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Carrols Restaurant Group 10-Q 2010
For the quarterly period ended July 4, 2010
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-33174

 

 

CARROLS RESTAURANT GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   16-1287774
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
968 James Street
Syracuse, New York
  13203
(Address of principal executive office)   (Zip Code)

Registrant’s telephone number, including area code: (315) 424-0513

Commission File Number: 001-06553

 

 

CARROLS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   16-0958146

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

968 James Street

Syracuse, New York

  13203
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number including area code: (315) 424-0513

 

 

Carrols Corporation meets the conditions set forth in General Instruction H(1) and is therefore filing this form with reduced disclosure format pursuant to General Instruction H(2).

Indicate by check mark whether either of the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers or smaller reporting companies. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Carrols Restaurant Group, Inc.    
Large accelerated filer   ¨   Accelerated filer   x
Non-accelerated filer   ¨   Smaller reporting company   ¨
Carrols Corporation      
Large accelerated filer   ¨   Accelerated filer   ¨
Non-accelerated filer   x   Smaller reporting company   ¨

Indicate by check mark whether either of the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 6, 2010, Carrols Restaurant Group, Inc. had 21,623,534 shares of its common stock, $.01 par value, outstanding. As of August 6, 2010, all outstanding equity securities of Carrols Corporation, which consisted of 10 shares of its common stock, were owned by Carrols Restaurant Group, Inc.

 

 

 


Table of Contents

CARROLS RESTAURANT GROUP, INC. AND CARROLS CORPORATION

FORM 10-Q

QUARTER ENDED JULY 4, 2010

 

          Page

PART I   FINANCIAL INFORMATION

  

Item 1

  

Carrols Restaurant Group, Inc. and Subsidiary—Consolidated Financial Statements (unaudited):

  
  

Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

   3
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009

   4
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009

   5
  

Notes to Consolidated Financial Statements

   6
  

Carrols Corporation and Subsidiaries—Consolidated Financial Statements (unaudited):

  
  

Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

   16
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009

   17
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009

   18
  

Notes to Consolidated Financial Statements

   19

Item 2

  

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

   38

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

   50

Item 4

  

Controls and Procedures

   50

PART II  OTHER INFORMATION

  

Item 1

  

Legal Proceedings

   51

Item 1A

  

Risk Factors

   51

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

   51

Item 3

  

Default Upon Senior Securities

   51

Item 4

  

Reserved

   51

Item 5

  

Other Information

   51

Item 6

  

Exhibits

   51

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share and per share amounts)

(Unaudited)

 

     June 30,
2010
    December 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,516      $ 4,402   

Trade and other receivables

     5,666        5,971   

Inventories

     5,193        5,935   

Prepaid rent

     4,219        3,928   

Prepaid expenses and other current assets

     5,645        4,835   

Refundable income taxes

     609        1,185   

Deferred income taxes

     4,834        4,834   
                

Total current assets

     29,682        31,090   

Property and equipment, net

     190,011        192,724   

Franchise rights, net (Note 4)

     72,076        73,674   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     476        543   

Franchise agreements, at cost less accumulated amortization of $6,050 and $5,854, respectively

     5,771        5,924   

Deferred income taxes

     1,853        1,935   

Other assets

     8,786        9,153   
                

Total assets

   $ 433,589      $ 439,977   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 13,437      $ 12,985   

Accounts payable

     14,627        15,983   

Accrued interest

     6,883        6,880   

Accrued payroll, related taxes and benefits

     16,833        21,454   

Accrued real estate taxes

     3,917        4,780   

Other liabilities

     9,671        9,061   
                

Total current liabilities

     65,368        71,143   

Long-term debt, net of current portion (Note 5)

     255,236        260,108   

Lease financing obligations (Note 9)

     10,029        9,999   

Deferred income—sale-leaseback of real estate

     41,868        43,088   

Accrued postretirement benefits (Note 8)

     1,769        1,914   

Other liabilities (Note 7)

     22,319        22,321   
                

Total liabilities

     396,589        408,573   

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—none

     —          —     

Voting common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding -21,621,878 and 21,611,607 shares, respectively

     216        216   

Additional paid-in capital

     2,596        1,759   

Retained earnings

     32,656        27,907   

Accumulated other comprehensive income (Note 13)

     1,673        1,663   

Treasury stock, at cost

     (141     (141
                

Total stockholders’ equity

     37,000        31,404   
                

Total liabilities and stockholders’ equity

   $ 433,589      $ 439,977   
                

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands of dollars, except share and per share amounts)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010    2009     2010    2009  

Revenues:

          

Restaurant sales

   $ 204,141    $ 203,535      $ 398,808    $ 404,524   

Franchise royalty revenues and fees

     335      399        812      753   
                              

Total revenues

     204,476      203,934        399,620      405,277   
                              

Costs and expenses:

          

Cost of sales

     62,969      59,349        122,167      117,622   

Restaurant wages and related expenses (including stock-based compensation expense of $14, $53, $28 and $105, respectively)

     59,611      59,144        118,745      117,787   

Restaurant rent expense

     12,232      12,402        24,588      24,834   

Other restaurant operating expenses

     29,105      29,286        57,337      58,700   

Advertising expense

     7,758      7,567        14,604      15,578   

General and administrative (including stock-based compensation expense of $402, $308, $781 and $603, respectively)

     12,677      12,698        25,174      25,916   

Depreciation and amortization

     8,113      7,883        16,235      15,753   

Impairment and other lease charges (Note 3)

     3,631      63        3,901      354   

Other income (Note 14)

     —        (579     —        (579
                              

Total operating expenses

     196,096      187,813        382,751      375,965   
                              

Income from operations

     8,380      16,121        16,869      29,312   

Interest expense

     4,708      4,923        9,451      10,074   
                              

Income before income taxes

     3,672      11,198        7,418      19,238   

Provision for income taxes (Note 6)

     1,237      4,133        2,669      7,147   
                              

Net income

   $ 2,435    $ 7,065      $ 4,749    $ 12,091   
                              

Basic net income per share (Note 12)

   $ 0.11    $ 0.33      $ 0.22    $ 0.56   
                              

Diluted net income per share (Note 12)

   $ 0.11    $ 0.32      $ 0.22    $ 0.56   
                              

Basic weighted average common shares outstanding (Note 12)

     21,618,962      21,592,535        21,616,325      21,592,498   

Diluted weighted average common shares outstanding (Note 12)

     21,844,162      21,782,987        21,840,881      21,688,962   

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands of dollars)

(Unaudited)

     2010     2009  

Cash flows provided from operating activities:

    

Net income

   $ 4,749      $ 12,091   

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

    

Loss on disposals of property and equipment

     220        105   

Stock-based compensation expense

     809        708   

Impairment and other lease charges

     3,901        354   

Depreciation and amortization

     16,235        15,753   

Amortization of deferred financing costs

     477        489   

Amortization of unearned purchase discounts

     —          (1,077

Amortization of deferred gains from sale-leaseback transactions

     (1,674     (1,559

Gain on settlements of lease financing obligations

     —          (70

Accretion of interest on lease financing obligations

     30        19   

Deferred income taxes

     82        768   

Accrued income taxes

     576        (1,485

Changes in other operating assets and liabilities

     (7,268     3,694   
                

Net cash provided from operating activities

     18,137        29,790   
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (5,910     (5,620

Restaurant remodeling

     (4,955     (5,421

Other restaurant capital expenditures

     (4,590     (3,190

Corporate and restaurant information systems

     (710     (3,077
                

Total capital expenditures

     (16,165     (17,308

Properties purchased for sale-leaseback

     (2,486     (210

Proceeds from sale-leaseback transactions

     4,109        5,454   

Proceeds from sales of other properties

     —          249   
                

Net cash used for investing activities

     (14,542     (11,815
                

Cash flows used for financing activities:

    

