CARROLS RESTAURANT GROUP, INC. We operate on a 52 or 53 week fiscal year ending on the Sunday closest toDecember 31 . Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Our fiscal year endedJanuary 3, 2021 contained 53 weeks and our fiscal year endingJanuary 2, 2022 will contain 52 weeks. Introduction The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with our unaudited Condensed Consolidated Financial Statements appearing elsewhere in this report and our Annual Report on Form 10-K for the year endedJanuary 3, 2021 . The overview provides our perspective on the individual sections of MD&A, which include the following: Company Overview-a general description of our business and our key financial measures. Recent and Future Events Affecting Our Results of Operations-a description of recent events that affect, and future events that may affect, our results of operations. Results from Operations-an analysis of our results of operations for the three months endedApril 4, 2021 compared to the three months endedMarch 29, 2020 including a review of material items and known trends and uncertainties. Liquidity and Capital Resources-an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity. Application of Critical Accounting Policies-an overview of accounting policies requiring critical judgments and estimates. Forward Looking Statements-cautionary information about forward-looking statements and a description of certain risks and projections. Company OverviewCarrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively, "Carrols Restaurant Group ", the "Company", "we", "our" or "us") is one of the largest restaurant companies inthe United States and has been operating restaurants for more than 60 years. We are the largest Burger King® franchisee inthe United States , based on number of restaurants. As ofApril 4, 2021 we operated, as franchisee, a total of 1,075 restaurants in 23 states under the trade names of Burger King® and Popeyes®. This included 1,010 Burger King restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65Popeyes restaurants in seven Southeastern states. Any reference to "BKC" refers toBurger King Corporation and its indirect parent company, Restaurant Brands International Inc. ("RBI"). Any reference to "PLK" refers toPopeyes Louisiana Kitchen, Inc. and its indirect parent company, RBI. The following is an overview of the key financial measures discussed in our results of operations: •Restaurant sales consists of food and beverage sales at our restaurants, net of sales discounts and excluding sales tax collected. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant development, acquisitions of restaurants and closures of restaurants. Comparable restaurant sales reflect the change in year-over-year sales for a comparable restaurant base. Restaurants we acquire are included in comparable restaurant sales after they have been owned for 12 months and newly developed restaurants are included in comparable restaurant sales after they have been open for 15 months. Restaurants are excluded from comparable restaurant sales during 24 -------------------------------------------------------------------------------- Table of Contents extended periods of closure, which primarily occur due to restaurant remodeling activity. For comparative purposes, where applicable, the calculation of the changes in comparable restaurant sales is based either on a 53-week or 52-week year and compares against the respective 52-week prior period. •Cost of sales consists of food, paper and beverage costs (including packaging costs) and delivery charges, less purchase discounts and vendor rebates. Cost of sales is generally influenced by changes in commodity costs, the mix of items sold, the level of promotional discounting, the effectiveness of our restaurant-level controls to manage food and paper costs, and the relative contribution of delivery sales. •Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers' compensation insurance and federal and state unemployment insurance. •Restaurant rent expense includes straight-lined lease costs and variable rent on our restaurant leases characterized as operating leases. •Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC and PLK, utilities, repairs and maintenance, real estate taxes and credit card fees. •Advertising expense includes advertising payments to BKC and PLK based on a percentage of sales as required under our franchise and operating agreements and additional marketing and promotional expenses in certain of our markets. •General and administrative expenses are comprised primarily of salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees, acquisition costs and stock-based compensation expense. •EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss. EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss are non-GAAP financial measures. EBITDA represents net loss before income taxes, interest expense, and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges, acquisition and integration costs, stock-based compensation expense, abandoned development costs, restaurant pre-opening costs, non-recurring litigation and other professional expenses and other income and expense. Adjusted Restaurant-Level EBITDA represents loss from operations as adjusted to exclude general and administrative expenses, depreciation and amortization, impairment and other lease charges, restaurant-level integration costs, pre-opening costs and other income and expense. Adjusted Net Loss represents net loss as adjusted, net of tax, to exclude impairment and other lease charges, acquisition costs and integration costs, abandoned development costs, pre-opening costs, non-recurring litigation and other professional expenses and other income and expense. We are presenting Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss because we believe that they provide a more meaningful comparison than EBITDA and net loss of our core business operating results, as well as with those of other similar companies. Additionally, we present Adjusted Restaurant-Level EBITDA because it excludes restaurant integration costs, restaurant pre-opening costs, other income and expense, and the impact of general and administrative expenses such as salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees. Although these costs are not directly related to restaurant-level operations, these costs are necessary for the profitability of our restaurants. Management believes that Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations on page 36, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA and Adjusted Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss are not measures of financial performance or liquidity under GAAP and, accordingly, should not be 25 -------------------------------------------------------------------------------- Table of Contents considered as alternatives to net income, income from operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. For the reconciliation between Net Loss to EBITDA, Adjusted EBITDA and Adjusted Net Loss and the reconciliation of income from operations to Adjusted Restaurant-Level EBITDA, see page 36. EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss have important limitations as analytical tools. These limitations include the following: •EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment; •EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt; •Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and •EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges and acquisition costs) have recurred and may reoccur. •Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights