CARROLS RESTAURANT GROUP, INC.
We use a 52 or 53 week fiscal year ending on the Sunday closest to December 31. Our fiscal years ended December 29, 2013, December 28, 2014, January 1, 2017, and December 31, 2017, December 30, 2018 and December 29, 2019 each contained 52 weeks. Our fiscal year ended January 3, 20162021 contained 53 weeks.
ITEM 1. BUSINESS
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 5560 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 December 31, 2017,January 3, 2021, we owned and operated 8071,009 Burger KingKing® restaurants located in 1723 Northeastern, Midwestern, Southcentral and Southeastern states and 65 Popeyes® restaurants in seven Southeastern states.
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,guests, has drive-thru service windows and has adjacent parking areas. As of December 31, 2017,January 3, 2021, almost all of our restaurants were freestanding. We operate our
business. WeIn 2021, we intend to continue to expand our restaurant base over the long term by making acquisitions, including acquisitions resulting from the exercise of the ROFR as well as other negotiatedselective acquisitions under our pre-approval rights. The consideration to BKC associated with the 2012 acquisition included a preferred stock equity interest in Carrols Restaurant Group, which is held by BKC Stockholders (as defined below) and convertible into approximately 20.5%15.0% of ourthe outstanding shares of our common stock.stock (after giving effect to such conversion). Since the 2012 acquisition, two of BKC's or RBI's senior executives have served on our Board of Directors. Jose Cil, BrandChristopher Finazzo, President Burger King,of BKC, Americas and Matthew Dunnigan, Chief Financial Officer of Restaurant Brands International Inc., the indirect parent company of BKC, currently serve on our boardBoard of directors.Directors. Our restaurants represented approximately 11.2%14.2% of the Burger King locations in the United States as of December 31, 2017.January 3, 2021. We believe that the combination of our rights under the operating agreement, BKC'sAmended ADA, RBI's equity interest and its board level
representation will continue to reinforce the alignment of our common interests with BKC forand Popeyes over the long term.
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.
•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, reduce restaurant labor costs and monitor operational performance, all of which are designed to improve the customer experience and increase customer traffic. In 2020, BKC implemented delivery services with major delivery providers as well as through its own mobile app. By the end of 2020, we were providing fully integrated delivery services at approximately 890 of our Burger King restaurants, based on the geographic availability of delivery services.
Strategically Remodel to Elevate Brand Profile and Increase Profit Potential. In 2018, we plan to remodel 30 to 35 locations to BKC's 20/20 image, to rebuild 5 to 7 restaurants and to construct 10 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.
Restaurant Economics
Selected restaurant operating data for our restaurants is as follows:
| | | | | | | | | | Year Ended |
| Year Ended | | December 30, 2018 | | December 29, 2019 | | January 3, 2021 |
| January 3, 2016 | | January 1, 2017 | | December 31, 2017 | |
Average annual sales per restaurant (all restaurants) (1) | $ | 1,274,372 |
| | $ | 1,311,516 |
| | $ | 1,387,850 |
| |
Legacy restaurants | $ | 1,274,607 |
| | $ | 1,312,234 |
| | $ | 1,393,662 |
| |
Acquired restaurants | $ | 1,257,742 |
| | $ | 1,305,419 |
| | $ | 1,364,093 |
| |
Average annual sales per restaurant (1) | | Average annual sales per restaurant (1) | $ | 1,449,047 | | | $ | 1,454,654 | | | $ | 1,435,531 | |
Average sales transaction | $ | 6.64 |
| | $ | 6.85 |
| | $ | 7.15 |
| Average sales transaction | $ | 7.37 | | | $ | 7.62 | | | $ | 8.63 | |
Drive-through sales as a percentage of total sales | 66.0 | % | | 67.0 | % | | 67.9 | % | Drive-through sales as a percentage of total sales | 68.4 | % | | 68.2 | % | | 86.1 | % |
Day-part sales percentages: | |
| | |
| | | Day-part sales percentages: | |
Breakfast | 13.2 | % | | 13.8 | % | | 13.7 | % | Breakfast | 13.5 | % | | 13.0 | % | | 11.5 | % |
Lunch | 32.8 | % | | 32.4 | % | | 32.3 | % | Lunch | 31.9 | % | | 31.7 | % | | 32.6 | % |
Dinner | 20.4 | % | | 20.4 | % | | 20.6 | % | Dinner | 20.9 | % | | 21.5 | % | | 22.6 | % |
Afternoon and late night | 33.6 | % | | 33.4 | % | | 33.4 | % | |
Afternoon | | Afternoon | 19.9 | % | | 20.1 | % | | 22.0 | % |
Late night | | Late night | 13.8 | % | | 13.7 | % | | 11.3 | % |
| |
(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. |
(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 for the years ended December 30, 2018 and December 29, 2019 or 53-week basis for the year ended January 3, 2021.
Restaurant Capital Costs
The initial cost of the franchise fee, equipment, seating, signage and other interior costs of a standard new Burger King and Popeyes restaurant currently is approximately $450,000$500,000 (which excludes the cost of land, 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$1,200,000 for Burger King restaurants and $500,000 to $1,000,000 for Popeyes restaurants and the cost of building and site improvements generally ranges from $850,000$1,000,000 to $1,025,000.$1,800,000 for both Burger King and Popeyes restaurants.
With respect to the development of freestanding restaurants, if we acquire the land toand construct the building, we typically 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.Senior Credit Facilities (as defined below).
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 20/20current image restaurant design draws inspiration from its signature flame-grilled cooking process and incorporates a variety of innovative elements to a backdrop that evokes the industrialwarm and welcoming look of the outdoors including corrugated metal, brick, wood and concrete. The cost of remodeling a restaurant to the BKC 20/20current image varies depending upon the age and condition of the restaurant and the amount of new equipment needed and can range from $250,000$600,000 to $650,000$1,400,000 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.approximately $1.1 million per restaurant in 2020. The total cost of a remodel has increased over time due to construction cost increases, the addition of a second drive-thru lane at certain locations and the replacement of certain kitchen equipment at the time of the remodel which is incremental to the cost to upgrade to the BKC 20/20current image 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 determinesapproves the acceptabilityviability of all acquisition prospects and new sites, based upon analyses prepared by our real estate, financial and operations professionals.
professionals and our return on investment requirements.
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.
Restaurant Locations
The following table details the locations of our 8071,009 Burger King restaurants as of December 31, 2017:January 3, 2021:
|
| | | | |
State | Total Restaurants |
IllinoisAlabama | 196 |
|
IndianaArkansas | 889 |
|
KentuckyGeorgia | 362 |
|
MaineIllinois | 1516 |
|
MarylandIndiana | 1792 |
|
MassachusettsKentucky | 141 |
|
MichiganLouisiana | 5317 |
|
New JerseyMaine | 1015 |
|
New YorkMaryland | 12829 |
|
North CarolinaMassachusetts | 1521 |
|
OhioMichigan | 11751 |
|
PennsylvaniaMississippi | 6433 |
|
South CarolinaMissouri | 321 |
|
TennesseeNew Jersey | 3110 |
|
VermontNew York | 5125 |
|
VirginiaNorth Carolina | 36157 |
|
West VirginiaOhio | 3116 |
|
TotalPennsylvania | 80761 |
|
South Carolina | 42 | |
Tennessee | 109 | |
Vermont | 6 | |
Virginia | 66 | |
West Virginia | 4 | |
Total | 1,009 | |
The following table details the locations of our 65 Popeyes restaurants as of January 3, 2021:
| | | | | |
State | Total Restaurants |
Arkansas | 2 | |
Indiana | 3 | |
Kentucky | 3 | |
Louisiana | 5 | |
Mississippi | 33 | |
Tennessee | 18 | |
Virginia | 1 | |
Total | 65 | |
Operations
Management Structure
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 4045 years of Burger King and quick-service restaurant experience at our company.
Operations for our Burger King restaurants are overseen by oneour new Chief Operating Officer, Carl Hauch, who joined us in February of 2021 and has over 20 years of experience in restaurant and retail operations, most recently in the Wendy's system, as well as two Division VPVice Presidents and nine13 Regional Directors that have an average of over 2722 years of Burger King restaurant experience. Our 111148 district managers support the Regional Directors in the management of our Burger King restaurants. Operations for our Popeyes restaurants are overseen by two Regional Directors and nine district managers.
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,Most often, our restaurants are staffed with hourly employees who are supervised by a salaried general manager and one to three salaried assistant managers.
