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 April 3, 20111, 2012
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)
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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 registrantsregistrant (1) havehas 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 werewas required to file such reports), and (2) havehas been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrants haveregistrant has submitted electronically and posted on their Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨x No ¨
Indicate by check mark whether the registrants areregistrant is a large accelerated filers,filer, an accelerated filers,filer, a non-accelerated filersfiler or a smaller reporting companies.company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||||
(Do not check if smaller reporting company) | ||||||||
Carrols Restaurant Group, Inc.
Indicate by check mark whether either of the registrants areregistrant is a shell companiescompany (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 6,8, 2012, Carrols Restaurant Group, Inc. had 22,061,18723,161,822 shares of its common stock, $.01 par value, outstanding. As of May 6, 2011, all outstanding equity securities of Carrols Corporation, which consisted of 10 shares of its common stock, were owned by Carrols Restaurant Group, Inc.
CARROLS RESTAURANT GROUP, INC. AND CARROLS CORPORATION
FORM 10-Q
QUARTER ENDED APRIL 3, 20111, 2012
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Item 1 | ||||||
Consolidated Balance Sheets as of March 31, | 3 | |||||
4 | ||||||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, | 5 | |||||
6 | ||||||
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Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3 | ||||||
Item 4 | ||||||
Item 1 | ||||||
Item 1A | ||||||
Item 2 | ||||||
Item 3 | ||||||
Item 4 | ||||||
Item 5 | ||||||
Item 6 |
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)
March 31, 2011 | December 31, 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,392 | $ | 3,144 | ||||
Trade and other receivables | 6,126 | 5,213 | ||||||
Inventories | 5,088 | 5,203 | ||||||
Prepaid rent | 4,014 | 4,018 | ||||||
Prepaid expenses and other current assets | 6,013 | 5,349 | ||||||
Refundable income taxes | — | 869 | ||||||
Deferred income taxes | 4,609 | 4,609 | ||||||
Total current assets | 30,242 | 28,405 | ||||||
Property and equipment, net | 185,672 | 186,850 | ||||||
Franchise rights, net (Note 4) | 69,633 | 70,432 | ||||||
Goodwill (Note 4) | 124,934 | 124,934 | ||||||
Intangible assets, net | 389 | 419 | ||||||
Franchise agreements, at cost less accumulated amortization of $6,232 and $6,102, respectively | 5,575 | 5,629 | ||||||
Deferred income taxes | 1,949 | 1,949 | ||||||
Other assets | 8,032 | 7,684 | ||||||
Total assets | $ | 426,426 | $ | 426,302 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt (Note 5) | $ | 16,937 | $ | 15,538 | ||||
Accounts payable | 14,823 | 13,944 | ||||||
Accrued interest | 3,139 | 6,853 | ||||||
Accrued payroll, related taxes and benefits | 16,738 | 19,504 | ||||||
Accrued income taxes payable | 1,527 | — | ||||||
Accrued real estate taxes | 3,158 | 4,778 | ||||||
Other liabilities | 9,473 | 7,434 | ||||||
Total current liabilities | 65,795 | 68,051 | ||||||
Long-term debt, net of current portion (Note 5) | 239,981 | 237,914 | ||||||
Lease financing obligations (Note 9) | 10,061 | 10,061 | ||||||
Deferred income—sale-leaseback of real estate | 39,817 | 40,472 | ||||||
Accrued postretirement benefits (Note 8) | 1,790 | 1,845 | ||||||
Other liabilities (Note 7) | 21,066 | 23,052 | ||||||
Total liabilities | 378,510 | 381,395 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—none | — | — | ||||||
Voting common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding 22,053,675 shares and 21,678,203 shares, respectively | 216 | 216 | ||||||
Additional paid-in capital | 4,237 | 3,474 | ||||||
Retained earnings | 42,069 | 39,823 | ||||||
Accumulated other comprehensive income (Note 13) | 1,535 | 1,535 | ||||||
Treasury stock, at cost | (141 | ) | (141 | ) | ||||
Total stockholders’ equity | 47,916 | 44,907 | ||||||
Total liabilities and stockholders’ equity | $ | 426,426 | $ | 426,302 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(In thousands of dollars, except share and per share amounts)
(Unaudited)
2011 | 2010 | |||||||
Revenues: | ||||||||
Restaurant sales | $ | 196,873 | $ | 194,667 | ||||
Franchise royalty revenues and fees | 365 | 477 | ||||||
Total revenues | 197,238 | 195,144 | ||||||
Costs and expenses: | ||||||||
Cost of sales | 60,315 | 59,198 | ||||||
Restaurant wages and related expenses (including stock-based compensation expense of $10 and $14, respectively) | 58,568 | 59,134 | ||||||
Restaurant rent expense | 12,054 | 12,356 | ||||||
Other restaurant operating expenses | 27,924 | 28,232 | ||||||
Advertising expense | 7,503 | 6,846 | ||||||
General and administrative (including stock-based compensation expense of $665 and $379, respectively) | 13,856 | 12,497 | ||||||
Depreciation and amortization | 8,108 | 8,122 | ||||||
Impairment and other lease charges (Note 3) | 1,080 | 270 | ||||||
Other income (Note 14) | (106 | ) | — | |||||
Total operating expenses | 189,302 | 186,655 | ||||||
Income from operations | 7,936 | 8,489 | ||||||
Interest expense | 4,613 | 4,743 | ||||||
Income before income taxes | 3,323 | 3,746 | ||||||
Provision for income taxes (Note 6) | 1,077 | 1,432 | ||||||
Net income | $ | 2,246 | $ | 2,314 | ||||
Basic and diluted net income per share (Note 12) | $ | 0.10 | $ | 0.11 | ||||
Basic weighted average common shares outstanding (Note 12) | 21,642,718 | 21,613,689 | ||||||
Diluted weighted average common shares outstanding (Note 12) | 22,067,753 | 21,837,600 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(In thousands of dollars)
(Unaudited)
2011 | 2010 | |||||||
Cash flows provided from (used for) operating activities: | ||||||||
Net income | $ | 2,246 | $ | 2,314 | ||||
Adjustments to reconcile net income to net cash provided from (used for) operating activities: | ||||||||
Loss on disposals of property and equipment | 114 | 64 | ||||||
Stock-based compensation expense | 675 | 393 | ||||||
Impairment and other lease charges | 1,080 | 270 | ||||||
Depreciation and amortization | 8,108 | 8,122 | ||||||
Amortization of deferred financing costs | 233 | 239 | ||||||
Amortization of deferred gains from sale-leaseback transactions | (839 | ) | (830 | ) | ||||
Accretion of interest on lease financing obligations | — | 14 | ||||||
Deferred income taxes | — | (20 | ) | |||||
Accrued income taxes | 2,396 | 2,814 | ||||||
Changes in other operating assets and liabilities | (9,413 | ) | (13,504 | ) | ||||
Net cash provided from (used for) operating activities | 4,600 | (124 | ) | |||||
Cash flows used for investing activities: | ||||||||
Capital expenditures: | ||||||||
New restaurant development | (3,407 | ) | (1,192 | ) | ||||
Restaurant remodeling | (2,999 | ) | (1,993 | ) | ||||
Other restaurant capital expenditures | (1,485 | ) | (2,203 | ) | ||||
Corporate and restaurant information systems | (545 | ) | (392 | ) | ||||
Total capital expenditures | (8,436 | ) | (5,780 | ) | ||||
Properties purchased for sale-leaseback | — | (1,141 | ) | |||||
Proceeds from sale-leaseback transactions | 1,861 | 2,319 | ||||||
Net cash used for investing activities | (6,575 | ) | (4,602 | ) | ||||
Cash flows provided from financing activities: | ||||||||
Borrowings on revolving credit facility | 25,800 | 41,700 | ||||||
Repayments on revolving credit facility | (19,500 | ) | (33,400 | ) | ||||
Principal pre-payments on term loans | — | (1,023 | ) | |||||
Scheduled principal payments on term loans | (2,814 | ) | (2,971 | ) | ||||
Principal payments on capital leases | (20 | ) | (22 | ) | ||||
Deferred financing fees | (330 | ) | — | |||||
Proceeds from stock option exercises | 87 | 11 | ||||||
Net cash provided from financing activities | 3,223 | 4,295 | ||||||
Net increase (decrease) in cash and cash equivalents | 1,248 | (431 | ) | |||||
Cash and cash equivalents, beginning of period | 3,144 | 4,402 | ||||||
Cash and cash equivalents, end of period | $ | 4,392 | $ | 3,971 | ||||
Supplemental disclosures: | ||||||||
Interest paid on long-term debt | $ | 7,848 | $ | 7,966 | ||||
Interest paid on lease financing obligations | $ | 245 | $ | 231 | ||||
Accruals for capital expenditures | $ | 980 | $ | 170 | ||||
Income taxes refunded, net of payments | $ | (1,319 | ) | $ | (1,392 | ) |
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 5,271 | $ | 24,661 | ||||
Trade and other receivables | 8,186 | 6,673 | ||||||
Inventories | 5,784 | 5,601 | ||||||
Prepaid rent | 4,027 | 4,077 | ||||||
Prepaid expenses and other current assets | 6,143 | 5,522 | ||||||
Refundable income taxes | 4,759 | 2,239 | ||||||
Deferred income taxes | 4,542 | 3,484 | ||||||
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Total current assets | 38,712 | 52,257 | ||||||
Property and equipment, net | 196,894 | 190,310 | ||||||
Franchise rights, net (Note 4) | 66,440 | 67,238 | ||||||
Goodwill (Note 4) | 124,934 | 124,934 | ||||||
Intangible assets, net | 272 | 301 | ||||||
Franchise agreements, at cost less accumulated amortization of $6,584 and $6,504, respectively | 5,080 | 5,225 | ||||||
Deferred financing fees | 8,257 | 8,670 | ||||||
Other assets | 5,670 | 9,457 | ||||||
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Total assets | $ | 446,259 | $ | 458,392 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt (Note 5) | $ | 6,554 | $ | 6,553 | ||||
Accounts payable | 13,988 | 14,759 | ||||||
Accrued interest | 2,348 | 7,178 | ||||||
Accrued payroll, related taxes and benefits | 18,566 | 21,796 | ||||||
Accrued real estate taxes | 3,244 | 4,812 | ||||||
Other liabilities | 11,698 | 8,779 | ||||||
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Total current liabilities | 56,398 | 63,877 | ||||||
Long-term debt, net of current portion (Note 5) | 257,227 | 261,966 | ||||||
Lease financing obligations (Note 8) | 10,266 | 10,064 | ||||||
Deferred income—sale-leaseback of real estate | 36,556 | 37,372 | ||||||
Deferred income taxes | 3,391 | 2,234 | ||||||
Accrued postretirement benefits | 1,943 | 2,055 | ||||||
Other liabilities (Note 7) | 22,458 | 21,667 | ||||||
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Total liabilities | 388,239 | 399,235 | ||||||
Commitments and contingencies (Note 10) | ||||||||
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—23,161,822 and 22,135,663 shares, respectively, and outstanding—22,727,419 and 21,750,237 shares, respectively | 227 | 218 | ||||||
Additional paid-in capital | 9,373 | 6,954 | ||||||
Retained earnings | 47,514 | 51,041 | ||||||
Accumulated other comprehensive income | 1,047 | 1,085 | ||||||
Treasury stock, at cost | (141 | ) | (141 | ) | ||||
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Total stockholders’ equity | 58,020 | 59,157 | ||||||
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Total liabilities and stockholders’ equity | $ | 446,259 | $ | 458,392 | ||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND SUBSIDIARYCOMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(In thousands of dollars, except per share amounts)
(Unaudited)
2012 | 2011 | |||||||
Revenues: | ||||||||
Restaurant sales | $ | 211,016 | $ | 196,873 | ||||
Franchise royalty revenues and fees | 576 | 365 | ||||||
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Total revenues | 211,592 | 197,238 | ||||||
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Costs and expenses: | ||||||||
Cost of sales | 66,906 | 60,315 | ||||||
Restaurant wages and related expenses (including stock-based compensation expense of $7 and $10, respectively) | 61,696 | 58,568 | ||||||
Restaurant rent expense | 11,933 | 12,054 | ||||||
Other restaurant operating expenses | 29,472 | 27,924 | ||||||
Advertising expense | 6,991 | 7,503 | ||||||
General and administrative (including stock-based compensation expense of $1,301 and $665, respectively) | 17,370 | 13,856 | ||||||
Depreciation and amortization | 9,014 | 8,108 | ||||||
Impairment and other lease charges (Note 3) | 6,926 | 1,080 | ||||||
Other income (Note 12) | — | (106 | ) | |||||
