ITEM 1. BUSINESS
HISTORICAL DEVELOPMENT
Carrols Corporation (the "Company" or "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 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 to 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 "Acquisition") by Carrols Holdings Corporation ("Holdings"), a corporation formed to effect the Acquisition by Mr. Alan Vituli and other members of the Company's current senior management, a private investor group and certain institutional investors. As a result of the Acquisition, Carrols became a wholly-owned subsidiary of Holdings. In March, 1992, Mr. Vituli, who was Chairman of the Board of the Company from the time of the Acquisition in December, 1986, was also elected to serve as Chief Executive Officer. Mr. Daniel T. Accordino became President of the Company in February, 1993. In January, 1995, the Company entered into three-year employment agreements with Messrs. Vituli and Accordino. See "Executive Compensation -- Employment Agreements".
At the time of the Acquisition, the Company owned 138 Burger King restaurants and a food distribution business. In August 1990, the Company sold the 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 was entered into on April 1, 1994 and which expires on March 31, 1999. See "Business--Supplies and Distribution."
Since the Acquisition, Carrols has expanded its operations from 138 Burger King restaurants to 217 as of March 15, 1995. During this period, Carrols built 27 restaurants, purchased 61 restaurants, and disposed of or closed nine restaurants. See "Business--Restaurant Locations." Since October 1992, the Company has acquired 50 Burger King restaurants through the 1992 acquisition of ten Burger King restaurants for a purchase price of approximately $7.4 million, the 1993 acquisition of 18 Burger King restaurants for a purchase price of approximately $10.5 million and the 1994 acquisition of 22 restaurants in three separate transactions, for a total purchase price of $11.6 million.
On August 17, 1993 the Company consummated a refinancing (the "Refinancing") that repaid all outstanding amounts under the then existing senior secured credit facility, the senior subordinated notes and the subordinated debentures. Under the terms of the refinancing and the Company's present outstanding indebtedness, debt amortization requirements are less than $1.0 million per year until 2000. The Refinancing included the issuance of $110.0 million aggregate principal amount of 11-1/2% Senior Notes due 2003 and the concurrent closing of a new $25.0 million senior secured revolving credit facility (the "Senior Secured Credit Facility") which replaced the Company's existing senior secured credit facility with the same lender. On December 20, 1994, Carrols amended certain provisions of the Senior Secured Credit Facility which included an increase in the maximum amount of the revolver to the original $25.0 million, elimination of the scheduled annual reductions in the maximum revolver available and a reduction in the interest rate. As part of the amendment, an additional $5.0 million credit facility was added to the existing $25.0 million facility, which additional facility will be secured by the 22 Burger King restaurants acquired during 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources".
COMPANY OPERATIONS
General. Since 1976, the Company's principal business has been the operation of Burger King restaurants. The Company is the largest independent Burger King franchisee in the United States. As of March 15, 1995, the Company operated, as franchisee, 217 Burger King restaurants, of which 195 are free-standing restaurants and 22 are located in retail shopping centers or specialty stores. Carrols currently operates Burger King restaurants in nine Northeastern and Midwestern states and one Southeastern state.
Carrols' Burger King restaurants are typically open seven days a week from 7:00 a.m. to 11:00 p.m. Substantially all of Carrols' Burger King restaurants offer a breakfast menu and the traditional Burger King menu for lunch and dinner. The majority of the Company's Burger King restaurants are free-standing buildings offering in-store seating and drive-thru service. A standard, free-standing Burger King restaurant building typically has an area of approximately 3,000 square feet with a seating capacity of approximately 90 and adjacent parking areas. Smaller Burger King facilities are utilized in retail shopping centers. In Carrols' free-standing Burger King restaurants, greater than 50% of sales are generated through drive-thru windows. Carrols leases most of its restaurant properties, although it owns the land and buildings on which 17 restaurants are located. See "Business--Properties."
Burger King. There are approximately 7,400 Burger King restaurants worldwide making BKC the second largest hamburger fast food operation. BKC has been franchising since 1954 and has expanded to locations in all 50 states, the District of Columbia and approximately 50 foreign countries.
Burger King restaurants are fast food restaurants of distinctive design which serve a limited menu of moderately-priced foods and offer efficient and rapid service. The Company believes that convenience, speed of service, quality of food and price/value are the primary competitive advantages of Burger King restaurants. Burger King restaurants appeal to a broad spectrum of consumers, with different meal segments tending to appeal to different groups.
