Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For Fiscal Year Ended December 28, 1997
Commission File Number 1-6553
CARROLS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 16-0958146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
968 James Street
Syracuse, New York 13203
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (315) 424-0513
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
11-1/2% Senior Notes Due 2003
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _ x
No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant: No voting stock is held by non-affiliates.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of March 15, 1998: 10.
The Company uses a 52-53 week fiscal year ending on the Sunday closest to
December 31. All references herein to the fiscal years ended December 31,
1995, December 29, 1996 and December 28, 1997 will hereinafter be referred
to as the fiscal years ended December 31, 1995, 1996 and 1997,
respectively.
PART I
This 1997 Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements include statements
regarding the intent, belief or current expectations of the Registrant and
its management team. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements. Such risks and uncertainties
include, among other things, competitive, economic and regulatory factors,
general economic conditions, the ability of the Registrant to manage its
growth and successfully implement its business strategy and other risks and
uncertainties that are discussed herein.
ITEM 1. BUSINESS
Historical Development
Carrols Corporation ("Carrols" or the "Company") is the largest franchisee
of Burger King restaurants in the United States. As of March 15, 1998
Carrols was operating 338 Burger King restaurants located in 13
Northeastern, Midwestern and Southeastern states. During the Company's
most recent fiscal year, the Company increased the total number of
restaurants that it operates by over 40% growing from 232 restaurants in
1996 to 335 restaurants at December 31, 1997. During 1997, Carrols opened
11 new restaurants, acquired 93 restaurants in 6 transactions, and closed
one underperforming restaurant.
Carrols was incorporated in 1968 and through 1976 its principal business
was the operation of fast food hamburger restaurants under the name Carrols
Restaurants and the operation of movie theaters under the name
CinemaNational. In 1976, as a result of growing competition from larger and
better recognized national fast food restaurant chains, Carrols became a
franchisee of Burger King Corporation ("BKC") and began converting its
restaurants into Burger King restaurants and ceased operating and
franchising restaurants under the name of Carrols Restaurants. In order to
facilitate the financing of the conversion of these restaurants, Carrols
disposed of a substantial portion of its movie theater assets.
In 1969, Carrols offered its common stock through an initial public
offering. The Company's shares were listed for trading on the New York
Stock Exchange in 1983.
The Company was acquired in December 1986 (the "1986 Acquisition") by
Carrols Holdings Corporation ("Holdings"), a corporation formed to effect
the 1986 Acquisition by Mr. Vituli, the Company's current Chairman and CEO,
and other members of the Company's then-current senior management, a
private investor group and certain institutional investors. As a result of
the 1986 Acquisition, Carrols became a wholly-owned subsidiary of Holdings.
At the time of the 1986 Acquisition, the Company owned 138 Burger King
restaurants and a food distribution business. In August 1990, the Company
sold its food distribution business to Burger King Distribution Services
("BKDS"), a division of ("BKC"). Carrols currently purchases
substantially all of its requirements for foodstuffs and paper and
packaging products from ProSource Services Corporation ("ProSource"), the
successor to BKDS, pursuant to a five year supply agreement which expires
on March 31, 1999.
Atlantic Acquisition. On April 3, 1996, pursuant to the Securities
Purchase Agreement (the "Atlantic Agreement"), dated as of March 6, 1996,
among Carrols, Holdings, the stockholders of Holdings and Atlantic
Restaurants, Inc. ("Atlantic"), Atlantic acquired Holdings, the owner of
100% of the outstanding capital stock of the Company (the "Atlantic
Acquisition"). Pursuant to the Atlantic Agreement, Atlantic acquired all
of the outstanding voting capital stock of Holdings for an aggregate
purchase price of approximately $86.5 million in cash. Atlantic is an
indirect wholly-owned subsidiary of Bahrain International Bank (E.C.), a
Bahrain exempt joint stock company ("BIB").
Recent Developments
Recapitalization. On February 20, 1997, the Certificate of Incorporation
of Holdings was amended (the "Amendment") such that (i) the 3,146,110
shares of Common Stock held by Atlantic were converted into 850,000 shares
of Common Stock, (ii) each of the classes consisting of (a) 882,353 shares
of Non-Voting Common Stock of Holdings, (b) 750 shares of Class B 10%
Cumulative Redeemable Preferred Stock (Series I) of Holdings, par value
$0.01 per share, and (c) 750 shares of Class B 10% Cumulative Redeemable
Preferred Stock (Series lI) of Holdings, par value $.01 per share, was
canceled and (iii) the outstanding warrants to purchase 488,111 shares of
Common Stock were converted into warrants to purchase 131,876 shares of
Common Stock. After giving effect to the foregoing, Holdings had 850,000
shares of Common Stock outstanding, all of which were held by Atlantic,
with no other voting capital stock outstanding.
Madison Dearborn Investment. On March 27, 1997, pursuant to a Stock
Purchase Agreement (the "MD Agreement") dated February 25, 1997, between
and among Holdings, Atlantic, Madison Dearborn Capital Partners, L.P. and
Madison Dearborn Capital Partners II, L.P. (together with Madison Dearborn
Capital Partners, L.P., the "MD Investors"). the MD Investors acquired (the
"MD Investment") (i) from Holdings 283,334 shares of Common Stock (the
"Holdings Shares") and (ii) from Atlantic 283,333 of the outstanding
shares of Common Stock (the "Atlantic Shares," and, together with the
Holdings Shares, the "MD Shares"). Pursuant to the MD Agreement, certain
members of senior management also purchased 10,810 shares of Common Stock
for $1.1 million. The aggregate purchase price for the MD Shares was
approximately $61 million in cash (the "MD Purchase Price"), of which
approximately one-half was paid to Holdings.
TCB Credit Facility. On May 12, 1997 the Company and Holdings entered into
a new financing agreement (the "TCB Refinancing") pursuant to which
Chase/Texas Commerce Bank National Association ("TCB"), as Administrative
Agent for a syndicate of lenders (the "Lenders"), (i) established a $25
million Revolving Credit Facility that replaced the existing Senior Secured
Credit Facility with Heller Financial, Inc. ("Heller") and (ii) established
a $127 million Advance Term Loan ($5 million of which was used to replace
an existing $5 million term loan with Heller).
Omega Acquisition. On March 28, 1997, the Company acquired 23 Burger King
restaurants (including one restaurant under construction) located in
Greenville, North Carolina and Spartanburg, South Carolina, for an
aggregate purchase price of $21.1 million in cash, pursuant to two separate
Purchase and Sale Agreements, each dated as of January 15, 1997, by and
between the Company, Omega Food Services, Inc. and Harold W. Hobgood as
Omega's agent.
Buffalo Acquisition. On August 20, 1997 the Company acquired 63 Burger
King restaurants located in Western New York, Pennsylvania, Indiana and
Kentucky for an aggregate purchase price of approximately $52 million in
cash, pursuant to a Purchase Agreement, dated as of July 7, 1997, among the
Company and Richard D. Fors, Jr., Charles J. Mund, Charles J. Mund, Jr.,
Eric W. Mund, William J. O'Donnell, John T. Sweeney, William J. Reznicek
and certain other individuals and entities signatory thereto.
