Carrols Restaurant Group, Inc.
CARROLS RESTAURANT GROUP, INC. (Form: 10-Q, Received: 08/10/2007 14:57:23)
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 1, 2007

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

 


Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:   Name on each exchange on which registered:
Common Stock, Carrols Restaurant Group, Inc., par value $.01 per share   The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

 


Commission File Number: 0-25629

 


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

 


Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 


Carrols Corporation meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with reduced disclosure format pursuant to General Instruction H(2) of Form 10-Q.

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 are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act, (Check one):

Large accelerated filers   ¨     Accelerated filers   ¨     Non-accelerated filers   x

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 3, 2007, Carrols Restaurant Group, Inc. had 21,550,827 shares of its common stock, $.01 par value outstanding. As of August 3, 2007, 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.

FORM 10-Q

QUARTER ENDED JUNE 30, 2007

 

         Page
PART I   FINANCIAL INFORMATION   
Item 1   Carrols Restaurant Group, Inc. and Subsidiary - Consolidated Financial Statements (unaudited):   
 

Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006

   3
 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006

   4
 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2007 and 2006

   5
 

Notes to Consolidated Financial Statements

   6
  Carrols Corporation and Subsidiaries - Consolidated Financial Statements (unaudited):   
 

Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006

   18
 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006

   19
 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2007 and 2006

   20
 

Notes to Consolidated Financial Statements

   21
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations    40
Item 3   Quantitative and Qualitative Disclosures About Market Risk    55
Item 4   Controls and Procedures    56
PART II   OTHER INFORMATION   
Item 1   Legal Proceedings    56
Item 1A   Risk Factors    56
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds    56
Item 3   Default Upon Senior Securities    56
Item 4   Submission of Matters to a Vote of Security Holders    56
Item 5   Other Information    57
Item 6   Exhibits    57

 

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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,
2007
    December 31,
2006
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 2,524     $ 3,939  

Trade and other receivables

     4,373       5,364  

Inventories

     4,596       4,677  

Prepaid rent

     3,650       4,130  

Prepaid expenses and other current assets

     6,413       5,367  

Refundable income taxes

     —         2,806  

Deferred income taxes

     4,539       4,539  
                

Total current assets

     26,095       30,822  

Property and equipment, net

     196,302       182,742  

Franchise rights, net (Note 4)

     81,660       83,268  

Goodwill (Note 4)

     124,934       124,934  

Intangible assets, net (Note 4)

     1,031       1,175  

Franchise agreements, at cost less accumulated amortization of $5,524 and $5,431, respectively

     5,733       5,793  

Deferred income taxes

     11,345       11,136  

Other assets

     11,852       12,989  
                

Total assets

   $ 458,952     $ 452,859  
                
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 1,681     $ 2,477  

Accounts payable

     20,956       17,860  

Accrued interest

     7,528       7,861  

Accrued payroll, related taxes and benefits

     16,414       18,445  

Accrued income taxes payable

     1,152       —    

Accrued real estate taxes

     3,352       4,102  

Other liabilities

     10,806       10,623  
                

Total current liabilities

     61,889       61,368  

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

     299,711       297,432  

Lease financing obligations (Note 9)

     54,258       58,571  

Deferred income—sale-leaseback of real estate

     30,595       31,391  

Accrued postretirement benefits (Note 8)

     6,754       6,370  

Other liabilities (Note 7)

     24,149       23,494  
                

Total liabilities

     477,356       478,626  

Commitments and contingencies (Note 12)

    

Stockholders’ deficit:

    

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

     —         —    

Voting common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding—21,550,827 shares at both dates

     216       216  

Additional paid-in capital

     (2,420 )     (3,108 )

Accumulated deficit

     (15,058 )     (21,733 )

Accumulated other comprehensive loss

     (1,001 )     (1,001 )

Treasury stock, at cost

     (141 )     (141 )
                

Total stockholders’ deficit

     (18,404 )     (25,767 )
                

Total liabilities and stockholders’ deficit

   $ 458,952     $ 452,859  
                

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, 2007 AND 2006

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

(Unaudited)

 

     Three months ended June 30,    Six months ended June 30,
     2007    2006    2007     2006

Revenues:

          

Restaurant sales

   $ 200,117    $ 190,252    $ 387,983     $ 372,465

Franchise royalty revenues and fees

     332      329      669       659
                            

Total revenues

     200,449      190,581      388,652       373,124
                            

Costs and expenses:

          

Cost of sales

     57,639      53,386      110,196       105,299

Restaurant wages and related expenses (including stock-based compensation expense of $39, $0, $76 and $0, respectively)

     58,562      55,298      114,510       108,960

Restaurant rent expense

     10,907      9,159      21,586       18,179

Other restaurant operating expenses

     28,270      27,441      55,954       53,889

Advertising expense

     8,449      7,248      16,984       14,160

General and administrative (including stock-based compensation expense of $315, $0, $633 and $0, respectively)

     13,305      11,977      26,451       24,351

Depreciation and amortization

     7,887      8,463      15,578       16,780

Impairment losses (Note 3)

     69      20      69       244

Other income (Note 10)

     —        —        (347 )     —  
                            

Total operating expenses

     185,088      172,992      360,981       341,862
                            

Income from operations

     15,361      17,589      27,671       31,262

Interest expense

     7,601      13,011      15,957       24,400

Loss on extinguishment of debt (Note 5)

     —        —        1,485       —  
                            

Income before income taxes

     7,760      4,578      10,229       6,862

Provision for income taxes (Note 6)

     2,662      1,489      3,554       2,248
                            

Net income

   $ 5,098    $ 3,089    $ 6,675     $ 4,614
                            

Basic and diluted net income per share (Note 13)

   $ 0.24    $ 0.19    $ 0.31     $ 0.29

Basic weighted average common shares outstanding (Note 13)

     21,550,827      15,892,018      21,550,827       15,894,900

Diluted weighted average common shares outstanding (Note 13)

     21,565,208      15,892,018      21,561,795       15,894,900

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, 2007 AND 2006

(In thousands of dollars)

(Unaudited)

 

     2007     2006  

Cash flows provided from operating activities:

    

Net income

   $ 6,675     $ 4,614  

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

    

Loss on disposals of property and equipment

     109       —    

Stock-based compensation expense

     709       —    

Depreciation and amortization

     15,578       16,780  

Amortization of deferred financing costs

     638       742  

Amortization of unearned purchase discounts

     (1,078 )     (1,077 )

Amortization of deferred gains from sale-leaseback transactions

     (969 )     (338 )

Impairment losses

     69       244  

Gain on settlements of lease financing obligations

     (163 )     (308 )

Accretion of interest on lease financing obligations

     262       153  

Deferred income taxes

     (210 )     (1,349 )

Loss on extinguishment of debt

     1,485       —    

Changes in other operating assets and liabilities

     6,482       3,073  
                

Net cash provided from operating activities

     29,587       22,534  
                

Cash flows provided from (used for) investing activities:

    

Capital expenditures:

    

New restaurant development

     (18,720 )     (12,066 )

Restaurant remodeling

     (3,244 )     (3,345 )

Other restaurant capital expenditures

     (4,270 )     (3,709 )

Corporate and restaurant information systems

     (1,493 )     (1,002 )
                

Total capital expenditures

     (27,727 )     (20,122 )

Properties purchased for sale-leaseback

     (2,461 )     (1,655 )

Deposit on properties purchased for sale-leaseback

     —         (1,616 )

Proceeds from sale-leaseback transactions

     2,473       26,118  

Proceeds from sales of other properties

     979       —    
                

Net cash provided from (used for) investing activities

     (26,736 )     2,725  
                

Cash flows used for financing activities:

    

Repayment of term loans under prior credit facility

     (118,400 )     —    

Borrowings on revolving credit facility

     11,600       —    

Repayments on revolving credit facility

     (11,600 )     —    

Proceeds from new senior credit facility

     120,000       —    

Scheduled principal payments on term loans

     —         (1,100 )

Principal pre-payments on term loans

     —         (17,000 )

Principal payments on capital leases

     (205 )     (208 )

Expenses from initial public offering

     (21 )     —    

Financing costs associated with issuance of debt

     (1,228 )     (4 )

Settlement of lease financing obligations

     (4,412 )     (14,225 )
                

Net cash used for financing activities

     (4,266 )     (32,537 )
                

Net decrease in cash and cash equivalents

     (1,415 )     (7,278 )

Cash and cash equivalents, beginning of period

     3,939       9,331  
                

Cash and cash equivalents, end of period

   $ 2,524     $ 2,053  
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 12,912     $ 15,051  

Interest paid on lease financing obligations

   $ 2,476     $ 7,353  

Increase in accruals for capital expenditures

   $ 196     $ 205  

Income taxes paid (refunded), net

   $ (195 )   $ 1,049  

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

   $ —       $ 13,582  

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

   $ —       $ 22,744  

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

 

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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

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

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

Business Description. At June 30, 2007 the Company operated, as franchisee, 326 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At June 30, 2007, the Company also owned and operated 80 Pollo Tropical restaurants of which 77 were located in Florida and three were located in the New York City metropolitan area, two of which were located in northern New Jersey and one of which was located in Brooklyn, New York and franchised a total of 27 Pollo Tropical restaurants, consisting of 23 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At June 30, 2007, the Company owned and operated 142 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in Georgia.

