restricted stock grantscapital improvements made in connection with future franchise agreement renewals may differ substantially from past franchise renewals depending on the long-term incentive component of our overall compensation plan. Our Compensation Committee and our board of directors agreedcurrent image requirements established from time to time by BKC.
We believe that the use of restricted stock grants wouldwe will be a more efficient and effective mechanismable to create alignment of senior management’s interests with those of our long term stockholders. As a result, in January 2011satisfy BKC's normal franchise agreement renewal criteria. Accordingly, we awarded restricted stock grants to our executive officers, including the Named Executive Officers, taking into account job responsibilities, individual performance and the number of shares of our common stock available for grant and issuance under our 2006 Stock Incentive Plan, as amended which we refer to as the "Carrols plan." Restricted stock grants utilized in the Carrols plan have a time-based vesting schedule with a certain percentage of shares vesting over a period of time established by the Compensation Committee under the Carrols plan. During the 2011 fiscal year, our Compensation Committee established a policy with respect to the timing of granting restricted stock under the Carrols plan. This policy providesbelieve that restricted stock being granted to employees, including the Named Executive Officers,renewal franchise agreements will be granted on either January 15 or July 15. Accordingly,a timely basis by BKC at the measurement of the value of any restricted stock grant would be based upon the priceexpiration of our common stock atexisting 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 close of business on those respective grant dates. The Compensation Committee would grant such restricted stock based upon recommendations from our CEO, who would provide such recommendations after evaluatingfuture.
We evaluate the individual performance of our employees (includingBurger King restaurants on an ongoing basis. Such evaluation depends on many factors, among other things, including our assessment of the Named Executive Officers,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 2016, we closed 12 restaurants, including 4 offset locations and 1 future offset location, with 9 of the closures occurring on the last day of our fiscal year. We currently expect to close between 20 to 25 restaurants in 2017, excluding any relocations 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 in 2000, becomes effective upon the CEO). Such performance evaluations coinciderenewal of the franchise agreement. Burger King royalties, as a percentage of our restaurant sales, were 4.2% in 2017, 2016 and 2015. We anticipate our Burger King royalties, as a percentage of our restaurant sales, will be 4.3% in 2017 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 normal endown 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 year annual review process for employees and senior management. The granting of stock options and restricted stock have been and are an important component of the total compensation package for the Named Executive Officers and is an important retention tool. Because the Compensation Committee’s policy has beenexisting Burger King restaurants, we cannot assure you that franchises granted by BKC to grant stock options or restricted stock on a fixed date, the Compensation Committee may have previously, or may in the future grant stock options or restricted stock at a time when it,third parties will not adversely affect any Burger King restaurants that we operate.
Except as well as the CEO and senior management, may be aware of material non-public information that, once made public, could either have a positive or negative effective on the price of our common stock.
2006 Stock Incentive Plan. The Carrols plan provides for the grant of stock options and stock appreciation rights, stock awards, performance awards, outside director stock options and outside director stock awards. Any officer, employee, associate, director and any consultant or advisor providing services to us are eligible to participate in the Carrols plan.
The Carrols plan is administeredpermitted by the Compensation Committee which approves awards and may base its considerations on recommendations by our CEO. The Compensation Committeeoperating 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 authority to (1) approve plan participants, (2) approve whether and to what extent stock options, stock appreciation rights and stock awards are to be granted and the number of shares of stock to be covered by each award (other than an outside director award), (3) approve forms of agreement for use under the Carrols plan, (4) determine terms and conditions of awards (including, but not limited to, the option price, any vesting restriction or limitation, any vesting acceleration or waiver or forfeiture, and any right of repurchase, 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 transfer restriction regarding any award), (5) modify, amend or adjustfranchisees.
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 termsmost popular of which is the Whopper® sandwich, a large, flame-grilled hamburger garnished with mayonnaise, lettuce, onions, pickles and conditionstomatoes. The basic menu of any award, (6) determineall 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 4.4% in 2016, 3.8% in 2015 and 4.0% in 2014. For 2017 we anticipate advertising expense to range between 4.1% and 4.3% of restaurant sales.
The efficiency and quality of advertising and promotional programs can significantly affect the fair market value, and (7) determine the type and amount of consideration to be received by us for any stock award issued.
On July 12, 2013 a restricted stock grant was made toquick-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 Regional Directors,own local advertising and promotions, including the purchase of 19,000 sharesadditional television, radio and print advertising. The concentration of restricted stock. Other thanour Burger King restaurants in many of our markets permits us to leverage advertising in those markets. We also utilize promotional programs, such awardas combination value meals and outside director awards, no other restricted stock grants were madediscounted prices, targeted to our customers, in 2013.order to create a flexible and directed marketing program.
Other BenefitsSuppliers
We offer certain other benefits to the CEO and Named Executive Officers as described below. Such benefits are not taken into account in determining such individuals’ base salary, annual incentive bonus or equity based compensation.
Deferred Compensation Plan. We provide certain benefits under The Carrols Corporation and Subsidiaries Deferred Compensation Plan a member of a national purchasing cooperative, Restaurant Services, Inc., which we refer to as "RSI", created for the “Deferred Compensation Plan”Burger King system. RSI is a non-profit independent purchasing cooperative that is responsible for 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 1, 2017, such distributors supplied 41%, 32% and 27%, 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 discussedclosely monitored to achieve a high level of customer satisfaction based on product quality, 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 "—, Nonqualified Deferred Compensation."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.
ChangeTrademarks
As a franchisee of ControlBurger King, we also have contractual rights to use certain BKC-owned trademarks, service marks and Severance Benefits. Forother 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;
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 discussionhealth care plan which provides a certain minimum scope of changehealth care services. The Act also limits the portion of control arrangements or severance arrangements and the triggerscost 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 payments under such arrangements, please see “—, Potential Payments Upon Termination or Change-of-Control.”
Other Post-Employment Benefits. The employment agreement for Mr. Accordino provides, for continued coverage under our welfaremedical plan.
We are also subject to various federal, state and benefits planslocal environmental laws, rules and regulations. We believe that we conduct our operations in substantial compliance with applicable environmental laws and regulations. Our costs for Mr. Accordinocompliance 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 his eligible dependents after cessationCompetition
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 employmentAgriculture, in 2016 food away from home dollars exceeded at-home dining, with us50.2% of food dollars spent on food away from home and with total expenditures increasing 8.0% 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, 2015 U.S. foodservice sales for the remainderTop 100 restaurant chains increased 5.9% from 2014 to $248.3 billion. Of this amount, the hamburger category represented $76.8 billion, or 30.9%, making it the largest category of their respective lives.the quick-service segment.
Compensation forThe 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 Named Executive Officersmost 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.
In December 2011,Employees
As of January 1, 2017, we entered into an employment agreementemployed approximately 21,500 persons of which approximately 160 were administrative personnel and approximately 21,340 were restaurant operations personnel. None of our employees are are unionized or covered by collective bargaining agreements. We believe that our overall relations with Mr. Accordino. On September 6, 2013,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 entered intofile 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 first amendmentwebsite 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 employment agreement. Mr. Accordino’s employment agreementSEC, as soon as reasonably practicable after electronically filing such material with the SEC. The reference to our website address is further described under "—, Summary Compensation Table."
Nonea 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 Named Executive Officers have an employment agreement with us.
Compensation Committee Report
The Compensation Committee has reviewedinformation and discussed the Compensation Discussion and Analysis with management. Based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis bedata included in both the Company'sthis Annual Report on Form 10-K for10-K. Any of the year ended December 29, 2013following 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 the Company's Proxy Statementcould also have a negative impact on Schedule 14A for the 2014 Annual Meeting of Stockholders.
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Compensation Committee |
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Manuel A. Garcia III, Chairman |
Clayton E. Wilhite |
David S. Harris |
Compensation Committee Interlocksour operating results if customers favor our competitors or we are forced to change our pricing and Insider Participationother marketing strategies.
The members of the our Compensation Committee for the fiscal year ended December 29, 2013 were Manuel A. Garcia III, Clayton E. Wilhite, and David S. Harris. Nicholas Daraviras resigned as a member of the Compensation Committee on November 15, 2013. None of the members of the our Compensation Committee were, during such year, an officer of us or any of our subsidiaries or had any relationship with us other than serving as a director.restaurant industry is highly competitive. In addition, no executive officer served as a director or a member of the compensation committee of any other entity, other than any subsidiary of ours, one of whose executive officers served as a director or on our Compensation Committee. None of the members of our Compensation Committee had any relationship required to be disclosed under this caption under the rules of the SEC.
SUMMARY COMPENSATION TABLE
The following table summarizes historical compensation awarded or paid to, or earned by, each of the Named Executive Officers for the fiscal years ended December 29, 2013, December 30, 2012 and January 1, 2012.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary ($) | | Bonus (1)($) | | Stock Awards (2)($) | | Option Awards ($) | | Non- Equity Incentive Plan Compensation ($) | | Change in Nonqualified Deferred Compensation Earnings (3) ($) | | All Other Compensation ($) | | Total ($) |
| Daniel T. Accordino | | 2013 | | $ | 560,004 |
| | $ | 415,469 |
| | $ | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 975,473 |
|
| President, Chief Executive | | 2012 | | $ | 544,000 |
| | $ | 368,281 |
| | $ | 1,055,918 |
| | — |
| | — |
| | — |
| | — |
| | $ | 1,968,199 |
|
| Officer and Director | | 2011 | | $ | 543,697 |
| | $ | 146,526 |
| | $ | 114,750 |
| | — |
| | — |
| | — |
| | — |
| | $ | 804,973 |
|
| Paul R. Flanders | | 2013 | | $ | 319,008 |
| | $ | 217,313 |
| | $ | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 536,321 |
|
| Vice President, Chief | | 2012 | | $ | 310,008 |
| | $ | 187,796 |
| | $ | 616,370 |
| | — |
| | — |
| | — |
| | — |
| | $ | 1,114,174 |
|
| Financial Officer and Treasurer | | 2011 | | $ | 275,004 |
| | $ | 276,969 |
| | $ | 30,600 |
| | — |
| | — |
| | — |
| | — |
| | $ | 582,573 |
|
| Timothy J. LaLonde | | 2013 | | $ | 216,000 |
| | $ | 99,391 |
| | $ | — |
| | — |
| | — |
| | $ | 676 |
| | — |
| | $ | 316,067 |
|
| Vice President, Corporate Controller | | 2012 | | $ | 196,008 |
| | $ | 79,158 |
| | $ | 203,090 |
| | — |
| | — |
| | — |
| | — |
| | $ | 478,256 |
|
| William E. Myers | | 2013 | | $ | 200,004 |
| | $ | 86,803 |
| | $ | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 286,807 |
|
| Vice President, General Counsel | | 2012 | | $ | 153,613 |
| | $ | 59,731 |
| | $ | 202,767 |
| | — |
| | — |
| | — |
| | — |
| | $ | 416,111 |
|
| Richard G. Cross | | 2013 | | $ | 195,000 |
| | $ | 87,230 |
| | $ | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 282,230 |
|
| Vice President, Real Estate | | 2012 | | $ | 175,423 |
| | $ | 68,214 |
| | $ | 203,720 |
| | — |
| | — |
| | — |
| | — |
| | $ | 447,357 |
|
_____________________________
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(1) | We provide bonus compensation to our executive officers based on an individual’s achievement of certain specified objectives and our achievement of specified increases in stockholder value. See “Compensation Discussion and Analysis” above for a discussion of our Executive Bonus Plan. Amounts include cash bonuses paid in fiscal year 2014, 2013 and 2012 with respect to services rendered in fiscal year 2013, 2012 and 2011, respectively. |
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(2) | The amounts shown represent the aggregate grant date fair value of restricted stock granted and approved by the Compensation Committee in each of the fiscal years presented and is consistent with the grant date fair value of the award computed in accordance with FASB ASC Topic 718. |
For the fiscal year ended December 30, 2012, this amount also includes the incremental compensation cost resulting from the conversion of all of our outstanding vested stock options to shares of our common stock and all of our outstanding non-vested stock options to non-vested shares of our common stock on March 5, 2012 in connection with the spin-off. See "Certain Relationships and Related Transactions — The Spin-Off and Related Transactions — Employee Matters Agreement — Treatment of Carrols Restaurant Group Stock Based Awards." See Notes 1 and 13 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 29, 2013, for assumptions used in the calculation of this amount. There were no forfeitures in 2013, 2012 or 2011 by the Named Executive Officers. These amounts reflect the grant date fair value for these awards and do not correspond to the actual value that will be recognized by the Named Executive Officers. The actual value, if any, that a Named Executive Officer may realize for restricted shares is the stock price at the date of vesting, so there is no assurance that the value realized by a Named Executive Officer will be at or near the value estimated by the Black-Scholes model used in connection with the 2012 conversion of stock options. These grants are included and discussed further in the tables included below under “Outstanding Equity Awards at Fiscal Year-End”.
(3) These amounts represent the above-market portion of earnings on compensation deferred by the Named Executive Officers under our nonqualified Deferred Compensation Plan. Earnings on deferred compensation are considered to be above-market to the extent that the rate of interest exceeds 120% of the applicable federal long-term rate. At December 29, 2013, 120% of the federal long-term rate was 3.99% per annum and the interest rate paid to participants was 8% per annum.
Accordino Employment Agreement
On November 1, 2011, we and Mr. Accordino mutually agreed that Mr. Accordino would become our President and Chief Executive Officer effective on January 1, 2012. In December 2011, we and Carrols LLC entered into a new employment agreement with Mr. Accordino. Mr. Accordino’s employment agreement which commenced on the Effective Date and is subject to automatic renewals for successive one-year terms unless either Mr. Accordino, we or Carrols LLC elects not to renew Mr. Accordino’s employment agreement by giving written notice to the others at least 30 days before a scheduled expiration date. Mr. Accordino’s employment agreement provides that Mr. Accordino will receive an annual base salary of $544,000 and provides that such amount may be increased annually at the sole
discretion of our Compensation Committee. Pursuant to Mr. Accordino’s employment agreement, Mr. Accordino will participate in our Executive Bonus Plan, and any stock option or other equity incentive plans applicable to executive employees, as determined by our Compensation Committee. Mr. Accordino’s employment agreement also provides that if Mr. Accordino’s employment is terminated without "cause" (as defined in Mr. Accordino’s employment agreement) or Mr. Accordino terminates his employment for "good reason" (as defined in Mr. Accordino’s employment agreement), in each case within twelve months following a "change of control" (as defined in Mr. Accordino’s employment agreement), Mr. Accordino will receive a cash lump sum payment equal to 2.99 times his average salary plus his average annual bonus (paid under our Executive Bonus Plan or deferred under our Deferred Compensation Plan) for the prior five years. Mr. Accordino’s employment agreement also provides that if Mr. Accordino’s employment is terminated by us or Carrols LLC without “cause”, as defined in Mr. Accordino’s employment agreement (other than following a change of control as described above), or Mr. Accordino terminates his employment for “good reason”, as defined in Mr. Accordino’s employment agreement (other than following a change of control as described above), Mr. Accordino will receive a lump sum cash payment in an amount equal to 2.00 times his average salary plus average annual bonus (paid under our Executive Bonus Plan or deferred under our Deferred Compensation Plan) for the prior five years. Mr. Accordino’s employment agreement includes non-competition and non-solicitation provisions effective during the term of Mr. Accordino’s employment agreement and for two years following its termination. Prior to December 2011, Mr. Accordino had an employment agreement with us that provided for substantially similar terms as the existing agreement. On September 6, 2013 we and Carrols LLC entered into an amendment to Mr. Accordino’s employment agreement to provide, among other things, that in the event that we or Carrols LLC elect not to renew the term of the employment agreement for any reason other than for "cause" (as defined in the employment agreement), we or Carrols LLC shall (1) pay to Mr. Accordino a lump sum cash payment equal to his annual base salary and vacation pay in effect on the last day of the term of the employment agreement; (2) pay to Mr. Accordino any amounts he is entitled to under the Deferred Compensation Plan; (3) pay to Mr. Accordino the annual bonus for the year in which the term of the employment agreement ended that is payable under the terms of the Executive Bonus Plan; and (4) continue certain health benefits and insurance policies.
GRANTS OF PLAN-BASED AWARDS
There were no grants of plan-based awards made to the Named Executive Officers during the fiscal year ended December 29, 2013.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information with respect to the value of all Carrols Restaurant Group equity awards that were outstanding at the December 29, 2013 fiscal year end for each of the Named Executive Officers.
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| | | Option Awards | | Stock Awards |
| Name | | Number of Securities Underlying Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested (2) ($) | | Equity Incentive Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
| Daniel T. Accordino (1) | | — | | — | | — | | — | | — | | 159,995 |
| | $ | 1,065,567 |
| | — |
| | — |
|
| Paul R. Flanders (1) | | — | | — | | — | | — | | — | | 77,367 |
| | $ | 515,264 |
| | — |
| | — |
|
| Timothy J. LaLonde (1) | | — | | — | | — | | — | | — | | 28,847 |
| | $ | 192,121 |
| | — |
| | — |
|
| William E. Myers (1) | | — | | — | | — | | — | | — | | 28,347 |
| | $ | 188,791 |
| | — |
| | — |
|
| Richard G. Cross (1) | | — | | — | | — | | — | | — | | 29,831 |
| | $ | 198,674 |
| | — |
| | — |
|
_____________________________
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(1) | On March 5, 2012, we converted all of our outstanding vested stock options to shares of our common stock and all of our outstanding non-vested stock options to non-vested restricted shares of our common stock. The non-vested restricted shares issued in connection with such conversion vest according to the same period and anniversary date as the original stock options, with a pro-rated portion of the shares vesting on the anniversary date of the original option award. |
In July 2012, we granted restricted stock awards to each Named Executive Officer pursuant to the Carrols plan. All such restricted stock awards vest over periods of four years with one-fourth of such restricted shares vesting on the first anniversary of the grant date and annually on the anniversary of the grant date thereafter.
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(2) | The market value of the restricted stock awards was determined based on the closing price of our common stock on the last trading day of the 2013 fiscal year, December 27, 2013, which was $6.66. |
OPTIONS EXERCISED AND STOCK VESTED
The following table summarizes the options exercised and vesting of restricted stock awards for each of our Named Executive Officers duringmarkets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and prepared food counters in grocery stores, supermarkets, cafeterias and other purveyors of moderately priced and quickly prepared food. We believe our largest competitors are McDonald's and Wendy's restaurants.
Due to competitive conditions, we, as well as certain of the fiscal year ended December 29, 2013.
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| | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| Name | | Number of Shares Acquired on Exercise (#) | | Value Realized on Exercise ($) | | Number of Shares Acquired on Vesting (#) | | Value Realized on Vesting ($) (1) |
| Daniel T. Accordino | | — |
| | — |
| | 65,587 |
| | $ | 412,889 |
|
| Paul R. Flanders | | — |
| | — |
| | 27,923 |
| | $ | 180,103 |
|
| Timothy J. LaLonde | | — |
| | — |
| | 10,654 |
| | $ | 68,718 |
|
| William E. Myers | | — |
| | — |
| | 10,339 |
| | $ | 65,888 |
|
| Richard G. Cross | | — |
| | — |
| | 11,056 |
| | $ | 71,311 |
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_____________________________
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(1) | Based on the per-share market price of our common stock on the vesting date, multiplied by the number of shares vested. |
NONQUALIFIED DEFERRED COMPENSATION
Weother 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 Deferred Compensation Plan for employees not eligiblenegative impact on our sales and earnings.
Factors applicable to participatethe quick-service restaurant segment may adversely affect our results of operations, which may cause a decrease in the Carrols Corporation Retirement Savings Plan, which we refer to as 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 salaryearnings and annual bonus. An eligible employee may elect, on a deferral agreement, to defer all or a specified percentage of base salary and, if applicable, all or a specified percentage of cash bonuses. All amounts deferred by the participants earn interest at 8% per annum. We do not match any portion of the funds. All of the Named Executive Officers are eligible to participate in our Deferred Compensation Plan.revenues.