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Total operating expenses | 210,308 | 189,302 | ||||||
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Income from operations | 1,284 | 7,936 | ||||||
Interest expense | 6,297 | 4,613 | ||||||
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Income (loss) before income taxes | (5,013 | ) | 3,323 | |||||
Provision (benefit) for income taxes (Note 6) | (1,486 | ) | 1,077 | |||||
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Net income (loss) | $ | (3,527 | ) | $ | 2,246 | |||
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Basic and diluted net income (loss) per share (Note 11) | $ | (0.16 | ) | $ | 0.10 | |||
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Basic weighted average common shares outstanding (Note 11) | 21,856,466 | 21,642,718 | ||||||
Diluted weighted average common shares outstanding (Note 11) | 21,856,466 | 22,067,753 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||
Net income (loss) | $ | (3,527 | ) | $ | 2,246 | |||
Change in valuation of interest rate swap, net of tax of $25 | (38 | ) | — | |||||
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Total other comprehensive loss | $ | (38 | ) | $ | — | |||
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Comprehensive income (loss) | $ | (3,565 | ) | $ | 2,246 | |||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(In thousands of dollars)
(Unaudited)
2012 | 2011 | |||||||
Cash flows provided from (used for) operating activities: | ||||||||
Net income (loss) | $ | (3,527 | ) | $ | 2,246 | |||
Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||
Loss on disposals of property and equipment | 60 | 114 | ||||||
Stock-based compensation | 1,308 | 675 | ||||||
Impairment and other lease charges | 6,926 | 1,080 | ||||||
Depreciation and amortization | 9,014 | 8,108 | ||||||
Amortization of deferred financing costs | 499 | 233 | ||||||
Amortization of deferred gains from sale-leaseback transactions | (826 | ) | (839 | ) | ||||
Accretion of interest on lease financing obligations | 202 | — | ||||||
Deferred income taxes | 99 | — | ||||||
Change in refundable income taxes | (2,520 | ) | 2,396 | |||||
Changes in other operating assets and liabilities | (11,027 | ) | (9,413 | ) | ||||
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Net cash provided from operating activities | 208 | 4,600 | ||||||
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Cash flows used for investing activities: | ||||||||
Capital expenditures: | ||||||||
New restaurant development | (5,365 | ) | (3,407 | ) | ||||
Restaurant remodeling | (3,285 | ) | (2,999 | ) | ||||
Other restaurant capital expenditures | (2,870 | ) | (1,485 | ) | ||||
Corporate and restaurant information systems | (4,460 | ) | (545 | ) | ||||
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Total capital expenditures | (15,980 | ) | (8,436 | ) | ||||
Proceeds from sale-leaseback transactions | — | 1,861 | ||||||
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Net cash used for investing activities | (15,980 | ) | (6,575 | ) | ||||
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Cash flows provided from (used for) financing activities: | ||||||||
Borrowings on prior revolving credit facility | — | 25,800 | ||||||
Repayments on prior revolving credit facility | — | (19,500 | ) | |||||
Borrowings on Carrols LLC revolving credit facility | 5,500 | — | ||||||
Repayments on Carrols LLC revolving credit facility | (8,600 | ) | — | |||||
Scheduled principal payments on term loans under prior credit facility | — | (2,814 | ) | |||||
Scheduled principal payments on Carrols LLC term loans | (1,625 | ) | — | |||||
Principal payments on capital leases | (13 | ) | (20 | ) | ||||
Financing costs associated with issuance of debt | — | (330 | ) | |||||
Excess tax benefits from stock-based compensation | 825 | — | ||||||
Proceeds from stock option exercises | 295 | 87 | ||||||
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Net cash provided from (used for) financing activities | (3,618 | ) | 3,223 | |||||
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Net increase (decrease) in cash | (19,390 | ) | 1,248 | |||||
Cash, beginning of period | 24,661 | 3,144 | ||||||
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Cash, end of period | $ | 5,271 | $ | 4,392 | ||||
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Supplemental disclosures: | ||||||||
Interest paid on long-term debt | $ | 10,564 | $ | 7,848 | ||||
Interest paid on lease financing obligations | $ | 244 | $ | 245 | ||||
Accruals for capital expenditures | $ | 838 | $ | 980 | ||||
Income taxes refunded, net | $ | (85 | ) | $ | (1,319 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share amounts)
1. Basis of Presentation
Business Description.At April 3, 20111, 2012 the Company operated, as franchisee, 304 quick-service297 restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At April 3, 2011,1, 2012, the Company also owned and operated 9086 Pollo Tropical restaurants, of which 85 were located in Florida and five wereone was located in New Jersey,Georgia, and franchised a total of 2933 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad, two in Venezuela, two in Costa Rica and three on college campuses in Florida. At April 3, 2011, the CompanyFlorida, and owned and operated 156157 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, two in Texas and one in Georgia.
On February 24, 2011, the Company announced its intention to pursue the splitting of its business into two separate, publicly-traded companies through the tax-free spin-off of its combined Pollo Tropical and Taco Cabana businesses to its stockholders. The company to be spun-off will own and operate the Pollo Tropical and Taco Cabana businesses. The Company will continue to own and operate its franchised Burger King restaurants.
Basis of Consolidation.Carrols Restaurant Group, Inc. (“Carrols Restaurant Group”) is a holding company and conducts all of its operations through Carrols Corporation (“Carrols”) and its wholly-owned subsidiaries.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. Any reference to “Carrols LLC” refers to Carrols’ wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company.
In April 2011, Fiesta Restaurant Group, Inc. (“Fiesta Restaurant Group”), a wholly owned subsidiary of Carrols Corporation, (“Carrols”was incorporated. In May 2011, Carrols contributed all of the outstanding capital stock of Pollo Operations, Inc. and Pollo Franchise Inc. (collectively “Pollo Tropical”). and Taco Cabana Inc. and subsidiaries (collectively “Taco Cabana”) to Fiesta Restaurant Group in exchange for all of the outstanding capital stock of Fiesta Restaurant Group. On May 7, 2012 all of the outstanding shares of Fiesta Restaurant Group common stock which were held by Carrols were distributed in the form of a pro rata dividend to the stockholders of record on April 26, 2012 of Carrols Restaurant Group is a holding company and conducts all of its operations through Carrols and its wholly-owned subsidiaries. Group. See Note 14 for additional information.
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.
Burger King Acquisition.On March 26, 2012, the Company and Carrols LLC entered into an agreement with Burger King Corporation (“BKC”) to purchase 278 of BKC’s company-owned Burger King restaurants located in Ohio, Indiana, Kentucky, Pennsylvania, North Carolina, South Carolina and Virginia for a 28.9% equity ownership interest in the Company (subject to certain limitations), certain cash payments payable at the closing of the transaction of approximately $2.8 million (subject to adjustment) for cash on hand and inventory at restaurants to be acquired and other cash payments of approximately $13.3 million with approximately $9.6 million to be paid at closing of the transaction with the balance to be paid over five years by Carrols LLC to BKC. The cash payment of approximately $13.3 million is for refranchising fees and for BKC’s assignment of its right of first refusal on franchisee restaurant transfers in 20 states pursuant to an operating agreement to be entered into at the closing of the acquisition. Carrols LLC will also enter into new franchise agreements pursuant to the purchase and operating agreements and enter into leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC’s underlying leases for those properties. Pursuant to the operating agreement, Carrols LLC will also agree to remodel 455 Burger King restaurants to BKC’s 20/20 restaurant image, including 57 restaurants in 2012, 154 restaurants in 2013, 154 restaurants in 2014 and 90 restaurants in 2015. The acquisition is expected to be completed in the second quarter of 2012.
The difference betweenconsummation of the consolidated financial statementsacquisition is subject to certain conditions, including, among other things (a) the completion of a refinancing sufficient for Carrols Restaurant Group and Carrols is primarilyLLC to repay its outstanding indebtedness under its senior secured credit facility, to pay amounts due to additional rent expenseBKC pursuant to the purchase and operating agreements, and with cash generated from operations, to pay for the Company’s obligations in connection with the remodeling plan, (b) the receipt of approximately $6 per year for Carrols Restaurant Groupthird party consents and the composition of stockholders’ equity.(c) other customary closing conditions.
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 yearsyear ended January 2, 2011 and January 3, 20101, 2012 will be referred to as the fiscal yearsyear ended December 31, 2010 and 2009, respectively.2011. Similarly, all references herein to the three months ended April 3, 20111, 2012 and April 4, 20103, 2011 will be referred to as the three months ended March 31, 20112012 and March 31, 2010,2011, respectively. The fiscal year ended December 31, 2010 contained 52 weeks and the fiscal year ended December 31, 2009 contained 53 weeks. The three months ended March 31, 20112012 and 20102011 each contained thirteen weeks.
Basis of Presentation.The accompanying unaudited consolidated financial statements for the three months ended March 31, 20112012 and 20102011 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 months ended March 31, 20112012 and 20102011 are not necessarily indicative of the results to be expected for the full year.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 20102011 contained in the Company’s 20102011 Annual Report on Form 10-K.10-K, as amended. The December 31, 20102011 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, |
• | Fiesta Restaurant Group 8.875% Senior |
• | Revolving and Term Loan Senior Credit Facilities. |
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousandsSee Note 3 for a discussion of dollars except share and per share amounts)
the fair value measurement of non-financial assets.
Use of Estimates.The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights and lease accounting matters. Actual results could differ from those estimates.
Subsequent Events. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.
2. Stock-Based Compensation
On January 15, 2011,In connection with the planned spin-off of Fiesta Restaurant Group, on March 5, 2012 the Company grantedconverted all of its outstanding vested stock options to shares of common stock and all of its outstanding non-vested stock options to non-vested shares of common stock. The non-vested shares will generally vest over the same period as the non-vested stock options. In connection with this conversion, the Company will record $1.0 million in incremental compensation cost, of which $0.7 million was recognized in the aggregate 360,200 non-vested restricted sharesfirst quarter of its common stock to certain employees. In general, these shares vest2012 and become non-forfeitable 25% per year and$0.3 million will be expensedrecognized over their 4 yearthe remaining vesting period. Included inperiods of the converted non-vested restricted share grant were 200,000 shares granted to our Chief Executive Officer, of which 100,000 shares will be expensed over a one year period ending January 15, 2012 and 100,000 shares will be expensed through December of 2013.stock options.