Training
We maintain a comprehensive training and development program for all of our personnel and provide both classroom and in-restaurant training for our salaried and hourly personnel. 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 the 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 quickly 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 throughout the day;
•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;
•allow customers to place mobile and third-party delivery orders that integrate directly with the point-of-sale system;
•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 ourthe 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.restaurants. 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.
Burger King and Popeyes Franchise Agreements
Each of our Burger King restaurants operates under a separate franchise agreement with BKC. Each of our Popeyes restaurants operates under a separate franchise agreement with PLK. Our franchise agreements with BKC and PLK generally require, among other things, that all restaurants comply with specified design criteria and operate in a prescribed manner, including utilization of thea standard Burger King menu. In addition, our Burger King franchise agreements generally require that our restaurants conform to BKC's current image and may provide for updating 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 and PLK 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 anya 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. AnyWith BKC's and PLK's respective approval, we can elect to extend franchise agreement, including renewals, can be extended at our discretionagreements for an additional 20-year term, with BKC's approval,20 year terms, provided that among other things, the restaurant meets the current Burger King operatingrestaurant image standard and image standards and that we are not in default under the terms of the franchise agreement. The franchise agreement fee for subsequent renewals for our Burger King and Popeyes restaurants is currently $50,000. BKC or PLK 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 for our Burger King and Popeyes restaurants include, among other things, our failure to operate such Burger King restaurant in accordance with the operating standards and specifications established by BKC or PLK (including failure to use equipment, uniforms or decor approved by BKC)the respective franchisor), our failure to sell products approved or designated by BKC or PLK, 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 or Popeyes restaurant system, conviction of us or our executive officers for certain indictable offenses, our failure to maintain a responsible credit rating or our acquisition of an interest in any other hamburger restaurant business. At December 31, 2017,January 3, 2021, we were not in default under any of our franchise agreements with BKC.BKC or PLK.
In order to obtain a successor franchise agreement with BKC and PLK, a franchisee is typically required to make capital improvements to the restaurant to bring it up to BKC's or PLK'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 December 31, 2017,January 3, 2021, we had 4312 Burger King franchise agreements due to expire in 2018, 292021, 14 Burger King franchise agreements due to expire in 20192022 and 513 Burger King franchise agreements due to expire in 2023, as well as 32 that expired prior to the end of 2020. At January 3, 2021 we had two Popeyes franchise agreements set to expire in 2021, four Popeyes franchise agreements set to expire in 2022 and one Popeyes franchise agreement set to expire in 2023, as well as six Popeyes franchise agreements that expired prior to the end of 2020.
We believe that we will be able to satisfy BKC's and PLK's normal franchise agreement renewal criteria. Accordingly, we believe that renewal franchise agreements will be granted on a timely basis by BKC and PLK 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 and PLK will grant these requests in the future.
In recent years, the historical costs of improving our Burger King restaurants in connection with franchise renewals generally have ranged from $250,000$400,000 to $650,000$800,000 per restaurant. The average cost of our remodels to the 20/20 image in 20172020 was approximately $550,000$1.1 million 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.BKC or PLK.
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 and Popeyes restaurants on an ongoing basis. With respect to franchise renewals, such evaluation depends on many factors, 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 or Popeyes restaurant is under-performing, or that we do not anticipate an adequate return on the capital investment 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 or Popeyes restaurant as part of the franchise renewal process. In 2017,2020, we closed 2134 Burger King restaurants, including 1one offset location. We currently expect to close between 20 to 25less than five Burger King restaurants in 2018,2021, 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 and PLK a monthly royalty. The royalty rate for new Burger King restaurants and for successor franchise agreements is 4.5% of sales. The royalty rate for new Popeyes restaurants and for successor franchise agreements is 5.0% 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
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 restaurant sales, were 4.3% in 20172020, 2019 and 4.2%in both2016 and 2015.2018, respectively. We anticipate our Burger King and Popeyes royalties, as a percentage of restaurant sales, will be 4.3%approximately 4.4% in 20182021 as a result of the terms outlined above. Newly constructed Burger King restaurants developed pursuant to the ADA as well as the Amended ADA received and will receive a 1% royalty rate reduction for a four year period and certain remodeled restaurants under the ADA generally received and will receive a 0.75% royalty rate reduction for a five year period.
We also generally contribute 4% of restaurant sales from our Burger King and Popeyes restaurants to fund BKC's and PLK's national and regional advertising. Pursuant to the ADA and Amended ADA, newly constructed Burger King restaurants will receive a 3% advertising contribution reduction for four years and certain remodeled restaurants, excluding upgrades, will receive a 0.75% advertising contribution reduction for a five year period. BKC engagesand PLK engage in substantial national and regional advertising and promotional activities and other efforts to maintain and enhance the Burger King brand.both brands. From time to time we supplement BKC's marketing with our own local advertising and promotional campaigns. See “- Advertising,“Advertising, Products and Promotion” below.
Our franchise agreements with BKC and PLK 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, onion rings, 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
BKC's and public relations activities. BKC'sPLK's advertising programs consist of national campaigns supplemented by local advertising. BKC's and PLK'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 3.9% in 2020, 4.0% in 2019 and 4.1% in 2017, 4.4% in 2016 and 3.8% in 2015.2018. For 20182021, we expect total advertising expense to range betweenbe approximately 4.0% and 4.2% of total 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 targeted to our customers, such as combination value meals and discounted prices targeted to our customers, in order to create a flexible and directed marketing program.
Digital
BKC and PLK have invested heavily in launching a digital platform that integrates with major third-party delivery service providers and provides a seamless ordering, payment, delivery and drive thru experience for our guests. In the BKC and PLK platforms, guests can place orders through a website or mobile app and have the product ready for pickup or delivered by a third-party partner. Digital sales, including sales through the delivery platforms plus mobile order and pay, have been a strong growth driver and represented approximately 4.4% of our restaurant sales in the fourth quarter of 2020 and 3.1% of our sales for all of 2020. We are also installing outdoor digital menu boards in all drive thru locations. In 2020, we installed outdoor digital menu boards at 359 Burger King restaurants and expect to complete the remaining installation of outdoor digital menu boards at all of our Burger King and Popeyes restaurants by the first half of 2022. The menu boards integrate with the POS system and allow for artificial intelligence to help optimize the guest experience. BKC and PLK continue to invest in the digital platform and BKC intends to launch its Royal Perks loyalty program in 2021, which will be driven from its mobile app.
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 help obtain favorable pricing and terms for supplying our restaurants. For our Burger King 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 primarily utilize mostly threefour distributors, Maines Paper & Food Service, Inc.,Lineage Foodservice Solutions, LLC, Reinhart Food Service L.L.C.L.L.C, McLane Company Inc., and MBM Food Service Inc.,Performance Foodservice, to supply
our Burger King restaurants with the majority of our foodstuffs and, asfoodstuffs. As of December 31, 2017,January 3, 2021, such distributors supplied 42%34%, 29%28%, 28% and 29%10%, respectively, of our Burger King restaurants.
For our Popeyes restaurants we are a member of a national purchasing cooperative, Supply Management Services, Inc. ("SMS"). SMS is a non-profit independent purchasing cooperative that is responsible for sourcing certain of our products and managing relationships with approved distributors for the Popeyes system. Popeyes utilizes five distributors, two for poultry products and three for all other products. For our Popeyes restaurants, one distributor, Tyson Foods, supplies 75% of our poultry products. Another distributor, Customized Distribution Services, Inc. supplies 60 of our Popeyes restaurants with all non- poultry products.
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 and PLK product uniformity standards. All BKC-approved and PLK-approved distributors are required to purchase foodstuffs and supplies from BKC-approved and PLK-approved manufacturers and purveyors. BKC isand PLK are each responsible for monitoring quality control and supervision of these manufacturers andthe applicable manufacturers. Each conducts regular visits to observe the preparation of foodstuffs and to perform various tests to ensure that only quality foodstuffs are sold to its approved suppliers. In addition, BKC coordinates and supervisesPLK coordinate and supervise 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 anyfailure of a 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 and PLK'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 detailed reports measuring compliance with various customer service standards and objectives to our restaurant operations management team, 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 and Popeyes, we also have contractual rights to use certain BKC-owned trademarks, service marks and other intellectual property relating to the Burger King concept.and Popeyes concepts. 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 the handling, preparation and sale of food and beverages; the provision of nutritional information on menu boards; minimum wage requirements; unemployment compensation; overtime; and other working conditions and citizenship requirements.
