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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 January 3, 1999
Commission File Number 333-71593
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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: None
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
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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 26, 1999: 10.
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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 29,
1996, December 28, 1997, and January 3, 1999 will hereinafter be referred to as
the fiscal years ended December 31, 1996, 1997 and 1998, respectively.
PART I
This 1998 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
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OVERVIEW
Who We Are
We are the largest Burger King(Registered) franchisee in the world, and we
have operated Burger King restaurants since 1976. As of December 31, 1998, we
operated 343 Burger King restaurants located in 13 Northeastern, Midwestern and
Southeastern states. We also own and operate the Pollo Tropical restaurant chain
which at December 31, 1998 included 40 company owned restaurants in Florida and
21 franchised restaurants. Over the last five years, we expanded our operations
through the acquisition and construction of additional Burger King restaurants
while also enhancing the quality of operations, the competitive position and the
financial performance of our existing restaurants.
As a result of our growth strategy, we increased the total number of Burger
King restaurants we operate by over 55% from 1994 to 1998. From fiscal 1994 to
fiscal 1998, we grew our revenues from $203.9 million to $416.6 million. In July
1998, we completed our purchase of Pollo Tropical for a cash purchase price of
approximately $95 million. Pollo Tropical is a regional quick-service restaurant
chain featuring grilled marinated chicken and authentic "made from scratch" side
dishes. Before we acquired it, for the twelve months ended June 30, 1998, Pollo
Tropical had revenues of $69.6 million. Assuming we had acquired Pollo Tropical
on January 1, 1998, for fiscal 1998 our revenues would have been
$454.7 million.
The Burger King System
Burger King is the second largest quick-service hamburger restaurant chain
in the world, with approximately 10,200 restaurants throughout the U.S. and in
53 foreign countries. In fiscal 1997, BKC reported systemwide sales of
approximately $7.9 billion from its restaurants in the U.S. From 1993 to 1997,
BKC increased its market share of the domestic quick-service hamburger market
from 16.2% to 19.4%. Burger King restaurants are quick-service restaurants of
distinctive design which feature flame-broiled hamburgers and serve several
widely-known, trademarked products, the most popular being the
WHOPPER(Registered) sandwich. Burger King restaurants are generally located in
high traffic areas throughout the U.S. We believe that the primary competitive
advantages of Burger King restaurants are:
o convenience of location;
o speed of service;
o quality; and
o price.
Pollo Tropical
We operate and franchise Pollo Tropical quick-service restaurants featuring
fresh grilled chicken marinated in a proprietary blend of tropical fruit juices
and spices and authentic "made from scratch" side dishes. The menu emphasizes
freshness and quality, with a focus on flavorful chicken served "hot off the
grill." Pollo Tropical restaurants combine high quality, distinctive menu items
and an inviting tropical setting with the convenience and value of quick-service
restaurants.
Pollo Tropical opened its first company-owned restaurant in 1988 in Miami,
and its first international franchised restaurant in 1995 in Puerto Rico. As of
December 31, 1998, we owned and operated 40 Pollo Tropical restaurants, all
located in south and central Florida, and we franchised 21 Pollo Tropical
restaurants located in Puerto Rico, the Dominican Republic, Ecuador, Netherlands
Antilles and Miami. For the fiscal year ended December 31, 1998, Pollo
Tropical's average comparable restaurant sales were approximately $2 million,
which we believe is among the highest in the quick-service restaurant industry.
We believe that our strategic acquisition of Pollo Tropical will allow us to:
o broaden our restaurant concepts;
o expand our geographic presence;
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o diversify our revenue base;
o increase our cash flow; and
o enhance our operating margins.
The Industry
The quick-service restaurant industry, which includes hamburgers, pizza,
chicken, various types of sandwiches and Mexican and other ethnic foods, has
experienced consistent growth. The National Restaurant Association estimates
that sales at quick-service restaurants will reach approximately $105.7 billion
in 1998, compared with approximately $61.4 billion in 1988.
This growth in the quick-service restaurant industry reflects consumers'
increasing desire for a convenient, reasonably priced restaurant experience. In
addition, consumer need for meals and snacks prepared outside of the home has
increased as a result of the greater numbers of working women and single parent
families. According to the National Restaurant Association, the percentage of
the average family's food budget spent on meals consumed "away from home" will
have grown from approximately 25% of the food budget in 1955 to a projected 44%
in 1999.
COMPETITIVE STRENGTHS
We attribute our success in the quick-service restaurant industry to the
following competitive strengths:
Largest Burger King Franchisee. We are the largest Burger King franchisee
in the world. We believe that our leadership position, together with our
experienced management team, effective management information systems, an
extensive infrastructure and a proven track record for integrating acquisitions
and new restaurants, provide us with attractive opportunities to build and
acquire additional restaurants. In addition, we believe that these factors
enable us to enhance restaurant margins and overall performance and allow us to
operate more efficiently than other Burger King franchisees.
Strong Brand Names. Since the formation of BKC in 1954, the Burger King
brand has become one of the most recognized brands in the restaurant industry.
BKC spends between 4% and 5% of total system sales on advertising per year
(approximately $390 million in 1997 and approximately $1.5 billion over the past
five years). The strong Burger King brand, coupled with the quality and value of
the food and convenience of its restaurants has provided the Burger King system
with consistent growth. According to Technomic, Inc., Burger King increased its
share of the domestic quick-service hamburger market from approximately 16.2% to
19.4% from 1992 to 1997.
Our acquisition of Pollo Tropical provides us with one of the most
recognized quick-service restaurant brands in Pollo Tropical's core markets of
south and central Florida. We believe that the following factors have led to the
success of the Pollo Tropical concept:
o strong brand awareness in Pollo Tropical's markets;
o loyalty among our Hispanic customers; and
o positioning of our menu to capitalize on the growing consumer preference
for both healthier and ethnic foods.
Stable Cash Flows. We believe that the stability of our operating cash
flow is due to the proven success of the Burger King concept and our consistent
focus on restaurant operations. During the past five years, our restaurant level
EBITDA (EBITDA before general and administrative expenses) margins for our
Burger King restaurants ranged between 15.4% and 18.2% and averaged 16.8%. In
addition, over the same period, restaurant level EBITDA margins for Pollo
Tropical restaurants ranged between 18.7% and 25.4% and averaged 23.1%. Cash
flow from operations has increased from $14.4 million in 1994 to $23.3 million
in 1998. We believe that the strength of our cash flow provides us with
liquidity to pursue our growth strategy.
Diversified Locations and Restaurant Concepts. Since August 1993, we have
increased the number of Burger King restaurants we own by over 70% and we have
increased our geographic presence from nine states to 13 states. Our acquisition
of Pollo Tropical further expands our geographic presence through the
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location of Pollo Tropical restaurants in Florida, the Caribbean and Central and
South America. We believe that this geographic expansion enables us to
capitalize on a region that has a rapidly growing population and to further
reduce our dependence on the economic performance of any one particular region.
In addition, this acquisition enables us to further diversify our revenue and
cash flow base to another concept within the quick-service restaurant industry.
Experienced Management Team with a Significant Equity Stake. Our senior
management team, headed by Chairman and Chief Executive Officer Alan Vituli and
President and Chief Operating Officer Daniel T. Accordino, has a long and
successful history of developing, acquiring and operating quick-service
restaurants. Under their leadership and direction, we have become the largest
Burger King franchisee. Mr. Vituli and Mr. Accordino lead a team of six regional
operating directors who have an average of 22 years of restaurant industry
experience and 46 district managers who have an average of 16 years of
restaurant management experience in the Burger King system.
We believe that the combination of our existing management team, together
with the continuity of leadership provided by Pollo Tropical's President and
Chief Operating Officer Nicholas A. Castaldo enhances our ability to capitalize
on future growth opportunities in the quick-service restaurant industry. Our
management owns (on a fully diluted basis) approximately 12% of Holdings, which
owns 100% of our stock. Our regional and district managers also hold options to
acquire equity in Holdings.
BUSINESS STRATEGY
Our business strategy is to continue to increase revenues and cash flow
through the construction of new restaurants, acquisitions, franchising and
increasing operating efficiencies. Based on our historical performance, we
believe that our business strategy represents a low-risk growth plan. Our
strategy is based on the following components:
Leverage Brand Names. We realize significant benefits as a Burger King
franchisee. These benefits are the result of the following:
o widespread recognition of the Burger King brand;
o the size and penetration of BKC's advertising;
o BKC's management of the Burger King brand, including new product
development; and
o the continued growth of the Burger King system.
We believe that the Burger King brand provides significant opportunities to
expand our operations both within and outside our existing geographic markets,
and that the Pollo Tropical brand provides us with significant growth
opportunities within south and central Florida.
Develop Additional Restaurants in Existing Markets. We believe that our
existing Burger King markets will continue to provide opportunities for the
development of new restaurants. We look to develop restaurants in those of our
markets that we believe are underpenetrated and where the demographic
characteristics are favorable for the development of new restaurants. Our own
staff of real estate and construction professionals conduct our new restaurant
development, with support provided by BKC's development field personnel. Before
developing a new restaurant, we conduct an extensive site selection and
evaluation process which includes in-depth demographic, market and financial
analysis. By selectively increasing the number of restaurants we operate in a
particular market, we can effectively leverage our management, corporate
infrastructure and local marketing while increasing brand awareness.
We believe that we are well positioned to develop new Pollo Tropical
restaurants in Pollo Tropical's core markets of south and central Florida, which
will take advantage of Hispanic customers' high frequency of visits and strong
acceptance of Pollo Tropical's menu items. We believe that the continued
population growth in our Florida markets will provide significant opportunities
to develop additional Pollo Tropical restaurants. We also expect to continue
franchising Pollo Tropical restaurants in parts of Central and South America and
the Caribbean.
Selectively Acquire Burger King Restaurants. The Burger King system is
highly fragmented in the U.S., with approximately 7,200 Burger King restaurants
being operated by approximately 1,600 franchisees.
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We expect to continue to participate as a buyer in the consolidation of the
Burger King system and we believe that opportunities for selective acquisitions
will continue in both existing and new geographic markets as smaller franchisees
seek liquidity through the sale of their restaurants. As the largest Burger King
franchisee with a demonstrated ability to effectively integrate acquisitions, we
believe that we are better positioned to capitalize on this consolidation than
other Burger King franchisees. We believe that by acquiring additional Burger
King restaurants, we can achieve operating efficiencies from our ability to
improve controls over restaurant food costs, more efficiently utilize labor, and
achieve economies of scale by leveraging our corporate infrastructure.
Achieve Operating Efficiencies. We maintain a disciplined commitment to
increasing the profitability of our existing restaurants. Our large base of
restaurants, centralized management structure and management information systems
enable us to optimize operating efficiencies for our new and existing
restaurants. We are able to control restaurant and corporate level costs,
capture economies of scale by leveraging our existing corporate infrastructure
and use our sophisticated management information and point-of-sale systems to
more efficiently manage our restaurant operations and to ensure consistent
application of operating controls. Our size enables us to realize benefits with
improved bargaining power for purchasing and cost management activities. We
believe these factors provide the basis for increased unit and company
profitability. We intend to reduce certain operating expenses after the our
acquisition of Pollo Tropical by eliminating duplicative costs. In addition, we
expect to realize further operating efficiencies by applying our existing
infrastructure and restaurant operating experience to our newly acquired Pollo
Tropical restaurants.
Consistently Provide Superior Customer Satisfaction. Our operations are
focused on achieving a high level of customer satisfaction through quick,
accurate and high-quality customer service. We and BKC have uniform operating
standards and specifications relating to the following:
o quality;
o preparation and selection of menu items;
o maintenance and cleanliness; and
o employee conduct.
We closely supervise the operation of all of our restaurants to help ensure that
standards and policies are followed and that product quality, customer service
and cleanliness of the restaurants are maintained at high levels.
OVERVIEW OF RESTAURANT CONCEPTS
Burger King Restaurants
"Have It Your Way(Registered)" service, flame-broiling, generous portions
and competitive prices characterize the Burger King system marketing strategy.
Burger King restaurants feature flame-broiled hamburgers, the most popular of
which is the WHOPPER(Registered) sandwich. The WHOPPER(Registered) is a large,
flame-broiled hamburger on a toasted bun garnished with a combination of
mayonnaise, lettuce, onions, pickles and tomatoes. The basic menu of all Burger
King restaurants consists of hamburgers, cheeseburgers, chicken and fish
sandwiches, breakfast items, french fried potatoes, salads, shakes, desserts,
soft drinks, milk and coffee. In addition, promotional menu items are introduced
periodically for limited periods. BKC continually seeks to develop new products
as it endeavors to enhance the menu and service of Burger King restaurants.
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Our Burger King restaurants are typically open seven days per week with
minimum operating hours from 6:00 AM to 11:00 PM. Burger King restaurants are
quick-service restaurants of distinctive design and are generally located in
high-traffic areas throughout the U.S. We believe that the primary competitive
advantages of Burger King restaurants are:
o convenience of location;
o quality;
o price; and
o speed of service.
Burger King restaurants appeal to a broad spectrum of consumers, with multiple
day-part meal segments that appeal to different groups of consumers.
Our 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. At December 31,
1998, 322 of our 343 Burger King restaurants were free-standing.
Pollo Tropical Restaurants
Pollo Tropical restaurants combine high quality, distinctive taste and an
inviting tropical setting with the convenience and value pricing of
quick-service restaurants. Pollo Tropical restaurants offer a unique selection
of food items reflecting tropical and Caribbean influences and feature grilled
fresh chicken marinated in a proprietary blend of tropical fruit juices and
spices. Chicken is grilled in view of customers on large, custom, open-flame
grills. Pollo Tropical broadened its selection in 1996 by adding "island" pork
to the menu, and in 1997 by adding a line of "TropiChops," a bowl containing
rice, black beans, chicken or pork and other ingredients at an attractive price
point to the menu. In 1998, grilled shrimp was added to the menu. We also
feature an array of distinctive and popular side dishes, including black beans
and rice, yucatan fries and sweet plantains, as well as more traditional fare
such as french fries, corn, and tossed and caesar salads. We also offer freshly
prepared tropical desserts, such as flan and tres leches.
Our Pollo Tropical restaurants incorporate high ceilings, large windows,
tropical plants, light colored woods, decorative tiles, a visually distinctive
exterior entrance tower, lush landscaping and other signature architectural
features, all designed to create an airy, inviting and tropical atmosphere. We
design our restaurants to conveniently serve a high volume of customer traffic
while retaining an inviting, casual atmosphere.
Our Pollo Tropical restaurants are open for lunch and dinner seven days per
week from 11:00 AM to 10:00 PM (11:00 PM on Friday and Saturday) and offer
sit-down dining, counter take-out and drive-thru service to accommodate the
varied schedules of families, business people, students and other time-sensitive
individuals. Our menu offers a variety of portion sizes to accommodate a single
customer, family or large group. Pollo Tropical restaurants also offer an
economical catering menu, with special prices and portions to serve 25 to 500
persons.
Our Pollo Tropical restaurants typically provide seating for 80 to 100
customers and provide drive-thru service. All of our Pollo Tropical restaurants
are free-standing buildings except for three end-cap locations in strip shopping
centers and one street-level storefront in an office building. Our current
prototypical free-standing Pollo Tropical restaurant ranges between 2,800 and
3,200 square feet in size.
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RESTAURANT ECONOMICS
Burger King Restaurants
For Fiscal 1998, our Burger King restaurants generated average sales of
approximately $1,124,000 and average restaurant level EBITDA of $183,000.
Drive-thru sales contributed 55.8% of restaurant sales. In all but 25 locations,
which are primarily in malls, our Burger King restaurants have a drive-thru
window. Percentages of total sales by day part are as follows:
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Breakfast 14.3%
Lunch 33.6%
Dinner 26.7%
Late Afternoon and
Late Night Snacks Remainder
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The average sales transaction was $3.83 in 1998.
The cost of the franchise fee, equipment, seating, signage and other
interior costs of a standard new Burger King restaurant is approximately
$265,000 (excluding the cost of the land, building, and site improvements). The
cost of land generally ranges from $200,000 to $500,000. The cost of building
and site improvements generally ranges from $500,000 to $550,000. We typically
lease the building and land components of our restaurants.
Pollo Tropical Restaurants
For Fiscal 1998, our Pollo Tropical restaurants generated average sales of
approximately $1,989,000 and average restaurant level EBITDA of $501,000. Pollo
Tropical restaurant sales are well balanced by method of service and by day
part. For 1998, drive-thru sales contributed 35.8% of restaurant sales and
take-out sales accounted for 23.2% of total sales. Percentages of total sales by
day part are as follows:
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Lunch 47.1%
Dinner 52.9%
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The average sales transaction was $7.62 in 1998.
The cost of equipment, seating signage and other interior costs of a
standard new Pollo Tropical restaurant is approximately $240,000 (excluding the
cost of the land, building, and site improvements). The cost of land generally
ranges from $450,000 to $700,000. The cost of building and site improvements
generally ranges from $550,000 to $650,000. Pollo Tropical has historically
financed the building and land costs of its Pollo Tropical restaurants through
internally generated cash flow, but we intend to lease our Pollo Tropical
restaurants in the future.