Borrowings on revolving credit facility

     71,700        51,700   

Repayments on revolving credit facility

     (69,200     (66,700

Principal pre-payments on term loans

     (1,023     —     

Scheduled principal payments on term loans

     (5,942     (3,000

Principal payments on capital leases

     (44     (53

Proceeds from lease financing obligations

     —          835   

Settlement of lease financing obligations

     —          (1,120

Financing costs associated with issuance of lease financing obligations

     —          (4

Proceeds from stock option exercises

     28        —     
                

Net cash used for financing activities

     (4,481     (18,342
                

Net decrease in cash and cash equivalents

     (886     (367

Cash and cash equivalents, beginning of period

     4,402        3,399   
                

Cash and cash equivalents, end of period

   $ 3,516      $ 3,032   
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 8,484      $ 9,732   

Interest paid on lease financing obligations

   $ 457      $ 668   

Accruals for capital expenditures

   $ 641      $ 521   

Income taxes paid, net

   $ 1,982      $ 7,865   

Capital lease obligations incurred

   $ 123      $ —     

Non-cash reduction of assets under lease financing obligations due to lease amendments

   $ —        $ 2,074   

Non-cash reduction of lease financing obligations due to lease amendments

   $ —        $ 2,833   

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share amounts)

1. Basis of Presentation

Business Description. At July 4, 2010 the Company operated, as franchisee, 309 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At July 4, 2010, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida, four were in New Jersey and one in Connecticut, and franchised a total of 29 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad and three on college campuses in Florida. At July 4, 2010, the Company owned and operated 155 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, one in Texas and one in Georgia.

Basis of Consolidation. The unaudited consolidated financial statements presented herein include the accounts of Carrols Restaurant Group, Inc. (“Carrols Restaurant Group” or the “Company”) and its wholly-owned subsidiary Carrols Corporation (“Carrols”). Carrols Restaurant Group is a holding company and conducts all of its operations through Carrols and its wholly-owned subsidiaries. Unless the context otherwise requires, Carrols Restaurant Group, Carrols and the direct and indirect subsidiaries of Carrols are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.

The difference between the consolidated financial statements of Carrols Restaurant Group and Carrols is primarily due to additional rent expense of approximately $6 per year for Carrols Restaurant Group and the composition of stockholders’ equity.

Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 3, 2010 and December 28, 2008 will be referred to as the fiscal years ended December 31, 2009 and 2008, respectively. Similarly, all references herein to the three and six months ended July 4, 2010 and June 28, 2009 will be referred to as the three and six months ended June 30, 2010 and June 30, 2009, respectively. The year ended December 31, 2009 contained 53 weeks and the year ended December 31, 2008 contained 52 weeks. The three and six months ended June 30, 2010 and 2009 each contained thirteen and twenty-six weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2010 and 2009 have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and six months ended June 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009 contained in the Company’s 2009 Annual Report on Form 10-K. The December 31, 2009 balance sheet data is derived from those audited financial statements.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

 

   

Current Assets and Liabilities. The carrying value of cash and cash equivalents and accrued liabilities approximates fair value because of the short maturity of those instruments.

 

   

Senior Subordinated Notes. The fair values of outstanding senior subordinated notes are based on quoted market prices. The fair values at June 30, 2010 and December 31, 2009 were approximately $164.2 million and $167.5 million, respectively.

 

   

Revolving and Term Loan Facilities. Rates and terms under Carrols’ senior credit facility are favorable to debt with similar terms and maturities that could be obtained, if at all, at June 30, 2010. Given the lack of comparative information regarding such debt, including the lack of trading in Carrols’ Term A debt, it is not practicable to estimate the fair value of our existing borrowings under Carrols’ senior credit facility at June 30, 2010.

 

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Table of Contents

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

Use of Estimates. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights, lease accounting matters and stock-based compensation. Actual results could differ from those estimates.

Subsequent Events. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.

2. Stock-Based Compensation

Stock-based compensation expense for the three and six months ended June 30, 2010 was $0.4 million and $0.8 million, respectively. As of June 30, 2010, the total non-vested stock-based compensation expense relating to the options and restricted shares was approximately $4.2 million and the Company expects to record an additional $0.8 million as compensation expense in 2010. At June 30, 2010, the remaining weighted average vesting period for stock options and restricted shares was 3.3 years and 1.6 years, respectively.

Stock Options

A summary of all option activity for the six months ended June 30, 2010 was as follows:

 

     2006 Plan
     Number of
Options
    Weighted
Average
Exercise Price
   Average
Remaining
Contractual
Life
   Aggregate
Intrinsic
Value (1)

Options outstanding at January 1, 2010

   2,130,758      $ 9.86    4.8    $ 2,340

Granted

   530,350        6.48      

Exercised

   (10,073     2.78      

Forfeited

   (39,049     10.16      
              

Options outstanding at June 30, 2010

   2,611,986      $ 9.20    4.7    $ 899
              

Vested or expected to vest at June 30, 2010

   2,577,103      $ 9.09    4.7    $ 884
              

Options exercisable at June 30, 2010

   1,120,107      $ 11.50    4.0    $ 243
              

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at July 4, 2010 of $4.46 and the grant price for only those awards that had a grant price that was less than the market price of the Company’s common stock at July 4, 2010.

3. Impairment of Long-Lived Assets and Other Lease Charges

The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value plus any lease liabilities to be incurred for non-operating properties, net of any estimated sublease recoveries.

The Company determined the fair value of the impaired long-lived assets at the restaurant level based on current economic conditions and historical experience. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The non-financial assets measured at fair value associated with

 

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Table of Contents

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

impairment charges recorded in 2010 totaled $1.4 million and consist of restaurant equipment, which will be used in other Company restaurants and whose value was determined based upon the Company’s experience of amounts utilized from prior restaurant closures, and an owned restaurant property valued based on recent property sales in the restaurant’s trade area.

Impairment and other lease charges recorded on long-lived assets for the Company’s segments were as follows:

 

     Three Months Ended
June  30,
   Six Months Ended
June  30,
     2010    2009    2010    2009

Burger King

   $ 259    $ 6    $ 281    $ 28

Pollo Tropical

     1,931      15      1,983      284

Taco Cabana

     1,441      42      1,637      42
                           
   $ 3,631    $ 63    $ 3,901    $ 354
                           

During the three months ended June 30, 2010, the Company recorded impairment and other lease charges of $3.6 million which included $1.4 million for an underperforming Pollo Tropical restaurant and $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant. The Company also closed one Pollo Tropical restaurant in the second quarter of 2010 whose fixed assets were impaired in 2009, and recorded lease charges of $0.2 million which principally consisted of future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term, net of any estimated cost recoveries from subletting the property. In addition, the Company recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.3 million associated with three underperforming Burger King restaurants.

During the six months ended June 30, 2009, the Company closed one Pollo Tropical restaurant property in Florida whose fixed assets were impaired in 2008, and recorded a charge of $0.3 million which principally consisted of future minimum lease payments and related ancillary costs from the date of the closure to the end of the remaining lease term, net of any estimated cost recoveries from subletting the property.

4. Goodwill and Franchise Rights

Goodwill. The Company is required to review goodwill for impairment annually, or more frequently, when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values.

Goodwill balances are summarized below:

 

     Pollo
Tropical
   Taco
Cabana
   Burger
King
   Total

Balance, June 30, 2010

   $ 56,307    $ 67,177    $ 1,450    $ 124,934
                           

Burger King Franchise Rights. Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.

The Company assesses the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no Burger King franchise rights determined to be impaired during the three and six months ended June 30, 2010 and 2009.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

Amortization expense related to Burger King franchise rights was $798 and $784 for the three months ended June 30, 2010 and 2009, respectively, and $1,598 and $1,568 for the six months ended June 30, 2010 and 2009, respectively. The Company estimates the amortization expense for the year ending December 31, 2010 and for each of the five succeeding years to be $3,197.

5. Long-term Debt

Long-term debt at June 30, 2010 and December 31, 2009 consisted of the following:

 

     June 30,
2010
    December 31,
2009
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ 4,400      $ 1,900   

Senior Credit Facility-Term loan A facility

     98,035        105,000   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,238        1,193   
                
     268,673        273,093   

Less: current portion

     (13,437     (12,985
                
   $ 255,236      $ 260,108   
                

Senior Credit Facility. On March 9, 2007, Carrols terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. Carrols’ senior credit facility initially totaled approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 2013 (or earlier on September 30, 2012 if the 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving credit facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans), maturing on March 9, 2012.