The following table describes contributions, earningsquick-service restaurant segment is highly competitive and balances at December 29, 2013 under our Deferred Compensation Plan.can be materially adversely affected by many factors, including:
changes in local, regional or national economic conditions; |
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| Name | | Executive Contributions in Last FY ($) | | Registrant Contributions in Last FY ($) | | Aggregate Earnings in Last FY ($) (1) | | Aggregate Withdrawals/Distributions ($) | | Aggregate Balance at Last FYE ($) |
| Daniel T. Accordino | | — |
| | — |
| | — |
| | — |
| | — |
|
| Paul R. Flanders | | — |
| | — |
| | — |
| | — |
| | — |
|
| Timothy J. LaLonde | | $ | 30,000 |
| | — |
| | $ | 1,332 |
| | — |
| | $ | 31,332 |
|
| William E. Myers | | — |
| | — |
| | — |
| | — |
| | — |
|
| Richard G. Cross | | — |
| | — |
| | — |
| | — |
| | — |
|
(1) Earnings represent the interest earned on amounts deferred at 8.0% per annum.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-OF-CONTROLchanges in consumer tastes;
Accordino Employment Agreementchanges in traffic patterns;
On September 6, 2013, weincreases in fuel prices and Carrols LLC entered into an amendment to Mr. Accordino's employment agreement to provide, among other things, thatutility costs;
consumer concerns about health, diet and nutrition;
increases in the event that we or Carrols LLC elect not to renew the term of the employment agreement for any reason other than for "cause" (as defined in the employment agreement), we or Carrols LLC shall (1) pay to Mr. Accordino a lump sum cash payment equal to his annual base salary and vacation pay in effect on the last day of the term of the employment agreement; (2) pay to Mr. Accordino any amounts he is entitled to under the Deferred Compensation Plan; (3) pay to Mr. Accordino the annual bonus for the year in which the term of the employment agreement ended that is payable under the terms of the Executive Bonus Plan; and (4) continue certain health benefits and insurance policies.
Mr. Accordino’s employment agreement also provides that if Mr. Accordino’s employment is terminated without "cause" (as defined in his employment agreement) or Mr. Accordino terminates his employment for "good reason" (as defined in his employment agreement), (a) in each case within twelve months following a "change of control" (as defined his employment agreement), or (b) and a binding agreement with respect to a change of control transaction was entered into during the term of his employment and such change of control
transaction occurs within 12 months after the date of his termination of employment, then in either case, Mr. Accordino will receive a cash lump sum payment equal to 2.99 multiplied by the average of the sum of his base salary and the annual bonus paid under the Executive Bonus Plan or deferred in accordance with the Deferred Compensation Plan in the five calendar years prior to the date of termination.
The employment agreement also provides that if Mr. Accordino’s employment is terminated by us or Carrols without cause more than 12 months following a change of control or Mr. Accordino terminates his employment for good reason more than 12 months following a change of control, Mr. Accordino will receive a cash lump sum payment in an amount equal to 2.00 multiplied by the average of the sum of his base salary and the annual bonus paid under the Executive Bonus Plan or deferred in accordance with the Deferred Compensation Plan in the five calendar years prior to the date of termination. The employment agreement includes non-competition and non-solicitation provisions effective during the term of the employment agreement and for two years following the termination of the employment agreement.
Change of Control/Severance Agreement
On June 3, 2013, we, Carrols and Carrols LLC entered into a change of control and severance agreement, which we refer to as the "change of control and severance agreement," with each of Messrs. Flanders, Myers, LaLonde, Cross and one other executive officer. Each change of control and severance agreement provides that if within one year following a "change of control" (as defined in the change of control and severance agreement), such employee's employment is terminated by us, Carrols or Carrols LLC without "cause" (as defined in the change of control and severance agreement) or by such employee for "good reason" (as defined in the change of control and severance agreement), then such employee will be entitled to receive (a) a cash lump sum payment in the amount equal to the product of 18 and the employee's monthly base salary at the then current rate, (b) an amount equal to the aggregate bonus payment for the year in which the employee incurs a termination of employment to which the employee would otherwise have been entitled had his employment not terminated under the Executive Bonus Plan then in effect, and (c) continued coverage under our welfare and benefits plans for such employee and his dependents for a period of up to 18 months. Each change of control and severance agreement also provides that if at any time other than within one year following a change of control, such employee's employment is terminated by us, Carrols or Carrols LLC without cause or by such employee for good reason, then such employee will be entitled to receive (a) a cash lump sum payment in the amount equal to one year's salary at the then current rate, (b) an amount equal to the pro rata portion of the aggregate bonus payment for the year in which the employee incurs a termination of employment to which the employee would otherwise have been entitled had his employment not terminated under our Executive Bonus Plan then in effect, and (c) continued coverage under our welfare and benefits plans for such employee and his dependents for a period of up to 18 months. The payments and benefits due under each change of control and severance agreement cannot be reduced by any compensation earned by the employee as a result of employment by another employer or otherwise. The payments are also not subject to any set-off, counterclaim, recoupment, defense or other right that we, Carrols or Carrols LLC may have against the employee.
The following table summarizes estimated benefits that would have been payable to Mr. Accordino if (1) the term of his employment agreement had not been renewed by us or Carrols LLC without cause; (2) his employment had been terminated on December 29, 2013 by us without cause or by him for good reason within 12 months of a change of control of us or such change of control is a result of (a) a binding agreement with respect to a change of control transaction was entered into during the term of his employment and (b) such change of control transaction occurs within 12 months after the date of termination of his employment; (3) his employment had been terminated on December 29, 2013 by us without cause or by him for good reason; (4) his employment had been terminated by us for cause or by him without good reason on December 29, 2013; (5) his employment had been terminated on December 29, 2013 by us due to disability; and (6) his employment had been terminated on December 29, 2013 due to death.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Non-renewal of Employment Agreement Without Cause | | Terminated Without Cause or by Employee for Good Reason Within 12 Months of a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason More than 12 Months following a Change in Control (2)($) | | Terminated For Cause or by Employee Without Good Reason ($) | | Disability ($) | | Death ($) |
| Severance | $ | 560,004 |
| | $ | 2,479,313 |
| (1) | $ | 1,658,403 |
| (2) | $ | — |
| | $ | 1,680,012 |
| (3) | $ | — |
|
| Bonus (4) | 415,469 |
| | 415,469 |
| | 415,469 |
| | — |
| | 415,469 |
| | — |
|
| Accrued Vacation (5) | 43,077 |
| | 43,077 |
| | 43,077 |
| | 43,077 |
| | — |
| | — |
|
| Welfare Benefits (6) | 318,770 |
| | 318,770 |
| | 318,770 |
| | — |
| | 318,770 |
| | 173,112 |
|
| Deferred Compensation Plan | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Equity (7) | — |
| | 1,065,567 |
| | 1,065,567 |
| | — |
| | — |
| | 1,065,567 |
|
| Total | $ | 1,337,320 |
| | $ | 4,322,196 |
| | $ | 3,501,286 |
| | $ | 43,077 |
| | $ | 2,414,251 |
| | $ | 1,238,679 |
|
_____________________________
| |
(1) | Reflects a lump sum cash payment in an amount equal to 2.99 multiplied by the average of the sum of the base salary and the annual bonus paid under the Executive Bonus Plan or deferred in accordance with the Deferred Compensation Plan in the five calendar years prior to the date of termination, which we refer to as the “Five-Year Compensation Average”.
|
| |
(2) | Reflects a lump sum cash payment in an amount equal to 2.00 multiplied by Mr. Accordino's Five Year Compensation Average. |
| |
(3) | Such amounts based on the base salary in effect at December 29, 2013 of $560,004 for Mr. Accordino, for a period of three years. |
| |
(4) | Reflects a lump sum cash payment in an amount equal to the pro rata portion of Mr. Accordino’s annual bonus under our Executive Bonus Plan for the year in which his employment is terminated. Amount represents the bonus earned by Mr. Accordino for the fiscal year ended December 29, 2013. |
| |
(5) | Amount represents four weeks of accrued but unpaid vacation as of December 29, 2013 based on the annual salary of $560,004 in effect at December 29, 2013 for Mr. Accordino. |
| |
(6) | Mr. Accordino's employment agreement requires continued coverage under our welfare and benefits plans for him and his eligible dependents for the remainder of their respective lives. The amount included in this table was actuarially determined based on the present value of future health care premiums paid for by us discounted at a rate of 4.48%. |
| |
(7) | The amount represents vesting of the outstanding shares of restricted stock held at December 29, 2013 based upon the closing price of our common stock on the last trading day of the 2013 fiscal year, December 27, 2013, which was $6.66. |
The following table summarizes estimated benefits that would have been payable to each Named Executive Officer identified in the table if the employment of such Named Executive Officer had been terminated on December 29, 2013 by us without cause or by the Named Executive Officer for good reason within one year after a change of control; or if the employment of such Named Executive Officer had been terminated on December 29, 2013 by us without cause or by the Named Executive Officer for good reason prior to a change of control or more than one year after a change of control.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Paul R. Flanders | | Timothy J. LaLonde | | William E. Myers | | Richard G. Cross | |
| | Terminated Without Cause or by Employee for Good Reason Within 12 Months of a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason Prior to a Change in Control or More Than One Year After a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason Within 12 Months of a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason Prior to a Change in Control or More Than One Year After a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason Within 12 Months of a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason Prior to a Change in Control or More Than One Year After a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason Within 12 Months of a Change in Control ($) | | Terminated Without Cause or by Employee for Good Reason Prior to a Change in Control or More Than One Year After a Change in Control ($) | |
| Severance | $ | 493,466 |
| (1) | $ | 328,993 |
| (3) | $ | 324,000 |
| (1) | $ | 222,761 |
| (3) | $ | 300,006 |
| (1) | $ | 206,264 |
| (3) | $ | 292,500 |
| (1) | $ | 201,104 |
| (3) |
| Bonus | 217,313 |
| (2) | 217,313 |
| (4) | 99,391 |
| (2) | 99,391 |
| (4) | 86,803 |
| (2) | 86,803 |
| (4) | 87,230 |
| (2) | 87,230 |
| (4) |
| Welfare Benefits (5) | 21,800 |
| | 21,800 |
| | 31,116 |
| | 31,116 |
| | 31,153 |
| | 31,153 |
| | 11,682 |
| | 11,682 |
| |
| Equity (6) | 515,264 |
| | 515,264 |
| | 192,121 |
| | 192,121 |
| | 188,791 |
| | 188,791 |
| | 198,674 |
| | 198,674 |
| |
| Total | $ | 1,247,843 |
| | $ | 1,083,370 |
| | $ | 646,628 |
| | $ | 545,389 |
| | $ | 606,753 |
| | $ | 513,011 |
| | $ | 590,086 |
| | $ | 498,690 |
| |
| |
(1) | Reflects a cash lump sum payment in an amount equal to 18 multiplied by the amount of the Named Executive Officer’s monthly base salary in effect at December 29, 2013 plus interest of 6.25% per annum (determined as the prime commercial rate established by the principal lending bank at December 29, 2013 of 3.25% plus 3%) until the time of payment which would be the fifth business day following the six month anniversary of termination. |
| |
(2) | Reflects an amount equal to the aggregate bonus payment for the year in which the Named Executive Officer incurs a termination of employment to which he would otherwise have been entitled had his employment not terminated under the Executive Bonus Plan in effect at December 29, 2013. Such payment would be made no later than March 15th of the calendar year following the calendar year the Named Executive Officer’s employment is terminated.
|
| |
(3) | Reflects a cash lump sum payment in the amount equal to one year of base salary in effect at December 29, 2013 plus interest of 6.25% per annum (determined as the prime commercial rate established by the principal lending bank at December 29, 2013 of 3.25% plus 3%) until the time of payment which would be the fifth business day following the six month anniversary of termination. |
| |
(4) | Reflects an amount equal to the pro-rata portion of the aggregate bonus payment for the year in which the Named Executive Officer incurs a termination of employment to which the Named Executive Officer would otherwise have been entitled had his employment not terminated under the Executive Bonus Plan in effect at December 29, 2013. |
| |
(5) | Reflects continued coverage of group term life and disability insurance and group health and dental plan coverage for such Named Executive Officer and his dependents for a period of 18 months based on rates in effect at December 29, 2013 without discounting. |
| |
(6) | All unvested shares of stock held by the Named Executive Officer will automatically vest. Unlike other payments in this table, the shares vest in accordance with the Carrols plan even if the Named Executive Officer’s employment is not terminated following a change of control (i.e. it is a “single trigger”). The amount is based on the unvested shares held by each Named Executive Officer at December 29, 2013 and the closing price of our common stock on the last trading day of the 2013 fiscal year, December 27, 2013, which was $6.66. |
DIRECTOR COMPENSATION
We use a combination of cash and stock-based compensation to attract and retain qualified non-employee directors to serve on our board of directors. The members of the board of directors, except for any member who is an executive officer or employee, each receives a fee for serving on our board of directors or board committees. Non-employee directors receive compensation for board service as follows:
Annual retainer of $30,000 year for serving as a director with the exception of the chairman of the board of directors who receives an annual retainer of $45,000.
Attendance fees of an additional $2,000 for each board of directors meeting attended in person and $500 for each board of directors meeting attended telephonically or by videoconference. The chairman of the Audit Committee receives an additional fee of $10,000 per year and each other member of the Audit Committee receives an additional fee of $2,500 per year. The chairman of the Compensation Committee receives an additional fee of $5,000 per year and each other member of the Compensation Committee receives an additional fee of $2,500 per year. The chairman of the Corporate Governance and Nominating Committee receives an additional fee of $2,500 per year and each other member of the Corporate Governance and Nominating Committee receives an additional fee of $1,500 per year. All directors will be reimbursed for all reasonable expenses they incur while acting as directors, including as members of any committee of the board of directors.
Our board of directors approved an amendment to Carrols plan pursuant to which beginning on the date of our annual meeting of stockholders in 2010 and on the date of each annual meeting thereafter, members of our board of directors, (except for any member who is an executive officer or employee and except for our two Class A directors) will receive a restricted stock award with an aggregate "fair market value" (as such term is defined in the Carrols plan) of $25,000 on the date of grant. Pursuant to the Carrols plan, upon becoming a director, any future director (except for any future Class A directors) will receive a restricted common stock award with an aggregate fair market value of $100,000 which will vest in equal installments over five years.
The following table summarizes the compensation we paid to our non-employee directors during the fiscal year ended December 29, 2013. Compensation information for Daniel T. Accordino, our Chief Executive Officer is set forth in the Summary Compensation Table above.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash (1) ($) | | Stock Award ($) (2) (5) | | Option Award ($) | | Non-Equity Incentive Plan Compensation | | Value and Nonqualified Deferred Compensation Earnings | | All Other Compensation ($) | | Total ($) |
| Clayton E. Wilhite | | $ | 59,500 |
| | $ | 25,005 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 84,505 |
|
| Joel M. Handel | | 43,000 |
| | 25,005 |
| | — |
| | — |
| | — |
| | — |
| | 68,005 |
|
| Nicholas Daraviras (3) | | 43,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 43,000 |
|
| David S. Harris | | 50,500 |
| | 25,005 |
| | — |
| | — |
| | — |
| | — |
| | 75,505 |
|
| Daniel Schwartz | | 38,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 38,000 |
|
| Steven Wiborg (4) | | 28,500 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28,500 |
|
| Manuel A. Garcia III (5) | | 4,507 |
| | 100,005 |
| | — |
| | — |
| | — |
| | — |
| | 104,512 |
|
| Alexandre Macedo (6) | | 9,500 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,500 |
|
________________
| |
(1) | The amounts listed in this column include the payment of annual retainers, additional fees for committee service, and attendance fees. |
| |
(2) | On June 11, 2013, Messrs. Wilhite, Handel and Harris were each granted 4,289 restricted shares of common stock valued at $5.83 per share under the Carrols plan. On November 15, 2013, Mr. Garcia was granted 15,899 restricted shares of common stock valued at $6.29 per share under the Carrols plan. The restricted shares of common stock vest and becomes non-forfeitable and one-fifth on the each anniversary of the award date, provided that, the participant has continuously remained a director of Carrols Restaurant Group. There were no forfeitures in 2013 by these persons. The amounts shown in this column represent the aggregate fair value of restricted common stock granted and approved by the Compensation Committee and is consistent with the grant date fair value of the award computed in accordance with FASB ASC Topic 718. See Notes 1 and 13 of the consolidated financial statements for the year ended December 29, 2013 included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013. |
| |
(3) | On December 18, 2013, Mr. Daraviras resigned as a director of Carrols Restaurant Group effective on December 31, 2013. |
| |
(4) | Effective October 25, 2013, Mr. Wiborg ceased being a Class A member of our board of directors. |
| |
(5) | On November 1, 2013, Mr. Garcia was appointed a director of Carrols Restaurant Group effective on November 15, 2013. |
| |
(6) | Effective October 25, 2013, Mr. Macedo was appointed as a Class A member of our board of directors. |
The following table represents the number of, unvested restricted stock awards held by eachand particular locations of, our non-employee directorscompeting restaurants;
changes in discretionary consumer spending;
inflation;
increases in the cost of food, such as beef, chicken, produce and packaging;
increased labor costs, including healthcare, unemployment insurance and minimum wage requirements;
the availability of December 29, 2013:
|
| | | |
Name | | Outstanding Stock Awards |
Clayton E. Wilhite | | 8,567 |
|
Joel M. Handel | | 8,567 |
|
Nicholas Daraviras | | — |
|
David S. Harris | | 25,991 |
|
Daniel Schwartz | | — |
|
Manuel A. Garcia III | | 15,899 |
|
Alexandre Macedo | | — |
|
Item 12. Security Ownership of Certain Beneficial Ownersexperienced management and Management and Related Stockholder Matters.
Equity Compensation Plans
The following table summarizes the equity compensation plans under which our common stock may be issued as of December 29, 2013. Our stockholders approved all plans.
|
| | | | | | | | |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options | | Number of securities remaining available for future issuance under equity compensation plans |
Equity compensation plans approved by security holders | — |
| | — |
| | 2,139,570 |
|
Equity compensation plans not approved by security holders | — |
| | — |
| | — |
|
Total | — |
| | — |
| | 2,139,570 |
|
Stock Ownership Information
The following table provides information regarding beneficial ownership of our common stock as of March 24, 2014 and to reflect the conversion of Series A Preferred Stock into shares of our common stock as of March 24, 2014, by:
each person known by us to beneficially own more than 5% of all outstanding shares of our common stock;
each of our directors, nominees for director and Named Executive Officers (as defined in “Executive Compensation—Compensation Discussion and Analysis” herein) individually;hourly-paid employees; and
all of our directors and executive officers as a group.regional weather conditions.
23,710,910 shares of our common stock were outstanding on March 24, 2014 (without giving effect to the conversion of Series A Preferred Stock).
Except as otherwise indicated, to our knowledge, all persons listed below have sole voting power and investment power and record and beneficial ownership of their shares, except to the extent that authority is shared by spouses under applicable law.
The information contained in this table reflects “beneficial ownership” as defined in Rule 13d-3 of the Exchange Act. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, (i) shares of common stock subject to options held by that person (and/or pursuant to proxies held by that person) that were exercisable on March 24, 2014 or became exercisable within 60 days following that date are considered outstanding, including those options to officers and directors authorized by board resolution, but not yet issued and (ii) shares of common stock issuable upon conversion of Series A Preferred Stock held by that person that were convertible on March 24, 2014 or convertible within 60 days following that date are considered outstanding. However, such shares are not considered outstanding for the purpose of computing the percentage ownership of any other person, nor is there any obligation to exercise any of the options or convert the Series A Preferred Stock. Except as otherwise indicated, the address for each beneficial owner is c/o Carrols Restaurant Group, Inc., 968 James Street, Syracuse, NY 13203.
|
| | | | | | | | | |
| Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class | | Percent of Class Giving Effect to the Conversion of Series A Preferred Stock (1) |
| Burger King Corporation (2) | | 9,414,580 |
| | — |
| | 28.4 | % |
| Keeley Asset Management Corp. (3) | | 2,860,521 |
| | 12.1 | % | | 8.6 | % |
| First Manhattan Co. (4) | | 2,165,521 |
| | 9.1 | % | | 6.5 | % |
| Brigade Capital Management, LLC (5) | | 1,700,000 |
| | 7.2 | % | | 5.1 | % |
| Highland Investment Fund (6) | | 1,551,312 |
| | 6.5 | % | | 4.7 | % |
| Royce & Associates, LLC (7) | | 1,210,274 |
| | 5.1 | % | | 3.7 | % |
| Daniel T. Accordino | | 981,590 |
| | 4.1 | % | | 3.0 | % |
| Paul R. Flanders | | 201,110 |
| | * |
| | * |
|
| Richard G. Cross | | 82,652 |
| | * |
| | * |
|
| Timothy J. LaLonde | | 65,603 |
| | * |
| | * |
|
| William E. Myers | | 43,413 |
| | * |
| | * |
|
| Joel M. Handel | | 28,507 |
| | * |
| | * |
|
| Clayton E. Wilhite | | 73,659 |
| | * |
| | * |
|
| David S. Harris | | 31,417 |
| | * |
| | * |
|
| Manuel A. Garcia III | | 15,899 |
| | * |
| | * |
|
| Daniel Schwartz (8)(9) | | 9,414,580 |
| | — |
| | 28.4 | % |
| Alexandre Macedo (8) | | — |
| | — |
| | — |
|
| All directors and executive officers as a group (9) | | 11,019,908 |
| | 6.8 | % | | 33.3 | % |
_________
| |
(1) | Percentages calculated based on the addition of 9,414,580 shares of common stock, which represents the shares of common stock issuable upon the conversion of shares of Series A Preferred Stock, to the outstanding common stock as of March 24, 2014.
|
| |
(2) | Information was obtained from a Schedule 13D filed on June 8, 2012 with the SEC. BKC beneficially owns 9,414,580 shares of common stock issuable upon the conversion of shares of Series A Preferred Stock. The shares held by BKC may be deemed to be beneficially owned by Burger King Worldwide, Inc. as a result of its ownership of 100% of the outstanding common stock of BKC. The address for BKC and Burger King Worldwide, Inc. is 5505 Blue Lagoon Drive, Miami, Florida 33126.
|
| |
(3) | Information was obtained from a Schedule 13G/A (Amendment No. 2) filed on February 7, 2014 with the SEC. The address for Keeley Asset Management Corp. is 111 West Jackson, Suite 810, Chicago, Illinois 60604. |
| |
(4) | Information was obtained from a Schedule 13G/A (Amendment No. 3) filed on February 13, 2014 with the SEC.The address for First Manhattan Co. is 399 Park Avenue, New York, New York 10022. |
| |
(5) | Information was obtained from a Schedule 13G filed on February 15, 2013 with the SEC. The address for Brigade Capital Management, LLC is 399 Park Avenue, 16th Floor, New York, New York 10022. |
| |
(6) | Information was obtained from a Schedule 13D/A (Amendment No.1) filed on March 7, 2014 with the SEC. The address for Highland Investment Fund is 227 Elgin Avenue, Grand Cayman, Cayman Islands, P.O. Box 852 GT. |
| |
(7) | Information was obtained from Schedule 13G filed on January 7, 2014 with the SEC. The address of Royce & Associates, LLC is 745 Fifth Avenue, New York, New York 10151. |
| |
(8) | The address of Mr. Schwartz and Mr. Macedo is 5505 Blue Lagoon Drive, Miami, Florida 33126. |
| |
(9) | Includes 9,414,580 shares held by BKC as reported in footnote (1) above. Mr. Schwartz is Chief Executive Officer of Burger King Worldwide, Inc. and BKC and therefore he may be deemed to share voting and investment power over the shares owned by BKC, and therefore to beneficially own such shares.
|
Item 13. Certain RelationshipsWe are highly dependent on the Burger King system and Related Transactions,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 Director Independence.
