Form 10-Q
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 3, 2011

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  x    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 4, 2011, Carrols Restaurant Group, Inc. had 22,086,503 shares of its common stock, $.01 par value, outstanding. As of August 4, 2011, 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 3, 2011

 

          Page  

PART I   FINANCIAL INFORMATION

  
Item 1   

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

  
  

Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010

     3   
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010

     4   
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010

     5   
  

Notes to Consolidated Financial Statements

     6   
  

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

  
  

Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010

     20   
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010

     21   
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010

     22   
  

Notes to Consolidated Financial Statements

     23   
Item 2   

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

     45   
Item 3   

Quantitative and Qualitative Disclosures About Market Risk

     59   
Item 4   

Controls and Procedures

     60   

PART II   OTHER INFORMATION

  
Item 1   

Legal Proceedings

     60   
Item 1A   

Risk Factors

     60   
Item 2   

Unregistered Sales of Equity Securities and Use of Proceeds

     72   
Item 3   

Default Upon Senior Securities

     72   
Item 4   

Reserved

     73   
Item 5   

Other Information

     73   
Item 6   

Exhibits

     73   

 

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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,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 7,437      $ 3,144   

Trade and other receivables

     7,177        5,213   

Inventories

     5,213        5,203   

Prepaid rent

     4,074        4,018   

Prepaid expenses and other current assets

     5,928        5,349   

Refundable income taxes

     418        869   

Deferred income taxes

     4,609        4,609   
  

 

 

   

 

 

 

Total current assets

     34,856        28,405   

Property and equipment, net

     186,685        186,850   

Franchise rights, net (Note 4)

     68,834        70,432   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     360        419   

Franchise agreements, at cost less accumulated amortization of $6,346 and $6,102 respectively

     5,457        5,629   

Deferred income taxes

     —          1,949   

Other assets

     8,215        7,684   
  

 

 

   

 

 

 

Total assets

   $ 429,341      $ 426,302   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 4,927      $ 15,538   

Accounts payable

     13,251        13,944   

Accrued interest

     6,828        6,853   

Accrued payroll, related taxes and benefits

     19,235        19,504   

Accrued real estate taxes

     4,543        4,778   

Other liabilities

     9,464        7,434   
  

 

 

   

 

 

 

Total current liabilities

     58,248        68,051   

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

     241,457        237,914   

Lease financing obligations (Note 9)

     11,799        10,061   

Deferred income—sale-leaseback of real estate

     39,192        40,472   

Accrued postretirement benefits (Note 8)

     1,709        1,845   

Deferred income taxes

     1,057        —     

Other liabilities (Note 7)

     21,635        23,052   
  

 

 

   

 

 

 

Total liabilities

     375,097        381,395   

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 - 22,075,409 and 21,678,203 shares, respectively

     216        216   

Additional paid-in capital

     5,057        3,474   

Retained earnings

     47,577        39,823   

Accumulated other comprehensive income (Note 13)

     1,535        1,535   

Treasury stock, at cost

     (141     (141
  

 

 

   

 

 

 

Total stockholders’ equity

     54,244        44,907   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 429,341      $ 426,302   
  

 

 

   

 

 

 

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

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

(Unaudited)

 

     Three months ended June 30,      Six months ended June 30,  
     2011     2010      2011     2010  

Revenues:

         

Restaurant sales

   $ 209,343      $ 204,141       $ 406,216      $ 398,808   

Franchise royalty revenues and fees

     501        335         866        812   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     209,844        204,476         407,082        399,620   
  

 

 

   

 

 

    

 

 

   

 

 

 

Costs and expenses:

         

Cost of sales

     66,172        62,969         126,487        122,167   

Restaurant wages and related expenses (including stock-based compensation expense of $10, $14, $20 and $28, respectively)

     60,232        59,611         118,800        118,745   

Restaurant rent expense

     12,208        12,232         24,262        24,588   

Other restaurant operating expenses

     29,039        29,105         56,963        57,337   

Advertising expense

     7,472        7,758         14,975        14,604   

General and administrative (including stock-based compensation expense of $713, $402, $1,378 and $781, respectively)

     13,749        12,677         27,605        25,174   

Depreciation and amortization

     8,389        8,113         16,497        16,235   

Impairment and other lease charges (Note 3)

     975        3,631         2,055        3,901   

Other income (Note 14)

     (342     —           (448     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     197,894        196,096         387,196        382,751   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     11,950        8,380         19,886        16,869   

Interest expense

     4,579        4,708         9,192        9,451   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     7,371        3,672         10,694        7,418   

Provision for income taxes (Note 6)

     1,863        1,237         2,940        2,669   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 5,508      $ 2,435       $ 7,754      $ 4,749   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic net income per share (Note 12)

   $ 0.25      $ 0.11       $ 0.36      $ 0.22   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted net income per share (Note 12)

   $ 0.25      $ 0.11       $ 0.35      $ 0.22   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic weighted average common shares outstanding (Note 12)

     21,663,181        21,618,962         21,652,950        21,616,325   

Diluted weighted average common shares outstanding (Note 12)

     22,160,514        21,844,162         22,114,134        21,840,881   

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(In thousands of dollars)

(Unaudited)

 

     2011     2010  

Cash flows provided from operating activities:

    

Net income

   $ 7,754      $ 4,749   

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

    

Loss (gain) on disposals of property and equipment

     (97     220   

Stock-based compensation expense

     1,398        809   

Impairment and other lease charges

     2,055        3,901   

Depreciation and amortization

     16,497        16,235   

Amortization of deferred financing costs

     466        477   

Amortization of deferred gains from sale-leaseback transactions

     (1,682     (1,674

Accretion of interest on lease financing obligations

     2        30   

Deferred income taxes

     3,006        82   

Refundable income taxes

     451        576   

Changes in other operating assets and liabilities

     (4,537     (7,268
  

 

 

   

 

 

 

Net cash provided from operating activities

     25,313        18,137   
  

 

 

   

 

 

 

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (8,696     (5,910

Restaurant remodeling

     (5,738     (4,955

Other restaurant capital expenditures

     (4,401     (4,590

Corporate and restaurant information systems

     (1,836     (710
  

 

 

   

 

 

 

Total capital expenditures

     (20,671     (16,165

Properties purchased for sale-leaseback

     —          (2,486

Proceeds from sale-leaseback transactions

     5,012        4,109   

Proceeds from sales of other properties

     572        —     
  

 

 

   

 

 

 

Net cash used for investing activities

     (15,087     (14,542
  

 

 

   

 

 

 

Cash flows used for financing activities:

    

Borrowings on revolving credit facility

     32,700        71,700   

Repayments on revolving credit facility

     (32,700     (69,200

Principal pre-payments on term loans

     —          (1,023

Scheduled principal payments on term loans

     (7,036     (5,942

Principal payments on capital leases

     (32     (44

Proceeds from lease financing obligations

     1,736        —     

Financing costs associated with issuance of lease financing obligations

     (89     —     

Deferred financing fees

     (697     —     

Proceeds from stock option exercises

     185        28   
  

 

 

   

 

 

 

Net cash used for financing activities

     (5,933     (4,481
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,293        (886

Cash and cash equivalents, beginning of period

     3,144        4,402   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,437      $ 3,516   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 8,250      $ 8,484   

Interest paid on lease financing obligations

   $ 500      $ 457   

Accruals for capital expenditures

   $ 674      $ 641   

Income tax (refunds) payments, net

   $ (515   $ 1,982   

Capital lease obligations incurred

   $ —        $ 123   

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 3, 2011 the Company operated, as franchisee, 303 restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At July 3, 2011, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida and five were located in New Jersey, and franchised a total of 30 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad, one in Venezuela and three on college campuses in Florida. At July 3, 2011 the Company also owned and operated 157 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, two 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”). In April 2011, Fiesta Restaurant Group, Inc. (“Fiesta Restaurant Group”), a wholly owned subsidiary of Carrols Corporation, was incorporated. In May 2011, Carrols contributed all of the outstanding capital stock of Pollo Operations, Inc. and Pollo Franchise Inc. (collectively “Pollo Tropical”) and Taco Cabana Inc. and subsidiaries (collectively “Taco Cabana”) to Fiesta Restaurant Group in exchange for all of the outstanding capital stock of Fiesta Restaurant Group. Any reference to “Carrols LLC” refers to Carrols’ wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company. 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.

On February 24, 2011, the Company announced its intention to split its business into two separate, publicly-traded companies through the tax-free spin-off of Fiesta Restaurant Group to its stockholders. If the spin-off is consummated, Fiesta Restaurant Group will continue to own and operate the Pollo Tropical and Taco Cabana businesses and the Company, Carrols and Carrols LLC will continue to own and operate its franchised Burger King restaurants. In the spin-off, it is anticipated that all shares of Fiesta Restaurant Group common stock, which are currently held by Carrols, will be distributed in the form of a pro rata dividend to the stockholders of Carrols Restaurant Group.

