Carrols Restaurant Group, Inc.
CARROLS CORP (Form: 10-Q, Received: 11/04/2009 15:29:43)
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 September 27, 2009

OR

 

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

Commission File Number: 001-33174

 

 

CARROLS RESTAURANT GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   16-1287774

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

968 James Street

Syracuse, New York

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

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

Commission File Number: 001-06553

 

 

CARROLS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   16-0958146

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

968 James Street

Syracuse, New York

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

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

 

 

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

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

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

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

 

Carrols Restaurant Group, Inc.      
Large accelerated filer     ¨    Accelerated filer    x
Non-accelerated filer   (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 October 30, 2009, Carrols Restaurant Group, Inc. had 21,594,145 shares of its common stock, $.01 par value, outstanding. As of October 30, 2009, all outstanding equity securities of Carrols Corporation, which consisted of 10 shares of its common stock, were owned by Carrols Restaurant Group, Inc.

 

 

 


Table of Contents

CARROLS RESTAURANT GROUP, INC. AND CARROLS CORPORATION

FORM 10-Q

QUARTER ENDED SEPTEMBER 27, 2009

 

          Page

PART I

   FINANCIAL INFORMATION   

Item 1

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

Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

   3
  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

   4
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

   5
  

Notes to Consolidated Financial Statements

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

Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

   17
  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

   18
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

   19
  

Notes to Consolidated Financial Statements

   20

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    40

Item 3

   Quantitative and Qualitative Disclosures About Market Risk    54

Item 4

   Controls and Procedures    55

PART II

   OTHER INFORMATION   

Item 1

   Legal Proceedings    55

Item 1A

   Risk Factors    55

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds    55

Item 3

   Default Upon Senior Securities    55

Item 4

   Submission of Matters to a Vote of Security Holders    55

Item 5

   Other Information    55

Item 6

   Exhibits    55

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM  1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

     September 30,
2009
    December 31,
2008
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,306      $ 3,399   

Trade and other receivables

     5,293        5,622   

Inventories

     5,467        5,588   

Prepaid rent

     2,983        2,998   

Prepaid expenses and other current assets

     4,751        6,738   

Deferred income taxes

     4,873        4,890   
                

Total current assets

     26,673        29,235   

Property and equipment, net

     197,081        195,376   

Franchise rights, net (Note 4)

     74,518        76,870   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     578        675   

Franchise agreements, at cost less accumulated amortization of $5,715 and $5,729, respectively

     5,900        5,826   

Deferred income taxes

     5,415        6,697   

Other assets

     9,228        10,585   
                

Total assets

   $ 444,327      $ 450,198   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 15,081      $ 12,093   

Accounts payable

     17,332        18,789   

Accrued interest

     3,232        7,742   

Accrued payroll, related taxes and benefits

     19,943        15,431   

Accrued income taxes payable

     3,001        2,099   

Accrued real estate taxes

     4,979        3,803   

Other liabilities

     11,494        10,848   
                

Total current liabilities

     75,062        70,805   

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

     265,232        289,202   

Lease financing obligations (Note 9)

     10,865        14,859   

Deferred income—sale-leaseback of real estate

     42,802        43,447   

Accrued postretirement benefits (Note 8)

     1,494        1,697   

Other liabilities (Note 7)

     21,670        21,729   
                

Total liabilities

     417,125        441,739   

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

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

     —          —     

Voting common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding - 21,594,145 and 21,592,462 shares, respectively

     216        216   

Additional paid-in capital

     1,403        348   

Retained earnings

     23,760        6,072   

Accumulated other comprehensive income (Note 13)

     1,964        1,964   

Treasury stock, at cost

     (141     (141
                

Total stockholders’ equity

     27,202        8,459   
                

Total liabilities and stockholders’ equity

   $ 444,327      $ 450,198   
                

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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

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

(Unaudited)

 

     Three months ended
September 30,
   Nine months ended
September 30,
 
     2009     2008    2009     2008  

Revenues:

         

Restaurant sales

   $ 200,802      $ 208,698    $ 605,326      $ 614,422   

Franchise royalty revenues and fees

     364        366      1,117        1,077   
                               

Total revenues

     201,166        209,064      606,443        615,499   
                               

Costs and expenses:

         

Cost of sales

     57,662        63,558      175,284        185,130   

Restaurant wages and related expenses (including stock-based compensation expense of $51, $57, $156 and $171, respectively)

     59,109        59,786      176,896        179,090   

Restaurant rent expense

     12,383        11,714      37,217        34,765   

Other restaurant operating expenses

     29,841        32,433      88,541        93,326   

Advertising expense

     7,974        7,826      23,552        24,874   

General and administrative (including stock-based compensation expense of $296, $438, $899 and $1,290, respectively)

     12,766        12,893      38,682        39,605   

Depreciation and amortization

     8,080        8,124      23,833        24,223   

Impairment and other lease charges (Note 3)

     46        53      400        155   

Other income (Note 14)

     (220     —        (799     (119
                               

Total costs and expenses

     187,641        196,387      563,606        581,049   
                               

Income from operations

     13,525        12,677      42,837        34,450   

Interest expense

     4,834        6,861      14,908        21,418   

Gain on extinguishment of debt (Note 5)

     —          —        —          (180
                               

Income before income taxes

     8,691        5,816      27,929        13,212   

Provision for income taxes (Note 6)

     3,094        2,136      10,241        4,829   
                               

Net income

   $ 5,597      $ 3,680    $ 17,688      $ 8,383   
                               

Basic net income per share (Note 12)

   $ 0.26      $ 0.17    $ 0.82      $ 0.39   
                               

Diluted net income per share (Note 12)

   $ 0.26      $ 0.17    $ 0.81      $ 0.39   
                               

Basic weighted average common shares outstanding (Note 12)

     21,593,927        21,573,485      21,592,974        21,572,241   

Diluted weighted average common shares outstanding (Note 12)

     21,844,946        21,576,176      21,740,957        21,575,280   

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

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In thousands of dollars)

(Unaudited)

 

     2009     2008  

Cash flows provided from operating activities:

    

Net income

   $ 17,688      $ 8,383   

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

    

Loss on disposals of property and equipment

     15        102   

Stock-based compensation expense

     1,055        1,461   

Impairment and other lease charges

     400        155   

Depreciation and amortization

     23,833        24,223   

Amortization of deferred financing costs

     732        890   

Amortization of unearned purchase discounts

     (1,616     (1,616

Amortization of deferred gains from sale-leaseback transactions

     (2,363     (1,582

Gain on settlements of lease financing obligations

     (76     (48

Accretion of interest on lease financing obligations

     33        180   

Deferred income taxes

     1,299        (58

Accrued income taxes

     902        2,748   

Gain on extinguishment of debt

     —          (180

Changes in other operating assets and liabilities

     5,039        (5,501
                

Net cash provided from operating activities

     46,941        29,157   
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (7,887     (26,464

Restaurant remodeling

     (10,073     (9,622

Other restaurant capital expenditures

     (8,367     (6,903

Corporate and restaurant information systems

     (3,624     (5,835
                

Total capital expenditures

     (29,951     (48,824

Properties purchased for sale-leaseback

     (1,260     —     

Proceeds from sale-leaseback transactions

     5,454        6,788   

Proceeds from sales of other properties

     819        119   
                

Net cash used for investing activities

     (24,938     (41,917
                

Cash flows provided from (used for) financing activities:

    

Borrowings on revolving credit facility

     77,700        109,600   

Repayments on revolving credit facility

     (92,600     (92,400

Scheduled principal payments on term loans

     (6,000     (1,500

Principal payments on capital leases

     (82     (119

Proceeds from lease financing obligations

     835        —     

Settlement of lease financing obligations

     (1,945     (5,500

Financing costs associated with issuance of lease financing obligations

     (4     —     

Repurchase of senior subordinated notes

     —          (1,820
                

Net cash provided from (used for) financing activities

     (22,096     8,261   
                

Net decrease in cash and cash equivalents

     (93     (4,499

Cash and cash equivalents, beginning of period

     3,399        7,396   
                

Cash and cash equivalents, end of period

   $ 3,306      $ 2,897   
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 17,803      $ 20,984   

Interest paid on lease financing obligations

   $ 926      $ 3,578   

Accruals for capital expenditures

   $ 318      $ 810   

Income taxes paid, net

   $ 8,040      $ 2,141   

Capital lease obligations incurred

   $ —        $ 158   

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

   $ 2,074      $ 298   

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

   $ 2,833      $ 880   

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

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

Business Description. At September 30, 2009 the Company operated, as franchisee, 314 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At September 30, 2009, the Company also owned and operated 91 Pollo Tropical restaurants, of which 85 were located in Florida, four were in New Jersey and one each in New York and Connecticut, and franchised a total of 27 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in the Bahamas and three on college campuses in Florida. At September 30, 2009, the Company owned and operated 155 Taco Cabana restaurants located primarily in Texas and franchised a total of four Taco Cabana restaurants, two in New Mexico, one in Texas 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 28, 2008 and December 30, 2007 will be referred to as the fiscal years ended December 31, 2008 and 2007, respectively. Similarly, all references herein to the three and nine months ended September 27, 2009 and September 28, 2008 will be referred to as the three and nine months ended September 30, 2009 and September 30, 2008, respectively. The years ended December 31, 2008 and 2007 each contained 52 weeks and the three and nine months ended September 30, 2009 and 2008 each contained thirteen and thirty-nine weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2009 and 2008 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 nine months ended September 30, 2009 and 2008 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, 2008 contained in the Company’s 2008 Annual Report on Form 10-K. The December 31, 2008 balance sheet data is derived from those audited financial statements.

Fair Value of Financial Instruments. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

 

   

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

 

   

Senior Subordinated Notes. The fair values of outstanding senior subordinated notes are based on quoted market prices. The fair values at September 30, 2009 and December 31, 2008 were approximately $165.0 million and $111.4 million, respectively.

 

   

Revolving and Term Loan Facilities. Rates and terms under Carrols’ senior credit facility are significantly favorable to debt with similar terms and maturities that could be potentially obtainable, if at all, at September 30, 2009. Given the lack of comparative information regarding such debt it is not practicable to estimate the fair value of our existing borrowings under our senior credit facility at September 30, 2009.

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

 

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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)

 

amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights, lease accounting matters and stock-based compensation. Actual results could differ from those estimates.

Subsequent Events. The Company evaluated for subsequent events through November 4, 2009, the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.

2. Stock-Based Compensation

As of September 30, 2009, the total non-vested stock-based compensation expense relating to the options and restricted shares was approximately $3.0 million and the Company expects to record an additional $0.4 million as compensation expense in 2009. At September 30, 2009, the remaining weighted average vesting period for stock options and restricted shares was 3.3 years and 1.6 years, respectively.

Stock Options

A summary of all option activity for the nine months ended September 30, 2009 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, 2009

   1,710,764      $ 12.17    5.3    $ —  

Granted

   544,000        2.77      

Forfeited

   (90,113     10.75      
              

Options outstanding at September 30, 2009

   2,164,651      $ 9.86    5.0    $ 2,809
              

Vested or expected to vest at September 30, 2009

   2,129,625      $ 9.89    5.0    $ 2,741
              

Options exercisable at September 30, 2009

   779,628      $ 12.85    4.5    $ —  
              

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at September 30, 2009 and the grant price for only those awards that had a grant price that was less than the market price of the Company’s common stock at September 30, 2009.

3. Impairment and Other Lease Charges

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Impairment and other lease charges recorded on long-lived assets for its segments were as follows:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Burger King

   $ 31    $ 43    $ 59    $ 135

Pollo Tropical

     —        5      284      5

Taco Cabana

     15      5      57      15
                           
   $ 46    $ 53    $ 400    $ 155
                           

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

4. Goodwill and Franchise Rights

Goodwill. 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. In performing its goodwill impairment test, the Company compares the net book values of its reporting units to their estimated fair values. In determining the estimated fair values of the reporting units, the Company employs a combination of a discounted cash flow analysis and a market-based approach. The results of the discounted cash flow analyses are corroborated with other value indicators where available, such as comparable company earnings multiples and research analyst estimates. No impairment losses have been recognized as a result of these tests. Goodwill balances are summarized below:

 

     Pollo
Tropical
   Taco
Cabana
   Burger
King
   Total

Balance, September 30, 2009

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

Burger King Franchise Rights. Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period. The Company assesses the potential impairment of 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 and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no impairment charges recorded against franchise rights for the three and nine months ended September 30, 2009 and 2008.

Amortization expense related to Burger King franchise rights was $784 and $799 for the three months ended September 30, 2009 and 2008, respectively. Amortization expense related to Burger King franchise rights was $2,352 and $2,399 for the nine months ended September 30, 2009 and 2008, respectively. The Company estimates the amortization expense for the year ending December 31, 2009 and for each of the five succeeding years to be $3,197.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

5. Long-term Debt

Long-term debt at September 30, 2009 and December 31, 2008 consisted of the following:

 

     September 30,
2009
    December 31,
2008
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ 3,100      $ 18,000   

Senior Credit Facility-Term loan A facility

     111,000        117,000   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,213        1,295   
                
     280,313        301,295   

Less: current portion

     (15,081     (12,093
                
   $ 265,232      $ 289,202   
                

Senior Credit Facility. On March 9, 2007, Carrols terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. Carrols’ senior credit facility initially totaled approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on March 31, 2012 if the 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving credit facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans), maturing on March 8, 2012.

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

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

2) Adjusted LIBOR plus the applicable margin percentage in effect ranging from 1.0% to 1.5% based on Carrols’ senior leverage ratio. At September 27, 2009 the LIBOR margin percentage was 1.0%.

At September 27, 2009, outstanding term loan borrowings under the senior credit facility were $111.0 million with the remaining balance due and payable as follows:

1) seven quarterly installments of $3.0 million beginning on September 30, 2009;

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

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

After reserving $14.3 million for letters of credit guaranteed by the facility, $47.6 million was available for borrowings under the revolving credit facility at September 27, 2009.

