AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Carrols Corporation Delaware 5800 16-0958146
Carrols Realty Holdings Corp. Delaware 6511 16-1443701
Carrols Realty I Corp. Delaware 6511 16-1440018
Carrols Realty II Corp. Delaware 6511 16-1440017
Carrols J.G. Corp. Delaware 6749 16-1440019
Quanta Advertising Corp. New York 7310 16-1033405
Pollo Franchise, Inc. Florida 5800 65-0446291
Pollo Operations, Inc. Florida 5800 65-0446289
(EXACT NAME OF EACH REGISTRANT (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
AS SPECIFIED IN ITS CHARTER) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
968 James Street
Syracuse, New York 13203
(315) 424-0513
(ADDRESS AND TELEPHONE NUMBER OF EACH REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
Joseph A. Zirkman, Esq. Copy to:
Vice President, General Counsel and Secretary David H. Landau, Esq.
Carrols Corporation Rosenman & Colin LLP
968 James Street 575 Madison Avenue
Syracuse, New York 13203 New York, New York 10022
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(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(2)
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9 1/2% Senior Subordinated Notes due 2008........ $170,000,000 100% $170,000,000 $47,260
Subsidiary Guarantees of the 9 1/2% Senior
Subordinated Notes Due 2008(3)................. (3) (3) (3) (3)
Total............................................ $170,000,000 100% $170,000,000 $47,260
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(1) Estimated, solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(2) Each Registrant other than Carrols Corporation is a subsidiary of Carrols
Corporation and is guaranteeing payment of the Notes. Pursuant to Rule
457(n) under the Securities Act of 1933, no registration fee is required
with respect to these guarantees.
(3) No separate consideration will be received from purchasers of the Notes with
respect to these guarantees.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 2, 1999
PROSPECTUS
, 1999
CARROLS CORPORATION
OFFER TO EXCHANGE UP TO $170,000,000
9 1/2% SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING
$170,000,000 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008
TERMS OF THE EXCHANGE NOTES
o The Exchange Notes will mature on December 1, 2008.
o We may redeem the Exchange Notes at any time after December 1, 2003. Before
December 1, 2001, we may redeem up to $59.5 million of the Exchange Notes
with the proceeds of certain types of public offerings of equity in our
company that we make.
o The Exchange Notes are identical in all material respects to the outstanding
notes, except for certain transfer restrictions and registration rights
relating to the outstanding notes.
o Interest will be paid:
-- every six months on June 1 and December 1
-- at a fixed annual rate of 9 1/2%.
o If we cannot make payments on the Exchange Notes when due, our guarantor
subsidiaries must make them instead.
o The Exchange Notes are unsecured.
o The Exchange Notes and subsidiary guarantees are subordinated to all of our
and our guarantor subsidiaries' current and future indebtedness (other than
trade payables), except indebtedness that expressly provides that it is not
senior to the Exchange Notes and the subsidiary guarantees or that expressly
provides that it is subordinate to any other of our indebtedness.
o No public market currently exists for the Exchange Notes. We do not intend to
list the Exchange Notes on any securities exchange, and, therefore, no active
public market is anticipated.
TERMS OF THE EXCHANGE OFFER
o All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
o Expires at 5:00 p.m., New York City time, on [ ], 1999, unless we
extend the offer.
o Subject to customary conditions.
o Tenders may be withdrawn at any time before the expiration of the Exchange
Offer.
o The exchange of notes will not be a taxable exchange for U.S. federal income
tax purposes.
o We will not receive any proceeds from the Exchange Offer.
YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS BEGINNING ON PAGE 14 OF THIS
PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
Prospectus Summary.......................................................................................... 1
Risk Factors................................................................................................ 14
Use of Proceeds............................................................................................. 21
Capitalization.............................................................................................. 22
Unaudited Pro Forma Combined Financial Information.......................................................... 23
Selected Historical Financial Information of Carrols........................................................ 28
Selected Historical Financial Information of Pollo Tropical................................................. 29
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 30
The Exchange Offer.......................................................................................... 41
Business.................................................................................................... 50
Management.................................................................................................. 62
Principal Stockholders...................................................................................... 73
Certain Relationships and Related Transactions.............................................................. 74
Description of the Senior Credit Facility................................................................... 75
Description of the Exchange Notes........................................................................... 76
Book-Entry; Delivery and Form............................................................................... 102
Certain U.S. Federal Income Tax Considerations.............................................................. 105
Plan of Distribution........................................................................................ 109
Legal Matters............................................................................................... 109
Experts..................................................................................................... 109
CERTAIN INTRODUCTORY MATTERS
Burger King(Registered) is a registered trademark and service mark and
Whopper(Registered) is a registered trademark of Burger King Brands, Inc., a
wholly owned subsidiary of Burger King Corporation ("BKC"). Neither BKC nor any
of its subsidiaries, affiliates, officers, directors, agents, employees,
accountants or attorneys are in any way participating in, approving or endorsing
this Exchange Offer, any of the distribution or accounting procedures used in
this Exchange Offer, or any representations made in connection with the Exchange
Offer. BKC's grant of any franchise or other rights to us is not intended as,
and should not be interpreted as, an express or implied approval, endorsement or
adoption of any statement regarding actual or projected financial or other
performance which may be contained in this Prospectus. All financial and other
projections have been prepared by us, and are our sole responsibility.
BKC's review of this Prospectus or the information included in this
Prospectus has been conducted solely for BKC to determine conformance with BKC
internal policies, and not to benefit or protect any other person. As an
investor you should not interpret BKC's review as an internal approval,
endorsement, acceptance or adoption of any representation, warranty, covenant or
projection contained in this Prospectus.
The enforcement or waiver of any of our obligations under any agreement
between us and BKC or BKC affiliates is a matter of BKC or BKC affiliates' sole
discretion. As an investor you should not rely on any representation, assumption
or belief that BKC or BKC affiliates will enforce or waive particular
obligations of the Company under such agreements.
Pollo Tropical(Registered), Tropigrill(Registered) and
Tropichops(Registered) are registered trademarks of ours.
WHERE YOU CAN FIND MORE INFORMATION
We and the subsidiary guarantors have filed with the Securities and
Exchange Commission ("SEC") a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), covering the Exchange
Notes. This Prospectus does not contain all of the information included in the
Registration Statement. Any statement made in this Prospectus concerning the
contents of any contract, agreement or document is not necessarily complete. If
we have filed any such contract, agreement or document as an exhibit to the
Registration Statement, you should read the exhibit for a more complete
understanding of the document or matter involved. Each statement regarding a
contract, agreement or other document is qualified in its entirety by reference
to the actual document.
We file periodic reports and other information with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Indenture
provides that even if we are not subject to the reporting requirements of the
Exchange Act, we will file with the SEC the periodic reports and other
information that a reporting company is required to file. In addition, the
Indenture requires us to deliver to you and to IBJ Whitehall Bank & Trust
Company (formerly known as IBJ Schroder Bank & Trust Company), copies of all
reports that we file with the SEC without any cost to you. We will also furnish
such other reports as we may determine or as the law requires.
You may read and copy the Registration Statement, including the attached
exhibits, and any reports, statements or other information that are on file at
the SEC's public reference room in Washington, D.C. You can request copies of
these documents, upon payment of a duplicating fee, by writing the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings will also be available to the public on
the SEC Internet site (http://www.sec.gov).
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements about our financial
condition, results of operations and business. All statements, other than
statements of historical facts included in this Prospectus, that address
activities, events or developments that we believe, intend or anticipate will or
may occur in the future are forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Actual results may differ materially from those
expressed or implied by the forward-looking statements for various reasons,
including those discussed under the "Risk Factors" section of this Prospectus.
You are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date of this Prospectus.
PROSPECTUS SUMMARY
In this Prospectus, the words "Company", "we", "ours", and "us" refer to
Carrols Corporation and its subsidiaries both before and after giving effect to
the acquisition of Pollo Tropical, Inc. ("Pollo Tropical"). The term "Carrols"
refers to Carrols Corporation and its subsidiaries prior to the acquisition of
Pollo Tropical. The following summary highlights selected information from this
Prospectus and may not contain all of the information that is important to you.
This Prospectus includes specific terms of the Exchange Notes, as well as
information regarding our business and detailed financial data. We encourage you
to read this Prospectus in its entirety.
Carrols and Pollo Tropical each use a 52/53 week fiscal year ending on the
Sunday closest to December 31. For convenience, the dating of the financial
information in this Prospectus has been labeled as of, and for the years ended,
December 31, 1993, 1994, 1995, 1996 and 1997, and as of, and for the nine months
ended September 30, 1997 and 1998 for Carrols, and the six months ended
June 30, 1997 and 1998 for Pollo Tropical, as the case may be, rather than the
actual fiscal year end or fiscal period end dates.
THE EXCHANGE OFFER
On November 24, 1998, we completed the private offering of $170,000,000
aggregate original principal amount at maturity of 9 1/2% Senior Subordinated
Notes due 2008. The Exchange Notes are guaranteed by all of our existing and
future direct and indirect subsidiaries other than certain subsidiaries which
currently do not conduct business operations.
We entered into an Exchange and Registration Rights Agreement with the
initial purchasers in the private offering in which we agreed, among other
things, to deliver to you this Prospectus and to complete the Exchange Offer on
or prior to May 24, 1999. You are entitled to exchange in the Exchange Offer
your notes for registered notes with substantially identical terms. If the
Exchange Offer is not completed on or prior to May 24, 1999, you will receive
liquidated damages in the amount of $0.192 per week per $1,000 of notes that you
hold until the time that the Exchange Offer is completed. You should read the
discussion under the heading "Description of the Exchange Notes" for further
information regarding the Exchange Notes.
We believe that, subject to certain conditions, you may resell the Exchange
Notes without compliance with the registration and prospectus delivery
provisions of the Securities Act. You should read the discussion under the
heading "The Exchange Offer" for further information regarding the Exchange
Offer and resale of notes.
THE COMPANY
OVERVIEW
Who We Are
Our company is the largest Burger King(Registered) franchisee in the world,
and we have operated Burger King restaurants since 1976. As of September 30,
1998, we operated 338 Burger King restaurants located in 13 Northeastern,
Midwestern and Southeastern states. Over the last five years, we expanded our
operations through the acquisition and construction of additional Burger King
restaurants while also enhancing the quality of operations, the competitive
position and financial performance of our existing restaurants.
As a result of our growth strategy, we increased the total number of
restaurants we operate by over 70% from 1993 to 1997, and over 40% in 1997
alone. From fiscal 1993 to fiscal 1997, we grew our revenues from $171.1 million
to $394.4 million and EBITDA from $20.2 million to $49.2 million. In July 1998,
we completed our purchase of Pollo Tropical for a cash purchase price of
approximately $97 million (the "Pollo Acquisition"). Pollo Tropical is a
regional quick-service restaurant chain featuring grilled marinated chicken and
authentic "made from scratch" side dishes. Before its acquisition by us, for the
twelve months ended June 30, 1998, Pollo Tropical had revenues of $69.6 million
and EBITDA of $13.0 million. Assuming the Pollo Acquisition had occurred on
October 1, 1997, for the twelve months ended September 30, 1998 our revenues
were $449.3 million and our EBITDA was $60.2 million.
1
The Burger King System
Burger King is the second largest quick-service hamburger restaurant chain
in the world, with approximately 9,800 restaurants throughout the U.S. and in 56
foreign countries. In fiscal 1997, BKC reported systemwide sales of
approximately $7.9 billion from its restaurants in the U.S. From 1993 to 1997,
BKC increased its market share of the domestic quick-service hamburger market
from 16.2% to 19.4%. Burger King restaurants are quick-service restaurants of
distinctive design which feature flame-broiled hamburgers and serve several
widely-known, trademarked products, the most popular being the
WHOPPER(Registered) sandwich. Burger King restaurants are generally located in
high traffic areas throughout the U.S. We believe that the primary competitive
advantages of Burger King restaurants are:
o convenience of location;
o speed of service;
o quality; and
o price.
Pollo Tropical
As a result of the Pollo Acquisition, we operate and franchise Pollo
Tropical quick-service restaurants featuring fresh grilled chicken marinated in
a proprietary blend of tropical fruit juices and spices and authentic "made from
scratch" side dishes. The menu emphasizes freshness and quality, with a focus on
flavorful chicken served "hot off the grill." Pollo Tropical restaurants combine
high quality, distinctive menu items and an inviting tropical setting with the
convenience and value of quick-service restaurants.
Pollo Tropical opened its first company-owned restaurant in Miami, and its
first international franchised restaurant in 1995 in Puerto Rico. As of
September 30, 1998, we owned and operated 37 Pollo Tropical restaurants, all of
which are located in south and central Florida, and we franchised 20 Pollo
Tropical restaurants located in Puerto Rico, the Dominican Republic, Ecuador,
Netherlands Antilles and Miami. For the fiscal year ended December 31, 1997,
Pollo Tropical's average comparable restaurant sales were approximately $1.9
million, which we believe is among the highest in the quick-service restaurant
industry. We believe that the strategic acquisition of Pollo Tropical will allow
us to:
o broaden our restaurant concepts;
o expand our geographic presence;
o diversify our revenue base;
o increase our cash flow; and
o enhance our operating margins.
The Industry
The quick-service restaurant industry, which includes hamburgers, pizza,
chicken, various types of sandwiches, Mexican and other ethnic foods, has
experienced consistent growth. The National Restaurant Association estimates
that sales at quick-service restaurants will reach approximately $105.7 billion
in 1998, compared with approximately $61.4 billion in 1988.
This growth in the quick-service restaurant industry reflects consumers'
increasing desire for a convenient, reasonably priced restaurant experience. In
addition, consumer need for meals and snacks prepared outside the home has
increased as a result of the greater numbers of working women and single parent
families. According to the National Restaurant Association, the percentage of
the average family's food budget spent on meals consumed "away from home" grew
from approximately 25% of the food budget in 1955 to approximately 44% in 1995.
COMPETITIVE STRENGTHS
We attribute our success in the quick-service restaurant industry to the
following competitive strengths:
Largest Burger King Franchisee
We are the largest Burger King franchisee in the world. We believe that our
leadership position, together with our experienced management team, effective
management information systems, an extensive infrastructure and a proven track
record for integrating acquisitions and new restaurants, provide us with
attractive opportunities to build and acquire additional restaurants. In
addition, we believe that these factors enable us to enhance restaurant margins
and overall performance and allow us to operate more efficiently than other
Burger King franchisees.
2
Strong Brand Names
Since the formation of BKC in 1954, the Burger King brand has become one of
the most recognized brands in the restaurant industry. BKC spends between 4% and
5% of total system sales on advertising per year (approximately $390 million in
1997 and approximately $1.5 billion over the past five years). The strong Burger
King brand, coupled with the quality and value of the food and convenience of
its restaurants has provided the Burger King system with consistent growth.
According to Technomic, Inc., from 1992 to 1997, Burger King increased its share
of the domestic quick-service hamburger market from approximately 16.2% to
19.4%.
The Pollo Acquisition provides us with one of the most recognized
quick-service restaurant brands in Pollo Tropical's core markets of south and
central Florida. We believe that the following factors have lead to the success
of the Pollo Tropical concept:
o strong brand awareness in Pollo Tropical's markets;
o loyalty among our Hispanic customers; and
o positioning of our menu to capitalize on the growing consumer preference
for both healthier and ethnic foods.
Stable Cash Flows
We believe that the stability of our operating cash flow is due to the
proven success of the Burger King concept and our consistent focus on restaurant
operations. During the past five years, our restaurant level EBITDA (EBITDA
before general and administrative expenses) margins for our Burger King
restaurants ranged between 15.4% and 18.3% and averaged 16.9%. In addition, over
the same period, restaurant level EBITDA margins for Pollo Tropical restaurants
ranged between 19.5% and 25.8% and averaged 23.7%. We believe that the strength
of our cash flow provides us with liquidity to pursue our growth strategy.
Diversified Locations and Restaurant Concepts
Since August 1993, we have increased the number of Burger King restaurants
we own by over 70% and we have increased our geographic presence from nine
states to 13 states. The Pollo Acquisition further expands our geographic
presence through the location of Pollo Tropical restaurants in Florida, the
Caribbean and Central and South America. We believe that this geographic
expansion enables us to capitalize on a region with a rapidly growing population
and further reduce our dependence on the economic performance of any one
particular region. In addition, the Pollo Acquisition enables us to further
diversify our revenue and cash flow base to another concept within the
quick-service restaurant industry.
Experienced Management Team with a Significant Equity Stake
Our senior management team, headed by Chairman and Chief Executive Officer
Alan Vituli and President and Chief Operating Officer Daniel T. Accordino, has a
long and successful history of developing, acquiring and operating quick-service
restaurants. Under their leadership and direction, we have become the largest
Burger King franchisee. Mr. Vituli and Mr. Accordino lead a team of six regional
operating directors who have an average of 22 years of restaurant industry
experience and 44 district managers who have an average of 16 years of
restaurant management experience in the Burger King system.
We believe that the combination of our existing management team, together
with the continuity of leadership provided by Pollo Tropical President and Chief
Operating Officer Nicholas A. Castaldo, enhances our ability to capitalize on
future growth opportunities in the quick-service restaurant industry. Our
management owns (on a fully diluted basis) approximately 12% of Carrols Holdings
Corporation ("Holdings"), which owns 100% of our stock. Our regional and
district managers also hold options to acquire equity in Holdings.
BUSINESS STRATEGY
Our business strategy is to continue to increase revenues and cash flow
through the construction of new restaurants, acquisitions, franchising and
increasing operating efficiencies. Based on our historical performance, we
believe our business
3
strategy represents a low-risk growth plan. Our strategy is based on the
following components:
Leverage Brand Names
We realize significant benefits as a Burger King franchisee. These benefits
are the result of the following:
o widespread recognition of the Burger King brand;
o the size and penetration of BKC's advertising;
o BKC's management of the Burger King brand, including new product
development; and
o the continued growth of the Burger King system.
We believe that the Burger King brand provides significant opportunities to
expand our operations both within and outside our existing geographic markets,
and that the Pollo Tropical brand provides us with significant growth
opportunities within south and central Florida.
Develop Additional Restaurants in Existing Markets
We believe that our existing Burger King markets will continue to provide
opportunities for the development of new restaurants. We look to develop
restaurants in those of our markets we believe are underpenetrated and where the
demographic characteristics are favorable for the development of new
restaurants. Our own staff of real estate and construction professionals conduct
our new restaurant development, with support provided by BKC's development field
personnel. Before developing a new restaurant, we conduct an extensive site
selection and evaluation process which includes in-depth demographic, market and
financial analysis. By selectively increasing the number of restaurants we
operate in a particular market, we can effectively leverage our management,
corporate infrastructure and local marketing while increasing brand awareness.
We believe that we are well positioned to develop new Pollo Tropical
restaurants in Pollo Tropical's core markets of south and central Florida, which
will take advantage of Hispanic customers' high frequency of visits and strong
acceptance of Pollo Tropical's menu items. We believe that the continued
population growth in our Florida markets will provide significant opportunity to
develop additional Pollo Tropical restaurants. We also expect to continue
franchising Pollo Tropical restaurants in parts of Central and South America and
the Caribbean.
Selectively Acquire Burger King Restaurants
The Burger King system is highly fragmented in the U.S., with approximately
7,200 Burger King restaurants being operated by approximately 1,600 franchisees.
We expect to continue to participate as a buyer in the consolidation of the
Burger King system and we believe that opportunities for selective acquisitions
will continue in both existing and new geographic markets as smaller franchisees
seek liquidity through the sale of their restaurants. As the largest Burger King
franchisee with a demonstrated ability to effectively integrate acquisitions, we
believe that we are better positioned to capitalize on this consolidation than
other Burger King franchisees. We believe that by acquiring additional Burger
King restaurants, we can achieve operating efficiencies from our ability to
improve controls over restaurant food costs, more efficiently utilize labor, and
achieve economies of scale by leveraging our corporate infrastructure.
Achieve Operating Efficiencies
We maintain a disciplined commitment to increasing the profitability of our
existing restaurants. Our large base of restaurants, centralized management
structure and management information systems enable us to optimize operating
efficiencies for our new and existing restaurants. We are able to control
restaurant and corporate level costs, capture economies of scale by leveraging
our existing corporate infrastructure and use our sophisticated management
information and point-of-sale systems to more efficiently manage our restaurant
operations and to ensure consistent application of operating controls. Our size
enables us to realize benefits with improved bargaining power for purchasing and
cost management activities. We believe these factors provide the basis for
increased unit and Company profitability. We intend to reduce certain operating
expenses after the Pollo Acquisition by eliminating duplicative costs. In
addition, we expect to realize further operating efficiencies by leveraging our
existing infrastructure and restaurant operating experience.
4
Consistently Provide Superior Customer Satisfaction
Our operations are focused on achieving a high level of customer
satisfaction through quick, accurate and high-quality customer service. We and
BKC have uniform operating standards and specifications relating to the
following:
o quality;
o preparation and selection of menu items;
o maintenance and cleanliness; and
o employee conduct.
We closely supervise the operation of all our restaurants to help ensure that
standards and policies are followed and that product quality, customer service
and cleanliness of the restaurants are maintained at high levels.
OWNERSHIP
Carrols Holdings Corporation
The Company's management, headed by Alan Vituli, owns approximately 12% of
Holdings (on a fully diluted basis). Holdings owns 100% of our stock. Holdings'
other equity investors (who each own approximately 44% of Holdings' fully
diluted capital stock) are Atlantic Restaurants, Inc., an affiliate of Dilmun
Investments, Inc., and funds managed by Madison Dearborn Partners, Inc.
An indirect wholly-owned subsidiary of Bahrain International Bank, an
international financial institution whose equity investors include members of
the Kuwaiti and Saudi Royal families, owns both Atlantic Restaurants, Inc. and
Dilmun Investments, Inc. Since its formation in 1982, Bahrain International Bank
has invested more than $600 million in U.S. companies, with a particular focus
on companies with strong brand awareness. Madison Dearborn Partners, Inc. is one
of the largest and most experienced private equity investment firms in the U.S.,
with $3.5 billion of capital under management and having invested over $1.8
billion in more than 125 companies in a variety of industries since 1980.
THE POLLO ACQUISITION AND THE PRIVATE OFFERING
Pursuant to an Agreement and Plan of Merger, dated June 3, 1998, we
commenced a tender offer to purchase all the outstanding shares of common stock
of Pollo Tropical for a price of $11.00 per share. We completed our merger with
Pollo Tropical on July 20, 1998. The aggregate consideration paid, including
fees and expenses, to effect the Pollo Acquisition was approximately
$97 million, which we financed under our credit facility. We used the proceeds
from the private offering of the outstanding notes to repay a portion of our
indebtedness under our credit facility, to repay all of our then outstanding
11 1/2% Senior Notes due 2003 and to pay related fees and expenses.
THE EXCHANGE OFFER
The Exchange Offer........................... We are offering to exchange up to $170,000,000 principal amount of
9 1/2% Senior Subordinated Notes Due 2008 of Carrols Corporation
which have been registered under the Securities Act, for
$170,000,000 principal amount of our outstanding 9 1/2% Senior
Subordinated Notes Due 2008 which were issued in November 1998 in
a private offering.
The terms of the Exchange Notes are identical in all material
respects to the terms of the outstanding notes, except that the
Exchange Notes are freely transferable by their holders (other
than as provided in this document), and are not subject to any
covenant regarding registration under the Securities Act. See "The
Exchange Offer."
Minimum Condition............................ The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of outstanding notes being tendered for exchange.
5
Expiration Date; Withdrawal of
Tender....................................... The Exchange Offer will expire at 5:00 p.m., New York City time,
on [ ], 1999. We do not currently intend to extend the
expiration date. You may withdraw any notes you tender pursuant to
the Exchange Offer before 5:00 p.m., New York City time, on
[ ], 1999. See "The Exchange Offer--Expiration Date;
Extension; Termination; Amendment" and "--Withdrawal Rights."
Conditions to the Exchange Offer............. This Exchange Offer is subject to certain customary conditions,
which we may waive. See "The Exchange Offer--Certain Conditions to
the Exchange Offer."
Resales...................................... We believe that the Exchange Notes may be offered for resale,
resold and otherwise transferred by you without compliance with
the registration and prospectus delivery provisions of the
Securities Act provided that:
o the Exchange Notes are being acquired in the ordinary
course of your business;
o you are not participating, do not intend to participate,
and have no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes; and
o you are not an "affiliate" of ours.
If our belief is inaccurate and you transfer any Exchange Note
without delivering a prospectus meeting the requirements of the
Securities Act or without an exemption from the registration of
your notes from such requirements, you may incur liability under
the Securities Act. We do not assume or indemnify you against such
liability.
Procedures for Tendering Outstanding
Notes........................................ If you wish to accept the Exchange Offer, you must complete, sign
and date the Letter of Transmittal in accordance with the
instructions, and deliver the Letter of Transmittal, along with
the outstanding notes and any other required documentation, to the
exchange agent.
Special Procedures for Beneficial
Owners....................................... If you beneficially own outstanding notes registered in the name
of a broker, dealer, commercial bank, trust company or other
nominee and you wish to tender your notes in the Exchange Offer,
you should contact the registered holder promptly and instruct it
to tender on your behalf. If you wish to tender on your own
behalf, you must, before completing and executing the Letter of
Transmittal and delivering your notes, either arrange to have your
notes registered in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered
ownership may take considerable time. See "The Exchange
Offer--Procedures for Tendering Old Notes."
6
Guaranteed Delivery Procedures............... If you wish to tender your notes and time will not permit your
required documents to reach the exchange agent by
[ ], 1999, or the procedure for book-entry transfer
cannot be completed on time or certificates for registered notes
cannot be delivered on time, you may tender your notes pursuant to
the procedures described in this Prospectus under the heading "The
Exchange Offer--Guaranteed Delivery Procedure."
Acceptance of Outstanding Notes and
Delivery of the Exchange Notes............... We will accept for exchange any and all outstanding notes which
are properly tendered (and not withdrawn) in the Exchange Offer
before 5:00 p.m., New York City time, on [ ], 1999. The
Exchange Notes issued pursuant to the Exchange Offer will be
delivered promptly following the expiration date.
Effect on the Holders of Outstanding
Notes........................................ Upon acceptance for exchange of all validly tendered outstanding
notes pursuant to the Exchange Offer, we and the guarantor
subsidiaries will have fulfilled the covenant contained in the
Registration Rights Agreement. Accordingly, under the Registration
Rights Agreement, the interest rate on the outstanding notes will
not increase, and you will have no further rights under the
Registration Rights Agreement other than those which survive the
Exchange Offer.
You will continue to hold your notes if you do not tender them. In
addition, you will be entitled to all the rights and subject to
all the applicable limitations under the Indenture, except for any
rights under the Registration Rights Agreement that terminate or
cease to have further effectiveness as a result of the exchange of
all validly tendered outstanding notes in this Exchange Offer. All
untendered outstanding notes will continue to be subject to the
restrictions on transfer provided for in the outstanding notes and
the Indenture. To the extent that the outstanding notes are
tendered and accepted in this Exchange Offer, the trading market
for untendered outstanding notes could be adversely affected.
Consequence of Failure to Exchange........... If you are eligible to participate in the Exchange Offer and you
do not tender your outstanding notes, your notes will continue to
be subject to certain restrictions on transfer. We and the
guarantor subsidiaries do not anticipate that we will register any
outstanding notes and the related guarantees which are not
exchanged in the Exchange Offer under the Securities Act, after
[ ], 1999.
Federal Income Tax Consequences.............. The exchange of outstanding notes should not result in gain or
loss to you or us for federal income tax purposes. See "Certain
U.S. Federal Income Tax Considerations."
Use of Proceeds.............................. We will not receive any proceeds from the issuance of the Exchange
Notes.
7
Exchange Agent............................... IBJ Whitehall Bank & Trust Company is serving as exchange agent in
connection with the Exchange Offer. IBJ Whitehall Bank & Trust
Company also serves as the Trustee under the Indenture. See "The
Exchange Offer--Exchange Agent."
TERMS OF THE EXCHANGE NOTES
Aggregate Amount of Notes.................... $170,000,000 principal amount of 9 1/2% Senior Subordinated Notes
Due 2008.
Issuer....................................... Carrols Corporation.
Maturity..................................... December 1, 2008.
Interest..................................... Annual rate--9 1/2%
Payment frequency--every six months on June 1 and December 1
First payment--June 1, 1999
Guarantees................................... The Exchange Notes are unconditionally guaranteed, on an unsecured
senior subordinated basis, by all of our subsidiaries which
conduct business operations.
Ranking...................................... The Exchange Notes and the subsidiary guarantees are senior
subordinated debts. They rank behind all of our and our guarantor
subsidiaries' current and future indebtedness (other than trade
payables), except indebtedness that expressly provides that it is
not senior to the Exchange Notes and the subsidiary guarantees or
that expressly provides that it is subordinate to any other of our
indebtedness or that of our subsidiary guarantors.
Assuming we had completed the private offering of the outstanding
notes on September 30, 1998 and applied the proceeds as intended,
the Exchange Notes and the subsidiary guarantees would have been
subordinated to $84.3 million of indebtedness (excluding unused
commitments of $25.0 million under our credit facility).
Optional Redemption.......................... On or after December 1, 2003, we may redeem the Exchange Notes in
cash at our option, in whole or in part, at the redemption prices
described in this Prospectus under the heading "Description of the
Exchange Notes", plus accrued and unpaid interest to the date of
redemption. Before December 1, 2001, we may redeem up to
$59.5 million of the Exchange Notes with the proceeds of certain
public offerings of equity in our company, at the redemption
prices described in this Prospectus, provided that at least 65% of
the originally issued principal amount of the Exchange Notes
remains outstanding after each such redemption. See "Description
of the Exchange Notes--Redemption."
Change of Control............................ Upon the occurrence of a change of control of the Company, we will
be required to offer to repurchase the Exchange Notes from you at
a price equal to 101% of their principal amount, together with
accrued and unpaid interest to the date of repurchase. See
"Description of the Exchange Notes--Change of Control."
8
Restrictive Covenants........................ The Indenture will limit, among other things, our ability and the
ability of our guarantor subsidiaries to:
o incur additional indebtedness;
o make certain payments and redemptions;
o make certain investments;
o sell assets and subsidiary guarantor stock;
o enter into transactions with affiliates; and
o consolidate, merge, transfer or sell all or substantially
all of our assets.
Absence of Public Market..................... There is no established trading market for the Exchange Notes. We
do not currently intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any
automated quotation system. Accordingly, we cannot assure you of
the development or liquidity of any market for the Exchange Notes.
The certificates representing the Exchange Notes will be issued in
fully registered form.
RISK FACTORS
You should carefully consider the matters set forth under "Risk Factors",
as well as the other information and financial statements included in this
Prospectus before you tender outstanding notes in the Exchange Offer.
PRINCIPAL OFFICES
We are a Delaware corporation. Our principal offices are located at 968
James Street, Syracuse, New York 13203, and our telephone number is
(315) 424-0513.
You should rely only on the information provided in this Prospectus. No
person has been authorized to provide you with different information. The
information in this Prospectus is accurate as of the date on the front cover.
You should not assume that the information contained in this Prospectus is
accurate as of any other date.
9
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth summary unaudited pro forma combined
financial information of our company. Such financial information has been
derived from Carrols' audited financial statements for its fiscal year ended
December 31, 1997 and its unaudited financial statements for the nine months
ended September 30, 1997 and September 30, 1998 and from Pollo Tropical's
audited financial statements for its fiscal year ended December 31, 1997 and its
unaudited financial statements for the six months ended June 30, 1997 and
June 30, 1998.
It is important that you read the summary financial information presented
below along with the historical consolidated financial statements of Carrols and
the historical consolidated financial statements of Pollo Tropical, the notes
thereto and the other information contained elsewhere in this Prospectus.
The Unaudited Pro Forma Combined Statement of Operations Data and Other
Financial Data presented below is intended to give you a better picture of what
our business might have looked like if the following transactions had occurred
at the beginning of the applicable periods presented:
o our acquisition of Pollo Tropical in July 1998;
o our acquisition of 23 and 63 Burger King restaurants in March 1997 and
August 1997, respectively; and
o the private offering of the outstanding notes.
The Unaudited Pro Forma Combined Balance Sheet Data presented below gives
you a better picture of what our business would have looked like if the private
offering of the outstanding notes occurred at September 30, 1998. See "Unaudited
Pro Forma Combined Financial Information," "Selected Historical Financial
Information of Carrols," "Selected Historical Financial Information of Pollo
Tropical," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Index to Financial Statements."
PRO FORMA COMBINED
--------------------------------------
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1997 1997 1998
------------ -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total revenues........................................................ $407,819 $302,648 $344,114
Costs and expenses:
Cost of sales....................................................... 120,862 89,248 102,577
Restaurant wages and related expenses............................... 117,983 88,197 97,477
Other restaurant operating expenses................................. 80,480 59,521 65,503
Advertising expenses................................................ 19,629 15,011 15,779
General and administrative expenses................................. 18,732 13,857 15,906
Depreciation and amortization....................................... 20,985 15,402 16,473
-------- -------- --------
Total costs and expenses......................................... 378,671 281,236 313,715
-------- -------- --------
Operating income...................................................... $ 29,148 $ 21,412 $ 30,399
-------- -------- --------
-------- -------- --------
OTHER FINANCIAL DATA:
EBITDA(1)............................................................. $ 50,133 $ 36,814 $ 46,872
EBITDA margin......................................................... 12.3% 12.2% 13.6%
Interest expense...................................................... $ 27,469 $ 21,338 $ 18,187
Capital expenditures.................................................. 20,555 12,052 23,522
Ratio of earnings to fixed charges(2)................................. 1.1x 1.0x 1.3x
AS OF
SEPTEMBER 30, 1998
------------------
BALANCE SHEET DATA:
Cash....................................................................................... $ 2,442
Total assets............................................................................... 312,828
Working capital (deficiency)............................................................... (26,092)
Total long-term debt(3).................................................................... 254,276
Stockholders' equity....................................................................... 14,427
10
HISTORICAL
------------------------------------
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1997 1997 1998
------------ -------- --------
(DOLLARS IN THOUSANDS)
OPERATING STATISTICS(4):
Number of restaurants (at end of period):
Burger King units..................................................... 335 329 338
Pollo Tropical units.................................................. 36 36 37
-------- -------- --------
Total.............................................................. 371 365 375
Average annual sales per restaurant:
Burger King units..................................................... $ 1,055 -- --
Pollo Tropical units.................................................. 1,843 -- --
Percentage change in comparable restaurant sales:
Burger King units(5).................................................. (1.4)% (1.2)% 7.2%
Pollo Tropical units(6)............................................... 4.2% 4.4% 8.4%
(1) EBITDA is defined as income (loss) from continuing operations before income
taxes, extraordinary items, interest, refinancing expenses, depreciation and
amortization and acquisition related expenses pertaining to the sale of
Pollo Tropical to Carrols. EBITDA is presented because we believe it is a
useful financial indicator for measuring a company's ability to service
and/or incur indebtedness; however, EBITDA should not be considered as an
alternative to net income (loss) as a measure of operating results or to
cash flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(2) For the purpose of determining the ratio of earnings to fixed charges,
earnings included earnings from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest on all indebtedness
plus that portion of operating lease rentals representative of the interest
factor.
(3) Includes approximately $3.1 million of capital lease obligations and other
debt.
(4) Data presented reflects our owned restaurants only and does not include
Pollo Tropical franchised units, which totaled 20 at September 30, 1998.
(5) The nine months ended September 30, 1998 contains 40 weeks. The percentage
change in comparable restaurant sales for this period has been calculated
using a comparable number of weeks from the prior year. The percentage
change in comparable restaurant sales using the actual number of weeks in
the nine months ended September 30, 1998 is 10.2%. The percentage change in
comparable restaurant sales is calculated using only those restaurants that
have been open since the beginning of the earliest period being compared.
(6) The percentage change in comparable restaurant sales is calculated using
only those restaurants that have been open for seven full calendar quarters
prior to the beginning of the latest period compared.
11
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical information at the end of and for each of
the fiscal years ended December 31, 1993, 1994, 1995, 1996 and 1997 with respect
to Carrols and Pollo Tropical have been derived from audited financial
statements of the respective companies. The summary historical financial
information at the end of and for the nine month periods ended September 30,
1997 and 1998 with respect to Carrols and the six month periods ended June 30,
1997 and 1998 of Pollo Tropical has been derived from unaudited financial
statements contained elsewhere in this Prospectus.
The Pollo Acquisition was completed in July 1998, and as a result, Carrols'
unaudited financial statements as of and for the nine month period ended
September 30, 1998 include the results of operations for the Pollo Tropical
restaurants since July 10, 1998. Interim period results are not necessarily
indicative of results to be expected for a complete fiscal year. See "Selected
Historical Financial Information of Carrols," "Selected Historical Financial
Information of Pollo Tropical," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Index to Financial
Statements."
CARROLS
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,(1)
------------------------------------------------------------ --------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales.............................. $171,137 $203,927 $226,257 $240,809 $295,436 $207,113
Franchise revenues............................ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total revenues............................... 171,137 203,927 226,257 240,809 295,436 207,113
Costs and expenses:
Cost of sales................................ 48,502 57,847 63,629 68,031 85,542 59,600
Restaurant wages and related expenses........ 51,739 59,934 65,932 70,894 89,447 63,539
Other restaurant operating expenses.......... 35,192 42,390 45,635 48,683 61,691 43,005
Advertising expenses......................... 7,930 8,785 9,764 10,798 13,122 9,093
General and administrative................... 7,534 9,122 10,434 10,387 13,121 9,337
Depreciation and amortization................ 12,143 11,259 11,263 11,015 15,102 10,578
Other costs(2)............................... -- 1,800 -- 509 -- --
-------- -------- -------- -------- -------- --------
Total costs and expenses................... 163,040 191,137 206,657 220,317 278,025 195,152
-------- -------- -------- -------- -------- --------
Income from operations........................ 8,097 12,790 19,600 20,492 17,411 11,961
Refinancing expenses.......................... -- -- -- -- -- --
Interest expense, net......................... 12,505 14,456 14,500 14,209 14,598 11,059
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary loss........................... (4,408) (1,666) 5,100 6,283 2,813 902
Provision (benefit) for income taxes.......... -- 165 (9,826) 3,100 655 181
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary loss....... (4,408) (1,831) 14,926 3,183 2,158 721
Extraordinary loss on extinguishment of debt,
net of tax................................... (4,883) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)............................. $ (9,291) $ (1,831) $ 14,926 $ 3,183 $ 2,158 $ 721
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
OTHER FINANCIAL DATA:
EBITDA(3)..................................... $ 20,240 $ 25,849 $ 30,863 $ 32,016 $ 32,513 $ 22,539
EBITDA margin................................. 11.8% 12.7% 13.6% 13.3% 11.0% 10.9%
Capital expenditures.......................... $ 3,863 $ 6,024 $ 8,022 $ 15,255 $ 18,210 $ 10,952
Ratio of earnings to fixed charges(4)......... -- -- 1.3x 1.3x 1.1x 1.1x
OPERATING STATISTICS:
Number of Burger King restaurants (at end of
period)...................................... 195 219 219 232 335 329
Average number of Burger King restaurants..... 185 207 219 225 280 263
Average annual sales per Burger King
restaurant................................... $ 925 $ 985 $ 1,033 $ 1,070 $ 1,055 --
Percentage change in comparable Burger King
restaurant sales(1).......................... (1.3)% 5.1% 3.8% 3.2% (1.4)% (1.2)%
BALANCE SHEET DATA (AT PERIOD END):
Total assets.................................. $119,735 $125,317 $135,064 $138,588 $215,328 $220,970
Working capital (deficiency).................. (13,806) (16,456) (13,602) (15,004) (18,273) (12,668)
Total long-term debt(5)....................... 119,667 125,519 120,578 121,265 160,287 177,232
Stockholders' equity (deficit)................ (22,404) (27,208) (12,916) (11,662) 17,447 18,059
NINE
MONTHS
ENDED
SEPTEMBER
30,(1)
--------
1998
--------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales.............................. $305,866
Franchise revenues............................ 161
--------
Total revenues............................... 306,027
Costs and expenses:
Cost of sales................................ 89,829
Restaurant wages and related expenses........ 89,014
Other restaurant operating expenses.......... 60,685
Advertising expenses......................... 13,920
General and administrative................... 13,364
Depreciation and amortization................ 14,294
Other costs(2)............................... --
--------
Total costs and expenses................... 281,106
--------
Income from operations........................ 24,921
Refinancing expenses.......................... 1,639
Interest expense, net......................... 14,716
--------
Income (loss) before income taxes and
extraordinary loss........................... 8,566
Provision (benefit) for income taxes.......... 3,850
--------
Income (loss) before extraordinary loss....... 4,716
Extraordinary loss on extinguishment of debt,
net of tax................................... --
--------
Net income (loss)............................. $ 4,716
--------
--------
OTHER FINANCIAL DATA:
EBITDA(3)..................................... $ 39,215
EBITDA margin................................. 12.8%
Capital expenditures.......................... $ 21,963
Ratio of earnings to fixed charges(4)......... 1.4x
OPERATING STATISTICS:
Number of Burger King restaurants (at end of
period)...................................... 338
Average number of Burger King restaurants..... 339
Average annual sales per Burger King
restaurant................................... --
Percentage change in comparable Burger King
restaurant sales(1).......................... 7.2%
BALANCE SHEET DATA (AT PERIOD END):
Total assets.................................. $306,898
Working capital (deficiency).................. (28,692)
Total long-term debt(5)....................... 241,613
Stockholders' equity (deficit)................ 18,285
- ------------------
(1) The nine month periods ended September 30, 1997 and 1998 include 39 weeks
and 40 weeks, respectively. The percentage change in comparable restaurant
sales for the nine months ended September 30, 1998 has been calculated using
a comparable number of weeks from the prior year. The percentage change in
comparable restaurant sales using the actual number of weeks in the nine
months ended September 30, 1998 and 1997 is 10.2%. The percentage change in
comparable restaurant sales is calculated using only those restaurants that
have been open since the beginning of the earliest period being compared.
(2) Other costs represent restaurant closure expenses of $1,800 in 1994 and
costs associated with a change in control of $509 in 1996 associated with
our sale to Atlantic Restaurants, Inc.
(3) EBITDA is defined as income (loss) from continuing operations before income
taxes, extraordinary items, interest, refinancing expenses, depreciation and
amortization and other costs. EBITDA is presented because we believe it is a
useful financial indicator for measuring a company's ability to service
and/or incur indebtedness; however, EBITDA should not be considered as an
alternative to net income (loss) as a measure of operating results or to
cash flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(4) For the purpose of determining the ratio of earnings to fixed charges,
earnings included earnings from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest on all indebtedness
plus that portion of operating lease rentals representative of the interest
factor. For 1993 and 1994, earnings were insufficient to cover fixed charges
by $4,808 and $1,666, respectively.
(5) Includes capital lease obligations and other debt which was $3.1 million at
September 30, 1998.
12
POLLO TROPICAL
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales....................... $19,305 $41,114 $55,489 $63,735 $65,118 $31,817 $35,448
Franchise revenues..................... -- 41 555 499 812 420 454
------- ------- ------- ------- ------- ------- -------
Total revenues....................... 19,305 41,155 56,044 64,234 65,930 32,237 35,902
Costs and expenses:
Cost of sales.......................... 6,961 14,849 20,065 24,037 22,533 11,164 11,999
Restaurant wages and related expenses.. 4,481 9,710 13,661 15,695 15,178 7,472 7,994
Other restaurant operating expenses.... 2,325 4,812 7,362 9,159 8,427 4,106 4,694
Advertising expenses................... 764 1,383 2,103 2,978 2,987 1,563 1,702
General and administrative............. 1,528 3,702 5,178 5,371 5,538 2,903 2,805
Depreciation and amortization.......... 635 2,301 3,397 2,962 2,355 1,208 1,133
Other (income) expense, net(1)......... (16) (22) 1,623 6,250 (32) (8) 488
------- ------- ------- ------- ------- ------- -------
Total costs and expenses............. 16,678 36,735 53,389 66,452 56,986 28,408 30,815
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............ 2,627 4,420 2,655 (2,218) 8,944 3,829 5,087
Interest (income) expense, net........... (14) 32 758 976 490 363 (31)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary loss..................... 2,641 4,388 1,897 (3,194) 8,454 3,466 5,118
Provision (benefit) for income taxes..... 963 1,590 720 (1,213) 3,212 1,316 2,242
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
loss................................... 1,678 2,798 1,177 (1,981) 5,242 2,150 2,876
Extraordinary loss on extinguishment of
debt, net of tax....................... -- -- (63) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)........................ $ 1,678 $ 2,798 $ 1,114 $(1,981) $ 5,242 $ 2,150 $ 2,876
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
OTHER FINANCIAL DATA:
EBITDA(2)................................ $ 3,262 $ 6,721 $ 7,544 $ 7,068 $11,299 $ 5,037 $ 6,723
EBITDA margin............................ 16.9% 16.3% 13.5% 11.0% 17.1% 15.6% 18.7%
Capital expenditures..................... $11,479 $24,179 $ 9,599 $ 4,621 $ 1,451 $ 659 $ 1,749
Ratio of earnings to fixed charges(3).... 6.7x 5.2x 2.2x -- 8.8x 6.4x 18.3x
OPERATING STATISTICS:
Number of restaurants (at end of
period)................................ 14 33 36 35 36 35 36
Average number of restaurants............ 9 21 33 38 35 35 36
Average annual sales per restaurant...... $ 2,145 $ 1,958 $ 1,681 $ 1,677 $ 1,861 -- --
Percentage change in comparable
restaurant sales(4).................... 7.8% (0.7)% (5.6)% 7.9% 4.2% 6.0% 7.9%
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................. $28,336 $42,255 $46,825 $48,501 $40,354 $45,309 $43,333
Working capital (deficiency)............. 6,979 (2,685) (4,407) (7,381) (4,906) (6,666) (3,368)
Total long-term debt..................... 2,500 11,402 12,049 11,375 1,214 6,632 95
Stockholders' equity..................... 21,409 24,619 25,959 24,142 29,731 26,442 32,877
- ------------------
(1) Other (income) expense for 1995 and 1996 includes restaurant closure
expenses of $1,492 and $6,324, respectively, and, for the six months ended
June 30, 1998, acquisition related expenses of $503 pertaining to the sale
of Pollo Tropical to Carrols.
(2) EBITDA is defined as income (loss) from operations before income taxes,
extraordinary items, interest, depreciation and amortization, restaurant
closure expenses and acquisition related expenses pertaining to the sale of
Pollo Tropical to us. EBITDA is presented because we believe it is a useful
financial indicator for measuring a company's ability to service and/or
incur indebtedness; however, EBITDA should not be considered as an
alternative to net income (loss) as a measure of operating results or to
cash flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(3) For the purposes of determining the ratio of earnings to fixed charges,
earnings included earnings from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest on all indebtedness
plus that portion of operating lease rentals representative of the interest
factor. For 1996, earnings were insufficient to cover fixed charges by
$3,194.
(4) The percentage change in comparable restaurant sales is calculated using
only those restaurants that have been open for seven full calendar quarters
prior to the beginning of the latest period compared.
13
RISK FACTORS
In addition to the other information set forth in this Prospectus, you
should carefully consider the following information before participating in the
Exchange Offer.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH.
We have a significant amount of indebtedness. The following chart shows
certain important credit statistics and is presented assuming we had completed
the private offering of the outstanding notes as of the dates or at the
beginning of the periods specified below and applied the proceeds as intended:
AT SEPTEMBER 30, 1998
---------------------
Total indebtedness......................................... $254.3 million
Stockholders' equity....................................... $ 14.4 million
Debt to total capitalization............................... 94.6%
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, 1997 ENDED SEPTEMBER 30, 1998
------------------ ------------------------
Ratio of earnings to fixed charges....................... 1.1x 1.3x
In addition to the foregoing, please be aware that our interest expense
will be higher compared to previous years because of our financing of the Pollo
Acquisition.
Such a large amount of indebtedness could have negative consequences for
us. For example, it could:
o make it more difficult for us to satisfy our obligations with respect to
the Exchange Notes;
o increase our vulnerability to general adverse economic and industry
conditions, as well as increases in interest rates;
o limit our ability to fund future working capital, capital expenditures
and other general corporate requirements;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
o place us at a competitive disadvantage compared to our competitors that
have less debt; and
o limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds.
And, failing to comply with those covenants could result in an event of
default which, if not cured or waived, could have a material adverse
effect on us.
SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES IS JUNIOR TO
OUR CREDIT FACILITY AND POSSIBLY TO ALL OF OUR FUTURE BORROWINGS.
The Exchange Notes and the subsidiary guarantees rank behind all of our
guarantor subsidiaries' current and future indebtedness (other than trade
payables), except indebtedness that expressly provides that it is not senior to
the Exchange Notes and the subsidiary guarantees or that expressly provides that
it is subordinate to any other of our indebtedness. As a result, upon any
distribution to our creditors or the creditors of the guarantors in a
bankruptcy, liquidation or reorganization or similar proceeding relating to us
or the guarantors or our or their property, the holders of our and the
subsidiary guarantors' senior debt will be entitled to be paid in full in cash
before any payment may be made with respect to the Exchange Notes or the
subsidiary guarantees.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, holders of the Exchange Notes will
participate with trade creditors and all other holders of our subordinated
indebtedness and the guarantors in the assets remaining after we and the
subsidiary guarantors have paid all senior debt. However, because the Indenture
requires that amounts otherwise payable to holders of the notes in a bankruptcy
or similar proceeding be paid to holders of senior debt instead, holders of the
Exchange Notes may receive less, ratably, than holders of trade payables in any
such proceeding. In any of
14
these cases, we and the subsidiary guarantors may not have sufficient funds to
pay all of our creditors and holders of the Exchange Notes may receive less,
ratably, than holders of senior debt.
In addition, the Exchange Notes will not be secured by any of our assets or
the assets of our subsidiaries. Obligations under our credit facility and any
guarantees of those obligations are secured by substantially all of our assets
and the assets of our subsidiaries. If we become insolvent or are liquidated, or
if payment under our credit facility is accelerated, the lenders under our
credit facility would have a prior claim with respect to our assets and would be
entitled to exercise remedies available to them under applicable laws.
Assuming we had completed the private offering of the outstanding notes on
September 30, 1998, the Exchange Notes and the subsidiary guarantees would have
been subordinated to $84.3 million of senior debt. See "Description of the
Exchange Notes--Ranking and Subordination of the Exchange Notes."