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 2, 2011 and January 3, 2010 will be referred to as the fiscal years ended December 31, 2010 and 2009, respectively. Similarly, all references herein to the three and six months ended July 3, 2011 and July 4, 2010 will be referred to as the three and six months ended June 30, 2011 and June 30, 2010, respectively. The fiscal year ended December 31, 2010 contained 52 weeks and the fiscal year ended December 31, 2009 contained 53 weeks. The three and six months ended June 30, 2011 and 2010 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, 2011 and 2010 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, 2011 and 2010 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, 2010 contained in the Company’s 2010 Annual Report on Form 10-K. The December 31, 2010 balance sheet data is derived from those audited financial statements.

 

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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)

 

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 both June 30, 2011 and December 31, 2010 were approximately $165.4 million.

 

   

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, 2011. 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, 2011.

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, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights and lease accounting matters. 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. See Note 16 to the consolidated financial statements.

2. Stock-Based Compensation

On January 15, 2011, the Company granted in the aggregate 360,200 non-vested restricted shares of its common stock to certain employees. In general, these shares vest 25% per year and will be expensed over their 4 year vesting period. Included in the non-vested restricted share grant were 200,000 shares granted to our Chief Executive Officer, of which 100,000 shares will be expensed over a one year period ending January 15, 2012 and 100,000 shares will be expensed through December of 2013.

Stock-based compensation expense for the three and six months ended June 30, 2011 was $0.7 million and $1.4 million, respectively. As of June 30, 2011, the total non-vested stock-based compensation expense relating to the options and non-vested shares was approximately $4.0 million and the Company expects to record an additional $1.4 million as compensation expense in 2011. At June 30, 2011, the remaining weighted average vesting period for stock options and non-vested shares was 2.6 years and 3.3 years, respectively.

 

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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)

 

Stock Options

A summary of all option activity for the six months ended June 30, 2011 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, 2011

     2,588,017      $ 9.17         4.2       $ 2,948   

Granted

     —             

Exercised

     (31,286     5.44         

Forfeited

     (31,825     9.46         
  

 

 

         

Options outstanding at June 30, 2011

     2,524,906        9.21         3.7         7,391   
  

 

 

         

Vested or expected to vest at June 30, 2011

     2,504,748        9.23         3.7         7,300   
  

 

 

         

Options exercisable at June 30, 2011

     1,607,914        10.75         3.2         3,220   
  

 

 

         

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at July 3, 2011 of $10.64 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 3, 2011.

A summary of all non-vested stock activity for the six months ended June 30, 2011 was as follows:

 

     Shares     Weighted
Average
Grant Date
Price
 

Nonvested at January 1, 2011

     45,701      $ 6.16   

Granted

     368,534        7.68   

Vested

     (11,939     6.32   

Forfeited

     (2,850     6.62   
  

 

 

   

Nonvested at June 30, 2011

     399,446        7.56   
  

 

 

   

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. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.

The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions and the Company’s history of using these assets in the operation of its business. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the six months ended June 30, 2011 totaled $48.

 

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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)

 

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,
 
     2011      2010      2011      2010  

Burger King

   $ 155       $ 259       $ 971       $ 281   

Pollo Tropical

     364         1,931         636         1,983   

Taco Cabana

     456         1,441         448         1,637   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $  975       $ 3,631       $ 2,055       $ 3,901   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended June 30, 2011, the Company recorded impairment and lease charges of $1.0 million which consisted primarily of $0.1 million for an underperforming Burger King restaurant, $0.4 million in lease charges for two previously closed Pollo Tropical restaurants, $0.3 million of lease charges for a Taco Cabana restaurant that was closed in the second quarter of 2011, and $0.2 million in lease charges for two previously closed Taco Cabana restaurants.

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.

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.

There have been no changes in goodwill or goodwill impairment losses during the six months ended June 30, 2011 or the years ended December 31, 2010 and 2009. Goodwill balances are summarized below:

 

     Pollo
Tropical
     Taco
Cabana
     Burger
King
     Total  

Balance, June 30, 2011

   $ 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. No impairment charges were recorded related to the Company’s Burger King franchise rights for the three and six months ended June 30, 2011 and 2010.

Amortization expense related to Burger King franchise rights was $799 and $798 for the three months ended June 30, 2011 and 2010, respectively, and $1,598 for both the six months ended June 30, 2011 and 2010. The Company estimates the amortization expense for the year ending December 31, 2011 and for each of the five succeeding years to be $3,194.

 

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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)

 

5. Long-term Debt

Long-term debt at June 30, 2011 and December 31, 2010 consisted of the following:

 

     June 30,
2011
    December 31,
2010
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ —        $ —     

Senior Credit Facility-Term loan A facility

     80,214        87,250   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,170        1,202   
  

 

 

   

 

 

 
     246,384        253,452   

Less: current portion

     (4,927     (15,538
  

 

 

   

 

 

 
   $ 241,457      $ 237,914   
  

 

 

   

 

 

 

On August 5, 2011 Carrols LLC and Fiesta Restaurant Group each entered into a new and independent secured credit facility. The new Carrols LLC secured credit facility provides for aggregate term loan borrowings of $65.0 million and a revolving credit facility that provides for aggregate borrowings of up to $20.0 million. The new Fiesta Restaurant Group secured credit facility consists of a revolving credit facility that provides for aggregate borrowings of up to $25.0 million. Also on August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”). Carrols LLC used net proceeds from the term loan borrowings of $65.0 million under the Carrols LLC secured credit facility and Fiesta Restaurant Group used net proceeds from the sale of the Fiesta Notes to distribute funds to Carrols to enable Carrols to (i) repay all outstanding indebtedness under Carrols prior senior credit facility, (ii) repurchase its outstanding 9% Senior Subordinated Notes due 2013 (the "Carrols Notes") pursuant to a cash tender offer and related consent solicitation and to pay the related tender premium and (iii) pay related fees and expenses. On August 5, 2011 there were no outstanding revolving credit borrowings under the new Carrols LLC secured credit facility or the new Fiesta Restaurant Group secured credit facility.

In connection with these transactions, on July 22, 2011 Carrols commenced a tender offer and consent solicitation for all of its outstanding Carrols Notes. On August 5, 2011, $118.4 million were accepted for payment and paid by Carrols. Carrols LLC distributed to Carrols net proceeds from the term loan borrowings of $65.0 million under the Carrols LLC secured credit facility and Fiesta Restaurant Group distributed to Carrols net proceeds from the sale of the $200.0 million Fiesta Notes to enable Carrols to redeem the balance of its outstanding Carrols Notes not tendered in the tender offer, which will expire on August 18, 2011, unless terminated or extended. As of August 5, 2011, $46.6 million of the Carrols Notes had not yet been tendered.

In accordance with ASC – 470, the Company has classified as current, at June, 30, 2011, the principal payment requirements for the next twelve months of the new borrowings discussed above. This resulted in a reclassification of $24.7 million of debt from short-term to long-term.

New Secured Credit Facilities. On August 5, 2011 Fiesta Restaurant Group entered into a new first lien revolving credit facility providing for aggregate borrowings of up to $25.0 million (including $10.0 million available for letters of credit). The new Fiesta Restaurant Group revolving credit facility also provides for incremental increases of up to $5.0 million, in the aggregate, to the revolving credit borrowings available under the Fiesta Restaurant Group secured credit facility, and matures on February 5, 2016. Borrowings under the Fiesta Restaurant Group secured credit facility bear interest at a per annum rate, at Fiesta Restaurant Group's option, of either (all terms as defined in the Fiesta Restaurant secured credit facility):

1) the Alternate Base Rate plus the applicable margin of 2.0% to 2.75% based on Fiesta Restaurant Group's Adjusted Leverage Ratio (with an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group secured credit facility), or

2) the LIBOR Rate plus the applicable margin of 3.0% to 3.75% based on Fiesta Restaurant Group's Adjusted Leverage Ratio (with an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group secured credit facility).

 

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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)

 

Fiesta Restaurant Group’s obligations under the Fiesta Restaurant Group secured credit facility are guaranteed by Fiesta Restaurant Group’s material subsidiaries and secured by a first priority lien on substantially all of the assets of Fiesta Restaurant Group and its material subsidiaries, as guarantors, (including a pledge of all of the capital stock and equity interests of its material subsidiaries).

The Fiesta Restaurant Group secured senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these facilities if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

On August 5, 2011 Carrols LLC entered into a new secured credit facility, which provides for $65.0 million aggregate principal amount of term loan borrowings and a revolving credit facility which provides for aggregate borrowings of up to $20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC secured credit facility also provides for incremental borrowing increases of up to $25 million, in the aggregate, to the revolving credit facility and term loan borrowings available under the Carrols LLC secured credit facility. Borrowings under the term loan and revolving credit borrowings under the Carrols LLC secured credit facility bear interest at a per annum rate, at Carrols LLC's option, of either (all terms as defined in the Carrols LLC secured credit facility):

1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC's Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC secured credit facility), or

2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC's Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC secured credit facility).

Under the Carrols LLC secured credit facility, Carrols LLC will be required to make mandatory prepayments of revolving credit facility borrowings and principal on term loan borrowings (i) annually in an amount equal to 50% to 100% of Excess Cash Flow (as defined in the Carrols LLC secured credit facility) based on Carrols LLC’s Adjusted Leverage Ratio and (ii) in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).