Stock-based compensation expense for the three months ended March 31, 2011 and 20102012 was $0.7$1.3 million and also included $0.4 million respectively.of expense related to the accelerated vesting of the former Chairman of the Board of Directors of Fiesta Restaurant Group’s unvested shares upon his leaving the board of directors of Fiesta Restaurant Group in the first quarter of 2012. As of March 31, 2011,2012, the total non-vested stock-based compensation expense relating to the options and non-vested shares was approximately $4.6$2.2 million and the Company expects to record an additional $2.1$0.8 million as compensation expense in 2011.the remainder of 2012. At March 31, 2011,2012, the remaining weighted average vesting period for stock options and non-vested shares was 2.7 years2.1 years.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and 3.6 years, respectively.per share amounts)
Stock OptionsOptions/Non-vested Shares
A summary of all option activity for the three months ended March 31, 20112012 was as follows:
2006 Plan | ||||||||||||||||
Number of Options | Weighted Average Exercise Price | Average Remaining Contractual Life | Aggregate Intrinsic Value (1) | |||||||||||||
Options outstanding at January 1, 2011 | 2,588,017 | $ | 9.17 | 4.2 | $ | 2,948 | ||||||||||
Granted | — | |||||||||||||||
Exercised | (16,436 | ) | 5.12 | |||||||||||||
Forfeited | (13,262 | ) | 6.99 | |||||||||||||
Options outstanding at March 31, 2011 | 2,558,319 | $ | 9.21 | 4.0 | $ | 5,430 | ||||||||||
Vested or expected to vest at March 31, 2011 | 2,534,957 | $ | 9.23 | 4.0 | $ | 5,356 | ||||||||||
Options exercisable at March 31, 2011 | 1,504,545 | $ | 10.86 | 3.5 | $ | 2,062 | ||||||||||
2006 Plan | ||||||||||||||||
Number of Options | Weighted Average Exercise Price | Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
Options outstanding at January 1, 2012 | 2,438,327 | $ | 9.33 | 3.2 | $ | 8,275 | ||||||||||
Granted | — | — | ||||||||||||||
Exercised | (69,824 | ) | 4.20 | |||||||||||||
Cancelled (1) | (2,348,950 | ) | 9.51 | |||||||||||||
Forfeited | (19,553 | ) | 6.58 | |||||||||||||
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Options outstanding at March 31, 2012 | — | $ | — | — | $ | — | ||||||||||
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Vested or expected to vest at March 31, 2012 | — | $ | — | — | $ | — | ||||||||||
�� |
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Options exercisable at March 31, 2012 | — | $ | — | — | $ | — | ||||||||||
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A summary of all non-vested stockshares activity for the three months ended March 31, 20112012 was as follows:
Shares | Weighted Average Grant Date Price | |||||||
Nonvested at January 1, 2011 | 45,701 | $ | 6.16 | |||||
Granted | 360,200 | 7.65 | ||||||
Vested | (4,700 | ) | 8.08 | |||||
Forfeited | (1,400 | ) | 6.90 | |||||
Nonvested at March 31, 2011 | 399,801 | $ | 7.49 | |||||
Weighted | ||||||||
Average | ||||||||
Grant Date | ||||||||
Shares | Price | |||||||
Nonvested at January 1, 2012 | 385,426 | $ | 7.54 | |||||
Granted (1) | 298,435 | 11.88 | ||||||
Vested (2) | (241,268 | ) | 7.57 | |||||
Forfeited | (8,190 | ) | 8.70 | |||||
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Nonvested at March 31, 2012 | 434,403 | $ | 10.47 | |||||
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(1) | Includes the conversion of all of outstanding vested stock options to shares of common stock and all of its outstanding non-vested stock options to non-vested shares as discussed above. |
(2) | Includes accelerated vesting of 200,000 of the former Chairman of the Board of Directors of Fiesta Restaurant Group’s non-vested shares. |
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 anyvalue. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, for non-operating properties, net of any estimated sublease recoveries.
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 levelequipment, for those restaurants reviewed for impairment, based on current economic conditions and historical experience.the Company’s history of using these assets in the operation of its business. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The non-financialLevel 3 assets measured at fair value associated with impairment charges recorded during the three months ended March 31, 20112012 totaled $40. They consist$0.3 million.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of restaurant equipment, which will be used in other Company restaurants with its value determined based upon the Company’s experiencedollars except share and per share amounts)
Impairment of amounts utilized from prior restaurant closures.
Impairmentlong-lived assets and other lease charges recorded on long-lived assets(recoveries) for the Company’s segments were as follows:
Three Months Ended | ||||||||||||||||
Three Months Ended March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2012 | 2011 | |||||||||||||
Burger King | $ | 816 | $ | 22 | $ | 26 | $ | 816 | ||||||||
Pollo Tropical | 272 | 52 | 5,879 | 272 | ||||||||||||
Taco Cabana | (8 | ) | 196 | 1,021 | (8 | ) | ||||||||||
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$ | 1,080 | $ | 270 | $ | 6,926 | $ | 1,080 | |||||||||
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During the three months ended March 31, 2012, the Company recorded other lease charges of $1.8 million and impairment charges of $4.1 million associated with the closure of the Company’s five Pollo Tropical restaurants in New Jersey in the first quarter of 2012. The Company also recorded an impairment charge of $1.0 million related to two Taco Cabana restaurants.
During the three months ended March 31, 2011, the Company recorded impairment and other lease charges of $1.1 million which primarily included $0.8 million for five underperforming Burger King restaurants and $0.2 million in other lease charges for a Pollo Tropical restaurant that was closed in the first quarter of 2011 and whose assets were previously impaired in 2010. During the three months ended March 31, 2010, the Company recorded a lease charge of $0.2 million related to a non-operating Taco Cabana property due to a reduction of estimated cost recoveries from subletting the property through the end of the remaining lease term.
4. Goodwill and Franchise Rights
Goodwill.The Company is required to review goodwill for impairment annually, or more frequently, when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values.
There have been no changes in goodwill or goodwill impairment losses forduring the yearsthree months ended March 31, 2012 or the year ended December 31, 2010 and 2009.2011. Goodwill balances are summarized below:
Pollo Tropical | Taco Cabana | Burger King | Total | |||||||||||||
Balance, March 31, 2011 | $ | 56,307 | $ | 67,177 | $ | 1,450 | $ | 124,934 | ||||||||
Pollo Tropical | Taco Cabana | Burger King | Total | |||||||||||||
Balance, March 31, 2012 | $ | 56,307 | $ | 67,177 | $ | 1,450 | $ | 124,934 | ||||||||
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Burger King Franchise Rights.Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.
The Company assesses the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. No impairment charges were recorded related to the Company’s Burger King franchise rights for the three months ended March 31, 20112012 and 2010.
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)
2011.
Amortization expense related to Burger King franchise rights was $799 and $800$798 for both the three months ended March 31, 20112012 and 2010,2011, respectively. The Company estimates the amortization expense for the year ending December 31, 20112012 and for each of the five succeeding years to be $3,194.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)
5. Long-term Debt
Long-term debt at March 31, 20112012 and December 31, 20102011 consisted of the following:
March 31, 2011 | December 31, 2010 | |||||||
Collateralized: | ||||||||
Senior Credit Facility-Revolving credit facility | $ | 6,300 | $ | — | ||||
Senior Credit Facility-Term loan A facility | 84,436 | 87,250 | ||||||
Unsecured: | ||||||||
9% Senior Subordinated Notes | 165,000 | 165,000 | ||||||
Capital leases | 1,182 | 1,202 | ||||||
256,918 | 253,452 | |||||||
Less: current portion | (16,937 | ) | (15,538 | ) | ||||
$ | 239,981 | $ | 237,914 | |||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Collateralized: | ||||||||
Carrols LLC Revolving Credit Facility | $ | 900 | $ | 4,000 | ||||
Carrols LLC Credit Facility-Term loan | 61,750 | 63,375 | ||||||
Fiesta Restaurant Group 8.875% Senior Secured Second Lien Notes | 200,000 | 200,000 | ||||||
Capital leases | 1,131 | 1,144 | ||||||
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263,781 | 268,519 | |||||||
Less: current portion | (6,554 | ) | (6,553 | ) | ||||
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$ | 257,227 | $ | 261,966 | |||||
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Senior Secured Credit Facility.Facilities.Carrols’On August 5, 2011 Carrols LLC entered into a senior secured credit facility, totals $185which provides for $65.0 million originally consisting of $120 million principal amount ofaggregate 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 limitwhich provides for aggregate borrowings of up to $25.0$20.0 million (including $10.0 million available for letters of credit and up to $5.0 million for swingline loans),credit) both maturing on March 8, 2012.August 5, 2016.
The term loan and revolving credit borrowings under theCarrols LLC 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 March 31, 2011 the LIBOR margin percentage was 1.0%.
At April 3, 2011, outstanding borrowings under Term loan A were $84.4 million with the remaining balance due and payable as follows:
1) four quarterly installments of approximately $4.2 million beginning on June 30, 2011; and
2) four quarterly installments of approximately $16.9 million beginning on June 30, 2012.
Under the senior credit facility, Carrols is required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an amount up to 50% of Excess Cash Flow depending upon Carrols’ Total Leverage Ratio (as such terms are defined in the senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by Carrols therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt. For the year ended December 31, 2010, there was not a required prepayment based on the Excess Cash Flow for 2010, as defined. For the year ended December 31, 2009, Carrols was required to make a principal prepayment of approximately $1.0 million in the first quarter of 2010.
The seniorsecured 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 creditthis 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.
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 April 3, 2011.
After reserving $13.5 million for letters of credit guaranteed by the facility, $45.2 million was available for borrowings under the revolving credit facility at April 3, 2011.
Senior Subordinated Notes.On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”) that 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 100% of the principal amount. At both April 3, 2011 and January 2, 2011, $165.0 million principal amount of the Notes were outstanding.
Restrictive covenants under the Notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Carrols was in compliance as of April 3, 2011 with the restrictive covenants in the Indenture governing the Notes.
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 LLC having an outstanding principal amount of $20$2.5 million or more (which would include the senior credit facility) if such defaultwhich results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of April 1, 2012, Carrols LLC was in compliance with the covenants under its senior secured credit facility. After reserving $4.8 million for letters of credit for workers’ compensation and other insurance policies guaranteed by the facility, $14.3 million was available for borrowing at April 1, 2012.
Carrols LLC Interest Rate Swap Agreement.As required by the Carrols LLC senior secured credit facility, in November of 2011, Carrols LLC entered into an interest rate swap agreement with its lenders to mitigate the risk of increases in the variable interest rate related to term loan borrowings under the Carrols LLC senior secured credit facility. The interest rate swap has been designated as a cash flow hedge.
The interest rate swap fixes the interest rate on 50% of the outstanding term loan borrowings under the Carrols LLC senior secured credit facility at 0.77% plus the credit margin on the debt. The agreement matures on November 28, 2014 and has a notional amount of $30.9 million at April 1, 2012. The differences between the variable LIBOR rate and the interest rate swap rate of 0.77% are settled monthly. The Company made payments to settle the interest rate swap of $40 during the first quarter of 2012 which were recorded as a component of interest expense. The Company’s interest rate swap agreement is recorded at fair value and a liability of $174 as of March 31, 2012 is included in long-term other liabilities in the accompanying consolidated balance sheets.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)
On August 5, 2011 Fiesta Restaurant Group entered into a first lien revolving credit facility providing for aggregate borrowings of up to $25.0 million (including $10.0 million available for letters of credit). The Fiesta Restaurant Group senior secured credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of April 1, 2012, Fiesta Restaurant Group was in compliance with the covenants under its senior secured credit facility. After reserving $9.4 million for letters of credit for workers’ compensation and other insurance policies guaranteed by the facility, $15.6 million was available for borrowing at April 1, 2012.
Fiesta Restaurant Group Senior Secured Second Lien Notes.On August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”) pursuant to an indenture dated as of August 5, 2011 governing such notes. The Fiesta Notes mature and are payable on August 15, 2016. Interest is payable semi-annually on February 15 and August 15. The Fiesta Notes are guaranteed by Fiesta Restaurant Group’s material subsidiaries and are secured by second-priority liens on substantially all of Fiesta Restaurant Group’s and its material subsidiaries’ assets (including a pledge of all of the capital stock and equity interests of its material subsidiaries).
The indenture governing the Fiesta Notes includes certain covenants, including limitations and restrictions on Fiesta Restaurant Group and its material subsidiaries who are guarantors under such indenture to incur additional debt, issue preferred stock, pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments, incur liens, sell assets, enter into transactions with affiliates, agree to payment restrictions affecting certain of its material subsidiaries and enter into mergers, consolidations or sales of all or substantially all of Fiesta Restaurant Group’s or its material subsidiaries’ assets.
The indenture governing the Fiesta Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these notes and the indenture if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $15.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. Fiesta Restaurant group was in compliance as of April 1, 2012 with the restrictive covenants of the indenture governing the Fiesta Notes.
6. Income Taxes
The provision (benefit) for income taxes for the three months ended March 31, 2012 and 2011 was comprised of the following:
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Current | $ | (1,585 | ) | $ | 1,077 | |||
Deferred | 99 | — | ||||||
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$ | (1,486 | ) | $ | 1,077 | ||||
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The provision for income taxes for the three months ended March 31, 2011 and 20102012 was comprisedderived using an estimated effective annual income tax rate for 2012 of 30.0%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the following:provision for income taxes by $9 in the three months ended March 31, 2012.
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Current | $ | 1,077 | $ | 1,452 | ||||
Deferred | — | (20 | ) | |||||
$ | 1,077 | $ | 1,432 | |||||
The provision for income taxes for the three months ended March 31, 2011 was derived using an estimated effective annual income tax rate for 2011 of 32.4%, which excludes any discrete tax adjustments. There were no discrete tax adjustments in the three months ended March 31, 2011.
