Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on June 22, 2004

Registration No. 333-        


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

CARROLS HOLDINGS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware   5812   16-1287774

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 


 

968 James Street

Syracuse, New York 13203

(315) 424-0513

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


 

Joseph A. Zirkman, Esq.

Vice-President, General Counsel

c/o Carrols Corporation

968 James Street

Syracuse, New York 13203

(315) 424-0513

(Name, Address Including Zip Code and Telephone Number, Including Area Code, of Agent For Service)

 


 

SEE TABLE OF ADDITIONAL REGISTRANTS

 


 

Copies to:

 

Wayne A. Wald, Esq.

Katten Muchin Zavis Rosenman

575 Madison Avenue

New York, New York 10022

(212) 940-8800

 

Risë B. Norman, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 


 

Approximate date of commencement of proposed sale to the public:

 

As soon as practicable after the effective date of this Registration Statement.

 



Table of Contents

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

 

CALCULATION OF REGISTRATION FEE

 


Title of Each Class of

Securities to be Registered

 

Proposed Maximum

Aggregate

Offering Price (1)

 

Amount of

Registration Fee

Enhanced Yield Securities (EYSs) (2)

           

Shares of Class A Common Stock, par value $0.01 per share (3)

           

        % Senior Subordinated Notes (4)

           

Subsidiary Guarantees of         % Senior Subordinated Notes (5)

           

Total

  $ 475,000,000   $ 60,183

(1) Estimated solely for the purpose of calculating the amount of registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) The EYSs represent              shares of the Class A common stock and $             million aggregate principal amount of         % senior subordinated notes of Carrols Holdings Corporation (“Carrols Holdings”), including              EYSs subject to the underwriters’ over-allotment option to purchase additional EYSs, and an indeterminate number of EYSs of the same series which may be received by holders of EYSs in the future on one or more occasions in replacement of the EYSs being offered hereby in the event of a subsequent issuance of EYSs, upon an automatic exchange of portions of the notes for identical portions of such additional notes as discussed in note (4) below.
(3) Includes              shares of Class A common stock subject to the underwriters’ over-allotment option to purchase additional EYSs.
(4) Includes $             million aggregate principal amount of Carrols Holdings’         % senior subordinated notes issued in the form of EYSs, which are subject to the underwriters’ over-allotment option to purchase additional EYSs. In addition, $             million aggregate principal amount of senior subordinated notes will be sold separately, not in the form of EYSs, to the public in connection with this offering. Also includes an indeterminate principal amount of senior subordinated notes of the same series as the senior subordinated notes, which will be received by holders of notes in the future on one or more occasions in the event of a subsequent issuance of EYSs, upon an automatic exchange of portions of the notes for identical portions of such additional notes.
(5) Each of the subsidiary guarantors listed in the Table of Additional Registrants on the next page will guarantee the notes being registered hereby. Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee for the guarantees is payable.

 

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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TABLE OF ADDITIONAL REGISTRANTS

 

Exact Name of Registrant

Guarantor as Specified in its Charter


  

State or Other

Jurisdiction of

Incorporation or

Organization


  

Primary Standard

Industrial Classification

Code Number


  

I.R.S. Employer

Identification Number


Carrols Corporation        Delaware    5812    16-0958146
Cabana Bevco LLC        Texas    5810    74-2974628
Cabana Beverages, Inc.        Texas    5810    74-2616290
Carrols J.G. Corp.        Delaware    5812    16-1440019
Carrols Realty Holdings Corp.        Delaware    6500    16-1443701
Carrols Realty I Corp.        Delaware    6500    16-1440018
Carrols Realty II Corp.        Delaware    6500    16-1440017
Get Real, Inc.        Delaware    5810    06-1387866
Pollo Franchise, Inc.        Florida    5812    65-0446291
Pollo Operations, Inc.        Florida    5812    65-0446289
Quanta Advertising Corp.        New York    7310    16-1033405
Taco Cabana, Inc.        Delaware    5810    74-2201241
TC Bevco LLC        Texas    5810    74-2974633
TC Lease Holdings III, V and VI, Inc.        Texas    6500    74-2642647
T.C. Management, Inc.        Delaware    5810    74-2686352
Texas Taco Cabana, L.P.        Texas    5810    74-2686346
TP Acquisition Corp.        Texas    5810    74-2673996

 

The address, including zip code, of the principal executive offices of each additional registrant is: 968 James Street, Syracuse, New York 13203. Their telephone number at that address is (315) 424-0513.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated June 22, 2004

 

CARROLS HOLDINGS CORPORATION

 

LOGO

 

Enhanced Yield Securities (EYSs)

representing

             shares of Class A common stock and

$                  % senior subordinated notes due 2016

and

$                     % senior subordinated notes due 2016

 


 

This is our initial public offering of EYSs and senior subordinated notes. We are offering              EYSs representing              shares of our Class A common stock and $             million aggregate principal amount of our         % senior subordinated notes due 2016. Each EYS initially represents:

    one share of our Class A common stock; and
    a             % senior subordinated note with $             principal amount.

 

We are also selling separately, not in the form of EYSs, an additional $             million aggregate principal amount of             % senior subordinated notes due 2016, which we refer to in this prospectus as the separate notes. Purchasers of the separate notes may not also purchase EYSs in this offering. The completion of the offering of the separate notes is a condition to our sale of the EYSs, and the completion of the offering of the EYSs is a condition to our sale of the separate notes. In addition, the completion of the internal corporate transactions described herein is a condition to our offering of the EYSs and the separate notes, and the completion of the offering of the EYSs and the separate notes is a condition to the consummation of the internal corporate transactions.

 

The notes mature on                     , 2016. We may defer or may be required to defer interest payments on the notes under specified circumstances and subject to the limitations described in “Description of Notes — Terms of the Notes — Interest Deferral” on page 122 and “Description of Other Indebtedness – New Credit Facility” on page 110. Deferred interest on the notes will bear interest quarterly at a rate equal to the stated annual rate of interest on the notes divided by four.

 

Upon a subsequent issuance by us of EYSs or additional notes of the same series, a portion of your notes may be automatically exchanged for an identical principal amount of the notes issued in such subsequent issuance, and in that event your EYSs or separate notes will be replaced with new EYSs or new notes. In addition to the notes offered hereby, the registration statement of which this prospectus is a part also registers the notes and new EYSs to be issued upon any such subsequent issuance. For more information regarding these automatic exchanges and the effect they may have on your investment, see “Description of Notes — Covenants Relating to EYSs — Procedures Relating to Subsequent Issuance” on page 129 and “Material U.S. Federal Income Tax Consequences — Consequences to U.S. Holders — Notes — Additional Issuances” on page 161.

 

Holders of EYSs will have the right to separate the EYSs into the shares of our Class A common stock and the notes represented thereby at any time after the earlier of 45 days from the closing of this offering or the occurrence of a change of control. Similarly, any holder of shares of our Class A common stock and notes may, unless the EYSs have automatically separated, combine the applicable number of shares of Class A common stock and principal amount of notes to form EYSs. Separation of all of the EYSs will occur automatically upon the occurrence of certain events described in this prospectus.

 

We will apply to list the EYSs on the                                          under the symbol “    .” We anticipate that the initial public offering price will be between $             and $             per EYS and the public offering price of the separate notes will be 100% of their stated principal amount.

 

Investing in the EYSs, shares of our Class A common stock and/or the notes involves risks. Risk Factors begin on page 30.

 

     Per EYS(1)

   Total

  

Per Separate

Note


  Total

Public Offering Price

   $                 $                             %   $             

Underwriting Discount

   $                 $                             %   $             

Proceeds to Carrols Holdings Corporation (before expenses)(2)

   $                 $                             %   $             

 

(1) Consists of $             allocated to each note, which represents 100% of its stated principal amount, and $             allocated to each share of Class A common stock.
(2) Approximately $             million of these proceeds will be paid to the existing stockholders, including certain members of management.

 

We have granted the underwriters an option to purchase up to an aggregate of              additional EYSs on the same terms and conditions as set forth above to cover over-allotments, if any. To the extent we sell more EYSs in connection with the over-allotment option, the cash proceeds to certain of the existing stockholders will be greater.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Lehman Brothers, on behalf of the underwriters, expects to deliver the EYSs and the separate notes on or about                     , 2004.

 


LEHMAN BROTHERS

 

                    , 2004


Table of Contents

TABLE OF CONTENTS

 

Summary

   1

Risk Factors

   30

Cautionary Statement Regarding Forward-Looking Statements

   49

The Transactions

   50

Use of Proceeds

   52

Dividend Policy

   54

Capitalization

   55

Dilution

   56

Selected Historical Financial Data

   57

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   62

Business

   77

Management

   97

Principal Stockholders

   106

Certain Relationships and Related Party Transactions

   108

Description of Other Indebtedness

   110

Description of EYSs

   111

Description of Capital Stock

   116

Description of Notes

   121

Shares Eligible for Future Sale

   156

Material U.S. Federal Income Tax Consequences

   157

Certain ERISA Considerations

   167

Underwriting

   168

Experts

   175

Legal Matters

   175

Where You Can Find More Information

   175

Index to Consolidated Financial Statements

   F-1

 


 

You should rely only upon the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 


 

Industry and Market Data

 

In this prospectus we refer to information and statistics regarding the food industry. Unless otherwise indicated, all U.S. restaurant industry data in this prospectus is from the Technomic Information Services (Technomic) 2004 report entitled “Technomic Top 100: Update and Analysis of the Largest U.S. Chain Restaurant Companies.” We believe that this source is reliable, but we have not independently verified its information and cannot guarantee its accuracy or completeness. The information and statistics we have used from Technomic reflect rounding adjustments.

 


 

Burger King® is a registered trademark and service mark and Whopper® is a registered trademark of Burger King Brands, Inc., a wholly-owned subsidiary of Burger King Corporation, or BKC. Neither BKC nor any of its subsidiaries, affiliates, officers, directors, agents, employees, accountants or attorneys are in any way participating in, approving or endorsing this offering, any of the underwriting or accounting procedures used in this offering, or any representations made in connection with this offering. The grant by BKC of any franchise or other rights to us is not intended as, and should not be interpreted as, an express or implied approval, endorsement or adoption of any statement regarding financial or other performance which may be contained in this prospectus. All financial information has been prepared by us and is our sole responsibility.

 

Any review by BKC of this prospectus or the information included in this prospectus has been conducted solely for the benefit of BKC to determine conformance with BKC internal policies, and not to benefit or protect any other person. No investor should interpret such review by BKC as an internal approval, endorsement, acceptance or adoption of any representation, warranty or covenant contained in this prospectus.

 

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The enforcement or waiver of any obligation of Carrols Corporation under any agreement between Carrols Corporation and BKC or BKC affiliates is a matter of BKC or BKC affiliates’ sole discretion. No investor should rely on any representation, assumption or belief that BKC or BKC affiliates will enforce or waive particular obligations of Carrols Corporation under those agreements.

 


 

Through and including                     , 2004 (the 25th day after the date of this prospectus), all dealers effecting transactions in the EYSs and separate notes, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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SUMMARY

 

The following is a summary of the principal features of this offering of EYSs and separate notes and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus.

 

Throughout this prospectus, we refer to Carrols Holdings Corporation, a Delaware corporation, as “Carrols Holdings” and, together with its consolidated operations, as “we,” “our” and “us,” unless otherwise indicated. Any reference to “Carrols” refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware corporation, and its consolidated operations, unless otherwise indicated. We are a holding company and have no direct operations. Our principal assets are the capital stock of Carrols and any intercompany notes owed to Carrols Holdings, all of which will be pledged to the creditors under the new credit facility, as described more fully below.

 

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. For convenience, the dating of the financial information in this prospectus has been labeled as of, and for the years ended, December 31, 1999, 2000, 2001, 2002 and 2003. Similarly, all references herein to the three months ended March 30, 2003 and March 28, 2004 are referred to as the three months ended March 31, 2003 and 2004, respectively.

 

Throughout this prospectus, we use the terms “EBITDA” and “EBITDA margins” because we believe they are useful financial indicators for measuring operating results as well as the ability to service and/or incur indebtedness. They should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. EBITDA is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Management believes the most directly comparable measure to EBITDA calculated in accordance with GAAP is net income (loss). See Reconciliation of Non-GAAP Financial Measures on page 60.

 

Carrols Holdings Corporation

 

Company Overview

 

We are one of the largest restaurant companies in the United States operating 534 restaurants in 16 states as of March 31, 2004. We operate three restaurant brands that provide balance through diversification of our restaurant concepts and geographic dispersion. We own and operate two regional restaurant companies, Taco Cabana® and Pollo Tropical® (together referred to by us as our Hispanic Brands). We are also the largest Burger King® franchisee in the world and have operated Burger King restaurants since 1976. For the year ended December 31, 2003, we had total revenues of $645.0 million and EBITDA of $83.7 million.

 

The following charts reflect total revenues and EBITDA generated by our Hispanic Brands and Burger King restaurants for the year ended December 31, 2003 which illustrate our balance and diversity:

 

LOGO

 

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Hispanic Brands.    We entered the quick-casual restaurant segment in 1998 with our acquisition of Pollo Tropical, Inc. and we subsequently acquired Taco Cabana, Inc. in late 2000. As of March 31, 2004, our Hispanic Brands were comprised of 183 company-owned and 33 franchised restaurants.

 

Taco Cabana—Our Taco Cabana restaurants combine generous portions of fresh, premium quality Tex-Mex and traditional Mexican style food in a festive setting with the convenience and value of quick-service restaurants. Menu items include flame-grilled beef and chicken fajitas, quesadillas, traditional Mexican and American breakfasts, other Tex-Mex dishes and fresh-made flour tortillas. Unlike many of our competitors, most menu items are made fresh daily in each of our Taco Cabana restaurants. Our Taco Cabana restaurants also offer a distinctive salsa bar as well as a variety of beverage choices, including margaritas and beer. Taco Cabana pioneered the Mexican patio café concept with its first restaurant in San Antonio, Texas in 1978. As of March 31, 2004, we owned and operated 123 Taco Cabana restaurants located in Texas and Oklahoma and franchised nine Taco Cabana restaurants. For the year ended December 31, 2003, our Taco Cabana restaurants generated total revenues of $181.5 million and EBITDA of $24.4 million. In addition, for 2003, our Taco Cabana restaurants generated average annual sales per restaurant of $1.5 million and average EBITDA per restaurant of $0.2 million.

 

Pollo Tropical—Our Pollo Tropical restaurants feature fresh grilled chicken marinated in a proprietary blend of tropical fruit juices and spices and authentic “made from scratch” side dishes. Our menu emphasizes freshness and quality with a focus on flavorful chicken served “hot off the grill.” Pollo Tropical restaurants combine high quality, distinctive menu items and an inviting tropical setting with the convenience and value of quick-service restaurants. Most menu items are made fresh daily in each of our Pollo Tropical restaurants. Pollo Tropical opened its first company-owned restaurant in 1988 in Miami. As of March 31, 2004, we owned and operated a total of 60 restaurants, 51 of which were located in south Florida under the trade name Pollo Tropical, and nine of which were located in central Florida under the trade name TropiGrill®. We also franchised 24 Pollo Tropical restaurants as of March 31, 2004, 19 of which were located in Puerto Rico, four in Ecuador and one in Miami. Since our acquisition of Pollo Tropical, we have expanded the brand by over 65% by opening 24 new company-owned restaurants. For the year ended December 31, 2003, our Pollo Tropical restaurants generated total revenues of $110.2 million and EBITDA of $22.6 million. In addition, for 2003, our Pollo Tropical restaurants generated average annual sales per restaurant of $1.8 million, which we believe is among the highest in the quick-casual segment, and average EBITDA per restaurant of $0.4 million.

 

Burger King.    Burger King is the second largest hamburger restaurant chain in the world and we are the largest Burger King franchisee in the world. Burger King restaurants feature flame-broiled hamburgers and other sandwiches, the most popular of which is the WHOPPER® sandwich. The WHOPPER® is a large, flame-broiled hamburger on a toasted bun garnished with mayonnaise, lettuce, onions, pickles and tomatoes. Burger King restaurants offer hamburgers, cheeseburgers, chicken and fish sandwiches, breakfast items, french fried potatoes, onion rings, salads, shakes, desserts, and a variety of soft drinks and other beverages. In addition, promotional menu items are introduced periodically for limited periods. Burger King continually seeks to develop new products to enhance the menu of its restaurants. As of March 31, 2004, we operated 351 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. For the year ended December 31, 2003, our Burger King restaurants generated total revenues of $353.3 million and EBITDA of $36.8 million. In addition, for 2003, our Burger King restaurants generated average annual sales per restaurant of $1.0 million and average EBITDA per restaurant of $0.1 million.

 

The Industry

 

Total restaurant industry revenues in the United States for 2003 were $291.9 billion, an increase of 3.4% over 2002. The U.S. restaurant industry is comprised of five major segments: quick-service, quick-casual, family/mid-scale, casual dining and fine dining restaurants. Sales in the overall restaurant industry are projected to increase at a compound annual growth rate of 4.8% between 2003 and 2008.

 

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The emerging quick-casual restaurant segment, which includes our Hispanic Brands, combines the convenience of quick-service restaurants with the menu variety, use of fresh ingredients, upscale decor and food quality of casual dining. We believe that the quick-casual restaurant segment is one of the fastest growing segments of the restaurant industry. Sales growth in 2003 of quick-casual chains in the Top 100 restaurant chains was 9.1% as compared to 5.1% for the overall Top 100 restaurant chains, which includes all five major segments.

 

The quick-service restaurant segment is the largest segment of the U.S. restaurant industry. Technomic identifies eight major types of quick-service restaurants in the United States: hamburger; pizza/pasta; chicken; other sandwich; Mexican; ice cream/yogurt; donut and cafeteria/buffet. Sales at quick-service restaurants in the United States were $144.1 billion in 2003, representing 49% of total U.S. restaurant industry sales. The hamburger segment of the U.S. quick-service restaurant segment, which includes our Burger King restaurants, generated revenues of $50.7 billion in 2003 making it the largest segment of the U.S. quick-service restaurant market. Sales in the hamburger segment are projected to increase at a compound annual growth rate of 3.5% between 2003 and 2008. We believe that the quick-service restaurant segment meets consumers’ desire for a convenient, reasonably priced restaurant experience.

 

Competitive Strengths

 

We attribute our success in the quick-casual and quick-service restaurant segments to the following competitive strengths:

 

Strong Brand Names.    We believe our restaurant concepts are highly recognized brands in their market areas.

 

    Hispanic Brands—Taco Cabana and Pollo Tropical are among the most highly recognized quick-casual restaurant brands in their respective core markets. Of the 123 Taco Cabana restaurants we owned and operated as of March 31, 2004, 117 were concentrated in five major Texas markets: San Antonio, Houston, Dallas/Fort Worth, Austin and El Paso. All of the 60 Pollo Tropical restaurants we owned and operated as of March 31, 2004 were located in four counties in south and central Florida. We believe that the following factors have contributed to the success of our Hispanic Brands:

 

  strong brand awareness in their respective core markets;

 

  high quality, freshly prepared food;

 

  high frequency of visits and loyalty by core customers; and

 

  distinctive menu offerings that capitalize on the growing consumer preference for variety and ethnic foods.

 

    Burger King—Since its introduction in 1954, the Burger King brand has become one of the most recognized brands in the restaurant industry. Each year Burger King spends between 4% and 5% of total system sales on advertising (a total of $2.3 billion over the past five years) to sustain and increase this high brand awareness. We believe that strong brand recognition, combined with food quality, value and convenience of Burger King restaurants, provide opportunities for growth for the Burger King brand.

 

Stable and Diversified Cash Flows.    We believe that the stability of our operating cash flows is due to the proven success of our restaurant concepts, the high degree of customer awareness of our brands and our consistent focus on effective restaurant operations. Over the past five years, our EBITDA margins have ranged between 12.6% and 14.4% and averaged 13.5%. We also believe that multiple concepts operating in diverse geographic areas enable us to capitalize on regions that have rapidly growing populations and to further reduce our dependence on the economic performance of any one particular region or restaurant concept. Taco Cabana, with its restaurants primarily located in Texas, and Pollo Tropical, with its restaurants primarily located in Florida, have provided us with geographic and concept diversity. In addition, our Burger King restaurants are geographically dispersed over 13 states in the Northeast, Southeast and Midwest regions.

 

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Well Positioned to Continue to Capitalize on Growing Population in Our Core Markets.    Due primarily to our acquisition of Taco Cabana in late 2000 as well as the development of new Taco Cabana and Pollo Tropical restaurants over the past five years, total revenues generated by our Hispanic Brands have increased from $83.8 million in 1999 to $291.7 million in 2003. During this time frame, total EBITDA generated by our Hispanic Brands has increased over 250% from $18.5 million in 1999 to $47.0 million in 2003. As of March 31, 2004, we collectively owned and operated or franchised more than 200 restaurants under our Hispanic Brands. Our Hispanic Brand restaurants are concentrated in two regions: Texas and Florida. We expect sales from these restaurants to benefit from the continued population growth in these regions and from the growth of the U.S. Hispanic population, both of which are expected to exceed the national average. According to the U.S. Census Bureau, the U.S. population is forecast to grow by 4.1% from 2005 to 2010 and the population in Texas and Florida is forecast to grow by 6.4% and 6.7%, respectively, during that same period. In addition, the growth of the Hispanic population is expected to outpace overall population growth and increase from 11.8% of the total U.S. population in 2000 to 18.2% by 2025.

 

Largest Burger King Franchisee.    We are the largest Burger King franchisee in the world. We believe that our leadership position, together with our experienced management team, effective management information systems, and a comprehensive infrastructure enable us to operate more efficiently and better enhance restaurant margins and overall performance levels than most other Burger King franchisees. These strengths also enable us to selectively acquire additional Burger King restaurants, continue to develop new restaurants and leverage this expertise across our Hispanic Brands.