The term loan borrowings under the new Carrols LLC secured credit facility are payable in consecutive quarterly principal payments of $1.625 million beginning on the last day of the fourth quarter of 2011 through the first quarter of 2016 with the remaining outstanding principal amount of $30.75 million due on the maturity date of August 5, 2016.

Carrols LLC’s obligations under the Carrols LLC secured credit facility are secured by a first priority lien on substantially all of the assets of Carrols LLC and by a pledge by Carrols of all of the outstanding equity interests of Carrols LLC.

The Carrols LLC secured senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these facilities if there is a default under any indebtedness of Carrols LLC having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

Fiesta Restaurant Group Senior Secured Second Lien Notes. On August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 pursuant to an indenture dated as of August 5, 2011 governing such notes. The Fiesta Notes mature on August 15, 2016 and the entire principal amount of the Fiesta Notes is payable of such maturity date. Interest is payable semi-annually on February 15 and August 15 with the first interest payment due on February 15, 2012. The Fiesta Notes are secured by second-priority liens on substantially all of Fiesta Restaurant Group’s and its material subsidiaries assets.

The Fiesta Notes are redeemable at the option of Fiesta Restaurant Group in whole or in part at any time after February 15, 2014 at a price of 104.438% of the principal amount plus accrued and unpaid interest, if any, if redeemed before February 15, 2015, 102.219% of the principal amount plus accrued and unpaid interest, if any, if redeemed after February 15, 2015 but before February 15, 2016 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after February 15, 2016. Prior to February 14, 2014, Fiesta Restaurant Group may redeem some or all of the Fiesta Notes at a redemption price of 100% of the principal

 

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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)

 

amount of each note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, at any time prior to February 15, 2014, Fiesta Restaurant Group may redeem up to 35% of the Fiesta Notes with the net cash proceeds from specified equity offerings at a redemption price equal to 108.875% of the principal amount of each note to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

The indenture governing the Fiesta Notes includes certain covenants, including limitations and restrictions on Fiesta Restaurant Group and its material subsidiaries who are guarantors under such indenture to incur additional debt, issue preferred stock, pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments, incur liens, sell assets, enter into transactions with affiliates, agree to payment restrictions affecting certain of its material subsidiaries and enter into mergers, consolidations or sales of all or substantially all of Fiesta Restaurant Group’s or its material subsidiaries' assets. These covenants are subject to certain exceptions and qualifications including, without limitation, permitting the spin-off transaction discussed in Note 1.

The indenture governing the Fiesta Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these notes and the indenture if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $15.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

Carrols Senior Credit Facility. Carrols’ prior senior credit facility totaled $185 million, originally consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 2013 (or earlier on September 30, 2012 if the Carrols Notes 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 8, 2012.

The term loan and revolving credit borrowings under the prior senior credit facility bore 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 June 30, 2011 the LIBOR margin percentage was 1.0%.

At July 3, 2011, outstanding borrowings under Term loan A of the prior senior credit facility were $80.2 million with the remaining balance due and payable as follows:

1) three quarterly installments of approximately $4.2 million beginning on September 30, 2011; and

2) four quarterly installments of approximately $16.9 million beginning on June 30, 2012.

Under the prior senior credit facility, Carrols was required to make mandatory prepayments of principal on term loan A facility 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 prior 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. For the year ended December 31, 2010, there was not a required prepayment based on the Excess Cash Flow for 2010, as defined. For the year ended December 31, 2009, Carrols was required to make a principal prepayment of approximately $1.0 million in the first quarter of 2010.

The prior senior credit facility contained 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 was 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 prior senior credit facility as of July 3, 2011.

After reserving $13.5 million for letters of credit guaranteed by the facility, $51.5 million was available for borrowings under the prior revolving credit facility at July 3, 2011.

Carrols Senior Subordinated Notes. On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013 that bear interest at a rate of 9% payable semi-annually on January 15 and July 15 and mature on January 15, 2013. At both July 3, 2011 and January 2, 2011, $165.0 million principal amount of the Carrols Notes were outstanding.

 

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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)

 

Restrictive covenants under the Carrols Notes included 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 as of July 3, 2011 with the restrictive covenants in the indenture governing the Carrols Notes.

On July 22, 2011, Carrols commenced an offer to purchase for cash any and all of the $165 million outstanding principal amount of the Carrols Notes and solicited consents to effect certain proposed amendments to the indenture governing the Carrols Notes. The tender offer will expire on August 18, 2011, unless terminated or extended. Holders who validly tendered the Carrols Notes on or before August 4, 2011 received total consideration of $1,003.75 for each $1,000 principal amount of such notes accepted for purchase. Total consideration included a consent payment of $30.00 per $1,000 principal amount, which was payable only to holders who tendered their Notes and validly delivered their consents prior to the expiration of the consent solicitation at 5:00 p.m. on August 4, 2011. On August 5, 2011, $118.4 million principal amount of the Carrols Notes that were validly tendered were accepted for payment and paid by Carrols. Holders who validly tender the Carrols Notes after 5:00 p.m. on August 4, 2011, but before August 18, 2011, will receive $973.75 for each $1,000 principal amount of such notes accepted for purchase. Accrued and unpaid interest, up to, but not including, the applicable settlement date, will be paid in cash on all validly tendered and accepted Carrols Notes.

The amendments to the indenture governing the Carrols Notes, among other things, eliminated a significant portion of the restrictive covenants in the indenture governing the Carrols Notes and eliminated certain events of default. The elimination (or, in certain cases, amendment) of these restrictive covenants and other provisions permit Carrols and its subsidiaries to, among other things, incur indebtedness, pay dividends or make other restricted payments, incur liens or make investments, in each case which otherwise may not have been permitted pursuant to the indenture governing the Carrols Notes. The amendments to the indenture governing the Carrols Notes are binding upon the holders of the Carrols Notes not tendered into the tender offer.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2011 and 2010 was comprised of the following:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011     2010      2011     2010  

Current

   $ (1,143 )   $ 1,135       $ (66 )   $ 2,587   

Deferred

     3,006        102         3,006        82   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 1,863      $ 1,237       $ 2,940     $ 2,669   
  

 

 

   

 

 

    

 

 

   

 

 

 

The provision for income taxes for the three and six months ended June 30, 2011 was derived using an estimated effective annual income tax rate for 2011 of 29.7%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the provision for income taxes by $241 in both the three and six months ended June 30, 2011.

The provision for income taxes for the three and six 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 Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2011 and December 31, 2010, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2007-2010 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, 2011 and December 31, 2010 consisted of the following:

 

     June 30,
2011
     December 31,
2010
 

Accrued occupancy costs

   $ 14,000       $ 13,250   

Accrued workers’ compensation costs

     3,624         3,423   

Deferred compensation

     840         2,937   

Other

     3,171         3,442   
  

 

 

    

 

 

 
   $ 21,635       $ 23,052   
  

 

 

    

 

 

 

Accrued occupancy costs include obligations pertaining to closed restaurant locations, contingent rent and accruals to expense operating lease rental payments on a straight-line basis over the lease term.

The following table presents the activity in the closed-store reserve included in accrued occupancy costs at June 30, 2011 and December 31, 2010:

 

     Six months ended
June 30, 2011
    Year ended
December 31, 2010
 

Balance, beginning of period

   $ 1,665      $ 862   

Accruals for additional lease charges

     1,066        1,279   

Payments, net

     (526     (632

Other adjustments

     66        156   
  

 

 

   

 

 

 

Balance, end of period

   $ 2,271      $ 1,665   
  

 

 

   

 

 

 

8. Postretirement Benefits

The Company provides postretirement medical benefits covering substantially all Burger King administrative and restaurant management salaried employees who retire or terminate after qualifying 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,
 
     2011     2010     2011     2010  

Service cost

   $ 7      $ 8      $ 14      $ 16   

Interest cost

     24        27        49        54   

Amortization of net gains and losses

     24        24        49        48   

Amortization of prior service credit

     (90     (90     (180     (180
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement benefit income

   $ (35   $ (31   $ (68   $ (62
  

 

 

   

 

 

   

 

 

   

 

 

 

During the six months ended June 30, 2011, the Company made contributions of $86 to its postretirement plan and expects to make additional contributions during 2011. Contributions made by the Company to its postretirement plan for the year ended December 31, 2010 were $156.

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.

 

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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)

 

Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

During the second quarter of 2011, the Company entered into a sale-leaseback transaction for a restaurant property that did not qualify for sale-leaseback accounting and the net proceeds of $1.7 million were recorded as a lease financing obligation.

Interest expense associated with lease financing obligations for the three months ended June 30, 2011 and 2010 was $0.3 million and $0.2 million, respectively, and was $0.5 million for both the six months ended June 30, 2011 and 2010.

