Carrols Restaurant Group, Inc.
2016 Annual Report
April 26, 2017
Fellow Stockholders:
We were pleased with our overall accomplishments in 2016 as we delivered solid financial results in the face of a
highly competitive and promotional environment. We continued to execute our expansion strategy with the completion
of additional acquisitions and continued to enhance the image of our restaurants through our multi-year remodeling
program.
Total revenues in 2016 were $943.6 million, an increase of 9.8% over the prior year, including $243.1 million in sales
from the 234 restaurants acquired from 2014 to 2016. Comparable restaurant sales growth of 2.3% in 2016 yielded a
strong 9.7% two-year trend which outpaced many of our quick-service peers. The combination of comparable restaurant
sales gains, contributions from our more recently acquired restaurants, and lower ground beef costs significantly
improved our profitability in 2016. We increased Adjusted EBITDA 16.6% to $89.5 million in 2016 from $76.7 million
in the prior year and improved Adjusted EBITDA margin by 55 basis points. Adjusted net income rose 33.0% to $17.9
million in 2016 from $13.4 million in 2015.
BURGER KING® continued to focus on its core products such as the flagship Whopper® sandwich while balancing
value promotions, like the 5 for $4 meal bundle and the $1.49 10-piece Chicken Nuggets, with limited time offerings
of premium sandwiches using the 2 for $5 Mix & Match platform. In 2016, the brand also introduced Grilled Hot
Dogs as a new menu item and gained traction in our breakfast business with the 2 for $4 breakfast Croissan'wich offer.
The variety and breadth of these product promotions are indicative of the overall competitiveness of the market and
are reflective of the tactics being successfully employed by BURGER KING®.
In 2016, we acquired 56 BURGER KING® restaurants in several transactions and in December announced a 43-
restaurant acquisition that we completed in early 2017. We have demonstrated how applying our operating and financial
disciplines to restaurants purchased from other franchisees can lead to improved sales and operating margins at those
locations while being accretive to shareholder value. Accordingly, acquisitions continue to be an important component
of our growth strategy.
We also remodeled 85 locations and rebuilt or relocated another 8 restaurants in 2016, which resulted in over 70% of
our restaurants featuring the 20/20 design image at year-end. In 2017, we anticipate remodeling another 20 to 25
restaurants, rebuilding 5 to 7 restaurants, and constructing 7 to 15 new restaurants. The reduction in remodeling, and
somewhat lower capital expenditures, should result in increased free cash flow that will likely be deployed in 2017 to
opportunistically acquire additional restaurants and to fund our planned development of new units.
In closing, we would like to thank the entire Carrols team, without whom these achievements would not have been
possible, as well as our dedicated stockholders for their ongoing support. We believe that we are demonstrating the
effectiveness of our business model and that our strategies position us for continued success in 2017 and beyond.
Sincerely,
Daniel T. Accordino
Chief Executive Officer and President
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-33174
CARROLS RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
968 James Street, Syracuse, New York
(Address of principal executive offices)
16-1287774
(I.R.S. Employer Identification No.)
13203
(Zip Code)
Registrant’s telephone number, including area code: (315) 424-0513
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $.01 per share
Name of each exchange on which registered:
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of March 3, 2017 Carrols Restaurant Group, Inc. had 36,202,380 shares of its common stock, $.01 par value, outstanding. The aggregate
market value of the common stock held by non-affiliates as of July 3, 2016 of Carrols Restaurant Group, Inc. was $421,171,436.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for Carrols Restaurant Group, Inc's 2017 Annual Meeting of Stockholders, which is
expected to be filed pursuant to Regulation 14A no later than 120 days after the conclusion of Carrols Restaurant Group, Inc.'s fiscal year ended
January 1, 2017 are incorporated by reference into Part III of this annual report.
CARROLS RESTAURANT GROUP, INC.
FORM 10-K
YEAR ENDED JANUARY 1, 2017
PART I
Item 1
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4
PART II
Item 5
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Item 9
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . .
Item 9A Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .
Principal Accountant Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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1
PART I—FINANCIAL INFORMATION
PART I
Throughout this Annual Report on Form 10-K, we refer to Carrols Restaurant Group, Inc. as “Carrols Restaurant
Group” and, together with its consolidated subsidiary, as “we”, “our” and “us” unless otherwise indicated or the context
otherwise requires. Any reference to “Carrols” refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware
corporation, and its consolidated subsidiary, unless otherwise indicated or the context otherwise requires. Any reference
to “Carrols LLC” refers to Carrols' direct subsidiary, Carrols LLC, a Delaware limited liability company, unless
otherwise indicated or the context otherwise requires.
We refer to our restaurants acquired over the past three years in 2014, 2015 and 2016 as our "acquired restaurants".
All of our other restaurants, including restaurants acquired prior to 2014, are referred to as our "legacy restaurants".
We use a 52 or 53 week fiscal year ending on the Sunday closest to December 31. Our fiscal years ended
December 30, 2012, December 29, 2013, December 28, 2014 and January 1, 2017 each contained 52 weeks. Our fiscal
year ended January 3, 2016 contained 53 weeks.
In this Annual Report on Form 10-K, we refer to information, forecasts and statistics regarding the restaurant
industry and to information, forecasts and statistics from Nation's Restaurant News, the U.S. Census Bureau and the
U.S. Department of Agriculture. Any reference to BKC in this Annual Report on Form 10-K refers to Burger King
Worldwide, Inc. and its wholly-owned subsidiaries, including Burger King Corporation, and its parent company
Restaurant Brands International, Inc. Unless otherwise indicated, information regarding BKC in this Annual Report
on Form 10-K has been made publicly available by BKC.
This 2016 Annual Report on Form 10-K contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature or that
depend upon or refer to future events or conditions are forward-looking statements. Words such as “may”, “might”,
“will”, “should”, “anticipate”, “believe”, “expect”, “intend”, “estimate”, “hope”, “plan” or similar expressions are
intended to identify such forward-looking statements. In addition, expressions of our strategies, intentions or plans
are also forward-looking statements. These statements reflect management's best judgment based on current views
with respect to future events and are subject to risks and uncertainties, both known and unknown. You are cautioned
not to place undue reliance on these forward-looking statements, which speak only as of their date. Actual results
could differ materially from those stated or implied in these forward-looking statements as a result of a number of
factors, included but not limited to, the factors discussed in Item 1A-Risk Factors. We believe important factors that
could cause actual results to differ materially from our expectations include the following, in addition to other risks
and uncertainties discussed herein:
• Effectiveness of the Burger King® advertising programs and the overall success of the Burger King brand;
•
Increases in food costs and other commodity costs;
• Competitive conditions;
• Our ability to integrate any restaurants we acquire;
• Regulatory factors;
• Environmental conditions and regulations;
• General economic conditions, particularly in the retail sector;
• Weather conditions;
• Fuel prices;
• Significant disruptions in service or supply by any of our suppliers or distributors;
• Changes in consumer perception of dietary health and food safety;
• Labor and employment benefit costs, including the effects of minimum wage increases, healthcare reform
and changes in the Fair Labor Standards Act;
2
• The outcome of pending or future legal claims or proceedings;
• Our ability to manage our growth and successfully implement our business strategy;
• Our inability to service our indebtedness;
• Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;
• The availability and terms of necessary or desirable financing or refinancing and other related risks and
uncertainties;
• Factors that affect the restaurant industry generally, including recalls if products become adulterated or
misbranded, liability if our products cause injury, ingredient disclosure and labeling laws and regulations,
reports of cases of food borne illnesses such as “mad cow” disease, and the possibility that consumers
could lose confidence in the safety and quality of certain food products, as well as negative publicity
regarding food quality, illness, injury or other health concerns; and
• Other factors discussed under Item 1A - "Risk Factors" and elsewhere herein.
ITEM 1. BUSINESS
Our Company
Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more
than 50 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and
have operated Burger King restaurants since 1976. As of January 1, 2017, we owned and operated 753 Burger King
restaurants located in 16 Northeastern, Midwestern and Southeastern states. Burger King restaurants feature the popular
flame-broiled Whopper® sandwich, as well as a variety of hamburgers, chicken and other specialty sandwiches, french
fries, salads, breakfast items, hot dogs, snacks, smoothies, frappes and other offerings. We believe that our size, seasoned
management team, extensive operating infrastructure, experience and proven operating disciplines differentiate us
from many of our competitors as well as many other Burger King operators.
According to BKC, as of December 31, 2016 there were a total of 15,738 Burger King restaurants, of which
almost all were franchised and 7,387 were located in the United States and Canada. Burger King is the second largest
hamburger restaurant chain in the world (as measured by number of restaurants) and we believe that the Burger King
brand is one of the world's most recognized consumer brands. Burger King restaurants have a distinctive image and
are generally located in high-traffic areas throughout the United States. Burger King restaurants are designed to appeal
to a broad spectrum of consumers, with multiple day-part meal segments targeted to different groups of consumers.
We believe that the competitive attributes of Burger King restaurants include significant brand recognition, convenience
of location, quality, speed of service and price.
Our Burger King restaurants are typically open seven days per week and generally have operating hours ranging
from 6:00 am to midnight on Sunday to Wednesday and to 2:00 am on Thursday to Saturday.
Our existing restaurants consist of one of several building types with various seating capacities. Our typical
freestanding restaurant contains approximately 2,600 square feet with seating capacity for 60 to 70 customers, has
drive-thru service windows and has adjacent parking areas. As of January 1, 2017, almost all of our restaurants were
freestanding. We operate our restaurants under franchise agreements with BKC.
Our acquisition of 278 Burger King restaurants on May 30, 2012 from BKC, which we refer to as the "2012
acquisition", included BKC's assignment of its right of first refusal on franchise restaurant transfers in 20 states as
follows: Connecticut (except Hartford county), Delaware, Indiana, Kentucky, Maine, Maryland, Massachusetts (except
for Middlesex, Norfolk and Suffolk counties), Michigan, New Hampshire, New Jersey, New York (except for Bronx,
Kings, Nassau, New York, Queens, Richmond, Suffolk and Westchester counties), North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina, Vermont, Virginia, Washington DC and West Virginia (the "ROFR") pursuant to an
operating agreement with BKC dated May 30, 2012, and as amended on January 26, 2015 and December 17, 2015,
which we refer to as the "operating agreement". In addition, pursuant to the operating agreement, BKC granted us,
on a non-exclusive basis, franchise pre-approval to acquire restaurants from Burger King franchisees in the 20 states
covered by the ROFR until we operate 1,000 Burger King restaurants. Newly constructed or acquired restaurants
beyond 1,000 or acquisitions in states not subject to the ROFR would be subject to BKC's customary approval process.
3
The amended operating agreement also required us to remodel 455 Burger King restaurants to BKC's "20/20" restaurant
image by December 31, 2016 and at December 31, 2016 we had complied with this remodel requirement.
In 2016, we acquired 56 restaurants in seven separate transactions, in 2015 we acquired 55 Burger King restaurants
in eight separate transactions and in 2014 we acquired 123 Burger King restaurants in five separate transactions. On
February 28, 2017, we acquired 43 Burger King restaurants located in and around the Cincinnati, Ohio market.
For the fiscal year ended January 1, 2017, our restaurants generated total revenues of $943.6 million and our
comparable restaurant sales increased 2.3%. Our average annual restaurant sales for all restaurants were approximately
$1,312,000 per restaurant.
We believe we have the following competitive strengths:
Our Competitive Strengths
Largest Burger King Franchisee in the United States. We are the largest Burger King franchisee in the United States
based on number of restaurants, and are well positioned to leverage the scale and marketing of one of the most recognized
brands in the restaurant industry. We believe the geographic dispersion of our restaurants provides us with stability
and enhanced growth opportunities in many of the markets in which we operate. We also believe that our large number
of restaurants increases our ability to effectively manage the awareness of the Burger King brand in certain markets
through our ability to influence local advertising and promotional activities.
Operational Expertise. We have been operating Burger King restaurants since 1976 and have developed sophisticated
information and operating systems that enable us to measure and monitor key metrics for operational performance,
sales and profitability that may not be available to other restaurant operators. Our focus on leveraging our operational
expertise, infrastructure and systems allows us to optimize the performance of our restaurants and restaurants that we
may acquire. Our size and history with the Burger King brand enable us to effectively track operating metrics and
leverage best practices across our organization. We believe that our experienced management team, operating culture,
effective operating systems and infrastructure enable us to operate more efficiently than many other Burger King
operators, resulting in higher restaurant margins and improved overall financial results.
Consistent Operating History and Financial Strength. We believe that the quality and sophistication of our restaurant
operations have driven our strong restaurant level performance. Comparable restaurant sales for our restaurants have
generally outperformed the Burger King system. Our strong restaurant level operations coupled with our financial
management capabilities have resulted in consistent and stable cash flows. We have demonstrated our ability to
prudently manage financial leverage through a variety of economic cycles. We believe that our cash flow from
operations and the availability of revolving credit borrowings under our amended senior credit facility will be used to
fund our ongoing operations and capital expenditures.
Distinct Brand with Global Recognition, Innovative Marketing and New Product Development. As a Burger King
franchisee, we benefit from, and rely on, BKC's extensive marketing, advertising and product development capabilities
to drive sales and generate increased restaurant traffic. Over the years, BKC has launched innovative and creative
multimedia advertising campaigns that highlight the popular relevance of the Burger King brand. BKC has also
introduced promotions that leverage both value and premium menu offerings as well as providing a platform for new
premium sandwich offerings. We believe these campaigns continue to positively impact the brand today as BKC
focuses on a well-balanced promotional mix and remains committed to focusing on fewer but more impactful new
product launches and limited time offers, both of which continue to show positive trends. BKC is also aggressively
working with franchisees throughout the system to encourage the renovation and remodeling of restaurants to BKC's
20/20 image, which we believe will continue to increase customer traffic and restaurant sales.
Strategic Relationship with Burger King Corporation. We believe that the structure of the 2012 acquisition
strengthened our well-established relationship with BKC and has further aligned our common interests to grow our
business. We intend to continue to expand by making acquisitions, including acquisitions resulting from the exercise
of the ROFR as well as other negotiated acquisitions under our pre-approval rights. The consideration to BKC associated
with the 2012 acquisition included an equity interest in Carrols Restaurant Group, which is now approximately 20.6%.
Since the 2012 acquisition, two of BKC's senior executives have served on our Board of Directors. Jose Cil, Executive
4
Vice President and President, Burger King, of Restaurant Brands International Inc., the indirect parent company of
BKC, and Alexandre Macedo, BKC's President of North America, currently serve on our board of directors. Our
restaurants represent approximately 10.2% of the Burger King locations in North America as of January 1, 2017. We
believe that the combination of our rights under the operating agreement, BKC's equity interest and its board level
representation will continue to reinforce the alignment of our common interests with BKC for the long term.
Multiple Growth Levers. We believe our historical track record of acquiring and integrating restaurants and our
commitment to remodel our restaurants provides multiple avenues to grow our business. With more than 50 years of
restaurant operating experience, we have successfully grown our business through acquisitions. We have experienced
increases in comparable restaurant sales, increased restaurant-level profitability and improved operating metrics at the
restaurants we have acquired in the last four years. In addition, we have remodeled a total of 489 restaurants to BKC’s
20/20 restaurant image as of January 1, 2017 which we believe has improved our guests’ overall experience and
increased customer traffic. At January 1, 2017 we had 547 restaurants with the BKC 20/20 image, which includes
restaurants converted prior to our acquisition.
Experienced Management Team with a Proven Track Record. We believe that our senior management team's
extensive experience in the restaurant industry and its long and successful history of developing, acquiring, integrating
and operating quick-service restaurants provide us with a competitive advantage. Our management team has a successful
history of integrating acquired restaurants, and over the past 20 years, we have significantly increased the number of
Burger King restaurants we own and operate, largely through acquisitions. Our operations are overseen by our Chief
Executive Officer, Dan Accordino, who has over 40 years of Burger King and quick-service restaurant experience and
nine Regional Directors that have an average of 27 years of Burger King restaurant experience. Our 107 district
managers that have an average tenure of 17 years in the Burger King system support the Regional Directors. Our
operations management is further supported by our infrastructure of financial, information systems, real estate, human
resources and legal professionals.
Our primary business strategies are as follows:
Our Business Strategies
Selectively Acquire and Develop Additional Burger King Restaurants. As of January 1, 2017, we operated 753
Burger King restaurants, making us one of the largest Burger King franchisees in the world. We acquired the ROFR
in the 2012 acquisition and were granted certain pre-approval rights to acquire additional franchised restaurants and
to develop new restaurants. Due to the number of restaurants and franchisees in the Burger King system and our
historical success in acquiring and integrating restaurants, we believe that there is considerable opportunity for future
growth. There are more than 2,000 Burger King restaurants we do not own in states in which we have the ROFR and
pre-approval rights. Furthermore, we believe there are additional Burger King restaurants in states not subject to the
ROFR that could be attractive acquisition candidates, subject to BKC's customary approval. We believe that the
assignment of the ROFR and the pre-approval to acquire and develop additional restaurants provide us with the
opportunity to significantly expand our ownership of Burger King restaurants in the future. On February 28, 2017, we
completed the acquisition of 43 restaurants in and around the Cincinnati, Ohio market from a franchisee in a negotiated
transaction. While we may evaluate and discuss potential acquisitions of additional restaurants from time to time, we
currently have no understandings, commitments or agreements with respect to any material acquisitions. We may be
required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to
obtain additional financing, if necessary, on acceptable terms or at all.
Improve Profitability of Restaurants We Acquire by Leveraging Our Existing Infrastructure and Best-
Practices. For acquired restaurants, we believe we can realize benefits from economies of scale, including leveraging
our existing infrastructure across a larger number of restaurants. Additionally, we believe that our skilled management
team, sophisticated information technology, operating systems and training and development programs support our
ability to enhance operating efficiencies at any restaurants we may acquire. We have demonstrated our ability to increase
the profitability of acquired restaurants and we believe, over time, that we will improve profitability and operational
efficiency at the restaurants we have and may acquire.
5
Increase Restaurant Sales and Customer Traffic. BKC has identified and implemented a number of strategies to
increase brand awareness, increase market share, improve overall operations and drive sales. These strategies are
central to our strategic objectives to deliver profitable growth.
• Products. The strength of the BKC menu has been built on a distinct flame-grilled cooking platform to make
better tasting hamburgers. We believe that BKC intends to continue to optimize the menu by focusing on core
products, such as the flagship Whopper® sandwich, while maintaining a balance between value promotions
and premium limited time offerings to drive sales and traffic. Recent product innovation has included a multi-
tier balanced marketing approach to value and premium offerings, pairing value promotions, such as the $1.49
10-piece chicken nugget promotion, with 2 for $5 premium limited time offerings, such as the X-Long Pulled
Pork sandwich, Grilled Chicken Burger and X-Long Cheeseburger. In 2016, BKC introduced the flame-grilled
hot dogs, Grilled Dogs, as a permanent menu item and promotional initiatives have included 2 for $4 breakfast
Croissan'wich and 2 for $10 Whopper meal deal. There have also been a number of enhancements to food
preparation procedures to improve the quality of BKC's existing products. These new menu platforms and
quality improvements form the backbone of BKC's strategy to appeal to a broader consumer base and to
increase restaurant sales.
• Image. We believe that re-imaged restaurants increase curb appeal and result in increased restaurant sales.
We have remodeled 489 restaurants to BKC's 20/20 restaurant image which features a fresh, sleek, eye-catching
design. The restaurant redesign incorporates easy-to-navigate digital menu boards in the dining room,
streamlined merchandising at the drive-thru and flat screen televisions in the dining area. We believe the
restaurant remodeling plan has improved our guests' dining experience and increased customer traffic. As of
January 1, 2017 we have a total of 547 restaurants with the 20/20 restaurant image, which includes restaurants
converted prior to our acquisition.
• Advertising and Promotion. We believe that we will continue to benefit from BKC's advertising support of its
menu items, product enhancement and re-imaging initiatives. BKC has established a data driven marketing
process which has focused on driving restaurant sales and traffic, while targeting a broad consumer base with
inclusive messaging. This strategy uses multiple touch points to advertise our products, including digital
advertising, social media and on-line video in addition to traditional television advertising. BKC has a food-
centric marketing strategy which focuses consumers on the food offerings, the core asset, and balances value
promotions and premium limited time offerings to drive profitable restaurant sales and traffic.
• Operations. We believe that improving restaurant operations and enhancing the customer experience are key
components to increasing the profitability of our restaurants. We believe we will benefit from BKC's ongoing
initiatives to improve food quality, simplify restaurant level execution and monitor operational performance,
all of which are designed to improve the customer experience and increase customer traffic.
Strategically Remodel to Elevate Brand Profile and Increase Profit Potential. In 2017, we plan to remodel an
additional 20 to 25 more locations to BKC's 20/20 image as well as rebuild 5 to 7 restaurants and construct 7 to 15
new restaurants (including relocations of 2 to 3 existing restaurants). We believe there are opportunities to increase
profitability by remodeling additional restaurants including restaurants that we have acquired or may acquire in the
future.
6
Selected restaurant operating data for our restaurants is as follows:
Restaurant Economics
Average annual sales per restaurant (all restaurants) (1)
Legacy restaurants
Acquired restaurants
Average sales transaction
Drive-through sales as a percentage of total sales
Day-part sales percentages:
Breakfast
Lunch
Dinner
Afternoon and late night
Year Ended
December 28, 2014
1,190,505
$
1,193,429
$
1,136,522
$
6.40
$
65.3%
$
$
$
$
January 3, 2016
1,274,372
1,300,126
1,170,472
6.64
66.0%
$
$
$
$
January 1, 2017
1,311,516
1,340,141
1,235,452
6.85
67.0%
12.9%
33.2%
20.4%
33.5%
13.2%
32.8%
20.4%
33.6%
13.8%
32.4%
20.4%
33.4%
(1) Average annual sales per restaurant are derived by dividing restaurant sales by the average number of restaurants operating
during the period on a 52-week basis.
Restaurant Capital Costs
The initial cost of the franchise fee, equipment, seating, signage and other interior costs of a standard new Burger
King restaurant currently is approximately $400,000 (which excludes the cost of the land, building and site
improvements). In the markets in which we primarily operate, the cost of land generally ranges from $500,000 to
$900,000 and the cost of building and site improvements generally ranges from $850,000 to $1,025,000.
With respect to development of freestanding restaurants, if we acquire the land to construct the building, we seek
to thereafter enter into an arrangement to sell and leaseback the land and building under a long-term lease. Historically,
we have been able to acquire and finance many of our locations under such leasing arrangements. Where we are unable
to purchase the underlying land, we enter into a long-term lease for the land followed by construction of the building
using cash generated from our operations or with borrowings under our senior credit facility.
The cost of securing real estate and developing and equipping new restaurants can vary significantly and depends
on a number of factors, including the local economic conditions and the characteristics of a particular site. Accordingly,
the cost of opening new restaurants in the future may differ substantially from the historical cost of restaurants previously
opened and the estimated costs above.
BKC's 20/20 restaurant design draws inspiration from its signature flame-grilled cooking process and incorporates
a variety of innovative elements to a backdrop that evokes the industrial look of corrugated metal, brick, wood and
concrete. The cost of remodeling a restaurant to the BKC 20/20 image varies depending upon the age and condition
of the restaurant and the amount of new equipment needed and can range from $250,000 to $650,000 per restaurant
with a projected cost of approximately $550,000 per restaurant in 2017 and an average cost of $450,000 over the past
three years. The total cost of a remodel has increased over time due to the replacement of certain kitchen equipment
at the time of the remodel which is incremental to the cost to upgrade to the BKC 20/20 design. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Recent and Future Events Affecting our
Results of Operations".
Site Selection
We believe that the location of our restaurants is a critical component of each restaurant's success. We evaluate
potential new sites on many critical criteria including accessibility, visibility, costs, surrounding traffic patterns,
competition and demographic characteristics. Our senior management determines the acceptability of all acquisition
prospects and new sites, based upon analyses prepared by our real estate, financial and operations professionals.
7
Seasonality
Our business is moderately seasonal due to regional weather conditions. Due to the location of our restaurants,
sales are generally higher during the summer months than during the winter months.
The following table details the locations of our 753 Burger King restaurants as of January 1, 2017:
Restaurant Locations
State
Illinois
Indiana
Kentucky
Maine
Massachusetts
Michigan
New Jersey
New York
North Carolina
Ohio
Pennsylvania
South Carolina
Tennessee
Vermont
Virginia
West Virginia
Total
Total
Restaurants
19
87
20
11
1
54
10
131
160
92
65
32
27
5
36
3
753
Management Structure
Operations
We conduct substantially all of our executive management, finance, marketing and operations support functions
from our corporate headquarters in Syracuse, New York. Carrols Restaurant Group is led by our Chief Executive
Officer and President, Daniel T. Accordino, who has over 40 years of Burger King and quick-service restaurant
experience at our company.
Our operations for our restaurants are overseen by nine Regional Directors that have an average of over 27 years
of Burger King restaurant experience. Our 107 district managers support the Regional Directors in the management
of our restaurants.
A district manager is responsible for the direct oversight of the day-to-day operations of an average of
approximately seven to eight restaurants. Typically, district managers have previously served as restaurant managers
at one of our restaurants. Regional directors, district managers and restaurant managers are compensated with a fixed
salary plus an incentive bonus based upon the performance of the restaurants under their supervision, and for our
regional directors and district managers, the combined performance of all of our restaurants. Typically, our restaurants
are staffed with hourly employees who are supervised by a salaried manager and one to three salaried assistant managers.
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Training
We maintain a comprehensive training and development program for all of our personnel and provide both
classroom and in-restaurant training for our salaried and hourly personnel. The program emphasizes system-wide
operating procedures, food preparation methods, food safety and customer service standards. BKC's training and
development programs are also available to us as a franchisee through web access in all of our restaurants.
Management Information Systems
Our sophisticated management information systems provide us with the ability to efficiently and effectively
manage our restaurants and to ensure consistent application of operating controls at our restaurants. Our size affords
us the ability to maintain an in-house staff of information technology and restaurant systems professionals dedicated
to continuously enhancing our systems. In addition, these capabilities allow us to integrate restaurants that we acquire
and achieve greater economies of scale and operating efficiencies.
We typically replace the POS systems at restaurants we acquire shortly after acquisition and implement our POS,
labor and inventory management systems. Our restaurants employ touch-screen POS systems that are designed to
facilitate accuracy and speed of order taking. These systems are user-friendly, require limited cashier training and
improve speed-of-service through the use of conversational order-taking techniques. The POS systems are integrated
with PC-based applications at the restaurant and hosted systems at our corporate office that are designed to facilitate
financial and management control of our restaurant operations.
Our restaurant systems provide daily tracking and reporting of traffic counts, menu item sales, labor and food
data including costs and inventories, and other key operating metrics for each restaurant. We communicate electronically
with our restaurants on a continuous basis via a high-speed data network, which enables us to collect this information
for use in our corporate management systems in near real-time. Our corporate headquarters manages systems that
support all of our accounting, operating and reporting systems. We also operate a 24-hour, seven-day help desk at our
corporate headquarters that enables us to provide systems and operational support to our restaurant operations as
required. Among other things, our restaurant information systems provide us with the ability to:
• monitor labor utilization and sales trends on a real-time basis at each restaurant, enabling the restaurant manager
to effectively manage to our established labor standards on a timely basis;
• reduce inventory shrinkage using restaurant-level inventory management systems and daily reporting of
inventory variances;
• analyze sales and product mix data to help restaurant managers forecast production levels;
• monitor day-part drive-thru speed of service at each of our restaurants;
• allow the restaurant manager to produce day-part labor schedules based on the restaurant's historical sales
patterns;
• systematically communicate human resource and payroll data to our administrative offices for efficient
centralized management of labor costs and payroll processing;
• employ centralized control over pricing, menu and inventory management activities at the restaurant utilizing
the remote management capabilities of our systems;
•
take advantage of electronic commerce including our ability to place orders with suppliers and to integrate
detailed invoice, receiving and product data with our inventory and accounting systems;
• provide analyses, reporting and tools to enable all levels of management to review a wide-range of financial,
product mix and operational data; and
• systematically analyze and report on detailed transactional data to help detect and identify potential theft.