A significant number of our food service personnel are paid at rates related to the federal, and where applicable, state minimum wage and, accordingly,wage. 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 13%14% of our approximately 1,9003,500 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, rules and regulations.
Our costs for compliance with environmental laws, orrules and regulations havehas not had a material adverse effect on our results of operations, cash flows or financial condition in the past.
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 2017through November 2020 food away from home dollars exceeded at-home dining, with 50.3%were 44.8% of nominal food dollars, spent on food away from home and with total expenditures increasing 2.6%decreasing 18.3% from 2016.the same period in 2019. This reflects changes in the overall restaurant industry as a result of the ongoing COVID-19 pandemic, but not the quick-service segment. Our sales stabilized in May 2020 as guests have relied on our take-out and delivery service modes.
Quick-Service Restaurants. We operate in the hamburger categoryand chicken categories of the quick-service restaurant segmentsegments 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, 20162019 U.S. foodservice sales for the Top 100200 restaurant chains increased 3.6%3.8% from 20152018 to $257.0$313.5 billion. Of this amount, the hamburger category represented $78.5$88.8 billion, or 30.5%28.3%, 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 operators outside the restaurant industry such as convenience stores, delicatessens and prepared food counters in supermarkets, grocery stores, cafeterias and other purveyors offeroffering moderately priced and quickly prepared foods. Our competitors may also employ marketing strategies such as frequent use of price discounting, frequent promotions and an emphasis on value menus.
We believe that:
that product quality and taste;
taste, brand recognition;
recognition, convenience of location;
location, speed of service;
service, menu variety;
price;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 for our Burger King restaurants are McDonald's and Wendy's.Wendy's and the largest competitors for our Popeyes restaurants are KFC and Chik-fil-A.
EmployeesHuman Capital Management
As of December 31, 2017,January 3, 2021, we employed approximately 23,50026,500 persons, of which approximately 160200 were administrative personnel and approximately 23,34026,300 were restaurant operations personnel. Approximately 75% of our employees are part-time and 80% have been employed by the Company for less than one year. None of our employees are unionized or covered by collective bargaining agreements. We believe that our overall relations with our employees are good.good and that our efforts to manage our workforce have been effective.
Diversity
We are committed to fostering a culture that encourages diversity and inclusion, and having diverse representation in our workforce. As of January 3, 2021, 56% of our employee base was female and approximately 56% of our employee base was comprised of racial and ethnic minorities.
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 restaurant personnel. Our program emphasizes, among other things, system-wide operating procedures, food preparation methods, food safety and customer service
standards. BKC's and PLK's training and development programs are also available to us as a franchisee through web access in all of our restaurants.
COVID-19 Response
Throughout the course of the ongoing COVID-19 pandemic, we have been adapting our business in order to continue operating safely, including, among other things, by doing the following:
•To support the health and safety of our employees, beginning in March 2020 we have mandated, among other things, the use of masks, sanitizers and contactless procedures in our restaurants, and have required team members' temperatures be taken at the beginning of each shift.
•We have increased the use of low contact procedures for food delivery, including installation of plexiglass barriers at the front counter and drive thru and the implementation of delivery services.
•We have suspended all non-essential travel for our employees and implemented a work-from-home policy for all non-restaurant personnel.
•We have established a "Carrols Cares" fund to provide immediate relief to employees in need.
Availability of Information
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 internet website (www.carrols.com)at 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 practicabflepracticable after electronically filing or furnishing such material with the SEC. The referencereferences to our website address is a textual reference only, meaning that it doesand the SEC website address do not constitute incorporation by reference of the information contained on the websitethese websites 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/A.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
We could be materially adversely affected by health concerns such as the current COVID-19 pandemic.
The United States and most other countries have experienced the widespread outbreak of the COVID-19 pandemic and in the past the Avian Flu or “SARS,” or H1N1. As we have experienced and are experiencing in the current COVID-19 environment:
•If a virus is transmitted by human contact, our employees or customers may become infected, or may choose, or be advised, to avoid gathering in public places, any of which may adversely affect our restaurant customer traffic and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. These are all areas that have been impacted during the second quarter of 2020 and continue to be challenges in the near-term for our business. The COVID-19 pandemic has negatively impacted our customer traffic, and we have had to take immediate actions to shift focus to our drive-thru, carry-out and delivery service modes. We have also experienced significant staffing challenges, both as a result of employee exposure to COVID-19 as well as the hourly workforce being disincentivized by federal, state and local unemployment benefits and fearful of the workplace.
•We also may be adversely affected if jurisdictions in which we have restaurants impose or continue to impose mandatory closures, seek or continue to seek voluntary closures or impose or continue to impose restrictions on operations. Even if such measures are not implemented and a virus or other disease does not
spread significantly, the perceived risk of infection or significant health risk may adversely affect our business. During the second quarter of 2020, we did see frequent changes to our restaurants' operating hours, as a result of shifting consumer behavior as well as public safety measures mandated by local jurisdictions. In March 2020, we closed the dining rooms in all our restaurants and modified operating hours in line with local ordinances and day-part sales trends. These closures were in effect for most of the second quarter of 2020, with each restaurant operating according to their respective local governmental guidelines as well as safety procedures developed by BKC and PLK. As individual states and local governments have allowed reopenings, we have continually evaluated the opportunity to re-open dining rooms. In most cases, consumers have not been eager to return to dining rooms, and restaurant sales in the third quarter of 2020 included approximately 1% of eat-in traffic.
•Lower customer traffic as experienced in the immediate onset of the COVID-19 pandemic in our markets may not provide enough revenue to cover the fixed operating costs of our restaurants. We temporarily closed 46 restaurants in late March 2020 and early April 2020 that were geographically close to one of our other restaurants, and these closures were in effect for most of the second quarter of 2020. Due to restaurant sales improvements after the initial months of the COVID-19 pandemic, we had reopened all of the temporarily closed restaurants by the end of 2020 except for two restaurants which were permanently closed in the third quarter. While most of these closures were temporary, our business remains sensitive to operating in environments with prolonged sales declines of the magnitude we saw in the first weeks of the pandemic.
•We will incur incremental costs for an indefinite period of time to provide safety to our guests and our employees in the form of masks, sanitizers and thermometers as well as additional labor to continuously sanitize our restaurants. Throughout the course of this evolving COVID-19 outbreak, we have been adapting our business in order to continue operating safely. To support the health and safety of our employees and customers, among other things, we mandated the use of masks, sanitizers and contactless procedures in our restaurants, and have required temperature checks at the beginning of each shift for our team members. During the year ended January 3, 2021, we incurred $2.7 million in expenses directly related to COVID-19 related supplies, including face masks, thermometers, sneeze guards and sanitizers.
•The uncertain economic environment that we are operating in now has required us to enhance our liquidity and bolster our balance sheet. In the first quarter of 2020 we borrowed on our Revolving Credit Facility to protect against a prolonged pandemic coupled with financial market illiquidity. We also increased our revolving credit borrowing capacity under our Revolving Credit Facility by $30.8 million to a total of $145.8 million, and incurred Incremental Term B-1 Loans of $75 million.
•Our financial performance depends on our continuing ability to offer fresh, quality food at competitive prices. A significant disruption in service or supply by our suppliers or distributors could create disruptions in the operations of our restaurants and adversely affect our business. During the second quarter of 2020, we were subject to a limited menu in some markets due to limited product available from one of our suppliers and in some instances, deliveries were delayed due to the conditions of the COVID-19 pandemic. A more significant disruption in service or supply by our suppliers or distributors due to the impact of COVID-19 on their businesses, whether from employees at these facilities contracting the COVID-19 virus, their own business suffering due to their inability to operate in the COVID-19 economic environment, or their own financial instability could have a material adverse effect on our business.
A health pandemic such as COVID-19 is a disease outbreak that has spread rapidly and widely by infection and has affected many individuals in areas of population density. Our restaurants are places where people can gather together for human connection. Customers might avoid or be advised to not gather in public places in the event of a health pandemic, and local, regional or national governments might continue or further limit or ban public gatherings to halt or delay the spread of disease. The impact of a health pandemic on us might be disproportionately greater than on other quick-service concepts that have lower customer traffic and that depend less on the gathering of people.
In addition, we cannot guarantee that changes to our operational policies and training will be effective to keep our employees and customers safe from the COVID-19 virus. Any publicity relating to health concerns or perceived or specific outbreaks of COVID-19 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. Furthermore, 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.