ADDITIONAL BORROWINGS AVAILABLE--WE AND OUR SUBSIDIARIES MAY BE ABLE TO INCUR
SUBSTANTIALLY MORE DEBT.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the Indenture do not fully prohibit us
or our subsidiaries from doing so. Our credit facility would permit additional
borrowing of up to $25.0 million and all of those borrowings would be senior to
the Exchange Notes and the subsidiary guarantees. See "Capitalization" and
"Description of the Senior Credit Facility."
ABILITY TO SERVICE DEBT--WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE
OUR INDEBTEDNESS.
Our ability to make payments on our indebtedness, including the Exchange
Notes, and to fund operating and capital expenditures will depend on our ability
to generate cash in the future. We believe based on current circumstances that
our cash flow, together with available borrowings under our credit facility,
will be adequate to permit us to meet our operating expenses and to service our
debt requirements for the foreseeable future. Significant assumptions underlie
this belief including that we will be successful in implementing our business
strategy and that there is no material adverse change in our business, liquidity
or capital requirements. We cannot assure you that we will generate sufficient
cash flow to meet our operating expenses and to service our debt requirements.
We may need to adopt alternative strategies, including:
o reducing or delaying capital expenditures;
o selling assets;
o restructuring or refinancing our indebtedness; or
o seeking additional equity capital.
We cannot assure you, however, that any of these alternative strategies would be
completed on satisfactory terms.
RESTRICTIONS IMPOSED BY OUR CREDIT FACILITY AND THE INDENTURE--OUR CREDIT
FACILITY AND THE INDENTURE IMPOSE SIGNIFICANT OPERATING AND FINANCIAL
RESTRICTIONS.
Our credit facility and the Indenture impose significant operating and
financial restrictions on us and our subsidiaries. These restrictions may
significantly limit or prohibit us from engaging in certain transactions,
including:
o disposing of assets;
o incurring additional indebtedness;
o repaying other indebtedness;
o paying dividends;
o entering into certain investments or acquisitions;
o repurchasing or redeeming capital stock;
15
o engaging in mergers or consolidations; and
o engaging in certain transactions with subsidiaries and affiliates.
Our credit facility requires us to maintain specified financial ratios and
satisfy certain financial tests. Our ability to meet these financial ratios and
tests may be affected by events beyond our control and, as a result, we cannot
guarantee to you that we will be able to meet such tests. In addition, the
restrictions contained in our credit facility could limit our ability to finance
future operations or capital needs or engage in other business activities that
may be in the interests of us or our subsidiaries. Our failure to comply with
the restrictions in the Indenture and our credit facility could lead to a
default under the terms our credit facility. In the event of such a default, the
lenders under our credit facility could declare all amounts borrowed due and
payable, including all interest that is accrued and unpaid. In addition, the
lenders under our credit facility could terminate their commitments to lend to
us. If that does occur, we cannot assure you that we would be able to make the
necessary payments to the lenders and we cannot give you any assurance that we
would be able to find additional alternative financing. Even if we could obtain
additional alternative financing, we cannot assure you that it would be on terms
that are favorable or acceptable to us.
You should also be aware that the existing indebtedness under our credit
facility is secured by substantially all of our and our subsidiaries' assets.
Should a default or acceleration of such indebtedness occur, the holders of such
indebtedness could seize these assets securing the indebtedness and sell the
assets to satisfy all or a part of what is owed.
WE ARE HIGHLY DEPENDENT ON THE BURGER KING SYSTEM AND OUR ABILITY TO RENEW OUR
FRANCHISES WITH BURGER KING CORPORATION
Our success is, to a large extent, directly related to the success of the
nationwide Burger King system. In turn, the ability of the nationwide Burger
King system to compete effectively depends upon the success of the management of
the Burger King system by BKC. We cannot assure you that BKC will be able to
compete effectively with other quick-service restaurants.
Under our franchise agreements with BKC (the "BKC Franchise Agreements"),
we are required to comply with operational programs established by BKC. In
addition, although not required, we may not be able to avoid adopting menu price
discount promotions instituted by BKC which may be unprofitable.
BKC's consent is required for us to expand and acquire additional Burger
King restaurants. BKC has a right of first refusal to acquire existing Burger
King restaurants which we may seek to acquire. Although BKC has historically
granted its approval to most of our acquisition requests, we cannot assure you
that it will continue to do so. In addition, BKC must consent to renew our
franchise agreements when the BKC Franchise Agreements expire. The BKC Franchise
Agreements typically have 20-year terms and are set to expire as follows:
o 55 BKC Franchise Agreements are due to expire within five years from
September 30, 1998; and
o an additional 123 BKC Franchise Agreements are due to expire within ten
years from September 30, 1998.
Although BKC has granted each of our requests for successor franchise
agreements, we cannot assure you that it will continue to do so. In addition, we
may be obligated to remodel particular restaurants in connection with obtaining
successor franchise agreements and thus incur substantial costs.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE QUICK-SERVICE RESTAURANT
INDUSTRY
The quick-service restaurant industry is highly competitive and can be
materially affected by many factors, including:
o changes in local, regional or national economic conditions;
o changes in demographic characteristics;
o changes in consumer tastes;
16
o changes in traffic patterns;
o consumer concerns about nutrition;
o increases in the number of, and particular locations of, competing
quick-service restaurants and other competitors;
o inflation;
o increases in the cost of food and packaging;
o increased labor costs, including health care and minimum wage
requirements;
o regional weather conditions; and
o the availability of experienced management and hourly-paid employees.
In addition, publicity from food quality, illness, injury or other health
concerns or alleged discrimination or other operating issues stemming from one
location or a limited number of locations could substantially affect us,
regardless of whether they pertain to our own restaurants. For a short period
during August 1997, negative publicity related to a recall of beef furnished by
a Burger King system supplier affected our sales, although none of our
restaurants purchased beef from this supplier. See "Business."
RISKS RELATED TO INCREASED LABOR COSTS
Wage rates for a substantial number of our employees are at or slightly
above the minimum wage. Recent legislation increasing the minimum wage has
resulted in higher wage rates for us. As federal and/or state minimum wage rates
increase, we may need to increase not only the wage rates of our minimum wage
employees but also the wages paid to the employees at wage rates which are above
the minimum wage. Although we anticipate that increases in the minimum wage may
be offset through pricing and other cost control efforts, we cannot assure you
that we will be able to do so. See "Business--Government Regulation."
COMPETITION IS INTENSE IN THE QUICK-SERVICE RESTAURANT INDUSTRY
The quick-service restaurant industry is highly competitive. Our
restaurants compete with a large number of national quick-service restaurant
chains, as well as regional quick-service restaurant chains, convenience stores
and other purveyors of moderately priced and quickly served foods. Our largest
competitor is McDonald's restaurants. According to publicly available
information, McDonald's restaurants had aggregate U.S. revenues of $17.1 billion
for the year ended December 31, 1997 and operated 12,380 restaurants in the U.S.
at that date.
To remain competitive, we, as well as certain of the other major
quick-service restaurant chains, have increasingly offered selected food items
and combination meals at discounted prices. These such changes in pricing and
other marketing strategies have had, and in the future may continue to have, a
negative impact on our sales and earnings. See "Business--Competition."
RISKS RELATING TO THE POLLO ACQUISITION
The Pollo Acquisition has increased the size of our operations which will
increase the demands placed upon our management, including demands resulting
from the need to integrate the accounting systems, management information
systems and other operations of Pollo Tropical with our own. Successful
integration of Pollo Tropical's operations will depend primarily on our ability
to effectively manage Pollo Tropical's operations. The integration of Pollo
Tropical may result in unforeseen difficulties that require a disproportionate
amount of our management's attention and our resources. We cannot assure you
that we will be able to integrate effectively the operations of Pollo Tropical.
A failure to integrate its operations effectively could have a material adverse
effect on us.
17
RISKS ASSOCIATED WITH GROWTH AND DEVELOPMENT
Our growth strategy is to acquire and develop additional Burger King
restaurants and, to a lesser extent, develop and franchise additional Pollo
Tropical restaurants. Development involves substantial risks, including the
risk:
o that development costs will exceed budgeted amounts;
o of delays in completion of construction;
o of the inability to obtain all necessary zoning and construction permits;
o of the inability to identify, or the unavailability of, suitable sites on
acceptable leasing or purchase terms;
o that developed properties will not achieve desired revenue or cash flow
levels once opened;
o of incurring substantial unrecoverable costs in the event a development
project is abandoned prior to completion;
o of changes in governmental rules, regulations and interpretations; and
o of changes in general economic and business conditions.
Although we intend to manage our growth and development to reduce these risks,
we cannot assure you that newly developed, acquired or franchised restaurants
will perform in accordance with our expectations.
Our development plans also will require additional management, operation
and financial resources. For example, we will be required to recruit and train
managers and other personnel for each new restaurant. We cannot assure you that
we will be able to manage our expanding operations effectively.
THE LOCATION OF RESTAURANTS IS IMPORTANT TO THEIR SUCCESS
The location of our restaurants has significant influence on their success.
We cannot assure you that current locations will continue to be economically
viable or that additional locations can be acquired at reasonable costs. In
addition, economic conditions where restaurants are located could decline in the
future, resulting in potentially reduced sales in those locations. We cannot
assure you that new sites will produce the same results as existing sites.
OUR SUCCESS DEPENDS ON CERTAIN SENIOR EXECUTIVES
Our success depends to a large extent upon the continued services of our
senior management, including Alan Vituli, Chairman of the Board and Chief
Executive Officer and Daniel T. Accordino, President and Chief Operating
Officer. We have employment agreements with Mr. Vituli and Mr. Accordino which
expire in March 2001. The loss of the services of Mr. Vituli or Mr. Accordino
could have a material adverse effect on our business, financial condition or
results of operations. Our success also depends upon our ability to develop
additional senior level operating management. See "Management."
GOVERNMENT REGULATION
As is the case with most businesses, we are subject to extensive laws and
regulations relating to the development and operation of restaurants, including
the following:
o zoning;
o the preparation and sale of food; and
o employer/employee relationships.
In the event that legislation having a negative impact on our business is
adopted, you should be aware that it could have a material adverse impact on us.
For example, substantial increases in the minimum wage 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.
18
POTENTIAL INABILITY TO REPURCHASE EXCHANGE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of certain specific kinds of change of control events,
we may be required to offer to repurchase all or a portion of the Exchange
Notes. We would be required to purchase the Exchange Notes at 101% of their
principal amount, plus accrued interest to the date of repurchase. If a change
of control occurs, we cannot be sure that we would have enough funds to pay for
all of the Exchange Notes. If we are required to purchase the Exchange Notes, we
would need to secure third-party financing if we do not have available funds to
meet our purchase obligations. However, we cannot assure you that we would be
able to secure such financing on favorable terms, if at all.
A change of control will result in an event of default under our credit
facility and may lead to an acceleration of other senior debt, if any. Such
events may permit the holders under such debt instruments to reduce the
borrowing base thereunder or accelerate the debt and, if the debt is not paid,
to enforce security interests on, or commence litigation that could ultimately
result in a sale of, substantially all of our assets. This would further reduce
our ability to raise cash to purchase the Exchange Notes.
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws protect creditors. These laws may be
applied by a court to subordinate or avoid the Exchange Notes or the guarantees
in favor of our other existing or future creditors or those of the guarantors.
If in a lawsuit on behalf of one of our unpaid creditors or a representative of
one of our creditors a court were to find that, at the time we issued the
outstanding notes, we:
o intended to hinder, delay or defraud any existing or future unpaid
creditors or contemplated insolvency with the intent to favor one or more
creditors over others; or
o did not receive fair consideration or reasonably equivalent value for
issuing the outstanding notes and we, at such time:
o were insolvent,
o were made insolvent by issuing the outstanding notes,
o were engaged or about to engage in a business or transaction for which
our remaining assets would be unreasonably small to carry on our
business, or
o intended to take on, or believed that we would take on, more debts than
we could pay,
such court could void our obligations under the Exchange Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the laws of the jurisdiction that is being applied in any
such proceeding. Generally, however, we would be considered insolvent if, at the
time we incurred the indebtedness, either:
o the sum of our debts (including contingent liabilities) is greater than
our assets, at a fair valuation; or
o the present fair saleable value of our assets is less than the amount
required to pay the probable liability on our total existing debts and
liabilities (including contingent liabilities) as they become absolute
and matured.
We believe that at the time we incurred the indebtedness constituting the
Exchange Notes, we:
o were not insolvent nor rendered insolvent as a result;
o were in possession of sufficient capital to run our business effectively;
o were incurring debts within our ability to pay them as they become due;
and
o had sufficient assets to satisfy any probable money judgment against us
in any pending action.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In reaching these conclusions, we
have relied upon various valuations and estimations of future cash flows that
necessarily involve a number of assumptions and choices of
19
methodology. We cannot give any assurances, however, as to what standards a
court would apply in making such determinations or that a court would agree with
our conclusions in this regard.
CONSEQUENCES OF A FAILURE TO EXCHANGE OUTSTANDING NOTES
The outstanding notes have not been registered under the Securities Act or
any state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption from those laws or in a transaction not subject to those laws.
Outstanding notes that remain outstanding after consummation of the Exchange
Offer will continue to bear a legend reflecting these restrictions on transfer.
In addition, upon consummation of the Exchange Offer, holders of outstanding
notes that remain outstanding will not be entitled to certain registration
rights under the Registration Rights Agreement. We do not currently anticipate
that we will register the outstanding notes under the Securities Act.
The outstanding notes were issued to and are currently owned by, a small
number of beneficial owners. Although the outstanding notes have been designated
for trading in the PORTAL market, to the extent that outstanding notes are
tendered and accepted in connection with the Exchange Offer, any trading market
for outstanding notes that remain outstanding after the Exchange Offer could be
adversely affected.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
Currently, there is no public market for the Exchange Notes. We do not
intend to apply for listing of the notes on any securities exchange or on any
automated dealer quotation system. We can make no assurances to you as to the
development or liquidity of any market for the Exchange Notes, your ability to
sell the exchange notes, or the price at which you may be able to sell the
notes. General declines in the market for securities similar to the Exchange
Notes may adversely affect the liquidity of, and trading market for, the
Exchange Notes independent of our financial performance and prospects.
20
USE OF PROCEEDS
We will not receive any proceeds from the Exchange Offer. We applied the
gross proceeds of $170.0 million from the private offering of the outstanding
notes (the "Private Offering") to:
o pay approximately $116.6 million to redeem our 11 1/2% Senior Notes due
2003 (the "11 1/2% Senior Notes"), consisting of the payment of
$107.6 million aggregate principal amount, a redemption premium of
approximately $4.6 million and interest accrued to December 24, 1998 of
$4.4 million;
o repay a portion of the borrowings under our credit facility in an amount
equal to $47.9 million; and
o pay fees and expenses of approximately $5.5 million.
Our credit facility consists of term loans which mature on June 30, 2003
and a revolving credit facility which matures on December 31, 2001. At
September 30, 1998, the term loans generally bore interest at a rate of 7.82%
and loans under the revolving credit facility bore interest at a weighted
average rate of 7.97%.
21
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1998 and the pro forma capitalization of the Company, adjusted
to give effect to the Private Offering of the outstanding 9 1/2% Senior
Subordinated Notes due 2008 (the "Old Notes") and the application of the
proceeds therefrom as if it had occurred at September 30, 1998. The information
presented below should be read in conjunction with the historical and pro forma
financial statements and related notes appearing elsewhere herein.
AS OF SEPTEMBER 30, 1998
----------------------------------
ACTUAL PRO FORMA
------------------------ ---------
(DOLLARS IN THOUSANDS)
Long-term debt (including current portion):
Senior Credit Facility:
Revolving Credit Facility(1)....................... $ 11,300 $ --
Term Loans......................................... 119,609 81,209
11 1/2% Senior Notes.................................. 107,637 --
9 1/2% Senior Subordinated Notes...................... -- 170,000
Capital leases and other.............................. 3,067 3,067
-------- --------
Total long-term debt............................... 241,613 254,276
Stockholders' equity(2)................................. 18,285 14,427
-------- --------
Total capitalization............................... $259,898 $268,703
-------- --------
-------- --------
- ------------------
(1) Pro forma for the Private Offering, the Company would have full availability
under its $25.0 million revolving credit facility.
(2) Pro forma stockholders' equity reflects extraordinary charges to record the
redemption premium of approximately $4.6 million associated with the
prepayment of the Company's 11 1/2% Senior Notes and to record the write off
of deferred financing costs of approximately $2.4 million, net of the
related income tax benefits.
22
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Statement of Operations and
Other Financial Data of the Company gives effect to the Pollo Acquisition, the
acquisition of 23 and 63 Burger King restaurants in March 1997 and August 1997,
respectively (the "Burger King Acquisitions") and the Private Offering as if
they occurred at the beginning of each of the applicable periods presented. Such
financial information has been derived from Carrols' audited financial
statements for its fiscal year ended December 31, 1997 and its unaudited
financial statements for the nine months ended September 30, 1997 and 1998 and
from Pollo Tropical's audited financial statements for its fiscal year ended
December 31, 1997 and its unaudited financial statements for the six months
ended June 30, 1997 and 1998. The Pollo Acquisition was completed in July 1998,
and as a result, Carrols' unaudited financial statements as of and for the nine
month period ended September 30, 1998 include the results of operations for the
Pollo Tropical restaurants since July 10, 1998.
The Pollo Acquisition was accounted for using the purchase method of
accounting. The total cost of the Pollo Acquisition has been allocated to the
assets acquired and liabilities assumed based upon their respective fair values
as determined through appraisals and internal estimates that the Company
believes are reasonable.
The following unaudited pro forma combined financial information is
presented for illustrative purposes only, does not purport to be indicative of
the Company's financial position or results of operations as of the date hereof,
or as of or for any other future date, and is not necessarily indicative of what
the Company's actual financial position or results of operations would have been
had the foregoing transactions occurred on January 1, 1998, October 1, 1997 or
January 1, 1997, nor does it give effect to (i) any transactions other than the
foregoing transactions and those described in the accompanying notes to
unaudited pro forma combined financial information of the Company or
(ii) Carrols' results of operations since September 30, 1998.
The following unaudited pro forma combined financial information is based
upon the historical financial statements of Carrols and Pollo Tropical and
should be read in conjunction with such historical financial statements, the
notes thereto and the other information contained elsewhere in this Prospectus.
See "Selected Historical Financial Information of Carrols," "Selected Historical
Financial Information of Pollo Tropical," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Index to Financial
Statements."
23
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
PRO FORMA PRO FORMA
HISTORICAL BURGER KING PRO FORMA HISTORICAL -----------------------
CARROLS ACQUISITIONS CARROLS POLLO TROPICAL ADJUSTMENTS COMBINED
---------- ----------- --------- -------------- ----------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales..................... $295,436 $46,453 $341,889 $ 65,118 $407,007
Franchise revenues................... -- 812 812
-------- ------- --------- -------- --------
Total revenues..................... 295,436 46,453 341,889 65,930 407,819
Costs and expenses:
Cost of sales........................ 85,542 12,787 98,329 22,533 120,862
Restaurant wages and related
expenses........................... 89,447 13,358 102,805 15,178 117,983
Other restaurant operating expenses.. 61,691 10,362 72,053 8,427 80,480
Advertising expense.................. 13,122 3,520 16,642 2,987 19,629
General and administrative........... 13,121 1,013 14,134 5,506 $ (908)(1) 18,732
Depreciation and amortization........ 15,102 1,694 16,796 2,355 240 (2) 20,985
1,594 (3)
-------- ------- --------- -------- --------- --------
Total costs and expenses........... 278,025 42,734 320,759 56,986 926 378,671
-------- ------- --------- -------- --------- --------
Income from operations................. 17,411 3,719 21,130 8,944 (926) 29,148
Interest expense....................... 15,581 2,664 18,245 545 8,679(4) 27,469
Interest income........................ (983) -- (983) (55) -- (1,038)
-------- ------- --------- -------- --------- --------
Income before income taxes and
extraordinary loss................... 2,813 1,055 3,868 8,454 (9,605) 2,717
Provision (benefit) for income taxes... 655 384 1,039 3,212 (3,204)(6) 1,047
-------- ------- --------- -------- --------- --------
Income before extraordinary loss....... 2,158 671 2,829 5,242 (6,401) 1,670
Extraordinary loss on extinguishment of
debt, net of taxes................... -- -- -- -- (4,173)(7) (4,173)
-------- ------- --------- -------- --------- --------
Net income (loss)...................... $ 2,158 $ 671 $ 2,829 $ 5,242 $ (10,574) $ (2,503)
-------- ------- --------- -------- --------- --------
-------- ------- --------- -------- --------- --------
OTHER FINANCIAL DATA:
EBITDA(8).............................. $ 32,513 $ 5,413 $ 37,926 $ 11,299 $ 908 $ 50,133
-------- ------- --------- -------- --------- --------
-------- ------- --------- -------- --------- --------
See Notes to Unaudited Pro Forma Combined Statement of Operations
24
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
PRO FORMA PRO PRO FORMA
HISTORICAL BURGER KING FORMA HISTORICAL -----------------------
CARROLS ACQUISITIONS CARROLS POLLO TROPICAL ADJUSTMENTS COMBINED
---------- ----------- -------- -------------- ----------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales................... $207,113 $46,453 $253,566 $ 48,502 $302,068
Franchise revenues................. -- -- -- 580 580
-------- ------- -------- -------- --------
Total revenues................... 207,113 46,453 $253,566 49,082 302,648
Costs and expenses:
Cost of sales...................... 59,600 12,787 72,387 16,861 89,248
Restaurant wages and related
expenses......................... 63,539 13,358 76,897 11,300 88,197
Other restaurant operating
expenses......................... 43,005 10,362 53,367 6,154 59,521
Advertising expense................ 9,093 3,520 12,613 2,398 15,011
General and administrative......... 9,337 1,013 10,350 4,199 $ (692)(1) 13,857
Depreciation and
amortization..................... 10,578 1,694 12,272 1,752 181 (2) 15,402
1,197 (3)
-------- ------- -------- -------- ------- --------
Total costs and expenses......... 195,152 42,734 237,886 42,664 686 281,236
-------- ------- -------- -------- ------- --------
Income from operations............... 11,961 3,719 15,680 6,418 (686) 21,412
Interest expense..................... 11,059 2,664 13,723 502 7,113 (4) 21,338
-------- ------- -------- -------- ------- --------
Income before income taxes
and extraordinary loss............. 902 1,055 1,957 5,916 (7,799) 74
Provision (benefit) for income
taxes.............................. 181 384 565 2,247 (2,641)(6) 171
-------- ------- -------- -------- ------- --------
Income (loss) before extraordinary
loss............................... 721 671 1,392 3,669 (5,158) (97)
Extraordinary loss on extinguishment
of debt, net of taxes.............. -- -- -- -- (4,173)(7) (4,173)
-------- ------- -------- -------- ------- --------
Net income (loss).................. $ 721 $ 671 $ 1,392 $ 3,669 $(9,331) $ (4,270)
-------- ------- -------- -------- --------
-------- ------- -------- -------- ------- --------
-------
OTHER FINANCIAL DATA:
EBITDA(8)............................ $ 22,539 $ 5,413 $ 27,952 $ 8,170 $ 692 $ 36,814
-------- ------- -------- -------- --------
-------- ------- -------- -------- ------- --------
-------
See Notes to Unaudited Pro Forma Combined Statement of Operations
25
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
HISTORICAL POLLO TROPICAL
--------------------------
JANUARY 1,
1998
TO JULY 1, 1998 PRO FORMA
HISTORICAL JUNE 30, TO --------------------------
CARROLS 1998 JULY 9, 1998 ADJUSTMENTS COMBINED
---------- ---------- ------------ ----------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales.............................. $305,866 $ 35,448 $2,161 $343,475
Franchise revenues............................ 161 454 24 639
-------- -------- ------ --------
Total revenues.............................. 306,027 35,902 2,185 344,114
Costs and expenses:
Cost of sales................................. 89,829 11,999 749 102,577
Restaurant wages and related expenses......... 89,014 7,994 469 97,477
Other restaurant operating expenses........... 60,685 4,694 124 65,503
Advertising expense........................... 13,920 1,702 157 15,779
General and administrative.................... 13,364 2,790 268 $ (516)(1) 15,906
Depreciation and amortization................. 14,294 1,133 68 151 (2) 16,473
827 (3)
-------- -------- ------ ------- --------
Total costs and expenses.................... 281,106 30,312 1,835 462 313,715
-------- -------- ------ ------- --------
Income from operations.......................... 24,921 5,590 350 (462) 30,399
Refinance expense............................... 1,639 -- -- -- 1,639
Interest expense................................ 14,716 (31) 1 3,501 (4) 18,187
Acquisition expense............................. -- 503 1,396 (1,899)(5) --
-------- -------- ------ ------- --------
Income (loss) before income taxes and
extraordinary loss............................ 8,566 5,118 (1,047) (2,064) 10,573
Provision (benefit) for income taxes............ 3,850 2,242 (424) (1,254)(6) 4,414
-------- -------- ------ ------- --------
Income (loss) before extraordinary loss......... 4,716 2,876 (623) (810) 6,159
Extraordinary loss on extinguishment of debt,
net of taxes.................................. -- -- -- (4,002)(7) (4,002)
-------- -------- ------ ------- --------
Net income (loss)............................... $ 4,716 $ 2,876 $ (623) $(4,812) $ 2,157
-------- -------- ------ ------- --------
-------- -------- ------ ------- --------
OTHER FINANCIAL DATA:
EBITDA(8)....................................... $ 39,215 $ 6,723 $ 418 $ 516 $ 46,872
-------- -------- ------ ------- --------
-------- -------- ------ ------- --------
See Notes to Unaudited Pro Forma Combined Statement of Operations
26
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) General and administrative expenses have been adjusted to eliminate
non-continuing expenses of Pollo Tropical subsequent to its acquisition, for the
respective periods as follows:
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------
1997 1997 1998
------------ ---- ----
Executive salaries and related costs................................... $723 $523 $356
Directors fees......................................................... 77 56 87
Public company expenses................................................ 108 113 73
---- ---- ----
$908 $692 $516
---- ---- ----
---- ---- ----
(2) Adjustment reflects the incremental amortization related to the net
additional deferred financing costs.
(3) Reflects the amortization of goodwill resulting from the Pollo
Acquisition, amortized over a 40 year period.
(4) Adjustment reflects interest expense resulting from the Private
Offering less the reduction for the repayment of existing debt, assuming all of
the transactions had been effected at the beginning of the respective period.
Reflects an interest rate of 9.50% on the Old Notes.
(5) Adjustment reflects the elimination of the acquisition expenses
incurred by Pollo Tropical.
(6) The income tax expense (benefit) rate, related to the effects of pro
forma adjustments, is 40% before the effect of non-deductible goodwill and
acquisition expenses incurred by Pollo Tropical.
(7) Reflects an extraordinary charge related to the redemption premium on
the 11 1/2% Senior Notes, and the write off of deferred financing expenses
associated with refinanced debt, net of related tax benefits of $3,414 for the
year ended December 31, 1997 and the nine months ended September 30, 1997 and
$3,275 for the nine months ended September 30, 1998.
(8) EBITDA is defined as income (loss) from continuing operations before
income taxes, extraordinary items, interest, refinancing expenses, depreciation
and amortization and acquisition related expenses pertaining to the sale of
Pollo Tropical to Carrols. EBITDA is presented because the Company believes it
is a useful financial indicator for measuring a company's ability to service
and/or incur indebtedness; however, EBITDA should not be considered as an
alternative to net income (loss) as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted accounting
principles.
27
SELECTED HISTORICAL FINANCIAL INFORMATION OF CARROLS
The selected financial information presented below at the end of and for
each of the fiscal years ended December 31, 1993, 1994, 1995, 1996 and 1997 has
been derived from the audited consolidated financial statements of Carrols. The
selected financial information for the nine months ended September 30, 1997 and
1998 has been derived from unaudited financial statements of Carrols and, in the
opinion of the Company, reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data on a basis
consistent with that of the audited data presented herein. The Pollo Acquisition
was completed in July 1998, and as a result, Carrols' unaudited financial
statements as of and for the nine month period ended September 30, 1998 include
the results of operations for the Pollo Tropical restaurants since July 10,
1998. The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year. The following selected
financial information should be read in conjunction with Carrols' Consolidated
Financial Statements and Notes thereto as of and for the fiscal years ended
December 31, 1995, 1996 and 1997 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30, (1)
-------------------------------------------------------- --------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales..................................... $171,137.. $203,927 $226,257 $240,809 $295,436 $207,113
Franchise revenues................................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total revenues................................... 171,137 203,927 226,257 240,809 295,436 207,113
Costs and expenses:
Cost of sales...................................... 48,502 57,847 63,629 68,031 85,542 59,600
Restaurant wages and related expenses.............. 51,739 59,934 65,932 70,894 89,447 63,539
Other restaurant operating expenses................ 35,192 42,390 45,635 48,683 61,691 43,005
Advertising expenses............................... 7,930 8,785 9,764 10,798 13,122 9,093
General and administrative......................... 7,534 9,122 10,434 10,387 13,121 9,337
Depreciation and amortization...................... 12,143 11,259 11,263 11,015 15,102 10,578
Other costs(2)..................................... -- 1,800 -- 509 -- --
-------- -------- -------- -------- -------- --------
Total costs and expenses......................... 163,040 191,137 206,657 220,317 278,025 195,152
-------- -------- -------- -------- -------- --------
Income from operations............................... 8,097 12,790 19,600 20,492 17,411 11,961
Refinancing expenses................................. -- -- -- -- -- --
Interest expense, net................................ 12,505 14,456 14,500 14,209 14,598 11,059
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary
loss............................................... (4,408) (1,666) 5,100 6,283 2,813 902
Provision (benefit) for income taxes................. -- 165 (9,826) 3,100 655 181
-------- -------- -------- -------- -------- --------
Income before extraordinary loss..................... (4,408) (1,831) 14,926 3,183 2,158 721
Extraordinary loss on extinguishment of debt, net of
tax................................................ (4,883) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss).................................... $ (9,291) $ (1,831) $ 14,926 $ 3,183 $ 2,158 $ 721
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
OTHER FINANCIAL DATA:
EBITDA(3)............................................ $ 20,240 $ 25,849 $ 30,863 $ 32,016 $ 32,513 $ 22,539
EBITDA margin........................................ 11.8% 12.7% 13.6% 13.3% 11.0% 10.9%
Capital expenditures................................. $ 3,863 $ 6,024 $ 8,022 $ 15,255 $ 18,210 $ 10,952
Ratio of earnings to fixed charges(4)................ -- -- 1.3x 1.3x 1.1x 1.1x
Operating Statistics:
Number of Burger King restaurants (at end of
period)............................................ 195 219 219 232 335 329
Average number of Burger King restaurants............ 185 207 219 225 280 263
Average annual sales per Burger King restaurant...... $ 925 $ 985 $ 1,033 $ 1,070 $ 1,055 --
Percentage change in comparable Burger King
restaurant sales(1)................................ (1.3)% 5.1% 3.8% 3.2% (1.4)% (1.2)%
BALANCE SHEET DATA (AT PERIOD END):
Total assets......................................... $119,735 $125,317 $135,064 $138,588 $215,328 $220,970
Working capital (deficiency)......................... (13,806) (16,456) (13,602) (15,004) (18,273) (12,668)
Total long-term debt(5).............................. 119,667 125,519 120,578 121,265 160,287 177,232
Stockholders' equity (deficit)....................... (22,404) (27,208) (12,916) (11,662) 17,447 18,059
NINE
MONTHS
ENDED
SEPTEMBER
30, (1)
--------
1998
--------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales..................................... $305,866
Franchise revenues................................... 161
--------
Total revenues................................... 306,027
Costs and expenses:
Cost of sales...................................... 89,829
Restaurant wages and related expenses.............. 89,014
Other restaurant operating expenses................ 60,685
Advertising expenses............................... 13,920
General and administrative......................... 13,364
Depreciation and amortization...................... 14,294
Other costs(2)..................................... --
--------
Total costs and expenses......................... 281,106
--------
Income from operations............................... 24,921
Refinancing expenses................................. 1,639
Interest expense, net................................ 14,716
--------
Income (loss) before income taxes and extraordinary
loss............................................... 8,566
Provision (benefit) for income taxes................. 3,850
--------
Income before extraordinary loss..................... 4,716
Extraordinary loss on extinguishment of debt, net of
tax................................................ --
--------
Net income (loss).................................... $ 4,716
--------
--------
OTHER FINANCIAL DATA:
EBITDA(3)............................................ $ 39,215
EBITDA margin........................................ 12.8%
Capital expenditures................................. $ 21,693
Ratio of earnings to fixed charges(4)................ 1.4x
Operating Statistics:
Number of Burger King restaurants (at end of
period)............................................ 338
Average number of Burger King restaurants............ 339
Average annual sales per Burger King restaurant...... --
Percentage change in comparable Burger King
restaurant sales(1)................................ 7.2%
BALANCE SHEET DATA (AT PERIOD END):
Total assets......................................... $306,898
Working capital (deficiency)......................... (28,692)
Total long-term debt(5).............................. 241,613
Stockholders' equity (deficit)....................... 18,285
- ------------------
(1) The nine months ended September 30, 1997 and 1998 included 39 weeks and 40
weeks, respectively. The percentage change in comparable restaurant sales
for the nine months ended September 30, 1998 has been calculated using a
comparable number of weeks from the prior year. The percentage change in
comparable restaurant sales using the actual number of weeks in the nine
months ended September 30, 1998 and 1997 is 10.2%. The percentage change in
comparable restaurant sales is calculated using only those restaurants that
have been open since the beginning of the earliest period being compared.
(2) Other costs represent restaurant closure expenses of $1,800 in 1994 and
costs associated with a change in control of $509 in 1996 associated with
the sale of the Company to Atlantic Restaurants, Inc.
(3) EBITDA is defined as income (loss) from continuing operations before income
taxes, extraordinary items, interest, refinancing expenses, depreciation and
amortization and other costs. EBITDA is presented because the Company
believes it is a useful financial indicator for measuring a company's
ability to service and/or incur indebtedness; however, EBITDA should not be
considered as an alternative to net income (loss) as a measure of operating
results or to cash flows as a measure of liquidity in accordance with
generally accepted accounting principles.
(4) For the purpose of determining the ratio of earnings to fixed charges,
earnings included earnings from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest on all indebtedness
plus that portion of operating lease rentals representative of the interest
factor. For 1993 and 1994, earnings were insufficient to cover fixed charges
by $4,808 and $1,666, respectively.
(5) Includes capital lease obligations and other debt, which was $3.1 million at
September 30, 1998.
28
SELECTED HISTORICAL FINANCIAL INFORMATION OF POLLO TROPICAL
The selected financial information presented below at the end of and for
each of the fiscal years ended December 31, 1993, 1994, 1995, 1996 and 1997 has
been derived from the audited consolidated financial statements of Pollo
Tropical. The selected information for the six months ended June 30, 1997 and
1998 has been derived from unaudited financial statements of Pollo Tropical and,
in the opinion of the Company, reflects all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such data on
a basis consistent with that of the audited data presented herein. The results
of operations for interim periods are not necessarily indicative of the results
to be expected for a full year. The following selected financial information
should be read in conjunction with Pollo Tropical's Consolidated Financial
Statements and Notes thereto as of and for the fiscal years ended December 31,
1995, 1996 and 1997 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
SIX
MONTHS
ENDED
JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------- -------
1993 1994 1995 1996 1997 1997
------- ------- ------- -------- ------- -------
(DOLLARS IN
THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales.......................................... $19,305 $41,114 $55,489 $ 63,735 $65,118 $31,817
Franchise revenues........................................ -- 41 555 499 812 420
------- ------- ------- -------- ------- -------
Total revenues.......................................... 19,305 41,155 56,044 64,234 65,930 32,237
Costs and expenses:
Cost of sales............................................. 6,961 14,849 20,065 24,037 22,533 11,164
Restaurant wages and related expenses..................... 4,481 9,710 13,661 15,695 15,178 7,472
Other restaurant operating expenses....................... 2,325 4,812 7,362 9,159 8,427 4,106
Advertising expenses...................................... 764 1,383 2,103 2,978 2,987 1,563
General and administrative................................ 1,528 3,702 5,178 5,371 5,538 2,903
Depreciation and amortization............................. 635 2,301 3,397 2,962 2,355 1,208
Other (income) expense, net(1)............................ (16) (22) 1,623 6,250 (32) (8)
------- ------- ------- -------- ------- -------
Total costs and expenses................................ 16,678 36,735 53,389 66,452 56,986 28,408
------- ------- ------- -------- ------- -------
Income (loss) from operations.............................. 2,627 4,420 2,655 (2,218) 8,944 3,829
Interest (income) expense, net............................. (14) 32 758 976 490 363
------- ------- ------- -------- ------- -------
Income (loss) before income taxes and extraordinary loss... 2,641 4,388 1,897 (3,194) 8,454 3,466
Provision (benefit) for income taxes....................... 963 1,590 720 (1,213) 3,212 1,316
------- ------- ------- -------- ------- -------
Income (loss) before extraordinary loss.................... 1,678 2,798 1,177 (1,981) 5,242 2,150
Extraordinary loss on extinguishment of debt, net of tax... -- -- (63) -- -- --
------- ------- ------- -------- ------- -------
Net income (loss)......................................... $ 1,678 $ 2,798 $ 1,114 $(1,981) $ 5,242 $ 2,150
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
OTHER FINANCIAL DATA:
EBITDA(2).................................................. $ 3,262 $ 6,721 $ 7,544 $ 7,068 $11,299 $ 5,037
EBITDA margin.............................................. 16.9% 16.3% 13.5% 11.0% 17.1% 15.6%
Capital expenditures....................................... $11,479 $24,179 $ 9,599 $ 4,621 $ 1,451 $ 659
Ratio of earnings to fixed charges(3)...................... 6.7x 5.2x 2.2x -- 8.8x 6.4x
OPERATING STATISTICS:
Number of restaurants (at end of period)................... 14 33 36 35 36 35
Average number of restaurants.............................. 9 21 33 38 35 35
Average annual sales per restaurant........................ $ 2,145 $ 1,958 $ 1,681 $ 1,677 $ 1,861 --
Percentage change in comparable restaurant sales(4) 7.8% (0.7)% (5.6)% 7.9% 4.2% 6.0%
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................................... $28,336 $42,255 $46,825 $ 48,501 $40,354 $45,309
Working capital (deficiency)............................... 6,979 (2,685) (4,407) (7,381) (4,906) (6,666)
Total long-term debt....................................... 2,500 11,402 12,049 11,375 1,214 6,632
Stockholders' equity....................................... 21,409 24,619 25,959 24,142 29,731 26,442
SIX
MONTHS
ENDED
JUNE
30,
1998
-------
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales.......................................... $35,448
Franchise revenues........................................ 454
-------
Total revenues.......................................... 35,902
Costs and expenses:
Cost of sales............................................. 11,999
Restaurant wages and related expenses..................... 7,994
Other restaurant operating expenses....................... 4,694
Advertising expenses...................................... 1,702
General and administrative................................ 2,805
Depreciation and amortization............................. 1,133
Other (income) expense, net(1)............................ 488
-------
Total costs and expenses................................ 30,815
-------
Income (loss) from operations.............................. 5,087
Interest (income) expense, net............................. (31)
-------
Income (loss) before income taxes and extraordinary loss... 5,118
Provision (benefit) for income taxes....................... 2,242
-------
Income (loss) before extraordinary loss.................... 2,876
Extraordinary loss on extinguishment of debt, net of tax... --
-------
Net income (loss)......................................... $ 2,876
-------
-------
OTHER FINANCIAL DATA:
EBITDA(2).................................................. $ 6,723
EBITDA margin.............................................. 18.7%
Capital expenditures....................................... $ 1,749
Ratio of earnings to fixed charges(3)...................... 18.3x
OPERATING STATISTICS:
Number of restaurants (at end of period)................... 36
Average number of restaurants.............................. 36
Average annual sales per restaurant........................ --
Percentage change in comparable restaurant sales(4) 7.9%
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................................... $43,333
Working capital (deficiency)............................... (3,368)
Total long-term debt....................................... 95
Stockholders' equity....................................... 32,877
- ------------------
(1) Other (income) expense for 1995 and 1996 includes restaurant closure
expenses of $1,492 and $6,324, respectively, and for the six months ended
June 30, 1998 acquisition related expenses of $503 pertaining to the sale of
Pollo Tropical to Carrols.
(2) EBITDA is defined as income (loss) from operations before income taxes,
extraordinary items, interest, depreciation and amortization, restaurant
closure expenses and acquisition related expenses pertaining to the sale of
Pollo Tropical to Carrols. EBITDA is presented because the Company believes
it is a useful financial indicator for measuring a company's ability to
service and/or incur indebtedness; however, EBITDA should not be considered
as an alternative to net income (loss) as a measure of operating results or
to cash flows as a measure of liquidity in accordance with generally
accepted accounting principles.
(3) For the purposes of determining the ratio of earnings to fixed charges,
earnings included earnings from continuing operations before income taxes
plus fixed charges. Fixed charges consist of interest on all indebtedness
plus that portion of operating lease rentals representative of the interest
factor. For 1996, earnings were insufficient to cover fixed charges by
$3,194.
(4) The percentage change in comparable restaurant sales is calculated using
only those restaurants that have been open for seven full calendar quarters
prior to the beginning of the latest period compared.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the largest Burger King franchisee in the world and has
operated Burger King restaurants since 1976. As of September 30, 1998, the
Company operated 338 Burger King restaurants located in 13 Northeastern,
Midwestern and Southeastern states. Over the last five years, the Company has
expanded its operations through the acquisition and construction of additional
Burger King restaurants while also enhancing the quality of operations, the
competitive position and financial performance of its existing restaurants. As a
result of its growth strategy, the Company has increased the total number of
restaurants it operates by over 70% from 1993 to 1997, and over 40% in 1997
alone. In July 1998, the Company completed its acquisition of Pollo Tropical for
a cash purchase price of approximately $97 million. As a result, the operations
of Pollo Tropical have been presented herein for the six months ended June 30,
1998 and 1997. Pollo Tropical is a regional quick-service restaurant chain
featuring grilled marinated chicken and authentic "made from scratch" side
dishes. At September 30, 1998, the Company owned and operated 37 Pollo Tropical
restaurants in Florida and franchised an additional 20 restaurants in the
Caribbean and Central and South America. Due to the acquisition of Pollo
Tropical in July 1998, results of the Company for the nine months ended
September 30, 1998 include the operations of Pollo Tropical from July 10, 1998.
RESULTS OF OPERATIONS OF CARROLS
The following table sets forth, for fiscal year 1995, 1996 and 1997 and for
the nine months ended September 30, 1997 and 1998, selected operating results of
Carrols as a percentage of restaurant sales:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------------- -----------------
Restaurant sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales........................................ 28.1 28.3 29.0 28.8 29.4
Restaurant wages and related expenses................ 29.1 29.4 30.3 30.7 29.1
Other restaurant expenses including advertising...... 24.5 24.7 25.3 25.2 24.4
General and administrative expenses.................. 4.6 4.5 4.4 4.5 4.4
Depreciation and amortization........................ 5.0 4.6 5.1 5.1 4.7
----- ----- ----- ----- -----
Operating income....................................... 8.7% 8.5% 5.9% 5.8% 8.1%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
EBITDA................................................. 13.6% 13.3% 11.0% 10.9% 12.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Fiscal 1998 will contain 53 weeks and the Company has historically included
the extra week in its second fiscal quarter. Accordingly, the nine months
results of operations and cash flows ending September 30, 1998 and 1997 include
40 and 39 weeks, respectively.
Restaurant Sales. Restaurant sales for the nine months ended
September 30, 1998, increased 47.7% to $305.9 million from $207.1 million in the
nine months of 1997. Sales at the Company's 224 comparable restaurants (those
units operating for the entirety of the compared periods) increased 10.2% for
the nine months of 1998. Adjusted for the additional week in 1998, comparable
restaurant sales increased 7.2%.
Operating Costs and Expenses. Cost of sales, as a percentage of sales,
were 29.4% for the nine months ended September 30, 1998 compared to 28.8% for
the first nine months of 1997. The increase in 1998 was due to higher cost
relationships at the Company's Pollo Tropical restaurants and higher food
commodity costs associated with the introduction of a new french fry product in
January 1998 offset, in part, by lower beef costs. In addition, the Company's
food and paper cost relationships have been somewhat higher for its recently
acquired Burger King units prior to these units becoming fully integrated into
the Company's operating systems.
30
Restaurant wages and related expenses, as a percentage of sales, during the
nine months ended September 30, 1998 decreased from 30.7% in 1997 to 29.1% in
1998 due to restaurant labor efficiencies, the effect of increased sales on
fixed management labor, and lower effective unemployment tax rates in New York
State and Ohio, offset, in part, by an increase in the Federal minimum wage rate
from $4.75 per hour to $5.15 per hour which took effect in September 1997.
Other restaurant operating expenses including advertising decreased from
25.2% of sales for the first nine months of 1997 to 24.4% for the first nine
months of 1998, due in part to reduced utility costs associated with a milder
winter in the Company's operating areas, as well as the effect of higher sales
on the fixed components of the Company's costs.
Administrative expenses, as a percentage of sales, decreased from 4.5% in
the first nine months of 1997 to 4.4% for the first nine months of 1998. The
approximate $4.8 million increase in the first nine months of 1998 compared to
1997 is due to the addition of field supervision and corporate support as a
result of the 1997 acquisition of 93 Burger King restaurants, the July 1998
acquisition of Pollo Tropical and to support the Company's plans for continued
expansion.
EBITDA. EBITDA increased from $22.5 million for the first nine months of
1997 to $39.2 million for the first nine months of 1998. As a percentage of
total revenues, EBITDA increased from 10.9% in 1997 to 12.8% in 1998 as a result
of the factors discussed above.
Depreciation and Amortization. Depreciation and amortization increased
$3.7 million in the first nine months of 1998 compared to 1997 due primarily to
the increase in goodwill and purchased intangibles associated with the purchase
of Pollo Tropical in July, 1998 and the purchase of Burger King restaurants in
1997.
Interest Expense. Interest expense was $14.7 million for the first nine
months of 1998 compared to $11.1 million for the first nine months of 1997. The
increase in 1998 was due to higher average debt balances from funding the
acquisition of Pollo Tropical in July, 1998 and the acquisition and construction
of Burger King restaurants in 1997.
Income Taxes. The provision for income taxes of $3.9 million for the nine
months ended September 30, 1998 is based on an estimated effective income tax
rate for 1998 of 45%. This rate is higher than the Federal statutory tax rate
due to state franchise and income taxes and non-deductible amortization of
certain franchise rights and intangible assets.
FISCAL 1997 COMPARED TO FISCAL 1996 COMPARED TO FISCAL 1995
Restaurant Sales. Restaurant sales for the year ended December 31, 1997,
increased 22.7% to $295.4 million from $240.8 million in 1996. The increase in
sales was primarily the result of the growth in the number of Burger King
restaurants operated by the Company which increased from 232 at the end of 1996
to 335 at the end of 1997. During 1997, the Company opened 11 new restaurants,
acquired 93 restaurants in six transactions, and closed one underperforming
restaurant. Sales at the Company's 214 comparable restaurants (those units
operating for the entirety of the compared periods) decreased 1.4% during 1997.
In general, the Company did not increase menu prices during 1997.
Restaurant sales were $240.8 million and $226.3 million for 1996 and 1995,
respectively, and increased 6.4% and 10.9% over the year-earlier periods.
Comparable restaurant sales increased 3.2% in 1996 and 3.8% in 1995. The average
number of restaurants operated by the Company was 280 in 1997, compared to 225
in 1996 and 219 in 1995.
Operating Costs and Expenses. Cost of sales (food and paper costs), as a
percentage of sales, were 29.0% in 1997 compared to 28.3% in 1996 and 28.1% in
1995. The increase in 1997, in part, reflected somewhat higher food costs
including approximately a 2% increase in average beef prices from their 1996
level. The increase in 1996 was due to the effect of higher discount promotional
activity over 1995, offset in part by lower commodity costs.
Restaurant wages and related expenses have increased as a percentage of
sales during the past three years, rising from 29.1% in 1995, to 29.4% in 1996,
and to 30.3% in 1997. Wages have increased over this period due to higher labor
rates including the effect of increases in the Federal minimum wage rates over
the past two years. A 1996 amendment to the Federal Fair Labor Standards Act of
1938 (the "Federal Fair Labor Standards Act") mandated an increase from $4.25
per hour to $4.75 per hour which took effect in October 1996, and a second
increase in September 1997 to $5.15 per hour.
31
Other restaurant operating expenses were 25.3% of sales in 1997, compared
to 24.7% in 1996 and 24.5% in 1995. In part, the increase in 1997 is reflective
of general inflationary increases without a corresponding increase in comparable
restaurant sales. In addition, the Company added a significant number of
restaurants through acquisition during 1997, and, therefore, expense
relationships have been somewhat higher as these new units become fully
integrated into the business of the Company.
Administrative expenses increased approximately $2.7 million, and, as a
percentage of sales, were 4.4% in 1997 compared to 4.5% and 4.6% in 1996 and
1995, respectively. This increase reflects the addition of field supervision and
corporate support as a result of the 1997 addition of over 100 restaurants and
to support the Company's plans for continued expansion.
EBITDA. EBITDA increased from $32.0 million in 1996 to $32.5 million in
1997. As a percentage of sales, EBITDA decreased from 13.3% in 1996 to 11.0% in
1997 as a result of the factors discussed above. EBITDA was $30.9 million in
1995.
Depreciation and Amortization. Depreciation and amortization was
$15.1 million in 1997, $11.0 million in 1996 and $11.3 million in 1995. These
costs increased $4.1 million in 1997 which was due primarily to the increase in
goodwill and purchased intangibles resulting from the purchase method of
accounting for newly acquired restaurants.
Interest Expense. Interest expense was $15.6 million in 1997 compared to
$14.2 million and $14.5 million in 1996 and 1995, respectively. The increase in
1997 was the result of higher average debt balances brought about by the funding
of the restaurants that were acquired during the year.
Income Taxes. The provision for income taxes of $655,000 in 1997 resulted
in an effective income tax rate of 23.2%. The low effective rate was primarily
attributable to the favorable settlement of a Federal income tax claim that the
Company has had outstanding for several years. As a result of the settlement,
the Company's tax provision was reduced by $806,000 and the Company recorded
interest income of $983,000. The higher than anticipated effective tax rate in
1996 was principally the result of the $.5 million of costs associated with a
change of control of the Company which are not deductible. The income tax
benefit reflected in 1995 resulted from the reversal of a valuation allowance
for the net deferred income tax asset associated with the Company's tax loss
carry forwards. This was based on a review of expected future earnings which
concluded that it was more likely than not that the Company would fully realize
the benefits of the net operating loss carry forwards.