from our acquisitions of restaurants and the amortization of franchise fees paid to BKC and PLK. •Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries. •Interest expense consists of interest expense associated with our Term Loan B borrowings, Term Loan B-1 borrowings, finance lease liabilities, amortization of deferred financing costs, amortization of original issue discounts and interest on revolving credit borrowings. Recent and Future Events Affecting our Results of Operations Impact of the COVID-19 Pandemic The impact of the COVID-19 pandemic on restaurant sales at our Burger King restaurants began during the week endedMarch 15, 2020 . During the week endedMarch 29, 2020 , comparable restaurant sales decreased 33.8% compared to the prior year week. Comparable restaurant sales declines at our Burger King restaurants began easing mid-April of 2020 and for the month of June of 2020 the change in comparable restaurant sales was positive. For ourPopeyes restaurants, the impact of the COVID-19 pandemic on restaurant sales started during the week endedMarch 22, 2020 and began easing mid-April of 2020. In response to the impact that the COVID-19 pandemic has had on our business operations and the continuing uncertainty in the economy in general, we have taken steps to adapt our business and strengthen and preserve our liquidity, including the following: •InMarch 2020 , we closed the dining rooms in all our restaurants and modified operating hours in line with local ordinances and day-part sales trends. These closures were in effect through most of the second quarter of 2020, with each restaurant operating according to their respective local governmental guidelines as well as safety procedures developed by BKC and PLK. As individual states and local governments have allowed reopenings, we have continually evaluated the opportunity to re-open dining 26 -------------------------------------------------------------------------------- Table of Contents rooms. By the end of the first quarter of 2021, most of our dining rooms have reopened, however, in most cases, guests have continued to rely on our drive-thru, carry-out and delivery service modes. •We launched delivery services in March of 2020 at approximately 800 of our restaurants. Since then, we have added additional third-party delivery partners as they became available as well as expanded the number of restaurants where delivery service is offered as new locations were covered by our delivery partners. For the first quarter of 2021, delivery comprised approximately 4.8% of total restaurant sales. •We temporarily closed 46 restaurants in lateMarch 2020 and earlyApril 2020 that were geographically close to one of our other restaurants, and these closures were in effect for most of the second quarter of 2020. By the end of 2020, we had reopened all of these restaurants with the exception of two Burger King restaurants we permanently closed in the third quarter of 2020. •As discussed below, we increased revolving credit borrowing capacity under our Revolving Credit Facility (as defined below) by$30.8 million to a total of$145.8 million in March and April of 2020, and again in April of 2021 to$175.0 million . In June of 2020, we borrowed Incremental Term B-1 Loans (as defined below) under our Senior Credit Facilities for net proceeds of$71.3 million after original issue discount to increase our liquidity and protect against the uncertainty of a prolonged pandemic. •We remain committed to active management of our expenditures and for the second quarter of 2020 limited spending mainly to necessary restaurant maintenance issues. For the full year of 2020, we reduced operating capital expenditures to$56.9 million from$134.9 million in 2019. We expect capital expenditures in 2021 to be approximately$60 million , net of estimated proceeds from sale-leaseback activity. •We reduced regional and corporate overhead by streamlining our regional management and support structure, improving our training process and instituted a 10% temporary reduction in all non-restaurant wages for the second quarter of 2020. Given our improved business trajectory, this reduction in wages was restored as ofJuly 1, 2020 . •As allowed under the Coronavirus Aid, Relief and Economic Security Act, as amended (the "CARES Act"), we deferred payment of the employer portion ofSocial Security taxes through the end of 2020. The amount of the cumulative deferral at the end of 2020 was approximately$21.6 million , of which 50% is payable on each ofDecember 31, 2021 andDecember 31, 2022 . This remains unpaid as ofApril 4, 2021 , with$10.8 million included in accrued payroll, related taxes and benefits and$10.8 million included in other liabilities, long-term in the accompanying consolidated balance sheets. •We negotiated with our landlords other than BKC to secure$5.8 million in deferral or abatement of 2020 cash rent obligations, of which$4.8 million was or is expected to be repaid over various periods which began in the third quarter of 2020. We have repaid$2.1 million related to these deferrals through the first quarter of 2021. •During the second quarter of 2020, we optimized payment terms with our key vendors and suppliers and utilized deferral opportunities with our utility vendors. These reverted to normal payment terms in July of 2020. During the year, we have experienced a number of minor and/or temporary supply chain issues which we continue to monitor as the communities we operate in reopen. •We suspended any acquisition activity and share repurchases during the first quarter of 2020, which we subsequently reinstated during the fourth quarter of 2020. Throughout the course of the evolving pandemic, we have been adapting our business in order to continue operating safely. To support the health and safety of our employees, beginning inMarch 2020 we mandated, among other things, the use of masks, sanitizers and temperature checks at the beginning of each shift for our team members as well as instituted contactless procedures in our restaurants. We also suspended all non-essential travel for our employees and implemented a work-from-home policy for all non-restaurant personnel effective through the second quarter of 2020. During the third quarter of 2020, administrative employees returned to the office on a voluntary basis in compliance withNew York's phased re-opening. Although the COVID-19 pandemic has negatively impacted the Company's customer traffic, the immediate actions taken to continue drive-thru and carry-out business operations and secure additional liquidity have minimized the financial impact on the Company's results of operations, financial condition and cash flows. We believe our business model and world-class brands are ideally positioned to serve value and convenience-seeking 27 -------------------------------------------------------------------------------- Table of Contents customers as the communities we operate in are reopening and customers are returning to pre-pandemic behaviors and activities. As of the first quarter of 2021, the dining rooms in most of our restaurants were open although not widely used as guests continue to rely on our drive-thru, carry-out and delivery service modes. We are currently working through a challenging labor environment that is impacting the quick-serve and casual dining business. We believe that this may ease in the coming months as the communities we operate in continue to reopen, with younger people gaining more access to the vaccine, the supply of potential high school and college-aged hourly team members seasonally increasing in the summer months, and schools