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 December 31, 2006 and January 1, 2006 will be referred to as the fiscal years ended December 31, 2006 and 2005, respectively. Similarly, all references herein to the three and six months ended July 1, 2007 and July 2, 2006 will be referred to as the three and six months ended June 30, 2007 and June 30, 2006, respectively. The years ended December 31, 2006 and 2005 each contained 52 weeks and the three and six months ended June 30, 2007 and 2006 contained 13 and 26 weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2007 and 2006 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, 2007 and 2006 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, 2006 contained in the Company’s 2006 Annual Report on Form 10-K. The December 31, 2006 balance sheet data is derived from those audited financial statements.

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

 

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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)

 

2. Stock-Based Compensation

The Company adopted an incentive stock plan in 2006 (the “2006 Plan”) under which incentive stock options, non-qualified stock options and restricted shares may be granted to employees and non-employee directors. During the three months ended June 30, 2007, there were an aggregate of 1,000 restricted shares granted to certain employees and an aggregate of 10,500 incentive stock options granted to three non-employee directors under the 2006 Plan. In December 2006, the Company granted incentive stock options, non-qualified stock options and restricted shares under the 2006 Plan. The stock options granted to employees generally vest 20% per year and expire seven years from the date of grant. Restricted shares granted to employees generally vest 33% per year for three years and restricted shares granted to non-employee directors generally vest at 20% per year.

Stock-based compensation related to these grants was $0.4 million and $0.7 million in the three and six months ended June 30, 2007, respectively and the income tax benefit recognized in the consolidated statement of operations for stock-based compensation was $0.1 million and $0.2 million for the three and six months ended June 30, 2007, respectively. There were no stock options issued or stock-based compensation expense recorded in the three or six months ended June 30, 2006.

As of June 30, 2007, the total non-vested stock-based compensation expense relating to the stock options and restricted stock was approximately $4.7 million and the Company expects to record an additional $0.8 million as compensation expense for the remainder of 2007. The remaining weighted average vesting period for the stock options is 3.89 years and for the restricted shares is approximately 3.09 years at June 30, 2007.

Stock Options

A summary of all option activity for the six months ended June 30, 2007 was as follows:

 

     2006 Plan
     Number of
Options
   

Weighted

Average

Exercise Price

  

Average

Remaining

Contractual
Life

  

Aggregate

Intrinsic

Value

(in thousands) (1)

Options outstanding at January 1, 2007

   1,241,750     $ 14.30      

Options granted

   10,500       15.81      

Options exercised

   —         —        

Options forfeited

   (18,500 )     14.30      
              

Options outstanding at June 30, 2007

   1,233,750     $ 14.31    6.51    $ 1,377
              

Expected to vest at June 30, 2007

   1,217,441     $ 14.31    6.51    $ 1,357
              

Options exercisable at June 30, 2007

   —       $ —      —      $ —  
              

(1) The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at June 30 and the grant price for only those awards that have a grant price that is less than the market price of the Company’s common stock at June 30.

Restricted Shares

The restricted stock activity for the six months ended June 30, 2007 was as follows:

 

     Shares    

Weighted

Average

Grant Date

Fair Value

Nonvested at January 1, 2007

   75,800     $ 13.00

Shares granted

   1,000     $ 16.00

Shares vested

   (200 )   $ 13.00

Shares forfeited

   (3,500 )   $ 13.00
        

Nonvested at June 30, 2007

   73,100     $ 13.04
        

 

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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 fair value of restricted shares granted is determined based on the Company’s closing stock price on the date of grant.

3. Impairment of Long-Lived Assets

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 undiscounted future cash flows from the related long-lived assets 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. 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 the three and six months ended June 30, 2007 and 2006, the Company recorded impairment losses on long-lived assets for its segments as follows:

 

     Three Months Ended
June 30,
  

Six Months Ended

June 30,

     2007    2006    2007    2006

Burger King

   $ 14    $ —      $ 14    $ 224

Taco Cabana

     55      20      55      20
                           
   $ 69    $ 20    $ 69    $ 244
                           

4. Goodwill, Franchise Rights and Intangible Assets

Goodwill. Goodwill is reviewed for impairment annually, or more frequently when events and circumstances indicate that the carrying amounts may be impaired. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values. Goodwill balances are summarized below:

 

     Pollo
Tropical
   Taco
Cabana
   Burger
King
   Total

Goodwill at June 30, 2007 and December 31, 2006

   $ 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 at January 1, 2002 plus one twenty-year renewal period. The Company assesses the potential impairment of 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 future cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no impairment charges against franchise rights for the three and six months ended June 30, 2007 and 2006.

Amortization expense related to Burger King franchise rights was $804 and $873 for the three months ended June 30, 2007 and 2006, respectively. Amortization expense related to Burger King franchise rights was $1,608 for in each of the six months ended June 30, 2007 and 2006. The estimated amortization expense for the year ending December 31, 2007 and for each of the five succeeding years is $3,216.

 

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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)

 

Intangible Assets. The Company acquired four Taco Cabana restaurants from a franchisee in 2005. Under Emerging Issues Task Force Issue No. 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”), certain reacquired rights, including the right to the acquirer’s trade name, are required to be recognized as intangible assets apart from goodwill. The Company allocated $1.6 million of the purchase price to this intangible asset. The Company recorded amortization expense relating to the intangible asset of approximately $71 and $72 for the three months ended June 30, 2007 and 2006, respectively. Amortization for each of the six months ended June 30, 2007 and 2006 was $144. The Company expects the annual amortization expense for the year ending December 31, 2007 and for each of five years ending 2008 through 2012 to be $289, $211, $133, $125, $117 and $99, respectively.

 

     June 30, 2007    December 31, 2006
    

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Gross

Carrying

Amount

  

Accumulated

Amortization

Intangible assets

   $ 1,610    $ 579    $ 1,610    $ 435

5. Long-term Debt

Long-term debt at June 30, 2007 and December 31, 2006 consisted of the following:

 

     June 30,
2007
    December 31,
2006
 

Collateralized:

    

Senior Credit Facility-Term loan B facility

   $ —       $ 118,400  

Senior Credit Facility-Term loan A facility

     120,000    

Unsecured:

    

9% Senior Subordinated Notes

     180,000       180,000  

Capital leases

     1,392       1,509  
                
     301,392       299,909  

Less: current portion

     (1,681 )     (2,477 )
                
   $ 299,711     $ 297,432  
                

On March 9, 2007, Carrols terminated its senior credit facility and entered into a new senior credit facility with a syndicate of lenders. Carrols’ new senior credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on September 30, 2012 if Carrols’ 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving 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 A borrowings and an additional $4.3 million of revolver borrowings from this facility were used to repay all outstanding borrowings and other obligations under Carrols’ prior senior credit facility and to pay certain fees and expenses incurred in connection with the new senior credit facility. The Company also recorded a $1.5 million loss on extinguishment of debt in the six months ended June 30, 2007 for the write-off of deferred financing costs related to the prior senior credit facility.

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

1) the applicable margin ranging from 0% to 0.25% based on Carrols’ senior leverage ratio (as defined in the new 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.

Term loan A borrowings shall be due and payable in quarterly installments, beginning on June 30, 2008 as follows:

1) four quarterly installments of $1.5 million beginning on June 30, 2008;

 

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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)

 

2) eight quarterly installments of $3.0 million beginning on June 30, 2009;

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

4) four quarterly installments of $18.0 million beginning on June 30, 2012.

Under the new senior credit facility, Carrols is also required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an initial amount equal to 50% of Excess Cash Flow (as defined in the new 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.

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

At June 30, 2007, $120.0 million principal amount of term loan borrowings were outstanding under the term loan A facility and no borrowings were outstanding under the revolving credit facility. After reserving $16.0 million for letters of credit guaranteed by the facility, $49.0 million was available for borrowings under the revolving credit facility at June 30, 2007. The Company was in compliance with the covenants under its senior credit facility as of June 30, 2007.

On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013, which are referred to herein as the “senior subordinated notes”. Restrictive covenants under the senior subordinated notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. At both June 30, 2007 and December 31, 2006, $180.0 million principal amount of the senior subordinated notes was outstanding.

