Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended October 3, 2010

OR

 

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

Commission File Number: 001-33174

 

 

CARROLS RESTAURANT GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

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

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

Commission File Number: 001-06553

 

 

CARROLS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   16-0958146

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

968 James Street

Syracuse, New York

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

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

 

 

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

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

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

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

 

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

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

As of November 5, 2010, Carrols Restaurant Group, Inc. had 21,624,732 shares of its common stock, $.01 par value, outstanding. As of November 5, 2010, all outstanding equity securities of Carrols Corporation, which consisted of 10 shares of its common stock, were owned by Carrols Restaurant Group, Inc.

 

 

 


Table of Contents

 

CARROLS RESTAURANT GROUP, INC. AND CARROLS CORPORATION

FORM 10-Q

QUARTER ENDED OCTOBER 3, 2010

 

          Page  

PART I   FINANCIAL INFORMATION

  

Item 1

  

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

  
  

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

     3   
  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009

     4   
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

     5   
  

Notes to Consolidated Financial Statements

     6   
  

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

  
  

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

     16   
  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009

     17   
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

     18   
  

Notes to Consolidated Financial Statements

     19   

Item 2

  

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

     38   

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

     50   

Item 4

  

Controls and Procedures

     50   

PART II  OTHER INFORMATION

  

Item 1

  

Legal Proceedings

     51   

Item 1A

  

Risk Factors

     51   

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

     51   

Item 3

  

Default Upon Senior Securities

     51   

Item 4

  

Reserved

     51   

Item 5

  

Other Information

     51   

Item 6

  

Exhibits

     51   

 

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Table of Contents

 

PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

     September 30,
2010
    December 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,257      $ 4,402   

Trade and other receivables

     6,872        5,971   

Inventories

     4,988        5,935   

Prepaid rent

     3,956        3,928   

Prepaid expenses and other current assets

     5,847        4,835   

Refundable income taxes

     —          1,185   

Deferred income taxes

     4,834        4,834   
                

Total current assets

     29,754        31,090   

Property and equipment, net

     191,892        192,724   

Franchise rights, net (Note 4)

     71,276        73,674   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     447        543   

Franchise agreements, at cost less accumulated amortization of $6,011 and $5,854, respectively

     5,675        5,924   

Deferred income taxes

     1,687        1,935   

Other assets

     8,540        9,153   
                

Total assets

   $ 434,205      $ 439,977   
                
LIABILITIES AND STOCKHOLDERS' EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 14,918      $ 12,985   

Accounts payable

     14,875        15,983   

Accrued interest

     3,160        6,880   

Accrued payroll, related taxes and benefits

     17,252        21,454   

Accrued income taxes payable

     430        —     

Accrued real estate taxes

     4,663        4,780   

Other liabilities

     10,836        9,061   
                

Total current liabilities

     66,134        71,143   

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

     250,568        260,108   

Lease financing obligations (Note 9)

     10,046        9,999   

Deferred income—sale-leaseback of real estate

     41,224        43,088   

Accrued postretirement benefits (Note 8)

     1,704        1,914   

Other liabilities (Note 7)

     22,508        22,321   
                

Total liabilities

     392,184        408,573   

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

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

     —          —     

Voting common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding - 21,623,798 and 21,611,607 shares, respectively

     216        216   

Additional paid-in capital

     3,024        1,759   

Retained earnings

     37,249        27,907   

Accumulated other comprehensive income (Note 13)

     1,673        1,663   

Treasury stock, at cost

     (141     (141
                

Total stockholders’ equity

     42,021        31,404   
                

Total liabilities and stockholders’ equity

   $ 434,205      $ 439,977   
                

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, 2010 AND 2009

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

(Unaudited)

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
     2010     2009     2010     2009  

Revenues:

        

Restaurant sales

   $ 201,272      $ 200,802      $ 600,080      $ 605,326   

Franchise royalty revenues and fees

     353        364        1,165        1,117   
                                

Total revenues

     201,625        201,166        601,245        606,443   
                                

Costs and expenses:

        

Cost of sales

     60,093        57,662        182,260        175,284   

Restaurant wages and related expenses (including stock-based compensation expense of $21, $51, $49 and $156, respectively)

     59,027        59,109        177,772        176,896   

Restaurant rent expense

     12,035        12,383        36,623        37,217   

Other restaurant operating expenses

     29,649        29,841        86,986        88,541   

Advertising expense

     8,856        7,974        23,460        23,552   

General and administrative (including stock-based compensation epense of $402, $296, $1,183 and $899, respectively)

     12,022        12,766        37,196        38,682   

Depreciation and amortization

     8,080        8,080        24,315        23,833   

Impairment and other lease charges (Note 3)

     191        46        4,092        400   

Other income (Note 14)

     (400     (220     (400     (799
                                

Total operating expenses

     189,553        187,641        572,304        563,606   
                                

Income from operations

     12,072        13,525        28,941        42,837   

Interest expense

     4,693        4,834        14,144        14,908   
                                

Income before income taxes

     7,379        8,691        14,797        27,929   

Provision for income taxes (Note 6)

     2,786        3,094        5,455        10,241   
                                

Net income

   $ 4,593      $ 5,597      $ 9,342      $ 17,688   
                                

Basic net income per share (Note 12)

   $ 0.21      $ 0.26      $ 0.43      $ 0.82   
                                

Diluted net income per share (Note 12)

   $ 0.21      $ 0.26      $ 0.43      $ 0.81   
                                

Basic weighted average common shares outstanding (Note 12)

     21,623,221        21,593,927        21,618,624        21,592,974   

Diluted weighted average common shares outstanding (Note 12)

     21,777,325        21,844,946        21,819,696        21,740,957   

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, 2010 AND 2009

(In thousands of dollars)

(Unaudited)

 

     2010     2009  

Cash flows provided from operating activities:

    

Net income

   $ 9,342      $ 17,688   

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

    

Loss on disposals of property and equipment

     525        15   

Stock-based compensation expense

     1,232        1,055   

Impairment and other lease charges

     4,092        400   

Depreciation and amortization

     24,315        23,833   

Amortization of deferred financing costs

     713        732   

Amortization of unearned purchase discounts

     —          (1,616

Amortization of deferred gains from sale-leaseback transactions

     (2,510     (2,363

Gain on settlements of lease financing obligations

     —          (76

Accretion of interest on lease financing obligations

     47        33   

Deferred income taxes

     248        1,299   

Accrued income taxes

     1,615        902   

Changes in other operating assets and liabilities

     (8,985     5,039   
                

Net cash provided from operating activities

     30,634        46,941   
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (9,783     (7,887

Restaurant remodeling

     (8,572     (10,073

Other restaurant capital expenditures

     (6,995     (8,367

Corporate and restaurant information systems

     (962     (3,624
                

Total capital expenditures

     (26,312     (29,951

Properties purchased for sale-leaseback

     (3,695     (1,260

Proceeds from sale-leaseback transactions

     5,891        5,454   

Proceeds from sales of other properties

     —          819   
                

Net cash used for investing activities

     (24,116     (24,938
                

Cash flows used for financing activities:

    

Borrowings on revolving credit facility

     96,300        77,700   

Repayments on revolving credit facility

     (94,000     (92,600

Principal pre-payments on term loans

     (1,023     —     

Scheduled principal payments on term loans

     (8,912     (6,000

Principal payments on capital leases

     (61     (82

Proceeds from lease financing obligations

     —          835   

Settlement of lease financing obligations

     —          (1,945

Financing costs associated with issuance of lease financing obligations

     —          (4

Proceeds from stock option exercises

     33        —     
                

Net cash used for financing activities

     (7,663     (22,096
                

Net decrease in cash and cash equivalents

     (1,145     (93

Cash and cash equivalents, beginning of period

     4,402        3,399   
                

Cash and cash equivalents, end of period

   $ 3,257      $ 3,306   
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 16,419      $ 17,803   

Interest paid on lease financing obligations

   $ 685      $ 926   

Accruals for capital expenditures

   $ 530      $ 318   

Income taxes paid, net

   $ 3,564      $ 8,040   

Capital lease obligations incurred

   $ 123      $ —     

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

   $ —        $ 2,074   

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

   $ —        $ 2,833   

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS)

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

1. Basis of Presentation

Business Description. At October 3, 2010, the Company operated, as franchisee, 306 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At October 3, 2010, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida, four were in New Jersey and one was in Connecticut, and franchised a total of 29 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad and three on college campuses in Florida. At October 3, 2010, the Company owned and operated 156 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, one in Texas and one in Georgia.

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

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

Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 3, 2010 and December 28, 2008 will be referred to as the fiscal years ended December 31, 2009 and 2008, respectively. Similarly, all references herein to the three and nine months ended October 3, 2010 and September 27, 2009 will be referred to as the three and nine months ended September 30, 2010 and September 30, 2009, respectively. The year ended December 31, 2009 contained 53 weeks. The three and nine months ended September 30, 2010 and 2009 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, 2010 and 2009 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and nine months ended September 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

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

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

 

   

Current Assets and Liabilities. The carrying value of cash and 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, 2010 and December 31, 2009 were approximately $166.2 million and $167.5 million, respectively.

 

   

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

 

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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)

 

 

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

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

2. Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, 2010 was $0.4 million and $1.2 million, respectively. As of September 30, 2010, 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 2010. At September 30, 2010, the remaining weighted average vesting period for stock options and restricted shares was 3.1 years and 1.5 years, respectively.

Stock Options

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

 

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

Options outstanding at January 1, 2010

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

Granted

     552,000        6.41         

Exercised

     (10,838     2.77         

Forfeited

     (59,766     9.67         
                

Options outstanding at September 30, 2010

     2,612,154      $ 9.16         4.5       $ 1,379   
                

Vested or expected to vest at September 30, 2010

     2,580,161      $ 9.19         4.5       $ 1,356   
                

Options exercisable at September 30, 2010

     1,214,954      $ 11.36         3.7       $ 440   
                

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at October 3, 2010 of $5.42 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 October 3, 2010.

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

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

The Company determined the fair value of the impaired long-lived assets at the restaurant level based on current economic conditions and historical experience. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The non-financial assets measured at fair value associated with impairment charges recorded in 2010 totaled $1.5 million and consist of restaurant equipment, which will be used in other Company restaurants and whose value was determined based upon the Company’s experience of amounts utilized from prior restaurant closures, and an owned restaurant property valued based on recent property sales in that restaurant’s trade area.

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Burger King

   $ 98       $ 31       $ 379       $ 59   

Pollo Tropical

     86         —           2,069         284   

Taco Cabana

     7         15         1,644         57   
                                   
   $ 191       $ 46       $ 4,092       $ 400   
                                   

During the nine months ended September 30, 2010, the Company recorded impairment and other lease charges of $4.1 million which included $1.4 million for an underperforming Pollo Tropical restaurant and $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant. In addition, the Company recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.4 million associated with underperforming Burger King restaurants.