The provision for income taxes for the three months ended March 31, 2010 was derived using an estimated effective annual income tax rate for 2010 of 37.0%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $46 in the three months ended March 31, 2010.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 20112012 and December 31, 2010,2011, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.
The tax years 2007-20102008-2011 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.
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 March 31, 20112012 and December 31, 20102011 consisted of the following:
March 31, | December 31, | |||||||||||||||
March 31, 2011 | December 31, 2010 | 2012 | 2011 | |||||||||||||
Accrued occupancy costs | $ | 13,304 | $ | 13,250 | $ | 15,114 | $ | 14,296 | ||||||||
Accrued workers’ compensation costs | 3,607 | 3,423 | ||||||||||||||
Accrued workers’ compensation and general liability claims | 3,058 | 3,208 | ||||||||||||||
Deferred compensation | 785 | 2,937 | 990 | 965 | ||||||||||||
Other | 3,370 | 3,442 | 3,296 | 3,198 | ||||||||||||
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$ | 21,066 | $ | 23,052 | $ | 22,458 | $ | 21,667 | |||||||||
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Accrued occupancy costs include obligations pertaining to closed restaurant locations, contingent rent and accruals to expense operating lease rental payments on a straight-line basis over the lease term.
The following table presents the activity in the exit cost reserve, of which $2.1 million and $1.1 million are included in long-term accrued occupancy costs above at March 31, 20112012 and December 31, 2010:2011, with the remainder in other current liabilities:
Three months ended | Year Ended | |||||||||||||||
Three months ended March 31, 2011 | Year ended December 31, 2010 | March 31, 2012 | December 31, 2011 | |||||||||||||
Balance, beginning of period | $ | 1,665 | $ | 862 | $ | 2,246 | $ | 1,665 | ||||||||
Changes in estimates of accrued costs | 265 | 1,279 | ||||||||||||||
Provisions for restaurant closures | 1,796 | 800 | ||||||||||||||
Accruals (recoveries) of additional lease charges | (67 | ) | 649 | |||||||||||||
Payments, net | (257 | ) | (632 | ) | (241 | ) | (1,021 | ) | ||||||||
Other adjustments | 34 | 156 | 46 | 153 | ||||||||||||
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Balance, end of period | $ | 1,707 | $ | 1,665 | $ | 3,780 | $ | 2,246 | ||||||||
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8. Postretirement Benefits
The Company provides postretirement medical benefits covering substantially all Burger King administrative and restaurant management salaried employees who retire or terminate after qualifying for such benefits. A December 31 measurement date is used for postretirement benefits.
The following summarizes the components of net periodic postretirement benefit income:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Service cost | $ | 7 | $ | 8 | ||||
Interest cost | 25 | 27 | ||||||
Amortization of net gains and losses | 24 | 24 | ||||||
Amortization of prior service credit | (90 | ) | (90 | ) | ||||
Net periodic postretirement benefit income | $ | (34 | ) | $ | (31 | ) | ||
During the three months ended March 31, 2011, the Company made contributions of $38 to its postretirement plan and expects to make additional contributions during 2011. Contributions made by the Company to its postretirement plan for the year ended December 31, 2010 were $156.
9. Lease Financing Obligations
The Company has previously entered into sale-leaseback transactions involving certain restaurant propertiesin various years 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.
Interest expense associated with lease financing obligations for the three months ended March 31, 2012 and 2011 was $0.5 million and 2010 was $0.2 million, and $0.3 million, respectively.
CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)
10.9. 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 chainbrand offering a uniquewide selection of food items reflecting tropical and Caribbean influencesCaribbean-inspired food, featuring grilled chicken marinated in a proprietary blend of tropical fruit juices and feature grilled marinated chicken and authentic “made from scratch” side dishes.spices. Taco Cabana is a quick-casual restaurant chain featuringbrand offering a wide selection of fresh Tex-Mex and traditional Mexican style food, including flame-grilled beef and chickensizzling fajitas, quesadillas, enchiladas, burritos and other Tex-Mex dishes.
The accounting policies of each segment are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.2011, as amended. The following table includes Adjusted Segment EBITDA, which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Adjusted Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and expense and gains and losses on extinguishment of debt.
The “Other” column includes corporate related items not allocated to reportable segments including stock-based compensation expense. Other identifiable assets consistand consists primarily of cash, certain other assets, corporate property and equipment, including restaurant information systems expenditures, goodwill and deferred income taxes. At the beginning of the first quarter of 2012, management reporting was modified to reflect the allocation of expenses associated with administrative support provided to the
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 | |||||||||||||||
March 31, 2011: | ||||||||||||||||||||
Total revenues | $ | 52,235 | $ | 63,381 | $ | 81,622 | $ | — | $ | 197,238 | ||||||||||
Cost of sales | 17,149 | 19,195 | 23,971 | — | 60,315 | |||||||||||||||
Restaurant wages and related expenses | 12,293 | 19,336 | 26,929 | 10 | 58,568 | |||||||||||||||
Restaurant rent expense | 2,313 | 4,031 | 5,710 | — | 12,054 | |||||||||||||||
General and administrative expenses (1) | 2,783 | 3,102 | 7,306 | 665 | 13,856 | |||||||||||||||
Depreciation and amortization | 1,915 | 2,266 | 3,446 | 481 | 8,108 | |||||||||||||||
Adjusted Segment EBITDA | 10,059 | 6,493 | 1,141 | |||||||||||||||||
Capital expenditures, including acquisitions | 1,192 | 3,841 | 2,858 | 545 | 8,436 | |||||||||||||||
March 31, 2010: | ||||||||||||||||||||
Total revenues | $ | 45,493 | $ | 62,032 | $ | 87,619 | $ | — | $ | 195,144 | ||||||||||
Cost of sales | 14,693 | 18,555 | 25,950 | — | 59,198 | |||||||||||||||
Restaurant wages and related expenses | 11,589 | 19,350 | 28,181 | 14 | 59,134 | |||||||||||||||
Restaurant rent expense | 2,461 | 3,899 | 5,996 | — | 12,356 | |||||||||||||||
General and administrative expenses (1) | 2,808 | 2,770 | 6,540 | 379 | 12,497 | |||||||||||||||
Depreciation and amortization | 1,930 | 2,277 | 3,472 | 443 | 8,122 | |||||||||||||||
Adjusted Segment EBITDA | 6,727 | 6,761 | 3,786 | |||||||||||||||||
Capital expenditures, including acquisitions | 801 | 1,290 | 3,297 | 392 | 5,780 | |||||||||||||||
Identifiable Assets: | ||||||||||||||||||||
At March 31, 2011 | $ | 50,388 | $ | 63,424 | $ | 141,086 | $ | 171,528 | $ | 426,426 | ||||||||||
At December 31, 2010 | 51,125 | 63,061 | 142,922 | 169,194 | 426,302 |
Company’s Pollo Tropical and Taco Cabana segments previously included in the Company’s Burger King segment. For comparability, we have recast prior year segment general and administrative expenses and Adjusted Segment EBITDA to reflect these changes. These recasts only affect the Company’s segment reporting, and do not change total consolidated general and administrative expenses, income from operations or net income (loss).
General and administrative expenses for each segment includes general and administrative expenses related directly to the segment as well as allocated expenses associated with administrative support for executive management, information systems and certain accounting, legal and other administrative functions.
Pollo | Taco | Burger | ||||||||||||||||||
Three Months Ended | Tropical | Cabana | King | Other | Consolidated | |||||||||||||||
March 31, 2012: | ||||||||||||||||||||
Total revenues | $ | 57,834 | $ | 68,308 | $ | 85,450 | $ | — | $ | 211,592 | ||||||||||
Cost of sales | 19,168 | 21,616 | 26,122 | — | 66,906 | |||||||||||||||
Restaurant wages and related expenses | 13,292 | 20,533 | 27,871 | — | 61,696 | |||||||||||||||
Restaurant rent expense | 2,147 | 4,104 | 5,682 | — | 11,933 | |||||||||||||||
General and administrative expenses | 5,210 | 5,870 | 6,290 | — | 17,370 | |||||||||||||||
Depreciation and amortization | 1,914 | 2,254 | 4,262 | 584 | 9,014 | |||||||||||||||
Adjusted Segment EBITDA | 10,269 | 4,860 | 3,403 | |||||||||||||||||
Capital expenditures | 4,550 | 3,900 | 7,041 | 489 | 15,980 | |||||||||||||||
March 31, 2011: | ||||||||||||||||||||
Total revenues | $ | 52,235 | $ | 63,381 | $ | 81,622 | $ | — | $ | 197,238 | ||||||||||
Cost of sales | 17,149 | 19,195 | 23,971 | — | 60,315 | |||||||||||||||
Restaurant wages and related expenses | 12,294 | 19,339 | 26,935 | — | 58,568 | |||||||||||||||
Restaurant rent expense | 2,313 | 4,031 | 5,710 | — | 12,054 | |||||||||||||||
General and administrative expenses | 4,106 | 4,815 | 4,935 | 13,856 | ||||||||||||||||
Depreciation and amortization | 1,915 | 2,266 | 3,446 | 481 | 8,108 | |||||||||||||||
Adjusted Segment EBITDA | 8,924 | 5,004 | 3,765 | |||||||||||||||||
Capital expenditures | 1,192 | 3,841 | 2,858 | 545 | 8,436 | |||||||||||||||
Identifiable Assets: | ||||||||||||||||||||
At March 31, 2012 | $ | 48,849 | $ | 60,387 | $ | 153,408 | $ | 183,615 | $ | 446,259 | ||||||||||
At December 31, 2011 | 49,875 | 59,764 | 149,167 | 199,586 | 458,392 |
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 (loss) is as follows:
Three Months Ended | ||||||||||||||||
Three Months Ended March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2012 | 2011 | |||||||||||||
Adjusted Segment EBITDA: | ||||||||||||||||
Pollo Tropical | $ | 10,059 | $ | 6,727 | $ | 10,269 | $ | 8,924 | ||||||||
Taco Cabana | 6,493 | 6,761 | 4,860 | 5,004 | ||||||||||||
Burger King | 1,141 | 3,786 | 3,403 | 3,765 | ||||||||||||
Less: | ||||||||||||||||
Depreciation and amortization | 8,108 | 8,122 | 9,014 | 8,108 | ||||||||||||
Impairment and other lease charges | 1,080 | 270 | 6,926 | 1,080 | ||||||||||||
Interest expense | 4,613 | 4,743 | 6,297 | 4,613 | ||||||||||||
Provision for income taxes | 1,077 | 1,432 | ||||||||||||||
Provision (benefit) for income taxes | (1,486 | ) | 1,077 | |||||||||||||
Stock-based compensation expense | 675 | 393 | 1,308 | 675 | ||||||||||||
Other income | (106 | ) | — | — | (106 | ) | ||||||||||
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Net income | $ | 2,246 | $ | 2,314 | ||||||||||||
Net income (loss) | $ | (3,527 | ) | $ | 2,246 | |||||||||||
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11.10. Commitments and Contingencies
On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against Carrols. The complaint alleged that Carrols engaged in a pattern or practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC ultimately attempted to present evidence of 511 individuals that it believed constituted the “class” of claimants for which it was seeking monetary and injunctive relief from Carrols. On April 20, 2005, the Court issued a decision and order granting Carrols’ Motion for Summary Judgment that Carrols filed in January 2004, dismissing the EEOC’s pattern or practice claim. Carrols then moved for summary judgment against the claims of the 511 individual claimants. On March 2, 2011, the Court issued a decision and order granting summary judgment against the claims of all but 131 of the 511 individual claimants and dismissed 380 of the individual claimants from the case. Both the EEOC and Carrols have since filed motions for reconsideration in part of the Court’s March 2, 2011 decision and order, as a result of which the number of surviving claimants may increase to as many as 184 or decrease to as few as four. It is not possible to predict the outcome of these motions at this time.
Subject to possible appeal by the EEOC, the EEOC’s pattern or practice claim is dismissed; however, the Court has yet to determine how the claims of the individual claimants ultimately determined to survive will proceed. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of that matter on an appeal, if one is taken. The Company does not believe that any of the remaining individual claims would have a material adverse impact on its consolidated financial statements.