6. Income Taxes

The income tax provision for the three and six months ended June 30, 2007 and 2006 was comprised of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  

Current

   $ 2,872     $ 2,502     $ 3,764     $ 3,597  

Deferred

     (210 )     (1,013 )     (210 )     (1,349 )
                                
   $ 2,662     $ 1,489     $ 3,554     $ 2,248  
                                

The provision for income taxes for the three and six months ended June 30, 2007 was derived using an estimated effective annual income tax rate for 2007 of 36.0% as well as the effect of any discrete tax items occurring in those periods. The tax provision for the three and six months ended June 30, 2007 includes a reduction of expense of $0.4 million related to the recognition of additional employment tax credits. $0.2 million of expense related to a New York state income tax audit assessment and $0.1 million of expense associated with changes in New York state tax legislation enacted in the second quarter of 2007. The net reduction of income tax expense of $0.1 million for these items was recorded in the second quarter.

The provision for income taxes for the three and six months ended June 30, 2006 was derived using an estimated effective annual income tax rate for 2006 of 33.5% as well as the effect of any discrete tax items occurring in those periods. There were no discrete tax items affecting the provision for income taxes in the three and six months ended June 30, 2006.

The Company adopted the provisions of Financial Standards Accounting Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) and interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in its consolidated financial statements. As of the adoption date of January 1, 2007, the Company had $0.6 million of unrecognized tax benefits. At June 30, 2007, the Company had $0.5 million of unrecognized tax benefits, all of which would reduce the Company’s effective tax rate if recognized.

 

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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 Company recognized interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2007, the Company had approximately $0.1 million of accrued interest related to uncertain tax positions.

The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject. It is not possible to reasonably estimate any possible change in the unrecognized tax benefits within the next twelve months.

On July 12, 2007, the Michigan Business Tax (the “MBT Act”) was signed into law, which provides a comprehensive restructuring of Michigan’s principal business taxes effective January 1, 2008. The MBT Act replaces the Michigan Single Business Tax that is scheduled to expire at the end of 2007. The Company is currently evaluating the impact of this law on its consolidated financial statements.

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2007 and December 31, 2006 consisted of the following:

 

     June 30,
2007
   December 31,
2006

Unearned purchase discounts

   $ 3,412    $ 4,526

Accrued occupancy costs

     9,203      8,683

Accrued workers’ compensation costs

     4,923      4,595

Other

     6,611      5,690
             
   $ 24,149    $ 23,494
             

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At June 30, 2007 and December 31, 2006, the Company had $0.6 million and $0.7 million in lease liability reserves, respectively, for remaining locations that are included in accrued occupancy costs.

The following table presents the activity in the exit cost reserve for the six months ended June 30, 2007:

 

     Six Months Ended
June 30, 2007
 

Balance, beginning of period

   $ 656  

Payments

     (63 )
        

Balance, end of period

   $ 593  
        

8. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management salaried employees. A December 31 measurement date is used for postretirement benefits.

The following summarizes the components of net periodic benefit cost:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007    2006     2007    2006  

Components of net periodic benefit cost:

          

Service cost

   $ 128    $ 118     $ 246    $ 236  

Interest cost

     110      83       203      166  

Amortization of gains and losses

     31      21       48      42  

Amortization of unrecognized prior service cost

     10      (7 )     3      (14 )
                              

Net periodic postretirement benefit cost

   $ 279    $ 215     $ 500    $ 430  
                              

 

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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)

 

During the three and six months ended June 30, 2007, the Company made contributions of $36 and $100 to its postretirement plan. The Company expects to make additional contributions during 2007.

9. Lease Financing Obligations

The Company entered into sale-leaseback transactions in various years involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, have been classified as financing transactions under Statement of Financial Accounting Standards (“SFAS”) No. 98, “Accounting for Leases” (“SFAS 98”). Under the financing method, the assets remain on the Company’s consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

During the second quarter of 2007, the Company exercised its right of first refusal under the leases for five restaurant properties previously accounted for as lease financing obligations and purchased these properties from the lessor. As a result, the Company reduced its lease financing obligations by $4.4 million. The Company also recorded a gain of $0.2 million as a reduction of interest expense which represented the net amount by which the lease financing obligations exceeded the purchase price of the restaurant properties acquired.

During the second and third quarters of 2006, the Company refinanced 14 restaurant properties previously accounted for as lease financing obligations and amended lease agreements for 34 restaurant properties to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting. As a result of these transactions in 2006, the Company reduced its lease financing obligations by $52.8 million, reduced its assets under lease financing obligations by $36.2 million and recorded deferred gains of $18.3 million which are being amortized as a reduction to rent expense over the remaining term of the underlying leases, which is generally 20 years.

As a result of these transactions, rent expense in the three and six months ended June 30, 2007 includes an additional $1.0 million and $2.0 million of expense, respectively, compared to the three and six months ended June 30, 2006. Also as a result of these transactions, the three and six months ended June 30, 2006 includes additional depreciation expense of $0.3 million and $0.6 million and additional interest expense of $1.3 million and $2.6 million as compared to the three and six months ended June 30, 2007. Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended June 30, 2007 and 2006 was $1.3 million and $4.5 million, respectively and for the six months ended June 30, 2007 and 2006 was $2.8 million and $7.3 million, respectively.

10. Other Income

In the first quarter of 2007, the Company recorded a gain of $0.3 million related to sale of one of its Taco Cabana restaurant properties.

11. 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. The Company’s Burger King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a quick-casual restaurant chain featuring grilled marinated chicken and Caribbean style “made from scratch” side dishes. Pollo Tropical’s core markets are located in South and Central Florida. Taco Cabana is a quick-casual restaurant chain featuring fresh Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabana’s core markets are primarily located in Texas.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The following table includes Segment EBITDA which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense and other income and expense.

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, 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, 2007:

              

Total revenues

   $ 42,747    $ 60,774    $ 96,928    $ —      $ 200,449

Cost of sales

     14,149      17,975      25,515      —        57,639

Restaurant wages and related expenses

     10,634      17,394      30,495      39      58,562

General and administrative expenses (1)

     2,547      2,728      7,715      315      13,305

Depreciation and amortization

     1,669      2,121      3,758      339      7,887

Segment EBITDA

     7,254      8,024      8,393      

Capital expenditures, including acquisitions

     6,810      5,387      3,347      1,302      16,846

June 30, 2006:

              

Total revenues

   $ 38,478    $ 58,681    $ 93,422    $ —      $ 190,581

Cost of sales

     12,367      17,015      24,004      —        53,386

Restaurant wages and related expenses

     9,530      16,506      29,262      —        55,298

General and administrative expenses (1)

     2,081      2,901      6,995      —        11,977

Depreciation and amortization

     1,418      2,033      4,676      336      8,463

Segment EBITDA

     7,669      8,121      10,282      

Capital expenditures, including acquisitions

     3,720      3,594      2,165      525      10,004

Six Months Ended

                        

June 30, 2007:

              

Total revenues

   $ 84,286    $ 118,968    $ 185,398    $ —      $ 388,652

Cost of sales

     27,541      34,953      47,702      —        110,196

Restaurant wages and related expenses

     20,965      33,874      59,595      76      114,510

General and administrative expenses (1)

     5,036      5,601      15,181      633      26,451

Depreciation and amortization

     3,164      4,174      7,601      639      15,578

Segment EBITDA

     14,086      15,375      14,219      

Capital expenditures, including acquisitions

     13,240      8,043      4,951      1,493      27,727

June 30, 2006:

              

Total revenues

   $ 77,064    $ 113,921    $ 182,139    $ —      $ 373,124

Cost of sales

     24,973      33,025      47,301      —        105,299

Restaurant wages and related expenses

     18,973      32,235      57,752      —        108,960

General and administrative expenses (1)

     4,266      5,857      14,228      —        24,351

Depreciation and amortization

     2,782      4,063      9,276      659      16,780

Segment EBITDA

     15,303      15,815      17,168      

Capital expenditures, including acquisitions

     8,003      6,838      4,279      1,002      20,122

Identifiable Assets:

              

At June 30, 2007

   $ 57,470    $ 74,579    $ 152,398    $ 174,505    $ 458,952

At December 31, 2006

     46,617      71,601      155,272      179,369      452,859

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2007    2006    2007     2006

Segment EBITDA:

          

Pollo Tropical

   $ 7,254    $ 7,669    $ 14,086     $ 15,303

Taco Cabana

     8,024      8,121      15,375       15,815

Burger King

     8,393      10,282      14,219       17,168
                            

Subtotal

     23,671      26,072      43,680       48,286

Less:

          

Depreciation and amortization

     7,887      8,463      15,578       16,780

Impairment losses

     69      20      69       244

Interest expense

     7,601      13,011      15,957       24,400

Loss on extinguishment of debt

     —        —        1,485       —  

Provision for income taxes

     2,662      1,489      3,554       2,248

Stock-based compensation expense

     354      —        709       —  

Other income

     —        —        (347 )     —  
                            

Net income

   $ 5,098    $ 3,089    $ 6,675     $ 4,614
                            

12. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against Carrols. The complaint alleged that Carrols engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC identified approximately 450 individuals (which was subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from Carrols.