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

4. Goodwill and Franchise Rights

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

Goodwill balances are summarized below:

 

     Pollo
Tropical
     Taco
Cabana
     Burger
King
     Total  

Balance, September 30, 2010

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

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

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

Amortization expense related to Burger King franchise rights was $799 and $784 for the three months ended September 30, 2010 and 2009, respectively, and $2,398 and $2,352 for the nine months ended September 30, 2010 and 2009, respectively. The Company estimates the amortization expense for the year ending December 31, 2010 and for each of the five succeeding years to be $3,197.

5. Long-term Debt

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

 

     September 30,
2010
    December 31,
2009
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ 4,200      $ 1,900   

Senior Credit Facility-Term loan A facility

     95,065        105,000   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,221        1,193   
                
     265,486        273,093   

Less: current portion

     (14,918     (12,985
                
   $ 250,568      $ 260,108   
                

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

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

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

2) Adjusted LIBOR plus the applicable margin percentage in effect ranging from 1.0% to 1.5% based on Carrols’ senior leverage ratio. At October 3, 2010 the LIBOR margin percentage was 1.0%.

During the nine months ended September 30, 2010, Carrols made a required prepayment of approximately $1.0 million based on 25% of Carrols’ Excess Cash Flow for the year ended December 31, 2009, as defined. At October 3, 2010, outstanding borrowings under Term loan A were $95.1 million with the remaining balance due and payable as follows:

1) two quarterly installments of approximately $3.0 million beginning on December 31, 2010;

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

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

After reserving $14.5 million for letters of credit guaranteed by the facility, $46.3 million was available for borrowings under the revolving credit facility at October 3, 2010.

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

In general, Carrols’ obligations under the senior credit facility are guaranteed by the Company and all of Carrols’ material subsidiaries and are collateralized by a pledge of Carrols’ common stock and the stock of each of Carrols’ material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting Carrols’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, Carrols is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). Carrols was in compliance with the covenants under its senior credit facility as of October 3, 2010.

Senior Subordinated Notes. On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). The notes bear interest at a rate of 9% payable semi-annually on January 15 and July 15 and mature on January 15, 2013. At both October 3, 2010 and January 3, 2010, $165.0 million principal amount of the Notes were outstanding.

Restrictive covenants under the Indenture governing the Notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Carrols was in compliance with the restrictive covenants in the Indenture governing the Notes as of October 3, 2010.

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

6. Income Taxes

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

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
     2010      2009      2010      2009  

Current

   $ 2,620       $ 2,562       $ 5,207       $ 8,942   

Deferred

     166         532         248         1,299   
                                   
   $ 2,786       $ 3,094       $ 5,455       $ 10,241   
                                   

The provision for income taxes for the three and nine months ended September 30, 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.6%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $108 and $38 in the three and nine months ended September 30, 2010, respectively.

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

The tax years 2007-2009 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

7. Other Liabilities, Long-Term

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

 

     September 30,      December 31,  
   2010      2009  

Accrued occupancy costs

   $ 12,555       $ 11,572   

Accrued workers’ compensation costs

     3,576         4,018   

Deferred compensation

     2,845         3,210   

Other

     3,532         3,521   
                 
   $ 22,508       $ 22,321   
                 

8. Postretirement Benefits

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

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

 

     Three Months Ended     Nine Months Ended  
   September 30,     September 30,  
     2010     2009     2010     2009  

Service cost

   $ 8      $ 6      $ 23      $ 21   

Interest cost

     27        30        81        84   

Amortization of net gains and losses

     24        27        73        69   

Amortization of prior service credit

     (90     (93     (270     (265
                                

Net periodic postretirement benefit income

   $ (31   $ (30   $ (93   $ (91
                                

During the nine months ended September 30, 2010, the Company made contributions of $107 to its postretirement plan and expects to make additional contributions during 2010. Contributions made by the Company to its postretirement plan for the year ended December 31, 2009 were $153.

9. Lease Financing Obligations

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

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

Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended September 30, 2010 and 2009 was $0.2 million and $0.3 million, respectively, and for the nine months ended September 30, 2010 and 2009 was $0.7 million and $0.9 million, respectively.

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

10. Business Segment Information

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

The accounting policies of each segment are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following table includes Adjusted Segment EBITDA, which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Adjusted Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and 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, 2010:

              

Total revenues

   $ 47,567       $ 63,702       $ 90,356       $ —         $ 201,625   

Cost of sales

     15,020         18,939         26,134         —           60,093   

Restaurant wages and related expenses

     11,417         19,390         28,199         21         59,027   

General and administrative expenses (1)

     3,195         2,287         6,138         402         12,022   

Depreciation and amortization

     2,004         2,226         3,394         456         8,080   

Adjusted Segment EBITDA

     7,489         6,483         6,394         

Capital expenditures, including acquisitions

     3,842         3,395         2,658         252         10,147   

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   

Adjusted Segment EBITDA

     6,294         6,662         8,822         

Capital expenditures, including acquisitions

     697         2,924         8,475         547         12,643   

Nine Months Ended

                                  

September 30, 2010:

              

Total revenues

   $ 139,873       $ 189,941       $ 271,431       $ —         $ 601,245   

Cost of sales

     44,880         56,644         80,736         —           182,260   

Restaurant wages and related expenses

     34,241         58,041         85,441         49         177,772   

General and administrative expenses (1)

     8,862         7,881         19,270         1,183         37,196   

Depreciation and amortization

     5,876         6,744         10,344         1,351         24,315   

Adjusted Segment EBITDA

     22,361         20,117         15,702         

Capital expenditures, including acquisitions

     7,667         8,261         9,422         962         26,312   

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   

Adjusted Segment EBITDA

     19,526         22,906         24,894         

Capital expenditures, including acquisitions

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

Identifiable Assets:

              

At September 30, 2010

   $ 52,698       $ 64,942       $ 145,146       $ 171,419       $ 434,205   

At December 31, 2009

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

 

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Adjusted Segment EBITDA:

        

Pollo Tropical

   $ 7,489      $ 6,294      $ 22,361      $ 19,526   

Taco Cabana

     6,483        6,662        20,117        22,906   

Burger King

     6,394        8,822        15,702        24,894   

Less:

        

Depreciation and amortization

     8,080        8,080        24,315        23,833   

Impairment and other lease charges

     191        46        4,092        400   

Interest expense

     4,693        4,834        14,144        14,908   

Provision for income taxes

     2,786        3,094        5,455        10,241   

Stock-based compensation expense

     423        347        1,232        1,055   

Other income

     (400     (220     (400     (799
                                

Net income

   $ 4,593      $ 5,597      $ 9,342      $ 17,688   
                                

11. Commitments and Contingencies

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

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

12. Net Income per Share

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

 

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CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010      2009  

Basic net income per share:

           

Net income

   $ 4,593       $ 5,597       $ 9,342       $ 17,688   

Weighted average common shares outstanding

     21,623,221         21,593,927         21,618,624         21,592,974   
                                   

Basic net income per share

   $ 0.21       $ 0.26       $ 0.43       $ 0.82   
                                   

Diluted net income per share:

           

Net income for diluted net income per share

   $ 4,593       $ 5,597       $ 9,342       $ 17,688   

Shares used in computed basic net income per share

     21,623,221         21,593,927         21,618,624         21,592,974   

Dilutive effect of restricted shares and stock options

     154,104         251,019         201,072         147,983   
                                   

Shares used in computed diluted net income per share

     21,777,325         21,844,946         21,819,696         21,740,957   
                                   

Diluted net income per share

   $ 0.21       $ 0.26       $ 0.43       $ 0.81   
                                   

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

     2,137,039         1,613,242         2,109,818         1,810,089   
                                   

 

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

13. Comprehensive Income

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010      2009  

Net income

   $ 4,593       $ 5,597       $ 9,342       $ 17,688   

Change in postretirement benefit obligation, net of tax

     —           —           10         —     
                                   

Comprehensive income

   $ 4,593       $ 5,597       $ 9,352       $ 17,688   
                                   

14. Other Income

During the three months ended September 30, 2010, the Company recorded a gain of $0.4 million related to a property insurance recovery from a fire at a Burger King restaurant. 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.

15. Recent Accounting Developments

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

 

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ITEM  1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

     September 30,     December 31,  
   2010     2009  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,257      $ 4,402   

Trade and other receivables

     6,872        5,971   

Inventories

     4,988        5,935   

Prepaid rent

     3,956        3,928   

Prepaid expenses and other current assets

     5,847        4,835   

Refundable income taxes

     —          1,185   

Deferred income taxes

     4,834        4,834   
                

Total current assets

     29,754        31,090   

Property and equipment, net

     191,892        192,724   

Franchise rights, net (Note 4)

     71,276        73,674   

Goodwill (Note 4)

     124,934        124,934   

Intangible assets, net

     447        543   

Franchise agreements, at cost less accumulated amortization of $6,011 and $5,854, respectively

     5,675        5,924   

Deferred income taxes

     1,687        1,935   

Other assets

     8,540        9,153   
                

Total assets

   $ 434,205      $ 439,977   
                
LIABILITIES AND STOCKHOLDER'S EQUITY     

Current liabilities:

    

Current portion of long-term debt (Note 5)

   $ 14,918      $ 12,985   

Accounts payable

     14,875        15,983   

Accrued interest

     3,160        6,880   

Accrued payroll, related taxes and benefits

     17,252        21,454   

Accrued income taxes

     430        —     

Accrued real estate taxes

     4,663        4,780   

Other liabilities

     10,836        9,061   
                

Total current liabilities

     66,134        71,143   

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

     250,568        260,108   

Lease financing obligations (Note 9)

     10,046        9,999   

Deferred income—sale-leaseback of real estate

     41,224        43,088   

Accrued postretirement benefits (Note 8)

     1,704        1,914   

Other liabilities (Note 7)

     22,453        22,271   
                

Total liabilities

     392,129        408,523   

Commitments and contingencies (Note 11)

    

Stockholder’s equity:

    

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

     —          —     

Additional paid-in capital

     (4,469     (5,734

Retained earnings

     44,872        35,525   

Accumulated other comprehensive income (Note 12)

     1,673        1,663   
                

Total stockholder’s equity

     42,076        31,454   
                

Total liabilities and stockholder’s equity

   $ 434,205      $ 439,977   
                

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, 2010 AND 2009

(In thousands of dollars)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
   2010     2009     2010     2009  

Revenues:

        

Restaurant sales

   $ 201,272      $ 200,802      $ 600,080      $ 605,326   

Franchise royalty revenues and fees

     353        364        1,165        1,117   
                                

Total revenues

     201,625        201,166        601,245        606,443   
                                

Costs and expenses:

        

Cost of sales

     60,093        57,662        182,260        175,284   

Restaurant wages and related expenses (including stock-based compensation expense of $21, $51, $49 and $156, respectively)