Critical information from our systems is available in near real-time to our restaurant managers, who are expected
to react quickly to trends or situations in their restaurant. Our district managers also receive near real-time information
for their respective restaurants and have access to key operating data on a remote basis using our corporate intranet-
based reporting. Management personnel at all levels, from the restaurant manager through senior management, utilize
and monitor key restaurant performance indicators that are also included in our restaurant-level incentive bonus plans.
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Burger King Franchise Agreements
Each of our Burger King restaurants operates under a separate franchise agreement with BKC. Our franchise
agreements with BKC generally require, among other things, that all restaurants comply with specified design criteria
and operate in a prescribed manner, including utilization of the standard Burger King menu. In addition, our Burger
King franchise agreements generally require that our restaurants conform to BKC's current image and provide for
remodeling of our restaurants during the tenth year of the agreements to conform to such current image, which may
require significant expenditures. These franchise agreements with BKC generally provide for an initial term of 20
years and currently have an initial franchise fee of $50,000. In the event that we terminate any franchise agreement
and close the related BKC restaurant prior to the expiration of its term, we generally are required to pay BKC an amount
based on the net present value of the royalty stream that would have been realized by BKC had such franchise agreement
not been terminated. Any franchise agreement, including renewals, can be extended at our discretion for an additional
20-year term, with BKC's approval, provided that, among other things, the restaurant meets the current Burger King
operating and image standards and that we are not in default under the terms of the franchise agreement. The franchise
agreement fee for subsequent renewals is currently $50,000. BKC may terminate any of the franchise agreements if
an act of default is committed by us under these agreements and such default is not cured. Defaults under the franchise
agreements include, among other things, our failure to operate such Burger King restaurant in accordance with the
operating standards and specifications established by BKC (including failure to use equipment, uniforms or decor
approved by BKC), our failure to sell products approved or designated by BKC, our failure to pay royalties or advertising
and sales promotion contributions as required, our unauthorized sale, transfer or assignment of such franchise agreement
or the related restaurant, certain events of bankruptcy or insolvency with respect to us, conduct by us or our employees
that has a harmful effect on the Burger King restaurant system, conviction of us or our executive officers for certain
indictable offenses, our failure to maintain a responsible credit rating or the acquisition by us of an interest in any other
hamburger restaurant business. At January 1, 2017, we were not in default under any of the franchise agreements with
BKC.
In order to obtain a successor franchise agreement with BKC, a franchisee is typically required to make capital
improvements to the restaurant to bring it up to BKC's current image standards. The cost of these improvements may
vary widely depending upon the magnitude of the required changes and the degree to which we have made interim
improvements to the restaurant. At January 1, 2017, we had 43 franchise agreements due to expire in 2017, 31 franchise
agreements due to expire in 2018 and 30 franchise agreements due to expire in 2019. In recent years, the historical
costs of improving our Burger King restaurants in connection with franchise renewals generally have ranged from
$250,000 to $650,000 per restaurant. The average cost of our remodels to the 20/20 image in 2016 was approximately
$520,000 per restaurant. The cost of remodels can vary depending upon the age and condition of the restaurant and
the amount of new equipment needed. The cost of capital improvements made in connection with future franchise
agreement renewals may differ substantially from past franchise renewals depending on the current image requirements
established from time to time by BKC.
We believe that we will be able to satisfy BKC's normal franchise agreement renewal criteria. Accordingly, we
believe that renewal franchise agreements will be granted on a timely basis by BKC at the expiration of our existing
franchise agreements. Historically, BKC has granted all of our requests for successor franchise agreements. However,
there can be no assurance that BKC will grant these requests in the future.
We evaluate the performance of our Burger King restaurants on an ongoing basis. Such evaluation depends on
many factors, among other things, including our assessment of the anticipated future operating results of the subject
restaurants and the cost of required capital improvements that we would need to commit for such restaurants. If we
determine that a Burger King restaurant is under-performing, or that we do not anticipate an adequate return on the
capital required to renew the franchise agreement, we may elect to close such restaurant. We may also relocate (offset)
a restaurant within its trade area and build a new Burger King restaurant as part of the franchise renewal process. In
2016, we closed 12 restaurants, including 4 offset locations and 1 future offset location, with 9 of the closures occurring
on the last day of our fiscal year. We currently expect to close between 20 to 25 restaurants in 2017, excluding any
relocations of existing restaurants. Our determination to close these restaurants is subject to further evaluation and
may change. We may also elect to close additional restaurants in the future.
In addition to the initial franchise fee, we generally pay BKC a monthly royalty. The royalty rate for new restaurants
and for successor franchise agreements is 4.5% of sales. Royalty payments for restaurants acquired from other
franchisees are based on the terms of existing franchise agreements being acquired, and may be less than 4.5%. The
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royalty rate was increased from 3.5% to 4.5% of sales in 2000, and generally for restaurants that were in existence in
2000, becomes effective upon the renewal of the franchise agreement. Burger King royalties, as a percentage of our
restaurant sales, were 4.2% in 2017, 2016 and 2015. We anticipate our Burger King royalties, as a percentage of our
restaurant sales, will be 4.3% in 2017 as a result of the terms outlined above.
We also generally contribute 4% of restaurant sales from our Burger King restaurants to fund BKC's national
and regional advertising. BKC engages in substantial national and regional advertising and promotional activities and
other efforts to maintain and enhance the Burger King brand. From time to time we supplement BKC's marketing
with our own local advertising and promotional campaigns. See “- Advertising, Products and Promotion” below.
Our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any
defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not
materially adversely affect the operations of existing Burger King restaurants, we cannot assure you that franchises
granted by BKC to third parties will not adversely affect any Burger King restaurants that we operate.
Except as permitted by the operating agreement, we are required to obtain BKC's consent before we acquire
existing Burger King restaurants from other franchisees or develop new Burger King restaurants. BKC also has the
right of first refusal to purchase any Burger King restaurant that is being offered for sale by a franchisee. However,
pursuant to the operating agreement, BKC assigned the ROFR to us in 20 states and granted us franchise pre-approval
to build new restaurants or acquire restaurants from franchisees until the date that we operate 1,000 restaurants.
Historically, BKC has approved substantially all of our acquisitions of restaurants from other franchisees.
Advertising, Products and Promotion
BKC's marketing strategy is characterized by its HAVE IT YOUR WAY® service, TASTE IS KING® tag line,
flame grilling, generous portions and competitive prices. Burger King restaurants feature flame-grilled hamburgers,
the most popular of which is the Whopper® sandwich, a large, flame-grilled hamburger garnished with mayonnaise,
lettuce, onions, pickles and tomatoes. The basic menu of all Burger King restaurants also includes a variety of
hamburgers, chicken and other specialty sandwiches, french fries, soft drinks, salads, breakfast items, snacks, and
other offerings. BKC and its franchisees have historically spent between 4% and 5% of their respective sales on
marketing, advertising and promotion to sustain high brand awareness. BKC's marketing initiatives are designed to
reach a diverse consumer base and BKC has continued to introduce a number of new and enhanced products to broaden
menu offerings and drive customer traffic in all day parts.
We are generally required to contribute 4% of restaurant sales to an advertising fund utilized by BKC for its
advertising, promotional programs and public relations activities. BKC's advertising programs consist of national
campaigns supplemented by local advertising. BKC's advertising campaigns are generally carried on television, radio
and in circulated print media (national and regional newspapers and magazines). As a percentage of our restaurant
sales advertising expense was 4.4% in 2016, 3.8% in 2015 and 4.0% in 2014. For 2017 we anticipate advertising
expense to range between 4.1% and 4.3% of restaurant sales.
The efficiency and quality of advertising and promotional programs can significantly affect the quick-service
restaurant businesses. We believe that one of the major advantages of being a Burger King franchisee is the value of
the extensive national and regional advertising and promotional programs conducted by BKC. In addition to the benefits
derived from BKC's advertising spending, we sometimes supplement BKC's advertising and promotional activities
with our own local advertising and promotions, including the purchase of additional television, radio and print
advertising. The concentration of our Burger King 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.
Suppliers
We are a member of a national purchasing cooperative, Restaurant Services, Inc., which we refer to as "RSI",
created for the Burger King system. RSI is a non-profit independent purchasing cooperative that is responsible for
sourcing our products and related supplies and managing relationships with approved distributors for the Burger King
system. We use our purchasing power to negotiate directly with certain other vendors, to obtain favorable pricing and
terms for supplying our restaurants. For our restaurants, we are required to purchase all of our foodstuffs, paper goods
and packaging materials from BKC-approved suppliers at prices negotiated by RSI. We currently utilize three
distributors, Maines Paper & Food Service, Inc., Reinhart Food Service L.L.C. and MBM Food Service Inc., to supply
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our restaurants with the majority of our foodstuffs and, as of January 1, 2017, such distributors supplied 41%, 32%
and 27%, respectively, of our restaurants. We may purchase non-food items, such as kitchen utensils, equipment
maintenance tools and other supplies, from any suitable source so long as such items meet BKC product uniformity
standards. All BKC-approved distributors are required to purchase foodstuffs and supplies from BKC-approved
manufacturers and purveyors. BKC is responsible for monitoring quality control and supervision of these manufacturers
and conducts regular visits to observe the preparation of foodstuffs, and to run various tests to ensure that only quality
foodstuffs are sold to its approved suppliers. In addition, BKC coordinates and supervises audits of approved suppliers
and distributors to determine continuing product specification compliance and to ensure that manufacturing plant and
distribution center standards are met. Although we believe that we have alternative sources of supply available to our
restaurants, in the event any distributor or supplier for our restaurants was unable to service us, this could lead to a
disruption of service or supply at our restaurants until a new distributor or supplier is engaged, which could have an
adverse effect on our business.
Quality Assurance
Our operational focus is closely monitored to achieve a high level of customer satisfaction based on product
quality, speed of service, order accuracy and quality of service. Our senior management and restaurant management
staffs are principally responsible for ensuring compliance with BKC's required operating procedures. We have uniform
operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance
and cleanliness of the premises and employee conduct. In order to maintain compliance with these operating standards
and specifications, we distribute to our restaurant operations management team detailed reports measuring compliance
with various customer service standards and objectives, including feedback obtained directly from our customers
through instructions given to them at the point of sale. The customer feedback is monitored by an independent agency
and us and consists of evaluations of speed of service, quality of service, quality of our menu items and other operational
objectives including the cleanliness of our restaurants. We also have our own staff that handle customer inquiries and
complaints. The level of customer satisfaction is a key metric in our restaurant-level incentive bonus plans.
We operate in accordance with quality assurance and health standards mandated by federal, state and local
governmental laws and regulations. These standards include food preparation rules regarding, among other things,
minimum cooking times and temperatures, maximum time standards for holding prepared food, food handling
guidelines and cleanliness. To maintain these standards, under BKC's oversight third-party firms conduct unscheduled
inspections and follow-up inspections of our restaurants and report their findings to us. In addition, restaurant managers
conduct internal inspections for taste, quality, cleanliness and food safety on a regular basis.
Trademarks
As a franchisee of Burger King, we also have contractual rights to use certain BKC-owned trademarks, service
marks and other intellectual property relating to the Burger King concept. We have no proprietary intellectual property
other than the Carrols logo and trademark.
Government Regulation
Various federal, state and local laws affect our business, including various health, sanitation, fire and safety
standards. Restaurants to be constructed or remodeled are subject to state and local building code and zoning
requirements. In connection with the development and remodeling of our restaurants, we may incur costs to meet
certain federal, state and local regulations, including regulations promulgated under the Americans with Disabilities
Act.
We are subject to the federal Fair Labor Standards Act and various other federal and state laws governing such
matters as:
• minimum wage requirements;
• unemployment compensation;
• overtime; and
• other working conditions and citizenship requirements.
12
A significant number of our food service personnel are paid at rates related to the federal, and where applicable,
state minimum wage and, accordingly, increases in the minimum wage have increased and in the future will increase
wage rates at our restaurants.
The Patient Protection and Affordable Care Act (the “Act”) required businesses employing fifty or more full-
time equivalent employees to offer health care benefits to those full-time employees or be subject to an annual penalty.
Those benefits must be provided under a health care plan which provides a certain minimum scope of health care
services. The Act also limits the portion of the cost of the benefits which we can require employees to pay. Based on
our enrollment history to date, approximately 15% of our approximately 1,300 eligible hourly employees have opted
for coverage under our medical plan.
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. Our costs
for compliance with environmental laws or regulations have not had a material adverse effect on our results of operations,
cash flows or financial condition in the past.
Industry and Competition
The Restaurant Market. Restaurant sales historically have closely tracked several macroeconomic indicators
and we believe that “away-from-home” food consumption will increase due to these trends in recent years. Historically,
unemployment has been inversely related to restaurant sales and, as the unemployment rate decreases and disposable
income increases, restaurant sales have increased. According to the U.S. Department of Agriculture, in 2016 food away
from home dollars exceeded at-home dining, with 50.2% of food dollars spent on food away from home and with total
expenditures increasing 8.0% from 2013.
Quick-Service Restaurants. We operate in the hamburger category of the quick-service restaurant segment of
the restaurant industry. Quick-service restaurants are distinguished by high speed of service and efficiency, convenience,
limited menu and service, and value pricing. According to Nation's Restaurant News, 2015 U.S. foodservice sales for
the Top 100 restaurant chains increased 5.9% from 2014 to $248.3 billion. Of this amount, the hamburger category
represented $76.8 billion, or 30.9%, making it the largest category of the quick-service segment.
The restaurant industry is highly competitive with respect to price, service, location and food quality. In each of
our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally
owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and
prepared food counters in supermarkets, grocery stores, cafeterias and other purveyors of moderately priced and quickly
prepared foods.
We believe that:
• product quality and taste;
• brand recognition;
• convenience of location;
• speed of service;
• menu variety;
• price; and
• ambiance
are the most important competitive factors in the quick-service restaurant segment and that our restaurants effectively
compete in each category. We believe our largest competitors are McDonald's and Wendy's.
As of January 1, 2017, we employed approximately 21,500 persons of which approximately 160 were
administrative personnel and approximately 21,340 were restaurant operations personnel. None of our employees are
are unionized or covered by collective bargaining agreements. We believe that our overall relations with our employees
are good.
Employees
Availability of Information
13
We file annual, quarterly and current reports and other information with the Securities and Exchange Commission
(the “SEC”). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room
at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
We make available at no cost through our website (www.carrols.com) our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as well as other reports relating
to us that are filed or furnished to the SEC, as soon as reasonably practicable after electronically filing such material
with the SEC. The reference to our website address is a textual reference only, meaning that it does not constitute
incorporation by reference of the information contained on the website and should not be considered part of this
document.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as other information and data included in this
Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business,
consolidated financial condition or results of operations.
Risks Related to Our Business
Intense competition in the restaurant industry could make it more difficult to profitably expand our business and
could also have a negative impact on our operating results if customers favor our competitors or we are forced to
change our pricing and other marketing strategies.
The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number
of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare.
We also compete with convenience stores, delicatessens and prepared food counters in grocery stores, supermarkets,
cafeterias and other purveyors of moderately priced and quickly prepared food. We believe our largest competitors are
McDonald's and Wendy's restaurants.
Due to competitive conditions, we, as well as certain of the other major quick-service restaurant chains, have
offered select food items and combination meals at discounted prices. These pricing and marketing strategies have
had, and in the future may have, a negative impact on our sales and earnings.
Factors applicable to the quick-service restaurant segment may adversely affect our results of operations, which
may cause a decrease in earnings and revenues.
The quick-service restaurant segment is highly competitive and can be materially adversely affected by many
factors, including:
• changes in local, regional or national economic conditions;
• changes in demographic trends;
• changes in consumer tastes;
• changes in traffic patterns;
•
increases in fuel prices and utility costs;
• consumer concerns about health, diet and nutrition;
•
increases in the number of, and particular locations of, competing restaurants;
• changes in discretionary consumer spending;
•
•
•
•
inflation;
increases in the cost of food, such as beef, chicken, produce and packaging;
increased labor costs, including healthcare, unemployment insurance and minimum wage requirements;
the availability of experienced management and hourly-paid employees; and
• regional weather conditions.
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We are highly dependent on the Burger King system and our ability to renew our franchise agreements with BKC.
The failure to renew our franchise agreements or Burger King's failure to compete effectively would materially
adversely affect our results of operations.
Due to the nature of franchising and our agreements with BKC, our success is, to a large extent, directly related
to the success of the Burger King system including its financial condition, advertising programs, new products, overall
quality of operations and the successful and consistent operation of Burger King restaurants owned by other franchisees.
We cannot assure you that Burger King will be able to compete effectively with other restaurants. As a result, any
failure of Burger King to compete effectively would likely have a material adverse effect on our operating results.
Under each of our franchise agreements with BKC, we are required to comply with operational programs
established by BKC. For example, our franchise agreements with BKC require that our restaurants comply with
specified design criteria. In addition, BKC generally has the right to require us during the tenth year of a franchise
agreement to remodel our restaurants to conform to the then-current image of Burger King, which may require the
expenditure of considerable funds. In addition we may not be able to avoid adopting menu price discount promotions
or permanent menu price decreases instituted by BKC that may be unprofitable.
Our franchise agreements typically have a 20-year term after which BKC's consent is required to receive a
successor franchise agreement. Our franchise agreements with BKC that are set to expire over the next three years are
as follows: 43 in 2017, 31 in 2018 and 30 in 2019.
We cannot assure you that BKC will grant each of our future requests for successor franchise agreements, and
any failure of BKC to renew our franchise agreements could adversely affect our operating results. In addition, as a
condition of approval of a successor franchise agreement, BKC may require us to make capital improvements to
particular restaurants to bring them up to Burger King current image standards, which may require us to incur substantial
costs.
In addition, our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants
in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not
materially adversely affect the operations of existing restaurants, we cannot assure you that franchises granted by BKC
to third parties will not adversely affect any restaurants that we operate.
Additionally, as a franchisee, we have no control over the Burger King brand. If BKC does not adequately protect
the Burger King brand and other intellectual property, our competitive position and operating results could be harmed.
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Our strategy includes pursuing acquisitions of additional Burger King restaurants and we may not find Burger
King restaurants that are suitable acquisition candidates or successfully operate or integrate any Burger King
restaurants we may acquire.
As part of our strategy, we intend to pursue the acquisition of additional Burger King restaurants. Pursuant to the
operating agreement between BKC and Carrols LLC, dated as of May 30, 2012, as amended on January 26, 2015 and
December 17, 2015, BKC assigned to us its ROFR under its franchise agreements with its franchisees to purchase all
of the assets of a restaurant or all or substantially all of the voting stock of the franchisee, whether direct or indirect,
on the same terms proposed between such franchisee and a third party purchaser in 20 states as follows: Connecticut
(except Hartford county), Delaware, Indiana, Kentucky, Maine, Maryland, Massachusetts (except for Middlesex,
Norfolk and Suffolk counties), Michigan, New Hampshire, New Jersey, New York (except for Bronx, Kings, Nassau,
New York, Queens, Richmond, Suffolk and Westchester counties), North Carolina, Ohio, Pennsylvania, Rhode Island,
South Carolina, Vermont, Virginia, Washington DC, and West Virginia. In addition, pursuant to the operating agreement,
BKC granted us, on a non-exclusive basis, franchise pre-approval to, among other things, acquire restaurants from
Burger King franchisees in the DMAs until the date that we operate 1,000 Burger King restaurants. As part of the
franchise pre-approval, BKC granted us pre-approval for acquisitions of restaurants from franchisees in the 20 states
above subject to and in accordance with the terms of the operating agreement. Although we believe that opportunities
for future acquisitions may be available from time to time, competition for acquisition candidates may exist or increase
in the future. Consequently, there may be fewer acquisition opportunities available to us at an attractive acquisition
price. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate additional
restaurants without substantial costs, delays or operational or financial problems. In the event we are able to acquire
additional restaurants, the integration and operation of the acquired restaurants may place significant demands on our
management, which could adversely affect our ability to manage our existing restaurants. We may be required to obtain
additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional
financing, if necessary, on acceptable terms or at all. Both our senior credit facility and the indenture governing the
$200 million of 8% Senior Secured Second Lien Notes due 2022 (the "Notes") contain restrictive covenants that may
prevent us from incurring additional debt to acquire additional Burger King restaurants.
We may experience difficulties in integrating restaurants acquired by us into our existing business.
The acquisition of a significant number of restaurants will involve the integration of those acquired restaurants
with our existing business. The difficulties of integration include:
• coordinating and consolidating geographically separated systems and facilities;
•
•
•
integrating the management and personnel of the acquired restaurants, maintaining employee morale and
retaining key employees;
implementing our management information systems; and
implementing operational procedures and disciplines to control costs and increase profitability.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of
our business and the loss of key personnel. The diversion of management's attention and any delays or difficulties
encountered in connection with the acquisition of restaurants and integration of acquired restaurants' operations could
have an adverse effect on our business, results of operations and financial condition.
Achieving the anticipated benefits of the acquisition of additional restaurants will depend in part upon whether
we can integrate any acquired restaurants in an efficient and effective manner. We may not accomplish this integration
process smoothly or successfully. If management is unable to successfully integrate acquired restaurants, the anticipated
benefits of the acquisition may not be realized.
In our evaluation of our recent and potential acquisitions, assumptions are made as to our ability to increase sales
as well as improve restaurant-level profitability particularly in the areas of food, labor and cash controls as well as
other operating expenses. If we are not able to make such improvements in these operational areas as planned, the
acquired restaurants' targeted profitability levels will be affected which could cause an adverse effect on our overall
financial results and financial condition.
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We could be adversely affected by food-borne illnesses, as well as widespread negative publicity regarding food
quality, illness, injury or other health concerns.
Negative publicity about food quality, illness, injury or other health concerns (including health implications of
obesity) or similar issues stemming from one restaurant or a number of restaurants could materially adversely affect
us, regardless of whether they pertain to our own restaurants, other Burger King restaurants, or to restaurants owned
or operated by other companies. For example, health concerns about the consumption of beef, chicken or eggs or by
specific events such as the outbreak of “mad cow” disease could lead to changes in consumer preferences, reduce
consumption of our products and adversely affect our financial performance. These events could also reduce available
supply or significantly raise the price of beef, chicken or eggs.
In addition, we cannot guarantee that our operational controls and employee training will be effective in preventing
food-borne illnesses, food tampering and other food safety issues that may affect our restaurants. Food-borne illness
or food tampering incidents could be caused by customers, employees or food suppliers and transporters and, therefore,
could be outside of our control. Any publicity relating to health concerns or the perceived or specific outbreaks of
food-borne illnesses, food tampering or other food safety issues attributed to one or more of our restaurants, could
result in a significant decrease in guest traffic in all of our restaurants and could have a material adverse effect on our
results of operations. In addition, similar publicity or occurrences with respect to other restaurants or restaurant chains
could also decrease our guest traffic and have a similar material adverse effect on our business.
We may incur significant liability or reputational harm if claims are brought against us or the Burger King brand.
We may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-
related illness, injuries suffered in our premises or other food quality, health or operational concerns, including
environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits,
including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace
and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and
overtime compensation issues and, in the case of quick service restaurants, alleging that they have failed to disclose
the health risks associated with high fat or high sodium foods and that their marketing practices have encouraged
obesity. We may also be subject to litigation or other actions initiated by governmental authorities or our employees,
among others, based upon these and other matters. Adverse publicity resulting from such allegations or occurrences
or alleged discrimination or other operating issues stemming from one or a number of our locations could adversely
affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases
filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if
we settle such cases. In addition, any such cases may materially and adversely affect our operations by increasing our
litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful,
our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able to continue
to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities
or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of
income, there could be a material adverse effect on our results of operations.
17
Changes in consumer taste could negatively impact our business.
We obtain a significant portion of our revenues from the sale of hamburgers and various types of sandwiches. If
consumer preferences for these types of foods change, it could have a material adverse effect on our operating results.
The quick-service restaurant segment is characterized by the frequent introduction of new products, often supported
by substantial promotional campaigns, and is subject to changing consumer preferences, tastes, and eating and
purchasing habits. Our success depends on BKC's ability to anticipate and respond to changing consumer preferences,
tastes and dining and purchasing habits, as well as other factors affecting the restaurant industry, including new market
entrants and demographic changes. BKC may be forced to make changes to our menu items in order to respond to
changes in consumer tastes or dining patterns, and we may lose customers who do not prefer the new menu items. In
recent years, numerous companies in the quick-service restaurant segments have introduced products positioned to
capitalize on the growing consumer preference for food products that are, or are perceived to be, promoting good
health, nutritious, low in calories and low in fat content. If BKC does not continually develop and successfully introduce
new menu offerings that appeal to changing consumer preferences or if the Burger King system does not timely
capitalize on new products, our operating results could suffer. In addition, any significant event that adversely affects
consumption of our products, such as cost, changing tastes or health concerns, could adversely affect our financial
performance.
If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create
disruptions in the operations of our restaurants, which could have a material adverse effect on our business.
Our financial performance depends on our continuing ability to offer fresh, quality food at competitive prices.
If a significant disruption in service or supply by our suppliers or distributors were to occur, it could create disruptions
in the operations of our restaurants, which could have a material adverse effect on us.
We are a member of a national purchasing cooperative, Restaurant Services, Inc., which serves as the purchasing
agent for approved distributors to the Burger King system. We are required to purchase all of our food products, paper
goods and packaging materials from BKC-approved suppliers. We currently utilize three distributors for our restaurants,
Maines Paper & Food Service, Inc., Reinhart Food Service L.L.C. and MBM Food Service Inc., to supply our restaurants
in various geographical areas. As of January 1, 2017, such distributors supplied 41%, 32% and 27%, respectively of
our restaurants. Although we believe that we have alternative sources of supply, in the event any distributors or suppliers
are unable to service us, this could lead to a disruption of service or supply until a new distributor or supplier is engaged,
which could have an adverse effect on our business.
If labor costs increase, we may not be able to make a corresponding increase in our prices and our operating results
may be adversely affected.
Wage rates for a number of our employees are either at or slightly above the federal and or state minimum wage
rates. As federal and/or state minimum wage rates increase, we may need to increase not only the wage rates of our
minimum wage employees but also the wages paid to the employees at wage rates which are above the minimum wage,
which will increase our costs. The extent to which we are not able to raise our prices to compensate for increases in
wage rates, including increases in state unemployment insurance costs or other costs including mandated health
insurance, could have a material adverse effect on our operating results. In addition, even if minimum wage rates do
not increase, we may still be required to raise wage rates in order to compete for an adequate supply of labor for our
restaurants.
The efficiency and quality of our competitors' advertising and promotional programs and the extent and cost of
our advertising could have a material adverse effect on our results of operations and financial condition.
The success of our restaurants depends in part upon the effectiveness of the advertising campaigns and promotions
by BKC. If our competitors increase spending on advertising and promotion, or the cost of television or radio advertising
increases, or BKC's or our advertising and promotions are less effective than our competitors', there could be a material
adverse effect on our results of operations and financial condition.
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Our business is regional and we therefore face risks related to reliance on certain markets as well as risks for other
unforeseen events.
At January 1, 2017, 21% of our restaurants were located in North Carolina, 17% were located in New York, and
31% were located in Indiana, Ohio and Michigan. Therefore, the economic conditions, state and local government
regulations, weather conditions or other conditions affecting New York, Indiana, Ohio, Michigan, and North Carolina
and other unforeseen events, including terrorism and other international conflicts may have a material impact on the
success of our restaurants in those locations.