Business Strategy
Carrols business strategy is to continue to increase revenues and improve
operating efficiencies thus increasing restaurant profits and EBITDA (as
defined). The Company's strategy is based on the following components:
Develop New Burger King Restaurants in Existing Markets. The Company looks
to expand in its existing markets through the development of new Burger
King restaurants where the demographics support the Company's ability to
increase profitability and operating leverage. The Company believes that
the number of markets that it operates in will continue to provide
opportunities for the construction of new restaurants. Management believes
that new restaurant development risk is significantly reduced due to the
proven success of the Burger King concept.
The Company's new restaurant development efforts are primarily managed by
its own staff of real estate and construction professionals with input from
BKC's development field personnel. Prior to developing a new restaurant,
the Company conducts an extensive site selection and evaluation process
including in-depth demographic, market and financial analysis.
Selective Acquisition of Existing Burger King Restaurants. The Company
believes that due to the number of Burger King restaurants and the number
of franchisees within the Burger King system that there will continue to be
opportunities for selective growth through acquisition in contiguous and
new geographic markets. When evaluating acquisition opportunities the
Company assesses the attractiveness of the market from a demographic
perspective including the potential for the development of new restaurants.
The Company believes that its restaurant operating controls, management
training and administrative efficiencies generally enable it to realize
greater profitability from acquired restaurants than the former owners
realized. It believes that it achieves profit efficiencies from its
ability to improve controls over restaurant food costs, more efficient
labor usage, and by its ability to realize economies of scale by leveraging
its corporate infrastructure.
Consistently Provide High Quality Products and Superior Customer Service.
As the number of restaurants that the Company owns in a particular market
increases, the Company has a greater ability to ensure overall customer
satisfaction in that market through consistency in food quality, service
and restaurant appearance. Its stronger presence in a particular market
also allows the Company to maximize the effectiveness of local Burger King
advertising and promotional programs.
Achieve Operating Efficiencies. The Company's large number of restaurants,
centralized management structure and management information systems enable
the Company to improve operating efficiencies for both existing and newly
acquired restaurants. These factors enable the Company to tightly control
restaurant and corporate level costs, to capture economies of scale by
leveraging its existing corporate overhead structure, and to use its
sophisticated management information and point-of-sale systems to more
efficiently manage its restaurant operations. Due to its size, the Company
also realizes benefits from its improved bargaining power with respect to
its purchasing and cost management activities.
Burger King Corporation
Overview. The Company believes that it realizes significant benefits from
its affiliation with BKC as a result of the widespread recognition of the
Burger King name and products, the size and market penetration of BKC's
media advertising, BKC's overall management of the Burger King brand,
including new product development, and from the continued growth of the
Burger King system. According to publicly available information, the
Burger King brand is the second largest restaurant franchised in the world,
with more than 9,400 Burger King restaurants worldwide and system-wide
restaurant sales of $9.8 billion for its fiscal year ended September 30,
1997. BKC is an indirect wholly owned subsidiary of Diageo PLC (a United
Kingdom food and spirits company formed from the merger of Grand
Metropolitan and Guinness).
Menu and Operations. The Burger King system marketing strategy is
characterized by its "Have It Your Way" service, flame-broiling, generous
portions and competitive prices. Burger King restaurants feature
flame-broiled hamburgers, the most popular of which is The Whopper(r)
sandwich. The Whopper is a large, flame-broiled hamburger on a toasted bun
garnished with combinations 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 7:00 AM to 11:00 PM. Burger King
restaurants are fast food restaurants of distinctive design and are
generally located in high-traffic areas throughout the United States. The
Company believes that convenience of location, quality of food, price/value
of food served, 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.
Restaurant Configurations. 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 restaurants
at March 15, 1998, 316 are free-standing and 22 are located in retail
shopping centers. In Carrols' freestanding Burger King restaurants over
55% of sales are generated from its drive-thru service windows.
Franchise Agreements.
Each of Carrols' Burger King restaurants operates under a separate
Franchise Agreement entered into between the Company and BKC. The 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 Franchise Agreements
generally provide for an initial term of 20 years and have an initial fee
of $40,000. A Successor Franchise Agreement may be granted by Burger King
for an additional 20 year term, provided the restaurant meets the
then-current BKC operating standards and the Company is not in default
under the relevant Franchise Agreement. Currently, the Successor Franchise
Agreement fee is $40,000. The Franchise Agreements are non-cancelable
except for failure to abide by the terms thereof.
In addition to this fee, in order to obtain a Successor Franchise
Agreement, a franchisee is typically required to make capital improvements
to the subject restaurant to bring the restaurant up to BKC's then-current
design standards. The amount of such capital expenditures 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.
Carrols believes that it enjoys a good relationship with BKC and that it
will satisfy BKC's normal Successor Franchise Agreement policies and,
accordingly, believes that Successor Franchise Agreements will be granted
in due course by BKC at the expiration of its existing Franchise
Agreements. Historically, BKC has granted each of the Company's requests
for a Successor Franchise Agreement for its restaurants.
In addition to the initial franchise fee, Carrols currently pays a monthly
royalty of 3-1/2% of the gross revenues from its restaurants to BKC.
Burger King franchisees currently also contribute 4% of gross revenues from
their 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
nationwide Burger King system. Carrols supplements BKC's marketing with
local advertising and promotional campaigns.
The cost of a new restaurant also includes the requisite equipment,
furniture, signage and various other costs. The Company estimates that the
average initial cost for a standard free-standing restaurant is
approximately $265,000 (excluding the cost of the building, land and site
improvements). The Company estimates that the aggregate cost of
constructing a free-standing restaurant and the cost of land and site
improvements varies considerably depending upon building type, land cost
and site work, and generally ranges from $700,000 to $1,000,000.
The BKC Franchise Agreements do not grant any franchisee exclusive rights
to a 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.
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. Since the Acquisition, BKC has granted its approval
to all of the Company's acquisitions, except for one instance when it
exercised its right of first refusal with respect to one proposed six
restaurant acquisition that the Company attempted to make in 1997.
Company Operations
Management Structure. Substantially all executive management, finance,
marketing and operations support functions are conducted centrally at the
Company's Syracuse, New York headquarters. The Company currently has six
regional directors, five of whom are vice presidents of the Company, who
are each responsible for the operations of the Carrols' Burger King
restaurants in their assigned region. Three of the regional directors have
been employed by Carrols for over 20 years. The regional directors are
supported by 44 district supervisors that are 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 Carrols' 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.
A typical Carrols' Burger King restaurant is staffed with hourly employees
who are supervised by a salaried manager and two or three salaried
assistant managers.
Training. The Company maintains a comprehensive training and development
program for all of its personnel. This program emphasizes the Burger King
system-wide operating procedures, food preparation methods and customer
service standards. Carrols provides both classroom and in-restaurant
training for its salaried and hourly personnel. In addition, BKC's
training and development programs are also available to the Company.
