Carrols Restaurant Group, Inc.
CARROLS RESTAURANT GROUP, INC. (Form: 10-Q, Received: 08/06/2008 06:03:09)
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 June 29, 2008

OR

 

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

Commission File Number: 001-33174

 

 

CARROLS RESTAURANT GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   16-1287774

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

968 James Street

Syracuse, New York

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

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

Commission File Number: 001-06553

 

 

CARROLS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   16-0958146

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

968 James Street

Syracuse, New York

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

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

 

 

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

Indicate by check mark whether either of the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

Yes   x     No   ¨

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

Carrols Restaurant Group, Inc.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer (Do not check if a smaller reporting company)   ¨    Smaller reporting company   ¨

Carrols Corporation

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer (Do not check if a smaller reporting company)   x    Smaller reporting company   ¨

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

As of August 1, 2008, Carrols Restaurant Group, Inc. had 21,573,809 shares of its common stock, $.01 par value, outstanding. As of August 1, 2008, 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, 2008

 

          Page

PART I

   FINANCIAL INFORMATION   

Item 1

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

Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007

   3
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007

   4
  

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007

   5
  

Notes to Consolidated Financial Statements

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

Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007

   17
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007

   18
  

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007

   19
  

Notes to Consolidated Financial Statements

   20

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    39

Item 3

   Quantitative and Qualitative Disclosures About Market Risk    54

Item 4

   Controls and Procedures    54

PART II

   OTHER INFORMATION   

Item 1

   Legal Proceedings    54

Item 1A

   Risk Factors    54

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds    54

Item 3

   Default Upon Senior Securities    54

Item 4

   Submission of Matters to a Vote of Security Holders    54

Item 5

   Other Information    55

Item 6

   Exhibits    55

 

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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,
2008
    December 31,
2007
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 4,432     $ 7,396  

Trade and other receivables

     5,885       4,734  

Inventories

     5,145       5,339  

Prepaid rent

     2,878       2,803  

Prepaid expenses and other current assets

     6,961       6,172  

Deferred income taxes

     4,784       4,802  
                

Total current assets

     30,085       31,246  

Property and equipment, net

     211,953       200,325  

Franchise rights, net (Note 4)

     78,469       80,052  

Goodwill (Note 4)

     124,934       124,934  

Intangible assets, net

     742       887  

Franchise agreements, at cost less accumulated amortization of $5,681 and $5,646, respectively

     5,657       5,548  

Deferred income taxes

     10,336       10,559  

Other assets

     11,405       12,007  
                

Total assets

   $ 473,581     $ 465,558  
                

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 6,117     $ 3,129  

Accounts payable

     21,208       20,054  

Accrued interest

     7,844       8,148  

Accrued payroll, related taxes and benefits

     16,295       18,669  

Accrued income taxes payable

     1,964       933  

Accrued real estate taxes

     3,607       3,312  

Other liabilities

     11,610       10,113  
                

Total current liabilities

     68,645       64,358  

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

     302,712       298,154  

Lease financing obligations (Note 9)

     47,315       52,689  

Deferred income—sale-leaseback of real estate

     31,731       31,348  

Accrued postretirement benefits (Note 8)

     2,886       3,022  

Other liabilities (Note 7)

     21,450       22,822  
                

Total liabilities

     474,739       472,393  

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—21,571,871 and 21,571,565 shares, respectively

     216       216  

Additional paid-in capital

     (625 )     (1,591 )

Accumulated deficit

     (1,977 )     (6,680 )

Accumulated other comprehensive income

     1,369       1,361  

Treasury stock, at cost

     (141 )     (141 )
                

Total stockholders’ deficit

     (1,158 )     (6,835 )
                

Total liabilities and stockholders’ deficit

   $ 473,581     $ 465,558  
                

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, 2008 AND 2007

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

(Unaudited)

 

     Three months ended June 30,    Six months ended June 30,  
   2008     2007    2008     2007  

Revenues:

         

Restaurant sales

   $ 210,331     $ 200,117    $ 405,724     $ 387,983  

Franchise royalty revenues and fees

     351       332      711       669  
                               

Total revenues

     210,682       200,449      406,435       388,652  
                               

Costs and expenses:

         

Cost of sales

     63,943       57,375      121,572       109,669  

Restaurant wages and related expenses (including stock-based compensation expense of $57, $39, $114 and $76, respectively)

     60,763       58,562      119,304       114,510  

Restaurant rent expense

     11,568       10,907      23,051       21,586  

Other restaurant operating expenses

     31,348       28,534      60,893       56,481  

Advertising expense

     9,224       8,449      17,048       16,984  

General and administrative (including stock-based compensation expense of $435, $315, $852 and $633, respectively)

     13,717       13,305      26,712       26,451  

Depreciation and amortization

     8,077       7,887      16,099       15,578  

Impairment losses (Note 3)

     81       69      102       69  

Other income (Note 10)

     (119 )     —        (119 )     (347 )
                               

Total operating expenses

     198,602       185,088      384,662       360,981  
                               

Income from operations

     12,080       15,361      21,773       27,671  

Interest expense

     7,123       7,601      14,557       15,957  

Loss (gain) on extinguishment of debt (Note 5)

     (180 )     —        (180 )     1,485  
                               

Income before income taxes

     5,137       7,760      7,396       10,229  

Provision for income taxes (Note 6)

     1,880       2,662      2,693       3,554  
                               

Net income

   $ 3,257     $ 5,098    $ 4,703     $ 6,675  
                               

Basic and diluted net income per share (Note 13)

   $ 0.15     $ 0.24    $ 0.22     $ 0.31  
                               

Basic weighted average common shares outstanding (Note 13)

     21,571,652       21,550,827      21,571,609       21,550,827  

Diluted weighted average common shares outstanding (Note 13)

     21,575,405       21,565,208      21,574,825       21,561,795  

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, 2008 AND 2007

(In thousands of dollars)

(Unaudited)

 

     2008     2007  

Cash flows provided from operating activities:

    

Net income

   $ 4,703     $ 6,675  

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

    

Loss (gain) on disposals of property and equipment

     (12 )     109  

Stock-based compensation expense

     966       709  

Depreciation and amortization

     16,099       15,578  

Amortization of deferred financing costs

     595       638  

Amortization of unearned purchase discounts

     (1,077 )     (1,078 )

Amortization of deferred gains from sale-leaseback transactions

     (1,044 )     (969 )

Impairment losses

     102       69  

Loss (gain) on settlements of lease financing obligations

     31       (163 )

Accretion of interest on lease financing obligations

     120       262  

Deferred income taxes

     249       (210 )

Accrued income taxes

     1,031       3,958  

Loss (gain) on extinguishment of debt

     (180 )     1,485  

Changes in other operating assets and liabilities

     (2,203 )     2,524  
                

Net cash provided from operating activities

     19,380       29,587  
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (16,385 )     (18,720 )

Restaurant remodeling

     (6,168 )     (3,244 )

Other restaurant capital expenditures

     (4,091 )     (4,270 )