Burger King restaurants feature flame-broiled hamburgers, which are an integral part of the Burger King identity, and several widely-known, trademarked products, the most popular being the Whopper sandwich, which is a large, flame-broiled hamburger on a five-inch toasted bun garnished with combinations of mayonnaise, lettuce, onions, pickles and tomatoes. The basic menu of all Burger King restaurants consists primarily of hamburgers, cheeseburgers, chicken sandwiches and filets, fish sandwiches, french fried potatoes, salads, shakes, desserts, soft drinks, milk and coffee. From time to time, other promotional items are added to the menu for limited periods. BKC continually seeks to develop new products and concepts as it endeavors to enhance the menu and service of Burger King restaurants.
Franchise Agreements. Each of Carrols' Burger King restaurants operates under a separate Franchise Agreement from 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. At the option of BKC, a Successor Franchise Agreement may be granted 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 $25,000 per restaurant. In addition to this fee, in order to obtain a Successor Franchise Agreement, Carrols 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 $140,000 per restaurant. The Franchise Agreements are non-cancelable except for failure to abide by the terms thereof.
Carrols believes that it enjoys a good relationship with BKC, and believes that it will satisfy BKC's normal Successor Franchise Agreement policies and, accordingly, that Successor Franchise Agreements will be granted in due course by BKC at expiration of the existing Franchise Agreements. BKC has granted Successor Franchise Agreements for all of the Franchise Agreements for which the Company has sought Successor Agreements.
In addition to the initial franchise fee, franchisees currently pay to BKC a monthly royalty of 3-1/2% of the gross revenues from their Burger King restaurants. Burger King operators currently also contribute 4% of monthly gross revenues from their Burger King restaurants to fund BKC's national and regional advertising. BKC engages in substantial 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. See "Business--Business Strategy" and "--Advertising and Promotion."
The franchisee of a new restaurant must also purchase the requisite equipment, seating, signage, and pay various other costs to open a new Burger King restaurant. The Company estimates that the average costs for a standard free-standing restaurant are approximately $260,000 (excluding the cost of the building and related real estate). In addition, the Company estimates that the
aggregate cost of constructing a free-standing restaurant and the cost of the associated real estate ranges from $650,000 to $1,000,000 (or higher) depending upon building type, land costs and site work.
The BKC Franchise Agreement does 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 has the right of first refusal to purchase any Burger King restaurant which the Company wishes to acquire. In addition, BKC's prior consent is required for the sale by the Company of any of its restaurants. Since the Acquisition, BKC has consented to each of the Company's proposed acquisitions.
Management Structure; Staffing; Training. Substantially all executive management, finance, marketing and operation support functions are conducted centrally at Carrols' Syracuse, New York headquarters. The Company currently has three vice president-regional directors who are responsible for the operations of all Burger King restaurants in their respective regions. Each of the three regional directors has been employed by Carrols for over 20 years. A fourth regional director has replaced a recently retired vice president-regional director. There are 28 district supervisors who report to the regional directors. The district supervisors have responsibility for an average of eight restaurants and are responsible for direct supervision of the day-to-day operations of the restaurants. Typically, district supervisors previously served as restaurant managers at one of Carrols' restaurants. 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 full-time manager and two or three assistant managers.
Carrols provides both classroom and in-restaurant training for its salaried and hourly personnel, in addition to training programs provided by BKC. Carrols believes that training and management development are integral to its success.
Control Systems. Financial and management control of Carrols' restaurants is facilitated by the use of a computerized point of sale system which electronically communicates data from each of the Company's restaurants to Carrols' centralized management information system on a daily basis. Sales reports, payroll data, food and labor cost analyses, and other operating information for each restaurant are also available daily to the restaurant manager, who is expected to react quickly to trends or situations in his or her restaurant. The daily information is accumulated for weekly operating reports covering significant restaurant performance indicators for each restaurant. These reports are monitored by each management level from district supervisor through senior management. Carrols believes that these systems materially enhance its ability to control and manage its restaurant operations.
Factors Affecting the Company's Operations. Carrols' business is affected by conditions which reduce automobile usage, such as inclement weather, gasoline prices and road construction. Weather conditions can be particularly severe in the Northeast where the Company operates a significant number of its Burger King restaurants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historically, the Company's business has also been affected by changes in local and national economic conditions, consumer spending habits, consumer tastes, consumer concerns about the nutritional quality of fast food and demographic trends.