RESULTS OF OPERATIONS OF POLLO TROPICAL
The following table sets forth for the period indicated certain selected
income statement data as a percentage of restaurant sales, except general and
administrative expenses, which is shown as a percentage of total revenues, and
certain restaurant data:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---------------- ----------------
INCOME STATEMENT DATA:
COSTS AND EXPENSES:
Cost of sales............................................. 36.2% 37.7% 34.6% 35.1% 33.9%
Restaurant payroll........................................ 24.6 24.6 23.3 23.5 22.6
Other restaurant operating expenses....................... 17.1 19.0 17.5 17.8 18.0
General and administrative................................ 9.2 8.4 8.4 9.0 7.8
Depreciation and amortization of property and equipment... 3.5 3.5 3.1 3.1 2.9
Amortization of deferred restaurant pre-opening costs..... 2.1 0.9 0.2 0.3 0.1
Other amortization........................................ 0.5 0.3 0.3 0.4 0.2
Restaurant closure expenses............................... 2.7 9.9 -- -- --
Income (loss) from operations............................... 5.0 (3.6) 13.7 12.0 14.4
Other expense, net(a)....................................... (1.6) (1.4) (0.7) (1.1) (1.3)
Net income (loss)........................................... 2.0 (3.1) 8.1 6.8 8.1
32
- ------------------
(a) Includes interest expense, interest income, other (income) expense, net, and
for the six months ended June 30, 1998, $503,000 of expenses related to the
sale of Pollo Tropical; excludes restaurant closure expenses.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
General
Pollo Tropical's operating results continued to improve during the six
months ended June 30, 1998 as Pollo Tropical posted its ninth consecutive
quarter of positive same store sales. For the first six months of 1998, same
store sales increased 7.9% compared with the same period of 1997. Pollo Tropical
believes that the sustained improvement in same store sales is primarily due to
the focused execution of its key marketing strategies, including every-day value
pricing on selected menu items, separate advertising campaigns aimed toward its
dual-target audiences, successful new product introductions and improved
customer service. As a result of the continued emphasis on marketing,
operational and cost control initiatives, Pollo Tropical's operating margins
have improved to 15.7% as a percentage of restaurant sales for the first six
months of 1998 compared with 12.0% for the same period of 1997.
During the six months ended June 30, 1998, one franchise restaurant opened
in Puerto Rico, one franchise restaurant opened in the Dominican Republic and
one franchise restaurant opened in Ecuador, continuing Pollo Tropical's growth
in the Caribbean and Central and South America through franchising. Pollo
Tropical receives exclusivity fees upon signing of area development agreements.
Such fees are recognized as revenue when franchise restaurants open or when such
agreements terminate. Additionally, Pollo Tropical receives a franchise fee when
franchise restaurants become operational, and Pollo Tropical receives continuing
royalties based on sales. As Pollo Tropical does not control the timing of
franchise openings and/or terminations of agreements, the recognition of
franchise revenues cannot be accurately predicted and, therefore, may fluctuate
significantly on a quarter to quarter basis.
Restaurant Sales. Restaurant sales for the six months ended June 30, 1998
increased 11.4% to $35.4 million from $31.8 million for the comparable six
months of 1997. This increase was primarily attributable to a sales increase in
restaurants open during the entire six months for both years. Same store sales
for the six months ended June 30, 1998 increased 7.9% from the comparable period
of 1997. Restaurant sales were also positively affected by an increase in the
number of restaurants open during the six months ended June 30, 1998, as
compared to the same period of 1997. During the six months ended June 30, 1998,
36 restaurants operated for the full six months, compared to the six months
ended June 30, 1997 when 34 restaurants operated for the full six months and one
operated for part of the six months.
Franchise Revenues. Franchise revenues for the six months ended June 30,
1998 increased $34,000 to $454,000 for the six months ended June 30, 1998, from
$420,000 for the six months ended June 30, 1997. Franchise revenues generally
consist of initial franchise fees which are recognized when a restaurant opens,
continuing royalties and fees from operating franchised restaurants, and
forfeiture of exclusivity fees when area development agreements are terminated.
This increase in franchise revenues primarily relates to an increase in
royalties from more franchise restaurants operating during the six months ended
June 30, 1998, as compared to the same period of 1997. During the six months
ended June 30, 1998, 16 franchise restaurants operated for the full six months
and three franchise restaurants operated for part of the six months, compared to
the first six months of 1997 when seven franchise restaurants operated for the
full six months and seven franchise restaurants operated for part of the six
months. The increase in royalty revenues was partially offset by a decrease in
franchise fees related to fewer franchise restaurant openings during the six
months ended June 30, 1998 as compared to the first six months of 1997.
Cost of Sales. Cost of sales, which consists of food, beverage, and paper
and supply costs, for the six months ended June 30, 1998 decreased to 33.9%, as
a percentage of restaurant sales, from 35.1% for the comparable six months of
1997. This was primarily due to an overall decrease in the average market price
of
33
chicken as compared to the first six months of 1997, a sales mix change driven
by the introduction of a new product during the first six months of 1997 and
improved operating efficiencies and controls.
Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers'
compensation insurance and group health insurance, for the six months ended
June 30, 1998 decreased to 22.6%, as a percentage of restaurant sales, from
23.5% for the comparable period of 1997. This decrease was primarily due to
efficiencies from the relative fixed cost nature of certain payroll costs
resulting from higher sales volumes for the six months ended June 30, 1998, as
compared to the first six months of 1997, as well as a reduction in workers'
compensation insurance expense.
Other Restaurant Operating Expenses. Other restaurant operating expenses
consists of all restaurant operating costs other than payroll expenses and
includes occupancy costs, utilities and advertising expenses. These expenses for
the six months ended June 30, 1998 increased to 18.0%, as a percentage of
restaurant sales, from 17.8% for the comparable period of 1997. The largest
component of the increase is a $150,000 increase in restaurant closure expenses.
The estimated expenses consist of $50,000 in net losses on disposal of fixed
assets and $100,000 in estimated liabilities associated with the termination of
the leases. Any difference between these estimated expenses and the actual
amounts of such expense will be recorded during the period in which such
differences become known.
General and Administrative Expenses. General and administrative expenses
for the six months ended June 30, 1998 decreased to 7.8%, as a percentage of
total revenues, from 9.0% for the comparable period of 1997. This decrease was
primarily due to savings associated with the outsourcing of certain management
functions and the fixed cost nature of general and administrative costs relative
to higher sales volume experienced during the six months ended June 30, 1998 as
compared to the first six months of 1997.
Depreciation and Amortization of Property and Equipment. Depreciation and
amortization of property and equipment for the six months ended June 30, 1998
decreased to 2.9%, as a percentage of restaurant sales, from 3.1% for the
comparable six month period in 1997. This decrease was primarily due to the
fixed cost nature of depreciation costs relative to the higher sales volume
experienced during the six months ended June 30, 1998, as compared to the
comparable six month period in 1997.
Other Amortization. Other amortization consists of amortization of
intangibles such as trademarks, leasehold acquisition costs, deferred restaurant
pre-opening costs and deferred franchise expenses. Other amortization for the
six months ended June 30, 1998, decreased to 0.3% as a percentage of restaurant
sales, from 0.7% for the comparable six month period of 1997. The decrease
primarily relates to fewer new restaurants being opened during the 12 months
ended June 30, 1998 as compared to the 12 months ended June 30, 1997 and less
amortization of deferred franchise costs due to the opening of fewer franchise
restaurants during the six months ended June 30, 1998, as compared to the first
six months of 1997.
Other Income (Expenses). Other income (expenses) for the six month period
ended June 30, 1998, increased as a percentage of restaurant sales, to 1.3% from
1.1% for the comparable six month period of 1997. This increase was primarily
due to approximately $503,000 in consulting and advisory services related to the
merger of Pollo Tropical and Carrols, partially offset by lower interest costs
due to the lower average balance of debt under the revolving line of credit
during the six months ended June 30, 1998 as compared with the comparable six
months of 1997. Pollo Tropical incurred interest costs of $29,340 during the six
months ended June 30, 1998. Such interest cost was offset by $60,991 in interest
income, which consisted primarily of interest income on invested cash balances.
During the same six month period of 1997, Pollo Tropical incurred interest costs
of $371,471, of which $1,034 was capitalized as construction cost and $7,578 was
offset as interest income.
FISCAL 1997 COMPARED TO FISCAL 1996
General
Pollo Tropical's financial results showed significant improvement in Fiscal
1997 as a result of Pollo Tropical's focused strategy. In Fiscal 1996, Pollo
Tropical revised its business strategy to concentrate on its ownership of
restaurants in its core markets in south and central Florida with company
restaurants and to
34
utilize franchising to expand the concept internationally, targeting South and
Central America and the Caribbean. As a result of this revised strategy, Pollo
Tropical closed five unprofitable expansion market restaurants in the fourth
quarter of 1996, and one in the first quarter of 1997. During Fiscal 1997, Pollo
Tropical opened two new restaurants in the core market of south Florida,
bringing the total company owned restaurants to 36 as of the end of Fiscal 1997,
from the 35 restaurants open as of the end of Fiscal 1996. Restaurant sales
increased approximately two percent as a result of positive same store sales,
but were somewhat offset by Pollo Tropical operating fewer restaurants through
most of 1997 as compared with 1996. Pollo Tropical's continued emphasis on
marketing, operational, and cost control initiatives produced improved store
level margins in 1997.
During Fiscal 1997, a total of nine new franchises were opened during the
year. This expansion occurred in three new international markets: the Dominican
Republic, Netherlands Antilles and Ecuador, as well as continued expansion in
the Puerto Rico market.
Restaurant Sales. Restaurant sales increased $1.4 million (2%) to
$65.1 million for Fiscal 1997 from $63.7 million for Fiscal 1996. This was
primarily due to a sales increase in restaurants open for both years. This
increase was offset by the effect of five restaurants closed in November 1996
and one restaurant closed in January 1997. During Fiscal 1997, 34 restaurants
operated for the full year and three restaurants operated for only part of the
year, of which one was closed during the year as compared to the prior year when
32 restaurants operated for the full year and eight restaurants operated for
only part of the year, of which five were closed in November 1996. Same store
sales for Fiscal 1997 increased 4.2%.
Franchise Revenues. Franchise revenues increased $313,000 to $812,000 for
Fiscal 1997 from $499,000 for Fiscal 1996. This revenue consisted of initial
franchise fees which are recognized when a restaurant opens, continuing
royalties, fees from operating franchised restaurants and forfeiture of
exclusivity fees, which are recognized when area development agreements are
terminated. This increase was primarily due to an increase in the number of
restaurants opened and operating during Fiscal 1997. During Fiscal 1997, seven
restaurants operated for the full year and nine opened during the year as
compared to the prior year when one restaurant operated for the full year and
six were opened during the year and five domestic franchised restaurants were
closed. During Fiscal 1997, Pollo Tropical recognized $25,000 for forfeiture of
exclusivity fees, as the area development agreement with Carrols was terminated.
During Fiscal 1996, $112,500 was recognized for forfeitures of exclusivity fees.
No area development agreements were entered into during Fiscal 1997.
As of the fiscal year ended December 31, 1997, 16 franchised restaurants
were in operation, as compared to seven franchised restaurants as of the fiscal
year ended December 31, 1996. Of the nine franchised restaurants opened during
Fiscal 1997, four were opened in Puerto Rico, two in the Dominican Republic, two
in Ecuador and one in Netherlands Antilles.
Cost of Sales. Cost of sales, which consists of food, beverage, paper and
supply costs, decreased 310 basis points, as a percentage of restaurant sales,
to 34.6% for Fiscal 1997 from 37.7% for Fiscal 1996. This decrease was due to a
variety of factors including favorable new contract prices on certain food and
paper items and distribution services, improved operating efficiencies and
controls, a sales mix change driven by the introduction of a new product with
relative lower food costs, the closing of six stores which had higher food cost
relative to their low sales volumes, and the effect of other initiatives
implemented during the previous twelve-month period.
Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers
compensation insurance and group health insurance decreased 130 basis points, as
a percentage of restaurant sales, to 23.3% for Fiscal 1997 as compared to 24.6%
for Fiscal 1996. This decrease was primarily due to Pollo Tropical's strategy of
concentrating growth in its core markets of south and central Florida which have
lower payroll expenses relative to their sales. In addition, higher average
sales volumes for Fiscal 1997 and increased controls placed on labor scheduling
at the unit level further reduced payroll expense, as a percentage of restaurant
sales, as compared to Fiscal 1996. These factors were slightly offset by the
increases in the minimum wage which went into effect September 1, 1996 and 1997.
During the next year Pollo Tropical expects that the higher minimum wage will
have a slightly
35
adverse effect on restaurant payroll expense, as a percentage of restaurant
sales, when compared to the previous year.
Other Restaurant Operating Expenses. Other restaurant operating expenses
consist of all restaurant operating costs other than payroll expenses and
include occupancy costs, utilities and advertising expenses. These expenses
decreased 150 basis points, as a percentage of restaurant sales, to 17.5% for
Fiscal 1997 from 19.0% for Fiscal 1996. The largest component of this change was
occupancy and utilities costs which decreased 90 basis points, as a percentage
of restaurant sales, to 8.6% for Fiscal 1997 from 9.5% during Fiscal 1996. This
decrease was due to Pollo Tropical's strategy of concentrating growth in its
core markets of south and central Florida which have lower occupancy and
utilities costs relative to their sales.
General and Administrative Expenses. General and administrative expenses
remained level at 8.4%, as a percentage of total revenues, for the year ended
December 31, 1997, as compared to the same period of the prior year.
Depreciation and Amortization of Property and Equipment. Depreciation and
amortization of property and equipment decreased 40 basis points, as a
percentage of restaurant sales, to 3.1% for Fiscal 1997 from 3.5% for Fiscal
1996. This decrease was primarily due to the Company's strategy of concentrating
growth in its core markets of South and Central Florida which have lower
depreciation costs relative to their sales volumes. This decrease was partially
offset by the two new restaurants opened during Fiscal 1997.
Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred restaurant pre-opening costs decreased 70 basis points, as a percentage
of restaurant sales, to 0.2% for Fiscal 1997 from 0.9% for Fiscal 1996. This
decrease was the result of fewer new restaurants being opened during the
12 months ended December 31, 1997, as compared to the 12 month period ended
December 31, 1996.
Other Amortization. Other amortization consists of amortization of
intangibles such as trademarks, organization costs, leasehold acquisition costs
and deferred franchise expenses. Other amortization as a percentage of
restaurant sales remained level at 0.3% for Fiscal 1997, as compared to Fiscal
1996.
Restaurant Closure Expense. In the fourth quarter of Fiscal 1996, Pollo
Tropical accrued estimated expenses in the amount of $6.5 million associated
with the closing of six restaurants. The estimated expenses consist of
$5.7 million in net losses on disposal of property and equipment, $670,000 in
estimated liabilities associated with termination of leases and $115,000
associated with employee termination benefits.
During Fiscal 1997, Pollo Tropical disposed of four of the six restaurants
for which it had established a reserve in Fiscal 1996. Three of the restaurants
were sold and one was subleased. As part of the sale of one of the restaurants,
Pollo Tropical received a note receivable in the amount of $880,000. Subsequent
to December 31, 1997, the mortgagee defaulted on the note. During Fiscal 1997,
Pollo Tropical incurred $3.5 million in net losses on disposal of fixed assets,
$583,000 in expenses associated with termination of leases and $108,000
associated with employee termination benefits which were applied to the closure
reserve established in Fiscal 1996. The remaining closure reserve in
management's estimate represents amounts expected to be incurred, net of amounts
realized upon the disposition of the remaining two restaurants. Any difference
between these estimated expenses and the actual amounts of such expenses will be
recorded during the period in which such differences become known.
Other Income (Expenses). Pollo Tropical incurred interest costs of
$549,000 during Fiscal 1997 of which $4,000 was capitalized as construction
costs. Such interest was further offset by $55,000 in interest income, $46,000
of which was interest income on the note receivable for the sale of a
restaurant. During Fiscal 1996, Pollo Tropical incurred interest costs of
$1,035,000, of which $44,000 was capitalized as construction cost, and generated
interest income of $15,000. This decrease in interest costs was primarily the
result of the lower average balance of debt outstanding under the revolving line
of credit during Fiscal 1997, as compared to Fiscal 1996.
36
FISCAL 1996 COMPARED TO FISCAL 1995
Restaurant Sales. Restaurant sales for Fiscal 1996 increased $8.2 million
(15%) to $63.7 million for Fiscal 1996 from $55.5 million for Fiscal 1995. This
was due to an increased number of restaurants being opened during the year ended
December 31, 1996, as compared to the same period of the prior year and to a
sales increase in restaurants open for both years. During Fiscal 1996, 32
restaurants operated for the full year and eight restaurants operated for only
part of the year, of which five were closed during the year as compared to the
prior year when 31 restaurants operated for the full year and seven restaurants
operated for only part of the year, of which two were closed during the year.
Same store sales for Fiscal 1996 increased 7.9%.
Franchise Revenues. Franchise revenues for Fiscal 1996 decreased $55,000
to $499,000 for Fiscal 1996 from $554,000 for Fiscal 1995. This revenue consists
of initial franchise fees which are recognized when a restaurant opens,
continuing royalties, fees from operating franchised restaurants and forfeiture
of exclusivity fees when area development agreements are terminated. During
Fiscal 1996, Pollo Tropical recognized $112,500 for forfeiture of exclusivity
fees as compared to $197,000 for the same period of the prior year.
During the year ended December 31, 1996, five domestic franchised
restaurants were closed, five franchised restaurants were opened in Puerto Rico,
and one domestic franchised restaurant opened in a non-traditional site in South
Florida.
Cost of Sales. Cost of sales, which consists of food, beverage, paper and
supply costs, increased 150 basis points, as a percentage of restaurant sales,
to 37.7% for Fiscal 1996 from 36.2% for the comparable period of the prior year.
This increase was due to higher relative food costs resulting from several
factors including the continued higher market price for chicken, the value
pricing strategy implemented in the first quarter, the successful launch of the
new pork product line in the core market at introductory pricing, and the
greater waste experienced in the lower volume restaurants in the expansion
markets. The market price for chicken averaged 12% higher for Fiscal 1996 as
compared to the same period of the prior year. During the third and fourth
quarters of Fiscal 1996, Pollo Tropical implemented several cost savings
programs as well as selective price increases on several menu items.
Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers
compensation insurance and group health insurance remained level, as a
percentage of restaurant sales, at 24.6% for Fiscal 1996 as compared to Fiscal
1995. Higher sales volumes as well as increased controls placed on labor
scheduling at the unit level helped to offset the higher relative payroll costs
in the expansion markets and the impact of the minimum wage increase which was
effective in the quarter ended December 31, 1996.
Other Restaurant Operating Expenses. Other restaurant operating expenses
consist of all restaurant operating costs other than payroll expenses and
include occupancy costs, utilities and advertising expenses. These expenses
increased 190 basis points, as a percentage of restaurant sales, to 19.0% for
Fiscal 1996 from 17.1% for the same period of the prior year. The largest
component of this change was advertising expense which increased 90 basis points
to 4.7% from 3.8% during the same period of the prior year. This increase was
due to the new marketing strategies and initiatives as well as expenditures in
supporting the expansion markets. The increase in operating expenses was also a
result of an increase in occupancy costs of 30 basis points to 4.7% from 4.4%
for the same period of the prior year. This increase was primarily due to the
full year effect for the two restaurants that were part of sale-leaseback
transactions in September 1995.
General and Administrative Expenses. General and administrative expenses
for Fiscal 1996 decreased 80 basis points to 8.4% from 9.2% for the same period
of the prior year. This decrease was primarily due to the fixed cost nature of
the general and administrative expenses relative to the higher sales volumes
experienced during the year. Pollo Tropical has reduced the number of support
staff and several operations positions as a result of the decrease in the number
of openings of new company-owned restaurants in Fiscal 1996 and Fiscal 1997.
Depreciation and Amortization of Property and Equipment. Depreciation and
amortization of property and equipment remained level, as a percentage of
restaurant sales, at 3.5% for the year ended December 31, 1996 as compared to
the same period of the prior year.
37
Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred restaurant pre-opening costs decreased 120 basis points, as a
percentage of restaurant sales, to 0.9% for Fiscal 1996 from 2.1% for Fiscal
1995. This decrease was the result of fewer new restaurants being opened during
the latest 12 months as compared to the 12 month period ended December 31, 1995.
Other Amortization. Other amortization consists of amortization of
intangibles such as trademarks, organization costs, leasehold acquisition costs
and deferred franchise expenses. Other amortization decreased slightly 20 basis
points, as a percentage of restaurant sales, to 0.3% for Fiscal 1996 from 0.5%
for Fiscal 1995. This decrease was primarily due to the higher cost associated
with franchised restaurants opened during Fiscal 1995 as compared to Fiscal
1996.
Restaurant Closure Expenses. During 1995, Pollo Tropical accrued estimated
expenses in the amount of $1.6 million for two restaurants closed in October
1995. The estimated expenses consisted of $1.2 million in net losses on disposal
of fixed assets and $321,000 in estimated liabilities associated with
termination of leases. The assets related to the Fiscal 1995 closed restaurants
were disposed of during Fiscal 1996 resulting in a gain in the amount of
$174,000. This gain was primarily attributable to the sale of the one restaurant
site and the reversal of an accrual due to a more favorable economic transaction
than originally estimated associated with the subleasing of the other restaurant
site.
In the fourth quarter of Fiscal 1996, Pollo Tropical accrued estimated
expenses in the amount of $6.5 million associated with the closing of six
restaurants. The estimated expenses consist of $5.7 million in net losses on
disposal of fixed assets, $670,000 in estimated liabilities associated with
termination of leases and $115,000 associated with employee termination
benefits. Any difference between these estimated expenses and the actual amounts
of such expenses will be recorded during the period in which such differences
become known.
Other Income (Expense). Pollo Tropical incurred interest costs of
$1.0 million during Fiscal 1996 of which $44,000 was capitalized as construction
costs. Such interest was further offset by $15,000 in interest income. During
Fiscal 1995, Pollo Tropical incurred interest costs of $991,000, of which
$206,000 was capitalized as construction cost, and generated interest income of
$28,000. Other expense for Fiscal 1995, included a write-off of approximately
$166,000 of deferred costs associated with Pollo Tropical's efforts in obtaining
certain private financing.
Extraordinary Charge. During Fiscal 1995, Pollo Tropical incurred an
extraordinary charge of $63,000 net of income tax benefit of $38,000, related to
the write-off of charges associated with the refinancing of Pollo Tropical's
debt which occurred during the third quarter of Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company does not have significant receivables or inventory and receives
trade credit based upon negotiated terms in purchasing food products and other
supplies. The Company is able to operate with a substantial working capital
deficit because (i) restaurant operations are conducted on a cash basis,
(ii) rapid turnover allows a limited investment in inventories, and (iii) cash
from sales is usually received before related accounts for food, supplies and
payroll become due. The Company's cash requirements arise primarily from the
need to finance the opening and equipping of new restaurants, for ongoing
capital reinvestment in its existing restaurants, for the acquisition of
existing Burger King restaurants, and for debt service.
The Company generated cash flow from operations in the first nine months of
1998 of approximately $22.3 million, compared with $7.1 million for the first
nine months of 1997.
The Company's capital expenditures include acquisitions of $97.3 million
and $78.1 million for the nine months ended September 30, 1998 and 1997,
respectively. The Company acquired Pollo Tropical in July 1998 for approximately
$97 million. For the first nine months of 1998 and 1997, the Company acquired
two and 91 Burger King restaurants, respectively, for $.6 million and
$78.1 million, respectively.
Capital expenditures, excluding acquisitions, for the first nine months of
1998 totaled $22.0 million, which included construction costs for twelve new
Burger King restaurants, six of which were open at September 30, 1998. Capital
expenditures, excluding acquisitions, for the same period in 1997 totaled
38
$11.0 million, which included construction costs for seven new Burger King
restaurants. The Company's capital expenditures also include remodeling costs
and capital maintenance projects for the ongoing reinvestment and enhancement of
its restaurants. These expenditures have increased in 1998 due to growth in the
number of restaurants and investments being made to enhance the operations of
the 95 Burger King restaurants the Company acquired since the beginning of 1997.
Carrols also has projects underway to upgrade its corporate information and
decision support systems along with its restaurant point-of-sale and management
systems. These systems projects have resulted in incremental capital investments
which totaled approximately $2.9 million for the first nine months of 1998.
The Company generated $18.5 million from the sale and leaseback of two
Burger King restaurant properties and 12 Pollo Tropical restaurant properties
during the first nine months of 1998, the proceeds of which were used to reduce
outstanding debt. Carrols also paid dividends to its parent totaling
$3.9 million for its parent's payment of dividends on its preferred stock and
for the early redemption of the remaining $3.6 million in preferred stock which
was scheduled for mandatory redemption in December 1998 and December 1999.
Carrols' 1997 operations generated approximately $19.9 million in cash,
compared to $14.3 million during 1996 and $16.7 million in 1995.
Capital expenditures totaled $96.7 million, $23.2 million and $8.5 million,
in 1997, 1996 and 1995, respectively. The 1997 capital expenditures included
$78.5 million for the acquisition of 93 existing Burger King restaurants
(including real estate for three of the restaurants), as well as $9.7 million
for the construction of 15 new restaurants. The balance of the 1997 capital
expenditures went toward restaurant capital maintenance and remodeling. During
1997, Carrols completed 23 remodels in conjunction with the renewal of
franchises that were scheduled to expire between 1997 and 1999. During the past
three years, Carrols has completed 68 remodels.
On March 27, 1997, Madison Dearborn acquired 283,334 shares, and senior
management acquired 10,810 shares, of common stock of Holdings which resulted in
Carrols receiving net proceeds of $30.4 million. On May 12, 1997 Carrols also
entered into a senior credit facility which established a $25.0 million
revolving loan facility and a $127.0 million advance loan facility (the "Senior
Credit Facility"). During 1997, Carrols used the net proceeds from the sale of
stock along with borrowings under its Senior Credit Facility to fund the
acquisition of 93 Burger King restaurants.
The sale and leaseback of 15 restaurant properties in December 1997
generated $13.0 million, the proceeds of which were used to reduce amounts which
had been borrowed under the Senior Credit Facility. In 1997, Carrols also paid
dividends to Holdings totaling $4.3 million for the payment by Holdings of
dividends on its preferred stock and for the redemption of $3.6 million of the
preferred stock.
At September 30, 1998, the Company had $130.9 million outstanding under the
Senior Credit Facility. The Pollo Acquisition was funded using the Company's
Senior Credit Facility which was amended on July 9, 1998 to modify, among other
things, certain financial covenants with respect to debt to cash flow ratios.
The Company is in compliance with its debt covenants at September 30, 1998. See
"Description of the Senior Credit Facility."
At September 30, 1998, after giving pro forma effect to the Private
Offering and the application of the proceeds therefrom, the Company would have
had approximately $254.3 million of indebtedness outstanding. Such indebtedness
would primarily have consisted of $170.0 million principal amount of the Old
Notes and $84.3 million of Senior Indebtedness.
Interest payments under the Old Notes and the Exchange Notes (after the
consummation of the Exchange Offer) and existing debt obligations will represent
significant liquidity requirements for the Company. The Company believes that
its operations and capital resources will provide sufficient cash availability
to cover its working capital, capital expenditures, planned development and debt
service requirements for the foreseeable future.
In 1998, the Company anticipates capital expenditures of approximately
$33 million, excluding the cost of acquisitions. These amounts include
approximately $15 million for construction of new Burger King
39
restaurants (including certain real estate) and $8 million for ongoing
reinvestment and remodeling of its existing Burger King restaurants. In 1998,
the Company began to upgrade its restaurant point-of-sale and in-restaurant
support systems, and has also undertaken an upgrade of its corporate information
and decision support systems. During 1998 and 1999 the Company estimates that it
will incur total expenditures for these systems projects of $11 to $12 million.
The Company anticipates total capital expenditures in 1998 of approximately $5
million for Pollo Tropical, consisting primarily of costs related to the
construction of new restaurants.
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in food and paper costs, labor and other
operating expenses. Wages paid in the Company's restaurants are impacted by
changes in the Federal or state minimum hourly wage rates. Accordingly, changes
in the Federal or states minimum hourly wage rate directly affect the Company's
labor cost. The Company and the restaurant industry 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 the
Company will be able to offset such inflationary cost increases in the future.
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Carrols has addressed this
risk to the availability and integrity of financial systems and the reliability
of operation systems. Carrols has projects underway for the installation of new
point-of-sale systems in its restaurants and for the replacement of a
substantial portion of its corporate financial and decision support systems.
The primary purpose of these projects is to improve the efficiency of
Carrols' restaurant and support operations, however, they will also provide the
additional benefit of making its systems Year 2000 compliant. The Company has
purchased point-of-sale hardware and software, and a suite of corporate
financial software applications all of which are designed and warranted to be
Year 2000 compliant. The total cost of these capital projects is anticipated to
be approximately $12 million to $13 million. Through September 30, 1998 the
Company has expended $3.2 million associated with these projects. The majority
of the remaining expenditures pertain to restaurant point-of-sale hardware.
As of November 13, 1998, the Company has successfully implemented certain
corporate financial applications including general ledger, accounts payable and
asset management as well as a portion of its payroll processing. The remaining
significant corporate support systems to be implemented are restaurant payroll
and human resources, which is anticipated to be implemented by March 31, 1999,
and sales and inventory accounting systems which are anticipated to be
implemented by the third quarter of 1999.
The Company believes that all of its computer systems will be Year 2000
compliant by the end of the third quarter of Fiscal 1999. The Company has not
developed a detailed contingency plan due to the anticipated implementation
dates of the projects above. The Company is evaluating its implementation
progress on an ongoing basis and will develop contingency plans as needed should
its scheduled implementation dates be modified. This is a forward looking
statement and is subject to risks and uncertainties, including the ability of
third party vendors and software provided by third parties to effectively
satisfy the requirements of being Year 2000 compliant.
40
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (the
"Letter of Transmittal") (which together constitute the Exchange Offer), to
exchange up to $170,000,000 aggregate principal amount of Exchange Notes for a
like aggregate principal amount of Old Notes properly tendered on or prior to
[ ] (the "Expiration Date") and not withdrawn as permitted pursuant
to the procedures described below. The Exchange Offer is being made with respect
to all of the Old Notes.
As of the date of this Prospectus, the aggregate principal amount of the
Old Notes outstanding is $170,000,000. This Prospectus, together with the Letter
of Transmittal, is first being sent on or about [ ], to all holders
of Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "--Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on November 24, 1998 in a transaction exempt from
the registration requirements of the Securities Act. Accordingly, the Old Notes
may not be reoffered, resold, or otherwise transferred unless registered under
the Securities Act or any applicable securities law or unless an applicable
exemption from the registration and prospectus delivery requirements of the
Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company and
all of its subsidiaries which conduct business operations (the "Guarantors")
entered into the Exchange and Registration Rights Agreement dated November 24,
1998 among the Company, the Guarantors and Chase Securities Inc. and NationsBanc
Montgomery Securities LLC (the "Registration Rights Agreement"), which requires
the Company and the Guarantors to file with the Commission a registration
statement relating to the Exchange Offer (the "Registration Statement") not
later than 75 days after the date of original issuance of the Old Notes, and to
use their best efforts to cause the Registration Statement to become effective
under the Securities Act not later than 150 days after the date of original
issuance of the Old Notes and the Exchange Offer to be consummated not later
than 30 business days after the date of the effectiveness of the Registration
Statement. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement.
The term "holder" with respect to the Exchange Offer, means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder, or any person whose Old Notes are held of record by The Depository Trust
Company ("DTC"). Other than pursuant to the Registration Rights Agreement, the
Company is not required to file any registration statement to register any
outstanding Old Notes. Holders of Old Notes who do not tender their Old Notes or
whose Old Notes are tendered but not accepted would have to rely on exemptions
from the registration requirements under the securities laws, including the
Securities Act, if they wish to sell their Old Notes.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal, $1,000 in principal amount of Exchange
Notes for each $1,000 in principal amount of the Old Notes. The terms of the
Exchange Notes are identical in all material respects to the terms of the Old
Notes for which they may be exchanged pursuant to this Exchange Offer, except
that the Exchange Notes will generally be freely transferable by holders thereof
and will not be subject to any covenant regarding registration. The Exchange
Notes will evidence the same indebtedness as the Old Notes and will be entitled
to the benefits of the Indenture. See "Description of the Exchange Notes."
41
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company is making the Exchange Offer in reliance on the position of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letters, and there can be no assurance that the Commission would
make a similar determination with respect to the Exchange Notes. Based on these
interpretations by the staff of the Commission, the Company believes that
Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for sale, resold and otherwise transferred by any holder of such
Exchange Notes (other than any such holder that is a broker-dealer or an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes and neither such holder nor any other such person is
engaging in or intends to engage in a distribution of such Exchange Notes. Since
the Commission has not considered the Exchange Offer in the context of a
no-action letter, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer. See
"--Resale of Exchange Notes" and "Plan of Distribution."
Interest on the Exchange Notes shall accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from November 24, 1998.
Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
[ ] (the "Expiration Date"). The Company expressly reserves the
right, at any time or from time to time, to extend the period of time during
which the Exchange Offer is open, and thereby delay acceptance for exchange of
any Old Notes, by giving oral or written notice to IBJ Whitehall Bank & Trust
Company, as Exchange Agent (the "Exchange Agent") and by giving written notice
of such extension to the holders thereof or by timely public announcement no
later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer unless properly
withdrawn. The Company does not anticipate extending the Expiration Date.
The Company expressly reserves the right to (i) terminate the Exchange
Offer and not to accept for exchange any Old Notes not theretofore accepted for
exchange upon the occurrence of any of the events specified below under
"--Certain Conditions to the Exchange Offer" which have not been waived by the
Company and (ii) amend the terms of the Exchange Offer in any manner which, in
its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day
excluding Saturday, Sunday or any other day which is a legal holiday under the
laws of New York, New York, or is a day on which banking institutions therein
located are authorized or required by law or other governmental action to close.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the
42
Exchange Offer must transmit either (i) a properly completed and duly executed
Letter of Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent, at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date, or (ii) if such Old Notes
are tendered pursuant to the procedures for book-entry transfer set forth below
under "--Book-Entry Transfer," a holder tendering Old Notes may transmit an
Agent's Message (as defined herein) to the Exchange Agent in lieu of the Letter
of Transmittal, in either case on or prior to the Expiration Date. In addition,
either (i) certificates for such Old Notes must be received by the Exchange
Agent along with the Letter of Transmittal, (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such
procedure is available, into the Exchange Agent's account at the DTC (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, along with the Letter of Transmittal or an Agent's
Message, as the case may be, must be received by the Exchange Agent prior to the
Expiration date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. The term "Agent's Message" means a message,
transmitted to the Book-Entry Transfer Facility and received by the Exchange
Agent and forming a part of the Book-Entry Confirmation, which states that the
Book-Entry Transfer Facility has received an express acknowledgment from the
tendering holder that such holder has received and agrees to be bound by the
Letter of Transmittal and the Company may enforce the Letter of Transmittal
against such holder. The method of delivery of Old Notes, Letters of Transmittal
or Agent's Message and all other required documents is at the election and risk
of the Holder. If such delivery is by mail, it is recommended that registered
mail, properly insured, with return receipt requested, be used. In all cases,
sufficient time should be allowed to assure timely delivery. No Letters of
Transmittal or Old Notes should be sent to the Company.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange for such
Old Notes are to be issued (and any untendered Old Notes are to be reissued) in
the name of the registered holder (which term, for the purposes described
herein, shall include any participant in the Book-Entry Transfer Facility's
systems whose name appears on a security listing as the owner of Old Notes), the
signature of such signer need not be guaranteed. In any other case, the tendered
Old Notes must be endorsed or accompanied by written instruments of transfer in
form satisfactory to the Company and duly executed by the registered holder, and
the signature on the endorsement or instrument of transfer must be guaranteed by
a bank, broker, dealer, credit union, savings association, clearing agency or
other institution (each an "Eligible Institution") that is a member of a
recognized signature guarantee medallion program within the meaning of
Rule 17Ad-15 under the Exchange Act. If the Exchange Notes and/or Old Notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the Old Notes, the signature in the
Letter of Transmittal must be guaranteed by an Eligible Institution.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly executed Letter of Transmittal
accompanied by the Old Notes is received by the Exchange Agent, or (ii) a Notice
of Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided below) from an Eligible Institution is received by the
Exchange Agent. Issuances of Exchange Notes in exchange for Old Notes tendered
pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided below) by an Eligible Institution
will be made only against deposit of the Letter of Transmittal (and any other
required documents) and the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Letters of Transmittal or Old Notes tendered for
exchange will be determined by the Company in its sole discretion, which
determination shall be final and binding. The Company reserves the absolute
right to reject any and all tenders of any particular Old Notes not properly
tendered and not to accept any particular Old Notes for exchange which
acceptance might, in the judgment of the Company or its counsel, be unlawful.
The Company also reserves the absolute right to waive any defects or
irregularities as to any particular Old Notes or conditions of the Exchange
Offer either before or after the Expiration Date (including the fight to waive
the ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities
43
in connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. None of the Company,
the Guarantors, the Exchange Agent nor any other person shall be under any duty
to give notification of any defect or irregularity with respect to any tender of
Old Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, (a) Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, (b) neither the holder
nor any such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and (c) neither the
holder nor any such other person is an "affiliate" of the Company as defined
under Rule 405 of the Securities Act, or if it is an affiliate, it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the Extent applicable. Any holder of Old Notes using the Exchange Offer to
participate in a distribution of the Exchange Notes (i) cannot rely on the
position of the staff of the Commission set forth in a certain no-action and
interpretive letters and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees, or an Agent's Message in lieu of a
Letter of Transmittal, and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under "--Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURE
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below, on or prior to the Expiration Date, a letter by
hand or mail, or sent by facsimile transmission (receipt confirmed by telephone
and an original delivered by guaranteed overnight courier) from an Eligible
Institution setting forth the name and address of the tendering holder, the
names in which the Old Notes are registered and, if possible, the certificate
numbers of the Old Notes to be tendered, and stating that the tender is being
made thereby and guaranteeing that within three business days after the
Expiration Date, the Old Notes in proper form for transfer or a Book-Entry
Confirmation, will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
44
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone and an original
delivered by guaranteed overnight courier) or letter must be received by the
Exchange Agent at the address set forth herein prior to the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
tendered the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old
Notes to be withdrawn (including the certificate number or numbers of such Old
Notes and the principal amount of each such Old Note), (iii) specify the
principal amount of Old Notes to be withdrawn, (iv) include a statement that
such holder is withdrawing his election to have such Old Notes exchanged,
(v) be signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered or as otherwise
described above (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to have the IBJ Whitehall Bank & Trust
Company, as trustee (the "Trustee") under the indenture ,dated as of
November 24, 1998 by and among the Company, the Guarantors and the Trustee (the
"Indenture"), a copy of which has been filed as an exhibit to the Registration
Statement, register the transfer of such Old Notes into the name of the person
withdrawing the tender and (vi) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. The Exchange Agent
will return the properly withdrawn Old Notes promptly following receipt of
notice of withdrawal. If Old Notes have been tendered pursuant to the procedure
for book-entry transfer, any notice of withdrawal must specify the name and
number of the account at the Book-Entry Transfer Facility to be credited with
the withdrawn Old Notes or otherwise comply with the Book-Entry Transfer
Facility procedure. All questions as to the validity, form and eligibility of
notices of withdrawals, including time of receipt, will be determined by the
Company and such determination will be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by Book-Entry Transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the Book-Entry Transfer procedures
described above, such Old Notes will be credited to an account with such
Book-Entry Transfer Facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after such
acceptance. See "--Certain Conditions to the Exchange Offer." For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to the principal amount
(or portion thereof) of the Old Note surrendered for tender.
In all cases, issuance of Exchange Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
the
45
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents, or, in the case of a Book-Entry
Confirmation, an Agent's Message in lieu thereof. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount than
the holder desires to exchange, such unaccepted or non-exchanged Old Notes will
be returned without expense to the tendering holder thereof (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Old Notes will he credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following events occur:
(a) if, in the sole judgment of the Company, the Exchange Offer would
violate any law, statute, rule or regulation or an interpretation thereof
of the Staff of the Commissions; or
(b) any governmental approval has not been obtained, which approval
the Company, in its sole discretion, deems necessary for the consummation
of the Exchange Offer; or
(c) there shall have occurred (i) any general suspension of,
shortening of hours for, or limitation on prices for, trading in securities
on any national securities exchange or in the over-the-counter market
(whether or not mandatory), (ii) a declaration of a banking moratorium or
any suspension of payments in respect of banks by Federal or state
authorities in the United States (whether or not mandatory), (iii) a
commencement of a war, armed hostilities or other international or national
crisis directly or indirectly involving the United States, (iv) any
limitation (whether or not mandatory) by any governmental authority on, or
other event having reasonable likelihood of affecting, the extension of
credit by banks or other lending institutions in the United States, or
(v) in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right, and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. If the Company waives or amends the
foregoing conditions, it will, if required by law, extend the Exchange Offer for
a minimum of five business days from the date that the Company first fives
notice, by public announcement or otherwise, of such waiver or amendment, if the
Exchange Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event, the
46
Company is required to use every reasonable effort to obtain the withdrawal of
any stop order at the earliest possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
IBJ Whitehall Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below.
BY HAND/OVERNIGHT COURIER OR MAIL:
IBJ Whitehall Bank & Trust Company
1 State Street
New York, New York 10004
Attention: Corporate Trust Administration
BY FACSIMILE: (212) 858-2952
Attention: Corporate Trust Administration
BY TELEPHONE: (212) 858-2000
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal
Delivery to an address other than as set forth above, or transmissions of
instructions via a facsimile to a number other than as set forth above, will not
constitute a valid delivery.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others for
soliciting acceptances of the Exchange Offer. The Company will, however, pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and the Guarantors and are estimated in the
aggregate to be approximately $200,000, which includes fees and expenses of the
Exchange Agent, Trustee, registration fees, accounting, legal printing and
related fees and expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction in which the securities laws or blue
sky laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
47
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person than the registered holder of the Old Notes tendered, or if
tendered Old Notes, are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will continue to be subject to the restrictions on transfer of
such Old Notes as set forth in the legend thereon and in the Indenture. Old
Notes not exchanged pursuant to the Exchange Offer will continue to remain
outstanding in accordance with their terms. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company and the Guarantors will have fulfilled a covenant contained in the
Registration Rights Agreement. Holders of Old Notes who do not tender their Old
Notes in the Exchange Offer will continue to hold such Old Notes and will be
entitled to all the rights and subject to all the limitations applicable thereto
under the Indenture, except for any such rights under the Registration Rights
Agreement that by their terms terminate or cease to have further effectiveness
as a result of the making of this Exchange Offer. All untendered Old Notes will
continue to be subject to the restrictions on transfer set forth in the
Indenture. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Old Notes could be adversely
affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter, and there can be no assurance that the Commission would
make a similar determination with respect to the Exchange Offer as it has in
such interpretive letters to third parties. Based on these interpretations by
the staff of the Commission, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder (other than any Holder that
is a broker-dealer or an "affiliate" of the
48
Company within the meaning of Rule 405 of the Securities Act) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and neither such holder nor any such other person is engaging in
or intends to engage in a distribution of the Exchange Notes. However, any
holder who is an "affiliate" of the Company or who has an arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, or any broker-dealer who purchased Old
Notes from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act. A
broker-dealer who holds Old Notes that were acquired for its own account as a
result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company and
the Guarantors have agreed, pursuant to the Registration Rights Agreement and
subject to certain specified limitations herein, to register or qualify the
Exchange Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Exchange Notes reasonably requests in
writing. Such registration or qualification may require the imposition of
restrictions or conditions (including suitability requirements for offerees or
purchasers) in connection with the offer or sale of any Exchange Notes.
49
BUSINESS
The Company is the largest Burger King franchisee in the world and has
operated Burger King restaurants since 1976. As of September 30, 1998, the
Company operated 338 Burger King restaurants located in 13 Northeastern,
Midwestern and Southeastern states. Over the last five years, the Company has
expanded its operations through the acquisition and construction of additional
Burger King restaurants while also enhancing the quality of operations, the
competitive position and financial performance of its existing restaurants. As a
result of its growth strategy, the Company has increased the total number of
restaurants it operates by over 70% from 1993 to 1997, and over 40% in 1997
alone. From fiscal 1993 to the last 12 months ending September 30, 1998, the
Company grew its revenues from $171.1 million to $394.4 million and EBITDA from
$20.2 million to $49.2 million. In July 1998, the Company completed its purchase
of Pollo Tropical for a cash purchase price of approximately $97 million. Pollo
Tropical is a regional quick-service restaurant chain featuring grilled
marinated chicken and authentic "made from scratch" side dishes. Prior to its
acquisition by the Company, for the twelve months ended June 30, 1998, Pollo
Tropical had revenues of $69.6 million and EBITDA of $13.0 million. Pro forma
for the Pollo Acquisition, the Company's revenues and EBITDA for the twelve
months ended September 30, 1998 were $449.3 million and $60.2 million,
respectively.
Burger King is the second largest quick-service hamburger restaurant chain
in the world, with approximately 9,800 restaurants throughout the U.S. and in 56
foreign countries. In fiscal 1997, BKC reported systemwide sales of
approximately $7.9 billion from its restaurants in the U.S. and from 1993 to
1997 increased its market share of the domestic quick-service hamburger market
from 16.2% to 19.4%. Burger King restaurants are quick-service restaurants of
distinctive design which feature flame-broiled hamburgers and serve several
widely-known, trademarked products, the most popular being the
WHOPPER(Registered)sandwich. Burger King restaurants are generally located in
high traffic areas throughout the U.S. The Company believes that convenience of
location, speed of service, quality and price are the primary competitive
advantages of Burger King restaurants.
As a result of the Pollo Acquisition, the Company operates and franchises
Pollo Tropical quick-service restaurants featuring fresh grilled chicken
marinated in a proprietary blend of tropical fruit juices and spices and
authentic "made from scratch" side dishes. The menu's emphasis is on freshness
and quality, with a focus on flavorful chicken served "hot off the grill." Pollo
Tropical restaurants combine high quality, distinctive menu items and an
inviting tropical setting with the convenience and value of quick-service
restaurants. Pollo Tropical opened its first company-owned restaurant in 1988 in
Miami, and its first international franchised restaurant in 1995 in Puerto Rico.
As of September 30, 1998, the Company owned and operated 37 Pollo Tropical
restaurants, all of which are located in south and central Florida, and
franchised 20 Pollo Tropical restaurants located in Puerto Rico, the Dominican
Republic, Ecuador, Netherlands Antilles and Miami. For the fiscal year ended
December 31, 1997, Pollo Tropical's average comparable restaurant sales were
approximately $1.9 million, which the Company believes is among the highest in
the quick-service restaurant industry. The Company believes that the strategic
acquisition of Pollo Tropical will allow the Company to (i) broaden its
restaurant concepts; (ii) expand its geographic presence; (iii) diversify its
revenue base; (iv) increase its cash flow; and (v) enhance its operating
margins.
The quick-service restaurant industry, which includes hamburgers, pizza,
chicken, various types of sandwiches, Mexican and other ethnic foods, has
experienced consistent growth. The National Restaurant Association estimates
that sales at quick-service restaurants will reach approximately $105.7 billion
in 1998, compared with approximately $61.4 billion in 1988. This growth in the
quick-service restaurant industry is a reflection of consumers' increasing
desire for a convenient, reasonably priced restaurant experience. In addition,
factors such as the greater numbers of working women and single parent families
have led to an increased need for meals and snacks prepared outside the home.
According to the National Restaurant Association, the percentage of the average
family's food budget spent on meals consumed "away from home" has grown from
approximately 25% of the food budget in 1955 to approximately 44% in 1995.
50
COMPETITIVE STRENGTHS
The Company believes its success in the quick-service restaurant industry
is attributable to the following competitive strengths:
Largest Burger King Franchisee. The Company is the largest Burger King
franchisee in the world. The Company believes that this leadership position,
together with its experienced management team, effective management information
systems, an extensive infrastructure and a proven track record for integrating
acquisitions and new restaurants, will provide it with attractive opportunities
to build and acquire additional restaurants. In addition, the Company believes
that these factors enable it to enhance restaurant margins and overall
performance, thereby allowing it to operate more efficiently than other Burger
King franchisees.
Strong Brand Names. The Burger King brand has developed significant equity
since the formation of BKC in 1954, and is one of the most recognized brands in
the restaurant industry. BKC spends between 4% and 5% of total system sales on
advertising per year (approximately $390 million in 1997 and approximately
$1.5 billion over the past five years). The strong Burger King brand, coupled
with the quality and value of the food and convenience of its restaurants, has
provided the Burger King system with consistent growth. According to Technomic
Inc., from 1992 to 1997, Burger King increased its share of the domestic quick-
service hamburger market from approximately 16.2% to approximately 19.4%. The
acquisition of Pollo Tropical provides the Company with one of the most
recognized quick-service restaurant brands in Pollo Tropical's core markets of
south and central Florida. The Company believes that the success of the Pollo
Tropical concept is due in large part to a strong brand awareness in its
markets, loyalty among its Hispanic customers, and the distinctive positioning
of its menu to cater to the growing consumer preference for both healthier and
ethnic foods.
Stable Cash Flows. The Company believes that the stability of its
operating cash flow is due to the proven success of the Burger King concept and
the Company's consistent focus on restaurant operations. During the past five
years, the Company's restaurant level EBITDA (EBITDA before general and
administrative expenses) margins for its Burger King restaurants ranged between
15.4% and 18.3% and averaged 16.9%. In addition, over the same period,
restaurant level EBITDA margins for Pollo Tropical restaurants ranged between
19.5% and 25.8% and averaged 23.7%. The Company believes that the strength of
its cash flow provides it with liquidity to pursue its growth strategy.
Diversified Locations and Restaurant Concepts. Since August 1993, the
Company has increased the number of Burger King restaurants it owns by over 70%
and has increased its geographic presence from nine states to 13 states. The
Pollo Acquisition has further expanded the geographic presence of the Company
through the location of Pollo Tropical restaurants in Florida, the Caribbean and
Central and South America. The Company believes that this geographic expansion
will enable it to capitalize on a region with a rapidly growing population and
further reduce the Company's dependence on the economic performance of any one
particular region. In addition, the Pollo Acquisition has enabled it to further
diversify its revenue and cash flow base to another concept within the
quick-service restaurant industry.