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 brand offering a wide selection of tropical and Caribbean-inspired food, featuring grilled chicken marinated in a proprietary blend of tropical fruit juices and spices. Taco Cabana is a quick-casual restaurant brand offering a wide selection of fresh Tex-Mex and traditional Mexican food, including sizzling fajitas, quesadillas, enchiladas, burritos 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, 2010. The following table includes Adjusted 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. Adjusted 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 expense 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, 2011:

              

Total revenues

   $ 52,642       $ 68,607       $ 88,595       $ —         $ 209,844   

Cost of sales

     17,413         22,262         26,497         —           66,172   

Restaurant wages and related expenses

     12,311         20,453         27,458         10         60,232   

Restaurant rent expenses

     2,437         4,079         5,692         —           12,208   

General and administrative expenses (1)

     3,298         2,893         6,845         713         13,749   

Depreciation and amortization

     2,043         2,274         3,549         523         8,389   

Adjusted Segment EBITDA

     9,581         7,003         5,111         

Capital expenditures, including acquisitions

     2,589         3,975         4,380         1,291         12,235   

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   

Restaurant rent expenses

     2,425         3,936         5,871         —           12,232   

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   

Adjusted Segment EBITDA

     8,145         6,873         5,522         

Capital expenditures, including acquisitions

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

Six Months Ended

                                  

June 30, 2011:

              

Total revenues

   $ 104,877       $ 131,988       $ 170,217       $ —         $ 407,082   

Cost of sales

     34,562         41,457         50,468         —           126,487   

Restaurant wages and related expenses

     24,604         39,789         54,387         20         118,800   

Restaurant rent expenses

     4,750         8,110         11,402         —           24,262   

General and administrative expenses (1)

     6,081         5,995         14,151         1,378         27,605   

Depreciation and amortization

     3,958         4,540         6,995         1,004         16,497   

Adjusted Segment EBITDA

     19,640         13,496         6,252         

Capital expenditures, including acquisitions

     3,781         7,816         7,238         1,836         20,671   

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   

Restaurant rent expenses

     4,886         7,835         11,867         —           24,588   

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   

Adjusted Segment EBITDA

     14,872         13,634         9,308         

Capital expenditures, including acquisitions

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

Identifiable Assets:

              

At June 30, 2011

   $ 50,755       $ 61,937       $ 141,659       $ 174,990       $ 429,341   

At December 31, 2010

     51,125         63,061         142,922         169,194         426,302   

 

(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 the Company’s Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other

 

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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)

 

  administrative functions. For the three and six months ended June 30, 2011, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $1.2 million and $2.6 million, respectively, and the administrative support expenses provided to Taco Cabana were $1.4 million and $3.3 million respectively. For the three and six months ended June 30, 2010, these administrative support expenses were $1.1 million and $2.2 million, respectively, for Pollo Tropical and $1.4 million and $2.8 million, respectively, for Taco Cabana.

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011     2010      2011     2010  

Adjusted Segment EBITDA:

         

Pollo Tropical

   $ 9,581      $ 8,145       $ 19,640      $ 14,872   

Taco Cabana

     7,003        6,873         13,496        13,634   

Burger King

     5,111        5,522         6,252        9,308   

Less:

         

Depreciation and amortization

     8,389        8,113         16,497        16,235   

Impairment and other lease charges

     975        3,631         2,055        3,901   

Interest expense

     4,579        4,708         9,192        9,451   

Provision for income taxes

     1,863        1,237         2,940        2,669   

Stock-based compensation expense

     723        416         1,398        809   

Other income

     (342     —           (448     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 5,508      $ 2,435       $ 7,754      $ 4,749   
  

 

 

   

 

 

    

 

 

   

 

 

 

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 or practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC ultimately attempted to present evidence of 511 individuals that it believed constituted the “class” of claimants for which it 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, dismissing the EEOC’s pattern or practice claim. Carrols then moved for summary judgment against the claims of the 511 individual claimants. On March 2, 2011, the Court issued a decision and order granting summary judgment against the claims of all but 131 of the 511 individual claimants and dismissed 380 of the individual claimants from the case. Both the EEOC and Carrols have since filed motions for reconsideration in part of the Court’s March 2, 2011 decision and order, as a result of which the number of surviving claimants may increase to as many as 184 or decrease to as few as four. It is not possible to predict the outcome of these motions at this time.

Subject to possible appeal by the EEOC, the EEOC’s pattern or practice claim is dismissed; however, the Court has yet to determine how the claims of the individual claimants ultimately determined to survive will proceed. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of that matter on an appeal, if one is taken. The Company does not believe that any of the remaining individual claims would have a material impact on its consolidated financial statements.

The Company is a party to various other litigation matters incidental to the conduct of the Company’s business. The Company does not believe that the outcome of any of these other matters will have a material 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,  
    2011     2010     2011     2010  

Basic net income per share:

       

Net income

  $ 5,508      $ 2,435      $ 7,754      $ 4,749   

Weighted average common shares outstanding

    21,663,181        21,618,962        21,652,950        21,616,325   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share

  $ 0.25      $ 0.11      $ 0.36      $ 0.22   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share:

       

Net income for diluted net income per share

  $ 5,508      $ 2,435      $ 7,754      $ 4,749   

Shares used in computed basic net income per share

    21,663,181        21,618,962        21,652,950        21,616,325   

Dilutive effect of non-vested shares and stock options

    497,333        225,200        461,184        224,556   
 

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computed diluted net income per share

    22,160,514        21,844,162        22,114,134        21,840,881   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share

  $ 0.25      $ 0.11      $ 0.35      $ 0.22   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    1,031,344        1,609,608        1,478,196        1,570,860   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) These shares subject to stock options 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,

 
     2011      2010      2011      2010  

Net income

   $ 5,508       $ 2,435       $ 7,754       $ 4,749   

Change in postretirement benefit obligation, net of tax

     —           —           —           10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 5,508       $ 2,435       $ 7,754       $ 4,759   
  

 

 

    

 

 

    

 

 

    

 

 

 

14. Other Income

In the three months ended June 30, 2011, the Company recorded a gain of $0.3 million related to the sale of a non-operating Burger King property. In the six months ended June 30, 2011, the Company also recorded a gain of $0.1 million related to a property insurance recovery from a fire at a Burger King restaurant.

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.

16. Subsequent Events

As discussed in Note 5, on August 5, 2011, the Company completed a refinancing of its existing indebtedness. Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceeds from these financings were or will be used to

 

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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)

 

repay amounts outstanding under Carrols senior credit facility and Carrols Notes, as well as to pay all related fees and expenses. Excess cash from the financings is expected to be approximately $10 million to $11 million.

Fiesta Restaurant Group sold $200 million of 8.875% senior secured second lien notes due 2016 and entered into a $25 million secured revolving credit facility which was undrawn at closing. Carrols LLC entered into an $85 million secured credit facility including term loan borrowings of $65 million and an undrawn $20 million revolving credit facility. Proceeds from these borrowings were or will be used to repay approximately $80.2 million outstanding under Carrols’ senior credit facility, to repurchase $118.4 million of the Carrols Notes tendered pursuant to a cash tender offer (such tender offer is not yet complete), to pay accrued interest and to pay related fees and expenses. In addition, the $46.6 million of the Carrols Notes not yet tendered will be repurchased upon completion of the cash tender offer or redeemed subsequent to its expiration along with payment for accrued interest and fees related to the tender offer.

As a result of these refinancing transactions, Carrols expects to record a loss on extinguishment of debt in the third quarter of 2011 representing the write-off of previously deferred financing fees and the tender premium on redemption of the 9% senior subordinated notes.

 

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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,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 7,437      $ 3,144   

Trade and other receivables

     7,177        5,213   

Inventories

     5,213        5,203   

Prepaid rent

     4,074        4,018   

Prepaid expenses and other current assets

     5,928        5,349   

Refundable income taxes

     418        869   

Deferred income taxes

     4,609        4,609   
  

 

 

   

 

 

 

Total current assets

     34,856        28,405   

Property and equipment, net

     186,685        186,850   

Franchise rights, net (Note 4)

     68,834        70,432   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     360        419   

Franchise agreements, at cost less accumulated amortization of $6,346 and $6,102, respectively

     5,457        5,629   

Deferred income taxes

     —          1,949   

Other assets

     8,215        7,684   
  

 

 

   

 

 

 

Total assets

   $ 429,341      $ 426,302   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 4,927      $ 15,538   

Accounts payable

     13,251        13,944   

Accrued interest

     6,828        6,853   

Accrued payroll, related taxes and benefits

     19,235        19,504   

Accrued real estate taxes

     4,543        4,778   

Other liabilities

     9,464        7,434   
  

 

 

   

 

 

 

Total current liabilities

     58,248        68,051   

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

     241,457        237,914   

Lease financing obligations (Note 9)

     11,799        10,061   

Deferred income—sale-leaseback of real estate

     39,192        40,472   

Accrued postretirement benefits (Note 8)

     1,709        1,845   

Deferred income taxes

     1,057        —     

Other liabilities (Note 7)

     21,825        23,060   
  

 

 

   

 

 

 

Total liabilities

     375,287        381,403   

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

     (2,685     (4,083

Retained earnings

     55,204        47,447   

Accumulated other comprehensive income (Note 12)