Under the senior credit facility, Carrols is also required to make mandatory prepayments of principal on its term loan 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. The senior credit facility contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the senior credit facility if there is a default in the payment of any principal of or interest on any indebtedness of Carrols having an outstanding principal amount of at least $2.5 million (excluding lease financing obligations but which would include the Indenture governing the Notes, as defined below) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.

In general, Carrols’ obligations under the senior credit facility are guaranteed by the Company and all of Carrols’ material subsidiaries and are collateralized by a pledge of Carrols’ common stock and the stock of each of Carrols’ material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting Carrols’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, Carrols is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). Carrols was in compliance with the covenants under its senior credit facility as of September 30, 2009.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Senior Subordinated Notes. On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). At both September 30, 2009 and December 31, 2008, $165.0 million principal amount of the senior subordinated notes were outstanding. During 2008, Carrols repurchased and retired $15.0 million principal amount of the Notes in open market transactions for $10.4 million resulting in a gain on extinguishment of debt of $4.4 million, net of a $0.3 million write-off of deferred financing costs. Of these repurchases in 2008, $2.0 million was repurchased in the three months ended September 30, 2008 which resulted in a gain on extinguishment of debt of $0.2 million.

Restrictive covenants under the Notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. The Indenture governing the Notes contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the Notes and the Indenture if there is a default under any indebtedness of Carrols having an outstanding principal amount of $20 million or more (which would include the senior credit facility) if such default results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. Carrols was in compliance with the restrictive covenants in the Indenture governing the Notes as of September 30, 2009.

6. Income Taxes

The provision for income taxes for the three and nine months ended September 30, 2009 and 2008 was comprised of the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  

Current

   $ 2,562    $ 2,443      $ 8,942    $ 4,887   

Deferred

     532      (307     1,299      (58
                              
   $ 3,094    $ 2,136      $ 10,241    $ 4,829   
                              

The provision for income taxes for the three and nine months ended September 30, 2009 was derived using an estimated effective annual income tax rate for 2009 of 37.3%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $130 and $187 in the three and nine months ended September 30, 2009, respectively.

The provision for income taxes for the three and nine months ended September 30, 2008 was derived using an estimated effective annual income tax rate for 2008 of 37.2%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $15 for the three months ended September 30, 2008 and reduced the provision for income taxes by $97 for the nine months ended September 30, 2008.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2009 and 2008, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2006-2008 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 due to the uncertainties regarding the timing of any examinations.

 

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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 September 30, 2009 and December 31, 2008 consisted of the following:

 

     September 30,
2009
   December 31,
2008

Accrued occupancy costs

   $ 11,282    $ 10,949

Accrued workers’ compensation costs

     3,675      4,312

Deferred compensation

     3,127      3,244

Other

     3,586      3,224
             
   $ 21,670    $ 21,729
             

8. Postretirement Benefits

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

The following summarizes the components of net periodic benefit income:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Service cost

   $ 6      $ 7      $ 21      $ 21   

Interest cost

     30        27        84        80   

Amortization of net gains and losses

     27        22        69        65   

Amortization of prior service credit

     (93     (90     (265     (269
                                

Net periodic postretirement benefit income

   $ (30   $ (34   $ (91   $ (103
                                

During the three and nine months ended September 30, 2009, the Company made contributions of $52 and $124 to its postretirement plan and expects to make additional contributions during 2009.

9. Lease Financing Obligations

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

During the nine months ended September 30, 2009, the Company settled $1.9 million of lease financing obligations which included a purchase from a lessor of one restaurant property previously subject to a lease financing obligation for $1.1 million and the settlement of the lease financing obligation recorded in the second quarter of 2009 for $0.8 million. The Company also modified provisions in two of its restaurant leases previously accounted for as lease financing obligations which allowed the respective sale transactions to qualify for sale-leaseback accounting and resulted in a reduction of lease financing obligations of $2.8 million. As a result of these transactions in 2009, lease financing obligations were reduced $4.0 million, assets under lease financing obligations were reduced by $2.1 million and deferred gains on qualified sale-leaseback transactions of $0.7 million were recorded.

In the nine months ended September 30, 2008, the Company purchased from the lessor six restaurant properties for $5.5 million that were previously accounted for as lease financing obligations.

In late 2008, the Company also amended or modified certain lease provisions and terminated certain purchase options for certain restaurant leases previously accounted for as lease financing obligations. The changes permitted 24 leases to qualify as operating leases and the related sale-leaseback transactions to be recorded as sales, which removed all of the respective assets under lease financing obligations and related liabilities from the Company’s consolidated balance sheet. The gains from these sales were generally deferred and are being amortized as an adjustment to rent expense over the remaining term of the underlying leases.

 

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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 September 30, 2009 and 2008 was $0.3 million and $1.1 million, respectively, and for the nine months ended September 30, 2009 and 2008 was $0.9 million and $3.8 million, respectively.

10. Business Segment Information

The Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King, operating as a franchisee, and Pollo Tropical and Taco Cabana, both Company-owned concepts. 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 authentic “made from scratch” side dishes. Pollo Tropical’s restaurants are primarily 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 restaurants 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 and other lease charges, stock-based compensation expense, other income and gains and losses on extinguishment of debt.

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Three Months Ended

   Pollo
Tropical
   Taco
Cabana
   Burger
King
   Other    Consolidated

September 30, 2009:

              

Total revenues

   $ 44,021    $ 63,013    $ 94,132    $ —      $ 201,166

Cost of sales

     14,379      18,074      25,209      —        57,662

Restaurant wages and related expenses

     10,689      19,030      29,339      51      59,109

General and administrative expenses (1)

     2,771      2,877      6,822      296      12,766

Depreciation and amortization

     2,014      2,249      3,407      410      8,080

Segment EBITDA

     6,294      6,662      8,822      

Capital expenditures, including acquisitions

     697      2,924      8,475      547      12,643

September 30, 2008:

              

Total revenues

   $ 43,389    $ 64,132    $ 101,543    $ —      $ 209,064

Cost of sales

     14,312      19,646      29,600      —        63,558

Restaurant wages and related expenses

     10,662      18,357      30,710      57      59,786

General and administrative expenses (1)

     2,996      3,036      6,423      438      12,893

Depreciation and amortization

     2,032      2,261      3,492      339      8,124

Segment EBITDA

     5,222      7,308      8,819      

Capital expenditures, including acquisitions

     3,656      7,320      5,369      3,250      19,595

Nine Months Ended

                        

September 30, 2009:

              

Total revenues

   $ 132,737    $ 189,543    $ 284,163    $ —      $ 606,443

Cost of sales

     43,585      54,960      76,739      —        175,284

Restaurant wages and related expenses

     32,553      56,029      88,158      156      176,896

General and administrative expenses (1)

     7,572      8,729      21,482      899      38,682

Depreciation and amortization

     5,936      6,708      10,056      1,133      23,833

Segment EBITDA

     19,526      22,906      24,894      

Capital expenditures, including acquisitions

     1,901      9,503      14,923      3,624      29,951

September 30, 2008:

              

Total revenues

   $ 133,125    $ 187,825    $ 294,549    $ —      $ 615,499

Cost of sales

     43,965      58,022      83,143      —        185,130

Restaurant wages and related expenses

     32,861      54,601      91,457      171      179,090

General and administrative expenses (1)