     59,027        59,109        177,772        176,896   

Restaurant rent expense

     12,035        12,383        36,623        37,217   

Other restaurant operating expenses

     29,649        29,841        86,986        88,541   

Advertising expense

     8,856        7,974        23,460        23,552   

General and administrative (including stock-based compensation expense of $402, $296, $1,183 and $899, respectively)

     12,020        12,764        37,191        38,677   

Depreciation and amortization

     8,080        8,080        24,315        23,833   

Impairment and other lease charges (Note 3)

     191        46        4,092        400   

Other income (Note 13)

     (400     (220     (400     (799
                                

Total costs and expenses

     189,551        187,639        572,299        563,601   
                                

Income from operations

     12,074        13,527        28,946        42,842   

Interest expense

     4,693        4,834        14,144        14,908   
                                

Income before income taxes

     7,381        8,693        14,802        27,934   

Provision for income taxes (Note 6)

     2,786        3,094        5,455        10,241   
                                

Net income

   $ 4,595      $ 5,599      $ 9,347      $ 17,693   
                                

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands of dollars)

(Unaudited)

 

     2010     2009  

Cash flows provided from operating activities:

    

Net income

   $ 9,347      $ 17,693   

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

    

Loss on disposals of property and equipment

     525        15   

Stock-based compensation expense

     1,232        1,055   

Impairment and other lease charges

     4,092        400   

Depreciation and amortization

     24,315        23,833   

Amortization of deferred financing costs

     713        732   

Amortization of unearned purchase discounts

     —          (1,616

Amortization of deferred gains from sale-leaseback transactions

     (2,510     (2,363

Gain on settlements of lease financing obligations

     —          (76

Accretion of interest on lease financing obligations

     47        33   

Deferred income taxes

     248        1,299   

Accrued income taxes

     1,615        902   

Changes in other operating assets and liabilities

     (8,990     5,034   
                

Net cash provided from operating activities

     30,634        46,941   
                

Cash flows used for investing activities:

    

Capital expenditures:

    

New restaurant development

     (9,783     (7,887

Restaurant remodeling

     (8,572     (10,073

Other restaurant capital expenditures

     (6,995     (8,367

Corporate and restaurant information systems

     (962     (3,624
                

Total capital expenditures

     (26,312     (29,951

Properties purchased for sale-leaseback

     (3,695     (1,260

Proceeds from sale-leaseback transactions

     5,891        5,454   

Proceeds from sales of other properties

     —          819   
                

Net cash used for investing activities

     (24,116     (24,938
                

Cash flows used for financing activities:

    

Borrowings on revolving credit facility

     96,300        77,700   

Repayments on revolving credit facility

     (94,000     (92,600

Principal pre-payments on term loans

     (1,023     —     

Scheduled principal payments on term loans

     (8,912     (6,000

Principal payments on capital leases

     (61     (82

Proceeds from lease financing obligations

     —          835   

Settlement of lease financing obligations

     —          (1,945

Financing costs associated with issuance of lease financing obligations

     —          (4

Proceeds from stock option exercises

     33        —     
                

Net cash used for financing activities

     (7,663     (22,096
                

Net decrease in cash and cash equivalents

     (1,145     (93

Cash and cash equivalents, beginning of period

     4,402        3,399   
                

Cash and cash equivalents, end of period

   $ 3,257      $ 3,306   
                

Supplemental disclosures:

    

Interest paid on long-term debt

   $ 16,419      $ 17,803   

Interest paid on lease financing obligations

   $ 685      $ 926   

Accruals for capital expenditures

   $ 530      $ 318   

Income taxes paid, net

   $ 3,564      $ 8,040   

Capital lease obligations incurred

   $ 123      $ —     

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

   $ —        $ 2,074   

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

   $ —        $ 2,833   

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

1. Basis of Presentation

Business Description. At October 3, 2010, the Company operated, as franchisee, 306 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At October 3, 2010, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida, four were in New Jersey and one was in Connecticut, and franchised a total of 29 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad and three on college campuses in Florida. At October 3, 2010, the Company owned and operated 156 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, one in Texas and one in Georgia.

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

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

Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 3, 2010 and December 28, 2008 will be referred to as the fiscal years ended December 31, 2009 and 2008, respectively. Similarly, all references herein to the three and nine months ended October 3, 2010 and September 27, 2009 will be referred to as the three and nine months ended September 30, 2010 and September 30, 2009, respectively. The year ended December 31, 2009 contained 53 weeks. The three and nine months ended September 30, 2010 and 2009 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, 2010 and 2009 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and nine months ended September 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

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

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

 

   

Current Assets and Liabilities. The carrying value of cash and 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, 2010 and December 31, 2009 were approximately $166.2 million and $167.5 million, respectively.

 

   

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

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

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

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

2. Stock-Based Compensation

Stock based compensation expense for the three and nine months ended September 30, 2010 was $0.4 million and $1.2 million, respectively. As of September 30, 2010, 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 2010. At September 30, 2010, the remaining weighted average vesting period for stock options and restricted shares was 3.1 years and 1.5 years, respectively.

Stock Options

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

 

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

Options outstanding at January 1, 2010

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

Granted

     552,000        6.41         

Exercised

     (10,838     2.77         

Forfeited

     (59,766     9.67         
                

Options outstanding at September 30, 2010

     2,612,154      $ 9.16         4.5       $ 1,379   
                

Vested or expected to vest at September 30, 2010

     2,580,161      $ 9.19         4.5       $ 1,356   
                

Options exercisable at September 30, 2010

     1,214,954      $ 11.36         3.7       $ 440   
                

 

(1) The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at October 3, 2010 of $5.42 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 October 3, 2010.

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

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

The Company determined the fair value of the impaired long-lived assets at the restaurant level based on current economic conditions and historical experience. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The non-financial assets measured at fair value associated with impairment charges recorded in 2010 totaled $1.5 million and consist of restaurant equipment, which will be used in other Company restaurants and whose value was determined based upon the Company’s experience of amounts utilized from prior restaurant closures, and an owned restaurant property valued based on recent property sales in that restaurant’s trade area.

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Burger King

   $ 98       $ 31       $ 379       $ 59   

Pollo Tropical

     86         —           2,069         284   

Taco Cabana

     7         15         1,644         57   
                                   
   $ 191       $ 46       $ 4,092       $ 400   
                                   

During the nine months ended September 30, 2010, the Company recorded impairment and other lease charges of $4.1 million which included $1.4 million for an underperforming Pollo Tropical restaurant and $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant. In addition, the Company recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.4 million associated with underperforming Burger King restaurants.

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

4. Goodwill and Franchise Rights

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

Goodwill balances are summarized below:

 

     Pollo
Tropical
     Taco
Cabana
     Burger
King
     Total  

Balance, September 30, 2010

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

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

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

Amortization expense related to Burger King franchise rights was $799 and $784 for the three months ended September 30, 2010 and 2009, respectively, and $2,398 and $2,352 for the nine months ended September 30, 2010 and 2009, respectively. The Company estimates the amortization expense for the year ending December 31, 2010 and for each of the five succeeding years to be $3,197.

5. Long-term Debt

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

 

     September 30,
2010
    December 31,
2009
 

Collateralized:

    

Senior Credit Facility-Revolving credit facility

   $ 4,200      $ 1,900   

Senior Credit Facility-Term loan A facility

     95,065        105,000   

Unsecured:

    

9% Senior Subordinated Notes

     165,000        165,000   

Capital leases

     1,221        1,193   
                
     265,486        273,093   

Less: current portion

     (14,918     (12,985
                
   $ 250,568      $ 260,108   
                

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

The term loan and revolving credit borrowings under the senior credit facility bear interest at a per annum rate, at 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 October 3, 2010 the LIBOR margin percentage was 1.0%.

During the nine months ended September 30, 2010, the Company made a required prepayment of approximately $1.0 million based on 25% of the Company’s Excess Cash Flow for the year ended December 31, 2009, as defined. At October 3, 2010, outstanding borrowings under Term loan A were $95.1 million with the remaining balance due and payable as follows:

1) two quarterly installments of approximately $3.0 million beginning on December 31, 2010;

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

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

After reserving $14.5 million for letters of credit guaranteed by the facility, $46.3 million was available for borrowings under the revolving credit facility at October 3, 2010.

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

In general, the Company’s obligations under the senior credit facility are guaranteed by Carrols Restaurant Group and all of the Company’s material subsidiaries and are collateralized by a pledge of the Company’s common stock and the stock of each of the Company’s material subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting the Company’s ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Company is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). The Company was in compliance with the covenants under its senior credit facility as of October 3, 2010.

Senior Subordinated Notes. On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). The notes bear interest at a rate of 9% payable semi-annually on January 15 and July 15 and mature on January 15, 2013. At both October 3, 2010 and January 3, 2010, $165.0 million principal amount of the Notes were outstanding.

Restrictive covenants under the Indenture governing the Notes include limitations with respect to the Company’s ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Carrols was in compliance with the restrictive covenants in the Indenture governing the Notes as of October 3, 2010.

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

6. Income Taxes

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Current

   $ 2,620       $ 2,562       $ 5,207       $ 8,942   

Deferred

     166         532         248         1,299   
                                   
   $ 2,786       $ 3,094       $ 5,455       $ 10,241   
                                   

The provision for income taxes for the three and nine months ended September 30, 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.6%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $108 and $38 in the three and nine months ended September 30, 2010, respectively.

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 both the three and nine months ended September 30, 2009.

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

The tax years 2007-2009 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

7. Other Liabilities, Long-Term

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

 

     September 30,
2010
     December 31,
2009
 

Accrued occupancy costs

   $ 12,555       $ 11,572   

Accrued workers’ compensation costs

     3,576         4,018   

Deferred compensation

     2,845         3,210   

Other

     3,477         3,471   
                 
   $ 22,453       $ 22,271   
                 

8. Postretirement Benefits

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

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Service cost

   $ 8      $ 6      $ 23      $ 21   

Interest cost

     27        30        81        84   

Amortization of net gains and losses

     24        27        73        69   

Amortization of prior service credit

     (90     (93     (270     (265
                                

Net periodic postretirement benefit income

   $ (31   $ (30   $ (93   $ (91
                                

During the three months ended September 30, 2010, the Company made contributions of $107 to its postretirement plan and expects to make additional contributions during 2010. Contributions made by the Company to its postretirement plan for the year ended December 31, 2009 were $153.

9. Lease Financing Obligations

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

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

 

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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)

 

 

Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended September 30, 2010 and 2009 was $0.2 million and $0.3 million, respectively and for the nine months ended September 30, 2010 and 2009 was $0.7 million and $0.9 million, respectively.