Site Selection. The Company believes that the location of its restaurants is very important to its success. The Company's operations personnel review all potential acquisition and new development sites for accessibility, visibility, costs, surrounding traffic patterns and demographic characteristics. The Company's senior management, based upon analyses prepared by its real estate professionals and its operations division, determines the acceptability of all acquisition and new development sites. See "Business--Business Strategy."
RESTAURANT LOCATIONS
The following table sets forth the locations of the 217 Burger King restaurants in Carrols' system at March 15, 1995.
NEW YORK (97) OHIO (65) MAINE (3)
Greater Albany (14) Greater Akron (11) Augusta (1) Auburn (1) Alliance (2) Bangor (2) Amsterdam (1) Archbold (1) Greater Binghamton (6) Ashland (1) Boonville (1) Bowling Green (2) MASSACHUSETTS (2) Buffalo (1) Bryan (1) Catskill (1) Greater Canton (11) North Andover (1) Cobleskill (1) Greater Cleveland (12) Billerica (1) Cortland (1) Defiance (1) Fulton (1) Findlay (2) Glens Falls (2) Fostoria (1) NEW JERSEY (2) Gloversville (2) Fremont (1) Herkimer (1) Hartville (1) Franklin (1) Hudson (1) Lima (2) Newton (1) Kingston (3) Mansfield (6) Middletown (2) Medina (1) New City (1) Mentor (1) CONNECTICUT (1) Newburgh (3) New Philadelphia (2) Niagara Falls (1) Ottawa (1) Westport (1) Norwich (1) Streetsboro (1) Oneonta (2) Tiffin (1) Oswego (1) Van Wert (1) VERMONT (1) Peekskill (1) Wapakoneta (1) Plattsburgh (3) Wooster (1) Rutland (1) Poughkeepsie (2) Port Jervis (1) Greater Rochester (15) MICHIGAN (14) Rome (2) Greater Syracuse (17) Ann Arbor (3) Schodack (1) Battle Creek (4) Greater Utica (4) Kalamazoo (4) Watertown (2) Jackson (3) Yorktown Heights (1)
NORTH CAROLINA (24) PENNSYLVANIA (8)
Greater Asheville (9) Bradford (1) Durham (7) East Stroudsburg (1) Forest City (1) Lebanon (1) Hendersonville (2) Reading (4) Marion (1) Tamaqua (1) Morganton (1) Raleigh (2) Shelby (1)
ADVERTISING AND PROMOTION
As a Burger King franchisee, a significant portion of the Company's advertising and promotional programs are established and coordinated by BKC through regional and national advertising campaigns. Carrols supplements BKC's advertising and promotional activities with local advertising and promotions, including purchasing 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.
Most BKC franchisees and BKC are required to contribute 4% of monthly gross revenues from restaurant operations to an advertising fund, utilized by BKC for its advertising and promotional programs and public relations activities. BKC's advertising programs are comprised of national campaigns and local advertising which supplements the national campaigns. BKC's advertising campaigns are generally carried on television, radio and in the mass circulated print media (national and regional newspapers and magazines). Carrols believes that one of the major advantages of being a Burger King franchisee is the leverage it realizes from the marketing power of BKC.
SUPPLIES AND DISTRIBUTION
As a Burger King franchisee, Carrols is required to purchase all of its foodstuffs, paper and packaging 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 such items meet BKC product uniformity standards. On April 1, 1994 Carrols entered into a new supply agreement with its supplier, ProSource, pursuant to which Carrols is required to obtain all of its foodstuffs (other than bread products), paper, promotional premiums and packaging from ProSource. The new supply agreement with ProSource is a five-year agreement which expires on March 31, 1999. The Company believes that ProSource's services are competitive with alternatives available to the Company. Carrols purchases its bread products from local bakeries. See "Business--Historical Development."
There are other BKC-approved supplier/distributors which compete with ProSource. Carrols believes that it would be able to substitute another supplier if ProSource were unable, for any reason, or chose not to continue to service the Company.
All BKC-approved suppliers are required to purchase all foodstuffs and supplies from BKC-approved manufacturers and purveyors. BKC is responsible for quality control and supervision of these manufacturers and purveyors. See "Business--Quality Assurance."