     8,324      9,048      20,943      1,290      39,605

Depreciation and amortization

     5,948      6,423      10,741      1,111      24,223

Segment EBITDA

     17,959      19,679      22,532      

Capital expenditures, including acquisitions

     15,064      16,360      11,565      5,835      48,824

Identifiable Assets:

              

At September 30, 2009

   $ 56,344    $ 66,812    $ 148,454    $ 172,717    $ 444,327

At December 31, 2008

     64,550      67,093      143,152      175,403      450,198

 

(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
September 30,
   Nine Months Ended
September 30,
 
     2009     2008    2009     2008  

Segment EBITDA:

         

Pollo Tropical

   $ 6,294      $ 5,222    $ 19,526      $ 17,959   

Taco Cabana

     6,662        7,308      22,906        19,679   

Burger King

     8,822        8,819      24,894        22,532   
                               

Subtotal

     21,778        21,349      67,326        60,170   

Less:

         

Depreciation and amortization

     8,080        8,124      23,833        24,223   

Impairment and other lease charges

     46        53      400        155   

Interest expense

     4,834        6,861      14,908        21,418   

Provision for income taxes

     3,094        2,136      10,241        4,829   

Stock-based compensation expense

     347        495      1,055        1,461   

Gain on extinguishment of debt

     —          —        —          (180

Other income

     (220     —        (799     (119
                               

Net income

   $ 5,597      $ 3,680    $ 17,688      $ 8,383   
                               

11. Commitments and Contingencies

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

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

12. Net Income per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options using the treasury stock method.

The computation of diluted net income per share excludes options to purchase 1,036,992 shares of common stock in each of the three and nine months ended September 30, 2009 and options to purchase 1,104,505 in each of the three and nine months ended September 30, 2008 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 31,508 shares of common stock are excluded from the computation of diluted net income per share in each of the three and nine months ended September 30, 2009 and options to purchase 51,098 of common stock are excluded from the computation of diluted net income per share in each of the three and nine months ended September 30, 2008 as they were antidilutive under the treasury stock method.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Basic net income per share:

           

Net income

   $ 5,597    $ 3,680    $ 17,688    $ 8,383

Weighted average common shares outstanding

     21,593,927      21,573,485      21,592,974      21,572,241
                           

Basic net income per share

   $ 0.26    $ 0.17    $ 0.82    $ 0.39
                           

Diluted net income per share:

           

Net income for diluted net income per share

   $ 5,597    $ 3,680    $ 17,688    $ 8,383

Shares used in computed basic net income per share

     21,593,927      21,573,485      21,592,974      21,572,241

Dilutive effect of restricted shares and stock options

     251,019      2,691      147,983      3,039
                           

Shares used in computed diluted net income per share

     21,844,946      21,576,176      21,740,957      21,575,280
                           

Diluted net income per share

   $ 0.26    $ 0.17    $ 0.81    $ 0.39
                           

13. Comprehensive Income

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Net income

   $ 5,597    $ 3,680    $ 17,688    $ 8,383

Change in postretirement benefit obligation, net of tax

     —        —        —        8
                           

Comprehensive income

   $ 5,597    $ 3,680    $ 17,688    $ 8,391
                           

14. Other Income

During the three months ended September 30, 2009, the Company recorded a gain of $0.2 million related to the sale of a non-operating property. During the nine months ended September 30, 2009, the Company also recorded a gain of $0.6 million related to an insurance recovery for damages to Taco Cabana restaurants during Hurricane Ike. The Company recorded a gain of $0.1 million in the nine months ended September 30, 2008 related to the sale of a Taco Cabana property.

 

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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)

 

15. Recent Accounting Developments

In June 2009, the FASB approved ASU 2009-01, the FASB Accounting Standards Codification (the “ASC”) as the single source of authoritative nongovernmental generally accepted accounting principles (“GAAP”). All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the ASC. All other non-grandfathered, non-SEC accounting literature not included in the ASC has become nonauthoritative. The ASC did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The ASC is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the ASC. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the ASC during the quarter ended September 30, 2009.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”) . This statement is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The statement is effective on January 1, 2010 for companies reporting on a calendar year basis. The Company is currently evaluating the impact of SFAS No. 167 on its financial statements.

In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820). The purpose of this ASU is to clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets. This guidance is effective upon issuance. This ASU had no impact on the Company’s 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)

 

     September 30,
2009
    December 31,
2008
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,306      $ 3,399   

Trade and other receivables

     5,293        5,622   

Inventories

     5,467        5,588   

Prepaid rent

     2,983        2,998   

Prepaid expenses and other current assets

     4,751        6,738   

Deferred income taxes

     4,873        4,890   
                

Total current assets

     26,673        29,235   

Property and equipment, net

     197,081        195,376   

Franchise rights, net (Note 4)

     74,518        76,870   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     578        675   

Franchise agreements, at cost less accumulated amortization of $5,715 and $5,729, respectively

     5,900        5,826   

Deferred income taxes

     5,415        6,697   

Other assets

     9,228        10,585   
                

Total assets

   $ 444,327      $ 450,198   
                
LIABILITIES AND STOCKHOLDER’S EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 15,081      $ 12,093   

Accounts payable

     17,332        18,789   

Accrued interest

     3,232        7,742   

Accrued payroll, related taxes and benefits

     19,943        15,431   

Accrued income taxes

     3,001        2,099   

Accrued real estate taxes

     4,979        3,803   

Other liabilities

     11,494        10,848   
                

Total current liabilities

     75,062        70,805   

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

     265,232        289,202   

Lease financing obligations (Note 9)

     10,865        14,859   

Deferred income—sale-leaseback of real estate

     42,802        43,447   

Accrued postretirement benefits (Note 8)

     1,494        1,697   

Other liabilities (Note 7)

     21,621        21,685   
                

Total liabilities

     417,076        441,695   

Commitments and contingencies (Note 11)

    

Stockholder’s equity:

    

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

     —          —     

Additional paid-in capital

     (6,090     (7,145

Retained earnings

     31,377        13,684   

Accumulated other comprehensive income (Note 12)

     1,964        1,964   
                

Total stockholder’s equity

     27,251        8,503   
                

Total liabilities and stockholder’s equity

   $ 444,327      $ 450,198   
                

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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In thousands of dollars)

(Unaudited)

 

     Three months ended
September 30,
   Nine months ended
September 30,
 
     2009     2008    2009     2008  

Revenues:

         

Restaurant sales

   $ 200,802      $ 208,698    $ 605,326      $ 614,422   

Franchise royalty revenues and fees

     364        366      1,117        1,077   
                               

Total revenues

     201,166        209,064      606,443        615,499   
                               

Costs and expenses:

         

Cost of sales

     57,662        63,558      175,284        185,130   

Restaurant wages and related expenses (including stock-based compensation expense of $51, $57, $156 and $171, respectively)

     59,109        59,786      176,896        179,090   

Restaurant rent expense

     12,383        11,714      37,217        34,765   

Other restaurant operating expenses

     29,841        32,433      88,541        93,326   

Advertising expense

     7,974        7,826      23,552        24,874   

General and administrative (including stock-based compensation expense of $296, $438, $899 and $1,290, respectively)