On April 20, 2005, the Court issued a decision and order granting Carrols’ Motion for Summary Judgment that Carrols filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed, however the Court noted that it was not ruling on the claims, if any, that individual employees might have against Carrols. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements.

On February 27, 2006, Carrols filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC has asserted that, notwithstanding the Court’s dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is awaiting the Court’s decision on Carrols’ summary judgment motion. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

On November 30, 2002, four former hourly employees commenced a lawsuit against Carrols in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that Carrols violated certain minimum wage laws under the Federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for Carrols. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. Carrols has since filed a Motion for Summary Judgment as to the existing plaintiffs that the Court has under consideration. On January 19, 2007, plaintiffs re-filed the Motion to certify and for National Discovery. Carrols has opposed such Motions. Carrols has also moved to disqualify the Plaintiffs from representing the class and to strike the purported evidence presented in support of the motion to certify. The various motions are not yet set for hearing. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any. Consequently, it is not possible to predict what adverse impact, if any, this case could have on the Company’s consolidated financial statements. Carrols intends to continue to contest this case vigorously.

 

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

13. 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.

The computation of diluted net income per share excludes options to purchase 631,375 shares of common stock in each of the three and six months ended June 30, 2007 because the exercise price of these options was greater than the average market price of the common shares in the periods and therefore, they were antidilutive. In addition, options to purchase 620,875 shares of common stock are excluded from the computation of diluted net income per share in each of the three and six months ended June 30, 2007 as they were antidilutive under the treasury stock method.

In connection with the Company’s initial public offering in 2006, the Company authorized an 11.288 for-one stock split on November 21, 2006 which became effective on December 8, 2006. Accordingly, basic and diluted shares for all periods presented have been calculated based on the average shares outstanding, as adjusted for the stock split.

The following table is a reconciliation of the 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,
     2007    2006    2007    2006

Basic net income per share:

           

Net income

   $ 5,098    $ 3,089    $ 6,675    $ 4,614

Weighted average common shares outstanding

     21,550,827      15,892,018      21,550,827      15,894,900

Basic net income per share

   $ 0.24    $ 0.19    $ 0.31    $ 0.29

Diluted net income per share:

           

Net income for diluted net income per share

   $ 5,098    $ 3,089    $ 6,675    $ 4,614

Shares used in computed basic net income per share

     21,550,827      15,892,018      21,550,827      15,894,900

Dilutive effect of stock options - treasury stock method

     14,381      —        10,968      —  
                           

Shares used in computed diluted net income per share

     21,565,208      15,892,018      21,561,795      15,894,900
                           

Diluted net income per share

   $ 0.24    $ 0.19    $ 0.31    $ 0.29
                           

14. Recent Accounting Developments

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. The statement applies whenever other pronouncements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is evaluating the impact the adoption of SFAS 157 will have on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is currently evaluating the impact the adoption of SFAS 159 will have on its financial statements.

In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“the FSP”). The FSP provides guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under the FSP, a tax position could be effectively

 

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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)

 

settled if a taxing authority has completed all of its required or expected examination procedures, if the entity does not intend to appeal or litigate the result and it is remote that the taxing authority would examine or re-examine the tax position. Application of the FSP shall be upon the initial adoption date of FIN 48. The FSP did not have a material impact on the Company’s consolidated financial statements.

 

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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,
2007
    December 31,
2006
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 2,524     $ 3,939  

Trade and other receivables

     4,373       5,364  

Inventories

     4,596       4,677  

Prepaid rent

     3,650       4,130  

Prepaid expenses and other current assets

     6,413       5,367  

Refundable income taxes

     —         2,806  

Deferred income taxes

     4,539       4,539  
                

Total current assets

     26,095       30,822  

Property and equipment, net

     196,302       182,742  

Franchise rights, net (Note 4)

     81,660       83,268  

Goodwill (Note 4)

     124,934       124,934  

Intangible assets, net (Note 4)

     1,031       1,175  

Franchise agreements, at cost less accumulated amortization of $5,524 and $5,431, respectively

     5,733       5,793  

Deferred income taxes

     11,345       11,136  

Other assets

     11,852       12,989  
                

Total assets

   $ 458,952     $ 452,859  
                
LIABILITIES AND STOCKHOLDER’S DEFICIT     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 1,681     $ 2,477  

Accounts payable

     20,956       17,860  

Accrued interest

     7,528       7,861  

Accrued payroll, related taxes and benefits

     16,414       18,445  

Accrued income taxes payable

     1,152       —    

Accrued real estate taxes

     3,352       4,102  

Other liabilities

     10,806       10,623  
                

Total current liabilities

     61,889       61,368  

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

     299,711       297,432  

Lease financing obligations (Note 9)

     54,258       58,571  

Deferred income—sale-leaseback of real estate

     30,595       31,391  

Accrued postretirement benefits (Note 8)

     6,754       6,370  

Other liabilities (Note 7)

     24,114       23,462  
                

Total liabilities

     477,321       478,594  

Commitments and contingencies (Note 12)

    

Stockholder’s deficit:

    

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

     —         —    

Additional paid-in capital

     (9,913 )     (10,601 )

Accumulated deficit

     (7,455 )     (14,133 )

Accumulated other comprehensive loss

     (1,001 )     (1,001 )
                

Total stockholder’s deficit

     (18,369 )     (25,735 )
                

Total liabilities and stockholder’s deficit

   $ 458,952     $ 452,859  
                

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, 2007 AND 2006

(In thousands of dollars)

(Unaudited)

 

     Three months ended
June 30,
   Six months ended
June 30,
     2007    2006    2007     2006

Revenues:

          

Restaurant sales

   $ 200,117    $ 190,252    $ 387,983     $ 372,465

Franchise royalty revenues and fees

     332      329      669       659
                            

Total revenues

     200,449      190,581      388,652       373,124
                            

Costs and expenses:

          

Cost of sales

     57,639      53,386      110,196       105,299

Restaurant wages and related expenses (including stock-based compensation expense of $39, $0, $76 and $0, respectively)

     58,562      55,298      114,510       108,960

Restaurant rent expense

     10,907      9,159      21,586       18,179

Other restaurant operating expenses

     28,270      27,441      55,954       53,889

Advertising expense

     8,449      7,248      16,984       14,160

General and administrative (including stock-based compensation expense of $315, $0, $633 and $0, respectively)

     13,304      11,976      26,448       24,348

Depreciation and amortization

     7,887      8,463      15,578       16,780

Impairment losses (Note 3)

     69      20      69       244

Other income (Note 10)

     —        —        (347 )     —  
                            

Total operating expenses

     185,087      172,991      360,978       341,859
                            

Income from operations

     15,362      17,590      27,674       31,265

Interest expense

     7,601      13,011      15,957       24,400

Loss on extinguishment of debt (Note 5)

     —        —        1,485       —  
                            

Income before income taxes

     7,761      4,579      10,232       6,865

Provision for income taxes (Note 6)

     2,662      1,489      3,554       2,248
                            

Net income

   $ 5,099    $ 3,090    $ 6,678     $ 4,617
                            

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, 2007 AND 2006

(In thousands of dollars)

(Unaudited)

 

     2007     2006  

Cash flows provided from operating activities:

    

Net income

   $ 6,678     $ 4,617  

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

    

Loss on disposals of property and equipment

     109       —    

Stock-based compensation expense

     709       —    

Depreciation and amortization

     15,578       16,780  

Amortization of deferred financing costs

     638       742  

Amortization of unearned purchase discounts

     (1,078 )     (1,077 )

Amortization of deferred gains from sale-leaseback transactions

     (969 )     (338 )

Impairment losses

     69       244  

Gain on settlement of lease financing obligations

     (163 )     (308 )

Accretion of interest on lease financing obligations

     262       153  

Deferred income taxes

     (210 )     (1,349 )

Loss on extinguishment of debt

     1,485       —    

Changes in other operating assets and liabilities

     6,479       3,070  
                

Net cash provided from operating activities

     29,587       22,534  
                

Cash flows provided from (used for) investing activities:

    

Capital expenditures:

    

New restaurant development

     (18,720 )     (12,066 )

Restaurant remodeling

     (3,244 )     (3,345 )

Other restaurant capital expenditures

     (4,270 )     (3,709 )