returning to more stable pre-pandemic schedules. While significant uncertainty remains as to when or the manner in which the circumstances surrounding the COVID-19 pandemic will change, including but not limited to stock price volatility, lower customer traffic, governmental restrictions on restaurant businesses and the unpredictable economic environment, we have been nimble in adapting our operations to the realities of the marketplace. We saw the results of these efforts in 2020 which have continued into 2021. Our Burger King restaurant sales in the first quarter of 2021 were 4.3% higher than restaurant sales in the comparable period of 2019, which includes the impact from the severe winter weather we experienced in February of 2021.Area Development and Remodeling Agreement The Company, Carrols,Carrols LLC , and BKC entered into a newArea Development Agreement (the "ADA") which commenced onApril 30, 2019 and was set to end onSeptember 30, 2024 and which superseded the Operating Agreement dated as ofMay 30, 2012 , as amended, betweenCarrols LLC and BKC. TheADA was amended and restated by all parties onJanuary 4, 2021 (the "Amended ADA"). Pursuant to theADA and for a cost of$3.0 million , BKC had assigned toCarrols LLC the right of first refusal on the sale of franchisee-operated restaurants in 16 states and a limited number of counties in four additional states ("ADA ROFR"). The ADA ROFR was terminated in connection with the Amended ADA. Under the Amended ADA,Carrols LLC has agreed to open, build and operate a total of 50 new Burger King restaurants, 80% of which must be inKentucky ,Tennessee andIndiana . This includes four Burger King restaurants bySeptember 30, 2021 , 10 additional Burger King restaurants bySeptember 30, 2022 , 12 additional Burger King restaurants bySeptember 30, 2023 , 12 additional Burger King restaurants bySeptember 30, 2024 and 12 additional Burger King restaurants bySeptember 30, 2025 . In addition, pursuant to the Amended ADA, BKC grantedCarrols LLC franchise pre-approval to build new Burger King restaurants or acquire Burger King restaurants from Burger King franchisees with respect to 500 Burger King restaurants in the aggregate in (i)Kentucky ,Tennessee andIndiana (excluding certain geographic areas inIndiana ) and (ii) (a) 16 states, which includeArkansas ,Indiana ,Kentucky ,Louisiana ,Maine ,Maryland ,Michigan ,Mississippi ,North Carolina ,Ohio ,Pennsylvania ,Rhode Island ,South Carolina ,Tennessee ,Vermont andVirginia (subject to certain exceptions for certain limited geographic areas within certain states) and (b) any other geographic locations thatCarrols LLC enters after the commencement date of the Amended ADA pursuant to BKC procedures subject to certain limitations. 28 -------------------------------------------------------------------------------- Table of Contents In connection with an acquisition of restaurants from in 2019, we also assumed a development agreement for Popeyes®, which included an assignment by PLK of its right of first refusal under its franchise agreements with its franchisees for acquisitions in two southern states, as well as a development commitment to open, build and operate approximately 80 new Popeyes® restaurants over six years. This development agreement with PLK was terminated onMarch 17, 2021 , with certain covenants applicable to us surviving the termination. PLK reserved the right to charge the us a$0.6 million fee if PLK and Carrols are not able to come to a mutually agreeable solution with respect to such fee within a six month period. Capital Expenditures We estimate our capital expenditures in 2021 will be approximately$60 million , net of estimated sale-leaseback activity. We incurred$10.6 million of capital expenditures in the first three months of 2021, net of sale-leaseback proceeds, properties purchased for sale-leaseback, and insurance proceeds. We opened two Burger King restaurants in the first three months of 2021. We expect to complete development of eight new Burger King restaurants in 2021 and to remodel 14 Burger King restaurants and sevenPopeyes restaurants. Refinancing of Indebtedness and Amendments to our Senior Credit Facilities OnApril 30, 2019 , we entered into a new senior secured credit facility which provides for senior secured credit facilities in an aggregate principal amount of$550.0 million (as amended the "Senior Credit Facilities"), consisting of (i) a term loan B facility in an aggregate principal amount of$425.0 million (the "Term Loan B Facility"), the entire amount of which was borrowed by us onApril 30, 2019 and (ii) a revolving credit facility (including a sub-facility of$35.0 million for standby letters of credit) in an aggregate principal amount of$125.0 million (the "Revolving Credit Facility"). Prior to the entry into the Second Amendment (as defined below), borrowings under the Term Loan B Facility and the Revolving Credit Facility initially bore interest at a rate per annum, at our option, of (i) the Alternate Base Rate (such definition and all other definitions used herein and otherwise not defined herein shall have the meanings set forth in the Senior Credit Facilities) plus the applicable margin of 2.25% or (ii) the LIBOR Rate plus a margin of 3.25% (as defined in the Senior Credit Facilities). The Term Loan B Facility matures onApril 30, 2026 and the Revolving Credit Facility matures onApril 30, 2024 . OnDecember 13, 2019 , we entered into the First Amendment to our Senior Credit Facilities which amended a financial covenant under the Senior Credit Facilities applicable solely with respect to the Revolving Credit Facility that previously required the Company to maintain quarterly a Total Net Leverage Ratio of not greater than 4.75 to 1.00 (measured on a most recent four quarter basis), to now require that the Company maintain only a First Lien Leverage Ratio of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter (beginning with the fiscal quarter endedDecember 29, 2019 ), the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to$12.0 million ) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. The First Amendment also reduced the aggregate maximum revolving credit borrowings under the Revolving Credit Facility by$10.0 million to a total of$115.0 million . OnMarch 25, 2020 , we entered into the Second Amendment to our Senior Credit Facilities (the "Second Amendment"). The Second Amendment increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the revolving credit facility (the "Revolving Committed Amount") by$15.4 million to a total of$130.4 million . The Second Amendment also amended the definition of Applicable Margin (such definition and all other definitions used herein and otherwise not defined herein shall be the meanings set forth in the Senior Credit Facilities) in the Senior Credit Facilities to provide that on and after the date of the Second Amendment (the "Second Amendment Effective Date"), the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to (a) for so long as the Revolving Committed Amount is greater than$115.0 million , (i) for the period commencing on the Second Amendment Effective Date and including the date that is 179 days after the Second Amendment Effective Date, 3.5% for LIBOR Rate Loans and 2.5% for Alternate Base Rate Loans, (ii) for the period commencing on the date that is 180 days after the 29 -------------------------------------------------------------------------------- Table of Contents Second Amendment Effective Date, through and including the date that is 269 days after the Second Amendment Effective Date, 4.25% for LIBOR Rate Loans and 3.25% for Alternate Base Rate Loans, (iii) for