     12,764        12,891      38,677        39,600   

Depreciation and amortization

     8,080        8,124      23,833        24,223   

Impairment and other lease charges (Note 3)

     46        53      400        155   

Other income (Note 13)

     (220     —        (799     (119
                               

Total costs and expenses

     187,639        196,385      563,601        581,044   
                               

Income from operations

     13,527        12,679      42,842        34,455   

Interest expense

     4,834        6,861      14,908        21,418   

Gain on extinguishment of debt (Note 5)

     —          —        —          (180
                               

Income before income taxes

     8,693        5,818      27,934        13,217   

Provision for income taxes (Note 6)

     3,094        2,136      10,241        4,829   
                               

Net income

   $ 5,599      $ 3,682    $ 17,693      $ 8,388   
                               

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

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In thousands of dollars)

(Unaudited)

 

     2009     2008  

Cash flows provided from operating activities:

    

Net income

   $ 17,693      $ 8,388   

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

    

Loss on disposals of property and equipment

     15        102   

Stock-based compensation expense

     1,055        1,461   

Impairment and other lease charges

     400        155   

Depreciation and amortization

     23,833        24,223   

Amortization of deferred financing costs

     732        890   

Amortization of unearned purchase discounts

     (1,616     (1,616

Amortization of deferred gains from sale-leaseback transactions

     (2,363     (1,582

Gain on settlements of lease financing obligations

     (76     (48

Accretion of interest on lease financing obligations

     33        180   

Deferred income taxes

     1,299        (58

Accrued income taxes

     902        2,748   

Gain on extinguishment of debt

     —          (180

Changes in other operating assets and liabilities

     5,034        (5,506
                

Net cash provided from operating activities

     46,941        29,157   
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (7,887     (26,464

Restaurant remodeling

     (10,073     (9,622

Other restaurant capital expenditures

     (8,367     (6,903

Corporate and restaurant information systems

     (3,624     (5,835
                

Total capital expenditures

     (29,951     (48,824

Properties purchased for sale-leaseback

     (1,260     —     

Proceeds from sale-leaseback transactions

     5,454        6,788   

Proceeds from sales of other properties

     819        119   
                

Net cash used for investing activities

     (24,938     (41,917
                

Cash flows provided from (used for) financing activities:

    

Borrowings on revolving credit facility

     77,700        109,600   

Repayments on revolving credit facility

     (92,600     (92,400

Scheduled principal payments on term loans

     (6,000     (1,500

Principal payments on capital leases

     (82     (119

Proceeds from lease financing obligations

     835        —     

Settlement of lease financing obligations

     (1,945     (5,500

Financing costs associated with issuance of lease financing obligations

     (4     —     

Repurchase of senior subordinated notes

     —          (1,820
                

Net cash provided from (used for) financing activities

     (22,096     8,261   
                

Net decrease in cash and cash equivalents

     (93     (4,499

Cash and cash equivalents, beginning of period

     3,399        7,396   
                

Cash and cash equivalents, end of period

   $ 3,306      $ 2,897   
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 17,803      $ 20,984   

Interest paid on lease financing obligations

   $ 926      $ 3,578   

Accruals for capital expenditures

   $ 318      $ 810   

Income taxes paid, net

   $ 8,040      $ 2,141   

Capital lease obligations incurred

   $ —        $ 158   

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

   $ 2,074      $ 298   

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

   $ 2,833      $ 880   

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

1. Basis of Presentation

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

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

Business Description. At September 30, 2009 the Company operated, as franchisee, 314 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At September 30, 2009, the Company also owned and operated 91 Pollo Tropical restaurants, of which 85 were located in Florida, four were in New Jersey and one each in New York and Connecticut, and franchised a total of 27 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in the Bahamas and three on college campuses in Florida. At September 30, 2009, the Company owned and operated 155 Taco Cabana restaurants located primarily in Texas and franchised a total of four Taco Cabana restaurants, two in New Mexico, one in Texas 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 28, 2008 and December 30, 2007 will be referred to as the fiscal years ended December 31, 2008 and 2007, respectively. Similarly, all references herein to the three and nine months ended September 27, 2009 and September 28, 2008 will be referred to as the three and nine months ended September 30, 2009 and September 30, 2008, respectively. The years ended December 31, 2008 and 2007 each contained 52 weeks and the three and nine months ended September 30, 2009 and 2008 each contained thirteen and thirty-nine weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2009 and 2008 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 nine months ended September 30, 2009 and 2008 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, 2008 contained in the Company’s 2008 Annual Report on Form 10-K. The December 31, 2008 balance sheet data is derived from those audited financial statements.

Fair Value of Financial Instruments. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

 

   

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

 

   

Senior Subordinated Notes. The fair values of outstanding senior subordinated notes are based on quoted market prices. The fair values at September 30, 2009 and December 31, 2008 were approximately $165.0 million and $111.4 million, respectively.

 

   

Revolving and Term Loan Facilities. Rates and terms under Carrols’ senior credit facility are significantly favorable to debt with similar terms and maturities that could be potentially obtainable, if at all, at September 30, 2009. Given the lack of comparative information regarding such debt it is not practicable to estimate the fair value of our existing borrowings under our senior credit facility at September 30, 2009.

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights, lease accounting matters and stock-based compensation. Actual results could differ from those estimates.

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

Subsequent Events . The Company evaluated for subsequent events through November 4, 2009, the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.

2. Stock-Based Compensation

As of September 30, 2009, the total non-vested stock-based compensation expense relating to the options and restricted shares was approximately $3.0 million and the Company expects to record an additional $0.4 million as compensation expense in 2009. At September 30, 2009 the remaining weighted average vesting period for stock options and restricted shares was 3.3 years and 1.6 years, respectively.

Stock Options

A summary of all option activity for the nine months ended September 30, 2009 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, 2009

   1,710,764      $ 12.17    5.3    $ —  

Granted

   544,000        2.77      

Forfeited

   (90,113     10.75      
              

Options outstanding at September 30, 2009

   2,164,651      $ 9.86    5.0    $ 2,809
              

Vested or expected to vest at September 30, 2009

   2,129,625      $ 9.89    5.0    $ 2,741
              

Options exercisable at September 30, 2009

   779,628      $ 12.85    4.5    $ —  
              

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at September 30, 2009 and the grant price for only those awards that had a grant price that was less than the market price of Carrols Restaurant Group’s common stock at September 30, 2009.

3. Impairment and Other Lease Charges

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Impairment and other lease charges recorded on long-lived assets for its segments were as follows:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
         2009            2008            2009            2008    

Burger King

   $ 31    $ 43    $ 59    $ 135

Pollo Tropical

     —        5      284      5

Taco Cabana

     15      5      57      15
                           
   $ 46    $ 53    $ 400    $ 155
                           

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

4. Goodwill and Franchise Rights

Goodwill. 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. In performing its goodwill impairment test, the Company compares the net book values of its reporting units to their estimated fair values. In determining the estimated fair values of the reporting units, the Company employs a combination of a discounted cash flow analysis and a market-based approach. The results of the discounted cash flow analyses are corroborated with other value indicators where available, such as comparable company earnings multiples and research analyst estimates. No impairment losses have been recognized as a result of these tests. Goodwill balances are summarized below:

 

     Pollo
Tropical
   Taco
Cabana
   Burger
King
   Total

Balance, September 30, 2009

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

Burger King Franchise Rights. Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period. The Company assesses the potential impairment of 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 months and nine months ended September 30, 2009 and 2008.