The Company is a party to various other litigation matters incidental to the conduct of the Company’s business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial statements.
12.11. Net Income (Loss) per Share
Basic net income (loss) 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 (loss) per share is computed by dividing net income (loss) 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 (loss) per share.
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 (loss) and share amounts used in the calculation of basic net income (loss) per share and diluted net income (loss) per share:
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Basic net income per share: | ||||||||
Net income | $ | 2,246 | $ | 2,314 | ||||
Weighted average common shares outstanding | 21,642,718 | 21,613,689 | ||||||
Basic net income per share | $ | 0.10 | $ | 0.11 | ||||
Diluted net income per share: | ||||||||
Net income for diluted net income per share | $ | 2,246 | $ | 2,314 | ||||
Shares used in computed basic net income per share | 21,642,718 | 21,613,689 | ||||||
Dilutive effect of non-vested shares and stock options | 425,035 | 223,911 | ||||||
Shares used in computed diluted net income per share | 22,067,753 | 21,837,600 | ||||||
Diluted net income per share | $ | 0.10 | $ | 0.11 | ||||
Shares excluded from diluted net income per share computation (1) | 1,925,047 | 2,057,504 | ||||||
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Basic net income (loss) per share: | ||||||||
Net income (loss) | $ | (3,527 | ) | $ | 2,246 | |||
Weighted average common shares outstanding | 21,856,466 | 21,642,718 | ||||||
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Basic net income (loss) per share | $ | (0.16 | ) | $ | 0.10 | |||
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Diluted net income (loss) per share: | ||||||||
Net income (loss) for diluted net income per share | $ | (3,527 | ) | $ | 2,246 | |||
Shares used in computed basic net income (loss) per share | 21,856,466 | 21,642,718 | ||||||
Dilutive effect of non-vested shares and stock options | — | 425,035 | ||||||
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Shares used in computed diluted net income (loss) per share | 21,856,466 | 22,067,753 | ||||||
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Diluted net income (loss) per share | $ | (0.16 | ) | $ | 0.10 | |||
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Shares excluded from diluted net income (loss) per share computation (1) | 434,403 | 1,925,047 | ||||||
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(1) | These shares subject to stock options and non-vested shares were not included in the computation of diluted net income (loss) per share because they would have been antidilutive for the |
13. Comprehensive IncomeCARROLS RESTAURANT GROUP, INC.
The items that currently impact the Company’s other comprehensive income are changes NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in postretirement benefit obligations, netthousands of tax.dollars except share and per share amounts)
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Net income | $ | 2,246 | $ | 2,314 | ||||
Change in postretirement benefit obligation, net of tax | — | 10 | ||||||
Comprehensive income | $ | 2,246 | $ | 2,324 | ||||
14.12. Other Income
In the three months ended March 31, 2011, the Company recorded a gain of $0.1 million related to a property insurance recovery from a fire at a Burger King restaurant.
15.13. Recent Accounting Developments
There are currently no recent accounting pronouncements which hadIn September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on testing goodwill for impairment. The guidance provides entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, provided that the entity has not yet performed its 2011 annual impairment test or are expected to have a materialissued its financial statements. The Company is evaluating the impact of this guidance on its annual testing for goodwill impairment at December 31, 2012.
14. Subsequent Events
On April 16, 2012, the Company’s consolidated financial statements asboard of directors of the dateCompany approved the spin-off of this report.
ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CARROLS CORPORATION AND SUBSIDIARIES
(In thousands of dollars except share and per share amounts)
(Unaudited)
March 31, 2011 | December 31, 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,392 | $ | 3,144 | ||||
Trade and other receivables | 6,126 | 5,213 | ||||||
Inventories | 5,088 | 5,203 | ||||||
Prepaid rent | 4,014 | 4,018 | ||||||
Prepaid expenses and other current assets | 6,013 | 5,349 | ||||||
Refundable income taxes | — | 869 | ||||||
Deferred income taxes | 4,609 | 4,609 | ||||||
Total current assets | 30,242 | 28,405 | ||||||
Property and equipment, net | 185,672 | 186,850 | ||||||
Franchise rights, net (Note 4) | 69,633 | 70,432 | ||||||
Goodwill (Note 4) | 124,934 | 124,934 | ||||||
Intangible assets, net | 389 | 419 | ||||||
Franchise agreements, at cost less accumulated amortization of $6,232 and $6,102, respectively | 5,575 | 5,629 | ||||||
Deferred income taxes | 1,949 | 1,949 | ||||||
Other assets | 8,032 | 7,684 | ||||||
Total assets | $ | 426,426 | $ | 426,302 | ||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt (Note 5) | $ | 16,937 | $ | 15,538 | ||||
Accounts payable | 14,823 | 13,944 | ||||||
Accrued interest | 3,139 | 6,853 | ||||||
Accrued payroll, related taxes and benefits | 16,738 | 19,504 | ||||||
Accrued income taxes | 1,527 | — | ||||||
Accrued real estate taxes | 3,158 | 4,778 | ||||||
Other liabilities | 9,473 | 7,434 | ||||||
Total current liabilities | 65,795 | 68,051 | ||||||
Long-term debt, net of current portion (Note 5) | 239,981 | 237,914 | ||||||
Lease financing obligations (Note 9) | 10,061 | 10,061 | ||||||
Deferred income—sale-leaseback of real estate | 39,817 | 40,472 | ||||||
Accrued postretirement benefits (Note 8) | 1,790 | 1,845 | ||||||
Other liabilities (Note 7) | 21,159 | 23,060 | ||||||
Total liabilities | 378,603 | 381,403 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Stockholder’s equity: | ||||||||
Common stock, par value $1; authorized 1,000 shares, issued and outstanding—10 shares | — | — | ||||||
Additional paid-in capital | (3,407 | ) | (4,083 | ) | ||||
Retained earnings | 49,695 | 47,447 | ||||||
Accumulated other comprehensive income (Note 12) | 1,535 | 1,535 | ||||||
Total stockholder’s equity | 47,823 | 44,899 | ||||||
Total liabilities and stockholder’s equity | $ | 426,426 | $ | 426,302 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(In thousands of dollars)
(Unaudited)
2011 | 2010 | |||||||
Revenues: | ||||||||
Restaurant sales | $ | 196,873 | $ | 194,667 | ||||
Franchise royalty revenues and fees | 365 | 477 | ||||||
Total revenues | 197,238 | 195,144 | ||||||
Costs and expenses: | ||||||||
Cost of sales | 60,315 | 59,198 | ||||||
Restaurant wages and related expenses (including stock-based compensation expense of $10 and $14, respectively) | 58,568 | 59,134 | ||||||
Restaurant rent expense | 12,054 | 12,356 | ||||||
Other restaurant operating expenses | 27,924 | 28,232 | ||||||
Advertising expense | 7,503 | 6,846 | ||||||
General and administrative (including stock-based compensation expense of $665 and $379, respectively) | 13,854 | 12,495 | ||||||
Depreciation and amortization | 8,108 | 8,122 | ||||||
Impairment and other lease charges (Note 3) | 1,080 | 270 | ||||||
Other income (Note 13) | (106 | ) | — | |||||
Total operating expenses | 189,300 | 186,653 | ||||||
Income from operations | 7,938 | 8,491 | ||||||
Interest expense | 4,613 | 4,743 | ||||||
Income before income taxes | 3,325 | 3,748 | ||||||
Provision for income taxes (Note 6) | 1,077 | 1,432 | ||||||
Net income | $ | 2,248 | $ | 2,316 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(In thousands of dollars)
(Unaudited)
2011 | 2010 | |||||||
Cash flows provided (used for) from operating activities: | ||||||||
Net income | $ | 2,248 | $ | 2,316 | ||||
Adjustments to reconcile net income to net cash provided from (used for) operating activities: | ||||||||
Loss on disposals of property and equipment | 114 | 64 | ||||||
Stock-based compensation expense | 675 | 393 | ||||||
Impairment and other lease charges | 1,080 | 270 | ||||||
Depreciation and amortization | 8,108 | 8,122 | ||||||
Amortization of deferred financing costs | 233 | 239 | ||||||
Amortization of deferred gains from sale-leaseback transactions | (839 | ) | (830 | ) | ||||
Accretion of interest on lease financing obligations | — | 14 | ||||||
Deferred income taxes | — | (20 | ) | |||||
Accrued income taxes | 2,396 | 2,814 | ||||||
Changes in other operating assets and liabilities | (9,328 | ) | (13,506 | ) | ||||
Net cash provided from (used for) operating activities | 4,687 | (124 | ) | |||||
Cash flows used for investing activities: | ||||||||
Capital expenditures: | ||||||||
New restaurant development | (3,407 | ) | (1,192 | ) | ||||
Restaurant remodeling | (2,999 | ) | (1,993 | ) | ||||
Other restaurant capital expenditures | (1,485 | ) | (2,203 | ) | ||||
Corporate and restaurant information systems | (545 | ) | (392 | ) | ||||
Total capital expenditures | (8,436 | ) | (5,780 | ) | ||||
Properties purchased for sale-leaseback | — | (1,141 | ) | |||||
Proceeds from sale-leaseback transactions | 1,861 | 2,319 | ||||||
Net cash used for investing activities | (6,575 | ) | (4,602 | ) | ||||
Cash flows provided from financing activities: | ||||||||
Borrowings on revolving credit facility | 25,800 | 41,700 | ||||||
Repayments on revolving credit facility | (19,500 | ) | (33,400 | ) | ||||
Principal pre-payments on term loans | — | (1,023 | ) | |||||
Scheduled principal payments on term loans | (2,814 | ) | (2,971 | ) | ||||
Deferred financing fees | (330 | ) | — | |||||
Principal payments on capital leases | (20 | ) | (22 | ) | ||||
Proceeds from stock option exercises | — | 11 | ||||||
Net cash provided from financing activities | 3,136 | 4,295 | ||||||
Net increase (decrease) in cash and cash equivalents | 1,248 | (431 | ) | |||||
Cash and cash equivalents, beginning of period | 3,144 | 4,402 | ||||||
Cash and cash equivalents, end of period | $ | 4,392 | $ | 3,971 | ||||
Supplemental disclosures: | ||||||||
Interest paid on long-term debt | $ | 7,848 | $ | 7,966 | ||||
Interest paid on lease financing obligations | $ | 245 | $ | 231 | ||||
Accruals for capital expenditures | $ | 980 | $ | 170 | ||||
Income taxes refunded, net of payments | $ | (1,319 | ) | $ | (1,392 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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 April 3, 2011 the Company operated, as franchisee, 304 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At April 3, 2011, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida, five were located in New Jersey, and franchised a total of 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 April 3, 2011, the Company owned and operated 156 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, two in Texas and one in Georgia.
On February 24, 2011, CarrolsFiesta Restaurant Group, Inc.which through its subsidiaries, owns and the Company announced their intention to pursue the splitting of their businesses into two separate, publicly-traded companies through the tax-free spin-off of their combined Pollo Tropical and Taco Cabana businesses to Carrols Restaurant Group’s stockholders. The company to be spun-off will own and operateoperates the Pollo Tropical and Taco Cabana businesses. Carrols Restaurant Group, Inc. and therestaurant brands. The Company will continue to own and operate theirits franchised Burger King restaurants.
Basis of Consolidation. The unaudited consolidated financial statements presented herein include the accounts of Carrols Corporation andrestaurants through its subsidiaries (the “Company”). TheCarrols and Carrols LLC. In connection with the spin-off, on April 24, 2012, the Company is a wholly-owned subsidiary ofand Carrols entered into several agreements with Fiesta Restaurant Group Inc. (“Carrols Restaurant Group” orthat govern the “Parent Company”). All intercompany transactions have been eliminated in consolidation.
The difference between the consolidated financial statements of Carrols Corporation and CarrolsCompany’s post spin-off relationship with Fiesta Restaurant Group, is primarily due to additional rent expense of approximately $6 per year for Carrolsincluding a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement.
Fiesta Restaurant Group and the composition of stockholder’s equity.
Fiscal Year.The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 2, 2011 and January 3, 2010 will be referred to as the fiscal years ended December 31, 2010 and 2009, respectively. Similarly, all references herein to the three months ended April 3, 2011 and April 4, 2010 will be referred to as the three months ended March 31, 2011 and March 31, 2010, respectively. The year ended December 31, 2010 contained 52 weeks and the year ended December 31, 2009 contained 53 weeks. The three months ended March 31, 2011 and 2010 each contained thirteen weeks.