10. Business Segment Information

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

The accounting policies of each segment are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following table includes Adjusted Segment EBITDA, which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Adjusted Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and 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, 2010:

              

Total revenues

   $ 47,567       $ 63,702       $ 90,356       $ —         $ 201,625   

Cost of sales

     15,020         18,939         26,134         —           60,093   

Restaurant wages and related expenses

     11,417         19,390         28,199         21         59,027   

General and administrative expenses (1)

     3,193         2,287         6,138         402         12,020   

Depreciation and amortization

     2,004         2,226         3,394         456         8,080   

Adjusted Segment EBITDA

     7,491         6,483         6,394         

Capital expenditures, including acquisitions

     3,842         3,395         2,658         252         10,147   

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   

Adjusted Segment EBITDA

     6,296         6,662         8,822         

Capital expenditures, including acquisitions

     697         2,924         8,475         547         12,643   

Nine Months Ended

                                  

September 30, 2010:

              

Total revenues

   $ 139,873       $ 189,941       $ 271,431       $ —         $ 601,245   

Cost of sales

     44,880         56,644         80,736         —           182,260   

Restaurant wages and related expenses

     34,241         58,041         85,441         49         177,772   

General and administrative expenses (1)

     8,857         7,881         19,270         1,183         37,191   

Depreciation and amortization

     5,876         6,744         10,344         1,351         24,315   

Adjusted Segment EBITDA

     22,366         20,117         15,702         

Capital expenditures, including acquisitions

     7,667         8,261         9,422         962         26,312   

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   

Adjusted Segment EBITDA

     19,531         22,906         24,894         

Capital expenditures, including acquisitions

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

Identifiable Assets:

              

At September 30, 2010

   $ 52,698       $ 64,942       $ 145,146       $ 171,419       $ 434,205   

At December 31, 2009

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

 

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Adjusted Segment EBITDA:

        

Pollo Tropical

   $ 7,491      $ 6,296      $ 22,366      $ 19,531   

Taco Cabana

     6,483        6,662        20,117        22,906   

Burger King

     6,394        8,822        15,702        24,894   

Less:

        

Depreciation and amortization

     8,080        8,080        24,315        23,833   

Impairment and other lease charges

     191        46        4,092        400   

Interest expense

     4,693        4,834        14,144        14,908   

Provision for income taxes

     2,786        3,094        5,455        10,241   

Stock-based compensation expense

     423        347        1,232        1,055   

Other income

     (400     (220     (400     (799
                                

Net income

   $ 4,595      $ 5,599      $ 9,347      $ 17,693   
                                

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,
 
     2010      2009      2010      2009  

Net income

   $ 4,595       $ 5,599       $ 9,347       $ 17,693   

Change in postretirement benefit obligation, net of tax

     —           —           10         —     
                                   

Comprehensive income

   $ 4,595       $ 5,599       $ 9,357       $ 17,693   
                                   

13. Other Income

During the three months ended September 30, 2010, the Company recorded a gain of $0.4 million related to a property insurance recovery from a fire at a Burger King restaurant. 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.

14. Recent Accounting Developments

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

15. Guarantor Financial Statements

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

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

TPAQ Holding Corporation

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

 

 

For 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.

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

September 30, 2010

(In thousands of dollars)

(Unaudited)

 

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 33      $ 3,224      $ —        $ 3,257   

Trade and other receivables

     538        6,334        —          6,872   

Inventories

     —          4,988        —          4,988   

Prepaid rent

     5        3,951        —          3,956   

Prepaid expenses and other current assets

     1,205        4,642        —          5,847   

Refundable income taxes

     —          —          —          —     

Deferred income taxes

     88        4,746        —          4,834   
                                

Total current assets

     1,869        27,885        —          29,754   

Property and equipment, net

     10,856        267,166        (86,130     191,892   

Franchise rights, net

     —          71,276        —          71,276   

Goodwill

     —          124,934        —          124,934   

Intangible assets, net

     —          447        —          447   

Franchise agreements, net

     —          5,675        —          5,675   

Intercompany receivable (payable)

     120,334        (150,109     29,775        —     

Investment in subsidiaries

     177,280        —          (177,280     —     

Deferred income taxes

     2,517        3,149        (3,979     1,687   

Other assets

     3,823        6,878        (2,161     8,540   
                                

Total assets

   $ 316,679      $ 357,301      $ (239,775   $ 434,205   
                                
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Current portion of long-term debt

   $ 14,854      $ 64      $ —        $ 14,918   

Accounts payable

     3,635        11,240        —          14,875   

Accrued interest

     3,160        —          —          3,160   

Accrued payroll, related taxes and benefits

     (929     18,181        —          17,252   

Accrued income taxes payable

     430        —          —          430   

Accrued real estate taxes

     —          4,663        —          4,663   

Other liabilities

     235        10,601        —          10,836   
                                

Total current liabilities

     21,385        44,749        —          66,134   

Long-term debt, net of current portion

     249,411        1,157        —          250,568   

Lease financing obligations

     —          129,905        (119,859     10,046   

Deferred income—sale-leaseback of real estate

     —          23,800        17,424        41,224   

Accrued postretirement benefits

     1,704        —          —          1,704   

Other liabilities

     2,103        18,598        1,752        22,453   
                                

Total liabilities

     274,603        218,209        (100,683     392,129   

Commitments and contingencies

        

Stockholder’s equity

     42,076        139,092        (139,092     42,076   
                                

Total liabilities and stockholder’s equity

   $ 316,679      $ 357,301      $ (239,775   $ 434,205   
                                

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2009

(In thousands of dollars)

(Unaudited)

 

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS         

Current assets:

        

Cash and cash equivalents

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

Trade and other receivables

     (827     6,798        —          5,971   

Refundable income taxes

     1,185        —          —          1,185   

Inventories

     —          5,935        —          5,935   

Prepaid rent

     3        3,925        —          3,928   

Prepaid expenses and other current assets

     1,106        3,729        —          4,835   

Deferred income taxes

     88        4,746        —          4,834   
                                

Total current assets

     1,589        29,501        —          31,090   

Property and equipment, net

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

Franchise rights, net

     —          73,674        —          73,674   

Goodwill

     —          124,934        —          124,934   

Intangible assets, net

     —          543        —          543   

Franchise agreements, net

     —          5,924        —          5,924   

Intercompany receivable (payable)

     139,010        (168,649     29,639        —     

Investment in subsidiaries

     163,791        —          (163,791     —     

Deferred income taxes

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

Other assets

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

Total assets

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

Current liabilities:

        

Current portion of long-term debt

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

Accounts payable

     3,735        12,248        —          15,983   

Accrued interest

     6,880        —          —          6,880   

Accrued payroll, related taxes and benefits

     1,889        19,565        —          21,454   

Accrued real estate taxes

     —          4,780        —          4,780   

Other liabilities

     255        8,806        —          9,061   
                                

Total current liabilities

     25,665        45,478        —          71,143   

Long-term debt, net of current portion

     258,994        1,114        —          260,108   

Lease financing obligations

     —          127,156        (117,157     9,999   

Deferred income—sale-leaseback of real estate

     —          24,611        18,477        43,088   

Accrued postretirement benefits

     1,914        —          —          1,914   

Other liabilities

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

Total liabilities

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

Stockholder’s equity

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

Total liabilities and stockholder’s equity

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

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2010

(In thousands of dollars)

(Unaudited)

 

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 201,272      $ —        $ 201,272   

Franchise royalty revenues and fees

     —          353        —          353   
                                

Total revenues

     —          201,625        —          201,625   
                                

Costs and expenses:

        

Cost of sales

     —          60,093        —          60,093   

Restaurant wages and related expenses (including stock based compensation expense of $21)

     —          59,027        —          59,027   

Restaurant rent expense

     —          9,690        2,345        12,035   

Other restaurant operating expenses

     —          29,649        —          29,649   

Advertising expense

     —          8,856        —          8,856   

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

     1,996        10,024        —          12,020   

Depreciation and amortization

     —          8,610        (530     8,080   

Impairment and other lease charges

     —          191        —          191   

Other income

     —          (400     —          (400
                                

Total costs and expenses

     1,996        185,740        1,815        189,551   
                                

Income (loss) from operations

     (1,996     15,885        (1,815     12,074   

Interest expense

     4,406        2,986        (2,699     4,693   

Intercompany interest allocations

     (4,556     4,556        —          —     
                                

Income (loss) before income taxes

     (1,846     8,343        884        7,381   

Provision (benefit) for income taxes

     (433     2,954        265        2,786   

Equity income from subsidiaries

     6,008        —          (6,008     —     
                                

Net income

   $ 4,595      $ 5,389      $ (5,389   $ 4,595   
                                

 

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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

Nine Months Ended September 30, 2010

(In thousands of dollars)

(Unaudited)

 

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

        

Restaurant sales

   $ —        $ 600,080      $ —        $ 600,080   

Franchise royalty revenues and fees

     —          1,165        —          1,165   
                                

Total revenues

     —          601,245        —          601,245   
                                

Costs and expenses:

        

Cost of sales

     —          182,260        —          182,260   

Restaurant wages and related expenses (including stock based compensation expense of $49)

     —          177,772        —          177,772   

Restaurant rent expense

     —          29,636        6,987        36,623   

Other restaurant operating expenses

     —          86,986        —          86,986   

Advertising expense

     —          23,460        —          23,460   

General and administrative (including stock based compensation expense of $1,183)

     6,564        30,627        —          37,191   

Depreciation and amortization

     —          25,908        (1,593     24,315   

Impairment and other lease charges

     —          4,092        —          4,092   

Other income

     —          (400     —          (400
                                

Total costs and expenses

     6,564        560,341        5,394        572,299   
                                

Income (loss) from operations

     (6,564     40,904        (5,394     28,946   

Interest expense

     13,286        8,927        (8,069     14,144   

Intercompany interest allocations

     (13,669     13,669        —          —     
                                

Income (loss) before income taxes

     (6,181     18,308        2,675        14,802   

Provision (benefit) for income taxes

     (2,039     6,485        1,009        5,455   

Equity income from subsidiaries

     13,489        —          (13,489     —     
                                

Net income

   $ 9,347      $ 11,823      $ (11,823   $ 9,347   
                                

 

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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   

Loss on extinguishment of debt

     —          —          —          —     

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   
                                

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2010

(In thousands of dollars)

(Unaudited)

 

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Cash flows provided from operating activities:

        

Net income

   $ 9,347      $ 11,823      $ (11,823   $ 9,347   

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

        

Loss on disposals of property and equipment

     —          525        —          525   

Stock-based compensation expense

     839        393        —          1,232   

Impairment and other lease charges

     —          4,092        —          4,092   

Depreciation and amortization

     —          25,908        (1,593     24,315   

Amortization of deferred financing costs

     700        206        (193     713   

Amortization of deferred gains from sale-leaseback transactions

     —          (1,421     (1,089     (2,510

Accretion of interest on lease financing obligations

     —          321        (274     47   

Deferred income taxes

     (57     (575     880        248   

Accrued income taxes

     1,615        —          —          1,615   

Changes in other operating assets and liabilities

     (3,986     (19,096     14,092        (8,990
                                

Net cash provided from operating activities

     8,458        22,176        —          30,634   
                                

Cash flows used for investing activities:

        

Capital expenditures:

        

New restaurant development

     —          (9,783     —          (9,783

Restaurant remodeling

     —          (8,572     —          (8,572

Other restaurant capital expenditures

     —          (6,995     —          (6,995

Corporate and restaurant information systems

     (857     (105     —          (962
                                

Total capital expenditures

     (857     (25,455     —          (26,312

Properties purchased for sale-leaseback

     —          (3,695     —          (3,695

Proceeds from sale-leaseback transactions

     —          3,572        2,319        5,891   
                                

Net cash used for investing activities

     (857     (25,578     2,319        (24,116
                                

Cash flows provided from (used for) financing activities:

        

Borrowings on revolving credit facility

     96,300        —          —          96,300   

Repayments on revolving credit facility

     (94,000     —          —          (94,000

Principal pre-payments on term loans

     (1,023     —          —          (1,023

Scheduled principal payments on term loans

     (8,912     —          —          (8,912

Principal payments on capital leases

     —          (61     —          (61

Proceeds from lease financing obligations

     —          2,429        (2,429     —     

Financing costs associated with issuance of lease financing obligations

     —          (110     110        —     

Proceeds from stock option exercises

     33        —          —          33   
                                

Net cash provided from (used for) financing activities

     (7,602     2,258        (2,319     (7,663
                                

Net decrease in cash and cash equivalents

     (1     (1,144     —          (1,145

Cash and cash equivalents, beginning of period

     34        4,368        —          4,402   
                                

Cash and cash equivalents, end of period

   $ 33      $ 3,224      $ —        $ 3,257   
                                

 

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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2009

(In thousands of dollars)

(Unaudited)

 

 

     Parent
Company
Only
    Guarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Cash flows provided from operating activities:

        

Net income

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

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

        

Loss on disposals of property and equipment

     —          15        —          15   

Stock-based compensation expense

     253        802        —          1,055   

Impairment and other lease charges

     —          400        —          400   

Depreciation and amortization

     —          25,326        (1,493     23,833   

Amortization of deferred financing costs

     716        219        (203     732   

Amortization of unearned purchase discounts

     —          (1,616     —          (1,616

Amortization of deferred gains from sale-leaseback transactions

     —          (1,359     (1,004     (2,363

Gain on settlements of lease financing obligations

     —          (76     —          (76

Accretion of interest on lease financing obligations

     —          288        (255     33   

Deferred income taxes

     —          331        968        1,299   

Accrued income taxes

     902        —          —          902   

Changes in other operating assets and liabilities

     1,914        (19,691     22,811        5,034   
                                

Net cash provided from operating activities

     21,478        25,463        —          46,941   
                                

Cash flows used for investing activities:

        

Capital expenditures:

        

New restaurant development

     —          (7,887     —          (7,887

Restaurant remodeling

     —          (10,073     —          (10,073

Other restaurant capital expenditures

     —          (8,367     —          (8,367

Corporate and restaurant information systems

     (905     (2,719     —          (3,624
                                

Total capital expenditures

     (905     (29,046     —          (29,951

Properties purchased for sale-leaseback

     —          (1,260     —          (1,260

Proceeds from sale-leaseback transactions

     —          —          5,454        5,454   

Proceeds from sales of other properties

     —          819        —          819   
                                

Net cash used for investing activities

     (905     (29,487     5,454        (24,938
                                

Cash flows provided from (used for) financing activities:

        

Borrowings on revolving credit facility

     77,700        —          —          77,700   

Repayments on revolving credit facility

     (92,600     —          —          (92,600

Scheduled principal payments on term loans

     (6,000     —          —          (6,000

Principal payments on capital leases

     —          (82     —          (82

Proceeds from lease financing obligations

     —          6,535        (5,700     835   

Settlement of lease financing obligations

     —          (1,945     —          (1,945

Financing costs associated with issuance of lease financing obligations

     —          (250     246        (4
                                

Net cash provided from (used for) financing activities

     (20,900     4,258        (5,454     (22,096
                                

Net increase (decrease) in cash and cash equivalents

     (327     234        —          (93

Cash and cash equivalents, beginning of period

     361        3,038        —          3,399   
                                

Cash and cash equivalents, end of period

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

 

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ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Throughout this Quarterly Report on Form 10-Q, we refer to Carrols Restaurant Group, Inc. as “Carrols Restaurant Group” and, together with its consolidated subsidiaries, as “we”, “our” and “us” unless otherwise indicated or the context otherwise requires. Any reference to “Carrols” refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware corporation, and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires. This combined Quarterly Report on Form 10-Q is filed by both Carrols Restaurant Group and its wholly owned subsidiary, Carrols.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 3, 2010 and December 28, 2008 will be referred to as the fiscal years ended December 31, 2009 and 2008, respectively. Similarly, all references herein to the three and nine months ended October 3, 2010 and September 27, 2009 will be referred to as the three and nine months ended September 30, 2010 and 2009, respectively. The years ended December 31, 2009 and 2008 contained 53 weeks and 52 weeks, respectively, and the three and nine months ended September 30, 2010 and 2009 each contained thirteen and thirty-nine weeks, respectively.

Introduction

Carrols Restaurant Group is a holding company that conducts all of its operations through its direct and indirect subsidiaries and has no assets other than the shares of capital stock of Carrols, its direct wholly-owned subsidiary. The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) relates to the consolidated financial statements of Carrols Restaurant Group and the consolidated financial statements for Carrols presented in Item 1.

The difference between the consolidated financial statements of Carrols Restaurant Group and Carrols is primarily due to additional rent expense of approximately $6,000 per year for Carrols Restaurant Group and the composition of stockholders’ equity.

The following MD&A is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the accompanying financial statement notes of each of Carrols Restaurant Group and Carrols appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2009. The overview provides our perspective on the individual sections of MD&A, which include the following:

Company Overview—a general description of our business and our key financial measures.

Recent and Future Events Affecting Our Results of Operations—a description of recent events that will affect and future events that may affect, our results of operations.

Executive Summary—an executive review of our performance for the three months ended September 30, 2010.

Results of Operations—an analysis of our results of operations for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009, including a review of material items and known trends and uncertainties.

Liquidity and Capital Resources—an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.

Application of Critical Accounting Policies—an overview of accounting policies requiring critical judgments and estimates.

Effects of New Accounting Standards—a discussion of new accounting standards and any implications related to our financial statements.

Forward Looking Statements—cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.

 

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Company Overview

We are one of the largest restaurant companies in the United States operating three restaurant brands in the quick-casual and quick-service restaurant segments with 552 restaurants located in 17 states as of October 3, 2010. We have been operating restaurants for more than 45 years. We own and operate two Hispanic restaurant brands, Pollo Tropical and Taco Cabana (together referred to by us as our Hispanic Brands), which we acquired in 1998 and 2000, respectively. We are also the largest Burger King franchisee, based on the number of restaurants, and have operated Burger King restaurants since 1976. As of October 3, 2010, our company-owned restaurants included 90 Pollo Tropical restaurants and 156 Taco Cabana restaurants, and we operated 306 Burger King restaurants under franchise agreements. We are franchising our Pollo Tropical restaurants and as of October 3, 2010 we had 29 franchised restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad, the Bahamas and on college campuses in the United States. Although we are not actively franchising our Taco Cabana restaurants, we had four Taco Cabana franchised restaurants at October 3, 2010 located in the United States. We believe that the diversification and strength of our restaurant brands as well as the geographic dispersion of our restaurants provide us with stability and enhanced growth opportunities. For the nine months ended September 30, 2010 and 2009, we had total revenues of $601.2 million and $606.4 million, respectively.

The following is an overview of the key financial measures discussed in our results of operations:

 

   

Restaurant sales consist of food and beverage sales, net of discounts, at our company-owned and operated restaurants. Restaurant sales are influenced by menu price increases, new restaurant openings, closures of restaurants and changes in comparable restaurant sales. Restaurants are included in comparable restaurant sales after they have been open for 12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants.

 

   

Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities for our Pollo Tropical and Taco Cabana restaurants, including chicken and beef, are generally purchased under contracts.

 

   

Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and state unemployment insurance.

 

   

Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of gains on sale-leaseback transactions.

 

   

Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses for our Burger King restaurants, utilities, repairs and maintenance, real estate taxes and credit card fees.

 

   

Advertising expense includes all promotional expenses including television, radio, billboards and other media for our Hispanic Brand restaurants and advertising payments based on a percentage of sales as required under our franchise agreements for our Burger King restaurants.

 

   

General and administrative expenses are comprised primarily of (1) salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, (2) legal, auditing and other professional fees and (3) stock-based compensation expense.

 

   

Adjusted Segment EBITDA, which is the measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, 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 expense and gains and losses on the extinguishment of debt. Adjusted Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted Segment EBITDA for our Burger King restaurants includes general and administrative expenses related directly to the Burger King segment as well as the expenses associated with administrative support to all three of our segments including executive management, information systems and certain accounting, legal and other administrative functions.

 

   

Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, depreciation of assets under lease financing obligations and the amortization of Burger King franchise rights and franchise fees.

 

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Interest expense consists primarily of interest expense associated with Carrols’ 9% Senior Subordinated Notes due 2013 (the “Notes”), borrowings under our senior credit facility, amortization of deferred financing costs and imputed interest expense on leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations. Interest expense also includes any gains and losses from the settlement of lease financing obligations. Interest on borrowings under our senior credit facility is generally based on LIBOR plus a current margin of 1.0% or prime as we designate. Consequently, changes in LIBOR rates or prime will impact our interest expense.

Recent and Future Events Affecting our Results of Operations

Future Restaurant Closures

We evaluate the performance of our Burger King restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant and, in relation to Burger King franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on such evaluation. In 2009, we closed four Burger King restaurants, not including restaurants relocated within the same market area. Excluding relocations, during the nine months ended September 30, 2010, we closed six Burger King restaurants and we anticipate that we will close one additional Burger King restaurant in 2010.

We closed two underperforming Taco Cabana restaurants and one underperforming Pollo Tropical restaurant in 2009 and during the nine months ended September 30, 2010 we closed one underperforming Pollo Tropical restaurant and one underperforming Taco Cabana restaurant. We currently do not anticipate closing any additional Taco Cabana or Pollo Tropical restaurants in 2010.

We do not believe that the future impact on our consolidated results of operations from such restaurant closures will be material, although there can be no assurance in this regard. Our determination of whether to close restaurants in the future is subject to further evaluation and may change.

From time to time we consider and evaluate strategic alternatives with respect to our Burger King restaurants, including the possible future sale of some or all of such restaurants. At this time, we have no understandings, commitments or agreements with respect to the foregoing and there can be no assurance that we will enter into any such arrangements in the future.