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RESTAURANT LOCATIONS
Burger King
The following table sets forth the locations of the 343 Burger King
restaurants in our system at December 31, 1998.
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TOTAL
STATE RESTAURANTS
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Connecticut.......................................................................................... 1
Indiana.............................................................................................. 5
Kentucky............................................................................................. 6
Maine................................................................................................ 4
Massachusetts........................................................................................ 2
Michigan............................................................................................. 24
New Jersey........................................................................................... 2
New York............................................................................................. 154
North Carolina....................................................................................... 40
Ohio................................................................................................. 72
Pennsylvania......................................................................................... 12
South Carolina....................................................................................... 20
Vermont.............................................................................................. 1
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Total................................................................................................ 343
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</TABLE>
We own 6% and lease 94% of our Burger King restaurants. We typically enter
into leases (including options to renew) from 20 to 40 years. The average
remaining term on all leases, including options, is approximately 25 years.
Generally, we have been able to renew leases, upon or prior to their expiration,
at the prevailing market rates. As part of our continuing program to upgrade our
restaurants, we remodeled 83 of our restaurants in the three years ended
December 31, 1998.
Pollo Tropical
The success of our Pollo Tropical restaurants has been due in large part to
the base of Hispanic customers who are a critical component in achieving the
high average store volumes that Pollo Tropical has experienced in its core
markets. As of December 31, 1998, we owned and operated 40 Pollo Tropical
restaurants, all located in Florida. In addition, our 21 franchised Pollo
Tropical restaurants are located as follows:
o 13 in Puerto Rico;
o 3 in the Dominican Republic;
o 3 in Ecuador;
o 1 in Netherlands Antilles; and
o 1 in Miami.
OPERATIONS
Management Structure
We conduct substantially all of our executive management, finance,
marketing and operations support functions from either our corporate
headquarters in Syracuse, New York or our Pollo Tropical headquarters in Miami,
Florida. With respect to our Burger King operations, we currently have six
regional directors with an average of 22 years of restaurant industry
experience, five of whom are our vice presidents. Each of our regional directors
are responsible for the operations of our Burger King restaurants in their
assigned region. Three of our regional directors have been employed by us for
over 20 years. Forty-six district supervisors who have an average of 16 years of
restaurant management experience in the Burger King system support the
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regional directors. Each district supervisor is responsible for the direct
oversight of the day-to-day operations of an average of seven restaurants.
Typically, district supervisors have previously served as restaurant managers at
one of our restaurants or at an acquired restaurant. Both regional directors and
district supervisors are compensated with a fixed salary plus an incentive bonus
based upon the performance of the restaurants under their supervision and are
eligible to participate in our incentive stock option plan. Typically, our
restaurants are staffed with hourly employees who are supervised by a salaried
manager and two or three salaried assistant managers.
Training
We maintain a comprehensive training and development program for all of our
personnel and provide both classroom and in-restaurant training for our salaried
and hourly personnel. For the Burger King restaurants, this program emphasizes
system-wide operating procedures, food preparation methods and customer service
standards. In addition, BKC's training and development programs are also
available to us.
Management Information Systems
We believe that our management information systems, which are typically
more sophisticated than those utilized by smaller Burger King franchisees and
other smaller quick-service restaurant operators, provide us with the ability to
more efficiently manage our restaurants and to ensure consistent application of
operating controls. We also believe that our size affords us the ability to
maintain an in-house staff of information systems professionals dedicated to
continuously enhancing our existing systems. These capabilities also allow us to
quickly integrate newly acquired restaurants and to leverage our investments in
information technology over a large base of restaurants.
Our Burger King restaurant systems, which consist of point-of-sale cash
register systems and PC-based restaurant support systems, transmit data on a
daily basis to our headquarters, which house mainframe, PC and server-based
application and decision support systems. These systems facilitate financial and
management control of restaurant operations and provide us with the ability to:
o analyze sales and product mix data;
o minimize shrinkage using inventory control and centralized standard costing
systems; and
o manage and control labor costs through the use of computerized labor systems.
Our 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. Our district supervisors also receive daily
information for all restaurants under their respective control and have access
to key operating data on a remote basis using laptop computers. Each management
level, from district supervisor through senior management, monitors key
restaurant performance indicators.
We also have a number of projects underway, principally based on existing
commercially available software, that are designed to further enhance our
capabilities and to upgrade our restaurant and corporate information systems. We
are implementing state-of-the-art, touch-screen point-of-sale systems in our
restaurants which are designed to facilitate accuracy and speed of order-taking
while providing systems that are user-friendly and that reduce training. We are
also enhancing our labor scheduling and inventory management modules at the
restaurants to further automate these functions. In addition, our corporate
financial systems are being upgraded to a client/server architecture in order
to:
o enhance the functionality of these systems;
o take advantage of work-flow technologies; and
o provide the foundation for the future deployment of web-based applications to
our restaurants.
Our Pollo Tropical restaurants utilize in-store computerized point-of-sale
systems to control cash, collect customer and sales statistics, and to track
labor and other restaurant data. It is our intention to further enhance our
Pollo Tropical operations by integrating its systems with our existing
management information
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systems. We believe that we will be able to improve the operating efficiencies
of the Pollo Tropical restaurants by employing tools and resources available in
our existing management information systems.
Site Selection
We believe that the location of our restaurants is a critical component of
each restaurant's success. We evaluate potential new development sites based
upon accessibility, visibility, costs, surrounding traffic patterns, competition
and demographic characteristics. Our senior management determines the
acceptability of all acquisition and new development sites, based upon analyses
prepared by our real estate professionals and operations personnel.
BURGER KING FRANCHISE AGREEMENTS
Each of our Burger King restaurants operates under a separate franchise
agreement. Our franchise agreements with BKC 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. Our franchise
agreements with BKC generally provide for an initial term of 20 years and have
an initial fee of $40,000. BKC may grant a successor franchise agreement for an
additional 20-year term, provided the restaurant meets the then-current BKC
operating standards. We are not in default under our current franchise agreement
with BKC. The successor BKC franchise agreement fee is currently $40,000. Our
franchise agreements with BKC are non-cancelable except for failure to abide by
their terms.
In order to obtain a successor franchise agreement with BKC, a franchisee
is typically required to make capital improvements to the Burger King restaurant
to bring the Burger King restaurant up to BKC's then-current design standards.
The required capital improvements will vary widely depending upon the magnitude
of the required changes and the degree to which we have made interim changes to
the restaurant. Although we estimate that a substantial remodeling can cost in
excess of $250,000, our average remodeling cost over the past five years has
been approximately $135,000 per restaurant.
We believe that we enjoy a good relationship with BKC and that we will
satisfy BKC's normal successor franchise agreement policies. Accordingly, we
believe that successor franchise agreements with BKC will be granted on a timely
basis by BKC at the expiration of our existing franchise agreements with BKC.
Historically, BKC has granted each of our requests for a successor franchise
agreement for our restaurants. We cannot assure you, however, that BKC will
continue to grant each of our requests for successor franchise agreements.
In addition to the initial franchise fee, we currently pay a monthly
royalty of 3 1/2% of the gross revenues from our Burger King restaurants to BKC.
We currently also contribute 4% of gross revenues from our Burger King
restaurants to fund BKC's national and regional advertising. BKC engages in
substantial national advertising and promotional activities and other efforts to
maintain and enhance the Burger King brand. We supplement BKC's marketing with
local advertising and promotional campaigns. See "Business--Advertising and
Promotion."
Our franchise agreements with BKC do not give us exclusive rights to
operate a Burger King restaurant in any defined territory. We believe that BKC
generally seeks to ensure that newly granted franchises do not materially
adversely affect the operations of existing Burger King restaurants. We cannot
assure you, however, that a franchise given by BKC to a third party will not
adversely effect any single Burger King restaurant that we operate.
We are required to obtain BKC's consent before we acquire or develop new
Burger King restaurants. BKC also has the right of first refusal to purchase any
Burger King restaurant which is the subject of a contract of sale. BKC has
granted its approval to all of our historic acquisitions of Burger King
restaurants, except for two instances when it exercised its right of first
refusal.
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POLLO TROPICAL FRANCHISE PROGRAM
As part of our growth strategy for our Pollo Tropical restaurants, we
intend to complement the development of additional restaurants owned by us in
the U.S. with a multi-unit area development franchise program as a means of
accelerating our penetration into international markets. We intend to offer
certain market areas to qualified and experienced area developers in the
Caribbean and Central and South American markets who are committed to the
development of multiple units in such areas on an expedited basis.
Our standard franchise agreement under which we franchise Pollo Tropical
restaurants to independent restaurant operators has a 15-year term (with one
15-year renewal option) and provides for an initial payment by the franchisee of
a portion of all franchise fees upon signing of the area development and
franchise agreements, with the remainder due before the opening of the
franchisee's Pollo Tropical restaurants. The franchisee also pays a continuing
royalty, based upon gross sales. The terms and conditions of these franchise
agreements will vary depending upon a number of factors, including:
o the experience and resources of the franchisee;
o the size and density of the covered territory;
o the number of units to be developed;
o the schedule for development;
o capital requirements; and
o fee and royalty arrangements.
All franchisees are required to operate their restaurants in compliance with
certain methods, standards and specifications developed by Pollo Tropical
regarding such matters as menu items, recipes, food preparation, materials,
supplies, services, fixtures, furnishings, decor and signs, although the
franchisee has discretion to determine the prices to be charged to customers. In
addition, all franchisees are required to purchase substantially all food,
ingredients, supplies and materials from suppliers approved by us.
ADVERTISING AND PROMOTION
The efficiency and quality of advertising and promotional programs can
significantly affect quick-service restaurant businesses. We believe that one of
the major advantages of being a Burger King franchisee is the value of the
extensive regional and national advertising and promotional programs conducted
by BKC. In addition to the benefits derived from BKC's advertising spending,
which according to information published by BKC was approximately $390 million
for 1997, we supplement BKC's advertising and promotional activities with local
advertising and promotions, including the purchase of additional television,
radio and print advertising. Our concentration of restaurants in many of our
markets permits us to leverage advertising in those markets. We also utilize
promotional programs, such as combination value meals and discounted prices,
targeted to our customers, in order to create a flexible and directed marketing
program.
We 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).
We believe that brand awareness for our Pollo Tropical restaurants is
extremely high because of the concentration of our restaurants in the south
Florida markets. Pollo Tropical restaurants are also clustered in target markets
in order to maximize the effectiveness of our advertising efforts. Pollo
Tropical advertises in both English and Spanish media throughout the year,
including television, radio and print advertising. Pollo Tropical also has
marketed at the individual restaurant level through special price offerings,
coupon discounts and unique promotional and public relations programs. Pollo
Tropical spent approximately 4.3% and 4.6% of revenues from restaurant sales on
advertising in fiscal 1998 and 1997, respectively.
12
<PAGE>
SUPPLIES AND DISTRIBUTION
We are a member of a national purchasing cooperative created for the Burger
King system known as Restaurant Services, Inc. Restaurant Services 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. We use our purchasing power to negotiate directly with
certain other vendors, to obtain favorable pricing and terms for supplying our
restaurants.
We are required to purchase all of our foodstuffs, paper goods and
packaging materials from BKC-approved suppliers. We may purchase non-food items
such as kitchen utensils, equipment maintenance tools and other supplies from
any suitable source provided that such items meet BKC product uniformity
standards. We currently obtain substantially all of our foodstuffs for our
Burger King restaurants (other than bread products which we purchase from local
bakeries), paper goods, promotional premiums and packaging materials from
AmeriServe Food Distribution, Inc. under a five-year supply agreement which
expires on March 31, 2004. We believe that AmeriServe's services are competitive
with alternatives available to us.
There are other BKC-approved supplier/distributors which compete with
AmeriServe. We believe that reliable alternative sources for all restaurant
supplies are readily available at competitive prices should our arrangements
with AmeriServe or any other existing supplier or distributor change.
All BKC-approved suppliers are required to purchase foodstuffs and supplies
from BKC-approved manufacturers and purveyors. BKC is responsible for monitoring
quality control and supervision of these manufacturers and conducts regular
visits to observe the preparation of foodstuffs, and to run various tests to
ensure that only high quality foodstuffs are sold to BKC-approved suppliers. In
addition, BKC coordinates and supervises audits of approved suppliers and
distributors to determine continuing product specification compliance and to
ensure that manufacturing plant and distribution center standards are met.
For our Pollo Tropical restaurants, we have negotiated directly with local
and national suppliers for the purchase of food and beverage products and
supplies to ensure consistent quality and freshness and to obtain competitive
prices. Each Pollo Tropical restaurant's food and supplies are ordered from
approved suppliers and are shipped directly to the restaurants.
QUALITY ASSURANCE
We focus our operations on achieving a high level of customer satisfaction
with speed, accuracy and quality of service closely monitored. Our senior
management and restaurant management staff are principally responsible for
ensuring compliance with our and BKC's operating procedures. We 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. In order to help maintain compliance with these
operating standards and specifications, we tabulate and distribute to our
restaurant management team detailed reports from our management information
system and surveys that are conducted by us or BKC.
We operate in accordance with quality assurance and health standards set by
BKC, as well as standards set by Federal, state and local governmental laws and
regulations. These standards include food preparation rules regarding, among
other things, minimum cooking times and temperatures, sanitation and
cleanliness. The "conveyor belt" cooking system utilized in all Burger King
restaurants, which is calibrated to carry hamburgers through the flame broiler
at regulated speeds, is one of the safest cooking systems among major
quick-service restaurants and helps to ensure that the standardized minimum
times and temperatures for cooking are met. In addition, BKC has set maximum
time standards for holding prepared food.
We closely supervise the operation of all of our Burger King restaurants to
help ensure that the restaurants follow standards and policies and maintain
product quality, customer service and cleanliness. In addition, BKC may conduct
unscheduled inspections of Burger King restaurants throughout the nationwide
system.
Our Pollo Tropical restaurant managers are actively involved in all aspects
of operations, with an emphasis on supervising the food preparation process as
well as food safety while insuring prompt and precise order fulfillment at both
the front counter and drive-thru windows. Orders typically are filled within two
minutes through the use of a computer display and communications system.
Managers conduct internal
13
<PAGE>
inspections for taste, quality, cleanliness and food safety several times a day
in order to provide a consistent level of customer service.
TRADEMARKS
Before we acquired Pollo Tropical, we had no proprietary intellectual
property other than the logo and trademark of Carrols Corporation. As a
franchisee of Burger King, we have contractual rights to use certain BKC-owned
trademarks, servicemarks and other intellectual property relating to the Burger
King concept.
Pollo Tropical has registered its principal trademarks for "Pollo
Tropical," "TropiGrill" and "TropiChops" in the United States and presently has
applications pending or registrations granted in various foreign countries in
which it conducts business or may conduct business through its franchise system.
As a result of our acquisition of Pollo Tropical, we have assumed ownership of
these marks. In certain foreign countries, Pollo Tropical has been involved in
trademark opposition proceedings to defend its rights to register certain
trademarks. We intend to protect the Pollo Tropical and TropiGrill trademarks by
appropriate legal action whenever necessary.
GOVERNMENT REGULATION
Various Federal, state and local laws affect our business, including
various health, sanitation, fire and safety standards. Restaurants to be
constructed or remodeled are subject to state and local building code and zoning
requirements. In connection with the construction and remodeling of our
restaurants, we may incur costs to meet certain Federal, state and local
regulations, including regulations promulgated under the Americans with
Disabilities Act.
We are subject to the Federal Fair Labor Standards Act and various state
laws governing such matters as:
o minimum wage requirements;
o overtime; and
o other working conditions and citizenship requirements.
In September 1997, we implemented the second phase of an increase in the
minimum wage in accordance with a 1996 amendment to the Federal Fair Labor
Standards Act. A significant number of our food service personnel are paid at
rates related to the Federal minimum wage and, accordingly, increases in the
minimum wage have increased wage rates at our restaurants.
We are also subject to various Federal, state and local environmental laws,
rules and regulations. We believe that we conduct our operations in substantial
compliance with applicable environmental laws and regulations. In an effort to
prevent and, if necessary, to correct environmental problems, we conduct
environmental audits of proposed restaurant sites and restaurants we seek to
acquire. None of the applicable environmental laws or regulations have had a
material adverse effect on our operations or financial condition.
With respect to the franchising of Pollo Tropical restaurants, we are
subject to franchise and related regulations in the U.S. and certain foreign
jurisdictions where we offer and sell franchises. These regulations include
obligations to provide disclosure about Pollo Tropical, the franchise agreements
and the franchise system. The regulations also include obligations to register
certain franchise documents in the U.S. and foreign jurisdictions, and
obligations to disclose the substantive relationship between the parties to the
agreements.