The term loan and revolving credit borrowings under the senior credit facility bear interest at a per annum rate, at Carrols’ option, of either:

1) the applicable margin percentage ranging from 0% to 0.25% based on Carrols’ senior leverage ratio (as defined in the senior credit facility) plus the greater of (i) the prime rate or (ii) the federal funds rate for that day plus 0.5%; or

2) Adjusted LIBOR plus the applicable margin percentage in effect ranging from 1.0% to 1.5% based on Carrols’ senior leverage ratio. At July 4, 2010 the LIBOR margin percentage was 1.0%.

During the six months ended June 30, 2010, the Company made a required prepayment of approximately $1.0 million based on 25% of Carrols’ Excess Cash Flow for the year ended December 31, 2009, as defined. At July 4, 2010, outstanding borrowings under Term loan A were $98.0 million with the remaining balance due and payable as follows:

1) three quarterly installments of approximately $3.0 million beginning on September 30, 2010;

2) four quarterly installments of approximately $4.5 million beginning on June 30, 2011; and

3) four quarterly installments of approximately $17.8 million beginning on June 30, 2012.

After reserving $14.5 million for letters of credit guaranteed by the facility, $46.1 million was available for borrowings under the revolving credit facility at July 4, 2010.

Under the senior credit facility, Carrols is also required to make mandatory prepayments of principal on its term loan borrowings (a) annually in an amount up to 50% of Excess Cash Flow depending upon Carrols’ Total Leverage Ratio (as such terms are defined in the senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by Carrols therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt. The senior credit facility contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the senior credit facility if there is a default in the payment of any principal of or interest on any indebtedness of Carrols having an outstanding principal amount of at least $2.5 million (excluding lease financing obligations but which would include the Indenture governing the Notes, as defined below) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

In general, Carrols’ obligations under the senior credit facility are guaranteed by the Company and all of Carrols’ material subsidiaries and are collateralized by a pledge of Carrols’ common stock and the stock of each of Carrols’ material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting Carrols’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, Carrols is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). Carrols was in compliance with the covenants under its senior credit facility as of July 4, 2010.

Senior Subordinated Notes. On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). At both July 4, 2010 and January 3, 2010, $165.0 million principal amount of the Notes were outstanding.

Restrictive covenants under the Indenture governing the Notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Carrols was in compliance with the restrictive covenants in the Indenture governing the Notes as of July 4, 2010.

The Indenture governing the Notes contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the Notes and the Indenture if there is a default under any indebtedness of Carrols having an outstanding principal amount of $20 million or more (which would include the senior credit facility) if such default results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2010 and 2009 was comprised of the following:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Current

   $ 1,135    $ 4,125    $ 2,587    $ 6,379

Deferred

     102      8      82      768
                           
   $ 1,237    $ 4,133    $ 2,669    $ 7,147
                           

The provision for income taxes for the three months ended June 30, 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.9%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the provision for income taxes by $116 and $70 in the three and six months ended June 30, 2010, respectively.

The provision for income taxes for the three and six months ended June 30, 2009 was derived using an estimated effective annual income tax rate for 2009 of 37.4%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $57 in both the three and six months ended June 30, 2009.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2010 and December 31, 2009, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2006-2009 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2010 and December 31, 2009 consisted of the following:

 

     June 30,
2010
   December 31,
2009

Accrued occupancy costs

   $ 12,299    $ 11,572

Accrued workers’ compensation costs

     3,982      4,018

Deferred compensation

     2,756      3,210

Other

     3,282      3,521
             
   $ 22,319    $ 22,321
             

8. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering Burger King administrative and restaurant management salaried employees who retire or terminate that qualify for such benefits. A December 31 measurement date is used for postretirement benefits.

The following summarizes the components of net periodic postretirement benefit income:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Service cost

   $ 8      $ 7      $ 16      $ 15   

Interest cost

     27        27        54        54   

Amortization of net gains and losses

     24        21        48        42   

Amortization of prior service credit

     (90     (88     (180     (172
                                

Net periodic postretirement benefit income

   $ (31   $ (33   $ (62   $ (61
                                

During the six months ended June 30, 2010, the Company made contributions of $74 to its postretirement plan and expects to make additional contributions during 2010. Contributions made by the Company to its postretirement plan for the year ended December 31, 2009 were $153.

9. Lease Financing Obligations

The Company has previously entered into sale-leaseback transactions involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, were classified as financing transactions. Under the financing method, the assets remain on the consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

During 2009, the Company settled $1.9 million of lease financing obligations which included a purchase from a lessor of one restaurant property previously subject to a lease financing obligation for $1.1 million and the settlement of a lease financing obligation incurred previously in 2009 for $0.8 million. The Company also modified provisions of three of its restaurant leases previously accounted for as lease financing obligations which allowed the respective sale transactions to qualify for sale-leaseback accounting. As a result of these transactions in 2009, lease financing obligations were reduced $4.9 million, assets under lease financing obligations were reduced by $2.7 million and deferred gains on qualified sale-leaseback transactions of $1.2 million were recorded.

Interest expense associated with lease financing obligations for the three months ended June 30, 2010 and 2009 was $0.2 million and $0.3 million, respectively, and for the six months ended June 30, 2010 and 2009 was $0.5 million and $0.6 million, respectively.

10. Business Segment Information

The Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King, operating as a franchisee, and Pollo Tropical and Taco Cabana, both Company-owned concepts. Pollo Tropical is a quick-casual restaurant chain offering a unique selection of food items reflecting tropical and Caribbean influences and features grilled marinated chicken and authentic “made from scratch” side dishes. Taco Cabana is a quick-casual restaurant chain featuring fresh Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

The accounting policies of each segment are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following table includes Segment EBITDA, which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and gains and losses on extinguishment of debt.

The “Other” column includes corporate related items not allocated to reportable segments, including stock-based compensation expense. Other identifiable assets consist primarily of cash, certain other assets, corporate property and equipment, including restaurant information systems expenditures, goodwill and deferred income taxes.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

Three Months Ended

   Pollo
Tropical
   Taco
Cabana
   Burger
King
   Other    Consolidated

June 30, 2010:

              

Total revenues

   $ 46,813    $ 64,207    $ 93,456    $ —      $ 204,476

Cost of sales

     15,167      19,150      28,652      —        62,969

Restaurant wages and related expenses

     11,235      19,301      29,061      14      59,611

General and administrative expenses (1)

     2,859      2,824      6,592      402      12,677

Depreciation and amortization

     1,942      2,241      3,478      452      8,113

Segment EBITDA

     8,145      6,873      5,522      

Capital expenditures, including acquisitions

     3,024      3,576      3,467      318      10,385

June 30, 2009:

              

Total revenues

   $ 44,578    $ 63,816    $ 95,540    $ —      $ 203,934

Cost of sales

     14,562      18,527      26,260      —        59,349

Restaurant wages and related expenses

     10,968      18,804      29,319      53      59,144

General and administrative expenses (1)

     2,454      2,896      7,040      308      12,698

Depreciation and amortization

     1,970      2,225      3,304      384      7,883

Segment EBITDA

     6,767      8,038      9,044      

Capital expenditures, including acquisitions

     349      2,793      3,822      2,379      9,343

Six Months Ended

                        

June 30, 2010:

              

Total revenues

   $ 92,306    $ 126,239    $ 181,075    $ —      $ 399,620

Cost of sales

     29,860      37,705      54,602      —        122,167

Restaurant wages and related expenses

     22,824      38,651      57,242      28      118,745

General and administrative expenses (1)

     5,667      5,594      13,132      781      25,174

Depreciation and amortization

     3,872      4,518      6,950      895      16,235

Segment EBITDA

     14,872      13,634      9,308      

Capital expenditures, including acquisitions

     3,825      4,866      6,764      710      16,165

June 30, 2009:

              