Corporate and restaurant information systems

     (1,493 )     (1,002 )
                

Total capital expenditures

     (27,727 )     (20,122 )

Properties purchased for sale-leaseback

     (2,461 )     (1,655 )

Deposit on properties purchased for sale-leaseback

     —         (1,616 )

Proceeds from sale-leaseback transactions

     2,473       26,118  

Proceeds from sales of other properties

     979       —    
                

Net cash provided from (used for) investing activities

     (26,736 )     2,725  
                

Cash flows used for financing activities:

    

Repayment of term loans under prior credit facility

     (118,400 )     —    

Borrowings on revolving credit facility

     11,600       —    

Repayments on revolving credit facility

     (11,600 )     —    

Proceeds from new senior credit facility

     120,000       —    

Scheduled principal payments on term loans

     —         (1,100 )

Principal pre-payments on term loans

     —         (17,000 )

Principal payments on capital leases

     (205 )     (208 )

Expenses from initial public offering

     (21 )     —    

Financing costs associated with issuance of debt

     (1,228 )     (4 )

Settlement of lease financing obligations

     (4,412 )     (14,225 )
                

Net cash used for financing activities

     (4,266 )     (32,537 )
                

Net decrease in cash and cash equivalents

     (1,415 )     (7,278 )

Cash and cash equivalents, beginning of period

     3,939       9,331  
                

Cash and cash equivalents, end of period

   $ 2,524     $ 2,053  
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 12,912     $ 15,051  

Interest paid on lease financing obligations

   $ 2,476     $ 7,353  

Increase in accruals for capital expenditures

   $ 196     $ 205  

Income taxes paid (refunded), net

   $ (195 )   $ 1,049  

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

   $ —       $ 13,582  

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

   $ —       $ 22,744  

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 amounts)

1. Basis of Presentation

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”). All intercompany transactions have been eliminated in consolidation.

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

Business Description. At June 30, 2007 the Company operated, as franchisee, 326 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At June 30, 2007, the Company also owned and operated 80 Pollo Tropical restaurants of which 77 were located in Florida and three were located in the New York City metropolitan area, two of which were located in northern New Jersey, and one of which was located in Brooklyn, New York and franchised a total of 27 Pollo Tropical restaurants, consisting of 23 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At June 30, 2007, the Company owned and operated 142 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in Georgia.

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 December 31, 2006 and January 1, 2006 will be referred to as the fiscal years ended December 31, 2006 and 2005, respectively. Similarly, all references herein to the three and six months ended July 1, 2007 and July 2, 2006 will be referred to as the three and six months ended June 30, 2007 and June 30, 2006, respectively. The years ended December 31, 2006 and 2005 each contained 52 weeks and the three and six months ended June 30, 2007 and 2006 contained 13 and 26 weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2007 and 2006 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, 2007 and 2006 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, 2006 contained in the Company’s 2006 Annual Report on Form 10-K. The December 31, 2006 balance sheet data is derived from those audited financial statements.

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

Earnings Per Share Presentation. The guidance of SFAS No. 128, “Earnings Per Share,” requires presentation of earnings per share by 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.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

2. Stock-Based Compensation

Carrols Restaurant Group adopted an incentive stock plan in 2006 (the “2006 Plan”) under which incentive stock options, non-qualified stock options and restricted shares may be granted to employees and non-employee directors. During the three months ended June 30, 2007, there were an aggregate of 1,000 restricted shares granted to certain employees and an aggregate of 10,500 incentive stock options granted to three non-employee directors under the 2006 Plan. In December 2006, Carrols Restaurant Group granted incentive stock options, non-qualified stock options and restricted shares under the 2006 Plan. The stock options granted generally vest at 20% per year and expire seven years from the date of grant. Restricted shares granted to employees generally vest 33% per year for three years and restricted shares granted to non-employee directors generally vest at 20% per year.

Stock-based compensation related to these grants was $0.4 million and $0.7 million in the three and six months ended June 30, 2007, respectively and the income tax benefit recognized in the consolidated statement of operations for stock-based compensation was $0.1 million and $0.2 million for the three and six months ended June 30, 2007, respectively. There were no stock options issued or stock-based compensation expense recorded in the three or six months ended June 30, 2006.

As of June 30, 2007, the total non-vested stock-based compensation expense relating to the stock options and restricted stock was approximately $4.7 million and the Company expects to record an additional $0.8 million as compensation expense for the remainder of 2007. The remaining weighted average vesting period for the stock options is 3.89 years and for the restricted shares is approximately 3.09 years at June 30, 2007.

Stock Options

A summary of all option activity for the six months ended June 30, 2007 was as follows:

 

     2006 Plan
   Number of
Options
    Weighted
Average
Exercise Price
   Average
Remaining
Contractual
Life
  

Aggregate
Intrinsic Value

(in thousands) (1)

Options outstanding at January 1, 2007

   1,241,750     $ 14.30      

Options granted

   10,500       15.81      

Options exercised

   —         —        

Options forfeited

   (18,500 )     14.30      
              

Options outstanding at June 30, 2007

   1,233,750     $ 14.31    6.51    $ 1,377
              

Expected to vest at June 30, 2007

   1,217,441     $ 14.31    6.51    $ 1,357
              

Options exercisable at June 30, 2007

   —       $ —      —      $ —  
              

(1) The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at June 30 and the grant price for only those awards that have a grant price that is less than the market price of the Carrols Restaurant Group’s common stock at June 30.

Restricted Shares

The restricted stock activity for the six months ended June 30, 2007 was as follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value

Nonvested at January 1, 2007

   75,800     $ 13.00

Shares granted

   1,000     $ 16.00

Shares vested

   (200 )   $ 13.00

Shares forfeited

   (3,500 )   $ 13.00
        

Nonvested at June 30, 2007

   73,100     $ 13.04
        

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

The fair value of restricted shares granted is determined based on the Company’s closing stock price on the date of grant.

3. Impairment of Long-Lived Assets

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 undiscounted future cash flows from the related long-lived assets 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. 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 the three and six months ended June 30, 2007 and 2006, the Company recorded impairment losses on long-lived assets for its segments as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2007    2006    2007    2006

Burger King

   $ 14    $ —      $ 14    $ 224

Taco Cabana

     55      20      55      20
                           
   $ 69    $ 20    $ 69    $ 244
                           

4. Goodwill, Franchise Rights and Intangible Assets

Goodwill. Goodwill is reviewed for impairment annually, or more frequently when events and circumstances indicate that the carrying amounts may be impaired. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values. Goodwill balances are summarized below:

 

     Pollo
Tropical
   Taco
Cabana
   Burger
King
   Total

Goodwill at June 30, 2007 and December 31, 2006

   $ 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 at January 1, 2002 plus one twenty-year renewal period. The Company assesses the potential impairment of 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 future cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no impairment charges against franchise rights for the three and six months ended June 30, 2007 and 2006.

Amortization expense related to Burger King franchise rights was $804 and $873 for the three months ended June 30, 2007 and 2006, respectively. Amortization expense related to Burger King franchise rights was $1,608 for in each of the six months ended June 30, 2007 and 2006. The estimated amortization expense for the year ending December 31, 2007 and for each of the five succeeding years is $3,216.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

Intangible Assets. The Company acquired four Taco Cabana restaurants from a franchisee in 2005. Under Emerging Issues Task Force Issue No. 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”), certain reacquired rights, including the right to the acquirer’s trade name, are required to be recognized as intangible assets apart from goodwill. The Company allocated $1.6 million of the purchase price to this intangible asset. The Company recorded amortization expense relating to the intangible asset of approximately $71 and $72 for the three months ended June 30, 2007 and 2006, respectively. Amortization for each of the six months ended June 30, 2007 and 2006 was $144. The Company expects the annual amortization expense for the year ending December 31, 2007 and for each of five years ending 2008 through 2012 to be $289, $211, $133, $125, $117 and $99, respectively.

 

     June 30, 2007    December 31, 2006
     Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Intangible assets

   $ 1,610    $ 579    $ 1,610    $ 435

5. Long-term Debt

Long-term debt at June 30, 2007 and December 31, 2006 consisted of the following:

 

     June 30,
2007
    December 31,
2006
 

Collateralized:

    

Senior Credit Facility-Term loan B facility

   $ —       $ 118,400  

Senior Credit Facility-Term loan A facility

     120,000    

Unsecured:

    

9% Senior Subordinated Notes

     180,000       180,000  

Capital leases

     1,392       1,509  
                
     301,392       299,909  

Less: current portion

     (1,681 )     (2,477 )
                
   $ 299,711     $ 297,432  
                

On March 9, 2007, the Company terminated its senior credit facility and entered into a new senior credit facility with a syndicate of lenders. The Company’s new senior credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on September 30, 2012 if the Company’s 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving 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 A borrowings and an additional $4.3 million of revolver borrowings from this facility were used to repay all outstanding borrowings and other obligations under the Company’s prior senior credit facility and to pay certain fees and expenses incurred in connection with the new senior credit facility. The Company also recorded a $1.5 million loss on extinguishment of debt in the six months ended June 30, 2007 for the write-off of deferred financing costs related to the prior senior credit facility.