Many of our restaurants are located in regions that may be susceptible to severe weather conditions such as harsh
winter weather. As a result, adverse weather conditions in any of these areas could damage these restaurants, result in
fewer guest visits to these restaurants and otherwise have a material adverse impact on our business.
We cannot assure you that the current locations of our restaurants will continue to be economically viable or that
additional locations will be acquired at reasonable costs.
The location of our restaurants has significant influence on their success. We cannot assure you that current
locations will continue to be economically viable or that additional locations can be acquired at reasonable costs. In
addition, the economic environment where restaurants are located could decline in the future, which could result in
reduced sales in those locations. We cannot assure you that new sites will be profitable or as profitable as existing
sites.
Economic downturns may adversely impact consumer spending patterns.
The U.S. economy has in the past experienced significant slowdown and volatility due to uncertainties related
to availability of credit, difficulties in the banking and financial services sectors, softness in the housing market,
diminished market liquidity, falling consumer confidence and high unemployment rates. Our business is dependent to
a significant extent on national, regional and local economic conditions, particularly those that affect our guests that
frequently patronize our restaurants. In particular, where our customers' disposable income is reduced (such as by job
losses, credit constraints and higher housing, tax, energy, interest or other costs) or where the perceived wealth of
customers has decreased (because of circumstances such as lower residential real estate values, increased foreclosure
rates, increased tax rates or other economic disruptions), our restaurants have in the past experienced, and may in the
future experience, lower sales and customer traffic as customers choose lower-cost alternatives or other alternatives
to dining out. The resulting decrease in our customer traffic or average sales per transaction has had an adverse effect
in the past, and could in the future have a material adverse effect, on our business.
The loss of the services of our senior management could have a material adverse effect on our business, financial
condition or results of operations.
Our success depends to a large extent upon the continued services of our senior management who have substantial
experience in the restaurant industry. We believe that it could be difficult to replace our senior management with
individuals having comparable experience. Consequently, the loss of the services of members of our senior management
could have a material adverse effect on our business, financial condition or results of operations.
Government regulation could adversely affect our financial condition and results of operations.
We are subject to extensive laws and regulations relating to the development and operation of restaurants, including
regulations relating to the following:
• zoning;
• requirements relating to labeling of caloric and other nutritional information on menu boards, advertising and
food packaging;
•
the preparation and sale of food;
• employer/employee relationships, including minimum wage requirements, overtime, working and safety
conditions, and citizenship requirements;
• health care; and
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• federal and state laws that prohibit discrimination and laws regulating design and operation of, and access to,
facilities, such as the Americans With Disabilities Act of 1990.
In the event that legislation having a negative impact on our business is adopted, it could have a material adverse
impact on us. For example, substantial increases in the minimum wage or state or Federal unemployment taxes could
adversely affect our financial condition and results of operations. Local zoning or building codes or regulations can
cause substantial delays in our ability to build and open new restaurants. Any failure to obtain and maintain required
licenses, permits and approvals could also adversely affect our operating results.
Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of
hazardous materials could expose us to liabilities, which could adversely affect our results of operations.
We are subject to a variety of federal, state and local environmental regulations relating to the use, storage,
discharge, emission and disposal of hazardous substances or other regulated materials, release of pollutants into the
air, soil and water, and the remediation of contaminated sites.
Failure to comply with environmental laws could result in the imposition of fines or penalties, restrictions on
operations by governmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for
alleged personal injury or damages to property or natural resources. Some environmental laws impose strict, and under
some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on
current and prior owners or operators of the sites, as well as those entities that send regulated materials to the sites.
We cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations
and permits. Therefore, our costs of complying with current and future environmental, health and safety laws could
adversely affect our results of operations.
We are subject to all of the risks associated with leasing property subject to long-term non-cancelable leases.
The leases for our restaurant locations (except for certain acquired restaurants which have an underlying lease
term of less than 20 years) generally have initial terms of 20 years, and typically provide for renewal options in five
year increments as well as for rent escalations. Generally, our leases are “net” leases, which require us to pay all of
the costs of insurance, taxes, maintenance and utilities. Additional sites that we lease are likely to be subject to similar
long-term non-cancelable leases. We generally cannot cancel our leases. If an existing or future restaurant is not
profitable, and we decide to close it, we may nonetheless be obligated to perform our monetary obligations under the
applicable lease including, among other things, paying all amounts due for the balance of the lease term. In addition,
as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or any terms
at all, which could cause us to close restaurants in desirable locations.
An increase in food costs could adversely affect our operating results.
Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in
food costs. Changes in the price or availability of certain food products could affect our ability to offer broad menu
and price offerings to guests and could materially adversely affect our profitability and reputation. The type, variety,
quality and price of beef, chicken, produce and cheese can be subject to change and to factors beyond our control,
including weather, governmental regulation, availability and seasonality, each of which may affect our food costs or
cause a disruption in our supply. Our food distributors or suppliers also may be affected by higher costs to produce
and transport commodities used in our restaurants, higher minimum wage and benefit costs and other expenses that
they pass through to their customers, which could result in higher costs for goods and services supplied to us. Although
RSI is able to contract for certain food commodities for periods up to one year, the pricing and availability of some
commodities used in our operations are not locked in for periods of longer than one week or at all. We do not currently
use financial instruments to hedge our risk to market fluctuations in the price of beef, produce and other food products.
We may not be able to anticipate and react to changing food costs through menu price adjustments in the future, which
could negatively impact our results of operations.
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Security breaches of confidential guest information in connection with our electronic processing of credit and debit
card transactions may adversely affect our business.
A significant amount of our restaurant sales are by credit or debit cards. Other restaurants and retailers have
experienced security breaches in which credit and debit card information of their customers was compromised. We
may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out
of the actual or alleged theft of our guests' credit or debit card information. Any such claim or proceeding, or any
adverse publicity resulting from these allegations, may have a material adverse effect on us and our restaurants.
We depend on information technology and any material failure of that technology could impair our ability to
efficiently operate our business.
We rely on information systems across our operations, including, for example, point-of-sale processing in our
restaurants, procurement and payment to other significant suppliers, collection of cash, and payment of other financial
obligations and various other processes and procedures. Our ability to efficiently manage our business depends
significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems
with maintenance, upgrading or transitioning to replacement systems or a breach in security of these systems could
cause delays in customer service and reduce efficiency in our operations. Significant capital investments might be
required to remediate any problems.
Carrols is currently a guarantor under 27 Fiesta Restaurant Group, Inc. ("Fiesta") restaurant property leases and
the primary lessee on five Fiesta restaurant property leases, and any default under such property leases by Fiesta
may result in substantial liabilities to us.
Fiesta, a former wholly-owned subsidiary of the Company, was spun-off in 2012 to the Company's stockholders.
Carrols currently is a guarantor under 27 Fiesta restaurant property leases. The Separation and Distribution Agreement,
which we refer to as the "separation agreement", dated as of April 24, 2012 and entered into in connection with the
spin-off among Carrols, Fiesta and us provides that the parties will cooperate and use their commercially reasonable
efforts to obtain the release of such guarantees. Unless and until any such guarantees are released, Fiesta agrees to
indemnify Carrols for any losses or liabilities or expenses that it may incur arising from or in connection with any such
lease guarantees.
Carrols is currently a primary lessee of five Fiesta restaurants which it subleases to Fiesta. The separation
agreement provides that the parties will cooperate and use their commercially reasonable efforts to cause Fiesta or a
subsidiary of Fiesta to enter into a new master lease or individual leases with the lessor with respect to the Fiesta
restaurants where Carrols is currently a lessee. The separation agreement provides that until such new master lease or
such individual leases are entered into, (i) Carrols will perform its obligations under the master lease for the five Fiesta
restaurants where it is a lessee and (ii) the parties will cooperate and use their commercially reasonable efforts to enter
into with the lessor a non-disturbance agreement or similar agreement which shall provide that Fiesta or one of its
subsidiaries shall become the lessee under such master lease with respect to such Fiesta restaurants and perform Carrols'
obligations under such master lease in the event of a breach or default by Carrols.
Such guarantees may never be released and a new master lease with respect to the five Fiesta properties where
Carrols is the primary lessee may never be entered into by Fiesta. Any losses or liabilities that may arise in connection
such guarantees or the master lease where Carrols is not able to receive indemnification from Fiesta may result in
substantial liabilities to us and could have a material adverse effect on our business.
Risks Related to Our Common Stock
The market price of our common stock may be highly volatile or may decline regardless of our operating
performance.
The trading price of our common stock may fluctuate substantially. The price of our common stock that will
prevail in the market may be higher or lower than the price you pay, depending on many factors, some of which are
beyond our control. Broad market and industry factors may adversely affect the market price of our common stock,
regardless of our actual operating performance. The fluctuations could cause a loss of all or part of an investment in
our common stock. Factors that could cause fluctuation in the trading price of our common stock may include, but are
not limited to the following:
21
• price and volume fluctuations in the overall stock market from time to time;
• significant volatility in the market price and trading volume of companies generally or restaurant companies;
• actual or anticipated variations in the earnings or operating results of our company or our competitors;
• actual or anticipated changes in financial estimates by us or by any securities analysts who might cover our
stock or the stock of other companies in our industry;
• market conditions or trends in our industry and the economy as a whole;
• announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures and
our ability to complete any such transaction;
• announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
• capital commitments;
• changes in accounting principles;
• additions or departures of key personnel;
• sales of our common stock, including sales of large blocks of our common stock or sales by our directors and
officers; and
• events that affect BKC.
In addition, if the market for restaurant company stocks or the stock market in general experiences loss of investor
confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of
operations or financial condition. The trading price of our common stock might also decline in reaction to events that
affect other companies in our industry or related industries even if these events do not directly affect us.
In the past, following periods of volatility in the market price of a company's securities, class action securities
litigation has often been brought against that company. Due to the potential volatility of our stock price, we may
therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and
divert management's attention and resources from our business, and could also require us to make substantial payments
to satisfy judgments or to settle litigation.
The concentrated ownership of our capital stock by insiders will likely limit our stockholders' ability to influence
corporate matters.
Our executive officers, directors and BKC together beneficially own approximately 25.3% of our outstanding
common stock as of March 3, 2017 (assuming conversion of the Series A Preferred Stock). Due to the issuance of
Series A Preferred Stock to BKC in connection with our 2012 acquisition, BKC beneficially owns approximately
20.6% of our common stock as of March 3, 2017 (assuming conversion of the Series A Preferred Stock). Our executive
officers and directors (excluding directors affiliated with BKC) together beneficially own approximately 5.9% of our
common stock outstanding as of March 3, 2017 (excluding conversion of the Series A Preferred Stock). As a result,
our executive officers, directors and BKC, if they act as a group, will be able to significantly influence matters that
require approval by our stockholders, including the election of directors and approval of significant corporate
transactions such as mergers and acquisitions. The directors will have the authority to make decisions affecting our
capital structure, including the issuance of additional debt and the declaration of dividends. BKC may also have interests
that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests.
Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also
have the effect of delaying or preventing a change of control of us that other stockholders may view as beneficial,
could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our
company and might ultimately depress the market price of our common stock.
We do not expect to pay any cash dividends for the foreseeable future, and the indenture governing the Notes and
the senior credit facility limit our ability to pay dividends to our stockholders.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable
future. The absence of a dividend on our common stock may increase the volatility of the market price of our common
22
stock or make it more likely that the market price of our common stock will decrease in the event of adverse economic
conditions or adverse developments affecting our company. Additionally, the indenture governing the Notes and our
senior credit facility limit, and the debt instruments that we may enter into in the future may limit our ability to pay
dividends to our stockholders.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price
of our stock could decline.
The trading market for our common stock will rely in part on the research and reports that industry or financial
analysts publish about us or our business. We cannot assure you that these analysts will publish research or reports
about us or that any analysts that do so will not discontinue publishing research or reports about us in the future. If
one or more analysts who cover us downgrade our stock, our stock price could decline rapidly. If analysts do not
publish reports about us or if one or more analysts cease coverage of our stock, we could lose visibility in the market,
which in turn could cause our stock price to decline.
Provisions in our restated certificate of incorporation and amended and restated bylaws, as amended, or Delaware
law might discourage, delay or prevent a change of control of our company or changes in our management and,
therefore, depress the trading price of our common stock.
Delaware corporate law and our restated certificate of incorporation and amended and restated bylaws, as
amended, contain provisions that could discourage, delay or prevent a change in control of our company or changes
in our management that the stockholders of our company may deem advantageous. These provisions:
• require that special meetings of our stockholders be called only by our board of directors or certain of our
officers, thus prohibiting our stockholders from calling special meetings;
• deny holders of our common stock cumulative voting rights in the election of directors, meaning that
stockholders owning a majority of our outstanding shares of common stock will be able to elect all of our
directors;
• authorize the issuance of “blank check” preferred stock that our board could issue to dilute the voting and
economic rights of our common stock and to discourage a takeover attempt;
• provide that approval of our board of directors or a supermajority of stockholders is necessary to make, alter
or repeal our amended and restated bylaws and that approval of a supermajority of stockholders is necessary
to amend, alter or change certain provisions of our restated certificate of incorporation;
• establish advance notice requirements for stockholder nominations for election to our board or for proposing
matters that can be acted upon by stockholders at stockholder meetings;
• divide our board into three classes of directors, with each class serving a staggered 3-year term, which generally
increases the difficulty of replacing a majority of the directors;
• provide that directors only may be removed for cause by a majority of the board or by a supermajority of our
stockholders; and
• require that any action required or permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any consent in writing.
Risks Related to Our Indebtedness
Our substantial indebtedness could adversely affect our financial condition.
As of January 1, 2017, we had approximately $223.6 million of total indebtedness outstanding consisting of
$200.0 million of Notes, $13.5 million of revolving credit borrowings, $3.0 million of lease financing obligations and
$7.0 million of capital leases and other debt. At January 1, 2017, we had $28.7 million of borrowing availability under
our senior credit facility (after reserving $12.8 million for letters of credit issued under our senior credit facility, which
included amounts for anticipated claims from our renewals of workers' compensation and other insurance policies),
which would effectively rank senior to the Notes. On January 13, 2017, we entered into an amendment to our senior
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credit facility to increase revolving credit borrowings to $73 million (including $20.0 million available for letters of
credit).
As a result of our substantial indebtedness, a significant portion of our operating cash flow will be required to
make payments of interest and principal on our outstanding indebtedness, and we may not generate sufficient cash
flow from operations, or have future borrowings available under our senior credit facility, to enable us to repay our
indebtedness, including the Notes, or to fund other liquidity needs.
Our substantial indebtedness could have important consequences to our stockholders. For example, it could:
• make it more difficult for us to satisfy our obligations with respect to the Notes and our other debt;
•
increase our vulnerability to general adverse economic and industry conditions;
• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness
and related interest, including indebtedness we may incur in the future, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures (including restaurant remodeling obligations under
the operating agreement) and other general corporate purposes;
• restrict our ability to acquire additional restaurants;
•
•
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
increase our cost of borrowing;
• place us at a competitive disadvantage compared to our competitors that may have less debt; and
•
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt
service requirements or general corporate purposes.
We expect to use cash flow from operations and revolving credit borrowings under our senior credit facility to
meet our current and future financial obligations, including funding our operations, debt service, possible future
acquisitions and capital expenditures (including restaurant remodeling). Our ability to make these payments depends
on our future performance, which will be affected by financial, business, economic and other factors, many of which
we cannot control. Our business may not generate sufficient cash flow from operations in the future, which could result
in our being unable to repay indebtedness, or to fund other liquidity needs. If we do not have enough money, we may
be forced to reduce or delay capital expenditures and restaurant acquisitions, sell assets, obtain additional debt or equity
capital or restructure or refinance all or a portion of our debt, including our senior credit facility and the Notes, on or
before maturity. We cannot make any assurances that we will be able to accomplish any of these alternatives on terms
acceptable to us, or at all. In addition, the terms of existing or future indebtedness, including the agreements for our
senior credit facility, may limit our ability to pursue any of these alternatives.
Despite current indebtedness levels and restrictive covenants, we may still be able to incur more debt or make certain
restricted payments, which could further exacerbate the risks described above.
We and our subsidiaries may be able to incur additional debt in the future, including debt that may be secured
on a first lien basis or pari passu with the Notes. Although our senior credit facility and the indenture governing the
Notes contain restrictions on our ability to incur indebtedness, those restrictions are subject to a number of exceptions.
In addition, if we are able to designate some of our restricted subsidiaries under the indenture governing the Notes as
unrestricted subsidiaries, those unrestricted subsidiaries would be permitted to borrow beyond the limitations specified
in the indenture governing the Notes and engage in other activities in which restricted subsidiaries may not engage.
We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover,
although our senior credit facility and the indenture governing the Notes contain restrictions on our ability to make
restricted payments, including the declaration and payment of dividends, we are able to make such restricted payments
under certain circumstances. Adding new debt to current debt levels or making restricted payments could intensify the
related risks that we and our subsidiaries now face.
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The agreements governing our debt agreements restrict our ability to engage in some business and financial
transactions and contain certain other restrictive terms.
Our debt agreements, such as the indenture governing the Notes and our senior credit facility, restrict our ability
in certain circumstances to, among other things:
•
incur additional debt;
• pay dividends and make other distributions on, redeem or repurchase, capital stock;
• make investments or other restricted payments;
• enter into transactions with affiliates;
• engage in sale and leaseback transactions;
• sell all, or substantially all, of our assets;
• create liens on assets to secure debt; or
• effect a consolidation or merger.
These covenants limit our operational flexibility and could prevent us from taking advantage of business
opportunities as they arise, growing our business or competing effectively. In addition, our senior credit facility required
us to maintain specified financial ratios and satisfy other financial tests. At January 1, 2017, we were in compliance
with such covenants under our senior credit facility. Our ability to meet these financial ratios and tests can be affected
by events beyond our control, and we cannot assure you that we will meet these tests.
A breach of any of these covenants or other provisions in our debt agreements could result in an event of default,
which if not cured or waived, could result in such debt becoming immediately due and payable. This, in turn, could
cause our other debt to become due and payable as a result of cross-acceleration provisions contained in the agreements
governing such other debt. In the event that some or all of our debt is accelerated and becomes immediately due and
payable, we may not have the funds to repay, or the ability to refinance, such debt. In addition, in the event that the
Notes become immediately due and payable, the holders of the Notes would not be entitled to receive any payment in
respect of the Notes until all of our senior debt has been paid in full.
We may not have the funds necessary to satisfy all of our obligations under our senior credit facility, the Notes or
other indebtedness in connection with certain change of control events.
Upon the occurrence of specific kinds of change of control events, the indenture governing the Notes requires
us to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest (and additional interest, if any) to the date of repurchase. However, it is possible that we will not have
sufficient funds, or the ability to raise sufficient funds, at the time of the change of control to make the required
repurchase of the Notes. In addition, restrictions under our senior credit facility may not allow us to repurchase the
Notes upon a change of control. If we could not refinance such debt or otherwise obtain a waiver from the holders of
such debt, we would be prohibited from repurchasing the Notes, which would constitute an event of default under the
indenture. Certain important corporate events, such as leveraged recapitalizations that would increase the level of our
indebtedness, would not constitute a “Change of Control” under the indenture.
In addition, our senior credit facility provides that certain change of control events constitute an event of default
under such senior credit facility. Such an event of default entitles the lenders thereunder to, among other things, cause
all outstanding debt obligations under the senior credit facility to become due and payable and to proceed against the
collateral securing such senior credit facility. Any event of default or acceleration of the senior credit facility will likely
also cause a default under the terms of our other indebtedness.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
As of January 1, 2017, we owned 7 and leased 746 Burger King restaurant properties including three restaurants
located in mall shopping centers and 21 co-branded locations. In addition, we owned four and leased seven non-
operating properties as of January 1, 2017, including two properties under construction that will open as new restaurants
in 2017.
We typically enter into leases (including renewal options) ranging from 20 to 40 years. The average remaining
term for all leases, including options, was approximately 22.8 years at January 1, 2017. Generally, we have been able
to renew leases, upon or prior to their expiration, at the prevailing market rates, although there can be no assurance
that this will continue to occur.
Most of our Burger King restaurant leases are coterminous with the related franchise agreements. We believe
that we generally will be able to renew at commercially reasonable rates the leases whose terms expire prior to the
expiration of that location's Burger King franchise agreement, although there can be no assurance that this will occur.
Most leases require us to pay utility and water charges and real estate taxes. Certain leases also require contingent
rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some
of our mall locations, we are also required to pay certain other charges such as a pro rata share of the mall's common
area maintenance costs, insurance and security costs.
In addition to the restaurant locations set forth under Item 1. “Business-Restaurant Locations”, we own a building
with approximately 25,300 square feet at 968 James Street, Syracuse, New York, which houses our executive offices
and most of our administrative operations for our Burger King restaurants. We also lease seven small regional offices
that support the management of our Burger King restaurants and two small administrative offices in Syracuse, NY that
support administrative operations.
ITEM 3. LEGAL PROCEEDINGS
Litigation. We are a party to various litigation matters that arise in the ordinary course of business. We do not
believe that the outcome of any of these matters will have a material adverse effect on our consolidated financial
statements.
26
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The NASDAQ Global Market under the symbol “TAST”. On March 3, 2017, there
were 36,202,380 shares of our common stock outstanding held by 554 holders of record. The number of record holders
was determined from the records of our transfer agent and does not include beneficial owners of our common stock
whose shares are held in the names of various securities brokers, dealers, and registered clearing agencies. The closing
price of our common stock on March 3, 2017 was $14.75.
The following table sets forth the range of high and low closing prices of our common stock for the periods
indicated, as reported by The NASDAQ Global Market:
Year Ended January 1, 2017
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended January 3, 2016
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock Price
Low
High
$
$
14.55
14.62
13.88
15.25
8.80
10.72
13.68
12.67
11.15
11.72
11.77
11.25
7.20
8.17
10.19
11.00
Dividends
We did not pay any cash dividends during the fiscal years 2016 or 2015. We currently intend to continue to retain
all available funds to fund the development and growth of our business and do not anticipate paying any cash dividends
on our common stock in the foreseeable future. In addition, we are a holding company and conduct all of our operations
through our direct and indirect subsidiaries. As a result, for us to pay dividends, we need to rely on dividends or
distributions to us from Carrols and indirectly from subsidiaries of Carrols. The indenture governing the Notes and
our senior credit facility limit, and debt instruments that we and our subsidiaries may enter into in the future may limit,
our ability to pay dividends to our stockholders.
27
Stock Performance Graph
The following graph compares from December 31, 2011 the cumulative total stockholder return on our common
stock over the cumulative total returns of The NASDAQ Composite Index and a peer group, The S&P SmallCap 600
Restaurants Index. We have elected to use the S&P SmallCap 600 Restaurant Index in compiling our stock performance
graph because we believe the S&P SmallCap 600 Restaurant Index represents a comparison to competitors with similar
market capitalization as us. The following graph is based on the closing price of our common stock from December 31,
2011 through December 31, 2016.
* $100 invested on 12/31/2011 in stock or index, including reinvestment of dividends.
Carrols Restaurant Group, Inc. . . . . . . . . $
NASDAQ Composite. . . . . . . . . . . . . . . . $
S&P SmallCap 600 Restaurants. . . . . . . . $
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016
473.20
216.54
210.05
185.56 $ 205.10 $
116.41 $ 165.47 $
121.01 $ 181.84 $
236.75 $
188.69 $
212.16 $
100.00 $
100.00 $
100.00 $
364.28 $
200.32 $
196.37 $
28
ITEM 6. SELECTED FINANCIAL DATA
The information in the following table should be read together with "Financial Statements and Supplementary
Data," and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included
elsewhere in this Annual Report on Form 10-K. Reported amounts below present the historical operating results and
cash flows of Fiesta for periods prior to May 7, 2012 as discontinued operations. On May 30, 2012, we acquired 278
restaurants from BKC. In 2014, we acquired 123 restaurants from other franchisees in five separate transactions and
in 2015, we acquired 55 restaurants from other franchisees in eight separate transactions. During 2016, we acquired
56 restaurants from other franchisees in seven separate transactions.
These historical results are not necessarily indicative of the results to be expected in the future. Our fiscal years
ended December 30, 2012, December 29, 2013, December 28, 2014 and January 1, 2017 each contained 52 weeks.
The fiscal year ended January 3, 2016 contained 53 weeks.
December 30, 2012 December 29, 2013 December 28, 2014
January 3, 2016
January 1, 2017
(In thousands of dollars, except share and per share data)
Year Ended
$
539,608
$
663,483
$
692,755
$
859,004
$
943,583
172,698
169,857
37,883
88,883
22,257
36,085
26,321
977
(717)
554,244
(14,636)
12,764
1,509
(28,909)
(10,093)
(18,816)
(72)
201,532
208,404
47,198
106,508
29,615
37,228
33,594
4,462
17
668,558
(5,075)
18,841
—
(23,916)
(10,397)
(13,519)
209,664
219,718
48,865
113,586
27,961
40,001
36,923
3,541
47
700,306
(7,551)
18,801
—
(26,352)
11,765
(38,117)
—
—
(18,888) $
(13,519) $
(38,117) $
240,322
267,950
58,096
135,874
32,242
50,515
39,845
3,078
(126)
827,796
31,208
18,569
12,635
4
—
4
—
4
$
250,112
297,766
64,814
148,946
41,299
54,956
47,295
2,355
338
907,881
35,702
18,315
—
17,387
(28,085)
45,472
—
45,472
(0.83) $
0.00
$
(0.59) $
— $
(1.23) $
— $
0.00
$
— $
1.01
—
Statements of operations data:
Restaurant sales
Costs and expenses:
Cost of sales
Restaurant wages and related expenses (1)
Restaurant rent expense
Other restaurant operating expenses (1)
Advertising expense
General and administrative (1)(2)
Depreciation and amortization
Impairment and other lease charges
Other expense (income) (3)
Total operating expenses
Income (loss) from operations
Interest expense
Loss on extinguishment of debt
Income (loss) from continuing operations
before income taxes
Provision (benefit) for income taxes
Net income (loss) from continuing operations
Income (loss) from discontinued operations, net
of income taxes
Net income (loss)
Per share data:
Basic and diluted net income (loss) per share:
Continuing operations
Discontinued operations
Weighted average shares used in computing
net income (loss) per share:
$
$
$
Basic
Diluted
22,580,468
22,580,468
22,958,963
22,958,963
30,885,275
30,885,275
34,958,847
44,623,251
35,178,329
44,851,345
29
December 30, 2012 December 29, 2013 December 28, 2014
January 3, 2016
January 1, 2017
(In thousands of dollars, except restaurant weekly sales data)
Year Ended
Other financial data:
Net cash provided from operating activities . . . . $
Total capital expenditures . . . . . . . . . . . . . . . . . .
Net cash used for investing activities . . . . . . . . .
Net cash provided from (used for) financing
activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Data:
Restaurants (at end of period) . . . . . . . . . .
Average number of restaurants. . . . . . . . . .
$
18,207
37,642
65,908
69,301
572
455.6
$
21,581
50,486
50,486
(1,083)
564
563.8
$
14,707
52,010
68,003
66,215
674
581.9
$
70,702
56,848
103,429
33,780
705
662.1
62,288
94,099
96,221
13,661
753
719.5
Average annual sales per restaurant (4) . . .
1,184,286
1,176,806
1,190,505
1,274,372
1,311,516
Adjusted EBITDA (5) . . . . . . . . . . . . . . . .
Adjusted net income (loss) (5) . . . . . . . . . .
Restaurant-Level EBITDA (5) . . . . . . . . . .
Change in comparable restaurant sales (6).
Balance sheet data (at end of period):
24,972
(13,529)
52,415
7.1%
34,271
(10,753)
70,226
1.0%
36,008
(10,408)
72,961
76,737
13,429
124,520
89,505
17,860
140,646
0.6%
7.4%
2.3%
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $
346,256
$
329,481
$
364,573
$
427,256
$
Working capital . . . . . . . . . . . . . . . . . . . . .