the period commencing on the date that is 270 days after the Second Amendment Effective Date, through and including the date that is 364 days after the Second Amendment Effective Date, 4.5% for LIBOR Rate Loans and 3.5% for Alternate Base Rate Loans and (iv) for the period commencing on the date that is 365 days after the Second Amendment Effective Date and thereafter, 4.75% for LIBOR Rate Loans and 3.75% for Alternate Base Rate Loans and (b) for so long as the Revolving Committed Amount is equal to or less than$115.0 million , 3.5% for LIBOR Rate Loans and 2.5% for Alternate Base Rate Loans. The Second Amendment also provides that beginning on the 180th day after the Second Amendment Effective Date and for so long as the Revolving Committed Amount is greater than$115.0 million , we shall pay to the Administrative Agent, for the ratable benefit of the Revolving Facility Lenders, a commitment fee (the "Ticking Fee") on the average daily amount of the Revolving Committed Amount at a rate per annum equal to (a) 0.125% for the 180th day after the Second Amendment Effective Date through and including the 269th day after the Second Amendment Effective Date, (b) 0.25% for the 270th day after the Second Amendment Effective Date through and including the 364th day after the Second Amendment Effective Date and (c) 1.00% for the 365th day after the Second Amendment Effective Date and thereafter. The Second Amendment provides that the Ticking Fee will be due and payable quarterly in arrears (calculated on a 360-day basis) on the last Business Day of each calendar quarter and will accrue from the 180th day after the Second Amendment Effective Date for so long as the Revolving Committed Amount is greater than$115.0 million . The Second Amendment also provides that we shall use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of$115.0 million , solely for our ongoing operations and our subsidiaries and shall not be held as cash on the balance sheet. Pursuant to the Letter Agreement, (the "Letter Agreement") dated as ofMarch 25, 2020 among the Company,Wells Fargo Securities, LLC ,Wells Fargo Bank, National Association andTruist Bank , we agreed to defer rent payments totaling approximately$2.4 million per month under certain real property leases for the period betweenApril 1, 2020 through and includingJune 30, 2020 . We paid these amounts in full according to these terms onJuly 1, 2020 . OnApril 8, 2020 , we entered into the Third Amendment to our Senior Credit Facilities which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by$15.4 million to a total of$145.8 million . OnApril 16, 2020 , we entered into the Fourth Amendment to our Senior Credit Facilities (the "Fourth Amendment"). The Fourth Amendment permits us to incur and, if necessary, repay indebtedness incurred pursuant to the Paycheck Protection Program (the "PPP") under the CARES Act. We have decided that we will not be borrowing under the PPP. OnJune 23, 2020 (the "Fifth Amendment Effective Date"), we entered into the Fifth Amendment to our Senior Credit Facilities (the "Fifth Amendment"). The Fifth Amendment increased the Term Loan (as defined in the Senior Credit Facilities) borrowings in the aggregate principal amount of$75 million of Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The Incremental Term B-1 Loans constitute a new tranche of Term Loans ranking pari passu in right of payment and security with the Initial Term Loans (as defined in the Senior Credit Facilities) for all purposes under the Senior Credit Facilities. The Incremental Term B-1 Loans have the same terms as outstanding borrowings under the Company's existing Term Loan B facility pursuant to and in accordance with the Senior Credit Facilities, provided that (i) borrowings under the Incremental Term B-1 Loans will bear interest at a rate per annum, at our option, of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior Credit Facilities) (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the Incremental Term B-1 Loans by us prior to the first anniversary of the Fifth Amendment Effective Date are subject to a premium to the Administrative Agent (as defined in the Senior Credit Facilities), for the ratable account of each applicable Term Loan Lender (as defined in the Senior Credit Facilities) holding Incremental Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with respect to the principal amount of the Incremental Term B-1 Loans so prepaid. The principal amount of the Incremental Term B-1 Loans will amortize in an aggregate annual amount equal to 1% of the original principal amount of the Incremental Term B-1 Loans and shall be repayable in consecutive quarterly installments on the last day of our fiscal quarters beginning on the third fiscal quarter of 2020 30 -------------------------------------------------------------------------------- Table of Contents with the remaining outstanding principal amount of the Incremental Term B-1 Loan and all accrued but unpaid interest and other amounts payable with respect to the Incremental Term B-1 Loan due onApril 30, 2026 which is the Term Loan Maturity Date (as defined in the Senior Credit Facilities). OnApril 6, 2021 , we entered into the Sixth Amendment to Credit Agreement (the "Sixth Amendment"). The Sixth Amendment increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under our Revolving Credit Facility by$29.2 million to a total of$175.0 million . The Sixth Amendment also amended the definitions in the Senior Credit Facilities of (i) Applicable Margin, to provide that the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to 3.25% for LIBOR Rate Loans and 2.25% for Alternate Base Rate Loans, and (ii) Revolving Maturity Date, to provide that the Revolving Maturity Date is extended toJanuary 29, 2026 . In addition, the Sixth Amendment amended the Senior Credit Facilities to remove our obligation to (i) pay a Ticking Fee pursuant to the TickingFee Rate and (ii) use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of$115.0 million solely for our ongoing operations and not to hold as cash on the balance sheet. As ofApril 4, 2021 , there were no revolving credit borrowings outstanding and$9.0 million of letters of credit were issued under our Revolving Credit Facility. After reserving for issued letters of credit,$136.8 million was available for revolving credit borrowings under our Senior Credit Facilities atApril 4, 2021 . Interest Rate Swap Agreement We entered into a five year interest rate swap agreement commencingMarch 3, 2020 and endingFebruary 28, 2025 with a notional amount of$220.0 million to swap variable rate interest payments (one-month LIBOR plus the applicable margin) under our Senior Credit Facilities for fixed interest payments bearing an interest rate of 0.915% plus the applicable margin in our Senior Credit Facilities. Stock Repurchase Program OnAugust 2, 2019 , our Board of Directors approved a stock repurchase plan (the "Repurchase Program") under which we may repurchase up to$25 million of our outstanding common stock. The authorization became effectiveAugust 2, 2019 , and expires 24 months thereafter, unless terminated earlier by the Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the year endedJanuary 3, 2021 , we repurchased in open market transactions 1,534,304 shares at an average share price of$6.52 for a total cost of$10.0 million under the Repurchase Program, all during the fourth quarter of 2020. We have not repurchased any shares in the three months endedApril 4, 2021 . As ofApril 4, 2021 ,$11.0 million was available to repurchase shares under the Repurchase Program. We have no obligation to repurchase additional