Management Information Systems. Financial and management control of
Carrols' restaurants is facilitated by the use of an integrated
computerized back office and point of sale system which electronically
transmits data from each of the Company's restaurants to Corporate
headquarters on a daily basis. These 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 a laptop computer. Key restaurant
performance indicators are monitored at each management level from district
supervisor through senior management.
The Company's management information system, typically not utilized by
smaller Burger King franchisees and other smaller quick-service restaurant
chains, provides management with the ability to analyze sales and product
mix data, to minimize shrinkage, and to control labor costs. Carrols
believes that these systems materially enhance its ability to more
efficiently control and manage its restaurant operations.
Factors Affecting the Company's Operations. Carrols' business is affected
by various factors including weather, gasoline prices and road
construction. Winter weather conditions can be particularly severe in the
Northeast where the Company operates a large number of its Burger King
restaurants. Historically, the Company's business has also been affected
by changes in local and national economic conditions, demographic trends,
consumer spending habits and tastes, and concerns about the nutritional
quality of quick-serve food.
Site Selection. The Company believes that the location of its restaurants
is very important to 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, based upon analyses prepared by its real
estate professionals and its operations personnel, determines the
acceptability of all acquisition and new development sites.
Restaurant Locations
The following table sets forth the locations of the 338 Burger King
restaurants in the Carrols' system at March 15, 1998.
State
Total
Restaurants
Connecticut
1
Indiana
5
Kentucky
6
Maine
4
Massachusetts
2
Michigan
23
New Jersey
2
New York
151
North Carolina
41
Ohio
72
Pennsylvania
11
South Carolina
19
Vermont
1
Total
338
Advertising and Promotion
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 over $400 million for 1997, Carrols
supplements BKC's advertising and promotional activities with local
advertising and promotions, including the purchase of additional
television, radio and print advertising. Carrols also utilizes promotional
programs, such as combination meals and discounted prices, targeted to its
customers, thereby enabling Carrols to create a flexible and directed
marketing program.
Burger King franchisees, as well as BKC-owned restaurants, are 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).
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, as well as its distributor,
to obtain favorable pricing and terms for supplying its restaurants.
As a Burger King franchisee, Carrols is required to purchase all of its
foodstuffs, paper goods and packaging materials from BKC-approved
suppliers. Other 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.
Carrols currently obtains substantially all of its foodstuffs (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.
There are other BKC-approved supplier/distributors which compete with
ProSource. Carrols 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.
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 own 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.
All Burger King franchisees operate subject to a comprehensive regimen of
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 unsold prepared food.
The Company closely supervises the operation of all of its 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.
Government Regulation
Carrols is subject to various Federal, state and local laws affecting its
business, including various health, sanitation, fire and safety standards.
Newly constructed or remodeled restaurants are subject to state and local
building code and zoning requirements. In connection with the remodeling
and alteration of the Company's restaurants, the Company may be required to
expend funds to meet certain Federal, state and local regulations,
including regulations promulgated by the Americans with Disabilities Act
(the "ADA") which require that remodeled or altered restaurants be handicap
accessible. The Company is also subject to Federal and state environmental
regulations, although such regulations have not had, and are not expected
to have, a material effect on the Company's operations.
The Company is subject to the 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 the Federal Fair Labor Standards Act of 1996. 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 labor costs at the Company's restaurants.
The Company is also subject to various local, state and Federal laws
regulating the discharge of pollutants into the environment. 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 in order to determine
whether there is any evidence of contamination prior to purchasing or
entering into a lease.
The Company believes that it is operating in compliance with applicable
Federal, state and local laws and regulations governing its operations.
Competition
The quick-service restaurant industry is highly competitive with respect to
price, service, location and food quality. In each of its markets,
Carrols' restaurants compete with a large number of national and regional
restaurant chains, as well as locally-owned restaurants, offering
low-priced 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.
In the Company's markets, McDonald's, Wendy's and Hardee's provide the most
significant competition.
The Company's largest competitor is McDonald's. According to publicly
available information, as of December 31, 1997, the McDonald's worldwide
system comprised over 23,000 restaurants and total system-wide revenues for
the year ended December 31, 1997 were $33.6 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 restaurants effectively compete in each category.
Employees
At December 31, 1997, Carrols employed approximately 11,700 persons of
which approximately 200 were supervisory and administrative personnel and
11,500 were restaurant operating personnel. None of Carrols' employees are
covered by collective bargaining agreements. Approximately 10,500 of the
restaurant operating personnel at December 31, 1997 were part-time
employees. Carrols believes that the dedication of its employees is
critical to its success, and that its employee relations are good.
ITEM 2. PROPERTIES
The Company owns the approximately 20,000 square foot building at 968 James
Street, Syracuse, New York, which houses its executive offices and all of
the Company's administrative operations (except for those conducted at five
small regional offices). In addition to the above, at December 31, 1997
the Company owned or leased the following properties:
@@
Owned
Leased
Leased
Land;
Land;
Land;
Owned
Owned
Leased
Building
Building
Building
Total
Burger King restaurants
23
17
295 (a)
335
Burger King restaurants
under construction
1
2
1
4
Excess properties:
Leased to others
- --
- --
4
4
Available for sale or lease
4
--
--
4
Total properties
28
19
300
347
@@
(a) Includes 22 restaurants located in mall shopping centers.
Most of the Company's leases are coterminous with the related Franchise
Agreements. The Company believes that it generally will be able to renew,
at commercially reasonable rates, the leases whose terms expire prior to
the subject Franchise Agreements.
Most leases require the Company, as lessee, to pay utility and water
charges, premiums on insurance and real estate taxes. Certain leases also
require contingent rentals based upon a percentage of gross sales that
exceed specified minimums.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding which, in
management's belief, will have a material adverse effect on the Company's
results of operations or financial condition, nor to any other pending
legal proceedings other than ordinary, routine litigation incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established trading market for the Company's capital stock.
Carrols Holdings Corporation owns 10 shares of common stock of the Company
(representing 100% of the capital stock of the Company).
Cash dividends paid during 1996 and 1997 by Carrols to Holdings were as
follows:
@@
Per Share
Total
January 1996
$ 800.00
$ 8,000
March 1996
$ 41,480.00
$ 414,800
August 1996
$ 20,722.40
$ 207,224
October 1996
$ 37,000.38
$ 370,004
April 1997
$184,217.01
$ 1,842,170
May 1997
$ 37,087.78
$ 370,878
July 1997
$ 13,610.00
$ 136,100
October 1997
$ 13,610.00
$ 136,100
December 1997
$185,309.46
$ 1,853,095
The Company's loan agreements impose limitations on certain restricted
payments, which include dividends and preferred stock redemptions. As a
result of the 1997 investments by Madison Dearborn and senior management,
the Company has sufficient unrestricted amounts to enable it to make the
required payments to satisfy preferred stock dividend and redemption
requirements.
ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands except per share data and restaurants
1997__
1996__
1995__
1994__
1993 (a)
Summary of Operating Results:
Restaurant sales
$ 295,436
$ 240,809
$ 226,257
$ 203,927
$ 171,137
Costs and expenses:
Cost of sales
85,542
68,031
63,629
57,847
48,502
Restaurant wages and related expenses
89,447
70,894
65,932
59,934
51,739
Advertising expense
13,122
10,798
9,764
8,785
7,930
Other restaurant operating expenses
61,691
48,683
45,635
42,390
35,192
Administrative expenses
13,121
10,387
10,434
9,122
7,534
Depreciation and amortization
15,102
11,015
11,263
11,259
12,143
Unusual (b)
-
509
-
1,800
-
Total operating costs and expenses
278,025
220,317
206,657
191,137
163,040
Operating income
17,411
20,492
19,600
12,790
8,097
Interest income from income tax refund
(983)
- -
- -
- -
- -
Interest expense
15,581
14,209
14,500
14,456
12,505
Income (loss) before taxes
2,813
6,283
5,100
(1,666)
(4,408)
Provision for (benefit from) income taxes
655
3,100
(9,826)
165
-
Net Income Before Extraordinary Loss
2,158
3,183
14,926
(1,831)
(4,408)
Extraordinary Loss on Extinguishment of Debt
-
-
-
-
(4,883)
Net Income (Loss)
$ 2,158
$ 3,183
$ 14,926
$ (1,831)
$ (9,291)
Other Financial Data:
EBITDA (c)
$ 32,513
$ 31,507
$ 30,863
$ 24,049
$ 20,240
Total assets
215,328
138,588
135,064
125,319
119,735
Long-term debt
154,649
118,180
116,375
120,680
114,197
Capital lease obligations, long-term
2,060
2,503
3,301
3,966
4,603
Total long-term debt and capital lease obligations
156,709
120,683
119,676
124,646
118,800
Stockholders' equity (deficit)
17,447
(11,662)
(12,916)
(27,208)
(22,404)
Number of Burger King Restaurants:
At end of period
335
232
219
219
195
Annual weighted average
280
225
219
207
185
(a) All years included 52 weeks except fiscal 1993 which had 53 weeks.
(b) Includes $509 in 1996 for costs associated with a change of control;
includes $1,800 in 1994 for charges related to closing restaurants.
(c) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, EBITDA is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements. In
addition, management believes that certain investors and lenders find
EBITDA to be a useful tool for measuring the ability of the Company to
service its debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, select operating
results as a percentage of restaurant sales.
1997
1996
1995
Restaurant sales
100.0%
100.0%
100.0%
Costs and expenses:
Cost of sales
29.0
28.3
28.1
Restaurant wages and related expenses
30.3
29.4
29.1
Other restaurant expenses including advertising
25.3
24.7
24.5
Administrative expenses
4.4
4.5
4.6
Depreciation and amortization
5.1
4.6
5.0
Operating income
5.9%
8.5%
8.7%
EBITDA
11.0%
13.1%
13.6%
Restaurant Sales. Restaurant sales for the year ended December 31, 1997,
increased 22.7% to $295.4 million from $240.8 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
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. The Federal Fair Labor Standards Act
of 1996 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.
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 4.3% 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. Earnings before interest, taxes, depreciation and amortization
("EBITDA") increased from $31.5 million in 1996 to $32.5 million in 1997.
As a percentage of sales, EBITDA decreased from 13.1% 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 carryforwards.
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 carryforwards.
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's 1997 operations generated approximately $19.9 million in
cash, compared to $14.3 million during 1996 and $16.7 million in 1995.
Capital expenditures represent a major investment of cash for the Company,
and totaled $96.7 million, $23.2 million and $8.5 million, 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 3 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, the Company completed 23 remodels in conjunction with the
renewal of franchises that were scheduled to expire between 1997 and 1999.
During the past three years, the Company has completed 68 remodels.
In 1998, the Company anticipates capital expenditures of approximately $35
million not including the cost of any acquisitions that the Company may
make. These amounts include approximately $15 million for construction of
new units (including certain real estate) and $8 million for ongoing
reinvestment and remodeling of its existing restaurants. The Company's
1998 reinvestment and remodeling spending is anticipated to be somewhat
higher than historical levels as the Company invests in the 1997 acquired
units to bring them up to the Company's operating standards. In 1998, the
Company also plans to upgrade its restaurant point-of-sale and
in-restaurant support systems, and has also undertaken an upgrade of its
headquarters information and decision support systems. The total cost of
these systems projects is estimated to be $11 to 12 million over the next
12 to 18 months.
On March 27,1997, Madison Dearborn Capital Partners acquired 283,334
shares, and senior management acquired 10,810 shares, of Carrols Holdings
which resulted in the Company receiving net proceeds of $30.4 million. On
May 12, 1997 the Company also entered into a new credit agreement which
established a $25 million Revolving Loan Facility and a $127 million
Advance Loan Facility which is available to fund the cost of acquisitions.
During 1997, the Company used the net proceeds from the sale of stock along
with borrowings under its credit facility to fund the acquisition of 93
Burger King restaurants totaling $79.6 million.
The sale and leaseback of 15 restaurant properties in December 1997
generated $13 million, the proceeds of which were used to reduce amounts
which had been borrowed under the Company's credit agreement. In 1997, the
Company 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. The balance of
Holdings' preferred stock is scheduled for mandatory redemption with
payments of $1.8 million in December 1998 and December 1999.
At December 31, 1997, the Company had $21.5 million available under its
Revolving Loan facility after reserving $1.0 million for a letter of credit
guaranteed by the facility, and $64.3 million available under its Advance
Loan Facility. While interest is accrued monthly, payments of
approximately $6.2 million for interest on the Company's 11.50% Senior
Notes are made each February 15th and August 15th thus creating semi-annual
cash needs. 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.
The Company's loan agreements impose limitations on certain restricted
payments, which include dividends and preferred stock redemptions. As a
result of the 1997 investments by Madison Dearborn and senior management,
the Company has sufficient unrestricted amounts to enable it to make the
required payments to satisfy preferred stock dividend and redemption
requirements.
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 rate.
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. The Company is
addressing this risk to the availability and integrity of financial systems
and the reliability of operational systems. As discussed above, the
Company 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 designed to improve the efficiency
of the Company's restaurant and support operations, however, they will also
provide the additional benefit of making its systems Year 2000 compliant.
The Company is installing commercially available point-of-sale hardware and
software, and has purchased a suite of financial software applications, all
of which are designed and warranted to be Year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALTITATIVE DISCLOSURES ABOUT MARKET
RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements attached hereto is set forth in Item 14.
@@ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On August 12, 1997 the registrant dismissed the accounting firm of Arthur
Andersen LLP ("Arthur Andersen") as their principal audit accountant and
has engaged the services of Coopers & Lybrand, L.L.P. ("Coopers & Lybrand")
as their principal accountants.