Corporate and restaurant information systems

     (2,585 )     (1,493 )
                

Total capital expenditures

     (29,229 )     (27,727 )

Properties purchased for sale-leaseback

     —         (2,461 )

Proceeds from sale-leaseback transactions

     4,657       2,473  

Proceeds from sales of other properties

     119       979  
                

Net cash used for investing activities

     (24,453 )     (26,736 )
                

Cash flows provided from (used for) financing activities:

    

Repayment of term loans under prior credit facility

     —         (118,400 )

Borrowings on revolving credit facility

     62,400       11,600  

Repayments on revolving credit facility

     (52,900 )     (11,600 )

Proceeds from new senior credit facility

     —         120,000  

Principal payments on capital leases

     (71 )     (205 )

Expenses from initial public offering

     —         (21 )

Financing costs associated with issuance of debt

     —         (1,228 )

Repurchase of senior subordinated notes

     (1,820 )     —    

Settlement of lease financing obligations

     (5,500 )     (4,412 )
                

Net cash provided from (used for) financing activities

     2,109       (4,266 )
                

Net decrease in cash and cash equivalents

     (2,964 )     (1,415 )

Cash and cash equivalents, beginning of period

     7,396       3,939  
                

Cash and cash equivalents, end of period

   $ 4,432     $ 2,524  
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 11,596     $ 12,912  

Interest paid on lease financing obligations

   $ 2,520     $ 2,476  

Increase in accruals for capital expenditures

   $ 220     $ 196  

Income taxes paid (refunded), net

   $ 1,414     $ (195 )

Capital lease obligations incurred

   $ 117     $ —    

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, 2008 the Company operated, as franchisee, 319 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At June 30, 2008, the Company also owned and operated 88 Pollo Tropical restaurants, of which 85 were located in Florida and three were located in New Jersey, and franchised a total of 27 Pollo Tropical restaurants, 23 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At June 30, 2008, the Company owned and operated 150 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 30, 2007 and December 31, 2006 will be referred to as the fiscal years ended December 31, 2007 and 2006, respectively. Similarly, all references herein to the three and six months ended June 29, 2008 and July 1, 2007 will be referred to as the three and six months ended June 30, 2008 and June 30, 2007, respectively. The years ended December 31, 2007 and 2006 each contained 52 weeks and the three and six months ended June 30, 2008 and 2007 contained thirteen and twenty-six weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2008 and 2007 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, 2008 and 2007 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, 2007 contained in the Company’s 2007 Annual Report on Form 10-K. The December 31, 2007 balance sheet data is derived from those audited financial statements.

Reclassification of previously issued interim financial statements . The Company has reclassified certain prior year amounts related to its Pollo Tropical restaurant expenses from cost of sales to other restaurant operating expenses in order to conform to the 2008 presentation in the Company’s interim results of operations and the presentation in the Company’s 2007 Annual Report on Form 10-K. The amount of increase (decrease) in previously reported interim amounts was as follows:

 

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

Cost of sales

   $ (264 )   $ (527 )

Other restaurant operating expenses

     264       527  
                

Total

   $ —       $ —    
                

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.

On January 15, 2008, the Company granted options to purchase 517,820 shares of its common stock, consisting of 160,000 shares of non-qualified stock options and 357,820 shares of incentive stock options (“ISOs”), and issued 7,100 shares of restricted stock. The non-qualified stock options and ISOs granted are exercisable for up to one-fifth of the total number of option shares on or after the first anniversary of the grant date and as of the first day of each month thereafter are exercisable for an additional one-sixtieth of the total number of option shares until fully exercisable. The options expire seven years from the date of the grant and were issued with an exercise price equal to the fair market value of the stock price, or $8.08 per share of common stock, on the date of grant. The restricted stock awards vest 100% on the third anniversary of the award date.

During the three months ended June 30, 2008 an aggregate of 10,500 non-qualified stock options were granted to three non-employee directors under the 2006 Plan. The options were issued with an exercise price equal to the fair market value of the stock price, or $6.43 per share of common stock, on the date of grant and generally vest 20% per year. 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 non-qualified options granted to three non-employee directors under the 2006 Plan. The stock options granted to the non-employee directors vest 20% per year and the restricted shares granted to employees vest 33% per year.

The Company currently uses and will continue to use the simplified method to estimate the expected term for share option grants until it has enough historical experience to provide a reasonable estimate of expected term in accordance with Staff Accounting Bulletin No. 110 (“SAB 110”). The weighted average fair-value of options granted during the three months ended June 30, 2008 was $1.96 which was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

     2008  

Risk-free interest rate

   3.22 %

Annual dividend yield

   0 %

Expected term

   4 years  

Expected volatility

   33 %

Stock-based compensation expense for the three and six months ended June 30, 2008 was $0.5 million and $1.0 million, respectively and for the three and six months ended June 30, 2007 was $0.4 million and $0.7 million, respectively.

As of June 30, 2008, the total non-vested stock-based compensation expense relating to the options and restricted shares is approximately $4.7 million and the Company expects to record an additional $1.0 million as compensation expense in 2008. The remaining weighted average vesting period for the stock options is 3.89 years and restricted shares is approximately 2.18 years at June 30, 2008.

Stock Options

A summary of all option activity for the six months ended June 30, 2008 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, 2008

   1,214,690     $ 14.31    6.0    $ —  

Granted

   528,320       8.05      

Forfeited

   (42,712 )     11.95      
              

Options outstanding at June 30, 2008

   1,700,298     $ 12.41    5.8    $ —  
              

Expected to vest at June 30, 2008

   1,306,931     $ 11.90    5.9    $ —  
              

Options exercisable at June 30, 2008

   358,059     $ 14.31    5.5    $ —  
              

 

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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)

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at June 30, 2008 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, 2008.

Restricted Shares

The restricted stock activity for the six months ended June 30, 2008 was as follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value

Nonvested at January 1, 2008

   55,398     $ 13.22

Shares granted

   7,100       8.08

Shares vested

   (306 )     16.00

Shares forfeited

   (2,664 )     12.86
        

Nonvested at June 30, 2008

   59,528       12.60
        

The value of restricted shares is determined based on the Company’s closing 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, 2008 and 2007, the Company recorded impairment losses on long-lived assets for its segments as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     
     2008    2007    2008    2007

Burger King

   $ 71    $ 14    $ 92    $ 14

Taco Cabana

     10      55      10      55
                           
   $ 81    $ 69    $ 102    $ 69
                           

4. Goodwill and Franchise Rights

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

Balance, June 30, 2008

   $ 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

 

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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)

 

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 recorded against franchise rights for the three and six months ended June 30, 2008 and 2007.

Amortization expense related to Burger King franchise rights was $799 and $804 for the three months ended June 30, 2008 and 2007, respectively. Amortization expense related to Burger King franchise rights was $1,600 and $1,608 for the six months ended June 30, 2008 and 2007. The estimated amortization expense for the year ending December 31, 2008 is $3,197 and for each of the five succeeding years is $3,196.