Related Party Transaction Procedures
The boardour agreements with BKC, our success is, to a large extent, directly related to the success of directors has assigned responsibility for reviewing related party transactions to our Audit Committee. The boardthe Burger King system including its financial condition, advertising programs, new products, overall quality of directorsoperations and the Audit Committee have adopted a written policy pursuant to which certain transactions between us or our subsidiariessuccessful and any of our directors or executive officers must be submitted to the Audit Committee for consideration prior to the consummation of the transaction as required by the rules of the SEC. The Audit Committee reports to the board of directors on all related party transactions considered.
The Spin-Off and Related Transactions
We and Fiesta Restaurant Group have operated separately, each as independent public companies, since the completion of the spin-off on May 7, 2012. At the time of the spin-off, we and Fiesta Restaurant Group entered into agreements which facilitated the spin-off, govern Fiesta Restaurant Group’s relationship with us after the spin-off and provide for the allocation of employee benefits, tax and other liabilities and obligations. The following is a summary of some of the terms of the material agreements that were entered into among Fiesta Restaurant Group, Carrols and us prior to the spin-off.
Separation and Distribution Agreement
The separation and distribution agreement, which we refer to as the "separation agreement", dated as of April 24, 2012, among Fiesta Restaurant Group, Carrols and us provides a framework for the relationship between Fiesta Restaurant Group and us following the spin-off, requires cooperation between the parties to fulfill the terms of the spin-off and specifies the terms and conditions of the spin-off. The separation agreement provides that, except as otherwise provided in such agreement, Fiesta Restaurant Group will assume all of the liabilities and perform all of the obligations arising under or relating to the operation of the Pollo Tropical and Taco Cabana businesses whether incurred before or after the spin-off. The separation agreement also contains certain mutual releases of liability and cross indemnification provisions customary for this type of transaction.
Carrols is currently a guarantor under 35 Pollo Tropical and Taco Cabana restaurant property leases and the primary lessee on five Pollo Tropical restaurant property leases. The separation agreement 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 Restaurant Group 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 Pollo Tropical restaurants which it subleases to a subsidiary of Fiesta Restaurant Group. The separation agreement provides that the parties will cooperate and use their commercially reasonable efforts to cause Fiesta Restaurant Group or a subsidiary of Fiesta Restaurant Group to enter into a new master lease or individual leases with the lessor with respect to the Pollo Tropical restaurants where Carrols is currently a lessee.
Fiesta Restaurant Group, on the one hand, and Carrols and us, on the other hand, have agreed to release each other and each other’s respective directors, officers, members, managing members, agents and employees from all liabilities existing or arising from any acts or events occurring or failing to occur on or before the distribution date. These releases are subject to certain exceptions, including claims arising under the separation agreement and the ancillary agreements; any specified liabilities; any liability assumed by a party pursuant to the separation agreement; and liability for claims of third parties for which indemnification or contribution is available under the separation agreement.
Each of Carrols and us, on the one hand, and Fiesta Restaurant Group, on the other hand, have agreed to indemnify the other party and the other party’s respective affiliates, successors and assigns, stockholders, directors, officers, members, managing members, agents and employees against liabilities arising out of or resulting from the failure of the indemnifying party to perform or discharge liabilities for which it is responsible under the separation agreement; the business of such party; any liability contemplated to be assumed or retained by such party; any breach or failure to perform by such party of its obligations under the separation agreement or ancillary agreements; or any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated or necessary to make the statements not misleading of such party in SEC filed registration statements or information statements.
Tax Matters Agreement
The tax matters agreement, which we refer to as the "tax matters agreement", dated as of April 24, 2012, among Fiesta Restaurant Group, Carrols and us (1) governs the allocation of the tax assets and liabilities between Fiesta Restaurant Group and Carrols and us, (2) provides for certain restrictions and indemnities in connection with the tax treatment of the spin-off and (3) addresses certain other tax related matters, including, without limitation, those relating to (a) the obligations of Fiesta Restaurant Group, Carrols and us with respect to the preparation or filing of tax returns for all periods, and (b) the control of any income tax audits and any indemnities with respect thereto. The tax matters agreement provides that if Fiesta Restaurant Group takes any actions after our distribution of Fiesta Restaurant Group’s shares in the spin-off that result in or cause the distribution to be taxable to itself or us, Fiesta Restaurant Group will be responsible
under the tax matters agreement for any resulting taxes imposed on Fiesta Restaurant Group or on Carrols or us. Similarly, the tax matters agreement provides that if we take any such actions that result in or cause the distribution to be taxable to us or Fiesta Restaurant Group, we will be responsible for such taxes. Further, the tax matters agreement provides that Fiesta Restaurant Group and we will each be responsible for 50% of the losses and taxes of Carrols Restaurant Group and its affiliates and Fiesta Restaurant Group and its affiliates resulting from the spin-off not attributable to any such action of Fiesta Restaurant Group or us.
Employee Matters Agreement
The employee matters agreement, which we refer to as the "employee matters agreement", dated as of April 24, 2012, among Fiesta Restaurant Group, Carrols and us provides for the transition of employee benefits arrangements and allocates responsibility for certain employee benefits matters on and after the spin-off, including, without limitation, the treatment of our existing welfare benefit plans, savings and retirement plans, equity-based plan and deferred compensation plan, and Fiesta Restaurant Group’s establishment of new plans.
Treatment of Carrols Restaurant Group Stock Based Awards. Employees of Carrols Restaurant Group, Carrols and its subsidiaries have been eligible to participate in the Carrols plan. Under the Carrols plan, our compensation committee granted certain stock-based awards, including shares of restricted common stock of Carrols Restaurant Group and stock options to purchase our common stock to employees and other eligible participants. The outstanding stock-based awards held by employees and other eligible participants of Carrols, us and our subsidiaries in connection with the spin-off were treated as set forth below. Pursuant to the employee matters agreement we have continued to maintain the Carrols plan after the completion of the spin-off, and Fiesta Restaurant Group has established a separate stock incentive plan.
Stock Options. In connection with the spin-off and in accordance with the Carrols plan, all outstanding vested stock options under the Carrols plan were converted on March 5, 2012 into shares of our common stock using a conversion formula to preserve the intrinsic value of each option to the holder. As part of the spin-off, holders who received shares of our common stock upon the conversion of vested stock options under the Carrols plan received a distribution of one share of common stock of Fiesta Restaurant Group for one share of our common stock on the distribution date. On March 5, 2012, we issued 666,090 shares of our common stock upon the conversion of outstanding vested stock options under the Carrols plan, and therefore, an additional 666,090 shares of Fiesta Restaurant Group common stock were issued and distributed on the distribution date.
In connection with the spin-off and in accordance with the Carrols plan, all outstanding unvested stock options under the Carrols plan were converted on March 5, 2012 into restricted shares of our common stock using a conversion formula to preserve the intrinsic value of each option to the holder. The time period of the restrictions on transferability of the restricted shares of our common stock issued upon the conversion of unvested stock options under the Carrols plan equal the remaining vesting period of such unvested stock options, and such restricted shares continue to be governed by the terms of the Carrols plan. As part of the spin-off, holders who received restricted shares of our common stock upon the conversion of unvested stock options under the Carrols plan received a distribution of one restricted share of common stock of Fiesta Restaurant Group for one restricted share of our common stock on the distribution date subject to the same terms and conditions applicable to the restricted shares of our common stock, including, but not limited to, the time period remaining on the restrictions on transfer and forfeiture provisions. Following the distribution date, (a) employees of Fiesta Restaurant Group and other eligible participants under the Carrols plan continue to hold restricted shares of our common stock subject to the terms of the Carrols plan and (b) our employees and other eligible participants under the Carrols plan continue to hold the restricted shares of Fiesta Restaurant Group common stock received on the distribution date subject to the terms of the Carrols plan. On March 5, 2012, we issued 288,435 restricted shares of our common stock upon the conversion of unvested stock options under the Carrols plan, and therefore, 288,435 restricted shares of Fiesta Restaurant Group common stock were issued and distributed on the distribution date.
Restricted Stock. In connection with the spin-off and in accordance with the Carrols plan, on the distribution date persons who held shares of our restricted common stock issued under the Carrols plan received restricted shares of Fiesta Restaurant Group common stock subject to the same terms and conditions applicable to the restricted shares of our common stock, including, but not limited to, the time period remaining on the restrictions on transfer and forfeiture provisions. The restricted shares of Fiesta Restaurant Group common stock received on the distribution date continue to be governed by the terms of the Carrols plan. Each holder of restricted shares of our common stock received a distribution of one share of restricted common stock of Fiesta Restaurant Group for each one share of our restricted common stock held by such holder on the spin-off record date. Following the distribution date, (a) employees of Fiesta Restaurant Group and other eligible participants under the Carrols plan continue to hold restricted shares of our common stock subject to the terms of the Carrols plan and (b) our employees and other eligible participants under the Carrols plan continue to hold the restricted shares of Fiesta Restaurant Group common stock received on the distribution date subject to the terms of the Carrols plan. On the distribution date, 434,400 restricted shares of our common stock issued under the Carrols plan, which includes the 288,435 restricted shares of our common stock issued upon the conversion of unvested stock options under the Carrols plan, were outstanding, and therefore, 434,400 restricted shares of Fiesta Restaurant Group common stock were issued and distributed on the distribution date.
Transition Services Agreement
Under the transition services agreement, which we refer to as the "transition services agreement", dated as of April 24, 2012, entered into by Fiesta Restaurant Group, Carrols, us and Carrols LLC (solely with respect to indemnification), we and Carrols agreed to provide certain support services (including accounting, tax accounting, treasury management, internal audit, financial reporting and analysis, human resources, and employee benefits management, information systems, restaurant systems support, legal, property management and insurance and risk management services) to Fiesta Restaurant Group, and Fiesta Restaurant Group agreed to provide certain limited management services (including certain legal services) to Carrols and us. In December 2013, Fiesta Restaurant Group terminated all of the services provided by us and Carrols under the transition services agreement.
The Acquisition
On May 30, 2012, we and Carrols LLC closed on the purchase from BKC of 278 acquired BKC restaurants located in Ohio, Indiana, Kentucky, Pennsylvania, North Carolina, South Carolina and Virginia. The acquired BKC restaurants were purchased by us and Carrols LLC for (1) a 28.9% equity ownership interest in us by issuance by us to BKC of 100 shares of Series A Preferred Stock (discussed more fully below), (2) cash payments of approximately $2.9 million, which were paid at the closing of the 2012 acquisition, for cash on hand and inventory at the acquired BKC restaurants and (3) other cash payments of approximately $13.3 million, of which approximately $9.6 million was paid at closing of the 2012 acquisition and the balance to be paid over five years.
Series A Convertible Preferred Stock
Upon the closing of the 2012 acquisition, we issued to BKC 100 shares of Series A Preferred Stock pursuant to the certificate of designation which are convertible into an aggregate of 28.9% of the shares of our common stock outstanding, on a fully diluted basis, on May 30, 2012 after giving effect to the issuance of the Series A Preferred Stock (or 9,414,580 shares of our common stock in the aggregate, which we refer to as the "conversion shares". The Series A Preferred Stock and the conversion shares are subject to a three-year restriction on transfer by BKC from the date of the issuance of the Series A Preferred Stock. So long as the number of shares of our common stock into which the outstanding shares of Series A Preferred Stock held by BKC are then convertible constitutes greater than 10% of the outstanding shares of our common stock (on an as-converted basis) and there is no prohibited transfer of the Series A Preferred Stock or the conversion shares during the holding period, BKC has certain approval rights with regards to, among other things: (a) our annual budget for each of the first two fiscal years following the issuance of the Series A Preferred Stock; (b) changes to the restaurant remodeling plan agreed to at the time of the closing of the acquisition; (c) modifying our organizational documents; (d) amending the size of our board of directors; (e) the authorization or consummation of any liquidation event, except as permitted pursuant to the operating agreement; (f) engaging in any business other than the acquisition andconsistent operation of Burger King restaurants except following a bankruptcy filing, reorganization or insolvency proceedingowned by or against BKC or its parent company,other franchisees. We cannot assure you that Burger King Worldwide, Inc., which filing has not been dismissed within 60 days; (g) issuing, inwill be able to compete effectively with other restaurants. As a result, any single transaction or seriesfailure of related transactions, sharesBurger King to compete effectively would likely have a material adverse effect on our operating results.
Under each of our common stockfranchise 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: 43 in an amount exceeding 35% of the total number of shares2017, 31 in 2018 and 30 in 2019.
We cannot assure you that BKC will grant each of our common stock outstanding immediately prior to the time of such issuance;future requests for successor franchise agreements, and (h) entering into certain affiliated transactions. The Series A Preferred Stock votes with our common stock on an as-converted basis and provides for the rightany failure of BKC to elect two membersrenew our boardfranchise agreements could adversely affect our operating results. In addition, as a condition of directorsapproval 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 Class A members untila franchisee, we have no control over the date on whichBurger King brand. If BKC does not adequately protect the numberBurger King brand and other intellectual property, our competitive position and operating results could be harmed.
Our strategy includes pursuing acquisitions of sharesadditional 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 common stock into whichstrategy, we intend to pursue the outstanding sharesacquisition of the Series A Preferred Stock held by BKC are then convertible constitutes less than 14.5% of the total number of outstanding shares of our common stock, which we refer to as the "director step-down date". From the director step-down date to the date on which the number of shares of our common stock into which the outstanding shares of Series A Preferred Stock held by BKC are then convertible constitute less than 10% of the total number of outstanding shares of our common stock or the date on which there is a prohibited transfer of the Series A Preferred Stock or the conversion shares during the holding period, BKC will have the right to elect one member to our board of directors as a Class A member. The Series A Preferred Stock ranks senior to our common stock with respect to rights on liquidation, winding-up and dissolution of Carrols Restaurant Group up to its stated value of $0.01 per share and thereafter pro rata with our common stock on an as converted basis. The Series A Preferred Stock receives dividends pro rata with our common stock on an as converted basis. The Series A Preferred Stock does not pay interest, is perpetual and has no mandatory prepayment features.
Operating Agreement
Upon the closing of the 2012 acquisition, Carrols LLC and BKC also entered into an operating agreement, which we refer to as the "operating agreement," which has a term commencing on May 30, 2012 and ending (unless earlier terminated in accordance with the provisions thereof) on the earlier to occur of (i) 20 years from May 30, 2012 or (ii) the date that we operate 1,000additional 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 right of first refusal on sales of restaurants by franchisees, which we refer to as the “ROFR”, under its franchise agreements with its franchisees to purchase all of the assets of a Burger King 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, which we refer to as the “DMAs.” The continued assignment of the ROFR is subject to suspension or termination in the event of non-compliance by us with respect to the agreed upon remodeling schedule of our existing restaurants and the acquired BKC restaurants as further described below.
Virginia. In addition, pursuant to the operating agreement, BKC granted us, on a non-exclusive basis, franchise pre-approval which we refer to, as the “franchise pre-approval,” to build new restaurants oramong other things, acquire restaurants from Burger King franchisees in the DMAs until the date that we operate 1,000 restaurants, which we refer to as “new restaurant growth.” We will pay BKC approximately $3.8 million for the ROFR andBurger King restaurants. As part of the franchise pre-approval, rights in equal quarterly installments of $190,227 over a five year period, with the first payment made on May 30, 2012, the closing date of the acquisition.
The grant by BKC to us of franchise pre-approval to develop new restaurants in the DMAs is a non-exclusive right, subject to customary BKC franchise, site and construction approval. Beginning on January 1 of the calendar year following the third anniversary of the closing date of the 2012 acquisition, a minimum of 10% of new restaurant growth by us in each calendar year during the term of the operating agreement must come from new development of Burger King restaurants (including offsets). As part of franchise pre-approval, BKC will grantgranted us pre-approval for acquisitions of restaurants from franchisees in the DMAs where20 states above subject to and in accordance with the terms of the operating agreement. Although we thenbelieve 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 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 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 existing restaurant.adverse effect on our business, results of operations and financial condition.
PursuantAchieving 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.
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 food products, 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 1, 2017, such distributors supplied 41%, 32% and 27%, 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 agreement,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 agreedmay need to remodel 455 existingincrease 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.
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 1, 2017, 21% of our restaurants were located in North Carolina, 17% were located in New York, and 31% were located in Indiana, Ohio and Michigan. Therefore, the economic conditions, state and local government regulations, weather conditions or other conditions affecting New York, Indiana, Ohio, Michigan, and North 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 BKCat reasonable costs.
The location of our restaurants has significant influence on their success. We cannot assure you that current locations will continue to BKC’s 20/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
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 image,is not profitable, and we decide to close it, we may nonetheless be obligated to perform our monetary obligations under the applicable lease including, 57among 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. 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.
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 27 Fiesta Restaurant Group, Inc. ("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.
Fiesta, a former wholly-owned subsidiary of the Company, was spun-off in 2012 154 restaurants in 2013, 154 restaurants in 2014to the Company's stockholders. Carrols currently is a guarantor under 27 Fiesta restaurant property leases. The Separation and 90 restaurants in 2015,Distribution Agreement, which we refer to as the “remodel plan.” We completed a total of 201 restaurant remodels to BKC’s 20/20 restaurant image"separation agreement", dated as of December 29, 2013. If we fail to beApril 24, 2012 and entered into in complianceconnection with the remodel plan, BKC’s sole remedyspin-off among Carrols, Fiesta and us provides that the parties will becooperate and use their commercially reasonable efforts to obtain the suspensionrelease 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 ROFR by written notice given by BKCparties will cooperate and use their commercially reasonable efforts to us oncause Fiesta or before January 31a subsidiary of the calendar year following the year in which we are not in complianceFiesta to enter into a new master lease or individual leases with the remodel plan. The suspension of the ROFR will begin in the calendar year following the calendar year of such non-compliance, and such suspension shall automatically terminate as soon as we are into compliance with the remodel plan. We will be deemed in compliance with the remodel plan in each calendar year so long as we complete at least 90% of the remodel plan for such calendar year. In any calendar year that we complete 90% but less than 100% of the remodel plan for that calendar year, we must complete the shortfall of remodels that were required plus 90% of the remodel plan for the next calendar year in order to remain in compliance with the remodel plan. In any calendar year that the ROFR has been suspended, we will be deemed to be back in compliance with the remodel plan and the ROFR will automatically be restored as soon as we complete 100% of the remodels that were required for the calendar year resulting in the suspension of the ROFR (assuming that all remodels completed in such subsequent year shall first apply to remedying the prior year’s shortfall).