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 other 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 for our Burger King restaurants are McDonald'sMcDonald’s and Wendy's restaurants.Wendy’s restaurants and the largest competitors for our Popeyes restaurants are KFC and Chick-fil-A.
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 affecthave a material adverse effect on 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:
•health concerns such as the ongoing coronavirus pandemic (COVID-19);
•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.
We are highly dependent on the Burger King systemand Popeyes systems and our ability to renew our franchise agreements with BKC.BKC and PLK. The failure to renew our franchise agreements or Burger King's or Popeyes' failure to compete effectively would materially adversely affect our results of operations.
Due to the nature of franchising and our agreements with BKC and PLK, our success is, to a large extent, directly related to the success of the Burger King and Popeyes system including itstheir financial condition, advertising programs, new products,product development, overall quality of operations and the successful and consistent operation of Burger King and Popeyes restaurants owned by other franchisees. We cannot assure you that Burger King or Popeyes restaurants will be able to compete effectively with other restaurants. As a result, any failure of the Burger King or Popeyes franchise systems to compete effectively would likely have a material adverse effect on our operating results.results of operations and financial condition.
Under each of our franchise agreements, with BKC, we are required to comply with operational programs established by BKC.BKC or PLK. For example, our franchise agreements with BKC and PLK 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 restaurants, and PLK
generally has the right to require us to remodel our restaurants to conform to the then-current image of Popeyes restaurants every six years, all of which may require the expenditure of considerable funds. In addition weWe also may not be able to avoid adopting menu price discount promotions or permanent menu price decreases instituted by BKC or PLK that may be unprofitable.
Our BKC franchise agreements typically have a 20-year20 year term after which BKC'sBKC’s consent is required to receive a successor franchise agreement. Our PLK franchise agreements with BKCtypically also have a 20-year term after which we have the options to (a) renew for a 10 year renewal term and (b) renew for a second supplemental renewal term of 10 years provided that arewe meet certain conditions as set to expire overforth in the next three years are as follows: 43 in 2018, 29 in 2019 and 51 in 2020.PLK franchise agreements.
We cannot assure you that BKC will grant each of our future requests for successor franchise agreements andor that we will be able to exercise any of the options to renew the PLK franchise agreements. Any failure of BKC to renew our franchise agreements couldwould materially adversely affect our operating results.results of operations and financial condition. 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 established by Burger King, which may require us to incur substantial costs. Similarly, one of the conditions to our ability to exercise the option to renew our PLK franchise agreements is that we must make capital improvements to particular restaurants to bring them up to current image standards established by Popeyes, which may require us to incur substantial costs.
In addition, our franchise agreements with BKC and PLK do not give us exclusive rights to operate Burger King or Popeyes 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, weWe cannot assure you that franchises granted by BKC or PLK 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 or the Popeyes brand. If BKC doesand PLK do not adequately protect the Burger King brandand Popeyes brands and other intellectual property, our competitive position and operating results of operations could be harmed.
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 20 states above until 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 $275.0 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.
We could be materially 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 or Popeyes 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 affecthave a material adverse effect on our results of operations and financial performance.condition. 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,Furthermore, 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 results of operations and financial condition.
Our strategy includes pursuing acquisitions of additional Burger King and Popeyes restaurants and we may not find Burger King restaurants or Popeyes restaurants that are suitable acquisition candidates or successfully operate or integrate any Burger King restaurants or Popeyes restaurants that we may acquire.
As part of our strategy, we intend to selectively pursue the acquisition of additional Burger King and Popeyes restaurants. Pursuant to the ADA and retained in the Amended ADA, BKC has granted us franchise pre-approval to acquire Burger King restaurants from Burger King franchisees until we acquire more than 500 Burger King restaurants. The right of first refusal assigned to us from BKC pursuant to the ADA was forfeited by us as a result of entering into the Amended ADA in January 2021.
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. Our Senior Credit Facilities contain restrictive covenants that may prevent us from incurring additional debt to acquire additional Burger King or Popeyes restaurants.
We may experience difficulties in integrating restaurants acquired by us into our existing business.
The acquisition of a significant number of restaurants involves 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 a material adverse effect on our 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 financial contribution 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.
We may incur significant liability or reputational harm if claims are brought against us or the Burger King brand.and Popeyes brands.
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 servicequick-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,results of operations and financial condition, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect usour results of operations and financial condition 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 results of operations and financial condition by increasing our litigation costs and diverting our attention and resources to address such actions. In addition,Furthermore, 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.
operations and financial condition.
Changes in consumer taste could negatively impact our business.
We obtain a significant portion of our revenues from the sale of hamburgers, fried chicken 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.results of operations and financial condition. 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'sBKC’s and PLK'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 or PLK 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.content or plant-based. If BKC or PLK does not continually develop and successfully introduce new menu offerings that appeal to changing consumer preferences or if the Burger King system doesand Popeyes franchise systems do not timely capitalize ondevelop new products, our operating results of operations and financial condition 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 results of operations and financial condition.
We could be adversely affected by our failure to acknowledge and sufficiently respond to the fast-moving influence of social media.
The widespread use of social media platforms can provide individuals with access to a broad audience at any time of day. The content shared by users on these platforms may be published without consideration of accuracy or its potential impact. Such content may be factually inaccurate, but nonetheless negatively impact our customer engagement, business operations, brand reputation or financial performance. This damage could be fast-moving and not allow us or our franchisors a chance to address the situation.
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.results of operations and financial condition.
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.our results of operations and financial condition.
We are a member of a national purchasing cooperative, Restaurant Services, Inc., which serveswe refer to as the purchasing agent"RSI", created for approved distributors to 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 Burger King restaurants, we are required to purchase all of our food products,foodstuffs, paper goods and packaging materials from BKC-approved suppliers.suppliers at prices negotiated by RSI. We currently primarily utilize mostly threefour distributors, for our restaurants, Maines Paper & Food Service, Inc.,Lineage Foodservice Solutions, LLC, Reinhart Food Service L.L.C.,L.L.C, McLane Company Inc. and MBM Food Service Inc. ,Performance Foodservice, to supply our Burger King restaurants in various geographical areas.with the majority of our foodstuffs. As of December 31, 2017,January 3, 2021, such distributors supplied 42%34%, 29%28%, 28% and 29% 10%, respectively, of our Burger King restaurants. Although
For our Popeyes restaurants we believeare a member of a national purchasing cooperative, Supply Management Services, Inc. ("SMS"). SMS is a non-profit independent purchasing cooperative that we have alternative sourcesis responsible for sourcing certain of supply, inour products and managing relationships with approved distributors for the Popeyes system. Popeyes utilizes five distributors, two for poultry products and three for all other products. For our Popeyes restaurants, one distributor, Tyson Foods, supplies 75% of our poultry products. Another distributor, Customized Distribution Services, Inc. supplies 60 of our Popeyes restaurants with all non-poultry products.
In the event that any of our distributors or suppliers are unable to service us thisand we are unable to timely secure alternative sources for product, we could lead tosuffer a disruption of service or supply until a new distributor or supplier is engaged, which could have ana material adverse effect on our business.results of operations and financial condition.
If labor costs increase, we may not be able to make a corresponding increase in our prices and our operating results of operations and financial condition may be materially 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.results of operations and financial condition. 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.
Higher labor costs due to statutory and regulatory changes could have a material adverse effect on our businessresults of operations and financial results.condition.
We are subject to the federal labor laws, including the Fair Labor Standards Act, as well as various state and local laws governing such matters as minimum wages, labor relations, workplace safety, citizenship requirements and other working conditions for employees. Federal, state and local laws may also require us to provide paid and unpaid leave, healthcare, sick time or other benefits to our employees. Changes in the law, or penalties associated with any failure on our part to comply with legal requirements, could increase our labor costs or result in additional expense.
StartingBeginning in 2018, certain workers will bewere able to take up to eight weeks (increasing in New York and other areas to twelve weeks in 2021) of employer-provided paid leave for childbirth, care for a seriously ill family member or needs related to a family member’s military deployment. TheseWe have considered these labor costs in our price changes, and additional expenseslabor costs may causerequire us to raise our prices.
prices in the future. In certain geographic areas which cannot absorb such increases, this could have a material adverse effect on our business, financial condition; results of operations and/or cash flows.and financial condition. We provide unpaid leave for employees for covered family and medical reasons, including
childbirth, to the extent required by the Family and Medical Leave Act of 1933,1993, as amended, and applicable state laws. To the extent we need to hire additional employees or pay overtime forto replace such employees on leave, this would be an added expense which could adverselyhave a material adverse affect on our results of operations.
operations and financial condition.