shares of stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on our stock price, trading volume, general market and economic conditions and other factors. Future Restaurant Closures We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of each restaurant in relation to its cash flow and future occupancy costs, and with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations. In 2020, excluding one restaurant relocated within its trade area, we closed 33 Burger King restaurants which included eleven Burger King restaurants permanently closed in the first quarter of 2020. In the first three months of 2021, we permanently closed one Burger King restaurant. We currently anticipate less than five restaurant closures in 2021 outside of any restaurants being relocated within their trade area at the end of their respective lease term. 31 -------------------------------------------------------------------------------- Table of Contents Our determination of whether to close restaurants in the future is subject to further evaluation and may change. We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their contractual lease term. We do not believe that the future impact on our results of operations due to restaurant closures will be material, although there can be no assurance in this regard. Effect of Minimum Wage Increases Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2021 and in many cases have also approved additional increases for future periods. Most notably,New York State has increased the minimum wage applicable to our business to$15.00 an hour onJuly 1, 2021 from$13.75 an hour in 2020,$12.75 per hour in 2019 and$11.75 per hour in 2018.New York State has anUrban Youth Credit through 2022 for which we have been receiving approximately$500,000 per year since 2016. We had 125 restaurants inNew York State atApril 4, 2021 . As of such date, we also had one restaurant inMassachusetts that has annual minimum wage increases reaching$15.00 per hour in 2023, 10 restaurants inNew Jersey that have annual minimum wage increases reaching$15.00 per hour in 2024, and 45 total restaurants inIllinois andMaryland that have annual minimum wage increases reaching$15.00 per hour in 2025. We typically attempt to offset the effects of wage inflation, at least in part, through periodic menu price increases. However, no assurance can be given that we will be able to offset these wage increases in the future. 32 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedApril 4, 2021 Compared to Three Months EndedMarch 29, 2020 The following table highlights the key components of sales and the number of restaurants in operation for our first quarter endedApril 4, 2021 as compared to the first quarter endedMarch 29, 2020 (inclusive of restaurants that were temporarily closed due to COVID-19 during the period):
Three Months Ended
April 4, 2021 March 29, 2020
Restaurant Sales 389,993 351,518
Burger King 368,488 329,637
Popeyes 21,505 21,881
Change in Comparable Restaurant Sales % (a) 13.8 % (5.7) %
Change in Comparable Burger King Restaurant Sales (a) 14.7 % (5.7) %
Change in Comparable Popeyes Restaurant Sales (a) 0.5 %
Burger King Restaurants operating at beginning of period: 1,009 1,036 New restaurants opened, including relocations 2 3 Restaurants closed, including relocations (1) (11) Burger King Restaurants at end of period 1,010 1,028 Average number of operating Burger King restaurants 1,009.0 1,030.2
65 65
Average number of operating Popeyes restaurants 65.0 64.8
a.Restaurants we acquire are included in comparable restaurant sales after they
have been operated by us for 12 months. Sales from restaurants we develop are
included in comparable restaurant sales after they have been open for 15 months.
The calculation of changes in comparable restaurant sales is based on the
comparable 13-week period.
Restaurant Sales. Total restaurant sales in the first quarter of 2021 increased
$38.5 million to $390.0 million from the first quarter of 2020. Our comparable
restaurant sales increased 13.8% compared to the first quarter of 2020 which
reflected an increase in average check of 11.2% and an increase in customer
traffic of 2.4%. The change in average check included a 0.7% effective price
increase compared to the first quarter of 2020. The decrease in customer traffic
and increase in average check realized during the first quarter of 2021 reflects
changing consumer behavior as a result of the COVID-19 pandemic. Promotional
sales discounts in the first quarter of 2021 were 23.0% of restaurant sales at
our Burger King restaurants compared to 22.3% in the first quarter of 2020.
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Operating Costs and Expenses (percentages stated as a percentage of total
revenue). The following table sets forth, for the three months ended April 4,
2021 and March 29, 2020 , selected operating results as a percentage of total
revenue:
Three Months Ended
April 4, 2021 March 29, 2020
Costs and expenses (all restaurants):
Cost of sales 29.2 % 29.3 %
Restaurant wages and related expenses 33.2 % 35.4 %
Restaurant rent expense 7.8 % 8.4 %
Other restaurant operating expenses 15.7 % 16.5 %
Advertising expense 3.9 % 3.9 %
General and administrative 5.5 % 5.9 %
Cost of sales decreased to 29.2% of restaurant sales in the first quarter of
2021 from 29.3% of restaurant sales in the first quarter of 2020. This decrease
reflected the positive impacts of improved operational efficiencies at our
Burger King restaurants (0.6%) and menu price increases taken at our Burger King
restaurants since the end of the first quarter of 2020 (0.3%). These positive
impacts were offset by the inclusion of delivery costs in 2021 (0.8%) as well as
increased commodity costs at our Burger King restaurants (0.4%, with other
commodities and case cost increases more than offsetting the 7.2% decrease in
ground beef prices compared to the first quarter of 2020). The impact on cost of
sales from lower promotions (0.2%) was partially offset by an unfavorable sales
mix (0.1%). Cost of sales at our Popeyes restaurants improved approximately 260
basis points over last year due to improved restaurant operations.
Restaurant wages and related expenses decreased to 33.2% of restaurant sales in
the first quarter of 2021 from 35.4% in the first quarter of 2020 due to labor
adjustments we made during 2020 in response to the COVID-19 pandemic. We were
able to adjust our labor requirements and hours based on operating day part
sales trends and in response to dining room closures. The impact of hourly labor
rate increases in the first quarter of 2021, inclusive of minimum wage
increases, was 6.5% when compared to the prior year period. This was more than
offset through effective labor hour management in the first quarter of 2021.
Restaurant rent expense increased $0.9 million , but decreased as a percentage of
restaurant sales to 7.8% in the first quarter of 2021 from 8.4% in the first
quarter of 2020 due primarily to the impact of higher sales on fixed rent
expense.
Other restaurant operating expenses decreased as a percentage of restaurant
sales to 15.7% in the first quarter of 2021 from 16.5% of restaurant sales in
the first quarter of 2020 as a result of efficiencies realized from reduced
dining room activity, primarily from utility costs (0.4%) and lower repair and
maintenance spending (0.1%). Reduced levels of operating supply costs were
offset by $0.2 million in expenses directly related to COVID-19, including face
masks, thermometers, sneeze guards, and sanitizers.
Advertising expense was 3.9% of restaurant sales in both the first quarter of
2021 and the first quarter of 2020.