Amortization expense related to Burger King franchise rights was $784 and $799 for the three months ended September 30, 2009 and 2008, respectively. Amortization expense related to Burger King franchise rights was $2,352 and $2,399 for the nine months ended September 30, 2009 and 2008, respectively. The estimated amortization expense for the year ending December 31, 2009 and for each of the five succeeding years is $3,197.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

5. Long-term Debt

Long-term debt at September 30, 2009 and December 31, 2008 consisted of the following:

 

     September 30,
2009
    December 31,
2008
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ 3,100      $ 18,000   

Senior Credit Facility-Term loan A facility

     111,000        117,000   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,213        1,295   
                
     280,313        301,295   

Less: current portion

     (15,081     (12,093
                
   $ 265,232      $ 289,202   
                

Senior Credit Facility. On March 9, 2007, the Company terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. The Company’s credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on March 30, 2012 if the 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving credit facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans), maturing on March 8, 2012.

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

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

2) Adjusted LIBOR plus the applicable margin percentage in effect ranging from 1.0% to 1.5% based on the Company’s senior leverage ratio. At September 27, 2009 the LIBOR margin percentage was 1.0%.

At September 27, 2009, outstanding term loan borrowings under the senior credit facility were $111.0 million with the remaining balance due and payable as follows:

1) seven quarterly installments of $3.0 million beginning on September 30, 2009;

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

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

After reserving $14.3 million for letters of credit guaranteed by the facility, $47.6 million was available for borrowings under the revolving credit facility at September 27, 2009.

Under the senior credit facility, the Company is also required to make mandatory prepayments of principal on its term loan borrowings (a) annually in an 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. The senior credit facility contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the senior credit facility if there is a default in the payment of any principal of or interest on any indebtedness of the Company having an outstanding principal amount of at least $2.5 million (excluding lease financing obligations but which would include the Indenture governing the Notes, as defined below) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.

In general, the Company’s obligations under the senior credit facility are guaranteed by Carrols Restaurant Group and all of the Company’s material subsidiaries and are collateralized by a pledge of the Company’s common stock and the stock of each of the Company’s material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting the Company’s ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Company is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). The Company was in compliance with the covenants under its new senior credit facility as of September 30, 2009.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Senior Subordinated Notes. On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). At both September 30, 2009 and December 31, 2008, $165.0 million principal amount of the senior subordinated notes were outstanding. During 2008, the Company repurchased and retired $15.0 million principal amount of the Notes in open market transactions for $10.4 million resulting in a gain on extinguishment of debt of $4.4 million, net of a $0.3 million write-off of deferred financing costs. Of these repurchases in 2008, $2.0 million was repurchased in the three months ended September 30, 2008 which resulted in a gain on extinguishment of debt of $0.2 million.

Restrictive covenants under the Notes include limitations with respect to the Company’s ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. The Indenture governing the Notes contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the Notes and the Indenture if there is a default under any indebtedness of the Company having an outstanding principal amount of $20 million or more (which would include the senior credit facility) if such default results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. The Company was in compliance with the restrictive covenants in the Indenture governing the Notes as of September 30, 2009.

6. Income Taxes

The provision for income taxes for the three and nine months ended September 30, 2009 and 2008 was comprised of the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  

Current

   $ 2,562    $ 2,443      $ 8,942    $ 4,887   

Deferred

     532      (307     1,299      (58
                              
   $ 3,094    $ 2,136      $ 10,241    $ 4,829   
                              

The provision for income taxes for the three and nine months ended September 30, 2009 was derived using an estimated effective annual income tax rate for 2009 of 37.3%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $130 and $187 in the three and nine months ended September 30, 2009, respectively.

The provision for income taxes for the three and nine months ended September 30, 2008 was derived using an estimated effective annual income tax rate for 2008 of 37.2%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $15 for the three months ended September 30, 2008 and reduced the provision for income taxes by $97 for the nine months ended September 30, 2008.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2009 and 2008, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2006-2008 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 due to the uncertainties regarding the timing of any examinations.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

7. Other Liabilities, Long-Term

Other liabilities, long-term, at September 30, 2009 and December 31, 2008 consisted of the following:

 

     September 30,
2009
   December 31,
2008

Accrued occupancy costs

   $ 11,282    $ 10,949

Accrued workers’ compensation costs

     3,675      4,312

Deferred compensation

     3,127      3,244

Other

     3,537      3,180
             
   $ 21,621    $ 21,685
             

8. Postretirement Benefits

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

The following summarizes the components of net periodic benefit income:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Service cost

   $ 6      $ 7      $ 21      $ 21   

Interest cost

     30        27        84        80   

Amortization of net gains and losses

     27        22        69        65   

Amortization of prior service credit

     (93     (90     (265     (269
                                

Net periodic postretirement benefit income

   $ (30   $ (34   $ (91   $ (103
                                

During the three and nine months ended September 30, 2009, the Company made contributions of $52 and $124 to its postretirement plan and expects to make additional contributions during 2009.

9. Lease Financing Obligations

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

During the nine months ended September 30, 2009, the Company settled $1.9 million of lease financing obligations which included a purchase from a lessor one of one restaurant property previously subject to a lease financing obligation for $1.1 million and the settlement of the lease financing obligation recorded in the second quarter of 2009 for $0.8 million. The Company also modified provisions in two of its restaurant leases previously accounted for as lease financing obligations which allowed the respective sale transactions to qualify for sale-leaseback accounting and resulted in a reduction of lease financing obligations of $2.8 million. As a result of these transactions in the second quarter of 2009, lease financing obligations were reduced $4.0 million, assets under lease financing obligations were reduced by $2.1 million and deferred gains on qualified sale-leaseback transactions of $0.7 million were recorded.

In the nine months ended September 30, 2008, the Company purchased from the lessor six restaurant properties for $5.5 million that were previously accounted for as lease financing obligations.

In late 2008, the Company also amended or modified certain lease provisions and terminated certain purchase options, for certain restaurant leases previously accounted for as lease financing obligations. The changes permitted 24 leases to qualify as operating leases and the related sale-leaseback transactions to be recorded as sales, which removed all of the respective assets under lease financing obligations and related liabilities from the Company’s consolidated balance sheet. The gains from these sales were generally deferred and are being amortized as an adjustment to rent expense over the remaining term of the underlying leases.

 

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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 September 30, 2009 and 2008 was $0.3 million and $1.1 million, respectively, and for the nine months ended September 30, 2009 and 2008 was $0.9 million and $3.8 million, respectively.

10. Business Segment Information

The Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King operating as a franchisee and Pollo Tropical and Taco Cabana, both Company-owned concepts. 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 restaurants are primarily 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 restaurants 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 gains and losses on extinguishment of debt.