 

Experienced Management Team.    Our senior management has extensive experience in the restaurant industry and has a long and successful history of developing, acquiring and operating quick-service and quick-casual restaurants. Management has successfully integrated the acquisitions of Taco Cabana and Pollo Tropical. We believe that our senior management team’s experience in operating restaurants and knowledge of the demographic and other characteristics of our core markets provide us with a competitive advantage.

 

Business Strategy

 

Our business strategy is to continue to increase revenues and cash flows through the development of new restaurants and selective acquisitions. Our business strategy also includes improvements in sales at our restaurants through our marketing and product development activities and through our operating efficiencies as a result of our training and sophisticated management information systems. We also may have opportunities to expand our Hispanic Brands in additional markets through franchising and other arrangements. Our strategy is based on the following components:

 

Leverage Strong Brand Names.    We realize significant benefits as an owner and operator of the Taco Cabana and Pollo Tropical restaurant concepts and as a Burger King franchisee. These benefits are the result of the following:

 

    strong recognition of the Taco Cabana and Pollo Tropical brands in their core markets;

 

    ability to manage brand awareness, marketing and product development for our Hispanic Brands;

 

    widespread recognition of the Burger King brand and flagship WHOPPER® product supported by a national advertising program; and

 

    ability to capitalize on Burger King’s product development capabilities.

 

Grow Sales and Continue to Improve Operating Efficiencies.    We maintain a disciplined commitment to increasing the profitability of our existing restaurants. Our strategy is to grow sales in our existing restaurants by continuing to develop new products for our Hispanic Brands, developing and enhancing the efficiency and quality of our proprietary advertising and promotional programs and improving the customer experience at all of

 

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our restaurants. Our large base of restaurants, skilled management team and sophisticated management information and operating systems enable us to optimize operating efficiencies for our restaurants. We are able to control restaurant labor and food costs, effectively manage our restaurant operations and ensure consistent application of operating controls through the use of our sophisticated management information and point-of-sale systems. Our size and, in the case of Burger King, the size of the Burger King system enable us to realize benefits from improved bargaining power for purchasing and cost management initiatives. We believe these factors provide the basis for increased restaurant level and company profitability.

 

Open Additional Restaurants.    We believe that many of our existing markets continue to provide opportunities for the development of new Taco Cabana, Pollo Tropical and Burger King restaurants. Our staff of real estate and development professionals are responsible for new restaurant development. Before developing a new restaurant, we conduct an extensive site selection and evaluation process that includes in-depth demographic, market and financial analyses. By selectively increasing the number of restaurants we operate in a particular market, we can increase brand awareness and effectively leverage our management oversight, corporate infrastructure and local marketing expenditures.

 

We believe there are further growth opportunities for our Hispanic Brands. We plan to open new restaurants in our existing markets which may be either free-standing buildings or restaurants contained within strip shopping centers (in-line restaurants) to further leverage our existing brand awareness. Operating in-line restaurants allows us to selectively expand our brand penetration and visibility in certain of our existing markets, while doing so at a lower cost than developing a restaurant as a free-standing building. We also believe that there may be opportunities to further expand these brands beyond their current core regions of Texas and south and central Florida.

 

We believe there may be opportunities to expand the number of Burger King restaurants we operate through selective acquisitions from other franchisees and through development of new restaurants in our existing markets. We believe that selective acquisitions of additional Burger King restaurants would result in operating efficiencies from our proven abilities to reduce operating costs and achieve increased economies of scale by leveraging our infrastructure and operating systems.

 

Explore Franchising and Other Arrangements.    We may consider expanding our Hispanic Brands into new markets through franchising and other arrangements, such as joint ventures, which would provide us with additional cash flows through royalties, franchise and other fees. We believe this strategy will allow us to test new markets for future expansion without incurring significant capital expenditures required for developing new company owned and operated restaurants.

 

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The Transactions

 

In connection with this offering, we will:

 

    effect a reclassification of our existing common stock and a number of other internal corporate transactions;

 

    enter into a $             million new credit facility; and

 

    conduct a tender offer and consent solicitation to repurchase all of Carrols’ 9 1/2% senior subordinated notes.

 

The closing of this offering is conditioned upon our completion of these transactions.

 

We estimate that we will sell              EYSs and an additional $             million aggregate principal amount of separate notes as part of this offering. The completion of the offering of the separate notes is a condition to our sale of the EYSs, and the completion of the offering of the EYSs is a condition to our sale of the separate notes. Assuming an initial public offering price of $             per EYS, which represents the midpoint of the range set forth on the cover page of this prospectus, and 100% of the stated principal amount of each separate note, we estimate that we will receive aggregate net proceeds of $             million from this offering of EYSs and separate notes, after deducting underwriting discounts, commissions and other estimated transaction expenses.

 

We will use these net proceeds, together with $             million of borrowings under the new credit facility, as follows:

 

    $             million to repurchase              shares of our existing common stock (and options to purchase shares of our existing common stock) from the existing stockholders, including certain members of management;

 

    $             million to repay all outstanding borrowings under the existing credit facility;

 

    $             million to repurchase all of Carrols’ 9 1/2% senior subordinated notes in the tender offer or through a redemption;

 

    $             million to pay bonuses and other payments to certain members of management upon the completion of this offering; and

 

    $             million to pay related fees and expenses.

 

If the underwriters exercise their over-allotment option with respect to the EYSs in full, we will use all of the net proceeds we receive from the sale of additional EYSs under the over-allotment option ($             million) to repurchase              shares of our existing common stock (and options to purchase              shares of our existing common stock) held by certain of the existing stockholders, including certain members of management.

 

We refer to the offering of the EYSs and the separate notes, our internal corporate transactions, the entering into of the new credit facility, the tender offer and consent solicitation, the repurchases of our existing common stock and stock options from the existing stockholders, the repayment in full of the existing credit facility and the retirement of Carrols’ 9 1/2% senior subordinated notes collectively as the “transactions.” Each of the transactions described above is conditioned upon our completion of each of the other transactions.

 

Internal Corporate Transactions

 

Prior to the commencement of this offering, we will amend our current certificate of incorporation and long-term incentive plans to provide for a single class of authorized common stock and to convert all outstanding stock options to purchase each of Carrols Holdings’ Taco Cabana class of common stock and Carrols Holdings’ Pollo Tropical class of common stock into options to purchase only Carrols Holdings’ Carrols class of common stock, which we refer to in this prospectus as our “existing common stock.”

 

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Concurrently with the closing of this offering, we will repurchase an aggregate of              shares of our existing common stock from Madison Dearborn Capital Partners, L.P. and Madison Dearborn Capital Partners II, L.P., together, Madison Dearborn, and BIB Holdings (Bermuda) Ltd., which we refer to collectively in this prospectus as the “existing financial investors.” In addition, we will repurchase an aggregate of                  shares of our existing common stock from certain of our directors and officers, and repurchase options to purchase an aggregate of                  shares of our existing common stock from certain of our directors, officers and current and former key employees.

 

In connection with this offering, we will reclassify our existing common stock into two classes of common stock: Class A common stock and Class B common stock. The shares of our existing common stock held by the existing stockholders and not repurchased by us in connection with this offering will be reclassified into shares of Class B common stock. Options to purchase our existing common stock held by the existing stockholders and not repurchased by us in connection with this offering will be exchanged for restricted shares of our Class B common stock to be issued under a newly-adopted restricted stock plan. In this prospectus, we refer to all of the foregoing transactions as our “internal corporate transactions.”

 

New Credit Facility

 

Concurrently with the closing of this offering, Carrols will repay all outstanding borrowings due to the current lenders under its senior secured credit facility, which we refer to in this prospectus as the “existing credit facility,” and will amend and restate the existing credit facility with a new syndicate of lenders, including Lehman Brothers as lead arranger and bookrunner. In this prospectus, we refer to this amended and restated senior secured credit facility as the “new credit facility.” The new credit facility will be comprised of a secured revolving credit facility in a total principal amount of up to $             million (including amounts reserved for letters of credit) and a term loan facility consisting of senior secured notes in an aggregate principal amount of $             million. A portion of the new credit facility ($             million) will be reserved to fund capital expenditures for new restaurant development. While the new credit facility will permit us to pay dividends on our shares of Class A common stock and Class B common stock and interest to holders of the notes, it will contain significant restrictions on our ability to do so, and on our subsidiaries’ ability to make dividend and interest payments to us. The revolving credit facility will have a     -year maturity and the term loan facility will have a     -year maturity. See “Description of Other Indebtedness—New Credit Facility.”

 

Tender Offer and Consent Solicitation

 

In connection with this offering, we will commence a tender offer and consent solicitation with respect to all of Carrols’ outstanding 9 1/2% senior subordinated notes due 2008 for an expected total consideration of $             million. In this prospectus, we refer to these notes as “Carrols’ 9 1/2% senior subordinated notes.” As of March 31, 2004, $170 million aggregate principal amount of Carrols’ 9 1/2% senior subordinated notes were outstanding. The closing of this offering will be conditioned upon the receipt of the tender and consent of at least a majority in aggregate principal amount of Carrols’ 9 1/2% senior subordinated notes outstanding in order to delete the restrictive covenants contained in the indenture governing those notes, and the consummation of the tender offer and consent solicitation will be conditioned upon the closing of this offering. Holders that provide consents will be obligated to tender and holders who tender will be obligated to consent. After we receive the required consents, we intend to enter into a supplemental indenture to remove the restrictive covenants contained in the indenture to facilitate this offering. We cannot assure you that the tender offer and consent solicitation will be consummated on the terms described above. If any notes are not tendered pursuant to the tender offer, we intend to redeem such outstanding notes. The notes are redeemable at our option on or after December 1, 2003 at a price of 104.75% of the principal amount if redeemed before December 1, 2004. We will use a portion of the net proceeds from this offering and borrowings under the new credit facility to pay for Carrols’ 9 1/2% senior subordinated notes accepted for purchase in the tender offer and consent solicitation or redeemed after this offering.

 

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The Existing Stockholders

 

The existing financial investors and certain of our directors, officers and current and former key employees are the owners of all our outstanding existing common stock (and, in the case of our directors, officers and current and former key employees, outstanding options to purchase our existing common stock) prior to this offering. In this prospectus, we refer to these owners as the “existing stockholders.” As discussed above, the existing stockholders will be selling an aggregate of              shares of our existing common stock (and options to purchase             shares of our existing common stock) to us for $             million, which we will purchase with a portion of the proceeds of this offering, or              shares of our existing common stock (and options to purchase              shares of our existing common stock) for $             million if the underwriters exercise their over-allotment option with respect to the EYSs.

 

Following the completion of our internal corporate transactions and upon the consummation of the other transactions, we anticipate that the existing financial investors will own an aggregate of              shares of our outstanding Class B common stock, representing approximately         % of our outstanding capital stock, or an aggregate of              shares representing approximately         % of our outstanding capital stock, if the underwriters’ over-allotment option with respect to the EYSs is exercised in full. In addition, we anticipate that the other existing stockholders will own an aggregate of              shares of our outstanding Class B common stock, representing approximately            % of our outstanding capital stock, or an aggregate of              shares representing approximately            % of our outstanding capital stock, if the underwriters’ over-allotment option with respect to the EYSs is exercised in full.

 

Exchange Rights of Class B Common Stockholders

 

After the expiration of a 180-day lock-up period, the holders of our Class B common stock will have rights to exchange their Class B common stock for EYSs or, if the EYSs have been automatically separated or if the Class A common stock is listed for separate trading on a stock exchange, Class A common stock, subject to certain restrictions. Following the consummation of the transactions and through the maturity date of the notes, and subject to the lock-up period, each share of Class B common stock will be exchangeable into EYSs at a fixed rate of              shares of Class B common stock for one EYS. If the EYSs have automatically separated or if the shares of our Class A common stock are listed for separate trading on a stock exchange, the holders of the Class B common stock may convert each share of Class B common stock into one share of Class A common stock. Following this offering, we expect that there will be              shares of Class B common stock (or              shares of Class B common stock if the underwriters exercise their over-allotment option with respect to the EYSs in full) exchangeable into              EYSs (or              EYSs if the underwriters exercise their over-allotment option in full). Subject to limited exceptions, until the second anniversary of the consummation of this offering, the amended and restated stockholders agreement to be entered into among the Class B stockholders will restrict the holders of our Class B common stock from exercising their exchange rights if following the exchange the holders of our Class B common stock would hold less than 10% of the outstanding shares of our capital stock in the aggregate. For a more complete description of this exchange right and the terms of our Class A common stock and Class B common stock, see “Description of Capital Stock.”

 

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Our Corporate Structure After this Offering

 

The following chart reflects our corporate structure immediately after this offering (without giving effect to the exercise of the underwriters’ over-allotment option with respect to the EYSs), including percentages of voting control:

 

LOGO

 

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General Information About This Prospectus

 

Throughout this prospectus, unless otherwise noted, we have assumed:

 

    no exercise of the underwriters’ over-allotment option with respect to the EYSs;

 

    the reclassification of our existing common stock (and options to purchase our existing common stock);

 

    that the 10% of our outstanding capital stock that the existing stockholders must continue to hold for two years following the consummation of this offering is calculated on a fully-diluted basis;

 

    the purchase of all of Carrols’ 9 1/2% senior subordinated notes in the tender offer and consent solicitation for aggregate consideration of $             million, including accrued and unpaid interest to the tender purchase date;

 

    a         % annual interest rate on the notes, which is subject to change depending on market conditions prior to the pricing date; and

 

    an initial public offering price of $             per EYS (which represents the midpoint of the range set forth on the cover page of this prospectus) comprised of $             allocated to one share of Class A common stock and $             (100% of the stated principal amount) allocated to each note, and 100% of the stated principal amount of each separate note.

 

Unless the context otherwise requires, references in this prospectus to this “offering” refer collectively to the offering of EYSs, including the shares of Class A common stock and notes represented by such EYSs, and $             million aggregate principal amount of separate notes.

 

Recent Developments

 

We restated our financial statements, including applicable footnotes, for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98, “Accounting for Leases”, rather than as sale/leaseback transactions.

 

The restatement was due to lease provisions in certain of our sale/leaseback transactions, which in our opinion have minimal commercial impact upon the relevant terms of the leases. Had we been aware of the potential impact of these provisions upon our financial statements, we believe that both we and the respective lessors would have agreed to exclude those provisions from each lease without affecting any of the material terms of such leases. We may amend these leases in the future to address these provisions and to qualify them for treatment as operating leases as originally intended. However, we cannot assure you as to when or whether any or all of such leases will be amended.

 

The impact of the restatement was to record on our balance sheets the property and equipment of the restaurants subject to these transactions and record the proceeds from these transactions (including the gains previously deferred) as a form of debt financing. The restatement also impacted our financial results by increasing the depreciation expense for the property and equipment subject to these transactions and recharacterizing the lease payments previously accounted for as rent expense for these restaurants as principal repayments and interest expense. The restatement had no impact on our liquidity and net cash flows. In addition, there was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.

 

As a result of the restatement, we were in default related to certain required financial leverage ratios and other covenants under the existing credit facility. We obtained a waiver from our senior secured lenders of any

 

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prior non-compliance and defaults resulting from the restatement. In addition, the existing credit facility was amended to exclude all adjustments resulting from this restatement on our financial covenant requirements and to treat on a prospective basis the specified leases as if no restatement or recharacterization had occurred.

 

See Note 2 to the consolidated financial statements included elsewhere in this prospectus for a complete discussion of the restatement. Amounts affected by the restatement that appear in this prospectus have also been restated.

 

Our Corporate Information

 

Our principal executive office is located at 968 James Street, Syracuse, New York 13203, and our telephone number is (315) 424-0513. Our internet address is www.carrols.com. www.carrols.com is a textual reference only, meaning that the information contained on the website is not part of this prospectus and is not incorporated in this prospectus by reference. Carrols Holdings is a Delaware corporation, incorporated in 1986.

 

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The Offering

 

Summary of the EYSs and Notes

 

We are offering              EYSs at an initial public offering price of $             per EYS, which represents the midpoint of the range set forth on the cover page of this prospectus, and $             million aggregate principal amount of separate notes at an assumed initial public offering price of 100% of their stated principal amount. The completion of the offering of separate notes is a condition to our sale of the EYSs and the completion of the offering of EYSs is a condition to our sale of the separate notes. In addition, no purchaser, including the existing stockholders or any affiliate of such purchaser, is permitted to purchase both EYSs and separate notes in this offering. Unless the context requires otherwise, the EYSs and the Class A common stock and notes represented by the EYSs, together with the separate notes, are referred to in this prospectus as the “offered securities.”

 

What are EYSs?

 

EYSs are securities comprised of Class A common stock and notes.

 

Each EYS initially represents:

 

    one share of our Class A common stock; and

 

    a         % note with $             principal amount.

 

The ratio of Class A common stock to principal amount of notes represented by an EYS is subject to change in the event of a stock split, recombination or reclassification of our Class A common stock. For example, if we effect a two-for-one stock split, from and after the effective date of the stock split, each EYS will represent two shares of Class A common stock and the same principal amount of notes as it previously represented. Similarly, if thereafter we elect to effect a two-for-one combination, from and after the effective date of the combination, each EYS will represent one share of Class A common stock and the same principal amount of notes as it previously represented. Likewise, if we effect a recombination or reclassification of our Class A common stock, each EYS will thereafter represent the appropriate number of shares of Class A common stock on a recombined or reclassified basis, as applicable, and the same principal amount of notes as it previously represented. If additional notes are issued and such notes are issued with original issue discount, referred to as OID, or if we issue notes subsequent to an issuance of notes with OID, a portion of each holder’s notes, whether held as separate notes or in the form of EYSs, will be exchanged without any further action on the part of the holder for a portion of the additional notes, so that each holder of separate notes or EYSs, as the case may be, will thereafter own indivisible note units comprised of the original notes and the additional notes in the same aggregate principal amount as such holder held prior to the automatic exchange. The principal amount of the original note and the additional note in each indivisible note unit will be identical. Accordingly, following an automatic exchange of notes, each note represented by an EYS and each separate note will consist of an indivisible note unit with an aggregate principal amount equal to the aggregate principal amount of the original note immediately prior to such exchange.

 

What payments can I expect to receive as a holder of EYSs or separate notes?

 

Assuming we make our scheduled interest payments on the notes, and pay dividends in the amount contemplated by the dividend policy to be adopted by our board of directors upon consummation of this offering, holders of the EYSs will receive in the aggregate approximately $             per year in interest on the notes and dividends on the Class A common stock represented by each EYS, and holders of the separate notes will receive $             per year per $             principal amount of their notes. We expect to make interest and dividend payments quarterly on the          day of each             ,             ,              and                      to holders of record on the      day or, if such day is not a business day, on the immediately preceding business day of such month.

 

You will be entitled to receive quarterly interest payments at an annual rate of         % of the aggregate principal amount of notes or, in the case of notes represented by EYSs, approximately $             per EYS per

 

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year, subject to our right to defer interest payments on the notes for an aggregate period not to exceed eight quarters prior to                     , 2009 and on up to four occasions after                     , 2009 for up to two quarters per occasion, so long as in each case we are not otherwise in default under the indenture governing the notes. The new credit facility will contain provisions that will require us under certain circumstances to defer interest payments on the notes pursuant to our option under the indenture to defer such payments. For a detailed description of these circumstances, see “Description of Notes—Terms of the Notes—Interest Deferral” and “Description of Other Indebtedness—New Credit Facility.”

 

Holders of the EYSs will also receive quarterly dividend payments on the shares of our Class A common stock represented by the EYSs, if and to the extent dividends are declared by our board of directors and permitted by applicable law and the terms of our then existing indebtedness. Specifically, the indenture governing the notes and the new credit facility will restrict our ability to declare and pay dividends on our Class A common stock as described under “Dividend Policy,” “Description of Notes” and “Description of Other Indebtedness—New Credit Facility.” Upon the closing of this offering, our board of directors is expected to adopt a dividend policy which contemplates that, subject to applicable law and the terms of our then existing indebtedness, initial annual dividends will be approximately $             per share of our Class A common stock and Class B common stock. However, our board of directors may, in its discretion, modify or repeal this dividend policy. We cannot assure you that we will pay dividends at this level in the future, if at all. Any dividends paid to one class of our common stock must be paid to the other.

 

Will my rights as a holder of EYSs be any different than the rights of a beneficial owner of separately held Class A common stock and notes?

 

No. As a holder of EYSs you are the beneficial owner of the Class A common stock and notes represented by your EYSs. As such, through your broker or bank and The Depository Trust Company, or DTC, you will have exactly the same rights, privileges and preferences, including voting rights, rights to receive distributions, rights and preferences in the event of a default under the indenture governing the notes, ranking upon bankruptcy and rights to receive communications and notices as a beneficial owner of separately held Class A common stock and notes, as applicable, would have through its broker or bank and DTC.

 

Do I have voting rights as a holder of EYSs?

 

EYSs have no voting rights separate and apart from the underlying securities. As a holder of EYSs, you will be able to vote with respect to the underlying shares of Class A common stock. The existing stockholders, through their ownership of shares of Class B common stock, will own         % of the voting power of our common stock outstanding immediately following the offering of the EYSs (or         % if the over-allotment option with respect to the EYSs is exercised in full). Shares of our Class A common stock and shares of our Class B common stock are entitled to the same voting rights per share and vote together as a single class on all matters with respect to which holders are entitled to vote.

 

Will the EYSs be listed on an exchange?

 

Yes. We will apply to have our EYSs listed on the              under the symbol “    .” Listing is subject to our fulfillment of all of the requirements of the             , including the distribution of the EYSs to a minimum number of public holders.

 

Will the shares of our Class A common stock and the notes represented by the EYSs be separately listed on an exchange?