Experienced Management Team with a Significant Equity Stake. The Company's
senior management team, led by Chairman and Chief Executive Officer Alan Vituli
and President and Chief Operating Officer Daniel T. Accordino, has a long and
successful history of developing, acquiring and operating quick-service
restaurants. Under their leadership and direction, the Company has become the
largest Burger King franchisee. Mr. Vituli and Mr. Accordino lead a team of six
regional operating directors who have an average of 22 years of restaurant
industry experience and 44 district managers who have an average of 16 years of
restaurant management experience in the Burger King system. The Company believes
that the combination of its existing management team, together with the
continuity of leadership provided by Pollo Tropical President and Chief
Operating Officer Nicholas A. Castaldo, will enhance its ability to capitalize
on future growth opportunities in the quick-service restaurant industry.
Management owns (on a fully diluted basis) approximately 12% of Holdings, which
owns 100% of the Company and all regional and district managers have options to
acquire equity in the Company.
51
BUSINESS STRATEGY
The Company's business strategy is to continue to increase revenues and
cash flow through the construction of new restaurants, acquisitions, franchising
and increasing operating efficiencies. Based on its historical performance, the
Company believes its business strategy represents a low-risk growth plan. The
Company's strategy is based on the following components:
Leverage Brand Names. The Company realizes significant benefits as a
Burger King franchisee. These benefits are the result of the widespread
recognition of the Burger King brand, the size and penetration of BKC's
advertising, BKC's management of the Burger King brand, including new product
development, and the continued growth of the Burger King system. The Company
believes that the Burger King brand provides significant opportunities to expand
the Company's operations both within and outside its existing geographic
markets, and that the Pollo Tropical brand provides it with significant growth
opportunities within south and central Florida.
Develop Additional Restaurants in Existing Markets. The Company believes
that its existing Burger King markets will continue to provide opportunities for
the development of new restaurants. The Company looks to develop restaurants in
those of its markets it believes are underpenetrated and where the demographic
characteristics are favorable for the development of new restaurants. The
Company's new restaurant development is conducted by its own staff of real
estate and construction professionals with support provided by BKC's development
field personnel. Prior to developing a new restaurant, the Company conducts an
extensive site selection and evaluation process which includes in-depth
demographic, market and financial analysis. By selectively increasing the number
of restaurants it operates in a particular market, the Company can effectively
leverage its management, corporate infrastructure and local marketing while
increasing brand awareness.
The Company believes that it is well positioned to develop new Pollo
Tropical restaurants in Pollo Tropical's core markets of south and central
Florida, which will take advantage of the strong acceptance of its menu items
and the high frequency of visits by its Hispanic customers. The Company believes
that the continued population growth in its Florida markets will provide
significant opportunity to develop additional Pollo Tropical restaurants. The
Company also expects to continue franchising Pollo Tropical restaurants in parts
of Central and South America and the Caribbean.
Selectively Acquire Burger King Restaurants. The Burger King system is
highly fragmented in the U.S., with approximately 7,200 Burger King restaurants
being operated by approximately 1,600 franchisees. The Company expects to
continue to participate as a buyer in the consolidation of the Burger King
system and believes that there will continue to be opportunities for selective
acquisitions in both existing and new geographic markets as smaller franchisees
seek liquidity through the sale of their restaurants. As the largest Burger King
franchisee with a demonstrated ability to effectively integrate acquisitions,
the Company believes that it is better positioned to capitalize on this
consolidation than other Burger King franchisees. The Company believes that by
acquiring additional Burger King restaurants, it will be able to achieve
operating efficiencies from its ability to improve controls over restaurant food
costs, more efficiently utilize labor, and achieve economies of scale by
leveraging its corporate infrastructure.
Achieve Operating Efficiencies. The Company maintains a disciplined
commitment to increasing the profitability of its existing restaurants. The
Company's large base of restaurants, centralized management structure and
management information systems enable the Company to optimize operating
efficiencies for its new and existing restaurants. The Company is able to
control restaurant and corporate level costs, capture economies of scale by
leveraging its existing corporate infrastructure and use its sophisticated
management information and point-of-sale systems to more efficiently manage its
restaurant operations and to ensure consistent application of operating
controls. Due to its size, the Company also realizes benefits from its improved
bargaining power with respect to purchasing and cost management activities. The
Company believes these factors provide the basis for increased unit and Company
profitability. The Company intends to reduce certain operating expenses
following the Pollo Acquisition by eliminating duplicative costs and, in
addition, expects to realize further operating efficiencies by leveraging the
Company's existing infrastructure and restaurant operating experience.
52
Consistently Provide Superior Customer Satisfaction. The Company's
operations are focused on achieving a high level of customer satisfaction
through quick, accurate and high-quality customer service. The Company and BKC
have uniform operating standards and specifications relating to the quality,
preparation and selection of menu items, maintenance and cleanliness and
employee conduct. The Company closely supervises the operation of all its
restaurants to help ensure that standards and policies are followed and that
product quality, customer service and cleanliness of the restaurants are
maintained at high levels.
OVERVIEW OF RESTAURANT CONCEPTS
Burger King Restaurants
The Burger King system marketing strategy is characterized by its "Have It
Your Way(Registered)" service, flame-broiling, generous portions and competitive
prices. Burger King restaurants feature flame-broiled hamburgers, the most
popular of which is the WHOPPER(Registered) sandwich. The WHOPPER(Registered) is
a large, flame-broiled hamburger on a toasted bun garnished with a combination
of mayonnaise, lettuce, onions, pickles and tomatoes. The basic menu of all
Burger King restaurants consists of hamburgers, cheeseburgers, chicken and fish
sandwiches, breakfast items, french fried potatoes, salads, shakes, desserts,
soft drinks, milk and coffee. In addition, promotional menu items are introduced
periodically for limited periods. BKC continually seeks to develop new products
as it endeavors to enhance the menu and service of Burger King restaurants.
The Company's Burger King restaurants are typically open seven days per
week with minimum operating hours from 6:00 AM to 11:00 PM. Burger King
restaurants are quick-service restaurants of distinctive design and are
generally located in high-traffic areas throughout the U.S. The Company believes
that convenience of location, quality, price and speed of service are the
primary competitive advantages of Burger King restaurants. Burger King
restaurants appeal to a broad spectrum of consumers, with multiple day-part meal
segments appealing to different groups of consumers.
The Company's Burger King restaurants consist of one of several building
types with various seating capacities. BKC's traditional restaurant contains
approximately 2,800 to 3,200 square feet with seating capacity for 90 to 100
customers, has drive-thru service windows, and has adjacent parking areas. Of
the Company's 338 Burger King restaurants at September 30, 1998, 320 are
free-standing.
Pollo Tropical Restaurants
Pollo Tropical restaurants combine high quality, distinctive taste and an
inviting tropical setting with the convenience and value pricing of
quick-service restaurants. Pollo Tropical restaurants offer a unique selection
of food items reflecting tropical and Caribbean influences and feature grilled
fresh chicken marinated in a proprietary blend of tropical fruit juices and
spices. Chicken is grilled in view of customers on large, custom, open-flame
grills. In 1996, Pollo Tropical broadened the selection by adding "island" pork
to the menu. In 1997, a line of "TropiChops," a bowl containing rice, black
beans, chicken or pork and other ingredients at an attractive price point, was
added to the menu. In 1998, the Company added grilled shrimp to the menu. Also
featured is an array of distinctive and popular side dishes, including black
beans and rice, yucatan fries and sweet plantains, as well as more traditional
fare such as french fries, corn, and tossed and caesar salads. The Company also
offers freshly prepared tropical desserts, such as flan and tres leches.
The Company's Pollo Tropical restaurants incorporate high ceilings, large
windows, tropical plants, light colored woods, decorative tiles, a visually
distinctive exterior entrance tower, lush landscaping and other signature
architectural features, all designed to create an airy, inviting and tropical
atmosphere. Restaurants are designed to conveniently serve a high volume of
customer traffic while retaining an inviting, casual atmosphere.
The Company's Pollo Tropical restaurants are open for lunch and dinner
seven days a week from 11:00 AM to 10:00 PM (11:00 PM on Friday and Saturday)
and offer sit-down dining, counter take-out and drive-thru service to
accommodate the varied schedules of families, business people, students and
other time-sensitive individuals. The menu offers a variety of portion sizes to
accommodate a single customer, family or large group. Pollo Tropical restaurants
also offer an economical catering menu, with special prices and portions to
serve 25 to 500 persons.
53
The Company's Pollo Tropical restaurants typically provide seating for 80
to 100 customers and provide drive-thru service. All of Pollo Tropical's
restaurants are free-standing buildings except for three end-cap locations in
strip shopping centers and one street-level storefront in an office building.
The Company's current prototypical free-standing Pollo Tropical restaurant
ranges between 2,800 and 3,200 square feet in size.
RESTAURANT ECONOMICS
Burger King Restaurants
For Fiscal 1997, the Company's Burger King restaurants generated average
sales of approximately $1,055,000 and average restaurant level EBITDA of
$163,000. Drive-thru sales contributed 56.2% of restaurant sales. In all but 24
locations, which are primarily in malls, the Company's Burger King restaurants
have a drive-thru window. Of total sales, breakfast accounted for 13.0% of
sales, lunch accounted for 34.7% of sales, dinner accounted for 26.7% of sales
and late afternoon and late night snacks accounted for the remainder of sales.
The average sales transaction was $3.85 in 1997.
The cost of the franchise fee, equipment, seating, signage and other
interior costs of a standard new Burger King restaurant is approximately
$265,000 (excluding the cost of the land, building, and site improvements). The
cost of land generally ranges from $200,000 to $500,000. The cost of building
and site improvements generally ranges from $500,000 to $550,000. The Company
typically leases the building and land components of its restaurants.
Pollo Tropical Restaurants
For Fiscal 1997, Company-owned Pollo Tropical restaurants generated average
sales of approximately $1,861,000 and average restaurant level EBITDA of
$453,000. Pollo Tropical restaurant sales are well balanced by method of service
and by day part. For 1997, drive-thru sales contributed 35.1% of restaurant
sales and take-out sales accounted for 22.3% of total sales. Of total sales,
lunch accounted for 45.8% of restaurant sales, and dinner accounted for 54.2% of
restaurant sales. The average sales transaction was $7.62.
The cost of equipment, seating signage and other interior costs of a
standard new Pollo Tropical restaurant is approximately $200,000 (excluding the
cost of the land, building, and site improvements). The cost of land generally
ranges from $500,000 to $800,000. The cost of building and site improvements
generally ranges from $550,000 to $650,000. Pollo Tropical has historically
financed the building and land costs of its Pollo Tropical restaurants through
internally generated cash flow, however, in the future, the Company intends to
lease its Pollo Tropical restaurants.
54
RESTAURANT LOCATIONS
Burger King
The following table sets forth the locations of the 338 Burger King
restaurants in the Company's system at September 30, 1998.
TOTAL
STATE RESTAURANTS
- ------------------------------------------------------------------------------------------- -----------
Connecticut................................................................................ 1
Indiana.................................................................................... 5
Kentucky................................................................................... 6
Maine...................................................................................... 4
Massachusetts.............................................................................. 2
Michigan................................................................................... 23
New Jersey................................................................................. 2
New York................................................................................... 153
North Carolina............................................................................. 40
Ohio....................................................................................... 70
Pennsylvania............................................................................... 11
South Carolina............................................................................. 20
Vermont.................................................................................... 1
---
Total...................................................................................... 338
---
---
Of the Company's Burger King restaurants, 6% are owned and 94% are leased. The
Company typically enters into leases (including options to renew) from 20 to
40 years. The average remaining term on all leases, including options, is
approximately 25 years. Generally, the Company has been able to renew leases,
upon or prior to their expiration, at the prevailing market rates. As part of
its continuing program to upgrade its restaurants, the Company remodeled 68 of
its restaurants in the three years ended December 31, 1997.
Pollo Tropical
The success of the Pollo Tropical restaurants has been due in large part to
the base of Hispanic customers who are a critical component in achieving the
high average store volumes that Pollo Tropical has experienced in its core
markets. As of September 30, 1998, Pollo Tropical owned and operated 37
restaurants, all of which are located in Florida, and franchised 20 restaurants,
12 of which are located in Puerto Rico, three in the Dominican Republic, three
in Ecuador, one in Netherlands Antilles and one in Miami.
COMPANY OPERATIONS
Management Structure. Substantially all of the Company's executive
management, finance, marketing and operations support functions are conducted
from either the Company's corporate headquarters in Syracuse, New York or the
Pollo Tropical headquarters in Miami, Florida. With respect to the Company's
Burger King operations, the Company currently has six regional directors with an
average of 22 years of restaurant industry experience, five of whom are vice
presidents of the Company. Each of the regional directors are responsible for
the operations of the Company's Burger King restaurants in their assigned
region. Three of the regional directors have been employed by the Company for
over 20 years. The regional directors are supported by 44 district supervisors
who have an average of 16 years restaurant management experience in the Burger
King system. Each district supervisor is responsible for the direct oversight of
the day-to-day operations of an average of seven restaurants. Typically,
district supervisors have previously served as restaurant managers at one of the
Company's restaurants or at an acquired restaurant. Both regional directors and
district supervisors are compensated with a fixed salary plus an incentive bonus
based upon the performance of the restaurants under their supervision and are
eligible to participate in the Company's incentive stock option plan. A typical
Company operated restaurant is staffed with hourly employees who are supervised
by a salaried manager and two or three salaried assistant managers.
55
Training. The Company maintains a comprehensive training and development
program for all of its personnel and provides both classroom and in-restaurant
training for its salaried and hourly personnel. For the Burger King restaurants,
this program emphasizes system-wide operating procedures, food preparation
methods and customer service standards. In addition, BKC's training and
development programs are also available to the Company.
Management Information Systems. The Company believes that its management
information systems, which are typically more sophisticated than those utilized
by smaller Burger King franchisees and other smaller quick-service restaurant
operators, provide it with the ability to more efficiently manage its
restaurants and to ensure consistent application of operating controls. The
Company also believes that its size affords it the ability to maintain an
in-house staff of information systems professionals dedicated to continuously
enhancing its existing systems. These capabilities also allow the Company to
quickly integrate newly acquired restaurants and to leverage its investments in
information technology over a large base of restaurants.
The Company's Burger King restaurant systems, which consist of
point-of-sale cash register systems and PC-based restaurant support systems,
transmit data on a daily basis to the Company's headquarters, which house
mainframe, PC and server-based application and decision support systems. These
systems facilitate financial and management control of restaurant operations and
provide management with the ability to analyze sales and product mix data, to
minimize shrinkage using inventory control and centralized standard costing
systems, and to manage and control labor costs through the use of computerized
labor systems.
The Company's systems provide daily tracking and reporting of customer
traffic counts, menu item sales, payroll data, food and labor cost analyses and
other operating information for each restaurant. This information is available
daily to the restaurant manager, who is expected to react quickly to trends or
situations in his or her restaurant. The district supervisors also receive daily
information for all restaurants under their respective control and have access
to key operating data on a remote basis using laptop computers. Key restaurant
performance indicators are monitored at each management level from district
supervisor through senior management.
The Company also has a number of projects underway, principally based on
existing commercially available software, that are designed to further enhance
its capabilities and to upgrade its restaurant and corporate information
systems. The Company is implementing state-of-the-art, touch-screen point-
of-sale systems in its restaurants which are designed to facilitate accuracy and
speed of order-taking while providing systems that are user-friendly and that
reduce training. The Company is also enhancing its labor scheduling and
inventory management modules at the restaurant to further automate these
functions. In addition, the Company's corporate financial systems are being
upgraded to a client/server architecture in order to enhance the functionality
of these systems, to take advantage of work-flow technologies and to provide the
foundation for the future deployment of web-based applications to its
restaurants.
The Company's Pollo Tropical restaurants utilize in-store computerized
point-of-sale systems to control cash, collect customer and sales statistics and
to track labor and other restaurant data. It is the Company's intention to
further enhance Pollo Tropical's operations by integrating its systems with the
Company's existing management information systems. The Company believes that it
will be able to improve the operating efficiencies of the Pollo Tropical
restaurants by employing tools and resources available in its existing
management information systems.
Site Selection. The Company believes that the location of its restaurants
is a critical component of each restaurant's success. Potential new development
sites are evaluated based upon accessibility, visibility, costs, surrounding
traffic patterns, competition and demographic characteristics. The Company's
senior management determines the acceptability of all acquisition and new
development sites, based upon analysis prepared by its real estate professionals
and operations personnel.
56
BURGER KING FRANCHISE AGREEMENTS
Each of the Company's Burger King restaurants operates under a separate
franchise agreement entered into between the Company and BKC. The BKC Franchise
Agreements require, among other things, that all restaurants be of standardized
design and be operated in a prescribed manner, including utilization of the
standard Burger King menu. The BKC Franchise Agreements generally provide for an
initial term of 20 years and have an initial fee of $40,000. A successor BKC
Franchise Agreement may be granted by BKC for an additional 20-year term,
provided the restaurant meets the then-current BKC operating standards and the
Company is not in default under its current BKC Franchise Agreement. Currently,
the successor BKC Franchise Agreement fee is $40,000. The BKC Franchise
Agreements are non-cancelable except for failure to abide by the terms thereof.
In order to obtain a successor BKC Franchise Agreement, a franchisee is
typically required to make capital improvements to the Burger King restaurant to
bring the Burger King restaurant up to BKC's then-current design standards. The
required capital improvements will vary widely depending upon the magnitude of
the required changes and the degree to which the Company has made interim
changes to the restaurant. Although the Company estimates that a substantial
remodeling can cost in excess of $250,000, the Company's average remodeling cost
over the past five years has been approximately $135,000 per restaurant.
The Company believes that it enjoys a good relationship with BKC and that
it will satisfy BKC's normal successor BKC Franchise Agreement policies and,
accordingly, believes that successor BKC Franchise Agreements will be granted in
due course by BKC at the expiration of its existing BKC Franchise Agreements.
Historically, BKC has granted each of the Company's requests for a successor BKC
Franchise Agreement for its restaurants. There can be no assurance, however,
that BKC will continue to grant each of the Company's requests for successor BKC
Franchise Agreements.
In addition to the initial franchise fee, the Company currently pays a
monthly royalty of 3 1/2% of the gross revenues from its Burger King restaurants
to BKC. The Company currently also contributes 4% of gross revenues from its
Burger King restaurants to fund BKC's national and regional advertising. BKC
engages in substantial national advertising and promotional activities and other
efforts to maintain and enhance the Burger King brand. The Company supplements
BKC's marketing with local advertising and promotional campaigns. See
"Business--Advertising and Promotion."
The Company's BKC Franchise Agreements do not give the Company exclusive
rights to operate a Burger King restaurant in any defined territory. The Company
believes that BKC generally seeks to ensure that newly granted franchises do not
materially adversely affect the operations of existing Burger King restaurants.
There can be no assurance, however, that a franchise given by BKC to a third
party will not adversely effect any single Company-operated Burger King
restaurant.
The Company is required to obtain BKC's consent prior to the acquisition or
development of new Burger King restaurants. BKC also has the right of first
refusal to purchase any Burger King restaurant which is the subject of a
contract of sale. BKC has granted its approval to all of the Company's historic
acquisitions of Burger King restaurants, except for one instance when it
exercised its right of first refusal with respect to a six restaurant
acquisition that the Company proposed in 1997.
POLLO TROPICAL FRANCHISE PROGRAM
As part of the Company's growth strategy for its Pollo Tropical
restaurants, the Company intends to complement the development of additional
Company-owned restaurants in the U.S. with a multi-unit area development
franchise program as a means of accelerating its penetration into international
markets. The Company intends to offer certain market areas to qualified and
experienced area developers in the Caribbean and Central and South American
markets who are committed to the development of multiple units in such areas on
an expedited basis.
The Company's standard franchise agreement under which it franchises Pollo
Tropical restaurants to independent restaurant operators (a "Pollo Tropical
Franchise Agreement") has a 15-year term (with one 15-year renewal option) and
provides for an initial payment by the franchisee of a portion of all franchise
fees upon signing of the area development and franchise agreements, with the
remainder due prior to the
57
opening of the franchisee's Pollo Tropical restaurants. The franchisee also pays
a continuing royalty, based upon gross sales. The terms and conditions of the
Pollo Tropical Franchise Agreement will vary depending upon a number of factors,
including the experience and resources of the franchisee, the size and density
of the covered territory, the number of units to be developed, the schedule for
development, capital requirements, fee and royalty arrangements and other
matters. All franchisees are required to operate their restaurants in compliance
with certain methods, standards and specifications developed by Pollo Tropical
regarding such matters as menu items, recipes, food preparation, materials,
supplies, services, fixtures, furnishings, decor and signs, although the
franchisee has discretion to determine the prices to be charged to customers. In
addition, all franchisees are required to purchase substantially all food,
ingredients, supplies and materials from suppliers approved by the Company.
ADVERTISING AND PROMOTION
Quick-service restaurant businesses can be significantly affected by the
efficiency and quality of advertising and promotional programs. The Company
believes that one of the major advantages of being a Burger King franchisee is
the value of the extensive regional and national advertising and promotional
programs conducted by BKC. In addition to the benefits derived from BKC's
advertising spending, which according to information published by BKC was
approximately $390 million for 1997, the Company supplements BKC's advertising
and promotional activities with local advertising and promotions, including the
purchase of additional television, radio and print advertising. The Company's
concentration of restaurants in many of its markets permits it to leverage
advertising in those markets. The Company also utilizes promotional programs,
such as combination value meals and discounted prices, targeted to its
customers, thereby enabling the Company to create a flexible and directed
marketing program.
The Company is generally required to contribute 4% of gross revenues from
restaurant operations 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).
The Company believes that brand awareness for its Pollo Tropical
restaurants is extremely high because of the concentration of its restaurants in
the south Florida markets. Pollo Tropical restaurants are also clustered in its
target markets in order to maximize the effectiveness of its advertising
efforts. Pollo Tropical advertises in both English and Spanish media throughout
the year, including television, radio and print advertising. Pollo Tropical also
has marketed at the individual restaurant level through special price offerings,
coupon discounts and unique promotional and public relations programs. Pollo
Tropical spent approximately 4.6% of revenues from restaurant sales on
advertising in Fiscal 1996 and 1997.
SUPPLIES AND DISTRIBUTION
The Company is a member of a national purchasing cooperative created for
the Burger King system known as Restaurant Services, Inc. ("RSI"). RSI is a
non-profit independent cooperative which acts as the purchasing agent for
approved distributors to the system and serves to negotiate the lowest cost for
the Burger King system. The Company uses its purchasing power to negotiate
directly with certain other vendors, to obtain favorable pricing and terms for
supplying its restaurants.
As a Burger King franchisee, the Company is required to purchase all of its
foodstuffs, paper goods and packaging materials from BKC approved suppliers.
Non-food items such as kitchen utensils, equipment maintenance tools and other
supplies may be purchased from any suitable source provided that such items meet
BKC product uniformity standards. The Company currently obtains substantially
all of its foodstuffs for its Burger King restaurants (other than bread products
which it purchases from local bakeries), paper goods, promotional premiums and
packaging materials from ProSource Distribution Services, Inc. ("ProSource")
under a five-year supply agreement which expires on March 31, 1999. The Company
believes that ProSource's services are competitive with alternatives available
to the Company.
58
There are other BKC approved supplier/distributors which compete with
ProSource. The Company believes that reliable alternative sources for all
restaurant supplies are readily available at competitive prices should the
arrangements with ProSource or any other existing supplier or distributor
change.
All BKC approved suppliers 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 high quality foodstuffs are sold to BKC-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.
For its Pollo Tropical restaurants, the Company has negotiated directly
with local and national suppliers for the purchase of food and beverage products
and supplies to ensure consistent quality and freshness and to obtain
competitive prices. Each Pollo Tropical restaurant's food and supplies are
ordered by its manager from approved suppliers and are shipped directly to the
restaurants.
QUALITY ASSURANCE
The Company's operations are focused on achieving a high level of customer
satisfaction with speed, accuracy and quality of service closely monitored. The
Company's senior management and restaurant management staff are principally
responsible for ensuring compliance with the Company's and BKC's operating
procedures. The Company and BKC 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. Detailed
reports from the Company's management information system and surveys conducted
by the Company or BKC are tabulated and distributed to management on a regular
basis to help maintain compliance.
The Company operates in accordance with quality assurance and health
standards set by BKC, as well as standards set by Federal, state and local
governmental laws and regulations. These standards include food preparation
rules regarding, among other things, minimum cooking times and temperatures,
sanitation and cleanliness. The "conveyor belt" cooking system utilized in all
Burger King restaurants, which is calibrated to carry hamburgers through the
flame broiler at regulated speeds, is one of the safest cooking systems among
major quick-service restaurants and helps to ensure that the standardized
minimum times and temperatures for cooking are met. In addition, BKC has set
maximum time standards for holding prepared food.
The Company closely supervises the operation of all of its Burger King
restaurants to help ensure that standards and policies are followed and that
product quality, customer service and cleanliness of the restaurants are
maintained. In addition, BKC may conduct unscheduled inspections of Burger King
restaurants throughout the nationwide system.
At the Pollo Tropical restaurants, restaurant managers are actively
involved in all aspects of operations with an emphasis on supervising the food
preparation process as well as food safety while insuring prompt and precise
order fulfillment at both the front counter and drive-thru windows. Through the
use of a computer display and communications system, orders typically are filled
within two minutes. Managers conduct internal inspections for taste, quality,
cleanliness and food safety several times a day in order to provide a consistent
level of customer service.
TRADEMARKS
Prior to the Pollo Acquisition, the Company had no proprietary intellectual
property other than the logo and trademark of Carrols Corporation. As a
franchisee of Burger King, the Company has contractual rights to use certain
BKC-owned trademarks, servicemarks and other intellectual property relating to
the Burger King concept.
Pollo Tropical has registered its principal trademarks for "Pollo
Tropical", "TropiGrill" and "TropiChops" in the U.S. and presently has
applications pending or registrations granted in various foreign countries in
which it conducts business or may conduct business through its franchise system.
As a result of
59
the Pollo Acquisition, the Company has assumed ownership of these marks. In
certain foreign countries, Pollo Tropical has been involved in trademark
opposition proceedings to defend its rights to register certain trademarks. The
Company intends to protect the Pollo Tropical and TropiGrill trademarks by
appropriate legal action whenever necessary.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws affecting
its 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 construction and
remodeling of the Company's restaurants, the Company may incur costs to meet
certain Federal, state and local regulations, including regulations promulgated
under the Americans with Disabilities Act.
The Company is subject to the Federal Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. In September 1997, the
second phase of an increase in the minimum wage was implemented in accordance
with a 1996 amendment to the Federal Fair Labor Standards Act. A significant
number of the Company's food service personnel are paid at rates related to the
Federal minimum wage and, accordingly, increases in the minimum wage have
increased wage rates at the Company's restaurants.
The Company also is subject to various Federal, state and local
environmental laws, rules and regulations. The Company believes that it conducts
its operations in substantial compliance with applicable environmental laws and
regulations. In an effort to prevent and, if necessary, to correct environmental
problems, the Company conducts environmental audits of proposed restaurant sites
and restaurants it seeks to acquire.
With respect to the franchising of Pollo Tropical restaurants, the Company
is subject to franchise and related regulations in the U.S. and certain foreign
jurisdictions where it offers and sells franchises. These regulations include
obligations to provide disclosure about Pollo Tropical, the franchise agreements
and the franchise system. They also include obligations to register certain
franchise documents in the U.S. and foreign jurisdictions, and obligations to
disclose the substantive relationship between the parties to the agreements.
COMPETITION
The quick-service restaurant industry is highly competitive with respect to
price, service, location and food quality. In each of its markets, the Company's
restaurants compete with a large number of national and regional restaurant
chains, as well as locally-owned restaurants, offering low and medium-priced
fare. Convenience stores, grocery store delicatessens and food counters,
cafeterias and other purveyors of moderately priced and quickly prepared foods
also compete with the Company.
With respect to its Burger King restaurants, the Company's largest
competitors in the quick-service hamburger restaurant segment are McDonald's and
Wendy's. According to publicly available information, as of December 31, 1997,
McDonald's U.S. operations comprised 12,380 restaurants and had U.S. systemwide
sales for the year ended December 31, 1997 of $17.1 billion. As of December 31,
1997, Wendy's U.S. operations comprised 4,575 restaurants and had total U.S.
systemwide sales for the year ended December 31, 1997 of $4.6 billion. The
Company believes that product quality and taste, national brand recognition,
convenience of location, speed of service, menu variety, price and ambiance are
the most important competitive factors in the quick-service restaurant industry
and that its Burger King and Pollo Tropical restaurants effectively compete in
each category.
In addition to the quick-service hamburger restaurant chains, Pollo
Tropical's competitors include international and regional chicken theme chains,
such as Boston Market, KFC and Kenny Rogers Roasters, as well as other types of
quick-service restaurants. The Company believes that the combination of freshly
prepared food, distinctive menu items, tropical ambience, and fast service help
to distinguish its Pollo Tropical restaurants from other quick-service food
operations. The Company also believes that the strong brand awareness of its
Pollo Tropical restaurants combined with the relatively high costs associated
with
60
starting a quick-service chain in Pollo Tropical's core markets will make it
difficult for new competitors to effectively compete with the Company's Pollo
Tropical restaurants in these markets.
EMPLOYEES
At December 31, 1998, the Company employed approximately 12,725 persons of
which approximately 225 were supervisory and administrative personnel and 12,500
were restaurant operating personnel. None of the Company's employees are covered
by collective bargaining agreements. Approximately 10,850 of the Company's
restaurant operating personnel at December 31, 1998 were part-time employees.
The Company believes that its employee relations are good.
LITIGATION
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
these matters will have a material adverse effect on its financial condition or
results of operations and cash flows.
PROPERTIES
In addition to the restaurant locations set forth under
"Business--Restaurant Locations", the Company owns an approximately 22,000
square foot building at 968 James Street, Syracuse, New York, which houses its
executive offices and most of the Company's administrative operations for its
Burger King restaurants. The Company leases 10,488 square feet at 7300 North
Kendall Drive, 8th Floor, Miami, Florida, which houses most of the Company's
administrative operations for its Pollo Tropical restaurants.
61
MANAGEMENT
The following table sets forth information with respect to the current
directors, executive officers and other officers of the Company:
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- -----------------------------------------------------
Alan Vituli............................... 57 Chairman of the Board and Chief Executive Officer
Daniel T. Accordino....................... 48 President, Chief Operating Officer and Director
Paul R. Flanders.......................... 42 Vice President--Finance and Treasurer
Joseph A. Zirkman......................... 38 Vice President, General Counsel and Secretary
Richard H. Liem........................... 45 Vice President--Financial Operations
Timothy J. LaLonde........................ 42 Vice President--Controller
Steven Barnes............................. 50 Vice President--Regional Director
Michael A. Biviano........................ 41 Vice President--Regional Director
Joseph W. Hoffman......................... 36 Regional Director
David R. Smith............................ 49 Vice President--Regional Director
James E. Tunnessen........................ 43 Vice President--Regional Director
Richard L. Verity......................... 42 Vice President--Regional Director
Nicholas A. Castaldo...................... 47 President and Chief Operating Officer--Pollo Tropical
Division
Benjamin D. Chereskin..................... 40 Director
James M. Conlon........................... 31 Director
David J. Mathies, Jr...................... 51 Director
Robin P. Selati........................... 32 Director
Clayton E. Wilhite........................ 53 Director
Certain biographical information regarding each current Director and
executive officer of the Company is set forth below:
Alan Vituli has been Chairman of the Board of the Company since 1986 and
Chief Executive Officer since March 1992. He is also a Director and Chairman of
the Board of Holdings. Between 1983 and 1985, Mr. Vituli was employed by Smith
Barney, Harris Upham & Co., Inc. as a Senior Vice President responsible for real
estate transactions. From 1966 until joining Smith Barney, Mr. Vituli was
associated with the accounting firm of Coopers & Lybrand, first as an employee
and the last ten years as a partner. Among the positions held by Mr. Vituli at
Coopers & Lybrand was National Director of Mergers and Acquisitions. Prior to
joining Coopers & Lybrand, Mr. Vituli was employed in a family-owned restaurant
business. From 1993 through the Pollo Acquisition, Mr. Vituli served on the
Board of Directors of Pollo Tropical, Inc.
Daniel T. Accordino has been President, Chief Operating Officer and a
Director of the Company since February 1993. Prior thereto, Mr. Accordino served
as Executive Vice President--Operations of the Company from December 1986 and as
Senior Vice President from April 1984. From 1979 to April 1984 he was Vice
President responsible for restaurant operations of the Company, having
previously served as the Company's Assistant Director of Restaurant Operations.
Mr. Accordino has been employed by the Company since 1972.
Paul R. Flanders has been Vice President--Finance and Treasurer since April
1997. Prior to joining the Company, he was Vice President--Corporate Controller
of Fay's Incorporated from 1989 to 1997, and Vice President--Controller for
Computer Consoles, Inc. from 1982 to 1989. Mr. Flanders was also associated with
the accounting firm of Touche Ross & Co. from 1977 to 1982.
Joseph A. Zirkman became Vice President and General Counsel of the Company
in January 1993. He was appointed Secretary of the Company in February 1993.
Prior to joining the Company, Mr. Zirkman was an associate with the New York
City law firm of Baer Marks & Upham beginning in 1986.
Richard H. Liem became Vice President--Financial Operations in May 1994.
Prior to joining the Company, Mr. Liem was a Senior Audit Manager with the
accounting firm of Price Waterhouse. Mr. Liem was with Price Waterhouse
beginning in 1983.
62
Timothy J. LaLonde has been Vice President--Controller since July 1997.
Prior to joining the Company, he was a controller at Fay's Incorporated from
1992 to 1997. Prior to that he was a Senior Audit Manager with the accounting
firm of Deloitte & Touche LLP, having been associated with that firm beginning
in 1978.
Steven Barnes is Vice President--Regional Director of the Company. He has
been a Vice President since February 1997 and a Regional Director of Operations
since 1993. Prior to joining the Company, Mr. Barnes was Vice
President--Operations of Snapps Restaurants, Inc. from 1989 to 1993.
Michael A. Biviano is Vice President--Regional Director of the Company.
Mr. Biviano has been Regional Director of Operations since October 1989, having
served as District Supervisor from December 1983 to October 1989. Mr. Biviano
has been employed by the Company since 1973.
Joseph W. Hoffman has been Regional Director of the Company since July
1997. Mr. Hoffman joined the Company in 1993 in connection with one of the
Company's acquisitions and served in the capacity of District Supervisor from
1993 to 1997. Prior to 1993 Mr. Hoffman was in a similar capacity with Community
Food Service, Inc.
David R. Smith is Vice President--Regional Director of the Company.
Mr. Smith has been Regional Director of Operations since 1984, having served as
District Supervisor from 1975 to 1984. Mr. Smith has been employed by the
Company since 1972.
James E. Tunnessen is Vice President--Regional Director of the Company. He
has been Regional Director of Operations since August 1988, having served as
District Supervisor from 1979 to August 1988. Mr. Tunnessen has been employed by
the Company since 1972.
Richard L. Verity has been Vice President--Regional Director since August
1997 when he joined the Company in conjunction with the Company's acquisition of
a group of 63 Burger King restaurants. Mr. Verity was previously with Resser
Management Corp. from 1986 to 1997 and held the position of Executive Vice
President.
Nicholas A. Castaldo has been the President of Pollo Tropical, Inc. since
October 1995 and its Chief Operating Officer since November 1, 1996. Prior to
joining Pollo Tropical and since August 1993, Mr. Castaldo was employed as Vice
President of Marketing of Denny's Inc. From 1986 to 1993, Mr. Castaldo was
employed by S&A Restaurant Corp., which includes Steak & Ale and Bennigan's
restaurant chains, and ultimately served as Senior Vice President of Marketing
and Business Development. Mr. Castaldo's career spans 20 years and includes
management positions at Burger King, Citicorp, and Clairol Inc.
Benjamin D. Chereskin has served as a Director since March 1997.
Mr. Chereskin is a Managing Director of Madison Dearborn Partners, Inc. and
co-founded the firm in 1993. Prior to that, Mr. Chereskin was with First Chicago
Venture Capital for nine years. Mr. Chereskin also serves on the Board of
Directors of Beverages & More, Inc., Cornerstone Brands, Inc., Tuesday Morning
Corporation and NWL Holdings, Inc.
James M. Conlon has served as Managing Director of Dilmun Investments, Inc.
since 1992. Since 1997, Mr. Conlon has been the Co-Head of the bank's U.S.
Merchant Banking group. Prior to joining Dilmun Investments, Inc., Mr. Conlon
was employed as an Investment Analyst in the Securities Division of TIAA-CREF.
Mr. Conlon serves on the Boards of Directors of Carrols Corporation; Capital
Recovery Holdings, Inc; Thompson Products, Inc.; and Independent Pictures, Inc.
David J. Mathies, Jr. has served as President of Dilmun Investments, Inc.,
since its inception in 1988. From 1971 to 1988, he was employed by Mellon Bank,
where he was head of their Pension Management Group, providing investment
management services to middle market clients. Mr. Mathies serves on the Boards
of Directors of Carrols Corporation; Capital Recovery Holdings, Inc; Thompson
Products; and Independent Pictures, Inc.
Robin P. Selati has served as a Director since March 1997. Mr. Selati is a
Managing Director of Madison Dearborn Partners, Inc. and joined the firm in
1993. Prior to 1993 Mr. Selati was associated with Alex Brown & Sons
Incorporated in the consumer/retail investment banking group. Mr. Selati also
serves as
63
a Director on the Board of Directors of Peter Piper, Inc., Tuesday Morning
Corporation and NWL Holdings, Inc.
Clayton E. Wilhite has served as a Director since July 1997. Since January
1998, Mr. Wilhite has been with CFI Group, Inc., has been its Managing Partner
since May 1998, and has served on the Board of Directors since September 1998.
CFI Group, Inc. is an international marketing and consulting firm specializing
in measuring customer satisfaction. Between 1996 and 1998, he was the Chairman
of Thurloe Holdings, L.L.C. Prior to 1996 Mr. Wilhite was with D'Arcy Masius
Benton & Bowles, Inc. ("DMB&B") having served as its Vice Chairman from 1995 to
1996, 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. From August 1996 through
the Pollo Acquisition, Mr. Wilhite served on the Board of Directors of Pollo
Tropical, Inc.
All Directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. The executive officers
of the Company are chosen by the Board and serve at its discretion. All
Directors of Carrols also serve as Directors for Holdings.
64
EXECUTIVE COMPENSATION
The following tables set forth certain information for the fiscal years
ended December 31, 1997, 1996 and 1995 for the Chief Executive Officer and the
next four most highly compensated executive officers of the Company who were
serving as executive officers at December 31, 1997 and whose annual compensation
exceeded $100,000. No other executive officers received total compensation in
excess of $100,000 in 1997. Stock option data refers to the stock options of
Holdings.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) OPTIONS(#)
- ------------------------------------------------------------------ ---- -------- -------- ------------
Alan Vituli ...................................................... 1997 $392,758 $ -- 72,830
Chairman of the Board and Chief Executive Officer 1996 363,160 128,210 --
1995 352,632 245,000 20,000
Daniel T. Accordino .............................................. 1997 288,386 -- 31,479
President, Chief Operating Officer and Director 1996 258,943 91,778 --
1995 250,751 150,322 10,000
Joseph A. Zirkman ................................................ 1997 120,436 -- 1,118
Vice President, General Counsel and Secretary 1996 115,288 40,934 --
1995 105,249 41,995 3,000
Paul R. Flanders ................................................. 1997 105,925 -- 1,500
Vice President, Finance and Treasurer 1996 -- -- --
1995 -- -- --
Richard H. Liem .................................................. 1997 103,160 -- 500
Vice President, Financial Operations 1996 94,750 30,288 --
1995 93,092 37,153 3,000
- ------------------
(a) The Company provides bonus compensation to Executive Officers based on an
individual's achievement of certain specified objectives and the Company's
achievement of specified increases in shareholder value.
65
OPTION GRANTS IN 1997 FISCAL YEAR
% OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED EXERCISE
UNDERLYING TO PRICE
OPTIONS EMPLOYEES (PRICE EXPIRATION
NAME GRANTED(C) IN 1997 PER SHARE) DATE
- ---------------------------------------------------------------- ---------- --------- ---------- ----------
Alan Vituli(a).................................................. 72,830 61.1% $ 101.76 3/26/2007
Daniel T. Accordino(a).......................................... 31,479 26.4% 101.76 3/26/2007
Joseph A. Zirkman(a)............................................ 368 .3% 101.76 3/26/2007
(b).......................................... 750 .6% 110.00 6/9/2007
Paul R. Flanders(b)............................................. 1,500 1.3% 110.00 6/9/2007
Richard H. Liem(b).............................................. 500 .4% 110.00 6/9/2007
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
OF STOCK APPRECIATION
FOR OPTION TERM(D)
------------------------------------------------
NAME 5% 10%
- ----------------------------------------------------------- ---------------------- ----------------------
Alan Vituli(a)............................................. $5,429,590 $ 13,035,600
Daniel T. Accordino(a)..................................... 2,346,808 5,634,322
Joseph A. Zirkman(a)....................................... 27,435 65,867
(b)........................................................ 51,884 131,484
Paul R. Flanders(b)........................................ 103,768 262,968
Richard H. Liem(b)......................................... 34,589 87,656
- ------------------
(a) Stock option grants to Messrs. Vituli, Accordino and Zirkman include 29,480,
2,579 and 368 shares, respectively, granted at the time of the investment in
the Company by Madison Dearborn Capital Partners, L.P. and Madison Dearborn
Capital Partners II, L.P. (the "Madison Dearborn Investors") on March 27,
1997 ("MD Investment") under the Vituli Non-Plan Option Agreement, the
Accordino Non-Plan Option Agreement and the Zirkman Non-Plan Option
Agreement, respectively. At the time of the MD Investment, stock option
grants under the 1996 Plan (as defined) were also made for 43,350 shares to
the Vituli Family Trust in exchange for options that it was holding.
Mr. Accordino was also granted options for 28,900 shares under the 1996
Plan. See "Management--Option Agreements Pursuant to the 1996 Plan" and
"Management--Other Option Agreements."
(b) Stock option grants to Messrs. Zirkman, Flanders and Liem include 750,
1,500, and 500 shares, respectively, granted under the 1996 Plan. These
options become exercisable at the rate of 25% per year beginning on
December 31, 1997.
(c) All options are exercisable for the common stock of Holdings.
(d) Potential realizable value is based on an assumption that the price of
Holdings' common shares appreciate at 5% and 10% annually (compounded) from
the date of grant until the end of the ten year option term. These
calculations are based on requirements promulgated by the Securities and
Exchange Commission and are not intended to forecast possible future
appreciation of the stock price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, no executive officer of the Company served as
a director of or member of a compensation committee of any entity for which any
of the persons serving on the Board of Directors of the Company or on the
Compensation Committee of the Board of Directors (the "Compensation Committee")
is an executive officer. The Compensation Committee is comprised of Messrs.
Chereskin, Mathies and Wilhite.
66
BOARD OF DIRECTORS
Directors Compensation. Directors who are Company employees do not receive
any additional compensation for serving as directors. Directors who are not
employees of the Company receive a fee of $15,000 per annum. All Directors are
reimbursed for all reasonable expenses incurred by them in acting as Directors,
including as members of any committee of the Board of Directors.
Liability Limitation. As permitted under the Delaware General Corporation
Law, the Company's Restated Certificate of Incorporation provides that a
Director of the Company will not be personally liable to the Company or its
stockholders for monetary damages for breach of a fiduciary duty owed to the
Company or its stockholders. By its terms and in accordance with the laws of the
State of Delaware, however, this provision does not eliminate or limit the
liability of a Director of the Company: (i) for any breach of the Director's
duty of loyalty to the Company or its stockholders; (ii) for an act or omission
not in good faith or involving intentional misconduct or a knowing violation of
law; (iii) for any transaction from which the Director derived an improper
personal benefit; or (iv) for an improper declaration of dividends or purchase
or redemption of the Company's securities.
Indemnification. The Company's Restated Certificate of Incorporation
provides that the Company shall indemnify its Directors and officers to the
fullest extent permitted by Delaware law.
DESCRIPTION OF PLANS
Employee Savings Plan. The Company offers certain of its salaried
employees the option to participate in the Carrols Corporation Corporate
Employee Savings Plan (the "Savings Plan") which is qualified as a
profit-sharing plan by the Internal Revenue Service. In accordance with the
Savings Plan, the Company matches up to $1,040 of an employee's mandatory
contributions by contributing $0.50 for each dollar contributed by the employee.
Employees are fully vested in their own contributions; employees become vested
in the Company's contributions beginning in the fourth year of service, and are
fully vested after seven years of service or upon retirement at age 65 with five
years service, death, or permanent or total disability. Benefits may be paid out
upon the occurrence of any of the foregoing events in a single cash lump sum or
in periodic installments over not more than the employee's assumed life
expectancy. The employee's contributions may be withdrawn at any time, subject
to restrictions on future contributions. The Company's matching contributions
may be withdrawn under certain conditions of financial necessity or hardship as
defined in the Savings Plan.
Bonus Plans. The Company has cash bonus plans designed to promote and
reward excellent performance by providing employees with incentive compensation.
Key senior management executives of each operating division can be eligible for
bonuses equal to varying percentages of their respective annual salaries
determined by the performance of the Company and the division.
1996 Long-Term Incentive Plan. In connection with the MD Investment,
Holdings adopted the Carrols Holdings Corporation 1996 Long-Term Incentive Plan
(the "1996 Plan") pursuant to which the Company may grant "Incentive Stock
Options" (as defined under Section 422 of the Internal Revenue Code),
nonqualified stock options, stock appreciation rights, restricted stock,
performance shares and performance units and other stock-based awards (the
foregoing collectively "Awards") to certain officers and employees of the
Company and its subsidiaries. The 1996 Plan replaced a prior long-term incentive
plan which was adopted December 26, 1996 (the "Prior Incentive Plan"). The 1996
Plan is designed to advance the interests of Holdings and the Company by
providing an additional incentive to attract, retain and motivate qualified and
competent persons through the encouragement of stock ownership or stock
appreciation rights in Holdings.
The 1996 Plan permits the Compensation Committee of the Board of Directors
of Holdings (the "Holdings Compensation Committee") to grant, from time to time,
options to purchase an aggregate of up to 106,250 shares of common stock of
Holdings ("Holdings Common Stock"). The vesting periods for awards and the
expiration dates for exercisability of Awards granted under the 1996 Plan are
determined by the Holdings Compensation Committee; however, the exercise period
for an option granted under the 1996 Plan may not exceed ten years from the date
of the grant. The Holdings Compensation Committee is authorized to
67
grant options under the 1996 Plan to all eligible officers and employees of the
Company and its subsidiaries, including executive officers and directors (other
than outside Directors and members of the Holdings Compensation Committee).
The option exercise price per share of any option granted under the 1996
Plan is determined by the Holdings Compensation Committee; however, in no event
shall the option price per share of any option intended to qualify as an
Incentive Stock Option be less than the fair market value of the Holdings Common
Stock on the date such option is granted. Payment of such option exercise price
shall be made (i) in cash, (ii) by delivering shares of Holdings Common Stock
already owned by the holder of such options, (iii) by delivering a promissory
note, (iv) by a combination for any of the foregoing, in accordance with the
terms of the 1996 Plan, the applicable stock option agreement and any applicable
guidelines of the Holdings Compensation Committee in effect at the time, or
(v) by any other means approved by the Holdings Compensation Committee. In the
event that the holder of an option issued pursuant to the 1996 Plan elects to
pay the exercise price of such option by delivering a promissory note, such
promissory note may be either (A) unsecured and fully recourse against the
holder of such option or (B) nonrecourse but secured by the shares of Holdings
Common Stock being purchased by such exercise and by other assets having a fair
market value equal to not less than forty percent of the exercise price of such
option and, in either event, such note shall mature on the fifth anniversary of
the date thereof and bear interest at the rate provided under
Section 1274(d) of the Internal Revenue Code of 1986, as amended from time to
time.
Pursuant to the 1996 Plan, in the event of a Change of Control (as defined
in the 1996 Plan) any and all Awards issued and outstanding shall vest and
become exercisable in full on the date of such Change of Control. In addition,
as soon as practicable but in no event later than thirty days prior to the
occurrence of such Change of Control, the Holdings Compensation Committee shall
notify any holder of an Award granted under the 1996 Plan of such Change of
Control. Further, upon a Change of Control that qualifies as an Approved Sale
(as defined in the 1996 Plan) in which the outstanding Holdings Common Stock is
converted or exchanged for or becomes a right to receive any cash, property or
securities other than Illiquid Consideration (as defined in the 1996 Plan),
(i) each Award granted under the 1996 Plan shall become exercisable solely for
the amount of such cash, property or securities that the holder of such Award
would have been entitled to had such Award been exercised immediately prior to
such event; (ii) the holder of such Award shall be given an opportunity to
either (A) exercise such Award prior to the consummation of the Approved Sale
and participate in such sale as a holder of Holdings Common Stock or (B) upon
consummation of the Approved Sale, receive in exchange for such Award
consideration equal to the amount determined by multiplying (1) the same amount
of consideration per share of Holdings Common Stock received by the holders of
Holdings Common Stock in connection with the Approved Sale less the exercise
price per share of Holdings Common Stock of such Award to acquire Holdings
Common Stock by (2) the number of shares of Holdings Common Stock represented by
such Award; and (iii) to the extent such Award is not exercised prior to or
simultaneous with such Approved Sale, any such Award shall be canceled.
1998 Directors' Stock Option Plan. During 1998, Holdings adopted the
Carrols Holdings Corporation 1998 Directors' Stock Option Plan (the "1998
Directors' Plan") pursuant to which the Company may grant "Incentive Stock
Options" (as defined under Section 422 of the Internal Revenue Code),
nonqualified stock options, stock appreciation rights, restricted stock, and
other stock-based awards (the foregoing collectively "Director Awards") to
certain non-employee Directors of Holdings. The 1998 Directors' Plan is designed
to advance the interests of Holdings and the Company by providing an additional
incentive to attract, retain and motivate non-employee individuals as Directors
of the Board of Holdings and the Company.
The 1998 Directors' Plan permits the Holdings Compensation Committee to
grant, from time to time, options to purchase an aggregate of up to 10,000
shares of Holdings Common Stock. The vesting periods for Director Awards and the
expiration dates for exercisability of Director Awards granted under the 1998
Directors' Plan are determined by the Compensation Committee; however, the
exercise period for an option granted under the 1998 Directors' Plan may not
exceed ten years from the date of the grant. The Holdings Compensation Committee
is authorized to grant options under the 1998 Directors' Plan to all eligible
non-employee Directors of Holdings. Directors that are employees of Holdings or
the Company, Madison Dearborn or Atlantic, or any of their respective affiliates
are not eligible under the 1998 Directors' Plan.