Total revenues

   $ 88,716    $ 126,530    $ 190,031    $ —      $ 405,277

Cost of sales

     29,206      36,886      51,530      —        117,622

Restaurant wages and related expenses

     21,864      36,999      58,819      105      117,787

General and administrative expenses (1)

     4,801      5,852      14,660      603      25,916

Depreciation and amortization

     3,922      4,459      6,649      723      15,753

Segment EBITDA

     13,232      16,244      16,072      

Capital expenditures, including acquisitions

     1,204      6,579      6,448      3,077      17,308

Identifiable Assets:

              

At June 30, 2010

   $ 50,946    $ 65,379    $ 145,477    $ 171,787    $ 433,589

At December 31, 2009

     52,802      67,342      146,679      173,154      439,977

 

(1) For the Pollo Tropical and Taco Cabana segments, such amounts include general and administrative expenses related directly to each segment. For the Burger King segment such amounts include general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to all three of the Company’s segments including executive management, information systems and certain accounting, legal and other administrative functions.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

A reconciliation of segment EBITDA to consolidated net income is as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010    2009     2010    2009  

Segment EBITDA:

          

Pollo Tropical

   $ 8,145    $ 6,767      $ 14,872    $ 13,232   

Taco Cabana

     6,873      8,038        13,634      16,244   

Burger King

     5,522      9,044        9,308      16,072   

Less:

          

Depreciation and amortization

     8,113      7,883        16,235      15,753   

Impairment and other lease charges

     3,631      63        3,901      354   

Interest expense

     4,708      4,923        9,451      10,074   

Provision for income taxes

     1,237      4,133        2,669      7,147   

Stock-based compensation expense

     416      361        809      708   

Other income

     —        (579     —        (579
                              

Net income

   $ 2,435    $ 7,065      $ 4,749    $ 12,091   
                              

11. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against Carrols. The complaint alleged that Carrols engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC identified approximately 450 individuals (which were subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from Carrols. On April 20, 2005, the Court issued a decision and order granting Carrols’ Motion for Summary Judgment that Carrols filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed; however the Court noted that it was not ruling on the claims, if any, that individual employees might have against Carrols. On February 27, 2006, Carrols filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC asserted that, notwithstanding the Court’s dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is awaiting the Court’s decision on Carrols’ summary judgment motion. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

The Company is a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial statements.

12. Net Income per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options using the treasury stock method. To the extent such outstanding stock options are antidilutive, they are excluded from the calculation of diluted net income per share.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

 

The following table is a reconciliation of the net income and share amounts used in the calculation of basic net income per share and diluted net income per share:

 

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009

Basic net income per share:

           

Net income

   $ 2,435    $ 7,065    $ 4,749    $ 12,091

Weighted average common shares outstanding

     21,618,962      21,592,535      21,616,325      21,592,498
                           

Basic net income per share

   $ 0.11    $ 0.33    $ 0.22    $ 0.56
                           

Diluted net income per share:

           

Net income for diluted net income per share

   $ 2,435    $ 7,065    $ 4,749    $ 12,091

Shares used in computed basic net income per share

     21,618,962      21,592,535      21,616,325      21,592,498

Dilutive effect of restricted shares and stock options

     225,200      190,452      224,556      96,464
                           

Shares used in computed diluted net income per share

     21,844,162      21,782,987      21,840,881      21,688,962
                           

Diluted net income per share

   $ 0.11    $ 0.32    $ 0.22    $ 0.56
                           

Shares excluded from diluted net income per share computation (1)

     1,609,608      1,124,777      1,570,860      1,348,834
                           

 

  (1) These shares were not included in the computation of diluted net income per share because they would have been antidilutive for the periods presented.

13. Comprehensive Income

The items that currently impact the Company’s other comprehensive income are changes in postretirement benefit obligations, net of tax.

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009

Net income

   $ 2,435    $ 7,065    $ 4,749    $ 12,091

Change in postretirement benefit obligation, net of tax

     —        —        10      —  
                           

Comprehensive income

   $ 2,435    $ 7,065    $ 4,759    $ 12,091
                           

14. Other Income

During the three and six months ended June 30, 2009, the Company recorded a gain of $0.6 million related to insurance recovery for damages to Taco Cabana restaurants during Hurricane Ike.

15. Recent Accounting Developments

There are currently no recent accounting pronouncements which had or are expected to have a material impact on the Company’s consolidated financial statements as of the date of this report.

 

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ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars except share and per share amounts)

(Unaudited)

 

     June 30,
2010
    December 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,516      $ 4,402   

Trade and other receivables

     5,666        5,971   

Inventories

     5,193        5,935   

Prepaid rent

     4,219        3,928   

Prepaid expenses and other current assets

     5,645        4,835   

Refundable income taxes

     609        1,185   

Deferred income taxes

     4,834        4,834   
                

Total current assets

     29,682        31,090   

Property and equipment, net

     190,011        192,724   

Franchise rights, net (Note 4)

     72,076        73,674   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     476        543   

Franchise agreements, at cost less accumulated amortization of $6,050 and $5,854, respectively

     5,771        5,924   

Deferred income taxes

     1,853        1,935   

Other assets

     8,786        9,153   
                

Total assets

   $ 433,589      $ 439,977   
                
LIABILITIES AND STOCKHOLDER’S EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 13,437      $ 12,985   

Accounts payable

     14,627        15,983   

Accrued interest

     6,883        6,880   

Accrued payroll, related taxes and benefits

     16,833        21,454   

Accrued real estate taxes

     3,917        4,780   

Other liabilities

     9,671        9,061   
                

Total current liabilities

     65,368        71,143   

Long-term debt, net of current portion (Note 5)

     255,236        260,108   

Lease financing obligations (Note 9)

     10,029        9,999   

Deferred income—sale-leaseback of real estate

     41,868        43,088   

Accrued postretirement benefits (Note 8)

     1,769        1,914   

Other liabilities (Note 7)

     22,266        22,271   
                

Total liabilities

     396,536        408,523   

Commitments and contingencies (Note 11)

    

Stockholder’s equity:

    

Common stock, par value $1; authorized 1,000 shares, issued and outstanding—10 shares

     —          —     

Additional paid-in capital

     (4,897     (5,734

Retained earnings

     40,277        35,525   

Accumulated other comprehensive income (Note 12)

     1,673        1,663   
                

Total stockholder’s equity

     37,053        31,454   
                

Total liabilities and stockholder’s equity

   $ 433,589      $ 439,977   
                

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands of dollars)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010    2009     2010    2009  

Revenues:

          

Restaurant sales

   $ 204,141    $ 203,535      $ 398,808    $ 404,524   

Franchise royalty revenues and fees

     335      399        812      753   
                              

Total revenues

     204,476      203,934        399,620      405,277   
                              

Costs and expenses:

          

Cost of sales

     62,969      59,349        122,167      117,622   

Restaurant wages and related expenses (including stock-based compensation expense of $14, $53, $28 and $105, respectively)

     59,611      59,144        118,745      117,787   

Restaurant rent expense

     12,232      12,402        24,588      24,834   

Other restaurant operating expenses

     29,105      29,286        57,337      58,700   

Advertising expense

     7,758      7,567        14,604      15,578   

General and administrative (including stock-based compensation expense of $402, $308, $781 and $603, respectively)

     12,676      12,697        25,171      25,913   

Depreciation and amortization

     8,113      7,883        16,235      15,753   

Impairment and other lease charges (Note 3)

     3,631      63        3,901      354   

Other income (Note 13)

     —        (579     —        (579
                              

Total operating expenses

     196,095      187,812        382,748      375,962   
                              

Income from operations

     8,381      16,122        16,872      29,315   

Interest expense

     4,708      4,923        9,451      10,074   
                              

Income before income taxes

     3,673      11,199        7,421      19,241   

Provision for income taxes (Note 6)

     1,237      4,133        2,669      7,147   
                              

Net income

   $ 2,436    $ 7,066      $ 4,752    $ 12,094   
                              

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands of dollars)

(Unaudited)

 

     2010     2009  

Cash flows provided from operating activities:

    