 

No. The notes represented by the EYSs and the separate notes will not be listed on any exchange. Our shares of Class A common stock will not be listed for separate trading on the              unless and until a sufficient number of

 

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shares are held separately and not in the form of EYSs and other conditions for listing on the                      have been satisfied as may be necessary to satisfy applicable listing requirements. If more than the required number of our outstanding shares of Class A common stock are no longer held in the form of EYSs and other conditions for listing on the                      have been satisfied for a period of 30 consecutive trading days, we will apply to list the shares of our Class A common stock for separate trading on the                     . The Class A common stock and notes represented by the EYSs will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act.

 

Will the separate notes be the same as the notes issued as a component of the EYSs?

 

Yes. The separate notes will be identical to the notes represented by EYSs, will have the same CUSIP number, and will be part of the same series of notes and issued under the same indenture. Accordingly, holders of separate notes and holders of notes represented by EYSs will vote together as a single class, in proportion to the aggregate principal amount of notes they hold, on all matters on which holders of notes are entitled to vote under the indenture governing the notes.

 

In what form will the offered securities be issued?

 

The offered securities will be issued in book-entry form only. This means that you will not be a registered holder of EYSs or the securities represented by the EYSs, or the separate notes, and you will not receive a certificate for your EYSs or the securities represented by your EYSs or the separate notes. You must rely on your broker, bank or other DTC nominee that will maintain your book-entry position to receive the benefits and exercise the rights of a holder of the offered securities.

 

Can I separate my EYSs into shares of Class A common stock and notes or combine shares of Class A common stock and notes to form EYSs?

 

Yes. Holders of any EYSs may at any time after the earlier of 45 days from the date of the closing of this offering or the occurrence of a change of control, through their broker, bank or other DTC nominee, separate the EYSs into the shares of our Class A common stock and the notes represented thereby. Similarly, unless the EYSs have previously been automatically separated, any holder of shares of our Class A common stock and notes may, at any time, through his or her broker, bank or other DTC nominee, combine the applicable number of shares of Class A common stock and principal amount of notes to form EYSs. Separation and combination of EYSs will occur promptly in accordance with DTC’s procedures and upon receipt of instructions from your broker and may involve transaction fees charged by your broker and/or financial intermediary. See “Description of EYSs—Book-Entry Settlement and Clearance—Separation and Combination.”

 

Will my EYSs automatically separate into shares of common stock and notes upon the occurrence of certain events?

 

Yes. Separation of all of the EYSs will occur automatically upon the occurrence of any redemption of the notes, whether in whole or in part, upon the maturity of the notes, upon the continuance of a payment default for 90 days under the indenture governing the notes or upon certain bankruptcy events.

 

What will happen if we issue additional EYSs or notes of the same series in the future?

 

We may in the future sell additional EYSs and/or notes of the same series, which will have terms that are identical to those of the EYSs or notes being sold in this offering. Additional EYSs will represent the same proportion of Class A common stock and notes as are represented by the then outstanding EYSs. In addition, we will be required to issue additional EYSs in the future upon the exercise of exchange rights by the holders of our Class B common stock. If we issue notes in the future (whether or not in the form of EYSs) and these notes are

 

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sold with OID for U.S. federal income tax purposes, holders of the notes outstanding prior to such issuance and purchasers of the newly issued notes will automatically exchange among themselves a portion of the notes they hold so that immediately following such automatic exchange, each holder of notes will own a pro rata portion of the new notes and the old notes. The aggregate principal amount of new notes and old notes held by any holder after the exchange will be the same as the aggregate principal amount of the notes held by such holder prior to the exchange. Accordingly, following an automatic exchange of notes, each note will consist of an indivisible note unit with an aggregate principal amount equal to the aggregate principal amount of the original note immediately prior to such exchange. This exchange will be effected automatically, without any action by the holders, through the facilities of DTC. DTC has advised us that the implementation of this automatic exchange may cause a delay in the settlement of trades for up to 24 hours. See “Description of EYSs—Book Entry Settlement and Clearance—Procedures Relating to Subsequent Issuances.”

 

Other than potential tax and bankruptcy implications and subject to market perception, we do not believe that the automatic exchange will affect the economic attributes of your investment in our EYSs or notes. The tax and bankruptcy implications of an automatic exchange are summarized below and are described in more detail in “Risk Factors—Risks Relating to the EYSs, the Shares of Class A Common Stock and the Notes” and “Material U.S. Federal Income Tax Consequences—Consequences to U.S. Holders—Notes—Additional Issuances.”

 

This automatic exchange should not impair the rights you might otherwise have to assert a claim under applicable securities laws against us or the underwriters with respect to the full amount of notes purchased by you.

 

What are the U.S. federal income tax consequences of an investment in the EYSs?

 

Certain of the U.S. federal income tax consequences of an investment in EYSs are uncertain. We intend to treat the purchase of EYSs in this offering as the purchase of shares of our Class A common stock and notes and, by purchasing EYSs, you will agree to such treatment. You must allocate the purchase price of the EYSs between the shares of our Class A common stock and the notes in proportion to their respective initial fair market values, which will establish your initial tax basis in the shares of our Class A common stock and the notes. We expect to report the initial fair market value of each share of our Class A common stock as $             and the initial fair market value of each $             principal amount of the notes as $            , and by purchasing EYSs, you will agree to such allocation. If this allocation is not respected, our interest deductions may be reduced or your income inclusions (on account of interest) may be increased.

 

We intend to treat the notes included in the EYSs as debt for U.S. federal income tax purposes, and we intend to deduct interest on such notes for tax purposes. Such position is subject to challenge by the IRS. If the notes are treated as equity rather than debt for U.S. federal income tax purposes, then the stated interest on the notes could be treated as dividends, and interest on the notes would not be deductible by us for U.S. federal income tax purposes, which could significantly reduce our future after-tax cash flow and adversely affect our ability to make interest and dividend payments. In addition, if the notes are treated as equity, payments on the notes to foreign holders generally would be subject to U.S. federal withholding taxes, and we could be liable for withholding taxes that were not collected on our prior interest payments to foreign holders. Payments to foreign holders would not be grossed-up on account of any such taxes.

 

Dividends paid on our Class A common stock through 2008 are expected to qualify for taxation to non-corporate EYS holders at long-term capital gain rates. Interest income on the notes will be taxable to U.S. individuals at ordinary income tax rates.

 

What are the U.S. federal income tax consequences of a subsequent issuance of notes?

 

The U.S. federal income tax consequences to you of the subsequent issuance of notes with OID upon a subsequent offering by us of EYSs or notes of the same series are uncertain.

 

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The indenture governing the notes will provide that, in the event there is a subsequent issuance of notes and such notes are issued with OID or are issued after an issuance of notes with OID, each holder of EYSs or separate notes, as the case may be, agrees that a portion of such holder’s notes will be exchanged for a portion of the notes acquired by the holders of such subsequently issued notes, as described above. As a result of these exchanges, the OID associated with the issuance of the new notes will be effectively spread among all holders of notes on a pro rata basis, which may adversely affect your tax treatment, as described below.

 

We intend to take the position that any subsequent issuance of notes, whether or not such notes are issued with OID, will not result in a taxable exchange of your notes for U.S. federal income tax purposes, but because of a lack of legal authority on point (1) our counsel is unable to opine on the matter and (2) there can be no assurance that the IRS will not assert that such a subsequent issuance of notes should be treated as a taxable exchange of a portion of your notes, whether held separately or in the form of EYSs, for a portion of the notes subsequently issued. In that event, you generally would have to recognize the gain (if any) realized by you on such exchange, but any loss realized by you on the exchange would most likely be disallowed. Your initial tax basis in the notes deemed to have been received in the exchange would equal the fair market value of such notes on the date of the deemed exchange (increased to reflect any disallowed loss), and your holding period for such notes would begin on the day after the deemed exchange.

 

Regardless of whether the exchange of notes is treated as a taxable event, such exchange could result in holders having to include OID in their taxable income prior to the receipt of cash. Following any subsequent issuance of notes with OID (or any issuance of notes thereafter), we (and our agents) will report any OID on the subsequently issued notes ratably among all holders of EYSs and separate notes, and each holder of EYSs and separate notes will, by purchasing EYSs or notes, agree to report OID in a manner consistent with this approach. However, the IRS might assert that any OID should be reported only to the persons that initially acquired such subsequently issued notes (and their transferees), and may challenge your reporting OID on your tax returns.

 

Immediately following an exchange of notes, we will file a Current Report on Form 8-K (or any other applicable form) to announce and quantify any changes in OID attributable to the notes.

 

Because there is no statutory, judicial or administrative authority directly addressing the tax treatment of the EYSs or instruments similar to the EYSs, we urge you to consult your own tax advisor concerning the tax consequences to you of an investment in the EYSs. For additional information, see “Material U.S. Federal Income Tax Consequences.”

 

What is the initial and prospective accounting treatment of the EYSs?

 

There is no explicit guidance under generally accepted accounting principles regarding the accounting and financial reporting of unit securities, such as the EYSs, comprised of common stock and notes. Any accounting treatment followed by us for the EYSs may be subject to future scrutiny and challenge. Authoritative accounting bodies such as the FASB, EITF or SEC may issue future guidance, rules or interpretations which may require us to adjust our accounting treatment for the EYSs. For our interpretation of the accounting treatment based on existing guidance available, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Accounting Policies.”

 

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Summary of the Common Stock

 

Issuer

Carrols Holdings Corporation

 

Shares of Class A common stock represented by EYSs

             shares, or              shares if the underwriters exercise their over-allotment option with respect to the EYSs in full.

 

Shares of Class B common stock to be outstanding following the offering

             shares, or              shares if the underwriters exercise their over-allotment option with respect to the EYSs in full.

 

Voting rights

Subject to applicable law, each outstanding share of our Class A common stock and Class B common stock will carry one vote per share and, as a general matter, will vote together as a single class.

 

Dividends

You and the holders of our Class B common stock will receive quarterly dividends on the shares of our common stock if, and to the extent, dividends are declared by our board of directors and permitted by applicable law and the terms of our then outstanding indebtedness. Specifically, the indenture governing the notes and the new credit facility both will restrict our ability to declare and pay dividends on our common stock as described in detail under “Dividend Policy.” Upon the closing of this offering, our board of directors is expected to adopt a dividend policy which contemplates that, subject to applicable law and the terms of our then existing indebtedness, initial annual dividends will be approximately $             per share of our common stock. Any time a dividend is paid to the holders of our Class A common stock, holders of our Class B common stock will be paid a dividend equal to the amount per share paid to holders of Class A common stock. Our board of directors may, in its discretion, modify or repeal this dividend policy. We cannot assure you that we will pay dividends at this level in the future, if at all.

 

Dividend payment dates

If declared, dividends will be paid quarterly on the          day of each             ,             ,                      and              to holders of record on the      day or, if such day is not a business day, on the immediately preceding business day of such month.

 

Listing

Our shares of Class A common stock will not be listed for separate trading on the              unless and until a sufficient number of shares are held separately and not in the form of EYSs and other conditions for listing on              as may be necessary are satisfied. If more than the required number of our outstanding shares of Class A common stock are no longer held in the form of EYSs and other conditions for listing on                      are satisfied for a period of 30 consecutive trading days, we will apply to list the shares of our Class A common stock for separate trading on the             . The notes and Class A common stock represented by the EYSs will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. Our shares of Class B common stock will not be listed for separate trading and will have limitations on their transferability.

 

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Rights to exchange shares of Class B common stock for EYSs or shares of Class A common stock

After the expiration of a 180-day lock-up period, the holders of our Class B common stock will have rights to exchange their Class B common stock for EYSs or, if the EYSs have been automatically separated or if the Class A common stock is listed for separate trading on a stock exchange, Class A common stock, subject to certain restrictions. For a complete description of this exchange right and the terms of our Class A common stock and Class B common stock, see “Description of Capital Stock.”

 

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Summary of Notes

 

When we refer to the notes in this prospectus, we are referring to the notes represented by the EYSs and the separate notes.

 

Issuer

Carrols Holdings Corporation

 

Notes represented by EYSs being offered to the public

$             million aggregate principal amount (or $             million aggregate principal amount if the underwriters exercise their over-allotment option with respect to the EYSs in full).

 

Notes being offered to the public separately, not in the form of EYSs

$             million aggregate principal amount.

 

Notes to be outstanding following the offering

$             million aggregate principal amount (or $             million aggregate principal amount if the underwriters exercise their over-allotment option with respect to the EYSs in full).

 

Interest rate

        % per year.

 

Interest payment dates

Interest on the notes will be payable quarterly in arrears on the      day of each             ,             ,              and                      commencing             , 2004 to holders of record on the              day or, if such day is not a business day, on the immediately preceding business day of such month.

 

Maturity date

The notes will mature on                     , 2016.

 

Interest deferral

We may, at our election, subject to certain restrictions, defer interest payments on the notes. We may defer interest payments prior to                     , 2009 on one or more occasions during this period for up to an aggregate period of eight quarters. In addition, after                     , 2009, we may, subject to certain restrictions, defer interest payments on the notes on up to four occasions for up to two quarters per occasion. However, we may not defer interest on more than one occasion after                     , 2009 unless and until all previously deferred interest (and interest on deferred interest) has been paid in full. The new credit facility will contain provisions that will require us under certain circumstances to defer interest payments on the notes pursuant to our option under the indenture to defer such payments.

 

 

Deferred interest on the notes will bear interest at the same rate per annum as the stated rate of interest applicable to the notes, compounded quarterly, until paid in full. At the end of any interest deferral period, we will be obligated to resume quarterly payments of interest on the notes, including interest on deferred interest. All interest deferred prior to                     , 2009, must be repaid by us on or prior to                     , 2009. All interest deferred after                     , 2009, must be repaid by us on or before maturity.

 

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During any interest deferral period and so long as any deferred interest or interest on deferred interest remains outstanding, we will not be permitted to make any payment of dividends on our common stock.

 

 

For a detailed description of interest deferral provisions of the indenture see “Description of Notes—Terms of the Notes—Interest Deferral.”

 

 

In the event that interest payments on the notes are deferred, you would be required to recognize interest income for U.S. federal income tax purposes even if you do not currently receive the related cash interest payments.

 

Ranking

The notes will be unsecured and

 

  subordinated in right of payment to all of our existing and future senior indebtedness, including our guarantee under the new credit facility;

 

  equal in right of payment to our other existing and future senior subordinated indebtedness; and

 

  effectively subordinated to all indebtedness of our existing and future subsidiaries that are not guarantors of the notes.

 

 

As of March 31, 2004, after giving pro forma effect to the transactions, we would have had approximately $             million of total consolidated indebtedness, of which $             million would have been senior to the notes.

 

Note guarantees

The notes will be guaranteed on an unsecured senior subordinated basis by each of our existing domestic subsidiaries and all future domestic subsidiaries that are borrowers or become guarantors under the new credit facility or any successor credit facility, other than certain inactive or immaterial subsidiaries that we may designate as unrestricted subsidiaries. Any guarantees will rank equally with all subsidiary guarantors’ other unsecured senior subordinated indebtedness, and will be subordinated in right of payment to any subsidiary guarantors’ senior indebtedness, including their borrowings or guarantees under the new credit facility.

 

Optional redemption

On or after                     , 2009, we may redeem some or all of the notes at any time at the redemption prices described in the section “Description of Notes—Optional Redemption.”

 

 

In addition, upon the occurrence of a tax event (as defined in the indenture governing the notes), we may, at our option, redeem the notes at any time at a redemption price of 100% of the principal amount to be redeemed plus accrued and unpaid interest to the redemption date.

 

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Mandatory offer to repurchase

If we experience specific kinds of changes in control, we must offer to repurchase the notes at 101% of their stated principal amount, plus accrued and unpaid interest, if any, to the date of redemption. In order to exercise that right, a holder must separate its EYSs into the shares of Class A common stock and notes represented thereby and hold the notes separately. See “Description of Notes—Repurchase at the Option of Holders.”

 

Procedures relating to subsequent issuances

The indenture governing the notes will provide that in the event we issue additional notes (including any issuance of EYSs in exchange for shares of Class B common stock) having identical terms as the notes but a different CUSIP number and such notes are issued with OID, each holder of EYSs or the separate notes, as the case may be, agrees that a portion of such holder’s notes, whether held as part of EYSs or separately, will be automatically exchanged for a portion of the notes acquired by the holders of such subsequently issued notes, and the records of any record holders of notes will be revised to reflect such exchanges. Consequently, following each such subsequent issuance and exchange, without any action by such holder, each holder of EYSs or the separate notes, as the case may be, will own an indivisible unit composed of notes of each separate issuance in the same proportion as each holder. However, the aggregate stated principal amount of notes owned by each other holder will not change as a result of such subsequent issuance and exchange. The automatic exchange of notes summarized above should not impair the rights any holder would otherwise have to assert a claim under applicable securities laws against us with respect to the full amount of notes purchased by such holder. However, subsequent issuances of notes by us may adversely affect the tax and non-tax treatment of the EYSs and notes. See “Risk Factors—Subsequent issuances of notes may adversely affect your tax treatment.”

 

Restrictive Covenants

The indenture governing the notes will contain covenants that, among other things, limit our ability and that of the restricted subsidiaries to:

 

  incur additional indebtedness and issue preferred equity;

 

  pay dividends or make other distributions in respect of our shares or to make other types of restricted payments or investments;

 

  sell assets;

 

  agree to payment restrictions affecting our restricted subsidiaries;

 

  consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

  enter into transactions with affiliates;

 

  create liens; and

 

  enter into new lines of business.

 

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Each of the covenants will be subject to a number of important exceptions and qualifications. See “Description of Notes—Certain Covenants.”

 

Listing

We do not anticipate that the notes will trade on any exchange. The notes will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act.

 

Representation Letter

None of the separate notes may be purchased, directly or indirectly, by persons who are also (1) purchasing EYSs in this offering or (2) holders of Class B common stock following our internal corporate transactions. Furthermore, prior to the closing of this offering, each person purchasing separate notes in this offering and holders of our Class B common stock will be asked to make certain representations to us in furtherance of these restrictions. See “Underwriting.”

 

Risk Factors

 

You should carefully consider the information under the heading “Risk Factors” and all other information in this prospectus before investing in the EYSs, the shares of our Class A common stock and/or the notes.

 

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Summary Consolidated Financial Statements

 

The following table sets forth our summary consolidated financial information derived from our audited consolidated financial statements for each of the fiscal years ended December 31, 2001, 2002 and 2003 and our unaudited consolidated financial statements for the three months ended March 31, 2003 and 2004, which are included elsewhere in this prospectus.

 

The unaudited consolidated financial statements for the three months ended March 31, 2003 and 2004 include all adjustments, consisting of normal recurring adjustments, which, in our opinion, are necessary for a fair presentation of the financial position and results of operations for these periods. The results of operations for the three months ended March 31, 2003 and 2004 are not necessarily indicative of the results to be expected for the full year.

 

The information in the table below is only a summary and should be read together with our consolidated financial statements as of December 31, 2002 and 2003, for the years ended December 31, 2001, 2002 and 2003, as of the three months ended March 31, 2004, and for the three months ended March 31, 2003 and 2004, “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all as included elsewhere in this prospectus. The figures in the table below reflect rounding adjustments.

 

We restated our financial statements including applicable footnotes for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98, “Accounting for Leases”, rather than as sale/leaseback transactions. See Note 2 to the consolidated financial statements included elsewhere in this prospectus for a complete discussion of the restatement. Amounts affected by the restatement that appear in this prospectus have also been restated.