Unearned Purchase Discounts

Unearned purchase discounts are amortized as a reduction of cost of sales either over the life of the supplier contract or the estimated purchase commitment period. In 2000, Burger King Corporation arranged for the Coca-Cola Company and Dr. Pepper/Seven-Up, Inc. to provide funding to franchisees in connection with certain initiatives to upgrade restaurants. We received approximately $20.4 million during 2000 and 2001 under this arrangement with these suppliers. The total amount of these purchase discounts amortized for the year ended December 31, 2009 was $2.2 million. At December 31, 2009 these purchase discounts were fully amortized, which has resulted in an increase in our cost of sales for the three and nine months ended September 30, 2010 and will also result in an increase in our cost of sales for the year ending December 31, 2010 when compared to the 2009 fiscal year.

Executive Summary—Operating Performance for the Three Months Ended September 30, 2010

Total revenues for the three months ended September 30, 2010 increased to $201.6 million from $201.2 million in the three months ended September 30, 2009. Revenues from our Hispanic Brand restaurants increased 4.0% to $111.3 million and revenues from our Burger King restaurants decreased to $90.4 million from $94.1 million in the prior year. Comparable restaurant sales in the third quarter of 2010 increased 8.8% at our Pollo Tropical restaurants, increased 1.0% at our Taco Cabana restaurants and decreased 3.2% at our Burger King restaurants. The comparable restaurant sales increases at our Pollo Tropical and Taco Cabana restaurants were a result of higher customer traffic while the decrease at our Burger King restaurants was due primarily to a decline in the average check and to a lesser extent lower customer traffic.

Restaurant operating margins were negatively impacted in the third quarter of 2010 by higher food costs and higher advertising spending at our Hispanic brand restaurants due to the timing of promotions. Food costs increased 1.2%, as a percentage of total restaurant sales, compared to the third quarter of 2009 due to higher beef costs, lower margin value menu sales and lower amortization of purchase discounts at our Burger King restaurants and from higher commodity costs and lower margin menu promotions at our Taco Cabana restaurants. As a percentage of total restaurant sales, restaurant wages

 

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and related expenses decreased slightly to 29.3% in the third quarter of 2010 from 29.4% in the third quarter of 2009. Advertising expenses, as a percentage of total restaurant sales, increased to 4.4% in the third quarter of 2010 from 4.0% in the third quarter of 2009. Operating results were favorably impacted by lower utility costs which, as a percentage of total restaurant sales, decreased to 3.9% in the third quarter of 2010 from 4.2% in the third quarter of 2009.

General and administrative expenses decreased to $12.0 million in the third quarter of 2010 from $12.8 million in the third quarter of 2009 due primarily to lower bonus accruals. As a percentage of total revenues, general and administrative expenses decreased to 6.0% in the third quarter of 2010 from 6.3% in the third quarter of 2009.

Interest expense decreased $0.1 million to $4.7 million in the third quarter of 2010 due primarily to a reduction in our total indebtedness since the beginning of the third quarter of 2009.

Our effective income tax rate, including discrete tax items, was 37.8% in the third quarter of 2010 compared to 35.6% in the third quarter of 2009.

As a result of the above, our net income decreased to $4.6 million in the third quarter of 2010 from $5.6 million in the third quarter of 2009.

Results of Operations

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

The following table sets forth, for the three months ended September 30, 2010 and 2009, selected operating results as a percentage of consolidated restaurant sales:

 

     2010     2009  

Restaurant sales:

    

Pollo Tropical

     23.5     21.8

Taco Cabana

     31.6     31.3

Burger King

     44.9     46.9
                

Total restaurant sales

     100.0     100.0

Costs and expenses:

    

Cost of sales

     29.9     28.7

Restaurant wages and related expenses

     29.3     29.4

Restaurant rent expense

     6.0     6.2

Other restaurant operating expenses

     14.7     14.9

Advertising expense

     4.4     4.0

General and administrative (including stock-based compensation expense)

     6.0     6.4

Since the beginning of the third quarter of 2009 through the end of the third quarter of 2010, we opened three new Taco Cabana restaurants and two new Burger King restaurants, both of which were relocations within their market areas. During the same period we closed eight Burger King restaurants, excluding relocations, one Pollo Tropical restaurant and one Taco Cabana restaurant.

Restaurant Sales. Total restaurant sales for the third quarter of 2010 increased to $201.3 million from $200.8 million due primarily to sales increases at our Pollo Tropical restaurants. Restaurant sales at our Hispanic Brand restaurants increased 4.0% to $110.9 million in the third quarter of 2010 from $106.7 million in 2009.

Pollo Tropical restaurant sales increased to $47.3 million in the third quarter of 2010 from $43.7 million in 2009 due primarily to an increase in comparable restaurant sales of 8.8%. Customer traffic increased 12.2% and was partially offset by a 3.4% decrease in the average check as a result of the introduction of a new line of wraps and sandwiches and increased promotional discounting. There have been no menu price increases in 2010.

Taco Cabana restaurant sales increased to $63.6 million in the third quarter of 2010 from $62.9 million in 2009. Comparable restaurant sales increased 1.0% due to an increase in customer traffic as a result of promotions and slightly higher promotional discounting. The effect of menu price increases in 2010 was approximately 2.1% in the third quarter of 2010 compared to the prior year.

 

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Burger King restaurant sales decreased to $90.4 million in the third quarter of 2010 from $94.1 million in 2009 due primarily to a decrease in comparable restaurant sales of 3.2%. The average check for our Burger King restaurants decreased 2.3% as a result of an increase in sales of lower priced menu items including the $1 Buck Double and the double cheeseburger. Customer traffic decreased 0.8% in the third quarter of 2010. Sales also decreased as a result of the closure of eight Burger King restaurants since the beginning of the third quarter of 2009. The effect of menu price increases taken since the beginning of the third quarter of 2009 was approximately 2.7% in the third quarter of 2010 compared to the prior year.

Operating Costs and Expenses. Cost of sales, as a percentage of total restaurant sales, increased to 29.9% in the third quarter of 2010 from 28.7% in the third quarter of 2009. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 31.8% in the third quarter of 2010 from 32.9% in the third quarter of 2009 due to higher margins on new menu items compared to the prior year (0.9% of Pollo Tropical sales) and lower commodity costs including lower chicken prices (0.3% of Pollo Tropical sales), partially offset by higher promotional discounting. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.8% in the third quarter of 2010 from 28.7% in the third quarter of 2009 due primarily to lower margins on menu item promotions in 2010 (0.7% of Taco Cabana sales), higher cheese commodity prices (0.5% of Taco Cabana sales) and higher promotional discounting, partially offset by the effect of menu price increases. Burger King cost of sales, as a percentage of Burger King restaurant sales, increased to 28.9% in the third quarter of 2010 from 26.8% in the third quarter of 2009 due primarily to higher commodity prices including beef (1.5% of Burger King sales), the effect of sales from lower margin menu items, including the $1 Buck Double and double cheeseburger (1.0% of Burger King sales) and from the lower amortization of deferred purchase discounts on Coke products (0.6% of Burger King sales), partially offset by the effect of menu price increases taken in the last twelve months.

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased slightly to 29.3% in the third quarter of 2010 from 29.4% in the third quarter of 2009. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 24.1% in the third quarter of 2010 from 24.4% in the third quarter of 2009 due primarily to the effect of higher sales volumes on fixed labor costs and productive labor efficiencies, partially offset by higher incentive bonuses. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased to 30.5% in the third quarter of 2010 from 30.2% in the third quarter of 2009 due primarily to higher medical and workers compensation claim costs. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, was 31.2% in both the third quarter of 2010 and 2009 as the effect of lower sales volumes on fixed labor costs was offset by lower workers compensation claim costs and the effect of menu price increases.

Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.0% in the third quarter of 2010 from 6.2% in the third quarter of 2009 due to the effect of higher sales volumes on fixed rentals at Pollo Tropical and, to a much lesser extent, at Taco Cabana.

Other restaurant operating expenses, as a percentage of total restaurant sales, decreased to 14.7% in the third quarter of 2010 from 14.9% in the third quarter of 2009. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 13.3% in the third quarter of 2010 from 14.3% in the third quarter of 2009 due primarily to lower utility costs (0.8% of Pollo Tropical sales) and the effect of higher sales volumes on fixed operating costs. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 14.7% in the third quarter of 2010 from 15.0% in the third quarter of 2009 due to lower utility costs (0.5% of Taco Cabana sales) partially offset by higher general liability claim costs. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased to 15.5% in the third quarter of 2010 from 15.0% in the third quarter of 2009 due primarily to higher repair and maintenance expenses due to exterior painting initiatives (0.4% of Burger King sales) and the effect of lower sales volumes on fixed operating costs.

Advertising expense, as a percentage of total restaurant sales, increased to 4.4% in the third quarter of 2010 from 4.0% in the third quarter of 2009. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, increased to 3.6% in the third quarter of 2010 from 2.5% in the third quarter of 2009 due to the timing of promotions within 2010. For all of 2010 our Pollo Tropical advertising costs are currently expected to be approximately 2.7% to 2.8% of Pollo Tropical restaurant sales. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased to 5.2% in the third quarter of 2010 from 4.7% in the third quarter of 2009 due primarily to the timing of promotions. For all of 2010 our Taco Cabana advertising costs are currently expected to be approximately 4.1% to 4.3% of Taco Cabana restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, was 4.2% in both the third quarter of 2010 and the third quarter of 2009. For all of 2010 our Burger King advertising costs are currently expected to be approximately 4.1% to 4.2% of our Burger King restaurant sales.

 

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General and administrative expenses decreased to $12.0 million in the third quarter of 2010 from $12.8 million in the third quarter of 2009 and, as a percentage of total restaurant sales, decreased to 6.0% in the third quarter of 2010 from 6.4% in the third quarter of 2009 due to lower administrative bonus accruals of approximately $1.3 million in the third quarter of 2010, compared to the third quarter of 2009, partially offset by higher salaries and related benefit costs.

Adjusted Segment EBITDA. As a result of the factors above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $7.5 million in the third quarter of 2010 from $6.3 million in the third quarter of 2009. Adjusted Segment EBITDA for our Taco Cabana restaurants decreased to $6.5 million in the third quarter of 2010 from $6.7 million in the third quarter of 2009. Adjusted Segment EBITDA for our Burger King restaurants decreased to $6.4 million in the third quarter of 2010 from $8.8 million in the third quarter of 2009.

Depreciation and Amortization. Depreciation and amortization expense was $8.1 million in both the third quarter of 2010 and 2009.

Impairment and Other Lease Charges. Impairment and other lease charges were $0.2 million in the third quarter of 2010 and included $0.1 million associated with underperforming Burger King restaurants and $0.1 million of additional lease charges associated with a closed Pollo Tropical restaurant location. There were no significant impairment and other lease charges in the third quarter of 2009.