BKC monitors all BKC-approved manufacturers and purveyors of its foodstuffs. BKC regularly visits these manufacturers and purveyors to observe the preparation of foodstuffs and run various tests to ensure that only high quality foodstuffs are sold to BKC-approved suppliers and distributors. In addition, BKC coordinates and supervises audits of approved suppliers and distributors to determine continuing product specification compliance and ensure that manufacturing plant and distribution center standards are met.
QUALITY ASSURANCE
All Burger King franchisees, including Carrols, 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 temperatures, sanitation and cleanliness. In addition, BKC has set maximum time standards for holding unsold prepared food; for example, sandwiches and french fries are discarded after ten minutes and seven minutes following preparation, respectively. The "conveyor belt" cooking system utilized in all Burger King restaurants, which is calibrated to carry hamburgers through the flame broiler at regulated speeds, helps ensure that standardized cooking times and temperatures are met.
Carrols, through its regional directors and district supervisors, closely supervises the operation of all of its restaurants to help insure that standards and policies are followed and that product quality, customer service and cleanliness of the restaurants are maintained. BKC conducts unscheduled monthly inspections of each Burger King restaurant throughout the Burger King system.
BUSINESS STRATEGY
The Company's primary business strategy is to expand its operations through the acquisition and construction of additional Burger King restaurants while enhancing the quality of operations and competitive position of its existing Burger King restaurants. Carrols believes the size of the nationwide Burger King system will continue to present opportunities for selective growth through acquisitions. In addition, Carrols believes that the number of markets in which the Company operates will provide opportunities for construction of new restaurants. The ability of the Company to expand through the acquisition and construction of additional Burger King restaurants is subject to, among other things, the availability of financing and obtaining the consent of the franchisor. Concurrent with growth within the Burger King system, the Company has identified other quick service restaurant concepts with appealing market niches and favorable unit economics which management believes provide excellent growth vehicles and will allow the Company to leverage its strong operations expertise. During the last 12 months, the Company entered into Area Development Agreements with Taco Cabana, Inc., and Pollo Tropical, Inc., pursuant to which the Company has the exclusive right in specified territories to develop and operate franchised restaurants in each of those concepts. See "Business -- Additional Restaurant Concepts".
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 requiring 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 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. A significant number of the Company's food service personnel are paid at rates related to the Federal minimum wage and increases in the minimum wage could increase the Company's labor costs.
The Company believes that it is operating in substantial compliance with applicable laws and regulations governing its operations.
COMPETITION
The fast food industry is highly competitive. 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. Carrols believes that national brand name identification is a significant competitive advantage in the fast food business. The Company's largest competitor is McDonald's. The Company believes that product quality and taste, convenience of location, speed of service, menu variety, price and ambiance, are the most important competitive factors in the fast food restaurant industry.
EMPLOYEES
At December 31, 1994, Carrols employed approximately 7,800 persons;approximately 100 were administrative personnel and 7,700 restaurant operating personnel. None of Carrols' employees is covered by collective bargaining agreements. Approximately 7,100 of the restaurant operating personnel at December 31, 1994 were part-time employees. Carrols believes that its employee relations are satisfactory.
ADDITIONAL RESTAURANT CONCEPTS
Taco Cabana. On June 20, 1994 Carrols entered into an agreement (the "Taco Cabana Agreement") with T.C. Management, Inc., an affiliate of Taco Cabana, Inc., for Carrols to have the exclusive right to develop Taco Cabana restaurants in North Carolina, South Carolina, and the Tidewater and Richmond areas of Virginia. Taco Cabana, Inc., is a publicly traded company which operates quick-service Mexican patio cafe restaurants. As of December 31, 1994, Taco Cabana owned and operated 104 Taco Cabana restaurants and franchised 23 Taco Cabana restaurants.
Taco Cabana restaurants feature generous portions of fresh, premium quality Tex-Mex and traditional Mexican style food at low prices. The restaurants provide interior, semi-enclosed and patio dining areas with a festive Mexican theme. Menu items include flame-grilled beef and chicken fajitas served on sizzling iron skillets, "Chicken Flameante" (a marinated rotisserie chicken), other Tex-Mex dishes, fresh, hot flour tortillas, and
lighter items such as a variety of salad entrees. Unlike many of its competitors, Taco Cabana makes all menu items "from scratch," preparing each item daily in each of its restaurants.