Increases in income tax rates or changes in income tax laws could adversely affect our business, financial condition or results of operations.operations and financial condition.
Increases in income tax rates in the United States or other changes in income tax laws in any particular jurisdiction could reduce our after-tax income from such jurisdiction and could adversely affect our business, financial condition or results of operations. The United States recently made changes to existing tax laws in the Tax Cuts and Jobs Act (the "Act""Tax Act"), which was signed into law on December 22, 2017. The changes in the Act are broad and complex and we continue to examine the impact it may have on our business and financial results. Among its many provisions, the Tax Act reduced the U.S. Federal corporate income tax rate from 35% to 21% and imposed limitations on the deductibility of interest and certain other corporate deductions. In accordance with applicable SEC guidance, we recorded a provisional net tax benefit in the fourth quarter of 2017 resulting from the enactment of the Act. This provisional expense is subject to change, possibly materially, due to, among other things, changes in estimates, interpretations and assumptions we have made, changes in Internal Revenue Service (IRS) interpretations, the issuance of new guidance, legislative actions, changes in accounting standards or related interpretations in response to the Act and future actions by states within the United States that have not currently adopted the Act. Additional changes in the U.S. tax regime, including changes in how existing tax laws are interpreted or enforced, could adversely affect our business, financial condition or results of operations.
operations and financial condition.
The efficiency and quality of our competitors'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.BKC or PLK. If our competitors increase spending on advertising and promotion, or the cost of television or radio advertising increases, or BKC'sBKC’s, PLK's or our advertising and promotions are less effective than our competitors'competitors’, there could be a material adverse effect on our results of operations and financial condition.
Our business is regional and we therefore face risks related to reliance on certain markets as well as risks for other unforeseen events.
At December 31, 2017, 19%January 3, 2021, 15% of our restaurants were located in North Carolina, 16%12% were located in New York, 12% were located in Tennessee, and 32%24% were located in Indiana, Ohio and Michigan. Therefore, the economic conditions, state and local government regulations, weather conditions or other conditions affecting New York, Tennessee, Indiana, Ohio, Michigan and North Carolina, and other unforeseen events, including terrorism and other international conflictsregional issues, 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.weather and hurricanes. 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.results of operations and financial condition.
We could be materially adversely affected by external events such as extreme weather, natural disasters, terrorist actions, pandemics and civil unrest, among others.
External events such as extreme weather, natural disasters, terrorist actions, pandemics and civil unrest, and anticipation of such events, can adversely affect consumer spending, supply availability and costs, and our ability to operate our business in any impacted market.
We cannot assure you that the current locations of our restaurants will continue to be economically viable or that additional locations willcan 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 for 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 is experiencing and 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.rates including
as a result of the COVID-19 pandemic. 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.restaurants and the health of surrounding businesses who employ a significant amount of workers. In particular, where our customers'customers’ disposable income is reduced (such as by job losses, credit constraints and higher housing, tax, energy, interest or other costs) or where theour customer's actual or 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.results of operations and financial condition.
The loss of the services of our senior management could have a material adverse effect on our business, financial condition or results of operations.operations and financial condition.
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.operations and financial condition.
Government regulation could adversely affect our financial condition and results of operations.operations and financial condition.
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, mandatory paid and unpaid leave, working and safety conditions, and citizenship requirements;
•health care; and
•federal and state laws that prohibit discrimination and laws regulating the 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.our results of operations and financial condition. 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.results of operations and financial condition.
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 affecthave a material adverse effect on our results of operations.operations and financial condition.
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 affecthave a material adverse effect our results of operations.operations and financial condition.
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 affecthave a material adverse effect on our operating results.results of operations and financial condition.
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, including as a result of the COVID-19 pandemic, 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, source and price of beef, chicken, produce and cheese can be subject to change anddue 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 may also 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 toof 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.operations and financial condition.
Security breaches of confidential guestcredit card, consumer, employee and other material information in connection withas well as other threats to our electronic processingtechnical systems may have a material adverse effect on our results of creditoperations and debit card transactions may adversely affect our business.financial condition.
A significant amountApproximately half of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which creditconfidential or material information has been compromised. The Company devotes significant resources to data encryption, network security and debit card information of their customers was compromised.other measures to protect its systems and data, but these security measures cannot provide absolute security. We may in the future become subject to lawsuits, fines or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our guests'guests’ credit or debit card or any other material information. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may have a material adverse effect on usour results of operations and our restaurants.financial condition.
We depend onThe Company’s results of operations, financial condition and reputation may be impacted by information technology and any material failure of that technology could impair our ability to efficiently operate our business.system failures or network disruptions.
We rely on information systems across our operations including, for example, point-of-sale processing in our restaurants, collection of cash, procurement and payment to significant suppliers, collection of cash, and payment of otherpayroll, financial obligationsreporting and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failureCompany may be subject to information technology system failures and network disruptions caused by natural disasters, accidents, pandemics, power disruptions, telecommunications failures, acts of these systemsterrorism or war, computer viruses, physical or electronic break-ins, ransomware or other events or disruptions. System redundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient for all eventualities which may have a material adverse effect on our results of operations and financial condition. While the Company maintains dedicated insurance coverage that, subject to operate effectively, problems with maintenance, upgradingpolicy terms and conditions and subject to a deductible, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or transitioning to replacement systems or a breachall types of claims that may arise in securitythe continually evolving area 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.cyber risk.
Carrols is currently a guarantor under 2718 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 2718 Fiesta restaurant property leases.leases, of which all except for two are still operating as of January 3, 2021. 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 a non-disturbance agreement or similar agreement with the lessor 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 when you pay,acquired our stock, 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:
•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;companies specifically;
•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.BKC, PLK or any of our significant suppliers discussed above.
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 likelymay limit our stockholders' ability to influence corporate matters.
OurAt January 3, 2021, our executive officers, directors, BKC and BKCBlue Holdco 1, LLC (collectively the "BKC Stockholders"), and Cambridge together beneficially ownowned approximately 25.1%45.1% of our outstanding common stock, as of March 5, 2018 (assuminggiving effect to the conversion of the Series AB Convertible Preferred Stock held by BKC). Dueissued to the issuance of Series A Preferred Stock to BKC in connection with our 2012 acquisition, BKC beneficially owns approximately 20.5% of our common stock as of March 5, 2018 (assuming conversion of the Series A Preferred Stock). Our executive officers and directors (excluding directors affiliated with BKC) together beneficially own approximately 5.8% of our common stock outstanding as of March 5, 2018 (excluding conversion of the Series A Preferred Stock).Stockholders. As a result, our executive officers, directors, affiliates of the BKC Stockholders and BKC,Cambridge, 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 haveBKC Stockholders and Cambridge each has two representatives on our Board of Directors, which has the authority to make decisions affecting our company and its capital structure, including the issuance of additional debt and the declaration of dividends. Each of the BKC Stockholders and Cambridge may also have interests that differ from yoursthose of other stockholders and may vote in a way with which youother stockholders disagree and which may be adverse to yourtheir 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 usthe Company that other stockholders may view as beneficial, which 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 currently do not expect to pay any cash dividends for the foreseeable future, and the indenture governing the Notes and the senior credit facilityour Senior Credit Facilities limit our ability to pay dividends to our stockholders.
We currently do not anticipate that we willexpect to 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 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 facilitySenior Credit Facilities 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 boardBoard of directorsDirectors 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 boardBoard of directorsDirectors 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 affecthave a material adverse effect on our financial condition.
As of December 31, 2017,January 3, 2021 we had approximately $281.9$494.2 million of total indebtedness outstanding consisting of $275.0$419.4 million Term Loan B borrowings and $73.9 million Term Loan B-1 borrowings under our Senior Credit Facilities and $0.9 million of Notes, $1.2finance lease liabilities. As of January 3, 2021 we had $136.1 million of lease financing obligations and $5.7 million of capital leases and other debt. At December 31, 2017, we had $60.2 million ofrevolving borrowing availability under our senior credit facilitySenior Credit Facilities (after reserving $12.8$9.7 million for letters of credit issued under our senior credit facility,the Senior Credit Facilities, 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 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,Senior Credit Facilities, to enable us to repay our indebtedness, including the Notes,Term Loan B and B-1 borrowings, 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 NotesSenior Credit Facilities 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 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, our cash balances and revolving credit borrowings under our senior credit facilitySenior Credit Facilities to meet our current and future financial obligations, including funding our operations, debt service, possible future acquisitions and capital expenditures (including restaurant remodeling and new restaurant development). 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 sufficient liquidity, 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,Senior Credit Facilities, 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,Senior Credit Facilities, 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 NotesSenior Credit Facilities 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 could also consider investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover, although our senior credit facility and the indenture governing the NotesSenior Credit Facilities 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.