 

     Year Ended December 31,

   Three Months Ended
March 31,


     (Restated)     (Restated)         (Restated)      
     2001

    2002

   2003

   2003

    2004

     (Dollars in thousands, except per share data)

Statements of Operations Data:

                                    

Revenues:

                                    

Restaurant sales

   $ 654,710     $ 655,545    $ 643,579    $ 151,902     $ 156,545

Franchise royalty revenues and fees

     1,579       1,482      1,406      338       355
    


 

  

  


 

Total revenues

     656,289       657,027      644,985      152,240       156,900
    


 

  

  


 

Costs and expenses:

                                    

Cost of sales

     189,947       183,976      181,182      42,434       43,681

Restaurant wages and related expenses

     192,918       196,258      194,315      47,044       47,851

Restaurant rent expense

     31,207       30,494      31,383      7,818       8,564

Other restaurant operating expenses

     86,435       87,335      89,880      21,363       21,890

Advertising expense

     28,830       28,041      27,351      7,269       5,827

General and administrative

     35,393       36,610      37,135      9,281       9,761

Depreciation and amortization

     47,966       44,051      47,253      10,885       11,152

Other expense (1)

     8,841       —        —        —         —  
    


 

  

  


 

Total operating expenses

     621,537       606,765      608,499      146,094       148,726
    


 

  

  


 

Income from operations

     34,752       50,262      36,486      6,146       8,174

Interest expense

     40,552       34,955      32,363      8,356       7,577
    


 

  

  


 

Income (loss) before income taxes

     (5,800 )     15,307      4,123      (2,210 )     597

Provision (benefit) for income taxes

     274       5,593      1,767      (863 )     220
    


 

  

  


 

Net income (loss)

   $ (6,074 )   $ 9,714    $ 2,356    $ (1,347 )   $ 377
    


 

  

  


 

Per Share Data:

                                    

Basic net income (loss) per share

   $ (5.31 )   $ 8.49    $ 2.06    $ (1.18 )   $ 0.33

Diluted net income (loss) per share

     (5.31 )     7.99      1.92      (1.18 )     0.30

 

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     Year Ended December 31,

    Three Months Ended
March 31,


 
     (Restated)     (Restated)           (Restated)        
     2001

    2002

    2003

    2003

    2004

 

Other Financial Data:

                                        

Cash provided from operating activities

   $ 47,968     $ 55,964     $ 48,239     $ 9,691     $ 10,464  

Cash used for investing activities

     (49,156 )     (55,071 )     (29,472 )     (9,055 )     (3,104 )

Cash provided from (used for) financing activities

     881       (760 )     (18,891 )     (554 )     (6,626 )

Capital expenditures, excluding acquisitions

     47,575       54,155       30,244       11,019       3,104  

EBITDA (2)

     89,771       94,313       83,739       17,031       19,326  

EBITDA margin (3)

     13.7 %     14.4 %     13.0 %     11.2 %     12.3 %

Ratio of earnings to fixed charges (4)

     —         1.33x       1.09x       —         1.06x  

Operating Statistics:

                                        

Total number of restaurants (at end of period)

     532       529       532       531       534  

Taco Cabana:

                                        

Number of restaurants (at end of period)

     120       116       121       117       123  

Average number of restaurants

     120.3       114.6       118.9       116.1       121.4  

Revenues:

                                        

Restaurant sales

   $ 177,398     $ 174,982     $ 181,068     $ 41,470     $ 46,044  

Franchise royalty revenues and fees

     405       429       413       96       103  
    


 


 


 


 


Total revenues

     177,803       175,411       181,481       41,566       46,147  

Average annual sales per restaurant (5)

     1,475       1,527       1,523                  

EBITDA (2)

     24,467       28,278       24,411       5,310       6,293  

EBITDA margin (3)

     13.8 %     16.1 %     13.5 %     12.8 %     13.6 %

Change in comparable restaurant sales (6)

     1.6 %     (0.2 )%     (3.0 )%     (4.3 )%     4.9 %

Pollo Tropical:

                                        

Number of restaurants (at end of period)

     53       58       60       59       60  

Average number of restaurants

     50.4       55.6       59.4       58.2       60.0  

Revenues:

                                        

Restaurant sales

   $ 96,437     $ 100,444     $ 109,201     $ 26,490     $ 29,372  

Franchise royalty revenues and fees

     1,174       1,053       993       242       252  
    


 


 


 


 


Total revenues

     97,611       101,497       110,194       26,732       29,624  

Average annual sales per restaurant (5)

     1,913       1,807       1,838                  

EBITDA (2)

     22,085       22,384       22,553       5,789       7,249  

EBITDA margin (3)

     22.6 %     22.1 %     20.5 %     21.7 %     24.5 %

Change in comparable restaurant sales (6)

     (0.3 )%     (4.2 )%     2.3 %     0.5 %     8.0 %

Burger King:

                                        

Number of restaurants (at end of period)

     359       355       351       355       351  

Average number of restaurants

     353.3       355.6       352.2       353.6       351.6  

Restaurant sales

   $ 380,875     $ 380,119     $ 353,310     $ 83,942     $ 81,129  

Average annual sales per restaurant (5)

     1,078       1,069       1,003                  

EBITDA (2)

     43,219       43,651       36,775       5,932       5,784  

EBITDA margin (3)

     11.3 %     11.5 %     10.4 %     7.1 %     7.1 %

Change in comparable restaurant sales (6)

     1.3 %     (1.3 )%     (7.2 )%     (7.3 )%     (3.2 )%

 

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Table of Contents
     December 31,

    March 31, 2004

     (Restated)
2001


    (Restated)
2002


    2003

   

Actual


   

Pro Forma

As Adjusted


Balance Sheet Data (At Period End):

                                      

Total assets

   $ 552,111     $ 547,388     $ 486,874     $ 475,010     $             

Working capital

     (34,967 )     (34,975 )     (40,857 )     (39,810 )      

Debt:

                                      

Senior and senior subordinated debt

   $ 368,500     $ 357,300     $ 294,100     $ 281,125     $  

Capital leases and other debt

     5,144       3,045       1,732       1,528        

Lease financing obligations

     88,471       86,702       84,685       84,141        
    


 


 


 


 

Total debt

   $ 462,115     $ 447,047     $ 380,517     $ 366,794     $  
    


 


 


 


 

Stockholders’ equity

   $ 8,888     $ 18,602     $ 20,958     $ 21,335     $  

 

(1) Other expense in 2001 resulted from the closure of seven Taco Cabana restaurants in the Phoenix, Arizona market and the discontinuance of restaurant development in that market. See Note 8 to the consolidated financial statements included elsewhere in this prospectus.

 

(2) Reconciliation of Non-GAAP Financial Measures

 

EBITDA is defined as income before interest, income taxes, depreciation and amortization, and non-cash other income and expense. EBITDA is presented because we believe it is a useful financial indicator for measuring operating results as well as the ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. EBITDA is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Management believes the most directly comparable measure to EBITDA calculated in accordance with GAAP is net income (loss). A reconciliation of EBITDA for each of our concepts to consolidated net income (loss) is presented below:

 

             Taco
Cabana


   Pollo
Tropical


   Burger
King


   Consolidated

 

Year Ended December 31, 2001 (restated)

                             

EBITDA

   $ 24,467    $ 22,085    $ 43,219    $ 89,771  

Less:

 

Other expense (a)

                          7,053  
   

Depreciation and amortization expense

                          47,966  
   

Interest expense

                          40,552  
   

Provision for income taxes

                          274  
                                 


Net loss

                        $ (6,074 )
                                 


Year Ended December 31, 2002 (restated)

                             

EBITDA

   $ 28,278    $ 22,384    $ 43,651    $ 94,313  

Less:

 

Depreciation and amortization expense

                          44,051  
   

Interest expense

                          34,955  
   

Provision for income taxes

                          5,593  
                                 


Net income

                        $ 9,714  
                                 


Year Ended December 31, 2003

                             

EBITDA

   $ 24,411    $ 22,553    $ 36,775    $ 83,739  

Less:

 

Depreciation and amortization expense

                          47,253  
   

Interest expense

                          32,363  
   

Provision for income taxes

                          1,767  
                                 


Net income

                        $ 2,356  
                                 


 

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Table of Contents
             Taco
Cabana


   Pollo
Tropical


   Burger
King


   Consolidated

 

Three Months Ended March 31, 2003 (restated)

                             

EBITDA

   $ 5,310    $ 5,789    $ 5,932    $ 17,031  

Less (add):

 

Depreciation and amortization expense

                          10,885  
       

Interest expense

                          8,356  
       

Benefit for income tax

                          (863 )
                                 


Net loss

                        $ (1,347 )
                                 


Three Months Ended March 31, 2004

                             

EBITDA

   $ 6,293    $ 7,249    $ 5,784    $ 19,326  

Less:

 

Depreciation and amortization expense

                          11,152  
   

Interest expense

                          7,577  
   

Provision for income taxes

                          220  
                                 


Net income

                        $ 377  
                                 



  (a) Reflects asset impairments related to the closure of seven Taco Cabana restaurants in the first quarter of 2002. See Note 8 to the consolidated financial statements included elsewhere in this prospectus.

 

(3) EBITDA margin is derived by dividing EBITDA by the total revenues applicable to the entity shown above.

 

(4) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income before income taxes plus fixed charges. Fixed charges consist of interest expense, including capitalized interest, on all indebtedness, amortization of deferred financing costs and one-third of rental expense on operating leases representing that portion of rental expense that we deemed to be attributable to interest. Our earnings were insufficient to cover our fixed charges for the year ended December 31, 2001 and for the three months ended March 31, 2003 by $5,800 and $2,210, respectively.

 

(5) Average annual sales per restaurant is derived by dividing restaurant sales for the applicable year by the average number of restaurants for the applicable year.

 

(6) The change in comparable restaurant sales is calculated using only those restaurants that have been open since the beginning of the earliest period being compared (12 months for Burger King and 18 months for Pollo Tropical and Taco Cabana).

 

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Interest and Allowed Dividend Payments to Holders of EYSs and Notes

 

The table below shows certain information relating to cash provided from operating activities, a reconciliation to Adjusted EBITDA, as defined in the indenture, and a further computation of Excess Cash, as defined in the indenture, for the twelve month period ended March 31, 2004, on a pro forma basis after giving effect to this offering and the other transactions, including the use of proceeds from this offering and the new credit facility, in each case assuming such transactions occurred on April 1, 2003. The indenture governing the notes contains a covenant that limits the amount of dividends we can pay and certain other restricted payments we can make. Generally, the payment of dividends is restricted by the amount of cash generated by our operations following the date of this offering, subject to adjustments, the result of which is defined in the indenture as Excess Cash. The computations of Adjusted EBITDA and Excess Cash are not measures determined in accordance with GAAP but are solely defined terms under the indenture. The indenture limits the amount of dividends or other restricted payments we are permitted to make to the amount of our Excess Cash, minus the sum of all prior dividends and other payments that are restricted by the indenture, in addition to certain other exceptions. Also, the indenture prevents us from paying dividends if our consolidated fixed charge coverage ratio, as calculated in accordance with the indenture, is below          to 1.00 for any four fiscal quarters. Our consolidated fixed charge coverage ratio for the twelve months ended March 31, 2004, after giving pro forma effect to this offering and the other transactions would have been     to 1.00.

 

As described more fully under “Dividend Policy,” upon the closing of this offering, our board of directors is expected to adopt a dividend policy pursuant to which we will pay out of lawfully available funds quarterly dividends of $             per share of Class A common stock and Class B common stock for the first full year after this offering.

 

The presentation in the table below is for informational purposes only and is not necessarily indicative of either the financial position, results of operations, covenant levels or interest and dividend payments that would have been achieved had this offering and the other transactions for which we are giving pro forma effect in this table actually occurred on April 1, 2003, nor is such information necessarily indicative of the results to be expected for the current or any future period. A number of factors may affect our results and impact the actual levels of Adjusted EBITDA and Excess Cash as calculated under the indenture, and dividends that we actually pay. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information. We will report our Adjusted EBITDA, Excess Cash and dividend payments for the applicable twelve month period in each annual and quarterly report that we file with the SEC as long as we are subject to those measures under the indenture governing the notes.

 

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Twelve Months Ended

March 31, 2004


     Historical

    Pro
Forma


     (Dollars in thousands)

Reconciliation of cash provided from operating activities to Excess Cash

              

Adjustments to reconcile cash provided from operating activities to net income:

              

Cash provided from operating activities

   $ 49,000     $             

Depreciation and amortization expense

     (47,520 )      

Deferred income taxes

     (498 )      

Change in operating assets and liabilities

     2,707        

Gain on disposal of property and equipment

     386        
    


     

Net income

     4,075        

Adjustments to reconcile net income to EBITDA:

              

Depreciation and amortization expense

     47,520        

Interest expense

     31,584        

Provision for income taxes

     2,850        
    


     

EBITDA

     86,029        

Adjustments to reconcile EBITDA to Adjusted EBITDA:

              

Non-cash Adjustments (1)

     (1,585 )      
    


     

Adjusted EBITDA as defined in the indenture

   $ 84,444        
    


     

Additions (deductions) to Adjusted EBITDA to compute Excess Cash:

              

Cash income taxes

 

     

Cash interest expense on senior and other indebtedness (2)

 

     

Cash interest expense on notes (3)

 

     

Capital expenditures

 

     

Principal payments on long-term debt

 

     

Principal payments on lease financing obligations

 

     

Excess Cash as defined in the indenture (4)

 

     

Dividends on Class A and Class B common stock

 

     

(1) Non-cash adjustments include a reduction of $2,146 for the amortization of a purchase discount over the life of the related supplier contract and an addition of $561 for non-cash postretirement benefit costs.
(2) Includes cash interest payments on borrowings under the new credit facility, lease financing obligations and capital leases and other debt.
(3) Represents         % interest on $             million of notes represented by EYSs and $             million of separate notes.
(4) Excess Cash is a defined term in the indenture governing the notes, which, for any period, is equal to Adjusted EBITDA minus the sum of:

 

    cash interest expense, whether or not capitalized, including any deferred interest;

 

    cash income taxes;

 

    capital expenditures, not otherwise financed;

 

    any cash non-recurring charges;

 

    cash expenditures constituting certain permitted investments;

 

    certain repayments of (1) long-term indebtedness (including any current portion of long-term indebtedness) and (2) short-term indebtedness that financed capital expenditures referred to above.

 

See “Description of Notes—Certain Covenants—Restricted Payments.” Excess Cash may be used by us to pay restricted payments, which include the payment of dividends on our Class A common stock and Class B common stock. We expect to use most of such Excess Cash to pay dividends based on the expected dividend policy described above.

 

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Based on the foregoing, aggregate payments to EYS holders and holders of separate notes on a pro forma basis for the twelve month period ended March 31, 2004 would have been as follows:

 

     Aggregate

   Per EYS

   Per Note

     (Dollars in thousands)          

Interest on notes (1)

   $                         $                         $                     

Dividends on Class A common stock (2)

                    
    

  

      

Total

   $      $         
    

  

      

(1) We may defer interest payments on the notes at our option and subject to certain limitations contained in the indenture. The new credit facility contains provisions that will require us under certain circumstances to defer interest payments on the notes pursuant to our option under the indenture to defer such payments. However, we expect to make the scheduled interest payments on the notes on a timely basis without deferring any interest payments. Deferred interest on our notes will bear interest at an annual rate equal to the stated rate of interest on the notes. See “Description of Notes—Terms of the Notes—Interest Deferral” and “Description of Other Indebtedness—New Credit Facility.”

 

(2) Dividends are payable if and to the extent they are declared by our board of directors and permitted by applicable law and the terms of our then existing indebtedness and are taxed as dividends to the extent of our current and accumulated earnings and profits with any excess taxed as a return of basis. The indenture governing our notes and the new credit facility will contain significant restrictions on our ability to declare and pay dividends on our common stock as discussed above and in “Dividend Policy.”

 

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RISK FACTORS

 

You should carefully consider the risks described below, as well as other information and data included in this prospectus, before deciding whether to invest in the EYSs or the separate notes. Any of the following risks could materially adversely affect our business, financial condition or results of operations, which may result in your loss of all or part of your original investment. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations.

 

Risks Relating to the EYSs, the Shares of Our Class A Common Stock and the Notes

 

Our substantial debt could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes and restrict our ability to pay dividends with respect to shares of our Class A common stock represented by EYSs.

 

We have a significant amount of indebtedness. The following table sets forth our total debt, total stockholders’ equity, total capitalization and ratio of total debt to total capitalization as of March 31, 2004, after giving pro forma effect to the transactions:

 

Total debt(1)

  $            

Total stockholders’ equity

   

Total capitalization

   

Ratio of total debt to total capitalization

   

(1) Including $             million of notes, borrowings of $             million outstanding under the new credit facility, $             million of lease financing obligations and $             million of capital leases and other debt.

 

Our ability to make distributions, pay dividends or make other payments will be subject to applicable law and contractual restrictions contained in the instruments governing any indebtedness of ours and our subsidiaries, including the new credit facility, which we will guarantee on a senior secured basis. Our level of debt could have negative consequences to you and to us. For example, it could:

 

    make it more difficult for us to satisfy our obligations with respect to the notes;

 

    increase our vulnerability to general adverse economic and industry conditions, as well as increases in interest rates;

 

    limit our ability to fund future working capital, capital expenditures, debt service and general corporate requirements;

 

    require us to dedicate a substantial portion of our cash flow from operations to the payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

    place us at a competitive disadvantage compared to our competitors that have less debt;

 

    limit our ability to borrow additional funds;

 

    make it more difficult to comply with the covenants in the indenture and the new credit facility, which could in turn result in an event of default under our indebtedness, which, if not cured or waived, could have a material adverse effect on us; and

 

    limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities.

 

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Despite our substantial debt, we may still incur significantly more debt, which could exacerbate the risks described above.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture governing the notes and the new credit facility will not fully prohibit us from doing so. As of March 31, 2004, after giving pro forma effect to the transactions, we would have had $             million available for additional borrowing under the new credit facility. All borrowings under the new credit facility will rank senior in right of payment to the notes, and any future guarantees of the new credit facility will rank senior to any future guarantees of the notes. The indenture governing the notes will allow us under certain circumstances to issue additional notes identical to the notes offered hereby (other than issuance date). For instance, if the holders of the Class B common stock were able to exercise their rights to convert such Class B common stock into EYSs, we could be obligated to issue up to an additional $             million principal amount of notes in the form of EYSs. To the extent not all of Carrols’ 9 1/2% senior subordinated notes are tendered pursuant to the tender offer and consent solicitation, outstanding Carrols’ 9 1/2% senior subordinated notes will rank pari passu with the guarantees of the notes until such notes are redeemed.

 

We will require a significant amount of cash to service our debt, including the notes, and to pay dividends with respect to shares of our common stock and our ability to generate cash depends on many factors beyond our control.

 

Our ability to make payments on our indebtedness, including the notes, to pay dividends with respect to shares of our common stock and to fund operating and capital expenditures will depend on our ability to generate cash in the future. We expect that a significant liquidity requirement will be for debt service on amounts outstanding under the new credit facility and under the notes. In addition, we currently expect to distribute a significant portion of any remaining cash earnings to our stockholders in the form of quarterly dividends.

 

Our ability to generate cash from our operations in the future is also, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. For example, a general increase in interest rates could result in increased interest payments required pursuant to our floating rate debt and decreased net cash flow available to service the notes or pay dividends.

 

Significant assumptions underlie our current plans to meet our liquidity needs, including that we will be successful in implementing our business strategy and that there is no material adverse change in our business, liquidity or capital requirements. We may not generate sufficient cash flow to meet our operating expenses or capital expenditure requirements, to service our debt requirements and to pay expected dividends. We may need to adopt alternate strategies, including:

 

    reducing or delaying capital expenditures;

 

    selling assets;

 

    restructuring or refinancing our indebtedness; or

 

    seeking additional equity capital, including additional issuances of EYSs and/or common stock.

 

These alternate strategies may not be completed on commercially reasonable terms, if at all.

 

We may not generate sufficient funds from operations to repay the principal amount of our indebtedness at maturity or in the event you exercise your right to require us to purchase your notes upon a change of control. If we were to incur additional debt, our debt service requirements would increase.

 

Credit ratings may affect our ability to obtain financing and the cost of such financing.

 

Our ability to obtain external and, in particular, debt financing is affected by our debt ratings, which are periodically reviewed by the major credit rating agencies. We anticipate that Moody’s and Standard & Poor’s will provide ratings for the notes. In determining our credit ratings, the rating agencies generally consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off-balance-sheet obligations and other commitments, total capitalization and

 

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various ratios calculated from these factors. The ratings provided to us by Moody’s and S&P for the notes could be at a level that would indicate that those rating agencies would describe the notes as imposing significant liquidity requirements and constraints on our ability to use cash flow from our operations in our business, which factors increase our vulnerability to future business, financial and economic conditions impacting on our ability to generate cash from our operations.

 

Restrictive covenants in the new credit facility and the indenture for our notes will restrict our ability to pursue our business strategies.

 

Unlike credit facilities of similarly situated borrowers, which customarily prohibit payments of dividends on the borrower’s common stock, the new credit facility will permit us to pay dividends on shares of our common stock, so long as our interest coverage ratio remains above certain established levels and no default or event of default exists under the new credit facility. Because the payment of dividends will decrease the amount of cash available to service our senior debt, the new credit facility will impose restrictions on our operations that are more restrictive than customary for credit facilities of similarly situated borrowers that prohibit or substantially limit payments of dividends. These restrictions, together with similar restrictions contained in the indenture governing the notes, may significantly limit or prohibit us from engaging in certain transactions, including:

 

    disposing of assets;

 

    incurring additional indebtedness;

 

    repaying other indebtedness;

 

    making capital expenditures above certain levels;

 

    paying dividends or making distributions in respect of our shares or making certain other restricted payments or investments;

 

    entering into acquisitions;

 

    repurchasing or redeeming capital stock;

 

    engaging in mergers or consolidations;

 

    engaging in certain transactions with subsidiaries and affiliates;

 

    allowing our restricted subsidiaries to make certain payments;

 

    creating liens; and

 

    entering into new lines of businesses.

 

In addition, the new credit facility will include other and more restrictive covenants and will prohibit us from prepaying our other debt, including the notes, while debt under the new credit facility is outstanding. The new credit facility will require us to maintain specified financial ratios and satisfy certain financial tests as described in detail under “Description of Other Indebtedness—New Credit Facility.” Our ability to meet these financial ratios and tests may be affected by events beyond our control, and we may need to refrain from certain actions or take actions we otherwise would avoid in order to continue to meet these ratios and tests. In addition, the restrictions to be included in the new credit facility could limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest.

 

Our failure to comply with the restrictions in the new credit facility and the indenture governing the notes could lead to a default under the terms of the new credit facility. In the event of such a default, the lenders under the new credit facility may elect to:

 

    declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable; or

 

    prevent us from making payments on the notes,

 

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either of which would result in an event of default under the indenture governing the notes. The lenders under the new credit facility will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under the new credit facility will also have the right to proceed against the collateral, including our available cash, granted to them to secure the debt. The collateral will consist of substantially all of our and our subsidiaries’ assets. If the debt under the new credit facility were to be accelerated, our assets may not be sufficient to repay in full that debt and our other debt, including the notes.

 

The restrictions contained in the new credit facility and the indenture governing the notes could:

 

    limit our ability to plan for, or react to, market conditions or meet capital needs or otherwise restrict our activities or business plans; and

 

    adversely affect our ability to finance our operations or to engage in other business activities that would be in our interest.

 

For a more full description of the restrictive covenants and maintenance covenants to be contained in the new credit facility and in the indenture, see the sections entitled, “Description of Other Indebtedness—New Credit Facility” and “Description of Notes—Certain Covenants.”

 

We may amend the new credit facility or the indenture governing the notes, or we may enter into new agreements that govern our senior indebtedness. The amended or new terms may significantly affect our ability to pay interest to holders of our EYSs and the notes and dividends to holders of our EYSs.