The Taco Cabana Agreement requires Carrols to develop three (3) Taco Cabana restaurants during the first year, six (6) Taco Cabana restaurants during the second year, and eight (8) Taco Cabana restaurants during each of the next three (3) years in order to retain the entirety of its territory under the agreement. Carrols has the ability to maintain the exclusive right to develop in its assigned territory provided it continues to develop Taco Cabana restaurants in accordance with the formula set forth in the Taco Cabana Agreement. Failure to comply with the formula would result in a reduction or elimination of its exclusive territorial rights. Upon execution of the Taco Cabana Agreement, Carrols paid a non-refundable fee of $250,000, which will be credited against development and license fees for the first five Taco Cabana restaurants developed by Carrols. The development and license fee for the first ten Taco Cabana restaurants to be opened by Carrols is $50,000 per restaurant, thereafter the development and license fee is $25,000 per restaurant.
Pollo Tropical. On January 1, 1995 Carrols entered into an agreement (the "Pollo Tropical Agreement") with Pollo Franchise, Inc., an affiliate of Pollo Tropical, Inc., for the exclusive right to develop Pollo Tropical restaurants in certain specified regions of Ohio and Kentucky. Pollo Tropical is a publicly traded company which operates a chain of quick service restaurants featuring grilled marinated chicken. As of December 31, 1994, Pollo Tropical currently had 34 restaurants systemwide, of which 33 were Company owned and 1 was franchised.
Pollo Tropical restaurants are quick-service restaurants featuring grilled, fresh chicken, marinated in a proprietary blend of tropical fruit juices and spices, and authentic "made from scratch" side dishes. The menu's emphasis on freshness and quality, as well as its focus on chicken served hot off the grill, provides a healthy and flavorful alternative to ordinary quick- service restaurants. Pollo Tropical restaurants combine high quality, distinctive taste and an inviting tropical setting with the convenience and low- price appeal of quick-service restaurants.
Pollo Tropical restaurants have a tropical and Latin theme, and feature fresh and flavorful chicken grilled to a quick golden brown over open flames in view of the customer. Chicken is served whole, in halves or in quarters, and grilled chicken breasts are served in sandwiches, salads and platters. The restaurants also offer a wide variety of distinctive and popular side dishes including black beans and rice, yucatan fries and sweet plantains.
The Pollo Tropical Agreement requires Carrols to develop three (3) Pollo Tropical restaurants during the first 18 months, six (6) Pollo Tropical restaurants during the next 12 months, and eight (8) Pollo Tropical restaurants during each of the next three years in order to retain the entirety of its territory under the agreement. Carrols maintains the exclusive right to develop in its assigned territories provided it continues to develop restaurants in accordance with the formula set forth in the Pollo Tropical Agreement. Failure to comply with the formula would result in a reduction or elimination of its exclusive territorial rights. Upon the execution of the Pollo Tropical
Agreement, Carrols paid a non-refundable fee of $110,000, which will be credited against franchise fees for the first five Pollo Tropical restaurants developed by Carrols. The license fee for the first three Pollo Tropical restaurants is $30,000 per restaurant, thereafter the license fee is $15,000 per restaurant.
In addition to the territories of Ohio and Kentucky, Carrols has certain limited options to develop Pollo Tropical restaurants in the State of Michigan (other than Detroit) and Toronto, Canada.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns the approximately 20,000 square foot building at 968 James Street, Syracuse, New York, in which its executive offices are located. This building houses all of the Company's administrative operations (except for those conducted at three small regional offices) and is adequate for future expansion. The Company is the beneficial owner of a 160,000 square foot warehouse building in Liverpool, New York. The warehouse is not used in the current operations of the Company and is available for sale or long-term lease.
In addition to the above, at March 15, 1995, the Company owned or leased the following properties:
Owned Leased Leased Land; Land; Land; Owned Owned Leased Building Building Building Total
Burger King restaurants 17 16 184(a) 217
Excess properties: Leased to others 1 -- 7 8 Available for sale or lease 4 -- -- 4
Total properties 22 16 191 229
(a) Includes 22 restaurants located in mall shopping centers or specialty locations.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established trading market for the Company's common equity, since 100% of its common stock is owned by Holdings.