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

Three Months Ended

   Pollo
Tropical
   Taco
Cabana
   Burger
King
   Other    Consolidated

September 30, 2009:

              

Total revenues

   $ 44,021    $ 63,013    $ 94,132    $ —      $ 201,166

Cost of sales

     14,379      18,074      25,209      —        57,662

Restaurant wages and related expenses

     10,689      19,030      29,339      51      59,109

General and administrative expenses (1)

     2,769      2,877      6,822      296      12,764

Depreciation and amortization

     2,014      2,249      3,407      410      8,080

Segment EBITDA

     6,296      6,662      8,822      

Capital expenditures, including acquisitions

     697      2,924      8,475      547      12,643

September 30, 2008:

              

Total revenues

   $ 43,389    $ 64,132    $ 101,543    $ —      $ 209,064

Cost of sales

     14,312      19,646      29,600      —        63,558

Restaurant wages and related expenses

     10,662      18,357      30,710      57      59,786

General and administrative expenses (1)

     2,994      3,036      6,423      438      12,891

Depreciation and amortization

     2,032      2,261      3,492      339      8,124

Segment EBITDA

     5,224      7,308      8,819      

Capital expenditures, including acquisitions

     3,656      7,320      5,369      3,250      19,595

Nine Months Ended

                        

September 30, 2009:

              

Total revenues

   $ 132,737    $ 189,543    $ 284,163    $ —      $ 606,443

Cost of sales

     43,585      54,960      76,739      —        175,284

Restaurant wages and related expenses

     32,553      56,029      88,158      156      176,896

General and administrative expenses (1)

     7,567      8,729      21,482      899      38,677

Depreciation and amortization

     5,936      6,708      10,056      1,133      23,833

Segment EBITDA

     19,531      22,906      24,894      

Capital expenditures, including acquisitions

     1,901      9,503      14,923      3,624      29,951

September 30, 2008:

              

Total revenues

   $ 133,125    $ 187,825    $ 294,549    $ —      $ 615,499

Cost of sales

     43,965      58,022      83,143      —        185,130

Restaurant wages and related expenses

     32,861      54,601      91,457      171      179,090

General and administrative expenses (1)

     8,319      9,048      20,943      1,290      39,600

Depreciation and amortization

     5,948      6,423      10,741      1,111      24,223

Segment EBITDA

     17,964      19,679      22,532      

Capital expenditures, including acquisitions

     15,064      16,360      11,565      5,835      48,824

Identifiable Assets:

              

At September 30, 2009

   $ 56,344    $ 66,812    $ 148,454    $ 172,717    $ 444,327

At December 31, 2008

     64,550      67,093      143,152      175,403      450,198

 

(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
September 30,
   Nine Months Ended
September 30,
 
     2009     2008    2009     2008  

Segment EBITDA:

         

Pollo Tropical

   $ 6,296      $ 5,224    $ 19,531      $ 17,964   

Taco Cabana

     6,662        7,308      22,906        19,679   

Burger King

     8,822        8,819      24,894        22,532   
                               

Subtotal

     21,780        21,351      67,331        60,175   

Less:

         

Depreciation and amortization

     8,080        8,124      23,833        24,223   

Impairment and other lease charges

     46        53      400        155   

Interest expense

     4,834        6,861      14,908        21,418   

Provision for income taxes

     3,094        2,136      10,241        4,829   

Stock-based compensation expense

     347        495      1,055        1,461   

Gain on extinguishment of debt

     —          —        —          (180

Other income

     (220     —        (799     (119
                               

Net income

   $ 5,599      $ 3,682    $ 17,693      $ 8,388   
                               

11. Commitments and Contingencies

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

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

12. Comprehensive income

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Net income

   $ 5,599    $ 3,682    $ 17,693    $ 8,388

Change in postretirement benefit obligation, net of tax

     —        —        —        8
                           

Comprehensive income

   $ 5,599    $ 3,682    $ 17,693    $ 8,396
                           

13. Other Income

During the three months ended September 30, 2009, the Company recorded a gain of $0.2 million related to the sale of a non-operating property. During the nine months ended September 30, 2009, the Company also recorded a gain of $0.6 million related to an insurance recovery for damages to Taco Cabana restaurants during Hurricane Ike. The Company recorded a gain of $0.1 million in the nine months ended September 30, 2008 related to the sale of a Taco Cabana property.

14. Recent Accounting Developments

In June 2009, the FASB approved ASU 2009-01, the FASB Accounting Standards Codification (the “ASC”) as the single source of authoritative nongovernmental generally accepted accounting principles (“GAAP”). All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the ASC. All other non-grandfathered, non-SEC accounting literature not included in the ASC has become nonauthoritative. The ASC did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The ASC is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the ASC. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the ASC during the quarter ended September 30, 2009.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”) . This statement is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The statement is effective on January 1, 2010 for companies reporting on a calendar year basis. The Company is currently evaluating the impact of SFAS No. 167 on its financial statements.

In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820). The purpose of this ASU is to clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets. This guidance is effective upon issuance. This ASU had no impact on the Company’s 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)

 

15. Guarantor Financial Statements

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

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

TPAQ Holding Corporation

The following supplemental financial information sets forth on a consolidating basis, balance sheets as of September 30, 2009 and December 31, 2008 for the Parent Company only, Guarantor Subsidiaries and for the Company and the related statements of operations for the three and nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008.

At the beginning of the third quarter of 2008 assets and liabilities related to the Company’s Burger King restaurant operations were transferred to Carrols LLC, a 100% owned subsidiary of the Company. Carrols LLC became a Guarantor Subsidiary at that time and its results of operations and cash flows are included with the Company’s other Guarantor Subsidiaries for all periods presented.

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

For purposes of the guarantor financial statements, the Company and its subsidiaries determine the applicable tax provision for each entity generally using the separate return method. Under this method, current 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.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

 

The Company 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

September 30, 2009

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 34      $ 3,272      $ —        $ 3,306

Trade and other receivables

     (693     5,986        —          5,293

Inventories

     —          5,467        —          5,467

Prepaid rent

     —          2,983        —          2,983

Prepaid expenses and other current assets

     779        3,972        —          4,751

Deferred income taxes

     58        4,815        —          4,873
                              

Total current assets

     178        26,495        —          26,673

Property and equipment, net

     9,267        273,737        (85,923     197,081

Franchise rights, net

     —          74,518        —          74,518

Goodwill

     —          124,934        —          124,934

Intangible assets, net

     —          578        —          578

Franchise fees, net

     —          5,900        —          5,900

Intercompany receivable (payable)

     148,244        (173,077     24,833        —  

Investment in subsidiaries

     158,386        —          (158,386     —  

Deferred income taxes

     2,824        5,444        (2,853     5,415

Other assets

     4,762        6,778        (2,312     9,228
                              

Total assets

   $ 323,661      $ 345,307      $ (224,641   $ 444,327
                              
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Current portion of long-term debt