5. Long-term Debt

Long-term debt at June 30, 2008 and December 31, 2007 consisted of the following:

 

     June 30,
2008
    December 31,
2007
 

Collateralized:

    

Revolving Credit facility

   $ 9,500     $ —    

Senior Credit Facility-Term loan A facility

     120,000       120,000  

Unsecured:

    

9% Senior Subordinated Notes

     178,000       180,000  

Capital leases

     1,329       1,283  
                
     308,829       301,283  

Less: current portion

     (6,117 )     (3,129 )
                
   $ 302,712     $ 298,154  
                

On March 9, 2007, Carrols terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. Carrols’ 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 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 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.

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

1) the applicable margin 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;

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 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 depending upon Carrols’ Total Leverage Ratio (as such terms are defined in the senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by Carrols therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

In general, Carrols’ obligations under the senior credit facility are guaranteed by the Company and all of Carrols’ material subsidiaries and are collateralized by a pledge of Carrols’ common stock and the stock of each of Carrols’ material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting 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 senior credit facility). Carrols was in compliance with the covenants under its senior credit facility as of June 30, 2008.

At June 30, 2008, $120.0 million principal amount of term loan borrowings were outstanding under the term loan A facility and $9.5 million principal amount of borrowings were outstanding under the revolving credit facility. After reserving $14.2 million for letters of credit guaranteed by the facility, $41.3 million was available for borrowings under the revolving credit facility at June 30, 2008.

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. On April 7, 2008, Carrols purchased and retired $2.0 million of its senior subordinated notes in an open market transaction. This resulted in a gain on extinguishment of debt of $0.2 million in the three months ended June 30, 2008. At June 30, 2008 and December 31, 2007, $178.0 million and $180.0 million principal amount of the senior subordinated notes were outstanding, respectively.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2008 and 2007 was comprised of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008    2007  

Current

   $ 1,945     $ 2,872     $ 2,444    $ 3,764  

Deferred

     (65 )     (210 )     249      (210 )
                               
   $ 1,880     $ 2,662     $ 2,693    $ 3,554  
                               

The provision for income taxes for the three and six months ended June 30, 2008 was derived using an estimated effective annual income tax rate for 2008 of 37.9%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $66 and $112 for the three and six months ended June 30, 2008.

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%. The tax provision for the three and six months ended June 30, 2007 includes a reduction of tax expense of $0.4 million related to the recognition of additional employment tax credits, $0.2 million of additional tax expense related to a New York state income tax audit assessment and $0.1 million of additional tax 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 Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2008, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2004-2007 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.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2008 and December 31, 2007 consisted of the following:

 

     June 30,
2008
   December 31,
2007

Unearned purchase discounts

   $ 1,115    $ 2,231

Accrued occupancy costs

     10,229      9,667

Accrued workers’ compensation costs

     4,156      4,418

Other

     5,950      6,506
             
   $ 21,450    $ 22,822
             

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At both June 30, 2008 and December 31, 2007, the Company had $0.5 million in lease liability reserves for remaining locations that are included in accrued occupancy costs.

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. On November 1, 2007 the Company amended its postretirement medical and life insurance benefits to eliminate life insurance benefits for active employees who retire after December 31, 2007 and to increase retiree contributions for both current and future retirees effective January 1, 2008. These amendments reduced the Company’s postretirement benefit obligations and reduced expense in the three and six months ended June 30, 2008.

The following summarizes the components of net periodic benefit cost:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008     2007    2008     2007

Service cost

   $ (24 )   $ 128    $ 14     $ 246

Interest cost

     (18 )     110      53       203

Amortization of gains and losses

     3       31      44       48

Amortization of unrecognized prior service cost

     (67 )     10      (180 )     3
                             

Net periodic postretirement benefit cost (benefit)

   $ (106 )   $ 279    $ (69 )   $ 500
                             

During the three and six months ended June 30, 2008, the Company made contributions of $31 and $80 to its postretirement plan.

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 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.

In the second quarter of 2008, the Company purchased from the lessor six restaurant properties for $5.5 million that were previously accounted for as lease financing obligations. As a result, the Company reduced its lease financing obligations by $5.5 million and recorded a loss of $31 as an increase to interest expense which represented the amount by which the purchase price exceeded the lease financing obligations.

In 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 acquired restaurant properties.

 

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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)

 

Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended June 30, 2008 and 2007 was $1.4 million and $1.3 million, respectively, and for the six months ended June 30, 2008 and 2007 was $2.7 million and $2.8 million, respectively.

10. Other Income

The Company recorded a gain of $0.1 million in the three and six months ended June 30, 2008 and a gain of $0.3 million in the six months ended June 30, 2007 each related to the sale of a Taco Cabana property.

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, other income and expense and loss (gain) on extinguishment of debt.

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Three Months Ended

   Pollo
Tropical
   Taco
Cabana
   Burger
King
   Other    Consolidated

June 30, 2008:

              

Total revenues

   $ 45,404    $ 63,436    $ 101,842    $ —      $ 210,682

Cost of sales

     15,312      19,540      29,091      —        63,943

Restaurant wages and related expenses

     10,899      18,594      31,213      57      60,763

General and administrative expenses (1)

     2,762      3,006      7,514      435      13,717

Depreciation and amortization

     2,000      2,091      3,611      375      8,077

Segment EBITDA

     6,733      5,789      8,089      

Capital expenditures, including acquisitions

     4,862      6,158      3,479      1,881      16,380

June 30, 2007:

              

Total revenues

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

Cost of sales

     13,885      17,975      25,515      —        57,375

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

Six Months Ended

                        

June 30, 2008:

              

Total revenues

   $ 89,736    $ 123,693    $ 193,006    $ —      $ 406,435

Cost of sales

     29,653      38,376      53,543      —        121,572

Restaurant wages and related expenses

     22,199      36,244      60,747      114      119,304

General and administrative expenses (1)

     5,328      6,012      14,520      852      26,712

Depreciation and amortization

     3,916      4,162      7,249      772      16,099

Segment EBITDA

     12,737      12,371      13,713      

Capital expenditures, including acquisitions

     11,408      9,040      6,196      2,585      29,229

June 30, 2007:

              

Total revenues

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

Cost of sales

     27,014      34,953      47,702      —        109,669

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

Identifiable Assets:

              

At June 30, 2008

   $ 66,924    $ 81,209    $ 147,460    $ 177,988    $ 473,581

At December 31, 2007

     59,609      79,370      148,467      178,112      465,558

 

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

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

 

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
     2008     2007    2008     2007  

Segment EBITDA:

         

Pollo Tropical

   $ 6,733     $ 7,254    $ 12,737     $ 14,086  

Taco Cabana

     5,789       8,024      12,371       15,375  

Burger King

     8,089       8,393      13,713       14,219  
                               

Subtotal

     20,611       23,671      38,821       43,680  

Less:

         