Cash dividends per share were declared during 1993 and 1994 as follows:
January, 1993 $ 20,010.00 April, 1993 20,010.00 July, 1993 20,010.00 October, 1993 113,935.45 December, 1993 99,995.00 January, 1994 237,301.10 April, 1994 20,000.00 July, 1994 20,000.00 October, 1994 20,000.00
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
CARROLS CORPORATION AND SUBSIDIARIES - SUMMARY OF SELECTED FINANCIAL DATA
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -----------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies
The following is a summary of certain significant accounting policies followed in the preparation of the consolidated financial statements.
Basis of Consolidation
The consolidated financial statements include the accounts of Carrols Corporation and its subsidiaries (the "Company"). The Company is a wholly-owned subsidiary of Carrols Holdings Corporation ("Holdings"). All significant intercompany transactions have been eliminated in consolidation.
The Company operates, as franchisee, 219 fast food restaurants under the trade name "Burger King" in nine Northeastern and Midwestern states and one Southeastern state. As reported by Burger King Corporation ("BKC"), the Burger King system is the second largest "hamburger fast food" restaurant system in the United States in terms of sales and number of restaurants. The Company is the largest independent Burger King franchisee in the United States.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Acquisitions
The Company has purchased existing restaurants, principally for cash, during 1994 and 1993 consisting of the following:
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acquisitions (Continued)
Proforma financial information with respect to the 1993 acquisition of 18 restaurants is as follows and assumes the acquisition took place at the beginning of the fiscal year:
1993 1992
Revenues $181,341,000 $175,350,000 Income (loss) before extraordinary item and cumulative effect of accounting change ($ 3,703,000) 434,000
Net loss ($ 8,586,000) (603,000)
Proforma financial information is not provided for the 1994 acquisitions since their effect on the 1994 consolidated financial statements is not significant.
Depreciation and Amortization
Depreciation and amortization is provided on the straight-line method for financial reporting purposes. The useful lives for computing depreciation and amortization are as follows:
Buildings and improvements 5 to 20 years Leasehold improvements Remaining life of lease including renewal op- tions or life of asset, whichever is shorter Equipment 3 to 10 years Capital leases Remaining life of lease
At the time of retirement or other disposition, the cost and accumulated depreciation is removed from the accounts and any gain or loss is reflected in income. Depreciation expense for the years ended December 31, 1994, 1993 and 1992 was $7,404,000, $7,840,000 and $7,240,000, respectively.
Franchise Rights and Beneficial Leases
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 and beneficial leases are amortized using the straight-line method, principally over the remaining lives of the leases including renewal options, but not in excess of 40 years.
The recoverability of the carrying values of franchise rights and beneficial leases is periodically evaluated based on current and forecasted cash flow, future market opportunities, strategic importance and estimated disposal values.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Excess of Cost Over Fair Value
The excess of cost over fair value of assets acquired is amortized on a straight-line basis over 40 years.
Deferred Financing Costs
Financing costs incurred in obtaining long-term debt are capitalized and are amortized over the life of the related debt on an effective interest basis.
Cash and Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Income Taxes
The Company and its subsidiaries are included in the consolidated federal income tax return of Holdings.
Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes" which requires, among other things, an asset and liability approach to recognizing the tax effects of temporary differences between tax and financial reporting. This change had no effect on the Company's 1993 financial statements.
Advertising Costs
All advertising costs are expensed as incurred.
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 cost was $125,000, $111,000, and $101,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
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 January 1, 1995 (52 weeks), January 2, 1994 (52 weeks) and January 3, 1993 (53 weeks).
Reclassification
Certain amounts for prior years have been reclassified to conform to the current year presentation.
2. INVENTORIES
Inventories at December 31 consisted of: 1994 1993
Raw materials (food and paper products) $1,415,000 $1,205,000 Supplies 839,000 846,000 --------- --------- $2,254,000 $2,051,000 ========= =========
3. LEASES
The Company utilizes land and buildings in its operations under various lease agreements. Initially these leases are generally for 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.
During 1991, the Company sold the real estate of twelve of the Company's restaurants under sale/leaseback arrangements for total proceeds of approximately $10,150,000. Deferred gains of approximately $2,050,000 were recorded in 1991 as a result of these transactions and are being amortized over the lives of the leases. The leases are operating leases, have a 20 year term with four five-year renewal options and provide for additional rent based on a percentage of sales in excess of predetermined levels. The leases contain purchase options at fair market value, as defined in each lease agreement. The deferred gain of $1,888,000 at December 31, 1994 is primarily the result of the 1991 transactions.