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

1) the applicable margin ranging from 0% to 0.25% based on the Company’s senior leverage ratio (as defined in the new 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.

Term loan A borrowings shall be due and payable in quarterly installments, beginning on June 30, 2008 as follows:

1) four quarterly installments of $1.5 million beginning on June 30, 2008;

2) eight quarterly installments of $3.0 million beginning on June 30, 2009;

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

4) four quarterly installments of $18.0 million beginning on June 30, 2012.

Under the new senior credit facility, the Company is also required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an initial amount equal to 50% of Excess Cash Flow (as defined in the new 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.

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

At June 30, 2007, $120.0 million principal amount of term loan borrowings were outstanding under the term loan A facility and no borrowings were outstanding under the revolving credit facility. After reserving $16.0 million for letters of credit guaranteed by the facility, $49.0 million was available for borrowings under the revolving credit facility at June 30, 2007. The Company was in compliance with the covenants under its new senior credit facility as of June 30, 2007.

On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013, which are referred to herein as the “senior subordinated notes.” Restrictive covenants under the senior subordinated notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. At both June 30, 2007 and December 31, 2006, $180.0 million principal amount of the senior subordinated notes was outstanding.

6. Income Taxes

The income tax provision for the three and six months ended June 30, 2007 and 2006 was comprised of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  

Current

   $ 2,872     $ 2,502     $ 3,764     $ 3,597  

Deferred

     (210 )     (1,013 )     (210 )     (1,349 )
                                
   $ 2,662     $ 1,489     $ 3,554     $ 2,248  
                                

The provision for income taxes for the three and six months ended June 30, 2007 was derived using an estimated effective annual income tax rate for 2007 of 36.0% as well as the effect of any discrete tax items occurring in those periods. The tax provision for the three and six months ended June 30, 2007 includes a reduction of expense of $0.4 million related to the recognition of additional employment tax credits, $0.2 million of expense related to a New York state income tax audit assessment and $0.1 million of expense associated with changes in New York state tax legislation enacted in the second quarter of 2007. The net reduction of income tax expense of $0.1 million for these items was recorded in the second quarter.

The provision for income taxes for the three and six months ended June 30, 2006 was derived using an estimated effective annual income tax rate for 2006 of 33.5% as well as the effect of any discrete tax items occurring in those periods. There were no discrete tax items affecting the provision for income taxes in the three and six months ended June 30, 2006.

The Company adopted the provisions of Financial Standards Accounting Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) and interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in its consolidated financial statements. As of the adoption date of January 1, 2007, the Company had $0.6 million of unrecognized tax benefits. At June 30, 2007, the Company had $0.5 million of unrecognized tax benefits, all of which would reduce the Company’s effective tax rate if recognized.

The Company recognized interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2007, the Company had approximately $0.1 million of accrued interest related to uncertain tax positions.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject. It is not possible to reasonably estimate any possible change in the unrecognized tax benefits within the next twelve months.

On July 12, 2007, the Michigan Business Tax (the “MBT Act”) was signed into law, which provides a comprehensive restructuring of Michigan’s principal business taxes effective January 1, 2008. The MBT Act replaces the Michigan Single Business Tax that is scheduled to expire at the end of 2007. The Company is currently evaluating the impact of this law on our consolidated financial statements.

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2007 and December 31, 2006 consisted of the following:

 

     June 30,
2007
   December 31,
2006

Unearned purchase discounts

   $ 3,412    $ 4,526

Accrued occupancy costs

     9,203      8,683

Accrued workers’ compensation costs

     4,923      4,595

Other

     6,576      5,658
             
   $ 24,114    $ 23,462
             

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At June 30, 2007 and December 31, 2006, the Company had $0.6 million and $0.7 million in lease liability reserves, respectively, for the remaining locations that are included in accrued occupancy costs.

The following table presents the activity in the exit cost reserve for the six months ended June 30, 2007:

 

     Six Months Ended
June 30, 2007
 

Balance, beginning of period

   $ 656  

Payments

     (63 )
        

Balance, end of period

   $ 593  
        

8. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management salaried employees. A December 31 measurement date is used for postretirement benefits.

The following summarizes the components of net periodic benefit cost:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007    2006     2007    2006  

Components of net periodic benefit cost:

          

Service cost

   $ 128    $ 118     $ 246    $ 236  

Interest cost

     110      83       203      166  

Amortization of gains and losses

     31      21       48      42  

Amortization of unrecognized prior service cost

     10      (7 )     3      (14 )
                              

Net periodic postretirement benefit cost

   $ 279    $ 215     $ 500    $ 430  
                              

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

During the three and six months ended June 30, 2007, the Company made contributions of $36 and $100 to its postretirement plan. The Company expects to make additional contributions during 2007. The Company expects to make additional contributions during 2007.

9. Lease Financing Obligations

The Company entered into sale-leaseback transactions in various years involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, have been classified as financing transactions under SFAS No. 98, “Accounting for Leases” (“SFAS 98”). Under the financing method, the assets remain on the Company’s consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

During the second quarter of 2007, the Company exercised its right of first refusal under the leases for five restaurant properties previously accounted for as lease financing obligations and purchased these properties from the lessor. As a result, the Company reduced its lease financing obligations by $4.4 million. The Company also recorded a gain of $0.2 million as a reduction of interest expense which represented the net amount by which the lease financing obligations exceeded the purchase price of the restaurant properties acquired.

During the second and third quarters of 2006, the Company refinanced 14 restaurant properties previously accounted for as lease financing obligations and amended lease agreements for 34 restaurant properties to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting. As a result of these transactions in 2006, the Company reduced its lease financing obligations by $52.8 million, reduced its assets under lease financing obligations by $36.2 million and recorded deferred gains of $18.3 million which are being amortized as a reduction to rent expense over the remaining term of the underlying leases, which is generally 20 years .

As a result of these transactions, rent expense in the three and six months ended June 30, 2007 includes an additional $1.0 million and $2.0 million of expense, respectively, compared to the three and six months ended June 30, 2006. Also as a result of these transactions, the three and six months ended June 30, 2006 includes additional depreciation expense of $0.3 million and $0.6 million and additional interest expense of $1.3 million and $2.6 million as compared to the three and six months ended June 30, 2007. Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended June 30, 2007 and 2006 was $1.3 million and $4.5 million, respectively and for the six months ended June 30, 2007 and 2006 was $2.8 million and $7.3 million, respectively.

10. Other Income

In the first quarter of 2007, the Company recorded a gain of $0.3 million related to sale of one of its Taco Cabana restaurant properties.

11. 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. The Company’s Burger King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a quick-casual restaurant chain featuring grilled marinated chicken and Caribbean style “made from scratch” side dishes. Pollo Tropical’s core markets are located in South and Central Florida. Taco Cabana is a quick-casual restaurant chain featuring fresh Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabana’s core markets are primarily located in Texas.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The following table includes Segment EBITDA which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense and other income and expense.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

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, goodwill and deferred income taxes.

 

Three Months Ended

   Pollo
Tropical
   Taco
Cabana
   Burger
King
   Other    Consolidated

June 30, 2007:

              

Total revenues

   $ 42,747    $ 60,774    $ 96,928    $ —      $ 200,449

Cost of sales

     14,149      17,975      25,515      —        57,639

Restaurant wages and related expenses

     10,634      17,394      30,495      39      58,562

General and administrative expenses (1)

     2,546      2,728      7,715      315      13,304

Depreciation and amortization

     1,669      2,121      3,758      339      7,887

Segment EBITDA

     7,255      8,024      8,393      

Capital expenditures, including acquisitions

     6,810      5,387      3,347      1,302      16,846

June 30, 2006:

              

Total revenues

   $ 38,478    $ 58,681    $ 93,422    $ —      $ 190,581

Cost of sales

     12,367      17,015      24,004      —        53,386

Restaurant wages and related expenses

     9,530      16,506      29,262      —        55,298

General and administrative expenses (1)

     2,080      2,901      6,995      —        11,976

Depreciation and amortization

     1,418      2,033      4,676      336      8,463

Segment EBITDA

     7,670      8,121      10,282      

Capital expenditures, including acquisitions

     3,720      3,594      2,165      525      10,004

Six Months Ended

                        

June 30, 2007:

              