7,478
(21,974)
(13,554)
(26,259)
Debt: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and senior subordinated debt . .
Capital leases . . . . . . . . . . . . . . . . . . . .
Lease financing obligations . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . $
Stockholders’ equity. . . . . . . . . . . . . . . . . . $
150,000
10,295
1,197
161,492
90,173
$
$
150,000
9,336
1,200
160,536
77,204
$
$
150,000
8,694
1,202
159,896
106,535
$
$
200,000
8,006
1,203
209,209
107,999
$
$
490,155
(39,231)
213,500
7,039
3,020
223,559
154,656
December 30, 2012 December 29, 2013 December 28, 2014
January 3, 2016
January 1, 2017
(In thousands of dollars, except restaurant weekly sales data)
Year Ended
Reconciliation of EBITDA and Adjusted EBITDA (5):
Net income (loss) from continuing operations
$
Provision (benefit) for income taxes
Interest expense
Depreciation and amortization
EBITDA
Impairment and other lease charges
Acquisition costs (7)
Gain on partial condemnation and fires (8)
Litigation settlement (9)
EEOC litigation and settlement costs
Stock compensation expense
Loss on extinguishment of debt
(18,816) $
(10,093)
(13,519) $
(10,397)
12,764
26,321
10,176
977
6,042
—
—
5,343
925
1,509
18,841
33,594
28,519
4,462
—
—
—
85
1,205
—
(38,117) $
11,765
18,801
36,923
29,372
3,541
1,915
—
—
—
1,180
—
$
4
—
18,569
39,845
58,418
3,078
1,168
—
—
—
1,438
12,635
45,472
(28,085)
18,315
47,295
82,997
2,355
1,853
(1,603)
1,850
—
2,053
—
Adjusted EBITDA
$
24,972
$
34,271
$
36,008
$
76,737
$
89,505
Reconciliation of Restaurant-Level EBITDA (5):
Income (loss) from continuing operations
$
(14,636) $
(5,075) $
(7,551) $
31,208
$
35,702
Add:
Restaurant-level integration costs
General and administrative expenses
Depreciation and amortization
Impairment and other lease charges
Other expense (income) (8) (9)
4,385
36,085
26,321
977
(717)
—
37,228
33,594
4,462
17
—
40,001
36,923
3,541
47
—
50,515
39,845
3,078
(126)
—
54,956
47,295
2,355
338
Restaurant-Level EBITDA
$
52,415
$
70,226
$
72,961
$
124,520
$
140,646
30
Reconciliation of Adjusted net income (loss) (5):
Net income (loss)
Add:
Loss on extinguishment of debt
Impairment and other lease charges
Acquisition costs (7)
Gain on partial condemnation and fires (8)
Litigation settlement (9)
$
(18,816) $
(13,519) $
(38,117) $
4
$
45,472
1,509
977
6,042
—
—
—
4,462
—
—
—
—
3,541
1,915
—
—
12,635
3,078
1,168
—
—
Income tax effect of above adjustments (10)
(3,241)
(1,696)
(2,073)
(6,415)
Deferred income tax valuation allowance
provision (benefit) (11)
Adjusted net income (loss)
Adjusted diluted net earnings (loss) per share
(12)
$
$
—
—
24,326
(13,529) $
(10,753) $
(10,408) $
2,959
13,429
(0.60) $
(0.47) $
(0.34) $
0.30
$
$
—
2,355
1,853
(1,603)
1,850
(1,693)
(30,374)
17,860
0.40
(1) For the year ended December 30, 2012 acquisition and integration expenses were included as follows: $1,800 in restaurant
wages and related expenses, $2,585 in other restaurant operating expenses and $1,657 in general and administrative expenses.
Acquisition expenses of $1,915, $1,168 and $1,853 were included in general and administrative expense for the years ended
December 28, 2014, January 3, 2016 and January 1, 2017, respectively.
(2) General and administrative expenses include stock-based compensation expense for the years ended December 30, 2012,
December 29, 2013, December 28, 2014, January 3, 2016 and January 1, 2017 of $925, $1,205, $1,180, $1,438 and $2,053,
respectively.
(3) In fiscal 2012, we recorded gains of $0.7 million related to property insurance recoveries from fires at two restaurants. In
fiscal 2016, we recorded gains of $1.2 million related to related to property insurance recoveries from fires at two restaurants,
a gain of $0.5 million related to a settlement for a partial condemnation on one of our operating restaurant properties and
expense of $1.85 million related to a litigation settlement.
(4) Average annual sales per restaurant are derived by dividing restaurant sales by the average number of restaurants operating
during the period on a 52-week basis.
(5) EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are non-GAAP financial measures.
EBITDA represents net income or loss from operations, before provision or benefit for income taxes, interest expense and
depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges,
acquisition costs, EEOC litigation and settlement costs, stock compensation expense, loss on extinguishment of debt and other
non-recurring income or expense. Restaurant-Level EBITDA represents income or loss from operations adjusted to exclude
general and administrative expenses, depreciation and amortization, impairment and other lease charges, and other income
or expense. Adjusted net income represents net income or loss adjusted to exclude loss on extinguishment of debt, impairment
and other lease charges, acquisition costs, the related income tax effect of these adjustments and the establishment or reversal
of a valuation allowance on our net deferred income tax assets.
We are presenting Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) because we believe that
they provide a more meaningful comparison than EBITDA and net income or loss of our core business operating results, as
well as with those of other similar companies. Additionally, we present Restaurant-Level EBITDA because it excludes the
impact of general and administrative expenses and other income or expense, which are not directly related to restaurant-level
operations. Management believes that Adjusted EBITDA and Restaurant-Level EBITDA, when viewed with our results of
operations in accordance with GAAP and the accompanying reconciliations, provide useful information about operating
performance and period-over-period growth, and provide additional information that is useful for evaluating the operating
performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted
EBITDA and Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our
ongoing cash earnings, from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are not measures of
financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or
loss, income or loss from operations or cash flow from operating activities as indicators of operating performance or liquidity.
Also, these measures may not be comparable to similarly titled captions of other companies.
EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) have important limitations as
analytical tools. These limitations include the following:
• EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect our capital expenditures, future
requirements for capital expenditures or contractual commitments to purchase capital equipment;
31
• EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the interest expense or the cash
requirements necessary to service principal or interest payments on our debt;
• Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize
will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not
reflect the cash required to fund such replacements; and
• EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) do not reflect the effect of
earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing
operations. However, some of these charges (such as impairment and other lease charges and acquisition and
integration costs) have recurred and may reoccur.
(6) Restaurants are included in comparable restaurant sales after they have been open or owned for 12 months. Comparable
restaurant sales are on a 53-week basis for the year ended January 3, 2016.
(7) Acquisition costs for the periods presented include primarily legal and professional fees incurred in connection with
acquisitions as well as restaurant-level integration costs in 2012.
(8) Includes gains of $1.2 million related to a insurance recoveries from fires at two of our restaurants and a gain of $0.5
million related to a settlement for a partial condemnation on one of our operating restaurant properties.
(9) Includes an expense of $1.85 million from a litigation settlement.
(10) The income tax effect related to all adjustments, other than the deferred income tax valuation allowance provision (benefit),
was calculated using an effective income tax rate of 38%.
(11) Reflects the removal of the income tax provision recorded for the establishment of a valuation allowance on all our net deferred
income tax assets during the years ended December 28, 2014 and January 3, 2016 and the income tax benefit recorded for its
subsequent reversal during the year ended January 1, 2017.
(12) Adjusted diluted net earnings (loss) per share is calculated based on Adjusted net income (loss) and the dilutive weighted
average common shares outstanding for each respective period.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended January 1,
2017 and December 28, 2014 each contained 52 weeks and the fiscal year ended January 3, 2016 contained 53 weeks.
Introduction
We are a holding company and conduct all of our operations through our direct and indirect subsidiaries, Carrols
and Carrols LLC, and have no assets other than the shares of capital stock of Carrols, our direct wholly-owned subsidiary.
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”)
is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read
in conjunction with, our Consolidated Financial Statements and the accompanying consolidated financial statement
footnotes appearing elsewhere in this Annual Report on Form 10-K. The overview provides our perspective on the
individual sections of MD&A, which include the following:
Company Overview—a general description of our business and our key financial measures.
Recent and Future Events Affecting Our Results of Operations—a description of recent events that affect, and
future events that may affect, our results of operations.
Results of Operations—an analysis of our results of operations for the years ended January 1, 2017, January 3,
2016 and December 28, 2014 including a review of the material items and known trends and uncertainties.
Liquidity and Capital Resources—an analysis of historical information regarding our sources of cash and capital
expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion
of cash flow items affecting liquidity.
Application of Critical Accounting Policies—an overview of accounting policies requiring critical judgments
and estimates.
32
Company Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more
than 55 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and
have operated Burger King restaurants since 1976. As of January 1, 2017, our restaurant operations consisted of 753
franchised Burger King restaurants in 16 states.
During the year ended January 1, 2017, we acquired 56 restaurants in seven separate transactions. During the
year ended January 3, 2016, we acquired 55 Burger King restaurants in eight separate transactions and during the year
ended December 28, 2014, we acquired 123 Burger King restaurants in five separate transactions, which we refer to
as the "2015 acquired restaurants" and "2014 acquired restaurants" in periods prior to 2016.
For 2016, we have modified our grouping of restaurants for reporting and analysis purposes. We refer to our
restaurants acquired over the past three years (2014, 2015 and 2016) as our "acquired restaurants". All of our other
restaurants, including restaurants acquired prior to 2014, are referred to as our "legacy restaurants".
The following is an overview of the key financial measures discussed in our results of operations:
• Restaurant sales consist of food and beverage sales at our restaurants, net of discounts and excluding sales
tax collected. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases,
new restaurant development and the closures of restaurants. Restaurants, including restaurants we acquire, are
included in comparable restaurant sales after they have been open or owned for 12 months. For comparative
purposes, where applicable, the calculation of the changes in comparable restaurant sales is based either on a
53-week or 52-week year.
• Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts.
Cost of sales is generally influenced by changes in commodity costs, the mix of items sold and the level of
promotional discounting and the effectiveness of our restaurant-level controls to manage food and paper costs.
• Restaurant wages and related expenses include all restaurant management and hourly productive labor costs
and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are
subject to inflation, including minimum wage increases and increased costs for health insurance, workers’
compensation insurance and federal and state unemployment insurance.
• Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases
and the amortization of favorable and unfavorable leases, reduced by the amortization of deferred gains on
sale-leaseback transactions.
• Other restaurant operating expenses include all other restaurant-level operating costs, the major components
of which are royalty expenses paid to BKC, utilities, repairs and maintenance, real estate taxes and credit card
fees.
• Advertising expense includes advertising payments to BKC based on a percentage of sales as required under
our franchise and operating agreements and additional marketing and promotional expenses in certain of our
markets.
• General and administrative expenses are comprised primarily of salaries and expenses associated with
corporate and administrative functions that support the development and operations of our restaurants, legal,
auditing and other professional fees, acquisition costs and stock-based compensation expense.
• EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss). EBITDA, Adjusted
EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are non-GAAP financial measures.
EBITDA represents net income or loss, before provision or benefit for income taxes, interest expense and
depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and
other lease charges, acquisition costs, loss on extinguishment of debt, stock compensation expense and non-
recurring income or expense. Restaurant-Level EBITDA represents income or loss from operations adjusted
to exclude general and administrative expenses, depreciation and amortization, impairment and other lease
charges and other income or expense. Adjusted net income (loss) represents net income or loss adjusted to
exclude loss on extinguishment of debt, impairment and other lease charges, acquisition costs, non-recurring
income and expense, the related income tax effect of these adjustments and the establishment in 2014 and
33
2015 and reversal in 2016 of a valuation allowance on all of our net deferred income tax assets. Adjusted net
income (loss) also presents the provision or benefit for income taxes as if there was no valuation allowance
on our net deferred income tax assets during all periods presented.
• We are presenting Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) because we
believe that they provide a more meaningful comparison than EBITDA and net income (loss) of our core
business operating results, as well as with those of other similar companies. Additionally, we present Restaurant-
Level EBITDA because it excludes the impact of general and administrative expenses and other income or
expense, which are not directly related to restaurant-level operations. Management believes that Adjusted
EBITDA and Restaurant-Level EBITDA, when viewed with our results of operations in accordance with
GAAP and the accompanying reconciliations on page 42, provide useful information about operating
performance and period-over-period growth, and provide additional information that is useful for evaluating
the operating performance of our core business without regard to potential distortions. Additionally,
management believes that Adjusted EBITDA and Restaurant-Level EBITDA permit investors to gain an
understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments
are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are not
measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as
alternatives to net income or loss, income or loss from operations or cash flow from operating activities as
indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly
titled captions of other companies. For the reconciliation between net income or loss to EBITDA, Adjusted
EBITDA and Adjusted net income or loss and the reconciliation of income or loss from operations to Restaurant-
Level EBITDA, see page 42.
EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) have important
limitations as analytical tools. These limitations include the following:
• EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect our capital expenditures, future
requirements for capital expenditures or contractual commitments to purchase capital equipment;
• EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the interest expense or the cash
requirements necessary to service principal or interest payments on our debt;
• Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and
amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Restaurant-
Level EBITDA do not reflect the cash required to fund such replacements; and
• EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) do not reflect
the effect of earnings or charges resulting from matters that our management does not consider to be
indicative of our ongoing operations. However, some of these charges (such as impairment and other lease
charges and acquisition costs) have recurred and may reoccur.
• Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned
buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights from
our acquisitions of Burger King restaurants and the amortization of franchise fees paid to BKC.
•
•
Impairment and other lease charges are determined through our assessment of the recoverability of property
and equipment and intangible assets by determining whether the carrying value of these assets can be recovered
over their respective remaining lives through undiscounted future operating cash flows. A potential impairment
charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these
assets may not be fully recoverable. Losses on sale-leaseback transactions are recognized when they are
incurred. Lease charges are recorded for our obligations under the related leases for closed locations net of
estimated sublease recoveries.
Interest expense consists primarily of interest expense associated with our $200.0 million of 8% Senior Secured
Second Lien Notes due 2022 (the "8% Notes"), our prior 11.25% Senior Secured Second Lien Notes due 2018
(the "11.25% Notes"), amortization of deferred financing costs and interest on revolving credit borrowings
under our senior credit facility.
34
Recent and Future Events Affecting our Results of Operations
Burger King Restaurant Acquisitions
From the beginning of 2014 through January 1, 2017, we have acquired 234 restaurants from other franchisees
in the following transactions ($ in thousands):
Closing Date
2014 Acquisitions:
April 30, 2014 (1)
June 30, 2014 (1)
July 22, 2014
October 8, 2014 (1)
November 4, 2014
2015 Acquisitions:
March 31, 2015
August 4, 2015
October 1, 2015 (1)
October 20, 2015
November 17, 2015
November 17, 2015 (1)
December 1, 2015 (1)
December 8, 2015
2016 Acquisitions:
February 23, 2016 (1)
May 25, 2016
July 14, 2016 (1)
August 23, 2016
October 4, 2016
November 15, 2016
December 1, 2016
Number of
Restaurants
Purchase
Price
Number of
Fee-Owned
Restaurants
Market Location
4 $
4
681
3,819
Fort Wayne, Indiana
1 Pittsburgh, Pennsylvania
21
30
64
123
4
5
5
1
2
6
23
9
55
8,609
20,330
18,761
52,200
794
663
5,044
709
618
10,945
26,175
7,802
52,750
7,127
12
12,080
6
5,445
4
8,755
7
1,623
3
7,251
17
5,807
7
56
48,088
234 $ 153,038
Rochester, New York and Southern Tier of
Western New York
12 Wilmington and Greenville, North Carolina
Nashville, Tennessee; Indiana and Illinois
13
Northern Vermont
Charlotte, North Carolina
1 Wheeling, West Virginia
Kalamazoo, Michigan
Evansville, Indiana
5 Evansville, Indiana
10 Detroit, Michigan
Northern New Jersey
16
Scranton/Wilkes-Barre, Pennsylvania
5 Detroit, Michigan
3 Detroit, Michigan
6 Portland, Maine
Raleigh, North Carolina
Pittsburgh and Johnstown, Pennsylvania
1 Columbus, Ohio
15
44
(1) Acquisitions resulting from the exercise of our ROFR.
The 2016 acquisitions included 15 fee-owned properties, of which 14 have been subsequently sold in sale-
leaseback transactions in 2016 for net proceeds of $19.1 million. The 2015 acquisitions included 16 fee-owned
properties of which 15 have been subsequently sold in sale-leaseback transactions in 2015 and 2016 for net proceeds
of $22.0 million.
35
The pro forma impact on the results of operations for the 2016 acquisitions is included below. The pro forma
results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been
consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated
operating results. This pro forma financial information does not give effect to any anticipated synergies, operating
efficiencies or cost savings or any transaction costs related to the 2016 acquired restaurants. The following table
summarizes certain pro forma financial information related to our 2016 operating results (a 52-week fiscal year):
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended
January 1, 2017
984,164
40,205
93,219
On February 28, 2017, we acquired 43 Burger King restaurants for a cash purchase price of $20.4 million located
in and around the Cincinnati market.
Capital Expenditures and Remodeling Commitment with BKC
On December 17, 2015, we and BKC entered into the Second Amendment to Operating Agreement (the
"Amendment"), which amended the operating agreement and a subsequent amendment to the operating agreement,
previously entered into between us and BKC in connection with our acquisition of restaurants from BKC in 2012. As
amended, the operating agreement required that we remodel to BKC's current 20/20 image a cumulative total of 455
restaurants by December 31, 2016. In 2016 we remodeled 93 restaurants including rebuilding four locations and
relocating four locations within their trade area. As of December 31, 2016 we had remodeled a total of 461 restaurants
to comply with this requirement. In addition, under a separate agreement we agreed to remodel 46 restaurants acquired
in 2014 over a five year period beginning in 2014 and at January 1, 2017 we had remodeled a total of 28 restaurants
associated with this agreement. At January 1, 2017 we had 547 restaurants with the BKC 20/20 restaurant image, which
included restaurants converted prior to our acquisition.
Under the operating agreement, beginning on January 1, 2016 and until we exceed operating 1,000 Burger King
restaurants, a minimum of 10% of our annual new restaurant growth (including acquisitions) must come from the
development of new Burger King restaurants (which includes restaurants we relocate within their marker area); provided
that for 2016 only, any required new restaurant development may be deferred and opened in 2017.
In 2017, we anticipate that total capital expenditures will range from $55 million to $75 million, although the
actual amount of capital expenditures may differ from these estimates. Capital expenditures in 2017 include remodeling
20 to 25 restaurants to the BKC 20/20 image standard at an approximate average cost of $550,000 per restaurant,
rebuilding 5 to 7 restaurants and the construction of 7 to 15 new restaurants, of which 2 to 3 restaurants will be relocated
within their respective markets, at an average cost of $1,200,000 per restaurant, which excludes the cost of land. Capital
expenditures in 2017 also include approximately $10 million to $12 million for non-recurring investments in new
kitchen production and food holding systems, new restaurant training systems and certain point-of sale equipment
upgrades. We will review on an ongoing basis our future remodel and development plans in relation to our available
capital resources and alternate investment opportunities.
Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and
future operating results of the restaurant in relation to its cash flow and future occupancy costs, and with regard to
franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on
these evaluations.
In 2016, excluding five restaurants relocated within their respective trade areas, we closed seven restaurants
including six restaurants closed on January 1, 2017. We currently anticipate closing 20 to 25 restaurants in 2017,
excluding any restaurants being relocated within their trade area, at the end of their respective lease term.
36
Our determination of whether to close restaurants in the future is subject to further evaluation and may change.
We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their
contractual lease term. We do not believe that the future impact on our results of operations due to restaurant closures
will be material, although there can be no assurance in this regard.
Reversal of Valuation Allowance on Deferred Income Tax Assets
We perform an assessment of positive and negative evidence regarding the realization of our net deferred income
tax assets as required by ASC 740. For the years ended January 3, 2016 and December 28, 2014, we determined that
a valuation allowance was needed for all of our net deferred income tax assets, based on the required weight of positive
and negative evidence under ASC 740, including consideration of our three-year cumulative losses at that time.
During the year ended January 1, 2017, we evaluated both positive and negative evidence to consider the reversal
of the valuation allowance on our net deferred income tax assets and determined in the fourth quarter of fiscal 2016
that there was sufficient positive evidence to conclude that it is more likely than not our deferred income tax assets
are realizable. As a result, in the fourth quarter of 2016 we recorded a $30.4 million income tax benefit to release the
full valuation allowance against our net deferred income tax assets and an income tax provision for all of 2016 of $2.3
million.
As of January 1, 2017, we had federal net operating loss carryforwards of approximately $61.0 million.
Effect of Minimum Wage Increases
Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2017
and in many cases have also approved additional increases for future periods. Most notably, New York State has
increased the minimum wage applicable to our business to $10.75 an hour in 2017 (from $9.75 an hour in 2016) with
subsequent annual increases reaching $15.00 an hour by July 1, 2021. Starting in 2015 we have been receiving New
York State minimum wage tax credits that partially offset these additional labor costs. These tax credits diminish over
the next few years and currently totals approximately $500,000 per year. We had 131 restaurants in New York State
at January 1, 2017. We typically attempt to offset the effects of wage inflation, at least in part, through periodic menu
price increases. However, no assurance can be given that we will be able to offset these wage increases in the future.
Refinancing of Indebtedness and Amendment to Our Senior Credit Facility
On January 13, 2017, we entered into an amendment to our senior credit facility that, among other things, increased
the aggregate maximum revolving credit borrowings by $18.0 million to a total of $73.0 million.
On February 12, 2016, we entered into an amendment to our senior credit facility to increase revolving credit
borrowings by $25 million to $55 million (including $20.0 million available for letters of credit). The amendment also
extended the maturity date of the senior credit facility to February 12, 2021 and reduced by 0.25% the interest rate for
revolving credit borrowings to, at our option, (i) the alternate base rate plus the applicable margin of 1.75% to 2.75%
based on our adjusted leverage ratio, or (ii) the LIBOR rate plus the applicable margin of 2.75% to 3.75% based on
our adjusted leverage ratio (all as defined under the amended credit agreement).
On April 29, 2015, we issued $200 million of 8% Notes and used a portion of the net proceeds to repurchase and
redeem all of our $150 million of outstanding 11.25% Notes tendered pursuant to a cash tender offer and redemption
and to pay related fees and expenses. We received net proceeds of approximately $35.2 million which were used for
working capital and general corporate purposes, capital expenditures to remodel our restaurants and subsequent
restaurant acquisitions.
See "—Liquidity and Capital Resources" for a discussion of the 8% Notes and our senior credit facility, as
amended.
37
Results of Operations
The following table sets forth, for the years ended January 1, 2017, January 3, 2016, and December 28, 2014
selected operating results as a percentage of total restaurant sales:
Costs and expenses (all restaurants):
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurant wages and related expenses . . . . . . . . .
Restaurant rent expense . . . . . . . . . . . . . . . . . . . . .
Other restaurant operating expenses. . . . . . . . . . . .
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . .
Fiscal 2016 compared to Fiscal 2015
January 1, 2017
January 3, 2016
December 28, 2014
Year Ended
26.5%
31.6%
6.9%
15.8%
4.4%
5.8%
28.0%
31.2%
6.8%
15.8%
3.8%
5.9%
30.3%
31.7%
7.1%
16.4%
4.0%
5.8%
In 2016, we acquired 56 restaurants from other franchisees and closed seven restaurants, excluding five restaurants
closed for relocation within their trade area.
Restaurant Sales. Total restaurant sales in 2016 increased 9.8% to $943.6 million from $859.0 million in 2015.
Comparable restaurant sales increased 2.3% due to an increase in average check of 2.6% and offset by a decrease in
customer traffic of 0.3%. Comparable restaurant sales in 2015 (on a 53-week basis) increased 7.4%. The effect of
menu price increases in 2016 was approximately 2.4%. Comparable restaurant sales in 2016 increased 2.3% at both
our legacy restaurants and acquired restaurants (primarily our 2014 acquisitions). Sales from the acquired restaurants
were $243.1 million in 2016. The extra week in 2015 contributed restaurant sales of $16.0 million.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales unless otherwise
noted). Cost of sales decreased to 26.5% in 2016 from 28.0% in 2015 due primarily to lower commodity costs (1.1%),
which included a 14.0% decrease in beef prices compared to the prior year, the effect of menu price increases (0.7%)
and the continued improvement in restaurant-level food and cash controls at our acquired restaurants, partially offset
by higher promotional discounting.
Restaurant wages and related expenses increased to 31.6% in 2016 from 31.2% in 2015 due primarily to higher
hourly labor rates partially offset by lower restaurant-level incentive bonus accruals (0.2%).
Restaurant rent expense increased slightly to 6.9% in 2016 from 6.8% in 2015 due to lower amortization of
deferred gains on sale-leaseback transactions.
Other restaurant operating expenses were 15.8% in both 2016 and 2015.
Advertising expense increased to 4.4% in 2016 from 3.8% in 2015 due primarily to the expiration of advertising
credits at the end of 2015 that were associated with 2012 BKC restaurant equipment initiatives and an increase in local
advertising in certain of our markets.
Restaurant-Level EBITDA. As a result of the factors above and the acquisition of 111 restaurants since the
beginning of 2015, Restaurant-Level EBITDA increased 13% to $140.6 million in 2016 compared to $124.5 million
in 2015. The extra week in 2015 contributed an additional $4.4 million in Restaurant-Level EBITDA. For a
reconciliation between income (loss) from operations to Restaurant-Level EBITDA see page 42.
38
Restaurant Sales:
Legacy restaurants
Acquired restaurants
Total
Restaurant-Level EBITDA and Margin:
Legacy restaurants
Acquired restaurants
Total
$
$
$
$
January 1, 2017
Year ended
% (1)
January 3, 2016
% (1)
(in thousands of dollars)
700,532
243,051
943,583
$
$
701,454
157,550
859,004
111,189
29,457
140,646
15.9% $
12.1%
14.9% $
107,093
17,427
124,520
15.3%
11.1%
14.5%
(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for each respective group of restaurants.
Restaurant-Level EBITDA margin increased by 0.6% at our legacy restaurants due primarily to lower beef prices,
a 2.3% increase in comparable restaurant sales, lower utility costs and lower restaurant bonuses partially offset by
higher advertising costs as discussed above.
Restaurant-Level EBITDA margin for our acquired restaurants increased 1.0% due to similar factors and also
from a comparable restaurant sales increase of 2.3% (primarily our 2014 acquisitions), higher vendor rebates and
continued improvement in food and cash controls. Restaurant-Level EBITDA margin for our acquired restaurants is
lower than our legacy restaurants due to the effect of lower average restaurant sales volumes on fixed operating expenses,
including fixed labor costs, rent and utility costs.
General and Administrative Expenses. General and administrative expenses increased $4.4 million in 2016 to
$55.0 million however, as a percentage of total restaurant sales, decreased to 5.8% in 2016 from 5.9% in 2015. The
increase in total general and administrative expenses was due primarily to additional field management and restaurant
manager training costs related to the 2016 and 2015 acquisitions, higher acquisition costs of $0.7 million and an increase
in stock-based compensation expense of $0.6 million partially offset by a decrease in administrative bonuses of $1.8
million.
Adjusted EBITDA. As a result of the factors above Adjusted EBITDA increased 16.6% to $89.5 million in 2016
from $76.7 million in 2015. For a reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see
page 42.
Depreciation and Amortization. Depreciation and amortization expense increased to $47.3 million in 2016 from
$39.8 million in 2015 due primarily to our ongoing restaurant remodeling initiatives and our acquisition of restaurants
in 2015 and 2016.