68
The option exercise price per share of any option granted under the 1998
Directors' Plan is determined by the Holdings Compensation Committee; however,
in no event shall the option price per share of any option intended to qualify
as an Incentive Stock Option be less than the fair market value of the Holdings
Common Stock on the date such option is granted. Payment of such option exercise
price shall be made (i) in cash, (ii) by delivering shares of Common Stock
already owned by the holder of such options, (iii) by delivering a promissory
note, (iv) by a combination of any of the foregoing, in accordance with the
terms of the 1998 Directors' Plan, the applicable stock option agreement and any
applicable guidelines of the Holdings Compensation Committee in effect at the
time, or (v) by any other means approved by the Holdings Compensation Committee.
In the event that the holder of an option issued pursuant to the 1998 Directors'
Plan elects to pay the exercise price of such option by delivering a promissory
note, such promissory note may be either (A) unsecured and fully recourse
against the holder of such options or (B) nonrecourse but secured by the shares
of Holdings Common Stock being purchased by such exercise and by other assets
having a fair market value equal to not less than forty percent of the exercise
price of such option and, in either event, such note shall mature on the fifth
anniversary of the date thereof and bear interest at the rate provided under
Section 1274(d) of the Internal Revenue Code of 1986, as amended from time to
time.
Pursuant to the 1998 Directors' Plan, in the event of a Change of Control
(as defined in the 1998 Directors' Plan), any and all Director Awards issued and
outstanding shall vest and become exercisable in full on the date of such Change
of Control. In addition, as soon as practicable but in no event later than
thirty days prior to the occurrence of a Change of Control, the Holdings
Compensation Committee shall notify any holder of a Director Award granted under
the 1998 Directors' Plan of such Change of Control. Further, upon a Change of
Control that qualifies as an Approved Sale (as defined in the 1998 Directors'
Plan) in which the outstanding Holdings Common Stock is converted or exchanged
for or becomes a right to receive any cash, property or securities other than
Illiquid Consideration (as defined in the 1998 Directors' Plan), (i) each
Director Award granted under the 1998 Directors' Plan shall become exercisable
solely for the amount of such cash, property or securities that the holder of
such Director Award would have been entitled to had such Director Award been
exercised immediately prior to such event; (ii) the holder of such Director
Award shall be given an opportunity to either (A) exercise such Director Award
prior to the consummation of the Approved Sale and participate in such sale as a
holder of Holdings Common Stock or (B) upon consummation of the Approved Sale,
receive in exchange for such Director Award consideration equal to the amount
determined by multiplying (1) the same amount of consideration per share of
Holdings Common Stock received by the holders of Holdings Common Stock in
connection with the Approved Sale less the exercise price per share of Holdings
Common Stock of such Director Award to acquire Holdings Common Stock by (2) the
number of shares of Holdings Common Stock represented by such Director Award;
and (iii) to the extent such Director Award is not exercised prior to or
simultaneous with such Approved Sale, any such Director Award shall be canceled.
DESCRIPTION OF EMPLOYMENT AGREEMENTS
Vituli Employment Agreement. On March 27, 1997, in connection with the MD
Investment, the Company entered into a Second Amended and Restated Employment
Agreement (the "Vituli Employment Agreement") with Alan Vituli, which amended
and restated that certain Amended and Restated Employment Agreement dated
April 3, 1996 between the Company and Mr. Vituli. Pursuant to the Vituli
Employment Agreement, Mr. Vituli will continue to serve as Chairman of the Board
and Chief Executive Officer of the Company. The Vituli Employment Agreement
shall be for an initial term of four years, commencing on March 27, 1997 and
will be subject to automatic renewals for successive one-year terms unless
either the Company or Mr. Vituli elects not to renew by giving written notice to
the other at least 90 days before a scheduled expiration date. Pursuant to the
Vituli Employment Agreement, Mr. Vituli will receive a base salary of $400,000
for the first year of the term, which amount increases annually by at least
$25,000 subject to additional increases that may be authorized by the
Compensation Committee. Pursuant to the Vituli Employment Agreement, Mr. Vituli
will participate in the Executive Bonus Plan of the Company and any stock option
plan of the Company applicable to executive employees. The Vituli Employment
Agreement also requires that the Company is responsible for maintaining the
premium payments on a split-dollar life insurance policy on the life of
Mr. Vituli providing a death benefit of $1.5 million payable to an irrevocable
trust designated by Mr. Vituli. The Vituli Employment Agreement provides that if
Mr. Vituli's employment
69
is terminated without Cause (as defined in the Vituli employment Agreement)
following a Change of Control (as defined in the Vituli Employment Agreement),
(i) Mr. Vituli will receive a cash payment in the amount equal to 2.99 times his
Five Year Compensation Average (as defined in the Vituli Employment Agreement)
if such Change of Control occurs during the first two years of the initial term
of the Vituli Employment Agreement and (ii) a cash lump sum equal to his salary
during the previous twelve months if terminated thereafter. The Vituli
Employment Agreement includes non-competition and non-solicitation provisions
effective during term of the agreement and for two years following its
termination.
Accordino Employment Agreement. On March 27, 1997 in connection with the
MD Investment, the Company entered into a Second Amended and Restated Employment
Agreement (the "Accordino Employment Agreement") with Daniel T. Accordino, which
amended and restated that certain Amended and Restated Employment Agreement
dated April 3, 1996 between the Company and Mr. Accordino. Pursuant to the
Accordino Employment Agreement, Mr. Accordino will continue to serve as
President and Chief Operating Officer of the Company. The Accordino Employment
Agreement shall be for an initial term of four years, commencing on March 27,
1997 and will be subject to automatic renewal for successive one-year terms
unless either the Company or Mr. Accordino elects not to renew by giving written
notice to the other at least 90 days before a scheduled expiration date.
Pursuant to the Accordino Employment Agreement, Mr. Accordino will receive a
base salary of $300,000 for the first year of the term, which amount increases
annually by at least $20,000 subject to additional increases that may be
authorized by the Compensation Committee. Pursuant to the Accordino Employment
Agreement, Mr. Accordino will participate in the Executive Bonus Plan of the
Company and any stock option plan of the Company applicable to executive
employees. The Accordino Employment Agreement also will require that the Company
is responsible for maintaining the premium payments on a split-dollar life
insurance policy on the life of Mr. Accordino providing a death benefit of
$1 million payable to an irrevocable trust designated by Mr. Accordino. The
Accordino Employment Agreement provides that if Mr. Accordino's employment is
terminated without Cause (as defined in the Accordino Employment Agreement)
following a Change of Control (as defined in the Accordino Employment
Agreement), (i) Mr. Accordino will receive a cash payment in the amount equal to
2.99 times his Five year Compensation Average (as defined in the Accordino
Employment Agreement) if such Change of Control occurs during the first two
years of the initial term of the Accordino Employment Agreement and (ii) a cash
lump sum equal to his salary during the pervious twelve months if terminated
thereafter. The Accordino Employment Agreement includes non-competition and
non-solicitation provisions effective during term of the agreement and for two
years following its termination.
Castaldo Employment Agreement. Effective July 20, 1998, in connection with
the Pollo Acquisition, the Company entered into an Amended and Restated
Employment Agreement (the "Castaldo Employment Agreement") with Nicholas A.
Castaldo, which amended and restated that certain Employment Agreement dated
September 19, 1995, as amended May 5, 1997, between Pollo Tropical and
Mr. Castaldo. Pursuant to the Castaldo Employment Agreement, Mr. Castaldo will
serve as the President and Chief Operating Officer of the Company's Pollo
Tropical Division. The Castaldo Employment Agreement will be for an initial term
commencing on July 20, 1998 and ending September 30, 2003, and will be subject
to renewal for up to two additional one-year periods at the Company's option,
exercisable by giving written notice to Mr. Castaldo by no later than July 31,
2003 or 2004, as applicable. Pursuant to the Castaldo Employment Agreement,
Mr. Castaldo will receive a base salary of $300,000 per year during the term,
which amount increases on January 1, 2000 and on each January 1st thereafter
during the term by at least 5% subject to additional increases that may be
authorized by the Company's Board of Directors. Pursuant to the Castaldo
Employment Agreement, Mr. Castaldo will be eligible to receive an annual bonus
of up to 100% of his base salary (of which not more than 50% may be subject to
deferral provisions in the Executive Bonus Plan of the Company (as defined in
the Castaldo Employment Agreement)), which bonus will be payable in accordance
with the Executive Bonus Plan of the Company and will be based solely upon the
achievement by Mr. Castaldo of certain corporate and individual performance
standards during the relevant period as reasonably established by the Company
after consultation with Mr. Castaldo. For the period January 1, 1998 through
June 30, 1998, Mr. Castaldo will receive a bonus based upon the previous Pollo
Tropical Executive Bonus Plan (as defined in the Castaldo Employment Agreement),
none of which bonus will be subject to any deferral provisions in the Executive
Bonus Plan of the Company. Pursuant to the Castaldo Employment Agreement,
Mr. Castaldo will be entitled to be granted, and it is anticipated that he will
be granted, non-qualified options or the
70
equivalent to purchase 5% of Pollo Tropical's common stock or equity value if no
such common stock has been issued. Such options will be issued pursuant to Pollo
Tropical's 1998 Stock Option or Tracking Stock Option Plan, which the Company
anticipates adopting in the future. The Castaldo Employment Agreement provides
that if Mr. Castaldo's employment is terminated by the Company without Cause (as
defined in the Castaldo Employment Agreement) or by Mr. Castaldo for Good Reason
(as defined in the Castaldo Employment Agreement), or if the term of the
Castaldo Employment Agreement expires, then Mr. Castaldo will be entitled to the
following payments and benefits:
(i) An amount equal to the greater of (x) Mr. Castaldo's base salary
then in effect, from the date on which his employment is terminated or
expires under the terms of the Castaldo Employment Agreement until
12 months after such termination date or (y) Mr. Castaldo's base salary
from such termination date through the end of the initial term. The
foregoing shall be payable as follows: a lump sum equal to one year's then
current base salary payable within ten days of such termination date and
the balance, if any, payable in 24 equal monthly installments.
(ii) Mr. Castaldo's stock options to be granted under the Option
Agreement (as defined in the Castaldo Employment Agreement) shall vest as
set forth in and in accordance with the terms and provisions of the Option
Agreement.
(iii) Mr. Castaldo's health and medical insurance benefits will be
continued at the Company's expense through the date which is 24 months
following the termination date.
(iv) Any portion of bonus that was deferred under the Pollo Tropical
Executive Bonus Plan will be payable in a lump sum within ten days of the
termination date.
The Castaldo Employment Agreement includes non-competition and
non-solicitation provisions effective during the term of the agreement and for
two years following its termination.
OPTION AGREEMENTS PURSUANT TO THE 1996 PLAN
Vituli Plan Option Agreement. On December 30, 1996 (during the Company's
1997 fiscal year), pursuant to the Securities Purchase Agreement dated as of
March 6, 1996 among the Company, Holdings, the stockholders of Holdings and
Atlantic Restaurants, Inc. (the "Atlantic Transaction"), Holdings granted to
Alan Vituli, under the 1996 Plan, an option (the "Vituli Option") to purchase
43,350 shares of Holdings Common Stock. The Vituli Option (i) was immediately
exercisable with regard to 15,300 shares of Holdings Common Stock at an exercise
price of $110.00 per share and (ii) was to become exercisable on June 1, 1997
with regard to (a) 15,300 shares of Holdings Common Stock at an exercise price
of $130.00 per share and (b) 12,750 shares of Holdings Common Stock at an
exercise price of $140.00 per share. On January 22, 1997, Mr. Vituli contributed
these options to the Vituli Family Trust for the benefit of his children.
In connection with the MD Investment, Holdings granted an option to
purchase 43,350 shares of Holdings Common Stock under the 1996 Plan in exchange
for the options held by the Vituli Family Trust (the "New Vituli Plan Option").
The Vituli Family Trust agreed to reduce the exercise price to $101.7646 per
share. The New Vituli Plan Option shall (i) have a term of ten years from the
date of grant, (ii) shall become exercisable on the date of grant with regard to
15,300 shares of Holdings Common Stock and (iii) shall become exercisable
(a) on December 31, 1997 with regard to 5,610 shares of Holdings Common Stock,
(b) on December 31, 1998 with regard to 5,610 shares of Holdings Common Stock,
(c) on December 31, 1999 with regard to 5,610 shares of Holdings Common Stock
and (d) on December 31, 2000 with regard to 11,220 shares of Holdings Common
Stock.
Accordino Plan Option Agreement. On December 30, 1996 (during the
Company's 1997 fiscal year), pursuant to the Atlantic Transaction, Holdings
granted to Daniel T. Accordino, under the 1996 Plan, an option (the "Accordino
Option") to purchase 28,900 shares of Holdings Common Stock. The Accordino
Option (i) was immediately exercisable with regard to 10,200 shares of Holdings
Common Stock at an exercise price of $110.00 per share and (ii) was to become
exercisable on December 31, 1997 with regard to (a) 10,200 shares of Holdings
Common Stock at an exercise price of $130.00 per share and (b) 8,500 shares of
Holdings Common Stock at an exercise price of $140.00 per share.
71
In connection with the MD Investment, the Accordino Option was canceled and
Holdings granted to Mr. Accordino, under the 1996 Plan, an option (the "New
Accordino Plan Option") to purchase 28,900 shares of Holdings Common Stock at an
exercise price of $101.7646 per share. The New Accordino Plan Option shall
(i) have a term of ten years from the date of grant, (ii) shall become
exercisable on the date of grant with regard to 10,200 shares of Holdings Common
Stock and (iii) become exercisable (a) on December 31, 1997 with regard to 3,740
shares of Holdings Common Stock, (b) on December 31, 1998 with regard to 3,740
shares of Holdings Common Stock, (c) on December 31, 1999 with regard to 3,740
shares of Holdings Common Stock and (d) on December 31, 2000 with regard to
7,480 shares of Holdings Common Stock.
OTHER OPTION AGREEMENTS
Vituli Non-Plan Option Agreement. In connection with the MD Investment,
Holdings granted to Mr. Vituli a nonqualified stock option (the "Vituli Non-Plan
Option") to purchase 29,480 shares of Holdings Common Stock at an exercise price
of $101.7646. The Vituli Non-Plan Option shall have a term of ten years from the
date of grant and shall become exercisable in five equal parts on the five
consecutive anniversaries of the date of grant. The Vituli Non-Plan Option will
have substantially the same terms as options issued under the 1996 Plan with
respect to (i) the method of payment of the exercise price of the Vituli
Non-Plan Option and (ii) the effect of a Change of Control (as defined in the
1996 Plan).
Accordino Non-Plan Option Agreement. In connection with the MD Investment,
Holdings granted to Mr. Accordino a nonqualified stock option (the "Accordino
Non-Plan Option") to purchase 2,579 shares of Holdings Common Stock at an
exercise price of $101.7646. The Accordino Non-Plan Option shall have a term of
ten years from the date of grant and shall become exercisable in five equal
parts on the five consecutive anniversaries of the date of grant. The Accordino
Non-Plan Option will have substantially the same terms as the Vituli Non-Plan
Option.
Zirkman Non-Plan Option Agreement. In connection with the MD Investment,
Holdings granted to Joseph A. Zirkman a nonqualified stock option (the "Zirkman
Non-Plan Option") to purchase 368 shares of Holdings Common Stock at an exercise
price of $101.7646. The Zirkman Non-Plan Option shall have a term of ten years
from the date of grant and shall become exercisable in five substantially equal
parts on the five consecutive anniversaries of the date of grant. The Zirkman
Non-Plan Option will have substantially the same terms as the Vituli Non-Plan
Option.
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PRINCIPAL STOCKHOLDERS
The following tables set forth the number and percentage of shares of
voting common stock of the Company and of Holdings beneficially owned, as of
December 31, 1998, by (i) all persons known by the Company to be the beneficial
owners of more than 5% of the shares of such voting common stock, (ii) each
Director of the Company who owns shares of such voting common stock, (iii) each
executive officer of the Company included in the Summary Compensation Table
above and (iv) all executive officers and Directors of the Company as a group.
SHARES BENEFICIALLY
OWNED(A)
--------------------- FULLY DILUTED(B)
NUMBER PERCENTAGE PERCENTAGE
------- ---------- ----------------
Stockholders of Carrols Corporation:
Carrols Holdings Corporation............................................ 10 100% 100%
968 James Street
Syracuse, New York 13203
Stockholders of Carrols Holdings Corporation:
Atlantic Restaurants, Inc............................................... 566,667 47.14% 44.14%
Madison Dearborn Capital Partners, L.P.................................. 283,333 23.57% 22.07%
Madison Dearborn Capital Partners II, L.P............................... 283,334 23.57% 22.07%
Executive Officers and Directors:
Alan Vituli(c).......................................................... 42,243 3.51% 6.44%
Daniel T. Accordino..................................................... 19,056 1.59% 2.52%
Joseph A. Zirkman....................................................... 672 .06% .13%
Paul R. Flanders........................................................ 875 .07% .16%
Richard H. Liem......................................................... 325 .03% .06%
Clayton E. Wilhite...................................................... 250 .02% .08%
Directors and executive officers of the Company as a group (12
persons)............................................................. 63,746 5.30% 9.44%
- ------------------
(a) The number of shares shown in the table includes stock options which are
currently exercisable or exercisable within 60 days to purchase: 32,416
shares held by Mr. Vituli; 18,196 shares held by Mr. Accordino; 549 shares
held by Mr. Zirkman; 875 shares held by Mr. Flanders; 325 shares held by
Mr. Liem; and 250 shares held by Mr. Wilhite.
(b) Gives effect to the exercise of all outstanding options for Holdings Common
Stock.
(c) Includes 26,520 vested stock options contributed to and held by the Vituli
Family Trust.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement. On March 27, 1997, in connection with the MD
Investment, all holders of Holdings Common Stock entered into a Stockholders
Agreement (the "Stockholders Agreement"). The Stockholders Agreement provides
that all holders of Holdings Common Stock will vote their Holdings Common Stock
in order to cause the following individuals to be elected to the board of
directors of Holdings and each of its subsidiaries (including the Company):
(a) three representatives designated by the Madison Dearborn Investors; (b)
three representatives designated by Atlantic; and (c) two representatives
designated by Mr. Vituli as long as Mr. Vituli is the Chief Executive Officer of
the Company, subject in each case to adjustment if the percentage holdings of
each decreases below a certain threshold. In addition, the Stockholders
Agreement provides for certain limitations on the ability of holders of Holdings
Common Stock to sell, transfer, assign, pledge or otherwise dispose of their
Holdings Common Stock. The Stockholders Agreement contains covenants requiring
the Company to obtain the prior consent of the Madison Dearborn Investors and
Atlantic prior to taking certain actions including, without limitation, the
redemption, purchase or other acquisition of Holdings' capital budget approved
by Holdings' board of directors for that year or the entry into the ownership,
active management or operation of any business other than Burger King franchise
restaurants.
Registration Rights Agreement. On March 27, 1997, in connection with the
MD Investment, Atlantic, the Madison Dearborn Investors, Alan Vituli, Daniel T.
Accordino and Joseph A. Zirkman entered into a Registration Agreement with
Holdings (the "Registration Agreement"). The Registration Agreement provides for
demand and piggyback rights with respect to Holdings Common Stock. The Madison
Dearborn Investors or Atlantic may demand registration under the Securities Act
(a "Demand Registration") of all or any portion of their shares of Holdings
Common Stock or options for shares of Holdings Common Stock (the "Registrable
Securities"), provided that (i) in the case of the first Demand Registration,
the Madison Dearborn Investors and Atlantic must consent to a Demand
Registration unless Holdings has completed a registered public offering of the
Holdings Common Stock and (ii) all Demand Registrations on Form S-1 must be
underwritten. The Madison Dearborn Investors and Atlantic are each entitled to
request: three Demand Registrations on Form S-1 in which Holdings shall pay all
registration expenses, provided that the offering value of the Registrable
Securities is at least $15 million; and an unlimited number of Demand
Registrations on Form S-3 in which Holdings shall pay all registration expenses,
provided that the offering value of the Registrable Securities is at least
$5 million with an underwritten offering equal to at least $10 million. Whenever
Holdings proposes to register any of its securities (other than pursuant to a
Demand Registration) and the registration form may be used for the registration
of Registrable Securities, Holdings shall give prompt written notice to all
holders of Registrable Securities of its intention to effect such a registration
and shall include in such registration all Registrable Securities to which
Holdings has received written requests for inclusion therein within 20 days
after receipt of Holdings' notice (a "Piggyback Registration"). Holdings shall
pay the registration expenses of the holders of Registrable Securities in all
Piggyback Registrations. The Registration Agreement contains typical "cut back"
provisions in connection with both Demand Registrations and Piggyback
Registrations. The Company will provide the holders of the Registrable
Securities with typical indemnification in the event of certain misstatements or
omissions made in connection with both Demand Registrations and Piggyback
Registrations.
74
DESCRIPTION OF THE SENIOR CREDIT FACILITY
The Senior Credit Facility, pursuant to which Chase Bank of Texas, National
Association, is agent and lender and which includes certain other lenders
parties thereto, provides for (i) a revolving credit facility under which the
Company may borrow up to $25.0 million (including a standby letter of credit
facility of up to $5.0 million) (the "Revolving Credit Facility") and (ii) a
term loan facility under which the Company may borrow up to $125.0 million (the
"Term Loan Facility"). Borrowings under the Revolving Credit Facility were, and
are required to be, used to refinance existing indebtedness of the Company, to
finance permitted acquisitions and new store development, and for other working
capital and general corporate purposes. Borrowings under the Term Loan Facility
were and are required to be, used to finance acquisitions by the Company and
refinance certain indebtedness of the Company.
Under the Senior Credit Facility, the Revolving Credit Facility expires on
December 31, 2001 (subject to a one-year extension upon the request of the
Company and unanimous approval of the lenders). Approximately $47.9 million of
the proceeds of the Private Offering were used to prepay principal amounts under
the Senior Credit Facility including $31.0 million which was applied to reduce
the Term Loan Facility. The outstanding principal amount of Term Loan advances
under the Term Loan Facility (after giving effect to the Private Offering and
the application by the Company of the proceeds therefrom) are repayable as
follows: (i) an aggregate of $7.1 million payable in four quarterly installments
in 1999; (ii) an aggregate of $8.9 million payable in four quarterly
installments in 2000; (iii) an aggregate of $10.8 million payable in four
quarterly installments in 2001; (iv) an aggregate of $12.6 million payable in
four quarterly installments in 2002; (v) an aggregate of $3.5 million payable in
March 2003 and (vi) a final payment of an aggregate of $45.7 million payable
upon the Term Loan Facility's maturity on June 30, 2003.
Borrowings under the Revolving Credit Facility and the Term Loan Facility
bear interest at a per annum rate, at the Company's option, of either
(i) (a) the greater of the prime rate or the federal funds rate plus .50%, plus
(b) a margin of 0%, .25%, .50%, .75% or 1.0%, based on the Company achieving
certain leverage ratios (as defined in the Senior Credit Facility) or
(ii) LIBOR plus a margin of 1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on the
Company achieving certain leverage ratios.
In general, the Company's obligations under the Senior Credit Facility are
secured by all of the assets, tangible or intangible, real, personal or mixed,
of the Company and certain of its subsidiaries (other than certain leasehold
property), and a pledge by Holdings of all of the outstanding capital stock of
the Company. In addition, payment of all obligations under the Senior Credit
Facility is guaranteed by Holdings. Under the Senior Credit Facility, the
Company is required to make mandatory prepayments of principal annually in an
amount equal to 50% of Excess Cash Flow (as defined in the Senior Credit
Facility), and also in the event of certain dispositions of assets (all subject
to certain exceptions) in an amount equal to 100% of the net proceeds received
by the Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility will require the Company to meet certain financial
ratio tests.
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DESCRIPTION OF THE EXCHANGE NOTES
The Old Notes have been, and the Exchange Notes are to be, issued under the
Indenture. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
TIA as in effect on the date of the Indenture. The definitions of certain
capitalized terms used in the following summary are set forth below under
"--Certain Definitions." For purposes of this section, references to the
"Company" include only Carrols Corporation and not its subsidiaries. The Old
Notes and the Exchange Notes are collectively referred to herein as the "Notes."
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the Exchange Notes. The
Exchange Notes may be presented for registration or transfer and exchange at the
offices of the Registrar, which initially will be the Trustee's corporate trust
office. The Company may change any Paying Agent and Registrar without notice to
the holders of the Exchange Notes (the "Holders"). The Company will pay
principal (and premium, if any) on the Exchange Notes at the Trustee's corporate
trust office in New York, New York. At the Company's option, interest may be
paid at the Trustee's corporate trust office or by check mailed to the
registered address of Holders. Any Old Notes that remain outstanding after the
completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to all existing and future Senior
Indebtedness, including borrowings under the Senior Credit Facility. The
Exchange Notes will rank pari pasu in right of payment with all other senior
subordinated Indebtedness of the Company and senior in right of payment to all
subordinated Indebtedness of the Company. The Exchange Notes will be limited in
aggregate principal amount to $170,000,000, and will mature on December 1, 2008.
Interest on the Exchange Notes will accrue at the rate of 9.5% per annum and
will be payable semiannually in arrears on each June 1 and December 1,
commencing on June 1, 1999, to the persons who are registered Holders at the
close of business on the May 15 and November 15, respectively, immediately
preceding the applicable interest payment date. Interest on the Exchange Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the Issue Date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
REDEMPTION
Optional Redemption. The Exchange Notes will be redeemable, at the
Company's option, in whole or in part at any time, on and after December 1,
2003, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on December 1 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
YEAR PERCENTAGE
- ----------------------------------------------------------------------------------------- ----------
2003..................................................................................... 104.750%
2004..................................................................................... 103.167%
2005..................................................................................... 101.583%
2006 and thereafter...................................................................... 100.000%
Optional Redemption Upon Public Equity Offerings. At any time, or from
time to time, on or prior to December 1, 2001, the Company may, at its option,
use the net cash proceeds of one or more Public Equity Offerings to redeem up to
35% of the principal amount of Exchange Notes originally issued at a redemption
price equal to 109.50% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided that at least 65%
of the principal amount of Exchange Notes originally
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issued remain outstanding immediately after any such redemption. In order to
effect the foregoing redemption with the proceeds of any Public Equity Offering,
the Company shall make such redemption not more than 90 days after the
consummation of any such Public Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Exchange Notes are to be redeemed at
any time, selection of such Exchange Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which such Exchange Notes are listed or, if such Exchange
Notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided, however, that no Exchange Notes of a principal amount of $1,000 or
less shall be redeemed in part; provided further, however, that if a partial
redemption is made with the proceeds of a Public Equity Offering, selection of
the Exchange Notes or portions thereof for redemption shall be made by the
Trustee only on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first- class mail at least
30 but not more than 60 days before the redemption date to each Holder of
Exchange Notes to be redeemed at its registered address. If any Exchange Note is
to be redeemed in part only, the notice of redemption that relates to such
Exchange Note shall state the portion of the principal amount thereof to be
redeemed. A new Exchange Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Exchange Note. On and after the redemption date,
interest will cease to accrue on Exchange Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
RANKING AND SUBORDINATION OF THE EXCHANGE NOTES
The payment of the principal of, premium, if any, and interest on the
Exchange Notes is subordinated in right of payment, to the extent and in the
manner provided in the Indenture, to the prior payment in full in cash of all
Senior Indebtedness.
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities, upon any
dissolution or winding up or total liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings (excluding any payment or distribution of Permitted Junior
Securities and excluding any payment from funds deposited in accordance with,
and held in trust for the benefit of Holders pursuant to, "Legal Defeasance and
Covenant Defeasance" (a "Defeasance Trust Payment")), all Senior Indebtedness
then due shall first be paid in full in cash before the Holders of the Exchange
Notes or the Trustee on behalf of such Holders shall be entitled to receive any
payment by the Company of the principal of, premium, if any, or interest on the
Exchange Notes, or any payment by the Company to acquire any of the Exchange
Notes for cash, property or securities, or any distribution by the Company with
respect to the Exchange Notes of any cash, property or securities (excluding any
payment or distribution of Permitted Junior Securities and excluding any
Defeasance Trust Payment). Before any payment may be made by, or on behalf of,
the Company of the principal of, premium, if any, or interest on the Exchange
Notes upon any such dissolution or winding up or total liquidation or
reorganization, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, any payment or distribution of assets or
securities of the Company of any kind or character, whether in cash, property or
securities (excluding any payment or distribution of Permitted Junior Securities
and excluding any Defeasance Trust Payment), to which the Holders of the
Exchange Notes or the Trustee on their behalf would be entitled, but for the
subordination provisions of the Indenture, shall be made by the Company or by
any receiver, trustee in bankruptcy, liquidation trustee, agent or other Person
making such payment or distribution, directly to the holders of the Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representatives or to the
trustee or trustees or agent or agents under any agreement or indenture pursuant
to which any of such Senior Indebtedness may have been issued, as their
respective interests may appear, to the extent necessary to pay all such Senior
Indebtedness in full in cash
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after giving effect to any prior or concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities and excluding any Defeasance Trust Payment) by the
Company of principal of, premium, if any, or interest on the Exchange Notes,
whether pursuant to the terms of the Exchange Notes, upon acceleration, pursuant
to an Offer to Repurchase or otherwise, shall be made if, at the time of such
payment, there exists a default in the payment of all or any portion of the
obligations on any Senior Indebtedness, whether at maturity, on account of
mandatory redemption or prepayment, acceleration or otherwise, and such default
shall not have been cured or waived or the benefits of this sentence waived by
or on behalf of the holders of such Senior Indebtedness. In addition, during the
continuance of any non-payment event of default with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be immediately
accelerated, and upon receipt by the Trustee of written notice (a "Payment
Blockage Notice") from the holder or holders of such Designated Senior
Indebtedness or the trustee or agent acting on behalf of the holders of such
Designated Senior Indebtedness, then, unless and until such event of default has
been cured or waived or has ceased to exist or such Designated Senior
Indebtedness has been discharged or repaid in full in cash or the benefits of
these provisions have been waived by the holders of such Designated Senior
Indebtedness, no direct or indirect payment (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment) will be made by the Company of principal of, premium, if any, or
interest on the Exchange Notes, whether pursuant to the terms of the Exchange
Notes, upon acceleration, pursuant to an Offer to Purchase or otherwise, to such
Holders, during a period (a "Payment Blockage Period") commencing on the date of
receipt of such notice by the Trustee and ending 179 days thereafter.
Notwithstanding anything in the subordination provisions of the Indenture or the
Exchange Notes to the contrary, (x) in no event will a Payment Blockage Period
extend beyond 179 days from the date the Payment Blockage Notice in respect
thereof was given, (y) there shall be a period of at least 181 consecutive days
in each 360-day period when no Payment Blockage Period is in effect and (z) not
more than one Payment Blockage Period may be commenced with respect to the
Exchange Notes during any period of 360 consecutive days. No event of default
that existed or was continuing on the date of commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period (to the extent the holder of Designated Senior
Indebtedness, or trustee or agent, giving notice commencing such Payment
Blockage Period had knowledge of such existing or continuing event of default)
may be, or be made, the basis for the commencement of any other Payment Blockage
Period by the holder or holders of such Designated Senior Indebtedness or the
trustee or agent acting on behalf of such Designated Senior Indebtedness,
whether or not within a period of 360 consecutive days, unless such event of
default has been cured or waived for a period of not less than 90 consecutive
days.
The failure to make any payment or distribution for or on account of the
Exchange Notes by reason of the provisions of the Indenture described under this
"Ranking and Subordination of the Exchange Notes" heading will not prevent, or
be construed as preventing, the occurrence of any Event of Default in respect of
the Exchange Notes. See "--Events of Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the Exchange Notes will be paid to the holders of Senior Indebtedness to the
extent necessary to pay the Senior Indebtedness in full in cash, and the Company
may be unable to meet fully or at all its obligations with respect to the
Exchange Notes. Furthermore, by reason of such subordination, in the event of
any such insolvency of the Company, creditors of the Company who are holders of
Senior Indebtedness may recover more, ratably, than other creditors of the
Company, including holders of the Exchange Notes. Subject to the restrictions
set forth in the Indenture, in the future the Company may issue additional
Senior Indebtedness.
GUARANTEES
Each Guarantor unconditionally guarantees, on a senior subordinated basis,
jointly and severally, to each Holder and the Trustee, the full and prompt
performance of the Company's obligations under the Indenture and the Exchange
Notes, including the payment of principal of and interest on the Exchange Notes.
The Guarantees will be subordinated to Guarantor Senior Indebtedness on the same
basis as the Exchange Notes
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are subordinated to Senior Indebtedness. The obligations of each Guarantor are
limited to the maximum amount which, after giving effect to all other contingent
and fixed liabilities of such Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Guarantor in an amount pro rata, based on the net
assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company without limitation, or with other Persons upon the terms and conditions
set forth in the Indenture. See "Certain Covenants--Merger, Consolidation and
Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by
the Company and the sale complies with the provisions set forth in "Certain
Covenants--Limitation on Asset Sales," the Guarantor's Guarantee will be
released.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Company's obligations pursuant to the Exchange Notes, and the aggregate net
assets, earnings and equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder has the right to require that the Company repurchase all or a
portion of such Holder's Exchange Notes pursuant to the offer described below
(the "Change of Control Offer"), at a repurchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the repurchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note repurchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Repurchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
repurchase price for all the Exchange Notes that might be delivered by Holders
seeking to accept the Change of Control Offer. In the event the Company is
required to repurchase outstanding Exchange Notes pursuant to a change of
Control Offer, the Company expects that it would seek third party financing to
the extent it does not have available funds to meet its repurchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing. Neither the Board of Directors of the Company nor the Trustee may
waive the covenant relating to a Holder's right to redemption upon a Change of
Control.
Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on its property, to make Restricted Payments (as defined) and to
make Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
redemption or repurchase of the Exchange Notes, and there can be no assurance
that the Company or the acquiring party will have sufficient financial resources
to effect such redemption or repurchase. Such restrictions and the restrictions
on transactions with Affiliates may, in certain circumstances, make more
difficult or discourage any leveraged buyout of the Company or any of its
Subsidiaries by the management of the Company. While such restrictions cover a
wide variety of arrangements which have traditionally been used to effect highly
leveraged transactions, the Indenture may
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not afford the Holders of Exchange Notes protection in all circumstances from
the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
The Senior Credit Facility provides that certain change of control events
with respect to the Company would constitute a default thereunder. Any permitted
refinancings of the Senior Credit Facility to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing the
Exchange Notes, the Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to repay the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing the Exchange
Notes. In such case, the Company's failure to purchase tendered Exchange Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Senior Credit Facility.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Change of Control" provisions of the Indenture, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock. The Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, incur (as defined) any
Indebtedness (other than Permitted Indebtedness) and the Company will not issue
any Disqualified Capital Stock and will not permit its Restricted Subsidiaries
to issue any Preferred Stock except Preferred Stock of a Restricted Subsidiary
issued to (and as long as it is held by) the Company or a Wholly Owned
Restricted Subsidiary of the Company; provided, however, that if no Default or
Event of Default shall have occurred and be continuing at the time of or as a
consequence of the incurrence of any such Indebtedness, the Company or any
Restricted Subsidiary may incur Indebtedness (including, without limitation,
Acquired Indebtedness), the Company may issue Disqualified Capital Stock and any
Restricted Subsidiary may issue Preferred Stock, if, in any case, at the time of
and immediately after giving pro forma effect to such incurrence of such
Indebtedness or the issuance of such Disqualified Capital Stock or Preferred
Stock, as the case may be, and the use of proceeds therefrom, the Company's
Consolidated Fixed Charge Coverage Ratio is greater than 2.0 to 1.0.
Limitation on Senior Subordinated Indebtedness. The Company shall not, and
shall not cause or permit any Guarantor to, directly or indirectly, incur, or
suffer to exist, any Indebtedness that by its terms would expressly rank senior
in right of payment to the Exchange Notes or the Guarantees of such Guarantor,
as the case may be, and subordinate in right of payment to any other
Indebtedness of the Company or such Guarantor, as the case may be.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock, (b) redeem any Capital Stock
of the Company or any warrants, rights or options to purchase or acquire shares
of any class of such Capital Stock, or (c) make any Investment (other than
Permitted Investments) (each of the foregoing actions set forth in clauses (a),
(b) and (c) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto, (i) a Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Capital Stock" covenant or (iii) the aggregate amount
of Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date (the amount expended for such purposes, if other
than in cash, being the fair market value of
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such property as determined reasonably and in good faith by the Board of
Directors of the Company) shall exceed the sum (the "Basket"), without
duplication, of: (w) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company earned subsequent to the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date") (treating such period as a
single accounting period); provided that for purposes of this clause (w), the
definition of "Net Income" shall include (i) after-tax gains from Asset Sales or
abandonments or reserves relating thereto and (ii) an add-back of amortization
associated with the excess of purchase price over the value allocated to
tangible property or assets, acquired by the Company or its Restricted
Subsidiaries; plus (x) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company or any equity contribution
received by the Company from a holder of the Company's Capital Stock (other than
Qualified Capital Stock or any equity contribution, the proceeds of which are to
be used to redeem Notes pursuant to the provisions described under
"Redemption--Optional Redemption Upon Public Equity Offerings"); plus (y) the
principal amount (or accreted amount (determined in accordance with GAAP), if
less) of any Indebtedness of the Company or any Subsidiary of the Company
incurred after the Issue Date which has been converted into or exchanged for
Qualified Capital Stock of the Company (minus the amount of any cash or property
distributed by the Company or any Subsidiary of the Company upon such conversion
or exchange); plus (z) the amount equal to the net reduction in Investments
(other than Permitted Investments) made by the Company or any of its Restricted
Subsidiaries in any Person resulting from, and without duplication,
(i) repurchases or redemptions of such Investments by such Person, proceeds
realized upon the sale of such Investment to an unaffiliated purchaser and
repayments of loans or advances or other transfers of assets by such Person to
the Company or any Restricted Subsidiary of the Company or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed the
amount of the Investment previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in the
calculation of Restricted Payments; provided, however, that no amount shall be
included under this clause (z) to the extent it is already included in
Consolidated Net Income.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within
60 days after the date of declaration of such dividend if the dividend would
have been permitted on the date of declaration; (2) so long as no Default shall
have occurred and be continuing or would arise therefrom, any purchase,
redemption, defeasance or other acquisition of Capital Stock or subordinated
Indebtedness of the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Qualified Capital Stock of the Company;
provided, however, that the value of any such Qualified Capital Stock issued in
exchange for Capital Stock and subordinated Indebtedness are excluded from
clause (iii)(x) of the immediately preceding paragraph; (3) so long as no
Default shall have occurred and be continuing or would arise therefrom, any
purchase, redemption, defeasance or other acquisition of subordinated
Indebtedness of the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, subordinated Indebtedness of the Company;
(4) so long as no Default shall have occurred and be continuing or would arise
therefrom, dividends or distributions by the Company to Holdings to be promptly
applied by Holdings to repurchase Capital Stock of Holdings (including rights,
options or warrants to acquire such Capital Stock) from employees of Holdings or
any of its Subsidiaries or their authorized representatives upon the death,
disability or termination of employment of such employees, in an aggregate
amount not to exceed $1 million in any fiscal year; provided, however, that
amounts not expended in any calendar year may be expended in succeeding fiscal
years as long as no more than $3 million is so expended in any fiscal year;
(5) so long as no Default shall have occurred and be continuing or would arise
therefrom, Restricted Payments not to exceed $10 million in the aggregate during
the term of the Indenture; and (6) any dividends or payments to Holdings in
respect of overhead expenses, including legal, accounting and other professional
fees, that are directly attributable to the operations of the Company and its
Restricted Subsidiaries. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses (1),
(4) and (5) shall be included in such calculation. Transactions pursuant to
clauses (2) and (3) shall not increase the Basket.
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The amount of any non-cash Restricted Payment shall be the fair market
value, on the date such Restricted Payment is made, of the assets or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to such Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors of the Company.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 90% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 270 days of receipt thereof
either (A) to prepay any Indebtedness incurred pursuant to clause (ii) of the
definition of "Permitted Indebtedness" and effect a permanent reduction
thereunder, (B) to prepay any Senior Indebtedness and effect a permanent
reduction thereunder, (C) to make an investment in Replacement Assets or (D) a
combination of prepayment and investment permitted by the foregoing clauses
(iii)(A), (iii)(B) and (iii)(C). On the 271st day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company or of such
Restricted Subsidiary determines, as the case may be, not to apply the Net Cash
Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B),
(iii)(C) and (iii)(D) of the next preceding sentence (each, a "Net Proceeds
Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have not
been applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (iii)(A), (iii)(B), (iii)(C) and (iii)(D) of the next preceding sentence
(each a "Net Proceeds Offer Amount") shall be applied by the Company or such
Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on
a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than
60 days following the applicable Net Proceeds Offer Trigger Date, from all
Holders on a pro rata basis, that amount of Notes equal to the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase; provided, however, that the Company may defer the Net Proceeds Offer
until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in
excess of $5 million resulting from one or more Asset Sales (at which time, the
entire unutilized Net Proceeds Offer Amount, and not just the amount in excess
of $5 million, shall be applied as required pursuant to this paragraph). If at
any time any non-cash consideration received by the Company or any Restricted
Subsidiary, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash (other than interest received
with respect to any such non-cash consideration), then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 90% of the
consideration for such Asset Sale constitutes cash or Replacement Assets and
(ii) such Asset Sale is for fair market value; provided that any consideration
not constituting Replacement Assets received by the Company or any of its
Restricted Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
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elect to tender their Exchange Notes in whole or in part in integral multiples
of $1,000 in exchange for cash. To the extent Holders properly tender Notes in
an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders
will be purchased on a pro rata basis (based on amounts tendered). A Net
Proceeds Offer shall remain open for a period of 20 business days or such longer
period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock, (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary or (c) transfer any of its property or assets to the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of: (1) applicable law; (2) the
Indenture; (3) customary non-assignment provisions of any contract or any lease
entered into in the ordinary course of business and consistent with past
practices governing a leasehold interest of any Restricted Subsidiary; (4) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired;
(5) agreements existing on the Issue Date, including, without limitation, the
Senior Credit Facility, to the extent and in the manner such agreements are in
effect on the Issue Date; (6) customary Liens granted by the Company or any
Restricted Subsidiary to secure Senior Indebtedness or Senior Indebtedness of a
Restricted Subsidiary; (7) an agreement governing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (2), (4) or (5) above; provided, however, that the
provisions relating to such encumbrance or restriction contained in any such
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4) or (5);
(8) Purchase Money Indebtedness for property or assets acquired in the ordinary
course of business that only imposes encumbrances or restrictions on the
property so acquired; (9) Permitted Liens; and (10) any agreement for the sale
or disposition of the Capital Stock or assets of a Restricted Subsidiary;
provided, however, that such encumbrances and restrictions are only applicable
to such assets or Restricted Subsidiary, as applicable, and any such sale or
disposition is made in compliance with the "Limitation on Asset Sales" covenant
to the extent applicable thereto.
Limitation on Liens. (a) The Company shall not, and shall not permit any
Restricted Subsidiary to, incur or suffer to exist any Lien (other than
Permitted Liens) on property or assets of the Company or such Restricted
Subsidiary to secure Indebtedness that is pari passu or subordinate in right of
payment to the Exchange Notes, in the case of the Company, or the Guarantors, in
the case of a Restricted Subsidiary that is a Guarantor, without making, or
causing such Restricted Subsidiary to make, effective provision for securing the
Exchange Notes or the Guarantees, as the case may be (and, if the Company so
determines, any other Indebtedness of the Company or of such Restricted
Subsidiary that is not pari passu with or subordinated in right of payment to
the Exchange Notes or the Guarantees, as the case may be); provided, however,
that (i) in the case of a Lien securing Indebtedness that is pari passu with the
Exchange Notes, in the case of the Company, or the Guarantees, in the case of a
Restricted Subsidiary that is a Guarantor, the Lien securing the Exchange Notes
or the Guarantees, as the case may be, is senior or pari passu in priority with
such Lien and (ii) in the case of a Lien securing Indebtedness that is
subordinated in right of payment to the Exchange Notes, in the case of the
Company, or the Guarantees, in the case of a Restricted Subsidiary that is a
Guarantor, the Lien securing the Exchange Notes or the Guarantees, as the case
may be, is senior in priority to such Lien.
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(b) Notwithstanding the foregoing, any security interest granted by the
Company or any Restricted Subsidiary to secure the Exchange Notes, in the case
of the Company, or the Guarantees, in the case of a Restricted Subsidiary that
is a Guarantor, created pursuant to paragraph (a) above shall provide by its
terms that such security interest shall be automatically and unconditionally
released and discharged upon the release by the holders of the Indebtedness of
the Company or any Restricted Subsidiary described in paragraph (a) above of
their security interest (including any deemed release upon indefeasible payment
in full of all obligations under such Indebtedness), at a time when (A) no other
Indebtedness that is pari passu or subordinated in right of payment to the
Notes, or the Guarantees, as the case may be, has been secured by such property
or assets of the Company or any such Restricted Subsidiary or (B) the holders of
all such other Indebtedness which is secured by such property or assets of the
Company or any such Restricted Subsidiary release their security interest in
such property or assets (including any deemed release upon indefeasible payment
in full of all obligations under such Indebtedness).
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person, unless: (i) either (1) the Company shall be the
surviving or continuing corporation or (2) the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Subsidiaries substantially as an entirety (the "Surviving Entity")
(x) shall be a corporation organized and validly existing under the laws of the
United States or any State thereof or the District of Columbia and (y) shall
expressly assume, by supplemental indenture (in form and substance satisfactory
to the Trustee), executed and delivered to the Trustee, the due and punctual
payment of the principal of, and premium, if any, and interest on all of the
Exchange Notes and the performance of every covenant of the Exchange Notes and
the Indenture on the part of the Company to be performed or observed;
(ii) immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant; (iii) immediately before and immediately
after giving effect to such transaction and the assumption contemplated by
clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default shall have
occurred or be continuing; and (iv) the Company or the Surviving Entity shall
have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have been
satisfied.
For purposes of the foregoing, the transfer by lease, assignment, sale or
otherwise, in a single transaction or series of transactions, of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Company.
The Indenture will provide that upon any consolidation, combination or
merger of the Company or any transfer of all or substantially all of the assets
of the Company in accordance with the foregoing, in which the Company is not the
continuing corporation, the successor Person formed by such consolidation or
into which the Company is merged or to which such conveyance, lease or transfer
is made shall succeed to, and be substituted for, and may exercise every right
and power of, the Company, as applicable, under the
84
Indenture and the Exchange Notes, as applicable, and the Registration Rights
Agreement with the same effect as if such surviving entity had been named as
such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of its Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or any
other Guarantor unless: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Guarantor) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized and existing under the laws of the United States
or any State thereof or the District of Columbia; (ii) such entity assumes by
supplemental indenture all of the obligations of the Guarantor on its Guarantee;
(iii) immediately after giving effect to such transaction, no Default or Event
of Default shall have occurred and be continuing; and (iv) immediately after
giving effect to such transaction and the use of any net proceeds therefrom on a
pro forma basis, the Company could satisfy the provisions of clause (ii) of the
first paragraph of this covenant. Any merger or consolidation of a Guarantor
with and into the Company (with the Company being the surviving entity) or
another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company
need only comply with clause (iv) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit or suffer to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than
(i) Affiliate Transactions permitted under paragraph (b) below and
(ii) Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time on
an arm's-length basis from a Person that is not an Affiliate of the Company or
such Restricted Subsidiary. In addition, if the Company or any Restricted
Subsidiary enters into an Affiliate Transaction (or a series of related
Affiliate Transactions) involving aggregate payments or other property with a
fair market value in excess of $5 million, the Company or such Restricted
Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain
a favorable opinion as to the fairness of such transaction or series of related
transactions to the Company or the relevant Restricted Subsidiary, as the case
may be, from a financial point of view, from an Independent Financial Advisor
and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Company's Board of Directors;
(ii) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture; (iii) any agreement as in effect as of the Issue Date and any payment
with respect thereto as required thereunder as of the Issue Date and as
described herein under "Certain Transactions"; and (iv) Restricted Payments
permitted by the Indenture.
Additional Subsidiary Guarantees. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary that
is not a Guarantor, or if the Company or any of its Restricted Subsidiaries
shall organize, acquire or otherwise invest in another Restricted Subsidiary,
then such transferee or acquired or other Restricted Subsidiary shall
(i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Exchange Notes and the Indenture on the terms set forth in the
Indenture and (ii) deliver to the Trustee an opinion of counsel that such
supplemental indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and enforceable
obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary
shall be a Guarantor for all purposes of the Indenture.
85
Designation of Unrestricted Subsidiaries. The Company may designate after
the Issue Date any Subsidiary of the Company as an "Unrestricted Subsidiary"
under the Indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation; and
(ii) the Company would be permitted to make an Investment (other than
a Permitted Investment) at the time of such Designation (assuming the
effectiveness of such Designation) pursuant the "Limitation on Restricted
Payments" covenant in an amount (the "Designation Amount") equal to the
fair market value of the Company's proportionate interest in the net worth
of such Subsidiary on such date calculated in accordance with GAAP.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the "Limitation
on Restricted Payments" covenant for all purposes of the Indenture in the
Designation Amount.
Neither the Company nor any Restricted Subsidiary shall at any time
(x) provide credit support for or guarantee any Indebtedness of any Unrestricted
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness); provided that the Company may pledge equity interests or
Indebtedness of any Unrestricted Subsidiary on a nonrecourse basis such that the
pledgee has no claim whatsoever against the Company other than to obtain such
pledged property, (y) be directly or indirectly liable for any Indebtedness of
any Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary,
except for any nonrecourse guarantee given solely to support the pledge by the
Company of the capital Stock of any Unrestricted Subsidiary. For purposes of the
foregoing, the Designation of a Subsidiary of the Company as an Unrestricted
Subsidiary shall be deemed to include the Designation of all of the Subsidiaries
of such Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses other than Permitted Businesses.
Reports to Holders. The Company will deliver to the Trustee and the
Holders within 15 days after the filing of the same with the Commission, copies
of the quarterly and annual reports and of the information, documents and other
reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a). In addition, for so
long as any Exchange Notes remain outstanding, the Company will furnish to the
Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act, and, to any beneficial holder of
Exchange Notes, if not obtainable from the SEC, information of the type that
would be filed with the SEC pursuant to the foregoing provisions, upon the
request of any such holder.