COMPETITION
The quick-service restaurant industry is highly competitive with respect to
price, service, location and food quality. In each of our markets, our
restaurants compete with a large number of national and regional restaurant
chains, as well as locally-owned restaurants, offering low and medium-priced
fare. Convenience stores, grocery store delicatessens and food counters,
cafeterias and other purveyors of moderately priced and quickly prepared foods
also compete with us.
14
<PAGE>
With respect to our Burger King restaurants, our largest competitors in the
quick-service hamburger restaurant segment are McDonald's and Wendy's. According
to publicly available information, as of December 31, 1997, McDonald's U.S.
operations comprised 12,380 restaurants and had U.S. systemwide sales for the
year ended December 31, 1997 of $17.1 billion. As of December 31, 1997, Wendy's
U.S. operations comprised 4,575 restaurants and had total U.S. systemwide sales
for the year ended December 31, 1997 of $4.6 billion. We believe that:
o product quality and taste;
o national brand recognition;
o convenience of location;
o speed of service;
o menu variety;
o price; and
o ambiance
are the most important competitive factors in the quick-service restaurant
industry and that our Burger King and Pollo Tropical restaurants effectively
compete in each category.
In addition to the quick-service hamburger restaurant chains, Pollo
Tropical's competitors include international and regional chicken theme chains,
such as Boston Market, KFC and Kenny Rogers Roasters, as well as other types of
quick-service restaurants. We believe that the combination of:
o freshly prepared food;
o distinctive menu items;
o tropical ambience; and
o fast service
help to distinguish our Pollo Tropical restaurants from other quick-service food
operations. We also believe that the strong brand awareness of our Pollo
Tropical restaurants combined with the relatively high costs associated with
starting a quick-service chain in Pollo Tropical's core markets will make it
difficult for new competitors to effectively compete with our Pollo Tropical
restaurants in these markets.
EMPLOYEES
At December 31, 1998, we employed approximately 12,725 persons of which
approximately 225 were supervisory and administrative personnel and 12,500 were
restaurant operating personnel. None of our employees are covered by collective
bargaining agreements. Approximately 10,850 of our restaurant operating
personnel at December 31, 1998 were part-time employees. We believe that our
employee relations are good.
15
<PAGE>
ITEM 2. PROPERTIES
At December 31, 1998 we owned or leased the following restaurant
properties:
<TABLE>
<CAPTION>
Owned Leased Leased
Land; Land; Land;
Owned Owned Leased
Building Building Building Total
-------- -------- -------- -----
<S> <C> <C> <C> <C>
Restaurants - operating 23 17 343 (a) 383
Restaurants
under construction 2 2
Excess properties:
Leased to others -- -- 5 5
Available for sale
or lease 3 -- -- 3
-- -- --- ---
Total restaurant properties 28 17 348 393
== == === ===
</TABLE>
(a) Includes 21 restaurants located in mall shopping centers.
Most of the Company's Burger King restaurant 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 Burger King 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.
In addition to the restaurant locations set forth under
"Business-Restaurant Locations," we own an approximately 22,000 square foot
building at 968 James Street, Syracuse, New York, which houses our executive
offices and most of our administrative operations for our Burger King
restaurants. We lease 10,488 square feet at 7300 North Kendall Drive, 8th Floor,
Miami, Florida, which houses most of our administrative operations for our Pollo
Tropical restaurants. We also lease six small regional offices that serve as the
bases for regional management.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct of
our business. We do not believe that the outcome of any of these matters will
have a material adverse effect on our financial condition or results of
operations and cash flows.
16
<PAGE>
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 1997 and 1998 by Carrols to Holdings were as
follows:
Per Share Total
--------- -----
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
January 1998 $ 9,081.70 $ 90,817
April 1998 $ 9,081.70 $ 90,817
May 1998 $ 227,715.60 $ 2,277,156
June 1998 $ 141,911.20 $ 1,419,112
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial information presented below at the end of
and for each of the fiscal years ended December 31, 1994, 1995, 1996, 1997 and
1998 has been derived from the audited consolidated financial statements of
Carrols. Our acquisition of Pollo Tropical was completed in July 1998 and, as a
result, Carrols' audited financial statements as of and for the year ended
December 31, 1998 include the results of operations for the Pollo Tropical
restaurants since July 10, 1998. The following selected financial information
should be read in conjunction with Carrols' Consolidated Financial Statements
and accompanying Notes as of December 31, 1997 and 1998 and for the fiscal years
ended December 31, 1996, 1997 and 1998 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997 1998(1)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales................................................ $203,927 $226,257 $240,809 $295,436 $416,190
Franchise revenues.............................................. -- -- -- -- 395
-------- -------- -------- -------- --------
Total revenues.................................................. 203,927 226,257 240,809 295,436 416,585
Costs and expenses:
Cost of sales..................................................... 57,847 63,629 68,031 85,542 122,620
Restaurant wages and related expenses............................. 59,934 65,932 70,894 89,447 121,732
Other restaurant operating expenses............................... 42,390 45,635 48,683 61,691 82,710
Advertising expense............................................... 8,785 9,764 10,798 13,122 18,615
General and administrative........................................ 9,122 10,434 10,387 13,121 19,219
Depreciation and amortization..................................... 11,259 11,263 11,015 15,102 20,005
Other costs(2).................................................... 1,800 -- 509 -- --
-------- -------- -------- -------- --------
Total costs and expenses........................................ 191,137 206,657 220,317 278,025 384,901
-------- -------- -------- -------- --------
Income from operations.............................................. 12,790 19,600 20,492 17,411 31,684
Refinancing expenses................................................ -- -- -- -- 1,639
Interest expense, net............................................... 14,456 14,500 14,209 14,598 21,068
-------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary loss............ (1,666) 5,100 6,283 2,813 8,977
Provision (benefit) for income taxes................................ 165 (9,826) 3,100 655 4,847
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss............................. (1,831) 14,926 3,183 2,158 4,130
Extraordinary loss on extinguishment of debt, net of tax............ -- -- -- -- 3,701
-------- -------- -------- -------- --------
Net income (loss)................................................... $ (1,831) $ 14,926 $ 3,183 $ 2,158 $ 429
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
BALANCE SHEET DATA (AT PERIOD END):
Total assets........................................................ $125,317 $135,064 $138,588 $215,328 $319,606
Working capital deficiency.......................................... (16,456) (13,602) (15,004) (18,293) (11,567)
Total long-term debt(3)............................................. 125,519 120,578 121,265 160,287 261,522
Stockholder's equity (deficit)...................................... (27,208) (12,916) (11,662) 17,447 13,998
OTHER FINANCIAL DATA:
EBITDA(4)........................................................... $ 25,849 $ 30,863 $ 31,507 $ 32,513 $ 45,411
Adjusted EBITDA(5).................................................. 25,849 30,863 32,016 32,513 51,689
Adjusted EBITDA margin.............................................. 12.7% 13.6% 13.3% 11.0% 12.4%
Cash provided by operating activities............................... $ 14,400 $ 16,682 $ 14,322 $ 19,940 $ 23,273
Cash used in investing activities................................... (16,958) (12,348) (20,238) (95,383) (126,504)
Cash provided by financing activities............................... 3,096 4,581 5,767 76,381 107,756
Capital expenditures, excluding acquisitions........................ 6,024 8,022 15,255 18,210 33,295
OPERATING STATISTICS:
Total number of restaurants......................................... 219 219 232 335 383
Number of Burger King restaurants (at end of period)................ 219 219 232 335 343
Average number of Burger King restaurants........................... 207 219 225 280 339
Average annual sales per Burger King restaurant..................... $ 985 $ 1,033 $ 1,070 $ 1,055 $ 1,124
Percentage change in comparable Burger King restaurant sales(1)..... 5.1% 3.8% 3.2% (1.4)% 6.2%
</TABLE>
- ------------------
(1) The year ended December 31, 1998 includes 53 weeks. All other years
presented include 52 weeks. The percentage change in comparable restaurant
sales for the year ended December 31, 1998 has been calculated using a
comparable number of weeks from the prior year. The percentage change in
comparable restaurant sales using the actual number of weeks in the year
ended December 31, 1998 is 7.9%. The percentage change in comparable
restaurant sales is calculated using only those restaurants that have been
open since the beginning of the earliest period being compared.
(2) Other costs represent a non-cash provision for restaurant closure expenses
of $1,800 in 1994 and costs associated with a change in control of $509 in
1996 associated with the sale of us to BIB Holdings.
(3) Includes capital lease obligations and other debt which was $2.9 million at
December 31, 1998.
(4) EBITDA is defined as income (loss) before income taxes, interest,
depreciation and amortization, non-cash extraordinary items and non-cash
other costs. EBITDA is presented because we believe it is a useful financial
indicator for measuring a company's ability to service and/or incur
indebtedness; however, EBITDA should not be considered as an alternative to
net income (loss) as a measure of operating results or to cash flows as a
measure of liquidity in accordance with generally accepted accounting
principles.
(5) Adjusted EBITDA is defined as EBITDA plus $509,000 of other costs in 1996
associated with the sale of us to BIB Holdings, refinancing expenses of
$1,639,000 in 1998 and the redemption premium of $4,639,000 associated with
the retirement of debt in 1998.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
We are the largest Burger King franchisee in the world, and we have
operated Burger King restaurants since 1976. As of December 31, 1998, we
operated 343 Burger King restaurants located in 13 Northeastern, Midwestern and
Southeastern states. Over the last five years, we expanded our operations
through the acquisition and construction of additional Burger King restaurants
while also enhancing the quality of operations, the competitive position and
financial performance of our existing restaurants. As a result of our growth
strategy, we increased the total number of restaurants we operate by over 55%
from 1994 to 1998. In July 1998, we completed our acquisition of Pollo Tropical
for a cash purchase price of approximately $95 million. As a result, the
operations of Pollo Tropical have been presented for the six months ended
June 30, 1998 and 1997. Pollo Tropical is a regional quick-service restaurant
chain featuring grilled marinated chicken and authentic "made from scratch" side
dishes. At December 31, 1998, we owned and operated 40 Pollo Tropical
restaurants in Florida and franchised an additional 21 restaurants in the
Caribbean, Central and South America and Miami. Due to our acquisition of Pollo
Tropical in July 1998, our results for the year ended December 31, 1998 include
the operations of Pollo Tropical from July 10, 1998.
RESULTS OF OPERATIONS OF CARROLS
The following table sets forth, for fiscal years 1996, 1997 and 1998,
selected operating results of Carrols as a percentage of restaurant sales:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Restaurant sales:
Burger King restaurants.................................................... 100.0% 100.0% 91.6%
Pollo Tropical............................................................. -- -- 8.4
--------- --------- ---------
Total restaurant sales....................................................... 100.0 100.0 100.0
Costs and expenses:
Cost of sales.............................................................. 28.3 29.0 29.5
Restaurant wages and related expenses...................................... 29.4 30.3 29.2
Other restaurant expenses including advertising............................ 24.7 25.3 24.3
General and administrative................................................. 4.5 4.4 4.6
Depreciation and amortization.............................................. 4.6 5.1 4.8
--------- --------- ---------
Income from operations....................................................... 8.5% 5.9% 7.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
The results of operations and cash flows for the years ended December 31,
1998 and 1997 include 53 and 52 weeks, respectively. During 1998, we opened 11
Burger King restaurants, acquired 2 Burger King restaurants and closed 5
underperforming Burger King restaurants.
Restaurant Sales. Burger King restaurant sales for the year ended
December 31, 1998 increased 29.0% to $381.0 million from $295.4 million in 1997.
Sales at our 223 comparable Burger King restaurants (those units operating for
the entirety of the compared periods) increased 6.2% in 1998, using a comparable
number of weeks from the year ended December 31, 1997. Comparable Burger King
restaurant sales increased 7.9% using the actual number of weeks in both fiscal
years. Burger King sales increases were also due to increased sales from our
$.99 Great Tastes Menu and the additional week in 1998. Pollo Tropical
restaurant sales for the period July 10, 1998 to December 31, 1998 totaled
$35.1 million.
Operating Costs and Expenses. Cost of sales, as a percentage of sales,
were 29.5% in 1998 compared to 29.0% in 1997. The increase in 1998 was due to
higher cost of sales at our Pollo Tropical restaurants, whose cost of sales was
35.1% in 1998, and which affected total cost of sales, as a percentage of sales,
by 0.5%. A 24% increase in costs associated with the new french fry product,
introduced in January 1998 at our Burger King restaurants, and higher food and
paper costs at recently acquired Burger King restaurants was offset by a 5.7%
decrease in beef costs.
<PAGE>
Restaurant wages and related expenses, as a percentage of sales, decreased
from 30.3% in 1997 to 29.2% in 1998 due to Pollo Tropical restaurant wages and
related expenses being 23.5% of sales. Pollo Tropical's restaurant wages and
related expenses are lower than those of the Burger King restaurants due to
Pollo Tropical's higher per unit sales volumes. This caused a 0.5% decrease, as
a percentage of sales, in combined restaurant wages and related expenses. The
remainder of the decrease is due to the effect of increased Burger King sales on
fixed management costs and lower unemployment tax rates in New York State and
Ohio.
Other restaurant operating expenses, including advertising, decreased from
25.3% of sales in 1997 to 24.3% in 1998 due to Pollo Tropical's other restaurant
operating expenses being 16.9% of sales. This caused a 0.7% decrease as a
percentage of sales, in total other restaurant operating expenses. In addition,
reduced utility costs associated with a milder winter in our Burger King
operating areas contributed 0.2%, as a percentage of sales, to the decrease from
1997 to 1998.
Administrative expenses, as a percentage of sales, increased from 4.4% in
1997 to 4.6% in 1998. The increase in 1998 is due to the addition of field
supervision and corporate support as a result of the 1997 acquisition of 93
Burger King restaurants, administrative functions acquired in the July 1998
acquisition of Pollo Tropical, and increased corporate expenses to support our
plans for continued expansion.
EBITDA. EBITDA increased from $32.5 million in 1997 to $45.4 million in
1998. Included in EBITDA for the year ended December 31, 1998 are refinancing
expenses of $1.6 million and a redemption premium of $4.6 million associated
with the retirement of debt. EBITDA, as adjusted for these items, was
$51.7 million for the year ended December 31, 1998. As a percentage of total
revenues, EBITDA, as adjusted, increased from 11.0% in 1997 to 12.4% in 1998 as
a result of the factors discussed above.
Depreciation and Amortization. Depreciation and amortization increased
$4.9 million in 1998 compared to 1997 due primarily to the increase in goodwill
and purchased intangibles associated with the purchase of Pollo Tropical in July
1998 and the purchase of Burger King restaurants in 1997.
Interest Expense. Interest expense was $21.1 million in 1998 compared to
$15.6 million in 1997. The increase in 1998 was due to higher average debt
balances from funding the acquisition of Pollo Tropical in July 1998 and the
acquisition of Burger King restaurants in 1997.
Income Taxes. The provision for income taxes of $4.8 million in 1998 is
based on an estimated effective income tax rate for 1998 of 53.9%. This rate is
higher than the Federal statutory tax rate due to state franchise and income
taxes and non-deductible amortization of franchise rights and intangible assets
pertaining to our acquisitions.
Net Income. Net income was $429,000 in 1998 compared to $2,158,000 in
1997. Net income in 1998 includes an extraordinary loss of $3,701,000,
which is net of tax, pertaining to the redemption of our 11.5% senior notes.
FISCAL 1997 COMPARED TO FISCAL 1996
Restaurant Sales. Restaurant sales for the year ended December 31, 1997,
increased 22.7% to $295.4 million from $240.8 million in 1996. The increase in
sales was primarily the result of the growth in the number of Burger King
restaurants operated by us which increased from 232 at the end of 1996 to 335 at
the end of 1997. During 1997, we opened 11 new restaurants, acquired 93
restaurants in six transactions, and closed one underperforming restaurant.
Sales at our 214 comparable restaurants (those units operating for the entirety
of the compared periods) decreased 1.4% during 1997. In general, we did not
increase menu prices during 1997.
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. The increase
in 1997 reflected higher food costs, including approximately a 2% increase in
average beef prices and higher costs as a percentage of sales at our newly
acquired Burger King units.
Restaurant wages and related expenses increased as a percentage of sales
from 29.4% in 1996 to 30.3% in 1997. Wages increased due to higher labor rates
including the effect of increases in the Federal minimum wage rates. A 1996
amendment to the Federal Fair Labor Standards Act of 1938 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. In part, the increase in 1997 is reflective of general
inflationary increases combined with a decrease in comparable restaurant sales.
In addition, we added a significant number of restaurants through acquisition
during 1997,
<PAGE>
and, therefore, expense relationships were somewhat higher as these new units
were not yet fully integrated into our business.
Administrative expenses increased approximately $2.7 million, and, as a
percentage of sales, were 4.4% in 1997 compared to 4.5% in 1996. 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 our plans for continued
expansion.
EBITDA. EBITDA increased from $31.5 million in 1996 to $32.5 million in
1997. As a percentage of sales, EBITDA decreased from 13.3% in 1996 to 11.0% in
1997 as a result of the factors discussed above.