Net income

   $ 4,752      $ 12,094   

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

    

Loss on disposals of property and equipment

     220        105   

Stock-based compensation expense

     809        708   

Impairment and other lease charges

     3,901        354   

Depreciation and amortization

     16,235        15,753   

Amortization of deferred financing costs

     477        489   

Amortization of unearned purchase discounts

     —          (1,077

Amortization of deferred gains from sale-leaseback transactions

     (1,674     (1,559

Gain on settlements of lease financing obligations

     —          (70

Accretion of interest on lease financing obligations

     30        19   

Deferred income taxes

     82        768   

Accrued income taxes

     576        (1,485

Changes in other operating assets and liabilities

     (7,271     3,691   
                

Net cash provided from operating activities

     18,137        29,790   
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (5,910     (5,620

Restaurant remodeling

     (4,955     (5,421

Other restaurant capital expenditures

     (4,590     (3,190

Corporate and restaurant information systems

     (710     (3,077
                

Total capital expenditures

     (16,165     (17,308

Properties purchased for sale-leaseback

     (2,486     (210

Proceeds from sale-leaseback transactions

     4,109        5,454   

Proceeds from sales of other properties

     —          249   
                

Net cash used for investing activities

     (14,542     (11,815
                

Cash flows used for financing activities:

    

Borrowings on revolving credit facility

     71,700        51,700   

Repayments on revolving credit facility

     (69,200     (66,700

Principal pre-payments on term loans

     (1,023     —     

Scheduled principal payments on term loans

     (5,942     (3,000

Principal payments on capital leases

     (44     (53

Proceeds from lease financing obligations

     —          835   

Settlement of lease financing obligations

     —          (1,120

Financing costs associated with issuance of lease financing obligations

     —          (4

Proceeds from stock option exercises

     28        —     
                

Net cash used for financing activities

     (4,481     (18,342
                

Net decrease in cash and cash equivalents

     (886     (367

Cash and cash equivalents, beginning of period

     4,402        3,399   
                

Cash and cash equivalents, end of period

   $ 3,516      $ 3,032   
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 8,484      $ 9,732   

Interest paid on lease financing obligations

   $ 457      $ 668   

Accruals for capital expenditures

   $ 641      $ 521   

Income taxes paid, net

   $ 1,982      $ 7,865   

Capital lease obligations incurred

   $ 123      $ —     

Non-cash reduction of assets under lease financing obligations due to lease amendments

   $ —        $ 2,074   

Non-cash reduction of lease financing obligations due to lease amendments

   $ —        $ 2,833   

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars, except share and per share amounts)

1. Basis of Presentation

Business Description. At July 4, 2010 the Company operated, as franchisee, 309 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At July 4, 2010, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida, four were in New Jersey and one was in Connecticut, and franchised a total of 29 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad and three on college campuses in Florida. At July 4, 2010, the Company owned and operated 155 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, one in Texas and one in Georgia.

Basis of Consolidation. The unaudited consolidated financial statements presented herein include the accounts of Carrols Corporation and its subsidiaries (the “Company”). The Company is a wholly-owned subsidiary of Carrols Restaurant Group, Inc. (“Carrols Restaurant Group” or the “Parent Company”). All intercompany transactions have been eliminated in consolidation.

The difference between the consolidated financial statements of Carrols Corporation and Carrols Restaurant Group is primarily due to additional rent expense of approximately $6 per year for Carrols Restaurant Group and the composition of stockholder’s equity.

Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 3, 2010 and December 28, 2008 will be referred to as the fiscal years ended December 31, 2009 and 2008, respectively. Similarly, all references herein to the three and six months ended July 4, 2010 and June 28, 2009 will be referred to as the three and six months ended June 30, 2010 and June 30, 2009, respectively. The year ended December 31, 2009 contained 53 weeks and the year ended December 31, 2008 contained 52 weeks. The three and six months ended June 30, 2010 and 2009 each contained thirteen and twenty-six weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2010 and 2009 have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and six months ended June 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009 contained in the Company’s 2009 Annual Report on Form 10-K. The December 31, 2009 balance sheet data is derived from those audited financial statements.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

 

   

Current Assets and Liabilities. The carrying value of cash and cash equivalents and accrued liabilities approximates fair value because of the short maturity of those instruments.

 

   

Senior Subordinated Notes. The fair values of outstanding senior subordinated notes are based on quoted market prices. The fair values at June 30, 2010 and December 31, 2009 were approximately $164.2 million and $167.5 million, respectively.

 

   

Revolving and Term Loan Facilities. Rates and terms under the Company’s senior credit facility are favorable to debt with similar terms and maturities that could be obtained, if at all, at June 30, 2010. Given the lack of comparative information regarding such debt, including the lack of trading in our Term A debt, it is not practicable to estimate the fair value of existing borrowings under the Company’s senior credit facility at June 30, 2010.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

Use of Estimates. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights, lease accounting matters and stock-based compensation. Actual results could differ from those estimates.

Earnings Per Share Presentation. Presentation of earnings per share is required for all entities that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market. The Company’s common stock is not publicly traded and therefore, earnings per share amounts are not presented.

Subsequent Events. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.

2. Stock-Based Compensation

Stock based compensation expense for the three and six months ended June 30, 2010 was $0.4 million and $0.8 million, respectively. As of June 30, 2010, the total non-vested stock-based compensation expense relating to the options and restricted shares was approximately $4.2 million and the Company expects to record an additional $0.8 million as compensation expense in 2010. At June 30, 2010, the remaining weighted average vesting period for stock options and restricted shares was 3.3 years and 1.6 years, respectively.

Stock Options

A summary of all option activity for the six months ended June 30, 2010 was as follows:

 

     2006 Plan
     Number of
Options
    Weighted
Average
Exercise Price
   Average
Remaining
Contractual
Life
   Aggregate
Intrinsic
Value (1)

Options outstanding at January 1, 2010

   2,130,758      $ 9.86    4.8    $ 2,340

Granted

   530,350        6.48      

Exercised

   (10,073     2.78      

Forfeited

   (39,049     10.16      
              

Options outstanding at June 30, 2010

   2,611,986      $ 9.20    4.7    $ 899
              

Vested or expected to vest at June 30, 2010

   2,577,103      $ 9.09    4.7    $ 884
              

Options exercisable at June 30, 2010

   1,120,107      $ 11.50    4.0    $ 243
              

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at July 4, 2010 of $4.46 and the grant price for only those awards that had a grant price that was less than the market price of Carrols Restaurant Group’s common stock at July 4, 2010.

3. Impairment of Long-lived Assets and Other Lease Charges

The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value plus any lease liabilities to be incurred for non-operating properties, net of any estimated sublease recoveries.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

The Company determined the fair value of the impaired long-lived assets at the restaurant level based on current economic conditions and historical experience. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The non-financial assets measured at fair value associated with impairment charges recorded in 2010 totaled $1.4 million and consist of restaurant equipment, which will be used in other Company restaurants and whose value was determined based upon the Company’s experience of amounts utilized from prior restaurant closures, and an owned restaurant property valued based on recent property sales in the restaurant’s trade area.

Impairment and other lease charges recorded on long-lived assets for the Company’s segments were as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Burger King

   $ 259    $ 6    $ 281    $ 28

Pollo Tropical

     1,931      15      1,983      284

Taco Cabana

     1,441      42      1,637      42
                           
   $ 3,631    $ 63    $ 3,901    $ 354
                           

During the three months ended June 30, 2010, the Company recorded impairment and other lease charges of $3.6 million which included $1.4 million for an underperforming Pollo Tropical restaurant and $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant. The Company also closed one Pollo Tropical restaurant in the second quarter of 2010 whose fixed assets were impaired in 2009, and recorded lease charges of $0.2 million which principally consisted of future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term, net of any estimated cost recoveries from subletting the property. In addition, the Company recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.3 million associated with three underperforming Burger King restaurants.

During the six months ended June 30, 2009, the Company closed one Pollo Tropical restaurant property in Florida whose fixed assets were impaired in 2008, and recorded a charge of $0.3 million which principally consisted of future minimum lease payments and related ancillary costs from the date of the closure to the end of the remaining lease term, net of any estimated cost recoveries from subletting the property.