   $ 15,000      $ 81      $ —        $ 15,081

Accounts payable

     5,294        12,038        —          17,332

Accrued interest

     3,232        —          —          3,232

Accrued payroll, related taxes and benefits

     1,305        18,638        —          19,943

Accrued income taxes payable

     3,001        —          —          3,001

Accrued real estate taxes

     —          4,979        —          4,979

Other liabilities

     322        11,172        —          11,494
                              

Total current liabilities

     28,154        46,908        —          75,062

Long-term debt, net of current portion

     264,100        1,132        —          265,232

Lease financing obligations

     —          127,936        (117,071     10,865

Deferred income—sale-leaseback of real estate

     —          23,974        18,828        42,802

Accrued postretirement benefits

     1,494        —          —          1,494

Other liabilities

     2,662        17,805        1,154        21,621
                              

Total liabilities

     296,410        217,755        (97,089     417,076

Stockholder’s equity

     27,251        127,552        (127,552     27,251
                              

Total liabilities and stockholder’s equity

   $ 323,661      $ 345,307      $ (224,641   $ 444,327
                              

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2008

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 361      $ 3,038      $ —        $ 3,399

Trade and other receivables

     (113     5,735        —          5,622

Inventories

     —          5,588        —          5,588

Prepaid rent

     —          2,998        —          2,998

Prepaid expenses and other current assets

     1,033        5,705        —          6,738

Deferred income taxes

     58        4,832        —          4,890
                              

Total current assets

     1,339        27,896        —          29,235

Property and equipment, net

     9,168        267,060        (80,852     195,376

Franchise rights, net

     —          76,870        —          76,870

Goodwill

     —          124,934        —          124,934

Intangible assets, net

     —          675        —          675

Franchise agreements, net

     —          5,826        —          5,826

Intercompany receivable (payable)

     169,553        (173,825     4,272        —  

Investment in subsidiaries

     136,071        —          (136,071     —  

Deferred income taxes

     2,794        5,788        (1,885     6,697

Other assets

     5,449        7,366        (2,230     10,585
                              

Total assets

   $ 324,374      $ 342,590      $ (216,766   $ 450,198
                              
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Current portion of long-term debt

   $ 12,000      $ 93      $ —        $ 12,093

Accounts payable

     1,800        16,989        —          18,789

Accrued interest

     7,742        —          —          7,742

Accrued payroll, related taxes and benefits

     (453     15,884        —          15,431

Accrued income taxes payable

     2,099        —          —          2,099

Accrued real estate taxes

     —          3,803        —          3,803

Other liabilities

     193        10,655        —          10,848
                              

Total current liabilities

     23,381        47,424        —          70,805

Long-term debt, net of current portion

     288,000        1,202        —          289,202

Lease financing obligations

     —          121,341        (106,482     14,859

Deferred income—sale-leaseback of real estate

     —          26,868        16,579        43,447

Accrued postretirement benefits

     1,697        —          —          1,697

Other liabilities

     2,793        18,203        689        21,685
                              

Total liabilities

     315,871        215,038        (89,214     441,695

Stockholder’s equity

     8,503        127,552        (127,552     8,503
                              

Total liabilities and stockholder’s equity

   $ 324,374      $ 342,590      $ (216,766   $ 450,198
                              

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2009

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 200,802      $ —        $ 200,802   

Franchise royalty revenues and fees

     —          364        —          364   
                                

Total revenues

     —          201,166        —          201,166   
                                

Costs and expenses:

        

Cost of sales

     —          57,662        —          57,662   

Restaurant wages and related expenses (including stock based compensation expense of $51)

     —          59,109        —          59,109   

Restaurant rent expense

     —          10,120        2,263        12,383   

Other restaurant operating expenses

     —          29,841        —          29,841   

Advertising expense

     —          7,974        —          7,974   

General and administrative (including stock based compensation expense of $296)

     2,210        10,554        —          12,764   

Depreciation and amortization

     —          8,598        (518     8,080   

Impairment and other lease charges

     —          46        —          46   

Other income

     —          (220     —          (220
                                

Total costs and expenses

     2,210        183,684        1,745        187,639   
                                

Income (loss) from operations

     (2,210     17,482        (1,745     13,527   

Interest expense

     4,526        2,951        (2,643     4,834   

Intercompany interest allocations

     (4,468     4,468        —          —     
                                

Income (loss) before income taxes

     (2,268     10,063        898        8,693   

Provision (benefit) for income taxes

     (907     3,616        385        3,094   

Equity income from subsidiaries

     6,960        —          (6,960     —     
                                

Net income

   $ 5,599      $ 6,447      $ (6,447   $ 5,599   
                                

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2008

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
   Eliminations     Consolidated
Total

Revenues:

         

Restaurant sales

   $ —        $ 208,698    $ —        $ 208,698

Franchise royalty revenues and fees

     —          366      —          366
                             

Total revenues

     —          209,064      —          209,064
                             

Costs and expenses:

         

Cost of sales

     —          63,558      —          63,558

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

     —          59,786      —          59,786

Restaurant rent expense

     —          10,300      1,414        11,714

Other restaurant operating expenses

     —          32,433      —          32,433

Advertising expense

     —          7,826      —          7,826

General and administrative (including stock based compensation expense of $438)

     1,367        11,524      —          12,891

Depreciation and amortization

     —          8,457      (333     8,124

Impairment and other lease charges

     —          53      —          53
                             

Total costs and expenses

     1,367        193,937      1,081        196,385
                             

Income (loss) from operations

     (1,367     15,127      (1,081     12,679

Interest expense

     5,681        2,758      (1,578     6,861

Intercompany interest allocations

     (4,556     4,556      —          —  
                             

Income (loss) before income taxes

     (2,492     7,813      497        5,818

Provision (benefit) for income taxes

     (796     2,672      260        2,136

Equity income from subsidiaries

     5,378        —        (5,378     —  
                             

Net income

   $ 3,682      $ 5,141    $ (5,141   $ 3,682
                             

 

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Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2009

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 605,326      $ —        $ 605,326   

Franchise royalty revenues and fees

     —          1,117        —          1,117   
                                

Total revenues

     —          606,443        —          606,443   
                                

Costs and expenses:

        

Cost of sales

     —          175,284        —          175,284   

Restaurant wages and related expenses (including stock based compensation expense of $156)

     —          176,896        —          176,896   

Restaurant rent expense

     —          30,549        6,668        37,217   

Other restaurant operating expenses

     —          88,541        —          88,541   

Advertising expense

     —          23,552        —          23,552   

General and administrative (including stock based compensation expense of $899)

     6,924        31,753        —          38,677   

Depreciation and amortization

     —          25,326        (1,493     23,833   

Impairment and other lease charges

     —          400        —          400   

Other income

     —          (799     —          (799
                                

Total costs and expenses

     6,924        551,502        5,175        563,601   
                                

Income (loss) from operations

     (6,924     54,941        (5,175     42,842   

Interest expense

     13,884        8,689        (7,665     14,908   

Intercompany interest allocations

     (13,405     13,405        —          —     
                                

Income (loss) before income taxes

     (7,403     32,847        2,490        27,934   

Provision (benefit) for income taxes

     (2,781     12,023        999        10,241   

Equity income from subsidiaries

     22,315        —          (22,315     —     
                                

Net income

   $ 17,693      $ 20,824      $ (20,824   $ 17,693   
                                

 

36


Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2008

(In thousands of dollars)

(Unaudited)

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 614,422      $ —        $ 614,422   

Franchise royalty revenues and fees

     —