Pursuant to the operating agreement, we entered into franchise agreements with BKC for the acquired BKC restaurants with terms of varying durations up to 20 years, depending upon the term of the underlying leases or subleases. Each franchise agreement provides for a royalty rate of 4.5% of sales, an advertising contribution payment of 4% of sales and a commitment to spend on local advertising during the term of no less than a 0.75% of sales in each of the DMAs, which we refer to as “investment spending” (provided that if any investment spending contract approved by 66.7% of the franchisees in a DMA calls for investment spending of less than 0.75% of sales, we will only be obligated to investment spending to such lesser amount.) Effective on the date of the closing of the 2012 acquisition, the franchise agreements for our restaurants were amended to add an investment spending commitment consistent with the terms set forth in the franchise agreements for the acquired BKC restaurants.
Pursuant to the operating agreement, we agreed to operate our restaurants at or above the U.S. Burger King system’s national average (measured on a quarterly basis) for the following operational metrics: (i) Speed of Service; (ii) Operational BKC Visits (OER or its current equivalent); (iii) Food Safety Scores; and (iv) Guest Trac (or the then current guest recovery program), which we refer to as the “operations metrics.” Subject to a six month grace periodlessor with respect to the acquired BKCFiesta restaurants if more than 10%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 our restaurants are rated belowits subsidiaries shall become the national average for any of the individual operations metrics for more than two consecutive quarters, we and BKC will meet and develop a cure period for and a cure plan that details how we will address the operational issues and by what date we will bring our performance up to and exceed the national average. If at least 90% of our restaurants do not meet or exceed the national average for any of the operations metrics after the cure period, franchise pre-approval for franchisee to franchisee transfers of restaurants or rightslessee 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:
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 growthcompanies;
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 25.3% of our outstanding common stock as of March 3, 2017 (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 20.6% of our common stock as of March 3, 2017 (assuming conversion of the Series A Preferred Stock). Our executive officers and directors (excluding directors affiliated with BKC) together beneficially own approximately 5.9% of our common stock outstanding as of March 3, 2017 (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 suspended untilable to significantly influence matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions such time as at least 90%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 restaurants meet or exceedcompany and might ultimately depress the national averagemarket price of our common stock.
We do not expect to pay any cash dividends for eachthe 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 operations metrics.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 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 of January 1, 2017, we had approximately $223.6 million of total indebtedness outstanding consisting of $200.0 million of Notes, $13.5 million of revolving credit borrowings, $3.0 million of lease financing obligations and $7.0 million of capital leases and other debt. At January 1, 2017, we had $28.7 million of borrowing availability under our senior credit facility (after reserving $12.8 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 January 13, 2017, we entered into an amendment to our senior
credit facility to increase revolving credit borrowings to $73 million (including $20.0 million available for letters of credit).
As a result of our substantial indebtedness, a significant portion of our operating agreementcash flow will be required to make payments of 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.
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 capital expenditures and restaurant acquisitions, 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 providesconsider 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 BKCour 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;
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.
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. At January 1, 2017, 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 indemnify the other for all losses, damages and/or contractual liabilities to third parties arising outmeet these tests.
A breach of or relating to 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 undertakings, promises and representationsunder our senior credit facility, the Notes or other indebtedness in connection with certain change of BKC and us, as the case may be, under the operating agreement, and for all claims or demands for damages to property or for injury, illness or death of persons directly or indirectly resulting therefrom.control events.
Registration Rights Agreement
Upon the closingoccurrence 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 2012 acquisition, weprincipal amount thereof, plus accrued and BKC entered into a registration rights agreement, which we referunpaid interest (and additional interest, if any) to as the “BKC registration rights agreement,” pursuant to which we agreed to file one shelf registration statement on Form S-3 covering the resale of at least 30% of the conversion shares as promptly as possible upon written request of BKC at any time after the 36-month anniversary of the closing of the 2012 acquisition. The BKC registration rights agreement also provides that BKC may make up to three demands to register for the resale of at least 33.3% of the conversion shares held by BKC under the Securities Act on the date of repurchase. However, it is possible that we will not have sufficient funds, or the closingability to raise sufficient funds, at the time of the 2012 acquisition uponchange of control to make the written request by BKC at any time following the 30-month anniversaryrequired repurchase of the closingNotes. 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 2012 acquisition.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 1, 2017, we owned 7 and leased 746 Burger King restaurant properties including three restaurants located in mall shopping centers and 21 co-branded locations. In addition, we owned four and leased seven non-operating properties as of January 1, 2017, including two properties under construction that will open as new restaurants in 2017.
We typically enter into leases (including renewal options) ranging from 20 to 40 years. The BKC registration rightsaverage remaining term for all leases, including options, was approximately 22.8 years at January 1, 2017. Generally, we have been able 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 providesrequire contingent rentals based upon a percentage of gross sales of the particular restaurant that wheneverexceed specified minimums. In some of our mall locations, we registerare 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 and two small administrative offices in Syracuse, NY that support administrative operations.
ITEM 3. LEGAL PROCEEDINGS
Litigation. We are a party to various litigation matters that arise in the ordinary course of business. We do not believe that the outcome of any of these matters will have a material adverse effect on our consolidated financial statements.
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 3, 2017, there were 36,202,380 shares of our common stock underoutstanding held by 554 holders of record. The number of record holders was determined from the Securities Act (other than on a Form S-4 or Form S-8), BKC has the right as specified therein to register its conversion shares as part of that registration, provided, however, that such registration rights are subject to the rights of the managing underwriters, if any, to reduce or exclude certain conversion shares owned by BKC from an underwritten registration (and subject to certain rights of certain persons, including members
records of our management that have piggyback registration rights). Except as otherwise provided in the BKC registration rights agreement, the BKC registration rights agreement requires us to pay for all coststransfer agent and expenses, other than underwriting discounts, commissions and underwriters’ counsel fees, incurred in connection with the registrationdoes not include beneficial owners of our common stock stock transfer taxes and the expenses of BKC’s legal counsel in connection with the sale of the conversionwhose shares provided that we will pay the reasonable fees and expenses of one counsel for BKC up to $50,000are held in the aggregate for any registration thereunder, subject to the limitations set forth therein. We will also agree to indemnify BKC against certain liabilities, including liabilities under the Securities Act. We have also agreed, to the extent a shelf registration is effective, to file up to two prospectus supplements in connection with a block sale or non-marketed underwritten offering by BKCnames of Carrols Restaurant Group common stock held by BKCvarious securities brokers, dealers, and pay one half of the accounting and printing fees related thereto to the extent such sale or offering is for a sales price of no less than 90% of the averageregistered clearing agencies. The closing price of our common stock for the five trading days ending immediately prior to such sale or offering and is not less than 300,000 shares of common stock.
Franchise Agreements and Leases
We operate all of our restaurants (including the acquired BKC restaurants) pursuant to franchise agreements entered into with BKC. In addition, we have entered into real property leases with BKC for a number of our restaurants (excluding the acquired BKC restaurants) and real property leases or subleases with respect to all of the acquired BKC restaurants.
Other
Pursuant to a registration agreement, which we refer to the the "registration agreement" datedon March 27, 1997 and amended December 14, 2006, Daniel T. Accordino, CEO of Carrols Restaurant Group, and two former executive officers of Carrols Restaurant Group have the right, whenever we register shares of our common stock under the Securities Act (other than on a Form S-4 or Form S-8) to register their shares subject to the registration agreement as part of that registration. Such registration rights are subject to the rights of the managing underwriters, if any, to reduce or exclude certain shares owned by such stockholders from the registration. The registration agreement requires us to pay for all costs and expenses, other than underwriting discounts and commissions for these stockholders, incurred in connection with the registration of their shares under the registration agreement. Under the registration agreement, we have agreed to indemnify these stockholders against certain liabilities, including liabilities under the Securities Act.
Independence of Directors
As required by the listing standards of NASDAQ, a majority of the members of our board of directors must qualify as “independent,” as affirmatively determined by our board of directors. Our board of directors determines director independence based on an analysis of such listing standards and all relevant securities and other laws and regulations regarding the definition of “independent.”
Consistent with these considerations, after review of all relevant transactions and relationships between each director, any of his or her family members, and us, our executive officers and our independent registered public accounting firm, the board of directors has affirmatively determined that a majority of our board of directors is comprised of independent directors. Our independent directors pursuant to NASDAQ are Messrs. Handel, Wilhite, Harris and Garcia.
Item 14. Principal Accountant Fees and Services
Fees for Professional Services3, 2017 was $14.75.
The following table sets forth the aggregate fees billed (or expectedrange 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 1, 2017 | | | |
| First Quarter | $ | 14.55 |
| | $ | 11.15 |
|
| Second Quarter | 14.62 |
| | 11.72 |
|
| Third Quarter | 13.88 |
| | 11.77 |
|
| Fourth Quarter | 15.25 |
| | 11.25 |
|
| | | | |
| 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 |
|
Dividends
We did not pay any cash dividends during the fiscal years 2016 or 2015. 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.
Stock Performance Graph
The following graph compares from December 31, 2011 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, 2011 through December 31, 2016.
* $100 invested on 12/31/2011 in stock or index, including reinvestment of dividends. |
| | | | | | | | | | | | | | | | | | |
| | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 |
| Carrols Restaurant Group, Inc. | $ | 100.00 |
| $ | 185.56 |
| $ | 205.10 |
| $ | 236.75 |
| $ | 364.28 |
| $ | 473.20 |
|
| NASDAQ Composite | $ | 100.00 |
| $ | 116.41 |
| $ | 165.47 |
| $ | 188.69 |
| $ | 200.32 |
| $ | 216.54 |
|
| S&P SmallCap 600 Restaurants | $ | 100.00 |
| $ | 121.01 |
| $ | 181.84 |
| $ | 212.16 |
| $ | 196.37 |
| $ | 210.05 |
|
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. During 2016, we acquired 56 restaurants from other franchisees in seven separate transactions.
These historical results are not necessarily indicative of the results to be billed) to us forexpected in the future. Our fiscal years ended December 30, 2012, December 29, 2013, December 28, 2014 and January 1, 2017 each contained 52 weeks. The fiscal year ended January 3, 2016 contained 53 weeks.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 30, 2012 | | December 29, 2013 | | December 28, 2014 | | January 3, 2016 | | January 1, 2017 |
| | (In thousands of dollars, except share and per share data) |
| Statements of operations data: | | | | | | | | | |
| Restaurant sales | $ | 539,608 |
| | $ | 663,483 |
| | $ | 692,755 |
| | $ | 859,004 |
| | $ | 943,583 |
|
| Costs and expenses: | | | | | | | | |
|
| Cost of sales | 172,698 |
| | 201,532 |
| | 209,664 |
| | 240,322 |
| | 250,112 |
|
| Restaurant wages and related expenses (1) | 169,857 |
| | 208,404 |
| | 219,718 |
| | 267,950 |
| | 297,766 |
|
| Restaurant rent expense | 37,883 |
| | 47,198 |
| | 48,865 |
| | 58,096 |
| | 64,814 |
|
| Other restaurant operating expenses (1) | 88,883 |
| | 106,508 |
| | 113,586 |
| | 135,874 |
| | 148,946 |
|
| Advertising expense | 22,257 |
| | 29,615 |
| | 27,961 |
| | 32,242 |
| | 41,299 |
|
| General and administrative (1)(2) | 36,085 |
| | 37,228 |
| | 40,001 |
| | 50,515 |
| | 54,956 |
|
| Depreciation and amortization | 26,321 |
| | 33,594 |
| | 36,923 |
| | 39,845 |
| | 47,295 |
|
| Impairment and other lease charges | 977 |
| | 4,462 |
| | 3,541 |
| | 3,078 |
| | 2,355 |
|
| Other expense (income) (3) | (717 | ) | | 17 |
| | 47 |
| | (126 | ) | | 338 |
|
| Total operating expenses | 554,244 |
| | 668,558 |
| | 700,306 |
| | 827,796 |
| | 907,881 |
|
| Income (loss) from operations | (14,636 | ) | | (5,075 | ) | | (7,551 | ) | | 31,208 |
| | 35,702 |
|
| Interest expense | 12,764 |
| | 18,841 |
| | 18,801 |
| | 18,569 |
| | 18,315 |
|
| Loss on extinguishment of debt | 1,509 |
| | — |
| | — |
| | 12,635 |
| | — |
|
| Income (loss) from continuing operations before income taxes | (28,909 | ) | | (23,916 | ) | | (26,352 | ) | | 4 |
| | 17,387 |
|
| Provision (benefit) for income taxes | (10,093 | ) | | (10,397 | ) | | 11,765 |
| | — |
| | (28,085 | ) |
| Net income (loss) from continuing operations | (18,816 | ) | | (13,519 | ) | | (38,117 | ) | | 4 |
| | 45,472 |
|
| Income (loss) from discontinued operations, net of income taxes | (72 | ) | | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | $ | (18,888 | ) | | $ | (13,519 | ) | | $ | (38,117 | ) | | $ | 4 |
| | $ | 45,472 |
|
| Per share data: | | | | | | | | | |
| Basic and diluted net income (loss) per share: | | | | | | | | | |
| Continuing operations | $ | (0.83 | ) | | $ | (0.59 | ) | | $ | (1.23 | ) | | $ | 0.00 |
| | $ | 1.01 |
|
| Discontinued operations | $ | 0.00 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Weighted average shares used in computing net income (loss) per share: | | | | | | | | | |
| Basic | 22,580,468 |
| | 22,958,963 |
| | 30,885,275 |
| | 34,958,847 |
| | 35,178,329 |
|
| Diluted | 22,580,468 |
| | 22,958,963 |
| | 30,885,275 |
| | 44,623,251 |
| | 44,851,345 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 30, 2012 | | December 29, 2013 | | December 28, 2014 | | January 3, 2016 | | January 1, 2017 |
| | (In thousands of dollars, except restaurant weekly sales data) |
| Other financial data: | | | | | | | | | |
| Net cash provided from operating activities | $ | 18,207 |
| | $ | 21,581 |
| | $ | 14,707 |
| | $ | 70,702 |
| | $ | 62,288 |
|
| Total capital expenditures | 37,642 |
| | 50,486 |
| | 52,010 |
| | 56,848 |
| | 94,099 |
|
| Net cash used for investing activities | 65,908 |
| | 50,486 |
| | 68,003 |
| | 103,429 |
| | 96,221 |
|
| Net cash provided from (used for) financing activities | 69,301 |
| | (1,083 | ) | | 66,215 |
| | 33,780 |
| | 13,661 |
|
| Operating Data: | | | | | | | | | |
| Restaurants (at end of period) | 572 |
| | 564 |
| | 674 |
| | 705 |
| | 753 |
|
| Average number of restaurants | 455.6 |
| | 563.8 |
| | 581.9 |
| | 662.1 |
| | 719.5 |
|
| Average annual sales per restaurant (4) | 1,184,286 |
| | 1,176,806 |
| | 1,190,505 |
| | 1,274,372 |
| | 1,311,516 |
|
| Adjusted EBITDA (5) | 24,972 |
| | 34,271 |
| | 36,008 |
| | 76,737 |
| | 89,505 |
|
| Adjusted net income (loss) (5) | (13,529 | ) | | (10,753 | ) | | (10,408 | ) | | 13,429 |
| | 17,860 |
|
| Restaurant-Level EBITDA (5) | 52,415 |
| | 70,226 |
| | 72,961 |
| | 124,520 |
| | 140,646 |
|
| Change in comparable restaurant sales (6) | 7.1 | % | | 1.0 | % | | 0.6 | % | | 7.4 | % | | 2.3 | % |
| Balance sheet data (at end of period): | | | | | | | | | |
| Total assets | $ | 346,256 |
| | $ | 329,481 |
| | $ | 364,573 |
| | $ | 427,256 |
| | $ | 490,155 |
|
| Working capital | 7,478 |
| | (21,974 | ) | | (13,554 | ) | | (26,259 | ) | | (39,231 | ) |
| Debt: | | | | | | | | | |
| Senior and senior subordinated debt | 150,000 |
| | 150,000 |
| | 150,000 |
| | 200,000 |
| | 213,500 |
|
| Capital leases | 10,295 |
| | 9,336 |
| | 8,694 |
| | 8,006 |
| | 7,039 |
|
| Lease financing obligations | 1,197 |
| | 1,200 |
| | 1,202 |
| | 1,203 |
| | 3,020 |
|
| Total debt | $ | 161,492 |
| | $ | 160,536 |
| | $ | 159,896 |
| | $ | 209,209 |
| | $ | 223,559 |
|
| Stockholders’ equity | $ | 90,173 |
| | $ | 77,204 |
| | $ | 106,535 |
| | $ | 107,999 |
| | $ | 154,656 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 30, 2012 | | December 29, 2013 | | December 28, 2014 | | January 3, 2016 | | January 1, 2017 |
| | (In thousands of dollars, except restaurant weekly sales data) |
| Reconciliation of EBITDA and Adjusted EBITDA (5): | | | | | | | | |
| Net income (loss) from continuing operations | $ | (18,816 | ) | | $ | (13,519 | ) | | $ | (38,117 | ) | | $ | 4 |
| | $ | 45,472 |
|
| Provision (benefit) for income taxes | (10,093 | ) | | (10,397 | ) | | 11,765 |
| | — |
| | (28,085 | ) |
| Interest expense | 12,764 |
| | 18,841 |
| | 18,801 |
| | 18,569 |
| | 18,315 |
|
| Depreciation and amortization | 26,321 |
| | 33,594 |
| | 36,923 |
| | 39,845 |
| | 47,295 |
|
| EBITDA | 10,176 |
| | 28,519 |
| | 29,372 |
| | 58,418 |
| | 82,997 |
|
| Impairment and other lease charges | 977 |
| | 4,462 |
| | 3,541 |
| | 3,078 |
| | 2,355 |
|
| Acquisition costs (7) | 6,042 |
| | — |
| | 1,915 |
| | 1,168 |
| | 1,853 |
|
| Gain on partial condemnation and fires (8) | — |
| | — |
| | — |
| | — |
| | (1,603 | ) |
| Litigation settlement (9) | — |
| | — |
| | — |
| | — |
| | 1,850 |
|
| EEOC litigation and settlement costs | 5,343 |
| | 85 |
| | — |
| | — |
| | — |
|
| Stock compensation expense | 925 |
| | 1,205 |
| | 1,180 |
| | 1,438 |
| | 2,053 |
|
| Loss on extinguishment of debt | 1,509 |
| | — |
| | — |
| | 12,635 |
| | — |
|
| Adjusted EBITDA | $ | 24,972 |
| | $ | 34,271 |
| | $ | 36,008 |
| | $ | 76,737 |
| | $ | 89,505 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Reconciliation of Restaurant-Level EBITDA (5): | | | | | | | | |
| Income (loss) from continuing operations | $ | (14,636 | ) | | $ | (5,075 | ) | | $ | (7,551 | ) | | $ | 31,208 |
| | $ | 35,702 |
|
| Add: | | | | | | | | | |
| Restaurant-level integration costs | 4,385 |
| | — |
| | — |
| | — |
| | — |
|
| General and administrative expenses | 36,085 |
| | 37,228 |
| | 40,001 |
| | 50,515 |
| | 54,956 |
|
| Depreciation and amortization | 26,321 |
| | 33,594 |
| | 36,923 |
| | 39,845 |
| | 47,295 |
|
| Impairment and other lease charges | 977 |
| | 4,462 |
| | 3,541 |
| | 3,078 |
| | 2,355 |
|
| Other expense (income) (8) (9) | (717 | ) | | 17 |
| | 47 |
| | (126 | ) | | 338 |
|
| Restaurant-Level EBITDA | $ | 52,415 |
| | $ | 70,226 |
| | $ | 72,961 |
| | $ | 124,520 |
| | $ | 140,646 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Reconciliation of Adjusted net income (loss) (5): | | | | | | | | |
| Net income (loss) | $ | (18,816 | ) | | $ | (13,519 | ) | | $ | (38,117 | ) | | $ | 4 |
| | $ | 45,472 |
|
| Add: | | | | | | | | | |
| Loss on extinguishment of debt | 1,509 |
| | — |
| | — |
| | 12,635 |
| | — |
|
| Impairment and other lease charges | 977 |
| | 4,462 |
| | 3,541 |
| | 3,078 |
| | 2,355 |
|
| Acquisition costs (7) | 6,042 |
| | — |
| | 1,915 |
| | 1,168 |
| | 1,853 |
|
| Gain on partial condemnation and fires (8) | — |
| | — |
| | — |
| | — |
| | (1,603 | ) |
| Litigation settlement (9) | — |
| | — |
| | — |
| | — |
| | 1,850 |
|
| Income tax effect of above adjustments (10) | (3,241 | ) | | (1,696 | ) | | (2,073 | ) | | (6,415 | ) | | (1,693 | ) |
| Deferred income tax valuation allowance provision (benefit) (11) | — |
| | — |
| | 24,326 |
| | 2,959 |
| | (30,374 | ) |
| Adjusted net income (loss) | $ | (13,529 | ) | | $ | (10,753 | ) | | $ | (10,408 | ) | | $ | 13,429 |
| | $ | 17,860 |
|
| Adjusted diluted net earnings (loss) per share (12) | $ | (0.60 | ) | | $ | (0.47 | ) | | $ | (0.34 | ) | | $ | 0.30 |
| | $ | 0.40 |
|
| |
| (1) | 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, $1,168 and $1,853 were included in general and administrative expense for the years ended December 28, 2014, January 3, 2016 and January 1, 2017, respectively. |
| |
| (2) | General and administrative expenses include stock-based compensation expense for the years ended December 30, 2012, December 29, 2013, December 28, 2014, January 3, 2016 and January 1, 2017 of $925, $1,205, $1,180, $1,438 and $2,053, respectively. |
| |
| (3) | In fiscal 2012, we recorded gains of $0.7 million related to property insurance recoveries from fires at two restaurants. In fiscal 2016, we recorded gains of $1.2 million related to related to property insurance recoveries from fires at two restaurants, a gain of $0.5 million related to a settlement for a partial condemnation on one of our operating restaurant properties and expense of $1.85 million related to a litigation settlement. |
| |
| (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, loss on extinguishment of debt and other non-recurring income or expense. 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, the related income tax effect of these adjustments and the establishment or reversal of a valuation allowance on our net deferred income tax assets. |
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, 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 (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.