Depreciation and Amortization. Depreciation and amortization was $15.1
million in 1997 compared to $11.0 million in 1996. The $4.1 million increase in
1997 was due 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 in 1996. The increase in 1997 was the result of higher average
debt balances brought about by the funding of the restaurants that we 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 we
had outstanding for several years. As a result of the settlement, our tax
provision was reduced by $806,000, and we recorded interest income of $983,000.
Net Income. Net income was $2,158,000 in 1997 compared to $3,183,000 in
1996. The decrease in net income is attributable to the factors discussed above.
ITEM 7A. QUANTITATIVE AND QUALTITATIVE DISCLOSURES ABOUT MARKET RISKS
See Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial statements attached hereto is set forth in Item 14.
18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 12, 1997 Carrols replaced the accounting firm of Arthur Andersen
LLP ("Arthur Andersen") as their principal external auditor and engaged the
services of Coopers & Lybrand, LLP ("Coopers & Lybrand").
Arthur Andersen was the principal external auditor during the year ended
December 31, 1996 and their report on the financial statements for the period
ended December 31, 1996 did not contain an adverse opinion or disclaimer of
opinion nor were financial statement opinions qualified or modified as to
uncertainty, as to audit scope or as to accounting principles.
There were no disagreements on any matters of accounting principles or
practices, financial statement disclosure or scope of auditing procedures with
the accounting firm of Arthur Andersen.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information about our directors, executive
officers and other officers:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Alan Vituli............................... 57 Chairman of the Board and Chief Executive Officer
Daniel T. Accordino....................... 48 President, Chief Operating Officer and Director
Paul R. Flanders.......................... 42 Vice President--Finance and Treasurer
Joseph A. Zirkman......................... 38 Vice President, General Counsel and Secretary
Richard H. Liem........................... 45 Vice President--Financial Operations
Timothy J. LaLonde........................ 42 Vice President--Controller
Steven Barnes............................. 50 Vice President--Regional Director
Michael A. Biviano........................ 41 Vice President--Regional Director
Joseph W. Hoffman......................... 36 Regional Director
David R. Smith............................ 49 Vice President--Regional Director
James E. Tunnessen........................ 43 Vice President--Regional Director
Richard L. Verity......................... 42 Vice President--Regional Director
Nicholas A. Castaldo...................... 47 President and Chief Operating Officer--Pollo Tropical
Division
Benjamin D. Chereskin..................... 40 Director
James M. Conlon........................... 31 Director
David J. Mathies, Jr...................... 51 Director
Robin P. Selati........................... 32 Director
Clayton E. Wilhite........................ 53 Director
</TABLE>
Certain biographical information regarding our directors, executive
officers and other officers is set forth below:
Alan Vituli has been Chairman of the Board 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 for the
last ten years as a partner. Among the positions held by Mr. Vituli at Coopers &
Lybrand was National Director of Mergers and Acquisitions. Before joining
Coopers & Lybrand, Mr. Vituli was employed in a family-owned restaurant
business. From 1993 through our acquisition of Pollo Tropical, Mr. Vituli served
on the Board of Directors of Pollo Tropical.
Daniel T. Accordino has been President, Chief Operating Officer and a
Director since February 1993. Before that, Mr. Accordino served as Executive
Vice President--Operations from December 1986 and as Senior Vice President from
April 1984. From 1979 to April 1984 he was Vice President responsible for
restaurant operations, having previously served as our Assistant Director of
Restaurant Operations. Mr. Accordino has been employed by us since 1972.
Paul R. Flanders has been Vice President--Finance and Treasurer since April
1997. Before joining us, he was Vice President--Corporate Controller of Fay's
Incorporated, a retailing chain, from 1989 to 1997, and Vice
President--Controller for Computer Consoles, Inc., a computer systems
manufacturer, from 1982 to 1989. Mr. Flanders was also associated with the
accounting firm of Touche Ross & Co. from 1977 to 1982.
Joseph A. Zirkman became Vice President and General Counsel in January
1993. He was appointed Secretary in February 1993. Before joining us,
Mr. Zirkman was an associate with the New York City law firm of Baer Marks &
Upham beginning in 1986.
Richard H. Liem became Vice President--Financial Operations in May 1994.
Before joining us, Mr. Liem was a Senior Audit Manager with the accounting firm
of Price Waterhouse. Mr. Liem was with Price Waterhouse beginning in 1983.
20
<PAGE>
Timothy J. LaLonde has been Vice President--Controller since July 1997.
Before joining us, he was a controller at Fay's Incorporated, a retailing chain,
from 1992 to 1997. Before that he was a Senior Audit Manager with the accounting
firm of Deloitte & Touche LLP, where he was employed since 1978.
Steven Barnes is Vice President--Regional Director. He has been a Vice
President since February 1997 and a Regional Director of Operations since 1993.
Before joining us, Mr. Barnes was Vice President--Operations of Snapps
Restaurants, Inc. from 1989 to 1993.
Michael A. Biviano is Vice President--Regional Director. Mr. Biviano has
been Regional Director of Operations since October 1989, having served as
District Supervisor from December 1983 to October 1989. Mr. Biviano has been
employed by us since 1973.
Joseph W. Hoffman has been Regional Director since July 1997. Mr. Hoffman
joined us in 1993 in connection with one of our acquisitions and served in the
capacity of District Supervisor from 1993 to 1997. Before 1993 Mr. Hoffman was
in a similar capacity with Community Food Service, Inc.
David R. Smith is Vice President--Regional Director. Mr. Smith has been
Regional Director of Operations since 1984, having served as District Supervisor
from 1975 to 1984. Mr. Smith has been employed by us since 1972.
James E. Tunnessen is Vice President--Regional Director. 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 us since
1972.
Richard L. Verity has been Vice President--Regional Director since August
1997 when he joined us in conjunction with our acquisition of a group of 63
Burger King restaurants. Mr. Verity was previously with Resser Management Corp.,
a restaurant management company, from 1986 to 1997 and held the position of
Executive Vice President.
Nicholas A. Castaldo has been the President of Pollo Tropical, Inc. since
October 1995 and its Chief Operating Officer since November 1, 1996. Before
joining Pollo Tropical and since August 1993, Mr. Castaldo was employed as Vice
President of Marketing for Denny's Inc., a restaurant company. From 1986 to
1993, Mr. Castaldo was employed by S&A Restaurant Corp., which includes Steak &
Ale and Bennigan's restaurant chains, and ultimately served as Senior Vice
President of Marketing and Business Development. Mr. Castaldo's career spans 20
years and includes management positions at Burger King, Citicorp, and Clairol
Inc.
Benjamin D. Chereskin has served as a Director since March 1997.
Mr. Chereskin is a Managing Director of Madison Dearborn Partners, Inc., a
venture capital firm, and co-founded the firm in 1993. Before that,
Mr. Chereskin was with First Chicago Venture Capital for nine years.
Mr. Chereskin also serves on the Board of Directors of Beverages & More, Inc.;
Cornerstone Brands, Inc.; Tuesday Morning Corporation and NWL Holdings, Inc.
James M. Conlon has served as a Director since 1998. Mr. Conlon has served
as Managing Director of Dilmun Investments, Inc., a venture capital firm, since
1992. Since 1997, Mr. Conlon has been the Co-Head of the bank's U.S. Merchant
Banking group. Before joining Dilmun Investments, Inc., Mr. Conlon was employed
as an Investment Analyst in the Securities Division of TIAA-CREF. Mr. Conlon
serves on the Boards of Directors of Carrols Corporation; Capital Recovery
Holdings, Inc; Thompson Products, Inc. and Independent Pictures, Inc.
David J. Mathies, Jr. has served as a Director since 1996. Mr. Mathies has
served as President of Dilmun Investments, Inc., a venture capital firm, since
its inception in 1988. From 1971 to 1988, he was employed by Mellon Bank, where
he was head of their Pension Management Group, providing investment management
services to middle market clients. Mr. Mathies serves on the Boards of Directors
of Carrols Corporation; Capital Recovery Holdings, Inc; Thompson Products and
Independent Pictures, Inc.
Robin P. Selati has served as a Director since March 1997. Mr. Selati is a
Managing Director of Madison Dearborn Partners, Inc., a venture capital firm,
and joined the firm in 1993. Before 1993, Mr. Selati was associated with Alex
Brown & Sons Incorporated in the consumer/retail investment banking group.
21
<PAGE>
Mr. Selati also serves on the Board of Directors of Peter Piper, Inc., Tuesday
Morning Corporation and NWL Holdings, Inc.
Clayton E. Wilhite has served as a Director since July 1997. Since January
1998, Mr. Wilhite has been with CFI Group, Inc., has been its Managing Partner
since May 1998, and has served on its Board of Directors since September 1998.
CFI Group, Inc. is an international marketing and consulting firm specializing
in measuring customer satisfaction. Between 1996 and 1998, he was the Chairman
of Thurloe Holdings, L.L.C. Before 1996, Mr. Wilhite was with the advertising
firm of D'Arcy Masius Benton & Bowles, Inc. having served as its Vice Chairman
from 1995 to 1996, as President of DMB&B/North America from 1988 to 1995, and as
Chairman and Managing Director of DMB&B/St. Louis from 1985 to 1988. From August
1996 through our acquisition of Pollo Tropical, Mr. Wilhite served on the Board
of Directors of Pollo Tropical, Inc.
All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Our executive officers
are chosen by the Board and serve at its discretion. All of our directors also
serve as directors of Holdings.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information for the fiscal years
ended December 31, 1998, 1997 and 1996 for our Chief Executive Officer and our
next four most highly compensated executive officers who were serving as
executive officers at December 31, 1998 and whose annual compensation exceeded
$100,000. Stock option data refers to the stock options of Holdings.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) OPTIONS(#)
- ------------------------------------------------------------------ ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Alan Vituli ...................................................... 1998 $425,004 $297,503 --
Chairman of the Board and Chief Executive Officer 1997 392,758 -- 72,830
1996 363,160 128,210 --
Daniel T. Accordino .............................................. 1998 320,004 192,002 --
President, Chief Operating Officer and Director 1997 288,386 -- 31,479
1996 258,943 91,778 --
Paul R. Flanders ................................................. 1998 143,759 71,880 500
Vice President, Finance and Treasurer 1997 105,925 -- 1,500
1996 -- -- --
Joseph A. Zirkman ................................................ 1998 131,000 65,500 400
Vice President, General Counsel and Secretary 1997 120,436 -- 1,118
1996 115,288 40,934 --
Richard H. Liem .................................................. 1998 111,000 39,960 300
Vice President, Financial Operations 1997 103,160 -- 500
1996 94,750 30,288 --
</TABLE>
- ------------------
(a) We provide bonus compensation to executive officers based on an individual's
achievement of certain specified objectives and our achievement of specified
increases in stockholder value.
23
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED EXERCISE
UNDERLYING TO PRICE
OPTIONS EMPLOYEES (PRICE EXPIRATION
NAME GRANTED(A) IN 1998 PER SHARE) DATE
- ---------------------------------------------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Paul R. Flanders................................................ 500 4.8% $ 124.78 2/28/2008
Joseph A. Zirkman............................................... 400 3.9 124.78 2/28/2008
Richard H. Liem................................................. 300 2.9 124.78 2/28/2008
</TABLE>
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
OF STOCK APPRECIATION
FOR OPTION TERM(B)
------------------------------------------------
NAME 5% 10%
- -------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Paul R. Flanders.............................................. $ 39,237 $ 99,434
Joseph A. Zirkman............................................. 31,389 79,547
Richard H. Liem............................................... 23,542 59,660
</TABLE>
- ------------------
(a) Stock option grants were granted under the 1996 Long-Term Incentive Plan.
These options become exercisable at the rate of 25% per year beginning on
December 31, 1998.
(b) 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 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 ours served as a
director of or member of a compensation committee of any entity for which any of
the persons serving on our Board of Directors or on the Compensation Committee
of the Board of Directors is an executive officer. The Compensation Committee is
comprised of Messrs. Chereskin, Mathies and Wilhite.
BOARD OF DIRECTORS
Directors' Compensation. Directors who are our employees do not receive
any additional compensation for serving as directors. Directors who are not our
employees receive a fee of $15,000 per annum. All directors are reimbursed for
all reasonable expenses they incur while acting as directors, including as
members of any committee of the Board of Directors.
Liability Limitation. As permitted under the Delaware General Corporation
Law, our Restated Certificate of Incorporation provides that a director will not
be personally liable to us or our stockholders for monetary damages for breach
of a fiduciary duty owed to us or our 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 any of our directors:
o for any breach of the director's duty of loyalty to us or our stockholders;
o for an act or omission not in good faith or involving intentional
misconduct or a knowing violation of law;
o for any transaction from which the director derived an improper personal
benefit; or
o for an improper declaration of dividends or purchase or redemption of our
securities.
Indemnification. Our Restated Certificate of Incorporation provides that we
will indemnify our directors and officers to the fullest extent permitted by
Delaware law.
24
<PAGE>
DESCRIPTION OF PLANS
Employee Savings Plan. We offer salaried employees, excluding those of
Pollo Tropical, the option to participate in the Carrols Corporation Corporate
Employee Savings Plan, which is qualified as a profit-sharing plan by the
Internal Revenue Service. In accordance with the plan, we match up to $1,040 of
an employee's mandatory contributions by contributing $0.50 for each dollar
contributed by the employee. Employees are fully vested in their own
contributions; employees become vested in our contributions beginning in the
fourth year of service and are fully vested after seven years of service or upon
retirement at age 65 with five years service, death, or permanent or total
disability. If any of the foregoing events occurs, benefits may be paid out in a
single cash lump sum or in periodic installments over not more than the
employee's assumed life expectancy. The employee's contributions may be
withdrawn at any time, subject to restrictions on future contributions. Our
matching contributions may be withdrawn under certain conditions of financial
necessity or hardship as defined in the plan.
Pollo Tropical 401(k) Savings Plan. Pollo Tropical has an employee savings
plan pursuant to Section 401(k) of the Internal Revenue Code. All employees who
are age 21 or older and who have been credited with at least 1,000 hours of
service within twelve consecutive months are eligible to participate in the
plan. Employees may elect to contribute to the plan through payroll deductions
in an amount not to exceed the amount permitted under the Internal Revenue Code.
We make discretionary matching contributions, which are allocated to
participants based on the participant's eligible deferrals during the plan year.
Employees are fully vested in their contributions. Our contributions vest at a
rate of 33% for each complete year of service. For the year ended December 31,
1998, our contributions to the plan totaled $17,000.
Bonus Plans. We have 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 our performance as well as the division's performance.
1996 Long-Term Incentive Plan. In connection with the investment by
Madison Dearborn Capital Partners, L.P. and Madison Dearborn Capital Partners
II, L.P. in 1997, Holdings adopted the Carrols Holdings Corporation 1996
Long-Term Incentive Plan pursuant to which we may grant awards such as
"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 to certain
of our and our subsidiaries' officers and employees. The 1996 Long-Term
Incentive Plan replaced a prior long-term incentive plan which was adopted
December 26, 1996. The plan is designed to advance our interests and the
interests of Holdings by providing an additional incentive to attract, retain
and motivate qualified and competent persons through the encouragement of stock
ownership or stock appreciation rights in Holdings.
The 1996 Long-Term Incentive Plan permits the Compensation Committee of the
Board of Directors of Holdings to grant, from time to time, options to purchase
an aggregate of up to 106,250 shares of common stock of Holdings. The vesting
periods for options and the expiration dates for exercisability of options
granted under the 1996 Long-Term Incentive Plan are determined by Holdings'
Compensation Committee; however, the exercise period for an option granted under
the 1996 Long-Term Incentive Plan may not exceed ten years from the date of the
grant. Holdings' Compensation Committee is authorized to grant options under the
plan to all of our and our subsidiaries' eligible officers and employees,
including executive officers and directors (other than outside directors and
members of Holdings' Compensation Committee).
Holdings' Compensation Committee determines the option exercise price per
share of any option granted under the 1996 Long-Term Incentive Plan; however,
the option price per share of an option intended to qualify as an Incentive
Stock Option shall not be less than the fair market value of the common stock of
Holdings on the date such option is granted. Payment of such option exercise
price shall be made:
(1) in cash;
(2) by delivering shares of Holdings' common stock already owned by the holder
of such options;
25
<PAGE>
(3) by delivering a promissory note;
(4) by a combination of any of the foregoing, in accordance with the
terms of the 1996 Long-Term Incentive Plan, the applicable stock
option agreement and any applicable guidelines of Holdings'
Compensation Committee in effect at the time; or
(5) by any other means approved by Holdings' Compensation Committee.
If the holder of an option issued pursuant to the plan elects to pay the
exercise price of such option by delivering a promissory note, such promissory
note may be either:
(1) unsecured and fully recourse against the holder of such option; or
(2) nonrecourse but secured by the shares of Holdings' common stock
being purchased by such exercise and by other assets having a fair
market value equal to not less than 40% of the exercise price of
such option. In either event, such note shall mature on the fifth
anniversary of the date of the note and bear interest at the rate
provided under Section 1274(d) of the Internal Revenue Code of
1986, as amended from time to time.