Adjusted Restaurant-Level EBITDA. As a result of the factors discussed above,
Adjusted Restaurant-Level EBITDA increased $16.7 million , or 73.2%, to $39.5
million in the first quarter of 2021 compared to $22.8 million in the first
quarter of 2020. As a percentage of total restaurant sales, Adjusted
Restaurant-Level EBITDA increased to 10.1% in the first quarter of 2021 from
6.5% in the first quarter of 2020. For a reconciliation between Adjusted
Restaurant-Level EBITDA and loss from operations see page 36.
General and Administrative Expenses. General and administrative expenses
increased $0.6 million in the first quarter of 2021 to $21.4 million , and
decreased as a percentage of total restaurant sales to 5.5% in the first quarter
of 2021 from 5.9% in the first quarter of 2020. The $0.6 million increase
included $2.4 million higher administrative bonus accruals in 2021 as a result
of favorable restaurant-level profitability in the period which was partially
offset by reduced overhead costs in 2021. This increase was offset by our
reduction in regional and
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corporate overhead costs of $1.6 million from streamlining our regional
management structure, improving our training process and reducing travel.
Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA increased to
$19.9 million in the first quarter of 2021 from $4.0 million in the first
quarter of 2020. As a percentage of total restaurant sales, Adjusted EBITDA
increased to 5.1% in the first quarter of 2021 from 1.1% in the first quarter of
2020. For a reconciliation between net loss and EBITDA and Adjusted EBITDA see
page 36.
Depreciation and Amortization Expense. Depreciation and amortization expense
decreased $0.4 million to $20.6 million in the first quarter of 2021 from $21.0
million in the first quarter of 2020.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.4
million due primarily to assets at a restaurant location closed during the
quarter. During the first quarter of 2020, impairment and other lease charges
were $2.9 million , consisting of $1.5 million of initial impairment charges for
three underperforming restaurants, capital expenditures of $0.2 million at
previously impaired restaurants, and $1.2 million of other lease charges
primarily due to nine restaurants closed during the first quarter of 2020.
Other Expense, net. Other expense, net in the first quarter of 2021 was $0.2
million which consisted of a loss on disposal of assets of $0.2 million . Other
expense, net for the three months ended March 29, 2020 included a loss on
disposal of assets of $0.1 million , loss on sale-leaseback transactions of $0.2
million and a gain on insurance recoveries from property damage at our
restaurants of $0.3 million .
Interest Expense. Interest expense decreased to $6.7 million in the first
quarter of 2021 from $7.1 million in the first quarter of 2020. Our weighted
average interest rate for borrowings under the Senior Credit Facilities
decreased to 4.4% in the first quarter of 2021 from 4.9% in the first quarter of
2020, as the variable rates on our borrowings decreased according to reduced
LIBOR rates.
Benefit for Income Taxes. For the three months ended April 4, 2021 the benefit
for income taxes was derived using an estimated effective annual income tax rate
for all of 2021 of 21.3%. The difference compared to the statutory rate for 2021
is attributable to various permanent non-deductible expenses which are not
directly related to the amount of pre-tax loss recorded in a period. The income
tax benefit for the first quarter of 2021 included net discrete tax expense of
$0.7 million .
For the three months ended March 29, 2020 the provision for income taxes was
derived using an estimated effective annual income tax rate for all of 2020 of
31.3%. During the first quarter of 2020, an expense of $2.1 million was
recognized to record an incremental valuation allowance for all of our net
deferred income tax assets at March 29, 2020 . There were no other discrete tax
adjustments in the first quarter of 2020.
Net Loss. As a result of the above, net loss for the first quarter of 2021 was
$7.2 million , or $0.14 per diluted share, compared to a net loss in the first
quarter of 2020 of $22.2 million , or $0.44 per diluted share.
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Reconciliations of net loss to EBITDA, Adjusted EBITDA and Adjusted Net Loss,
and Loss from operations to Adjusted Restaurant-Level EBITDA for the three
months ended April 4, 2021 and March 29, 2020 are as follows (in thousands,
except for per share data):
Three Months Ended
Reconciliation of EBITDA and Adjusted EBITDA: April 4, 2021 March 29, 2020 Net loss$ (7,168) $ (22,209) Benefit from income taxes (2,661) (6,978) Interest expense 6,726 7,140 Depreciation and amortization 20,609 21,031 EBITDA 17,506 (1,016) Impairment and other lease charges 353 2,881 Acquisition and integration costs (1) - 81 Abandoned development costs (2) - 688 Pre-opening costs (3) 29 89 Litigation and other professional expenses (4) 282 61 Other expense, net (5) 227 56 Stock-based compensation expense 1,469 1,132 Adjusted EBITDA$ 19,866 $ 3,972 Reconciliation of Adjusted Restaurant-Level EBITDA: Loss from operations$ (3,103) $
(22,047)
Add:
General and administrative expenses 21,369 20,787
Pre-opening costs (3) 29 89
Depreciation and amortization 20,609 21,031
Impairment and other lease charges 353 2,881
Other expense, net (5) 227 56
Adjusted Restaurant-Level EBITDA $ 39,484 $22,797
Reconciliation of Adjusted Net Loss: Net loss$ (7,168) $ (22,209) Add: Impairment and other lease charges 353 2,881 Acquisition and integration costs (1) - 81 Abandoned development costs (2) - 688 Pre-opening costs (3) 29 89 Litigation and other professional expenses (4) 282 61 Other expense, net (5) 227 56 Income tax effect on above adjustments (6) (223) (964) Adjusted Net Loss$ (6,500) $ (19,317) Adjusted diluted net loss per share (7)$ (0.13)
49,824 50,821
(1)Acquisition and integration costs for the three months ended March 29, 2020
primarily include legal and professional fees incurred in connection with the
acquisition of 165 Burger King and 55 Popeyes restaurants from Cambridge
Franchise Holdings, LLC in 2019 which were included in general and
administrative expense.
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(2)Abandoned development costs for the three months ended March 29, 2020
represents the write-off of capitalized costs due to the abandoned development
in 2020 of previously planned new restaurant locations.
(3)Pre-opening costs for the three months ended April 4, 2021 and March 29, 2020
include training, labor and occupancy costs incurred during the construction of
new restaurants.
(4)Litigation and other professional expenses for the three months ended
April 4, 2021 and March 29, 2020 includes litigation expenses pertaining to an
ongoing lawsuit with one of the Company's former vendors and other non-recurring
professional service expenses.