Accumulated amortization pertaining to capital leases for the years ended December 31, 1994 and 1993 was $8,285,000 and $7,422,000, respectively.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
Total rent expense on operating leases, including percentage rent on both operating and capital leases, for the years ended December 31, was as follows:
The Company issued $110 million of unsecured senior notes in August 1993 to effect a refinancing of existing long-term obligations. The extraordinary loss of $4,883,000 on extinguishment of debt in 1993 includes $2,245,000 of previously deferred financing costs and $2,638,000 of premium and expenses paid on the retirement of subordinated debentures and debt.
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 not redeemable prior to August 15, 1998, except that, through August 1996, the Company may redeem up to $33 million in aggregate principal amount at 111.5% plus accrued interest from the proceeds of a public offering of common stock by the Company or by Carrols Holdings Corporation. The notes are redeemable at the option of the Company in whole or in part on or after August 15, 1998 at specified redemption prices. 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 December 20, 1994, the revolving line of credit agreement was amended to provide for an additional acquisition loan of $5 million. The $5 million acquisition loan will be collateralized by the twenty-two restaurants acquired during 1994 and will be fully advanced during 1995. The $5 million is required to be repaid by quarterly payments of $250,000 beginning in November 1997 increasing to quarterly payments of $500,000 beginning in November 1998. As of December 31, 1994, the outstanding balance under the acquisition loan was $650,000.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
4. LONG-TERM DEBT - continued
Effective December 20, 1994, in conjunction with the additional $5 million acquisition loan, the revolving line of credit agreement was amended to reduce the interest rate on borrowings to either the London Interbank Offering Rate plus 2.5% or the prime rate plus 1.25%. If the revolving line of credit and acquisition loan exceed $25 million, then the interest rate is increased to either the London Interbank Offering Rate plus 3.5% or the prime rate plus 2.25% on the amount of the loan exceeding $25 million. The amount available under the revolving line of credit was increased to $25 million with no future reductions until its maturity in August 2000. At December 31, 1994 there was $14.8 million available under the revolving line of credit facility after reduction for the $8.6 million outstanding and a $1.6 million letter of credit guaranteed by the facility. A commitment fee of 1/2% is payable on the unused balance. At December 31, 1994, the facility was collateralized by substantially all assets of the Company.
The Industrial Development Revenue bonds were issued on August 30, 1983 in connection with the purchase and modernization of a warehouse. Bonds are due in yearly amounts of $250,000 through 1998, with interest at seventy-five percent of prime. The bonds are collateralized by the warehouse which has a net book value of $1,890,000.
Restrictive covenants of the senior notes and the revolving line of credit 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; consolidations, mergers and transfers of assets and minimum interest and fixed charge coverage ratios.
At December 31, 1994, principal payments required on all long-term debt are as follows:
1995 $ 258,000 1996 258,000 1997 291,000 1998 266,000 1999 452,000 Subsequent to 1999 119,413,000 ----------- $120,938,000 ===========
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
5. INCOME TAXES
The components of deferred income taxes at December 31, are as follows:
1994 1993 Assets Receivable and other reserves $ 588,000 $ 351,000 Insurance reserves 707,000 487,000 Accrued vacation 426,000 405,000 Deferred gain on sale/leaseback transactions 755,000 799,000 Postretirement benefits 542,000 534,000 Capital leases 572,000 555,000 Net operating loss carryforwards 14,845,000 13,096,000 Less: Valuation allowance (11,799,000) (6,376,000) ---------- ---------- 6,636,000 9,851,000 ---------- ---------- Liabilities Franchise rights 6,500,000 7,384,000 Depreciation 136,000 2,438,000 Installment sales 29,000 ---------- ---------- 6,636,000 9,851,000 ---------- ---------- $ 0 $ 0 ========== ==========
During 1993, the Company settled outstanding disputes with the Internal Revenue Service relating to income tax claims arising from periods prior to the acquisition of Carrols by Holdings. The cost to the company of these settlements approximated $2.7 million of tax claims plus $1.6 million of interest and had been previously reserved. The Company has net operating loss carryforwards for income tax purposes of approximately $37 million, which expire in varying amounts beginning 2001 through 2009.