Depreciation and amortization

     8,077       7,887      16,099       15,578  

Impairment losses

     81       69      102       69  

Interest expense

     7,123       7,601      14,557       15,957  

Provision for income taxes

     1,880       2,662      2,693       3,554  

Stock-based compensation expense

     492       354      966       709  

Loss (gain) on extinguishment of debt

     (180 )     —        (180 )     1,485  

Other income

     (119 )     —        (119 )     (347 )
                               

Net income

   $ 3,257     $ 5,098    $ 4,703     $ 6,675  
                               

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 were subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from Carrols. On April 20, 2005, the Court issued a decision and order granting Carrols’ Motion for Summary Judgment that Carrols filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed; however the Court noted that it was not ruling on the claims, if any, that individual employees might have against Carrols. On February 27, 2006, Carrols filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC asserted that, notwithstanding the Court’s dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is awaiting the Court’s decision on Carrols’ summary judgment motion. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

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 (the “Court”) entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleged, 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 sought damages, costs and injunctive relief. They also sought to notify and certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for Carrols. On December 17, 2007, the Court issued a decision and order denying Plaintiffs’ motion for notice and class certification and granting the Company’s motion to dismiss all of the claims of the plaintiffs, other than certain nominal claims relating to orientation and managers’ meetings. The Court instructed the parties to confer, in good faith, and settle those nominal claims. Subject to settlement of the amounts for orientation and managers’ meetings and possible appeal by the Plaintiffs, the case is concluded. The Company does not believe that these settlement amounts will be material to its consolidated financial statements.

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

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 1,099,544 and 631,375 shares of common stock for each of the three and six months ended June 30, 2008 and 2007, respectively, 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 2,538 and 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, 2008 and 2007, respectively, as they were antidilutive under the treasury stock method.

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,
     2008    2007    2008    2007

Basic net income per share:

           

Net income

   $ 3,257    $ 5,098    $ 4,703    $ 6,675

Weighted average common shares outstanding

     21,571,652      21,550,827      21,571,609      21,550,827

Basic net income per share

   $ 0.15    $ 0.24    $ 0.22    $ 0.31

Diluted net income per share:

           

Net income for diluted net income per share

   $ 3,257    $ 5,098    $ 4,703    $ 6,675

Shares used in computed basic net income per share

     21,571,652      21,550,827      21,571,609      21,550,827

Dilutive effect of restricted shares and stock options

     3,753      14,381      3,216      10,968
                           

Shares used in computed diluted net income per share

     21,575,405      21,565,208      21,574,825      21,561,795
                           

Diluted net income per share

   $ 0.15    $ 0.24    $ 0.22    $ 0.31
                           

14. Comprehensive income

SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”), requires the disclosure of certain revenue, expenses, gains and losses that are excluded from net income in accordance with U.S. generally accepted accounting principles. The items that currently impact the Company’s other comprehensive income are changes in postretirement benefit obligations, net of tax.

 

     Three months ended June 30,    Six months ended June 30,
     2008    2007    2008    2007

Net income

   $ 3,257    $ 5,098    $ 4,703    $ 6,675

Change in postretirement benefit obligation, net of tax

     —        —        8      —  
                           

Comprehensive income

   $ 3,257    $ 5,098    $ 4,711    $ 6,675
                           

15. Recent Accounting Developments

In September 2006, the Financial Accounting Standards Board (“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. In February 2007, the FASB issued FSP FAS 157-2, delaying the effective date of SFAS 157 for certain nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for financial assets and financial liabilities, effective for fiscal 2008, did not have a material impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact SFAS 157 may have for nonfinancial assets and liabilities in its consolidated financial statements.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

In 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 did not elect to begin reporting any financial assets or liabilities at fair value upon adoption of this standard.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financials Statements, an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 clarifies the accounting for non controlling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact SFAS 160 will have on its consolidated financial statements.

In April 2008, the FASB issued FSP SFAS No. 142-3 “Determination of the Useful Life of Intangible Assets” (“SFAS 142-3”). SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumption used to determine the useful life of a recognized intangible asset under SFAS No. 142. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which will require the Company to adopt these provisions in the first quarter of 2009. The Company has reviewed this pronouncement and does not anticipate the adoption of SFAS No. 142-3 will materially impact its 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,
2008
    December 31,
2007
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 4,432     $ 7,396  

Trade and other receivables

     5,885       4,734  

Inventories

     5,145       5,339  

Prepaid rent

     2,878       2,803  

Prepaid expenses and other current assets

     6,961       6,172  

Deferred income taxes

     4,784       4,802  
                

Total current assets

     30,085       31,246  

Property and equipment, net

     211,953       200,325  

Franchise rights, net (Note 4)

     78,469       80,052  

Goodwill (Note 4)

     124,934       124,934  

Intangible assets, net

     742       887  

Franchise agreements, at cost less accumulated amortization of $5,681 and $5,646, respectively

     5,657       5,548  

Deferred income taxes

     10,336       10,559  

Other assets

     11,405       12,007  
                

Total assets

   $ 473,581     $ 465,558  
                
LIABILITIES AND STOCKHOLDER’S DEFICIT     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 6,117     $ 3,129  

Accounts payable

     21,208       20,054  

Accrued interest

     7,844       8,148  

Accrued payroll, related taxes and benefits

     16,295       18,669  

Accrued income taxes payable

     1,964       933  

Accrued real estate taxes

     3,607       3,312  

Other liabilities

     11,610       10,113  
                

Total current liabilities

     68,645       64,358  

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

     302,712       298,154  

Lease financing obligations (Note 9)

     47,315       52,689  

Deferred income—sale-leaseback of real estate

     31,731       31,348  

Accrued postretirement benefits (Note 8)

     2,886       3,022  

Other liabilities (Note 7)

     21,409       22,784  
                

Total liabilities

     474,698       472,355  

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

     (8,118 )     (9,084 )

Accumulated earnings

     5,632       926  

Accumulated other comprehensive income

     1,369       1,361  
                

Total stockholder’s deficit

     (1,117 )     (6,797 )
                

Total liabilities and stockholder’s deficit

   $ 473,581     $ 465,558  
                

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, 2008 AND 2007

(In thousands of dollars)

(Unaudited)

 

     Three months ended June 30,    Six months ended June 30,  
     2008     2007    2008     2007  

Revenues:

         

Restaurant sales

   $ 210,331     $ 200,117    $ 405,724     $ 387,983  

Franchise royalty revenues and fees

     351       332      711       669  
                               

Total revenues

     210,682       200,449      406,435       388,652  
                               

Costs and expenses:

         

Cost of sales

     63,943       57,375      121,572       109,669  

Restaurant wages and related expenses (including stock-based compensation expense of $57, $39, $114 and $76, respectively)

     60,763       58,562      119,304       114,510  

Restaurant rent expense

     11,568       10,907      23,051       21,586  

Other restaurant operating expenses

     31,348       28,534      60,893       56,481  

Advertising expense

     9,224       8,449      17,048       16,984  

General and administrative (including stock-based compensation expense of $435, $315, $852 and $633, respectively)