Arthur Andersen were 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 have been 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 for the most recent year or any
subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The Company's Directors and executive officers are:
Name
Age
Position with the Company
Alan Vituli
56
Chairman of the Board and Chief Executive Officer
Daniel T. Accordino
47
President, Chief Operating Officer and Director
Paul R. Flanders
41
Vice President-Finance and Treasurer
Timothy J. LaLonde
41
Vice President-Controller
Richard H. Liem
44
Vice President-Financial Operations
Joseph A. Zirkman
37
Vice President, General Counsel and Secretary
Steven Barnes
49
Vice President-Regional Director
Michael A. Biviano
41
Vice President-Regional Director
Joseph W. Hoffman
35
Regional Director
David R. Smith
48
Vice President-Regional Director
James E. Tunnessen
43
Vice President-Regional Director
Richard L. Verity
41
Vice President-Regional Director
Benjamin D. Chereskin
39
Director
James M. Conlon
30
Director
David J. Mathies, Jr.
50
Director
C. Ronald Petty
52
Director
Robin P. Selati
32
Director
Clayton E. Wilhite
52
Director
Certain biographical information regarding each current Director and
executive officer of the Company is set forth below:
Mr. Vituli has been Chairman of the Board of Carrols 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. Mr. Vituli also serves
as a Director on the Board of Directors of Pollo Tropical, Inc.
Mr. Accordino has been President, Chief Operating Officer and a Director of
Carrols since February 1993. Prior thereto, he served as Executive Vice
President-Operations of Carrols 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 1973.
Mr. Flanders has been Vice President-Finance and Treasurer since April
1997. Prior to joining Carrols 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.
Mr. LaLonde has been Vice President-Controller since July 1997. Prior to
joining Carrols 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.
Mr. Liem became Vice President-Financial Operations in May 1994. Prior to
joining Carrols Mr. Liem was a Senior Audit Manager with the accounting
firm of Price Waterhouse. Mr. Liem was with Price Waterhouse beginning in
1983.
Mr. Zirkman became Vice President and General Counsel of Carrols in January
1993. He was appointed Secretary of the Company in February 1993. Prior to
joining Carrols, Mr. Zirkman was an associate with the New York City law
firm of Baer Marks & Upham beginning in 1986.
Mr. Barnes is Vice President-Regional Director of Carrols. He has been a
Vice President since February 1997 and a Regional Director of Operations
since 1993. Prior to joining Carrols, Mr. Barnes was Vice
President-Operations of Snapps Restaurants, Inc. from 1989 to 1993.
Mr. Biviano is Vice President-Regional Director of Carrols. He 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.
Mr. Hoffman has been Regional Director of Carrols 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 he was in a similar capacity with Community Food
Service, Inc.
Mr. Smith is Vice President-Regional Director of Carrols. He 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.
Mr. Tunnessen is Vice President-Regional Director of Carrols. 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.
Mr. 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 restaurants. Mr. Verity was previously with Resser Management
Corp. from 1986 to 1997 and held the position of Executive Vice President.
Mr. Chereskin has served as a Director since March 1997. He has been a
Vice President of Madison Dearborn Capital Partners since co-founding 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., The Cornerstone Investments Group,
Inc., Tuesday Morning Corporation and National Wholesale Liquidators, Inc.
Mr. Conlon has served as a Director since February 1998. Since 1992, he
has held the position of Managing Director-Merchant Banking, USA for Dilmun
Investments, Inc. From 1989 to 1992 Mr. Conlon was a securities analyst
for TIAA-CREF.
Mr. Mathies has served as a Director of Carrols since April 1996. Since
1988, Mr. Mathies has been President of Dilmun Investments, Inc. 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. Petty has served as a Director of Carrols since July 1997. Mr. Petty
has been the Chairman, Chief Executive and President of Peter Piper, Inc.
since November 1996. Prior to joining Peter Piper, Mr. Petty was the
Executive Vice President of Flagstar Companies, Inc. and President and
Chief Executive Officer of Denny's. Before that he served as President and
Chief Executive of Miami Subs Corporation and held a variety of senior
positions with Burger King Corporation including President and Chief
Operating Officer of its U.S. and International division.
Mr. Selati has served as a Director since March 1997. Since 1993, he has
been associated with Madison Dearborn Capital Partners. Prior to 1993 he
was associated with Alex Brown & Sons Incorporated in the consumer/retail
investment banking group. Mr. Selati also serves as a Director on the
Board of Directors of Peter Piper, Inc., Tuesday Morning Corporation, and
National Wholesale Liquidators, Inc.
Mr. Wilhite has served as a Director since July 1997. Since 1996 he has
been the Chairman of Thurloe Holdings, L.L.C.. Prior to 1996 he 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. Mr. Wilhite also serves as a Director 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 Corporation also serve as Directors
for Carrols Holdings Corporation.
ITEM 11. 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 Carrols Holdings Corporation.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation
Securities
(a)
Underlying
Name and Principal Position
Year
Salary
Bonus
Options (#)
Alan Vituli
1997
$392,758
$ -
72,830
Chairman of the Board and
1996
363,160
128,210
- -
Chief Executive Officer
1995
352,632
245,000
20,000
Daniel T. Accordino
1997
288,386
- -
31,479
President, Chief Operating
1996
258,943
91,778
- -
Officer and Director
1995
250,751
150,322
10,000
Joseph A. Zirkman
1997
120,436
- -
1,118
Vice President, General
1996
115,288
40,934
- -
Counsel and Secretary
1995
105,249
41,995
3,000
Paul R. Flanders
1997
105,925
- -
1,500
Vice-President, Finance
1996
- -
- -
- -
and Treasurer
1995
- -
- -
- -
Richard H. Liem
1997
103,160
- -
500
Vice President,
1996
94,750
30,288
- -
Financial Operations
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.
Option Grants in Last Fiscal Year
Number of Securities Underlying Options
% of Total Options Granted to Employees
Exercise
Price (Price per
Expiration
(c)
Potential Realizable Value at Assumed Rates of Stock Appreciation for
Option Term
Name
Granted
in 1997
Share
Date
5%
10%
Alan Vituli (a)
72,830
61.1%
$ 101.76
3/26/2007
$5,429,590
$13,035,600
Daniel T. Accordino (a)
31,479
26.4%
101.76
3/26/2007
2,346,808
5,634,322
Joseph A. Zirkman (a)
368
.3%
101.76
3/26/2007
27,435
65,867
(b)
750
.6%
110.00
6/9/2007
51,884
131,484
Paul R. Flanders (b)
1,500
1.3%
110.00
6/9/2007
103,768
262,968
Richard H. Liem (b)
500
.4%
110.00
6/9/2007
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 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 Long-Term Incentive Plan 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
Long-Term Incentive Plan. These plans, as well as the terms of the
aforementioned grants, are described in detail separately in this report.
(b) Stock option grants to Messrs. Zirkman, Flanders and Liem include 750,
1,500, and 500 shares, respectively, granted under the 1996 Long-Term
Incentive Plan. These options become exercisable at the rate of 25% per
year beginning on December 31, 1997.
(c) 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.
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 committed in bad 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 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 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. In
accordance with the Savings Plan, Carrols matches up to $1,060 of an
employee's contributions by contributing $0.50 for each dollar contributed
by the employee. Employees are fully vested in their own contributions;
employees become vested in Carrols' 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, permanent or total
disability. Benefits may be paid out upon the occurrence of any of the
foregoing events in a single cash lump sum, in periodic installments over
not more than 15 years or in the form of an annuity. The employee's
contributions may be withdrawn at any time, subject to restrictions on
future contributions. Carrols' matching contributions may be withdrawn
under certain conditions of financial necessity or hardship as defined in
the Savings Plan.