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EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not prohibited by the provisions of the Indenture described under "Ranking
and Subordination of the Exchange Notes" above);
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not prohibited by the provisions of the Indenture described
under "--Ranking and Subordination of the Exchange Notes" above);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect to the "Merger,
Consolidation and Sale of Assets" covenant, which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
(iv) a default or defaults under the terms of one or more instruments
evidencing or securing Indebtedness of the Company or any of its Restricted
Subsidiaries having an outstanding principal amount of $10 million or more
individually or in the aggregate that has resulted in the acceleration of
the payment of such Indebtedness or failure by the Company or any of its
Restricted Subsidiaries to pay principal when due at the stated maturity of
any such Indebtedness and such default or defaults shall have continued
after any applicable grace period and shall not have been cured or waived;
(v) one or more judgments in an aggregate amount in excess of $10
million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees ceases to be in full force and effect or
any of the Guarantees is declared to be null and void and unenforceable or
any of the Guarantees is found to be invalid or any of the Guarantors
denies its liability under its Guarantee (other than by reason of release
of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of, and premium, if any, and accrued interest on all
the Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), and the same shall become immediately
due and payable. If an Event of Default specified in clause (vi) above with
respect to the Company occurs and is continuing, then all unpaid principal of,
and premium, if any, and accrued interest on all of the outstanding Notes shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description
87
above of Events of Default, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Exchange Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (iii) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Exchange Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the Notes on the
stated date for payment thereof or on the applicable redemption date, as the
case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such
88
deposit or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any other
material agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound;
(vi) the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (vii) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with; (viii) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that after the 91st
day following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain other customary conditions
precedent are satisfied. Notwithstanding the foregoing, the opinion of counsel
required by clause (ii) above with respect to a Legal Defeasance need not be
delivered if all Exchange Notes not therefore delivered to the Trustee for
cancellation (x) have become due and payable, (y) will become due and payable on
the maturity date within one year or (z) are to be called for redemption within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be;
(ii) the Company has paid all other sums payable under the Indenture by the
Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a
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majority in principal amount of Notes to waive Defaults or Events of Default
(other than Defaults or Events of Default with respect to the payment of
principal and interest or the Notes); (vi) amend, change or modify in any
material respect the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate a
Net Proceeds Offer with respect to any Asset Sale that has been consummated or
modify any of the provisions or definitions with respect thereto; (vii) modify
the ranking or priority of any Note or Guarantee in respect thereof in any
manner adverse to the Holders or modify the definition of Senior Indebtedness or
amend or modify the subordination provisions of any Note or Guarantee in any
manner adverse to the Holders; or (viii) release any Guarantor from any of its
obligations under its Guarantee or the Indenture otherwise than in accordance
with the Indenture.
GOVERNING LAW
The Indenture provides that it, the Exchange Notes and the Guarantees are
governed by, and to be construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the law of another jurisdiction would be
required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of its Restricted
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"amend" means amend, modify, supplement, restate or amend and restate,
including successively; and "amending" and "amended" have correlative meanings.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary of the Company or any Restricted Subsidiary, or
shall be merged with or into the Company or any Restricted Subsidiary, or (b)
the acquisition by the Company or any Restricted Subsidiary of the assets of any
Person (other than a Restricted Subsidiary) which constitute all or
substantially all of the assets of such Person or comprises any division or line
of
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business of such Person or any other properties or assets of such Person other
than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person of (a) any Capital Stock of any Restricted Subsidiary; or (b) any
other property or assets of the Company or any Restricted Subsidiary other than
in the ordinary course of business; provided, however, that Asset Sales shall
not include (i) a transaction or series of related transactions for which the
Company or its Restricted Subsidiaries receive aggregate consideration of less
than $1.5 million, (ii) the sale, lease, conveyance, disposition or other
transfer of all or substantially all of the assets of the Company as permitted
under "Merger, Consolidation and Sale of Assets," (iii) the Pollo Sale-Leaseback
or (iv) transactions resulting in a Partnership Investment and a Partnership
Loan.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person, and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's;
(iv) certificates of deposit or bankers' acceptances maturing within one year
from the date of acquisition thereof issued by any bank organized under the laws
of the United States of America or any state thereof or the District of Columbia
or any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events (whether or not approved by the Board of Directors of the Company):
(i) any sale, lease, exchange or other transfer (in one transaction or a series
of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture) other than to the Permitted Holders; (ii) the approval by the holders
of Capital Stock of the Company of any plan or proposal for the liquidation or
dissolution of the Company (whether or not otherwise in compliance with the
provisions of the Indenture); (iii) prior to the earlier to occur of (A) the
first public offering of Capital Stock of Holdings or (B) the first public
offering of Capital Stock of the Company, either (1) the
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Permitted Holders cease to be the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of 45% in the aggregate of the total voting
power of the Voting Stock of the Company, whether as a result of issuance of
securities of the Company, any merger, consolidation, liquidation or dissolution
of the Company, any direct or indirect transfer of securities by Holdings or
otherwise or (2) any "person" (as such term is used in Section 13(d) and
14(d) of the Exchange Act), other than the Permitted Holders, is or becomes the
beneficial owner (as defined above), directly or indirectly, of more of the
total voting power of the voting stock of the Company than the Permitted
Holders; (iv) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in clause (iii) above), directly or indirectly, of
more than 30% of the total voting power of the Voting Stock of the Company;
provided, however, that the Permitted Holders "beneficially own" (as so
defined), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other person and
do not have the right or ability by voting power, contract or otherwise to elect
designate for election a majority of the Board of Directors of the Company; or
(v) the replacement of a majority of the Board of Directors of the Company over
a two-year period from the directors who constituted the Board of Directors of
the Company at the beginning of such period, and such replacement shall not have
been approved by a vote of at least a majority of the Board of Directors of the
Company then still in office who either were members of such Board of Directors
at the beginning of such period or whose election as a member of such Board of
Directors was previously so approved.
"Commodity Obligations" means the obligations of any Person pursuant to any
commodity futures contract, commodity option or other similar agreement or
arrangement.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business), (B) Consolidated Interest
Expense and (C) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in accordance
with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis (calculated in accordance with Regulation S-X under the Securities
Act) for the period of such calculation to (i) the incurrence or repayment of
any Indebtedness of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), other than the incurrence or repayment of
Indebtedness in the ordinary course of business for working capital purposes
pursuant to working capital facilities, occurring during the Four Quarter Period
or at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the case
may be (and the application of the proceeds thereof), occurred on the first day
of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition)
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incurring, assuming or otherwise being liable for Acquired Indebtedness and also
including any Consolidated EBITDA attributable to the assets which are the
subject of the Asset Acquisition or Asset Sale during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) occurred on the first day of the
Four Quarter Period. If such Person or any of its Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if such Person or any Restricted Subsidiary of such Person had directly incurred
or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio,"
(1) interest on outstanding Indebtedness determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined thereafter
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements relating
to Interest Swap Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person or its Restricted Subsidiaries (other than
dividends paid in Qualified Capital Stock and other than dividends paid with
respect to such Preferred Stock held by such Person or its Restricted
Subsidiaries) paid, accrued or scheduled to be paid or accrued during such
period times (y) a fraction, the numerator of which is one and the denominator
of which is one minus the then current effective consolidated federal, state and
local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
of deferred financing costs, (b) the net costs under Interest Swap Obligations,
Currency Swap Obligations and Commodity Obligations, (c) all capitalized
interest and (d) the interest portion of any deferred payment obligation; and
(ii) the interest component of Capitalized Lease Obligations, in each case paid,
accrued and/or scheduled to be paid or accrued by such Person and its Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person,
other than a Restricted Subsidiary of the referent Person, except, for purposes
of the covenant described under "Certain Covenants--Limitation on Restricted
Payments," to the extent of cash dividends or distributions paid to the referent
Person or to a Restricted Subsidiary of the referent Person by such Person
unless, and to the extent, in the case of a Restricted Subsidiary who receives
such dividends or distributions, such Restricted Subsidiary is subject to clause
(d) above, (f) any restoration to income of any contingency reserve, except to
the extent that provision for such reserve was made out of Consolidated Net
Income accrued at any time following the Issue Date, (g) income or loss
attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued), and (h) in the case of a successor to the referent
Person by consolidation or merger or as a transferee of the referent Person's
assets, any earnings of the successor corporation prior to such consolidation,
merger or transfer of assets.
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"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Currency Swap Obligations" means the obligations of any Person pursuant to
any foreign exchange contract, currency swap agreement or similar agreement.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means (a) any Indebtedness outstanding
under the Senior Credit Facility and (b) any other Senior Indebtedness which, at
the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least
$20 million, if the instrument governing such Senior Indebtedness expressly
states that such Indebtedness is "Designated Senior Indebtedness" for purposes
of the Indenture and a Board Resolution setting forth such designation by the
Company has been filed with the Trustee.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantor" means (i) each of Carrols Realty Holdings Corp., Carrols Realty
I Corp., Carrols Realty II Corp., Carrols J.G. Corp., Quanta Advertising Corp.,
Pollo Franchise, Inc. and Pollo Operations, Inc. and (ii) each of the Company's
Restricted Subsidiaries that in the future executes a supplemental indenture in
which such Restricted Subsidiary agrees to be bound by the terms of the
Indenture as a Guarantor; provided that any Person constituting a Guarantor as
described above shall cease to constitute a Guarantor when its respective
Guarantee is released in accordance with the terms of the Indenture.
"Guarantor Senior Indebtedness" means, with respect to any Guarantor, at
any date, (a) all obligations of such Guarantor under the Senior Credit
Facility; (b) all Interest Swap Obligations, Currency Swap Obligations and
Commodity Obligations of such Guarantor; (c) all obligations of such Guarantor
under stand-by letters of credit; and (d) all other Indebtedness of such
Guarantor, including principal, premium, if any, and interest (including
Post-Petition Interest) on such Indebtedness, unless the instrument under which
such Indebtedness of such Guarantor is incurred expressly provides that such
Indebtedness for money borrowed is not senior or superior in right of payment to
the Guarantee of such Guarantor, and all renewals, extensions, modifications,
amendments or refinancings thereof. Notwithstanding the foregoing, Guarantor
Senior
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Indebtedness shall not include (a) to the extent that it may constitute
Indebtedness, any obligation for federal, state, local or other taxes; (b) any
Indebtedness among or between such Guarantor and the Company or any Subsidiary
of the Company or any Affiliate of the Company or any of such Affiliate's
Subsidiaries; (c) to the extent that it may constitute Indebtedness, any
obligation in respect of any trade payable incurred for the purchase of goods or
materials, or for services obtained, in the ordinary course of business;
(d) that portion of any Indebtedness that is incurred in violation of the
Indenture; (e) Indebtedness evidenced by the Guarantees; (f) Indebtedness of
such Guarantor that is expressly subordinate or junior in right of payment to
any other Indebtedness of such Guarantor; (g) to the extent that it may
constitute Indebtedness, any obligation owing under leases (other than
Capitalized Lease Obligations) or management agreements; and (h) any obligation
that by operation of law is subordinate to any general unsecured obligations of
such Guarantor. No Indebtedness shall be deemed to be subordinated to other
Indebtedness solely because such other Indebtedness is secured.
"Holder" means the registered holder of any Exchange Notes.
"Holdings" means Carrols Holdings Corporation which owns all of the
outstanding Capital Stock of the Company.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, in respect of such Indebtedness or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such
Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred" and "incurring" shall have meanings correlative to the
foregoing). Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary or is merged or consolidated with or into the Company or
any Restricted Subsidiary shall be deemed to be incurred at such time. The
accrual of interest or the accretion of original issue discount shall not be
deemed to be an incurrence.
"Indebtedness" means with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money, (ii) all indebtedness of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all indebtedness of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) reimbursement obligations of such
Person on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
indebtedness or obligations referred to in clauses (i) through (v) above and
clause (viii) below, (vii) all obligations of any other Person of the type
referred to in clauses (i) through (vi) which are secured by any lien on any
property or asset of such Person, the amount of such obligation being deemed to
be the lesser of the fair market value of such property or asset or the amount
of the obligation so secured, (viii) all Interest Swap Obligations, Currency
Swap Obligations and Commodity Obligations of such Person, and (ix) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends, if any. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
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"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include the applicable
Designation Amount at the time of the Designation of any Restricted Subsidiary
as an Unrestricted Subsidiary and shall exclude the fair market value of the
Company's proportionate interest in the net worth of such Unrestricted
Subsidiary at the time of the Revocation with respect to such Unrestricted
Subsidiary and (ii) the amount of any Investment shall be the original cost of
such Investment plus the cost of all additional Investments by the Company or
any of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary such that, after giving effect to any such sale
or disposition, the Company no longer owns, directly or indirectly, greater than
50% of the outstanding Common Stock of such Restricted Subsidiary, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"Partnership Investments" mean Investments by the Company or a Restricted
Subsidiary in a partnership (i) which holds one or more Burger King franchises,
(ii) in which the Company or a Restricted
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Subsidiary has at least a 20% equity interest and the remaining equity interest
is held by a former employee of the Company or a Restricted Subsidiary and
(iii) which has outstanding Partnership Loans, consistent with past practice.
"Partnership Loans" means loans made by the Company or a Restricted
Subsidiary to an entity (i) in which the Company or a Restricted Subsidiary has
a Partnership Investment and (ii) which finance the acquisition of assets from
the Company or a Restricted Subsidiary at fair market value.
"Permitted Business" means the business conducted by the Company and the
Restricted Subsidiaries on the Issue Date and other businesses similar thereto
or reasonably related thereto.
"Permitted Holders" means Atlantic Restaurants, Inc., Madison Dearborn
Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Alan Vituli
or Daniel T. Accordino or their respective affiliates or, in the case of a
natural person, any entity of which the controlling owners or beneficiaries
consist of family members of such natural person or such natural person.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes and Permitted Refinancings thereof;
(ii) Indebtedness incurred pursuant to a senior secured credit
facility, including, without limitation, the Senior Credit Facility, in an
aggregate principal amount at any time outstanding not to exceed
$155 million in the aggregate;
(iii) Permitted Refinancings of (x) other Indebtedness of the Company
or any Restricted Subsidiary to the extent outstanding on the Issue Date
reduced by the amount of any scheduled amortization payments or mandatory
prepayments when actually paid or permanent reductions thereon and
(y) Indebtedness incurred under the Consolidated Fixed Charge Coverage
Ratio test of the "Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Capital Stock" covenant;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any Restricted Subsidiary; provided, however, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Currency Swap Obligations of the Company covering Indebtedness of
the Company or any Restricted Subsidiary; provided, however, that such
Currency Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in currency exchange rates on
obligations incurred in accordance with the Indenture to the extent the
notional principal amount of such Currency Swap Obligation does not exceed
the amount of the underlying obligation to which such Currency Swap
Obligation relates;
(vi) Commodity Obligations of the Company covering Indebtedness of the
Company or any Restricted Subsidiary; provided, however, that such
Commodity Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in the price of commodities
actually used in the ordinary course of business of the Company and its
Restricted Subsidiaries;
(vii) Indebtedness of a Restricted Subsidiary to the Company or to a
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided that
if as of any date any Person other than the Company or a Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness;
(viii) Indebtedness of the Company to a Restricted Subsidiary for so
long as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided that (a) any Indebtedness of the Company to
any Restricted Subsidiary is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Indenture and the
Notes and (b) if as of any date any
97
Person other than a Restricted Subsidiary owns or holds any such
Indebtedness or any Person holds a Lien in respect of such Indebtedness,
such date shall be deemed the incurrence of Indebtedness not constituting
Indebtedness permitted by this clause (viii);
(ix) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(x) Indebtedness of the Company or any Restricted Subsidiary
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(xi) Indebtedness represented by Capitalized Lease Obligations of the
Company and its Restricted Subsidiaries with respect to leasehold
improvements and equipment;
(xii) Purchase Money Indebtedness; and
(xiii) additional Indebtedness of the Company in an aggregate
principal amount not to exceed $30 million at any one time outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that immediately after such Investment will
be a Restricted Subsidiary of the Company; (ii) Investments in the Company by
any Restricted Subsidiary; provided that any Indebtedness evidencing such
Investment is unsecured and subordinated, pursuant to a written agreement, to
the Company's obligations under the Notes and the Indenture; (iii) Investments
in cash and Cash Equivalents; (iv) loans and advances to employees and officers
of the Company and its Restricted Subsidiaries (other than to Permitted Holders)
in the ordinary course of business for bona fide business purposes not in excess
of $1,000,000 at any one time outstanding; (v) Interest Swap Obligations,
Currency Swap Obligations and Commodity Obligations entered into in the ordinary
course of the Company's or its Restricted Subsidiaries' businesses and otherwise
in compliance with the Indenture; (vi) Investments in securities of trade
creditors or customers received pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (vii) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant; (viii) Partnership
Loans and Partnership Investments in an aggregate amount not to exceed
$5 million (without duplication) at any one time outstanding; and
(ix) Investments made by the Company or any Restricted Subsidiary of the Company
in a Restricted Subsidiary of the Company.
"Permitted Junior Securities" means any securities of the Company or any
other Person that are (i) equity securities without special covenants or
(ii) debt securities expressly subordinated in right of payment to all Senior
Indebtedness that may at the time be outstanding, to substantially the same
extent as, or to a greater extent than, the Notes are subordinated as provided
in the Indenture, in any event pursuant to a court order so providing and as to
which (a) the rate of interest on such securities shall not exceed the effective
rate of interest on the Notes on the date of the Indenture, (b) such securities
shall not be entitled to the benefits of covenants or defaults materially more
beneficial to the holders of such securities than those in effect with respect
to the Notes on the date of the Indenture and (c) such securities shall not
provide for amortization (including sinking fund and mandatory prepayment
provisions) commencing prior to the date six months following the final
scheduled maturity date of the Senior Indebtedness (as modified by the plan of
reorganization of readjustment pursuant to which such securities are issued).
"Permitted Liens" means (a) Liens imposed by law such as carriers',
warehousemen's and mechanics' Liens and other similar Liens arising in the
ordinary course of business which secure payment of obligations not more than
60 days past due or which are being contested in good faith and by appropriate
proceedings; (b) Liens existing on the Issue Date; (c) Liens securing only the
Notes; (d) Liens in favor of the Company or any Restricted Subsidiary; (e) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded; provided, however, that any
reserve or other appropriate provision as shall be required
98
in conformity with GAAP shall have been made therefor; (f) easements,
reservation of rights of way, restrictions and other similar easements,
licenses, restrictions on the use of properties, or minor imperfections of title
that in the aggregate are not material in amount and do not in any case
materially detract from the properties subject thereto or interfere with the
ordinary conduct of the business of the Company and the Restricted Subsidiaries;
(g) Liens resulting from the deposit of cash or notes in connection with
contracts, tenders or expropriation proceedings, or to secure workers'
compensation, surety or appeal bonds, costs of litigation when required by law
and public and statutory obligations or obligations under franchise arrangements
entered into in the ordinary course of business; (h) judgment Liens not giving
rise to an Event of Default; and (i) Liens securing letters of credit entered
into in the ordinary course of business.
"Permitted Refinancing" means, with respect to any Indebtedness of any
Person, any Refinancing of such Indebtedness; provided, however, that (i) such
Indebtedness shall not result in an increase in the aggregate principal amount
of Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company in connection with such Refinancing), (ii) such Indebtedness
other than Senior Indebtedness shall not have a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or a final maturity earlier than the final
maturity of the Indebtedness being Refinanced and (iii) if the Indebtedness
being Refinanced is subordinate or junior to the Notes, then such Refinancing
Indebtedness shall be subordinate to the Notes, as applicable, at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Pollo Sale-Leaseback" means a Sale and Leaseback Transaction in respect of
real estate assets acquired in connection with the acquisition of Pollo
Tropical, Inc. by the Company and effected within 360 days of the Issue Date.
"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person in
accordance with and at the contract rate (including, without limitation, any
rate applicable upon default) specified in the agreement or instrument creating,
evidencing or governing such Indebtedness, whether or not, pursuant to
applicable law or otherwise, the claim for such interest is allowed as a claim
in such Insolvency or Liquidation Proceeding.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Public Equity Offering" means an underwritten public offering of Qualified
Capital Stock of Holdings or the Company pursuant to a registration statement
filed with the Commission in accordance with the Securities Act; provided,
however, that in the event of a Public Equity Offering by Holdings, Holdings
contributes to the capital of the Company the portion of the net cash proceeds
of such Public Equity Offering necessary to pay the aggregate redemption price
(plus accrued interest to the date of redemption) of the Notes to be redeemed
pursuant to "--Redemption--Optional Redemption upon Public Equity Offerings."
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing part of the purchase price, or the cost of installation,
construction or improvement, of property or equipment (including quick-service
restaurant properties and related franchises and other intangibles); provided,
however, (A) the Indebtedness shall not exceed 75% of the cost of such property
or assets and shall not be secured by any property or assets of the Company or
any Restricted Subsidiary other than the property and assets so acquired or
constructed, (B) the Indebtedness constituting such Indebtedness (other than the
refinancing of such Indebtedness) shall have initially been incurred within
270 days of the entering into or incurrence of such underlying obligation and
(C) the Lien securing such Indebtedness shall be created within 270 days of such
acquisition or construction or, in the case of a refinancing of any Purchase
Money Indebtedness, within 270 days of such refinancing.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
99
"redeem" means redeem, repurchase, defease or otherwise acquire or retire
for value; and "redemption" and "redeemed" have correlative meanings.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Replacement Assets" means, with respect to an Asset Sale, properties and
assets that replace the properties and assets that were the subject of such
Asset Sale or properties and assets that will be used in a Permitted Business
(or the Capital Stock of an entity all of whose assets constitute Replacement
Assets).
"Restricted Subsidiary" means any Subsidiary of the Company which at the
time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Senior Credit Facility" means the Loan Agreement dated as of May 12, 1997,
as amended, among Carrols Corporation, Chase Bank of Texas, National
Association, as agent, and the lenders party thereto in their capacities as
lenders thereunder, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (provided that such increase in borrowings is permitted by the
"Limitation on Incurrence of Additional Indebtedness and Issuance of
Disqualified Capital Stock" covenant above) or adding Restricted Subsidiaries of
the Company as additional borrowers or guarantors thereunder) all or any portion
of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders.
"Senior Indebtedness" means, at any date, (a) all obligations of the
Company under the Senior Credit Facility; (b) all Interest Swap Obligations,
Currency Swap Obligations and Commodity Obligations of the Company; (c) all
obligations of the Company under stand-by letters of credit; and (d) all other
Indebtedness of the Company, including principal, premium, if any, and interest
(including Post-Petition Interest) on such Indebtedness, unless the instrument
under which such Indebtedness of the Company is incurred expressly provides that
such Indebtedness for money borrowed is not senior or superior in right of
payment to the Notes, and all renewals, extensions, modifications, amendments or
refinancings thereof. Notwithstanding the foregoing, Senior Indebtedness shall
not include (a) to the extent that it may constitute Indebtedness, any
obligation for federal, state, local or other taxes; (b) any Indebtedness among
or between the Company and any Subsidiary of the Company or any Affiliate of the
Company or any of such Affiliate's Subsidiaries; (c) to the extent that it may
constitute Indebtedness, any obligation in respect of any trade payable incurred
for the purchase of goods or materials, or for services obtained, in the
ordinary course of business; (d) that portion of any Indebtedness that is
incurred in violation of the Indenture; (e) Indebtedness evidenced by the Notes;
(f) Indebtedness of the Company that is expressly subordinate or junior in right
of payment to any other Indebtedness of the Company; (g) to the extent that it
may constitute Indebtedness, any obligation owing under leases (other than
Capitalized Lease Obligations) or management agreements; and (h) any obligation
that by operation of law is subordinate to any general unsecured obligations of
the Company. No Indebtedness shall be deemed to be subordinated to other
Indebtedness solely because such other Indebtedness is secured.
"Significant Subsidiary," with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary
100
circumstances shall at the time be owned, directly or indirectly, by such Person
or (ii) any other Person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly, owned by
such Person.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
101
BOOK-ENTRY; DELIVERY AND FORM
THE GLOBAL EXCHANGE NOTES
The Exchange Notes initially will be represented by one or more registered
notes in global form, without interest coupons (collectively, the "Global
Exchange Note") in minimum denominations of $1,000 and integral multiples in
excess thereof. The Global Exchange Note will be deposited with, or on behalf
of, DTC and registered in the name of Cede & Co., as nominee of DTC, Morgan
Guaranty Trust Company of New York, Brussels Office, as operator of the
Euroclear System ("Euroclear"), or Cedel Bank, societe anonyme ("Cedel"), or
will remain in the custody of the Trustee pursuant to the FAST Balance
Certificate Agreement between DTC and the Trustee.
Except as set forth below, the Global Exchange Note may be transferred, in
whole and not in part, solely to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global Exchange Notes may not be
exchanged for Notes in physical, certificated form ("Certificated Exchange
Notes") except in the limited circumstances described below.
All interests in the Global Exchange Notes, including those held through
Euroclear or Cedel, may be subject to the procedures and requirements of DTC.
Those interests held through Euroclear or Cedel may also be subject to the
procedures and requirements of such systems.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL EXCHANGE NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. The
Company does not take any responsibility for these operations or procedures, and
investors are urged to contact the relevant system or its participants directly
to discuss these matters.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking organization"
within the meaning of the New York Banking Law, (iii) a member of the Federal
Reserve System, (iv) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (v) a "clearing agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, "Participants") and facilitates the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes to the accounts of its Participants, thereby eliminating the
need for physical transfer and delivery of certificates. DTC's Participants
include securities brokers and dealers (including the Initial Purchasers), banks
and trust companies, clearing corporations and certain other organizations.
Indirect access to DTC's system is also available to other entities such as
banks, brokers, dealers and trust companies (collectively, "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Investors who are not Participants
may beneficially own securities held by or on behalf of DTC only through
Participants or Indirect Participants.
DTC is aware that some computer applications, systems and the like for
processing data ("Systems") that are dependent upon calendar dates, including
dates before, on, and after January 1, 2000, may encounter "Year 2000" problems.
DTC has informed its participants and other members of the financial community
(the "Industry") that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders, book-entry deliveries, and
settlement of trades within DTC ("Services"), continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its Services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's direct and indirect participants and third party vendors from whom
DTC licenses software and hardware, and third party vendors on whom DTC relies
for information on the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
Industry that it is contacting (and will continue to contact) third party
102
vendors from whom DTC acquires services to: (i) impress upon them the importance
of such services being Year 2000 compliant; and (ii) determine the extent of
their efforts for Year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing such contingency
plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
The Company expects that pursuant to procedures established by DTC
(i) upon deposit of each Global Exchange Note, DTC will credit the accounts of
Participants with an interest in the Global Exchange Note and (ii) ownership of
the Exchange Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
interests of Participants) and the records of Participants and Indirect
Participants (with respect to the interests of persons other than Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Exchange Notes represented
by a Global Exchange Note to such persons may be limited. In addition, because
DTC can act only on behalf of Participants, who in turn act on behalf of persons
who hold interests through such Participants, the ability of a person having an
interest in Exchange Notes represented by a Global Exchange Note to pledge or
transfer such interest to persons or entities that do not participate in DTC's
system, or to otherwise take actions in respect of such interest, may be
affected by the lack of a physical definitive security in respect of such
interest.
So long as DTC or its nominee is the registered owner of a Global Exchange
Note, DTC or such nominee, as the case may be, will be considered the sole owner
or holder of the Exchange Notes represented by the Global Exchange Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Exchange Note will not be entitled to have Exchange Notes
represented by such Global Exchange Note registered in their names, will not
receive or be entitled to receive physical delivery of Certificated Exchange
Notes, and will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee thereunder. Accordingly, each
holder owning a beneficial interest in a Global Exchange Note must rely on the
procedures of DTC and, if such holder is not a Participant or an Indirect
Participant, on the procedures of the Participant through which such holder owns
its interest, to exercise any rights of a holder of Notes under the Indenture or
such Global Exchange Note. The Company understands that under existing industry
practice, in the event that the Company requests any action of holders of
Exchange Notes, or a holder that is an owner of a beneficial interest in a
Global Exchange Note desires to take any action that DTC, as the holder of such
Global Exchange Note, is entitled to take, DTC would authorize the Participants
to take such action and the Participants would authorize holders owning through
such Participants to take such action or would otherwise act upon the
instruction of such holders. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of Notes by DTC, or for maintaining, supervising or
reviewing any records of DTC relating to such Exchange Notes.
Payments with respect to the principal of, and premium, if any, and
interest on, any Exchange Notes represented by a Global Exchange Note registered
in the name of DTC or its nominee on the applicable record date will be payable
by the Trustee to or at the direction of DTC or its nominee in its capacity as
the registered holder of the Global Exchange Note representing such Exchange
Notes under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names the Exchange Notes, including the
Global Exchange Notes, are registered as the owners thereof for the purpose of
receiving payment thereon and for any and all other purposes whatsoever.
Accordingly, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to owners of
beneficial interests in a Global Exchange Note (including principal, premium, if
any, and interest). Payments by the Participants and the Indirect Participants
to the owners of beneficial interests in a Global Exchange
103
Note will be governed by standing instructions and customary industry practice
and will be the responsibility of the Participants or the Indirect Participants
and DTC.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes, cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case
may be, by its respective depositary; however, such cross-market transactions
will require delivery of instructions to Euroclear or Cedel, as the case may be,
by the counterparty in such system in accordance with the rules and procedures
and within the established deadlines (Brussels time) of such system. Euroclear
or Cedel, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the Global Exchange Notes in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Euroclear participants and Cedel participants may not deliver instructions
directly to the depositaries for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Exchange Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of DTC. Cash received in Euroclear or
Cedel as a result of sales of interest in a Global Security by or through a
Euroclear or Cedel participant to a Participant in DTC will be received with
value on the settlement date of DTC but will be available in the relevant
Euroclear or Cedel cash account only as of the business day for Euroclear or
Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Exchange Notes among
participants in DTC, Euroclear and Cedel, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE NOTES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
Exchange Notes in definitive form under the Indenture or (iii) upon the
occurrence of certain other events as provided in the Indenture, then, upon
surrender by DTC of the Global Exchange Notes, Certificated Exchange Notes will
be issued to each person that DTC identifies as the beneficial owner of the
Notes represented by the Global Exchange Notes. Upon any such issuance, the
Trustee is required to register such Certificated Exchange Notes in the name of
such person or persons (or the nominee of any thereof) and cause the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Exchange Notes and each such person may conclusively rely on, and
shall be protected in relying on, instructions from DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the Exchange Notes to be issued).
104
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain material U.S. federal
income tax consequences of the purchase, ownership and disposition of Notes by
holders that acquire Notes at original issuance for cash at their face value.
This discussion does not address the tax consequences to subsequent purchasers
of Notes and is limited to investors who hold the Notes as capital assets.
Furthermore, this discussion does not address all aspects of U.S. federal income
taxation that may be applicable to investors in light of their particular
circumstances, or to investors subject to special treatment under U.S. federal
income tax law (including, without limitation, certain financial institutions,
insurance companies, tax-exempt entities, dealers in securities, persons who
have acquired Notes as part of a straddle, hedge, conversion transaction or
other integrated investment or persons whose functional currency is not the U.S.
dollar). This discussion is based on provisions of the Internal Revenue Code of
1986, as amended (the "Code"), United States Treasury Department regulations
("Treasury regulations") promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change, possibly with retroactive effect.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES TO SUCH INVESTOR OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
A NOTE, INCLUDING THE APPLICABILITY OF ANY FEDERAL ESTATE OR GIFT TAX LAWS, ANY
STATE, LOCAL OR FOREIGN TAX LAWS AND ANY PROPOSED CHANGES IN APPLICABLE TAX
LAWS.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not be considered a taxable exchange for U.S. federal income tax purposes
because the Exchange Notes will not differ materially in kind or extent from the
Old Notes and because the exchange will occur by operation of the terms of the
Notes. Accordingly, such exchange will have no U.S. federal income tax
consequences to Holders of Old Notes. A Holder's adjusted tax basis and holding
period in an Exchange Note will be the same as such Holder's adjusted tax basis
and holding period, respectively, in the Old Note exchanged therefor. All
references to Notes under this heading "Certain U.S. Federal Income Tax
Considerations," apply equally to Exchange Notes.
U.S. TAXATION OF U.S. HOLDERS
As used herein, the term "U.S. Holder" means a holder of a Note that is,
for U.S. federal income tax purposes, (i) a citizen or resident of the United
States, (ii) a corporation, limited liability company or partnership created or
organized in or under the laws of the U.S. or of any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source or (iv) a trust, if a U.S. court is able to
exercise primary supervision over the administration of such trust and one or
more U.S. persons have the authority to control all substantial decisions of
such trust; and the term "Non-U.S. Holder" means a holder of a Note that is not
a U.S. Holder.
Payments of Interest
Stated interest payable on the Notes generally will be included in the
gross income of a U.S. Holder as ordinary interest income at the time accrued or
received, in accordance with such U.S. Holder's method of accounting for
U.S.federal income tax purposes.
Disposition of the Notes
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a Note (collectively, a "Disposition"), a U.S. Holder generally
will recognize a capital gain or loss equal to the difference between the amount
realized by such U.S. Holder (except to the extent such amount is attributable
to accrued interest, which will be treated as ordinary interest income) and such
U.S. Holder's adjusted tax basis in the Note. Such capital gain or loss
generally will be long-term capital gain or loss if the holding period for the
Note exceeds one year at the time of the Disposition. Non-corporate taxpayers
may be taxed at reduced rates
105
of federal income tax in respect of long-term capital gains realized on a
Disposition of Notes in certain instances. Prospective investors should consult
their tax advisors regarding the tax consequences of realizing long-term capital
gains.
U.S. TAXATION OF NON-U.S. HOLDERS
Payments of Interest
In general, payments of interest received by a Non-U.S. Holder will not be
subject to U.S. federal withholding tax, provided that (a) (i) the Non-U.S.
Holder does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote, (ii) the
Non-U.S. Holder is not a controlled foreign corporation that is related to the
Company actually or constructively through stock ownership, (iii) the Non-U.S.
Holder is not a bank receiving interest on a loan entered into in the ordinary
course of its business, and (iv) either (x) the beneficial owner of the Note
provides the Company or its paying agent with a properly executed certification
on IRS Form W-8 (or a suitable substitute form) signed under penalties of
perjury that the beneficial owner is not a "U.S. person" for United States
federal income tax purpose and that provides the beneficial owner's name and
address, or (y) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
business holds the Note and certifies to the Company or its agent under
penalties of perjury that the IRS Form W-8 (or a suitable substitute) has been
received by it from the beneficial owner of the Note or a qualifying
intermediary and furnishes the payor a copy thereof; (b) the interest received
on the Note is effectively connected with the conduct by the Non-U.S. Holder of
a trade or business in the United States and the Non-U.S. Holder complies with
certain certification requirements; or (c) the Non-U.S. Holder is entitled to
the benefits of an income tax treaty under which the interest is exempt from
U.S. withholding tax and the Non-U.S. Holder complies with certain certification
requirements.
Recently issued Treasury regulations (the "Withholding Regulations") that
will be effective with respect to payments made after December 31, 1999, will
provide alternative methods for satisfying the certification requirements
described in clause (a)(iv) above. The Withholding Regulations will also
require, in the case of Notes held by a foreign partnership, that (x) the
certification described in clause (a)(iv) above be provided by the partners and
(y) the partnership provide certain information, including its taxpayer
identification number. A look-through rule will apply in the case of tiered
partnerships.
Payments of interest to a Non-U.S. Holder that do not qualify for the
non-imposition of U.S. withholding tax discussed above, will be subjected to
U.S. federal withholding tax at a rate of 30% (or such reduced rate of
withholding as provided for in an applicable treaty if such Non-U.S. Holder
provides a properly executed Form 1001 or successor form).
Disposition of the Notes
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
or withholding tax with respect to gain realized on the Disposition of a Note,
unless (i) the gain is effectively connected with a U.S. trade or business
conducted by the Non-U.S. Holder (see "U.S. Taxation of Non-U.S.
Holders--Effectively Connected Income," below), (ii) subject to certain
exceptions, the Non-U.S. Holder is an individual who holds the Note as a capital
asset and is present in the United States for 183 or more days during the
taxable year of the Disposition, or (iii) the Non-U.S. Holder is subject to tax
pursuant to certain provisions of the Code applicable to certain individuals who
renounce their U.S. citizenship or terminate long-term U.S. residency. If a
Non-U.S. Holder falls under clause (ii) above, the holder generally will be
subject to U.S. federal income tax at a rate of 30% (or reduced treaty rate) on
the gain derived from the sale. If a Non-U.S. Holder falls under clause
(iii) above, such holder generally will be taxed on the net gain derived from
the Disposition of a Note in a manner similar to that of U.S. citizens and
resident aliens.
106
Effectively Connected Income
If interest and other payments received by a Non-U.S. Holder with respect
to the Notes (including proceeds from the Disposition of the Notes) are
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States (or the Non-U.S. Holder is otherwise subject
to U.S. federal income taxation on a net basis with respect to such Holder's
ownership of the Notes), such Non-U.S. Holder generally will be subject to the
rules described above under "U.S. Taxation of U.S. Holders" (subject to any
modification provided under an applicable income tax treaty). Such Non-U.S.
Holder may also be subject to the U.S. "branch profits tax" if such Non-U.S.
Holder is a corporation.
U.S. Federal Estate Taxes
A Note beneficially owned by an individual who is a Non-U.S. Holder at the
time of his or her death generally will not be subject to U.S. federal estate
tax as a result of such death if (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote and (ii) interest payments with respect
to the Note would not have been, if received at the time of such individual's
death, effectively connected with the conduct of a U.S. trade or business.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The backup withholding rules require a payor to deduct and withhold tax if
(i) the payee fails to furnish a taxpayer identification number ("TIN") in the
prescribed manner, (ii) the IRS notifies the payor that the TIN furnished by the
payee is incorrect, (iii) the payee has failed to report properly the receipt of
"reportable payments" and the IRS has notified the payor that withholding is
required, or (iv) the payee fails to certify under the penalty of perjury that
such payee is not subject to backup withholding. If any one of the events
discussed above occurs with respect to a holder of Notes, the Company, its
paying agent or other withholding agent will be required to withhold a tax equal
to 31% of any "reportable payment" made in connection with the Notes of such
holder. A "reportable payment" includes, among other things, amounts paid in
respect of interest on a Note. Certain holders (including, among others,
corporations and certain tax-exempt organizations) are not subject to backup
withholding.
Back-up withholding generally will not apply to a Note issued in registered
form that is beneficially owned by a Non-U.S. Holder if the certification of
Non-U.S. Holder status is provided to the Company or its agent as described
above in "U.S. Taxation of Non-U.S. Holders--Payments and Interest", provided
that the payor does not have actual knowledge that the holder is a U.S. person.
The Company may be required to report annually to the IRS and to each Non-U.S.
Holder the amount of interest paid to, and the tax withheld, if any, with
respect to each Non-U.S. Holder.
If payments of principal and interest are made to the beneficial owner of a
Note by or through the foreign office of a custodian, nominee or other agent of
such beneficial owner, or if the proceeds of the sale of Notes are paid to the
beneficial owner of a Note through a foreign office of a "broker" (as defined in
the pertinent Regulations), the proceeds will not be subject to backup
withholding (absent actual knowledge that the payee is a U.S. person).
Information reporting (but not backup withholding) will apply, however, to a
payment by a foreign office of a custodian, nominee, agent or broker that is
(i) a U.S. person, (ii) a controlled foreign corporation for U.S. federal income
tax purposes, or (iii) a foreign person that derives 50% or more of its gross
income from the conduct of a U.S. trade or business for a specified three-year
period or, effective after December 31, 1999, by a foreign office of certain
other persons; unless the broker has in its records documentary evidence that
the holder is a Non-U.S. Holder and certain conditions are met (including that
the broker has no actual knowledge that the holder is a U.S. Holder) or the
holder otherwise establishes an exemption. Payment through the U.S. office of a
custodian, nominee, agent or broker is subject to both backup withholding at a
rate of 31% and information reporting, unless the holder certifies that it is a
Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption.
Any amount withheld under the backup withholding rules will be allowed as a
credit against, or refund of, such holder's U.S. federal income tax liability,
provided that any required information is provided by the holder to the IRS.
107
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY, DOES NOT CONSTITUTE TAX ADVICE AND
IS NOT BASED UPON ANY OPINION OF COUNSEL. ACCORDINGLY, EACH INVESTOR SHOULD
CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES TO IT OF
PURCHASING, HOLDING AND DISPOSING OF NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN
APPLICABLE LAWS.
108
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to such broker-dealer for use
in connection with any such resale. In addition, until [ ], 1999, all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at prevailing market prices at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchaser of any such Exchange Notes. Any
broker-dealers that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit from such
resale of Exchange Notes and any commissions or concessions received by any such
persons may be deemed to be an underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Old Notes) other than dealers' and brokers' discounts,
commissions and counsel fees and will indemnify the holders of the Old Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the validity of the Exchange Notes
being offered hereby and certain other legal matters in connection with the
Exchange Offer will be passed upon for the Company by Rosenman & Colin LLP, New
York, New York.
EXPERTS
The consolidated balance sheet of Carrols and its subsidiaries as of
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
1997 and December 31, 1995 included in this Prospectus have been audited by
PricewaterhouseCoopers LLP, independent public accountants
("PricewaterhouseCoopers"), as stated in their report appearing herein. The
consolidated financial statements of Carrols and its subsidiaries as of
December 31, 1996 and for the year then ended included in this Prospectus have
been audited by Arthur Andersen LLP, independent public accountants ("Arthur
Andersen"), as stated in their report appearing herein.
The consolidated financial statements of Pollo Tropical and its
subsidiaries as of December 31, 1997 and 1996 and for each of the three years
ended December 31, 1997, 1996 and 1995 included in this Prospectus have been
audited by Arthur Andersen, as stated in their report included herein.
109
The reports on the aforementioned financial statements and schedules are
included herein in reliance upon the authority of said firms as experts in
giving said reports.
On August 12, 1997 Carrols replaced the accounting firm of Arthur Andersen
as their principal audit accountants with PricewaterhouseCoopers.
Arthur Andersen was the principal audit accountants during the year ended
December 31, 1996 and their report on the financial statements for the period
ended December 31, 1996 did not contain an adverse opinion or disclaimer of
opinion nor were financial statement opinions qualified or modified as to
uncertainty, as to audit scope or as to accounting principles.
There were no disagreements on any matters of accounting principles or
practices, financial statement disclosure or auditing scope of procedure with
the accounting firm of Arthur Andersen.
110
INDEX TO FINANCIAL STATEMENTS
CARROLS CORPORATION AND SUBSIDIARIES
Audited Consolidated Financial Statements--Years Ended December 31, 1997, 1996 and 1995
Reports of Independent Certified Public Accountants..................................................... F-2
Consolidated Balance Sheets............................................................................. F-4
Consolidated Statements of Operations................................................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit)............................................... F-7
Consolidated Statements of Cash Flows................................................................... F-8
Notes to Consolidated Financial Statements.............................................................. F-9
Unaudited Consolidated Financial Statements--Nine Months Ended September 30, 1998 and 1997
Consolidated Balance Sheets............................................................................. F-19
Consolidated Statements of Operations................................................................... F-20
Consolidated Statements of Cash Flows................................................................... F-21
Notes to Consolidated Financial Statements.............................................................. F-22
POLLO TROPICAL, INC. AND SUBSIDIARIES
Audited Consolidated Financial Statements--Years Ended December 31, 1997, 1996 and 1995
Report of Independent Certified Public Accountants...................................................... F-24
Consolidated Balance Sheets............................................................................. F-25
Consolidated Statements of Operations................................................................... F-26
Consolidated Statements of Shareholders' Equity......................................................... F-27
Consolidated Statements of Cash Flows................................................................... F-28
Notes to Consolidated Financial Statements.............................................................. F-30
Unaudited Condensed Consolidated Financial Statements--Six Months Ended June 30, 1998 and 1997
Condensed Consolidated Balance Sheets................................................................... F-42
Condensed Consolidated Statements of Operations......................................................... F-43
Consolidated Statement of Shareholders' Equity.......................................................... F-44
Condensed Consolidated Statements of Cash Flows......................................................... F-45
Notes to Condensed Consolidated Financial Statements.................................................... F-46
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Carrols Corporation
We have audited the consolidated balance sheet of Carrols Corporation (a wholly
owned subsidiary of Carrols Holdings Corporation) and Subsidiaries as of
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
1997 and December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Carrols
Corporation and Subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the years ended
December 31, 1997 and December 31, 1995, in conformity with generally accepted
accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedule
for the years ended December 31, 1997 and 1995 is presented for purposes of
additional analysis and is not a required part of the basic consolidated
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.
/s/ PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
February 27, 1998
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Carrols Corporation:
We have audited the accompanying consolidated balance sheet of Carrols
Corporation (a wholly-owned subsidiary of Carrols Holdings Corporation) and
subsidiaries as of December 29, 1996, and the related consolidated statements of
operations, stockholder's deficit, and cash flows for the year then ended. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Carrols Corporation and
subsidiaries as of December 29, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule for the year ended December 29, 1996
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York
March 7, 1997
F-3
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,252,000 $ 1,314,000
Trade and other receivables, net of reserves of $130,000 and $310,000 at 1997
and 1996, respectively...................................................... 748,000 793,000
Inventories (Note 2)........................................................... 3,355,000 2,163,000
Prepaid real estate taxes...................................................... 939,000 725,000
Prepaid expenses and other current assets...................................... 1,388,000 932,000
Refundable income taxes (Note 5)............................................... 2,141,000 --
Deferred income taxes (Note 5)................................................. 2,605,000 3,264,000
------------ ------------
Total current assets............................................................. 13,428,000 9,191,000
------------ ------------
Property and equipment, at cost (Notes 3 and 4):
Land........................................................................... 7,280,000 9,066,000
Buildings and improvements..................................................... 12,487,000 16,175,000
Leasehold improvements......................................................... 43,146,000 38,816,000
Equipment...................................................................... 61,331,000 46,834,000
Capital leases................................................................. 14,548,000 14,548,000
------------ ------------
138,792,000 125,439,000
Less accumulated depreciation and amortization................................... (67,908,000) (63,356,000)
------------ ------------
Net property and equipment....................................................... 70,884,000 62,083,000
------------ ------------
Franchise rights, at cost less accumulated amortization of $25,047,000 and
$21,787,000 at 1997 and 1996, respectively..................................... 108,938,000 46,203,000
Intangible assets, at cost less accumulated amortization of $8,900,000 and
$8,326,000 at 1997 and 1996, respectively...................................... 7,864,000 8,640,000
Other assets..................................................................... 7,778,000 5,834,000
Deferred income taxes (Note 5)................................................... 6,436,000 6,637,000
------------ ------------
$215,328,000 $138,588,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-4
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 11,950,000 $ 9,319,000
Accrued interest............................................................... 4,770,000 4,741,000
Accrued payroll, related taxes and benefits.................................... 6,299,000 4,620,000
Accrued income taxes........................................................... -- 1,058,000
Other liabilities.............................................................. 5,104,000 3,875,000
Current portion of long-term debt (Note 4)..................................... 3,137,000 8,000
Current portion of capital lease obligations (Note 3).......................... 441,000 574,000
------------ ------------
Total current liabilities........................................................ 31,701,000 24,195,000
Long-term debt, net of current portion (Note 4).................................. 154,649,000 118,180,000
Capital lease obligations, net of current portion (Note 3)....................... 2,060,000 2,503,000
Deferred income--sale/leaseback of real estate (Note 3).......................... 4,555,000 2,154,000
Accrued postretirement benefits (Note 9)......................................... 1,627,000 1,522,000
Other liabilities................................................................ 3,289,000 1,696,000
------------ ------------
Total liabilities................................................................ 197,881,000 150,250,000
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit) (Note 6):
Common stock, par value $1; authorized 1,000 shares, issued and outstanding--10
shares...................................................................... 10 10
Additional paid-in capital..................................................... 28,362,990 1,411,990
Accumulated deficit............................................................ (10,916,000) (10,574,000)
Less: note receivable--redemption of warrants.................................. -- (2,500,000)
------------ ------------
Total stockholders' equity (deficit)............................................. 17,447,000 (11,662,000)
------------ ------------
$215,328,000 $138,588,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-5
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
Restaurant sales................................................ $295,436,000 $240,809,000 $226,257,000
Costs and expenses:
Cost of sales................................................. 85,542,000 68,031,000 63,629,000
Restaurant wages and related expenses......................... 89,447,000 70,894,000 65,932,000
Advertising expense........................................... 13,122,000 10,798,000 9,764,000
Other restaurant operating expenses........................... 61,691,000 48,683,000 45,635,000
Administrative expenses....................................... 13,121,000 10,387,000 10,434,000
Depreciation and amortization................................. 15,102,000 11,015,000 11,263,000
Costs associated with change of control....................... -- 509,000 --
------------ ------------ ------------
Total operating expenses...................................... 278,025,000 220,317,000 206,657,000
------------ ------------ ------------
Operating income................................................ 17,411,000 20,492,000 19,600,000
Interest income (Note 5)........................................ (983,000) -- --
Interest expense................................................ 15,581,000 14,209,000 14,500,000
------------ ------------ ------------
Income before income taxes...................................... 2,813,000 6,283,000 5,100,000
Provision (benefit) for income taxes (Note 5)................... 655,000 3,100,000 (9,826,000)
------------ ------------ ------------
Net Income...................................................... $ 2,158,000 $ 3,183,000 $ 14,926,000
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-6
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONAL TOTAL
COMMON PAID- ACCUMULATED NOTES STOCKHOLDERS'
STOCK IN-CAPITAL DEFICIT RECEIVABLE EQUITY (DEFICIT)
------ ----------- ------------ ------------ ----------------
Balance at December 31, 1994.................... $ 10 $ 1,474,990 $(28,683,000) $ -- $(27,208,000)
Net income...................................... 14,926,000 14,926,000
Dividends declared.............................. (636,000) (636,000)
Exercise of stock options....................... 2,000 2,000
---- ----------- ------------ ------------ ------------
Balance at December 31, 1995.................... 10 840,990 (13,757,000) -- (12,916,000)
Net income...................................... 3,183,000 3,183,000
Dividends declared.............................. (1,000,000) (1,000,000)
Exercise of stock options....................... 12,000 12,000
Tax benefit from sale of stock options due to
change of control............................. 1,559,000 1,559,000
Loan to purchase warrants....................... (2,500,000) (2,500,000)
---- ----------- ------------ ------------ ------------
Balance at December 31, 1996.................... 10 1,411,990 (10,574,000) (2,500,000) (11,662,000)
Net income...................................... 2,158,000 2,158,000
Dividends declared.............................. (4,338,000) (4,338,000)
Capital contribution............................ 30,382,000 30,382,000
Tax benefit from sale of stock options due to
change of control............................. 907,000 907,000
Redemption of warrants.......................... (2,500,000) 2,500,000
---- ----------- ------------ ------------ ------------
Balance at December 31, 1997.................... $ 10 $28,362,990 $(10,916,000) $ -- $ 17,447,000
---- ----------- ------------ ------------ ------------
---- ----------- ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-7
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
Cash Flows From Operating Activities:
Net income........................................................ $ 2,158,000 $ 3,183,000 $ 14,926,000
Adjustments to reconcile net income to net cash provided by
operating activities:
(Gain) loss on disposal of property equipment................... (344,000) (314,000) 156,000
Depreciation and amortization................................... 15,102,000 11,015,000 11,263,000
Deferred income taxes........................................... 860,000 160,000 (10,061,000)
Changes in operating assets and liabilities:
Refundable income taxes...................................... (2,141,000) -- --
Trade and other receivables.................................. 45,000 (105,000) (156,000)
Inventories.................................................. (588,000) 129,000 (38,000)
Prepaid real estate tax expenses and other current assets.... (731,000) (174,000) (45,000)
Other assets...................................................... (149,000) (611,000) (80,000)
Accounts payable............................................. 2,631,000 410,000 1,363,000
Accrued payroll, related tax and benefits.................... 1,286,000 (256,000) 297,000
Accrued income taxes......................................... (1,058,000) 983,000 48,000
Other liabilities--current................................... 1,229,000 266,000 (893,000)
Accrued interest............................................. 29,000 (68,000) (90,000)
Other liabilities--long-term................................. 1,593,000 (231,000) 84,000
Other........................................................ 18,000 (65,000) (92,000)
------------ ------------ ------------
Net cash provided from operating activities......................... 19,940,000 14,322,000 16,682,000
------------ ------------ ------------
Cash Flows For Investing Activities:
Capital expenditures:
New restaurant development................................... (9,732,000) (5,280,000) (2,767,000)
Remodels..................................................... (3,807,000) (6,656,000) (2,524,000)
Other capital expenditures................................... (4,671,000) (3,319,000) (2,731,000)
Acquisition of restaurants........................................ (78,485,000) (7,945,000) (516,000)
Notes and mortgages issued........................................ -- (749,000) (2,503,000)
Payments received on notes and mortgages.......................... 88,000 39,000 32,000
Disposal of property, equipment and franchise rights.............. 1,224,000 2,342,000 17,000
Other investments................................................. -- 1,330,000 (1,356,000)
------------ ------------ ------------
Net cash used for investing activities.............................. (95,383,000) (20,238,000) (12,348,000)
------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from long-term debt, net................................. 62,614,000 2,997,000 4,376,000
Principal payments and retirements of long-term obligations....... (26,184,000) (2,047,000) (9,184,000)
Proceeds from sale-leaseback transactions......................... 13,000,000 4,246,000 861,000
Dividends paid.................................................... (4,338,000) (1,000,000) (636,000)
Exercise of employee stock options and related tax benefits....... 907,000 1,571,000 2,000
Capital contribution.............................................. 30,382,000 -- --
------------ ------------ ------------
Net cash provided from (used for) financing activities.............. 76,381,000 5,767,000 (4,581,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................ 938,000 (149,000) (247,000)
Cash and cash equivalents, beginning of year........................ 1,314,000 1,463,000 1,710,000
------------ ------------ ------------
Cash and cash equivalents, end of year.............................. $ 2,252,000 $ 1,314,000 $ 1,463,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures:
Interest paid on debt............................................. $ 15,552,000 $ 14,277,000 $ 14,590,000
Income taxes paid................................................. $ 1,456,000 $ 393,000 $ 153,000
The accompanying notes are an integral part of these financial statements.