     13,716       13,304      26,709       26,448  

Depreciation and amortization

     8,077       7,887      16,099       15,578  

Impairment losses (Note 3)

     81       69      102       69  

Other income (Note 10)

     (119 )     —        (119 )     (347 )
                               

Total operating expenses

     198,601       185,087      384,659       360,978  
                               

Income from operations

     12,081       15,362      21,776       27,674  

Interest expense

     7,123       7,601      14,557       15,957  

Loss (gain) on extinguishment of debt (Note 5)

     (180 )     —        (180 )     1,485  
                               

Income before income taxes

     5,138       7,761      7,399       10,232  

Provision for income taxes (Note 6)

     1,880       2,662      2,693       3,554  
                               

Net income

   $ 3,258     $ 5,099    $ 4,706     $ 6,678  
                               

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

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(In thousands of dollars)

(Unaudited)

 

     2008     2007  

Cash flows provided from operating activities:

    

Net income

   $ 4,706     $ 6,678  

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

    

Loss (gain) on disposals of property and equipment

     (12 )     109  

Stock-based compensation expense

     966       709  

Depreciation and amortization

     16,099       15,578  

Amortization of deferred financing costs

     595       638  

Amortization of unearned purchase discounts

     (1,077 )     (1,078 )

Amortization of deferred gains from sale-leaseback transactions

     (1,044 )     (969 )

Impairment losses

     102       69  

Accretion of interest on lease financing obligations

     120       262  

Deferred income taxes

     249       (210 )

Accrued income taxes

     1,031       3,958  

Loss (gain) on extinguishment of debt

     (180 )     1,485  

Loss (gain) on settlements of lease financing obligations

     31       (163 )

Changes in other operating assets and liabilities

     (2,206 )     2,521  
                

Net cash provided from operating activities

     19,380       29,587  
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (16,385 )     (18,720 )

Restaurant remodeling

     (6,168 )     (3,244 )

Other restaurant capital expenditures

     (4,091 )     (4,270 )

Corporate and restaurant information systems

     (2,585 )     (1,493 )
                

Total capital expenditures

     (29,229 )     (27,727 )

Properties purchased for sale-leaseback

     —         (2,461 )

Proceeds from sale-leaseback transactions

     4,657       2,473  

Proceeds from sales of other properties

     119       979  
                

Net cash used for investing activities

     (24,453 )     (26,736 )
                

Cash flows provided from (used for) financing activities:

    

Repayment of term loans under prior credit facility

     —         (118,400 )

Borrowings on revolving credit facility

     62,400       11,600  

Repayments on revolving credit facility

     (52,900 )     (11,600 )

Proceeds from new senior credit facility

     —         120,000  

Settlement of lease financing obligations

     (5,500 )     (4,412 )

Repurchase of senior subordinated notes

     (1,820 )     —    

Principal payments on capital leases

     (71 )     (205 )

Expenses from initial public offering

     —         (21 )

Financing costs associated with issuance of debt

     —         (1,228 )
                

Net cash provided from (used for) financing activities

     2,109       (4,266 )
                

Net decrease in cash and cash equivalents

     (2,964 )     (1,415 )

Cash and cash equivalents, beginning of period

     7,396       3,939  
                

Cash and cash equivalents, end of period

   $ 4,432     $ 2,524  
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 11,596     $ 12,912  

Interest paid on lease financing obligations

   $ 2,520     $ 2,476  

Increase in accruals for capital expenditures

   $ 220     $ 196  

Income taxes paid (refunded), net

   $ 1,414     $ (195 )

Capital lease obligations incurred

   $ 117     $ —    

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-(Continued)

(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 Corporation and its subsidiaries (“the Company”). The Company is a wholly-owned subsidiary of Carrols Restaurant Group, Inc. (“Carrols Restaurant Group” or the “Parent Company”). All intercompany transactions have been eliminated in consolidation.

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

Business Description. At June 30, 2008 the Company operated, as franchisee, 319 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At June 30, 2008, the Company also owned and operated 88 Pollo Tropical restaurants of which 85 were located in Florida and three were located in New Jersey, and franchised a total of 27 Pollo Tropical restaurants, 23 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At June 30, 2008, the Company owned and operated 150 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 30, 2007 and December 31, 2006 will be referred to as the fiscal years ended December 31, 2007 and 2006, respectively. Similarly, all references herein to the three and six months ended June 29, 2008 and July 1, 2007 will be referred to as the three and six months ended June 30, 2008 and June 30, 2007, respectively. The years ended December 31, 2007 and 2006 each contained 52 weeks and the three and six months ended June 30, 2008 and 2007 contained thirteen and twenty-six weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2008 and 2007 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, 2008 and 2007 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, 2007 contained in the Company’s 2007 Annual Report on Form 10-K. The December 31, 2007 balance sheet data is derived from those audited financial statements.

Reclassification of previously issued interim financial statements . The Company has reclassified certain prior year amounts related to its Pollo Tropical restaurant expenses from cost of sales to other restaurant operating expenses in order to conform to the 2008 presentation in the Company’s interim results of operations and the presentation in the Company’s 2007 Annual Report on Form 10-K. The amount of increase (decrease) in previously reported interim amounts was as follows:

 

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

Cost of sales

   $ (264 )   $ (527 )

Other restaurant operating expenses

     264       527  
                

Total

   $ —       $ —    
                

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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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Earnings Per Share Presentation. The guidance of Statement of Financial Accounting Standards (“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.

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.

On January 15, 2008, Carrols Restaurant Group granted options to purchase 517,820 shares of its common stock, consisting of 160,000 shares of non-qualified stock options and 357,820 shares of incentive stock options (“ISOs”), and issued 7,100 shares of restricted stock. The non-qualified stock options and ISOs granted are exercisable for up to one-fifth of the total number of option shares on or after the first anniversary of the grant date and as of the first day of each month thereafter are exercisable for an additional one-sixtieth of the total number of option shares until fully exercisable. The options expire seven years from the date of the grant and were issued with an exercise price equal to the fair market value of the stock price, or $8.08 per share of common stock, on the date of grant. The restricted stock awards vest 100% on the third anniversary of the award date.

During the three months ended June 30, 2008 an aggregate of 10,500 non-qualified stock options were granted to three non-employee directors under the 2006 Plan. The options were issued with an exercise price equal to the fair market value of the stock price, or $6.43 per share of common stock, on the date of grant and generally vest 20% per year. 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 non-qualified stock options granted to three non-employee directors under the 2006 Plan. The stock options granted to the non-employee directors vest 20% per year and the restricted shares granted to employees vest 33% per year.

The Company currently uses and will continue to use the simplified method to estimate the expected term for share option grants until it has enough historical experience to provide a reasonable estimate of expected term in accordance with Staff Accounting Bulletin No. 110 (“SAB 110”). The weighted average fair-value of options granted during the three months ended June 30, 2008 was $1.96 which was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

     2008  

Risk-free interest rate

   3.22 %

Annual dividend yield

   0 %

Expected term

   4 years  

Expected volatility

   33 %

Stock-based compensation expense for the three and six months ended June 30, 2008 was $0.5 million and $1.0 million, respectively and for the three and six months ended June 30, 2007 was $0.4 million and $0.7 million, respectively.