Bonus Plans. Carrols 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 Closing, 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 and retain
qualified and competent persons through the encouragement of stock
ownership or stock appreciation rights in Holdings.
The 1996 Plan permits the Company's Compensation Committee to grant, from
time to time, options to purchase an aggregate of up to 106,250 shares of
Common Stock. The vesting periods for awards and the expiration dates for
exercisability of Awards granted under the 1996 Plan are determined by the
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 Compensation Committee is authorized to grant options under the 1996
Plan to all eligible employees of the Company and its subsidiaries,
including executive officers and directors (other than outside Directors
and members of the Compensation Committee).
The option exercise price per share of any option granted under the 1996
Plan is determined by the 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 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 payable over a three year period and bearing interest at
the rate provided under Section 1274(d) of the Internal Revenue Code of
1986, as amended from time to time or (iv) by a combination of any of the
foregoing, in accordance with the terms of the 1996 Plan, the applicable
stock option agreement and any applicable guidelines of the Compensation
Committee in effect at the time.
Pursuant to the 1996 Plan, in the event of a Change of Control (as defined
in the 1996 Plan), any or all Stock Options (as defined in the 1996 Plan)
and Stock Appreciation Rights (as defined in the 1996 Plan) still
outstanding shall, notwithstanding any contrary terms of the Award
Agreement (as defined in the 1996 Plan), accelerate and become exercisable
in full at least ten days prior to (and shall expire on) the consummation
of such Change of Control, on such conditions as the Compensation Committee
shall determine, unless the successor corporation assumes the outstanding
Stock Options or Stock Appreciation Rights or substitutes substantially
equivalent options.
Pursuant to the 1996 Plan, 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 (i)
unsecured and fully recourse against the holder of such option or (ii)
nonrecourse but secured by the shares of 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.
In addition, pursuant to the 1996 Plan, in the event of a Change of Control
(as defined in the 1996 Plan) during the term of employment with Carrols of
a holder of an option issued under the 1996 Plan, the portion of any such
option that is not vested 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 Compensation Committee shall notify any holder of an option
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 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 option
granted under the 1996 Plan shall become exercisable solely for the amount
of such cash, property or securities that the holder of such option would
have been entitled to had such option been exercised immediately prior to
such event (ii) the holder of such option shall be given an opportunity to
either (A) exercise such option prior to the consummation of the Approved
Sale and participate in such sale as a holder of Common Stock or (B) upon
consummation of the Approved Sale, receive in exchange for such option
consideration equal to the amount determined by multiplying (1) the same
amount of consideration per share of Common Stock received by the holders
of Common Stock in connection with the Approved Sale less the exercise
price per share of Common Stock of such option to acquire Common Stock by
(2) the number of shares of Common Stock represented by such option; and
(iii) to the extent such option is not exercised prior to or simultaneous
with such Approved Sale, any such option shall be canceled.
Description of Employment Agreements
Vituli Employment Agreement. On March 27, 1997 in connection with the MD
Closing, 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 will require 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.
Accordino Employment Agreement. On March 27, 1997 in connection with the
MD Closing, 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.
Option Agreements Pursuant to Holdings Stock Option Plans
Vituli Plan Option Agreement. On December 30, 1996 (during the Company's
1997 fiscal year), pursuant to the Atlantic Transaction, Holdings granted
to Alan Vituli, under the 1996 Plan, an option (the "Vituli Option") to
purchase 43,350 shares of Common Stock. The Vituli Option (i) was
immediately exercisable with regard to 15,300 shares of 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 Common Stock at an
exercise price of $130.00 per share and (b) 12,750 shares of 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 Closing, Holdings granted an option to purchase
43,350 shares of 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, shall (ii) become exercisable on the date of grant
with regard to 15,300 shares of Common Stock and (iii) shall become
exercisable (a) on December 31, 1997 with regard to 5,610 shares of Common
Stock, (b) on December 31, 1998 with regard to 5,610 shares of Common
Stock, (c) on December 31, 1999 with regard to 5,610 shares of Common Stock
and (d) on December 31, 2000 with regard to 11,220 shares of 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 Common Stock. The Accordino Option
(i) was immediately exercisable with regard to 10,200 shares of Common
Stock at an exercise price of $110.00 per share and (ii) was to becomes
exercisable on December 31, 1997 with regard to (a) 10,200 shares of Common
Stock at an exercise price of $130.00 per share and (b) 8,500 shares of
Common Stock at an exercise price of $140.00 per share.
In connection with the MD Closing, 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 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 and shall (ii) become
exercisable on the date of grant with regard to 10,200 shares of Common
Stock and (iii) become exercisable (a) on December 31, 1997 with regard to
3,740 shares of Common Stock, (b) on December 31, 1998 with regard to 3,740
shares of Common Stock, (c) on December 31, 1999 with regard to 3,740
shares of Common Stock and (d) on December 31, 2000 with regard to 7,480
shares of Common Stock.
Other Option Agreements
Vituli Non-Plan Option Agreement. In connection with the MD Closing,
Holdings granted to Mr. Vituli a nonqualified stock option (the "Vituli
Non-Plan Option") to purchase 29,480 shares of 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 in Control (as defined in the New 1996 Plan) on the Vituli Non-Plan
Option.
Accordino Non-Plan Option Agreement. In connection with the MD Closing,
Holdings granted to Mr. Accordino a nonqualified stock option (the
"Accordino Non-Plan Option") to purchase 2,579 shares of 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 Closing,
Holdings granted to Joseph A. Zirkman a nonqualified stock option (the
"Zirkman Non-Plan Option") to purchase 368 shares of 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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 March 15, 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)@@
Number
Percentage
Stockholders of Carrols Corporation:
Carrols Holdings Corporation
968 James Street
Syracuse, New York 13203
10
100%
Stockholders of Carrols Holdings Corporation:
Atlantic Restaurants, Inc.
566,667
47.8%
Madison Dearborn Capital Partners, L.P.
283,333
23.9%
Madison Dearborn Capital Partners, L.P. II
283,334
23.9%
Executive Officers and Directors:
Alan Vituli (b)
36,633
3.1%
Daniel T. Accordino
15,316
1.3%
Joseph A. Zirkman
385
- ---
Paul R. Flanders
375
- ---
Richard H. Liem
125
- ---
Directors and executive officers of Carrols
as a group (12 persons)
52,959
4.5%
@@
(a) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to a security. For purposes of this
table, a person is deemed as of any date to have "beneficial ownership" of
any security that such person has the right to acquire within 60 days after
such date. The number of shares shown in the table includes stock options
which are currently exercisable or exercisable within 60 days to purchase:
26,806 shares held by Mr. Vituli; 14,456 shares held by Mr. Accordino; 262
shares held by Mr. Zirkman; 375 shares held by Mr. Flanders; and, 125
shares held by Mr. Liem.