Total revenues

   $ 84,286    $ 118,968    $ 185,398    $ —      $ 388,652

Cost of sales

     27,541      34,953      47,702      —        110,196

Restaurant wages and related expenses

     20,965      33,874      59,595      76      114,510

General and administrative expenses (1)

     5,033      5,601      15,181      633      26,448

Depreciation and amortization

     3,164      4,174      7,601      639      15,578

Segment EBITDA

     14,089      15,375      14,219      

Capital expenditures, including acquisitions

     13,240      8,043      4,951      1,493      27,727

June 30, 2006:

              

Total revenues

   $ 77,064    $ 113,921    $ 182,139    $ —      $ 373,124

Cost of sales

     24,973      33,025      47,301      —        105,299

Restaurant wages and related expenses

     18,973      32,235      57,752      —        108,960

General and administrative expenses (1)

     4,263      5,857      14,228      —        24,348

Depreciation and amortization

     2,782      4,063      9,276      659      16,780

Segment EBITDA

     15,306      15,815      17,168      

Capital expenditures, including acquisitions

     8,003      6,838      4,279      1,002      20,122

Identifiable Assets:

              

At June 30, 2007

   $ 57,470    $ 74,579    $ 152,398    $ 174,505    $ 458,952

At December 31, 2006

     46,617      71,601      155,272      179,369      452,859

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2007    2006    2007     2006

Segment EBITDA:

          

Pollo Tropical

   $ 7,255    $ 7,670    $ 14,089     $ 15,306

Taco Cabana

     8,024      8,121      15,375       15,815

Burger King

     8,393      10,282      14,219       17,168
                            

Subtotal

     23,672      26,073      43,683       48,289

Less:

          

Depreciation and amortization

     7,887      8,463      15,578       16,780

Impairment losses

     69      20      69       244

Interest expense

     7,601      13,011      15,957       24,400

Loss on extinguishment of debt

     —        —        1,485       —  

Provision for income taxes

     2,662      1,489      3,554       2,248

Stock-based compensation expense

     354      —        709       —  

Other income

     —        —        (347 )     —  
                            

Net income

   $ 5,099    $ 3,090    $ 6,678     $ 4,617
                            

12. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against the Company. The complaint alleged that the Company engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC identified approximately 450 individuals (which were subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from the Company.

On April 20, 2005, the Court issued a decision and order granting the Company’s Motion for Summary Judgment that the Company filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed, however the Court noted that it was not ruling on the claims, if any, that individual employees might have against the Company. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements.

On February 27, 2006, the Company filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC has asserted that, notwithstanding the Court’s dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is awaiting the Court’s decision on the Company’s summary judgment motion. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

On November 30, 2002, four former hourly employees commenced a lawsuit against the Company in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that the Company violated certain minimum wage laws under the Federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. The Company has since filed a Motion for Summary Judgment as to the existing plaintiffs that the Court has under consideration. On January 19, 2007, plaintiffs re-filed the Motion to certify and for National Discovery. The Company has opposed such Motions. The Company has also moved to disqualify the Plaintiffs from representing the class and to strike the purported evidence presented in support of the motion to certify. The various motions are not yet set for hearing. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any. Consequently, it is not possible to predict what adverse impact, if any, this case could have on the Company’s consolidated financial statements. The Company intends to continue to contest this case vigorously.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

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

13. Recent Accounting Developments

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. The statement applies whenever other pronouncements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is evaluating the impact the adoption of SFAS 157 will have on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is currently evaluating the impact the adoption of SFAS 159 will have on its consolidated financial statements.

In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“the FSP”). The FSP provides guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under the FSP, a tax position could be effectively settled if a taxing authority has completed all of its required or expected examination procedures, if the entity does not intend to appeal or litigate the result and it is remote that the taxing authority would examine or re-examine the tax position. Application of the FSP shall be upon the initial adoption date of FIN 48. The FSP did not have a material impact on the Company’s consolidated financial statements.

14. Guarantor Financial Statements

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

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols Realty Holdings

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

TPAQ Holding Corporation

The following supplemental financial information sets forth on a consolidating basis, balance sheets as of June 30, 2007 and December 31, 2006 for the Parent Company Only, Guarantor Subsidiaries and for the Company and the related statements of operations and cash flows for the three and six months ended June 30, 2007 and 2006.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

 

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 Emerging Issues Task Force Issue No. 90-14, “Unsecured Guarantee by Parent of Subsidiary’s Lease Payments in a Sale-Leaseback Transaction,” 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 and deferred taxes are allocated to each reporting entity as if it were to file a separate tax return. The rules followed by the reporting entity in computing its tax obligation or refund, including the effects of the alternative minimum tax, would be the same as those followed in filing a separate return with the Internal Revenue Service. However, for purposes of evaluating an entity’s ability to realize its tax attributes, the Company assesses whether it is more likely than not that those assets will be realized at the consolidated level. Any differences in the total of the income tax provision (benefit) for the Parent Company only and the Guarantor Subsidiaries, as calculated on the separate return method and the consolidated income tax provision (benefit) are eliminated in consolidation.

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

 

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CONSOLIDATING BALANCE SHEET

June 30, 2007

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 558     $ 1,966     $ —       $ 2,524  

Trade and other receivables

     1,187       3,186       —         4,373  

Inventories

     2,847       1,749       —         4,596  

Prepaid rent

     1,654       1,996       —         3,650  

Prepaid expenses and other current assets

     2,414       3,999       —         6,413  

Deferred income taxes

     2,653       1,886       —         4,539  
                                

Total current assets

     11,313       14,782       —         26,095  

Property and equipment, net

     62,911       185,910       (52,519 )     196,302  

Franchise rights, net

     81,660       —         —         81,660  

Goodwill

     1,450       123,484       —         124,934  

Intangible assets, net

     —         1,031       —         1,031  

Franchise fees, net

     5,733       —         —         5,733  

Intercompany receivable (payable)

     157,837       (158,727 )     890       —    

Investment in subsidiaries

     38,279         (38,279 )     —    

Deferred income taxes

     5,423       7,183       (1,261 )     11,345  

Other assets

     7,876       5,637       (1,661 )     11,852  
                                

Total assets

   $ 372,482     $ 179,300     $ (92,830 )   $ 458,952  
                                
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)         

Current liabilities:

        

Current portion of long-term debt

   $ 1,592     $ 89     $ —       $ 1,681  

Accounts payable

     9,869       11,087       —         20,956  

Accrued interest

     7,528       —         —         7,528  

Accrued payroll, related taxes and benefits

     9,372       7,042       —         16,414  

Accrued income taxes payable

     1,152       —           1,152  

Accrued real estate taxes

     720       2,632       —         3,352  

Other liabilities

     7,270       3,536       —         10,806  
                                

Total current liabilities

     37,503       24,386       —         61,889  

Long-term debt, net of current portion

     298,654       1,057       —         299,711  

Lease financing obligations

     14,878       105,181       (65,801 )     54,258  

Deferred income—sale-leaseback of real estate

     16,878       5,466       8,251       30,595  

Accrued postretirement benefits

     6,754       —         —         6,754  

Other liabilities

     16,184       7,563       367       24,114  
                                

Total liabilities

     390,851       143,653       (57,183 )     477,321  

Commitments and contingencies

     —         —         —         —    

Stockholder’s equity (deficit)

     (18,369 )     35,647       (35,647 )     (18,369 )
                                

Total liabilities and stockholder’s equity (deficit)

   $ 372,482     $ 179,300     $ (92,830 )   $ 458,952  
                                

 

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CONSOLIDATING BALANCE SHEET

December 31, 2006

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 1,182     $ 2,757     $ —       $ 3,939  

Trade and other receivables

     783       4,581       —         5,364  

Inventories

     2,997       1,680       —         4,677  

Prepaid rent

     2,203       1,927       —         4,130  

Prepaid expenses and other current assets

     1,920       3,447       —         5,367  

Refundable income taxes

     2,806       —         —         2,806  

Deferred income taxes

     2,653       1,886       —         4,539  
                                

Total current assets

     14,544       16,278       —         30,822  

Property and equipment, net

     62,978       171,369       (51,605 )     182,742  

Franchise rights, net

     83,268       —         —         83,268  

Goodwill

     1,450       123,484       —         124,934  

Intangible assets, net

     —         1,175       —         1,175  

Franchise agreements, net

     5,793       —         —         5,793  

Intercompany receivable (payable)

     151,907       (152,204 )     297       —    

Investment in subsidiaries

     35,396       —         (35,396 )     —    

Deferred income taxes

     5,215       6,619       (698 )     11,136  

Other assets

     8,703       6,008       (1,722 )     12,989  
                                

Total assets

   $ 369,254     $ 172,729     $ (89,124 )   $ 452,859  
                                
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)         

Current liabilities:

        

Current portion of long-term debt

   $ 2,295     $ 182     $ —       $ 2,477  

Accounts payable

     7,783       10,077       —         17,860  

Accrued interest

     7,861       —         —         7,861  

Accrued payroll, related taxes and benefits

     11,034       7,411       —         18,445  

Accrued real estate taxes

     1,754       2,348       —         4,102  

Other liabilities

     7,123       3,500       —         10,623  
                                

Total current liabilities

     37,850       23,518       —         61,368  

Long-term debt, net of current portion

     296,397       1,035         297,432  

Lease financing obligations

     19,419       103,060       (63,908 )     58,571  

Deferred income—sale-leaseback of real estate

     18,548       4,812       8,031       31,391  

Accrued postretirement benefits

     6,370       —         —         6,370  

Other liabilities

     16,405       6,799       258       23,462  
                                

Total liabilities

     394,989       139,224       (55,619 )     478,594  

Commitments and contingencies

     —         —         —         —    

Stockholder’s equity (deficit)

     (25,735 )     33,505       (33,505 )     (25,735 )
                                

Total liabilities and stockholder’s equity (deficit)

   $ 369,254     $ 172,729     $ (89,124 )   $ 452,859  
                                

 

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CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2007

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
   Eliminations     Consolidated
Total

Revenues:

         

Restaurant sales

   $ 96,928     $ 103,189    $ —       $ 200,117

Franchise royalty revenues and fees

     —         332      —         332
                             

Total revenues

     96,928       103,521      —         200,449
                             

Costs and expenses:

         

Cost of sales

     25,515       32,124      —         57,639

Restaurant wages and related expenses (including stock-based compensation expense of $39)

     30,483       28,079      —         58,562

Restaurant rent expense

     5,914       3,685      1,308       10,907

Other restaurant operating expenses

     14,337       13,933      —         28,270

Advertising expense

     4,559       3,890      —         8,449

General and administrative (including stock based compensation expense of $315)

     6,867       6,437      —         13,304

Depreciation and amortization

     3,944       4,251      (308 )     7,887

Impairment losses

     14       55      —         69

Other income

     —         —        —         —  
                             

Total operating expenses

     91,633       92,454      1,000       185,087
                             

Income from operations

     5,295       11,067      (1,000 )     15,362

Interest expense

     6,540       2,515      (1,454 )     7,601

Intercompany interest allocations

     (4,556 )     4,556      —         —  
                             

Income before income taxes

     3,311       3,996      454       7,761

Provision for income taxes

     1,095       1,389      178       2,662

Equity income from subsidiaries

     2,883       —        (2,883 )     —  
                             

Net income

   $ 5,099     $ 2,607    $ (2,607 )   $ 5,099
                             

 

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CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2006

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
   Eliminations     Consolidated
Total

Revenues:

         

Restaurant sales

   $ 93,422     $ 96,830    $ —       $ 190,252

Franchise royalty revenues and fees

     —         329      —         329
                             

Total revenues

     93,422       97,159      —         190,581
                             

Costs and expenses:

         

Cost of sales

     24,004       29,382      —         53,386

Restaurant wages and related expenses

     29,262       26,036      —         55,298

Restaurant rent expense

     5,163       3,270      726       9,159

Other restaurant operating expenses

     13,736       13,705      —         27,441

Advertising expense

     3,980       3,268      —         7,248

General and administrative

     6,268       5,708      —         11,976

Depreciation and amortization

     4,844       3,774      (155 )     8,463

Impairment losses

     —         20      —         20
                             

Total operating expenses

     87,257       85,163      571       172,991
                             

Income from operations

     6,165       11,996      (571 )     17,590

Interest expense

     10,693       3,123      (805 )     13,011

Intercompany interest allocations

     (4,556 )     4,556      —         —  
                             

Income before income taxes

     28       4,317      234       4,579

Provision for income taxes

     11       1,490      (12 )     1,489

Equity income from subsidiaries

     3,073       —        (3,073 )     —  
                             

Net income

   $ 3,090     $ 2,827    $ (2,827 )   $ 3,090
                             

 

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Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2007

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ 185,398     $ 202,585     $ —       $ 387,983  

Franchise royalty revenues and fees

     —         669       —         669  
                                

Total revenues

     185,398       203,254       —         388,652  
                                

Costs and expenses:

        

Cost of sales

     47,702       62,494       —         110,196  

Restaurant wages and related expenses (including stock-based compensation expense of $76)

     59,620       54,890       —         114,510  

Restaurant rent expense

     11,781       7,209       2,596       21,586  

Other restaurant operating expenses

     28,310       27,644       —         55,954  

Advertising expense

     8,610       8,374       —         16,984  

General and administrative (including stock based compensation expense of $633)

     13,584       12,864       —         26,448  

Depreciation and amortization

     7,944       8,247       (613 )     15,578  

Impairment loss

     14       55       —         69  

Other income

     —         (347 )     —         (347 )
                                

Total operating expenses

     177,565       181,430       1,983       360,978  
                                

Income from operations

     7,833       21,824       (1,983 )     27,674  

Interest expense

     13,817       5,027       (2,887 )     15,957  

Loss on extinguishment of debt

     1,485       —         —         1,485  

Intercompany interest allocations

     (9,112 )     9,112       —         —    
                                

Income before income taxes

     1,643       7,685       904       10,232  

Provision for income taxes

     507       2,760       287       3,554  

Equity income from subsidiaries

     5,542       —         (5,542 )     —    
                                

Net income

   $ 6,678     $ 4,925     $ (4,925 )   $ 6,678  
                                

 

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Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2006

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
   Eliminations     Consolidated
Total

Revenues:

         

Restaurant sales

   $ 182,139     $ 190,326    $ —       $ 372,465

Franchise royalty revenues and fees

     —         659      —         659
                             

Total revenues

     182,139       190,985      —         373,124
                             

Costs and expenses:

         

Cost of sales

     47,301       57,998      —         105,299

Restaurant wages and related expenses

     57,752       51,208      —         108,960

Restaurant rent expense

     10,548       6,299      1,332       18,179

Other restaurant operating expenses

     27,483       26,406      —         53,889

Advertising expense

     7,659       6,501      —         14,160

General and administrative

     12,759       11,589      —         24,348

Depreciation and amortization

     9,605       7,459      (284 )     16,780

Impairment losses

     224       20      —         244
                             

Total operating expenses

     173,331       167,480      1,048       341,859
                             

Income from operations

     8,808       23,505      (1,048 )     31,265

Interest expense

     20,397       5,488      (1,485 )     24,400

Intercompany interest allocations

     (9,112 )     9,112      —         —  
                             

Income before income taxes

     (2,477 )     8,905      437       6,865

Provision for income taxes

     (976 )     3,129      95       2,248

Equity income from subsidiaries

     6,118       —        (6,118 )     —  
                             

Net income

   $ 4,617     $ 5,776    $ (5,776 )   $ 4,617
                             

 

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Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2007

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Cash flows provided from operating activities:

        

Net income

   $ 6,678     $ 4,925     $ (4,925 )   $ 6,678  

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

        

Gain on disposals of property and equipment

     133       (24 )     —         109  

Stock-based compensation expense

     530       179       —         709  

Depreciation and amortization

     7,944       8,247       (613 )     15,578  

Amortization of deferred financing costs

     608       104       (74 )     638  

Amortization of unearned purchase discounts

     (1,078 )     —         —         (1,078 )

Amortization of deferred gains from sale-leaseback transactions

     (593 )     (127 )     (249 )     (969 )

Impairment losses

     14       55       —         69  

Gain on settlements of lease financing obligations

     (163 )     —         —         (163 )

Accretion of interest on lease financing obligations

     33       229       —         262  

Deferred income taxes

     (210 )     (323 )     323       (210 )

Loss on extinguishment of debt

     1,485       —         —         1,485  

Changes in other operating assets and liabilities

     (5,561 )     6,502       5,538       6,479  
                                

Net cash provided from operating activities

     9,820       19,767       —         29,587  
                                

Cash flows used for investing activities:

        

Capital expenditures:

        

New restaurant development

     (911 )     (17,809 )     —         (18,720 )

Restaurant remodeling

     (2,160 )     (1,084 )     —         (3,244 )

Other restaurant capital expenditures

     (1,880 )     (2,390 )     —         (4,270 )

Corporate and restaurant information systems

     (1,386 )     (107 )     —         (1,493 )
                                

Total capital expenditures

     (6,337 )     (21,390 )     —         (27,727 )

Properties purchased for sale-leaseback

     —         (2,461 )     —         (2,461 )

Proceeds from sale-leaseback transactions

     —         661       1,812       2,473  

Proceeds from sales of other properties

     —         979       —         979  
                                

Net cash used for investing activities