(5)Other expense, net, for the three months ended April 4, 2021 , included a loss
on disposal of assets of $0.2 million . Other expense, net, for the three months
ended March 29, 2020 included a loss on disposal of assets of $0.1 million , loss
on sale-leaseback transactions of $0.2 million and a gain on insurance
recoveries from property damage at our restaurants of $0.3 million .
(6)The income tax effect related to the adjustments to Adjusted Net Loss during
the periods presented was calculated using an incremental income tax rate of 25%
for the three months ended April 4, 2021 and March 29, 2020 .
(7)Adjusted diluted net loss per share is calculated based on Adjusted net loss
and the dilutive weighted average common shares outstanding for the respective
periods.
Liquidity and Capital Resources
As is common in the restaurant industry, we maintain relatively low levels of
accounts receivable and inventories and receive trade credit based upon
negotiated terms for purchasing food products and other supplies. As a result,
we may at times maintain current liabilities in excess of current assets, which
results in a working capital deficit. We are able to operate with a substantial
working capital deficit because:
•restaurant operations are primarily conducted on a cash basis;
•rapid turnover results in a limited investment in inventories; and
•cash from sales is usually received before related liabilities for food,
supplies and payroll become due.
Interest payments under our debt obligations, capital expenditures including for
our remodeling initiatives, payments of royalties and advertising to BKC and PLK
and payments related to our lease obligations represent significant liquidity
requirements for us, not including any discretionary expenditures for the
acquisition or development of additional Burger King and Popeyes restaurants.
If our future financing needs increase, we may need to arrange additional debt
or equity financing. We continually evaluate and consider various financing
alternatives to enhance or supplement our existing financial resources,
including our Senior Credit Facilities. However, there can be no assurance that
we will be able to enter into any such arrangements on acceptable terms or at
all.
We believe our cash balances, cash generated from our operations and
availability of revolving credit borrowings under our Senior Credit Facilities
provide sufficient cash availability to cover our anticipated working capital
needs, capital expenditures and debt service requirements for the next twelve
months.
Operating Activities. Net cash provided by operating activities was $7.0 million
in the first three months of 2021 compared to net cash used in operating
activities of $3.8 million in the first three months of 2020. The increase was
due primarily to an increase of $18.5 million in EBITDA offset by a decrease in
cash provided by working capital components of $6.3 million .
Investing Activities. Net cash used for investing activities in the first three
months of 2021 and 2020 was $10.6 million and $22.0 million , respectively.
Capital expenditures are a large component of our investing activities and
include: (1) new restaurant development, which may include the purchase of real
estate; (2) restaurant remodeling, which includes the renovation or rebuilding
of the interior and exterior of our existing restaurants including expenditures
associated with our franchise agreement renewals and certain restaurants that we
acquire; (3) other restaurant capital expenditures, which include capital
maintenance expenditures for the ongoing reinvestment and enhancement of our
restaurants, and from time to time, to support BKC's and PLK's initiatives; and
(4) corporate and restaurant information systems, including expenditures for our
point-of-sale systems for restaurants that we acquire.
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Table of Contents The following table sets forth our capital expenditures for the periods presented (in thousands):
Three Months Ended
April 4, 2021 March 29, 2020
New restaurant development $ 1,643 $ 10,517
Restaurant remodeling 1,758 5,651
Other restaurant capital expenditures 5,831 3,475
Corporate and restaurant information systems 1,395 4,954
Total capital expenditures $ 10,627 $ 24,597
Number of new restaurant openings, including relocations 2 3
In the first three months of 2020, investing activities also included net
proceeds of $13.7 million from seven sale-leaseback transaction and $1.4 million
of insurance recoveries related to property damage at four of our restaurants.
Financing Activities. Net cash used in financing activities in the first three
months of 2021 was $1.4 million and included principal payments of $1.3 million
on the Term Loan B Facility. We also made principal payments on finance leases
of $0.1 million .
Net cash provided by financing activities in the three months of 2020 was $64.1
million and included net revolving credit borrowings of $66.0 million under our
Revolving Credit Facility, principal payments of $1.1 million on the Term Loan B
Facility, financing costs associated with our Senior Credit Facilities of $0.3
million and principal payments on finance leases of $0.6 million .
Senior Credit Facility. As described above under "-Recent and Future Events
Affecting Our Results of Operations-Refinancing of Indebtedness and Amendments
to our Senior Credit Facilities", we entered into the Senior Credit Facilities
and subsequent amendments to the Senior Credit Facilities. Our obligations under
the Senior Credit Facilities are guaranteed by our subsidiaries and are secured
by first priority liens on substantially all of our assets and our subsidiaries,
including a pledge of all of the capital stock and equity interests of our
subsidiaries. Under the Senior Credit Facilities, we are required to make
mandatory prepayments of borrowings following dispositions of assets, debt
issuances and the receipt of insurance and condemnation proceeds (all subject to
certain exceptions).
At April 4, 2021 , borrowings under our Senior Credit Facilities bore interest as
follows:
(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate
Base Rate (as defined in the Senior Credit Facilities) plus 2.50% or (b) LIBOR
Rate (as defined in the Senior Credit Facilities) plus 3.50%.
(ii) Term Loan B borrowings: at a rate per annum equal to (a) the Alternate Base
Rate (as defined plus 2.25% or (b) LIBOR Rate plus 3.25%.
(iii) Term Loan B-1 borrowings: at a rate per annum, at our option, of (a) the
Alternate Base Rate plus the applicable margin of 5.25% or (b) the LIBOR Rate
(which shall not be less than 1% for Incremental Term B-1 Loans) plus the
applicable margin of 6.25%.
The weighted average interest rate on borrowings under our Senior Credit
Facilities was 4.4% and 4.9% for the three months ended April 4, 2021 and
March 29, 2020 , respectively.
The Term Loan B and B-1 borrowings are due and payable in quarterly
installments, which began on September 30, 2019 . Amounts outstanding at April 4,
2021 are due and payable as follows:
(i) twenty quarterly installments of $1.3 million ;
(ii) one final payment of $467.0 million on April 30, 2026 .