(b) Includes 20,910 vested stock options contributed to and held by the
Vituli Family Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements
CARROLS CORPORATION AND SUBSIDIARIES:
Page
Opinion of Independent Certified F-1 to
Public Accountants F-2
Financial Statements:
Consolidated Balance Sheets F-3 to
F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholder's Deficit F-6
Consolidated Statements of Cash Flows F-7 to
F-8
Notes to Consolidated Financial F-9 to
Statements F-18
(b) Financial Statement Schedules
Schedule Description Page
CARROLS CORPORATION AND SUBSIDIARIES:
II Valuation and Qualifying Accounts F-19
Schedules other than those listed are omitted for the reason that they are
not required, not applicable, or the required information is shown in the
financial statements or notes thereto.
Separate financial statements of the Company are not filed for the reasons
that (1) consolidated statements of the Company and its consolidated
subsidiaries are filed and (2) the Company is primarily an operating
Company and all subsidiaries included in the consolidated financial
statements filed are wholly-owned, and indebtedness of all subsidiaries
included in the consolidated financial statements to any person other than
the Company does not exceed 5% of the total assets as shown by the
Consolidated Balance Sheet at December 31, 1997.
(c) Exhibits Required by Item 601 of Regulation S-K
@@
EXHIBIT NUMBER
DESCRIPTION
INCORPORATED BY
REFERENCE
2.1
Purchase and Sale Agreement dated
February 10, 1994 between Carrols Corporation, as Purchase, and KIN
Restaurant, Inc., as Seller
Exhibit 2.1 to the Company's 1994 Annual Report on Form 10-K
2.2
Purchase and Sale Agreement dated April 18, 1994 among Carrols Corporation,
as Purchaser, and Riva Development Corporation and John Riva, as Seller
Exhibit 2.2 to the Company's 1994 Annual Report on Form 10-K
2.3
Purchase and Sale Agreement dated May 31, 1994 among Carrols Corporation,
as Purchaser, and Michael P. Jones and Donald M. Cepiel, Sr., and the
corporations listed therein
Exhibit 2.3 to the Company's 1994 Annual Report on Form 10-K
2.4
Securities Purchase Agreement dated as of March 6, 1996, by and among
Atlantic Restaurants, Inc., Carrols Holdings Corporation, Carrols
Corporation and certain Selling Shareholders
Exhibit 2.1 to the Company's current report on Form 8-K filed March 21,
1996
2.5
Deferred Securities Purchase Agreement dated as of March 6, 1996 by and
among Atlantic Restaurants, Inc., Alan Vituli and Pryor, Cashman, Sherman &
Flynn
Exhibit 2.2 to the Company's current report on Form 8-K filed March 21,
1996
3.1
Restated Certificate of Incorporation
Exhibit 3.(3)(a) to the Company's 1987 Annual Report on Form 10-K
3.2
Certificate of Amendment of the Restated Certificate of Incorporation
Exhibit 3.2 to the Company's 1996 Annual Report on Form 10-K
3.3
Restated By-laws
Exhibit 3.(3)(b) to the Company's 1987 Annual Report on Form 10-K
4.1
Indenture dated as of August 17, 1993 among Holdings, the Company and
Marine Midland Bank, N.A.
Exhibit 4.1 to Amendment No. 3 to the Company's Registration Statement on
Form S-1 (Number 3365100) filed August 10, 1993
10.1
First Amended and Restated Loan Security and Preferred Stock Purchase
Agreement by and among Carrols Merger Corporation, Carrols Holdings
Corporation and Heller Financial, Inc. dated as of December 22, 1986
Exhibit 10.1 to the Company's 1987 Annual Report on Form 10-K
@@
EXHIBIT NUMBER
DESCRIPTION
INCORPORATED BY
REFERENCE
10.2
Second Amended and Restated Loan and Security Agreement by and among
Carrols Corporation, Carrols Holdings Corporation and Heller Financial,
Inc. dated as of September 15, 1992
Exhibit 10.15 to the Company's 1992 Annual Report on Form 10-K
10.3
Senior Subordinated Credit Agreement dated as of September 15, 1992 between
Carrols Corporation, Carrols Holdings Corporation and World Subordinated
Debt Partners, L.P.
Exhibit 10.17 to the Company's 1992 Annual Report on Form 10-K
10.4
Third Amended and Restated Loan and Security Agreement by, and among
Carrols Corporation, Carrols Holdings Corporation and Heller Financial,
Inc. dated as of August 9, 1993
Exhibit 10.19 to Amendment No. 2 to the Company's Form S-1 Registration
Statement filed August 4, 1993
@@10.5
First Amendment to Third Amended and Restated Loan and Security Agreement
by and among Carrols Corporation, Carrols Holdings Corporation and Heller
Financial, Inc. dated as of October 27, 1993
The Company's 1993 Annual Report on Form 10-K
10.6
Second Amendment to Third Amended and Restated Loan and Security Agreement
by and among Carrols Corporation, Carrols Holdings Corporation and Heller
Financial, Inc. dated as of March 11, 1994
The Company's 1993 Annual Report on Form 10-K
10.7
Third Amendment to Third Amended and Restated Loan and Security Agreement
among Carrols Holdings Corporation, Carrols Corporation and Heller
Financial, Inc. dated as of May 2, 1994
Exhibit 10.9 to the Company's 1994 Annual Report on Form 10-K
10.8
Fourth Amendment to Third Amended and Restated Loan and Security Agreement
among Carrols Holdings Corporation, Carrols Corporation and Heller
Financial, Inc. dated as of December 20, 1994
Exhibit 10.10 to the Company's 1994 Annual Report on Form 10-K
10.9
Supply Agreement between ProSource Services Corporation and Carrols
Corporation dated April 1, 1994
Exhibit 10.11 to the Company's 1994 Annual Report on Form 10-K
10.10
Fifth Amendment to Third Amended and Restated Loan and Security Agreement
among Carrols Holdings Corporation, Carrols Corporation and Heller
Financing, Inc. dated as of February 22, 1995
Exhibit 10.10 to the Company's 1996 Annual Report on Form 10-K
EXHIBIT NUMBER
DESCRIPTION
INCORPORATED BY
REFERENCE
10.11
Sixth Amendment to Third Amended and Restated Loan and Security Agreement
among Carrols Holdings Corporation, Carrols Corporation and Heller
Financing, Inc. dated as of February 14, 1996
Exhibit 10.11 to the Company's 1996 Annual Report on Form 10-K
10.12
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
Exhibit 10.12 to the Company's 1996 Annual Report on
Form 10-K
10.13
1994 Regional Directors Bonus Plan
Exhibit 10.19 to the Company's 1994 Annual Report on Form 10-K
10.14
Carrols Corporation Corporate Employee's Savings Plan dated December 31,
1994
Exhibit 10.21 to the Company's 1994 Annual Report on Form 10-K
10.15
Commitment Letter from Texas Commerce Bank National Association and Chase
Securities Inc. and accepted and agreed to by Carrols Corporation as of
January 8, 1997
Exhibit 10.15 to the Company's 1996 Annual Report on Form 10-K
10.16
Escrow Agreement dated as of March 6, 1996 by and among Atlantic
Restaurants, Inc., Bahrain International Bank (E.C.), Carrols Holdings
Corporation, Carrols Corporation, certain selling shareholders and Baer
Marks & Upham L.L.P.