Basis of Presentation.The accompanying unaudited consolidated financial statements for the three months ended March 31, 2011 and 2010 have been prepared without an audit, pursuant to the rules and regulations ofhas filed with the Securities and Exchange Commission and do not include certain(the “SEC”) a Form 10 registration statement, File No. 001-35373, as amended (the “Registration Statement”), which includes as an exhibit an information statement which describes the spin-off. This Registration Statement, which registered the common stock of Fiesta Restaurant Group under the Securities Exchange Act of 1934, as amended, was declared effective by the SEC on April 25, 2012.
On May 7, 2012, the Company completed the spin-off of Fiesta Restaurant Group in the form of a pro rata dividend of all of the informationissued and the footnotes required by accounting principles generally accepted in the United Statesoutstanding common stock of AmericaFiesta Restaurant Group to Carrols Restaurant Group’s stockholders whereby each stockholder of Carrols Restaurant Group’s common stock of record on April 26, 2012 received one share of Fiesta Restaurant Group common stock for complete financial statements. In the opinionevery one share of management, all normal and recurring adjustments considered necessary forCarrols Restaurant Group common stock held. As a fair presentation of such financial statements have been included. The results of operations for the three months ended March 31, 2011 and 2010 are not necessarily indicativeresult of the results to be expected for the full year.
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010 contained in the Company’s 2010 Annual Report on Form 10-K. The December 31, 2010 balance sheet dataspin-off, Fiesta Restaurant Group is derived from those audited financial statements.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sellnow 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:
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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 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’sindependent company whose common stock is not publicly traded and therefore, earnings per share amounts are not presented.
Subsequent Events.on The Company evaluated for subsequent events throughNASDAQ Global Select Market under the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.
2. Stock-Based Compensation
On January 15, 2011, the Company granted in the aggregate 360,200 non-vested restricted shares of itssymbol “FRGI.” Carrols Restaurant Group’s common stock will continue to certain employees. In general, these shares vest and become non-forfeitable 25% per year and will be expensed over their 4 year vesting period. Included in the non-vested restricted share grant were 200,000 shares granted to our Chief Executive Officer, of which 100,000 shares will be expensed over a one year period ending January 15, 2012 and 100,000 shares will be expensed through December of 2013.
Stock-based compensation expense for the three months ended March 31, 2011 and 2010 was $0.7 million and $0.4 million, respectively. As of March 31, 2011, the total non-vested stock-based compensation expense relating to the options and non-vested shares was approximately $4.6 million and the Company expects to record an additional $2.1 million as compensation expense in 2011. At March 31, 2011, the remaining weighted average vesting period for stock options and non-vested shares was 2.7 years and 3.6 years, respectively.
Stock Options
A summary of all option activity for the three months ended March 31, 2011 was as follows:
2006 Plan | ||||||||||||||||
Number of Options | Weighted Average Exercise Price | Average Remaining Contractual Life | Aggregate Intrinsic Value (1) | |||||||||||||
Options outstanding at January 1, 2011 | 2,588,017 | $ | 9.17 | 4.2 | $ | 2,948 | ||||||||||
Granted | — | |||||||||||||||
Exercised | (16,436 | ) | 5.12 | |||||||||||||
Forfeited | (13,262 | ) | 6.99 | |||||||||||||
Options outstanding at March 31, 2011 | 2,558,319 | $ | 9.21 | 4.0 | $ | 5,430 | ||||||||||
Vested or expected to vest at March 31, 2011 | 2,534,957 | $ | 9.23 | 4.0 | $ | 5,356 | ||||||||||
Options exercisable at March 31, 2011 | 1,504,545 | $ | 10.86 | 3.5 | $ | 2,062 | ||||||||||
A summary of all non-vested stock activity for the three months ended March 31, 2011 was as follows:
Shares | Weighted Average Grant Date Price | |||||||
Nonvested at January 1, 2011 | 45,701 | $ | 6.16 | |||||
Granted | 360,200 | 7.65 | ||||||
Vested | (4,700 | ) | 8.08 | |||||
Forfeited | (1,400 | ) | 6.90 | |||||
Nonvested at March 31, 2011 | 399,801 | $ | 7.49 | |||||
3. Impairment of Long-lived Assets and Other Lease Charges
trade on 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.
CARROLS CORPORATION AND SUBSIDIARIES
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 during the three months ended March 31, 2011 totaled $40. They consist of restaurant equipment, which will be used in other Company restaurants with its value determined based upon the Company’s experience of amounts utilized from prior restaurant closures.
Impairment and other lease charges recorded on long-lived assets for the Company’s segments were as follows:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Burger King | $ | 816 | $ | 22 | ||||
Pollo Tropical | 272 | 52 | ||||||
Taco Cabana | (8 | ) | 196 | |||||
$ | 1,080 | $ | 270 | |||||
During the three months ended March 31, 2011, the Company recorded impairment and other lease charges of $1.1 million which primarily included $0.8 million for five underperforming Burger King restaurants and $0.2 million in other lease charges for a Pollo Tropical restaurant that was closed in the first quarter of 2011 and whose assets were previously impaired in 2010. During the three months ended March 31, 2010, the Company recorded a lease charge of $0.2 million related to a non-operating Taco Cabana property due to a reduction of estimated costs recoveries from subletting the property through the end of the remaining lease term.
4. Goodwill and Franchise Rights
Goodwill.The Company is required to review goodwill for impairment annually, or more frequently, when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values.
There have been no changes in goodwill or goodwill impairment losses for the years ended December 31, 2010 and 2009. Goodwill balances are summarized below:
Pollo Tropical | Taco Cabana | Burger King | Total | |||||||||||||
Balance, March 31, 2011 | $ | 56,307 | $ | 67,177 | $ | 1,450 | $ | 124,934 | ||||||||
Burger King Franchise Rights.Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.
The Company assesses the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. No impairment charges were recorded related to the Company’s Burger King franchise rights for the three months ended March 31, 2011 and 2010.
CARROLS CORPORATION AND SUBSIDIARIES
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 $800 for the three months ended March 31, 2011 and 2010, respectively. The Company estimates the amortization expense for the year ending December 31, 2011 and for each of the five succeeding years to be $3,194.
5. Long-term Debt
Long-term debt at March 31, 2011 and December 31, 2010 consisted of the following:
March 31, 2011 | December 31, 2010 | |||||||
Collateralized: | ||||||||
Senior Credit Facility-Revolving credit facility | $ | 6,300 | $ | — | ||||
Senior Credit Facility-Term loan A facility | 84,436 | 87,250 | ||||||
Unsecured: | ||||||||
9% Senior Subordinated Notes | 165,000 | 165,000 | ||||||
Capital leases | 1,182 | 1,202 | ||||||
256,918 | 253,452 | |||||||
Less: current portion | (16,937 | ) | (15,538 | ) | ||||
$ | 239,981 | $ | 237,914 | |||||
Senior Credit Facility.The Company’s senior credit facility totals $185 million, originally consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 2013 (or earlier on September 30, 2012 if the 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving credit facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans), maturing on March 8, 2012.
The term loan and revolving credit borrowingsNASDAQ Global Market under the senior credit facility bear interest at a per annum rate, at the Company’s option, of either:symbol “TAST.”
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 March 31, 2011 the LIBOR margin percentage was 1.0%.
At April 3, 2011, outstanding borrowings under Term loan A were $84.4 million with the remaining balance due and payable as follows:
1) four quarterly installments of approximately $4.2 million beginning on June 30, 2011; and
2) four quarterly installments of approximately $16.9 million beginning on June 30, 2012.
Under the senior credit facility, the Company is required to make mandatory prepayments of principal on term loan A facility 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. For the year ended December 31, 2010, there was not a required prepayment based on the Excess Cash Flow for 2010, as defined. For the year ended December 31, 2009, the Company was required to make a principal prepayment of approximately $1.0 million in the first quarter of 2010.
The 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) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.
CARROLS CORPORATION AND SUBSIDIARIES
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 April 3, 2011.
After reserving $13.5 million for letters of credit guaranteed by the facility, $45.2 million was available for borrowings under the revolving credit facility at April 3, 2011.
Senior Subordinated Notes.On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”) that 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 the Company in whole or in part at 100% of the principal amount. At both April 3, 2011 and January 2, 2011, $165.0 million principal amount of the Notes were outstanding.
Restrictive covenants under the Notes include limitations with respect to the Company’s ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. The Company was in compliance as of April 3, 2011 with the restrictive covenants in the Indenture governing the Notes.
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 months ended March 31, 2011 and 2010 was comprised of the following:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Current | $ | 1,077 | $ | 1,452 | ||||
Deferred | — | (20 | ) | |||||
$ | 1,077 | $ | 1,432 | |||||
The provision for income taxes for the three months ended March 31, 2011 was derived using an estimated effective annual income tax rate for 2011 of 32.4%, which excludes any discrete tax adjustments. There were no discrete tax adjustments in the three months ended March 31, 2011.
The provision for income taxes for the three months ended March 31, 2010 was derived using an estimated effective annual income tax rate for 2010 of 37.0%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $46 in the three months ended March 31, 2010.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2011 and December 31, 2010, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.
The tax years 2007-2010 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.
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 March 31, 2011 and December 31, 2010 consisted of the following:
March 31, 2011 | December 31, 2010 | |||||||
Accrued occupancy costs | $ | 13,304 | $ | 13,250 | ||||
Accrued workers’ compensation costs | 3,607 | 3,423 | ||||||
Deferred compensation | 785 | 2,937 | ||||||
Other | 3,463 | 3,450 | ||||||
$ | 21,159 | $ | 23,060 | |||||
Accrued occupancy costs include obligations pertaining to closed restaurant locations, contingent rent and accruals to expense operating lease rental payments on a straight-line basis over the lease term.
The following table presents the activity in the exit cost reserve included in accrued occupancy costs at March 31, 2011 and December 31, 2010:
Three months ended March 31, 2011 | Year ended December 31, 2010 | |||||||
Balance, beginning of period | $ | 1,665 | $ | 862 | ||||
Changes in estimates of accrued costs | 265 | 1,279 | ||||||
Payments, net | (257 | ) | (632 | ) | ||||
Other adjustments | 34 | 156 | ||||||
Balance, end of period | $ | 1,707 | $ | 1,665 | ||||
8. Postretirement Benefits
The Company provides postretirement medical benefits covering substantially all Burger King administrative and restaurant management salaried employees who retire or terminate after qualifying for such benefits. A December 31 measurement date is used for postretirement benefits.
The following summarizes the components of net periodic postretirement benefit income:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Service cost | $ | 7 | $ | 8 | ||||
Interest cost | 25 | 27 | ||||||
Amortization of net gains and losses | 24 | 24 | ||||||
Amortization of prior service credit | (90 | ) | (90 | ) | ||||
Net periodic postretirement benefit income | $ | (34 | ) | $ | (31 | ) | ||
During the three months ended March 31, 2011, the Company made contributions of $38 to its postretirement plan and expects to make additional contributions during 2011. Contributions made by the Company to its postretirement plan for the year ended December 31, 2010 were $156.
9. Lease Financing Obligations
The Company has previously entered into sale-leaseback transactions involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, were classified as financing transactions. Under the financing method, the assets remain on the consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.
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 for the three months ended March 31, 2011 and 2010 was $0.2 million and $0.3 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 feature 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, 2010. The following table includes Adjusted Segment EBITDA, which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Adjusted Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and 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.