Impairment and Other Lease Charges. Impairment and other lease charges were $2.4 million in 2016 and included
$0.9 million of capital expenditures at previously impaired restaurants, $0.2 million related to initial impairment
charges for four underperforming restaurants and non-cash losses of $1.2 million associated with the sale-leaseback
of seven restaurant properties.
Interest Expense. Interest expense decreased to $18.3 million in 2016 from $18.6 million in 2015 due to our
refinancing in the second quarter of 2015 discussed above. The weighted average interest rate on our long-term debt,
excluding lease financing obligations, was 7.9% in 2016 compared to 8.9% in 2015.
Income Taxes. As discussed above we reversed the valuation allowance on all of our net deferred income tax
assets in 2016 resulting in a tax benefit of $30.4 million. Excluding the valuation allowance reversal, we recorded a
provision for income taxes in 2016 of $2.3 million. The 2016 effective tax rate of 13.2%, exclusive of the valuation
allowance reversal, is lower than the statutory tax rate primarily due to employment tax credits.
39
Net Income. As a result of the above, net income was $45.5 million in 2016, or $1.01 per diluted share, compared
to net income of $4,000 in 2015, or $0.00 per diluted share.
Fiscal 2015 Compared to Fiscal 2014
In 2015, we acquired 55 restaurants from other franchisees, closed 23 restaurants and sold one restaurant.
Restaurant Sales. Total restaurant sales in 2015 increased 24.0% to $859.0 million from $692.8 million in 2014.
Comparable restaurant sales (on a 53-week basis) increased 7.4% due to an increase in average check of 3.5% and
increase in customer traffic of 3.9%. The effect of menu price increases in 2015 was approximately 2.9%. Comparable
restaurant sales (on a 53-week basis) increased 6.6% at our legacy restaurants and increased 8.5% at our 2012 acquired
restaurants. Sales from the restaurants we acquired in 2014 and 2015 were $157.6 million in 2015. The extra week in
2015 contributed restaurant sales of $16.0 million.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales unless otherwise
noted). Cost of sales decreased to 28.0% in 2015 from 30.3% in 2014 due primarily to lower commodity costs (1.5%),
which included a 9.4% decrease in beef prices compared to the prior year, the continued improvement in restaurant-
level food and cash controls at our acquired restaurants (0.4%) and the effect of menu price increases.
Restaurant wages and related expenses decreased to 31.2% in 2015 from 31.7% in 2014 due to leveraging fixed
labor costs from higher sales volumes and lower workers compensation claims (0.2%), partially offset by higher
restaurant-level incentive bonus accruals.
Restaurant rent expense decreased to 6.8% in 2015 from 7.1% in 2014 due in part to the closure of 36 restaurants
with lower sales volumes since the beginning of 2014 and the effect of higher sales volumes on fixed rental costs.
Other restaurant operating expenses decreased to 15.8% in 2015 from 16.4% in 2014 due primarily to lower
utility costs (0.3%), lower general liability insurance claims and the effect of higher sales volumes on fixed operating
costs.
Advertising expense decreased to 3.8% in 2015 from 4.0% in 2014 due primarily to reduced spending for additional
local advertising in many of our markets.
Restaurant-Level EBITDA. As a result of the factors above, the acquisition of 178 restaurants in 2014 and 2015
and an additional $4.4 million of restaurant EBITDA in the extra week before general and administrative costs of $0.4
million, Restaurant-Level EBITDA increased to $124.5 million in 2015 from $73.0 million in 2014. For a reconciliation
between income (loss) from operations to Restaurant-Level EBITDA see page 42.
Restaurant Sales:
Legacy restaurants
2012 acquired restaurants
2014 and 2015 acquired restaurants
Total
Restaurant-Level EBITDA and Margin:
Legacy restaurants
2012 acquired restaurants
2014 and 2015 acquired restaurants
Total
$
$
$
$
January 3, 2016
Year ended
% (1)
December 28, 2014 % (1)
(in thousands of dollars)
392,754
308,700
157,550
859,004
$
$
367,828
290,945
33,982
692,755
65,509
41,584
17,427
124,520
16.7% $
13.5%
11.1%
14.5% $
48,701
22,022
2,238
72,961
13.2%
7.6%
6.6%
10.5%
(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for each respective group of restaurants.
40
Restaurant-Level EBITDA margin increased by 3.5% at our legacy restaurants due to lower commodity costs,
lower utility costs and leveraging fixed operating costs from a 6.6% increase in comparable restaurant sales in 2015.
Restaurant-Level EBITDA margin increased 5.9% at our 2012 acquired restaurants due to similar factors as
our legacy restaurants including leveraging higher sales volumes from a comparable restaurant sales increase of
8.5% in 2015, as well as the closure of 24 underperforming restaurants acquired in 2012 since the beginning of
2014 and the continued improvement in food and cash controls.
Restaurant-Level EBITDA margin for our 2014 and 2015 acquired restaurants was 11.1% in 2015 and was
higher than in 2014 due primarily to similar factors as our other restaurants including leveraging higher sales
volumes from a comparable restaurant sales increase in 2015 of 5.9% for the 2014 acquired restaurants and
continued improvement in food and cash controls.
General and Administrative Expenses. General and administrative expenses increased $10.5 million in 2015 to
$50.5 million and, as a percentage of total restaurant sales, increased to 5.9% in 2015 from 5.8% in 2014 due to an
increase in administrative bonuses of $6.7 million and incremental field management and training costs associated
with the 2014 and 2015 acquired restaurants.
Adjusted EBITDA. As a result of the factors above Adjusted EBITDA more than doubled to $76.7 million in 2015
from $36.0 million in 2014. For a reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see
page 42.
Depreciation and Amortization. Depreciation and amortization expense increased to $39.8 million in 2015 from
$36.9 million in 2014 due primarily our restaurant remodeling initiatives and the restaurants acquired in 2014 and
2015.
Impairment and Other Lease Charges. Impairment and other lease charges were $3.1 million in 2015 and were
comprised of $1.6 million of estimated future rent payments and other lease related charges due to the closure
of underperforming restaurants, $0.2 million of initial impairment charges associated with two underperforming
restaurants and $1.3 million of impairment charges associated with capital expenditures at previously impaired
restaurants.
Interest Expense. Interest expense decreased to $18.6 million in 2015 from $18.8 million in 2014 due to our
refinancing in the second quarter of 2015. The weighted average interest rate on our long-term debt, excluding lease
financing obligations, was 8.9% in 2015 compared to 11.2% in 2014.
Income Taxes. Due to the valuation allowance established in 2014 on all of our deferred income tax assets as
discussed above, we did not record any income tax expense in 2015.
Loss on Extinguishment of Debt. A loss on extinguishment of debt of $12.6 million was recorded in the second
quarter of 2015 in connection with the refinancing of our 11.25% Notes. The loss on extinguishment of debt included
the tender and redemption premium and other transaction costs associated with the repurchase and redemption of the
11.25% Notes of approximately $9.8 million and the write-off of $2.8 million of previously deferred financing costs
related to the 11.25% Notes.
Net Income (Loss). As a result of the above, net income was $4,000 in 2015, or $0.00 per diluted share, compared
to a net loss of $38.1 million in 2014, or $1.23 per diluted share.
41
Reconciliations of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted net income (loss) and income
(loss) from operations to Restaurant-Level EBITDA for the years ended January 1, 2017, January 3, 2016, and
December 28, 2014 are as follows (in thousands):
January 1, 2017
Year Ended
January 3, 2016
December 28, 2014
Reconciliation of EBITDA and Adjusted EBITDA:
Net income (loss)
Provision (benefit) for income taxes
Interest expense
Depreciation and amortization
EBITDA
Impairment and other lease charges
Acquisition costs (1)
Gains on partial condemnation and fires (2)
Litigation settlement (3)
Stock compensation expense
Loss on extinguishment of debt
Adjusted EBITDA
Reconciliation of Restaurant-Level EBITDA:
Income (loss) from operations
Add:
General and administrative expenses
Depreciation and amortization
Impairment and other lease charges
Other expense (income)
Restaurant-Level EBITDA
Reconciliation of Adjusted net income (loss):
Net income (loss)
Add:
Loss on extinguishment of debt
Impairment and other lease charges
Acquisition costs (1)
Gains on partial condemnation and fires (2)
Litigation settlement (3)
Income tax effect on above adjustments (4)
Deferred income tax valuation allowance provision
(benefit) (5)
Adjusted net income (loss)
Adjusted diluted net earnings (loss) per share (6)
$
$
$
$
$
$
$
45,472 $
(28,085)
18,315
47,295
82,997
2,355
1,853
(1,603)
1,850
2,053
—
89,505 $
4 $
—
18,569
39,845
58,418
3,078
1,168
—
—
1,438
12,635
76,737 $
(38,117)
11,765
18,801
36,923
29,372
3,541
1,915
—
—
1,180
—
36,008
35,702 $
31,208 $
(7,551)
54,956
47,295
2,355
338
140,646 $
50,515
39,845
3,078
(126)
124,520 $
40,001
36,923
3,541
47
72,961
45,472 $
4 $
(38,117)
—
2,355
1,853
(1,603)
1,850
(1,693)
12,635
3,078
1,168
—
—
(6,415)
(30,374)
17,860 $
0.40 $
2,959
13,429 $
0.30 $
—
3,541
1,915
—
—
(2,073)
24,326
(10,408)
(0.34)
(1) Acquisition costs for the periods presented include primarily legal and professional fees incurred in connection with restaurant
acquisitions, which were included in general and administrative expense.
(2) Includes gains of $1.2 million related to insurance recoveries from fires at two of our restaurants and a gain of $0.5
million related to a settlement for a partial condemnation on one of our operating restaurant properties.
(3) Includes an expense of $1.85 million from a litigation settlement.
42
(4) The income tax effect related to all adjustments, other than the deferred income tax valuation allowance provision (benefit),
was calculated using an effective income tax rate of 38%.
(5) Reflects the removal of the income tax provision recorded for the establishment of a valuation allowance on all our net deferred
income tax assets during the years ended December 28, 2014 and January 3, 2016 and the income tax benefit recorded for its
subsequent reversal during the year ended January 1, 2017.
(6) Adjusted diluted net earnings (loss) per share is calculated based on Adjusted net income (loss) and the diluted weighted
average common shares outstanding for the respective periods.
Liquidity and Capital Resources
We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in
purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:
•
•
•
restaurant operations are primarily conducted on a cash basis;
rapid turnover results in a limited investment in inventories; and
cash from sales is usually received before related liabilities for food, supplies and payroll become due.
On January 13, 2017, we entered into an amendment to our senior credit facility to, among other things, increase
the aggregate maximum revolving credit borrowings by $18.0 million to a total of $73.0 million.
Interest payments under our debt obligations, capital expenditures, including our remodeling and new restaurant
development initiatives in 2017, payments of royalties and advertising to BKC and payments related to our lease
obligations represent significant liquidity requirements for us as well as any discretionary expenditures for the
acquisition of additional Burger King restaurants. We believe cash generated from our operations and availability of
revolving credit borrowings under our amended senior credit facility will provide sufficient cash availability to cover
our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.
Operating activities. Net cash provided from operating activities for the years ended January 1, 2017, January 3,
2016 and December 28, 2014 was $62.3 million, $70.7 million and $14.7 million, respectively. Net cash provided by
operating activities in 2016 decreased by $8.4 million compared to 2015 due primarily to a decrease in cash from the
changes in the components of working capital of $20.3 million partially offset by an increase in Adjusted EBITDA of
$12.8 million.
Net cash provided from operating activities in 2015 increased by $56.0 million compared to 2014 due primarily
to an increase in net income of $38.1 million and $15.1 million in cash provided from the changes in the components
of working capital, due in part from higher incentive bonus accruals at January 3, 2016.
Investing activities. Net cash used for investing activities from continuing operations for the years ended January 1,
2017, January 3, 2016 and December 28, 2014 was $96.2 million, $103.4 million and $68.0 million, respectively.
As discussed above, in 2016, we acquired 56 restaurants in seven transactions for a total cash purchase price of
$48.1 million. In 2015, we acquired 55 restaurants in eight transactions for total cash purchase price of $52.8 million
and in 2014 we acquired 123 restaurants in five transactions for total cash purchase price of $52.2 million.
Capital expenditures are a large component of our investing activities and include: (1) new restaurant
development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation
or rebuilding of the interior and exterior of our existing restaurants in connection with franchise agreement renewals;
(3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment
and enhancement of our restaurants, and from time to time, to support BKC’s initiatives; and (4) corporate and restaurant
information systems, including expenditures for our point-of-sale software for restaurants that we acquire.
43
The following table sets forth our capital expenditures for the periods presented (dollar amounts in thousands):
Year Ended January 1, 2017:
New restaurant development
Restaurant remodeling
Other restaurant capital expenditures
Corporate and restaurant information systems
Total capital expenditures
Number of new restaurant openings including relocations
Year Ended January 3, 2016:
New restaurant development
Restaurant remodeling
Other restaurant capital expenditures
Corporate and restaurant information systems
Total capital expenditures
Number of new restaurant openings including relocations
Year Ended December 28, 2014:
New restaurant development
Restaurant remodeling
Other restaurant capital expenditures
Corporate and restaurant information systems
Total capital expenditures
Number of new restaurant openings including relocations
$
$
$
$
$
$
8,228
65,767
15,168
4,936
94,099
4
574
41,582
10,772
3,920
56,848
—
1,696
38,197
6,720
5,397
52,010
1
Investing activities also included sale-leaseback transactions related to our restaurant properties, primarily related
to fee-owned properties acquired in restaurant acquisitions, the net proceeds from which were $53.6 million in 2016,
$9.1 million in 2015 and $19.6 million in 2014. The net proceeds from these sales were used to fund our remodeling
initiatives and other cash requirements or to reduce outstanding borrowings under our senior credit facility.
We also had expenditures related to the purchase of restaurant properties to be sold in sale-leaseback transactions
of $9.0 million in 2016, $3.5 million in 2015 and $3.4 million in 2014.
Investing activities in 2014 also included the release of $20.0 million of restricted cash that was previously required
as collateral for our obligations under our senior credit facility.
Financing activities. Net cash provided from financing activities for the year ended January 1, 2017 was $13.7
million and due primarily to net revolving credit borrowings of $13.5 million in 2016.
Net cash provided from financing activities for the year ended January 3, 2016 was $33.8 million due primarily
to the refinancing in 2015.
Net cash provided from financing activities for the year ended December 28, 2014 was $66.2 million due primarily
from a public offering of our common stock which generated net cash proceeds of $67.3 million.
8% Senior Secured Second Lien Notes. The 8% Notes mature and are payable on May 1, 2022. Interest is payable
semi-annually on May 1 and November 1 commencing November 1, 2015. The 8% Notes are guaranteed jointly and
severally by our subsidiaries and are secured by second-priority liens on substantially all of our and our subsidiaries'
assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).
The 8% Notes are redeemable at our option in whole or in part at any time after May 1, 2018 at a price of 104%
of the principal amount plus accrued and unpaid interest, if any, if redeemed before May 1, 2019, 102% of the principal
amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2019 but before May 1, 2020 and 100% of
the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2020. Prior to May 1, 2018,
we may redeem some or all of the 8% Notes at a redemption price of 100% of the principal amount of each 8% Note
plus accrued and unpaid interest, if any, and a make-whole premium. In addition, the indenture governing the 8% Notes
also provides that we may redeem up to 35% of the 8% Notes using the proceeds of certain equity offerings completed
before May 1, 2018.
44
The 8% Notes are jointly and severally guaranteed, unconditionally and in full by our subsidiaries which are
directly or indirectly 100% owned by us. Separate condensed consolidating information is not included because Carrols
Restaurant Group is a holding company that has no independent assets or operations. There are no significant restrictions
on our ability or any of the guarantor subsidiaries' ability to obtain funds from its respective subsidiaries. All
consolidated amounts in our financial statements are representative of the combined guarantors.
The indenture governing the 8% Notes includes certain covenants, including limitations and restrictions on
our and our subsidiaries who are guarantors under such indenture to, among other things: incur indebtedness or issue
preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other
restricted payments or investments; sell assets; agree to payment restrictions affecting certain subsidiaries; enter into
transaction with affiliates; or merge, consolidate or sell substantially all of our assets. We were in compliance as of
January 1, 2017 with the restrictive covenants of the indenture governing the 8% Notes.
The indenture governing the 8% Notes and the security agreement provide that any capital stock and equity
interests of any of our subsidiaries will be excluded from the collateral to the extent that the par value, book value or
market value of such capital stock or equity interests exceeds 20% of the aggregate principal amount of the 8% Notes
then outstanding.
The indenture governing the 8% Notes contains customary default provisions, including without limitation, a
cross default provision pursuant to which it is an event of default under the 8% Notes and the indenture governing the
8% Notes if there is a default under any of our indebtedness having an outstanding principal amount of $20.0 million
or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to
pay principal when due.
Senior Credit Facility. On May 30, 2012, we entered into a senior credit facility, which was amended on January
13, 2017 to provide for aggregate revolving credit borrowings of up to $73.0 million (including $20.0 million available
for letters of credit). The amended senior credit facility also provides for potential incremental borrowing increases
of up to $25.0 million, in the aggregate, and will mature on February 12, 2021.
At January 1, 2017 there were revolving credit borrowings outstanding of $13.5 million and $12.8 million of
letters of credit issued under the amended senior credit facility. After reserving for outstanding revolving credit
borrowings and issued letters of credit at January 12, 2017, $42.4 million was available for revolving credit borrowings
under the amended senior credit facility.
Borrowings under the amended senior credit facility bear interest at a rate per annum, at our option, based on
(all terms as defined in our amended senior credit facility):
(i) the Alternate Base Rate plus the applicable margin of 1.75% to 2.75% based on the our Adjusted Leverage
Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 2.75% to 3.75% based on the our Adjusted Leverage Ratio.
At January 1, 2017, our Alternate Base Rate margin was 1.75% and our LIBOR Rate margin was 2.75% based
on our Adjusted Leverage Ratio.
On December 19, 2014, we entered into the first amendment to the senior credit facility which provided for the
release of $20.0 million of cash collateral, originally deposited on May 30, 2012 in an account with the Administrative
Agent.
Our obligations under the amended senior credit facility are guaranteed by our subsidiaries and are secured by
first priority liens on substantially all of our assets and those of our subsidiaries, including a pledge of all of the capital
stock and equity interests of our subsidiaries.
Under the amended senior credit facility, we are required to make mandatory prepayments of borrowings in the
event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain
exceptions).
The amended senior credit facility contains certain covenants, including without limitation, those limiting our
and our subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses,
change the character of its business in all material respects, engage in transactions with related parties, make certain
45
investments, make certain restricted payments or pay dividends. In addition, the amended senior credit facility requires
us to meet certain financial ratios, including a Fixed Charge Coverage Ratio, Adjusted Leverage Ratio and First Lien
Leverage Ratio (all as defined under the amended senior credit facility). We were in compliance with the covenants
under our senior credit facility at January 1, 2017.
The amended senior credit facility contains customary default provisions, including that the lenders may terminate
their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due
and payable upon the occurrence and during the continuance of customary defaults which include, without limitation,
payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon
the occurrence of a change of control.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of January 1, 2017 (in
thousands):
Contractual Obligations
Long-term debt obligations, including interest (1)
Capital lease obligations, including interest (2)
Operating lease obligations (3)
Lease financing obligations, including interest (4)
Total
Less than
1 Year
Payments due by period
1 – 3
Years
$ 304,563 $ 16,743 $ 33,485 $ 46,335 $ 208,000
338
615,545
4,883
1,659
117,274
439
8,205
917,699
5,973
4,141
122,141
435
2,067
62,739
216
More than
5 Years
3 – 5
Years
Total contractual obligations
$1,236,440 $ 81,765 $160,202 $ 165,707 $ 828,766
(1) Our long term debt at January 1, 2017 included $200.0 million of 8% Notes and $13.5 million of revolving credit borrowings.
Total interest payments on our Notes of $88.0 million for all years presented are included at the coupon rate of 8%. Interest
payments on our outstanding revolving credit borrowings are variable in nature and have been calculated using an assumed
interest rate of 5.5% for each year (See Item 7A. Quantitative and Qualitative Disclosures about Market Risks - Interest
Rate Risks).
(2) Includes total interest of $1.2 million for all years presented.
(3) Represents the aggregate minimum lease payments under operating leases. Many of our leases also require contingent rent
based on a percentage of sales in addition to the minimum base rent and require expenses incidental to the use of the
property all of which have been excluded from this table.
(4) Includes total interest of $3.0 million for all years presented.
We have not included obligations under our postretirement medical benefit plans in the contractual obligations
table as our postretirement plan is not required to be funded in advance, but is funded as retiree medical claims are
paid. Also excluded from the contractual obligations table are payments we may make for workers' compensation,
general liability and employee healthcare claims for which we pay all claims, subject to annual stop-loss limitations
both for individual claims and claims in the aggregate. The majority of our recorded liabilities related to self-insured
employee health and insurance plans represent estimated reserves for incurred claims that have yet to be filed or settled.
The total of these liabilities was $7.5 million at January 1, 2017.
Future restaurant remodeling obligations to BKC have also been excluded from the table above as well as
contractual obligations related to royalties and advertising payable to BKC.
Long-Term Debt Obligations. Refer to Note 8 of our consolidated financial statements for details of our long-
term debt.
Lease Guarantees. Fiesta Restaurant Group, Inc. ("Fiesta"), our former wholly-owned subsidiary, was spun-off
in 2012 to our stockholders. As of January 1, 2017, we are a guarantor under 27 Fiesta restaurant property leases, with
lease terms expiring on various dates through 2030, and we are the primary lessee on five Fiesta restaurant property
leases, which we sublease to Fiesta. We are fully liable for all obligations under the terms of the leases in the event
that Fiesta fails to pay any sums due under the lease, subject to indemnification provisions of the separation and
distribution agreement entered into in connection with the spin-off.
46
The maximum potential liability for future rental payments we could be required to make under these leases at
January 1, 2017 was $25.2 million. The obligations under these leases will generally continue to decrease over time
as these operating leases expire. No payments have been made to date and none are expected to be required to be made
in the future. We have not recorded a liability for those guarantees in accordance with ASC 460 - Guarantees as Fiesta
has indemnified us for all such obligations and we did not believe it was probable we would be required to perform
under any of the guarantees or direct obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant
properties and not recorded on our consolidated balance sheet.
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and
paper costs, labor and other operating expenses, the cost of providing medical and prescription drug insurance to our
employees and energy costs. Wages paid in our restaurants are impacted by changes in the Federal and state hourly
minimum wage rates and the Fair Labor Standards Act. Accordingly, changes in the Federal and state hourly minimum
wage rates directly affect our labor costs. We typically attempt to offset the effect of inflation, at least in part, through
periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will
be able to offset such inflationary cost increases in the future.
Application of Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting
principles generally accepted in the United States of America. Preparing consolidated financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These
estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies
are described in the “Significant Accounting Policies” footnote in the notes to our consolidated financial statements.
Critical accounting estimates are those that require application of management’s most difficult, subjective or complex
judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.
Sales recognition at our restaurants is straightforward as customers pay for products at the time of sale and
inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within
30 days. The earnings reporting process is covered by our system of internal controls and generally does not require
significant management estimates and judgments. However, critical accounting estimates and judgments, as noted
below, are inherent in the assessment and recording of the fair market values of acquired restaurant assets and liabilities,
insurance liabilities, the valuation of deferred income tax assets, assessing impairment of long-lived assets and lease
accounting matters. While we apply our judgment based on assumptions believed to be reasonable under the
circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would
be reported using different assumptions.
Acquisition Accounting. We account for business combinations under the acquisition method of accounting in
accordance with ASC 805, "Business Combinations" ("ASC 805"). As required by ASC 805, assets acquired and
liabilities assumed in a business combination are recorded at their respective fair values as of the business combination
date. The most difficult estimations of individual fair values are those involving long-lived assets, such as property,
equipment, favorable and unfavorable leases and intangible assets. We use available information to make these fair
value determinations and, when necessary, engage an independent valuation specialist to assist in the fair value
determination of favorable or unfavorable leases and intangible assets.
Insurance Liabilities. The amount of liability we record for claims related to insurance requires us to make
judgments about the amount of expenses that will ultimately be incurred. We are insured for certain losses related to
workers’ compensation, general liability and medical insurance claims under policies where we pay all claims, subject
to annual stop-loss insurance limitations both for individual claims and claims in the aggregate. We record insurance
liabilities based on historical trends, which are continually monitored, and adjust accruals as warranted by changing
circumstances. Since there are estimates and assumptions inherent in recording these insurance liabilities, including
the ability to estimate the future development of incurred claims based on historical claims experience and loss reserves,
47
current claim data, and the severity of the claims, differences between actual future events and prior estimates and
assumptions could result in adjustments to these liabilities. As of January 1, 2017, we had $7.5 million accrued for
these insurance claims.
Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property
and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the
related long-lived assets to their respective carrying values. In determining future cash flows, significant estimates are
made by us with respect to future operating results of each restaurant over its remaining lease term, including sales
trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the
impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value.
This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell the
related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in
the future, we may be required to record impairment charges for these assets.
Lease Accounting. Judgments made by management for our lease obligations include the length of the lease term,
which includes the determination of renewal options that are reasonably assured. The lease term can affect the
classification of a lease as capital or operating for accounting purposes, the term over which related leasehold
improvements for each restaurant are amortized, and any rent holidays and/or changes in rental amounts for recognizing
rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation,
amortization and rent expense than would be reported if different assumed lease terms were used.
We also must evaluate sales of our restaurants which occur in sale-leaseback transactions to determine the proper
accounting for the proceeds of such sales either as a sale or a financing. This evaluation requires certain judgments in
determining whether clauses in the lease or any related agreements constitute continuing involvement. For those sale-
leasebacks that are accounted for as financing transactions, we must estimate our incremental borrowing rate, or another
rate in cases where the incremental borrowing rate is not appropriate to utilize, for purposes of determining interest
expense and the resulting amortization of the lease financing obligation. Changes in the determination of the incremental
borrowing rates or other rates utilized in connection with the accounting for lease financing transactions could have a
significant effect on the interest expense and underlying balance of the lease financing obligations.
Valuation of Deferred Income Tax Assets. We perform an assessment of positive and negative evidence regarding
the realization of our net deferred income tax assets as required by ASC 740. Under ASC 740, the weight given to
negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC
740 also prescribes that objective historical evidence be given greater weight than subjective evidence, including our
forecasts of future taxable income, which include assumptions that cannot be objectively verified. Based on our
evaluation of positive evidence in 2016 we reversed the valuation allowance established in 2014 and 2015 on all of
our net deferred income tax assets. We will continue to monitor and evaluate the positive and negative evidence
considered in arriving at the above conclusion, in order to assess whether such conclusion remains appropriate in future
periods.
We must also make estimates of certain items that relate to current and deferred tax liabilities. These estimates
include employer tax credits for items such as the Work Opportunity Tax Credit, as well as estimates of tax depreciation
based on methods anticipated to be used on our tax returns. These estimates are made based on the best available
information at the time of the estimate and historical experience.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risk associated with fluctuations in interest rates, primarily limited to our senior credit
facility. At January 1, 2017, there were outstanding revolving credit borrowings of $13.5 million under our senior
credit facility. A 1% change in interest rates would have resulted in a nominal change to interest expense for the year
ended January 1, 2017.
Borrowings under the senior credit facility bear interest at a rate per annum, at our option, based on (all terms as
defined in our amended senior credit facility):
48
(i) the Alternate Base Rate plus the applicable margin of 1.75% to 2.75% based on our Adjusted Leverage Ratio,
or
(ii) the LIBOR Rate plus the applicable margin of 2.75% to 3.75% based on our Adjusted Leverage Ratio.
At January 1, 2017 our Alternate Base Rate margin was 1.75% and our LIBOR Rate margin was 2.75%.