 

The new credit facility and the indenture governing the notes will contain significant restrictions on our ability to pay interest on the notes and dividends on shares of our common stock based on meeting specified financial ratios, and compliance with other conditions. As a result of general economic conditions, conditions in the lending markets, the results of our business or for any other reason, we may elect or be required to amend or refinance the new credit facility or the notes, at or prior to maturity, or enter into additional agreements for senior indebtedness. Regardless of any protection you have in the indenture governing the notes, any such amendment, refinancing or additional agreement may contain covenants that could limit in a significant manner our ability to pay interest payments and dividends to you.

 

Our board of directors may, in its discretion, amend or repeal the dividend policy it is expected to adopt upon the closing of this offering. You may not receive the level of dividends provided for in the dividend policy or any dividends at all.

 

Our board of directors may, in its discretion, amend or repeal the dividend policy it is expected to adopt upon the closing of this offering. Our board of directors may decrease the level of dividends provided for in this dividend policy or entirely discontinue the payment of dividends. Future dividends with respect to shares of our common stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other factors that our board of directors may deem relevant. The indenture governing the notes and the new credit facility will contain significant restrictions on our ability to make dividend payments, including, if we defer interest on the notes pursuant to the terms of the new credit facility or the indenture, restrictions on the payment of dividends until we have paid all deferred interest.

 

We may not have the ability to raise the funds necessary to pay our indebtedness at maturity or to finance any change of control offer required by the indenture.

 

A significant portion of our cash flows from operations will be dedicated to maintaining our restaurants and servicing our debt requirements. In addition, we currently expect to distribute a significant portion of any remaining cash earnings to our stockholders in the form of quarterly dividends. Moreover, prior to the maturity

 

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of the notes, we will not be required to make any payments of principal on the notes. We may not generate sufficient funds from operations to repay the principal amount of our indebtedness at maturity. We may therefore need to refinance our debt or raise additional capital. These alternatives may not be available to us when needed or on satisfactory terms due to prevailing market conditions, a decline in our business or restrictions contained in our senior debt obligations.

 

Likewise, upon the incurrence of certain specific kinds of change of control events, we may be required to offer to repurchase all or a portion of the notes. We would be required to purchase all of the notes at 101% of their principal amount, plus accrued interest to the date of repurchase. If a change of control occurs, we cannot be sure that we would have enough funds to pay for all of the notes. If we were required to repurchase the notes, we would need to secure third-party financing if we do not have available funds to meet our purchase obligations. However, we may not be able to secure such financing on favorable terms, if at all. In addition, the new credit facility will prohibit us from repurchasing the notes until we first repay the new credit facility in full. If we do not have enough cash to repay the new credit facility, we will need to refinance the new credit facility or obtain a waiver from the lenders under the new credit facility. We may not be able to do so on favorable terms, if at all.

 

In addition, a change of control will result in an event of default under the new credit facility and may lead to an acceleration of other senior debt, if any. Such events may permit the holders under such debt instruments to reduce the borrowing base under such debt instruments or accelerate the debt and, if the debt is not paid, to take action that could ultimately result in a sale of substantially all of our assets. This would further reduce our ability to raise cash to purchase the notes.

 

Your right to receive payments on the notes and the guarantees is junior to our existing and future senior indebtedness, secured indebtedness and the indebtedness of our subsidiaries that are not guarantors.

 

We are a holding company and conduct all of our operations through our subsidiaries. The notes and the note guarantees issued by our subsidiary guarantors will be unsecured senior subordinated obligations, junior in right of payment to the senior debt of Carrols Holdings and each subsidiary guarantor, respectively. The indebtedness under the existing credit facility is secured by substantially all of our assets and is expected to remain secured under the new credit facility. Should a default or acceleration of this indebtedness occur, the holders of this indebtedness could sell the assets to satisfy all or part of what is owed. As a result of the subordinated nature of the notes and related guarantees, upon any distribution to our creditors or the creditors of the subsidiary guarantors in bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors or our or their property, the holders of our senior indebtedness and senior indebtedness of the subsidiary guarantors will be entitled to be paid in full in cash before any payment may be made with respect to the notes or the subsidiary guarantees.

 

In the event of a bankruptcy, liquidation, reorganization or similar proceeding relating to us or the subsidiary guarantors, holders of the notes will participate with trade creditors and all other holders of unsecured indebtedness of ours or the subsidiary guarantors similarly subordinated in the assets remaining after we and the subsidiary guarantors have paid all senior indebtedness. In any of these cases, we and the subsidiary guarantors may not have sufficient funds to pay all of our creditors, and holders of the notes may receive less, ratably, than the holders of senior indebtedness. In such event we and the subsidiary guarantors would not be able to make all principal payments on the notes.

 

The subordination provisions of the indenture governing the notes will also provide that payments to you under the subsidiary guarantees may be blocked for up to 179 days by holders of designated senior indebtedness if a default other than a payment default exists under such senior indebtedness. During any period in which payments to holders of the notes are blocked in this manner, any amounts received by holders of the notes with respect to the subsidiary guarantees, including as a result of any legal action to enforce the subsidiary guarantees, would be required to be turned over to the holders of senior indebtedness. Because of the existence of the subordination provisions, including the requirement that holders of the notes pay over distributions to holder of

 

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senior indebtedness, holders of the notes may receive less ratably than our other unsecured creditors, including trade creditors. See “Description of Notes—Subordination.”

 

As of March 31, 2004, after giving pro forma effect to the transactions, the notes and the subsidiary guarantees would have ranked junior, on a consolidated basis, to $             million of total debt and $             million of outstanding senior debt (including $             million of lease financing obligations and $             million of capital leases and other debt), and $             million of letters of credit. In addition, as of March 31, 2004, after giving pro forma effect to the transactions, we would have had the ability to borrow up to an additional $             million under the new credit facility (including amounts reserved for letters of credit), which would have ranked senior in right of payment to the notes.

 

In the event of bankruptcy or insolvency, the notes and guarantees could be adversely affected by principles of equitable subordination or recharacterization.

 

In the event of bankruptcy, liquidation, reorganization or similar proceedings relating to us or the subsidiary guarantors, a party in interest may seek to subordinate the notes or guarantees to creditors under principles of equitable subordination or to recharacterize the notes as equity which could have the effect of voiding the guarantees. While we believe that any such attempt should fail, we cannot assure you as to the outcome of such proceedings. In the event of a subordination or recharacterization, you may not recover any amounts owing on the notes until all senior claims have been paid. Moreover, in the event of such a recharacterization of the notes as equity, holders of the notes might be required to return any payment made to them while the company was insolvent or if the company was rendered insolvent by the payment, potentially up to six years prior to our bankruptcy. Similarly, if the notes were recharacterized as equity, holders of the notes might be required to return any payment made to them by a subsidiary guarantor in respect of the notes while such subsidiary was insolvent or if such subsidiary was rendered insolvent by the payment, potentially up to six years prior to its bankruptcy. An entity would be considered insolvent for these purposes if at the time of, or due to such payment, the fair saleable value of its assets was less than its debts, including contingent liabilities, it was engaged or about to engage in a business or a transaction for which its remaining assets available to carry on its business constituted unreasonably small capital, or it intended to incur, or believed it would incur, debts beyond its ability to pay as they mature.

 

The realizable value of our assets upon liquidation may be insufficient to satisfy claims.

 

As of March 31, 2004, our total assets included intangible assets (principally goodwill with respect to our acquisitions of Taco Cabana and Pollo Tropical and franchise rights relating to our acquisition of Burger King restaurants) in the amount of $209.9 million, representing 44.2% of our total consolidated assets. The value of our proprietary intangible assets will continue to depend significantly upon the continued profitability of our Hispanic Brands. As a result, in the event of a default on the notes or any bankruptcy or dissolution of our company, the realizable value of these assets may be substantially lower and may be insufficient to satisfy the claims of our creditors.

 

We are a holding company and rely on dividends, interest and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations.

 

We are a holding company and conduct all of our operations through our subsidiaries and currently have no significant assets other than our Carrols shares, all of which will be pledged to the creditors under the new credit facility that we guarantee. As a result, we will rely on dividends and other payments or distributions from Carrols, and indirectly from the subsidiaries of Carrols, to meet our debt service obligations and enable us to pay dividends. The ability of our direct and indirect subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends), agreements of those subsidiaries, the terms of the new credit facility and the covenants of any future outstanding indebtedness we or our direct and indirect subsidiaries incur.

 

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If we defer interest on the notes, you may be owed a substantial amount of deferred interest that will not be due and payable until a later date.

 

Under the indenture governing the notes, we may, at our election, subject to certain restrictions, defer interest payments on the notes prior to                     , 2009 on one or more occasions for up to an aggregate period of eight quarters. In addition, after                    , 2009, we may, subject to certain restrictions, defer interest payments on the notes on up to four occasions for up to two quarters per occasion, so long as in each case we are not otherwise in default under the indenture. However, we may not defer interest during any period on more than one occasion after                     , 2009 unless and until all previously deferred interest (and interest on deferred interest) has been paid in full. The new credit facility will contain provisions that will require us under certain circumstances to defer interest payments on the notes pursuant to our option under the indenture to defer such payments.

 

Deferred interest on the notes will bear interest at the same rate per annum as the stated rate of interest applicable to the notes, compounded quarterly, until paid in full. At the end of any interest deferral period, we will be obligated to resume quarterly payments of interest on the notes, including interest on deferred interest. All interest deferred prior to                     , 2009, must be repaid by us on or prior to                     , 2009. All interest deferred after                     , 2009, must be repaid by us on or before maturity. You may be owed a substantial amount of deferred interest that will not be due and payable until such dates. If you sell your EYSs or separate notes during an interest deferral period, you will not receive any payment of deferred interest from us. In addition, we will not be permitted to pay any dividend payments on our common stock until we have paid all of the deferred interest.

 

Interest on the notes might not be deductible by us for U.S. federal income tax purposes.

 

As discussed more fully under “Material U.S. Federal Income Tax Consequences,” we believe that the notes issued as part of an EYS should be treated as debt for U.S. federal income tax purposes. However, there is no authority that directly addresses the tax treatment of instruments substantially identical to the EYSs, and our treatment of the notes as debt therefore may be challenged. If the notes were to be treated as equity for U.S. federal income tax purposes, then our interest payments would be recharacterized as non-deductible dividends, which would materially increase our taxable income and, thus, our U.S. federal and applicable state income tax liability. This would reduce our after-tax cash flows and could materially and adversely impact our ability to make interest and dividend payments.

 

If the notes were treated as equity rather than debt for U.S. federal income tax purposes, payments made to foreign holders would be subject to withholding of U.S. federal income taxes.

 

Foreign holders could be subject to withholding and estate taxes with regard to the notes in the same manner as they will be with regard to our common stock, and we could be liable for withholding taxes that were not collected on our prior interest payments to foreign holders. Payments to foreign holders would not be grossed-up for any such taxes. For discussion of these tax related risks, see “Material U.S. Federal Income Tax Consequences.”

 

The allocation of the purchase price of the EYSs may not be respected.

 

The purchase price of each EYS must be allocated for income tax purposes between the share of our Class A common stock and the note in proportion to their respective fair market values at the time of purchase. If our allocation is not respected, it is possible that the notes will be treated as having been issued with OID (if the allocation to the notes were determined to be too high) or amortizable bond premium (if the allocation to the notes were determined to be too low). You generally would have to include any OID in income in advance of the receipt of cash attributable to that income, and would be able to elect to amortize bond premium over the term of the notes. If the notes were to be treated as having been issued with bond premium, then our interest deductions would be correspondingly reduced, and our U.S. federal and applicable state income tax liability increased, which could adversely affect our cash flow available for interest and dividend payments.

 

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The interest rate on the notes might not be viewed as an arm’s length interest rate.

 

We plan to deduct the interest expense on the notes from taxable income for income tax purposes and to report the full benefit of the income tax deductions in our consolidated financial statements. If the Internal Revenue Service were to determine that the interest rate on the notes exceeds an arm’s length interest rate, any excess amount over arm’s length interest rate would not be deductible and could be recharacterized as a dividend payment instead of an interest payment. The reclassification of interest payments as dividend payments would cause our taxable income and, thus, our U.S. federal income tax liability to be increased, which could adversely affect our cash flows available for interest and dividend payments, and we could be liable for withholding taxes (and interest and possible penalties for failure to withhold) that were not collected on our prior interest payments to foreign holders.

 

If we subsequently issue notes with significant OID, we may not be able to deduct all of the interest on those notes.

 

It is possible that notes we issue in a subsequent issuance will be issued at a discount to their face value. If such discount were to cause the notes to have “significant original issue discount,” then the notes would be classified as “applicable high yield discount obligations,” or AHYDOs, and a portion of the OID on the notes could be nondeductible by us and the remainder would be deductible only when paid. This treatment would have the effect of increasing our taxable income and may adversely affect our cash flow available for interest and dividend payments.

 

Subsequent issuances of notes may adversely affect your tax treatment.

 

The indenture governing the notes will provide that, in the event there is a subsequent issuance of notes with OID or after any such issuance, each holder of EYSs or the separate notes, as the case may be, agrees that a portion of such holder’s notes will be exchanged for a portion of the notes acquired by the holders of such subsequently issued notes. Consequently, immediately following such subsequent issuance, each holder of subsequently issued notes held either as part of EYSs or separately, and each holder of existing notes held either as part of EYSs or separately, will own an inseparable unit composed of a proportionate percentage of both the old notes and the newly issued notes. Therefore, subsequent issuances of notes with OID may adversely affect your tax treatment by increasing the OID, if any, that you were previously accruing with respect to the notes, resulting in your having to accrue interest income in advance of receiving the related cash payments.

 

Following any subsequent issuance of notes with OID (or any issuance of notes thereafter), we and our agents will report any OID on the subsequently issued notes ratably among all holders of EYSs and the separate notes, and each holder of EYSs and the separate notes will, by purchasing EYSs, agree to report OID in a manner consistent with this approach. Therefore, a subsequent issuance of notes with OID may adversely affect your tax treatment by creating OID on notes that you originally purchased without OID, resulting in your having to accrue interest income in advance of receiving the related cash payments. However, the Internal Revenue Service may assert that any OID should be reported only to the persons that initially acquired such subsequently issued notes and their transferees. In such case, the Internal Revenue Service might further assert that, unless a holder can establish that it is not a person that initially acquired such subsequently issued notes or a transferee thereof, all of the notes held by such holder have OID. Any of these assertions by the Internal Revenue Service could create significant uncertainties in the pricing of EYSs and the notes, and could adversely affect the market for EYSs and the notes. For a discussion of these tax related risks, see “Material U.S. Federal Income Tax Consequences.”

 

Deferral of interest payments would have adverse tax consequences for you and may adversely affect the trading price of the notes.

 

If we defer interest payments on the notes, holders of the notes will be required to recognize interest income for U.S. federal income tax purposes in respect of interest payments on the notes represented by the EYSs or the

 

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separate notes, as the case may be, held by holders of the notes before they receive any cash payment of this interest. See “Material U.S. Federal Income Tax Considerations—Deferral of Interest.” In addition, we will not pay holders of the notes this cash if they sell the EYSs or the separate notes, as the case may be, before the end of any deferral period or before the record date relating to interest payments that are to be paid.

 

If we defer interest, the selling price of the EYSs or the separate notes might not fully reflect the value of accrued but unpaid interest on the notes. For a discussion of these tax related risks, see “Material U.S. Federal Income Tax Consequences.”

 

Any OID attributable to you could reduce the amount of principal you could recover from us in a bankruptcy proceeding.

 

Under New York and federal bankruptcy law, holders of subsequently issued notes having OID may be limited to an amount equal to the sum of (1) the initial offering price for the notes and (2) the portion of the OID that is not deemed to constitute “unmatured interest” for the purposes of the United States Bankruptcy Code. Any OID that was not amortized as of the date of the commencement of a bankruptcy filing would constitute “unmatured interest.” As a result, an automatic exchange that results in a holder receiving a note with OID could have the effect of ultimately reducing the amount such holder can recover from us in the event of an acceleration or bankruptcy.

 

You will be immediately diluted by $             per share of Class A common stock if you purchase EYSs in this offering.

 

If you purchase EYSs in this offering, based on the book value of the assets and liabilities reflected on our balance sheet, you will experience an immediate dilution of $             per share of Class A common stock represented by the EYSs which exceeds the entire price allocated to each share of Class A common stock represented by the EYSs in this offering because there will be a net tangible book deficit for each share of Class A common stock outstanding immediately after this offering. Our net tangible book deficiency as of March 31, 2004, after giving pro forma effect to the transactions, would have been approximately $             million, or $             per share of Class A common stock.

 

Our interest expense may increase significantly and could cause our net income and distributable cash to decline significantly.

 

The new credit facility will be subject to periodic renewal or must otherwise be refinanced. We may not be able to renew or refinance the new credit facility, or if renewed or refinanced, the renewal or refinancing may occur on less favorable terms. Borrowings under the new credit facility will be made at a floating rate of interest. In the event of an increase in the base reference interest rates, our interest expense will increase and could have a material adverse effect on our ability to make cash dividend payments to our stockholders. Our ability to continue to expand our business will, to a large extent, be dependent upon our ability to borrow funds under the new credit facility and to obtain other third-party financing, including through the sale of EYSs or any other sale of securities. We cannot assure you that such financing will be available to us on favorable terms, if at all.

 

The indenture governing the notes and the new credit facility will permit us to pay a significant portion of our free cash flow to stockholders in the form of dividends.

 

Although the indenture governing the notes and the new credit facility will have some limitations on our payment of dividends, they will permit us to pay a significant portion of our free cash flow to stockholders in the form of dividends and, following completion of this offering, we intend to pay quarterly dividends. Specifically, the indenture governing the notes will permit us to pay dividends out of our excess cash, as defined in the indenture, as described in detail under “Description of Notes—Certain Covenants—Restricted Payments.” Any amounts paid by us in the form of dividends will not be available in the future to satisfy our obligations under the notes.

 

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Because we will use a significant portion of the proceeds of this offering to purchase shares of common stock from the existing stockholders, we will have less of the proceeds of this offering available to repay our existing debt.

 

We will use a significant portion of the net proceeds from this offering to purchase shares of our existing common stock (and options to purchase our existing common stock) from the existing stockholders in connection with this offering. As a result of these purchases from the existing stockholders, our total indebtedness will be higher after the offering and we will not have any remaining net proceeds from this offering available to us after the repayment of all outstanding borrowings under the existing credit facility, the repurchase of all of Carrols’ 9 1/2% senior subordinated notes in the tender offer or through a redemption, the payment of bonuses and other payments to management and the payment of related fees and expenses. The lack of any remaining available net proceeds from this offering on a going-forward basis may require us to borrow more money under the new credit facility or seek other sources of capital to repay debt, fund our operations or continue to expand our business.

 

The notes or the guarantees of the notes by our subsidiaries may not be enforceable.

 

Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, the notes or the subsidiary guarantees could be voided, or claims in respect of the notes or the subsidiary guarantees could be subordinated to all other debt of ours or a subsidiary guarantor, as applicable, if, among other things, we or the subsidiary guarantor, at the time that we issued the notes or it assumed the guarantee received less than reasonably equivalent value or fair consideration for issuing the notes or the subsidiary guarantee and, at the time we issued the notes or it issued the guarantee:

 

    was insolvent or rendered insolvent by reason of issuing the notes or the guarantees and the application of the proceeds of the notes or the guarantees;

 

    was engaged or about to engage in a business or a transaction for which our or such guarantor’s remaining assets available to carry on our or its respective business constituted unreasonably small capital;

 

    intended to incur, or believed that we or such guarantor would incur, debts beyond our or such guarantor’s ability to pay the debts as they mature; or

 

    was a defendant in an action for money damages, or had a judgment for money damages entered against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.

 

In addition, any payment by us or the subsidiary guarantor pursuant to the notes or the subsidiary guarantees could be voided and required to be returned to us or the guarantor or to a fund for the benefit of the creditors of ours or the guarantor.

 

The measures of insolvency for the purposes of fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an entity would be considered insolvent if, at the time it incurred the debt, or due to the incurrence of such debt:

 

    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of its assets;

 

    the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

    it could not pay its debts as they become due.

 

We believe that immediately after the issuance of the notes and the guarantees and the application of the proceeds therefrom, we and each of the subsidiary guarantors will be solvent, will have sufficient capital to carry on our respective businesses and will be able to pay our respective debts as they mature. However, we cannot be sure as to what standard a court would apply in making these determinations or that a court would reach the same conclusions with regard to these issues. Regardless of the standard that the court uses, we cannot be sure that the issuance by us of the notes or by the subsidiary guarantors of the subsidiary guarantees would not be voided or

 

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that the notes or the subsidiary guarantees would not be subordinated to our or their other debt. If the guarantee of any subsidiary guarantor were voided, the notes would be effectively subordinated to all debt of that subsidiary guarantor.

 

If interest rates rise, the trading value of the EYSs may decline.

 

We cannot predict the interest rate environment or guarantee that interest rates will not rise in the future. Should interest rates rise or should the threat of rising interest rates develop, debt markets may be adversely affected. As a result, the trading value of the EYSs or the notes and Class A common stock represented thereby may decline.

 

There is not an active trading market for EYSs, or securities similar to the EYSs, in the United States.

 

EYSs are a novel type of security and there is not an active market for EYSs, or securities similar to the EYSs, in the United States. Because of this, investors may be unfamiliar with these new securities and the demand for them may be lower than for securities that have been actively traded for a number of years. We cannot assure you that an active trading market for the EYSs will develop in the future, which may cause the price of the EYSs to fluctuate substantially.

 

Before this offering, there has not been a public market for the EYSs, shares of our Class A common stock or the notes. The price of the EYSs may fluctuate substantially, which could negatively affect EYS holders.