4. Goodwill and Franchise Rights

Goodwill. The Company is required to review goodwill for impairment annually, or more frequently, when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values.

Goodwill balances are summarized below:

 

     Pollo
Tropical
   Taco
Cabana
   Burger
King
   Total

Balance, June 30, 2010

   $ 56,307    $ 67,177    $ 1,450    $ 124,934
                           

Burger King Franchise Rights. Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.

The Company assesses the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no Burger King franchise rights determined to be impaired during the three and six months ended June 30, 2010 and 2009.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

Amortization expense related to Burger King franchise rights was $798 and $784 for the three months ended June 30, 2010 and 2009, respectively, and $1,598 and $1,568 for the six months ended June 30, 2010 and 2009, respectively. The Company estimates the amortization expense for the year ending December 31, 2010 and for each of the five succeeding years to be $3,197.

5. Long-term Debt

Long-term debt at June 30, 2010 and December 31, 2009 consisted of the following:

 

     June 30,
2010
    December 31,
2009
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ 4,400      $ 1,900   

Senior Credit Facility-Term loan A facility

     98,035        105,000   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,238        1,193   
                
     268,673        273,093   

Less: current portion

     (13,437     (12,985
                
   $ 255,236      $ 260,108   
                

Senior Credit Facility. On March 9, 2007, the Company terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. The Company’s credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 2013 (or earlier on September 30, 2012 if the 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving credit facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans), maturing on March 9, 2012.

The term loan and revolving credit borrowings under the senior credit facility bear interest at a per annum rate, at the Company’s option, of either:

1) the applicable margin percentage ranging from 0% to 0.25% based on the Company’s senior leverage ratio (as defined in the senior credit facility) plus the greater of (i) the prime rate or (ii) the federal funds rate for that day plus 0.5%; or

2) Adjusted LIBOR plus the applicable margin percentage in effect ranging from 1.0% to 1.5% based on the Company’s senior leverage ratio. At July 4, 2010 the LIBOR margin percentage was 1.0%.

During the six months ended June 30, 2010, the Company made a required prepayment of approximately $1.0 million based on 25% of the Company’s Excess Cash Flow for the year ended December 31, 2009, as defined. At July 4, 2010, outstanding borrowings under Term loan A were $98.0 million with the remaining balance due and payable as follows:

1) three quarterly installments of approximately $3.0 million beginning on September 30, 2010;

2) four quarterly installments of approximately $4.5 million beginning on June 30, 2011; and

3) four quarterly installments of approximately $17.8 million beginning on June 30, 2012.

After reserving $14.5 million for letters of credit guaranteed by the facility, $46.1 million was available for borrowings under the revolving credit facility at July 4, 2010.

Under the senior credit facility, the Company is also required to make mandatory prepayments of principal on its term loan borrowings (a) annually in an amount of up to 50% of Excess Cash Flow depending upon the Company’s Total Leverage Ratio (as such terms are defined in the senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by the Company therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt. The senior credit facility contains customary default provisions as provided therein, including without limitation, a cross default

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

provision pursuant to which it is an event of default under the senior credit facility if there is a default in the payment of any principal of or interest on any indebtedness of the Company having an outstanding principal amount of at least $2.5 million (excluding lease financing obligations but which would include the Indenture governing the Notes, as defined below) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.

In general, the Company’s obligations under the senior credit facility are guaranteed by Carrols Restaurant Group and all of the Company’s material subsidiaries and are collateralized by a pledge of the Company’s common stock and the stock of each of the Company’s material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting the Company’s ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Company is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). The Company was in compliance with the covenants under its senior credit facility as of July 4, 2010.

Senior Subordinated Notes. On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). At both July 4, 2010 and January 3, 2010, $165.0 million principal amount of the Notes were outstanding.

Restrictive covenants under the Indenture governing the Notes include limitations with respect to the Company’s ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Carrols was in compliance with the restrictive covenants in the Indenture governing the Notes as of July 4, 2010.

The Indenture governing the Notes contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the Notes and the Indenture if there is a default under any indebtedness of the Company having an outstanding principal amount of $20 million or more (which would include the senior credit facility) if such default results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2010 and 2009 was comprised of the following:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Current

   $ 1,135    $ 4,125    $ 2,587    $ 6,379

Deferred

     102      8      82      768
                           
   $ 1,237    $ 4,133    $ 2,669    $ 7,147
                           

The provision for income taxes for the three months ended June 30, 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.9%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the provision for income taxes by $116 and $70 in the three and six months ended June 30, 2010, respectively.

The provision for income taxes for the three and six months ended June 30, 2009 was derived using an estimated effective annual income tax rate for 2009 of 37.4%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $57 in both the three and six months ended June 30, 2009.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2010 and December 31, 2009, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2006-2009 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2010 and December 31, 2009 consisted of the following:

 

     June 30,
2010
   December 31,
2009

Accrued occupancy costs

   $ 12,299    $ 11,572

Accrued workers’ compensation costs

     3,982      4,018

Deferred compensation

     2,756      3,210

Other

     3,229      3,471
             
   $ 22,266    $ 22,271
             

8. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering Burger King administrative and restaurant management salaried employees who retire or terminate that qualify for such benefits. A December 31 measurement date is used for postretirement benefits.

The following summarizes the components of net periodic postretirement benefit income:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Service cost

   $ 8      $ 7      $ 16      $ 15   

Interest cost

     27        27        54        54   

Amortization of net gains and losses

     24        21        48        42   

Amortization of prior service credit

     (90     (88     (180     (172
                                

Net periodic postretirement benefit income

   $ (31   $ (33   $ (62   $ (61
                                

During the three months ended June 30, 2010, the Company made contributions of $74 to its postretirement plan and expects to make additional contributions during 2010. Contributions made by the Company to its postretirement plan for the year ended December 31, 2009 were $153.

9. Lease Financing Obligations

The Company has previously entered into sale-leaseback transactions involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, were classified as financing transactions. Under the financing method, the assets remain on the consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

During 2009, the Company settled $1.9 million of lease financing obligations which included a purchase from a lessor of one restaurant property previously subject to a lease financing obligation for $1.1 million and the settlement of a lease financing obligation incurred previously in 2009 for $0.8 million. The Company also modified provisions of three of its restaurant leases previously accounted for as lease financing obligations which allowed the respective sale transactions to qualify for sale-leaseback accounting. As a result of these transactions in 2009, lease financing obligations were reduced $4.9 million, assets under lease financing obligations were reduced by $2.7 million and deferred gains on qualified sale-leaseback transactions of $1.2 million were recorded.

Interest expense associated with lease financing obligations for the three months ended June 30, 2010 and 2009 was $0.2 million and $0.3 million, respectively and for the six months ended June 30, 2010 and 2009 was $0.5 million and $0.6 million, respectively.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

10. Business Segment Information

The Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King, operating as a franchisee, and Pollo Tropical and Taco Cabana, both Company-owned concepts. Pollo Tropical is a quick-casual restaurant chain offering a unique selection of food items reflecting tropical and Caribbean influences and features grilled marinated chicken and authentic “made from scratch” side dishes. Taco Cabana is a quick-casual restaurant chain featuring fresh Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following table includes Segment EBITDA, which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and gains and losses on extinguishment of debt.