Commodity Price Risk
We are exposed to market price fluctuations in beef and other food product prices caused by weather, market
conditions and other factors which are not considered predictable or within our control. Given the historical volatility
of beef and other food product prices, this exposure can impact our food and beverage costs. Although many of the
products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements
have been negotiated in advance to minimize price volatility. Where possible, these types of purchasing techniques to
control costs are used as an alternative to using financial instruments to hedge commodity prices. In many cases, we
believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature
by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level
operating margins.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of Carrols Restaurant Group, Inc. required by this Item are
described in Item 15 of this Annual Report on Form 10-K and are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act), designed
to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as
other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of January 1, 2017.
Changes in Internal Control over Financial Reporting. No changes occurred in our internal control over financial
reporting during the fourth quarter of 2016 that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our senior management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act), designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules and forms.
49
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management has evaluated the effectiveness of its internal control over financial reporting as of January 1, 2017
based on the criteria set forth in a report entitled Internal Control-Integrated Framework (2013), issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have
concluded that, as of January 1, 2017, our internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the
effectiveness of our internal control over financial reporting and their report is included herein.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Carrols Restaurant Group, Inc.
Syracuse, New York
We have audited the internal control over financial reporting of Carrols Restaurant Group, Inc. and subsidiary (the
"Company") as of January 1, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected
by the company's board of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of January 1, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and consolidated financial statement schedule as of and for
the year ended January 1, 2017 of the Company and our report dated March 7, 2017 expressed an unqualified
opinion on those consolidated financial statements and consolidated financial statement schedule.
/s/ Deloitte & Touche LLP
Rochester, New York
March 7, 2017
51
ITEM 9B. OTHER INFORMATION
None.
52
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2017 Annual
Meeting of Stockholders.
We have adopted a written code of ethics applicable to our directors, officers and employees in accordance with
the rules of The NASDAQ Stock Market and the SEC. We make our code of ethics available free of charge through
our internet website, www.carrols.com. We will disclose on our website amendments to or waivers from our code of
ethics in accordance with all applicable laws and regulations.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2017 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2017 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2017 Annual
Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2017 Annual
Meeting of Stockholders.
53
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) (1) Financial Statements - Carrols Restaurant Group, Inc. and Subsidiary
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a) (2) Financial Statement Schedule
Schedule Description
II
Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F- 1
F- 2
F- 3
F- 4
F- 5
F- 7
Page
F- 32
Schedules other than those listed are omitted for the reason that they are not required, not applicable, or the
required information is shown in the financial statements or notes thereto.
(a) (3) Exhibits
Exhibit
Number Description
EXHIBIT INDEX
2.1
3.1
3.2
3.3
3.4
4.1
4.2
4.3
Asset Purchase Agreement, dated as of March 26, 2012, among Carrols Restaurant Group, Inc., Carrols
LLC and Burger King Corporation (incorporated by reference to Exhibit 2.1 to Carrols Restaurant
Group, Inc.'s Current Report on Form 8-K filed on March 28, 2012)
Form of Restated Certificate of Incorporation of Carrols Restaurant Group, Inc. (incorporated by
reference to Exhibit 3.1 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as
amended (Registration No. 333-137524))
Form of Amended and Restated Bylaws of Carrols Restaurant Group, Inc. (incorporated by reference to
Exhibit 3.2 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as amended
(Registration No. 333-137524)
Amendment to Carrols Restaurant Group, Inc. Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on
January 6, 2012)
Carrols Restaurant Group, Inc. Certificate of Designation of Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 3.1 to Carrols Restaurant Group, Inc.'s Current Report on Form
8-K filed on June 1, 2012)
Form of Registration Agreement by and among Carrols Restaurant Group, Inc., Atlantic Restaurants,
Inc., Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners II, L.P., Alan Vituli,
Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to Exhibit 10.24 to Carrols
Corporation's 1996 Annual Report on Form 10-K)
Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to Carrols
Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 10, 2012)
Form of Registration Rights Agreement between Carrols Restaurant Group Inc. and Burger King
Corporation (incorporated by reference to Exhibit 4.2 to Carrols Restaurant Group, Inc.'s Current
Report on Form 8-K filed on March 28, 2012)
54
Exhibit
Number Description
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Indenture governing the 11.25% Senior Secured Second Lien Notes due 2018, dated as of May 30,
2012, between Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New
York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Carrols
Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012)
Form of 11.25% Senior Secured Second Lien Note due 2018 (incorporated by reference to Exhibit 4.4)
Registration Rights Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the
guarantors named therein and Wells Fargo Securities, LLC (incorporated by reference to Exhibit 4.3 to
Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012)
Supplemental Indenture, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the
guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.4 to Carrols Restaurant Group, Inc.'s Quarterly Report on Form
10-Q filed on May 6, 2015)
Indenture governing the 8% Senior Secured Second Lien Notes due 2022, dated as of April 29,
2015, among Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New
York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Carrols
Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015)
Form of 8% Senior Secured Second Lien Notes due 2022 (incorporated by reference to Exhibit 4.8)
Registration Rights Agreement, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the
guarantors named therein and Wells Fargo Securities, LLC (incorporated by reference to Exhibit 4.3 to
Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015)
Carrols Corporation Retirement Savings Plan dated April 1, 1999 (incorporated by reference to Exhibit
10.29 to Carrols Corporation's 1999 Annual Report on Form 10-K) †
Carrols Corporation Retirement Savings plan July 1, 2002 Restatement (incorporated by reference to
Exhibit 10.29 to Carrols Corporation's September 29, 2002 Quarterly Report on Form 10-Q) †
Addendum incorporating EGTRRA Compliance Amendment to Carrols Corporation Retirement
Savings Plan dated September 12, 2002 (incorporated by reference to Exhibit 10.30 to Carrols
Corporation's September 29, 2002 Quarterly Report on Form 10-Q) †
First Amendment, dated as of January 1, 2004, to Carrols Corporation Retirement Savings Plan
(incorporated by reference to Exhibit 10.35 to Carrols Corporation's December 31, 2003 Annual Report
on Form 10-K) †
2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.27 to Carrols Restaurant Group
Inc.'s Registration Statement on Form S-1, as amended (Registration No. 333-137524)) †
Amendment to Carrols Restaurant Group, Inc. 2006 Stock Incentive Plan, dated as of March 24, 2010
(incorporated by reference to Appendix A of Carrols Restaurant Group, Inc.'s Definitive Proxy
Statement filed on April 28, 2011) †
Amendment to Carrols Restaurant Group, Inc. 2006 Stock Incentive Plan, dated as of April 11, 2011
(incorporated by reference to Appendix A of Carrols Restaurant Group, Inc.'s Definitive Proxy
Statement filed on April 28, 2011) †
2016 Stock Incentive Plan (incorporated by reference to Appendix A to Carrols Restaurant Group,
Inc.'s Definitive Proxy Statement on Schedule 14A filed on April 29, 2016) †
Form of Change of Control/Severance Agreement (incorporated by reference to Exhibit 10.1 to Carrols
Restaurant Group Inc.'s Current Report on Form 8-K filed on June 7, 2013) †
Form of Change of Control and Severance Agreement (incorporated by reference to Exhibit 10.2 to
Carrols Restaurant Group Inc.'s Current Report on Form 8-K filed on June 7, 2013) †
Form of Agreement, by and among Carrols Restaurant Group, Inc., Madison Dearborn Capital
Partners, L.P., Madison Dearborn Capital Partners, II, L.P., BIB Holdings (Bermuda) Ltd., Alan Vituli,
Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to Exhibit 10.31 to Carrols
Restaurant Group Inc.'s Registration Statement on Form S-1, as amended (Registration No.
333-137524))
55
Exhibit
Number Description
10.12
10.13
10.14
Form of Amendment No. 1 to Registration Agreement, by and among Carrols Restaurant Group, Inc.,
Madison Dearborn Capital Partners, L.P., Madison Dearborn Capital Partners, II, L.P., BIB Holdings
(Bermuda) Ltd., Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman (incorporated by reference to
Exhibit 10.32 to Carrols Restaurant Group Inc.'s Registration Statement on Form S-1, as amended
(Registration No. 333-137524))
Employment Agreement dated as of December 22, 2011 among Carrols Restaurant Group, Inc., Carrols
LLC and Daniel T. Accordino (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group,
Inc.'s Current Report on Form 8-K filed on December 27, 2011) †
First Amendment to Employment Agreement, dated as of September 6, 2013, among Carrols
Restaurant Group, Inc., Carrols LLC and Daniel T. Accordino (incorporated by reference to Exhibit
10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on September 11, 2013) †
10.16
10.17
10.18
10.15 Amended and Restated Carrols Corporation and Subsidiaries Deferred Compensation Plan dated
December 1, 2008 (incorporated by reference to Exhibit 10.23 to Carrols Restaurant Group's and
Carrols Corporation's 2008 Annual Report on Form 10-K) †
Separation and Distribution Agreement dated as of April 24, 2012 among Carrols Restaurant Group,
Inc., Carrols Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to
Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012)
Tax Matters Agreement dated as of April 24, 2012 among Carrols Restaurant Group, Inc., Carrols
Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to Exhibit 10.2
to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012)
Employee Matters Agreement dated as of April 24, 2012 among Carrols Restaurant Group, Inc.,
Carrols Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to
Exhibit 10.3 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012)
Transition Services Agreement dated as of April 24, 2012 among Carrols Restaurant Group, Inc.,
Carrols Corporation, Carrols LLC and Fiesta Restaurant Group, Inc. (incorporated by reference to
Exhibit 10.4 to Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on April 26, 2012)
Second Lien Security Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc.,
the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as collateral
agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Current Report on
Form 8-K filed on June 1, 2012)
First Lien Security Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the
guarantors named therein, and Wells Fargo Bank, National Association, as administrative agent
(incorporated by reference to Exhibit 10.2 to Carrols Restaurant Group, Inc.'s Current Report on Form
8-K filed on June 1, 2012)
10.21
10.19
10.20
10.22 Amendment No. 1 to Asset Purchase Agreement, dated as of May 30, 2012, among Carrols Restaurant
Group, Inc., Carrols LLC and Burger King Corporation (incorporated by reference to Exhibit 10.3 to
Carrols Restaurant Group, Inc.'s Current Report on Form 8-K filed on June 1, 2012)
10.23 Operating Agreement, dated as of May 30, 2012, between Carrols LLC and Burger King Corporation
10.24
10.25
10.26
(incorporated by reference to Exhibit 10.4 to Carrols Restaurant Group, Inc.'s Current Report on Form
8-K filed on June 1, 2012)
Credit Agreement, dated as of May 30, 2012, between Carrols Restaurant Group, Inc., the guarantors
named therein, the lenders named therein and Wells Fargo Bank, National Association, as
administrative agent (incorporated by reference to Exhibit 10.6 to Carrols Restaurant Group, Inc.'s
Current Report on Form 8-K filed on June 1, 2012)
First Amendment to Credit Agreement dated as of December 19, 2014 among Carrols Restaurant
Group, Inc., the guarantors named therein, the lenders named therein and Wells Fargo Bank, National
Association, as administrative agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant
Group, Inc.'s Current Report on Form 8-K filed on December 22, 2014)
First Amendment to Operating Agreement dated as of January 26, 2015, between Carrols LLC and
Burger King Corporation (incorporated by reference to Exhibit 10.25 to Carrols Restaurant Group,
Inc.'s Annual Report on Form 10-K filed on March 4, 2015)
56
Exhibit
Number Description
10.27
10.28
10.29
10.30
10.31
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Second Lien Security Agreement, dated as of April 29, 2015, among Carrols Restaurant Group, Inc.,
the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as collateral
agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant Group, Inc.'s Quarterly Report
on Form 10-Q filed on May 6, 2015)
Second Amendment to Credit Agreement and First Amendment to Security Agreement, dated as of
April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein, the lenders named
therein and Wells Fargo Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2
to Carrols Restaurant Group, Inc.'s Quarterly Report on Form 10-Q filed on May 6, 2015)
Third Amendment to Credit Agreement dated as of February 12, 2016 among Carrols Restaurant
Group, Inc., the guarantors named therein, the lenders named therein and Wells Fargo Bank, National
Association, as administrative agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant
Group, Inc.'s Current Report on Form 8-K filed on February 17, 2016)
Second Amendment to Operating Agreement dated as of December 17, 2015 between Carrols LLC and
Burger King Corporation # (incorporated by reference to Exhibit 10.29 to Carrols Restaurant Group,
Inc.'s Annual Report on Form 10-K filed on March 9, 2016)
Fourth Amendment to Credit Agreement dated as of January 13, 2017 among Carrols Restaurant
Group, Inc., the guarantors named therein, the lenders named therein and Wells Fargo Bank, National
Association, as administrative agent (incorporated by reference to Exhibit 10.1 to Carrols Restaurant
Group, Inc.'s Current Report on Form 8-K filed on January 20, 2017)
Carrols Restaurant Group, Inc. and Carrols Corporation Code of Ethics (incorporated by reference to
Exhibit 14.1 to Carrols Restaurant Group Inc.’s and Carrols Corporation’s 2006 Annual Report on
Form 10-K)
List of Subsidiaries #
Consent of Deloitte & Touche LLP #
Chief Executive Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for
Carrols Restaurant Group, Inc.#
Chief Financial Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for
Carrols Restaurant Group, Inc.#
Chief Executive Officer's Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.#
Chief Financial Officer's Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.#
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
#
†
Filed herewith.
Compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Carrols Restaurant Group, Inc.
Syracuse, New York
We have audited the accompanying consolidated balance sheets of Carrols Restaurant Group, Inc. and subsidiary
(the "Company") as of January 1, 2017 and January 3, 2016, and the related consolidated statements of
comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years in the
period ended January 1, 2017. Our audits also included the consolidated financial statement schedule listed in the
Index at Item 15(a)2. These consolidated financial statements and consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated
financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position
of the Company as of January 1, 2017 and January 3, 2016, and the results of their operations and their cash flows
for each of the three years in the period ended January 1, 2017, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of January 1, 2017, based on the criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 7, 2017 expressed an unqualified opinion
on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Rochester, New York
March 7, 2017
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 1, 2017 AND JANUARY 3, 2016
(In thousands of dollars, except share and per share amounts)
January 1, 2017
January 3, 2016
Current assets:
ASSETS
Cash
Trade and other receivables
Inventories
Prepaid rent
Prepaid expenses and other current assets
Refundable income taxes
Total current assets
Property and equipment, net (Note 3)
Franchise rights, net (Note 4)
Goodwill (Note 4)
Franchise agreements, at cost less accumulated amortization of $9,734 and $8,471, respectively
Favorable leases, net (Note 4)
Deferred income taxes (Note 10)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt (Note 8)
Accounts payable
Accrued interest
Accrued payroll, related taxes and benefits
Accrued real estate taxes
Other liabilities
Total current liabilities
Long-term debt, net of current portion and deferred financing costs (Note 8)
Lease financing obligations
Deferred income—sale-leaseback of real estate (Note 7)
Accrued postretirement benefits (Note 17)
Unfavorable leases, net (Note 4)
Other liabilities (Note 6)
Total liabilities
Commitments and contingencies (Note 14)
Stockholders’ equity (Note 12):
Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—100
shares
Voting common stock, par value $.01; authorized—100,000,000 shares, issued—35,835,800
and 35,508,660 shares, respectively, and outstanding—35,258,579 and 35,039,890 shares,
respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss (Note 17)
Treasury stock, at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
$
$
$
2,002
7,623
7,761
4,665
7,465
153
29,669
247,847
134,153
22,869
19,591
5,441
28,841
1,744
490,155
1,616
22,445
2,676
26,029
5,202
10,932
68,900
215,108
2,938
12,271
4,566
11,686
20,030
335,499
22,274
6,161
7,126
4,168
5,266
—
44,995
220,114
118,881
20,438
15,467
5,652
—
1,709
427,256
1,435
20,436
2,672
27,582
5,117
14,012
71,254
202,042
1,193
12,589
3,060
12,004
17,115
319,257
—
—
353
141,133
14,514
(1,203)
(141)
154,656
490,155
$
350
139,083
(30,958)
(335)
(141)
107,999
427,256
The accompanying notes are an integral part of these consolidated financial statements.
F- 2
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars, except share and per share amounts)
January 1,
2017
January 3,
2016
December 28,
2014
943,583
$
859,004
$
692,755
240,322
267,950
58,096
135,874
32,242
50,515
39,845
3,078
(126)
827,796
31,208
18,569
12,635
4
—
4
0.00
209,664
219,718
48,865
113,586
27,961
40,001
36,923
3,541
47
700,306
(7,551)
18,801
—
(26,352)
11,765
(38,117)
(1.23)
30,885,275
30,885,275
(38,117)
(1,059)
(39,176)
$
$
$
$
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurant wages and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurant rent expense (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other restaurant operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative (including stock-based compensation expense of
$2,053, $1,438, and $1,180, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment and other lease charges (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income) (Notes 9 and 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250,112
297,766
64,814
148,946
41,299
54,956
47,295
2,355
338
907,881
35,702
18,315
—
17,387
(28,085)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic and diluted net income (loss) per share (Note 13):. . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shares used in computing net income (loss) per share:
45,472
1.01
$
$
Basic weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted average common shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . .
35,178,329
44,851,345
34,958,847
44,623,251
Other comprehensive income (loss), net of tax:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Change in postretirement benefit obligations, net of tax (Note 17) . . . . . . . . . . . . . . .
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
45,472
(868)
44,604
$
$
4
22
26
The accompanying notes are an integral part of these consolidated financial statements.
F- 3
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars, except share and per share amounts)
Common Stock
Preferred
Shares
Amount
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Total
(Accumulated Comprehensive
Treasury
Stockholders'
Deficit)
Income (Loss)
Stock
Equity
Balance at December 29,
2013
Stock-based compensation
23,048,334
—
$
230
—
$
— $
—
69,258
1,180
$
$
7,155
—
$
702
—
(141) $
—
77,204
1,180
Vesting of non-vested shares
and excess tax benefits
278,906
Issuance of common stock
(Note 12)
Net loss
Change in postretirement
benefit obligations (Note
17)
Balance at December 28,
2014
Stock-based compensation
11,500,000
—
—
34,827,240
—
Vesting of non-vested shares
and excess tax benefits
Net income
212,650
—
Change in postretirement
benefit obligations (Note
17)
—
Balance at January 3, 2016
35,039,890
Stock-based compensation
—
Vesting of non-vested shares
and excess tax benefits
Net income
Change in postretirement
benefit obligations, net of
tax benefit of $541 (Note
17)
218,689
—
3
115
—
—
348
—
2
—
—
350
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3)
—
67,212
—
—
(38,117)
—
—
—
—
—
(1,059)
—
—
—
—
—
67,327
(38,117)
(1,059)
137,647
1,438
(30,962)
—
(357)
—
(141)
—
106,535
1,438
(2)
—
—
139,083
2,053
(3)
—
—
—
4
—
—
—
22
—
—
—
—
4
22
(30,958)
(335)
(141)
107,999
—
—
45,472
—
—
—
—
—
—
2,053
—
45,472
—
(868)
—
(868)
—
—
Balance at January 1, 2017
35,258,579
$
353
$
— $ 141,133
$
14,514
$
(1,203) $
(141) $
154,656
The accompanying notes are an integral part of these consolidated financial statements.
F- 4
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars)
Cash flows provided from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income (loss) to net cash provided from operating activities: . . .
45,472
$
4
$
(38,117)
January 1,
2017
January 3,
2016
December
28, 2014
Loss (gain) on disposals of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment and other lease charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred gains from sale-leaseback transactions . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other operating assets and liabilities:
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll, related taxes and benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided from operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows used for investing activities:
Capital expenditures: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New restaurant development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurant remodeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other restaurant capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and restaurant information systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of restaurants, net of cash acquired (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from insurance recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in restricted cash balance (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties purchased for sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale-leaseback transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(549)
2,053
2,355
47,295
791
(1,788)
(28,085)
—
(153)
(1,462)
1,686
4
(1,553)
(3,778)
62,288
(8,228)
(65,767)
(15,168)
(4,936)
(94,099)
(48,088)
1,413
—
—
(9,046)
53,599
364
1,438
3,078
39,845
874
(2,535)
—
12,635
2,416
(2,127)
2,054
502
10,261
1,893
70,702
(574)
(41,582)
(10,772)
(3,920)
(56,848)
(52,750)
—
534
—
(3,513)
9,148
537
1,180
3,541
36,923
1,007
(1,793)
11,548
—
177
(1,094)
2,194
30
(700)
(726)
14,707
(1,696)
(38,197)
(6,720)
(5,397)
(52,010)
(52,200)
—
54
20,000
(3,412)
19,565
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(96,221)
(103,429)
(68,003)
Cash flows provided from financing activities:
Proceeds from issuance of 8% senior secured second lien notes . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of 11.25% senior secured second lien notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under senior credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments under senior credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing costs associated with issuance of debt and lease financing obligations . . . . . . . . . . .
Proceeds from public stock offering, net of expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
200,000
(159,771)
129,000
(115,500)
(1,480)
1,816
(175)
—
13,661
(20,272)
22,274
—
—
(1,280)
—
(5,169)
—
33,780
1,053
21,221
—
—
59,000
(59,000)
(1,050)
—
(62)
67,327
66,215
12,919
8,302
Cash, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,002
$
22,274
$
21,221
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars)
January 1,
2017
January 3,
2016
December
28, 2014
Supplemental disclosures: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest paid on lease financing obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accruals for capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes paid (refunded), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital lease obligations acquired or incurred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-cash reduction of capital lease assets and obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,415
105
4,032
153
583
$
$
$
$
$
— $
17,088
104
3,779
$
$
$
(2,416) $
615
$
— $
17,659
103
4,683
(41)
1,459
1,055
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
1. Basis of Presentation
Business Description. At January 1, 2017 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated,
as franchisee, 753 restaurants under the trade name “Burger King®” in 16 Northeastern, Midwestern and Southeastern
states.
Basis of Consolidation. Carrols Restaurant Group is a holding company and conducts all of its operations through
its wholly-owned subsidiary, Carrols Corporation (“Carrols”) and Carrols' wholly-owned subsidiary, Carrols LLC, a
Delaware limited liability company. The consolidated financial statements presented herein include the accounts of
Carrols Restaurant Group and its wholly-owned subsidiary Carrols.
Unless the context otherwise requires, Carrols Restaurant Group, Carrols and Carrols LLC are collectively referred
to as the “Company.” All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The
fiscal years ended January 1, 2017 and December 28, 2014 each contained 52 weeks and the fiscal year ended January 3,
2016 contained 53 weeks.
Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates
of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, the
evaluation for impairment of goodwill, long-lived assets and franchise rights, lease accounting matters, the valuation
of assets and liabilities acquired and the valuation of deferred income tax assets. Actual results could differ from those
estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Inventories. Inventories, primarily consisting of food and paper, are stated at the lower of cost or market.
Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve
its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed
in service. Property and equipment is recorded at cost. Repair and maintenance activities are expensed as incurred.
Depreciation and amortization is provided using the straight-line method over the following estimated useful
lives:
Owned buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets subject to capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shorter of useful life or lease term
9 to 30 years
3 to 7 years
3 to 7 years
Leasehold improvements are depreciated over the shorter of their estimated useful lives or the underlying lease
term. In circumstances where an economic penalty would be presumed by the non-exercise of one or more renewal
options under the lease, the Company includes those renewal option periods when determining the lease term. For
significant leasehold improvements made during the latter part of the lease term, the Company amortizes those
improvements over the shorter of their useful life or the expected lease term. The expected lease term would consider
the exercise of renewal options if the value of the improvements would imply that an economic penalty would be
incurred without the renewal of the option. Building costs incurred for new restaurants on leased land are depreciated
over the lease term, which is generally a period of twenty years.
F- 7
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Business Combinations. In accordance with ASC 805, the Company allocates the purchase price of an acquired
business to its net identifiable assets and liabilities based on the estimated fair values. The excess of the purchase price
over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The Company uses all available
information to estimate fair values of identifiable intangible assets and property acquired. In making these
determinations, the Company may engage an independent third party valuation specialist to assist with the valuation
of certain leasehold improvements, franchise rights and favorable and unfavorable leases.
The Company estimates that the seller's carrying value of acquired restaurant equipment, subject to certain
adjustments, and restaurant equipment subject to capital leases is equivalent to fair value of this equipment at the date
of the acquisitions. The fair values of assumed franchise agreements are valued as if the remaining term of the agreement
is at the market rate. The fair values of acquired land, buildings and certain leasehold improvements are determined
using both the cost approach and market approach. The fair value of the favorable and unfavorable leases acquired,
as well as the fair value of land, buildings and leasehold improvements acquired, is measured using significant inputs
observable in the open market. The Company categorizes all such inputs as Level 2 inputs under ASC 820. The fair
value of acquired franchise rights is determined using the income approach.
On May 30, 2012, the Company acquired 278 Burger King restaurants from Burger King Corporation ("BKC"),
including BKC's assignment of its right of first refusal on franchise restaurant transfers in 20 states as follows:
Connecticut (except Hartford county), Delaware, Indiana, Kentucky, Maine, Maryland, Massachusetts (except for
Middlesex, Norfolk and Suffolk counties), Michigan, New Hampshire, New Jersey, New York (except for Bronx,
Kings, Nassau, New York, Queens, Richmond, Suffolk and Westchester counties), North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina, Vermont, Virginia, Washington DC and West Virginia, (the "ROFR") pursuant to an
operating agreement with BKC dated May 30, 2012, and as amended on January 26, 2015 and December 17, 2015.
Franchise Rights. For its restaurant acquisitions prior to 2002, the Company generally allocated to franchise
rights, an intangible asset, the excess of purchase price and related costs over the value assigned to the net tangible
and intangible assets acquired. For acquisitions subsequent to 2002, the Company determined the fair value of franchise
rights based upon the acquired restaurants' future earnings, discounting those earnings using an appropriate market
discount rate and subtracting a contributory charge for net working capital, property and equipment and assembled
workforce to determine the fair value attributable to these franchise rights. Amounts allocated to franchise rights for
each acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise
agreements plus one twenty-year renewal period.
Franchise Agreements. Fees for initial franchises and renewals are amortized using the straight-line method over
the term of the agreement, which is generally twenty years.
Goodwill. Goodwill represents the excess of purchase price over the value assigned to the net tangible and
identifiable intangible assets of businesses acquired. Goodwill is not amortized but is tested for impairment at least
annually as of the fiscal year end.
Favorable and Unfavorable Leases. Favorable and unfavorable leases are due to the terms of acquired operating
lease contracts being favorable or unfavorable relative to market terms of comparable leases on the acquisition date.
Favorable and unfavorable leases are amortized as a component of rent expense on a straight-line basis over the
remaining lease terms at the time of the acquisition.
Impairment of Long-Lived Assets. The Company assesses the recoverability of property and equipment, franchise
rights and other intangible assets by determining whether the carrying value of these assets can be recovered over their
respective remaining useful lives through undiscounted future operating cash flows. Impairment is reviewed whenever
events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
Deferred Financing Costs. Financing costs incurred in obtaining long-term debt and lease financing obligations
are capitalized and amortized over the life of the related obligation as interest expense using the effective interest
F- 8
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
method. Long-term debt on the consolidated balance sheet is presented net of the unamortized amount of the financing
costs related to long-term borrowings.
Leases. All leases are reviewed for capital or operating classification at their inception. The majority of the
Company’s leases are operating leases. Many of the lease agreements contain rent holidays, rent escalation clauses
and/or contingent rent provisions. Rent expense for leases that contain scheduled rent increases is recognized on a
straight-line basis over the lease term, including any option periods included in the determination of the lease term.
Contingent rentals are generally based upon a percentage of sales or a percentage of sales in excess of stipulated
amounts and are generally not considered minimum rent payments but are recognized as rent expense when incurred.