Three Months Ended | Pollo Tropical | Taco Cabana | Burger King | Other | Consolidated | |||||||||||||||
March 31, 2011: | ||||||||||||||||||||
Total revenues | $ | 52,235 | $ | 63,381 | $ | 81,622 | $ | — | $ | 197,238 | ||||||||||
Cost of sales | 17,149 | 19,195 | 23,971 | — | 60,315 | |||||||||||||||
Restaurant wages and related expenses | 12,293 | 19,336 | 26,929 | 10 | 58,568 | |||||||||||||||
Restaurant rent expense | 2,313 | 4,031 | 5,710 | — | 12,054 | |||||||||||||||
General and administrative expenses (1) | 2,781 | 3,102 | 7,306 | 665 | 13,854 | |||||||||||||||
Depreciation and amortization | 1,915 | 2,266 | 3,446 | 481 | 8,108 | |||||||||||||||
Adjusted Segment EBITDA | 10,061 | 6,493 | 1,141 | |||||||||||||||||
Capital expenditures, including acquisitions | 1,192 | 3,841 | 2,858 | 545 | 8,436 | |||||||||||||||
March 31, 2010: | ||||||||||||||||||||
Total revenues | $ | 45,493 | $ | 62,032 | $ | 87,619 | $ | — | $ | 195,144 | ||||||||||
Cost of sales | 14,693 | 18,555 | 25,950 | — | 59,198 | |||||||||||||||
Restaurant wages and related expenses | 11,589 | 19,350 | 28,181 | 14 | 59,134 | |||||||||||||||
Restaurant rent expense | 2,461 | 3,899 | 5,996 | — | 12,356 | |||||||||||||||
General and administrative expenses (1) | 2,806 | 2,770 | 6,540 | 379 | 12,495 | |||||||||||||||
Depreciation and amortization | 1,930 | 2,277 | 3,472 | 443 | 8,122 | |||||||||||||||
Adjusted Segment EBITDA | 6,729 | 6,761 | 3,786 | |||||||||||||||||
Capital expenditures, including acquisitions | 801 | 1,290 | 3,297 | 392 | 5,780 | |||||||||||||||
Identifiable Assets: | ||||||||||||||||||||
At March 31, 2011 | $ | 50,388 | $ | 63,424 | $ | 141,086 | $ | 171,528 | $ | 426,426 | ||||||||||
At December 31, 2010 | 51,125 | 63,061 | 142,922 | 169,194 | 426,302 |
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 March 31, | ||||||||
2010 | 2009 | |||||||
Adjusted Segment EBITDA: | ||||||||
Pollo Tropical | $ | 10,061 | $ | 6,729 | ||||
Taco Cabana | 6,493 | 6,761 | ||||||
Burger King | 1,141 | 3,786 | ||||||
Less: | ||||||||
Depreciation and amortization | 8,108 | 8,122 | ||||||
Impairment and other lease charges | 1,080 | 270 | ||||||
Interest expense | 4,613 | 4,743 | ||||||
Provision for income taxes | 1,077 | 1,432 | ||||||
Stock-based compensation expense | 675 | 393 | ||||||
Other income | (106 | ) | — | |||||
Net income | $ | 2,248 | $ | 2,316 | ||||
11. Commitments and Contingencies
On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against the Company. The complaint alleged that the Company engaged in a pattern or practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC ultimately attempted to present evidence of 511 individuals that it believed constituted the “class” of claimants for which it was seeking monetary and injunctive relief from the Company. On April 20, 2005, the Court issued a decision and order granting the Company’s Motion for Summary Judgment that the Company filed in January 2004, dismissing the EEOC’s pattern or practice claim. The Company then moved for summary judgment against the claims of the 511 individual claimants. On March 2, 2011, the Court issued a decision and order granting summary judgment against the claims of all but 131 of the 511 individual claimants and dismissed 380 of the individual claimants from the case. Both the EEOC and the Company have since filed motions for reconsideration in part of the Court’s March 2, 2011 decision and order, as a result of which the number of surviving claimants may increase to as many as 184 or decrease to as few as four. It is not possible to predict the outcome of these motions at this time.
Subject to possible appeal by the EEOC, the EEOC’s pattern or practice claim is dismissed; however, the Court has yet to determine how the claims of the individual claimants ultimately determined to survive will proceed. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of that matter on an appeal, if one is taken. The Company does not believe that any of the remaining individual claims would have a material adverse impact on its consolidated financial statements.
The Company is a party to various other litigation matters incidental to the conduct of the Company’s business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial statements.
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 March 31, | ||||||||
2011 | 2010 | |||||||
Net income | $ | 2,248 | $ | 2,316 | ||||
Change in postretirement benefit obligation, net of tax | — | 10 | ||||||
Comprehensive income | $ | 2,248 | $ | 2,326 | ||||
13. Other Income
In the three months ended March 31, 2011, the Company recorded a gain of $0.1 million related to a property insurance recovery from a fire at a Burger King restaurant.
14. Recent Accounting Developments
There are currently no recent accounting pronouncements which had or are expected to have a material impact on the Company’s consolidated financial statements as of the date of this report.
15. 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 March 31, 2011 and December 31, 2010 for the Parent Company only, Guarantor Subsidiaries and for the Company and the related statements of operations for the three months ended March 31, 2011 and 2010, and cash flows for the three months ended March 31, 2011 and 2010.
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 taxes are allocated to each reporting entity as if it were to file a separate tax return. The rules followed by the reporting entity in computing its tax obligation or refund would be the same as those followed in filing a separate income tax return. However, for purposes of evaluating an entity’s ability to realize its tax attributes, the Company assesses whether it is more likely than not that those assets will be realized at the consolidated level. Any differences in the total of the income tax provision for the Parent Company only and the Guarantor Subsidiaries, as calculated on the separate return method, and the consolidated income tax provision are eliminated in consolidation.
The Company provides administrative support to its subsidiaries related to executive management, information systems and certain accounting, legal and other administrative functions. For purposes of the guarantor financial statements, the Company allocates such corporate costs on a specific identification basis, where applicable, or based on revenues or the number of restaurants for each subsidiary. Management believes that these allocations are reasonable based on the nature of costs incurred. Beginning in January 2011, all administrative costs have been allocated to our guarantor subsidiaries using such methods.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING BALANCE SHEET
March 31, 2011
(In thousands of dollars)
(Unaudited)
Parent Company Only | Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,270 | $ | 3,122 | $ | — | $ | 4,392 | ||||||||
Trade and other receivables | 115 | 6,011 | — | 6,126 | ||||||||||||
Inventories | — | 5,088 | — | 5,088 | ||||||||||||
Prepaid rent | 5 | 4,009 | — | 4,014 | ||||||||||||
Prepaid expenses and other current assets | 1,455 | 4,558 | — | 6,013 | ||||||||||||
Deferred income taxes | (108 | ) | 4,717 | — | 4,609 | |||||||||||
Total current assets | 2,737 | 27,505 | — | 30,242 | ||||||||||||
Property and equipment, net | 11,746 | 256,945 | (83,019 | ) | 185,672 | |||||||||||
Franchise rights, net | — | 69,633 | — | 69,633 | ||||||||||||
Goodwill | — | 124,934 | — | 124,934 | ||||||||||||
Intangible assets, net | — | 389 | — | 389 | ||||||||||||
Franchise fees, net | — | 5,575 | — | 5,575 | ||||||||||||
Intercompany receivable (payable) | 106,605 | (136,767 | ) | 30,162 | — | |||||||||||
Investment in subsidiaries | 184,773 | — | (184,773 | ) | — | |||||||||||
Deferred income taxes | 2,814 | 3,649 | (4,514 | ) | 1,949 | |||||||||||
Other assets | 3,726 | 6,244 | (1,938 | ) | 8,032 | |||||||||||
Total assets | $ | 312,401 | $ | 358,107 | $ | (244,082 | ) | $ | 426,426 | |||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 16,887 | $ | 50 | $ | — | $ | 16,937 | ||||||||
Accounts payable | 2,179 | 12,644 | — | 14,823 | ||||||||||||
Accrued interest | 3,139 | — | — | 3,139 | ||||||||||||
Accrued payroll, related taxes and benefits | (326 | ) | 17,064 | — | 16,738 | |||||||||||
Accrued income taxes payable | 1,527 | — | — | 1,527 | ||||||||||||
Accrued real estate taxes | — | 3,158 | — | 3,158 | ||||||||||||
Other liabilities | 455 | 9,018 | — | 9,473 | ||||||||||||
Total current liabilities | 23,861 | 41,934 | — | 65,795 | ||||||||||||
Long-term debt, net of current portion | 238,849 | 1,132 | — | 239,981 | ||||||||||||
Lease financing obligations | — | 126,441 | (116,380 | ) | 10,061 | |||||||||||
Deferred income—sale-leaseback of real estate | — | 23,840 | 15,977 | 39,817 | ||||||||||||
Accrued postretirement benefits | 1,790 | — | — | 1,790 | ||||||||||||
Other liabilities | 78 | 19,145 | 1,936 | 21,159 | ||||||||||||
Total liabilities | 264,578 | 212,492 | (98,467 | ) | 378,603 | |||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholder’s equity | 47,823 | 145,615 | (145,615 | ) | 47,823 | |||||||||||
Total liabilities and stockholder’s equity | $ | 312,401 | $ | 358,107 | $ | (244,082 | ) | $ | 426,426 | |||||||
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING BALANCE SHEET
December 31, 2010
(In thousands of dollars)
Parent Company Only | Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 42 | $ | 3,102 | $ | — | $ | 3,144 | ||||||||
Trade and other receivables | 91 | 5,122 | — | 5,213 | ||||||||||||
Refundable income taxes | 869 | — | — | 869 | ||||||||||||
Inventories | — | 5,203 | — | 5,203 | ||||||||||||
Prepaid rent | 5 | 4,013 | — | 4,018 | ||||||||||||
Prepaid expenses and other current assets | 1,452 | 3,897 | — | 5,349 | ||||||||||||
Deferred income taxes | (108 | ) | 4,717 | — | 4,609 | |||||||||||
Total current assets | 2,351 | 26,054 | — | 28,405 | ||||||||||||
Property and equipment, net | 10,613 | 259,774 | (83,537 | ) | 186,850 | |||||||||||
Franchise rights, net | — | 70,432 | — | 70,432 | ||||||||||||
Goodwill | — | 124,934 | — | 124,934 | ||||||||||||
Intangible assets, net | — | 419 | — | 419 | ||||||||||||
Franchise agreements, net | — | 5,629 | — | 5,629 | ||||||||||||
Intercompany receivable (payable) | 109,966 | (139,948 | ) | 29,982 | — | |||||||||||
Investment in subsidiaries | 180,985 | — | (180,985 | ) | — | |||||||||||
Deferred income taxes | 2,814 | 3,356 | (4,221 | ) | 1,949 | |||||||||||
Other assets | 3,619 | 6,065 | (2,000 | ) | 7,684 | |||||||||||
Total assets | $ | 310,348 | $ | 356,715 | $ | (240,761 | ) | $ | 426,302 | |||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 15,480 | $ | 58 | $ | — | $ | 15,538 | ||||||||
Accounts payable | 2,072 | 11,872 | — | 13,944 | ||||||||||||
Accrued interest | 6,853 | — | — | 6,853 | ||||||||||||
Accrued payroll, related taxes and benefits | 85 | 19,419 | — | 19,504 | ||||||||||||
Accrued real estate taxes | — | 4,778 | — | 4,778 | ||||||||||||
Other liabilities | 220 | 7,214 | — | 7,434 | ||||||||||||
Total current liabilities | 24,710 | 43,341 | — | 68,051 | ||||||||||||
Long-term debt, net of current portion | 236,770 | 1,144 | — | 237,914 | ||||||||||||
Lease financing obligations | — | 126,430 | (116,369 | ) | 10,061 | |||||||||||
Deferred income—sale-leaseback of real estate | — | 24,157 | 16,315 | 40,472 | ||||||||||||
Accrued postretirement benefits | 1,845 | — | — | 1,845 | ||||||||||||
Other liabilities | 2,124 | 19,072 | 1,864 | 23,060 | ||||||||||||
Total liabilities | 265,449 | 214,144 | (98,190 | ) | 381,403 | |||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholder’s equity | 44,899 | 142,571 | (142,571 | ) | 44,899 | |||||||||||
Total liabilities and stockholder’s equity | $ | 310,348 | $ | 356,715 | $ | (240,761 | ) | $ | 426,302 | |||||||
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2011
(In thousands of dollars)
(Unaudited)
Parent Company Only | Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||