As of June 30, 2008, the total non-vested stock-based compensation expense relating to the options and restricted shares is approximately $4.7 million and the Company expects to record an additional $1.0 million as compensation expense in 2008. The remaining weighted average vesting period for the stock options is 3.89 years and restricted shares is approximately 2.18 years at June 30, 2008.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Stock Options

A summary of all option activity for the six months ended June 30, 2008 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, 2008

   1,214,690     $ 14.31    6.0    $ —  

Granted

   528,320       8.05      

Forfeited

   (42,712 )     11.95      
              

Options outstanding at June 30, 2008

   1,700,298     $ 12.41    5.8    $ —  
              

Expected to vest at June 30, 2008

   1,306,931     $ 11.90    5.9    $ —  
              

Options exercisable at June 30, 2008

   358,059     $ 14.31    5.5    $ —  
              

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at June 30, 2008 and the grant price for only those awards that have a grant price that is less than the market price of Carrols Restaurant Group’s common stock at June 30, 2008.

Restricted Shares

The restricted stock activity for the six months ended June 30, 2008 was as follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value

Nonvested at January 1, 2008

   55,398     $ 13.22

Shares granted

   7,100       8.08

Shares vested

   (306 )     16.00

Shares forfeited

   (2,664 )     12.86
        

Nonvested at June 30, 2008

   59,528       12.60
        

The value of restricted shares is determined based on Carrols Restaurant Group’s closing 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, 2008, the Company recorded impairment losses on long-lived assets for its segments as follows:

 

     Three Months Ended    Six Months Ended
   June 30,    June 30,
     2008    2007    2008    2007

Burger King

   $ 71    $ 14    $ 92    $ 14

Taco Cabana

     10      55      10      55
                           
   $ 81    $ 69    $ 102    $ 69
                           

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

4. Goodwill and Franchise Rights

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

Balance, June 30, 2008

   $ 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 recorded against franchise rights for the three and six months ended June 30, 2008 and 2007.

Amortization expense related to Burger King franchise rights was $799 and $804 for the three months ended June 30, 2008 and 2007, respectively. Amortization expense related to Burger King franchise rights was $1,600 and $1,608 for the six months ended June 30, 2008 and 2007. The estimated amortization expense for the year ending December 31, 2008 is $3,197 and for each of the five succeeding years is $3,196.

5. Long-term Debt

Long-term debt at June 30, 2008 and December 31, 2007 consisted of the following:

 

     June 30,
2008
    December 31,
2007
 

Collateralized:

    

Revolving Credit facility

   $ 9,500     $ —    

Senior Credit Facility-Term loan A facility

     120,000       120,000  

Unsecured:

    

9% Senior Subordinated Notes

     178,000       180,000  

Capital leases

     1,329       1,283  
                
     308,829       301,283  

Less: current portion

     (6,117 )     (3,129 )
                
   $ 302,712     $ 298,154  
                

On March 9, 2007, the Company terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. The Company’s credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on September 30, 2012 if the 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving 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.

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

1) the applicable margin 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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

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

 

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

Under the 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 depending upon the Company’s Total Leverage Ratio (as such terms are defined in the senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by the Company therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt.

In general, the Company’s obligations under the senior credit facility are guaranteed by Carrols Restaurant Group and all of the Company’s material subsidiaries and are collateralized by a pledge of the Company’s common stock and the stock of each of the Company’s material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting the Company’s ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Company is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). The Company was in compliance with the covenants under its new senior credit facility as of June 30, 2008.

At June 30, 2008, $120.0 million principal amount of term loan borrowings were outstanding under the term loan A facility and $9.5 million principal amount of borrowings were outstanding under the revolving credit facility. After reserving $14.2 million for letters of credit guaranteed by the facility, $41.3 million was available for borrowings under the revolving credit facility at June 30, 2008.

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 Company’s ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. On April 7, 2008, the Company purchased and retired $2.0 million of the senior subordinated notes in an open market transaction. This resulted in a gain on extinguishment of debt of $0.2 million in the three months ended June 30, 2008. At June 30, 2008 and December 31, 2007, $178.0 million and $180.0 million principal amount of the senior subordinated notes were outstanding, respectively.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2008 and 2007 was comprised of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008    2007  

Current

   $ 1,945     $ 2,872     $ 2,444    $ 3,764  

Deferred

     (65 )     (210 )     249      (210 )
                               
   $ 1,880     $ 2,662     $ 2,693    $ 3,554  
                               

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

The provision for income taxes for the three and six months ended June 30, 2008 was derived using an estimated effective annual income tax rate for 2008 of 37.9%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $66 and $112 for the three and six months ended June 30, 2008.

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%. The tax provision for the three and six months ended June 30, 2007 includes a reduction of tax expense of $0.4 million related to the recognition of additional employment tax credits, $0.2 million of additional tax expense related to a New York state income tax audit assessment and $0.1 million of additional tax 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 Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2008, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2004-2007 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.

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2008 and December 31, 2006 consisted of the following:

 

     June 30,    December 31,
   2008    2007

Unearned purchase discounts

   $ 1,115    $ 2,231

Accrued occupancy costs

     10,229      9,667

Accrued workers’ compensation costs

     4,156      4,418

Other

     5,909      6,468
             
   $ 21,409    $ 22,784
             

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At both June 30, 2008 and December 31, 2007, the Company had $0.5 million in lease liability reserves for the remaining locations that are included in accrued occupancy costs.

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. On November 1, 2007 the Company amended its postretirement medical and life insurance benefits to eliminate life insurance benefits for active employees who retire after December 31, 2007 and to increase retiree contributions for both current and future retirees effective January 1, 2008. These amendments reduced the Company’s postretirement benefit obligations and reduced expense in the three and six months ended June 30, 2008.

The following summarizes the components of net periodic benefit cost:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008     2007    2008     2007

Service cost

   $ (24 )   $ 128    $ 14     $ 246

Interest cost

     (18 )     110      53       203

Amortization of gains and losses

     3       31      44       48

Amortization of unrecognized prior service cost

     (67 )     10      (180 )     3
                             

Net periodic postretirement benefit cost (benefit)

   $ (106 )   $ 279    $ (69 )   $ 500
                             

 

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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, 2008, the Company made contributions of $31 and $80 to its postretirement plan.

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 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.

In the second quarter of 2008, the Company purchased from the lessor six restaurant properties for $5.5 million that were previously accounted for as lease financing obligations. As a result, the Company reduced its lease financing obligations by $5.5 million and recorded a loss of $31 as an increase to interest expense which represented the amount by which the purchase price exceeded the lease financing obligations.

In 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 acquired restaurant properties.

Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended June 30, 2008 and 2007 was $1.4 million and $1.3 million, respectively and for the six months ended June 30, 2008 and 2007 was $2.7 million and $2.8 million, respectively.

10. Other Income

The Company recorded a gain of $0.1 million in the three and six months ended June 30, 2008 and a gain of $0.3 million in the six months ended June 30, 2007 each related to the sale of a Taco Cabana property.

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, other income and expense and loss (gain) on extinguishment of debt.

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Three Months Ended

   Pollo
Tropical
   Taco
Cabana
   Burger
King
   Other    Consolidated

June 30, 2008:

              

Total revenues

   $ 45,404    $ 63,436    $ 101,842    $ —      $ 210,682

Cost of sales

     15,312      19,540      29,091      —        63,943

Restaurant wages and related expenses

     10,899      18,594      31,213      57      60,763

General and administrative expenses (1)

     2,761      3,006      7,514      435      13,716

Depreciation and amortization

     2,000      2,091      3,611      375      8,077

Segment EBITDA

     6,734      5,789      8,089      

Capital expenditures, including acquisitions

     4,862      6,158      3,479      1,881      16,380

June 30, 2007:

              

Total revenues

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

Cost of sales

     13,885      17,975      25,515      —        57,375

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

Six Months Ended

                        

June 30, 2008:

              

Total revenues

   $ 89,736    $ 123,693    $ 193,006    $ —      $ 406,435

Cost of sales

     29,653      38,376      53,543      —        121,572

Restaurant wages and related expenses

     22,199      36,244      60,747      114      119,304

General and administrative expenses (1)

     5,325      6,012      14,520      852      26,709

Depreciation and amortization

     3,916      4,162      7,249      772      16,099

Segment EBITDA

     12,740      12,371      13,713      

Capital expenditures, including acquisitions

     11,408      9,040      6,196      2,585      29,229

June 30, 2007:

              

Total revenues

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

Cost of sales

     27,014      34,953      47,702      —        109,669

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

Identifiable Assets:

              

At June 30, 2008

   $ 66,924    $ 81,209    $ 147,460    $ 177,988    $ 473,581

At December 31, 2007

     59,609      79,370      148,467      178,112      465,558

 

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
     2008     2007    2008     2007  

Segment EBITDA:

         

Pollo Tropical

   $ 6,734     $ 7,255    $ 12,740     $ 14,089  

Taco Cabana

     5,789       8,024      12,371       15,375  

Burger King

     8,089       8,393      13,713       14,219  
                               

Subtotal

     20,612       23,672      38,824       43,683  

Less:

         

Depreciation and amortization

     8,077       7,887      16,099       15,578  

Impairment losses

     81       69      102       69  

Interest expense

     7,123       7,601      14,557       15,957  

Provision for income taxes

     1,880       2,662      2,693       3,554  

Stock-based compensation expense

     492       354      966       709  

Loss (gain) on extinguishment of debt

     (180 )     —        (180 )     1,485  

Other income

     (119 )     —        (119 )     (347 )
                               

Net income

   $ 3,258     $ 5,099    $ 4,706     $ 6,678  
                               

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

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 (the “Court”) entitled Dawn Seever, et al. v. the Company. The lawsuit alleged, 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 sought damages, costs and injunctive relief. They also sought to notify and certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. On December 17, 2007, the Court issued a decision and order denying Plaintiffs’ motion for notice and class certification and granting the Company’s motion to dismiss all of the claims of the plaintiffs, other than certain nominal claims relating to orientation and managers’ meetings. The Court instructed the parties to confer, in good faith, and settle those nominal claims. Subject to settlement of the amounts for orientation and managers’ meetings and possible appeal by the Plaintiffs, the case is concluded. The Company does not believe that these settlement amounts will be material to its consolidated financial statements.

 

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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. Comprehensive income

SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”), requires the disclosure of certain revenue, expenses, gains and losses that are excluded from net income in accordance with U.S. generally accepted accounting principles. The items that currently impact the Company’s other comprehensive income are changes in the postretirement benefit obligations, net of tax.

 

     Three months ended June 30,    Six months ended June 30,
     2008    2007    2008    2007

Net income

   $ 3,258    $ 5,099    $ 4,706    $ 6,678

Change in postretirement benefit obligation, net of tax

     —        —        8      —  
                           

Comprehensive income

   $ 3,258    $ 5,099    $ 4,714    $ 6,678
                           

14. Recent Accounting Developments

In September 2006, the Financial Accounting Standards Board (“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. In February 2007, the FASB issued FSP FAS 157-2, delaying the effective date of SFAS 157 for certain nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for financial assets and financial liabilities, effective for fiscal 2008, did not have a material impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact SFAS 157 may have for nonfinancial assets and liabilities in its 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 did not elect to begin reporting any financial assets or liabilities at fair value upon adoption of this standard.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financials Statements, an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 clarifies the accounting for non controlling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact SFAS 160 will have on its consolidated financial statements.

In April 2008, the FASB issued FSP SFAS No. 142-3 “Determination of the Useful Life of Intangible Assets” (“SFAS 142-3”). SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumption used to determine the useful life of a recognized intangible asset under SFAS No. 142. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which will require the Company to adopt these provisions in the first quarter of 2009. The Company has reviewed this pronouncement and does not anticipate the adoption of SFAS No. 142-3 will materially impact its financial statements.

15. 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:

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

TPAQ Holding Corporation

The following supplemental financial information sets forth on a consolidating basis, balance sheets as of June 30, 2008 and December 31, 2007 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, 2008 and 2007.

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 for the Parent Company only and the Guarantor Subsidiaries, as calculated on the separate return method and the consolidated income tax provision are eliminated in consolidation.

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING BALANCE SHEET

June 30, 2008

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 2,028     $ 2,404     $ —       $ 4,432  

Trade and other receivables

     1,225       4,660       —         5,885  

Inventories

     3,058       2,087       —         5,145  

Prepaid rent

     1,047       1,831       —         2,878  

Prepaid expenses and other current assets

     2,421       4,540       —         6,961  

Deferred income taxes

     2,766       2,018       —         4,784  
                                

Total current assets

     12,545       17,540       —         30,085  

Property and equipment, net

     61,838       205,634       (55,519 )     211,953  

Franchise rights, net

     78,469       —         —         78,469  

Goodwill

     1,450       123,484       —         124,934  

Intangible assets, net

     —         742       —         742  

Franchise agreements, net

     5,657       —         —         5,657  

Intercompany receivable (payable)

     171,485       (171,972 )     487       —    

Investment in subsidiaries

     43,786       —         (43,786 )     —    

Deferred income taxes

     3,617       8,358       (1,639 )     10,336  

Other assets

     7,015       6,113       (1,723 )     11,405  
                                

Total assets

   $ 385,862     $ 189,899     $ (102,180 )   $ 473,581  
                                
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)         

Current liabilities:

        