The “Other” column includes corporate related items not allocated to reportable segments, including stock-based compensation expense. Other identifiable assets consist primarily of cash, certain other assets, corporate property and equipment, including restaurant information systems expenditures, goodwill and deferred income taxes.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

Three Months Ended

   Pollo
Tropical
   Taco
Cabana
   Burger
King
   Other    Consolidated

June 30, 2010:

              

Total revenues

   $ 46,813    $ 64,207    $ 93,456    $ —      $ 204,476

Cost of sales

     15,167      19,150      28,652      —        62,969

Restaurant wages and related expenses

     11,235      19,301      29,061      14      59,611

General and administrative expenses (1)

     2,858      2,824      6,592      402      12,676

Depreciation and amortization

     1,942      2,241      3,478      452      8,113

Segment EBITDA

     8,146      6,873      5,522      

Capital expenditures, including acquisitions

     3,024      3,576      3,467      318      10,385

June 30, 2009:

              

Total revenues

   $ 44,578    $ 63,816    $ 95,540    $ —      $ 203,934

Cost of sales

     14,562      18,527      26,260      —        59,349

Restaurant wages and related expenses

     10,968      18,804      29,319      53      59,144

General and administrative expenses (1)

     2,453      2,896      7,040      308      12,697

Depreciation and amortization

     1,970      2,225      3,304      384      7,883

Segment EBITDA

     6,768      8,038      9,044      

Capital expenditures, including acquisitions

     349      2,793      3,822      2,379      9,343

Six Months Ended

                        

June 30, 2010:

              

Total revenues

   $ 92,306    $ 126,239    $ 181,075    $ —      $ 399,620

Cost of sales

     29,860      37,705      54,602      —        122,167

Restaurant wages and related expenses

     22,824      38,651      57,242      28      118,745

General and administrative expenses (1)

     5,664      5,594      13,132      781      25,171

Depreciation and amortization

     3,872      4,518      6,950      895      16,235

Segment EBITDA

     14,875      13,634      9,308      

Capital expenditures, including acquisitions

     3,825      4,866      6,764      710      16,165

June 30, 2009:

              

Total revenues

   $ 88,716    $ 126,530    $ 190,031    $ —      $ 405,277

Cost of sales

     29,206      36,886      51,530      —        117,622

Restaurant wages and related expenses

     21,864      36,999      58,819      105      117,787

General and administrative expenses (1)

     4,798      5,852      14,660      603      25,913

Depreciation and amortization

     3,922      4,459      6,649      723      15,753

Segment EBITDA

     13,235      16,244      16,072      

Capital expenditures, including acquisitions

     1,204      6,579      6,448      3,077      17,308

Identifiable Assets:

              

At June 30, 2010

   $ 50,946    $ 65,379    $ 145,477    $ 171,787    $ 433,589

At December 31, 2009

     52,802      67,342      146,679      173,154      439,977

 

(1) For the Pollo Tropical and Taco Cabana segments, such amounts include general and administrative expenses related directly to each segment. For the Burger King segment such amounts include general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to all of the Company’s segments including executive management, information systems and certain accounting, legal and other administrative functions.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

A reconciliation of segment EBITDA to consolidated net income is as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010    2009     2010    2009  

Segment EBITDA:

          

Pollo Tropical

   $ 8,146    $ 6,768      $ 14,875    $ 13,235   

Taco Cabana

     6,873      8,038        13,634      16,244   

Burger King

     5,522      9,044        9,308      16,072   

Less:

          

Depreciation and amortization

     8,113      7,883        16,235      15,753   

Impairment and other lease charges

     3,631      63        3,901      354   

Interest expense

     4,708      4,923        9,451      10,074   

Provision for income taxes

     1,237      4,133        2,669      7,147   

Stock-based compensation expense

     416      361        809      708   

Other income

     —        (579     —        (579
                              

Net income

   $ 2,436    $ 7,066      $ 4,752    $ 12,094   
                              

11. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against the Company. The complaint alleged that the Company engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC identified approximately 450 individuals (which were subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from the Company. On April 20, 2005, the Court issued a decision and order granting the Company’s Motion for Summary Judgment that the Company filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed; however the Court noted that it was not ruling on the claims, if any, that individual employees might have against the Company. On February 27, 2006, the Company filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC asserted that, notwithstanding the Court’s dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is awaiting the Court’s decision on the Company’ summary judgment motion. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

The Company is a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial statements.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

12. Comprehensive Income

The items that currently impact the Company’s other comprehensive income are changes in the postretirement benefit obligations, net of tax.

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009

Net income

   $ 2,436    $ 7,066    $ 4,752    $ 12,094

Change in postretirement benefit obligation, net of tax

     —        —        10      —  
                           

Comprehensive income

   $ 2,436    $ 7,066    $ 4,762    $ 12,094
                           

13. Other Income

During the three and six months ended June 30, 2009, the Company recorded a gain of $0.6 million related to insurance recovery for damages to Taco Cabana restaurants during Hurricane Ike.

14. Recent Accounting Developments

There are currently no recent accounting pronouncements which had or are expected to have a material impact on the Company’s consolidated financial statements as of the date of this report.

15. Guarantor Financial Statements

The Company’s obligations under the Notes are jointly and severally guaranteed in full on an unsecured senior subordinated basis by certain of the Company’s subsidiaries (“Guarantor Subsidiaries”), all of which are directly or indirectly wholly-owned by the Company. These subsidiaries are:

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

TPAQ Holding Corporation

The following supplemental financial information sets forth on a consolidating basis, balance sheets as of June 30, 2010 and December 31, 2009 for the Parent Company only, Guarantor Subsidiaries and for the Company and the related statements of operations for the three and six months ended June 30, 2010 and 2009, and cash flows for the six months ended June 30, 2010 and 2009.

For certain of the Company’s sale-leaseback transactions, the Parent Company has guaranteed on an unsecured basis the rental payments of its subsidiaries. In accordance with ASC 840-40-25-16, “Sale-Leaseback Transactions,” the Company has included in the following guarantor financial statements amounts pertaining to these leases as if they were accounted for as financing transactions of the Guarantor Subsidiaries. These adjustments are eliminated in consolidation.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars, except share and per share amounts)

 

For purposes of the guarantor financial statements, the Company and its subsidiaries determine the applicable tax provision for each entity generally using the separate return method. Under this method, current and deferred taxes are allocated to each reporting entity as if it were to file a separate tax return. The rules followed by the reporting entity in computing its tax obligation or refund, including the effects of the alternative minimum tax, would be the same as those followed in filing a separate return with the Internal Revenue Service. However, for purposes of evaluating an entity’s ability to realize its tax attributes, the Company assesses whether it is more likely than not that those assets will be realized at the consolidated level. Any differences in the total of the income tax provision for the Parent Company only and the Guarantor Subsidiaries, as calculated on the separate return method and the consolidated income tax provision are eliminated in consolidation.

The Company provides some administrative support to its subsidiaries related to executive management, information systems and certain accounting, legal and other administrative functions. For purposes of the guarantor financial statements, the Company allocates such corporate costs on a specific identification basis, where applicable, or based on revenues or the number of restaurants for each subsidiary. Management believes that these allocations are reasonable based on the nature of costs incurred.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

June 30, 2010

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 34      $ 3,482      $ —        $ 3,516

Trade and other receivables

     (43     5,709        —          5,666

Inventories

     —          5,193        —          5,193

Prepaid rent

     4        4,215        —          4,219

Prepaid expenses and other current assets

     1,518        4,127        —          5,645

Refundable income taxes

     609        —          —          609

Deferred income taxes

     88        4,746        —          4,834
                              

Total current assets

     2,210        27,472        —          29,682

Property and equipment, net

     10,885        265,787        (86,661     190,011

Franchise rights, net

     —          72,076        —          72,076

Goodwill

     —          124,934        —          124,934

Intangible assets, net

     —          476        —          476

Franchise fees, net

     —          5,771        —          5,771

Intercompany receivable (payable)

     127,243        (157,104     29,861        —  

Investment in subsidiaries

     171,272        —          (171,272     —  

Deferred income taxes

     2,514        3,139        (3,800     1,853

Other assets

     4,053        6,959        (2,226     8,786
                              

Total assets

   $ 318,177      $ 349,510      $ (234,098   $ 433,589
                              
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Current portion of long-term debt