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.
| |
| (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 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) | Includes gains of $1.2 million related to a insurance recoveries from fires at two of our restaurants and a gain of $0.5 million related to a settlement for a partial condemnation on one of our operating restaurant properties. |
| |
| (9) | Includes an expense of $1.85 million from a litigation settlement. |
| |
| (10) | The income tax effect related to all adjustments, other than the deferred income tax valuation allowance provision (benefit), was calculated using an effective income tax rate of 38%. |
| |
| (11) | Reflects the removal of the income tax provision recorded for the establishment of a valuation allowance on all our net deferred income tax assets during the years ended December 28, 2014 and January 3, 2016 and the income tax benefit recorded for its subsequent reversal during the year ended January 1, 2017. |
| |
| (12) | Adjusted diluted 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. |
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 years ended January 1, 2017 and December 28, 2014 each contained 52 weeks and the fiscal year ended January 3, 2016 contained 53 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 1, 2017, January 3, 2016 and December 28, 2014 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 55 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 1, 2017, our restaurant operations consisted of 753 franchised Burger King restaurants in 16 states.
During the year ended January 1, 2017, we acquired 56 restaurants in seven separate transactions. During the year ended January 3, 2016, we acquired 55 Burger King restaurants in eight separate transactions and during the year ended December 28, 2014, we acquired 123 Burger King restaurants in five separate transactions, which we refer to as the "2015 acquired restaurants" and "2014 acquired restaurants" in periods prior to 2016.
For 2016, we have modified our grouping of restaurants for reporting and analysis purposes. We refer to our restaurants acquired over the past three years (2014, 2015 and 2016) as our "acquired restaurants". All of our other restaurants, including restaurants acquired prior to 2014, 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 level of promotional discounting 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 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 advertising payments to BKC based on a percentage of sales as required under our franchise and operating agreements and additional marketing and promotional expenses in certain of our markets.
General and administrative expenses are comprised primarily of salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees, acquisition costs and 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, 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, loss on extinguishment of debt, stock compensation expense and non-recurring income or expense. 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 (loss) represents net income or loss adjusted to exclude loss on extinguishment of debt, impairment and other lease charges, acquisition costs, non-recurring income and expense, the related income tax effect of these adjustments and the establishment in 2014 and
2015 and reversal in 2016 of a valuation allowance on all of our net deferred income tax assets. Adjusted net income (loss) also presents the provision or benefit for income taxes as if there was no valuation allowance on our net deferred income tax assets during all periods presented.
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 (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 (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 or loss 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 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. Losses on sale-leaseback transactions are recognized when they are incurred. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.
Interest expense consists primarily of interest expense associated with our $200.0 million of 8% Senior Secured Second Lien Notes due 2022 (the "8% Notes"), our prior 11.25% Senior Secured Second Lien Notes due 2018 (the "11.25% Notes"), amortization of deferred financing costs and interest on revolving credit borrowings under our senior credit facility.
Recent and Future Events Affecting our Results of Operations
Burger King Restaurant Acquisitions
From the beginning of 2014 through January 1, 2017, we have acquired 234 restaurants from other franchisees in the following transactions ($ in thousands):
|
| | | | | | | | | | |
| Closing Date | | Number of Restaurants | | Purchase Price | | Number of Fee-Owned Restaurants | Market Location |
| 2014 Acquisitions: | | | | | | | |
| 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 | |
| 2015 Acquisitions: | | | | | | | |
| March 31, 2015 | | 4 |
| | 794 |
| | | Northern Vermont |
| August 4, 2015 | | 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 | (1) | 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 |
| | | 55 |
| | 52,750 |
| | 16 | |
| 2016 Acquisitions: | | | | | | | |
| February 23, 2016 | (1) | 12 |
| | 7,127 |
| | | Scranton/Wilkes-Barre, Pennsylvania |
| May 25, 2016 | | 6 |
| | 12,080 |
| | 5 | Detroit, Michigan |
| July 14, 2016 | (1) | 4 |
| | 5,445 |
| | 3 | Detroit, Michigan |
| August 23, 2016 | | 7 |
| | 8,755 |
| | 6 | Portland, Maine |
| October 4, 2016 | | 3 |
| | 1,623 |
| | | Raleigh, North Carolina |
| November 15, 2016 | | 17 |
| | 7,251 |
| | | Pittsburgh and Johnstown, Pennsylvania |
| December 1, 2016 | | 7 |
| | 5,807 |
| | 1 | Columbus, Ohio |
| | | 56 |
| | 48,088 |
| | 15 | |
| | | 234 |
| | $ | 153,038 |
| | 44 | |
| |
| (1) | Acquisitions resulting from the exercise of our ROFR. |
The 2016 acquisitions included 15 fee-owned properties, of which 14 have been subsequently sold in sale-leaseback transactions in 2016 for net proceeds of $19.1 million. The 2015 acquisitions included 16 fee-owned properties of which 15 have been subsequently sold in sale-leaseback transactions in 2015 and 2016 for net proceeds of $22.0 million.
The pro forma impact on the results of operations for the 2016 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 2016 acquired restaurants. The following table summarizes certain pro forma financial information related to our 2016 operating results (a 52-week fiscal year):
|
| | | |
| | Year Ended |
| | January 1, 2017 |
| Restaurant sales | $ | 984,164 |
|
| Income from operations | $ | 40,205 |
|
| Adjusted EBITDA | $ | 93,219 |
|
On February 28, 2017, we acquired 43 Burger King restaurants for a cash purchase price of $20.4 million located in and around the Cincinnati market.
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 restaurants from BKC in 2012. As amended, the operating agreement required that we remodel to BKC's current 20/20 image a cumulative total of 455 restaurants by December 31, 2016. In 2016 we remodeled 93 restaurants including rebuilding four locations and relocating four locations within their trade area. As of December 31, 2016 we had remodeled a total of 461 restaurants to comply with this requirement. In addition, under a separate agreement we agreed to remodel 46 restaurants acquired in 2014 over a five year period beginning in 2014 and at January 1, 2017 we had remodeled a total of 28 restaurants associated with this agreement. At January 1, 2017 we had 547 restaurants with the BKC 20/20 restaurant image, which included restaurants converted prior to our acquisition.
Under the operating agreement, beginning on January 1, 2016 and until we exceed operating 1,000 Burger King restaurants, a minimum of 10% of our annual new restaurant growth (including acquisitions) must come from the development of new Burger King restaurants (which includes restaurants we relocate within their marker area); provided that for 2016 only, any required new restaurant development may be deferred and opened in 2017.
In 2017, we anticipate that total capital expenditures will range from $55 million to $75 million, although the actual amount of capital expenditures may differ from these estimates. Capital expenditures in 2017 include remodeling 20 to 25 restaurants to the BKC 20/20 image standard at an approximate average cost of $550,000 per restaurant, rebuilding 5 to 7 restaurants and the construction of 7 to 15 new restaurants, of which 2 to 3 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 2017 also include approximately $10 million to $12 million for non-recurring investments in new kitchen production and food holding systems, new restaurant training systems and certain point-of sale equipment upgrades. 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 2016, excluding five restaurants relocated within their respective trade areas, we closed seven restaurants including six restaurants closed on January 1, 2017. We currently anticipate closing 20 to 25 restaurants in 2017, excluding any restaurants being relocated within their trade area, at the end of their respective lease term.
Our determination of whether to close restaurants in the future is subject to further evaluation and may change. We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their contractual lease term. 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.
Reversal of Valuation Allowance on 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. For the years ended January 3, 2016 and December 28, 2014, we determined that a valuation allowance was needed for all of our net deferred income tax assets, based on the required weight of positive and negative evidence under ASC 740, including consideration of our three-year cumulative losses at that time.
During the year ended January 1, 2017, we evaluated both positive and negative evidence to consider the reversal of the valuation allowance on our net deferred income tax assets and determined in the fourth quarter of fiscal 2016 that there was sufficient positive evidence to conclude that it is more likely than not our deferred income tax assets are realizable. As a result, in the fourth quarter of 2016 we recorded a $30.4 million income tax benefit to release the full valuation allowance against our net deferred income tax assets and an income tax provision for all of 2016 of $2.3 million.
As of January 1, 2017, we had federal net operating loss carryforwards of approximately $61.0 million.
Effect of Minimum Wage Increases
Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2017 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 $10.75 an hour in 2017 (from $9.75 an hour in 2016) with subsequent annual increases reaching $15.00 an hour by July 1, 2021. Starting in 2015 we have been receiving New York State minimum wage tax credits that partially offset these additional labor costs. These tax credits diminish over the next few years and currently totals approximately $500,000 per year. We had 131 restaurants in New York State at January 1, 2017. 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.
Refinancing of Indebtedness and Amendment to Our Senior Credit Facility
On January 13, 2017, we entered into an amendment to our senior credit facility that, among other things, increased the aggregate maximum revolving credit borrowings by $18.0 million to a total of $73.0 million.
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 by 0.25% 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).
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.
See "—Liquidity and Capital Resources" for a discussion of the 8% Notes and our senior credit facility, as amended.
Results of Operations
The following table sets forth, for the years ended January 1, 2017, January 3, 2016, and December 28, 2014 selected operating results as a percentage of total restaurant sales:
|
| | | | | | | | |
| | Year Ended |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Costs and expenses (all restaurants): | | | | | |
| Cost of sales | 26.5 | % | | 28.0 | % | | 30.3 | % |
| Restaurant wages and related expenses | 31.6 | % | | 31.2 | % | | 31.7 | % |
| Restaurant rent expense | 6.9 | % | | 6.8 | % | | 7.1 | % |
| Other restaurant operating expenses | 15.8 | % | | 15.8 | % | | 16.4 | % |
| Advertising expense | 4.4 | % | | 3.8 | % | | 4.0 | % |
| General and administrative expenses | 5.8 | % | | 5.9 | % | | 5.8 | % |
Fiscal 2016 compared to Fiscal 2015
In 2016, we acquired 56 restaurants from other franchisees and closed seven restaurants, excluding five restaurants closed for relocation within their trade area.
Restaurant Sales. Total restaurant sales in 2016 increased 9.8% to $943.6 million from $859.0 million in 2015. Comparable restaurant sales increased 2.3% due to an increase in average check of 2.6% and offset by a decrease in customer traffic of 0.3%. Comparable restaurant sales in 2015 (on a 53-week basis) increased 7.4%. The effect of menu price increases in 2016 was approximately 2.4%. Comparable restaurant sales in 2016 increased 2.3% at both our legacy restaurants and acquired restaurants (primarily our 2014 acquisitions). Sales from the acquired restaurants were $243.1 million in 2016. The extra week in 2015 contributed restaurant sales of $16.0 million.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales unless otherwise noted). Cost of sales decreased to 26.5% in 2016 from 28.0% in 2015 due primarily to lower commodity costs (1.1%), which included a 14.0% decrease in beef prices compared to the prior year, the effect of menu price increases (0.7%) and the continued improvement in restaurant-level food and cash controls at our acquired restaurants, partially offset by higher promotional discounting.
Restaurant wages and related expenses increased to 31.6% in 2016 from 31.2% in 2015 due primarily to higher hourly labor rates partially offset by lower restaurant-level incentive bonus accruals (0.2%).
Restaurant rent expense increased slightly to 6.9% in 2016 from 6.8% in 2015 due to lower amortization of deferred gains on sale-leaseback transactions.
Other restaurant operating expenses were 15.8% in both 2016 and 2015.
Advertising expense increased to 4.4% in 2016 from 3.8% in 2015 due primarily to the expiration of advertising credits at the end of 2015 that were associated with 2012 BKC restaurant equipment initiatives and an increase in local advertising in certain of our markets.
Restaurant-Level EBITDA. As a result of the factors above and the acquisition of 111 restaurants since the beginning of 2015, Restaurant-Level EBITDA increased 13% to $140.6 million in 2016 compared to $124.5 million in 2015. The extra week in 2015 contributed an additional $4.4 million in Restaurant-Level EBITDA. For a reconciliation between income (loss) from operations to Restaurant-Level EBITDA see page 42.
|
| | | | | | | | | | | | | | |
| | | Year ended |
| | | January 1, 2017 | | % (1) | | January 3, 2016 | | % (1) |
| | | (in thousands of dollars) |
| Restaurant Sales: | | | | | | | | |
| Legacy restaurants | | $ | 700,532 |
| | | | $ | 701,454 |
| | |
| Acquired restaurants | | 243,051 |
| | | | 157,550 |
| | |
| Total | | $ | 943,583 |
| | | | $ | 859,004 |
| | |
| | | | | | | | | |
| Restaurant-Level EBITDA and Margin: | | | | | | | | |
| Legacy restaurants | | $ | 111,189 |
| | 15.9 | % | | $ | 107,093 |
| | 15.3 | % |
| Acquired restaurants | | 29,457 |
| | 12.1 | % | | 17,427 |
| | 11.1 | % |
| Total | | $ | 140,646 |
| | 14.9 | % | | $ | 124,520 |
| | 14.5 | % |
(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 0.6% at our legacy restaurants due primarily to lower beef prices, a 2.3% increase in comparable restaurant sales, lower utility costs and lower restaurant bonuses partially offset by higher advertising costs as discussed above.
Restaurant-Level EBITDA margin for our acquired restaurants increased 1.0% due to similar factors and also from a comparable restaurant sales increase of 2.3% (primarily our 2014 acquisitions), higher vendor rebates and continued improvement in food and cash controls. Restaurant-Level EBITDA margin for our acquired restaurants is lower than our legacy restaurants due to the effect of lower average restaurant sales volumes on fixed operating expenses, including fixed labor costs, rent and utility costs.
General and Administrative Expenses. General and administrative expenses increased $4.4 million in 2016 to $55.0 million however, as a percentage of total restaurant sales, decreased to 5.8% in 2016 from 5.9% in 2015. The increase in total general and administrative expenses was due primarily to additional field management and restaurant manager training costs related to the 2016 and 2015 acquisitions, higher acquisition costs of $0.7 million and an increase in stock-based compensation expense of $0.6 million partially offset by a decrease in administrative bonuses of $1.8 million.
Adjusted EBITDA. As a result of the factorsabove Adjusted EBITDA increased 16.6% to $89.5 million in 2016 from $76.7 million in 2015. For a reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see page 42.
Depreciation and Amortization. Depreciation and amortization expense increased to $47.3 million in 2016 from $39.8 million in 2015 due primarily to our ongoing restaurant remodeling initiatives and our acquisition of restaurants in 2015 and 2016.
Impairment and Other Lease Charges. Impairment and other lease charges were $2.4 million in 2016 and included $0.9 million of capital expenditures at previously impaired restaurants, $0.2 million related to initial impairment charges for four underperforming restaurants and non-cash losses of $1.2 million associated with the sale-leaseback of seven restaurant properties.
Interest Expense. Interest expense decreased to $18.3 million in 2016 from $18.6 million in 2015 due to our refinancing in the second quarter of 2015 discussed above. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 7.9% in 2016 compared to 8.9% in 2015.
Income Taxes. As discussed above we reversed the valuation allowance on all of our net deferred income tax assets in 2016 resulting in a tax benefit of $30.4 million. Excluding the valuation allowance reversal, we recorded a provision for income taxes in 2016 of $2.3 million. The 2016 effective tax rate of 13.2%, exclusive of the valuation allowance reversal, is lower than the statutory tax rate primarily due to employment tax credits.
Net Income. As a result of the above, net income was $45.5 million in 2016, or $1.01 per diluted share, compared to net income of $4,000 in 2015, or $0.00 per diluted share.
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 contributed restaurant sales of $16.0 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, the acquisition of 178 restaurants in 2014 and 2015 and an additional $4.4 million of restaurant EBITDA in the extra week before general and administrative costs of $0.4 million, Restaurant-Level EBITDA increased to $124.5 million in 2015 from $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 an increase in 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.
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 $4,000 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.
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 1, 2017, January 3, 2016, and December 28, 2014 are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Reconciliation of EBITDA and Adjusted EBITDA: | | | | | |
| Net income (loss) | $ | 45,472 |
| | $ | 4 |
| | $ | (38,117 | ) |
| Provision (benefit) for income taxes | (28,085 | ) | | — |
| | 11,765 |
|
| Interest expense | 18,315 |
| | 18,569 |
| | 18,801 |
|
| Depreciation and amortization | 47,295 |
| | 39,845 |
| | 36,923 |
|
| EBITDA | 82,997 |
| | 58,418 |
| | 29,372 |
|
| Impairment and other lease charges | 2,355 |
| | 3,078 |
| | 3,541 |
|
| Acquisition costs (1) | 1,853 |
| | 1,168 |
| | 1,915 |
|
| Gains on partial condemnation and fires (2) | (1,603 | ) | | — |
| | — |
|
| Litigation settlement (3) | 1,850 |
| | — |
| | — |
|
| Stock compensation expense | 2,053 |
| | 1,438 |
| | 1,180 |
|
| Loss on extinguishment of debt | — |
| | 12,635 |
| | — |
|
| Adjusted EBITDA | $ | 89,505 |
| | $ | 76,737 |
| | $ | 36,008 |
|
|
| | | | | | | | | | | |
| Reconciliation of Restaurant-Level EBITDA: | | | | | |
| Income (loss) from operations | $ | 35,702 |
| | $ | 31,208 |
| | $ | (7,551 | ) |
| Add: | | | | | |
| General and administrative expenses | 54,956 |
| | 50,515 |
| | 40,001 |
|
| Depreciation and amortization | 47,295 |
| | 39,845 |
| | 36,923 |
|
| Impairment and other lease charges | 2,355 |
| | 3,078 |
| | 3,541 |
|
| Other expense (income) | 338 |
| | (126 | ) | | 47 |
|
| Restaurant-Level EBITDA | $ | 140,646 |
| | $ | 124,520 |
| | $ | 72,961 |
|
|
| | | | | | | | | | | |
| Reconciliation of Adjusted net income (loss): | | | | | |
| Net income (loss) | $ | 45,472 |
| | $ | 4 |
| | $ | (38,117 | ) |
| Add: | | | | | |
| Loss on extinguishment of debt | — |
| | 12,635 |
| | — |
|
| Impairment and other lease charges | 2,355 |
| | 3,078 |
| | 3,541 |
|
| Acquisition costs (1) | 1,853 |
| | 1,168 |
| | 1,915 |
|
| Gains on partial condemnation and fires (2) | (1,603 | ) | | — |
| | — |
|
| Litigation settlement (3) | 1,850 |
| | — |
| | — |
|
| Income tax effect on above adjustments (4) | (1,693 | ) | | (6,415 | ) | | (2,073 | ) |
| Deferred income tax valuation allowance provision (benefit) (5) | (30,374 | ) | | 2,959 |
| | 24,326 |
|
| Adjusted net income (loss) | $ | 17,860 |
| | $ | 13,429 |
| | $ | (10,408 | ) |
| Adjusted diluted net earnings (loss) per share (6) | $ | 0.40 |
| | $ | 0.30 |
| | $ | (0.34 | ) |
| |
| (1) | Acquisition costs for the periods presented include primarily legal and professional fees incurred in connection with restaurant acquisitions, which were included in general and administrative expense. |
| |
| (2) | Includes gains of $1.2 million related to insurance recoveries from fires at two of our restaurants and a gain of $0.5 million related to a settlement for a partial condemnation on one of our operating restaurant properties. |
| |
| (3) | Includes an expense of $1.85 million from a litigation settlement. |
| |
| (4) | The income tax effect related to all adjustments, other than the deferred income tax valuation allowance provision (benefit), was calculated using an effective income tax rate of 38%. |
| |
| (5) | Reflects the removal of the income tax provision recorded for the establishment of a valuation allowance on all our net deferred income tax assets during the years ended December 28, 2014 and January 3, 2016 and the income tax benefit recorded for its subsequent reversal during the year ended January 1, 2017. |
| |
| (6) | Adjusted diluted 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. |
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 January 13, 2017, we entered into an amendment to our senior credit facility to, among other things, increase the aggregate maximum revolving credit borrowings by $18.0 million to a total of $73.0 million.