Interest Expense. Total interest expense decreased to $4.7 million in the third quarter of 2010 from $4.8 million in the third quarter of 2009 due to a reduction in our total outstanding indebtedness of $19.4 million since the beginning of the third quarter of 2009. The weighted average interest rate on our long-term debt, excluding lease financing obligations, for the third quarter of 2010 was 6.1% compared to 5.9% in the third quarter of 2009. Interest expense on lease financing obligations decreased to $0.2 million in the third quarter of 2010 from $0.3 million in the third quarter of 2009 due to a reduction in lease financing obligations of $1.6 million since the beginning of the third quarter of 2009.

Provision for Income Taxes. The provision for income taxes for the third quarter of 2010 was derived using an estimated effective annual income tax rate for the year ending December 31, 2010 of 36.6%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $108,000 in the third quarter of 2010 and resulted in an overall tax rate of 37.8%. The provision for income taxes for the third quarter of 2009 was derived using an estimated effective annual income tax rate for the year ending December 31, 2009 of 37.3%, which excluded any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $130,000 in the third quarter of 2009 and resulted in an overall tax rate of 35.6%

Net Income. As a result of the foregoing, net income was $4.6 million in the third quarter of 2010 compared to $5.6 million in the third quarter of 2009.

 

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Nine months ended September 30, 2010 Compared to Nine months ended September 30, 2009

The following table sets forth, for the nine months ended September 30, 2010 and 2009, selected operating results as a percentage of consolidated restaurant sales:

 

     2010     2009  

Restaurant sales:

    

Pollo Tropical

     23.2     21.8

Taco Cabana

     31.6     31.3

Burger King

     45.2     46.9
                

Total restaurant sales

     100.0     100.0

Costs and expenses:

    

Cost of sales

     30.4     29.0

Restaurant wages and related expenses

     29.6     29.2

Restaurant rent expense

     6.1     6.1

Other restaurant operating expenses

     14.5     14.6

Advertising expense

     3.9     3.9

General and administrative (including stock-based compensation expense)

     6.2     6.4

Since the beginning of 2009 through the third quarter of 2010, we have opened one new Pollo Tropical restaurant, five new Taco Cabana restaurants and three new Burger King restaurants, all of which were relocations within their market areas. During the same period we closed ten Burger King restaurants, excluding relocations, two Pollo Tropical restaurants and three Taco Cabana restaurants.

Restaurant Sales. Total restaurant sales for the first nine months of 2010 decreased $5.2 million to $600.1 million due to lower sales at our Burger King restaurants. Restaurant sales at our Hispanic Brand restaurants increased 2.3% to $328.7 million in the first nine months of 2010.

Pollo Tropical restaurant sales increased $7.1 million to $138.9 million in the first nine months of 2010 due to an increase in comparable restaurant sales of 6.3% driven by a 9.5% increase in customer traffic. The average check at our Pollo Tropical restaurants decreased 3.1% in the first nine months of 2010 compared to the first nine months of 2009 as a result of the introduction of our new line of wraps and sandwiches and increased promotional discounting.

Taco Cabana restaurant sales increased $0.4 million to $189.7 million in the first nine months of 2010 due primarily to the net addition of two Taco Cabana restaurants since the beginning of 2009, partially offset by a 0.3% decrease in comparable restaurant sales. The average check at our Taco Cabana restaurants decreased 1.6% in the first nine months of 2010 compared to the first nine months of 2009 as a result of new product promotions and increased promotional discounting in the first nine months of 2010. Customer traffic for the first nine months of 2010 increased 1.4% compared to the first nine months of 2009.

Burger King restaurant sales decreased $12.7 million to $271.4 million in the first nine months of 2010 due to a decrease in comparable restaurant sales of 3.7% resulting from a decrease in the average check of 4.7% in the first nine months of 2010 as a result of an increase in sales of lower priced menu items including the $1 Buck Double and double cheeseburger. Sales also decreased as a result of the closure, excluding relocated restaurants, of ten Burger King restaurants since the beginning of 2009. Customer traffic increased of 1.1% in the first nine months of 2010 compared to the first nine months of 2009.

Operating Costs and Expenses. Cost of sales, as a percentage of total restaurant sales, increased to 30.4% in the first nine months of 2010 from 29.0% in the first nine months of 2009. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 32.3% in the first nine months of 2010 from 33.1% in the first nine months of 2009 due primarily to lower commodity prices (0.4% of Pollo Tropical sales), including lower rice and chicken prices, and higher margins on new menu items compared to the prior year, partially offset by higher promotional discounting. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.9% in the first nine months of 2010 from 29.0% in the first nine months of 2009 due primarily to lower margins on menu item promotions in 2010 (0.6% of Taco Cabana sales) and higher commodity prices including fuel surcharges (0.3% of Taco Cabana sales), partially offset by the effect of menu price increases in 2010. Burger King cost of sales, as a percentage of Burger King restaurant sales, increased to 29.7% in the first nine months of 2010 from 27.0% in the first nine months of 2009 due primarily to higher commodity

 

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prices including beef (1.2% of Burger King sales), an increase in sales from lower margin menu items, including the $1 Buck Double and double cheeseburger (1.3% of Burger King sales), and from the lower amortization of deferred purchase discounts on Coke products, partially offset by the effect of menu price increases taken in late 2009 and 2010 (0.6% of Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales, increased to 29.6% in the first nine months of 2010 from 29.2% in the first nine months of 2009. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 24.6% in the first nine months of 2010 from 24.7% in the first nine months of 2009 due primarily to the effect of higher sales volumes on fixed labor costs offset by higher workers compensation claim costs (0.4% of Pollo Tropical sales). Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased to 30.6% in the first nine months of 2010 from 29.6% in the first nine months of 2009 due primarily to the effect of slightly negative sales volumes on wage rate increases, higher medical insurance claim costs (0.2% of Taco Cabana sales) and higher workers compensation claim costs (0.3% of Taco Cabana sales). Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 31.5% in the first nine months of 2010 from 31.1% in the first nine months of 2009 due primarily to the effect of lower sales volumes on fixed labor costs.

Restaurant rent expense, as a percentage of total restaurant sales, was 6.1% in both the first nine months of 2010 and the first nine months of 2009.

Other restaurant operating expenses, as a percentage of total restaurant sales, decreased slightly to 14.5% in the first nine months of 2010 from 14.6% in the first nine months of 2009. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 13.2% in the first nine months of 2010 from 14.1% in the first nine months of 2009 due primarily to lower utility costs (0.9% of Pollo Tropical sales) and the effect of higher sales volumes on fixed operating costs, partially offset by higher repair and maintenance expenses associated with upgrading our restaurants (0.3% of Pollo Tropical sales). Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, increased slightly to 14.4% in the first nine months of 2010 from 14.3% in the first nine months of 2009 due primarily to higher repair and maintenance and other related costs to upgrade our restaurants, partially offset by lower utility costs (0.2% of Taco Cabana sales). Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased slightly to 15.2% in the first nine months of 2010 from 15.1% in the first nine months of 2009 due primarily to the effect of lower sales volumes on fixed operating costs substantially offset by lower utility costs (0.2% of Burger King sales).

Advertising expense, as a percentage of total restaurant sales, was 3.9% in both the first nine months of 2010 and the first nine months of 2009. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, increased slightly to 2.8% in the first nine months of 2010 from 2.7% in the first nine months of 2009 due to the timing of promotions within 2010. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased to 4.3% in the first nine months of 2010 from 4.2% in the first nine months of 2009 due primarily to the timing of promotions. Burger King advertising expense, as a percentage of Burger King restaurant sales, was 4.2% in both the first nine months of 2010 and 2009.

General and administrative expenses decreased $1.5 million in the first nine months of 2010 to $37.2 million from $38.7 million in the first nine months of 2009 and, as a percentage of total restaurant sales, decreased to 6.2% from 6.4% in the first nine months of 2009 due primarily to lower administrative bonus accruals of approximately $3.1 million in the first nine months of 2010 partially offset by higher salary costs and higher stock-based compensation expense.

Adjusted Segment EBITDA. As a result of the factors above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $22.4 million in the first nine months of 2010 from $19.5 million in the first nine months of 2009. Adjusted Segment EBITDA for our Taco Cabana restaurants decreased to $20.1 million in the first nine months of 2010 from $22.9 million in the first nine months of 2009. Adjusted Segment EBITDA for our Burger King restaurants decreased to $15.7 million in the first nine months of 2010 from $24.9 million in the first nine months of 2009.

Depreciation and Amortization. Depreciation and amortization expense increased to $24.3 million in the first nine months of 2010 from $23.8 million in the first nine months of 2009 due primarily to expenditures made in the latter half of 2009 for new broilers at our Burger King restaurants and new point-of-sale systems at our Pollo Tropical restaurants.

Impairment and Other Lease Charges. Impairment and other lease charges were $4.1 million in the first nine months of 2010 and included $1.4 million for an underperforming Pollo Tropical restaurant and $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant. In addition, we recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana

 

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restaurant and $0.4 million associated with underperforming Burger King restaurants. Impairment and other lease charges were $0.4 million in the first nine months of 2009 due primarily to lease related charges of $0.3 million associated with the closure of a Pollo Tropical restaurant in Florida in the first quarter of 2009.

Interest Expense. Total interest expense decreased $0.8 million to $14.1 million in the first nine months of 2010 due to a reduction in our total outstanding indebtedness of $40.6 million since the beginning of 2009 and, to a lesser extent; lower effective interest rates on our LIBOR based borrowings under our senior credit facility. The weighted average interest rate on our long-term debt, excluding lease financing obligations, for the first nine months of 2010 was 6.0% compared to 5.9% in the first nine months of 2009. Interest expense on lease financing obligations decreased to $0.7 million in the first nine months of 2010 from $0.9 million in the first nine months of 2009 due to a reduction in lease financing obligations of $4.8 million since the beginning of 2009.

Provision for Income Taxes. The provision for income taxes for the first nine months of 2010 was derived using an estimated effective annual income tax rate of for the year ending December 31, 2010 of 36.6%, which excludes any discrete tax adjustments. Discrete tax adjustments have increased the provision for income taxes by $38,000 in the first nine months of 2010 and resulted in an overall tax rate of 36.9%. The provision for income taxes for the first nine months of 2009 was derived using an estimated effective annual income tax rate for the year ending December 31, 2009 of 37.3%, which excluded any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $187,000 in the first nine months of 2009 and resulted in an overall tax rate of 36.7%

Net Income. As a result of the foregoing, net income was $9.3 million in the first nine months of 2010 compared to $17.7 million in the first nine months of 2009.