Exhibit 2.3 to the Company's Current Report on Form 8-K filed March 21,
1996
10.17
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
Exhibit 10.27 to the Company's current report on Form 8-K filed April 10,
1996
10.18
Amended and Restated Employment Agreement dated as of April 3, 1996 by and
between Carrols Corporation and Alan Vituli
Exhibit 10.23 to the Company's Current Report on Form 8-K filed on April
10, 1996
10.19
Amended and Restated Employment Agreement dated as of April 3, 1996 by and
between Carrols Corporation and Daniel T. Accordino
Exhibit 10.24 to the Company's Current Report on Form 8-K filed on April
10, 1996
10.20
Carrols Corporation 1996 Long-Term Incentive Plan
Exhibit 10.20 to the Company's 1996 Annual Report on Form 10-K
10.21
Stock Option Agreement dated as of December 30, 1996 by and between Carrols
Corporation and Alan Vituli
Exhibit 10.21 to the Company's 1996 Annual Report on Form 10-K
EXHIBIT NUMBER
DESCRIPTION
INCORPORATED BY
REFERENCE
10.22
Stock Option Agreement dated as of December 30, 1996 by and between Carrols
Corporation and Daniel T. Accordino
Exhibit 10.22 to the Company's 1996 Annual Report on Form 10-K
10.23
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
Exhibit 10.23 to the Company's 1996 Annual Report on Form 10-K
10.24
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
Exhibit 10.24 to the Company's 1996 Annual Report on Form 10-K
10.25
Form of Second Amended and Restated Employment Agreement by and between
Carrols Corporation and Alan Vituli
Exhibit 10.25 to the Company's 1996 Annual Report on Form 10-K
10.26
Form of Second Amended and Restated Employment Agreement by and between
Carrols Corporation and Daniel T. Accordino
Exhibit 10.26 to the Company's 1996 Annual Report on Form 10-K
10.27
Form of Carrols Holdings Corporation 1996 Long-Term Incentive Plan
Exhibit 10.27 to the Company's 1996 Annual Report on Form 10-K
10.28
Form of Stock Option Agreement by and between Carrols Holdings Corporation
and Alan Vituli
Exhibit 10.28 to the Company's 1996 Annual Report on Form 10-K
10.29
Form of Stock Option Agreement by and between Carrols Holdings Corporation
and Daniel T. Accordino
Exhibit 10.29 to the Company's 1996 Annual Report on Form 10-K
10.30
Form of Unvested Stock Option Agreement by and between Carrols Holdings
Corporation and Alan Vituli
Exhibit 10.30 to the Company's 1996 Annual Report on Form 10-K
10.31
Form of Unvested Stock Option Agreement by and between Carrols Holdings
Corporation and Daniel T. Accordino
Exhibit 10.31 to the Company's 1996 Annual Report on Form 10-K
10.32
Form of Unvested Stock Option Agreement by and between Carrols Holdings
Corporation and Joseph A. Zirkman
Exhibit 10.32 to the Company's 1996 Annual Report on Form 10-K
EXHIBIT NUMBER
DESCRIPTION
INCORPORATED BY
REFERENCE
10.33
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.
Exhibit 10.38 to the Company's current report on Form 8-K filed March 27,
1997
10.34
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.
Exhibit 10.39 to the Company's current report on Form 8-K filed March 27,
1997
10.35
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.
Exhibit 10.40 to the Company's current report on Form 8-K filed March 27,
1997
10.36
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
Exhibit 10.41 to the Company's current report on Form 8-K filed August 20,
1997
16.1
Letter re: change in certifying accountant
Exhibit 16.1 to the Company's 1996 Annual Report on Form 10-K
16.2
Letter re: change in certifying accountant
Exhibit 16.1 to the Company's current report on Form 8-K filed August 15,
1997
22.1
Subsidiaries of the Registrant:
Carrols J.G. Corp., Carrols Realty Holdings Corp., Carrols Realty I Corp.,
Carrols Realty II Corp., CDC Theater Properties, Inc., H.N.S. Equipment &
Leasing Corp., Quanta Advertising Corp., Confectionery Square Corp., Jo-Ann
Enterprises, Inc.
27
Financial Data Schedule
Reports on Form 8-K - No current reports on Form 8-K were filed during the
quarter ended December 28, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized on the
25th day of March, 1998.
CARROLS CORPORATION
BY: /s/ Alan Vituli
Alan Vituli, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Alan Vituli
(Alan Vituli) Director, Chairman and Chief
Executive Officer March 25, 1998
Daniel T. Accordino
(Daniel T. Accordino) Director, President and Chief
Operating Officer March 25, 1998
Benjamin D. Chereskin
(Benjamin D. Chereskin) Director March 25, 1998
James M. Conlon
(James M. Conlon) Director March 25, 1998
David J. Mathies, Jr.
(David J. Mathies, Jr.) Director March 25, 1998
C. Ronald Petty
(C. Ronald Petty) Director March 25, 1998
Robin P. Selati
(Robin P. Selati) Director March 25, 1998
Clayton E. Wilhite
(Clayton E. Wilhite) Director March 25, 1998
Paul R. Flanders
(Paul R. Flanders Vice President - Finance
and Treasurer March 25, 1998
Timothy J. LaLonde
(Timothy J. LaLonde) Vice President - Controller March 25, 1998
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 as listed in Item
14 of the Form 10-K 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/
Coopers & Lybrand, L.L.P.
Syracuse, New York
February 27, 1998
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 and schedule 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 listed in the index at Item 14 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
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
___________
ASSETS
1997
1996
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.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 1997 AND 1996
___________
LIABILITIES AND STOCKHOLDERS' EQUITY
1997
1996
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.
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.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
___________
Additional
Total
Common
Paid-in
Accumulated
Notes
Stockholders'
Stock
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.
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)
The accompanying notes are an integral part of these financial statements.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
___________
1997
1996
1995
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.
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 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 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:
Capital
Operating
Years Ending:
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 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
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.
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 and 7,250 shares
respectively, at liquidation preference and
redemption price
$3,633,000
Voting common stock, par value $.01, authorized
3,000,000 and 6,000,000 shares, respectively,
issued and outstanding 1,144,144 and 850,000
shares, respectively
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
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 283,334 shares of
common stock of Holdings to Madison Dearborn Capital Partners ("Madison
Dearborn"), an independent third party, resulting in approximately $30.4
million of new equity for the Company. Atlantic also sold 283,333 of its
shares of Holdings to Madison Dearborn resulting in both Atlantic and
Madison Dearborn 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.
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
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.
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:
(Unaudited)
Year Ended
December 31,
1997
1996
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
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
Description
of Period
Expenses
Deductions
of 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.
??
13
13
47
F-46
54