     1,535        1,535   
  

 

 

   

 

 

 

Total stockholder’s equity

     54,054        44,899   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 429,341      $ 426,302   
  

 

 

   

 

 

 

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(In thousands of dollars)

(Unaudited)

 

     Three months ended June 30,      Six months ended June 30,  
     2011     2010      2011     2010  

Revenues:

         

Restaurant sales

   $ 209,343      $ 204,141       $ 406,216      $ 398,808   

Franchise royalty revenues and fees

     501        335         866        812   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     209,844        204,476         407,082        399,620   
  

 

 

   

 

 

    

 

 

   

 

 

 

Costs and expenses:

         

Cost of sales

     66,172        62,969         126,487        122,167   

Restaurant wages and related expenses (including stock-based compensation expense of $10, $14, $20 and $28, respectively)

     60,232        59,611         118,800        118,745   

Restaurant rent expense

     12,208        12,232         24,262        24,588   

Other restaurant operating expenses

     29,039        29,105         56,963        57,337   

Advertising expense

     7,472        7,758         14,975        14,604   

General and administrative (including stock-based compensation expense of $713, $402, $1,378 and $781, respectively)

     13,748        12,676         27,602        25,171   

Depreciation and amortization

     8,389        8,113         16,497        16,235   

Impairment and other lease charges (Note 3)

     975        3,631         2,055        3,901   

Other income (Note 13)

     (342     —           (448     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     197,893        196,095         387,193        382,748   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     11,951        8,381         19,889        16,872   

Interest expense

     4,579        4,708         9,192        9,451   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     7,372        3,673         10,697        7,421   

Provision for income taxes (Note 6)

     1,863        1,237         2,940        2,669   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 5,509      $ 2,436       $ 7,757      $ 4,752   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(In thousands of dollars)

(Unaudited)

 

     2011     2010  

Cash flows provided from operating activities:

    

Net income

   $ 7,757      $ 4,752   

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

    

Loss (gain) on disposals of property and equipment

     (97     220   

Stock-based compensation expense

     1,398        809   

Impairment and other lease charges

     2,055        3,901   

Depreciation and amortization

     16,497        16,235   

Amortization of deferred financing costs

     466        477   

Amortization of deferred gains from sale-leaseback transactions

     (1,682     (1,674

Accretion of interest on lease financing obligations

     2        30   

Deferred income taxes

     3,006        82   

Refundable income taxes

     451        576   

Changes in other operating assets and liabilities

     (4,355     (7,271
  

 

 

   

 

 

 

Net cash provided from operating activities

     25,498        18,137   
  

 

 

   

 

 

 

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (8,696     (5,910

Restaurant remodeling

     (5,738     (4,955

Other restaurant capital expenditures

     (4,401     (4,590

Corporate and restaurant information systems

     (1,836     (710
  

 

 

   

 

 

 

Total capital expenditures

     (20,671     (16,165

Properties purchased for sale-leaseback

     —          (2,486

Proceeds from sale-leaseback transactions

     5,012        4,109   

Proceeds from sales of other properties

     572        —     
  

 

 

   

 

 

 

Net cash used for investing activities

     (15,087     (14,542
  

 

 

   

 

 

 

Cash flows used for financing activities:

    

Borrowings on revolving credit facility

     32,700        71,700   

Repayments on revolving credit facility

     (32,700     (69,200

Principal pre-payments on term loans

     —          (1,023

Scheduled principal payments on term loans

     (7,036     (5,942

Principal payments on capital leases

     (32     (44

Proceeds from lease financing obligations

     1,736        —     

Financing costs associated with issuance of lease financing obligations

     (89     —     

Deferred financing fees

     (697     —     

Proceeds from stock option exercises

     —          28   
  

 

 

   

 

 

 

Net cash used for financing activities

     (6,118     (4,481
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,293        (886

Cash and cash equivalents, beginning of period

     3,144        4,402   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,437      $ 3,516   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 8,250      $ 8,484   

Interest paid on lease financing obligations

   $ 500      $ 457   

Accruals for capital expenditures

   $ 674      $ 641   

Income tax (refunds) payments, net

   $ (515   $ 1,982   

Capital lease obligations incurred

   $ —        $ 123   

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 3, 2011 the Company operated, as franchisee, 303 restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At July 3, 2011, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida, five were located in New Jersey, and franchised a total of 30 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad, one in Venezuela and three on college campuses in Florida. At July 3, 2011 the Company also owned and operated 157 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, two 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”). In April 2011, Fiesta Restaurant Group, Inc. (“Fiesta Restaurant Group”), a wholly owned subsidiary of Carrols Corporation, was incorporated. In May 2011, the Company contributed all of the outstanding capital stock of Pollo Operations, Inc. and Pollo Franchise Inc. (collectively “Pollo Tropical”) and Taco Cabana Inc. and subsidiaries (collectively “Taco Cabana”) to Fiesta Restaurant Group in exchange for all of the outstanding capital stock of Fiesta Restaurant Group. Any reference to “Carrols LLC” refers to Carrols’ wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company. All intercompany transactions have been eliminated in consolidation.

On February 24, 2011, Carrols Restaurant Group, Inc. and the Company announced its intention to split its business into two separate, publicly-traded companies through the tax-free spin-off of Fiesta Restaurant Group to its stockholders. If the spin-off is consummated, Fiesta Restaurant Group will own and operate the Pollo Tropical and Taco Cabana businesses. Carrols Restaurant Group, Inc., the Company and Carrols LLC will continue to own and operate its franchised Burger King restaurants. In the spin-off, it is anticipated that all shares of Fiesta Restaurant Group common stock, which are currently held by the Company, will be distributed in the form of a pro rata dividend to the stockholders of Carrols Restaurant Group.

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 2, 2011 and January 3, 2010 will be referred to as the fiscal years ended December 31, 2010 and 2009, respectively. Similarly, all references herein to the three and six months ended July 3, 2011 and July 4, 2010 will be referred to as the three and six months ended June 30, 2011 and June 30, 2010, respectively. The year ended December 31, 2010 contained 52 weeks and the year ended December 31, 2009 contained 53 weeks. The three and six months ended June 30, 2011 and 2010 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, 2011 and 2010 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, 2011 and 2010 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, 2010 contained in the Company’s 2010 Annual Report on Form 10-K. The December 31, 2010 balance sheet data is derived from those audited 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)

 

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 both June 30, 2011 and December 31, 2010 were approximately $165.4 million.

 

   

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, 2011. 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, 2011.

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, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights and lease accounting matters. 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. See Note 15 to the consolidated financial statements.

2. Stock-Based Compensation

On January 15, 2011, Carrols Restaurant Group granted in the aggregate 360,200 non-vested restricted shares of its common stock to certain employees. In general, these shares vest 25% per year and will be expensed over their 4 year vesting period. Included in the non-vested restricted share grant were 200,000 shares granted to our Chief Executive Officer, of which 100,000 shares will be expensed over a one year period ending January 15, 2012 and 100,000 shares will be expensed through December of 2013.

Stock-based compensation expense for the three and six months ended June 30, 2011 and 2010 was $0.7 million and $1.4 million, respectively. As of June 30, 2011, the total non-vested stock-based compensation expense relating to the options and non-vested shares was approximately $4.0 million and the Company expects to record an additional $1.4 million as compensation expense in 2011. At June 30, 2011, the remaining weighted average vesting period for stock options and non-vested shares was 2.6 years and 3.3 years, 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)

 

Stock Options

A summary of all option activity for the six months ended June 30, 2011 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, 2011

     2,588,017      $ 9.17         4.2       $ 2,948   

Granted

     —             

Exercised

     (31,286     5.44         

Forfeited

     (31,825     9.46         
  

 

 

         

Options outstanding at June 30, 2011

     2,524,906        9.21         3.7         7,391   
  

 

 

         

Vested or expected to vest at June 30, 2011

     2,504,748        9.23         3.7         7,300   
  

 

 

         

Options exercisable at June 30, 2011

     1,607,914        10.75         3.2         3,220   
  

 

 

         

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at July 3, 2011 of $10.64 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 3, 2011.

A summary of all non-vested stock activity for the six months ended June 30, 2011 was as follows:

 

     Shares     Weighted
Average
Grant Date
Price
 

Nonvested at January 1, 2011

     45,701      $ 6.16   

Granted

     368,534        7.68   

Vested

     (11,939     6.32   

Forfeited

     (2,850     6.62   
  

 

 

   

Nonvested at June 30, 2011

     399,446        7.56   
  

 

 

   

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. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.

The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions and the Company’s history of using these assets in the operation of its business. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the six months ended June 30, 2011 totaled $48.

 

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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)

 

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,
 
     2011      2010      2011      2010  

Burger King

   $ 155       $ 259       $ 971       $ 281   

Pollo Tropical

     364         1,931         636         1,983   

Taco Cabana

     456         1,441         448         1,637   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 975       $ 3,631       $ 2,055       $ 3,901   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended June 30, 2011, the Company recorded impairment and lease charges of $1.0 million which consisted primarily of $0.1 million for an underperforming Burger King restaurant, $0.4 million in lease charges for two previously closed Pollo Tropical restaurants, $0.3 million of lease charges for a Taco Cabana restaurant that was closed in the second quarter of 2011 and $0.2 million in lease charges for two previously closed Taco Cabana restaurants.