Interest payments under our debt obligations, capital expenditures, including our remodeling and new restaurant development initiatives in 2017, 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 1, 2017, January 3, 2016 and December 28, 2014 was $62.3 million, $70.7 million and $14.7 million, respectively. Net cash provided by operating activities in 2016 decreased by $8.4 million compared to 2015 due primarily to a decrease in cash from the changes in the components of working capital of $20.3 million partially offset by an increase in Adjusted EBITDA of $12.8 million.
Net cash provided from 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 changes in the components of working capital, due in part from higher incentive bonus accruals at January 3, 2016.
Investing activities. Net cash used for investing activities from continuing operations for the years ended January 1, 2017, January 3, 2016 and December 28, 2014 was $96.2 million, $103.4 million and $68.0 million, respectively.
As discussed above, in 2016, we acquired 56 restaurants in seven transactions for a total cash purchase price of $48.1 million. In 2015, we acquired 55 restaurants in eight transactions for total cash purchase price of $52.8 million and in 2014 we acquired 123 restaurants in five transactions for total 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 in connection with 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.
The following table sets forth our capital expenditures for the periods presented (dollar amounts in thousands):
|
| | | | |
| Year Ended January 1, 2017: | | |
| New restaurant development | | $ | 8,228 |
|
| Restaurant remodeling | | 65,767 |
|
| Other restaurant capital expenditures | | 15,168 |
|
| Corporate and restaurant information systems | | 4,936 |
|
| Total capital expenditures | | $ | 94,099 |
|
| Number of new restaurant openings including relocations | | 4 |
|
| 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 |
|
| Number of new restaurant openings including relocations | | — |
|
| 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 |
|
| Number of new restaurant openings including relocations | | 1 |
|
Investing activities also included sale-leaseback transactions related to our restaurant properties, primarily related to fee-owned properties acquired in restaurant acquisitions, the net proceeds from which were $53.6 million in 2016, $9.1 million in 2015 and $19.6 million in 2014. 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.
We also had expenditures related to the purchase of restaurant properties to be sold in sale-leaseback transactions of $9.0 million in 2016, $3.5 million in 2015 and $3.4 million in 2014.
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 1, 2017 was $13.7 million and due primarily to net revolving credit borrowings of $13.5 million in 2016.
Net cash provided from financing activities for the year ended January 3, 2016 was $33.8 million due primarily to the refinancing in 2015.
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.
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 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. We were in compliance as of January 1, 2017 with the restrictive covenants of the indenture governing the 8% Notes.
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.
Senior Credit Facility. On May 30, 2012, we entered into a senior credit facility, which was amended on January 13, 2017 to provide for aggregate revolving credit borrowings of up to $73.0 million (including $20.0 million available for letters of credit). The amended senior credit facility also provides for potential incremental borrowing increases of up to $25.0 million, in the aggregate, and will mature on February 12, 2021.
At January 1, 2017 there were revolving credit borrowings outstanding of $13.5 million and $12.8 million of letters of credit issued under the amended senior credit facility. After reserving for outstanding revolving credit borrowings and issued letters of credit at January 12, 2017, $42.4 million was available for revolving credit borrowings under the amended senior credit facility.
Borrowings under the amended senior credit facility bear interest at a rate per annum, at our option, based on (all terms as defined in our amended senior credit facility):
(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 January 1, 2017, our Alternate Base Rate margin was 1.75% and our LIBOR Rate margin was 2.75% based on our Adjusted Leverage Ratio.
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).
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 our senior credit facility at January 1, 2017.
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 1, 2017 (in thousands):
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| | | | | | | | | | | | | | | | | | | | |
| | | 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) | | $ | 304,563 |
| | $ | 16,743 |
| | $ | 33,485 |
| | $ | 46,335 |
| | $ | 208,000 |
|
| Capital lease obligations, including interest (2) | | 8,205 |
| | 2,067 |
| | 4,141 |
| | 1,659 |
| | 338 |
|
| Operating lease obligations (3) | | 917,699 |
| | 62,739 |
| | 122,141 |
| | 117,274 |
| | 615,545 |
|
| Lease financing obligations, including interest (4) | | 5,973 |
| | 216 |
| | 435 |
| | 439 |
| | 4,883 |
|
| Total contractual obligations | | $ | 1,236,440 |
| | $ | 81,765 |
| | $ | 160,202 |
| | $ | 165,707 |
| | $ | 828,766 |
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| (1) | Our long term debt at January 1, 2017 included $200.0 million of 8% Notes and $13.5 million of revolving credit borrowings. Total interest payments on our Notes of $88.0 million for all years presented are included at the coupon rate of 8%. Interest payments on our outstanding revolving credit borrowings are variable in nature and have been calculated using an assumed interest rate of 5.5% for each year (See Item 7A. Quantitative and Qualitative Disclosures about Market Risks - Interest Rate Risks). |
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| (2) | Includes total interest of $1.2 million for all years presented. |
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| (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. |
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| (4) | Includes total interest of $3.0 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 $7.5 million at January 1, 2017.
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. Fiesta Restaurant Group, Inc. ("Fiesta"), our former wholly-owned subsidiary, was spun-off in 2012 to our stockholders. As of January 1, 2017, we are a guarantor under 27 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 1, 2017 was $25.2 million. The obligations under these leases will generally continue to decrease over time 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, the cost of providing medical and prescription drug insurance to our employees and energy costs. Wages paid in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates and the Fair Labor Standards Act. 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, assessing impairment of long-lived assets 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 assumptions could result in adjustments to these liabilities. As of January 1, 2017, we had $7.5 million accrued for these insurance claims.
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.
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.
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.
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 be given greater weight than subjective evidence, including our forecasts of future taxable income, which include assumptions that cannot be objectively verified. Based on our evaluation of positive evidence in 2016 we reversed the valuation allowance established in 2014 and 2015 on all of 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 our senior credit facility. At January 1, 2017, there were outstanding revolving credit borrowings of $13.5 million under our senior credit facility. A 1% change in interest rates would have resulted in a nominal change to interest expense for the year ended January 1, 2017.
Borrowings under the senior credit facility bear interest at a rate per annum, at our option, based on (all terms as defined in our amended senior credit facility):
(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.
At January 1, 2017 our Alternate Base Rate margin was 1.75% and our LIBOR Rate margin was 2.75%.
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, these types of purchasing techniques to control costs are used 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 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
None.
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 1, 2017.
Changes in Internal Control over Financial Reporting. No changes occurred in our internal control over financial reporting during the fourth quarter of 2016 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 1, 2017 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 1, 2017, our internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP: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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| | | Year Ended |
| | | December 29, 2013 | | December 30, 2012 |
| | | (Amounts in thousands) |
| Audit Fees (1) | | $ | 813 |
| | $ | 771 |
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| Audit-Related Fees (2) | | — |
| | 188 |
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| Total Audit and Audit Related Fees | | 813 |
| | 959 |
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| Tax Fees (3) | | 68 |
| | 191 |
|
| All Other Fees | | — |
| | — |
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| Total | | $ | 881 |
| | $ | 1,150 |
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________________REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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(1) | Audit fees represents the aggregate fees billed or to be billed for professional services rendered for the audit of our annual consolidated financial statements, review of interim quarterly financial statements included in our quarterly reports on Form 10-Q, and for the effectiveness of our internal controls over financial reporting. |
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(2) | Audit related fees shown include fees for assurance and related services that are traditionally performed by independent auditors. This includes due diligence related to mergers and acquisitions, and consulting on financial accounting/reporting standards. |
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(3) | The aggregate tax fees billed for professional services rendered for tax consulting and compliance. |
PolicyTo the Board of Directors and Stockholders of
Carrols Restaurant Group, Inc.
Syracuse, New York
We have audited the internal control over financial reporting of Carrols Restaurant Group, Inc. and subsidiary (the "Company") as of January 1, 2017, based on Auditcriteria established in Internal Control - Integrated Framework (2013) issued by the Committee Pre-Approval of Services ProvidedSponsoring 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, Deloitte & Touche LLP
The Audit Committee has establishedor 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 pre-approvalprevention 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 services providedmaterial respects, effective internal control over financial reporting as of January 1, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the independent registered public accounting firm. The Audit Committee pre-approves all auditof 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 non-audit services provided byconsolidated financial statement schedule as of and for the independent registered public accounting firm, other than de minimis non-audit services,year ended January 1, 2017 of the Company and shall not engage the independent registered public accounting firm to perform the specific non-audit services proscribed by law or regulation. The Audit Committee may form one or more subcommittees, each of which shall take such actions as shall be delegated by the Audit Committee; provided, however, the decisions of any Audit Committee member to whom pre-approval authority is delegated must be presented to the full Audit Committee at its next scheduled meeting.our report dated March 7, 2017 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.
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| /s/ Deloitte & Touche LLP |
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| Rochester, New York |
| March 7, 2017 |
ITEM 9B. OTHER INFORMATION
None.
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 2017 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 2017 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 2017 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 2017 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 2017 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) (1) Financial Statements - Carrols Restaurant Group, Inc. and Subsidiary
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| CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY | | |
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(a) (2) Financial Statement Schedule
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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
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| 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) |
| 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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| 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) |
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| Exhibit | |
| Number | Description |
| 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 4.13)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 | 2016 Stock Incentive Plan (incorporated by reference to Appendix A to Carrols Restaurant Group, Inc.'s Definitive Proxy Statement on Schedule 14A filed on April 29, 2016) † |
| 10.9 | 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) † |
10.910.10 | 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) † |
10.1010.11 | 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 | |
| |
|
| |
| Exhibit | |
| Number | Description |
| 10.12 | 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)) |
10.1210.13 | 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) † |
10.1310.14 | 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) † |
10.1410.15 | 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) † |
10.1510.16 | 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) |
10.1610.17 | 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) |
|
| |
10.1710.18 | 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) |
10.1810.19 | 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) |
10.1910.20 | 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) |
10.2010.21 | 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) |
10.2110.22 | 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) |
10.2210.23 | 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) |
10.2310.24 | 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) |
| 10.25 | 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) |
| 10.26 | 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) |
| |
| |
|
| |
| Exhibit | |
| Number | Description |
| 10.27 | 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) |
| 10.28 | 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) |
| 10.29 | 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) |
| 10.30 | Second Amendment to Operating Agreement dated as of December 17, 2015 between Carrols LLC and Burger King Corporation # (incorporated by reference to Exhibit 10.29 to Carrols Restaurant Group, Inc.'s Annual Report on Form 10-K filed on March 9, 2016) |
| 10.31 | Fourth Amendment to Credit Agreement dated as of January 13, 2017 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 January 20, 2017) |
| 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 (Filed as Exhibit 21.1 to Carrols Restaurant Group, Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014)# |
| 23.1 | Consent of Deloitte & Touche LLP (Filed as Exhibit 23.1 to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014)# |
| 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. (Filed as Exhibit 32.1 to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014)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. (Filed as Exhibit 32.2 to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014)Inc.# |
*101.INS | XBRL Instance Document (Filed as Exhibit 101.INS to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014) |
*101.SCH | XBRL Taxonomy Extension Schema Document (Filed as Exhibit 101.SCH to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014) |
*101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (Filed as Exhibit 101.CAL to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014) |
*101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (Filed as Exhibit 101.DEF to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014) |
*101.LAB | XBRL Taxonomy Extension Label Linkbase Document (Filed as Exhibit 101.LAB to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014) |
*101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (Filed as Exhibit 101.PRE to Carrols Restaurant Group Inc.'s 2013 Annual Report on Form 10-K filed on March 3, 2014) |
| |
| † | Compensatory plan or arrangement |
ITEM 16. FORM 10-K SUMMARY
None.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Carrols Restaurant Group, Inc.
Syracuse, New York
We have audited the accompanying consolidated balance sheets of Carrols Restaurant Group, Inc. and subsidiary (the "Company") as of January 1, 2017 and January 3, 2016, 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 1, 2017. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)2. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 1, 2017 and January 3, 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2017, 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 1, 2017, 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 7, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
|
|
|
| /s/ Deloitte & Touche LLP |
|
| Rochester, New York |
| March 7, 2017 |
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 1, 2017 AND JANUARY 3, 2016
(In thousands of dollars, except share and per share amounts)
|
| | | | | | | |
| | January 1, 2017 | | January 3, 2016 |
| ASSETS | | | |
| Current assets: | | | |
| Cash | $ | 2,002 |
|
| $ | 22,274 |
|
| Trade and other receivables | 7,623 |
| | 6,161 |
|
| Inventories | 7,761 |
| | 7,126 |
|
| Prepaid rent | 4,665 |
| | 4,168 |
|
| Prepaid expenses and other current assets | 7,465 |
| | 5,266 |
|
| Refundable income taxes | 153 |
| | — |
|
| Total current assets | 29,669 |
| | 44,995 |
|
| Property and equipment, net (Note 3) | 247,847 |
| | 220,114 |
|
| Franchise rights, net (Note 4) | 134,153 |
| | 118,881 |
|
| Goodwill (Note 4) | 22,869 |
| | 20,438 |
|
| Franchise agreements, at cost less accumulated amortization of $9,734 and $8,471, respectively | 19,591 |
| | 15,467 |
|
| Favorable leases, net (Note 4) | 5,441 |
| | 5,652 |
|
| Deferred income taxes (Note 10) | 28,841 |
| | — |
|
| Other assets | 1,744 |
| | 1,709 |
|
| Total assets | $ | 490,155 |
| | $ | 427,256 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Current portion of long-term debt (Note 8) | $ | 1,616 |
| | $ | 1,435 |
|
| Accounts payable | 22,445 |
| | 20,436 |
|
| Accrued interest | 2,676 |
| | 2,672 |
|
| Accrued payroll, related taxes and benefits | 26,029 |
| | 27,582 |
|
| Accrued real estate taxes | 5,202 |
| | 5,117 |
|
| Other liabilities | 10,932 |
| | 14,012 |
|
| Total current liabilities | 68,900 |
| | 71,254 |
|
| Long-term debt, net of current portion and deferred financing costs (Note 8) | 215,108 |
| | 202,042 |
|
| Lease financing obligations | 2,938 |
| | 1,193 |
|
| Deferred income—sale-leaseback of real estate (Note 7) | 12,271 |
| | 12,589 |
|
| Accrued postretirement benefits (Note 17) | 4,566 |
| | 3,060 |
|
| Unfavorable leases, net (Note 4) | 11,686 |
| | 12,004 |
|
| Other liabilities (Note 6) | 20,030 |
| | 17,115 |
|
| Total liabilities | 335,499 |
| | 319,257 |
|
| Commitments and contingencies (Note 14) |
| |
|
| Stockholders’ equity (Note 12): | | | |
| 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—35,835,800 and 35,508,660 shares, respectively, and outstanding—35,258,579 and 35,039,890 shares, respectively | 353 |
| | 350 |
|
| Additional paid-in capital | 141,133 |
| | 139,083 |
|
| Retained earnings (accumulated deficit) | 14,514 |
| | (30,958 | ) |
| Accumulated other comprehensive loss (Note 17) | (1,203 | ) | | (335 | ) |
| Treasury stock, at cost | (141 | ) | | (141 | ) |
| Total stockholders’ equity | 154,656 |
| | 107,999 |
|
| Total liabilities and stockholders’ equity | $ | 490,155 |
| | $ | 427,256 |
|
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars, except share and per share amounts)
|
| | | | | | | | | | | |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Restaurant sales | $ | 943,583 |
| | $ | 859,004 |
| | $ | 692,755 |
|
| Costs and expenses: | | | | | |
| Cost of sales | 250,112 |
| | 240,322 |
| | 209,664 |
|
| Restaurant wages and related expenses | 297,766 |
| | 267,950 |
| | 219,718 |
|
| Restaurant rent expense (Note 7) | 64,814 |
| | 58,096 |
| | 48,865 |
|
| Other restaurant operating expenses | 148,946 |
| | 135,874 |
| | 113,586 |
|
| Advertising expense | 41,299 |
| | 32,242 |
| | 27,961 |
|
| General and administrative (including stock-based compensation expense of $2,053, $1,438, and $1,180, respectively) | 54,956 |
| | 50,515 |
| | 40,001 |
|
| Depreciation and amortization | 47,295 |
| | 39,845 |
| | 36,923 |
|
| Impairment and other lease charges (Note 5) | 2,355 |
| | 3,078 |
| | 3,541 |
|
| Other expense (income) (Notes 9 and 14) | 338 |
| | (126 | ) | | 47 |
|
| Total operating expenses | 907,881 |
| | 827,796 |
| | 700,306 |
|
| Income (loss) from operations | 35,702 |
| | 31,208 |
| | (7,551 | ) |
| Interest expense | 18,315 |
| | 18,569 |
| | 18,801 |
|
| Loss on extinguishment of debt (Note 8) | — |
| | 12,635 |
| | — |
|
| Income (loss) before income taxes | 17,387 |
| | 4 |
| | (26,352 | ) |
| Provision (benefit) for income taxes (Note 10) | (28,085 | ) | | — |
| | 11,765 |
|
| Net income (loss) | $ | 45,472 |
| | $ | 4 |
| | $ | (38,117 | ) |
| Basic and diluted net income (loss) per share (Note 13): | $ | 1.01 |
| | $ | 0.00 |
| | $ | (1.23 | ) |
| Shares used in computing net income (loss) per share: | | | | | |
| Basic weighted average common shares outstanding | 35,178,329 |
| | 34,958,847 |
| | 30,885,275 |
|
| Diluted weighted average common shares outstanding | 44,851,345 |
| | 44,623,251 |
| | 30,885,275 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Net income (loss) | $ | 45,472 |
| | $ | 4 |
| | $ | (38,117 | ) |
| Change in postretirement benefit obligations, net of tax (Note 17) | (868 | ) | | 22 |
| | (1,059 | ) |
| Comprehensive income (loss) | $ | 44,604 |
| | $ | 26 |
| | $ | (39,176 | ) |
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(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 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 12) | 11,500,000 |
| | 115 |
| | — |
| | 67,212 |
| | — |
| | — |
| | — |
| | 67,327 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (38,117 | ) | | — |
| | — |
| | (38,117 | ) |
| Change in postretirement benefit obligations (Note 17) | — |
| | — |
| | — |
| | — |
| | — |
| | (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 17) | — |
| | — |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | 22 |
|
| Balance at January 3, 2016 | 35,039,890 |
| | 350 |
| | — |
| | 139,083 |
| | (30,958 | ) | | (335 | ) | | (141 | ) | | 107,999 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | 2,053 |
| | — |
| | — |
| | — |
| | 2,053 |
|
| Vesting of non-vested shares and excess tax benefits | 218,689 |
| | 3 |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 45,472 |
| | — |
| | — |
| | 45,472 |
|
| Change in postretirement benefit obligations, net of tax benefit of $541 (Note 17) | — |
| | — |
| | — |
| | — |
| | — |
| | (868 | ) | | — |
| | (868 | ) |
| Balance at January 1, 2017 | 35,258,579 |
| | $ | 353 |
| | $ | — |
| | $ | 141,133 |
| | $ | 14,514 |
| | $ | (1,203 | ) | | $ | (141 | ) | | $ | 154,656 |
|
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars)
|
| | | | | | | | | | | |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Cash flows provided from operating activities: | | | | | |
| Net income (loss) | $ | 45,472 |
| | $ | 4 |
| | $ | (38,117 | ) |
| Adjustments to reconcile net income (loss) to net cash provided from operating activities: | | | | | |
| Loss (gain) on disposals of property and equipment | (549 | ) | | 364 |
| | 537 |
|
| Stock-based compensation | 2,053 |
| | 1,438 |
| | 1,180 |
|
| Impairment and other lease charges | 2,355 |
| | 3,078 |
| | 3,541 |
|
| Depreciation and amortization | 47,295 |
| | 39,845 |
| | 36,923 |
|
| Amortization of deferred financing costs | 791 |
| | 874 |
| | 1,007 |
|
| Amortization of deferred gains from sale-leaseback transactions | (1,788 | ) | | (2,535 | ) | | (1,793 | ) |
| Deferred income taxes | (28,085 | ) | | — |
| | 11,548 |
|
| Loss on extinguishment of debt | — |
| | 12,635 |
| | — |
|
| Changes in other operating assets and liabilities: | | | | | |
| Refundable income taxes | (153 | ) | | 2,416 |
| | 177 |
|
| Trade and other receivables | (1,462 | ) | | (2,127 | ) | | (1,094 | ) |
| Accounts payable | 1,686 |
| | 2,054 |
| | 2,194 |
|
| Accrued interest | 4 |
| | 502 |
| | 30 |
|
| Accrued payroll, related taxes and benefits | (1,553 | ) | | 10,261 |
| | (700 | ) |
| Other | (3,778 | ) | | 1,893 |
| | (726 | ) |
| Net cash provided from operating activities | 62,288 |
| | 70,702 |
| | 14,707 |
|
| Cash flows used for investing activities: | | | | | |
| Capital expenditures: | | | | | |
| New restaurant development | (8,228 | ) | | (574 | ) | | (1,696 | ) |
| Restaurant remodeling | (65,767 | ) | | (41,582 | ) | | (38,197 | ) |
| Other restaurant capital expenditures | (15,168 | ) | | (10,772 | ) | | (6,720 | ) |
| Corporate and restaurant information systems | (4,936 | ) | | (3,920 | ) | | (5,397 | ) |
| Total capital expenditures | (94,099 | ) | | (56,848 | ) | | (52,010 | ) |
| Acquisition of restaurants, net of cash acquired (Note 2) | (48,088 | ) | | (52,750 | ) | | (52,200 | ) |
| Proceeds from insurance recoveries | 1,413 |
| | — |
| | — |
|
| Proceeds from sales of other assets | — |
| | 534 |
| | 54 |
|
| Decrease in restricted cash balance (Note 8) | — |
| | — |
| | 20,000 |
|
| Properties purchased for sale-leaseback | (9,046 | ) | | (3,513 | ) | | (3,412 | ) |
| Proceeds from sale-leaseback transactions | 53,599 |
| | 9,148 |
| | 19,565 |
|
| Net cash used for investing activities | (96,221 | ) | | (103,429 | ) | | (68,003 | ) |
| Cash flows provided from 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 | ) | | — |
|
| Borrowings under senior credit facility | 129,000 |
| | — |
| | 59,000 |
|
| Repayments under senior credit facility | (115,500 | ) | | — |
| | (59,000 | ) |
| Principal payments on capital leases | (1,480 | ) | | (1,280 | ) | | (1,050 | ) |
| Proceeds from lease financing obligations | 1,816 |
| | — |
| | — |
|
| Financing costs associated with issuance of debt and lease financing obligations | (175 | ) | | (5,169 | ) | | (62 | ) |
| Proceeds from public stock offering, net of expenses | — |
| | — |
| | 67,327 |
|
| Net cash provided from financing activities | 13,661 |
| | 33,780 |
| | 66,215 |
|
| Net increase (decrease) in cash | (20,272 | ) | | 1,053 |
| | 12,919 |
|
| Cash, beginning of period | 22,274 |
| | 21,221 |
| | 8,302 |
|
| Cash, end of period | $ | 2,002 |
| | $ | 22,274 |
| | $ | 21,221 |
|
|
| | | | | | | | | | | |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Supplemental disclosures: | | | | | |
| Interest paid on long-term debt | $ | 17,415 |
| | $ | 17,088 |
| | $ | 17,659 |
|
| Interest paid on lease financing obligations | $ | 105 |
| | $ | 104 |
| | $ | 103 |
|
| Accruals for capital expenditures | $ | 4,032 |
| | $ | 3,779 |
| | $ | 4,683 |
|
| Income taxes paid (refunded), net | $ | 153 |
| | $ | (2,416 | ) | | $ | (41 | ) |
| Capital lease obligations acquired or incurred | $ | 583 |
| | $ | 615 |
| | $ | 1,459 |
|
| Non-cash reduction of capital lease assets and obligation | $ | — |
| | $ | — |
| | $ | 1,055 |
|
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
1. Basis of Presentation
Business Description. At January 1, 2017 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated, as franchisee, 753 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 years ended January 1, 2017 and December 28, 2014 each contained 52 weeks and the fiscal year ended January 3, 2016 contained 53 weeks.