6. STOCKHOLDER'S EQUITY
The Company
The Company has 1,000 shares of common stock authorized, 10 shares issued and outstanding. Dividends on the Company's common stock are restricted to amounts permitted by various loan and debenture agreements.
Additional paid-in capital was reduced for cash dividends declared of $2,973,000,$2,741,000 and $200,000 in 1994, 1993 and 1992, respectively.
The Class A Preferred Stock, issued in December 1986, is subject to redemptions equally over each of the tenth through thirteenth anniversaries of issuance. 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 timely made, the annual dividend rate on the Class A Preferred Stock will automatically increase to 14%.
Each share of Holdings Class B Convertible Preferred Stock is convertible at any time prior to redemption into 1,176.5 shares of Holdings Non-Voting Common Stock (subject to adjustment to prevent dilution).
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. Dividends on the Class B preferred stock cannot be declared or paid if there are any Class A preferred stock dividends in arrears.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
6. STOCKHOLDER'S EQUITY (Continued)
In conjunction with the Class A Preferred Stock, warrants to purchase 529,412 shares of Holdings Common Stock at an exercise price of $.97 to $1.00 per share were granted. Outstanding warrants as of December 31, 1994 and 1993 totalled 463,549 and 529,412, respectively. Warrants are exercisable until the redemption of the Class A Preferred Stock. The warrants contain restrictions as to transfer, dilution and registration rights.
The Company also granted warrants for the purchase of 281,602 shares of Holdings Common Stock with various expiration dates through 2004 at an exercise price of $1.00 per share.
Redemption Offer
During 1993, Carrols Holdings Corporation initiated a redemption and retirement offer resulting in the tender of 743,843 shares of common stock and the tender of warrants to purchase 65,863 shares of common stock with a total redemption value of $3,173,000.
Approximately $500,000, or 249,988 shares, of the redemption was effected during 1993. The remainder of the redemption, $2,673,000, or 493,855 shares and warrants for 65,863 shares, was completed in 1994.
Stock Options
Carrols Holdings Corporation adopted an Employee Stock Option and Award Plan on December 14, 1993. Effective April 1, 1994, Holdings also adopted a Stock Option Plan for non-employee directors. The Plans allow 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 is authorized to grant options for up to 850,000 shares, 100,000 shares for non-employee directors and 750,000 shares for employees. As of December 31, 1994, 51 employees and non-employee directors were granted options for 257,000 shares at $4.00 per share, of which 15,000 shares were for non-employee directors. Options are generally exercisable over 5 years with 46,400 options exercisable as of December 31, 1994.
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.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
8. POSTRETIREMENT EMPLOYMENT BENEFITS
The Company provides postretirement medical and life insurance benefits covering substantially all salaried employees.
As of January 1, 1992, the provisions of Statement of Financial Accounting Standard (SFAS) No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, were adopted. The Company elected the immediate recognition approach with respect to the transition obligation.
The following sets forth the plan status at December 31:
Accumulated Postretirement Benefit Obligation (APBO):
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________
8. POSTRETIREMENT EMPLOYMENT BENEFITS (Continued)
A 10.5% annual rate of increase in the per capita costs of covered health care benefits was assumed for 1994, gradually decreasing to 5.5% by the year 2004. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $471,000 and increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1994 by $18,000. A discount rate of 7% was used to determine the accumulated postretirement benefit obligation. Actual benefit costs paid on behalf of retirees in 1994 amounted to $31,000.
9. LIQUIDITY AND RESOURCES
Although the Company has experienced losses since inception, it has and expects to continue to generate sufficient cash flows to meet its obligations. In addition to cash flows from operations, the Company's available resources include, among other things, borrowing from available lines of credit, sale leasebacks of owned real estate to the extent permitted under the loan agreements and managing certain discretionary expenditures.
10. LOSS ON CLOSING RESTAURANTS AND OTHER
The loss on closing restaurants and other of $1.8 million for 1994 reflects approximately $1.3 million associated with the closing during 1995 of certain restaurants operating at a negative annual cash flow. These costs include the write-down of assets to net realizable value and estimated lease termination costs. The loss also includes the write-down of approximately $0.5 million to net estimated realizable value of a vacant warehouse held for sale with a net book value as of December 31, 1994 of $1.9 million.
CARROLS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 ___________