Pursuant to the 1996 Long-Term Incentive Plan, in the event of a Change of
Control (as defined in the plan) any and all options issued and outstanding will
vest and become exercisable in full on the date of such Change of Control. In
addition, as soon as practicable but no later than thirty days before such
Change of Control, Holdings' Compensation Committee shall notify any holder of
an option granted under the plan of such Change of Control. Further, upon a
Change of Control that qualifies as an Approved Sale (as defined in the plan) in
which the outstanding common stock of Holdings is converted or exchanged for or
becomes a right to receive any cash, property or securities other than Illiquid
Consideration (as defined in the plan),
(1) each option granted under the 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;
(2) 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 Holdings'
common stock; or
(b) upon consummation of the Approved Sale, receive in exchange for
such option consideration equal to the amount determined by
multiplying:
(x) the same amount of consideration per share of Holdings'
common stock received by the holders in connection with the
Approved Sale less the exercise price per share of Holdings'
common stock of such option to acquire Holdings' common
stock by
(y) the number of shares of Holdings' common stock represented
by such option; and
(3) to the extent such option is not exercised prior to or
simultaneous with such Approved Sale, any such option shall be
canceled.
1998 Directors' Stock Option Plan. During 1998, Holdings adopted the
Carrols Holdings Corporation 1998 Directors' Stock Option Plan pursuant to which
we may grant "Incentive Stock Options" (as defined under Section 422 of the
Internal Revenue Code), nonqualified stock options, stock appreciation rights,
restricted stock, and other stock-based awards to certain non-employee directors
of Holdings. The plan is designed to advance the interests of Holdings and us by
providing an additional incentive to attract, retain and motivate non-employee
individuals as directors of our Board and the Board of Holdings.
The 1998 Directors' Stock Option Plan permits Holdings' Compensation
Committee to grant, from time to time, options to purchase an aggregate of up to
10,000 shares of Holdings' common stock. The vesting periods for these options
and the expiration dates for exercisability of the options granted under the
plan are determined by the Compensation Committee; however, the exercise period
for an option granted under the plan may not exceed ten years from the date of
the grant. Holdings' Compensation Committee is authorized to grant options under
the plan to all eligible non-employee directors of Holdings. Directors that are
our
26
<PAGE>
employees or employees of Holdings, Madison Dearborn Capital Partners, L.P.,
Madison Dearborn Capital Partners II, L.P. or BIB Holdings, or any of their
respective affiliates are not eligible under the plan.
The option exercise price per share of any option granted under the 1998
Directors' Stock Option Plan is determined by Holdings' Compensation Committee;
however, the option price per share of an option intended to qualify as an
Incentive Stock Option shall not be less than the fair market value of Holdings'
common stock on the date such option is granted. Payment of such option exercise
price shall be made:
(1) in cash;
(2) by delivering shares of common stock already owned by the holder of such
options;
(3) by delivering a promissory note;
(4) by a combination of any of the foregoing, in accordance with the
terms of the plan, the applicable stock option agreement and any
applicable guidelines of the Holdings Compensation Committee in
effect at the time; or
(5) by any other means approved by the Holdings Compensation Committee.
If the holder of an option issued pursuant to the plan elects to pay the
exercise price of such option by delivering a promissory note, such promissory
note may be either:
(1) unsecured and fully recourse against the holder of such options;
or
(2) nonrecourse but secured by the shares of Holdings' common stock
being purchased by such exercise and by other assets having a fair
market value equal to not less than 40% of the exercise price of
such option.
In either event, such note shall mature on the fifth anniversary of the date of
the note and bear interest at the rate provided under Section 1274(d) of the
Internal Revenue Code of 1986, as amended from time to time.
Pursuant to the 1998 Directors' Stock Option Plan, in the event of a Change
of Control (as defined in the plan), any and all options issued and outstanding
shall vest and become exercisable in full on the date of such Change of Control.
In addition, as soon as practicable but in no event later than 30 days prior to
a Change of Control, Holdings' Compensation Committee shall notify any holder of
an option granted under the plan of such Change of Control. Further, upon a
Change of Control that qualifies as an Approved Sale (as defined in the 1998
Directors' Plan) in which the outstanding common stock of Holdings is converted
or exchanged for or becomes a right to receive any cash, property or securities
other than Illiquid Consideration (as defined in the 1998 Directors' Plan):
(1) each option granted under the plan shall become exercisable solely
for the amount of such cash, property or securities that the
holder of such award would have been entitled to had such award
been exercised immediately prior to such event;
(2) 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 Holdings'
common stock; or
(b) upon consummation of the Approved Sale, receive in exchange for
such award consideration equal to the amount determined by
multiplying:
(x) the same amount of consideration per share of Holdings'
common stock received by the holders in connection with the
Approved Sale less the exercise price per share of Holdings'
common stock of such award to acquire Holdings' common stock
by
(y) the number of shares of Holdings' common stock represented
by such option; and
(3) to the extent such option is not exercised prior to or
simultaneous with such Approved Sale, any such award will be
canceled.
27
<PAGE>
DESCRIPTION OF EMPLOYMENT AGREEMENTS
Vituli Employment Agreement. On March 27, 1997, in connection with the
investment by Madison Dearborn Capital Partners, L.P. and Madison Dearborn
Capital Partners II, L.P., we entered into a Second Amended and Restated
Employment Agreement with Alan Vituli, which amended and restated an Amended and
Restated Employment Agreement dated April 3, 1996 between us and Mr. Vituli.
Pursuant to the amended employment agreement, Mr. Vituli will continue to serve
as our Chairman of the Board and Chief Executive Officer. The amended employment
agreement will 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 we or Mr. Vituli elect not to renew by giving written notice to
the other at least 90 days before a scheduled expiration date. Pursuant to the
amended 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 amended employment agreement,
Mr. Vituli will participate in our Executive Bonus Plan and any of our stock
option plans applicable to executive employees. The amended employment agreement
also requires that we are responsible for maintaining the premium payments on a
split-dollar life insurance policy on the life of Mr. Vituli providing a death
benefit of $1.5 million payable to an irrevocable trust designated by
Mr. Vituli. The amended employment agreement provides that if Mr. Vituli's
employment is terminated without Cause (as defined in the amended employment
agreement) following a Change of Control (as defined in the amended employment
agreement),
(1) Mr. Vituli will receive a cash payment in the amount equal to 2.99
times his Five Year Compensation Average (as defined in the
amended employment agreement) if such Change of Control occurs
during the first two years of the initial term of the amended
employment agreement; and
(2) a cash lump sum equal to his salary during the previous 12 months
if terminated thereafter. The amended employment agreement
includes non-competition and non-solicitation provisions effective
during the term of the amended employment agreement and for two
years following its termination.
Accordino Employment Agreement. On March 27, 1997, in connection with the
investment by Madison Dearborn Capital Partners, L.P. and Madison Dearborn
Capital Partners II, L.P., we entered into a Second Amended and Restated
Employment Agreement with Daniel T. Accordino, which amended and restated an
Amended and Restated Employment Agreement dated April 3, 1996 between us and
Mr. Accordino. Pursuant to the amended employment agreement, Mr. Accordino will
continue to serve as our President and Chief Operating Officer. The amended
employment agreement will 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 we or Mr. Accordino elect not to renew by giving written
notice to the other at least 90 days before a scheduled expiration date.
Pursuant to the amended 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 amended employment
agreement, Mr. Accordino will participate in our Executive Bonus Plan and any of
stock option plans applicable to executive employees. The amended employment
agreement also will require that we are responsible for maintaining the premium
payments on a split-dollar life insurance policy on the life of Mr. Accordino
providing a death benefit of $1.0 million payable to an irrevocable trust
designated by Mr. Accordino. The amended employment agreement provides that if
Mr. Accordino's employment is terminated without Cause (as defined in the
amended employment agreement) following a Change of Control (as defined in the
amended employment agreement),
(1) Mr. Accordino will receive a cash payment in the amount equal to
2.99 times his Five Year Compensation Average (as defined in the
amended employment agreement) if such change of control occurs
during the first two years of the agreement; and
(2) a cash lump sum equal to his salary during the previous 12 months
if terminated thereafter. The agreement includes non-competition
and non-solicitation provisions effective during the term of the
amended employment agreement and for two years following its
termination.
28
<PAGE>
Castaldo Employment Agreement. Effective July 20, 1998, in connection with
our acquisition of Pollo Tropical, we entered into an Amended and Restated
Employment Agreement with Nicholas A. Castaldo, which amended and restated an
Employment Agreement dated September 19, 1995, as amended May 5, 1997, between
Pollo Tropical and Mr. Castaldo. Pursuant to the amended agreement,
Mr. Castaldo will serve as the President and Chief Operating Officer of our
Pollo Tropical Division. The agreement will be for an initial term commencing on
July 20, 1998 and ending September 30, 2003, and will be subject to renewal for
up to two additional one-year periods at our option, exercisable by giving
written notice to Mr. Castaldo by no later than July 31, 2003 or 2004, as
applicable. Pursuant to the agreement, Mr. Castaldo will receive a base salary
of $300,000 per year during the term, which amount increases on January 1, 2000
and on each January 1st thereafter during the term by at least 5% subject to
additional increases that may be authorized by our Board of Directors. Pursuant
to the agreement, Mr. Castaldo will be eligible to receive an annual bonus of up
to 100% of his base salary (of which not more than 50% may be subject to
deferral provisions in our Executive Bonus Plan (as defined in the agreement)),
which bonus will be payable in accordance with our Executive Bonus Plan and will
be based solely upon the achievement by Mr. Castaldo of certain corporate and
individual performance standards during the relevant period as reasonably
established by us with Mr. Castaldo. For the period January 1, 1998 through
June 30, 1998, Mr. Castaldo will receive a bonus based upon the previous Pollo
Tropical Executive Bonus Plan (as defined in the agreement), none of which bonus
will be subject to any deferral provisions in our Executive Bonus Plan. Pursuant
to the agreement, Mr. Castaldo will be entitled to be granted, and it is
anticipated that he will be granted, non-qualified options or the equivalent to
purchase 5% of Pollo Tropical's common stock or equity value if no such common
stock has been issued. Such options will be issued pursuant to Pollo Tropical's
1998 Stock Option or Tracking Stock Option Plan, which we anticipate adopting in
the future. Mr. Castaldo's agreement provides that if Mr. Castaldo's employment
is terminated by us without Cause (as defined in the agreement) or by
Mr. Castaldo for Good Reason (as defined in the agreement), or if the term of
the agreement expires, then Mr. Castaldo will be entitled to the following
payments and benefits:
(1) An amount equal to the greater of:
(x) Mr. Castaldo's base salary then in effect, from the date on
which his employment is terminated or expires under the
terms of the agreement until 12 months after such
termination date; or
(y) Mr. Castaldo's base salary from such termination date
through the end of the initial term. The foregoing will be
payable as follows: a lump sum equal to one year's then
current base salary payable within ten days of such
termination date and the balance, if any, payable in 24
equal monthly installments.
(2) Mr. Castaldo's stock options to be granted under the Option
Agreement (as defined in the agreement) shall vest as set forth in
and in accordance with the terms and provisions of the Option
Agreement;
(3) Mr. Castaldo's health and medical insurance benefits will be
continued at our expense through the date which is 24 months
following the termination date; and
(4) any portion of bonus that was deferred under the Pollo Tropical
Executive Bonus Plan will be payable in a lump sum within ten days
of the termination date.
Mr. Castaldo's agreement includes non-competition and non-solicitation
provisions effective during the term of the agreement and for two years
following its termination.
OPTION AGREEMENTS PURSUANT TO THE 1996 LONG-TERM INCENTIVE PLAN
Vituli Plan Option Agreement. On December 30, 1996, pursuant to the
Securities Purchase Agreement dated as of March 6, 1996 among Holdings, the
stockholders of Holdings, BIB Holdings and us, Holdings granted to Alan Vituli,
under the 1996 Long-Term Incentive Plan, an option to purchase 43,350 shares of
Holdings' common stock. The option:
(1) was immediately exercisable with regard to 15,300 shares of
Holdings' common stock at an exercise price of $110.00 per share;
and
29
<PAGE>
(2) was to become exercisable on June 1, 1997 with regard to:
(a) 15,300 shares of Holdings' common stock at an exercise price of
$130.00 per share; and
(b) 12,750 shares of Holdings' common stock at an exercise price of
$140.00 per share.
On January 22, 1997, Mr. Vituli contributed these options to the Vituli Family
Trust for the benefit of his children.
In connection with the investment by Madison Dearborn Capital Partners,
L.P. and Madison Dearborn Capital Partners II, L.P. in 1997, Holdings granted an
option to purchase 43,350 shares of Holdings' common stock under the 1996
Long-Term Incentive Plan in exchange for the options held by the Vituli Family
Trust. The Vituli Family Trust agreed to reduce the exercise price to $101.7646
per share. The new option:
(1) has a term of ten years from the date of grant;
(2) became exercisable:
(a) on the date of grant with regard to 15,300 shares of Holdings'
common stock;
(b) on December 31, 1997 with regard to 5,610 shares of Holdings'
common stock;
(c) on December 31, 1998 with regard to 5,610 shares of Holdings'
common stock; and
(3) will become exercisable:
(a) on December 31, 1999 with regard to 5,610 shares of Holdings'
common stock; and
(b) on December 31, 2000 with regard to 11,220 shares of Holdings'
common stock.
Accordino Plan Option Agreement. On December 30, 1996, pursuant to the
Securities Purchase Agreement dated as of March 6, 1996, Holdings granted to
Daniel T. Accordino, under the 1996 Long-Term Incentive Plan, an option to
purchase 28,900 shares of Holdings' common stock. The option:
(1) was immediately exercisable with regard to 10,200 shares of
Holdings' common stock at an exercise price of $110.00 per share;
and
(2) was to become exercisable on December 31, 1997 with regard to:
(a) 10,200 shares of Holdings' common stock at an exercise price of
$130.00 per share; and
(b) 8,500 shares of Holdings' common stock at an exercise price of
$140.00 per share.
In connection with the investment by Madison Dearborn Capital Partners,
L.P. and Madison Dearborn Capital Partners II, L.P. in 1997, the option granted
to Mr. Accordino was canceled and Holdings granted to Mr. Accordino, under the
1996 Long-Term Incentive Plan, an option to purchase 28,900 shares of Holdings'
common stock at an exercise price of $101.7646 per share. The new option:
(1) has a term of ten years from the date of grant;
(2) became exercisable:
(a) on the date of grant with regard to 10,200 shares of Holdings'
common stock;
(b) on December 31, 1997 with regard to 3,740 shares of Holdings'
common stock;
(c) on December 31, 1998 with regard to 3,740 shares of Holdings'
common stock; and
(3) will become exercisable:
(a) on December 31, 1999 with regard to 3,740 shares of Holdings'
common stock; and
(b) on December 31, 2000 with regard to 7,480 shares of Holdings'
common stock.
30
<PAGE>
OTHER OPTION AGREEMENTS GRANTED IN CONNECTION WITH THE MADISON DEARBORN
INVESTMENT
Vituli Non-Plan Option Agreement. In connection with the investment by
Madison Dearborn Partners, L.P. and Madison Dearborn Capital Partners II, L.P.
in 1997, Holdings granted to Mr. Vituli a nonqualified stock option to purchase
29,480 shares of Holdings' common stock at an exercise price of $101.7646. The
option will have a term of ten years from the date of grant and will become
exercisable in five equal parts on the five consecutive anniversaries of the
date of grant. The option will have substantially the same terms as options
issued under the 1996 Long-Term Incentive Plan with respect to:
(1) the method of payment of the exercise price of the option; and
(2) the effect of a Change of Control (as defined in the 1996 Long-Term
Incentive Plan).
Accordino Non-Plan Option Agreement. In connection with the investment by
Madison Dearborn Partners, L.P. and Madison Dearborn Capital Partners II, L.P.
in 1997, Holdings granted to Mr. Accordino a nonqualified stock option to
purchase 2,579 shares of Holdings' common stock at an exercise price of
$101.7646. The option will have a term of ten years from the date of grant and
will become exercisable in five equal parts on the five consecutive
anniversaries of the date of grant. The option will have substantially the same
terms as the option granted to Mr. Vituli.
Zirkman Non-Plan Option Agreement. In connection with the investment by
Madison Dearborn Partners, L.P. and Madison Dearborn Capital Partners II, L.P.
in 1997, Holdings granted to Joseph A. Zirkman a nonqualified stock option to
purchase 368 shares of Holdings' common stock at an exercise price of $101.7646.