Current portion of long-term debt

   $ 6,075     $ 42     $ —       $ 6,117  

Accounts payable

     10,441       10,767       —         21,208  

Accrued interest

     7,844       —         —         7,844  

Accrued payroll, related taxes and benefits

     8,708       7,587       —         16,295  

Accrued income taxes payable

     1,964       —           1,964  

Accrued real estate taxes

     892       2,715       —         3,607  

Other liabilities

     7,081       4,529       —         11,610  
                                

Total current liabilities

     43,005       25,640       —         68,645  

Long-term debt, net of current portion

     301,694       1,018       —         302,712  

Lease financing obligations

     7,581       110,462       (70,728 )     47,315  

Deferred income—sale-leaseback of real estate

     18,380       5,500       7,851       31,731  

Accrued postretirement benefits

     2,886       —         —         2,886  

Other liabilities

     13,433       7,406       570       21,409  
                                

Total liabilities

     386,979       150,026       (62,307 )     474,698  

Commitments and contingencies

        

Stockholder’s equity (deficit)

     (1,117 )     39,873       (39,873 )     (1,117 )
                                

Total liabilities and stockholder’s equity (deficit)

   $ 385,862     $ 189,899     $ (102,180 )   $ 473,581  
                                

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2007

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 4,912     $ 2,484     $ —       $ 7,396  

Trade and other receivables

     1,239       3,495       —         4,734  

Inventories

     3,243       2,096       —         5,339  

Prepaid rent

     1,036       1,767       —         2,803  

Prepaid expenses and other current assets

     2,458       3,714       —         6,172  

Deferred income taxes

     2,789       2,013       —         4,802  
                                

Total current assets

     15,677       15,569       —         31,246  

Property and equipment, net

     60,874       193,636       (54,185 )     200,325  

Franchise rights, net

     80,052       —         —         80,052  

Goodwill

     1,450       123,484       —         124,934  

Intangible assets, net

     —         887       —         887  

Franchise agreements, net

     5,548       —         —         5,548  

Intercompany receivable (payable)

     166,701       (167,258 )     557       —    

Investment in subsidiaries

     39,080       —         (39,080 )     —    

Deferred income taxes

     3,845       7,961       (1,247 )     10,559  

Other assets

     7,345       6,373       (1,711 )     12,007  
                                

Total assets

   $ 380,572     $ 180,652     $ (95,666 )   $ 465,558  
                                
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)         

Current liabilities:

        

Current portion of long-term debt

   $ 3,080     $ 49     $ —       $ 3,129  

Accounts payable

     10,436       9,618       —         20,054  

Accrued interest

     8,148       —         —         8,148  

Accrued payroll, related taxes and benefits

     10,966       7,703       —         18,669  

Accrued income taxes payable

     933       —         —         933  

Accrued real estate taxes

     744       2,568       —         3,312  

Other liabilities

     7,138       2,975       —         10,113  
                                

Total current liabilities

     41,445       22,913       —         64,358  

Long-term debt, net of current portion

     297,117       1,037         298,154  

Lease financing obligations

     13,065       108,089       (68,465 )     52,689  

Deferred income—sale-leaseback of real estate

     17,713       5,650       7,985       31,348  

Accrued postretirement benefits

     3,022       —         —         3,022  

Other liabilities

     15,007       7,313       464       22,784  
                                

Total liabilities

     387,369       145,002       (60,016 )     472,355  

Commitments and contingencies

        

Stockholder’s equity (deficit)

     (6,797 )     35,650       (35,650 )     (6,797 )
                                

Total liabilities and stockholder’s equity (deficit)

   $ 380,572     $ 180,652     $ (95,666 )   $ 465,558  
                                

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2008

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ 101,842     $ 108,489     $ —       $ 210,331  

Franchise royalty revenues and fees

     —         351       —         351  
                                

Total revenues

     101,842       108,840       —         210,682  
                                

Costs and expenses:

        

Cost of sales

     29,091       34,852       —         63,943  

Restaurant wages and related expenses (including stock-based compensation expense of $57)

     31,247       29,516       —         60,763  

Restaurant rent expense

     6,074       4,113       1,381       11,568  

Other restaurant operating expenses

     15,027       16,321       —         31,348  

Advertising expense

     4,834       4,390       —         9,224  

General and administrative (including stock based compensation expense of $435)

     6,996       6,720       —         13,716  

Depreciation and amortization

     3,843       4,559       (325 )     8,077  

Impairment losses

     71       10       —         81  

Other income

     —         (119 )     —         (119 )
                                

Total operating expenses

     97,183       100,362       1,056       198,601  
                                

Income from operations

     4,659       8,478       (1,056 )     12,081  

Interest expense

     6,061       2,596       (1,534 )     7,123  

Gain on extinguishment of debt

     (180 )     —         —         (180 )

Intercompany interest allocations

     (4,557 )     4,557       —         —    
                                

Income before income taxes

     3,335       1,325       478       5,138  

Provision for income taxes

     1,165       436       279       1,880  

Equity income from subsidiaries

     1,088       —         (1,088 )     —    
                                

Net income

   $ 3,258     $ 889     $ (889 )   $ 3,258  
                                

 

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Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 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       31,860      —         57,375

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       14,197      —         28,534

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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Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2008

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ 193,006     $ 212,718     $ —       $ 405,724  

Franchise royalty revenues and fees

     —         711       —         711  
                                

Total revenues

     193,006       213,429       —         406,435  
                                

Costs and expenses:

        

Cost of sales

     53,543       68,029       —         121,572  

Restaurant wages and related expenses (including stock-based compensation expense of $114)

     60,815       58,489       —         119,304  

Restaurant rent expense

     12,100       8,215       2,736       23,051  

Other restaurant operating expenses

     29,576       31,317       —         60,893  

Advertising expense

     8,807       8,241       —         17,048  

General and administrative (including stock based compensation expense of $852)

     13,469       13,240       —         26,709  

Depreciation and amortization

     7,727       9,014       (642 )     16,099  

Impairment loss

     92       10       —         102  

Other income

     —         (119 )     —         (119 )
                                

Total operating expenses

     186,129       196,436       2,094       384,659  
                                

Income from operations

     6,877       16,993       (2,094 )     21,776  

Interest expense

     12,434       5,163       (3,040 )     14,557  

Gain on extinguishment of debt

     (180 )     —         —         (180 )

Intercompany interest allocations

     (9,113 )     9,113       —         —    
                                

Income before income taxes

     3,736       2,717       946       7,399  

Provision for income taxes

     1,277       954       462       2,693  

Equity income from subsidiaries

     2,247       —         (2,247 )     —    
                                

Net income

   $ 4,706     $ 1,763     $ (1,763 )   $ 4,706  
                                

 

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Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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       61,967       —         109,669  

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       28,171       —         56,481  

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 losses

     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

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2008

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Cash flows provided from (used for) operating activities:

        

Net income

   $ 4,706     $ 1,763     $ (1,763 )   $ 4,706  

Adjustments to reconcile net income to net cash provided from (used for) operating activities:

        

Loss (gain) on disposals of property and equipment

     51