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.
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.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Business Combinations. In accordance with ASC 805, 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.
The Company estimates that the seller's carrying value of acquired restaurant equipment, subject to certain adjustments, and restaurant equipment subject to capital leases is equivalent to fair value of this equipment at the date of the acquisitions. The fair values of assumed franchise agreements are valued as if the remaining term of the agreement is at the market rate. The fair values of acquired land, buildings and certain leasehold improvements are 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, is measured using significant inputs observable in the open market. The Company categorizes all such inputs as Level 2 inputs under ASC 820. The fair value of acquired franchise rights is determined using the income approach.
On May 30, 2012, the Company acquired 278 Burger King restaurants from Burger King Corporation ("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 unfavorableleases 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.
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 useful 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
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
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 self-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.
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, trade and other receivables, accounts payable and long-term debt. The carrying amounts of cash, trade and other receivables and
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
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 1, 2017 and January 3, 2016 was approximately $216.5 million and $212.0 million, respectively.
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 $1.0 million, $1.5 million and $2.6 million during the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
Stock-Based Compensation. The Company has 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 non-vested shares under this plan. Non-vested shares granted to corporate employees generally vest on a straight-line basis over three or four years and non-vested shares granted to non-employee directors generally vest on a straight-line basis over three to five years.
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. See Note 11 to the consolidated financial statements.
Gift cards. The Company sells gift cards in its restaurants that are issued under BKC's 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 Not Yet Adopted. In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. This ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, using a modified retrospective approach. Early adoption is permitted. The Company is evaluating the potential impact that adoption will have on its consolidated financial statements, but expects it will have a material impact on its consolidated balance sheet as it will record assets and obligations for current operating leases.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). The pronouncement was issued to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. The guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
provision for income taxes in the consolidated statement of income, instead of additional paid-in capital in the consolidated balance sheet. Additionally, excess tax benefits will be classified as operating activities in the consolidated statement of cash flow instead of in financing activities as required under the current guidance. The Company has not selected a transition method but does not expect the provisions of ASU 2016-09 to have a material impact on the Company’s consolidated financial statements.
Subsequent Events. The Company reviewed and evaluated subsequent events through the issuance date of the Company’s consolidated financial statements. On February 28, 2017, the Company acquired 43 Burger King restaurants located in and around the Cincinnati, Ohio market for a cash purchase price of $20.4 million, which included inventory, restaurant equipment and intangible assets.
2. Acquisitions
2016 Acquisitions
During the year ended January 1, 2017, the Company acquired a total of 56 restaurants from other franchisees, which are referred to as the "2016 acquired restaurants", in the following transactions:
|
| | | | | | | | | | | |
| Closing Date | | Number of Restaurants | | Purchase Price | | Number of Fee-Owned Restaurants (1) | Market Location |
| February 23, 2016 | (2) | 12 |
| | $ | 7,127 |
| | | Scranton/Wilkes-Barre, Pennsylvania |
| May 25, 2016 | | 6 |
| | 12,080 |
| | 5 | Detroit, Michigan |
| July 14, 2016 | (2) | 4 |
| | 5,445 |
| | 3 | Detroit, Michigan |
| August 23, 2016 | | 7 |
| | 8,755 |
| | 6 | Portland, Maine |
| October 4, 2016 | | 3 |
| | 1,623 |
| | | Raleigh, North Carolina |
| November 15, 2016 | | 17 |
| | 7,251 |
| | | Pittsburgh and Johnstown, Pennsylvania |
| December 1, 2016 | | 7 |
| | 5,807 |
| | 1 | Columbus, Ohio |
| | | 56 |
| | $ | 48,088 |
| | 15 |
| |
| |
*(1) | As providedThe 2016 acquisitions included the purchase of 15 fee-owned properties. Fourteen of these fee-owned properties were sold in Rule 406Tsale-leaseback transactions during 2016 for net proceeds of Regulation S-T, this information is deemed furnished and not filed$19.1 million. |
| |
| (2) | Acquisitions resulting from the exercise of the ROFR. |
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(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 seven 2016 acquisitions:
|
| | | |
| Inventory | $ | 558 |
|
| Land and buildings | 19,387 |
|
| Restaurant equipment | 1,599 |
|
| Restaurant equipment - subject to capital lease | 435 |
|
| Leasehold improvements | 2,464 |
|
| Franchise fees | 1,121 |
|
| Franchise rights | 21,202 |
|
| Favorable leases | 390 |
|
| Deferred taxes | 216 |
|
| Goodwill | 2,431 |
|
| Capital lease obligations for restaurant equipment | (492 | ) |
| Unfavorable leases | (1,152 | ) |
| Other liabilities | (71 | ) |
| Net assets acquired | $ | 48,088 |
|
The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2016 acquired restaurants contributed restaurant sales of $28.6 million during the year ended January 1, 2017. 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 1, 2017, acquisition costs of approximately $1.6 million related to the 2016 acquisitions were recorded in general and administrative expense.
The pro forma impact on the results of operations for restaurants acquired in 2016 and 2015 is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the restaurants acquired in 2016 and 2015 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 |
| | (52 weeks) | | (53 weeks) |
| | January 1, 2017 | | January 3, 2016 |
| Restaurant sales | $ | 984,164 |
| | $ | 986,935 |
|
| Net income | $ | 48,264 |
| (1) | $ | 12,078 |
|
| Basic and diluted net income per share | $ | 1.07 |
| | $ | 0.27 |
|
(1) Includes a tax benefit of $30.4 million for the reversal of the Company's valuation allowance on its net deferred income tax assets (see Note 10).
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 2016 acquired restaurants.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
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 purposesnet proceeds of Sections 11$4.3 million and 12 fee-owned properties were sold in sale-leaseback transactions during 2016 for net proceeds of $17.7 million. |
| |
| (2) | Acquisitions resulting from the exercise of the Securities ActROFR. |
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 $70.4 million and $12.9 million during the years ended January 1, 2017 and January 3, 2016, 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 1, 2017 and January 3, 2016, acquisition costs of approximately $0.2 million and $1.0 million, respectively, related to the 2015 acquisitions were recorded in general and administrative expense.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The pro forma impact on the results of operations for restaurants acquired in 2015 and 2014 is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions in 2015 and 2014 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 |
| | (53 weeks) | | (52 weeks) |
| | January 3, 2016 | | December 28, 2014 |
| 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 | ) |
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.
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 | (2) | 4 |
| | $ | 681 |
| | | Fort Wayne, Indiana |
| June 30, 2014 | (2) | 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 | (2) | 30 |
| | 20,330 |
| | 12 | Wilmington and Greenville, North Carolina |
| November 4, 2014 | (3) | 64 |
| | 18,761 |
| | | Nashville, Tennessee; Indiana and Illinois |
| | | 123 |
| | $ | 52,200 |
| | 13 |
| |
| |
| (1) | The 2014 acquisitions included the purchase of 1933, as amended,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 $13.0 million and Section 18one property was sold in a sale-leaseback transaction in 2015 for net proceeds of $1.1 million. |
| |
| (2) | Acquisitions resulting from the exercise of the Securities Exchange ActROFR. |
| |
| (3) | In connection with the acquisition on November 4, 2014, the Company entered into an agreement with BKC to remodel 46 of 1934, as amended.the restaurants acquired over a five-year period beginning in 2014. |
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(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 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 millionand$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, 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 |
|
| Restaurant sales | $ | 793,521 |
|
| Net loss | $ | (31,364 | ) |
| Basic and diluted net loss per share | $ | (1.02 | ) |
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.
Acquired Intangible Assets
Goodwill recorded in connection with these acquisitions represents costs in excess of fair values assigned to the underlying net assets of acquired restaurants. Acquired goodwill that is expected to be deductible for income tax purposes was $1,803 in 2016, $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.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The weighted average amortization period of the intangible assets acquired is as follows:
|
| | | | | |
| | 2016 Acquisitions | | 2015 Acquisitions | | 2014 Acquisitions |
| Favorable leases | 15.4 | | 15.5 | | 13.4 |
| Unfavorable leases | 12.0 | | 6.5 | | 15.0 |
| Franchise rights | 28.0 | | 26.6 | | 30.4 |
3. Property and Equipment
Property and equipment at January 1, 2017 and January 3, 2016 consisted of the following:
|
| | | | | | | | |
| | | January 1, 2017 | | January 3, 2016 |
| Land | | $ | 8,112 |
| | $ | 19,126 |
|
| Owned buildings | | 9,174 |
| | 13,625 |
|
| Leasehold improvements | | 265,008 |
| | 215,673 |
|
| Equipment | | 203,412 |
| | 181,283 |
|
| Assets subject to capital leases | | 16,948 |
| | 16,547 |
|
| | | 502,654 |
| | 446,254 |
|
| Less accumulated depreciation and amortization | | (254,807 | ) | | (226,140 | ) |
| | | $ | 247,847 |
| | $ | 220,114 |
|
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 1, 2017 and January 3, 2016 of $11,008 and $9,553, respectively. Depreciation expense for all property and equipment for the years ended January 1, 2017, January 3, 2016 and December 28, 2014 was $39,918, $33,878 and $31,372, 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 1, 2017, January 3, 2016 and December 28, 2014.
|
| | | |
| Goodwill at December 28, 2014 | $ | 17,793 |
|
| Acquisitions of restaurants (Note 2) | 2,645 |
|
| Goodwill at January 3, 2016 | 20,438 |
|
| Acquisitions of restaurants (Note 2) | 2,431 |
|
| Goodwill at January 1, 2017 | $ | 22,869 |
|
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:
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
|
| | | | | | | | | | | | | | | | |
| | | January 1, 2017 | | January 3, 2016 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Franchise rights | | $ | 227,952 |
| | $ | 93,799 |
| | $ | 206,750 |
| | $ | 87,869 |
|
Amortization expense related to franchise rights for the years ended January 1, 2017, January 3, 2016 and December 28, 2014 was $5,930, $4,685 and $4,366, respectively, and the Company expects annual amortization to be $6,241 in each of the next five fiscal years. No impairment charges were recorded related to the Company’s franchise rights during the years ended January 1, 2017, January 3, 2016 and December 28, 2014.
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 1, 2017 | | January 3, 2016 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated
Amortization |
| Favorable leases | | $ | 7,201 |
| | $ | 1,760 |
| | $ | 6,991 |
| | $ | 1,339 |
|
| Unfavorable leases | | $ | 16,329 |
| | $ | 4,643 |
| | $ | 15,448 |
| | $ | 3,444 |
|
The net reduction of rent expense related to the amortization of favorable and unfavorable leases for the years ended January 1, 2017, January 3, 2016 and December 28, 2014 was $869, $799 and $715, respectively, and the Company expects the net reduction of rent expense to be $702 in 2017, $701 in 2018, $628 in 2019, $550 in 2020 and $481 in 2021.
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 1, 2017 the Company recorded impairment and other lease charges of $2.4 million including $0.9 million of capital expenditures at previously impaired restaurants, $0.2 million related to initial impairment charges for four underperforming restaurants and non-cash losses of $1.2 million associated with the sale-leaseback of seven restaurant properties.
During the year ended January 3, 2016, the Company recorded impairment and other lease charges of $3.1 million including other lease charges of $1.6 millionassociated with the closure of ten of the Company's restaurants, asset impairment charges of $1.3 million for capital expenditures at previously impaired restaurants and $0.2 million related to initial impairment charges for two underperforming restaurants.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
During the year ended December 28, 2014, the Company recorded impairment and other lease charges of $3.5 million including other lease charges of $1.0 million associated with the closure of three of the Company's restaurants, impairment charges of $1.1 million for capital expenditures at previously impaired restaurants and $1.4 million related to initial impairment charges for nine underperforming restaurants.
The following table presents the activity in the accrual for closed restaurant locations:
|
| | | | | | | |
| | January 1, 2017 | | January 3, 2016 |
| Balance, beginning of year | $ | 2,088 |
| | $ | 1,721 |
|
| Provisions for restaurant closures | 59 |
| | 1,472 |
|
| Changes in estimates of accrued costs | (89 | ) | | (95 | ) |
| Payments, net | (691 | ) | | (1,228 | ) |
| Other adjustments, including the effect of discounting future obligations | 146 |
| | 218 |
|
| Balance, end of year | $ | 1,513 |
| | $ | 2,088 |
|
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 1, 2017 and January 3, 2016 consisted of the following:
|
| | | | | | | |
| | January 1, 2017 | | January 3, 2016 |
| Deferred rent | $ | 11,498 |
| | $ | 9,620 |
|
| Other accrued occupancy costs | 3,254 |
| | 2,581 |
|
| Accrued workers’ compensation and general liability claims | 3,364 |
| | 3,606 |
|
| Deferred compensation | 1,756 |
| | 997 |
|
| Other | 158 |
| | 311 |
|
| | $ | 20,030 |
| | $ | 17,115 |
|
Other accrued occupancy costs above include long-term obligations pertaining to closed restaurant locations, contingent rent and unamortized lease incentives.
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.
During the years ended January 1, 2017, January 3, 2016 and December 28, 2014, the Company sold 38, 7 and 15 restaurant properties, respectively, in sale-leaseback transactions for net proceeds of $53,599, $9,148 and $19,565, respectively. These leases have been classified as operating leases and generally contain a twenty-year initial term plus renewal options.
Deferred gains from sale-leaseback transactions of restaurant properties of $1,480, $16 and $373 were recognized during the years ended January 1, 2017, January 3, 2016, and December 28, 2014, respectively, and are being amortized over the term of the related leases. The amortization of deferred gains from sale-leaseback transactions was $1,788, $2,535 and $1,793 for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Minimum rent commitments under capital and non-cancelable operating leases at January 1, 2017 were as follows :
|
| | | | | | | |
| Fiscal year ending: | Capital | | Operating |
| December 31, 2017 | $ | 2,067 |
| | $ | 62,739 |
|
| December 30, 2018 | 2,073 |
| | 61,595 |
|
| December 29, 2019 | 2,068 |
| | 60,546 |
|
| January 3, 2021 | 1,367 |
| | 59,207 |
|
| January 2, 2022 | 292 |
| | 58,067 |
|
| Thereafter | 338 |
| | 615,545 |
|
| Total minimum lease payments | 8,205 |
| | $ | 917,699 |
|
| Less amount representing interest | (1,166 | ) | | |
| Total obligations under capital leases | 7,039 |
| | |
| Less current portion | (1,616 | ) | | |
| Long-term obligations under capital leases | $ | 5,423 |
| | |
Total rent expense on operating leases, including contingent rent on both operating and capital leases, was as follows:
|
| | | | | | | | | | | |
| | Year ended |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Minimum rent on real property | $ | 59,076 |
| | $ | 53,085 |
| | $ | 45,371 |
|
| Contingent rent on real property | 5,738 |
| | 5,011 |
| | 3,494 |
|
| Restaurant rent expense | 64,814 |
| | 58,096 |
| | 48,865 |
|
| Administrative and equipment rent | 267 |
| | 276 |
| | 264 |
|
| | $ | 65,081 |
| | $ | 58,372 |
| | $ | 49,129 |
|
8. Long-term Debt
Long-term debt at January 1, 2017 and January 3, 2016 consisted of the following:
|
| | | | | | | |
| | January 1, 2017 | | January 3, 2016 |
| Collateralized: | | | |
| Carrols Restaurant Group 8% Senior Secured Second Lien Notes | $ | 200,000 |
| | $ | 200,000 |
|
| Senior Credit Facility - Revolving credit borrowings | 13,500 |
| | — |
|
| Capital leases | 7,039 |
| | 8,006 |
|
| | 220,539 |
| | 208,006 |
|
| Less: current portion | (1,616 | ) | | (1,435 | ) |
| Less: deferred financing costs | (3,815 | ) | | (4,529 | ) |
| | $ | 215,108 |
| | $ | 202,042 |
|
8% Notes. On April 29, 2015, the Company issued 200,000 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. 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 Company recorded a loss on debt extinguishment of $12.6 million in the year ended January 3, 2016 due to the repurchase and redemption of its prior 11.25% Senior Secured Second Lien Notes.
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,
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
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 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 most recently amended onJanuary 13, 2017 to provide for aggregate revolving credit borrowings of up to $73.0 million (including $20.0 million available for letters of credit). As amended, the senior credit facility will mature on February 12, 2021. The amended senior credit facility also provides for potential incremental borrowing increases of up to $25.0 million, in the aggregate. At January 1, 2017, there was $13.5 million of revolving credit borrowings outstanding and $12.8 million of letters of credit issued under the amended senior credit facility. After reserving for issued letters of credit and outstanding revolving credit borrowings at January 13, 2017, $42.4 million was available for revolving credit borrowings under the amended senior credit facility.