Lease Financing Obligations. Lease financing obligations pertain to real estate sale-leaseback transactions
accounted for under the financing method. The assets (land and building) subject to these obligations remain on the
Company’s consolidated balance sheet at their historical costs and such assets (excluding land) continue to be
depreciated over their remaining useful lives. The proceeds received by the Company from these transactions are
recorded as lease financing obligations and the lease payments are applied as payments of principal and interest. The
selection of the interest rate on lease financing obligations is evaluated at inception of the lease based on the Company’s
incremental borrowing rate adjusted to the rate required to prevent recognition of a non-cash loss or negative
amortization of the obligation through the end of the primary lease term.
Revenue Recognition. Revenues from Company restaurants are recognized when payment is tendered at the time
of sale, net of sales discounts and excluding sales tax collected.
Income Taxes. Deferred income tax assets and liabilities are based on the difference between the financial statement
and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when those
differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities
during the period including any changes in valuation allowances. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation
allowance is established when it is necessary to reduce deferred tax assets to an amount for which realization is likely.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
Company and its subsidiary file a consolidated federal income tax return.
Advertising Costs. All advertising costs are expensed as incurred.
Cost of Sales. The Company includes the cost of food, beverage and paper, net of any vendor discounts and
rebates, in cost of sales.
Pre-opening Costs. The Company’s pre-opening costs are expensed as incurred and generally include payroll
costs associated with the opening of a new restaurant, rent and promotional costs.
Insurance. The Company is self-insured for workers’ compensation, general liability and medical insurance
claims under policies where it pays all claims, subject to stop-loss limitations both for individual claims and in certain
cases claims in the aggregate. Losses are accrued based upon the Company’s estimates of the aggregate liability for
claims based on Company experience and other methods used to measure such estimates. The Company does not
discount any of its self-insurance obligations.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining
fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for
the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities;
and Level 3 inputs are unobservable and reflect our own assumptions. Financial instruments include cash, trade and
other receivables, accounts payable and long-term debt. The carrying amounts of cash, trade and other receivables and
F- 9
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
accounts payable approximate fair value because of the short-term nature of these financial instruments. The fair value
of the Carrols Restaurant Group 8.0% Senior Secured Second Lien Notes due 2022 is based on a recent trading value,
which is considered Level 2, and at January 1, 2017 and January 3, 2016 was approximately $216.5 million and $212.0
million, respectively.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment
analysis of long-lived assets, goodwill and intangible assets. Long-lived assets and definite-lived intangible assets are
measured at fair value on a nonrecurring basis using Level 3 inputs. As described in Note 5, the Company recorded
long-lived asset impairment charges of $1.0 million, $1.5 million and $2.6 million during the years ended January 1,
2017, January 3, 2016 and December 28, 2014, respectively.
Stock-Based Compensation. The Company has an incentive stock plan under which incentive stock options, non-
qualified stock options and non-vested shares may be granted to employees and non-employee directors. On an annual
basis, the Company has granted non-vested shares under this plan. Non-vested shares granted to corporate employees
generally vest on a straight-line basis over three or four years and non-vested shares granted to non-employee directors
generally vest on a straight-line basis over three to five years.
For non-vested stock awards, the fair market value of the award, determined based upon the closing value of the
Company’s stock price on the grant date, is recorded to compensation expense on a straight-line basis over the requisite
service period. See Note 11 to the consolidated financial statements.
Gift cards. The Company sells gift cards in its restaurants that are issued under BKC's gift card program. Proceeds
from the sale of Burger King gift cards at the Company’s restaurants are received by BKC. The Company recognizes
revenue from gift cards upon redemption by the customer.
Concentrations of Credit Risk. Financial instruments that potentially subject the Company to a concentration of
credit risk consist primarily of cash and cash equivalents. The Company maintains its day-to-day operating cash
balances in interest-bearing transaction accounts at financial institutions, which are insured by the Federal Deposit
Insurance Corporation up to $250,000. Although the Company maintains balances that exceed the federally insured
limit, it has not experienced any losses related to these balances and believes its credit risk to be minimal.
Segment Information. Operating segments are components of an entity for which separate financial information
is available and is regularly reviewed by the chief operating decision maker in order to allocate resources and assess
performance. The Company's chief operating decision maker currently evaluates the Company's operations from a
number of different operational perspectives, however resource allocation decisions are made on a total-company
basis. The Company derives all significant revenues from a single operating segment. Accordingly, the Company views
the operating results of its Burger King restaurants as one reportable segment.
Recently Issued Accounting Pronouncements Not Yet Adopted. In February 2016, the FASB issued ASU No.
2016-02, Leases. This ASU is intended to improve the reporting of leasing transactions to provide users of financial
statements with more decision-useful information. This ASU will require organizations that lease assets to recognize
on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The amendments
in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years, using a modified retrospective approach. Early adoption is permitted. The Company is evaluating the
potential impact that adoption will have on its consolidated financial statements, but expects it will have a material
impact on its consolidated balance sheet as it will record assets and obligations for current operating leases.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). The
pronouncement was issued to simplify the accounting for share-based payment transactions, including income tax
consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash
flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. The guidance will
be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the
area covered in this update. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the
F- 10
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
provision for income taxes in the consolidated statement of income, instead of additional paid-in capital in the
consolidated balance sheet. Additionally, excess tax benefits will be classified as operating activities in the consolidated
statement of cash flow instead of in financing activities as required under the current guidance. The Company has not
selected a transition method but does not expect the provisions of ASU 2016-09 to have a material impact on the
Company’s consolidated financial statements.
Subsequent Events. The Company reviewed and evaluated subsequent events through the issuance date of the
Company’s consolidated financial statements. On February 28, 2017, the Company acquired 43 Burger King
restaurants located in and around the Cincinnati, Ohio market for a cash purchase price of $20.4 million, which included
inventory, restaurant equipment and intangible assets.
2. Acquisitions
2016 Acquisitions
During the year ended January 1, 2017, the Company acquired a total of 56 restaurants from other franchisees,
which are referred to as the "2016 acquired restaurants", in the following transactions:
Number of
Restaurants
Purchase
Price
Number of
Fee-Owned
Restaurants (1)
Closing Date
February 23, 2016 (2)
May 25, 2016
July 14, 2016 (2)
August 23, 2016
October 4, 2016
November 15, 2016
December 1, 2016
7,127
12 $
12,080
6
5,445
4
8,755
7
1,623
3
7,251
17
7
5,807
56 $ 48,088
Market Location
Scranton/Wilkes-Barre, Pennsylvania
5 Detroit, Michigan
3 Detroit, Michigan
6 Portland, Maine
Raleigh, North Carolina
Pittsburgh and Johnstown, Pennsylvania
1 Columbus, Ohio
15
(1) The 2016 acquisitions included the purchase of 15 fee-owned properties. Fourteen of these fee-owned properties were sold
in sale-leaseback transactions during 2016 for net proceeds of $19.1 million.
(2) Acquisitions resulting from the exercise of the ROFR.
F- 11
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the
acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase
price for the seven 2016 acquisitions:
Inventory
Land and buildings
Restaurant equipment
Restaurant equipment - subject to capital lease
Leasehold improvements
Franchise fees
Franchise rights
Favorable leases
Deferred taxes
Goodwill
Capital lease obligations for restaurant equipment
Unfavorable leases
Other liabilities
Net assets acquired
$
$
558
19,387
1,599
435
2,464
1,121
21,202
390
216
2,431
(492)
(1,152)
(71)
48,088
The results of operations for the restaurants acquired are included from the closing date of the respective
acquisition. The 2016 acquired restaurants contributed restaurant sales of $28.6 million during the year ended January 1,
2017. It is impracticable to disclose net earnings for the post-acquisition periods as net earnings of these restaurants
were not tracked on a collective basis due to the integration of administrative functions, including field supervision.
During the year ended January 1, 2017, acquisition costs of approximately $1.6 million related to the 2016 acquisitions
were recorded in general and administrative expense.
The pro forma impact on the results of operations for restaurants acquired in 2016 and 2015 is included below.
The pro forma results of operations are not necessarily indicative of the results that would have occurred had the
restaurants acquired in 2016 and 2015 been consummated at the beginning of the periods presented, nor are they
necessarily indicative of any future consolidated operating results. The following table summarizes the Company's
unaudited proforma operating results:
Restaurant sales
Net income
Basic and diluted net income per share
Year Ended
(52 weeks)
(53 weeks)
January 3, 2016
January 1, 2017
986,935
$
984,164
$
12,078
48,264 (1) $
$
0.27
$
$
1.07
(1) Includes a tax benefit of $30.4 million for the reversal of the Company's valuation allowance on its net deferred income tax
assets (see Note 10).
This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or
cost savings or any transaction costs related to the 2016 acquired restaurants.
F- 12
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
2015 Acquisitions
During the year ended January 3, 2016, the Company acquired an aggregate of 55 restaurants from other
franchisees, which are referred to as the "2015 acquired restaurants", in the following transactions:
Closing Date
March 31, 2015
August 4, 2015
October 1, 2015 (2)
October 20, 2015
November 17, 2015
November 17, 2015 (2)
December 1, 2015 (2)
December 8, 2015
Number of
Restaurants
Purchase
Price
Number of
Fee-Owned
Restaurants (1)
Market Location
794
4 $
663
5
5,044
5
709
1
618
2
10,945
6
26,175
23
9
7,802
55 $ 52,750
Northern Vermont
Charlotte, North Carolina
1 Wheeling, West Virginia
Kalamazoo, Michigan
Evansville, Indiana
5 Evansville, Indiana
10 Detroit, Michigan
Northern New Jersey
16
(1) The 2015 acquisitions included the purchase of 16 fee-owned properties. Three of these fee-owned properties were sold in
sale-leaseback transactions during the fourth quarter of 2015 for net proceeds of $4.3 million and 12 fee-owned properties
were sold in sale-leaseback transactions during 2016 for net proceeds of $17.7 million.
(2) Acquisitions resulting from the exercise of the ROFR.
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the
acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase
price for the eight 2015 acquisitions:
Inventory
Land and buildings
Restaurant equipment
Restaurant equipment - subject to capital lease
Leasehold improvements
Franchise fees
Franchise rights
Favorable leases
Goodwill
Capital lease obligations for restaurant equipment
Unfavorable leases
Other liabilities
Net assets acquired
$
$
544
22,614
2,844
443
1,770
1,000
20,666
1,475
2,645
(494)
(324)
(433)
52,750
The results of operations for the restaurants acquired are included from the closing date of the respective
acquisition. The 2015 acquired restaurants contributed restaurant sales of $70.4 million and $12.9 million during the
years ended January 1, 2017 and January 3, 2016, respectively. It is impracticable to disclose net earnings for the post-
acquisition periods as net earnings of these restaurants were not tracked on a collective basis due to the integration of
administrative functions, including field supervision. During the years ended January 1, 2017 and January 3, 2016,
acquisition costs of approximately $0.2 million and $1.0 million, respectively, related to the 2015 acquisitions were
recorded in general and administrative expense.
F- 13
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The pro forma impact on the results of operations for restaurants acquired in 2015 and 2014 is included below.
The pro forma results of operations are not necessarily indicative of the results that would have occurred had the
acquisitions in 2015 and 2014 been consummated at the beginning of the periods presented, nor are they necessarily
indicative of any future consolidated operating results. The following table summarizes the Company's unaudited
proforma operating results:
Restaurant sales
Net income (loss)
Basic and diluted net income (loss) per share
Year Ended
(53 weeks)
(52 weeks)
January 3, 2016
$
$
$
918,456
6,447
0.14
December 28, 2014
862,357
$
(27,252)
$
(0.88)
$
This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or
cost savings or any transaction costs related to the 2015 acquired restaurants.
2014 Acquisitions
During the year ended December 28, 2014, the Company acquired an aggregate of 123 restaurants from other
franchisees, which are referred to as the "2014 acquired restaurants", in the following transactions:
Closing Date
April 30, 2014 (2)
June 30, 2014 (2)
Number of
Restaurants
Purchase
Price
Number of
Fee-Owned
Restaurants (1)
Market Location
4 $
4
681
3,819
Fort Wayne, Indiana
1 Pittsburgh, Pennsylvania
July 22, 2014
21
8,609
October 8, 2014 (2)
November 4, 2014 (3)
20,330
30
64
18,761
123 $ 52,200
12
13
Rochester, New York and Southern Tier of
Western New York
Wilmington and Greenville, North
Carolina
Nashville, Tennessee; Indiana and Illinois
(1) The 2014 acquisitions included the purchase of 13 fee-owned properties. Ten of these fee-owned properties were sold in
sale-leaseback transactions during the fourth quarter of 2014 for net proceeds of $13.0 million and one property was sold
in a sale-leaseback transaction in 2015 for net proceeds of $1.1 million.
(2) Acquisitions resulting from the exercise of the ROFR.
(3)
In connection with the acquisition on November 4, 2014, the Company entered into an agreement with BKC to remodel 46
of the restaurants acquired over a five-year period beginning in 2014.
F- 14
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the
acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase
price for the five 2014 acquisitions:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurant equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurant equipment - subject to capital lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Favorable leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligation for restaurant equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unfavorable leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,267
15,955
5,818
1,381
1,804
3,064
17,098
2,096
1,526
65
9,631
(1,458)
(5,912)
(135)
52,200
The results of operations for the restaurants acquired are included from the closing date of the respective
acquisition. The 2014 acquired restaurants and contributed restaurant sales of $144.6 million and $34.0 million in the
years ended January 3, 2016 and December 28, 2014, respectively. It is impracticable to disclose net earnings for the
post-acquisition periods as net earnings of these restaurants were not tracked on a collective basis due to the integration
of administrative functions, including field supervision. During the years ended January 3, 2016 and December 28,
2014, transaction and integration costs of approximately $0.2 million and $1.9 million, respectively, related to the
2014 acquisitions were recorded in general and administrative expense.
The pro forma impact on the results of operations for the 2014 acquisitions is included below. The pro forma
results of operations are not necessarily indicative of the results that would have occurred had the 2014 acquisitions
been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future
consolidated operating results. The following table summarizes the Company's unaudited proforma operating results:
Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 28, 2014
793,521
(31,364)
(1.02)
Year ended
This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or
cost savings or any transaction costs related to the 2014 acquired restaurants.
Acquired Intangible Assets
Goodwill recorded in connection with these acquisitions represents costs in excess of fair values assigned to the
underlying net assets of acquired restaurants. Acquired goodwill that is expected to be deductible for income tax
purposes was $1,803 in 2016, $3,311 in 2015 and $7,221 in 2014. Deferred income tax assets are primarily due to the
book and tax bases difference of net favorable and unfavorable leases.
F- 15
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The weighted average amortization period of the intangible assets acquired is as follows:
Favorable leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unfavorable leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
Acquisitions
15.4
12.0
28.0
2015
Acquisitions
15.5
6.5
26.6
2014
Acquisitions
13.4
15.0
30.4
3. Property and Equipment
Property and equipment at January 1, 2017 and January 3, 2016 consisted of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Owned buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets subject to capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
$
January 1, 2017
January 3, 2016
8,112 $
9,174
265,008
203,412
16,948
502,654
(254,807)
247,847 $
19,126
13,625
215,673
181,283
16,547
446,254
(226,140)
220,114
Assets subject to capital leases primarily pertain to buildings leased for certain restaurant locations and certain
leases of restaurant equipment and had accumulated amortization at January 1, 2017 and January 3, 2016 of $11,008
and $9,553, respectively. Depreciation expense for all property and equipment for the years ended January 1, 2017,
January 3, 2016 and December 28, 2014 was $39,918, $33,878 and $31,372, respectively.
4. Intangible Assets
Goodwill. The Company is required to review goodwill for impairment annually, or more frequently, when events
and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less
than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment
assessment as of the last day of the fiscal year. In performing its goodwill impairment test, the Company compared
the net book value of its reporting unit to its estimated fair value, the latter determined by employing a combination
of a discounted cash flow analysis and a market-based approach. There have been no recorded goodwill impairment
losses during the years ended January 1, 2017, January 3, 2016 and December 28, 2014.
Goodwill at December 28, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,793
2,645
Acquisitions of restaurants (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,438
Goodwill at January 3, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of restaurants (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,431
Goodwill at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,869
Franchise Rights. Amounts allocated to franchise rights for each acquisition of Burger King restaurants are
amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus
one twenty-year renewal period. The following is a summary of the Company’s franchise rights as of the respective
balance sheet dates:
F- 16
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
January 1, 2017
January 3, 2016
Franchise rights. . . . . . . . . . . . . . . . . . . . . . . .
$
227,952 $
93,799 $
206,750 $
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
87,869
Amortization expense related to franchise rights for the years ended January 1, 2017, January 3, 2016 and
December 28, 2014 was $5,930, $4,685 and $4,366, respectively, and the Company expects annual amortization to be
$6,241 in each of the next five fiscal years. No impairment charges were recorded related to the Company’s franchise
rights during the years ended January 1, 2017, January 3, 2016 and December 28, 2014.
Favorable and Unfavorable Leases. Amounts allocated to favorable and unfavorable leases are being amortized
using the straight-line method over the remaining terms of the underlying lease agreements as a net reduction of
restaurant rent expense. The following is a summary of the Company’s favorable and unfavorable leases as of the
respective balance sheet dates, which are included as assets and liabilities, respectively, on the accompanying
consolidated balance sheets:
January 1, 2017
January 3, 2016
Favorable leases . . . . . . . . . . . . . . . . . . . . . $
Unfavorable leases . . . . . . . . . . . . . . . . . . . $
7,201 $
16,329 $
1,760 $
4,643 $
6,991 $
15,448 $
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
1,339
3,444
The net reduction of rent expense related to the amortization of favorable and unfavorable leases for the years
ended January 1, 2017, January 3, 2016 and December 28, 2014 was $869, $799 and $715, respectively, and the
Company expects the net reduction of rent expense to be $702 in 2017, $701 in 2018, $628 in 2019, $550 in 2020 and
$481 in 2021.
5. Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant
level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over
the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying
value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an
asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair
value. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary
costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the
lease liabilities to be incurred, net of any estimated sublease recoveries.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment,
based on current economic conditions and the Company’s history of using these assets in the operation of its business.
These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair
value hierarchy.
During the year ended January 1, 2017 the Company recorded impairment and other lease charges of $2.4 million
including $0.9 million of capital expenditures at previously impaired restaurants, $0.2 million related to initial
impairment charges for four underperforming restaurants and non-cash losses of $1.2 million associated with the sale-
leaseback of seven restaurant properties.
During the year ended January 3, 2016, the Company recorded impairment and other lease charges of $3.1 million
including other lease charges of $1.6 million associated with the closure of ten of the Company's restaurants, asset
impairment charges of $1.3 million for capital expenditures at previously impaired restaurants and $0.2 million related
to initial impairment charges for two underperforming restaurants.
F- 17
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
During the year ended December 28, 2014, the Company recorded impairment and other lease charges of $3.5
million including other lease charges of $1.0 million associated with the closure of three of the Company's restaurants,
impairment charges of $1.1 million for capital expenditures at previously impaired restaurants and $1.4 million related
to initial impairment charges for nine underperforming restaurants.
The following table presents the activity in the accrual for closed restaurant locations:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provisions for restaurant closures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in estimates of accrued costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustments, including the effect of discounting future obligations .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,088 $
59
(89)
(691)
146
1,513 $
1,721
1,472
(95)
(1,228)
218
2,088
January 1, 2017
January 3, 2016
Changes in estimates of accrued costs primarily relate to revisions to certain sublease income assumptions and
costs.
6. Other Liabilities, Long-Term
Other liabilities, long-term, at January 1, 2017 and January 3, 2016 consisted of the following:
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other accrued occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued workers’ compensation and general liability claims. . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
11,498 $
3,254
3,364
1,756
158
20,030 $
9,620
2,581
3,606
997
311
17,115
January 1, 2017
January 3, 2016
Other accrued occupancy costs above include long-term obligations pertaining to closed restaurant locations,
contingent rent and unamortized lease incentives.
7. Leases
The Company utilizes land and buildings in its operations under various lease agreements. The Company does
not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally
for twenty years and, in many cases, provide for renewal options and in most cases rent escalations. Certain leases
require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement.
For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance
and utilities.
During the years ended January 1, 2017, January 3, 2016 and December 28, 2014, the Company sold 38, 7 and
15 restaurant properties, respectively, in sale-leaseback transactions for net proceeds of $53,599, $9,148 and $19,565,
respectively. These leases have been classified as operating leases and generally contain a twenty-year initial term plus
renewal options.
Deferred gains from sale-leaseback transactions of restaurant properties of $1,480, $16 and $373 were recognized
during the years ended January 1, 2017, January 3, 2016, and December 28, 2014, respectively, and are being amortized
over the term of the related leases. The amortization of deferred gains from sale-leaseback transactions was $1,788,
$2,535 and $1,793 for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
F- 18
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Minimum rent commitments under capital and non-cancelable operating leases at January 1, 2017 were as follows :
Fiscal year ending:
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 29, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 3, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 2, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amount representing interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital
2,067
2,073
2,068
1,367
292
338
8,205
(1,166)
7,039
(1,616)
5,423
Operating
62,739
61,595
60,546
59,207
58,067
615,545
917,699
$
$
Total rent expense on operating leases, including contingent rent on both operating and capital leases, was as
follows:
January 1, 2017
January 3, 2016
Year ended
Minimum rent on real property. . . . . . . . . . . . . . . . . . $
Contingent rent on real property . . . . . . . . . . . . . . . . .
Restaurant rent expense . . . . . . . . . . . . . . . . . . . . . .
Administrative and equipment rent. . . . . . . . . . . . . . .
$
59,076 $
5,738
64,814
267
65,081 $
December 28, 2014
45,371
3,494
48,865
264
49,129
53,085 $
5,011
58,096
276
58,372 $
8. Long-term Debt
Long-term debt at January 1, 2017 and January 3, 2016 consisted of the following:
January 1, 2017
January 3, 2016
Collateralized:
Carrols Restaurant Group 8% Senior Secured Second Lien Notes . . . . $
Senior Credit Facility - Revolving credit borrowings. . . . . . . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
200,000 $
13,500
7,039
220,539
(1,616)
(3,815)
215,108 $
200,000
—
8,006
208,006
(1,435)
(4,529)
202,042
8% Notes. On April 29, 2015, the Company issued 200,000 of 8.0% Senior Secured Second Lien Notes due 2022
(the "8% Notes") pursuant to an indenture dated as of April 29, 2015 governing such notes. The 8% Notes mature and
are payable on May 1, 2022. Interest is payable semi-annually on May 1 and November 1 commencing November 1,
2015. The 8% Notes are guaranteed by the Company's subsidiaries and are secured by second-priority liens on
substantially all of the Company's and its subsidiaries' assets (including a pledge of all of the capital stock and equity
interests of its subsidiaries). The Company recorded a loss on debt extinguishment of $12.6 million in the year ended
January 3, 2016 due to the repurchase and redemption of its prior 11.25% Senior Secured Second Lien Notes.
The 8% Notes are redeemable at the option of the Company in whole or in part at any time after May 1, 2018 at
a price of 104% of the principal amount plus accrued and unpaid interest, if any, if redeemed before May 1, 2019,
F- 19
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
102% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2019 but before May 1,
2020 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2020. Prior
to May 1, 2018, the Company may redeem some or all of the 8% Notes at a redemption price of 100% of the principal
amount of each note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, the indenture
governing the 8% Notes also provides that the Company may redeem up to 35% of the 8% Notes using the proceeds
of certain equity offerings completed before May 15, 2018.
The 8% Notes are jointly and severally guaranteed, unconditionally and in full by the Company's subsidiaries
which are directly or indirectly 100% owned by the Company. Separate condensed consolidating information is not
included because Carrols Restaurant Group is a holding company that has no independent assets or operations. There
are no significant restrictions on its ability or any of the guarantor subsidiaries' ability to obtain funds from its respective
subsidiaries. All consolidated amounts in our financial statements are representative of the combined guarantors.
The indenture governing the 8% Notes includes certain covenants, including limitations and restrictions on the
Company and its subsidiaries who are guarantors under such indenture to, among other things: incur indebtedness or
issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other
restricted payments or investments; sell assets; agree to payment restrictions affecting certain subsidiaries; enter into
transaction with affiliates; or merge, consolidate or sell substantially all of the Company's assets.
The indenture governing the 8% Notes and the security agreement provide that any capital stock and equity
interests of any of the Company's subsidiaries will be excluded from the collateral to the extent that the par value, book
value or market value of such capital stock or equity interests exceeds 20% of the aggregate principal amount of the
8% Notes then outstanding.
The indenture governing the 8% Notes contains customary default provisions, including without limitation, a
cross default provision pursuant to which it is an event of default under the 8% Notes and the indenture governing the
8% Notes if there is a default under any of the Company's indebtedness having an outstanding principal amount of
$20.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused
by a failure to pay principal when due.
Senior Credit Facility. On May 30, 2012, the Company entered into a senior credit facility, which was most
recently amended on January 13, 2017 to provide for aggregate revolving credit borrowings of up to $73.0 million
(including $20.0 million available for letters of credit). As amended, the senior credit facility will mature on February
12, 2021. The amended senior credit facility also provides for potential incremental borrowing increases of up to $25.0
million, in the aggregate. At January 1, 2017, there was $13.5 million of revolving credit borrowings outstanding and
$12.8 million of letters of credit issued under the amended senior credit facility. After reserving for issued letters of
credit and outstanding revolving credit borrowings at January 13, 2017, $42.4 million was available for revolving
credit borrowings under the amended senior credit facility.
Borrowings under the amended senior credit facility bear interest at a rate per annum, at the Company’s option,
based on (all terms as defined in the Company's amended senior credit facility):
(i) the Alternate Base Rate plus the applicable margin of 1.75% to 2.75% based on the Company’s Adjusted
Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 2.75% to 3.75% based on the Company’s Adjusted Leverage
Ratio.
At January 1, 2017, the Company's Alternate Base Rate margin was 1.75% and the LIBOR Rate margin was
2.75% based on the Company's Adjusted Leverage Ratio at the end of the third quarter of 2016. The interest rate in
effect for outstanding borrowings at January 1, 2017 under the Alternate Base Rate option was 5.50%.
F- 20
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
On February 12, 2016, the Company entered into the third amendment to the senior credit facility which increased
aggregate revolving credit borrowings to $55.0 million, extended the maturity date to February 12, 2021 and amended
the definition of applicable margins.
On December 19, 2014, the Company entered into the first amendment to the senior credit facility which provided
for the release of $20.0 million of cash collateral, originally deposited on May 30, 2012 in an account with the
Administrative Agent.
The Company’s obligations under the amended senior credit facility are guaranteed by its subsidiaries and are
secured by first priority liens on substantially all of the assets of the Company and its subsidiaries, including a pledge
of all of the capital stock and equity interests of its subsidiaries.
Under the amended senior credit facility, the Company is required to make mandatory prepayments of borrowings
in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain
exceptions).
The amended senior credit facility contains certain covenants, including without limitation, those limiting the
Company’s and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or
businesses, change the character of its business in all material respects, engage in transactions with related parties,
make certain investments, make certain restricted payments or pay dividends. In addition, the amended senior credit
facility requires the Company to meet certain financial ratios, including a Fixed Charge Coverage Ratio, Adjusted
Leverage Ratio and First Lien Leverage Ratio (all as defined under the amended senior credit facility). The Company
was in compliance with the covenants under its senior credit facility at January 1, 2017.
The amended senior credit facility contains customary default provisions, including that the lenders may terminate
their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due
and payable upon the occurrence and during the continuance of customary defaults which include, without limitation,
payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon
the occurrence of a change of control.
Prior Senior Secured Second Lien Notes. On May 30, 2012, the Company issued $150 million of 11.25% Senior
Secured Second Lien Notes due 2018 pursuant to an indenture governing such 11.25% Notes. Interest was payable
semi-annually on May 15 and November 15. The 11.25% Notes were repurchased or redeemed in connection with the
issuance of the 8.0% Notes on April 29, 2015.