The option will have a term of ten years from the date of grant and will become
exercisable in five substantially equal parts on the five consecutive
anniversaries of the date of grant. The option will have substantially the same
terms as the option granted to Mr. Vituli.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth the number and percentage of shares of our
voting stock and Holdings' voting common stock beneficially owned, as of March
15, 1999, by:
(1) all persons known by us to be the beneficial owners of more than
5% of the shares of such voting common stock;
(2) each of our directors who owns shares of such voting common stock;
(3) each of our executive officers included in the Summary
Compensation Table above; and
(4) all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(A)
---------------------- FULLY DILUTED(B)
NUMBER PERCENTAGE PERCENTAGE
--------- ---------- ----------------
<S> <C> <C> <C>
Stockholders of Carrols Corporation:
Carrols Holdings Corporation............................................ 10 100% 100%
968 James Street
Syracuse, New York 13203
Stockholders of Carrols Holdings Corporation:
BIB Holdings (Bermuda) Ltd.(c).......................................... 566,667 46.80% 44.50%
c/o Dilmun Investments
Metro Center
One Station Place
Stamford, CT 06902
Madison Dearborn Capital Partners, L.P.................................. 283,333 23.40% 22.25%
Three First National Plaza
Suite 3800
Chicago, IL 60602
Madison Dearborn Capital Partners II, L.P............................... 283,334 23.40% 22.25%
(Same address as Madison Dearborn Capital Partners, L.P.)
Executive Officers and Directors:
Alan Vituli(d).......................................................... 48,139 3.98% 6.49%
Daniel T. Accordino..................................................... 19,572 1.62% 2.54%
Paul R. Flanders........................................................ 875 *% *%
Joseph A. Zirkman....................................................... 746 *% *%
Richard H. Liem......................................................... 325 *% *%
Clayton E. Wilhite...................................................... 250 *% *%
Directors and executive officers of Carrols as a group (12 persons)..... 70,232 5.80% 9.52%
</TABLE>
- ------------------
* Less than one percent.
(a) The number of shares shown in the table includes stock options which are
currently exercisable or exercisable within 60 days of the date of this
prospectus to purchase: 38,312 shares held by Mr. Vituli; 18,712 shares held
by Mr. Accordino; 875 shares held by Mr. Flanders; 623 shares held by
Mr. Zirkman; 325 shares held by Mr. Liem; and 250 shares held by
Mr. Wilhite.
(b) Gives effect to the exercise of all outstanding options for Holdings' common
stock.
(c) These 566,667 shares of Holdings' common stock were previously owned by
Atlantic Restaurants, Inc. which was formed to effect the acquisition of the
company in 1996. Atlantic Restaurants, Inc., which was a wholly-owned
subsidiary of BIB Holdings, was merged into BIB Holdings on February 10,
1999.
(d) Includes 26,520 vested stock options contributed to and held by the Vituli
Family Trust.
32
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement. On March 27, 1997, in connection with the
investment by Madison Dearborn Capital Partners, L.P. and Madison Dearborn
Capital Partners II, L.P., all holders of Holdings' common stock entered into a
Stockholders Agreement. The agreement provides that all holders of Holdings'
common stock will vote their common stock in order to cause the following
individuals to be elected to the Board of Directors of Holdings and each of its
subsidiaries (including us):
(a) three representatives designated collectively by Madison Dearborn
Capital Partners, L.P. and Madison Dearborn Capital Partners II,
L.P.;
(b) three representatives designated by BIB Holdings; and
(c) two representatives designated by Mr. Vituli as long as
Mr. Vituli is our Chief Executive Officer, subject in each case to
adjustment if the percentage holdings of each decreases below a
certain threshold.
In addition, the agreement provides for certain limitations on the ability
of holders of Holdings' common stock to sell, transfer, assign, pledge or
otherwise dispose of their common stock. The agreement contains covenants
requiring us to obtain the prior consent of Madison Dearborn Capital Partners,
L.P., Madison Dearborn Capital Partners II, L.P., and BIB Holdings before taking
certain actions including the redemption, purchase or other acquisition of
Holdings' capital budget approved by Holdings' Board of Directors for that year
or the entry into the ownership, active management or operation of any business
other than Burger King franchise restaurants.
Registration Rights Agreement. On March 27, 1997, in connection with the
investment by Madison Dearborn Capital Partners, L.P. and Madison Dearborn
Capital Partners II, L.P., those entities, BIB Holdings, Alan Vituli, Daniel T.
Accordino and Joseph A. Zirkman entered into a registration agreement with
Holdings. The registration agreement provides for demand and piggyback rights
with respect to Holdings' common stock. The Madison Dearborn Capital Partners,
L.P. and Madison Dearborn Capital Partners II, L.P. or BIB Holdings may demand
registration under the Securities Act of all or any portion of their shares of
Holdings' common stock or options for shares of Holdings' common stock (the
"Registrable Securities"), provided that:
(1) in the case of the first demand registration, Madison Dearborn
Capital Partners, L.P., and Madison Dearborn Capital Partners II,
L.P. and BIB Holdings must consent to a demand registration unless
Holdings has completed a registered public offering of the
Holdings' common stock; and
(2) all demand registrations on Form S-1 must be underwritten.
Madison Dearborn Capital Partners, L.P. and Madison Dearborn Capital Partners
II, L.P., collectively, and BIB Holdings are each entitled to request:
(1) three demand registrations on Form S-1 in which Holdings will pay
all registration expenses, provided that the offering value of the
Registrable Securities is at least $15 million; and
(2) an unlimited number of demand registrations on Form S-3 in which
Holdings will pay all registration expenses, provided that the
offering value of the Registrable Securities is at least
$5 million with an underwritten offering equal to at least
$10 million.
Whenever Holdings proposes to register any of its securities (other than
pursuant to a demand registration) and the registration form may be used for the
registration of Registrable Securities, Holdings shall give prompt written
notice to all holders of Registrable Securities of its intention to effect such
a registration and shall include in such registration all Registrable Securities
to which Holdings has received written requests for inclusion in such
registration within 20 days after receipt of Holdings' notice. Holdings shall
pay the registration expenses of the holders of Registrable Securities in all
such piggyback registrations. The Registration Agreement contains typical "cut
back" provisions in connection with both demand registrations and piggyback
registrations. We will provide the holders of the Registrable Securities with
typical indemnification in the event of certain misstatements or omissions made
in connection with both demand registrations and piggyback registrations.
33
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
CARROLS CORPORATION AND SUBSIDIARIES:
<TABLE>
<CAPTION>
Page
<S> <C>
Opinion of Independent Certified Public Accountants F-1 to F-2
Financial Statements:
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholder's Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-21
(b) Financial Statement Schedules
Schedule Description Page
-------- --------------------------------- ----
II Valuation and Qualifying Accounts F-22
</TABLE>
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,
1998.
Reports on Form 8-K - No current reports on Form 8-K were filed during the
quarter ended January 3, 1999.
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------- ----------
<S> <C> <C>
2.1 -- Agreement and Plan of Merger dated June 3, 1998 by and between Carrols Corporation and
Pollo Tropical, Inc. (incorporated by reference to Exhibit (c)(1) to the Tender Offer
Statement on Schedule 14 (d)(1) dated July 3, 1998)
3.1 -- Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.(3)(a) to
Carrols Corporation's 1987 Annual Report on Form 10-K)
3.2 -- Certificate of Amendment of the Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 to Carrols Corporation's Amendment No. 1 to Form S-4 filed
March 24, 1999)
3.3 -- Restated By-laws (incorporated by reference to Exhibit 3.(3)(b) to Carrols Corporation's
1986 Annual Report on Form 10-K )
4.1 -- Indenture, dated as of November 24, 1998, between Carrols Corporation, the Guarantors
named therein and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference
to Exhibit 4.1 to Carrols Corporation's Form S-4 filed February 2, 1999)
4.2 -- Exchange and Registration Rights Agreement, dated as of November 24, 1998, among Carrols
Corporation and Chase Securities Inc. and NationsBanc Montgomery Securities LLC
(incorporated by reference to Exhibit 4.2 to Carrols Corporation's Form S-4 filed on
February 2, 1999)
4.3 -- Form of 9 1/2% Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.3
to Carrols Corporation's Form S-4 filed February 2, 1999)
10.1 -- Loan Agreement dated as of May 12, 1997 by and among Carrols Corporation, Texas Commerce
Bank National Association, Heller Financial, Inc., First Union National Bank of North
Carolina, and the other lenders now or thereafter parties thereto (incorporated by
reference to Exhibit 10.1 to Carrols Corporation's Form S-4 filed February 2, 1999)
10.2 -- Amendment to Carrols Corporation's Senior Credit Facility titled Amendment to Loan
Agreement, made and entered into as of July 9, 1998, by and among Carrols Corporation,
Heller Financial, Inc., NationsBank, and Chase Bank of Texas, National Association
(incorporated by reference to Exhibit (b)(2) to the Tender Offer Statement on Schedule
(d)(1) dated July 3, 1998)
10.3 -- Amendment to Loan Agreement dated as of December 31, 1998, by and among Carrols
Corporation, Heller Financial, Inc., NationsBank, and Chase Bank of Texas, National
Association (incorporated by reference to Exhibit 10.3 to Carrols Corporation's Form S-4
filed February 2, 1999)
10.4 -- Supply Agreement between ProSource Services Corporation and Carrols Corporation dated
April 1, 1994 (incorporated by reference to Exhibit 10.11 to Carrols Corporation's 1994
Annual Report on Form 10-K)
10.5 -- Stock Purchase Agreement dated as of February 25, 1997 by and among Madison Dearborn
Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Atlantic Restaurants,
Inc. and Carrols Holdings Corporation (incorporated by reference to Exhibit 10.12 to
Carrols Corporation's 1996 Annual Report on Form 10-K)
10.6 -- 1994 Regional Directors Bonus Plan (incorporated by reference to Exhibit 10.19 to Carrols
Corporation's 1994 Annual Report on Form 10-K)
10.7 -- Carrols Corporation Corporate Employee's Savings Plan dated December 31, 1994
(incorporated by reference to Exhibit 10.21 to Carrols Corporation's 1994 Annual Report
on Form 10-K)
10.8 -- Seventh Amendment to Third Amended and Restated Loan and Security Agreement by and among
Heller Financial, Inc., Carrols Holdings Corporation and Carrols Corporation dated as of
April 3, 1996 (incorporated by reference to Exhibit 10.27 to Carrols Corporation's
current report on Form 8-K filed April 10, 1996)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------- --
<S> <C> <C>
10.9 -- Amended and Restated Employment Agreement dated as of April 3, 1996 by and between
Carrols Corporation and Alan Vituli (incorporated by reference to Exhibit 10.23 to
Carrols Corporation's Current Report on Form 8-K filed on April 10, 1996)
10.10 -- Amended and Restated Employment Agreement dated as of April 3, 1996 by and between
Carrols Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.24
to Carrols Corporation's Current Report on Form 8-K filed on April 10, 1996)
10.11 -- Amended and Restated Employment Agreement dated as of July 20, 1998 by and between
Carrols Corporation and Nicholas A. Castaldo (incorporated by reference to Exhibit 10.11
to Carrols Corporation's Form S-4 filed February 2, 1999)
10.12 -- Carrols Corporation 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit
10.20 -- to Carrols Corporation's 1996 Annual Report on Form 10-K)
10.13 -- Stock Option Agreement dated as of December 30, 1996 by and between Carrols Corporation
and Alan Vituli (incorporated by reference to Exhibit 10.21 to Carrols Corporation's 1996
Annual Report on Form 10-K)
10.14 -- Stock Option Agreement dated as of December 30, 1996 by and between Carrols Corporation
and Daniel T. Accordino (incorporated by reference to Exhibit 10.22 to Carrols
Corporation's 1996 Annual Report on Form 10-K)
10.15 -- Form of Stockholders Agreement by and among Carrols Holdings Corporation, Madison
Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Atlantic
Restaurants, Inc., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated
by reference to Exhibit 10.23 to Carrols Corporation's 1996 Annual Report on Form 10-K)
10.16 -- Form of Registration Agreement by and among Carrols Holdings Corporation, Atlantic
Restaurants, Inc., Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital
Partners II, L.P., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated
by reference to Exhibit 10.24 to Carrols Corporation's 1996 Annual Report on Form 10-K)
10.17 -- Form of Second Amended and Restated Employment Agreement by and between Carrols
Corporation and Alan Vituli (incorporated by reference to Exhibit 10.25 to Carrols
Corporation's 1996 Annual Report on Form 10-K)
10.18 -- Form of Second Amended and Restated Employment Agreement by and between Carrols
Corporation and Daniel T. Accordino (incorporated by reference to Exhibit 10.26 to
Carrols Corporation's 1996 Annual Report on Form 10-K)
10.19 -- Form of Carrols Holdings Corporation 1996 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.27 to Carrols Corporation's 1996 Annual Report on Form 10-K)
10.20 -- Form of Stock Option Agreement by and between Carrols Holdings Corporation and Alan
Vituli (incorporated by reference to Exhibit 10.28 to Carrols Corporation's 1996 Annual
Report on Form 10-K)
10.21 -- Form of Stock Option Agreement by and between Carrols Holdings Corporation and Daniel T.
Accordino (incorporated by reference to Exhibit 10.29 to Carrols Corporation's 1996
Annual Report on Form 10-K)
10.22 -- Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and
Alan Vituli (incorporated by reference to Exhibit 10.30 to Carrols Corporation's 1996
Annual Report on Form 10-K)
10.23 -- Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and
Daniel T. Accordino (incorporated by reference to Exhibit 10.31 to Carrols Corporation's
1996 Annual Report on Form 10-K)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------- --
<S> <C> <C>
10.24 -- Form of Unvested Stock Option Agreement by and between Carrols Holdings Corporation and
Joseph A. Zirkman (incorporated by reference to Exhibit 10.32 to Carrols Corporation's
1996 Annual Report on Form 10-K)
10.25 -- First Amendment to the Stock Purchase Agreement dated March 27, 1997 by and among Carrols
Holdings Corporation, Atlantic Restaurants, Inc., Madison Dearborn Capital Partners, L.P.