 

None of the EYSs, the shares of our Class A common stock or the notes has a public market history. We cannot assure you that an active trading market for the EYSs will develop in the future, and we currently do not expect that an active trading market for the shares of our Class A common stock will develop until the notes are redeemed or mature. If the notes represented by your EYSs are redeemed or mature, the EYSs will automatically separate and you will then hold shares of our Class A common stock. We will not apply to list our shares of Class A common stock for separate trading on the                         or any other stock exchange until the number of shares held separately and not represented by EYSs is sufficient to satisfy applicable requirements for separate trading on such exchange. In addition, the Class A common stock may not be approved for listing at such time. We do not intend to list the notes on any securities exchange. Accordingly, we cannot assure that there will be a market for the notes.

 

The price of the EYSs or notes may fluctuate substantially, which could negatively affect holders of EYSs or holders of the separate notes.

 

The initial public offering price of the EYSs will be determined by negotiations among us, the existing stockholders and the underwriters and may not be indicative of the market price of the EYSs after this offering. Factors such as quarterly variations in our financial results, announcements by us or others, developments affecting us, our customers and our suppliers, general interest rate levels and general market volatility could cause the market price of the EYSs to fluctuate significantly.

 

The limited liquidity of the trading market for the separate notes, may adversely affect the trading price of the separate notes.

 

We are separately selling $             million aggregate principal amount of notes representing approximately         % of the total outstanding notes, assuming the underwriters exercise their over-allotment option with respect to the EYSs in full. While the separate notes are part of the same series of notes as, and are identical to, the notes represented by the EYSs, at the time of the issuance of the separate notes, the notes represented by the EYSs will not be separable for at least 45 days and will not be separately tradable until separated. As a result, the initial trading market for the separate notes will be very limited. After the holders of the EYSs are permitted to separate their EYSs, a sufficient number of holders of EYSs may not separate their EYSs into shares of our Class A

 

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common stock and notes to create a sizable and more liquid trading market for the separate notes. Therefore, a liquid market for the separate notes may not develop or may not develop in a timely manner, which may adversely affect the ability of the holders of the separate notes to sell any of their separate notes and the price at which these holders would be able to sell any of the separate notes.

 

If the EYSs automatically separate, the limited liquidity of the market for the notes and Class A common stock may adversely affect your ability to sell the notes and Class A common stock.

 

Although we will use our reasonable efforts to list our Class A common stock for separate trading on the                         under certain circumstances, we may not be successful in listing the Class A common stock due to our inability to meet the listing requirements at such time. The notes represented by the EYSs will not be listed on any stock exchange. Upon separation of the EYSs, no sizable market for the notes and the Class A common stock may ever develop and the liquidity of any trading market for the notes or the Class A common stock that does develop may be limited. As a result, your ability to sell your notes and Class A common stock, and the market price you can obtain, could be adversely affected.

 

Future sales or the possibility of future sales of a substantial amount of EYSs, shares of our Class A common stock or notes may depress the price of the EYSs and the shares of our Class A common stock and the notes.

 

Future sales or the availability for sale of substantial amounts of EYSs or shares of our Class A common stock or a significant principal amount of the notes in the public market could adversely affect the prevailing market price of the offered securities and could impair our ability to raise capital through future sales of our securities.

 

Upon completion of this offering, we will have             EYSs outstanding, in respect of in the aggregate              shares of our Class A common stock and $             million aggregate principal amount of the notes. In addition, we will have outstanding an additional $             million aggregate principal amount of the separate notes. All of the offered securities will be freely tradable without restriction or further registration under the Securities Act, unless, in the case of EYSs, the EYSs and securities represented thereby are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act.

 

Additionally, upon completion of this offering, the existing financial investors will own an aggregate of                      shares of our Class B common stock, representing approximately         % of our outstanding capital stock, and the other existing stockholders will own an aggregate of                      shares of our Class B common stock, representing approximately             % of our outstanding capital stock.

 

The holders of our Class B common stock will have rights to exchange their Class B common stock for EYSs or, if the EYSs have been automatically separated or if the Class A common stock is listed for separate trading on a stock exchange, Class A common stock, subject to certain restrictions. These EYSs or shares of Class A common stock could be sold pursuant to an underwritten or other registered offering under a registration rights agreement with us. Such sales could cause a decline in the market price of the EYSs.

 

We may issue shares of our Class A common stock and/or notes, which may be in the form of EYSs, or other securities from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our Class A common stock and the aggregate principal amount of notes, which may be in the form of EYSs, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. In addition, we may also grant registration rights covering those EYSs, shares of our Class A common stock, notes or other securities in connection with any such acquisitions and investments.

 

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If we defer interest payments on the notes, the trading price of the EYSs or notes may be adversely affected.

 

Subject to certain limitations, we have the option to defer interest payments on the notes for certain periods pursuant to the terms of the indenture governing the notes. In addition, the new credit facility will contain provisions that will require us under certain circumstances to defer interest payments on the notes pursuant to our option under the indenture to defer such payments. If we defer interest payments on the notes, holders of the notes will continue to accrue, but will not be paid, interest. In addition, we will not be permitted to pay, and you will not receive, any dividend payments on the shares of our Class A common stock until we have paid all the deferred interest. Therefore, if we defer interest payments and we have stopped paying dividends on the Class A common stock during the same period, the EYSs and the notes may trade at prices that do not fully reflect the value of any accrued but unpaid interest on the notes and, in the case of the EYSs, will most likely trade at lower prices because no dividends will be paid on the Class A common stock during such period. This deferral feature and dividend restrictions may mean that the market prices for the EYS and the notes may be more volatile than other securities that do not have such deferral features.

 

Our amended and restated certificate of incorporation and amended and restated by-laws and several other factors could limit another party’s ability to acquire us and deprive our investors of the opportunity to obtain a takeover premium for their securities.

 

Our amended and restated certificate of incorporation and amended and restated by-laws will contain certain provisions that may make it difficult for another company to acquire us and for you to receive any related takeover premium for your securities. For example, our amended and restated certificate of incorporation will authorize the issuance of preferred stock without stockholder approval and upon such terms as the board of directors may determine. The rights of the holders of shares of our common stock will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that may be issued in the future. We will also have a classified board of directors. We are also subject to Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner.

 

Risks Relating to the Restaurant Industry and our Business

 

Intense competition in the restaurant industry could make it more difficult to expand our business and could also have a negative impact on our sales if customers favor our competitors or we are forced to change our pricing and other marketing strategies.

 

The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and food counters in grocery stores, cafeterias and other purveyors of moderately priced and quickly prepared food.

 

Our Taco Cabana restaurants, although part of the quick-casual segment of the restaurant industry, compete with quick-service operators, including those in the quick-service Mexican segment such as Taco Bell, other quick-casual operators and traditional casual dining Mexican restaurants. In addition to quick-service hamburger restaurant chains as well as other types of quick-service restaurants, Pollo Tropical’s competitors include national and regional chicken-based concepts, such as Boston Market and Kentucky Fried Chicken (KFC), and regional grilled chicken concepts.

 

With respect to our Burger King restaurants, our largest competitors are McDonald’s and Wendy’s restaurants. According to publicly available information, McDonald’s restaurants had aggregate U.S. system wide sales of $22.1 billion for the year ended December 31, 2003 and operated 13,600 restaurants in the United States at that date, and Wendy’s restaurants had aggregate system wide sales of $7.4 billion for the year ended December 31, 2003 and operated 5,761 restaurants in the United States at that date.

 

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To remain competitive, we, as well as certain of the other major quick-casual and quick-service restaurant chains, have increasingly offered selected food items and combination meals at discounted prices. These changes in pricing and other marketing strategies have had, and in the future may continue to have, a negative impact on our sales and earnings.

 

Additionally, we may encounter difficulties growing beyond our presence in our existing core markets. We cannot assure you that we will be able to successfully grow our market presence beyond the current key regions within our existing markets, as we may encounter well-established competitors in new areas. In addition, we may be unable to find attractive locations or successfully market our products as we expand beyond our existing core markets, as the competitive circumstances and consumer characteristics in these new areas may differ substantially from those in areas in which we currently operate. As a result of the foregoing, we cannot assure you that we will be able to successfully integrate or profitably operate new company-operated restaurants outside our core markets.

 

Factors specific to the quick-casual and quick-service restaurant segments may adversely affect our results of operations, which may cause a decrease in earnings and revenues.

 

The quick-casual and quick-service restaurant segments are highly competitive and can be materially affected by many factors, including:

 

    changes in local, regional or national economic conditions;

 

    changes in demographic trends;

 

    changes in consumer tastes;

 

    changes in traffic patterns;

 

    consumer concerns about nutrition;

 

    increases in the number of, and particular locations of, competing restaurants;

 

    inflation;

 

    increases in utility costs;

 

    increases in the cost of food, such as beef and chicken, and packaging;

 

    increased labor costs, including healthcare and minimum wage requirements;

 

    regional weather conditions; and

 

    the availability of experienced management and hourly-paid employees.

 

We are highly dependent on the Burger King system and our ability to renew our franchises with Burger King Corporation. The failure to renew our franchises or Burger King’s failure to effectively compete could materially reduce our results of operations.

 

Due to the nature of franchising and Carrols’ agreements with BKC, our success is, to a large extent, directly related to the success of the nationwide Burger King system. In turn, the ability of the nationwide Burger King system to compete effectively depends upon the success of the management of the Burger King system by BKC and the success of its advertising programs. We cannot assure you that Burger King will be able to compete effectively with other quick-service restaurants.

 

Under our franchise agreements with BKC, we are required to comply with operational programs established by BKC. For example our franchise agreements with BKC require that our restaurants comply with specified design criteria. In addition, BKC has the right to require us during the tenth year of a franchise agreement to remodel our restaurants to conform with the then-current image of Burger King. In addition, although not required, we may not be able to avoid adopting menu price discount promotions instituted by BKC which may be unprofitable.

 

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BKC’s consent is required for us to expand and acquire additional Burger King restaurants. BKC has a right of first refusal to acquire existing Burger King restaurants which we may seek to acquire. We cannot assure you that BKC will continue to consent to our acquisitions of existing Burger King restaurants in the future or that it would not exercise its right of first refusal with regard to restaurants we seek to acquire. In addition, BKC must consent to renew our franchise agreements when they expire. Our franchise agreements with BKC typically have 20-year terms and are set to expire as follows:

 

    five of our franchise agreements with BKC are due to expire in 2004;

 

    24 of our franchise agreements with BKC are due to expire in 2005; and

 

    an additional 17 of our franchise agreements with BKC are due to expire in 2006.

 

We cannot assure you that BKC will grant each of our requests for successor franchise agreements. In addition, we may be obligated to make capital improvements to particular restaurants to bring them up to Burger King current design standards in connection with obtaining successor franchise agreements and thus incur substantial costs.

 

In addition, Carrols’ franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing Burger King restaurants, we cannot assure you that a franchise given by BKC to a third party will not adversely affect any single Burger King restaurant that we operate.

 

We may incur significant liability or reputational harm if claims are brought against us.

 

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. A significant judgment against us could have a material adverse effect on our financial performance. Adverse publicity resulting from such allegations or alleged discrimination or other operating issues stemming from one of our locations or a limited number of our locations could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. For example, on November 16, 1998, the Equal Employment Opportunity Commission filed a complaint alleging that Carrols has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. It is not possible to predict what adverse impact, if any, this case could have on our financial condition or results of operations and cash flows. While our evaluation of the complaint continues, this case and any future cases which may be filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, this case and any future cases may materially and adversely affect our operations by increasing our litigation costs and insurance premiums and diverting our attention and resources to address such actions. See “Business—Legal Proceedings.”

 

We can be adversely affected by 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 and transfatty acids) or alleged discrimination or other operating issues stemming from one location or a limited number of locations could substantially affect us, regardless of whether they pertain to our own restaurants. For example, health concerns about the consumption of beef or chicken or by specific events such as the outbreak of Bovine Spongiform Encephalopathy (mad cow disease) or Avian Influenza (bird flu) could lead to changes in consumer preferences, reduce consumption of our products and adversely affect our financial performance. Similarly these events could reduce the available supply of beef or chicken or significantly raise the price of beef or chicken.

 

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Changes in consumer taste could negatively impact our business.

 

We obtain a significant portion of our revenues from the sale of hamburgers, chicken, various types of sandwiches, Mexican and other ethnic foods. The quick-casual and quick-service restaurant segments are characterized by the frequent introduction of new products, often accompanied by substantial promotional campaigns. In recent years, numerous companies in the quick-casual and 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, healthy, nutritious, low in calories and low in fat content. If we do not timely capitalize on a new product, we may not receive the full benefits of a consumer shift toward that product or products. In addition, any significant event that adversely affects consumption of our products, such as cost, changing tastes or health concerns, could adversely affect our financial performance.

 

If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our business.

 

Our financial performance is dependent on our continuing ability to offer fresh, premium quality food at competitive prices. 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 us.

 

For our Taco Cabana and Pollo Tropical restaurants, we have negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies. Taco Cabana and Pollo Tropical restaurants’ food and supplies are ordered from approved suppliers and are shipped via distributors to the restaurants. For our Taco Cabana restaurants, SYGMA Network, Inc. serves as our primary distributor of food and beverage products and supplies. For our Pollo Tropical restaurants, Henry Lee, a division of Gordon Food Service, serves as our primary distributor of food and paper products. We rely on our suppliers and distributors and if any of them is unable to service us, this could lead to a material disruption in service or supply until new suppliers or distributors are engaged.

 

If labor costs increase, we may not be able to make a corresponding increase in our revenues and our profitability may decline.

 

Wage rates for a substantial number of our employees are at or slightly above the minimum wage. 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 and adversely affect our results of operations.

 

The efficiency and quality of our competitors’ advertising and promotional programs could have a material adverse effect on our results of operations and financial condition.

 

Should our competitors increase spending on advertising and promotion, should the cost of television or radio advertising increase, should our advertising funds materially decrease for any reason, or should our advertising and promotion be less effective than our competitors’, there could be a material adverse effect on our results of operations and financial condition.

 

Newly acquired or developed restaurants may not perform as we expect and we cannot assure you that our growth and development plans will be achieved.

 

Part of our growth strategy is to develop additional Taco Cabana and Pollo Tropical restaurants both within and outside our core markets and to selectively acquire and develop additional Burger King restaurants. Development involves substantial risks, including the following:

 

    the inability to obtain or self-fund development financing;

 

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    development costs that exceed budgeted amounts;

 

    delays in completion of construction;

 

    the inability to obtain all necessary zoning and construction permits;

 

    the inability to identify, or the unavailability of, suitable sites on acceptable leasing or purchase terms;

 

    developed restaurants that do not achieve desired revenue or cash flow levels once opened;

 

    incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion;

 

    the inability to recruit, train and retain managers and other employees necessary to staff each new restaurant;

 

    changes in governmental rules, regulations and interpretations; and

 

    changes in general economic and business conditions.

 

We cannot assure you that our growth and development plans can be achieved. Our development plans will require additional management, operational and financial resources. For example, we will be required to recruit and train managers and other personnel for each new restaurant. We cannot assure you that we will be able to manage our expanding operations effectively and our failure to do so could adversely affect our results of operations.

 

Our business is regional and we therefore face risks related to reliance on certain markets.

 

Ninety-five percent of our Taco Cabana restaurants are located in Texas, all of our owned and operated Pollo Tropical restaurants are located in Florida, and 65% of our Burger King restaurants are located in New York and Ohio. Therefore, the economic conditions, state and local government regulations, weather conditions affecting Florida, Texas, New York and Ohio and the tourism industry affecting Florida may have a material impact on the success of our restaurants in those locations. For example, the events of September 11, 2001 had a significant negative impact on tourism in Florida, which adversely impacted the revenues and operating results at our Pollo Tropical restaurants.

 

We cannot assure you that the current locations of our existing restaurants will continue to be economically viable or that additional locations will be acquired at reasonable costs.

 

The location of our restaurants has significant influence on their success. We cannot assure you that current locations will continue to be economically viable or that additional locations can be acquired at reasonable costs. In addition, economic conditions where restaurants are located could decline in the future, which could result in potentially reduced sales in those locations. We cannot assure you that new sites will be as profitable as existing sites.

 

If the sale/leaseback market requires significantly higher yields, we may not enter into sale/leaseback transactions and as a result would not receive the related net proceeds.

 

From time to time, we sell our restaurant properties in sale/leaseback transactions. We historically have used, and intend to use, the net proceeds from such transactions to reduce outstanding debt and fund future capital expenditures for new restaurant development. However, the sale/leaseback market may cease to be a reliable source of additional cash flows for us in the future if capitalization rates become less attractive or other unfavorable market conditions develop. For example, should the sale/leaseback market require significantly higher yields, we may not enter into sale/leaseback transactions, which could adversely affect our ability to reduce outstanding debt and fund new capital expenditures for future restaurant development.

 

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The loss of the services of our senior executives could have a material adverse effect on our business, financial condition or results of operations.

 

Our success depends to a large extent upon the continued services of our senior management, including Alan Vituli, Chairman of the Board and Chief Executive Officer, and Daniel T. Accordino, President and Chief Operating Officer, who have substantial experience in the restaurant industry. Our current employment agreements with Mr. Vituli and Mr. Accordino expire on September 30, 2004. In connection with this offering, we intend to enter into new employment agreements with Messrs. Vituli and Accordino. We believe that it would be extremely difficult to replace Messrs. Vituli and Accordino with individuals having comparable experience. Consequently, the loss of the services of Mr. Vituli or Mr. Accordino could have a material adverse effect on our business, financial condition or results of operations.

 

Government regulation could adversely affect our financial condition and results of operations.

 

We are subject to extensive laws and regulations relating to the development and operation of restaurants, including regulations relating to the following:

 

    zoning;

 

    the preparation and sale of food;

 

    liquor licenses which allow us to serve alcoholic beverages at our Taco Cabana restaurants;

 

    employer/employee relationships, including minimum wage requirements, overtime, working and safety conditions, and citizenship requirements;

 

    federal and state laws that prohibit discrimination and laws regulating design and operation of facilities, such as the Americans With Disabilities Act of 1990; and

 

    federal and state regulations governing the operations of franchises, including rules promulgated by the Federal Trade Commission.

 

In the event that legislation having a negative impact on our business is adopted, you should be aware that it could have a material adverse impact on us. For example, substantial increases in the minimum wage 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.

 

If one of our employees sells alcoholic beverages to an intoxicated or minor patron, we may be liable to third parties for the acts of the patron.

 

We serve alcoholic beverages at our Taco Cabana restaurants and are subject to the “dram-shop” statutes of the jurisdictions in which we serve alcoholic beverages. “Dram-shop” statutes generally provide that serving alcohol to an intoxicated or minor patron is a violation of the law.

 

In most jurisdictions, if one of our employees sells alcoholic beverages to an intoxicated or minor patron, we may be liable to third parties for the acts of the patron. We cannot guarantee that those patrons will not be served or that we will not be subject to liability for their acts. Our liquor liability insurance coverage may not be adequate to cover any potential liability and insurance may not continue to be available on commercially acceptable terms or at all, or we may face increased deductibles on such insurance. Any increase in the number or size of “dram-shop” claims could have a material adverse effect on us through the costs of: defending against such claims; paying deductibles and increased insurance premium amounts; implementing improved training and heightened control procedures for our employees; and paying any damages or settlements on such claims.

 

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Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our results of operations.

 

We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. We own and lease numerous parcels of real estate on which our restaurants are located.

 

Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law which could adversely affect operations. Also, in the event of the determination of contamination on properties owned or operated by us, we can be held liable for severe penalties and costs of remediation. These penalties could adversely affect operations.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains statements which constitute forward-looking statements including, without limitation, the statements under “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” The words “believes,” “anticipates,” “plans,” “expects,” “intends,” “estimates,” “projects” and similar expressions are intended to identify forward-looking statements. Those statements include statements regarding our intent, belief or current expectations. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. We believe important factors that could cause actual results to differ materially from our expectations include the following:

 

    competitive conditions;

 

    economic and regulatory factors;

 

    environmental conditions and regulations;

 

    general economic conditions, particularly at the retail level;

 

    weather conditions;

 

    significant disruptions in service or supply by any of our suppliers or distributors;

 

    labor and employment benefit costs;

 

    the outcome of pending or yet-to-be instituted legal proceedings;

 

    our ability to manage our growth and successfully implement our business strategy;

 

    the risks associated with the expansion of our business;

 

    general risks associated with food service industry;

 

    our inability to integrate any businesses we acquire;

 

    our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;

 

    the availability and terms of necessary or desirable financing or refinancing and other risks and uncertainties;

 

    the risk of events similar to those of September 11, 2001 or an outbreak or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity;

 

    factors that affect the food industry generally, including recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as recent publicity concerning the health implications of obesity and transfatty acids; and

 

    other factors discussed under “Risk Factors” or elsewhere in this prospectus.

 

Developments in any of these areas, which are more fully described elsewhere in this prospectus and which descriptions are incorporated into this section by reference, could cause our results to differ materially from results that have been or may be projected by or on our behalf.

 

All forward-looking statements included in this prospectus are based on information available to us on the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this prospectus.

 

We caution that the foregoing list of important factors is not exclusive. We urge you not to unduly rely on forward-looking statements contained in this prospectus.

 

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THE TRANSACTIONS

 

In connection with this offering, we will effect the transactions described below. For additional information concerning the transactions, see “Use of Proceeds,” “Description of Other Indebtedness” and “Capitalization.”

 

Internal Corporate Transactions.    Prior to the commencement of this offering, we will amend our current certificate of incorporation and long-term incentive plans to provide for a single class of authorized common stock and to convert all outstanding stock options to purchase each of Carrols Holdings’ Taco Cabana class of common stock and Carrols Holdings’ Pollo Tropical class of common stock into options to purchase only Carrols Holdings’ Carrols class of common stock.