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.

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.

There have been no changes in goodwill or goodwill impairment losses during the six months ended June 30, 2011 or the years ended December 31, 2010 and 2009. Goodwill balances are summarized below:

 

     Pollo
Tropical
     Taco
Cabana
     Burger
King
     Total  

Balance, June 30, 2011

   $ 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. No impairment charges were recorded related to the Company’s Burger King franchise rights for the three and six months ended June 30, 2011 and 2010.

Amortization expense related to Burger King franchise rights was $799 and $798 for the three months ended June 30, 2011 and 2010, respectively, and $1,598 for both the six months ended June 30, 2011 and 2010. The Company estimates the amortization expense for the year ending December 31, 2011 and for each of the five succeeding years to be $3,194.

 

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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)

 

5. Long-term Debt

Long-term debt at June 30, 2011 and December 31, 2010 consisted of the following:

 

     June 30,
2011
    December 31,
2010
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ —        $ —     

Senior Credit Facility-Term loan A facility

     80,214        87,250   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,170        1,202   
  

 

 

   

 

 

 
     246,384        253,452   

Less: current portion

     (4,927     (15,538
  

 

 

   

 

 

 
   $ 241,457      $ 237,914   
  

 

 

   

 

 

 

On August 5, 2011 Carrols LLC and Fiesta Restaurant Group each entered into a new and independent secured credit facility. The new Carrols LLC secured credit facility provides for aggregate term loan borrowings of $65.0 million and a revolving credit facility that provides for aggregate borrowings of up to $20.0 million. The new Fiesta Restaurant Group secured credit facility consists of a revolving credit facility that provides for aggregate borrowings of up to $25.0 million. Also on August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”). Carrols LLC used net proceeds from the term loan borrowings of $65.0 million under the Carrols LLC secured credit facility and Fiesta Restaurant Group used net proceeds from the sale of the Fiesta Notes to distribute funds to the Company to enable the Company to (i) repay all outstanding indebtedness under the Company’s prior senior credit facility, (ii) repurchase its outstanding 9% Senior Subordinated Notes due 2013 (the "Carrols Notes") pursuant to a cash tender offer and related consent solicitation and to pay the related tender premium and (iii) pay related fees and expenses. On August 5, 2011 there were no outstanding revolving credit borrowings under the new Carrols LLC secured credit facility or the new Fiesta Restaurant Group secured credit facility.

In connection with these transactions, on July 22, 2011 the Company commenced a tender offer and consent solicitation for all of its outstanding Carrols Notes. On August 5, 2011, $118.4 million principal amount of the Carrols Notes were accepted for payment and paid by the Company. Carrols LLC distributed to the Company net proceeds from the term loan borrowings of $65.0 million under the Carrols LLC secured credit facility and Fiesta Restaurant Group distributed to the Company net proceeds from the sale of the $200.0 million Fiesta Notes to enable the Company to redeem the balance of its outstanding Carrols Notes not tendered in the tender offer, which will expire on August 18, 2011, unless terminated or extended. As of August 5, 2011, $46.6 million of Carrols Notes had not yet been tendered.

In accordance with ASC – 470, the Company has classified as current, at June, 30, 2011, the principal payment requirements for the next twelve months of the new borrowings discussed above. This resulted in a reclassification of $24.7 million of debt from short-term to long-term.

New Secured Credit Facilities. On August 5, 2011 Fiesta Restaurant Group entered into a new first lien revolving credit facility providing for aggregate borrowings of up to $25.0 million (including $10.0 million available for letters of credit). The new Fiesta Restaurant Group revolving credit facility also provides for incremental increases of up to $5.0 million, in the aggregate, to the revolving credit borrowings available under the Fiesta Restaurant Group secured credit facility, and matures on February 5, 2016. Borrowings under the Fiesta Restaurant Group secured credit facility bear interest at a per annum rate, at Fiesta Restaurant Group's option, of either (all terms as defined in the Fiesta Restaurant secured credit facility):

1) the Alternate Base Rate plus the applicable margin of 2.0% to 2.75% based on Fiesta Restaurant Group's Adjusted Leverage Ratio (with an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group secured credit facility), or

2) the LIBOR Rate plus the applicable margin of 3.0% to 3.75% based on Fiesta Restaurant Group's Adjusted Leverage Ratio (with an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group secured credit facility).

 

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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)

 

Fiesta Restaurant Group’s obligations under the Fiesta Restaurant Group secured credit facility are secured by a first priority lien on substantially all of the assets of Fiesta Restaurant Group and its material subsidiaries, as guarantors, (including a pledge of all of the capital stock and equity interests of its material subsidiaries).

The Fiesta Restaurant Group secured senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these facilities if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

On August 5, 2011 Carrols LLC entered into a new secured credit facility, which provides for $65.0 million aggregate principal amount of term loan borrowings and a revolving credit facility which provides for aggregate borrowings of up to $20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC secured credit facility also provides for incremental borrowing increases of up to $25 million, in the aggregate, to the revolving credit facility and term loan borrowings available under the Carrols LLC secured credit facility. Borrowings under the term loan and revolving credit borrowings under the Carrols LLC secured credit facility bear interest at a per annum rate, at Carrols LLC's option, of either (all terms as defined in the Carrols LLC secured credit facility):

1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC's Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC secured credit facility), or

2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC's Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC secured credit facility).

Under the Carrols LLC secured credit facility, Carrols LLC will be required to make mandatory prepayments of revolving credit facility borrowings and principal on term loan borrowings (i) annually in an amount equal to 50% to 100% of Excess Cash Flow (as defined in the Carrols LLC secured credit facility) based on Carrols LLC’s Adjusted Leverage Ratio and (ii) in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).

The term loan borrowings under the new Carrols LLC secured credit facility are payable in consecutive quarterly principal payments of $1.625 million beginning on the last day of the fourth quarter of 2011 through the first quarter of 2016 with the remaining outstanding principal amount of $30.75 million due on the maturity date of August 5, 2016.

Carrols LLC’s obligations under the Carrols LLC secured credit facility are secured by a first priority lien on substantially all of the assets of Carrols LLC and by a pledge by Carrols of all of the outstanding equity interests of Carrols LLC.

The Carrols LLC secured senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these facilities if there is a default under any indebtedness of Carrols LLC having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

Fiesta Restaurant Group Senior Secured Second Lien Notes. On August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 pursuant to an indenture dated as of August 5, 2011 governing such notes. The senior secured second lien notes mature on August 15, 2016 and the entire principal amount of such notes is payable of such maturity date. Interest is payable semi-annually on February 15 and August 15 with the first interest payment due on February 15, 2012. The Fiesta Notes are secured by second-priority liens on substantially all of Fiesta Restaurant Group’s and its material subsidiaries assets.

The Fiesta Notes are redeemable at the option of Fiesta Restaurant Group in whole or in part at any time after February 15, 2014 at a price of 104.438% of the principal amount plus accrued and unpaid interest, if any, if redeemed before February 15, 2015, 102.219% of the principal amount plus accrued and unpaid interest, if any, if redeemed after February 15, 2015 but before February 15, 2016 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after February 15, 2016. Prior to February 14, 2014, Fiesta Restaurant Group may redeem some or all of the notes at a redemption price of 100% of the principal

 

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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)

 

amount of each note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, at any time prior to February 15, 2014, Fiesta Restaurant Group may redeem up to 35% of the notes with the net cash proceeds from specified equity offerings at a redemption price equal to 108.875% of the principal amount of each note to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

The indenture governing the Fiesta Notes includes certain covenants, including limitations and restrictions on Fiesta Restaurant Group and its material subsidiaries who are guarantors under such indenture to incur additional debt, issue preferred stock, pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments, incur liens, sell assets, enter into transactions with affiliates, agree to payment restrictions affecting certain of its material subsidiaries and enter into mergers, consolidations or sales of all or substantially all of Fiesta Restaurant Group’s or its material subsidiaries’ assets. These covenants are subject to certain exceptions and qualifications including, without limitation, permitting the spin-off transaction discussed in Note 1.

The indenture governing the Fiesta Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these notes and the indenture if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $15.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

Carrols Senior Credit Facility. The Company’s prior senior credit facility totaled $185 million, originally consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 2013 (or earlier on September 30, 2012 if the Carrols Notes 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 8, 2012.

The term loan and revolving credit borrowings under the prior senior credit facility bore 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 June 30, 2011 the LIBOR margin percentage was 1.0%.

At July 3, 2011, outstanding borrowings under Term loan A of the prior senior credit facility were $80.2 million with the remaining balance due and payable as follows:

1) three quarterly installments of approximately $4.2 million beginning on September 30, 2011; and

2) four quarterly installments of approximately $16.9 million beginning on June 30, 2012.