and Madison Dearborn Capital Partners II, L.P. (incorporated by reference to
Exhibit 10.38 to Carrols Corporation's current report on Form 8-K filed March 27, 1997)
10.26 -- Purchase and Sale Agreement dated as of January 15, 1997 by and between Carrols
Corporation, as Purchaser, Omega Services, Inc. as Seller and Mr. Harold W. Hobgood as
Omega's Agent (incorporated by reference to Exhibit 10.39 to Carrols Corporation's
current report on Form 8-K filed March 27, 1997)
10.27 -- Purchase and Sale Agreement dated as of January 15, 1997 by and between Carrols
Corporation, as Purchaser, Omega Services, Inc. as Seller and Mr. Harold W. Hobgood as
Omega's Agent (incorporated by reference to Exhibit 10.40 to Carrols Corporation's
current report on Form 8-K filed March 27, 1997)
10.28 -- Purchase Agreement dated as of July 7, 1997 among Carrols Corporation, as Purchaser, and
the individuals and trusts listed on Exhibit A attached thereto, as Sellers, the
individuals and entities listed on Exhibit B attached thereto, as Affiliated Real
Property Owners, and Richard D. Fors, Jr. and Charles J. Mund, as the Seller's
representatives (incorporated by reference to Exhibit 10.41 to Carrols Corporation's
current report on Form 8-K filed August 20, 1997)
10.29 -- Carrols Holdings Corporation 1998 Directors' Stock Option Plan
10.30 -- Loan Agreement dated as of February 12, 1999 by and among Carrols Corporation, each of
the Lenders party thereto, Manufacturers and Traders Trust Company, as Co-Agent,
Nationsbank, N.A., as Co-Agent, Suntrust Bank, Atlanta, as Co-Agent and Chase Bank of
Texas, National Association, as Agent (incorporated by reference to Exhibit 10.30 to
Carrols Corporation's Amendment No. 1 to Form S-4 filed March 24, 1999)
16.1 -- Letter re: Change in Certifying Accountant (incorporated by reference to Exhibit 16.1 to
Carrols Corporation's Current Report on Form 8-K filed with the Commission on August 15,
1997)
21.1 -- List of Subsidiaries (incorporated by reference to Exhibit 21.1 to Carrols Corporation's
Form S-4 filed February 2, 1999)
27 -- Financial Data Schedule (incorporated by reference to Exhibit 27 to Carrols Corporation's
Amendment No. 1 to Form S-4 filed March 24, 1999)
</TABLE>
- ------------------
* Filed herewith.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder
of Carrols Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholder's equity, cash flows, and
supplemental schedule present fairly, in all material respects, the financial
position of Carrols Corporation (a wholly owned subsidiary of Carrols Holdings
Corporation) and its subsidiaries at December 31, 1998 and December 31, 1997,
and the results of their operations and their cash flows for the two years ended
in the period December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits proved a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
February 19, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Carrols Corporation:
We have audited the accompanying consolidated statements of operations,
stockholder's deficit and cash flows of Carrols Corporation (a wholly-owned
subsidiary of Carrols Holdings Corporation) and subsidiaries for the year ended
December 29, 1996. 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 results of operations and cash flows of Carrols
Corporation and subsidiaries for the year ended December 29, 1996, 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
F-2
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 6,777,000 $ 2,252,000
Trade and other receivables, net of reserves of $93,000 and $130,000,
respectively................................................................ 1,060,000 748,000
Inventories.................................................................... 3,431,000 3,355,000
Prepaid real estate taxes...................................................... 796,000 939,000
Prepaid expenses and other current assets...................................... 2,768,000 1,388,000
Refundable income taxes (Note 6)............................................... 4,588,000 2,141,000
Deferred income taxes (Note 6)................................................. 3,956,000 2,585,000
------------ ------------
Total current assets............................................................. 23,376,000 13,408,000
------------ ------------
Property and equipment, at cost (Notes 2 and 3):
Land........................................................................... 9,497,000 7,280,000
Buildings and improvements..................................................... 22,275,000 12,487,000
Leasehold improvements......................................................... 57,148,000 43,146,000
Equipment...................................................................... 81,630,000 61,331,000
Capital leases................................................................. 14,570,000 14,548,000
------------ ------------
185,120,000 138,792,000
Less accumulated depreciation and amortization................................... (77,451,000) (67,908,000)
------------ ------------
Net property and equipment....................................................... 107,669,000 70,884,000
------------ ------------
Franchise rights, at cost less accumulated amortization of $29,819,000 and
$25,047,000, respectively...................................................... 106,041,000 108,938,000
Intangible assets, at cost less accumulated amortization of $9,630,000 and
$8,900,000, respectively....................................................... 69,167,000 7,864,000
Other assets..................................................................... 10,367,000 7,778,000
Deferred income taxes (Note 6)................................................... 2,986,000 6,456,000
------------ ------------
$319,606,000 $215,328,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 10,614,000 $ 11,950,000
Accrued interest............................................................... 2,012,000 4,770,000
Accrued payroll, related taxes and benefits.................................... 9,390,000 6,299,000
Other liabilities.............................................................. 9,431,000 5,104,000
Current portion of long-term debt (Note 3)..................................... 3,200,000 3,137,000
Current portion of capital lease obligations (Note 2).......................... 296,000 441,000
------------ ------------
Total current liabilities........................................................ 34,943,000 31,701,000
Long-term debt, net of current portion (Note 3).................................. 256,285,000 154,649,000
Capital lease obligations, net of current portion (Note 2)....................... 1,741,000 2,060,000
Deferred income--sale/leaseback of real estate (Note 2).......................... 4,274,000 4,555,000
Accrued postretirement benefits (Note 12)........................................ 1,708,000 1,627,000
Other liabilities................................................................ 6,657,000 3,289,000
------------ ------------
Total liabilities................................................................ 305,608,000 197,881,000
Commitments and contingencies (Notes 2 and 9)
Stockholder's equity (Note 7):
Common stock, par value $1; authorized 1,000 shares, issued and outstanding--10
shares...................................................................... 10 10
Additional paid-in capital..................................................... 24,484,990 28,362,990
Accumulated deficit............................................................ (10,487,000) (10,916,000)
------------ ------------
Total stockholder's equity....................................................... 13,998,000 17,447,000
------------ ------------
$319,606,000 $215,328,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Restaurant sales.............................................. $416,190,000 $295,436,000 $240,809,000
Franchise fees and royalty revenues........................... 395,000 -- --
------------ ------------ ------------
Total revenues................................................ 416,585,000 295,436,000 240,809,000
------------ ------------ ------------
Costs and expenses:
Cost of sales................................................. 122,620,000 85,542,000 68,031,000
Restaurant wages and related expenses......................... 121,732,000 89,447,000 70,894,000
Other restaurant operating expenses........................... 82,710,000 61,691,000 48,683,000
Advertising expense........................................... 18,615,000 13,122,000 10,798,000
General and administrative.................................... 19,219,000 13,121,000 10,387,000
Depreciation and amortization................................. 20,005,000 15,102,000 11,015,000
Costs associated with change of control....................... -- -- 509,000
------------ ------------ ------------
Total operating expenses................................... 384,901,000 278,025,000 220,317,000
------------ ------------ ------------
Income from operations.......................................... 31,684,000 17,411,000 20,492,000
Interest expense.............................................. 21,068,000 15,581,000 14,209,000
Interest income (Note 6)...................................... -- (983,000) --
Refinancing expenses (Note 4)................................. 1,639,000 -- --
------------ ------------ ------------
Income before income taxes and extraordinary loss............... 8,977,000 2,813,000 6,283,000
Provision for income taxes (Note 6)............................. 4,847,000 655,000 3,100,000
------------ ------------ ------------
Income before extraordinary loss................................ 4,130,000 2,158,000 3,183,000
Extraordinary loss on extinguishment of debt, net of tax benefit
(Note 3)...................................................... 3,701,000 -- --
------------ ------------ ------------
Net income...................................................... $ 429,000 $ 2,158,000 $ 3,183,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID- ACCUMULATED NOTES STOCKHOLDER'S
STOCK IN-CAPITAL DEFICIT RECEIVABLE EQUITY (DEFICIT)
------ ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
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
Net income.................................... 429,000 429,000
Dividends declared............................ (3,878,000) (3,878,000)
---- ----------- ------------ ------------ ------------
Balance at December 31, 1998.................... $ 10 $24,484,990 $(10,487,000) $ -- $ 13,998,000
---- ----------- ------------ ------------ ------------
---- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income...................................................... $ 429,000 $ 2,158,000 $ 3,183,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of property & equipment...................... (96,000) (344,000) (314,000)
Depreciation and amortization................................. 20,005,000 15,102,000 11,015,000
Extraordinary loss on redemption of debt, net of tax.......... 3,701,000 -- --
Deferred income taxes......................................... 854,000 860,000 160,000
Changes in operating assets and liabilities:
Refundable income taxes....................................... 2,204,000 (2,141,000) --
Accounts payable.............................................. (3,169,000) 2,631,000 410,000
Accrued payroll, related taxes and benefits................... 2,128,000 1,286,000 (256,000)
Accrued income taxes.......................................... -- (1,058,000) 983,000
Other liabilities--current.................................... 383,000 1,229,000 266,000
Accrued interest.............................................. (2,758,000) 29,000 (68,000)
Other liabilities--long-term.................................. -- 1,593,000 (231,000)
Other......................................................... (408,000) (1,405,000) (826,000)
------------- ------------ ------------
Net cash provided from operating activities....................... 23,273,000 19,940,000 14,322,000
------------- ------------ ------------
Cash Flows For Investing Activities:
Capital expenditures:
Purchase of Pollo Tropical, Inc. net of cash acquired......... (94,632,000) -- --
New restaurant development.................................... (13,297,000) (9,732,000) (5,280,000)
Restaurant remodeling......................................... (9,500,000) (3,807,000) (6,656,000)
Other capital expenditures.................................... (10,498,000) (4,671,000) (3,319,000)
Acquisition of restaurants.................................... (629,000) (78,485,000) (7,945,000)
Notes and mortgages issued...................................... -- -- (749,000)
Payments received on notes and mortgages........................ 715,000 88,000 39,000
Proceeds from dispositions of property and equipment............ 1,337,000 1,224,000 2,342,000
Other investments............................................... -- -- 1,330,000
------------- ------------ ------------
Net cash used for investing activities............................ $(126,504,000) $(95,383,000) $(20,238,000)
------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Proceeds from long-term debt, net............................... $ 245,000,000 $ 65,206,000 $ 2,997,000
Principal payments and retirements of long-term obligations..... (143,851,000) (26,184,000) (2,047,000)
Proceeds from sale-leaseback transactions....................... 20,532,000 13,000,000 4,246,000
Dividends paid.................................................. (3,878,000) (4,338,000) (1,000,000)
Financing costs associated with issuance of debt................ (5,408,000) (2,592,000) --
Redemption premium on retirement of debt........................ (4,639,000) -- --
Exercise of employee stock options and related tax benefits..... -- 907,000 1,571,000
Capital contribution............................................ -- 30,382,000 --
------------- ------------ ------------
Net cash provided from financing activities....................... 107,756,000 76,381,000 5,767,000
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents.............. 4,525,000 938,000 (149,000)
Cash and cash equivalents, beginning of year...................... 2,252,000 1,314,000 1,463,000
------------- ------------ ------------
Cash and cash equivalents, end of year............................ $ 6,777,000 $ 2,252,000 $ 1,314,000
------------- ------------ ------------
------------- ------------ ------------
Supplemental disclosures:
Interest paid on debt........................................... $ 23,826,000 $ 15,552,000 $ 14,277,000
Income taxes paid............................................... $ 3,652,000 $ 1,456,000 $ 393,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 1998 the Company operated, as franchisee, 343 quick-service
restaurants under the trade name "Burger King" in thirteen Northeastern,
Midwestern and Southeastern states. As described in Note 13, during fiscal 1998,
the Company purchased Pollo Tropical, Inc. ("Pollo Tropical"). At December 31,
1998 the Company also owned and operated 40 Pollo Tropical restaurants located
in Florida and franchised 21 restaurants in Puerto Rico, the Dominican Republic,
Ecuador, Netherlands Antilles, and Florida.
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. Inventories are primarily comprised of food and paper.
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:
<TABLE>
<S> <C>
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
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was
$12,737,000, $9,718,000, and $7,300,000, respectively.
Franchise Rights. Fees for initial franchises and renewals 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 of the excess purchase price
over net assets acquired and beneficial leases. The excess purchase price over
net assets acquired is amortized using the straight line method over 40 years.
Beneficial leases 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, which are included in other
assets, were 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 subordinated notes and on a
straight-line basis for costs associated with the Company's senior credit
facility.
Franchise Fees and Royalty Revenues associated with Pollo Tropical
restaurants. Franchise fees are typically collected upon execution of an area
development and/or franchise agreement. Royalty revenues are based on a percent
of gross sales. Franchise fees are initially recorded as deferred revenue and
are recognized in
F-9
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
earnings when the franchised restaurants are opened, or upon forfeiture of such
fees by the franchisees pursuant to the terms of the franchise development
agreements.
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. The Company and its subsidiaries will
file a consolidated federal income tax return for the year ended December 31,
1998.
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.
Self Insurance. The Company is generally self-insured for workers
compensation and general liability insurance. The Company maintains stop loss
coverage for both individual claim amounts in the amount of $500,000 and annual
aggregate claims in the amount of $1,500,000. Losses are accrued based upon the
Company's estimates of the aggregate liability for claims based on Company
experience and certain actuarial methods used to measure such 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 Subordinated Notes. The fair values of outstanding senior
subordinated notes and senior notes are based on quoted market prices. The
fair values at December 31, 1998 and 1997 are approximately $171,275,000,
and $113,577,000, respectively.
Revolving and Term Loan Facilities. Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate fair value. The recorded amounts, as of December 31, 1998 and
1997, approximated 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.
Segment Reporting. On December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires reporting financial and
descriptive information about reportable operating segments. The Company has
determined that its two quick-service restaurant concepts, Burger King and Pollo
Tropical, are considered segments. See Note 8.
F-10
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 3, 1999 (53 weeks), December 28, 1997 (52 weeks) and December 29,
1996 (52 weeks).
Reclassifications. Certain amounts for prior years have been reclassified
to conform to the current year presentation.
2. 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. The net deferred gain is $4,274,000 and $4,555,000 at
December 31, 1998 and 1997, respectively. Accumulated amortization pertaining to
capital leases for the years ended December 31, 1998 and 1997 was $10,580,000
and $9,951,000, respectively.
Minimum rent commitments under capital and noncancelable operating leases
at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
YEARS ENDING: CAPITAL OPERATING
- --------------------------------------------------------------- ---------- ------------
<S> <C> <C>
1999........................................................ $ 533,000 $ 24,156,000
2000........................................................ 480,000 23,803,000
2001........................................................ 470,000 23,274,000
2002........................................................ 429,000 22,229,000
2003........................................................ 288,000 21,195,000
2004 and thereafter......................................... 1,041,000 163,648,000
---------- ------------
Total minimum lease payments................................ 3,241,000 $278,305,000
------------
------------
Less amount representing interest....................... 1,204,000
----------
Total obligations under capital leases...................... 2,037,000
Less current portion.................................... 296,000
----------
Long-term obligations under capital leases.................. $1,741,000
----------
----------
</TABLE>
Total rent expense on operating leases, including percentage rent on both
operating and capital leases, for the past three years was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Minimum rent on real property............................. $22,441,000 $15,303,000 $11,590,000
Additional rent based on a percentage of sales............ 4,328,000 3,099,000 2,700,000
Equipment rent............................................ 39,000 162,000 167,000
----------- ----------- -----------
$26,808,000 $18,564,000 $14,457,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-11
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. LONG-TERM DEBT
On February 12, 1999, the Company entered into a new senior credit facility
with Chase Bank of Texas, National Association, as agent and lender, and other
lenders as parties thereto. The balance sheet at December 31, 1998 and principal
payment schedule below reflect the principal payment terms of this new credit
facility.
Long-term debt at December 31 consisted of:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Collateralized:
Revolving credit facility.................................. $ 38,619,000 $ 2,500,000
Term loan facility......................................... 50,000,000 46,786,000
Other notes payable with interest rates to 10%............. 866,000 863,000
Unsecured 9.5% senior subordinated notes..................... 170,000,000 --
Unsecured 11.5% senior notes................................. -- 107,637,000
------------ ------------
259,485,000 157,786,000
Less current portion......................................... 3,200,000 3,137,000
------------ ------------
$256,285,000 $154,649,000
------------ ------------
------------ ------------
</TABLE>
The new senior credit facility provides for total borrowings of
$150.0 million and consists of a $100.0 million revolving credit facility
(including a standby letter of credit facility for up to $5.0 million) and a
$50.0 million term loan facility.
Borrowings under the new revolving credit facility may be used to finance
permitted acquisitions and new store development, or for working capital and
general corporate purposes. At December 31, 1998, $60,400,000 would have been
available for borrowings under the new revolving credit facility, after
reserving $975,000 for an outstanding letter of credit guaranteed by the
facility.
Borrowings under the revolving credit facility and the term loan facility
bear interest at a per annum rate, at our option, of either:
1) (a) the greater of the prime rate (or the federal funds rate plus
.50%) plus (b) a margin ranging from 0% to .75%, based on debt to cash flow
ratios; or
2) LIBOR plus a margin ranging from 1.00% to 2.25%, based on debt to
cash flow ratios.
Under the new senior credit facility, the revolving credit facility expires
on December 31, 2003 (subject to a one-year extension upon request and unanimous
approval of the lenders). The term loan facility is repayable as follows:
1) an aggregate of $3.0 million payable in four quarterly installments
in 1999;
2) an aggregate of $4.0 million payable in four quarterly installments
in 2000;
3) an aggregate of $5.0 million payable in four quarterly installments
in 2001;
4) an aggregate of $6.0 million payable in four quarterly installments
in 2002;
5) an aggregate of $7.0 million payable in four quarterly installments
in 2003; and
6) a final payment of $25.0 million payable upon the term loan
facility's maturity on December 31, 2003.
In general, the Company's obligations under our new senior credit facility
are secured by all of the Company's assets, a pledge of the Company's common
stock and the stock of each of the Company's subsidiaries.
F-12
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. LONG-TERM DEBT--(CONTINUED)
The Company issued $170.0 million of unsecured senior subordinated notes on
November 24, 1998. The senior notes bear interest at a rate of 9.5% payable
semi-annually on June 1 and December 1 and mature on December 1, 2008. The notes
are redeemable at the option of the Company in whole or in part on or after
December 1, 2003 at a price of 104.75% of the principal amount if redeemed
before December 1, 2004, 103.167% of the principal amount if redeemed after
December 1, 2004 but before December 1, 2005, 101.583% of the principal amount
if redeemed after December 1, 2005 but before December 1, 2006 and at 100% of
the principal amount after December 1, 2006.
In connection with the issuance of the 9.5% senior subordinated notes, the
Company redeemed all of its outstanding 11.5% senior notes. This redemption
included aggregate principal amounts of $107,637,000, a redemption premium of
$4,639,000, and accrued interest to December 24, 1998 of $4,436,000. In
addition, the Company used the proceeds of the 9.5% notes to repay $47.9 million
of its previous senior credit facility.
In connection with the redemption of the 11.5% senior notes, the Company
recognized an extraordinary loss of $3,701,000, which is net of a $3,281,000
income tax benefit, for the redemption premium and the write-off of $2,343,000
in unamortized debt issue costs related to the 11.5% notes.
In connection with the new senior credit facility above, the Company has
recognized a pre-tax write-off in 1999 of approximately $1.8 million. This
write-off represents unamortized debt issue costs related to the previous senior
credit facility.
Restrictive covenants of the senior subordinated notes and the senior
credit facility include limitations with respect to the Company's ability to
issue additional debt, incur liens, sell or acquire assets or businesses, pay
dividends and make certain investments. In addition, our senior credit facility
requires the Company to meet certain financial ratio tests.