Borrowings under the amended senior credit facility bear interest at a rate per annum, at the Company’s option, based on (all terms as defined in the Company's amended senior credit facility):
(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 January 1, 2017, the Company's Alternate Base Rate margin was 1.75% and the LIBOR Rate margin was 2.75% based on the Company's Adjusted Leverage Ratio at the end of the third quarter of 2016. The interest rate in effect for outstanding borrowings at January 1, 2017 under the Alternate Base Rate option was 5.50%.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
On February 12, 2016, the Company entered into the third amendment to the senior credit facility which increased aggregate revolving credit borrowings to $55.0 million, extended the maturity date to February 12, 2021 and amended the definition of applicable margins.
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 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 1, 2017.
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 1, 2017, principal payments required on long-term debt, including capital leases, were as follows:
|
| | | |
| 2017 | $ | 1,616 |
|
| 2018 | 1,738 |
|
| 2019 | 1,859 |
|
| 2020 | 1,283 |
|
| 2021 | 13,754 |
|
| Thereafter | 200,289 |
|
| | $ | 220,539 |
|
The weighted average interest rate on all debt, excluding lease financing obligations, for the years ended January 1, 2017, January 3, 2016 and December 28, 2014 was 7.9%, 8.9% and 11.2%, respectively. Interest expense on the Company’s long-term debt, excluding lease financing obligations, was $18,208, $18,462 and $18,694 for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
9. Other Expense (Income)
In 2016, the Company recorded net gains of $1.2 million related to related to property insurance recoveries from fires at two restaurants, a gain of $0.5 million related to a settlement for a partial condemnation on one of its operating restaurant properties and expense of $1.85 million related to a settlement of litigation as discussed in Note 14.
10. Income Taxes
The provision (benefit) for income taxes was comprised of the following:
|
| | | | | | | | | | | |
| | Year ended |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Current: | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | — |
|
| State | — |
| | — |
| | 217 |
|
| | — |
| | — |
| | 217 |
|
| | | | | | |
| Deferred: | | | | | |
| Federal | 1,297 |
| | (2,901 | ) | | (11,330 | ) |
| State | 992 |
| | (58 | ) | | (1,448 | ) |
| | 2,289 |
| | (2,959 | ) | | (12,778 | ) |
| Change in valuation allowance | (30,374 | ) | | 2,959 |
| | 24,326 |
|
| Provision (benefit) for income taxes | $ | (28,085 | ) | | $ | — |
| | $ | 11,765 |
|
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.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The components of deferred income tax assets and liabilities at January 1, 2017 and January 3, 2016 were as follows:
|
| | | | | | | |
| | January 1, 2017 | | January 3, 2016 |
| Deferred income tax assets: | | | |
| Deferred income on sale-leaseback of certain real estate | $ | 4,714 |
| | $ | 4,881 |
|
| Lease financing obligations | 254 |
| | 242 |
|
| Postretirement benefit obligations | 1,255 |
| | 1,229 |
|
| Stock-based compensation expense | 599 |
| | 378 |
|
| Federal net operating loss carryforwards | 21,351 |
| | 17,696 |
|
| State net operating loss carryforwards | 3,845 |
| | 3,795 |
|
| Goodwill and other intangibles, net | 2,814 |
| | 2,639 |
|
| Occupancy costs | 7,460 |
| | 7,120 |
|
| Tax credit carryforwards | 21,987 |
| | 13,667 |
|
| Accrued vacation benefits | 2,560 |
| | 2,314 |
|
| Accrued workers compensation | 1,490 |
| | 2,087 |
|
| Accumulated other comprehensive income-postretirement benefits | 499 |
| | — |
|
| Other | 2,131 |
| | 1,869 |
|
| Gross deferred income tax assets | 70,959 |
| | 57,917 |
|
| Less: Valuation allowance | — |
| | (30,374 | ) |
| Net deferred income tax assets | $ | 70,959 |
| | $ | 27,543 |
|
| | | | |
| Deferred income tax liabilities: | | | |
|
| Accumulated other comprehensive income-postretirement benefits | $ | — |
| | $ | (42 | ) |
| Inventory and other reserves | (97 | ) | | (103 | ) |
| Property and equipment depreciation | (17,599 | ) | | (3,803 | ) |
| Franchise rights | (24,422 | ) | | (23,595 | ) |
| Total deferred income tax liabilities | $ | (42,118 | ) | | $ | (27,543 | ) |
| | | | |
| Carrying value of net deferred income tax assets | $ | 28,841 |
| | $ | — |
|
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. For the years ended January 3, 2016 and December 28, 2014, the Company determined that a valuation allowance was needed for all of its net deferred income tax assets, based on the required weight of positive and negative evidence under ASC 740, including consideration of the Company’s three-year cumulative losses. During the year ended December 28, 2014, the Company recorded income tax expense of $24.3 million due to the establishment of a valuation allowance on its net deferred tax assets and during the year ended January 3, 2016, the Company established an additional valuation allowance of $3.0 million as a result of changes in its net deferred income tax assets.
During the year ended January 1, 2017, the Company evaluated evidence to consider the reversal of the valuation allowance on its net deferred income tax assets and determined in the fourth quarter of fiscal 2016 that there was sufficient positive evidence to conclude that it is more likely than not its deferred income tax assets are realizable. In determining the likelihood of future realization of the deferred income tax assets as of January 1, 2017, the Company considered both positive and negative evidence and weighted the effect of such evidence based upon its objectivity. As a result, the Company believes that the weight of the positive evidence, including the cumulative income position in the three most recent years (as adjusted for non-recurring items and permanent differences between book and tax) and forecasts for a sustained level of future taxable income, is sufficient to overcome the weight of the negative evidence,
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
and recorded a $30.4 million tax benefit to release the full valuation allowance against the Company's deferred income tax assets in the fourth quarter of 2016.
The Company's federal net operating loss carryforwards expire beginning in 2033. As of January 1, 2017, the Company had federal net operating loss carryforwards of approximately $61.0 million. The Company’s state net operating loss carryforwards expire beginning in 2017 through 2036.
A reconciliation of the statutory federal income tax benefit to the income tax provision (benefit) for the years ended January 1, 2017, January 3, 2016, and December 28, 2014 was as follows:
|
| | | | | | | | | | | |
| | Year ended |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Statutory federal income tax provision (benefit) | $ | 6,085 |
| | $ | 1 |
| | $ | (9,223 | ) |
| State income taxes, net of federal benefit | 403 |
| | 6 |
| | (749 | ) |
| Change in valuation allowance | (30,374 | ) | | 2,959 |
| | 24,326 |
|
| Employment tax credits | (5,408 | ) | | (2,710 | ) | | (2,291 | ) |
| Non-deductible expenses | 965 |
| | — |
| | 25 |
|
| Miscellaneous | 244 |
| | (256 | ) | | (323 | ) |
| Provision (benefit) for income taxes | $ | (28,085 | ) | | $ | — |
| | $ | 11,765 |
|
The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At January 1, 2017 and January 3, 2016, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2013 - 2016 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.
11. Stock-Based Compensation
2016 Stock Incentive Plan. In 2016, the Company adopted a stock plan entitled the 2016 Stock Incentive Plan (the “2016 Plan”) and reserved and authorized a total of 4,000,000 shares of common stock for grant thereunder. As of January 1, 2017, 4,000,000 shares were available for future grant or issuance.
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. The 2006 Plan expired in 2016 and as of January 1, 2017, no shares were available for future grant or issuance under this plan.
On January 15, 2016, the Company granted 319,000 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 2016 the Company issued an aggregate of 8,140 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 1, 2017, January 3, 2016, and December 28, 2014 was $2.1 million, $1.4 million and $1.2 million, respectively.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
A summary of all non-vested share activity for the year ended January 1, 2017 was as follows:
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Price |
| Nonvested at January 3, 2016 | 468,770 |
| | $ | 7.40 |
|
| Granted | 327,140 |
| | 12.28 |
|
| Vested | $ | (218,689 | ) | | 6.71 |
|
| Nonvested at January 1, 2017 | $ | 577,221 |
| | 10.42 |
|
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 1, 2017, total non-vested stock-based compensation expense was approximately $4.5 million and the remaining weighted average vesting period for non-vested shares was 2.6 years.
12. Stockholder's Equity
Preferred Stock. In 2012, Carrols Restaurant Group issued to 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 ranks 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.
13. 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 securities, based on their respective rights to receive dividends. As the Company incurred a net loss for the year ended December 28, 2014 and losses are not allocated to the participating securities under the two-class method, such method is not applicable for the aforementioned reporting period.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
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 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Basic net income (loss) per share: | | | | | |
| Net income (loss) | $ | 45,472 |
| | $ | 4 |
| | $ | (38,117 | ) |
| Less: Income attributable to non-vested shares | (616 | ) | | — |
| | — |
|
| Less: Income attributable to preferred stock | (9,461 | ) | | (1 | ) | | — |
|
| Net income available to common stockholders | $ | 35,395 |
| | $ | 3 |
| | $ | (38,117 | ) |
| Weighted average common shares outstanding | 35,178,329 |
| | 34,958,847 |
| | 30,885,275 |
|
| Basic net income (loss) per share | $ | 1.01 |
| | $ | 0.00 |
| | $ | (1.23 | ) |
| Diluted net income (loss) per share: | | | | | |
| Net income (loss) | $ | 45,472 |
| | $ | 4 |
| | $ | (38,117 | ) |
| Shares used in computed basic net income (loss) per share | 35,178,329 |
| | 34,958,847 |
| | 30,885,275 |
|
| Dilutive effect of preferred stock and non-vested shares | 9,673,016 |
| | 9,664,404 |
| | — |
|
| Shares used in computed diluted net income (loss) per share | 44,851,345 |
| | 44,623,251 |
| | 30,885,275 |
|
| Diluted net income (loss) per share (1) | $ | 1.01 |
| | $ | 0.00 |
| | $ | (1.23 | ) |
| Shares excluded from diluted net income (loss) per share computation (2) | — |
| | — |
| | 9,810,007 |
|
| |
| (1) | Diluted net income (loss) per share is equal to basic net income (loss) per share for the periods presented due to the allocation of earnings to participating securities under the two-class method of calculating basic net income (loss) per share causing basic net income (loss) per share to be lower than diluted net income (loss) per share calculated under the treasury-stock method. |
| |
| (2) | 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. |
14. Commitments and Contingencies
Lease Guarantees. Fiesta Restaurant Group, Inc ("Fiesta"), a former wholly-owned subsidiary of the Company, was spun-off in 2012 to the Company's stockholders. As of January 1, 2017, the Company is a guarantor under 27 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 of Fiesta.
The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at January 1, 2017 was $25.2 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.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Litigation. On August 21, 2012 Alan Vituli, the Company's former chairman and chief executive officer, filed an action in the Superior Court of the State of Delaware ( the “Court”) against the Company and Carrols. On July 29, 2016 the Company, Carrols, and Mr. Vituli agreed to fully resolve all of Mr. Vituli’s claims in the lawsuit for a total payment by the Company of $2.0 million. Upon the execution of releases and payment of the settlement amount, the litigation was dismissed. Net of a contribution from the Company's insurance carrier, $1.85 million is included in other income (expense) in the accompanying consolidated statements of comprehensive income (loss) for the year ended January 1, 2017.
The Company is a party to various other 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.
15. Transactions with Related Parties
In connection with an acquisition of restaurants from BKC in 2012, the Company issued to BKC 100 shares of Series A Convertible Preferred Stock, which as of January 1, 2017 constitutes approximately 20.8% of the outstanding shares of the Company's common stock on a fully diluted basis. See Note 12—Stockholder's Equity for further information. Pursuant to the terms of the Series A Convertible Preferred Stock, BKC also 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 $40.0 million, $36.2 million, and $29.1 million for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, 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 $40.2 million, $32.0 million and $27.5 million for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
As of January 1, 2017, January 3, 2016, and December 28, 2014, the Company leased 275, 293 and 311 of its restaurant locations from BKC, respectively. As of January 1, 2017, for 145 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 1, 2017, January 3, 2016 and December 28, 2014 was $27.8 million, $28.4 million, and $26.6 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 1, 2017, the Company owed BKC $0.2 million associated with its purchase of the right of first refusal related to the 2012 acquisition and $6.3 million related to the payment of advertising, royalties and rent, which is remitted on a monthly basis.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
16. 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 $496, $463 and $370 for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, 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 1, 2017 and January 3, 2016, a total of $1,756 and $997, respectively, was deferred under this plan, including accrued interest.
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
17. Postretirement Benefits
The Company sponsors a postretirement medical and life insurance plan covering substantially all 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 1, 2017 and January 3, 2016:
|
| | | | | | | |
| | January 1, 2017 | | January 3, 2016 |
| Change in benefit obligation: | | | |
| Benefit obligation at beginning of year | $ | 3,060 |
| | $ | 3,121 |
|
| Service cost | 150 |
| | 127 |
|
| Interest cost | 165 |
| | 114 |
|
| Plan participants' contributions | 98 |
| | 101 |
|
| Actuarial loss (gain) | 1,251 |
| | (214 | ) |
| Benefits paid | (164 | ) | | (220 | ) |
| Medicare part D prescription drug subsidy | 6 |
| | 31 |
|
| Benefit obligation at end of year | $ | 4,566 |
| | $ | 3,060 |
|
| Change in plan assets: | |
| | |
|
| Fair value of plan assets at beginning of year | $ | — |
| | $ | — |
|
| Employer contributions | 60 |
| | 88 |
|
| Plan participants' contributions | 98 |
| | 101 |
|
| Benefits paid | (164 | ) | | (220 | ) |
| Medicare part D prescription drug subsidy | 6 |
| | 31 |
|
| Fair value of plan assets at end of year | — |
| | — |
|
| Funded status | $ | (4,566 | ) | | $ | (3,060 | ) |
| Weighted average assumptions: | |
| | |
|
| Discount rate used to determine benefit obligations | 4.11 | % | | 4.25 | % |
| Discount rate used to determine net periodic benefit cost | 4.25 | % | | 3.83 | % |
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 2016 was due primarily to the Company utilizing updated actuarial data affecting the Medicare Part D prescription drug subsidy.
Components of net periodic postretirement benefit income recognized in the consolidated statements of operations were:
|
| | | | | | | | | | | |
| | Year ended |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Service cost | $ | 150 |
| | $ | 127 |
| | $ | 85 |
|
| Interest cost | 165 |
| | 114 |
| | 92 |
|
| Amortization of net gains and losses | 197 |
| | 163 |
| | 104 |
|
| Amortization of prior service credit | (355 | ) | | (355 | ) | | (355 | ) |
| Net periodic postretirement benefit expense (income) | $ | 157 |
| | $ | 49 |
| | $ | (74 | ) |
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(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 1, 2017 | | January 3, 2016 |
| Prior service credit | $ | 1,972 |
| | $ | 2,327 |
|
| Net loss | (3,272 | ) | | (2,218 | ) |
| Deferred income taxes | 97 |
| | (444 | ) |
| Accumulated other comprehensive loss | $ | (1,203 | ) | | $ | (335 | ) |
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 $211. 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 1, 2017 and January 3, 2016:
|
| | | | | | | |
| | Year ended |
| | January 1, 2017 | | January 3, 2016 |
| Net actuarial loss (gain) | $ | 1,251 |
| | $ | (214 | ) |
| Amortization of net loss | (197 | ) | | (163 | ) |
| Amortization of prior service credit | 355 |
| | 355 |
|
| Deferred income taxes | (541 | ) | | — |
|
| Total recognized in accumulated other comprehensive loss | $ | 868 |
| | $ | (22 | ) |
Assumed health care cost trend rates at year end were as follows: |
| | | | | | | | |
| | January 1, 2017 | | January 3, 2016 | | December 28, 2014 |
| Medical benefits cost trend rate assumed for the following year pre-65 | 7.50 | % | | 7.75 | % | | 8.00 | % |
| Medical benefits cost trend rate assumed for the following year post-65 | 6.50 | % | | 6.75 | % | | 7.00 | % |
| Prescription drug benefit cost trend rate assumed for the following year | 10.50 | % | | 11.00 | % | | 9.00 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 3.89 | % | | 3.89 | % | | 3.89 | % |
| Year that the rate reaches the ultimate trend rate | 2075 |
| | 2075 |
| | 2075 |
|
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 | $ | 89 |
| | $ | 64 |
|
| Effect on postretirement benefit obligation | 966 |
| | 731 |
|
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
During 2017, the Company expects to contribute approximately $145 to its postretirement benefit plan. The benefits, net of Medicare Part D subsidy receipts, expected to be paid in each year from 2017 through 2021 are $145, $165, $167, $166 and $173 respectively, and for the years 2022-2026 the aggregate amount is $1,092.
18. Selected Quarterly Financial Data (Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Year Ended January 1, 2017 | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| Restaurant sales | $ | 222,519 |
| (1) | $ | 241,368 |
| (1) | $ | 238,870 |
| (1) | $ | 240,826 |
| (1) |
| Income from operations | 6,680 |
| (1)(2) | 13,896 |
| (1)(2) | 9,049 |
| (1)(2) | 6,077 |
| (1)(2) |
| Net income | 2,145 |
| | 9,376 |
| | 4,489 |
| | 29,462 |
| (3) |
| Basic and diluted net income per share | 0.05 |
| | 0.21 |
| | 0.10 |
| | 0.65 |
| |
| Restaurants at end of period | 717 |
| | 723 |
| | 734 |
| | 753 |
| (4) |
| | | |
| | Year Ended January 3, 2016 | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter (7) | |
| Restaurant sales | $ | 193,170 |
| | $ | 219,102 |
| (5) | $ | 217,676 |
| (5) | $ | 229,056 |
| (5) |
| Income (loss) from operations | (4,462) |
| (5)(6) | 12,358 |
| (5)(6) | 11,751 |
| (5)(6) | 11,561 |
| (5)(6) |
| Net 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 |
| | 657 |
| | 660 |
| | 705 |
| |
| |
| (1) | In fiscal 2016 the Company acquired 12 restaurants in the first quarter, six restaurants in the second quarter, 11 restaurants in the third quarter and 27 restaurants in the fourth quarter (See Note 2). In fiscal 2016 the Company recorded acquisition costs related to the 2016 and 2015 acquisitions of $0.4 million in the first quarter, $0.2 million in the second quarter, $0.5 million in the third quarter and $0.8 million in the fourth quarter (See Note 2). |
| |
| (2) | In fiscal 2016 the Company recorded impairment and other lease charges of $0.2 million in the first quarter, $0.3 million in the second quarter, $0.7 million in the third quarter and $1.2 million in the fourth quarter (See Note 5). Also in fiscal 2016, the Company recorded a gain of $0.5 million related to a settlement for a partial condemnation on one of its operating restaurant properties in the first quarter, expense of $1.85 million related to the settlement of litigation with its former Chairman and CEO in the second quarter (see Note 14), a gain of $0.5 million related to property insurance recoveries from a fire at one of its restaurants in the second quarter and a gain of $0.7 million related to property insurance recoveries from a fire at one of its restaurants in the fourth quarter (see Note 9). |
| |
| (3) | In the fourth quarter of 2016, the Company recorded an income tax benefit of $30.4 million related to the reversal of the valuation allowance previously recorded on all of the Company's net deferred tax assets (See Note 10). |
| |
| (4) | The Company closed nine restaurants at the end of the fourth quarter of 2016. |
| |
| (5) | 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 2015 and 2014 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). |
| |
| (6) | 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). |
| |
| (7) | The fourth quarter of fiscal 2015 contained 14 weeks. |
25
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(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 1, 2017 | | | | | | | | | | |
| Deferred income tax valuation allowance | | $ | 30,374 |
| | $ | — |
| | $ | — |
| | $ | (30,374 | ) | | $ | — |
|
| 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 |
|
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 Amendmentreport to be signed on its behalf by the undersigned, thereunto duly authorized.authorized, on the 7th day of March 2017.
|
| | |
Date: March 28, 2014 | | 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 Chairman of the Board of Directors | | March 7, 2017 |
| Daniel T. Accordino | | | |
| | | | |
| /s/ Paul R. Flanders | | Vice President, Chief Financial Officer and Treasurer | | March 7, 2017 |
| Paul R. Flanders | | | |
| | | | |
| /s/ Timothy J. LaLonde | | Vice President, Controller | | March 7, 2017 |
| Timothy J. LaLonde | | | |
| | | | |
| /s/ Jose E. Cil | | Director | | March 7, 2017 |
| Jose E. Cil | | | | |
| | | | |
| /s/ Hannah S. Craven | | Director | | March 7, 2017 |
| Hannah S. Craven | | | | |
| | | | |
| /s/ Manuel A. Garcia III | | Director | | March 7, 2017 |
| Manuel A. Garcia III | | | | |
| | | | |
| /s/ Joel M. Handel | | Director | | March 7, 2017 |
| Joel M. Handel | | | | |
| | | | |
| /s/ David S. Harris | | Director | | March 7, 2017 |
| David S. Harris | | | | |
| | | | |
| /s/ Alexandre Macedo | | Director | | March 7, 2017 |
| Alexandre Macedo | | | | |
| | | | |