The agreements governing our debt agreementsOur Senior Credit Facilities 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,Senior Credit Facilities 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 requiredSenior Credit Facilities may require us to maintain specified financial ratiosa First Lien Net Ratio (as defined in the Senior Credit Facilities) and satisfy other financial tests. At December 31, 2017, we were in compliance with such covenants under our senior credit facility. Our ability to meet thesethis financial ratiosratio and other tests can be affected by events beyond our control, and we cannot assure you that we will meet these tests. At January 3, 2021, we were in compliance with such covenants.
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 NotesSenior Credit Facilities 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 providesOur Senior Credit Facilities provide that certain change of control events constitute an event of default under such senior credit facility.default. Such an event of default entitles the lenders thereunder to, among other things, cause all outstanding debt obligations under the senior credit facilitySenior Credit Facilities to become due and payable and to proceed against the collateral securing such senior credit facility.Senior Credit Facilities. Any event of default or acceleration of the senior credit facilitySenior Credit Facilities will likely also cause a default under the terms of our other indebtedness.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2017,January 3, 2021, we owned 8nine and leased 799 Burger King1,065 restaurant properties including two restaurants located in mall shopping centers and 2128 co-branded locations. In addition, we owned fourfive and leased seven19 non-operating properties as of December 31, 2017,January 3, 2021, not including threetwo properties under construction that are expected to open as new restaurants in 2018.2021.
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 23.425.8 years at December 31, 2017.January 3, 2021. 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 KingKing® 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 KingKing® 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 mallshopping center locations, we are also required to pay certain other charges such as a pro rata share of the mall'sshopping center'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, most of our administrative operations for our Burger KingKing® restaurants and one of our regional support offices. We also lease seveneight small regional offices that support the management of our Burger KingKing® restaurants, two offices in Tennessee acquired in the Cambridge Acquisition, and two smallsmaller administrative offices in Syracuse, NY that support administrative operations.
ITEM 3. LEGAL PROCEEDINGS
Litigation. We are involved in various litigation matters and claims that arise in the ordinary course of business. Based on our currently available information, we do not believe that the outcomeultimate resolution of any of these matters will have a material adverse effect on our consolidated financial statements.
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 is traded on The NASDAQ Global Market under the symbol “TAST”. The high and low closing sale prices of our common stock for the periods indicated, as reported by The NASDAQ Global Market, are set forth below:
|
| | | | | | | |
| Common Stock Price |
| High | | Low |
Year Ended December 31, 2017 | | | |
First Quarter | $ | 16.85 |
| | $ | 13.80 |
|
Second Quarter | 14.25 |
| | 11.85 |
|
Third Quarter | 12.55 |
| | 10.55 |
|
Fourth Quarter | 13.30 |
| | 10.00 |
|
| | | |
Year Ended January 1, 2017 | | | |
First Quarter | $ | 14.55 |
| | $ | 11.15 |
|
Second Quarter | 14.62 |
| | 11.72 |
|
Third Quarter | 13.88 |
| | 11.77 |
|
Fourth Quarter | 15.25 |
| | 11.25 |
|
On March 5, 2018,3, 2021, there were 36,538,90353,337,104 shares of our common stock outstanding held by 519482 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 5, 2018 was $12.90.
We did not pay any cash dividends during the fiscal years 20172020 or 2016.2019. We currently intend to continue to retain all available funds to fund the development and growth of our business and do not anticipate payingexpect to pay any cash dividends on our common stock in the foreseeable future. In addition, weWe 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 Carrolsour direct and indirectly from subsidiaries of Carrols. The indenture governing the Notes and our senior credit facilityindirect subsidiaries. Our Senior Credit Facilities 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.
Stock Performance Graph
The following graph compares from December 31, 20122015 the cumulative total stockholder return on our common stock overrelative to the cumulative total returns of The NASDAQ Composite Index and a peer group, Thethe 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 priceassumes an investment of $100 in our common stock fromand each index on December 31, 2012 through December 31, 2017.2015.
* $100 invested on 12/31/20122015 in stock or index, including reinvestment of dividends. | | | | | | | | | | | | | | | | | | | | |
| 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 |
Carrols Restaurant Group, Inc. | $ | 100.00 | | $ | 129.90 | | $ | 103.49 | | $ | 83.82 | | $ | 60.05 | | $ | 53.49 | |
NASDAQ Composite | $ | 100.00 | | $ | 108.87 | | $ | 141.13 | | $ | 137.12 | | $ | 187.44 | | $ | 271.64 | |
S&P SmallCap 600 Restaurants | $ | 100.00 | | $ | 108.78 | | $ | 100.34 | | $ | 98.61 | | $ | 103.52 | | $ | 106.19 | |
Purchases of Equity Securities by the Issuer
On August 2, 2019, our Board of Directors approved a repurchase program under which we may repurchase up to $25 million of our outstanding common stock (the "Repurchase Program"). The authorization became effective on August 2, 2019, and will expire 24 months thereafter, unless terminated earlier by our Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Exchange Act. We have no obligation to repurchase stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on our stock price, trading volume, general market and economic conditions, and other factors.
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| | | | | | | | | | | | | | | | | | |
| 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 |
Carrols Restaurant Group, Inc. | $ | 100.00 |
| $ | 110.54 |
| $ | 127.59 |
| $ | 196.32 |
| $ | 255.02 |
| $ | 203.18 |
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NASDAQ Composite | $ | 100.00 |
| $ | 141.63 |
| $ | 162.09 |
| $ | 173.33 |
| $ | 187.19 |
| $ | 242.29 |
|
S&P SmallCap 600 Restaurants | $ | 100.00 |
| $ | 162.20 |
| $ | 188.79 |
| $ | 176.07 |
| $ | 185.75 |
| $ | 178.90 |
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The table below reflects shares of common stock we repurchased in the fourth quarter of 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet to Be Purchased Under the Plans or Programs |
| | | | | | | | |
September | Purchased 9/28 through 9/30 | — | | | $ | — | | | — | | | $ | — | |
October | Purchased 10/1 through 10/31 | — | | | $ | — | | | — | | | $ | — | |
November | Purchased 11/1 through 11/30 | 762,512 | | | $ | 6.11 | | | 762,512 | | | $ | 16,326,820 | |
December | Purchased 12/1 through 12/31 | 771,792 | | | $ | 6.92 | | | 771,792 | | | $ | 10,983,543 | |
January | Purchased 1/1 through 1/3 | — | | | $ | — | | | — | | | $ | — | |
(1) Shares were repurchased in open market transactions pursuant to the Repurchase Program.
ITEM 6. SELECTED FINANCIAL DATA
Our fiscal years ended January 1, 2017, December 31, 2017, December 30, 2018 and December 29, 2019 presented below each include 52 weeks. The fiscal year ended January 3, 2021 presented below includes 53 weeks.
The information in the following tabletables should be read together with "Financial Statements and Supplementary Data,"our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K/A. 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 and in 2017 we acquired 64 restaurants from other franchisees in three separate transactions.