Under the prior senior credit facility, the Company was required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an amount up to 50% of Excess Cash Flow depending upon the Company’s Total Leverage Ratio (as such terms are defined in the prior 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. For the year ended December 31, 2010, there was not a required prepayment based on the Excess Cash Flow for 2010, as defined. For the year ended December 31, 2009, the Company was required to make a principal prepayment of approximately $1.0 million in the first quarter of 2010.

The prior senior credit facility contained 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 was 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 prior senior credit facility as of July 3, 2011.

After reserving $13.5 million for letters of credit guaranteed by the facility, $51.5 million was available for borrowings under the prior revolving credit facility at July 3, 2011.

Carrols Senior Subordinated Notes. On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013 that bear interest at a rate of 9% payable semi-annually on January 15 and July 15 and mature on January 15, 2013. At both July 3, 2011 and January 2, 2011, $165.0 million principal amount of the Carrols Notes were outstanding.

 

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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)

 

Restrictive covenants under the Carrols Notes included 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. The Company was in compliance as of July 3, 2011 with the restrictive covenants in the indenture governing the Carrols Notes.

On July 22, 2011, The Company commenced an offer to purchase for cash any and all of the $165 million outstanding principal amount of the Carrols Notes and solicited consents to effect certain proposed amendments to the indenture governing the Carrols Notes. The tender offer will expire on August 18, 2011, unless terminated or extended. Holders who validly tendered the Carrols Notes on or before August 4, 2011 received total consideration of $1,003.75 for each $1,000 principal amount of such notes accepted for purchase. Total consideration included a consent payment of $30.00 per $1,000 principal amount, which was payable only to holders who tendered their Notes and validly delivered their consents prior to the expiration of the consent solicitation at 5:00p.m. on August 4, 2011. On August 5, 2011, $118,366,000 principal amount of the Carrols Notes that were validly tendered on or prior to 5:00p.m. on August 4, 2011 were accepted for payment and paid by the Company. Holders who validly tender the Carrols Notes after 5:00p.m. on August 4, 2011, but before August 18, 2011, will receive $973.75 for each $1,000 principal amount of such notes accepted for purchase. Accrued and unpaid interest, up to, but not including, the applicable settlement date, will be paid in cash on all validly tendered and accepted Carrols Notes.

The amendments to the indenture governing the Carrols Notes, among other things, eliminated a significant portion of the restrictive covenants in the indenture governing the Carrols Notes and eliminated certain events of default. The elimination (or, in certain cases, amendment) of these restrictive covenants and other provisions permit the Company and its subsidiaries to, among other things, incur indebtedness, pay dividends or make other restricted payments, incur liens or make investments, in each case which otherwise may not have been permitted pursuant to the indenture governing the Carrols Notes. The amendments to the indenture governing the Carrols Notes are binding upon the holders of the Carrols Notes not tendered into the tender offer.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2011 and 2010 was comprised of the following:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011     2010      2011     2010  

Current

   $ (1,143   $ 1,135       $ (66   $ 2,587   

Deferred

     3,006        102         3,006        82   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 1,863      $ 1,237       $ 2,940      $ 2,669   
  

 

 

   

 

 

    

 

 

   

 

 

 

The provision for income taxes for the three and six months ended June 30, 2011 was derived using an estimated effective annual income tax rate for 2011 of 29.7%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the provision for income taxes by $241 in both the three and six months ended June 30, 2011.

The provision for income taxes for the three and six 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.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2011 and December 31, 2010, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2007-2010 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 CORPORATION AND SUBSIDIARIES

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, 2011 and December 31, 2010 consisted of the following:

 

     June 30,
2011
     December 31,
2010
 

Accrued occupancy costs

   $ 14,000       $ 13,250   

Accrued workers’ compensation costs

     3,624         3,423   

Deferred compensation

     840         2,937   

Other

     3,361         3,450   
  

 

 

    

 

 

 
   $ 21,825       $ 23,060   
  

 

 

    

 

 

 

Accrued occupancy costs include obligations pertaining to closed restaurant locations, contingent rent and accruals to expense operating lease rental payments on a straight-line basis over the lease term.

The following table presents the activity in the closed-store reserve included in accrued occupancy costs at June 30, 2011 and December 31, 2010:

 

     Six months ended
June 30, 2011
    Year ended
December 31, 2010
 

Balance, beginning of period

   $ 1,665      $ 862   

Accruals for additional lease charges

     1,066        1,279   

Payments, net

     (526     (632

Other adjustments

     66        156   
  

 

 

   

 

 

 

Balance, end of period

   $ 2,271      $ 1,665   
  

 

 

   

 

 

 

8. Postretirement Benefits

The Company provides postretirement medical benefits covering substantially all Burger King administrative and restaurant management salaried employees who retire or terminate after qualifying 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,
 
     2011     2010     2011     2010  

Service cost

   $ 7      $ 8      $ 14      $ 16   

Interest cost

     24        27        49        54   

Amortization of net gains and losses

     24        24        49        48   

Amortization of prior service credit

     (90     (90     (180     (180
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement benefit income

   $ (35   $ (31   $ (68   $ (62
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three and six months ended June 30, 2011, the Company made contributions of $86 to its postretirement plan and expects to make additional contributions during 2011. Contributions made by the Company to its postretirement plan for the year ended December 31, 2010 were $156.

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.

 

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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)

 

During the second quarter of 2011, the Company entered into a sale-leaseback transaction for a restaurant property that did not qualify for sale-leaseback accounting and the net proceeds of $1.7 million were recorded as a lease financing obligation.

Interest expense associated with lease financing obligations for the three months ended June 30, 2011 and 2010 was $0.3 million and $0.2 million, respectively, and was $0.5 million for both the six months ended June 30, 2011 and 2010.

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 brand offering a wide selection of tropical and Caribbean-inspired food, featuring grilled chicken marinated in a proprietary blend of tropical fruit juices and spices. Taco Cabana is a quick-casual restaurant brand offering a wide selection of fresh Tex-Mex and traditional Mexican food, including sizzling fajitas, quesadillas, enchiladas, burritos 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, 2010. The following table includes Adjusted 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. Adjusted 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 expense 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 CORPORATION AND SUBSIDIARIES

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, 2011:

              

Total revenues

   $ 52,642       $ 68,607       $ 88,595       $ —         $ 209,844   

Cost of sales

     17,413         22,262         26,497         —           66,172   

Restaurant wages and related expenses

     12,311         20,453         27,458         10         60,232   

Restaurant rent expense

     2,437         4,079         5,692         —           12,208   

General and administrative expenses (1)

     3,297         2,893         6,845         713         13,748   

Depreciation and amortization

     2,043         2,274         3,549         523         8,389   

Adjusted Segment EBITDA

     9,582         7,003         5,111         

Capital expenditures, including acquisitions

     2,589         3,975         4,380         1,291         12,235   

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   

Restaurant rent expense

     2,425         3,936         5,871         —           12,232   

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   

Adjusted Segment EBITDA

     8,146         6,873         5,522         

Capital expenditures, including acquisitions

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

Six Months Ended

                                  

June 30, 2011:

              

Total revenues

   $ 104,877       $ 131,988       $ 170,217       $ —         $ 407,082   

Cost of sales

     34,562         41,457         50,468         —           126,487   

Restaurant wages and related expenses

     24,604         39,789         54,387         20         118,800   

Restaurant rent expense

     4,750         8,110         11,402         —           24,262   

General and administrative expenses (1)

     6,078         5,995         14,151         1,378         27,602   

Depreciation and amortization

     3,958         4,540         6,995         1,004         16,497   

Adjusted Segment EBITDA

     19,643         13,496         6,252         

Capital expenditures, including acquisitions

     3,781         7,816         7,238         1,836         20,671   

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   

Restaurant rent expense

     4,886         7,835         11,867         —           24,588   

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   

Adjusted Segment EBITDA

     14,875         13,634         9,308         

Capital expenditures, including acquisitions

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

Identifiable Assets:

              

At June 30, 2011

   $ 50,755       $ 61,937       $ 141,659       $ 174,990       $ 429,341   

At December 31, 2010

     51,125         63,061         142,922         169,194         426,302   

 

(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 the Company’s Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative

 

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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)

 

  functions. For the three and six months ended June 30, 2011, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $1.2 million and $2.6 million, respectively, and the administrative support expenses provided to Taco Cabana were $1.4 million and $3.3 million respectively. For the three and six months ended June 30, 2010, these administrative support expenses were $1.1 million and $2.2 million, respectively, for Pollo Tropical and $1.4 million and $2.8 million, respectively, for Taco Cabana.