 

Concurrently with the closing of this offering, we will repurchase an aggregate of             shares of our existing common stock from the existing financial investors for $             million, which we will purchase with a portion of the proceeds of this offering. In addition, we will repurchase             shares of our existing common stock from certain of our directors and officers and options to purchase             shares of our existing common stock from certain of our directors, officers and current and former key employees for $             million.

 

In connection with this offering, we will reclassify our existing common stock into two classes of common stock: Class A common stock and Class B common stock. The shares of our existing common stock held by the existing stockholders and not repurchased by us in connection with this offering will be reclassified into shares of Class B common stock. Options to purchase our existing common stock held by the existing stockholders and not repurchased by us in connection with this offering will be exchanged for restricted shares of our Class B common stock to be issued under a newly-adopted restricted stock plan.

 

Following the completion of our internal corporate transactions and upon the consummation of the other transactions, we anticipate that the existing financial investors will own an aggregate of              shares of our outstanding Class B common stock, representing approximately         % of our outstanding capital stock, or an aggregate of              shares representing approximately         % of our outstanding capital stock, if the underwriters’ over-allotment option with respect to the EYSs is exercised in full. In addition, we anticipate that the other existing stockholders will own an aggregate of             shares of our outstanding Class B common stock, representing approximately            % of our outstanding capital stock, or an aggregate of              shares, representing approximately            % of our outstanding capital stock, if the underwriters’ over-allotment option with respect to the EYSs is exercised in full.

 

The holders of our Class B common stock will have certain rights to exchange their Class B common stock for EYSs or shares of Class A common stock. For a complete description of this exchange right and the terms of our Class A common stock and Class B common stock, see “Description of Capital Stock.”

 

New Credit Facility.    Concurrently with the closing of this offering, Carrols will repay all outstanding borrowings due to the current lenders under the existing credit facility (including $             million aggregate principal amount of term loan borrowings and all outstanding revolving credit borrowings ($             million) as of                     ), plus accrued and unpaid interest. The terms of the existing credit facility allow us to prepay loans without premium or penalty. The existing credit facility will be amended and restated in connection with this offering with a new syndicate of lenders, including Lehman Brothers as lead arranger and bookrunner. The new credit facility will be comprised of a secured revolving credit facility in a total principal amount of up to $             million (including amounts reserved for letters of credit) and a term loan facility consisting of senior secured notes in an aggregate principal amount of $             million. A portion of the new credit facility ($             million) will be reserved to fund capital expenditures for new restaurant development. While the new credit facility will permit us to pay dividends on the shares of our Class A common stock and Class B common stock and interest to holders of the notes, it will contain significant restrictions on our ability to do so, and on our subsidiaries’ ability to make dividend and interest payments to us. The revolving credit facility will have a             -year maturity and the term loan facility will have a             -year maturity.

 

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Tender Offer and Consent Solicitation.    In connection with this offering, we will commence a tender offer and consent solicitation with respect to all of Carrols’ 9 1/2% senior subordinated notes for an expected total consideration of $             million. As of March 31, 2004, $170 million aggregate principal amount of Carrols’ 9 1/2% senior subordinated notes were outstanding. The closing of this offering will be conditioned upon the receipt of the tender and consent of at least a majority in aggregate principal amount of Carrols’ 9 1/2% senior subordinated notes outstanding in order to delete the restrictive covenants contained in the indenture governing those notes, and the consummation of the tender offer and consent solicitation will be conditioned upon the closing of this offering. Holders that provide consents will be obligated to tender and holders who tender will be obligated to consent. After we receive the required consents, we intend to enter into a supplemental indenture to remove the restrictive covenants contained in the indenture to facilitate this offering. We cannot assure you that the tender offer and consent solicitation will be consummated on the terms described above. If any notes are not tendered pursuant to the tender offer, we intend to redeem such outstanding notes. The notes are redeemable at our option on or after December 1, 2003 at a price of 104.75% of the principal amount if redeemed before December 1, 2004. We will use a portion of the net proceeds from this offering and borrowings under the new credit facility to pay for Carrols’ 9 1/2% senior subordinated notes accepted for purchase in the tender offer and consent solicitation or redeemed after this offering.

 

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USE OF PROCEEDS

 

Assuming an initial public offering price of $             per EYS, which represents the midpoint of the range set forth on the cover page of this prospectus, and 100% of the stated principal amount of each separate note, we estimate that we will receive aggregate net proceeds of $             million from this offering of EYSs and separate notes, after deducting underwriting discounts, commissions and other estimated transaction expenses. We will use these net proceeds, together with $             million of borrowings under the new credit facility as follows:

 

    $             million to repurchase             shares of our existing common stock (and options to purchase shares of our existing common stock) from the existing stockholders, including certain members of management;

 

    $             million to repay all outstanding borrowings under the existing credit facility;

 

    $             million to repurchase all of Carrols’ 9 1/2% senior subordinated notes in the tender offer or through a redemption;

 

    $             million to pay bonuses and other payments to certain members of management upon the completion of this offering; and

 

    $             million to pay related fees and expenses.

 

If the underwriters exercise their over-allotment option to purchase additional EYSs in full, we will use all of the net proceeds we receive from the sale of additional EYSs under the over-allotment option ($             million) to repurchase             shares of our existing common stock (and options to purchase                  shares of our existing common stock) held by certain of the existing stockholders including certain members of management.

 

The existing credit facility consists of a $50 million revolving credit facility (including a standby letter of credit facility for up to $20 million), a $70 million term loan A facility and an $80 million term loan B facility. There were no outstanding borrowings as of March 31, 2004 under the revolving credit facility. As of March 31, 2004, $37.1 million principal amount was outstanding under the term loan A facility and $74.1 million principal amount was outstanding under the term loan B facility. The weighted average interest rate on outstanding borrowings under the existing credit facility as of March 31, 2004 was 4.8%. The revolving credit facility and the term loan A facility expire on December 31, 2005. The term loan B facility expires on December 31, 2007.

 

Carrols also has $170 million aggregate principal amount outstanding of unsecured Carrols’ 9 1/2% senior subordinated notes due 2008.

 

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The table below sets forth our estimate of the sources and uses of funds required to effect the transactions, assuming they all occurred as of                     , 2004.

 

Total Sources and Uses of Funds

(Dollars in thousands)

 

Sources of Funds:

      

New credit facility (1)

   $  

EYSs offered hereby

      

Separate notes offered hereby

      
    

Total Sources of Funds

   $  
    

Uses of Funds:

      

Repurchases of equity from existing stockholders (2)

   $  

Repayment of the existing credit facility (3)

      

Repurchase of Carrols’ 9½% senior subordinated notes (4)

      

Management payments (5)

      

Related fees and expenses

      
    

Total Uses of Funds

   $  
    


(1) The new credit facility will consist of a $             million term loan facility and a $             million revolving facility.
(2) Represents our purchase from the existing stockholders of a total of              shares of our existing common stock (and options to purchase          shares of our existing common stock).
(3) Represents all outstanding borrowings under the existing credit facility.
(4) The notes bear interest at a rate of 9½% and mature on December 1, 2008. Includes tender premium and consent fees to be paid to holders of such outstanding notes.
(5) Consists of an aggregate of approximately $             in bonuses and other payments payable to certain members of management upon the completion of this offering.

 

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DIVIDEND POLICY

 

Upon the closing of this offering, our board of directors is expected to adopt a dividend policy pursuant to which, in the event and to the extent we have any lawfully available cash for distribution to the holders of our common stock, and subject to applicable law, as described below, and the terms of the new credit facility, the indenture governing the notes and any other then outstanding indebtedness of ours, our board of directors will declare cash dividends on our common stock. The initial dividend rate is expected to be equal to $             per share of Class A common stock and Class B common stock per annum, in each case subject to adjustment. We will pay these dividends on or about the         day of each             ,              ,              and             , to holders of record on the         day or, if such day is not a business day, on the immediately preceding business day of such month.

 

If we have any remaining cash after the payment of dividends as contemplated above, our board of directors will, in its sole discretion, decide to use that cash to fund working capital, capital expenditures or acquisitions, repay indebtedness, pay additional dividends or for general corporate purposes.

 

The indenture governing the notes will restrict our ability to declare and pay dividends on our common stock as follows:

 

    we may not pay dividends or other restricted payments if such payments will exceed our excess cash, as defined in the indenture, minus the sum of all prior dividends and other payments that are restricted by the indenture, in addition to certain other exceptions;

 

    we may not pay dividends while interest on the notes is being deferred or, after the end of any interest deferral, so long as any deferred interest has not been paid in full; and

 

    we may not pay any dividends if a default or event of default under the indenture has occurred and is continuing.

 

The new credit facility will restrict our ability to declare and pay dividends on our common stock. See “Description of Other Indebtedness—New Credit Facility” for a description of this dividend restriction.

 

Our board of directors may, in its discretion, amend or repeal this dividend policy. Our board of directors may decrease the level of dividends provided for in this dividend policy or discontinue entirely the payment of dividends.

 

We are a holding company and conduct all of our operations through our subsidiaries and currently have no significant assets other than our Carrols shares, all of which will be pledged as collateral to the creditors under the new credit facility that we guarantee. As a result, we will rely on dividends and other payments or distributions from Carrols and, indirectly, from the subsidiaries of Carrols, to meet our debt service obligations and enable us to pay dividends. The ability of our direct and indirect subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends), agreements of those subsidiaries, the terms of the new credit facility and the covenants of any future outstanding indebtedness we or our direct and indirect subsidiaries incur.

 

Future dividends with respect to shares of our capital stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant. Under Delaware law, our board of directors may declare dividends only to the extent of our “surplus” (which is defined as total assets at fair market value minus total liabilities and minus statutory capital), or if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal years.

 

We have not paid dividends in the past five years.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2004:

 

    on an actual basis;

 

    on an adjusted basis as if the transactions contemplated in this prospectus (including our internal corporate transactions) had occurred on that date, assuming no exercise of the underwriters’ over-allotment option to purchase additional EYSs; and

 

    as further adjusted assuming full exercise of the underwriters’ over-allotment option to purchase additional EYSs.

 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” the consolidated financial statements and the notes to those statements included elsewhere in this prospectus, and the financial data set forth under “Selected Historical Financial Data.”

 

     As of March 31, 2004

     Actual

    Adjustments

   As Adjusted
Assuming No
Exercise of
Underwriters’
Over-
Allotment
Option


   Adjustments

   As Further
Adjusted
Assuming
Full Exercise
of the
Underwriters’
Over-
Allotment
Option


     (Dollars in thousands, except per share data)

Cash and cash equivalents

   $ 3,148                     
    


                  

Debt, including current portion:

                           

Existing credit facility

     111,125                     

Carrols’ 9 1/2% senior subordinated notes

     170,000                     

Lease financing obligations, including current portion

     84,141                     

Capital leases and other debt

     1,528                     

Notes offered hereby

     —                       

New credit facility

     —                       
    


                  

Total long-term debt

     366,794                     
    


                  

Stockholders’ equity:

                           

Preferred stock, par value $0.01; authorized 100,000 shares, issued and outstanding—none

     —                       

Non-voting common stock, par value $0.01; authorized 4,000,000 shares, issued and outstanding—none

     —                       

Voting common stock, par value $0.01; authorized 3,000,000 shares, issued and outstanding 1,144,144 shares

     11                     

Class A common stock, par value $0.01; authorized          shares, issued and outstanding          shares

     —                       

Class B common stock, par value $0.01; authorized          shares, issued and outstanding          shares

     —                       

Additional paid-in capital

     32,042                     

Accumulated deficit

     (10,718 )                   
    


                  

Total stockholders’ equity

     21,335                     
    


                  

Total capitalization

   $ 388,129                     
    


                  

 

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DILUTION

 

Dilution is the amount by which:

 

    the portion of the offering price paid by the purchasers of the EYSs to be sold in the offering that is allocated to our shares of Class A common stock represented by the EYSs, exceeds

 

    the net tangible book value or deficiency per share of our common stock after the offering.

 

Net tangible book value or deficiency per share of our Class A common stock is determined at any date by subtracting our total liabilities from our total assets less our intangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.

 

Our net tangible book deficiency as of March 31, 2004 was $             million, or $             per share of common stock. After giving effect to our receipt and intended use of approximately $             million of estimated net proceeds (after deducting estimated underwriting discounts and commissions and transaction expenses) from our sale of EYSs and separate notes in this offering (including the repurchase for $             million, or $             million if the underwriters exercise their over-allotment option with respect to the EYSs in full, of our existing common stock (and options to purchase              shares of our existing common stock) from certain of the existing stockholders), our pro forma as adjusted net tangible book deficiency as of March 31, 2004 would have been $             million, or $             per share of common stock. This represents an immediate increase in net tangible book value of $             per share of our common stock to the existing stockholders and an immediate dilution of $             per share of our common stock to new investors purchasing Class A common stock represented by the EYSs in this offering.

 

The following table illustrates this substantial and immediate dilution to new investors:

 

    

Per Share

of Class A

Common Stock


  

Per Share of Class A Common Stock

Assuming Full Exercise of the

Over-Allotment Option


Portion of the initial public offering price of $             per EYS allocated to one share of Class A common stock

         

Net tangible book value (deficiency) per share as of March 31, 2004

         

Increase per share attributable to cash payments made by investors in this offering

         

Net tangible book value (deficiency) as adjusted after this offering

         

Dilution in net tangible book value per share to new investors

         

 

The following table sets forth on a pro forma basis as of March 31, 2004, assuming no exercise of the underwriters’ over-allotment option with respect to the EYSs:

 

    the total number of shares of our Class A common stock represented by EYSs and of Class B common stock to be outstanding following the consummation of the transactions;

 

    the total consideration paid by the existing stockholders and to be paid by the new investors purchasing EYSs in this offering; and

 

    the average price per share of common stock paid by the existing stockholders (cash and stock) and to be paid by new investors purchasing EYSs in this offering:

 

    

Shares of Common

Stock Purchased


  Total Consideration

 

Average Price

Per Share of

Common Stock


     Number

   Percent

  Amount

   Percent

 
              (in thousands)         

Existing stockholders

                %   $                         %   $             

Class B common stock

                          

New investors

                          

Class A common stock

                          

Total

                          

 

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SELECTED HISTORICAL FINANCIAL DATA

 

Restatement

 

We restated our financial statements, including applicable footnotes, for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98, “Accounting for Leases”, rather than as sale/leaseback transactions.

 

The restatement was due to lease provisions in certain of our sale/leaseback transactions, which in our opinion have minimal commercial impact upon the relevant terms of the leases. Had we been aware of the potential impact of these provisions upon our financial statements, we believe that both we and the respective lessors would have agreed to exclude those provisions from each lease without affecting any of the material terms of such leases. We may amend these leases in the future to address these provisions and to qualify them for treatment as operating leases as originally intended. However, we cannot assure you as to when or whether any or all of such leases will be amended.

 

The impact of the restatement was to record on our balance sheets the property and equipment of the restaurants subject to these transactions and record the proceeds from these transactions (including the gains previously deferred) as a form of debt financing. The restatement also impacted our financial results by increasing the depreciation expense for the property and equipment subject to these transactions and recharacterizing the lease payments previously accounted for as rent expense for these restaurants as principal repayments and interest expense. The restatement had no impact on our liquidity and net cash flow. In addition, there was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.

 

As a result of the restatement, we were in default related to certain required financial leverage ratios and other covenants under the existing credit facility. We obtained a waiver from our senior secured lenders of any prior non-compliance and defaults resulting from the restatement. In addition, the existing credit facility was amended to exclude all adjustments resulting from this restatement on our financial covenant requirements and to treat on a prospective basis the specified leases as if no restatement or recharacterization had occurred.

 

The following summary of selected financial data has been revised to reflect this restatement. See Note 2 to the consolidated financial statements included elsewhere in this prospectus for the restatement adjustments for the years ended 2001 and 2002 and the three months ended March 31, 2003.

 

Selected Financial Data

 

The following table sets forth our selected consolidated financial data derived from our audited consolidated financial statements for each of the fiscal years ended December 31, 1999, 2000, 2001, 2002 and 2003, of which the consolidated financial statements for fiscal 2001, 2002 and 2003 are included elsewhere in this prospectus. The selected historical consolidated financial data for the three months ended March 31, 2003 and 2004 have been derived from our unaudited consolidated financial statements for those periods. The unaudited consolidated financial statements for the three months ended March 31, 2003 and 2004 include all adjustments, consisting of normal recurring adjustments, which, in our opinion, are necessary for a fair presentation of the financial position and results of operations for these periods. The results of operations for the three months ended March 31, 2003 and 2004 are not necessarily indicative of the results to be expected for the full year.

 

The information in the following table should be read together with our consolidated financial statements as of December 31, 2002 and 2003, for the years ended December 31, 2001, 2002 and 2003, as of March 31, 2004, and for the three months ended March 31, 2003 and 2004 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all as included elsewhere in this prospectus. The amounts in the following table reflect rounding adjustments.

 

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Our acquisition of Taco Cabana was completed in late 2000 and, as a result, our financial data as of and for the year ended December 31, 2000 include the results of operations for Taco Cabana since December 20, 2000.

 

     Year Ended December 31,

    Three Months Ended
March 31,


 
    

(Restated)

1999 (1)


   

(Restated)

2000 (1)


   

(Restated)

2001 (1)


    (Restated)
2002


    2003

   

(Restated)

2003


    2004

 

Statements of Operations Data:

     (Dollars in thousands, except per share data)  

Revenues:

                                                        

Restaurant sales

   $ 455,440     $ 465,862     $ 654,710     $ 655,545     $ 643,579     $ 151,902     $ 156,545  

Franchise royalty revenues and fees

     1,039       1,039       1,579       1,482       1,406       338       355  
    


 


 


 


 


 


 


Total revenues

     456,479       466,901       656,289       657,027       644,985       152,240       156,900  
    


 


 


 


 


 


 


Costs and expenses:

                                                        

Cost of sales

     137,279       132,646       189,947       183,976       181,182       42,434       43,681  

Restaurant wages and related expenses

     134,125       135,787       192,918       196,258       194,315       47,044       47,851  

Restaurant rent expense

     24,267       24,187       31,207       30,494       31,383       7,818       8,564  

Other restaurant operating expenses

     59,716       61,500       86,435       87,335       89,880       21,363       21,890  

Advertising expense

     20,618       20,554       28,830       28,041       27,351       7,269       5,827  

General and administrative

     23,102       26,403       35,393       36,610       37,135       9,281       9,761  

Depreciation and amortization

     26,499       31,815       47,966       44,051       47,253       10,885       11,152  

Other expense (income) (2)

     —         (1,365 )     8,841       —         —         —         —    
    


 


 


 


 


 


 


Total operating expenses

     425,606       431,527       621,537       606,765       608,499       146,094       148,726  
    


 


 


 


 


 


 


Income from operations

     30,873       35,374       34,752       50,262       36,486       6,146       8,174  

Interest expense

     26,844       28,696       40,552       34,955       32,363       8,356       7,577  

Loss on extinguishment of debt

     1,825       575       —         —         —         —         —    
    


 


 


 


 


 


 


Income (loss) before income taxes

     2,204       6,103       (5,800 )     15,307       4,123       (2,210 )     597  

Provision (benefit) for income taxes

     2,342       3,407       274       5,593       1,767       (863 )     220  
    


 


 


 


 


 


 


Net income (loss)

   $ (138 )   $ 2,696     $ (6,074 )   $ 9,714     $ 2,356     $ (1,347 )   $ 377  
    


 


 


 


 


 


 


Per Share Data:

                                                        

Basic net income (loss) per share

   $ (0.12 )   $ 2.36     $ (5.31 )   $ 8.49     $ 2.06     $ (1.18 )   $ 0.33  

Diluted net income (loss) per share

     (0.12 )     2.28       (5.31 )     7.99       1.92       (1.18 )     0.30  

Other Financial Data:

                                                        

Cash provided from operating activities

   $ 39,076     $ 50,862     $ 47,968     $ 55,964     $ 48,239     $ 9,691     $ 10,464  

Cash used for investing activities

     (49,935 )     (190,818 )     (49,156 )     (55,071 )     (29,472 )     (9,055 )     (3,104 )

Cash provided from (used for) financing activities

     4,983       140,767       881       (760 )     (18,891 )     (554 )     (6,626 )

Capital expenditures, excluding acquisitions

     45,332       36,157       47,575       54,155       30,244       11,019       3,104  

EBITDA (3)

     57,372       65,824       89,771       94,313       83,739       17,031       19,326  

EBITDA margin (4)

     12.6 %     14.1 %     13.7 %     14.4 %     13.0 %     11.2 %     12.3 %

Ratio of earnings to fixed charges (5)

     1.06 x     1.16 x     —         1.33 x     1.09 x     —         1.06 x

Operating Statistics:

                                                        

Total number of restaurants (at end of period)

     397       521       532       529       532       531       534  

Taco Cabana (6):

                                                        

Number of restaurants (at end of period)

     109       117       120       116       121       117       123  

Average number of restaurants

     106.0       112.8       120.3       114.6       118.9       116.1       121.4  

Revenues:

                                                        

Restaurant sales

   $ 159,241     $ 170,315     $ 177,398     $ 174,982     $ 181,068     $ 41,470     $ 46,044  

Franchise royalty revenues and fees

     359       376       405       429       413       96       103  
    


 


 


 


 


 


 


Total revenues

     159,600       170,691       177,803       175,411       181,481       41,566       46,147  

Average annual sales per restaurant (7)

     1,487       1,510       1,475       1,527       1,523                  

EBITDA (3)

     25,122       25,685       24,467       28,278       24,411       5,310       6,293  

EBITDA margin (4)

     15.7 %     15.0 %     13.8 %     16.1 %     13.5 %     12.8 %     13.6 %

Change in comparable restaurant
sales (8)