As of April 4, 2021 , there were no revolving credit borrowings outstanding and
$9.0 million of letters of credit issued under the Revolving Credit Facility.
After reserving for issued letters of credit, $136.8 million was available for
revolving credit borrowings under the Senior Credit Facilities at April 4, 2021 .
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The Senior Credit Facilities contain certain covenants, including without
limitation, those limiting our and our subsidiaries' ability to, among other
things, incur indebtedness, incur liens, sell or acquire assets or businesses,
change the character of its business in any material respect, engage in
transactions with related parties, make certain investments, make certain
restricted payments or pay dividends. In addition, the Senior Credit Facilities
require us to meet a First Lien Leverage Ratio (as defined in the Senior Credit
Facilities). As there were no borrowings under the Revolving Credit Facility at
April 4, 2021 , no First Lien Leverage Ratio calculation was required. We were in
compliance with the covenants under our Senior Credit Facilities at April 4,
2021 .
The Senior Credit Facilities contain customary default provisions, including
that the lenders may terminate their obligation to advance and may declare the
unpaid balance of borrowings, or any part thereof, immediately due and payable
upon the occurrence and during the continuance of customary events of default
which include, without limitation, payment default, covenant default, bankruptcy
default, cross-default on other indebtedness, judgment default and the
occurrence of a change of control.
In March 2020 , we entered into an interest rate swap agreement with our lenders
to mitigate the risk of increases in the variable interest rate related to term
loan borrowings under the Term Loan B Facility. The interest rate swap fixes the
interest rate on 50% of the outstanding term loan borrowings under the Term Loan
B Facility at 0.915% plus the applicable margin in its Senior Credit Facilities.
The agreement matures on February 28, 2025 and has a notional amount of $220.0
million at April 4, 2021 . The differences between the variable LIBOR rate and
the interest rate swap rate of 0.915% are settled monthly. We made payments of
$0.4 million to settle the interest rate swap during the three months
ended April 4, 2021 . The fair value of our interest rate swap agreement was a
liability of $1.9 million as of April 4, 2021 and is included in long-term other
liabilities in the accompanying consolidated balance sheets. Changes in the
valuation of our interest rate swap were included as a component of other
comprehensive income, and will be reclassified to earnings as the losses are
realized. We expect to reclassify net losses totaling $1.7 million into earnings
in the next twelve months.
Contractual Obligations
A table of our contractual obligations as of January 3, 2021 was included in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of our Annual Report on Form 10-K for the fiscal year
ended January 3, 2021 . There have been no significant changes to our contractual
obligations during the three months ended April 4, 2021 .
Inflation
The inflationary factors that have historically affected our results of
operations include increases in food and paper costs, labor and other operating
expenses, the cost of providing medical and prescription drug insurance to our
employees and energy costs. Wages paid in our restaurants are impacted by
changes in the Federal and state hourly minimum wage rates and the Fair Labor
Standards Act. Accordingly, changes in the Federal and state hourly minimum wage
rates and increases in the wage level to not be considered an hourly employee
will directly affect our labor costs. We typically attempt to offset the effect
of inflation, at least in part, through periodic menu price increases and
various cost reduction programs. However, no assurance can be given that we will
be able to offset such inflationary cost increases in the future.
Application of Critical Accounting Policies
Our unaudited condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America . Preparing consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. These estimates and assumptions are affected
by the application of our accounting policies. Our significant accounting
policies are described in the "Basis of Presentation" footnote in the notes to
the Consolidated Financial Statements included in our Annual Report on Form 10-K
for the fiscal year ended January 3, 2021 . Critical accounting estimates are
those that require application of management's most difficult, subjective or
complex judgments, often as a result of matters that are inherently uncertain
and may change in subsequent periods. There have been no material changes
affecting our critical accounting policies previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended January 3, 2021 .
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Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements
that are predictive in nature or that depend upon or refer to future events or
conditions are forward-looking statements. These statements are often identified
by the words "may", "might", "will", "should", "anticipate", "believe",
"expect", "intend", "estimate", "hope", "plan" or similar expressions. In
addition, expressions of our strategies, intentions or plans are also forward
looking statements. These statements reflect management's current views with
respect to future events and are subject to risks and uncertainties, both known
and unknown. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their date. There are
important factors that could cause actual results to differ materially from
those in forward-looking statements, many of which are beyond our control.
Investors are 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 or implied in the
forward-looking statements. We have identified significant factors that could
cause actual results to differ materially from those stated or implied in the
forward-looking statements. We believe important factors that could cause actual
results to differ materially from our expectations include the following, in
addition to other risks and uncertainties discussed herein and in our Annual
Report on Form 10-K for the period ended January 3, 2021 :
•The impact of the COVID-19 pandemic;
•Effectiveness of the Burger King® and Popeyes® advertising programs and the
overall success of the Burger King® and Popeyes® brands;
•Increases in food costs and other commodity costs;
•Our ability to hire and retain employees at current or increased wage rates;
•Competitive conditions, including pricing pressures, discounting, aggressive
marketing and the potential impact of competitors' new unit openings and
promotions on sales of our restaurants;
•Our ability to integrate any restaurants we acquire;
•Regulatory factors;
•Environmental conditions and regulations;
•General economic conditions, particularly in the retail sector;
•Weather conditions;
•Fuel prices;
•Significant disruptions in service or supply by any of our suppliers or
distributors;
•Changes in consumer perception of dietary health and food safety;
•Labor and employment benefit costs, including the effects of minimum wage
increases, healthcare reform and changes in the Fair Labor Standards Act;
•The outcome of pending or future legal claims or proceedings;
•Our ability to manage our growth and successfully implement our business
strategy;
•Our inability to service our indebtedness;
•Our borrowing costs and credit ratings, which may be influenced by the credit
ratings of our competitors;
•The availability and terms of necessary or desirable financing or refinancing
and other related risks and uncertainties; and
•Factors that affect the restaurant industry generally, including recalls if
products become adulterated or misbranded, liability if our products cause
injury, ingredient disclosure and labeling laws and regulations, reports of
cases of food borne illnesses such as "mad cow" disease, and the possibility
that consumers could lose confidence in the safety and quality of certain food
products as well as negative publicity regarding food quality, illness, injury,
or other health concerns.
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