   $ 13,368      $ 69      $ —        $ 13,437

Accounts payable

     3,275        11,352        —          14,627

Accrued interest

     6,883        —          —          6,883

Accrued payroll, related taxes and benefits

     (587     17,420        —          16,833

Accrued real estate taxes

     —          3,917        —          3,917

Other liabilities

     296        9,375        —          9,671
                              

Total current liabilities

     23,235        42,133        —          65,368

Long-term debt, net of current portion

     254,067        1,169        —          255,236

Lease financing obligations

     —          129,794        (119,765     10,029

Deferred income—sale-leaseback of real estate

     —          24,093        17,775        41,868

Accrued postretirement benefits

     1,769        —          —          1,769

Other liabilities

     2,053        18,618        1,595        22,266
                              

Total liabilities

     281,124        215,807        (100,395     396,536

Stockholder’s equity

     37,053        133,703        (133,703     37,053
                              

Total liabilities and stockholder’s equity

   $ 318,177      $ 349,510      $ (234,098   $ 433,589
                              

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2009

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 34      $ 4,368      $ —        $ 4,402

Trade and other receivables

     (827     6,798        —          5,971

Refundable income taxes

     1,185        —          —          1,185

Inventories

     —          5,935        —          5,935

Prepaid rent

     3        3,925        —          3,928

Prepaid expenses and other current assets

     1,106        3,729        —          4,835

Deferred income taxes

     88        4,746        —          4,834
                              

Total current assets

     1,589        29,501        —          31,090

Property and equipment, net

     9,356        268,774        (85,406     192,724

Franchise rights, net

     —          73,674        —          73,674

Goodwill

     —          124,934        —          124,934

Intangible assets, net

     —          543        —          543

Franchise agreements, net

     —          5,924        —          5,924

Intercompany receivable (payable)

     139,010        (168,649     29,639        —  

Investment in subsidiaries

     163,791        —          (163,791     —  

Deferred income taxes

     2,460        2,594        (3,119     1,935

Other assets

     4,510        6,887        (2,244     9,153
                              

Total assets

   $ 320,716      $ 344,182      $ (224,921   $ 439,977
                              
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Current portion of long-term debt

   $ 12,906      $ 79      $ —        $ 12,985

Accounts payable

     3,735        12,248        —          15,983

Accrued interest

     6,880        —          —          6,880

Accrued payroll, related taxes and benefits

     1,889        19,565        —          21,454

Accrued real estate taxes

     —          4,780        —          4,780

Other liabilities

     255        8,806        —          9,061
                              

Total current liabilities

     25,665        45,478        —          71,143

Long-term debt, net of current portion

     258,994        1,114        —          260,108

Lease financing obligations

     —          127,156        (117,157     9,999

Deferred income—sale-leaseback of real estate

     —          24,611        18,477        43,088

Accrued postretirement benefits

     1,914        —          —          1,914

Other liabilities

     2,689        18,271        1,311        22,271
                              

Total liabilities

     289,262        216,630        (97,369     408,523

Stockholder’s equity

     31,454        127,552        (127,552     31,454
                              

Total liabilities and stockholder’s equity

   $ 320,716      $ 344,182      $ (224,921   $ 439,977
                              

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2010

(In thousands of dollars)

(Unaudited)

 

     Company
Only
    Guarantor
Subsidiaries
   Eliminations     Consolidated
Total

Revenues:

         

Restaurant sales

   $ —        $ 204,141    $ —        $ 204,141

Franchise royalty revenues and fees

     —          335      —          335
                             

Total revenues

     —          204,476      —          204,476
                             

Costs and expenses:

         

Cost of sales

     —          62,969      —          62,969

Restaurant wages and related expenses (including stock based compensation expense of $14)

     —          59,611      —          59,611

Restaurant rent expense

     —          9,899      2,333        12,232

Other restaurant operating expenses

     —          29,105      —          29,105

Advertising expense

     —          7,758      —          7,758

General and administrative (including stock based compensation expense of $402)

     2,353        10,323      —          12,676

Depreciation and amortization

     —          8,656      (543     8,113

Impairment and other lease charges

     —          3,631      —          3,631
                             

Total operating expenses

     2,353        191,952      1,790        196,095
                             

Income (loss) from operations

     (2,353     12,524      (1,790     8,381

Interest expense

     4,424        2,982      (2,698     4,708

Intercompany interest allocations

     (4,557     4,557      —          —  
                             

Income (loss) before income taxes

     (2,220     4,985      908        3,673

Provision (benefit) for income taxes

     (890     1,716      411        1,237

Equity income from subsidiaries

     3,766        —        (3,766     —  
                             

Net income

   $ 2,436      $ 3,269    $ (3,269   $ 2,436
                             

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2009

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 203,535      $ —        $ 203,535   

Franchise royalty revenues and fees

     —          399        —          399   
                                

Total revenues

     —          203,934        —          203,934   
                                

Costs and expenses:

        

Cost of sales

     —          59,349        —          59,349   

Restaurant wages and related expenses (including stock based compensation expense of $53)

     —          59,144        —          59,144   

Restaurant rent expense

     —          10,149        2,253        12,402   

Other restaurant operating expenses

     —          29,286        —          29,286   

Advertising expense

     —          7,567        —          7,567   

General and administrative (including stock based compensation expense of $308)

     2,192        10,505        —          12,697   

Depreciation and amortization

     —          8,386        (503     7,883   

Impairment and other lease charges

     —          63        —          63   

Other income

     —          (579     —          (579
                                

Total operating expenses

     2,192        183,870        1,750        187,812   
                                

Income (loss) from operations

     (2,192     20,064        (1,750     16,122   

Interest expense

     4,620        2,873        (2,570     4,923   

Intercompany interest allocations

     (4,469     4,469        —          —     
                                

Income (loss) before income taxes

     (2,343     12,722        820        11,199   

Provision (benefit) for income taxes

     (845     4,628        350        4,133   

Equity income from subsidiaries

     8,564        —          (8,564     —     
                                

Net income

   $ 7,066      $ 8,094      $ (8,094   $ 7,066   
                                

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2010

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
   Eliminations     Consolidated
Total

Revenues:

         

Restaurant sales

   $ —        $ 398,808    $ —        $ 398,808

Franchise royalty revenues and fees

     —          812      —          812
                             

Total revenues

     —          399,620      —          399,620
                             

Costs and expenses:

         

Cost of sales

     —          122,167      —          122,167

Restaurant wages and related expenses (including stock based compensation expense of $28)

     —          118,745      —          118,745

Restaurant rent expense

     —          19,946      4,642        24,588

Other restaurant operating expenses

     —          57,337      —          57,337

Advertising expense

     —          14,604      —          14,604

General and administrative (including stock based compensation expense of $781)

     4,568        20,603      —          25,171

Depreciation and amortization

     —          17,298      (1,063     16,235

Impairment and other lease charges

     —          3,901      —          3,901
                             

Total operating expenses

     4,568        374,601      3,579        382,748
                             

Income (loss) from operations

     (4,568     25,019      (3,579     16,872

Interest expense

     8,880        5,941      (5,370     9,451

Intercompany interest allocations

     (9,113     9,113      —          —  
                             

Income (loss) before income taxes

     (4,335     9,965      1,791        7,421

Provision (benefit) for income taxes

     (1,606     3,531      744        2,669

Equity income from subsidiaries

     7,481        —        (7,481     —  
                             

Net income

   $ 4,752      $ 6,434    $ (6,434   $ 4,752
                             

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2009

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 404,524      $ —        $ 404,524   

Franchise royalty revenues and fees

     —          753        —          753   
                                

Total revenues

     —          405,277        —          405,277   
                                

Costs and expenses:

        

Cost of sales

     —          117,622        —          117,622   

Restaurant wages and related expenses (including stock based compensation expense of $105)

     —          117,787        —          117,787   

Restaurant rent expense

     —          20,429        4,405        24,834   

Other restaurant operating expenses

     —          58,700        —          58,700   

Advertising expense

     —          15,578        —          15,578   

General and administrative (including stock based compensation expense of $603)

     4,714        21,199        —          25,913   

Depreciation and amortization

     —          16,728        (975     15,753   

Impairment and other lease charges

     —          354        —          354   

Other income

     —          (579     —          (579
                                

Total operating expenses

     4,714        367,818        3,430        375,962   
                                

Income (loss) from operations

     (4,714     37,459        (3,430     29,315   

Interest expense

     9,358        5,738        (5,022     10,074   

Intercompany interest allocations