F-8
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation. The consolidated financial statements include the
accounts of Carrols Corporation and its subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated in consolidation. The
Company is a wholly-owned subsidiary of Carrols Holdings Corporation
("Holdings").
At December 31, 1997 the Company operated, as franchisee, 335 fast food
restaurants under the trade name "Burger King" in seven Northeastern, four
Midwestern and two Southeastern states. According to publicly available
information the Burger King brand is the second largest franchised restaurant
system in the world. The Company is the largest independent Burger King
franchisee in the United States.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation and amortization is provided using the straight-line method over
the following estimated useful lives:
Buildings and improvements.................... 5 to 20 years
Leasehold improvements........................ Remaining life of lease including renewal
options or life of asset, whichever is shorter
Equipment..................................... 3 to 10 years
Capital leases................................ Remaining life of lease
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$9,718,000, $7,300,000 and $7,594,000, respectively.
Franchise Rights. Fees for initial franchises and renewals paid to Burger
King Corporation are amortized using the straight-line method over the term of
the agreement, generally twenty years. Acquisition costs allocated to franchise
rights are amortized using the straight-line method, principally over the
remaining lives of the acquired leases including renewal options, but not in
excess of 40 years.
Intangible Assets. Intangible assets consist primarily of beneficial
leases which are amortized using the straight-line method over the lives of the
leases including renewal options, but not in excess of 40 years.
Long-Lived Assets. The Company assesses the recoverability of property and
equipment, franchise rights and intangible assets by determining whether the
amortization of these assets, over their respective remaining lives, can be
recovered through undiscounted future operating cash flows. Impairment is
reviewed whenever events or changes in circumstances indicate the carrying
amounts of these assets may not be fully recoverable.
Deferred Financing Costs. Financing costs incurred in obtaining long-term
debt are capitalized and amortized over the life of the related debt on an
effective interest basis for costs associated with the Company's unsecured
senior notes and on a straight-line basis for costs associated with the
Company's advance loan facility.
Income Taxes. The Company and its subsidiaries were included in the
consolidated federal income tax return of Holdings through the date of the
change of control at April 3, 1996. The Company and its subsidiaries have filed
separate federal income tax returns for the period April 4, 1996 to December 31,
1996 and the year ended December 31, 1997.
Advertising Costs. All advertising costs are expensed as incurred.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts
F-9
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Estimates also affect the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments. The following methods were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that fair value:
Current Assets and Liabilities--The carrying value of cash and cash
equivalents and accrued liabilities approximates fair value because of the
short maturity of those instruments.
Senior Notes--The fair value of senior notes is based on quoted market
prices. The fair value at December 31, 1997 is approximately $113,557,000.
Revolving and Advance Loan Facilities--Rates currently available to
the Company for debt with similar terms and remaining maturities are used
to estimate fair value. The recorded amount, as of December 31, 1997,
approximates fair value.
Stock-Based Compensation. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) which permitted entities to recognize as an expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 also allowed entities to continue to apply the
provisions of APB 25 and provide pro forma net income disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS 123 has
been applied. The Company has elected to continue to apply the provisions of APB
25 and provide the pro forma disclosure provisions of SFAS 123.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the
Sunday closest to December 31. The financial statements included herein are as
of December 28, 1997 (52 weeks), December 29, 1996 (52 weeks), and December 31,
1995 (52 weeks).
Reclassifications. Certain amounts for prior years have been reclassified
to conform to the current year presentation.
2. INVENTORIES
Inventories at December 31, consisted of:
1997 1996
---------- -----------
Raw materials (food and paper products).......................... $2,111,000 $ 1,386,000
Supplies......................................................... 1,244,000 777,000
---------- -----------
$3,355,000 $ 2,163,000
---------- -----------
---------- -----------
3. LEASES
The Company utilizes land and buildings in its operations under various
lease agreements. These leases are generally for initial terms of twenty years
and, in most cases, contain renewal options for two to four additional five year
periods. The rent payable under such leases is generally a percentage of sales
with a provision for minimum rent. In addition, most leases require payment of
property taxes, insurance and utilities.
Deferred gains have been recorded as a result of sale/leaseback
transactions and are being amortized over the lives of the leases. These leases
are operating leases, with a twenty year primary term with four five-year
renewal options and provide for additional rent based on a percentage of sales
in excess of predetermined levels. The net deferred gain is $4,555,000 and
$2,154,000 at December 31, 1997 and 1996, respectively. Accumulated
F-10
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. LEASES--(CONTINUED)
amortization pertaining to capital leases for the years ended December 31, 1997
and 1996 was $9,951,000 and $9,151,000, respectively.
Minimum rent commitments under noncancelable leases at December 31, 1997
were as follows:
YEARS ENDING: CAPITAL OPERATING
- ------------- ---------- ------------
1998........................................................ $ 758,000 $ 18,807,000
1999........................................................ 541,000 17,884,000
2000........................................................ 480,000 17,470,000
2001........................................................ 469,000 16,889,000
2002........................................................ 429,000 16,069,000
2003 and thereafter......................................... 1,329,000 123,819,000
---------- ------------
Total minimum lease payments................................ 4,006,000 $210,938,000
------------
------------
Less amount representing interest....................... 1,505,000
----------
Total obligations under capital leases...................... 2,501,000
Less current portion.................................... 441,000
----------
Long-term obligations under capital leases.................. $2,060,000
----------
----------
Total rent expense on operating leases, including percentage rent on both
operating and capital leases, for the past three years was as follows:
1997 1996 1995
----------- ----------- -----------
Minimum rent on real property............................. $15,303,000 $11,590,000 $11,108,000
Additional rent based on a percentage of sales............ 3,099,000 2,700,000 2,548,000
Equipment rent............................................ 162,000 167,000 164,000
----------- ----------- -----------
$18,564,000 $14,457,000 $13,820,000
----------- ----------- -----------
----------- ----------- -----------
4. LONG-TERM DEBT
Long-term debt at December 31 consisted of:
1997 1996
------------ ------------
Collateralized:
Revolving loan facility.................................... $ 2,500,000 $ 4,669,000
Acquisition loan........................................... -- 5,000,000
Advance term loan facility................................. 46,786,000 --
Other notes payable with interest rates to 10%............. 863,000 857,000
Unsecured 11.5% senior notes................................. 107,637,000 107,662,000
------------ ------------
157,786,000 118,188,000
Less current portion......................................... 3,137,000 8,000
------------ ------------
$154,649,000 $118,180,000
------------ ------------
------------ ------------
The Company issued $110 million of unsecured senior notes in August 1993.
The senior notes bear interest at a rate of 11.5%, payable semi-annually on each
February 15 and August 15, and are due August 15, 2003. The notes are redeemable
at the option of the Company in whole or in part on or after August 15, 1998 at
a price of 104.31% of the principal amount if redeemed before August 15, 1999
and 102.88% of the principal amount if redeemed before August 15, 2000, with
other specified redemption prices thereafter. Provisions of the revolving
F-11
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. LONG-TERM DEBT--(CONTINUED)
line of credit facility place limitations on the redemption or repurchase of the
notes so long as the facility remains in effect.
On March 27, 1997, the Company entered into a loan agreement (the "Loan
Agreement") among the Company, Texas Commerce Bank National Association, as
Agent, and other lenders (collectively the "Lenders") who are parties thereto.
The Loan Agreement provides for: (i) $127,000,000 Advance Term Loan Facility
under which the Company may borrow, through December 31, 1999, up to 75% of the
purchase costs incurred in connection with the acquisition of restaurants; and
(ii) a $25,000,000 Revolving Loan Facility which replaced the Company's previous
revolving credit facility. The Revolving Loan Facility is available to finance
restaurant acquisitions and new restaurant development by the Company, and for
other working capital and general corporate purposes. At December 31, 1997,
$21,525,000 was available for use under the Revolving Loan Facility after
reserving $975,000 for a letter of credit guaranteed by the facility.
The Loan Agreement provides for interest rate options of: (i) the greater
of the prime rate (or the Federal Funds Rate plus .50%) plus a variable margin
between 0% and 1% (1% at December 31, 1997); or (ii) the London Interbank
offering rate plus a variable margin between 1.5% and 2.5% (2.5% of
December 31, 1997), based upon debt to cash flow ratios. Commitment fees on the
unused balances of the Advance Term Loan Facility and the Revolving Loan
Facility are payable quarterly at the annual rates of 0.25% and 0.375%,
respectively.
The Revolving Loan Facility has a maturity date of December 31, 2001 while
the Advance Term Loan Facility requires quarterly principal repayments at an
annual rate of 6% beginning with the end of the second quarter after each
advance loan and increasing 2% per year through the sixth year, with the
remainder repayable on June 30, 2003.
The $5 million acquisition loan was collateralized by twenty-two
restaurants acquired during 1994. This loan was paid in full in 1997 and
refinanced under the Company's Advance Term Loan Facility.
Substantially all assets of the Company are or will be pledged to the
lender as collateral under the loans made pursuant to the Loan Agreement.
Restrictive covenants of the senior notes and the revolving loan facility
include limitations with respect to the issuance of additional debt and
redeemable preferred stock; the sale of assets; dividend payments and capital
stock redemption; transactions with affiliates; investments; consolidations,
mergers and transfers of assets and minimum interest and fixed charge coverage
ratios.
At December 31, 1997, principal payments required on all long-term debt are
as follows:
1998...................................................... $ 3,137,000
1999...................................................... 4,274,000
2000...................................................... 5,153,000
2001...................................................... 8,486,000
2002...................................................... 6,438,000
2003 and thereafter....................................... 129,798,000
------------
$157,286,000
------------
------------
F-12
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. INCOME TAXES
The income tax provision (benefit) was comprised of the following at
December 31:
1997 1996 1995
---------- ---------- -----------
Current:
Federal.................................................... $ 887,000 $ 981,000 $ 35,000
State...................................................... 628,000 400,000 200,000
---------- ---------- -----------
1,515,000 1,381,000 235,000
---------- ---------- -----------
Deferred:
Federal.................................................... (672,000) 1,199,000 (8,552,000)
State...................................................... (188,000) 520,000 (1,509,000)
---------- ---------- -----------
(860,000) 1,719,000 (10,061,000)
---------- ---------- -----------
$ 655,000 $3,100,000 $(9,826,000)
---------- ---------- -----------
---------- ---------- -----------
The components of deferred income tax assets and liabilities at
December 31, are as follows:
1997 1996
----------- -----------
Deferred tax assets:
Accounts receivable and other reserves....................... $ 408,000 $ 503,000
Accrued vacation benefits.................................... 508,000 427,000
Other accruals............................................... 168,000 --
Deferred gain on sale of real estate......................... 1,710,000 853,000
Postretirement benefits...................................... 650,000 602,000
Capital leases............................................... 464,000 463,000
Property and equipment depreciation.......................... 549,000 671,000
Alternative minimum tax credit carryforward.................. 21,000 --
Net operating loss carryforwards............................. 10,459,000 12,348,000
----------- -----------
14,937,000 15,867,000
Deferred tax liabilities:
Amortization of franchise rights............................. 5,896,000 5,966,000
----------- -----------
Net deferred income tax assets................................. $ 9,041,000 $ 9,901,000
----------- -----------
----------- -----------
The Company has net operating loss carryforwards for income tax purposes of
approximately $27 million. The net operating loss carryforwards expire in
varying amounts beginning in 2003 through 2010. Due to change in ownership the
Company is limited, for federal tax purposes, to a $4,354,000 utilization of net
operating losses annually. Realization of the deferred income tax assets
relating to these net operating losses is dependent on generating sufficient
taxable income prior to the expiration of the loss carryforwards. Based upon
results of operations, management believes it is more likely than not that the
Company will generate sufficient future taxable income to fully realize the
benefit of the net operating loss carryforwards and existing temporary
differences, although there can be no assurance of this. Accordingly, during
1995, the previously provided valuation allowance was eliminated and the net
deferred tax assets were recognized as a deferred income tax benefit.
F-13
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. INCOME TAXES--(CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
tax rates for the years ended December 31, is as follows:
1997 1996
------------------ ------------------
Statutory federal income tax rate............................ 957,000 34.0% $2,136,000 34.0%
State income taxes, net of federal benefit................... 266,000 9.5% 607,000 9.7%
Nondeductible expenses....................................... 197,000 7.0% 197,000 3.1%
Tax appeals settlement....................................... (806,000) (28.7)% -- --
Miscellaneous................................................ 41,000 1.4% 160,000 2.5%
--------- ----- ---------- ----
$ 655,000 23.2% $3,100,000 49.3%
--------- ----- ---------- ----
--------- ----- ---------- ----
Included in refundable income taxes at December 31, 1997 is $983,000 of
interest income associated with a federal tax appeals claim settlement.
6. STOCKHOLDERS' EQUITY (DEFICIT)
The Company
The Company has 1,000 shares of common stock authorized of which 10 shares
are issued and outstanding. Dividends on the Company's common stock are
restricted to amounts permitted by various loan agreements.
Holdings
The sole activity of Holdings is the ownership of 100% of the stock of
Carrols Corporation. In February 1997, a 1 for 3.701 reverse stock split was
effected to reduce the outstanding shares of common stock of Holdings to 850,000
shares. As a result of a recapitalization in February 1997, the capital
structure of Holdings was as follows at December 31, 1997:
Class A, preferred stock 10% cumulative redeemable, par value $.01, authorized,
issued and outstanding 3,633 shares, at liquidation preference and redemption
price $3,633,000
Voting common stock, par value $.01, authorized 3,000,000 shares, issued and
outstanding 1,144,144 shares 11,000
The Class A preferred stock is subject to two remaining equal mandatory
redemptions, scheduled for December 23, 1998 and 1999. In addition, subject to
the redemption restrictions of various loan agreements, all preferred stock may
be redeemed at the option of Holdings, at a price of $1,000 per share, plus
accrued dividends. In the event that the scheduled redemptions are not made
timely, the annual dividend rate on the amount of Class A Preferred Stock not
redeemed is automatically increased to 14%.
Holders of the Preferred Stock are entitled to cumulative dividends payable
quarterly at the rate of 10% per annum. In the event that Holdings fails to pay
four consecutive quarterly dividends on the Class A preferred stock, the
subsequent dividend rate increases to 11.5%; if eight consecutive quarterly
dividends are missed, the rate increases to 13% per annum until such dividends
are paid.
Warrants outstanding at December 31, 1996 to purchase 131,886 shares of
Holdings Common Stock at exercise prices of $3.59 to $3.70 per share were owned
by an independent third party. To facilitate the sale and purchase of the
warrants, Holdings loaned $2,500,000 to the purchaser of the warrants which loan
was secured by a collateral pledge of the shares of the purchaser and of the
warrants. The receivable was reclassified to increase
F-14
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
stockholders' deficit as of December 31, 1996. In 1997, Holdings exercised its
option to purchase the warrants at an aggregate price of $2,510,000 from the
third party in exchange for payment on the related loan.
Change of Control Transactions
On April 3, 1996, Holdings, Carrols Corporation and certain selling
shareholders of Holdings sold approximately 97 percent of the issued common
stock and common stock equivalents (the Class B Convertible Preferred stock,
warrants to buy common stock and options to buy common stock) exclusive of the
warrants referred to above to Atlantic Restaurants, Inc. ("Atlantic"). This
change in control resulted in the Company incurring a one-time charge of
$509,000 in fiscal 1996.
On March 27, 1997, Holdings and Atlantic, its then sole stockholder,
entered into an agreement whereby they agreed to sell 141,667 shares of common
stock of Holdings to each of Madison Dearborn Capital Partners, L.P. ("MDCP"),
and Madison Dearborn Capital Partners II, L.P. ("MDCP II"), both independent
third parties, resulting in approximately $30.4 million of new equity for the
Company. Atlantic also sold 141,666 of its shares of Holdings to MDCP and
141,667 of such shares to MDCP II, resulting in both Atlantic and funds managed
by Madison Dearborn Partners, Inc. having an equal interest in the Company.
Both transactions constituted a "change of control" under the Indenture
governing the Senior Notes Due 2003 ("Notes"). Accordingly, each holder of the
Notes had the right to require the Company to repurchase all or any part of such
holder's Notes at a repurchase price in cash equal to 101% of the principal
amount of the Notes being repurchased plus accrued and unpaid interest in both
1996 and in 1997. Such redemptions totaled $25,000 in 1997 and $838,000 in 1996.
Stock Options
Holdings adopted an Employee Stock Option and Award Plan on December 14,
1993 ("The 1993 Plan"). Effective April 1, 1994, Holdings also adopted a Stock
Option Plan for non-employee directors ("Directors Plan"). The Plans allowed for
the granting of non-qualified stock options, stock appreciation rights and
incentive stock options to directors, officers and certain other Company
employees. The Company was authorized to grant options for up to 229,700 shares,
27,000 shares for non-employee directors and 202,700 shares for employees.
Options were generally exercisable over 5 years with 25,600 options exerciseable
as of December 31, 1995. As of December 31, 1995, non-employee directors were
granted options totaling 4,900 shares. Under the Directors Plan, no options were
exercised or canceled during 1995. During 1996, 57,000 options (36,600 at $14.80
and 20,400 at $22.65) were canceled by the sale of such options in conjunction
with the sale to Atlantic and the plans were canceled. The remaining 32,426
options were subject to a deferred purchase agreement whereby the sale and
cancellation occurred in January, 1997.
F-15
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
A summary of all option activity in the 1993 Plan and the Directors Plan
for the years ended December 31, 1997, 1996 and 1995 is as follows:
OPTIONS AT OPTIONS AT
$14.80 $22.65
---------- ----------
Balance at December 31, 1994.......................................... 69,441 --
Granted............................................................. -- 26,777
Exercised........................................................... (162) --
Canceled............................................................ (3,350) (621)
-------- --------
Balance at December 31, 1995.......................................... 65,929 26,156
Exercised........................................................... (810) --
Canceled............................................................ (38,098) (20,751)
-------- --------
Balance at December 31, 1996.......................................... 27,021 5,405
Canceled............................................................ (27,021) (5,405)
-------- --------
Balance at December 31, 1997.......................................... -- --
-------- --------
-------- --------
Holdings adopted a stock option plan in 1996 entitled the 1996 Long-Term
Incentive Plan ("1996 Plan") and authorized a total of 106,250 shares to be
granted at prices ranging from $101.77 to $140.00 per share. Options under this
plan generally vest over a four year period There were no outstanding options in
fiscal 1996 under this plan. In 1997, options were granted at prices ranging
from $101.77 to $110.00 per share.
A summary of all option activity in the 1996 Plan for the year ended
December 31, 1997 was as follows:
OPTIONS AT OPTIONS AT
$101.77 $110.00
---------- ----------
Balance at December 31, 1996.......................................... -- --
Granted............................................................. 72,250 14,460
Canceled............................................................ -- (570)
-------- --------
Balance at December 31, 1997.......................................... 72,250 13,890
-------- --------
-------- --------
Exercisable at December 31, 1997...................................... 34,850 --
-------- --------
-------- --------
In addition, in conjunction with the 1997 sale of Holdings common stock to
Madison Dearborn, additional options not part of the 1996 Plan for 32,427 shares
at a price of $101.77 were granted with vesting over a five year period. None of
these options were exercisable at December 31, 1997.
Had compensation cost been determined based upon the fair value of the
stock options at grant date consistent with the method of SFAS 123, the
Company's pro-forma net income for the year ended December 31, 1997 would have
been $1,527,000 as compared with $2,158,000, as reported.
The fair value of each option grant was estimated using the minimum value
option pricing model with the following weighted-average assumptions for the
year ended December 31, 1997:
Risk-free interest rate......................................... 6.53%
Annual dividend yield........................................... 0%
Expected life................................................... 5 years
F-16
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. LITIGATION
The Company is a party to various legal proceedings arising from the normal
course of business. Management believes adverse decisions relating to litigation
and contingencies in the aggregate would not materially effect the Company's
results of operations or financial condition.
8. EMPLOYEE SAVINGS PLAN
The Company offers a savings plan for salaried employees. Under the plan,
participating employees may contribute up to 10% of their salary annually. The
Company's contributions, which begin to vest after three years and fully vest
after seven years of service, are equal to 50% of the employee's contributions
to a maximum Company contribution of $530 annually. The employees have various
investment options available under a trust established by the plan. The plan
expense was $208,000, $164,000 and $125,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
9. POSTRETIREMENT BENEFITS
While the Company reserves the right to change its policy, the Company
provides postretirement medical and life insurance benefits covering
substantially all salaried employees. The following is the plan status and
accumulated postretirement benefit obligation (APBO) at December 31:
1997 1996
---------- ----------
Accumulated benefit obligation:
Retirees........................................................ $ 519,000 $ 518,000
Fully eligible active participants.............................. 28,000 26,000
Other active plan participants not fully eligible............... 814,000 697,000
---------- ----------
Total APBO...................................................... 1,361,000 1,241,000
Unrecognized prior service cost................................... 286,000 315,000
Unrecognized net actuarial losses................................. (20,000) (34,000)
---------- ----------
Accrued postretirement benefit obligation......................... $1,627,000 $1,522,000
---------- ----------
---------- ----------
Net periodic postretirement benefit cost for 1997, 1996 and 1995 included
the following components:
1997 1996 1995
-------- -------- --------
Service cost--benefits earned during the year....................... $ 69,000 $ 64,000 $ 47,000
Interest cost on accumulated benefit obligation..................... 85,000 77,000 76,000
Net amortization of actuarial gains and losses and prior service
costs............................................................. (25,000) (25,000) (29,000)
-------- -------- --------
$129,000 $116,000 $ 94,000
-------- -------- --------
-------- -------- --------
A 6.50% annual rate of increase in the per capita costs of covered health
care benefits was assumed for 1997, gradually decreasing to 5.5% by the year
2001. Increasing the assumed health care cost trend rates by one percentage
point in each future year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $137,000 and increase the sum of the
service cost and interest cost components by $26,000 in 1997.
For 1997, 1996 and 1995, a discount rate of 7% was used to determine the
accumulated postretirement benefit obligation. Actual benefit costs paid on
behalf of retirees in 1997, 1996 and 1995 was $24,000 in each year.
F-17
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. ACQUISITIONS
On March 28, 1997, the Company purchased certain assets and franchise
rights of twenty-three Burger King restaurants in North and South Carolina for a
cash price of approximately $21 million.
On August 20, 1997, the Company purchased certain assets and franchise
rights of sixty-three Burger King restaurants, primarily in Western New York
State, Indiana and Kentucky for a cash price of approximately $52 million.
The following unaudited proforma results of operations assume these
acquisitions occurred as of the beginning of the respective periods:
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------ ------------
(UNAUDITED)
Revenues..................................................... $341,889,000 $329,927,000
------------ ------------
------------ ------------
Operating Income............................................. $ 21,129,000 $ 28,652,000
------------ ------------
------------ ------------
Net income................................................... $ 2,829,000 $ 5,603,000
------------ ------------
------------ ------------
The unaudited results of operations are not necessarily indicative of the
actual operating results that would have occurred had the acquisitions been
consummated on January 1 of each fiscal year, or of future operating results of
the combined companies.
During the year ended December 31, 1997, the Company acquired a total of 93
restaurants. Assets acquired and liabilities assumed in these transactions were
as follows:
Inventory.................................................. $ 604,000
Land....................................................... 1,025,000
Buildings and improvements................................. 1,532,000
Equipment.................................................. 10,221,000
Franchise rights........................................... 65,496,000
Accrued payroll, related taxes and benefits................ (393,000)
-----------
$78,485,000
-----------
-----------
F-18
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 2,442,000 $ 2,252,000
Trade and other receivables....................................................... 870,000 748,000
Inventories....................................................................... 2,973,000 3,355,000
Prepaid real estate taxes......................................................... 1,434,000 939,000
Prepaid expenses and other current assets......................................... 2,540,000 1,388,000
Refundable income taxes........................................................... 869,000 2,141,000
Deferred income taxes............................................................. 2,980,000 2,605,000
------------ ------------
Total current assets................................................................ 14,108,000 13,428,000
Property and equipment, at cost:
Land.............................................................................. 9,026,000 7,280,000
Buildings and improvements........................................................ 24,639,000 12,487,000
Leasehold improvements............................................................ 54,058,000 43,146,000
Equipment......................................................................... 75,114,000 61,331,000
Capital leases.................................................................... 14,548,000 14,548,000
------------ ------------
177,385,000 138,792,000
Less accumulated depreciation and amortization.................................... (76,060,000) (67,908,000)
------------ ------------
Net property and equipment.......................................................... 101,325,000 70,884,000
Franchise rights, at cost less accumulated amortization of $27,974,000 and
$25,047,000 at September 30, 1998 and December 31, 1997, respectively............. 107,106,000 108,938,000
Intangible assets, at cost less accumulated amortization of $9,229,000 and
$8,900,000 at September 30, 1998 and December 31, 1997, respectively.............. 71,547,000 7,864,000
Other assets........................................................................ 7,251,000 7,778,000
Deferred income taxes............................................................... 5,561,000 6,436,000
------------ ------------
$306,898,000 $215,328,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 14,091,000 $ 11,950,000
Accrued interest.................................................................. 2,344,000 4,770,000
Accrued payroll, related taxes and benefits....................................... 8,040,000 6,299,000
Other liabilities................................................................. 9,672,000 5,104,000
Current portion of long-term debt................................................. 8,351,000 3,137,000
Current portion of capital lease obligations...................................... 302,000 441,000
------------ ------------
Total current liabilities........................................................... 42,800,000 31,701,000
Long-term debt, net of current portion.............................................. 231,125,000 154,649,000
Capital lease obligations, net of current portion................................... 1,835,000 2,060,000
Deferred income--sale/leaseback of real estate...................................... 4,342,000 4,555,000
Accrued postretirement benefits..................................................... 1,765,000 1,627,000
Other liabilities................................................................... 6,746,000 3,289,000
------------ ------------
Total liabilities................................................................... 288,613,000 197,881,000
------------ ------------
Stockholders' equity:
Common stock, par value $1; authorized 1,000 shares, issued and outstanding--10
shares.......................................................................... 10 10
Additional paid-in capital........................................................ 24,484,990 28,362,990
Accumulated deficit............................................................... (6,200,000) (10,916,000)
------------ ------------
Total stockholders' equity.......................................................... 18,285,000 17,447,000
------------ ------------
$306,898,000 $215,328,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-19
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
------------ ------------
(40 WEEKS) (39 WEEKS)
(UNAUDITED)
Revenues:
Restaurant sales............................................................... $305,866,000 $207,113,000
Franchise fees and royalties................................................... 161,000 --
------------ ------------
Total revenues.............................................................. 306,027,000 207,113,000
Costs and expenses:
Cost of sales.................................................................. 89,829,000 59,600,000
Restaurant wages and related expenses.......................................... 89,014,000 63,539,000
Advertising expense............................................................ 13,920,000 9,093,000
Other restaurant operating expenses............................................ 60,685,000 43,005,000
Administrative expenses........................................................ 13,364,000 9,337,000
Depreciation and amortization.................................................. 14,294,000 10,578,000
------------ ------------
Total operating expenses.................................................... 281,106,000 195,152,000
------------ ------------
Operating income................................................................. 24,921,000 11,961,000
Refinancing expenses (Note 5).................................................. 1,639,000 --
Interest expense............................................................... 14,716,000 11,059,000
------------ ------------
Income before income taxes....................................................... 8,566,000 902,000
Provision for income taxes....................................................... 3,850,000 181,000
------------ ------------
Net income....................................................................... $ 4,716,000 $ 721,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-20
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
------------- ------------
(40 WEEKS) (39 WEEKS)
(UNAUDITED)
Cash flows from operating activities:
Net income..................................................................... $ 4,716,000 $ 721,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization............................................... 14,294,000 10,578,000
Deferred income taxes....................................................... (445,000) --
Gain on sale of property and equipment...................................... (119,000) (344,000)
Change in operating assets and liabilities.................................. 3,808,000 (3,904,000)
------------- ------------
Cash provided by operating activities....................................... 22,254,000 7,051,000
------------- ------------
Cash flows from investing activities:
Capital expenditures:
Purchase of Pollo Tropical, Inc.,
net of cash acquired...................................................... (96,632,000) --
New restaurant development.................................................. (7,595,000) (6,391,000)
Remodels and other capital expenditures..................................... (14,368,000) (4,561,000)
Acquisitions of Burger King restaurants..................................... (629,000) (78,056,000)
Proceeds from sales of property and equipment.................................. 1,337,000 1,092,000
------------- ------------
Net cash used for investing activities...................................... (117,887,000) (87,916,000)
------------- ------------
Cash flows from financing activities:
Proceeds from revolving loan facility, net..................................... 8,800,000 3,600,000
Proceeds from advance term loan facility....................................... 75,000,000 62,700,000
Principal payments on advance term loan
facility.................................................................... (2,177,000) (200,000)
Principal payments on capital leases........................................... (364,000) (444,000)
Proceeds from issuing stock.................................................... -- 30,442,000
Proceeds from sale-leaseback transactions...................................... 18,536,000 --
Dividends paid................................................................. (3,878,000) (2,349,000)
Retirement of long-term debt................................................... -- (9,669,000)
Financing costs associated with long-term debt................................. (75,000) (2,397,000)
Other.......................................................................... (19,000) (23,000)
------------- ------------
Net cash provided by financing activities................................... 95,823,000 81,660,000
------------- ------------
Increase in cash and cash equivalents............................................ 190,000 795,000
Cash and cash equivalents, beginning of period................................... 2,252,000 1,314,000
------------- ------------
Cash and cash equivalents, end of period......................................... $ 2,442,000 $ 2,109,000
------------- ------------
------------- ------------
The accompanying notes are an integral part of these financial statements.
F-21
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
1. STATEMENT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and do not include all of the information and the footnotes
required by generally accepted accounting principles for complete statements. In
the opinion of management, all normal and recurring adjustments necessary for a
fair presentation of such financial statements have been included.
The Company uses a 52-53 week fiscal year ending on the Sunday closest to
December 31. Fiscal 1998 will contain 53 weeks and the company has historically
included the extra week in its second fiscal quarter. Accordingly the nine
months results of operations and cash flows include 40 weeks and 39 weeks,
respectively.
The results of operations for the nine months ended September 30, 1998, are
not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1997 contained in the Company's 1997 Annual Report on Form 10-K.
The December 31, 1997 balance sheet data is derived from these audited financial
statements.
Certain amounts for the prior year have been reclassified to conform to the
current year presentation.
2. INVENTORIES
Inventories at September 30, 1998 and December 31, 1997, consisted of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Raw materials (food and paper products)......................... $ 1,964,000 $2,111,000
Supplies........................................................ 1,009,000 1,244,000
----------- ----------
$ 2,973,000 $3,355,000
----------- ----------
----------- ----------
3. INCOME TAXES
The income tax provision for the nine months ended September 30, 1998 and
1997 was comprised of the following:
1998 1997
---------- --------
Current............................................................. $4,295,000 $181,000
Deferred............................................................ (445,000) --
---------- --------
$3,850,000 $181,000
---------- --------
---------- --------
For 1998 and 1997 the difference between the expected tax provision
resulting from application of the federal statutory income tax rate to pre-tax
income and the reported income tax provision results principally from state
taxes and non-deductible amortization of certain franchise rights and other
intangible assets.
F-22
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
4. ACQUISITIONS
On March 28, 1997, the Company purchased certain assets and franchise
rights of 23 Burger King restaurants in North and South Carolina for a cash
price of approximately $21 million.
On August 20, 1997, the Company purchased certain assets and franchise
rights of 63 Burger King restaurants, primarily in Western New York State,
Indiana and Kentucky for a cash price of approximately $52 million.
On July 9, 1998, the Company consummated the purchase of Pollo Tropical
Inc. ("Pollo Tropical") for an approximate cash purchase price of $96.6 million
and on July 20, 1998 merged Pollo Tropical into the Company. The excess purchase
price over net assets acquired, of approximately $64.0 million, is included in
intangible assets. The Company used its existing senior credit facility to
finance the Pollo Tropical acquisition. This borrowing required the Company to
amend this facility in July 1998 to modify, among other things, certain
financial covenants with respect to debt to cash flow ratios.
The following pro forma results of operations for the periods presented
below assume these acquisitions occurred as of the beginning of the respective
periods:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
Revenues................................. $344,114,000 $302,648,000
Operating income......................... $ 30,519,000 $ 21,580,000
Net income............................... $ 5,441,000 $ 1,083,000
The preceding pro forma financial information is not necessarily indicative
of the operating results that would have occurred had either acquisition been
consummated as of the beginning of the respective periods, nor are they
necessarily indicative of future operating results.
5. LOSS ON REFINANCING EXPENSES
The Company expensed all costs associated with its efforts to refinance its
existing debt in the third quarter of 1998 as the timing of any future
refinancing is uncertain and the related activities have currently ceased.
Approximately $1.2 million of these costs related to losses on interest rate
hedge transactions, which were settled in the third quarter.
F-23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Pollo Tropical, Inc.:
We have audited the accompanying consolidated balance sheets of Pollo
Tropical, Inc. (a Florida corporation) and subsidiaries as of December 28, 1997
and December 29, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 28, 1997,
December 29, 1996 and December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pollo Tropical, Inc. and
subsidiaries as of December 28, 1997 and December 29, 1996, and the results of
their operations and their cash flows for the years ended December 28, 1997,
December 29, 1996 and December 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 18, 1998 (except with respect to the matters discussed
in Note 13, as to which the date is March 16, 1998).
F-24
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 292,455 $ 94,490
Inventories....................................................................... 280,595 271,996
Prepaid expenses.................................................................. 244,753 316,559
Prepaid income taxes.............................................................. -- 354,062
Deferred income taxes............................................................. 419,743 1,583,649
Other current assets.............................................................. 279,384 554,689
----------- -----------
Total current assets............................................................ 1,516,930 3,175,445
Property and equipment, at cost, less accumulated
depreciation and amortization..................................................... 35,405,159 42,539,997
Deferred restaurant pre-opening costs, net of
accumulated amortization of $45,603 in 1997 and $702,614 in 1996.................. 24,730 99,213
Intangible assets, net of accumulated amortization.................................. 467,923 431,892
Leasehold acquisition costs, net of accumulated
amortization of $387,537 in 1997 and $310,600 in 1996............................. 1,079,925 1,423,334
Note receivable, net of current portion............................................. 840,032 --
Deposits and deferred costs on future
restaurant locations.............................................................. 250,727 93,338
Other assets........................................................................ 768,675 737,345
----------- -----------
Total assets.................................................................... $40,354,101 $48,500,564
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 1,553,056 $ 2,673,868
Accrued liabilities............................................................... 2,617,624 1,524,906
Current maturities of long-term debt.............................................. 126,559 83,773
Accrued restaurant closure expenses............................................... 2,125,525 6,273,830
----------- -----------
Total current liabilities....................................................... 6,422,764 10,556,377
Long-term debt, net of current maturities........................................... 1,087,393 11,290,952
Deferred rent....................................................................... 1,483,978 1,361,353
Deferred franchise fee income....................................................... 237,500 270,000
Deferred income taxes............................................................... 1,391,085 879,830
----------- -----------
Total liabilities............................................................... 10,622,720 24,358,512
----------- -----------
Commitments and contingencies (Notes 11 and 13)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued or
outstanding..................................................................... -- --
Common stock, $.01 par value, 15,000,000 shares authorized, 8,207,658 shares in
1997 and 8,149,799 shares in 1996 issued and outstanding........................ 82,076 81,498
Additional paid-in capital........................................................ 22,054,326 21,708,161
Retained earnings................................................................. 7,594,979 2,352,393
----------- -----------
Total shareholders' equity...................................................... 29,731,381 24,142,052
----------- -----------
Total liabilities and shareholders' equity...................................... $40,354,101 $48,500,564
----------- -----------
----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-25
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
Revenues:
Restaurant sales................................................ $ 65,118,299 $ 63,734,848 $ 55,489,397
Franchise revenues.............................................. 811,700 499,304 554,416
------------ ------------ ------------
65,929,999 64,234,152 56,043,813
------------ ------------ ------------
Operating expenses:
Cost of sales................................................... 22,532,898 24,037,263 20,064,837
Restaurant payroll.............................................. 15,177,551 15,695,011 13,660,579
Other restaurant operating expenses............................. 11,413,996 12,136,629 9,465,369
General and administrative...................................... 5,537,684 5,370,644 5,177,554
Depreciation and amortization of property and equipment......... 2,023,311 2,202,074 1,961,783
Amortization of deferred restaurant pre-opening costs........... 122,828 554,744 1,159,723
Other amortization.............................................. 209,378 204,514 274,970
Restaurant closure expenses..................................... -- 6,324,242 1,491,934
------------ ------------ ------------
57,017,646 66,525,121 53,256,749
------------ ------------ ------------
Income (loss) from operations..................................... 8,912,353 (2,290,969) 2,787,064
------------ ------------ ------------
Other income (expense):
Interest expense, net of capitalization......................... (545,104) (991,144) (785,648)
Interest income................................................. 54,955 14,599 27,861
Other, net...................................................... 32,481 73,843 (130,865)
------------ ------------ ------------
(457,668) (902,702) (888,652)
------------ ------------ ------------
Income (loss) before income taxes and extraordinary charge........ 8,454,685 (3,193,671) 1,898,412
Provision for (benefit from) income taxes......................... 3,212,099 (1,213,278) 720,836
------------ ------------ ------------
Income (loss) before extraordinary charge......................... 5,242,586 (1,980,393) 1,177,576
Extraordinary charge for early extinguishment of debt, net of
income tax benefit of $37,942................................... -- -- 62,967
------------ ------------ ------------
Net income (loss)............................................ $ 5,242,586 $ (1,980,393) $ 1,114,609
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share:
Basic........................................................... $ .64 $ (.24) $ .14
------------ ------------ ------------
------------ ------------ ------------
Diluted......................................................... $ .63 $ (.24) $ .14
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-26
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK,
$.01 PAR VALUE
-------------------- TOTAL
NUMBER OF ADDITIONAL RETAINED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS EQUITY
--------- ------- --------------- ----------- -------------
Balance, December 31, 1994.................. 7,944,990 $79,449 $21,321,047 $ 3,218,177 $24,618,673
Proceeds from exercise of stock options,
including tax benefit of $202,078...... 77,962 780 223,907 -- 224,687
Restricted stock award, net of deferred
compensation of $112,500............... 25,000 250 (250) -- --
Amortization of deferred
compensation........................... -- -- 1,286 -- 1,286
Net income for the year................... -- -- -- 1,114,609 1,114,609
--------- ------- ----------- ----------- -----------
Balance, December 31, 1995.................. 8,047,952 80,479 21,545,990 4,332,786 25,959,255
Proceeds from exercise of stock options,
including tax benefit of $123,038...... 101,847 1,019 154,455 -- 155,474
Amortization of deferred
compensation........................... -- -- 7,716 -- 7,716
Net loss for the year..................... -- -- -- (1,980,393) (1,980,393)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1996.................. 8,149,799 81,498 21,708,161 2,352,393 24,142,052
Proceeds from exercise of stock options,
including tax benefit of $53,107....... 57,859 578 275,005 -- 275,583
Amortization of deferred
compensation........................... -- -- 71,160 -- 71,160
Net income for the year................... -- -- -- 5,242,586 5,242,586
--------- ------- ----------- ----------- -----------
Balance, December 31, 1997.................. 8,207,658 $82,076 $22,054,326 $ 7,594,979 $29,731,381
--------- ------- ----------- ----------- -----------
--------- ------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-27
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)............................................... $ 5,242,586 $ (1,980,393) $ 1,114,609
------------ ------------ ------------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities--
Depreciation and amortization................................ 2,355,517 2,961,332 3,396,476
Loss on disposal of property and equipment................... 87,156 221,239 63,856
Restaurant closure expenses, net............................. -- 6,324,242 1,491,934
Deferred rent................................................ 122,625 168,444 322,682
Amortization of stock based compensation..................... 71,160 7,716 1,286
Extraordinary charge, net.................................... -- -- 62,967
Changes in operating assets and liabilities--
(Increase) decrease in assets:
Inventories............................................. (8,599) 31,915 16,116
Prepaid expenses........................................ 71,806 (29,884) 91,810
Prepaid income taxes.................................... 421,343 (78,344) (152,680)
Other current assets.................................... 291,644 (103,133) (390,165)
Deferred restaurant pre-opening costs................... (48,345) (247,516) (530,748)
Other assets............................................ (144,441) (50,365) (242,841)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities................ (42,267) (602,491) 945,894
Income taxes payable.................................... -- -- 126,000
Accrued restaurant closure expenses..................... 1,669,612 (155,198) (92,418)
Deferred franchise fee income........................... (32,500) (327,500) (91,471)
Deferred income taxes, net................................... 1,675,161 (1,508,057) 92,517
------------ ------------ ------------
Total adjustments............................................ 6,489,872 6,612,400 5,111,215
------------ ------------ ------------
Net cash provided by operating activities.................. 11,732,458 4,632,007 6,225,824
------------ ------------ ------------
Cash flows from investing activities:
Payments for property and equipment............................. (1,397,021) (4,539,108) (9,058,937)
Proceeds from disposition of property and equipment............. -- -- 2,621,470
Payments for intangible assets.................................. (53,596) (81,896) (273,890)
Payments for leasehold acquisition costs........................ -- -- (265,772)
Payments on note receivable..................................... 11,810 -- --
(Increase) decrease in deposits and deferred costs on future
restaurant locations......................................... (157,389) 34,002 84,252
------------ ------------ ------------
Net cash used in investing activities...................... (1,596,196) (4,587,002) (6,892,877)
------------ ------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-28
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt............................ $ (83,773) $ (77,276) $ (2,374,996)
Net borrowings (repayments) under revolving credit agreement.... (10,077,000) (596,999) 3,021,800
Proceeds from exercise of stock options......................... 222,476 32,436 22,609
------------ ------------ ------------
Net cash provided by (used in) financing activities........ (9,938,297) (641,839) 669,413
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents....... 197,965 (596,834) 2,360
Cash and cash equivalents,
Beginning of period............................................. 94,490 691,324 688,964
------------ ------------ ------------
Cash and cash equivalents,
End of period................................................... $ 292,455 $ 94,490 $ 691,324
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for --
Interest, net of capitalization of $4,022 in 1997, $43,894 in
1996 and $205,694 in 1995.................................. $ 483,877 $ 973,072 $ 790,260
------------ ------------ ------------
------------ ------------ ------------
Income taxes................................................. $ 963,085 $ 280,000 $ 655,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of noncash investing and financing
activities:
Tax benefit from stock options recorded to additional paid-in
capital...................................................... $ 53,107 $ 123,038 $ 202,078
------------ ------------ ------------
------------ ------------ ------------
Note received from sale of Company-owned restaurant............. $ 880,000 $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-29
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) GENERAL
Pollo Tropical, Inc. ("Pollo Tropical") and subsidiaries (collectively, the
"Company"), as of December 31, 1997, owned and operated 36 "Pollo Tropical"
restaurants located in Florida. As of December 31, 1997, there were 16
franchised restaurants open in Florida, Puerto Rico, the Dominican Republic,
Ecuador and Netherlands Antilles.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year end
The Company utilizes a 52/53 week year end and ends its year on the Sunday
closest to January 1. All references to December 31, 1997, and Fiscal 1997
herein relate to December 28, 1997, and the 52 week period then ended,
respectively. All references to December 31, 1996, and Fiscal 1996 herein relate
to December 29, 1996, and the 52 week period then ended, respectively. All
references to December 31, 1995, and Fiscal 1995 herein relate to December 31,
1995, and the 52 week period then ended, respectively.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Pollo Tropical and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered to be cash and cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, note receivable, accounts
payable, accrued liabilities and long-term debt approximates fair value as of
December 31, 1997 and 1996.
Inventories
Inventories, which consist of restaurant food items, related paper supplies
and crew uniforms, are stated at the lower of cost (computed on the first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the terms of the leases which are less
than the estimated lives of the related improvements. Maintenance and repairs
which do not improve or extend the life of the asset are expensed as incurred.
The Company capitalizes interest cost as part of the historical cost of
acquiring and constructing restaurant property. Interest capitalization ceases
when the property is placed in service.
F-30
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Deferred Restaurant Pre-Opening Costs
Direct costs incurred prior to a restaurant opening to the public are
capitalized and amortized over a period of one year beginning on the date the
restaurant commences operations.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
following periods:
LIFE IN YEARS
------------------
Covenant not to compete............................ Term of agreement
Organization costs................................. 5
Loan costs......................................... Term of loan
Trademark costs.................................... 40
Leasehold Acquisition Costs
Costs incurred to obtain leaseholds are capitalized and amortized over the
initial terms of the related leases.
Deferred Franchise Costs
Deferred franchise costs, which are included in Other assets in the
accompanying Consolidated Balance Sheets, are amortized and included in Other
amortization in the accompanying Consolidated Statements of Operations, as
franchised restaurants are opened.
Long-Lived Assets
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful lives of its
intangible and other long-lived assets or whether the remaining balance of its
intangible and other long-lived assets should be evaluated for possible
impairment. The Company uses an estimate of the related undiscounted cash flows
over the remaining lives of the intangible and other long-lived assets in
determining whether an impairment has occurred.
Consolidated Balance Sheet Data
Other current assets consist of the following:
1997 1996
-------- --------
Insurance dividend receivable......................................... $ 63,000 $215,000
Rebates............................................................... 97,676 129,664
Other................................................................. 118,708 210,025
-------- --------
$279,384 $554,689
-------- --------
-------- --------
Accrued liabilities consist of the following:
1997 1996
---------- ----------
Sales tax......................................................... $ 198,394 $ 293,084
Payroll related................................................... 1,100,214 585,436
Workers compensation.............................................. 449,014 --
Other............................................................. 870,002 646,386
---------- ----------
$2,617,624 $1,524,906
---------- ----------
---------- ----------
F-31
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Franchise Revenues
Franchise revenues consist of franchise fees, which are typically collected
upon execution of an area development and/or franchise agreement, and continuing
royalties, based upon gross sales. Franchise fees are initially recorded as
deferred franchise fee income and are recognized in earnings either when
franchised restaurants are opened, or upon forfeiture of such fees by the
franchisees pursuant to the terms of the franchise development agreements, as
applicable.
Franchise revenues consist of the following:
1997 1996 1995
-------- -------- --------
Franchise fees..................................................... $220,000 $227,500 $376,471
Continuing royalties............................................... 591,700 271,804 177,945
-------- -------- --------
$811,700 $499,304 $554,416
-------- -------- --------
-------- -------- --------
Advertising Costs
Advertising costs not directly related to the opening of a new restaurant
are expensed during the period in which the cost is incurred. Advertising
expense was $2,987,688, $2,978,255 and $2,103,155 for Fiscal 1997, Fiscal 1996
and Fiscal 1995, respectively, and is included in other restaurant operating
expenses in the accompanying Consolidated Statements of Operations.
Income Taxes
The Company accounts for its income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rate applicable when the related asset or
liability is expected to be realized or settled. Deferred income tax expenses or
benefits are based on the changes in the asset or liability from period to
period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such a valuation
allowance would be included in the provision for deferred income taxes in the
period of change.
Net Income (Loss) Per Share
In Fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). As a result, the Company's
earnings per share have been restated for Fiscal 1995 and Fiscal 1996 to show
basic and diluted earnings per share in accordance with SFAS 128. Prior to the
adoption of SFAS 128, the Company reported primary earnings per share, which
equaled diluted earnings per share pursuant to SFAS 128. Following is the
reconciliation of the shares used in the computations for the periods presented.