     5.5 %     3.4 %     1.6 %     (0.2 )%     (3.0 )%     (4.3 )%     4.9 %

 

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     Year Ended December 31,

    Three Months Ended
March 31,


 
    

(Restated)

1999 (1)


   

(Restated)

2000 (1)


   

(Restated)

2001 (1)


    (Restated)
2002


    2003

   

(Restated)

2003


    2004

 
     (Dollars in thousands, except per share data)  

Pollo Tropical:

                                                        

Number of restaurants (at end of period)

     45       49       53       58       60       59       60  

Average number of restaurants

     41.8       45.6       50.4       55.6       59.4       58.2       60.0  

Revenues:

                                                        

Restaurant sales

   $ 82,751     $ 88,976     $ 96,437     $ 100,444     $ 109,201     $ 26,490     $ 29,372  

Franchise royalty revenues and fees

     1,039       1,028       1,174       1,053       993       242       252  
    


 


 


 


 


 


 


Total revenues

     83,790       90,004       97,611       101,497       110,194       26,732       29,624  

Average annual sales per restaurant (7)

     1,980       1,951       1,913       1,807       1,838                  

EBITDA (3)

     18,513       20,963       22,085       22,384       22,553       5,789       7,249  

EBITDA margin (4)

     19.6 %     20.6 %     22.6 %     22.1 %     20.5 %     21.7 %     24.5 %

Change in comparable restaurant sales (8)…

     0.7 %     1.7 %     (0.3 )%     (4.2 )%     2.3 %     0.5 %     8.0 %

Burger King:

                                                        

Number of restaurants (at end of period)

     352       355       359       355       351       355       351  

Average number of restaurants

     344.3       352.1       353.3       355.6       352.2       353.6       351.6  

Restaurant sales

   $ 372,689     $ 371,335     $ 380,875     $ 380,119     $ 353,310     $ 83,942     $ 81,129  

Average annual sales per restaurant (7)

     1,082       1,055       1,078       1,069       1,003                  

EBITDA (3)

     38,859       43,986       43,219       43,651       36,775       5,932       5,784  

EBITDA margin (4)

     9.6 %     11.3 %     11.3 %     11.5 %     10.4 %     7.1 %     7.1 %

Change in comparable restaurant sales (8)

     (2.5 )%     (2.5 )%     1.3 %     (1.3 )%     (7.2 )%     (7.3 )%     (3.2 )%

Balance Sheet Data (At Period End):

                                                        

Total assets

   $ 373,978     $ 558,971     $ 552,111     $ 547,388     $ 486,874             $ 475,010  

Working capital

     (22,835 )     (24,476 )     (34,967 )     (34,975 )     (40,857 )             (39,810 )

Debt:

                                                        

Senior and senior subordinated debt

     251,100       5,538       368,500       357,300       294,100               281,125  

Capital leases and other debt

     2,394       5,538       5,144       3,045       1,732               1,528  

Lease financing obligations

     60,887       90,004       88,471       86,702       84,685               84,141  
    


 


 


 


 


 


 


Total debt

     314,381       461,142       462,115       447,047       380,517               366,794  

Stockholders’ equity

     12,266       14,962       8,888       18,602       20,958               21,335  

(1) The restatement adjustments affecting fiscal years 1999, 2000 and 2001 are set forth in the following table (in thousands):

 

     Year Ended December 31,

 
     1999

    2000

    2001

 
    

Previously

Reported


    Restated

   

Previously

Reported


    Restated

   

Previously

Reported


    Restated

 

Statements of Operations Data:

                                                

Restaurant rent expense

   $ 29,377     $ 24,267     $ 30,095     $ 24,187     $ 40,042     $ 31,207  

Depreciation and amortization

     23,898       26,499       28,856       31,815       43,495       47,966  

Total operating expense

     428,115       425,606       434,476       431,527       625,901       621,537  

Income from operations

     28,364       30,873       32,425       35,374       30,388       34,752  

Interest expense

     22,386       26,844       23,666       28,696       32,988       40,552  

Income before income taxes.

     4,153       2,204       8,184       6,103       (2,600 )     (5,800 )

Provision for income taxes

     3,100       2,342       4,216       3,407       1,364       274  

Net income (loss)

     1,053       (138 )     3,968       2,696       (3,964 )     (6,074 )

Balance Sheet Data:

                                                

Total assets

   $ 320,027     $ 373,978     $ 476,912     $ 558,971     $ 474,003     $ 552,111  

Working capital

     (21,696 )     (22,835 )     (25,943 )     (24,476 )     (33,198 )     (34,967 )

Lease financing obligations

     —         60,887       —         90,004       —         88,471  

Total debt

     253,494       314,381       371,138       461,142       373,644       462,115  

Stockholders’ equity

     15,051       12,266       19,019       14,962       15,055       8,888  

Other Financial Data:

                                                

Cash provided from operating activities

   $ 38,173     $ 39,076     $ 49,720     $ 50,862     $ 46,435     $ 47,968  

Cash provided from financing activities

     5,886       4,983       141,909       140,767       2,414       881  

EBITDA

     52,262       57,372       59,916       65,824       80,936       89,771  

EBITDA Margin

     11.4 %     12.6 %     12.8 %     14.1 %     12.3 %     13.7 %

 

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     The restatement adjustments affecting fiscal years 1990, 2000 and 2001 were to record on our balance sheets the property and equipment of the restaurants subject to these transactions and the proceeds from these transactions (including the gains previously deferred) as a form of debt financing. The restatement also impacted our financial results by increasing the depreciation expense for the property and equipment subject to these transactions and recharacterizing the lease payments previously accounted for as rent expense for these restaurants as principal repayments and interest expense. The cumulative effect of these adjustments affecting periods prior to fiscal 1999 are reflected as an increase of $1,594 to our accumulated deficit at December 31, 1998.

 

(2) Other income in 2000 was from the recognition of previously deferred contractual payments received from Ameriserve Food Distribution, Inc., which was recognized upon termination of the related supply agreement in 2000. Other expense in 2001 resulted from the closure of seven Taco Cabana restaurants in the Phoenix, Arizona market and the discontinuance of restaurant development in that market. See Note 8 to the consolidated financial statements included elsewhere in this prospectus.

 

(3) Reconciliation of Non-GAAP Financial Measures:

 

     EBITDA is defined as income before interest, income taxes, depreciation and amortization, and non-cash other income and expense. EBITDA is presented because we believe it is a useful financial indicator for measuring operating results as well as the ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. EBITDA is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Management believes the most directly comparable measure to EBITDA calculated in accordance with GAAP is net income (loss).

 

     A reconciliation of EBITDA for each of our concepts to consolidated net income (loss) is presented below:

 

    

Taco

Cabana


   Pollo
Tropical


   Burger King

   Consolidated

 

Year Ended December 31, 1999 (restated)

                             

EBITDA

     —      $ 18,513    $ 38,859    $ 57,372  

Less: Depreciation and amortization expense

                          26,499  

          Interest expense

                          26,844  

          Provision for income taxes

                          2,342  

          Loss on extinguishment of debt

                          1,825  
                         


Net loss

                        $ (138 )
                         


Year Ended December 31, 2000 (restated)

                             

EBITDA

   $ 875    $ 20,963    $ 43,986    $ 65,824  

Less: Other income

                          (1,365 )

          Depreciation and amortization

                          31,815  

          Interest expense

                          28,696  

          Provision for income taxes

                          3,407  

          Loss on extinguishment of debt

                          575  
                         


Net loss

                        $ 2,696  
                         


Year Ended December 31, 2001 (restated)

                             

EBITDA

   $ 24,467    $ 22,085    $ 43,219    $ 89,771  

Less: Other expense (a)

                          7,053  

          Depreciation and amortization expense

                          47,966  

          Interest expense

                          40,552  

          Provision for income taxes

                          274  
                         


Net loss

                        $ (6,074 )
                         


Year Ended December 31, 2002 (restated)

                             

EBITDA

   $ 28,278    $ 22,384    $ 43,651    $ 94,313  

Less: Depreciation and amortization expense

                          44,051  

          Interest expense

                          34,955  

          Provision for income taxes

                          5,593  
                         


Net income

                        $ 9,714  
                         


Year Ended December 31, 2003

                             

EBITDA

   $ 24,411    $ 22,553    $ 36,775    $ 83,739  

Less: Depreciation and amortization expense

                          47,253  

          Interest expense

                          32,363  

          Provision for income taxes

                          1,767  
                         


Net income

                        $ 2,356  
                         


 

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Table of Contents
    

Taco

Cabana


   Pollo
Tropical


   Burger King

   Consolidated

 

Three Months Ended March 31, 2003 (restated)

                             

EBITDA

   $ 5,310    $ 5,789    $ 5,932    $ 17,031  

Less (add): Depreciation and amortization expense

                          10,885  

          Interest expense

                          8,356  

          Benefit for income tax

                          (863 )
                         


Net loss

                        $ (1,347 )
                         


Three Months Ended March 31, 2004

                             

EBITDA

   $ 6,293    $ 7,249    $ 5,784    $ 19,326  

Less: Depreciation and amortization expense

                          11,152  

          Interest expense

                          7,577  

          Provision for income taxes

                          220  
                         


Net income

                        $ 377  
                         


 

 

 

  (a) Reflects asset impairments related to the closure of seven Taco Cabana restaurants in the first quarter of 2002. See Note 8 to the consolidated financial statements included elsewhere in this prospectus.

 

(4) EBITDA margin is derived by dividing EBITDA by the total revenues applicable to the entity shown above.

 

(5) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income before income taxes plus fixed charges. Fixed charges consist of interest expense, including capitalized interest, on all indebtedness, amortization of deferred financing costs and one-third of rental expense on operating leases representing that portion of rental expense that we deemed to be attributable to interest. Our earnings were insufficient to cover our fixed charges for the year ended December 31, 2001 and for the three months ended March 31, 2003 by $5,800 and $2,210 respectively.

 

(6) Taco Cabana was acquired in late 2000. Average restaurants, average sales and comparable sales data for periods prior to the respective acquisition are presented for informational purposes only.

 

(7) Average annual sales per restaurant is derived by dividing restaurant sales for the applicable year by the average number of restaurants for the applicable year.

 

(8) The change in comparable restaurant sales is calculated using only those restaurants that have been open since the beginning of the earliest period being compared (12 months for Burger King and 18 months for Pollo Tropical and Taco Cabana).

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Overview

 

We are one of the largest restaurant companies in the United States operating 534 restaurants in 16 states as of March 31, 2004. We operate three restaurant brands that provide balance through diversification of our restaurant concepts and geographic dispersion. We own and operate two regional Hispanic Brand restaurant companies: Taco Cabana and Pollo Tropical. We are also the largest Burger King franchisee in the world and have operated Burger King restaurants since 1976.

 

Restatement

 

We restated our financial statements, including applicable footnotes, for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98, “Accounting for Leases”, rather than as sale/leaseback transactions.

 

The restatement was due to lease provisions in certain of our sale/leaseback transactions, which in our opinion have minimal commercial impact upon the relevant terms of the leases. Had we been aware of the potential impact of the provisions upon our financial statements, we believe that both we and the respective lessors would have agreed to exclude those provisions from each lease without affecting any of the material terms of such leases. We may amend these leases in the future to address these provisions and to qualify them for treatment as operating leases as originally intended. However, we cannot assure you as to when or whether any or all of such leases will be amended.

 

The impact of the restatement was to record on our balance sheets the property and equipment of the restaurants subject to these transactions and record the proceeds from these transactions (including the gains previously deferred) as a form of debt financing. The restatement also impacted our financial results by increasing the depreciation expense for the property and equipment subject to these transactions and recharacterizing the lease payments previously accounted for as rent expense for these restaurants as principal repayments and interest expense. In addition, the restatement had no impact on our liquidity and net cash flow. There was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.

 

As a result of the restatement, we were in default related to certain required financial leverage ratios and other covenants under the existing credit facility. We obtained a waiver from our senior secured lenders of any prior non-compliance and defaults resulting from the restatement. In addition, the existing credit facility was amended to exclude all adjustments resulting from this restatement on our financial covenant requirements and to treat on a prospective basis the specified leases as if no restatement or recharacterization had occurred.

 

See Note 2 to the consolidated financial statements included elsewhere in this prospectus for a complete discussion of the restatement. Amounts affected by the restatement that appear in our Management’s Discussion and Analysis of Financial Condition and Results of Operations below have also been restated.

 

Significant Accounting Policies

 

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 1 to the consolidated financial statements, included elsewhere in this prospectus, includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the more significant accounting policies and methods used by us.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make assumptions and estimates that can have a material impact on our results of

 

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operations. Sales recognition at company-operated restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls, and generally does not require significant management estimates and judgments. However, estimates and judgments are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes and the valuation of goodwill for impairment. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.

 

Accrued occupancy costs.    We make estimates of accrued occupancy costs pertaining to closed restaurant locations on an ongoing basis. These estimates require assessment and continuous evaluation of a number of factors such as the remaining contractual period under our lease obligations, the amount of sublease income, if any, we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future events and prior estimates could result in adjustments to these accrued costs.

 

Insurance liabilities.    We are self-insured for most workers’ compensation, general liability and medical insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance liabilities, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.

 

Legal obligations.    In the normal course of business, we must make estimates of potential future legal obligations and liabilities, which require the use of management’s judgment. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates and adjustments to income could be required.

 

Income taxes.    We record income tax liabilities utilizing known obligations and estimates of potential obligations. We are required to record a valuation allowance if the value of estimated deferred tax assets are different from those recorded. This would include making estimates and judgments on future taxable income, the consideration of feasible tax planning strategies and existing facts and circumstances. When the amount of deferred tax assets to be realized is different from that recorded, the asset balance and income statement would reflect the change in the period such determination is made.

 

Goodwill valuation.    We must evaluate our recorded intangible assets for impairment under Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” on an ongoing basis. We have elected to conduct our annual impairment review of goodwill and other intangible assets at December 31. Our review at December 31, 2003 indicated there has been no impairment as of that date. This annual evaluation requires us to make estimates and assumptions regarding the fair value of our reporting units. These estimates may differ from actual future events.

 

The following critical accounting policies address the initial and prospective accounting for the EYSs and the shares of Class A common stock and notes represented thereby:

 

Income Taxes.    We intend to account for our issuance of the EYSs in this offering as representing an issuance of separate securities (shares of Class A common stock and the notes), and to allocate the proceeds received for each EYS between the Class A common stock and the notes in proportion to their respective fair market values at the time of issuance. Accordingly, we will account for the notes included in the EYSs as long-term debt bearing a stated interest rate of         % maturing on                  , 2016. As discussed below, based on the opinion of tax counsel, we are of the view that the notes should be treated as debt for U.S. federal income tax purposes. We intend to annually deduct interest expense of approximately $             on the notes from taxable income for U.S. federal and state income tax purposes. There can be no assurance that the classification of the notes as debt (or the amount of interest expense deducted) will not be challenged by the IRS or will not be

 

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sustained if challenged (although to date we have not been informed by the IRS that they believe that the notes should be treated as equity rather than debt). We have not sought a ruling from the IRS that the notes should be treated as debt. If our treatment of the notes as debt is put at risk as a result of a future ruling by the IRS, including an adverse ruling for other similar securities or an adverse ruling for EYSs, then we may need to consider the effect of such developments on the determination of our future income tax provisions and obligations. If the notes are required to be treated as equity for income tax purposes, then interest expense associated with the notes would not be deductible from our taxable income and we would be required to recognize additional tax expense and establish a related income tax liability. The additional tax that would be due to federal and state tax authorities in that event could adversely affect our financial position, cash flows, and liquidity, and could also adversely affect our ability to make interest payments on the notes and dividend payments on shares of our Class A common stock, and also our ability to continue as a going concern. In addition, non-U.S. holders of our EYSs could be subject to withholding taxes on the payment of interest treated as dividends on equity, which could subject us to additional liability for the withholding taxes that we did not collect on such payments.

 

As discussed under “Material U.S. Federal Income Tax Consequences—Consequences to U.S. Holders—Notes—Characterization as Debt,” the determination as to whether an instrument is treated as debt or equity for U.S. federal income tax purposes is based on all the facts and circumstances. There is no clear statutory definition of debt, and the characterization of an instrument as debt or equity is governed by principles developed in the case law, which analyze numerous factors that are intended to identify the formal characteristics of, and the economic substance of, the investor’s interest. In light of the representations and determinations described in the section referred to above and their relevance to several of the factors analyzed in the case law, and taking into account the facts and circumstances relating to the issuance of the notes (including the separate issuance of notes in this offering), we (and our counsel) are of the view that the notes should be treated as debt for U.S. federal income tax purposes. We intend to take such position, and therefore our financial statements will not reflect a tax liability related to this position. However, there can be no assurance that this position would be sustained if challenged by the IRS.

 

Additionally, there can be no assurance that the IRS will not assert that the interest rate on the notes is not an arm’s length rate. If the IRS were successful in such assertion, then any excess of the interest paid on the notes over the deemed arm’s length amount would not be deductible by us and could be characterized as a dividend payment instead of an interest payment for U.S. federal income tax purposes. In that event, our taxable income and, thus, our U.S. federal income tax liability, could be materially increased. We intend to support the determination of an appropriate arm’s length interest rate on the notes through the utilization of a third party valuation firm and through the sale of the separate notes pursuant to this offering.

 

EYSs and Class B common stock.    Our EYSs represent Class A common stock, notes and embedded derivative features that may require bifurcation under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Upon completion of this offering, proceeds from the issuance of the EYSs will first be allocated, based upon relative fair value at the issuance date, to Class A common stock and the notes. If it is determined at the time of issuance that any of the embedded derivatives are required to be bifurcated and separately accounted for, then a portion of the proceeds from the original issuance will also be allocated to the embedded derivatives equal to the combined fair value of the embedded derivatives that require bifurcation. If a portion of the initial proceeds is allocated to any of the derivatives, the proceeds allocated to the notes will be reduced and the notes will be recorded at a discount and accreted to their redemption value as a component of interest expense using the effective interest method. Any such allocation will not affect the tax treatment of the EYSs.

 

The Class A common stock portion of the EYS will be included in stockholders’ equity, net of the related portion of the EYS transaction costs allocated to Class A common stock, and dividends paid on the Class A common stock will be recorded as a reduction to retained earnings when declared by us. The senior subordinated debt portion of the EYS unit will be included in long-term debt, and the related portion of the EYSs transaction

 

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costs allocated to the notes will be capitalized as deferred financing costs and amortized to interest expense using the effective interest method. Interest on the notes will be charged to expense as accrued by us. Any derivatives requiring bifurcation will be recorded as a liability as required by FAS 133 and will be marked to market with changes in fair value being recorded in earnings. We intend to determine the fair value of the Class A common stock, the notes and any embedded derivatives that require bifurcation through the utilization of a third party valuation firm and the sale of the separate notes with the same terms that are part of this offering.

 

In connection with our internal corporate transactions, we will issue shares of Class B common stock to the existing stockholders. Class B common stock may, subject to certain conditions, be exchanged in the future for EYSs. Because we have two classes of common stock, net income will be allocated between the two classes of common stock for purposes of computing earnings per share.

 

Holders of our Class B common stock will agree to restrictions on the transferability of the Class B common stock. After the expiration of a 180-day lock-up period, the holders of our Class B common stock will have rights to exchange their Class B common stock for EYSs or, if the EYSs have been automatically separated or if the Class A common stock is listed for separate trading on a stock exchange, Class A common stock, subject to certain restrictions. Following the consummation of the transactions and through the maturity date of the notes, and subject to the lock-up period, each share of Class B common stock will be exchangeable into EYSs at a fixed rate of              shares of Class B common stock for one EYS. If the EYSs have automatically separated or if the shares of our Class A common stock are listed for separate trading on a stock exchange, the holders of the Class B common stock may convert each share of Class B common stock into one share of Class A common stock. Subject to limited exceptions, until the second anniversary of the consummation of this offering, the amended and restated stockholders agreement will restrict the holders of our Class B common stock from exercising such exchange rights if following the exchange the holders of our Class B common stock would hold less than 10% of the outstanding shares of our capital stock in the aggregate. For a more complete description of this exchange right and the terms of our Class A common stock and Class B common stock, see “Description of Capital Stock.”

 

Results of Operations

 

The following table sets forth, for fiscal years 2001, 2002 and 2003, and the three months ended March 31, 2003 and 2004, our selected operating results as a percentage of total restaurant sales:

 

     Year Ended December 31,

   

Three Months Ended

March 31,


 
     (Restated)
2001


    (Restated)
2002


    2003

    (Restated)
2003


    2004

 

Restaurant sales:

                              

Taco Cabana

   27.1 %   26.7 %   28.1 %   27.3 %   29.4 %

Pollo Tropical

   14.7 %   15.3 %   17.0 %   17.4 %   18.8 %

Burger King

   58.2 %   58.0 %   54.9 %   55.3 %   51.8 %
    

 

 

 

 

Total restaurant sales

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Costs and expenses:

                              

Cost of sales

   29.0 %   28.1 %   28.2 %   27.9 %   27.9 %

Restaurant wages and related expenses

   29.5 %   29.9 %   30.2 %   31.0 %   30.6 %

Restaurant rent expense

   4.8 %   4.7 %   4.9 %   5.1 %   5.5 %

Other restaurant expenses including advertising

   17.6 %   17.6 %   18.2 %   18.8 %   17.7 %

General and administrative

   5.4 %   5.6 %   5.8 %   6.1 %   6.2 %

Depreciation and amortization

   7.3 %   6.7 %   7.3 %   7.2 %   7.1 %

Other expense

   1.4 %   —       —       —       —    
    

 

 

 

 

Income from restaurant operations

   5.1 %   7.4 %   5.5 %   3.8 %   5.0 %