Liquidity and Capital Resources

We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:

 

   

restaurant operations are primarily conducted on a cash basis;

 

   

rapid turnover results in a limited investment in inventories; and

 

   

cash from sales is usually received before related liabilities for food, supplies and payroll become due.

In response to economic conditions and changes in the capital markets, we have and will continue to focus on reducing our debt balances and our financial leverage, particularly in the near term. We significantly reduced our spending on new restaurant development in 2009 which allowed us to utilize our free cash flow to reduce our outstanding indebtedness. We are continuing to limit new restaurant growth in 2010.

Interest payments under our debt obligations, capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe cash generated from our operations, availability of borrowing under our revolving credit facility and proceeds from anticipated sale-leaseback transactions will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.

Operating Activities. Net cash provided from operating activities for the nine months ended September 30, 2010 decreased $16.3 million to $30.6 million due to a reduction of net income adjusted for depreciation and amortization and impairment and other lease charges of $4.2 million, and an increase in the components of net working capital of $13.3 million, primarily from the timing of vendor and income tax payments and lower bonus accruals. Net cash provided from operating activities for the nine months ended September 30, 2009 was $46.9 million and resulted primarily from net income of $17.7 million, adjusted for non-cash items including depreciation and amortization expense and impairment and other lease charges of $24.2 million and reductions in the components of working capital of $5.9 million.

Investing Activities. Net cash used for investing activities in the nine months ended September 30, 2010 and 2009 was $24.1 million and $24.9 million, respectively. Capital expenditures are the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants, including expenditures associated with Burger King franchise renewals; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems, including expenditures in 2009 for new point-of-sale systems for all of our Pollo Tropical restaurants.

 

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The following table sets forth our capital expenditures for the periods presented (in thousands):

 

     Pollo
Tropical
     Taco
Cabana
     Burger
King
     Other      Consolidated  

Nine months ended September 30, 2010:

              

New restaurant development

   $ 4,331       $ 3,183       $ 2,269       $ —         $ 9,783   

Restaurant remodeling

     1,573         2,819         4,180         —           8,572   

Other restaurant capital expenditures (1)

     1,763         2,259         2,973         —           6,995   

Corporate and restaurant information systems

     —           —           —           962         962   
                                            

Total capital expenditures

   $ 7,667       $ 8,261       $ 9,422       $ 962       $ 26,312   
                                            

Number of new restaurant openings (2)

     —           1         1            2   

Nine months ended September 30, 2009:

              

New restaurant development

   $ 672       $ 6,201       $ 1,014       $ —         $ 7,887   

Restaurant remodeling

     364         1,414         8,295         —           10,073   

Other restaurant capital expenditures (1)

     865         1,888         5,614         —           8,367   

Corporate and restaurant information systems

     —           —           —           3,624         3,624   
                                            

Total capital expenditures

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

Number of new restaurant openings (2)

     1        3         1            5   

 

1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the nine months ended September 30, 2010 and 2009, total restaurant repair and maintenance expenses were approximately $13.5 million and $12.7 million, respectively.
2) Includes Burger King restaurants which were relocated within the same market area under a new franchise agreement.

For all of 2010, we anticipate that total capital expenditures will be approximately $40 million, although the actual amount of capital expenditures may differ from these estimates. These capital expenditures are expected to include approximately $14 million to $16 million for the development of new restaurants including the purchase of related real estate. In 2010 we anticipate opening three new Hispanic Brand restaurants and one Burger King restaurant, which was a relocation of an existing restaurant within its current market area. Capital expenditures in 2010 also are expected to include expenditures of approximately $23 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs, including initiatives in certain markets for both our Pollo Tropical and Taco Cabana restaurants to enhance the interior of the restaurant and elevate the level of guest service, and capital maintenance expenditures.

Investing activities also include sale-leaseback transactions related to our restaurant properties, the net proceeds from which were $5.9 million and $5.5 million in the nine months ended September 30, 2010 and 2009, respectively. In the nine months ended September 30, 2009 we also sold two non-operating restaurant properties for net proceeds of $0.8 million. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility. In the nine months ended September 30, 2010 we purchased three of our restaurant properties for $3.7 million which we anticipate will be sold in sale-leaseback transactions. We also acquired two properties for future sale-leaseback for $1.3 million in the nine months ended September 30, 2009.

Financing Activities. Net cash used for financing activities in the nine months ended September 30, 2010 was $7.7 million due to principal payments on our term loan under our senior credit facility of $9.9 million partially offset by net revolver borrowings of $2.3 million. Net cash used for financing activities in the first nine months of 2009 was $22.1 million and included net repayments of our revolving credit borrowings of $14.9 million and scheduled term loan principal repayments of $6.0 million. In 2009, we settled $1.9 million of lease financing obligations which included a purchase from a lessor of one restaurant property for $1.1 million that was previously subject to a lease financing obligation and the settlement of a lease financing obligation recorded in the second quarter of 2009 for $0.8 million.

Senior Credit Facility. Our senior credit facility consists of term loan A borrowings maturing on March 9, 2013 (or earlier on September 30, 2012 if the Notes are not refinanced by June 30, 2012) and a $65.0 million revolving credit facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans) maturing on March 9, 2012.

 

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

1) the applicable margin ranging from 0% to 0.25% based on our 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 our senior leverage ratio. At September 30, 2010 the LIBOR margin percentage was 1.0%.

During the nine months ended September 30, 2010, we made a required prepayment of approximately $1.0 million based on 25% of Carrols’ Excess Cash Flow, as defined, for the year ended December 31, 2009. At October 3, 2010, outstanding term loan borrowings under the senior credit facility were $95.1 million with the remaining balance due and payable as follows:

1) two quarterly installments of approximately $3.0 million beginning on December 31, 2010;

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

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

Under our senior credit facility, we are also required to make mandatory prepayments of principal on term loan borrowings (a) annually in an amount up to 50% of Excess Cash Flow depending upon our 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 us, 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) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.

In general, obligations under the senior credit facility are guaranteed by us 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 our ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of our business, engage in transactions with related parties, make certain investments or pay dividends. In addition, we are required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). We were in compliance as of October 3, 2010 with the covenants in the senior credit facility. At October 3, 2010, Carrols fixed charge coverage ratio was 1.35 to 1.00 compared to the minimum required fixed charge ratio of 1.20 to 1.00, Carrols senior leverage ratio was 1.36 to 1.00 compared to the allowed senior leverage ratio of 2.00 to 1.00, and Carrols total leverage ratio was 3.40 to 1.00 compared to the allowed total leverage ratio of 4.00 to 1.00.

Notes. On December 15, 2004 Carrols issued $180.0 million of Notes. The Notes bear interest at a rate of 9% payable semi-annually on January 15 and July 15 and mature on January 15, 2013. The Notes are redeemable at the option of Carrols in whole or in part at a price of 102.25% of the principal amount if redeemed before January 15, 2011 and at 100% of the principal amount after January 15, 2011.

The Notes are unsecured and guaranteed by Carrols’ material subsidiaries. Restrictive covenants under the Notes include limitations with respect to, among other things, Carrols’ and its material subsidiaries’ ability to incur 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 as of October 3, 2010 with the restrictive covenants in the Indenture governing the Notes.

Indebtedness. At October 3, 2010, we had total debt outstanding of $275.5 million comprised of $165.0 million of Notes, term loan borrowings of $95.1 million under the senior credit facility, revolving credit borrowings of $4.2 million under the senior credit facility, lease financing obligations of $10.0 million and capital lease obligations of $1.2 million. After reserving $14.5 million for letters of credit guaranteed by our senior credit facility, $46.3 million was available for revolving credit borrowings under the senior credit facility at October 3, 2010.

 

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Contractual Obligations

A table of our contractual obligations as of December 31, 2009 was included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no significant changes to our contractual obligations during the nine months ended September 30, 2010.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our consolidated balance sheet.

Application of Critical Accounting Policies

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Significant Accounting Policies” footnote in the notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. There have been no material changes affecting our critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Effects of New Accounting Standards

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are predictive in nature or that depend upon or refer to future events or conditions are forward-looking statements. These statements are often identified by the words “may,” “might,” “will,” “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “hope”, “plan” or similar expressions. In addition, expressions of our strategies, intentions or plans are also forward looking statements. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties, both known and unknown. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected or implied in the forward-looking statements. We believe important factors that could cause actual results to differ materially from our expectations include the following, in addition to other risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009:

 

   

Competitive conditions;

 

   

Regulatory factors;

 

   

Environmental conditions and regulations;

 

   

General economic conditions, particularly in the retail sector;

 

   

Weather conditions;

 

   

Increases in commodity costs;

 

   

Fuel prices;

 

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Significant disruptions in service or supply by any of our suppliers or distributors;

 

   

Changes in consumer perception of dietary health and food safety;

 

   

Labor and employment benefit costs;

 

   

The outcome of pending or future legal claims and proceedings;

 

   

Our ability to manage our growth and successfully implement our business strategy;

 

   

The risks associated with the expansion of our business;

 

   

Our ability to integrate any businesses we acquire;

 

   

Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;

 

   

The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;

 

   

The risk of an act of terrorism or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity; and

 

   

Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations, reports of cases of “mad cow” disease and avian flu, and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as negative publicity regarding food quality, illness, injury or other health concerns.

Inflation

The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates as well as changes in payroll related taxes. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes from the information presented in Item 7A included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 with respect to the Company’s market risk sensitive instruments.

A 1% change in interest rates would have resulted in an increase or decrease in interest expense of approximately $0.8 million for the nine months ended September 30, 2010.

ITEM 4—CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 3, 2010.

 

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No change occurred in our internal control over financial reporting during the third quarter of 2010 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

None

 

Item 1A. Risk Factors

Part I—Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 describes important factors that could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time-to-time. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3. Default Upon Senior Securities

None

 

Item 4. Reserved

 

Item 5. Other Information

None

 

Item 6. Exhibits

(a) The following exhibits are filed as part of this report.

 

Exhibit

No.

     
31.1    Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
31.2    Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
31.3    Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Corporation.
31.4    Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Corporation.
32.1    Chief Executive Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
32.2    Chief Financial Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
32.3    Chief Executive Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Corporation.
32.4    Chief Financial Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Corporation.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      CARROLS RESTAURANT GROUP, INC.
Date: November 10, 2010      

/S/    ALAN VITULI        

      (Signature)
     

Alan Vituli

Chairman of the Board and

Chief Executive Officer

Date: November 10, 2010

     

/S/    PAUL R. FLANDERS        

      (Signature)
     

Paul R. Flanders

Vice President – Chief Financial Officer and Treasurer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      CARROLS CORPORATION
Date: November 10, 2010      

/S/    ALAN VITULI        

      (Signature)
     

Alan Vituli

Chairman of the Board and

Chief Executive Officer

Date: November 10, 2010

     

/S/    PAUL R. FLANDERS        

      (Signature)
     

Paul R. Flanders

Vice President – Chief Financial Officer and Treasurer

 

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