1997 1996 1995
---------- ---------- ----------
Weighted average shares used in basic computation............. 8,179,131 8,099,650 7,991,570
Stock options and warrants.................................... 108,148 -- 97,594
---------- ---------- ----------
Weighted average shares used in diluted computation........... 8,287,279 8,099,650 8,089,164
---------- ---------- ----------
---------- ---------- ----------
F-32
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The effect of the extraordinary charge on basic and diluted earnings per
share for Fiscal 1995 is as follows:
Basic:
Income before extraordinary charge.............................. $ .15
Extraordinary charge............................................ (.01)
-----
Net income...................................................... $ .14
-----
-----
Diluted:
Income before extraordinary charge.............................. $ .15
Extraordinary charge............................................ (.01)
-----
Net income...................................................... $ .14
-----
-----
The net income (loss) amount used as the numerator in calculating basic and
diluted earnings per share equals net income (loss) in the accompanying
Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates with regard to the accompanying consolidated financial
statements relate to accrued restaurant closure expenses and workers
compensation expense, as discussed in Note 11. Although the Company believes its
estimates are appropriate, changes in assumptions utilized in preparing such
estimates could cause these estimates to change in the near term.
(3) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
1997 1996
-------- --------
Cash on hand.......................................................... $ 52,450 $ 49,900
Cash management fund.................................................. 240,005 44,590
-------- --------
$292,455 $ 94,490
-------- --------
-------- --------
F-33
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
LIFE IN
YEARS 1997 1996
------- ----------- -----------
Land............................................................. -- $ 9,257,525 $11,657,999
Buildings and leasehold improvements............................. 7-31 23,130,989 25,927,959
Furniture, fixtures and equipment................................ 5-15 9,435,115 9,513,141
Signs............................................................ 7 1,036,597 1,103,039
Software......................................................... 5 95,022 92,500
----------- -----------
42,955,248 48,294,638
Less: Accumulated depreciation and amortization.................. (7,550,089) (5,754,641)
----------- -----------
$35,405,159 $42,539,997
----------- -----------
----------- -----------
At December 31, 1997, property and equipment includes $2,164,448 of
property and equipment, less accumulated depreciation and amortization of
$136,923, related to closed restaurants (See Note 11).
The Company's office space and the land underlying some of its existing
restaurant locations are leased under operating leases (See Note 11).
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
1997 1996
-------- --------
Covenant not to compete............................................... $ 50,000 $ 50,000
Organization costs.................................................... -- 51,497
Loan costs............................................................ 154,632 154,632
Trademark costs....................................................... 335,100 260,281
-------- --------
539,732 516,410
Less: Accumulated amortization........................................ (71,809) (84,518)
-------- --------
$467,923 $431,892
-------- --------
-------- --------
(6) NOTE RECEIVABLE
In conjunction with the Fiscal 1997 sale of a restaurant site (See
Note 11) the Company recorded a note receivable in the amount of $880,000. The
note bears interest at a rate of 10% per annum based on a 15 year amortization
period. The note is secured by a mortgage on the restaurant site. Subsequent to
December 31, 1997, the mortgagee defaulted on the note. During Fiscal 1998, the
Company intends to foreclose on the note and proceed with the sale of the
restaurant site in order to satisfy the mortgage. The foreclosure is not
expected to have a material effect on the Company's Fiscal 1998 results of
operations.
(7) DEPOSITS AND DEFERRED COSTS ON FUTURE RESTAURANT LOCATIONS
Deposits and deferred costs on future restaurant locations consist of
amounts deposited with lessors and/or paid to others to secure real property and
develop future restaurant locations. Upon opening of the restaurant, all such
deposits and deferred costs are charged to the appropriate depreciable and
amortizable asset categories.
F-34
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(8) INDEBTEDNESS
Long-term debt consists of the following:
1997 1996
---------- -----------
Advances under a $25,000,000 revolving credit and term loan
agreement with interest payable monthly, at the Company's
option, at prime (8.50% at December 31, 1997) plus .375% or
libor rate (5.969% at December 31, 1997) plus 2.65%. Loan
converts to a term loan on August 31, 1998, at which time
principal payments equal to the loan balance divided by 120
commence, with a balloon payment due June 30, 2003............. $1,075,000 $11,152,000
Mortgage note payable with interest at 8%, payable monthly in
equal principal and interest installments from January 1996
through maturity in June 1999, collateralized by a restaurant
location....................................................... 138,952 222,725
---------- -----------
1,213,952 11,374,725
Less: Current maturities of long-term debt....................... (126,559) (83,773)
---------- -----------
$1,087,393 $11,290,952
---------- -----------
---------- -----------
The $25,000,000 revolving credit and term loan (the "Loan") is unsecured;
however, the Company has agreed not to further encumber any of its presently
owned real estate while the Loan is outstanding. The lender has no obligation to
make further advances after July 13, 1998. At December 31, 1997, the available
portion of the Loan was $23,775,000.
The terms of the Loan require that the Company remain in compliance with
certain financial and non-financial covenants, including the maintenance of
certain financial ratios. The Company was in compliance with the debt covenants
at December 31, 1997.
In connection with obtaining the Loan, the proceeds from which were used to
repay substantially all the outstanding indebtedness, the Company incurred costs
in the aggregate of $154,632, which are capitalized as intangible assets in the
accompanying Consolidated Balance Sheets, and are being amortized over the term
of the Loan. The unamortized balance of capitalized costs associated with
obtaining indebtedness retired with the proceeds from the Loan was charged to
expense during the quarter ended October 1, 1995, and is included, net of income
tax benefit, in the accompanying Consolidated Statements of Operations as an
extraordinary charge.
Repayment of future maturities of long-term debt at December 31, 1997 is as
follows:
FISCAL YEAR
- -----------
1998...................................................... $ 126,559
1999...................................................... 155,726
2000...................................................... 107,500
2001...................................................... 107,500
2002...................................................... 107,500
Thereafter................................................ 609,167
----------
$1,213,952
----------
----------
F-35
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(9) INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
1997 1996 1995
---------- ----------- --------
Federal........................................................ $3,035,434 $(1,225,018) $618,257
State.......................................................... 176,665 11,740 102,579
---------- ----------- --------
Total........................................................ $3,212,099 $(1,213,278) $720,836
---------- ----------- --------
---------- ----------- --------
Current........................................................ $1,536,938 $ 294,779 $628,319
Deferred....................................................... 1,675,161 (1,508,057) 92,517
---------- ----------- --------
Total........................................................ $3,212,099 $(1,213,278) $720,836
---------- ----------- --------
---------- ----------- --------
Deferred income taxes arise primarily due to temporary differences in
recognizing certain revenues and expenses for tax purposes, the use of
accelerated depreciation for tax purposes, and the expected use of alternative
minimum tax carry-forwards in future periods. The components of the current
deferred income tax asset and the net non-current deferred income tax liability
are as follows:
1997 1996
---------- -----------
Current deferred tax asset:
Accrued restaurant closure expenses............................ $ (248,846) $(1,583,649)
Accrued liabilities............................................ (170,897) --
---------- -----------
Current deferred income tax asset........................... $ (419,743) $(1,583,649)
---------- -----------
---------- -----------
Non-current deferred tax liability:
Depreciation and amortization of property and equipment........ $2,184,573 $ 2,024,154
Deferred franchise fee income, net............................. 102,099 54,947
Deferred rent.................................................. (527,085) (341,705)
Alternative minimum tax carry-forwards......................... (162,590) (736,747)
Foreign tax credit carry-forwards.............................. (197,569) (74,577)
Other, net..................................................... (8,343) (46,242)
---------- -----------
Non-current deferred income tax liability, net.............. $1,391,085 $ 879,830
---------- -----------
---------- -----------
At December 31, 1997, the Company had available foreign tax credit
carry-forwards in the amount of $45,545 which expires in 2001, and $152,024,
which expires in 2002.
The following table reconciles the Federal statutory income tax rate and
the Company's effective income tax rate as follows:
1997 1996 1995
---- ---- ----
Provision for income taxes at Federal statutory rate.............................. 34.0% 34.0% 34.0%
State taxes, net of Federal income tax benefit.................................... 3.6 3.6 3.6
Nondeductible expenses............................................................ 1.0 0.9 0.8
Jobs tax credits.................................................................. (.5) -- --
Other, net........................................................................ (.1) (.5) (.4)
---- ---- ----
Effective income tax rate......................................................... 38.0% 38.0% 38.0%
---- ---- ----
---- ---- ----
The Company's December 31, 1993 Federal income tax return is currently
being audited by the Internal Revenue Service. It is not possible to predict the
ultimate outcome of this audit; however, the Company does not believe that the
ultimate resolution of any of these matters will have a material adverse effect
on the accompanying consolidated financial statements.
F-36
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) SHAREHOLDERS' EQUITY
Stock Based Compensation Plans
In September 1993, the Company adopted the 1993 Option Plan (as amended to
date, the "1993 Plan"). Under the 1993 Plan, 800,000 shares of common stock are
reserved for issuance upon exercise of options. All regular employees of the
Company or any of its subsidiaries, including officers and directors, are
eligible to receive grants of options under the 1993 Plan. The 1993 Plan is
designed to serve as an incentive for retaining qualified and competent
employees.
In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). Under the 1995 Plan, 500,000 shares of common stock are reserved for
issuance upon exercise of options. All regular and former regular employees and
consultants of the Company or any of its subsidiaries, including officers and
directors, are eligible to receive grants of options under the 1995 Plan. The
1995 Plan is designed to serve as an incentive for retaining qualified and
competent employees.
In June 1995, the Company adopted the 1995 Bonus/Fee Stock Option Plan (the
"1995 Bonus Plan"). Under the 1995 Bonus Plan, 500,000 shares of common stock
are reserved for issuance upon exercise of options. The 1995 Bonus Plan allows
certain eligible employees and directors who receive either a cash bonus or a
director's fee of $2,500 or more to elect to receive stock options instead of
receiving cash to which they are entitled (the "Deferred Cash"). The per share
exercise price of the options granted pursuant to the 1995 Bonus Plan would be
equal to 50% of the fair market value of the common stock on the day the option
is granted. The number of shares of common stock covered by the option would be
calculated by doubling the number of shares that could be purchased at fair
market value with the Deferred Cash so that the "in-the-money" value of the
option equals the Deferred Cash.
In November 1995, the Company adopted the 1995 Directors' Stock Option Plan
(the "1995 Directors' Plan"). Under the 1995 Directors' Plan, 200,000 shares of
common stock are reserved for issuance upon exercise of options. Each existing
Director received a grant of an option to purchase 18,000 shares on the
effective date of the plan. Upon election as a member of the Board, each
Director receives an option to purchase 15,000 shares of common stock, and an
additional option to purchase 3,000 shares of common stock is granted to each
eligible Director on each annual meeting date under certain conditions. All
stock options granted to existing Directors pursuant to the 1995 Directors' Plan
become exercisable as follows: 11,000 shares six months from the date of grant,
the next 6,000 shares twelve months from the date of grant and the remaining
1,000 shares two years after the date of grant, so long as the optionee is a
Director on the relevant exercise date. The remaining stock options granted
pursuant to the 1995 Directors' Plan become exercisable equally over a three
year period on each of the three one-year anniversaries of the date of grant, so
long as the optionee is a Director on the relevant exercise date.
In November 1995, the Company adopted the 1995 Restricted Stock Award Plan
(the "1995 Restricted Plan"). Under the 1995 Restricted Plan, not less than
100,000 shares of common stock are reserved for award and issuance, generally at
no cost to the employee. In November 1995, the Company awarded 25,000 shares of
common stock to its President pursuant to the 1995 Restricted Plan. These shares
vest as to 20% in September 1998, 30% in September 1999 and 50% in September
2000. The Company recorded deferred compensation of $112,500 on the date of
grant based on the quoted market value of the common stock. Deferred
compensation is being amortized to expense ratably over the restricted period,
and is included in the accompanying consolidated financial statements.
The Company's Board of Directors, or a committee thereof (the "Committee"),
administers and interprets each of the above described plans (collectively, the
"Plans"). The Plans provide for the granting of both "incentive stock options"
(as defined in Section 422 of the Internal Revenue Code) and nonstatutory stock
options or awards. Options are granted under the Plans on such terms and at such
prices as determined by the
F-37
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) SHAREHOLDERS' EQUITY--(CONTINUED)
Committee, except that the per share exercise price of incentive stock options
cannot be less than the fair market value of the common stock on the date of
grant. Generally, the stock options granted pursuant to the 1993 Plan, the 1995
Plan and the 1995 Bonus Plan vest in increments of 33% per year over a three
year period on the yearly anniversary of the grant and have a term of ten years
from the date of grant.
The following table summarizes stock option activity:
WEIGHTED-AVERAGE
EXERCISE AVAILABLE FOR
PRICE PER SHARE OUTSTANDING FUTURE GRANTS
---------------- ----------- -------------
Balance, December 31, 1994.............................. $ 8.23 788,066 131,235
Authorized, net....................................... -- -- 1,065,000
Granted/converted..................................... $ 4.66 478,800 (478,800)
Exercised............................................. $ 0.29 (77,962) --
Canceled.............................................. $12.84 (213,400) 213,400
--------- ---------
Balance, December 31, 1995.............................. $ 6.10 975,504 930,835
Granted............................................... $ 4.50 136,900 (136,900)
Exercised............................................. $ 0.32 (101,847) --
Canceled.............................................. $ 6.09 (98,790) 98,790
--------- ---------
Balance, December 31, 1996.............................. $ 6.51 911,767 892,725
Granted............................................... $ 5.68 49,454 (49,454)
Exercised............................................. $ 3.86 (59,192) --
Canceled.............................................. $ 7.19 (118,135) 118,135
--------- ---------
Balance, December 31, 1997.............................. $ 6.36 783,894 961,406
--------- ---------
--------- ---------
The following table summarizes information about the stock options
outstanding at December 31, 1997:
OUTSTANDING
- ---------------------------------------------------------- EXERCISABLE
WEIGHTED-AVERAGE -----------------------------------------------
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------------- ------- ---------------- ---------------- ------- ----------------
$0.29 - $0.58 27,034 3.98 $ 0.30 27,034 $ 0.30
$2.71 - $6.94 529,690 6.44 $ 4.42 214,987 $ 4.02
$8.00 - $13.50 227,170 5.62 $11.62 227,170 $11.62
------- -------
783,894 469,191
------- -------
------- -------
The weighted-average exercise price and weighted-average market price of
13,100 options granted during 1997 for which the exercise price exceeds the
market price of the stock on the grant date is $4.50 and $3.02, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for stock-based employee
compensation arrangements whereby no compensation cost related to stock options
is deducted in determining net income (loss) if the exercise price of a stock
option is equal to quoted market value on the measurement date. Had compensation
cost for the Company's stock option plans been determined pursuant to SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net
income (loss) and diluted net income (loss) per share would have been different
than the amounts recorded in the accompanying Consolidated Statements of
Operations. Using the Black-Scholes option pricing model for all options granted
after December 31, 1994, the Company's pro forma net income
F-38
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) SHAREHOLDERS' EQUITY--(CONTINUED)
(loss), pro forma diluted net income (loss) per share and pro forma weighted
average fair value of options granted, with related assumptions, are as follows:
1997 1996 1995
----------- ----------- -----------
Pro forma net income (loss)........................... $5,077,850 $(2,127,024) $1,064,705
Pro forma diluted net income (loss) per share......... $ 0.62 $ (0.26) $ 0.13
Pro forma weighted average fair value of options
granted............................................. $ 2.57 $ 1.54 $ 2.12
Risk free interest rates.............................. 5.31%-6.46% 5.31%-6.46% 5.37%-7.11%
Expected lives........................................ 3-5 Years 3-5 Years 3-5 Years
Expected volatility................................... 59% 59% 59%
Pro forma net income (loss) reflects only options granted in Fiscal 1997,
1996 and 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected over the
options' vesting period ranging from one to three years and compensation cost
for options granted prior to January 1, 1995 is not considered.
(11) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases land and facilities for office and restaurant locations
under various noncancelable operating lease agreements, one of which is with a
related party. Certain of these lease agreements contain provisions for rent
overrides based on a percentage of gross sales. Additionally, the Company, in
certain instances, is responsible for real estate taxes and common area
maintenance costs. The leases also provide for renewal options. Future minimum
rental commitments, excluding renewal option periods, under these operating
lease agreements at December 31, 1997 are as follows:
RELATED UNRELATED
FISCAL YEAR PARTIES PARTIES TOTAL
- ---------- ----------- -----------
1998..................................................... $ 102,879 $ 2,013,167 $ 2,116,046
1999..................................................... 102,879 1,986,226 2,089,105
2000..................................................... 111,881 1,908,793 2,020,674
2001..................................................... 118,311 1,871,445 1,989,756
2002..................................................... 118,311 1,725,974 1,844,285
Thereafter............................................... 830,150 13,585,382 14,415,532
---------- ----------- -----------
$1,384,411 $23,090,987 $24,475,398
---------- ----------- -----------
---------- ----------- -----------
Future minimum rental commitments have been reduced by future minimum
sublease rentals of $2,605,841 due under non-cancelable subleases.
Rent expense was $2,201,655 (net of $159,010 in sublease rentals),
$2,292,827 (net of $94,850 in sublease rentals) and $1,918,955 in Fiscal 1997,
Fiscal 1996 and Fiscal 1995, respectively, which included $102,879, $102,879 and
$97,288, respectively, paid to related parties.
Rent expense is recorded in the accompanying consolidated financial
statements on the straight-line basis in accordance with generally accepted
accounting principles. Actual rent is paid in accordance with the lease terms.
The excess of rent expense over actual rent paid in Fiscal 1997, Fiscal 1996 and
Fiscal 1995 was $88,047, $76,655 and $332,950, respectively.
F-39
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(11) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
In July 1995, the Company entered into sale/leaseback transactions with an
unrelated party for two of its owned restaurant sites, which resulted in net
proceeds that approximated the carrying value of the land, buildings and
fixtures sold. The resulting leases are accounted for as operating leases.
Employment Agreements
In September 1995, the Company entered into an employment agreement with
its President which calls for minimum annual compensation of $250,000 through
September 1998 and which may be extended at the Company's discretion, through
September 2000.
Franchise Development Agreements
The Company has entered into international area development and franchise
agreements, granting the right to develop Pollo Tropical restaurants in the
Caribbean and Latin America. The Company's standard franchise agreement has a
15-year term and provides for an initial franchise fee and a continuing royalty,
based upon gross sales. The agreements grant the franchisee the rights to
operate restaurants and use the associated trade name and trademark within the
standards and guidelines established by the Company.
Guarantee
A loan (with a principal balance of approximately $485,000 at December 31,
1997) made by a bank to a related party is collateralized by all the assets of
one of the Company's operating restaurants.
Self-Insured Workers Compensation
The Company is self-insured for workers compensation. The Company maintains
stop loss coverage for individual claims in excess of $250,000 and for claims
which exceed $700,000 in the aggregate in any one year. While the ultimate
amount of claims incurred are dependent on future developments, in management's
opinion, recorded reserves are adequate to cover the future payment of claims.
Accrued Restaurant Closure Expenses
During Fiscal 1995, the Company accrued estimated expenses in the amount of
$1,565,108 for two restaurants closed in October 1995. The estimated expenses
consisted of $1,243,626 in net losses on disposal of fixed assets and $321,482
in estimated liabilities associated with termination of leases. The assets
related to the Fiscal 1995 closed restaurants were disposed of during Fiscal
1996 resulting in a gain in the amount of $174,047. This gain is primarily
attributable to the sale of the one restaurant site and the reversal of an
accrual due to a more favorable economic transaction than originally estimated
associated with the subleasing of the other restaurant site.
In the fourth quarter of Fiscal 1996, the Company accrued estimated
expenses in the amount of $6,498,289 associated with the closing of six
restaurants. The estimated expenses consist of $5,713,142 in net losses on
disposal of fixed assets, $670,237 in estimated liabilities associated with
termination of leases and $114,910 associated with employee termination
benefits.
During Fiscal 1997, the Company disposed of four of the six restaurants for
which it had established a reserve in Fiscal 1996. Three of the restaurants were
sold and one was subleased. As part of the sale of one of the restaurants, the
Company received a note receivable in the amount of $880,000. Subsequent to
December 31, 1997, the mortgagee defaulted on the note. During Fiscal 1998, the
Company intends to foreclose on the property, which was held as collateral under
the mortgage and proceed with its sale in order to satisfy the mortgage. During
Fiscal 1997, the Company incurred $3,456,570 in net losses on disposal of fixed
assets, $583,436 in expenses associated with termination of leases and $108,299
associated with employee termination
F-40
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(11) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
benefits which were applied to the closure reserve established in Fiscal 1996.
The remaining closure reserve in management's estimate represents amounts
expected to be incurred, net of amounts realized upon the disposition of the
remaining two restaurants. Any difference between these estimated expenses and
the actual amounts of such expenses will be recorded during the period in which
such differences become known. Actual results that substantially differ from
management's estimate could be material to the Company's financial statements.
Purchase Agreements
During Fiscal 1997, the Company entered into three purchase agreements for
future restaurant sites for an aggregate purchase price in the amount of
$1,740,000. The anticipated closing dates for the purchase agreements will be
during Fiscal 1998.
Litigation, Claims and Assessments
From time to time, the Company may be engaged in routine litigation and
disputes incidental to its business. The Company does not believe that the
ultimate resolution of any of these matters will have a material adverse effect
on the accompanying consolidated financial statements.
(12) RELATED-PARTY TRANSACTIONS
Included in Payments for property and equipment for the years ended
December 31, 1997, 1996 and 1995 are $13,245, $32,920 and $26,758, respectively,
paid to a related party for architectural services.
Included in Deferred franchise fee income at December 31, 1996 is $120,000
received from a related party for initial franchise fees. During Fiscal 1997,
forfeitures of exclusivity fees of $25,000 were recognized due to the
termination of the area development agreement.
Included in restaurant sales for the years ended December 31, 1997 and 1996
are $27,849 and $7,593, respectively, of sales to a related party.
During Fiscal 1997, the Company entered into an agreement to purchase
certain rights relating to parking, exclusivity and option terms from a related
party in the amount of $150,000. The Company anticipates closing on the purchase
during Fiscal 1998.
(13) SUBSEQUENT EVENTS
On March 16, 1998, purported shareholders of the Company instituted suit
against the Company, its principal officers and all of its directors, alleging a
breach of fiduciary duties and seeking damages as well as injunctive and other
relief in response to the Company's announcement that it had received a proposal
from Larry J. Harris, the co-founder and Chief Executive Officer of the Company,
for the merger of the Company, pursuant to which the public shareholders of the
Company would receive $10.00 per share in cash. The plaintiff is seeking
certification as the representative of a class of all of the Company's
shareholders other than the defendants, the Company's principal shareholders,
and all persons related thereto. The Company believes that the lawsuit has no
basis, and intends to vigorously defend the action. Although the ultimate
outcome of the lawsuit cannot be predicted, the Company does not believe the
outcome of the lawsuit will have a material adverse effect on the financial
position, results of operation or cash flows of the Company.
F-41
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 2,520,531 $ 292,455
Inventories...................................................................... 284,602 280,595
Prepaid expenses................................................................. 549,225 244,753
Deferred income taxes............................................................ 336,929 419,743
Other current assets............................................................. 350,388 279,384
----------- ------------
Total current assets............................................................... 4,041,675 1,516,930
Property and equipment, at cost, less accumulated depreciation and amortization.... 35,753,202 35,405,159
Intangible assets, net............................................................. 636,112 467,923
Leasehold acquisition costs, net................................................... 1,037,854 1,079,925
Deposits and deferred costs on future restaurant locations......................... 237,911 250,727
Note receivable, net of current portion............................................ 824,870 840,032
Other assets....................................................................... 801,582 793,405
----------- ------------
Total assets....................................................................... $43,333,206 $ 40,354,101
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 1,529,751 $ 1,553,056
Accrued liabilities.............................................................. 3,465,113 2,603,450
Current maturities of long-term debt............................................. 94,543 126,559
Income tax payable............................................................... 277,117 14,174
Accrued restaurant closure expenses.............................................. 2,042,945 2,125,525
----------- ------------
Total current liabilities.......................................................... 7,409,469 6,422,764
Long-term debt, net of current maturities.......................................... -- 1,087,393
Deferred rent...................................................................... 1,574,891 1,483,978
Deferred franchise fee income...................................................... 187,500 237,500
Deferred income taxes.............................................................. 1,284,353 1,391,085
----------- ------------
Total liabilities.................................................................. 10,456,213 10,622,720
----------- ------------
Shareholders' equity:
Common stock..................................................................... 82,810 82,076
Additional paid-in capital....................................................... 22,322,765 22,054,326
Retained earnings................................................................ 10,471,418 7,594,979
----------- ------------
Total shareholders' equity......................................................... 32,876,993 29,731,381
----------- ------------
Total liabilities and shareholders' equity......................................... $43,333,206 $ 40,354,101
----------- ------------
----------- ------------
See accompanying notes to condensed consolidated financial statements.
F-42
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Revenues:
Restaurant sales................................................................. $35,448,257 $31,816,551
Franchise revenues............................................................... 454,016 420,045
----------- -----------
35,902,273 32,236,596
----------- -----------
Operating expenses:
Cost of sales.................................................................... 11,999,029 11,164,343
Restaurant payroll............................................................... 7,994,411 7,471,827
Other restaurant operating expenses.............................................. 6,396,129 5,668,812
General and administrative....................................................... 2,805,088 2,902,578
Depreciation and amortization of property
and equipment................................................................. 1,036,607 999,145
Other amortization............................................................... 96,398 208,900
Other income, net................................................................ (15,860) (8,410)
Acquisition expenses............................................................. 503,457 --
----------- -----------
30,815,259 28,407,195
----------- -----------
Income from operations............................................................. 5,087,014 3,829,401
Interest (income) expense, net..................................................... (31,204) 362,859
----------- -----------
Income before income taxes......................................................... 5,118,218 3,466,542
Provision for income taxes......................................................... 2,241,779 1,316,939
----------- -----------
Net income......................................................................... $ 2,876,439 $ 2,149,603
----------- -----------
----------- -----------
See accompanying notes to condensed consolidated financial statements.
F-43
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
COMMON STOCK,
$.01 PAR VALUE
-------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ----------- ----------- -------------
Balance, December 31, 1997.................. 8,207,658 $82,076 $22,054,326 $ 7,594,979 $29,731,381
Proceeds from exercise of stock options,
including tax benefit of $13,131....... 73,338 734 243,497 -- 244,231
Amortization of deferred
compensation........................... -- -- 24,942 -- 24,942
Net income for the period................. -- -- -- 2,876,439 2,876,439
--------- ------- ----------- ----------- -----------
Balance, June 30, 1998...................... 8,280,996 $82,810 $22,322,765 $10,471,418 $32,876,993
--------- ------- ----------- ----------- -----------
--------- ------- ----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements.
F-44
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Cash flows from operating activities:
Net income.......................................................................... $ 2,876,439 $ 2,149,603
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................................ 1,133,005 1,208,045
Loss on disposal of property and equipment................................... 93,354 6,481
Deferred rent................................................................ 90,913 81,110
Amortization of stock based compensation..................................... 24,942 33,788
Deferred income taxes........................................................ (23,918) 667,186
Amortization of deferred loan costs.......................................... 10,144 10,144
Changes in operating assets and liabilities:
(Increase) decrease in--
Inventories.................................................................. (4,007) (9,530)
Prepaid expenses............................................................. (304,472) (206,660)
Other current assets......................................................... (55,842) 39,251
Other assets............................................................... (58,228) 20,453
Increase (decrease) in--
Accounts payable and accrued liabilities..................................... 838,358 1,029,503
Income tax payable........................................................... 276,076 337,116
Deferred franchise fee income................................................ (50,000) (66,892)
Accrued restaurant closure expenses.......................................... 5,665 982,405
----------- -----------
Total adjustments................................................................. 1,975,990 4,132,400
----------- -----------
Net cash provided by operating activities......................................... 4,852,429 6,282,003
----------- -----------
Cash flows from investing activities:
Payments for property and equipment................................................. (1,558,950) (616,098)
Payment for intangible assets....................................................... (189,910) (43,108)
Decrease in deposits and deferred costs on future
restaurant locations........................................................... 12,816 75,436
----------- -----------
Net cash used in investing activities........................................ (1,736,044) (583,770)
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreement........................ (1,074,950) (4,701,794)
Principal payments on long-term debt................................................ (44,459) (41,051)
Proceeds from issuance of common stock.............................................. 231,100 89,303
----------- -----------
Net cash used in financing activities........................................ (888,309) (4,653,542)
----------- -----------
Net increase in cash and cash equivalents.................................... 2,228,076 1,044,691
Cash and cash equivalents, beginning of period...................................... 292,455 94,490
----------- -----------
Cash and cash equivalents, end of period............................................ $ 2,520,531 $ 1,139,181
----------- -----------
----------- -----------
See accompanying notes to condensed consolidated financial statements.
F-45
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 1997, which has
been derived from audited financial statements, and the unaudited interim
condensed financial statements included herein, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission, except that
earnings per share data has been omitted. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made herein are adequate to make the information presented
not misleading. These financial statements must be read in conjunction with the
financial statements and the notes thereto included elsewhere in this Offering
Memorandum.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
Pollo Tropical and the results of operations and cash flows for the periods
indicated. Results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
(2) ACCOUNTING POLICIES
During interim periods Pollo Tropical follows the accounting policies set
forth in its consolidated financial statements included elsewhere in this
Offering Memorandum. Reference should be made to such financial statements for
information on such accounting policies and further financial details. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
(3) NEWLY ISSUED ACCOUNTING STANDARD
In April 1998, the Financial Accounting Standards Board issued Statement of
Position ("SOP") No. 98-5, "Reporting on the Cost of Start-Up Activities". SOP
98-5 requires that the costs of start-up activities, including organization
costs, be expensed as incurred. Pollo Tropical plans to adopt SOP 98-5 when
required in the first quarter of Fiscal 1999, although early adoption is
permitted. Initial adoption of SOP 98-5 should be as of the beginning of the
Fiscal year in which first adopted, and will be reported as the cumulative
effect of a change in accounting principle in the first quarter of Fiscal 1999.
At the present time, Pollo Tropical cannot predict the amount of the cumulative
effect of the change in accounting principle that will be recorded in the first
quarter of Fiscal year 1999, however, had the Company adopted the new standard
at the beginning of Fiscal year 1998, the cumulative effect of the change in
accounting principle that would have been recorded in the accompanying Condensed
Consolidated Statements of Operations for the six months ended June 30, 1998,
would not have been material to income before cumulative effect of a change in
accounting principle. Had the provisions of SOP 98-5 been applicable to the
accompanying condensed consolidated financial statements, income before
cumulative effect of a change in accounting principle as calculated in
accordance with the provisions of SOP 98-5 would not have been materially
different than the historical amount reported herein.
(4) ACQUISITION EXPENSES
As of July 20, 1998, Pollo Tropical consummated an Agreement and Plan of
Merger, ("Merger Agreement"), with Carrols Corporation ("Carrols"). Pursuant to
the Merger Agreement, Pollo Tropical shareholders tendering their shares to
Carrols will receive $11.00 per share and Pollo Tropical will be merged with and
into Carrols (the "Merger") and upon the Merger, the remaining shares
outstanding, if any, will be converted into the right to receive $11.00 per
share. Carrols will be the surviving corporation of the Merger.
Simultaneously with the execution of the Merger Agreement, Pollo Tropical,
Carrols and Larry Harris, Pollo Tropical's Chairman and Chief Executive Officer
entered into a Non-Competition and Confidentiality Agreement
F-46
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(4) ACQUISITION EXPENSES--(CONTINUED)
(the "Confidentiality Agreement"). Under the Confidentiality Agreement, Carrols
will pay $350,000 to Mr. Harris within five days after the consummation of the
Merger and an additional $90,000 in connection with Mr. Harris' accrued bonus
for the six months ended June 30, 1998. Additionally, Carrols will pay William
Carl Drew, Pollo Tropical's Chief Financial Officer, half his full maximum
annual bonus due plus a lump sum severance payment upon his departure equal to
Mr. Drew's one year annual base salary. The total amount of these payments to
Mr. Drew approximates $168,000. During the six months ended June 30, 1998, Pollo
Tropical has incurred approximately $300,000 in financial services advisory
fees, $97,000 in legal fees, $93,000 in director fees for special committee
meetings and $14,000 in outside professional and office expenses associated with
the merger, which are included in Acquisition expenses in the accompanying
Condensed Consolidated Statements of Operations. In addition, Pollo Tropical
will also incur approximately $1.1 million in financial services advisory fees
upon the consummation of the Merger Agreement, write off approximately $101,000
in capitalized loan costs approximately $51,000 in unamortized deferred
compensation, and will record approximately $18,000 due to the accelerated
vesting of stock options.
The accompanying Condensed Consolidated Financial Statements do not include
any adjustments to reflect the amount of Carrols' investment in the Company.
(5) COMMITMENTS AND CONTINGENCIES
Accrued Restaurant Closure Expenses
During the six months ended June 30, 1998, Pollo Tropical incurred $88,597
in net losses on disposal of fixed assets and $141,118 in expenses associated
with termination of leases which were applied to the closure reserve established
in Fiscal 1996. In the second quarter of Fiscal 1998 Pollo Tropical increased
the accrued restaurant closure expenses $150,000, consisting of $50,000 in net
losses on disposal of fixed assets and $100,000 in estimated liabilities
associated with the termination of leases. Any difference between these
estimated expenses and the actual amounts of such expenses will be recorded
during the period in which such differences become known.
Purchase and Construction Agreements
During Fiscal 1997, Pollo Tropical entered into a purchase agreement for a
future restaurant site with a purchase price of approximately $640,000. Pollo
Tropical expects to close the agreement during Fiscal 1998. Pollo Tropical has
also entered into a construction contract for a new restaurant in the amount of
approximately $492,000 and estimates incurring an additional $3.3 million in
capital expenditures to develop five restaurants in 1998.
F-47
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]
$170,000,000
CARROLS CORPORATION
----------------
PROSPECTUS
----------------
OFFER TO EXCHANGE UP TO $170,000,000 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING $170,000,000 9 1/2% SENIOR SUBORDINATED NOTES DUE
2008
, 1999
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this Prospectus. You must not
rely on any unauthorized information. This Prospectus does not offer to sell or
buy any shares in any jurisdiction where it is unlawful. The information in this
Prospectus is current as of the date of this Prospectus.
Until , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Carrols Corporation (the "Company"), Carrols Realty Holdings Corp. ("Realty
Holdings"), Carrols Realty I Corp. ("Realty I"), Carrols Realty II Corp.
("Realty II") and Carrols J.G. Corp. ("J.G.") are all incorporated in Delaware.
Under Section 145 of the General Corporation Law of Delaware, a Delaware
corporation has the power, under specified circumstances, to indemnify its
directors, officers, employees and agents in connection with actions, suits or
proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any action, suit or
proceeding. Article Ninth of the Restated Certificate of Incorporation of the
Company provides for indemnification of directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
(relating to liability for unauthorized acquisitions or redemptions of, or
dividends on, capital stock) of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. Article Ninth of the Company's Certificate of
Incorporation contains such a provision.
Quanta Advertising Corp. ("Quanta") is incorporated in New York.
Section 722 of the New York Business Corporation Law permits a New York
corporation to indemnify its directors and officers in connection with actions
or proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are directors or officers
of the corporation, against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and necessarily incurred
as a result of such action or proceeding, or any appeal therein. Such
indemnification shall only be authorized if such person acted in good faith and
in a manner such person reasonably believed to be in, or not opposed to, the
best interests of the corporation and, in criminal actions or proceedings, if
such person had no reasonable cause to believe that his conduct was unlawful.
Section 721 of the New York Business Corporation Law states that the
indemnification provided for by Article 7 thereof shall not be deemed exclusive
of any other rights to which a director or officer seeking indemnification or
advancement of expenses may be entitled.
Pollo Franchise, Inc. ("Pollo Franchise") and Pollo Operations, Inc.
("Pollo Operations") are both incorporated in Florida. Section 607.0850 of the
Florida Business Corporation Act permits indemnification against expenses,
fines, judgments and settlements incurred by any director, officer or employee
of a company in the event of pending or threatened civil, criminal,
administrative or investigative proceedings, if such person was, or was
threatened to be made, a party by reason of the fact that he or she is or was a
director, officer, or employee of the company. Section 607.0850 also provides
that the indemnification provided for therein shall not be deemed exclusive of
any other rights to which those seeking indemnification may otherwise be
entitled. The by-laws of Pollo Franchise and Pollo Operations each contain such
a provision in Article VIII thereof.
The Company, Realty Holdings, Realty I, Realty II, J.G., Quanta, Pollo
Franchise and Pollo Operations all have directors' and officers' liability
insurance covering certain liabilities incurred by the directors and officers of
the Company, Realty Holdings, Realty I, Realty II, J.G., Quanta, Pollo Franchise
and Pollo Operations in connection with the performance of their respective
duties.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) See the Exhibit Index included immediately preceding the exhibits to
this Registration Statement.
(b) See the Schedule Index included immediately preceding the Exhibit Index
to this Registration Statement.
ITEM 22. UNDERTAKINGS.
Each of the undersigned Registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to the Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, each of the
Registrants has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a Registrant
of expenses incurred or paid by a director, officer or controlling person of a
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, such Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act, and will be governed
by the final adjudication of such issue.
Each of the undersigned Registrants hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
CARROLS CORPORATION HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
CARROLS CORPORATION
By: /s/ ALAN VITULI
-----------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ DANIEL T. ACCORDINO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Daniel T. Accordino
/s/ PAUL R. FLANDERS Vice President--Finance and Treasurer February 2, 1999
- ------------------------------------------ (Principal Financial Officer)
Paul R. Flanders
/s/ BENJAMIN D. CHERESKIN Director February 2, 1999
- ------------------------------------------
Benjamin D. Chereskin
/s/ JAMES M. CONLON Director February 2, 1999
- ------------------------------------------
James M. Conlon
/s/ DAVID J. MATHIES, JR. Director February 2, 1999
- ------------------------------------------
David J. Mathies, Jr.
/s/ ROBIN P. SELATI Director February 2, 1999
- ------------------------------------------
Robin P. Selati
/s/ CLAYTON E. WILHITE Director February 2, 1999
- ------------------------------------------
Clayton E. Wilhite
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
CARROLS REALTY HOLDINGS CORP. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF NEW YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
CARROLS REALTY HOLDINGS CORP.
By: /s/ ALAN VITULI
-----------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ DANIEL T. ACCORDINO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Daniel T. Accordino
/s/ PAUL R. FLANDERS Vice President, Treasurer and Chief February 2, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Paul R. Flanders Officer)
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
CARROLS REALTY I CORP. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
CARROLS REALTY I CORP.
By: /s/ ALAN VITULI
-----------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ DANIEL T. ACCORDINO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Daniel T. Accordino
/s/ PAUL R. FLANDERS Vice President, Treasurer and Chief February 2, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Paul R. Flanders Officer)
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
CARROLS REALTY II CORP. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
CARROLS REALTY II CORP.
By: /s/ ALAN VITULI
------------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ DANIEL T. ACCORDINO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Daniel T. Accordino
/s/ PAUL R. FLANDERS Vice President, Treasurer and Chief February 2, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Paul R. Flanders Officer)
II-6
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
CARROLS J.G. CORP. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
CARROLS J.G. CORP.
By: /s/ ALAN VITULI
------------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ DANIEL T. ACCORDINO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Daniel T. Accordino
/s/ PAUL R. FLANDERS Vice President, Treasurer and Chief February 2, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Paul R. Flanders Officer)
II-7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
QUANTA ADVERTISING CORP. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF NEW YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
QUANTA ADVERTISING CORP.
By: /s/ ALAN VITULI
------------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ DANIEL T. ACCORDINO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Daniel T. Accordino
/s/ PAUL R. FLANDERS Vice President, Treasurer and Chief February 2, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Paul R. Flanders Officer)
II-8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
POLLO FRANCHISE, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
POLLO FRANCHISE, INC.
By: /s/ ALAN VITULI
------------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ NICHOLAS A. CASTALDO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Nicholas A. Castaldo
/s/ PAUL R. FLANDERS Vice President, Treasurer and Chief February 2, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Paul R. Flanders Officer)
II-9
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
POLLO OPERATIONS, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
POLLO OPERATIONS, INC.
By: /s/ ALAN VITULI
------------------------------------
Alan Vituli
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS ALAN VITULI AND PAUL R. FLANDERS AND EACH
OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THE WITHIN
REGISTRATION STATEMENT ON FORM S-4 AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION AND SUCH OTHER STATE AND FEDERAL GOVERNMENT COMMISSIONS AND
AGENCIES AS MAY BE NECESSARY OR ADVISABLE, AND GRANTS UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO
AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN
AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT AND
COULD DO IN PERSON, HEREBY FULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
/s/ ALAN VITULI Chairman and Chief Executive Officer; February 2, 1999
- ------------------------------------------ Director (Principal Executive Officer)
Alan Vituli
/s/ NICHOLAS A. CASTALDO President and Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Nicholas A. Castaldo
/s/ PAUL R. FLANDERS Vice President, Treasurer and Chief February 2, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Paul R. Flanders Officer)
II-10
FINANCIAL STATEMENT SCHEDULE INDEX
Schedule II................... Valuation and qualifying accounts for the years ended December 31, 1997, 1996 and
1995
S-1
CARROLS CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------------------------- -------- -------- -------- --------
Year ended December 31, 1997:
Reserve for doubtful trade accounts receivable................. 310,000 (180,000)(b) 130,000
Other reserves(a).............................................. 753,000 133,000 886,000
Year ended December 31, 1996:
Reserve for doubtful trade accounts receivable................. 419,000 16,000 (125,000)(b) 310,000
Other reserves(a).............................................. 788,000 (35,000)(b) 753,000
Year ended December 31, 1995:
Reserve for doubtful trade accounts receivable................. 424,000 12,000 (17,000)(b) 419,000
Other reserves(a).............................................. 542,000 388,000 (142,000)(b) 788,000
(a) Included principally in other assets
(b) Represents write-offs of accounts
S-2
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------- ----------
2.1 -- Agreement and Plan of Merger dated June 3, 1998 by and between Carrols Corporation and
Pollo Tropical, Inc. (incorporated by reference to Exhibit (c)(1) to the Tender Offer
Statement on Schedule 14 (d)(1) dated July 3, 1998)
3.1 -- Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.(3)(a) to
Carrols Corporation's 1987 Annual Report on Form 10-K)
3.2 -- Certificate of Amendment of the Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 to Carrols Corporation's 1996 Annual Report on Form 10-K)
3.3 -- Restated By-laws (incorporated by reference to Exhibit 3.(3)(b) to Carrols Corporation's
1986 Annual Report on Form 10-K )
*4.1 -- Indenture, dated as of November 24, 1998, between Carrols Corporation, the Guarantors
named therein and IBJ Schroder Bank & Trust Company, as Trustee
*4.2 -- Exchange and Registration Rights Agreement, dated as of November 24, 1998, among Carrols
Corporation and Chase Securities Inc. and NationsBanc Montgomery Securities LLC
*4.3 -- Form of 9 1/2% Senior Subordinated Note due 2008
*5.1 -- Opinion of Rosenman & Colin LLP
*10.1 -- Loan Agreement dated as of May 12, 1997 by and among Carrols Corporation, Texas Commerce
Bank National Association, Heller Financial, Inc., First Union National Bank of North
Carolina, and the other lenders now or thereafter parties thereto
10.2 -- Amendment to Carrols Corporation's Senior Credit Facility titled Amendment to Loan
Agreement, made and entered into as of July 9, 1998, by and among Carrols Corporation,
Heller Financial, Inc., NationsBank, and Chase Bank of Texas, National Association
(incorporated by reference to Exhibit (b)(2) to the Tender Offer Statement on Schedule
(d)(1) dated July 3, 1998)
*10.3 -- Amendment to Loan Agreement dated as of December 31, 1998, by and among Carrols
Corporation, Heller Financial, Inc., NationsBank, and Chase Bank of Texas, National
Association
10.4 -- Supply Agreement between ProSource Services Corporation and Carrols Corporation dated
April 1, 1994 (incorporated by reference to Exhibit 10.11 to Carrols Corporation's 1994
Annual Report on Form 10-K)
10.5 -- Stock Purchase Agreement dated as of February 25, 1997 by and among Madison Dearborn
Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Atlantic Restaurants,
Inc. and Carrols Holdings Corporation (incorporated by reference to Exhibit 10.12 to
Carrols Corporation's 1996 Annual Report on Form 10-K)
10.6 -- 1994 Regional Directors Bonus Plan (incorporated by reference to Exhibit 10.19 to Carrols
Corporation's 1994 Annual Report on Form 10-K)
10.7 -- Carrols Corporation Corporate Employee's Savings Plan dated December 31, 1994
(incorporated by reference to Exhibit 10.21 to Carrols Corporation's 1994 Annual Report
on Form 10-K)
10.8 -- Seventh Amendment to Third Amended and Restated Loan and Security Agreement by and among
Heller Financial, Inc., Carrols Holdings Corporation and Carrols Corporation dated as of
April 3, 1996 (incorporated by reference to Exhibit 10.27 to Carrols Corporation's
current report on Form 8-K filed April 10, 1996)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------- --
10.9 -- Amended and Restated Employment Agreement dated as of April 3, 1996 by and between
Carrols Corporation and Alan Vituli (incorporated by reference to Exhibit 10.23 to
Carrols Corporation's Current Report on Form 8-K filed on April 10, 1996)
10.10 -- Amended and Restated Employment Agreement dated as of April 3, 1996 by and between
Carrols Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.24
to Carrols Corporation's Current Report on Form 8-K filed on April 10, 1996)
*10.11 -- Amended and Restated Employment Agreement dated as of July 20, 1998 by and between
Carrols Corporation and Nicholas A. Castaldo
10.12 -- Carrols Corporation 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit
10.20 -- to Carrols Corporation's 1996 Annual Report on Form 10-K)
10.13 -- Stock Option Agreement dated as of December 30, 1996 by and between Carrols Corporation
and Alan Vituli (incorporated by reference to Exhibit 10.21 to Carrols Corporation's 1996
Annual Report on Form 10-K)
10.14 -- Stock Option Agreement dated as of December 30, 1996 by and between Carrols Corporation
and Daniel T. Accordino (incorporated by reference to Exhibit 10.22 to Carrols
Corporation's 1996 Annual Report on Form 10-K)
10.15 -- Form of Stockholders Agreement by and among Carrols Holdings Corporation, Madison
Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Atlantic
Restaurants, Inc., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated
by reference to Exhibit 10.23 to Carrols Corporation's 1996 Annual Report on Form 10-K)
10.16 -- Form of Registration Agreement by and among Carrols Holdings Corporation, 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)
10.17 -- Form of Second Amended and Restated Employment Agreement by and between Carrols
Corporation and Alan Vituli (incorporated by reference to Exhibit 10.25 to Carrols
Corporation's 1996 Annual Report on Form 10-K)
10.18 -- Form of Second Amended and Restated Employment Agreement by and between Carrols
Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.26 to
Carrols Corporation's 1996 Annual Report on Form 10-K)
10.19 -- Form of Carrols Holdings Corporation 1996 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.27 to Carrols Corporation's 1996 Annual Report on Form 10-K)
10.20 -- Form of Stock Option Agreement by and between Carrols Holdings Corporation and Alan
Vituli (incorporated by reference to Exhibit 10.28 to Carrols Corporation's 1996 Annual
Report on Form 10-K)
10.21 -- Form of Stock Option Agreement by and between Carrols Holdings Corporation and Daniel T.
Accordino (incorporated by reference to Exhibit 10.29 to Carrols Corporation's 1996
Annual Report on Form 10-K)
10.22 -- Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and
Alan Vituli (incorporated by reference to Exhibit 10.30 to Carrols Corporation's 1996
Annual Report on Form 10-K)
10.23 -- Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and
Daniel T. Accordino (incorporated by reference to Exhibit 10.31 to Carrols Corporation's
1996 Annual Report on Form 10-K)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------- --
10.24 -- Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and
Joseph A. Zirkman (incorporated by reference to Exhibit 10.32 to Carrols Corporation's
1996 Annual Report on Form 10-K)
10.25 -- First Amendment to the Stock Purchase Agreement dated March 27, 1997 by and among Carrols
Holdings Corporation, Atlantic Restaurants, Inc., Madison Dearborn Capital Partners, L.P.
and Madison Dearborn Capital Partners II, L.P. (incorporated by reference to
Exhibit 10.38 to Carrols Corporation's current report on Form 8-K filed March 27, 1997)
10.26 -- Purchase and Sale Agreement dated as of January 15, 1997 by and between Carrols
Corporation, as Purchaser, Omega Services, Inc. as Seller and Mr. Harold W. Hobgood as
Omega's Agent (incorporated by reference to Exhibit 10.39 to Carrols Corporation's
current report on Form 8-K filed March 27, 1997)
10.27 -- Purchase and Sale Agreement dated as of January 15, 1997 by and between Carrols
Corporation, as Purchaser, Omega Services, Inc. as Seller and Mr. Harold W. Hobgood as
Omega's Agent (incorporated by reference to Exhibit 10.40 to Carrols Corporation's
current report on Form 8-K filed March 27, 1997)
10.28 -- Purchase Agreement dated as of July 7, 1997 among Carrols Corporation, as Purchaser, and
the individuals and trusts listed on Exhibit A attached thereto, as Sellers, the
individuals and entities listed on Exhibit B attached thereto, as Affiliated Real
Property Owners, and Richard D. Fors, Jr. and Charles J. Mund, as the Seller's
representatives (incorporated by reference to Exhibit 10.41 to Carrols Corporation's
current report on Form 8-K filed August 20, 1997)
*10.29 -- Carrols Holdings Corporation 1998 Directors' Stock Option Plan
*12.1 -- Calculation of Earnings to Fixed Charges Ratio
16.1 -- Letter re: Change in Certifying Accountant (incorporated by reference to Exhibit 16.1 to
Carrols Corporation's Current Report on Form 8-K filed with the Commission on August 15,
1997)
*21.1 -- List of Subsidiaries
*23.1 -- Consent of PricewaterhouseCoopers LLP
*23.2 -- Consent of Arthur Andersen LLP
*23.3 -- Consent of Arthur Andersen LLP
*23.4 -- Consent of Rosenman & Colin LLP (included in Exhibit 5.1)
*24 -- Power of Attorney (included on signature pages at II-3, II-4, II-5, II-6, II-7, II-8,
II-9 and II-10)
*25 -- Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of IBJ Whitehall
Bank & Trust Company, as Trustee
*99.1 -- Form of Letter of Transmittal for Old Notes
*99.2 -- Form of Notice of Guaranteed Delivery for Old Notes
- ------------------
* Filed herewith.