At January 1, 2017, principal payments required on long-term debt, including capital leases, were as follows:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,616
1,738
1,859
1,283
13,754
200,289
220,539
The weighted average interest rate on all debt, excluding lease financing obligations, for the years ended January 1,
2017, January 3, 2016 and December 28, 2014 was 7.9%, 8.9% and 11.2%, respectively. Interest expense on the
Company’s long-term debt, excluding lease financing obligations, was $18,208, $18,462 and $18,694 for the years
ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
F- 21
9. Other Expense (Income)
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In 2016, the Company recorded net gains of $1.2 million related to related to property insurance recoveries from
fires at two restaurants, a gain of $0.5 million related to a settlement for a partial condemnation on one of its operating
restaurant properties and expense of $1.85 million related to a settlement of litigation as discussed in Note 14.
10. Income Taxes
The provision (benefit) for income taxes was comprised of the following:
January 1, 2017
January 3, 2016
December 28, 2014
Year ended
Current:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . $
— $
—
—
1,297
992
2,289
(30,374)
(28,085) $
— $
—
—
(2,901)
(58)
(2,959)
2,959
— $
—
217
217
(11,330)
(1,448)
(12,778)
24,326
11,765
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amount used for income tax purposes.
F- 22
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
The components of deferred income tax assets and liabilities at January 1, 2017 and January 3, 2016 were as
follows:
January 1, 2017
January 3, 2016
Deferred income tax assets:
Deferred income on sale-leaseback of certain real estate . . . . . . . . . . . . . . $
Lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal net operating loss carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating loss carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangibles, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued vacation benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued workers compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income-postretirement benefits. . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred income tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred income tax liabilities:
Accumulated other comprehensive income-postretirement benefits. . . . . . $
Inventory and other reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,714 $
254
1,255
599
21,351
3,845
2,814
7,460
21,987
2,560
1,490
499
2,131
70,959
—
70,959 $
— $
(97)
(17,599)
(24,422)
(42,118) $
Carrying value of net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . $
28,841 $
4,881
242
1,229
378
17,696
3,795
2,639
7,120
13,667
2,314
2,087
—
1,869
57,917
(30,374)
27,543
(42)
(103)
(3,803)
(23,595)
(27,543)
—
The Company performs an assessment of positive and negative evidence regarding the realization of its net
deferred income tax assets as required by ASC 740. For the years ended January 3, 2016 and December 28, 2014, the
Company determined that a valuation allowance was needed for all of its net deferred income tax assets, based on the
required weight of positive and negative evidence under ASC 740, including consideration of the Company’s three-
year cumulative losses. During the year ended December 28, 2014, the Company recorded income tax expense of $24.3
million due to the establishment of a valuation allowance on its net deferred tax assets and during the year ended
January 3, 2016, the Company established an additional valuation allowance of $3.0 million as a result of changes in
its net deferred income tax assets.
During the year ended January 1, 2017, the Company evaluated evidence to consider the reversal of the valuation
allowance on its net deferred income tax assets and determined in the fourth quarter of fiscal 2016 that there was
sufficient positive evidence to conclude that it is more likely than not its deferred income tax assets are realizable. In
determining the likelihood of future realization of the deferred income tax assets as of January 1, 2017, the Company
considered both positive and negative evidence and weighted the effect of such evidence based upon its objectivity.
As a result, the Company believes that the weight of the positive evidence, including the cumulative income position
in the three most recent years (as adjusted for non-recurring items and permanent differences between book and tax)
and forecasts for a sustained level of future taxable income, is sufficient to overcome the weight of the negative evidence,
F- 23
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
and recorded a $30.4 million tax benefit to release the full valuation allowance against the Company's deferred income
tax assets in the fourth quarter of 2016.
The Company's federal net operating loss carryforwards expire beginning in 2033. As of January 1, 2017, the
Company had federal net operating loss carryforwards of approximately $61.0 million. The Company’s state net
operating loss carryforwards expire beginning in 2017 through 2036.
A reconciliation of the statutory federal income tax benefit to the income tax provision (benefit) for the years
ended January 1, 2017, January 3, 2016, and December 28, 2014 was as follows:
January 1, 2017
January 3, 2016
December 28, 2014
Year ended
Statutory federal income tax provision (benefit) . . . $
State income taxes, net of federal benefit . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . .
Employment tax credits. . . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . $
6,085 $
403
(30,374)
(5,408)
965
244
(28,085) $
1 $
6
2,959
(2,710)
—
(256)
— $
(9,223)
(749)
24,326
(2,291)
25
(323)
11,765
The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax
expense. At January 1, 2017 and January 3, 2016, the Company had no unrecognized tax benefits and no accrued
interest related to uncertain tax positions. The tax years 2013 - 2016 remain open to examination by the major taxing
jurisdictions to which the Company is subject. In 2014, the Company concluded an examination of its consolidated
federal income tax return for the tax years 2009 through 2012. Although it is not reasonably possible to estimate the
amount by which unrecognized tax benefits may increase within the next twelve months due to uncertainties regarding
the timing of examinations, the Company does not expect unrecognized tax benefits to significantly change in the next
twelve months.
11. Stock-Based Compensation
2016 Stock Incentive Plan. In 2016, the Company adopted a stock plan entitled the 2016 Stock Incentive Plan
(the “2016 Plan”) and reserved and authorized a total of 4,000,000 shares of common stock for grant thereunder. As
of January 1, 2017, 4,000,000 shares were available for future grant or issuance.
2006 Stock Incentive Plan. In 2006, the Company adopted a stock plan entitled the 2006 Stock Incentive Plan,
as amended, (the “2006 Plan”) and reserved and authorized a total of 3,300,000 shares of common stock for grant
thereunder. On June 9, 2011, the stockholders approved an amendment to the 2006 Plan increasing the number of
shares of common stock available for issuance by an additional 1,000,000 shares. The 2006 Plan expired in 2016 and
as of January 1, 2017, no shares were available for future grant or issuance under this plan.
On January 15, 2016, the Company granted 319,000 non-vested shares of stock to officers of the Company. These
shares vest and become non-forfeitable 25% per year and are being expensed over their four-year vesting period. In
addition, during 2016 the Company issued an aggregate of 8,140 non-vested shares of common stock to non-employee
directors. The non-vested stock awards vest over five years at the rate of 20% on each anniversary date of the award,
provided that the participant has continuously remained a director of the Company.
Stock-based compensation expense for the years ended January 1, 2017, January 3, 2016, and December 28,
2014 was $2.1 million, $1.4 million and $1.2 million, respectively.
F- 24
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
A summary of all non-vested share activity for the year ended January 1, 2017 was as follows:
Nonvested at January 3, 2016
Granted
Vested
Nonvested at January 1, 2017
Shares
Weighted Average
Grant Date Price
468,770 $
327,140
(218,689)
577,221
$
$
7.40
12.28
6.71
10.42
The fair value of the non-vested shares is based on the closing price of the Company's common stock on the date
of grant. As of January 1, 2017, total non-vested stock-based compensation expense was approximately $4.5 million
and the remaining weighted average vesting period for non-vested shares was 2.6 years.
12. Stockholder's Equity
Preferred Stock. In 2012, Carrols Restaurant Group issued to BKC 100 shares of Series A Convertible Preferred
Stock pursuant to a certificate of designation. These shares are convertible into 9,414,580 shares of Carrols Restaurant
Group Common Stock ("Carrols Common Stock").
The Preferred Stock ranks senior to Carrols Common Stock with respect to rights on liquidation, winding-up and
dissolution of Carrols Restaurant Group. The Preferred Stock is perpetual, will receive any dividends and amounts
upon a liquidation event on an as converted basis, does not pay interest and has no mandatory prepayment features.
BKC also has certain approval and voting rights as set forth in the certificate of designation for the Preferred
Stock so long as it owns greater than 10.0% of the outstanding shares of Carrols Common Stock (on an as-converted
basis). The Preferred Stock will vote with the Company's common stock on an as converted basis and provides for the
right of BKC to elect (a) two members to the Company's board of directors until the date on which the number of
shares of common stock into which the outstanding shares of the Preferred Stock held by BKC are then convertible
constitutes less than 14.5% of the total number of outstanding shares of common stock and (b) one member to the
Company's board of directors until BKC owns Preferred Stock (on an as converted basis to common stock) which
equals less than 10.0% of the total number of outstanding shares of common stock.
Common Stock Public Offering. On April 30, 2014, the Company completed an underwritten public offering of
10.0 million shares of common stock at a price of $6.20 per share (the "Public Offering"). The Company also issued
and sold an additional 1.5 million shares of common stock pursuant to the underwriters exercise of the option to
purchase additional shares at the same terms and conditions as offered in the Public Offering, for a total share issuance
of 11.5 million shares. All shares were issued and sold by the Company and the net proceeds received were approximately
$67.3 million in the aggregate after deducting underwriting discounts and commissions and offering expenses.
The Company used the net proceeds of the Public Offering to accelerate the remodeling of the Company's
restaurants to BKC's 20/20 restaurant image and to acquire franchised Burger King restaurants.
A shelf registration statement (including a prospectus) relating to these securities was filed by the Company with
the Securities and Exchange Commission (“SEC”) and was declared effective by the SEC on February 1, 2016.
13. Net Income (Loss) per Share
The Company applies the two-class method to calculate and present net income (loss) per share. The Company's
non-vested share awards and Series A Convertible Preferred Stock issued to BKC contain non-forfeitable rights to
dividends and are considered participating securities for purposes of computing net income (loss) per share pursuant
to the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared
(whether paid or unpaid) and the remaining undistributed earnings are then allocated to common stock and participating
securities, based on their respective rights to receive dividends. As the Company incurred a net loss for the year ended
December 28, 2014 and losses are not allocated to the participating securities under the two-class method, such method
is not applicable for the aforementioned reporting period.
F- 25
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders
by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net income
(loss) per share reflects additional shares of common stock outstanding, where applicable, calculated using the treasury
stock method or the two-class method.
The following table sets forth the calculation of basic and diluted net income (loss) per share:
January 1,
2017
Year ended
January 3,
2016
December 28,
2014
Basic net income (loss) per share:
Net income (loss)
Less: Income attributable to non-vested shares
Less: Income attributable to preferred stock
Net income available to common stockholders
Weighted average common shares outstanding
Basic net income (loss) per share
Diluted net income (loss) per share:
Net income (loss)
Shares used in computed basic net income (loss) per share
Dilutive effect of preferred stock and non-vested shares
Shares used in computed diluted net income (loss) per share
Diluted net income (loss) per share (1)
Shares excluded from diluted net income (loss) per share
computation (2)
$
45,472 $
(616)
(9,461)
35,395 $
$
35,178,329
$
1.01 $
45,472 $
$
35,178,329
9,673,016
44,851,345
$
1.01 $
4 $
—
(1)
3 $
34,958,847
0.00 $
4 $
34,958,847
9,664,404
44,623,251
0.00 $
(38,117)
—
—
(38,117)
30,885,275
(1.23)
(38,117)
30,885,275
—
30,885,275
(1.23)
—
—
9,810,007
(1) Diluted net income (loss) per share is equal to basic net income (loss) per share for the periods presented due to
the allocation of earnings to participating securities under the two-class method of calculating basic net income
(loss) per share causing basic net income (loss) per share to be lower than diluted net income (loss) per share
calculated under the treasury-stock method.
(2) Shares issuable upon conversion of preferred stock and non-vested shares were excluded from the computation
of diluted net loss in periods of net loss because their effect would have been anti-dilutive.
14. Commitments and Contingencies
Lease Guarantees. Fiesta Restaurant Group, Inc ("Fiesta"), a former wholly-owned subsidiary of the Company,
was spun-off in 2012 to the Company's stockholders. As of January 1, 2017, the Company is a guarantor under 27
Fiesta restaurant property leases, with lease terms expiring on various dates through 2030, and is the primary lessee
on five Fiesta restaurant property leases, which it subleases to Fiesta. The Company is fully liable for all obligations
under the terms of the leases in the event that Fiesta fails to pay any sums due under the lease, subject to indemnification
provisions of the Separation and Distribution Agreement entered into in connection with the spin-off of Fiesta.
The maximum potential amount of future undiscounted rental payments the Company could be required to make
under these leases at January 1, 2017 was $25.2 million. The obligations under these leases will generally continue to
decrease over time as these operating leases expire. No payments related to these guarantees have been made by the
Company to date and none are expected to be required to be made in the future. The Company has not recorded a
liability for these guarantees in accordance with ASC 460 - Guarantees as Fiesta has indemnified the Company for all
such obligations and the Company did not believe it was probable it would be required to perform under any of the
guarantees or direct obligations.
F- 26
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Litigation. On August 21, 2012 Alan Vituli, the Company's former chairman and chief executive officer, filed an
action in the Superior Court of the State of Delaware ( the “Court”) against the Company and Carrols. On July 29,
2016 the Company, Carrols, and Mr. Vituli agreed to fully resolve all of Mr. Vituli’s claims in the lawsuit for a total
payment by the Company of $2.0 million. Upon the execution of releases and payment of the settlement amount, the
litigation was dismissed. Net of a contribution from the Company's insurance carrier, $1.85 million is included in other
income (expense) in the accompanying consolidated statements of comprehensive income (loss) for the year ended
January 1, 2017.
The Company is a party to various other litigation matters that arise in the ordinary course of business. The
Company does not believe that the outcome of any of these other matters will have a material adverse effect on its
consolidated financial statements.
15. Transactions with Related Parties
In connection with an acquisition of restaurants from BKC in 2012, the Company issued to BKC 100 shares of
Series A Convertible Preferred Stock, which as of January 1, 2017 constitutes approximately 20.8% of the outstanding
shares of the Company's common stock on a fully diluted basis. See Note 12—Stockholder's Equity for further
information. Pursuant to the terms of the Series A Convertible Preferred Stock, BKC also has two representatives on
the Company's board of directors.
Each of the Company's restaurants operates under a separate franchise agreement with BKC. These franchise
agreements generally provide for an initial term of twenty years and currently have an initial franchise fee of $50. Any
franchise agreement, including renewals, can be extended at the Company's discretion for an additional 20 year term,
with BKC's approval, provided that, among other things, the restaurant meets the current Burger King image standard
and the Company is not in default under terms of the franchise agreement. In addition to the initial franchise fee, the
Company generally pays BKC a monthly royalty at a rate of 4.5% of sales. Royalty expense was $40.0 million, $36.2
million, and $29.1 million for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
The Company is also generally required to contribute 4% of restaurant sales from the Company's restaurants to
an advertising fund utilized by BKC for its advertising, promotional programs and public relations activities, and
amounts for additional local advertising in markets that approve such advertising. Advertising expense associated with
these expenditures was $40.2 million, $32.0 million and $27.5 million for the years ended January 1, 2017, January 3,
2016 and December 28, 2014, respectively.
As of January 1, 2017, January 3, 2016, and December 28, 2014, the Company leased 275, 293 and 311 of its
restaurant locations from BKC, respectively. As of January 1, 2017, for 145 of the restaurants, the terms and conditions
of the lease with BKC are identical to those between BKC and their third-party lessor. Aggregate rent under these BKC
leases for the years ended January 1, 2017, January 3, 2016 and December 28, 2014 was $27.8 million, $28.4 million,
and $26.6 million, respectively. The Company believes the related party lease terms have not been significantly affected
by the fact that the Company and BKC are deemed to be related parties.
As of January 1, 2017, the Company owed BKC $0.2 million associated with its purchase of the right of first
refusal related to the 2012 acquisition and $6.3 million related to the payment of advertising, royalties and rent, which
is remitted on a monthly basis.
F- 27
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
16. Retirement Plans
The Company offers its salaried employees the option to participate in the Carrols Corporation Retirement Savings
Plan (the “Retirement Plan”). The Retirement Plan includes a savings option pursuant to section 401(k) of the Internal
Revenue Code in addition to a post-tax savings option. Participating employees may contribute up to 50% of their
salary annually to either of the savings options, subject to other limitations. The employees may allocate their
contributions to various investment options available under a trust established by the Retirement Plan. The Company
may elect to contribute to the Retirement Plan on an annual basis. The Company's contribution is equal to 50% of the
employee's contribution subject to a maximum annual amount and begins to vest after one year of service and fully
vests after five years of service. A year of service is defined as a plan year during which an employee completes at
least 1,000 hours of service. Expense recognized for the Company's contributions to the Retirement Plan was $496,
$463 and $370 for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
The Company also has an Amended and Restated Deferred Compensation Plan which permits employees not
eligible to participate in the Retirement Plan because they have been excluded as “highly compensated” employees
(as so defined in the Retirement Plan) to voluntarily defer portions of their base salary and annual bonus. All amounts
deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds.
At January 1, 2017 and January 3, 2016, a total of $1,756 and $997, respectively, was deferred under this plan, including
accrued interest.
F- 28
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
17. Postretirement Benefits
The Company sponsors a postretirement medical and life insurance plan covering substantially all administrative
and restaurant management personnel who retire or terminate after qualifying for such benefits.
The following was the plan status and accumulated postretirement benefit obligation (APBO) at January 1, 2017
and January 3, 2016:
January 1, 2017
January 3, 2016
Change in benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants' contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare part D prescription drug subsidy . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Change in plan assets:
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . $
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants' contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare part D prescription drug subsidy . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average assumptions:
Discount rate used to determine benefit obligations . . . . . . . . . . . . . . .
Discount rate used to determine net periodic benefit cost . . . . . . . . . . .
3,060
150
165
98
1,251
(164)
6
4,566
$
$
— $
60
98
(164)
6
—
(4,566)
$
4.11%
4.25%
3,121
127
114
101
(214)
(220)
31
3,060
—
88
101
(220)
31
—
(3,060)
4.25%
3.83%
The discount rate is determined based on high-quality fixed income investments that match the duration of
expected retiree medical and life insurance benefits. The Company has typically used the corporate AA/Aa bond rate
for this assumption. The actuarial loss in 2016 was due primarily to the Company utilizing updated actuarial data
affecting the Medicare Part D prescription drug subsidy.
Components of net periodic postretirement benefit income recognized in the consolidated statements of operations
were:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net gains and losses. . . . . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . . . . . . . .
Net periodic postretirement benefit expense (income) . . . . $
January 1, 2017
150
165
197
(355)
157
Year ended
January 3, 2016
127
$
114
163
(355)
49
$
December 28,
2014
$
$
85
92
104
(355)
(74)
F- 29
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
Amounts recognized in accumulated other comprehensive income that have not yet been recognized as
components of net periodic benefit income, consisted of:
Prior service credit
Net loss
Deferred income taxes
Accumulated other comprehensive loss
Year ended
January 1, 2017
January 3, 2016
$
$
1,972 $
(3,272)
97
(1,203) $
2,327
(2,218)
(444)
(335)
The estimated net loss that will be amortized from accumulated other comprehensive income into net periodic
postretirement benefit income over the next fiscal year is $211. The amount of prior service credit for the postretirement
benefit plan that will be amortized from accumulated other comprehensive income into net periodic postretirement
benefit income over the next fiscal year is $355.
The following table reflects the changes in accumulated other comprehensive income for the years ended
January 1, 2017 and January 3, 2016:
Year ended
January 1, 2017
January 3, 2016
Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in accumulated other comprehensive loss . . . . . . . . $
1,251
(197)
355
(541)
868
$
$
(214)
(163)
355
—
(22)
Assumed health care cost trend rates at year end were as follows:
January 1,
2017
January 3,
2016
December
28, 2014
Medical benefits cost trend rate assumed for the following year pre-65 . . . .
Medical benefits cost trend rate assumed for the following year post-65 . . .
Prescription drug benefit cost trend rate assumed for the following year . . .
Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . .
7.50%
6.50%
10.50%
3.89%
2075
7.75%
6.75%
11.00%
3.89%
2075
8.00%
7.00%
9.00%
3.89%
2075
The assumed healthcare cost trend rate represents the Company's estimate of the annual rates of change in the
costs of the healthcare benefits currently provided by the Company's postretirement plan. The healthcare cost trend
rate implicitly considers estimates of healthcare inflation, changes in healthcare utilization and delivery patterns,
technological advances and changes in the health status of the plan participants. Assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the health
care cost trend rates would have the following effects:
Effect on total of service and interest cost components. . . . . . . . . . . . . . . . . . . . . . $
Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89 $
966
64
731
1% Point
Increase
1% Point
Decrease
F- 30
CARROLS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars except share and per share amounts)
During 2017, the Company expects to contribute approximately $145 to its postretirement benefit plan. The
benefits, net of Medicare Part D subsidy receipts, expected to be paid in each year from 2017 through 2021 are $145,
$165, $167, $166 and $173 respectively, and for the years 2022-2026 the aggregate amount is $1,092.
18. Selected Quarterly Financial Data (Unaudited)
First
Quarter
Restaurant sales. . . . . . . . . . . . . . . . . . . . . . . $ 222,519 (1)
Income from operations . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net income per share . . . .
Restaurants at end of period . . . . . . . . . . . . .
6,680 (1)(2)
2,145
0.05
717
First
Quarter
Restaurant sales. . . . . . . . . . . . . . . . . . . . . . . $ 193,170
Income (loss) from operations . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net income (loss) per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurants at end of period . . . . . . . . . . . . .
(0.27)
659
(4,462) (5)(6)
(9,276)
Year Ended January 1, 2017
Second
Quarter
$ 241,368 (1)
Third
Quarter
$ 238,870 (1)
Fourth
Quarter
$ 240,826 (1)
13,896 (1)(2)
9,376
0.21
723
9,049 (1)(2)
4,489
0.10
734
6,077 (1)(2)
29,462 (3)
0.65
753 (4)
Year Ended January 3, 2016
Second
Quarter
$ 219,102 (5)
Third
Quarter
$ 217,676 (5)
Fourth
Quarter (7)
$ 229,056 (5)
12,358 (5)(6)
(4,977)
11,751 (5)(6)
7,239
11,561 (5)(6)
7,018
(0.14)
657
0.16
660
0.16
705
(1)
(2)
(3)
In fiscal 2016 the Company acquired 12 restaurants in the first quarter, six restaurants in the second quarter, 11 restaurants
in the third quarter and 27 restaurants in the fourth quarter (See Note 2). In fiscal 2016 the Company recorded acquisition
costs related to the 2016 and 2015 acquisitions of $0.4 million in the first quarter, $0.2 million in the second quarter, $0.5
million in the third quarter and $0.8 million in the fourth quarter (See Note 2).
In fiscal 2016 the Company recorded impairment and other lease charges of $0.2 million in the first quarter, $0.3 million in
the second quarter, $0.7 million in the third quarter and $1.2 million in the fourth quarter (See Note 5). Also in fiscal 2016,
the Company recorded a gain of $0.5 million related to a settlement for a partial condemnation on one of its operating
restaurant properties in the first quarter, expense of $1.85 million related to the settlement of litigation with its former
Chairman and CEO in the second quarter (see Note 14), a gain of $0.5 million related to property insurance recoveries from
a fire at one of its restaurants in the second quarter and a gain of $0.7 million related to property insurance recoveries from
a fire at one of its restaurants in the fourth quarter (see Note 9).
In the fourth quarter of 2016, the Company recorded an income tax benefit of $30.4 million related to the reversal of the
valuation allowance previously recorded on all of the Company's net deferred tax assets (See Note 10).
(4) The Company closed nine restaurants at the end of the fourth quarter of 2016.
(5)
In fiscal 2015 the Company acquired four restaurants in the second quarter, five restaurants in the third quarter and 46
restaurants in the fourth quarter (See Note 2). In fiscal 2015 the Company recorded acquisition costs related to the 2015 and
2014 acquisitions of $0.2 million in the first quarter, $0.1 million in the third quarter and $0.8 million in the fourth quarter
(See Note 2).
In fiscal 2015 the Company recorded impairment and other lease charges of $1.6 million in the first quarter, $0.7 million in
the second quarter, $0.4 million in the third quarter and $0.3 million in the fourth quarter (See Note 5).
(6)
(7) The fourth quarter of fiscal 2015 contained 14 weeks.
F- 31
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 1, 2017, JANUARY 3, 2016 AND DECEMBER 28, 2014
(In thousands of dollars)
Description
Year Ended January 1, 2017
Column B
Column C
Column D Column E
Balance at
Beginning
of Period
Charged
to Costs
and
Expenses
Charged
to other
accounts Deductions
Balance
at End of
Period
Deferred income tax valuation allowance . . $
30,374 $
— $
— $
(30,374) $
—
Year Ended January 3, 2016
Deferred income tax valuation allowance . .
27,423 $
2,959 $
(8)
Year Ended December 28, 2014
Deferred income tax valuation allowance . .
2,687
24,326
410
—
—
30,374
27,423
F- 32
Pursuant to the requirements of the 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 7th day
of March 2017.
SIGNATURES
CARROLS RESTAURANT GROUP, INC.
/s/ Daniel T. Accordino
(Signature)
Daniel T. Accordino
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities on the dates indicated.
Signature
/s/ Daniel T. Accordino
Daniel T. Accordino
/s/ Paul R. Flanders
Paul R. Flanders
/s/ Timothy J. LaLonde
Timothy J. LaLonde
/s/ Jose E. Cil
Jose E. Cil
/s/ Hannah S. Craven
Hannah S. Craven
/s/ Manuel A. Garcia III
Manuel A. Garcia III
/s/ Joel M. Handel
Joel M. Handel
/s/ David S. Harris
David S. Harris
/s/ Alexandre Macedo
Alexandre Macedo
Title
President, Chief Executive Officer and
Chairman of the Board of Directors
Vice President, Chief Financial Officer and
Treasurer
Vice President, Controller
Director
Director
Director
Director
Director
Director
Date
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
STOCKHOLDER INFORMATION
EXECUTIVE OFFICERS
Carrols Restaurant Group, Inc.’s common stock is
traded on the NASDAQ Global Market under the
symbol “TAST”.
Daniel T. Accordino
Chairman of the Board, Chief Executive Officer and
President
STOCK TRANSFER AGENT
American Stock Transfer & Trust Co.
6201 15th Ave
Brooklyn, NY 10038
Paul R. Flanders
Vice President, Chief Financial Officer and Treasurer
William E. Myers
Vice President, General Counsel and Secretary
Timothy J. LaLonde
Vice President, Controller
Richard G. Cross
Vice President, Real Estate
Gerald J. DiGenova
Vice President, Human Resources
INDEPENDENT AUDITORS
Deloitte & Touche, LLP
Rochester, New York
OUTSIDE GENERAL COUNSEL
Akerman LLP
New York, New York
FORM 10-K REPORT
The Company’s 2016 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on
March 7, 2017 is reproduced in this annual report. You
may obtain additional copies of this report by writing
to Investor Relations, Carrols Restaurant Group, Inc.,
968 James Street, Syracuse, New York 13203.
Except for the historical information contained herein,
the matters addressed are forward-looking statements.
Forward-looking statements, written, oral or otherwise
made, represent our expectations or beliefs concerning
future events. Without limiting the foregoing, these
statements are often identified by the words "may",
"might", "will", "should", "anticipate", "believe",
"expect", “intend”, “estimate”, “hope”, “plan” or
similar expressions. In addition, expressions of our
strategies, intentions or plans are also forward-looking
statements. Such statements reflect management's
current views with respect to future events and are
subject to risks and uncertainties, both known and
unknown. You are cautioned not to place undue reliance
on these forward-looking statements as there are
important factors that could cause actual results to differ
materially from those in forward-looking statements,
many of which are beyond our control. Investors are
referred to the full discussion of risks and uncertainties
as included in Carrols Restaurant Group, Inc.’s filings
with the Securities and Exchange Commission.
DIRECTORS
Daniel T. Accordino, Chairman
José E. Cil
Hannah Craven
Manuel A. Garcia III
Joel M. Handel
David S. Harris
Alexandre Macedo