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011     2010      2011     2010  

Adjusted Segment EBITDA:

         

Pollo Tropical

   $ 9,582      $ 8,146       $ 19,643      $ 14,875   

Taco Cabana

     7,003        6,873         13,496        13,634   

Burger King

     5,111        5,522         6,252        9,308   

Less:

         

Depreciation and amortization

     8,389        8,113         16,497        16,235   

Impairment and other lease charges

     975        3,631         2,055        3,901   

Interest expense

     4,579        4,708         9,192        9,451   

Provision for income taxes

     1,863        1,237         2,940        2,669   

Stock-based compensation expense

     723        416         1,398        809   

Other income

     (342     —           (448     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 5,509      $ 2,436       $ 7,757      $ 4,752   
  

 

 

   

 

 

    

 

 

   

 

 

 

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 or practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC ultimately attempted to present evidence of 511 individuals that it believed constituted the “class” of claimants for which it 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, dismissing the EEOC’s pattern or practice claim. The Company then moved for summary judgment against the claims of the 511 individual claimants. On March 2, 2011, the Court issued a decision and order granting summary judgment against the claims of all but 131 of the 511 individual claimants and dismissed 380 of the individual claimants from the case. Both the EEOC and the Company have since filed motions for reconsideration in part of the Court’s March 2, 2011 decision and order, as a result of which the number of surviving claimants may increase to as many as 184 or decrease to as few as four. It is not possible to predict the outcome of these motions at this time.

Subject to possible appeal by the EEOC, the EEOC’s pattern or practice claim is dismissed; however, the Court has yet to determine how the claims of the individual claimants ultimately determined to survive will proceed. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of that matter on an appeal, if one is taken. The Company does not believe that any of the remaining individual claims would have a material impact on its consolidated financial statements.

The Company is a party to various other litigation matters incidental to the conduct of the Company’s business. The Company does not believe that the outcome of any of these other matters will have a material 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,
 
     2011      2010      2011      2010  

Net income

   $ 5,509       $ 2,436       $ 7,757       $ 4,752   

Change in postretirement benefit obligation, net of tax

     —           —           —           10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 5,509       $ 2,436       $ 7,757       $ 4,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Other Income

In the three months ended June 30, 2011, the Company recorded a gain of $0.3 million related to the sale of a non-operating Burger King property. In the six months ended June 30, 2011, the Company also recorded a gain of $0.1 million related to a property insurance recovery from a fire at a Burger King restaurant.

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. Subsequent Events

As discussed in Note 5, on August 5, 2011, the Company completed a refinancing of its existing indebtedness. Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceeds from these financings were or will be used to repay amounts outstanding under the Company’s senior credit facility and the Carrols Notes, as well as to pay all related fees and expenses. Excess cash from the financings is expected to be approximately $10 million to $11 million.

Fiesta Restaurant Group sold $200 million of 8.875% senior secured second lien notes due 2016 and entered into a $25 million secured revolving credit facility which was undrawn at closing. Carrols LLC entered into an $85 million secured credit facility including term loan borrowings of $65 million and an undrawn $20 million revolving credit facility. Proceeds from these borrowings were or will be used to repay approximately $80.2 million outstanding under Carrols Corporation's senior credit facility, to repurchase $118.4 million of the Carrols Notes tendered pursuant to a cash tender offer (such tender offer is not yet complete), to pay accrued interest and to pay related fees and expenses. In addition, the $46.6 million of the Carrols Notes not yet tendered will be repurchased upon completion of the cash tender offer or redeemed subsequent to its expiration along with payment for accrued interest and fees related to the tender offer.

As a result of these refinancing transactions, the Company expects to record a loss on extinguishment of debt in the third quarter of 2011 representing the write-off of previously deferred financing fees and the tender premium on redemption of the 9% senior subordinated notes.

16. Guarantor Financial Statements

The Company’s obligations under the Carrols Notes are jointly and severally guaranteed in full on an unconditional basis by all of the Company’s material 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.

Fiesta Restaurant Group, Inc.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

 

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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)

 

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, 2011 and December 31, 2010 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, 2011 and 2010, and cash flows for the six months ended June 30, 2011 and 2010.

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.

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 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 would be the same as those followed in filing a separate income tax return. 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 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. Beginning in January 2011, all administrative costs have been allocated to our guarantor subsidiaries using such methods.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

CONSOLIDATING BALANCE SHEET

June 30, 2011

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 4,692      $ 6,220      $ (3,475   $ 7,437   

Trade and other receivables

     (86     7,263        —          7,177   

Inventories

     —          5,213        —          5,213   

Prepaid rent

     4        4,070        —          4,074   

Prepaid expenses and other current assets

     1,369        4,559        —          5,928   

Refundable income taxes

     418        —          —          418   

Deferred income taxes

     (108     4,717        —          4,609   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     6,289        32,042        (3,475     34,856   

Property and equipment, net

     11,885        257,298        (82,498     186,685   

Franchise rights, net

     —          68,834        —          68,834   

Goodwill

     —          124,934        —          124,934   

Intangible assets, net

     —          360        —          360   

Franchise fees, net

     —          5,457        —          5,457   

Intercompany receivable (payable)

     91,973        (122,063     30,090        —     

Investment in subsidiaries

     191,726        —          (191,726     —     

Deferred income taxes

     —          4,803        (4,803     —     

Other assets

     3,869        6,226        (1,880     8,215   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 305,742      $ 377,891      $ (254,292   $ 429,341   
  

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Current portion of long-term debt

   $ 4,875      $ 52      $ —        $ 4,927   

Accounts payable

     382        16,344        (3,475     13,251   

Accrued interest

     6,828        —          —          6,828   

Accrued payroll, related taxes and benefits

     (22     19,257        —          19,235   

Accrued real estate taxes

     —          4,543        —          4,543   

Other liabilities

     297        9,167        —          9,464   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     12,360        49,363        (3,475     58,248   

Long-term debt, net of current portion

     240,339        1,118        —          241,457   

Lease financing obligations

     —          128,190        (116,391     11,799   

Deferred income—sale-leaseback of real estate

     —          23,556        15,636        39,192   

Accrued postretirement benefits

     1,709        —          —          1,709   

Deferred income taxes

     (2,814     3,871        —          1,057   

Other liabilities

     94        19,719        2,012        21,825   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     251,688        225,817        (102,218     375,287   

Stockholder’s equity

     54,054        152,074        (152,074     54,054   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 305,742      $ 377,891      $ (254,292   $ 429,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

CONSOLIDATING BALANCE SHEET

December 31, 2010

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 42      $ 3,102      $ —        $ 3,144   

Trade and other receivables

     91        5,122        —          5,213   

Refundable income taxes

     869        —          —          869   

Inventories

     —          5,203        —          5,203   

Prepaid rent

     5        4,013        —          4,018   

Prepaid expenses and other current assets

     1,452        3,897        —          5,349   

Deferred income taxes

     (108     4,717        —          4,609   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     2,351        26,054        —          28,405   

Property and equipment, net

     10,613        259,774        (83,537     186,850   

Franchise rights, net

     —          70,432        —          70,432   

Goodwill

     —          124,934        —          124,934   

Intangible assets, net

     —          419        —          419   

Franchise agreements, net

     —          5,629        —          5,629   

Intercompany receivable (payable)

     109,966        (139,948     29,982        —     

Investment in subsidiaries

     180,985        —          (180,985     —     

Deferred income taxes

     2,814        3,356        (4,221     1,949   

Other assets

     3,619        6,065        (2,000     7,684   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 310,348      $ 356,715      $ (240,761   $ 426,302   
  

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Current portion of long-term debt

   $ 15,480      $ 58      $ —        $ 15,538   

Accounts payable

     2,072        11,872        —          13,944   

Accrued interest

     6,853        —          —          6,853   

Accrued payroll, related taxes and benefits

     85        19,419        —          19,504   

Accrued real estate taxes

     —          4,778        —          4,778   

Other liabilities

     220        7,214        —          7,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     24,710        43,341        —          68,051   

Long-term debt, net of current portion

     236,770        1,144        —          237,914   

Lease financing obligations

     —          126,430        (116,369     10,061   

Deferred income—sale-leaseback of real estate

     —          24,157        16,315        40,472   

Accrued postretirement benefits

     1,845        —          —          1,845   

Other liabilities

     2,124        19,072        1,864        23,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     265,449        214,144        (98,190     381,403   

Stockholder’s equity

     44,899        142,571        (142,571     44,899   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 310,348      $ 356,715      $ (240,761   $ 426,302   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2011

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 209,343      $ —        $ 209,343   

Franchise royalty revenues and fees

     —          501        —          501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          209,844        —          209,844   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of sales

     —          66,172        —          66,172   

Restaurant wages and related expenses (including stock based compensation expense of $10)

     —          60,232        —          60,232   

Restaurant rent expense

     —          9,902        2,306        12,208   

Other restaurant operating expenses

     —          29,039        —          29,039   

Advertising expense

     —          7,472        —          7,472   

General and administrative (including stock based compensation expense of $713)

     —          13,748        —          13,748   

Depreciation and amortization

     —          8,908        (519     8,389   

Impairment and other lease charges

     —          975        —          975   

Other income

     —          (342     —          (342
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          196,106        1,787        197,893   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     —          13,738        (1,787     11,951   

Interest expense

     4,281        2,939        (2,641     4,579   

Intercompany interest allocations

     (1,983     1,983        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (2,298     8,816        854        7,372   

Provision (benefit) for income taxes

     (854     2,355        362        1,863   

Equity income from subsidiaries

     6,953        —          (6,953     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,509      $ 6,461      $ (6,461   $ 5,509   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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)

 

     Parent
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

     (8