At December 31, 1998, principal payments required on all long-term debt,
including the new senior credit facility, are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 3,200,000
2000...................................................... 4,112,000
2001...................................................... 5,000,000
2002...................................................... 6,000,000
2003...................................................... 70,619,000
Thereafter................................................ 170,554,000
------------
$259,485,000
------------
------------
</TABLE>
The weighted average interest rate for the years ended December 31, 1998
and 1997 was 9.9% and 10.7%, respectively.
4. REFINANCING EXPENSES
The Company expensed all costs associated with its efforts to refinance its
existing debt in the third quarter of 1998 as the timing of any future
refinancing was uncertain and the related activities had ceased. Approximately
$1.2 million of these costs related to losses on interest rate hedge
transactions, which were settled in the third quarter.
5. SUMMARIZED FINANCIAL INFORMATION OF CERTAIN SUBSIDIARIES
The following table presents summarized combined financial information for
the following wholly-owned subsidiaries, whom unconditionally guarantee the
$170.0 million senior subordinated notes of the Company:
F-13
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. SUMMARIZED FINANCIAL INFORMATION OF CERTAIN SUBSIDIARIES--(CONTINUED)
Carrols Realty Holdings, Carrols Realty I Corp., Carrols Realty II Corp.,
Carrols J.G. Corp., Quanta Advertising Corp., Pollo Franchise Inc. and Pollo
Operations, Inc. on a combined basis at December 31, or for the year then ended.
The Statement of Operations for the year ended December 31, 1998 includes the
operations of Pollo Operations, Inc. and Pollo Franchise Inc. for the period
July 10, 1998 through December 31, 1998.
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C> <C>
Balance sheet:
Current assets.............................................. $ 910,000 $ 6,000
Non-current assets.......................................... 89,922,000 5,591,000
Current liabilities......................................... 7,401,000 --
Non-current liabilities..................................... 1,845,000 344,000
<CAPTION>
1998 1997 1996
----------- ---------- --------
<S> <C> <C> <C>
Statement of Operations:
Revenues.................................................... $35,543,000 $ 283,000 $268,000
Operating expenses.......................................... 30,576,000 283,000 268,000
Income from operations...................................... 4,967,000 -- --
Net income.................................................. 805,000 -- --
</TABLE>
6. INCOME TAXES
The income tax provision was comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 152,000 $ 887,000 $ 981,000
Foreign..................................................... 114,000 -- --
State....................................................... 471,000 628,000 400,000
---------- ---------- ----------
737,000 1,515,000 1,381,000
---------- ---------- ----------
Deferred:
Federal..................................................... 3,602,000 (672,000) 1,199,000
State....................................................... 508,000 (188,000) 520,000
---------- ---------- ----------
4,110,000 (860,000) 1,719,000
---------- ---------- ----------
$4,847,000 $ 655,000 $3,100,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-14
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. INCOME TAXES--(CONTINUED)
The components of deferred income tax assets and liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current Deferred Tax Assets:
Accounts receivable and other reserves.................................... $ 206,000 $ 248,000
Accrued vacation benefits................................................. 649,000 508,000
Other non-deductible accruals............................................. 695,000 132,000
Loss on disposal of assets................................................ 259,000 --
Reserve for closed restaurants............................................ 450,000 --
Net operating loss carryforwards.......................................... 1,697,000 1,697,000
---------- ----------
Total Current Deferred Tax Assets........................................... 3,956,000 2,585,000
---------- ----------
Long Term Deferred Tax Assets/(Liabilities):
Deferred income on sale/leaseback of real estate.......................... 1,265,000 1,710,000
Postretirement benefit expenses........................................... 723,000 650,000
Capital leases............................................................ 412,000 464,000
Property and equipment depreciation....................................... (1,216,000) 549,000
Net operating loss carryforwards.......................................... 7,388,000 8,762,000
Amortization of franchise rights.......................................... (6,443,000) (5,896,000)
Non-deductible rent expense............................................... 843,000 36,000
Other..................................................................... 14,000 181,000
---------- ----------
Total Long-Term Net Deferred Tax Assets..................................... 2,986,000 6,456,000
---------- ----------
Total Net Deferred Tax Assets............................................... $6,942,000 $9,041,000
---------- ----------
---------- ----------
</TABLE>
The Company has net operating loss carryforwards for income tax purposes of
approximately $23 million. The net operating loss carryforwards expire in
varying amounts beginning in 2003 through 2010. Due to a 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.
A reconciliation of the statutory federal income tax rate to the effective
tax rates for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate..................... $3,053,000 34.0% $ 957,000 34.0% $2,136,000 34.0%
State income taxes, net of federal benefit............ 515,000 5.7% 266,000 9.5% 607,000 9.7%
Nondeductible expenses................................ 611,000 6.8% 197,000 7.0% 197,000 3.1%
Tax appeals settlement................................ -- -- (806,000) (28.7)% -- --
Foreign taxes......................................... 114,000 1.3% -- -- -- --
Miscellaneous......................................... 554,000 6.1% 41,000 1.4% 160,000 2.5%
---------- ---- --------- ----- ---------- ----
$4,847,000 53.9% $ 655,000 23.2% $3,100,000 49.3%
---------- ---- --------- ----- ---------- ----
---------- ---- --------- ----- ---------- ----
</TABLE>
Included in refundable income taxes at December 31, 1997 is $983,000 of
interest income associated with a Federal tax appeals claim settlement.
F-15
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. STOCKHOLDER'S EQUITY
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 1998, all preferred stock was redeemed at the option of
Holdings, at a price of $1,000 per share, plus accrued dividends. 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. The capital structure of
Holdings at December 31, 1998 was as follows:
<TABLE>
<S> <C>
Voting common stock, par value $.01, authorized
3,000,000 shares issued and outstanding
1,144,144 shares................................................................. $11,000
</TABLE>
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 BIB Holdings (Bermuda) Ltd. ("BIB"), formerly
Atlantic Restaurants, Inc. 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 BIB, 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. BIB also sold 283,333 of its shares of Holdings to Madison
Dearborn resulting in both BIB and Madison Dearborn having an equal interest in
the Company.
Both transactions constituted a "change of control" under the Indenture
governing the pre-existing 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
In 1996, Holdings adopted a stock option plan 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.
F-16
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. STOCKHOLDER'S EQUITY--(CONTINUED)
In 1998, Holdings adopted the Carrols Holdings Corporation 1998 Directors'
Stock Option Plan ("1998 Directors' Plan") authorizing to grant up to 10,000
options to non-employee Directors. Options under this plan are exercisable over
four years.
A summary of all option activity in the 1996 Plan and the Directors Plan
for the years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS AT OPTIONS AT OPTIONS AT
$101.77 $110.00 $124.78
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996.............................. -- -- --
Granted................................................. 72,250 14,460 --
Canceled................................................ -- (570) --
------ ------ ------
Balance at December 31, 1997.............................. 72,250 13,890 --
Granted................................................. -- 2,000 10,375
Canceled................................................ -- (310) (465)
------ ------ ------
Balance at December 31, 1998.............................. 72,250 15,580 9,910
------ ------ ------
------ ------ ------
Exercisable at December 31, 1997.......................... 34,850 -- --
------ ------ ------
------ ------ ------
Exercisable at December 31, 1998.......................... 44,250 3,895 --
------ ------ ------
------ ------ ------
</TABLE>
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. 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 and 1996 is as follows:
<TABLE>
<CAPTION>
OPTIONS AT OPTIONS AT
$14.80 $22.65
---------- ----------
<S> <C> <C>
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.......................................... -- --
-------- --------
-------- --------
</TABLE>
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. There
were no options exercisable at December 31, 1997 and 6,486 options exercisable
at December 31, 1998. The weighted average exercise price of all options
outstanding at December 31, 1998 is $122.30.
F-17
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. STOCKHOLDER'S EQUITY--(CONTINUED)
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 would have been $180,000 and $1,527,000 for the
years ended December 31, 1998 and 1997, respectively.
The fair value of each option grant was estimated using the minimum value
option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Risk-free interest rate............................................................. 5.60% 6.53%
Annual dividend yield............................................................... 0% 0%
Expected life....................................................................... 5 years 5 years
</TABLE>
8. BUSINESS SEGMENT INFORMATION
The Company is engaged in the quick-service restaurant industry, with two
restaurant concepts: Burger King operating as a franchisee and Pollo Tropical a
Company owned concept. The Company's Burger King restaurants are all located in
the United States, primarily in the Northeast, Southeast and Midwest. Pollo
Tropical is a regional quick-service restaurant chain featuring grilled
marinated chicken and authentic "made from scratch" side dishes. Pollo
Tropical's core markets are located in south and central Florida.
Segment information for December 31, 1997 and 1996 is not presented, since
the Pollo Tropical acquisition did not occur until July 9, 1998 and previous to
this the Company operated its business as one segment whose results are
reflected in the 1997 and 1996 Statement of Operations. Segment information for
Burger King restaurants for the year ended December 31, 1998 and Pollo Tropical
for the period July 10, 1998 through December 31, 1998 is shown in the following
table. The "Other" column includes corporate related items not allocated to
reportable segments and for income from operations, principally corporate
depreciation and amortization. Other identifiable assets consist primarily of
franchise rights and intangible assets. Non-operating expenses, comprised of
interest expense, interest income, and refinancing expenses and the
extraordinary loss are corporate related items and therefore have not been
allocated to the reportable segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------
BURGER KING
RESTAURANTS POLLO TROPICAL OTHER CONSOLIDATED
----------- -------------- ------- ------------
($ IN 000'S)
<S> <C> <C> <C> <C>
Revenues.................................................... $ 381,042 $ 35,543 $ -- $416,585
Cost of sales............................................... 110,269 12,351 -- 122,620
Restaurant wages and related expenses....................... 113,456 8,276 -- 121,732
Depreciation and amortization............................... 11,620 1,018 7,367 20,005
Income from operations...................................... 33,334 5,717 (7,367) 31,684
Identifiable assets......................................... 196,932 23,078 99,596 319,606
Capital expenditures, excluding acquisitions................ 26,560 4,335 2,400 33,295
</TABLE>
9. LITIGATION
The Company is a party to various legal proceedings arising from the normal
course of business. Based on information currently available, management
believes adverse decisions relating to litigation and contingencies in the
aggregate would not materially affect the Company's results of operations, cash
flows or financial condition.
F-18
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. EMPLOYEE SAVINGS PLAN
The Company offers a savings plan for its salaried employees, excluding
those of Pollo Tropical. 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 $520
annually. The employees have various investment options available under a trust
established by the plan. The plan expense, including Company contributions, was
$216,000, $208,000 and $164,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
11. 401(K) PLAN
The Company offers an employee savings plan for its Pollo Tropical
employees pursuant to Section 401(k) (the "401K Plan) of the Internal Revenue
Code. All employees who are age 21 or older and who have been credited with at
least 1,000 hours of service within 12 consecutive months are eligible to
participate in the 401K Plan. The Company makes discretionary matching
contributions, which are allocated to participants based on the participant's
eligible deferrals during the plan year. Company contributions vest at a rate of
33% for each year of service. Company contributions to the 401K Plan totaled
$17,000, for the year ended December 31, 1998.
12. 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:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of the year............................. $ 1,361,000 $ 1,241,000
Service cost............................................................ 107,000 69,000
Interest cost........................................................... 101,000 85,000
Plan participant's contributions........................................ 3,000 --
Amendments, curtailments, special termination........................... 69,000 --
Actuarial loss.......................................................... 177,000 --
Benefits paid........................................................... (95,000) (34,000)
----------- -----------
Benefit obligation at end of the year................................... $ 1,723,000 $ 1,361,000
Change in plan assets:
Fair value of plan assets at end of year................................ -- --
----------- -----------
Funded status........................................................... (1,723,000) (1,361,000)
Unrecognized prior service cost......................................... (193,000) (286,000)
Unrecognized actuarial net loss......................................... 208,000 20,000
----------- -----------
Accrued benefit cost.................................................... $(1,708,000) $(1,627,000)
----------- -----------
----------- -----------
Weighted average assumptions as of December 31:
Discount rate........................................................... 6.5% 7.0%
----------- -----------
----------- -----------
</TABLE>
F-19
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. POSTRETIREMENT BENEFITS--(CONTINUED)
For measurement purposes, a 6.25% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998, gradually decreasing
to 5.5% by the year 2001.
<TABLE>
<CAPTION>
1998 1997 1996
----------- -----------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost............................................. $ 107,000 $ 69,000 $ 64,000
Interest cost............................................ 101,000 85,000 77,000
Amortization of gains and losses......................... -- 4,000 --
Amortization of unrecognized prior service cost.......... (25,000) (29,000) (25,000)
----------- ----------- -----------
Net periodic postretirement benefit cost................... $ 183,000 $ 129,000 $ 116,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in the
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
INCREASE DECREASE
-------- ---------
<S> <C> <C>
Effect on total of service and interest cost components.............. $ 42,000 $ (32,000)
Effect on postretirement benefit obligation.......................... 277,000 (215,000)
</TABLE>
13. ACQUISITIONS
On July 9, 1998, the Company consummated the purchase of the outstanding
common stock of Pollo Tropical Inc. ("Pollo Tropical") for an approximate cash
purchase price of $94.6 million and on July 20, 1998 merged Pollo Tropical into
the Company. Pollo Tropical operates and franchises quick-service restaurants
featuring fresh grilled chicken marinated in a proprietary blend of tropical
fruit juices and spices and authentic "made from scratch" side dishes. The Pollo
Tropical acquisition has been accounted for by the purchase method of accounting
and, accordingly, the results of operations of Pollo Tropical from July 10, 1998
are included in the accompanying consolidated financial statements. The excess
purchase price over net assets acquired is included in intangible assets and is
amortized over 40 years using the straight-line method. The Company used its
previous senior credit facility to finance the Pollo Tropical acquisition.
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 proforma results of operations for the periods presented
below assume these acquisitions occurred as of the beginning of the respective
period in which the acquisition occurred:
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997
----------------------- -----------------------
<S> <C> <C>
Revenues..................................................... $ 454,672,000 $ 407,819,000
------------- -------------
------------- -------------
Income from operations....................................... $ 37,313,000 $ 29,356,000
------------- -------------
------------- -------------
Net income................................................... $ 1,206,000 $ 2,728,000
------------- -------------
------------- -------------
</TABLE>
The preceding proforma financial information is not necessarily indicative
of the operating results that would have occurred had any of the acquisitions
been consummated as of the beginning of the respective periods, nor are they
necessarily indicative of future operating results.
F-20
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. ACQUISITIONS--(CONTINUED)
Assets acquired and liabilities assumed in these acquisitions were as follows:
<TABLE>
<CAPTION>
ACQUISITION OF ACQUISITION OF
POLLO TROPICAL BURGER KING UNITS
--------------- ------------------
<S> <C> <C>
Current assets, excluding cash....................................... $ 2,422,000 $ --
Inventory............................................................ 298,000 604,000
Property and equipment............................................... 38,005,000 12,778,000
Franchise rights..................................................... -- 65,496,000
Intangible assets including goodwill................................. 64,011,000 --
Other non-current assets............................................. 783,000 --
Accounts payable..................................................... (1,833,000) --
Accrued payroll, related taxes and benefits.......................... (963,000) (393,000)
Current liabilities.................................................. (3,944,000) --
Other non-current liabilities........................................ (4,147,000) --
----------- ------------
$94,632,000 $ 78,485,000
----------- ------------
----------- ------------
</TABLE>
F-21
<PAGE>
CARROLS CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------- ---------- ---------- ---------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ---------- END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Reserve for doubtful trade accounts receivable.......... $130,000 $ 64,000(c) $ (101,000)(b) $ 93,000
Other reserves(a)....................................... 886,000 365,000 (277,000)(b) 974,000
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
</TABLE>
- ------------------
(a) Included principally in other assets.
(b) Represents write-offs of accounts.
(c) Represents reserves acquired in the Pollo Tropical acquisition.
F-22
<PAGE>
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 30th day of
March, 1999.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Alan Vituli Director, Chairman and Chief Executive March 30, 1999
- -------------- Officer (Principal Executive Officer)
(Alan Vituli)
/s/Daniel T. Accordino Director, President and Chief Operating March 30, 1999
- ---------------------- Officer
(Daniel T. Accordino)
/s/Benjamin D. Chereskin Director March 30, 1999
- ------------------------
(Benjamin D.Chereskin)
/s/James M. Conlon Director March 30, 1999
- ------------------
(James M. Conlon)
/s/David J. Mathies, Jr. Director March 30, 1999
- ------------------------
(David J. Mathies, Jr.)
/s/Robin P. Selati Director March 30, 1999
- ------------------
(Robin P. Selati)
/s/Clayton E. Wilhite Director March 30, 1999
- ---------------------
(Clayton E. Wilhite)
/s/Paul R. Flanders Vice President - Finance March 30, 1999
- ------------------- and Treasurer (Principal Financial Officer
(Paul R. Flanders) and Principal Accounting Officer)
/s/Timothy J. LaLonde Vice President - Controller March 30, 1999
- ---------------------
(Timothy J. LaLonde)
</TABLE>
5