These historical results are10-K. Our consolidated financial information may not necessarilybe indicative of the results to be expected in the future. Our fiscal years ended December 29, 2013, December 28, 2014, January 1, 2017 and December 31, 2017 each contained 52 weeks. The fiscal year ended January 3, 2016 contained 53 weeks.our future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
Acquisition Activity: | January 1, 2017 | | December 31, 2017 | | December 30, 2018 | | December 29, 2019 | | January 3, 2021 |
Restaurants acquired | 56 | | 64 | | 44 | | 234 | | — | |
Transactions | 7 | | 3 | | 4 | | 3 | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| January 1, 2017 | | December 31, 2017 | | December 30, 2018 | | December 29, 2019 | | January 3, 2021 |
| (In thousands, except share and per share data) |
Statements of operations data: | | | | | | | | | |
Revenue: | | | | | | | | | |
Restaurant sales | 943,583 | | | 1,088,532 | | | 1,179,307 | | | 1,452,516 | | | 1,547,502 | |
Other revenue | — | | | — | | | — | | | 10,249 | | | — | |
Total revenue | 943,583 | | | 1,088,532 | | | 1,179,307 | | | 1,462,765 | | | 1,547,502 | |
| | | | | | | | | |
Costs and expenses: | | | | | | | | | |
Cost of sales | 250,112 | | | 304,593 | | | 326,308 | | | 431,969 | | | 452,738 | |
Restaurant wages and related expenses | 297,766 | | | 350,054 | | | 382,829 | | | 485,278 | | | 498,127 | |
Restaurant rent expense | 64,814 | | | 75,948 | | | 81,409 | | | 107,147 | | | 118,444 | |
Other restaurant operating expenses | 148,946 | | | 166,786 | | | 178,750 | | | 227,364 | | | 236,059 | |
Advertising expense | 41,299 | | | 44,677 | | | 48,340 | | | 58,689 | | | 60,735 | |
General and administrative (1)(2) | 54,956 | | | 60,348 | | | 66,587 | | | 84,734 | | | 84,051 | |
Depreciation and amortization | 47,295 | | | 54,159 | | | 58,468 | | | 74,674 | | | 81,727 | |
Impairment and other lease charges | 2,355 | | | 2,827 | | | 3,685 | | | 3,564 | | | 12,778 | |
Other expense (income) (3) | 338 | | | (333) | | | (424) | | | (1,911) | | | (1,271) | |
Total operating expenses | 907,881 | | | 1,059,059 | | | 1,145,952 | | | 1,471,508 | | | 1,543,388 | |
Income (loss) from operations | 35,702 | | | 29,473 | | | 33,355 | | | (8,743) | | | 4,114 | |
Interest expense | 18,315 | | | 21,710 | | | 23,638 | | | 27,856 | | | 27,283 | |
Loss on extinguishment of debt | — | | | — | | | — | | | 7,443 | | | — | |
Gain on bargain purchase | — | | | — | | | (230) | | | — | | | — | |
Income (loss) before income taxes | 17,387 | | | 7,763 | | | 9,947 | | | (44,042) | | | (23,169) | |
Provision (benefit) for income taxes | (28,085) | | | 604 | | | (157) | | | (12,123) | | | 6,294 | |
Net income (loss) | $ | 45,472 | | | $ | 7,159 | | | $ | 10,104 | | | $ | (31,919) | | | $ | (29,463) | |
Per share data: | | | | | | | | | |
Basic and diluted net income (loss) per share: | $ | 1.01 | | | $ | 0.16 | | | $ | 0.22 | | | $ | (0.74) | | | $ | (0.58) | |
| | | | | | | | | |
Weighted average shares used in computing net income (loss) per share: | | | | | | | | | |
Basic | 35,178,329 | | | 35,416,531 | | | 35,715,372 | | | 43,421,715 | | | 50,751,185 | |
Diluted | 44,851,345 | | | 44,976,514 | | | 45,319,971 | | | 43,421,715 | | | 50,751,185 | |
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| | | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 29, 2013 | | December 28, 2014 | | January 3, 2016 | | January 1, 2017 | | December 31, 2017 |
| (In thousands of dollars, except share and per share data) |
Statements of operations data: | | | | | | | | | |
Restaurant sales | $ | 663,483 |
| | $ | 692,755 |
| | $ | 859,004 |
| | $ | 943,583 |
| | $ | 1,088,532 |
|
Costs and expenses: | | | | | | | | |
|
Cost of sales | 201,532 |
| | 209,664 |
| | 240,322 |
| | 250,112 |
| | 304,593 |
|
Restaurant wages and related expenses | 208,404 |
| | 219,718 |
| | 267,950 |
| | 297,766 |
| | 350,054 |
|
Restaurant rent expense | 47,198 |
| | 48,865 |
| | 58,096 |
| | 64,814 |
| | 75,948 |
|
Other restaurant operating expenses | 106,508 |
| | 113,586 |
| | 135,874 |
| | 148,946 |
| | 166,786 |
|
Advertising expense | 29,615 |
| | 27,961 |
| | 32,242 |
| | 41,299 |
| | 44,677 |
|
General and administrative (1)(2) | 37,228 |
| | 40,001 |
| | 50,515 |
| | 54,956 |
| | 60,348 |
|
Depreciation and amortization | 33,594 |
| | 36,923 |
| | 39,845 |
| | 47,295 |
| | 54,159 |
|
Impairment and other lease charges | 4,462 |
| | 3,541 |
| | 3,078 |
| | 2,355 |
| | 2,827 |
|
Other expense (income) (3) | 17 |
| | 47 |
| | (126 | ) | | 338 |
| | (333 | ) |
Total operating expenses | 668,558 |
| | 700,306 |
| | 827,796 |
| | 907,881 |
| | 1,059,059 |
|
Income (loss) from operations | (5,075 | ) | | (7,551 | ) | | 31,208 |
| | 35,702 |
| | 29,473 |
|
Interest expense | 18,841 |
| | 18,801 |
| | 18,569 |
| | 18,315 |
| | 21,710 |
|
Loss on extinguishment of debt | — |
| | — |
| | 12,635 |
| | — |
| | — |
|
Income (loss) before income taxes | (23,916 | ) | | (26,352 | ) | | 4 |
| | 17,387 |
| | 7,763 |
|
Provision (benefit) for income taxes | (10,397 | ) | | 11,765 |
| | — |
| | (28,085 | ) | | 604 |
|
Net income (loss) | $ | (13,519 | ) | | $ | (38,117 | ) | | $ | 4 |
| | $ | 45,472 |
| | $ | 7,159 |
|
Per share data: | | | | | | | | | |
Basic and diluted net income (loss) per share: | $ | (0.59 | ) | | $ | (1.23 | ) | | $ | 0.00 |
| | $ | 1.01 |
| | $ | 0.16 |
|
| | | | | | | | | |
Weighted average shares used in computing net income (loss) per share: | | | | | | | | | |
Basic | 22,958,963 |
| | 30,885,275 |
| | 34,958,847 |
| | 35,178,329 |
| | 35,416,531 |
|
Diluted | 22,958,963 |
| | 30,885,275 |
| | 44,623,251 |
| | 44,851,345 |
| | 44,976,514 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| January 1, 2017 | | December 31, 2017 | | December 30, 2018 | | December 29, 2019 | | January 3, 2021 |
| (In thousands, except restaurant weekly sales data) |
Other financial data: | | | | | | | | | |
Net cash provided by operating activities | $ | 62,288 | | | $ | 72,783 | | | $ | 80,769 | | | $ | 48,708 | | | $ | 103,945 | |
Total capital expenditures | 94,099 | | | 73,516 | | | 75,735 | | | 134,879 | | | 56,890 | |
Net cash used for investing activities | 96,221 | | | 108,105 | | | 106,894 | | | 218,045 | | | 47,857 | |
Net cash provided by financing activities | 13,661 | | | 62,372 | | | 727 | | | 168,297 | | | 5,902 | |
Operating Data: | | | | | | | | | |
Restaurants (at end of period) | 753 | | | 807 | | | 849 | | | 1,101 | | | 1,074 | |
Average number of restaurants | 719.5 | | | 784.3 | | | 813.9 | | | 998.5 | | | 1,078.0 | |
Average annual sales per restaurant (4) | 1,311 | | | 1,388 | | | 1,449 | | | 1,455 | | | 1,436 | |
Adjusted EBITDA (5) | 89,505 | | | 91,771 | | | 102,990 | | | 86,371 | | | 107,855 | |
Adjusted net income (loss) (5) | 17,860 | | | 9,262 | | | 14,091 | | | (15,323) | | | (3,733) | |
Adjusted Restaurant-Level EBITDA (5) | 140,646 | | | 146,837 | | | 162,133 | | | 156,131 | | | 181,562 | |
Change in comparable restaurant sales (6) | 2.3 | % | | 5.2 | % | | 3.8 | % | | 2.2 | % | | (2.7) | % |
Balance sheet data (at end of period): | | | | | | | | | |
Total assets | $ | 490,115 | | | $ | 581,514 | | | $ | 600,251 | | | $ | 1,751,460 | | | $ | 1,757,085 | |
Working capital | (39,231) | | | (19,514) | | | (47,461) | | | (109,540) | | | (44,396) | |
Debt: | | | | | | | | | |
Senior and senior subordinated debt | 213,500 | | | 275,000 | | | 275,000 | | | 468,625 | | | 493,250 | |
Finance leases | 7,039 | | | 5,681 | | | 3,941 | | | 2,524 | | | 908 | |
Lease financing obligations | 3,020 | | | 1,203 | | | 1,201 | | | 1,198 | | | 1,189 | |
Total debt | $ | 223,559 | | | $ | 281,884 | | | $ | 280,142 | | | $ | 472,347 | | | $ | 495,347 | |
Stockholders’ equity | $ | 154,656 | | | $ | 169,060 | | | $ | 185,540 | | | $ | 309,462 | | | $ | 271,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| January 1, 2017 | | December 31, 2017 | | December 30, 2018 | | December 29, 2019 | | January 3, 2021 |
| (In thousands, except per share data) |
Reconciliation of EBITDA and Adjusted EBITDA (5): | | | | | | | | |
Net income (loss) | $ | 45,742 | | | $ | 7,159 | | | $ | 10,104 | | | $ | (31,919) | | | $ | (29,463) | |
Provision (benefit) for income taxes | (28,085) | | | 604 | | | (157) | | | (12,123) | | | 6,294 | |
Interest expense | 18,315 | | | 21,710 | | | 23,638 | | | 27,856 | | | 27,283 | |
Depreciation and amortization | 47,295 | | | 54,159 | | | 58,468 | | | 74,674 | | | 81,727 | |
EBITDA | 82,997 | | | 83,632 | | | 92,053 | | | 58,488 | | | 85,841 | |
Impairment and other lease charges | 2,355 | | | 2,827 | | | 3,685 | | | 3,564 | | | 12,778 | |
Acquisition and integration costs (7) | 1,853 | | | 1,793 | | | 1,445 | | | 10,827 | | | 273 | |
Abandoned development costs | — | | | — | | | — | | | 256 | | | 3,464 | |
Pre-opening costs | — | | | 363 | | | 462 | | | 1,449 | | | 163 | |
Other income, net (3) | (1,603) | | | (362) | | | (424) | | | (1,911) | | | (1,271) | |
Litigation and other professional expenses (8) | 1,850 | | | — | | | 187 | | | 502 | | | 1,384 | |
Stock compensation expense | 2,053 | | | 3,518 | | | 5,812 | | | 5,753 | | | 5,223 | |
Gain on bargain purchase | — | | | — | | | (230) | | | — | | | — | |
Loss on extinguishment of debt | — | | | — | | | — | | | 7,443 | | | — | |
Adjusted EBITDA | $ | 89,505 | | | $ | 91,771 | | | $ | 102,990 | | | $ | 86,371 | | | $ | 107,855 | |
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| | | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 29, 2013 | | December 28, 2014 | | January 3, 2016 | | January 1, 2017 | | December 31, 2017 |
| (In thousands of dollars, except restaurant weekly sales data) |
Other financial data: | | | | | | | | | |
Net cash provided from operating activities | $ | 21,581 |
| | $ | 14,707 |
| | $ | 70,702 |
| | $ | 62,288 |
| | $ | 72,783 |
|
Total capital expenditures | 50,486 |
| | 52,010 |
| | 56,848 |
| | 94,099 |
| | 73,516 |
|
Net cash used for investing activities | 50,486 |
| | 68,003 |
| | 103,429 |
| | 96,221 |
| | 108,105 |
|
Net cash provided from (used for) financing activities | (1,083 | ) | | 66,215 |
| | 33,780 |
| | 13,661 |
| | 62,732 |
|
Operating Data: | | | | | | | | | |
Restaurants (at end of period) | 564 |
| | 674 |
| | 705 |
| | 753 |
| | 807 |
|
Average number of restaurants | 563.8 |
| | 581.9 |
| | 662.1 |
| | 719.5 |
| | 784.3 |
|
Average annual sales per restaurant (4) | 1,176,806 |
| | 1,190,505 |
| | 1,274,372 |
| | 1,311,516 |
| | 1,387,850 |
|
Adjusted EBITDA (5) | 34,271 |
| | 36,008 |
| | 76,737 |
| | 89,505 |
| | 91,408 |
|
Adjusted net income (loss) (5) | (10,668 | ) | | (10,408 | ) | | 13,429 |
| | 17,860 |
| | 9,037 |
|
Restaurant-Level EBITDA (5) | 70,226 |
| | 72,961 |
| | 124,520 |
| | 140,646 |
| | 146,474 |
|
Change in comparable restaurant sales (6) | 1.0 | % | | 0.6 | % | | 7.4 | % | | 2.3 | % | | 5.2 | % |
Balance sheet data (at end of period): | | | | | | | | | |
Total assets | $ | 329,481 |
| | $ | 364,573 |
| | $ | 427,256 |
| | $ | 490,155 |
| | $ | 581,514 |
|
Working capital | (21,974 | ) | | (13,554 | ) | | (26,259 | ) | | (39,231 | ) | | (19,514 | ) |
Debt: | | | | | | | | | |
Senior and senior subordinated debt | 150,000 |
| | 150,000 |
| | 200,000 |
| | 213,500 |
| | 275,000 |
|
Capital leases | 9,336 |
| | 8,694 |
| | 8,006 |
| | 7,039 |
| | 5,681 |
|
Lease financing obligations | 1,200 |
| | 1,202 |
| | 1,203 |
| | 3,020 |
| | 1,203 |
|
Total debt | $ | 160,536 |
| | $ | 159,896 |
| | $ | 209,209 |
| | $ | 223,559 |
| | $ | 281,884 |
|
Stockholders’ equity | $ | 77,204 |
| | $ | 106,535 |
| | $ | 107,999 |
| | $ | 154,656 |
| | $ | 169,060 |
|
36
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| | | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 29, 2013 | | December 28, 2014 | | January 3, 2016 | | January 1, 2017 | | December 31, 2017 |
| (In thousands of dollars, except per share data) |
Reconciliation of EBITDA and Adjusted EBITDA (5): | | | | | | | | |
Net income (loss) from continuing operations | $ | (13,519 | ) | | $ | (38,117 | ) | | $ | 4 |
| | $ | 45,472 |
| | $ | 7,159 |
|
Provision (benefit) for income taxes | (10,397 | ) | | 11,765 |
| | — |
| | (28,085 | ) | | 604 |
|
Interest expense | 18,841 |
| | 18,801 |
| | 18,569 |
| | 18,315 |
| | 21,710 |
|
Depreciation and amortization | 33,594 |
| | 36,923 |
| | 39,845 |
| | 47,295 |
| | 54,159 |
|
EBITDA | 28,519 |
| | 29,372 |
| | 58,418 |
| | 82,997 |
| | 83,632 |
|
Impairment and other lease charges | 4,462 |
| | 3,541 |
| | 3,078 |
| | 2,355 |
| | 2,827 |
|
Acquisition costs (7) | — |
| | 1,915 |
| | 1,168 |
| | 1,853 |
| | 1,793 |
|
Gain on partial condemnation and fires (8) | — |
| | — |
| | — |
| | (1,603 | ) | | (362 | ) |
Litigation settlement (9) | 85 |
| | — |
| | — |
| | 1,850 |
| | — |
|
Stock compensation expense | 1,205 |
| | 1,180 |
| | 1,438 |
| | 2,053 |
| | 3,518 |
|
Loss on extinguishment of debt | — |
| | — |
| | 12,635 |
| | — |
| | — |
|
Adjusted EBITDA | $ | 34,271 |
| | $ | 36,008 |
| | $ | 76,737 |
| | $ | 89,505 |
| | $ | 91,408 |
|
|
| | | | | | | | | | | | | | | | | | | |
Reconciliation of Restaurant-Level EBITDA (5): | | | | | | | | |
Income (loss) from continuing operations | $ | (5,075 | ) | | $ | (7,551 | ) | | $ | 31,208 |
| | $ | 35,702 |
| | $ | 29,473 |
|
Add: | | | | | | | | | |
Restaurant-level integration costs | — |
| | — |
| | — |
| | — |
| | — |
|
General and administrative expenses | 37,228 |
| | 40,001 |
| | 50,515 |
| | 54,956 |
| | 60,348 |
|
Depreciation and amortization | 33,594 |
| | 36,923 |
| | 39,845 |
| | 47,295 |
| | 54,159 |
|
Impairment and other lease charges | 4,462 |
| | 3,541 |
| | 3,078 |
| | 2,355 |
| | 2,827 |
|
Other expense (income) (8) (9) | 17 |
| | 47 |
| | (126 | ) | | 338 |
| | (333 | ) |
Restaurant-Level EBITDA | $ | 70,226 |
| | $ | 72,961 |
| | $ | 124,520 |
| | $ | 140,646 |
| | $ | 146,474 |
|