Revenues: | ||||||||||||||||
Restaurant sales | $ | — | $ | 196,873 | $ | — | $ | 196,873 | ||||||||
Franchise royalty revenues and fees | — | 365 | — | 365 | ||||||||||||
Total revenues | — | 197,238 | — | 197,238 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of sales | — | 60,315 | — | 60,315 | ||||||||||||
Restaurant wages and related expenses (including stock based compensation expense of $10) | — | 58,568 | — | 58,568 | ||||||||||||
Restaurant rent expense | — | 9,750 | 2,304 | 12,054 | ||||||||||||
Other restaurant operating expenses | — | 27,924 | — | 27,924 | ||||||||||||
Advertising expense | — | 7,503 | — | 7,503 | ||||||||||||
General and administrative (including stock based compensation expense of $665) | — | 13,854 | — | 13,854 | ||||||||||||
Depreciation and amortization | — | 8,628 | (520 | ) | 8,108 | |||||||||||
Impairment and other lease charges | — | 1,080 | — | 1,080 | ||||||||||||
Other income | — | (106 | ) | — | (106 | ) | ||||||||||
Total operating expenses | — | 187,516 | 1,784 | 189,300 | ||||||||||||
Income from operations | — | 9,722 | (1,784 | ) | 7,938 | |||||||||||
Interest expense | 4,328 | 2,925 | (2,640 | ) | 4,613 | |||||||||||
Intercompany interest allocations | (1,997 | ) | 1,997 | — | — | |||||||||||
Income (loss) before income taxes | (2,331 | ) | 4,800 | 856 | 3,325 | |||||||||||
Provision (benefit) for income taxes | (791 | ) | 1,756 | 112 | 1,077 | |||||||||||
Equity income from subsidiaries | 3,788 | — | (3,788 | ) | — | |||||||||||
Net income | $ | 2,248 | $ | 3,044 | $ | (3,044 | ) | $ | 2,248 | |||||||
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2010
(In thousands of dollars)
(Unaudited)
Parent Company Only | Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||
Revenues: | ||||||||||||||||
Restaurant sales | $ | — | $ | 194,667 | $ | — | $ | 194,667 | ||||||||
Franchise royalty revenues and fees | — | 477 | — | 477 | ||||||||||||
Total revenues | — | 195,144 | — | 195,144 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of sales | — | 59,198 | — | 59,198 | ||||||||||||
Restaurant wages and related expenses (including stock based compensation expense of $14) | — | 59,134 | — | 59,134 | ||||||||||||
Restaurant rent expense | — | 10,047 | 2,309 | 12,356 | ||||||||||||
Other restaurant operating expenses | — | 28,232 | — | 28,232 | ||||||||||||
Advertising expense | — | 6,846 | — | 6,846 | ||||||||||||
General and administrative (including stock based compensation expense of $379) | 2,215 | 10,280 | — | 12,495 | ||||||||||||
Depreciation and amortization | — | 8,642 | (520 | ) | 8,122 | |||||||||||
Impairment and other lease charges | — | 270 | — | 270 | ||||||||||||
Total operating expenses | 2,215 | 182,649 | 1,789 | 186,653 | ||||||||||||
Income (loss) from operations | (2,215 | ) | 12,495 | (1,789 | ) | 8,491 | ||||||||||
Interest expense | 4,456 | 2,959 | (2,672 | ) | 4,743 | |||||||||||
Intercompany interest allocations | (4,556 | ) | 4,556 | — | — | |||||||||||
Income (loss) before income taxes | (2,115 | ) | 4,980 | 883 | 3,748 | |||||||||||
Provision (benefit) for income taxes | (716 | ) | 1,815 | 333 | 1,432 | |||||||||||
Equity income from subsidiaries | 3,715 | — | (3,715 | ) | — | |||||||||||
Net income | $ | 2,316 | $ | 3,165 | $ | (3,165 | ) | $ | 2,316 | |||||||
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2011
(In thousands of dollars)
(Unaudited)
Parent Company Only | Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||
Cash flows provided from (used for) operating activities: | ||||||||||||||||
Net income | $ | 2,248 | $ | 3,044 | $ | (3,044 | ) | $ | 2,248 | |||||||
Adjustments to reconcile net income to net cash provided from (used for) operating activities: | ||||||||||||||||
Loss on disposals of property and equipment | — | 114 | — | 114 | ||||||||||||
Stock-based compensation expense | — | 675 | — | 675 | ||||||||||||
Impairment and other lease charges | — | 1,080 | — | 1,080 | ||||||||||||
Depreciation and amortization | — | 8,628 | (520 | ) | 8,108 | |||||||||||
Amortization of deferred financing costs | 229 | 67 | (63 | ) | 233 | |||||||||||
Amortization of deferred gains from sale-leaseback transactions | — | (501 | ) | (338 | ) | (839 | ) | |||||||||
Accretion of interest on lease financing obligations | — | 12 | (12 | ) | — | |||||||||||
Deferred income taxes | — | (292 | ) | 292 | — | |||||||||||
Accrued income taxes | 2,396 | — | — | 2,396 | ||||||||||||
Changes in other operating assets and liabilities | (6,348 | ) | (6,665 | ) | 3,685 | (9,328 | ) | |||||||||
Net cash provided from (used for) operating activities | (1,475 | ) | 6,162 | — | 4,687 | |||||||||||
Cash flows used for investing activities: | ||||||||||||||||
Capital expenditures: | ||||||||||||||||
New restaurant development | — | (3,407 | ) | — | (3,407 | ) | ||||||||||
Restaurant remodeling | — | (2,999 | ) | — | (2,999 | ) | ||||||||||
Other restaurant capital expenditures | — | (1,485 | ) | — | (1,485 | ) | ||||||||||
Corporate and restaurant information systems | (453 | ) | (92 | ) | — | (545 | ) | |||||||||
Total capital expenditures | (453 | ) | (7,983 | ) | — | (8,436 | ) | |||||||||
Proceeds from sale-leaseback transactions | — | 1,861 | — | 1,861 | ||||||||||||
Net cash used for investing activities | (453 | ) | (6,122 | ) | — | (6,575 | ) | |||||||||
Cash flows provided from (used for) financing activities: | ||||||||||||||||
Borrowings on revolving credit facility | 25,800 | — | — | 25,800 | ||||||||||||
Repayments on revolving credit facility | (19,500 | ) | — | — | (19,500 | ) | ||||||||||
Scheduled principal payments on term loans | (2,814 | ) | — | — | (2,814 | ) | ||||||||||
Principal payments on capital leases | — | (20 | ) | — | (20 | ) | ||||||||||
Deferred financing fees | (330 | ) | — | — | (330 | ) | ||||||||||
Net cash provided from (used for) financing activities | 3,156 | (20 | ) | — | 3,136 | |||||||||||
Net increase in cash and cash equivalents | 1,228 | 20 | — | 1,248 | ||||||||||||
Cash and cash equivalents, beginning of period | 42 | 3,102 | — | 3,144 | ||||||||||||
Cash and cash equivalents, end of period | $ | 1,270 | $ | 3,122 | $ | — | $ | 4,392 | ||||||||
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2010
(In thousands of dollars)
(Unaudited)
Parent Company Only | Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||
Cash flows provided from (used for) operating activities: | ||||||||||||||||
Net income | $ | 2,316 | $ | 3,165 | $ | (3,165 | ) | $ | 2,316 | |||||||
Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||||||||||
Loss on disposals of property and equipment | — | 64 | — | 64 | ||||||||||||
Stock-based compensation expense | 265 | 128 | — | 393 | ||||||||||||
Impairment and other lease charges | — | 270 | — | 270 | ||||||||||||
Depreciation and amortization | — | 8,642 | (520 | ) | 8,122 | |||||||||||
Amortization of deferred financing costs | 235 | 64 | (60 | ) | 239 | |||||||||||
Amortization of deferred gains from sale-leaseback transactions | — | (444 | ) | (386 | ) | (830 | ) | |||||||||
Accretion of interest on lease financing obligations | — | 103 | (89 | ) | 14 | |||||||||||
Deferred income taxes | — | (359 | ) | 339 | (20 | ) | ||||||||||
Accrued income taxes | 2,814 | — | — | 2,814 | ||||||||||||
Changes in other operating assets and liabilities | (9,381 | ) | (8,006 | ) | 3,881 | (13,506 | ) | |||||||||
Net cash provided from (used for) operating activities | (3,751 | ) | 3,627 | — | (124 | ) | ||||||||||
Cash flows used for investing activities: | ||||||||||||||||
Capital expenditures: | ||||||||||||||||
New restaurant development | — | (1,192 | ) | — | (1,192 | ) | ||||||||||
Restaurant remodeling | — | (1,993 | ) | — | (1,993 | ) | ||||||||||
Other restaurant capital expenditures | — | (2,203 | ) | — | (2,203 | ) | ||||||||||
Corporate and restaurant information systems | (362 | ) | (30 | ) | — | (392 | ) | |||||||||
Total capital expenditures | (362 | ) | (5,418 | ) | — | (5,780 | ) | |||||||||
Properties purchased for sale-leaseback | — | (1,141 | ) | — | (1,141 | ) | ||||||||||
Proceeds from sale-leaseback transactions | — | — | 2,319 | 2,319 | ||||||||||||
Net cash used for investing activities | (362 | ) | (6,559 | ) | 2,319 | (4,602 | ) | |||||||||
Cash flows provided from financing activities: | ||||||||||||||||
Borrowings on revolving credit facility | 41,700 | — | — | 41,700 | ||||||||||||
Repayments on revolving credit facility | (33,400 | ) | — | — | (33,400 | ) | ||||||||||
Principal pre-payments on term loans | (1,023 | ) | (1,023 | ) | ||||||||||||
Scheduled principal payments on term loans | (2,971 | ) | — | — | (2,971 | ) | ||||||||||
Principal payments on capital leases | — | (22 | ) | — | (22 | ) | ||||||||||
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 | 11 | — | — | 11 | ||||||||||||
Net cash provided from financing activities | 4,317 | 2,297 | (2,319 | ) | 4,295 | |||||||||||
Net increase (decrease) in cash and cash equivalents | 204 | (635 | ) | — | (431 | ) | ||||||||||
Cash and cash equivalents, beginning of period | 34 | 4,368 | — | 4,402 | ||||||||||||
Cash and cash equivalents, end of period | $ | 238 | $ | 3,733 | $ | — | $ | 3,971 | ||||||||
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 2, 20111, 2012 and January 3, 20102, 2011 will be referred to as the fiscal years ended December 31, 20102011 and 2009,2010, respectively. Similarly, all references herein to the three months ended April 3, 20111, 2012 and April 4, 20103, 2011 will be referred to as the three months ended March 31, 20112012 and 2010,2011, respectively. The fiscal years ended December 31, 2011 and 2010 and 2009each contained 52 weeks and 53 weeks, respectively, and the three months ended March 31, 20112012 and 20102011 each contained thirteen weeks, respectively.weeks.
Introduction
Carrols Restaurant Group isWe are a holding company and conductsconduct all of itsour operations through itsour direct and indirect subsidiaries and hashave no assets other than the shares of capital stock of Carrols, itsour 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 theour 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, 2010.2011, as amended. 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 affect, and future events that may affect, our results of operations.
Executive Summary—an executive review of our performance for the three months ended March 31, 2011.2012.
Results of Operations—an analysis of our results of operations for the three months ended March 31, 20112012 compared to the three months ended March 31, 2010,2011, 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.
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 550 restaurants located in 16 states as of April 3, 2011. We have been operating restaurants for more than 50 years. We own and operate two Hispanic restaurant brands, Pollo Tropical and Taco Cabana (together referred to by usWith 297 Burger King restaurants as our Hispanic Brands), whichof April 1, 2012, 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. Our former indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc. (“Fiesta”), which was spun off by us to our stockholders on May 7, 2012, owns and operates the Pollo Tropical and Taco Cabana restaurant brands. As of April 3, 2011, our company-owned1, 2012, Fiesta owned and operated restaurants included 9086 Pollo Tropical restaurants and 156157 Taco Cabana restaurants, and we operated 304with our 297 Burger King restaurants under franchise agreements.we owned an operated a total of 540 restaurants in 17 states.
We areFiesta is franchising our Pollo Tropical restaurants primarily internationally and, as of April 3, 2011, we1, 2012, had 2933 franchised restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad, the Bahamas, Trinidad, Venezuela, Costa Rica and on college campuses in Florida. WeFiesta also havehas agreements for the future development of franchised Pollo Tropical restaurants in Panama, Tobago, Aruba, Curacao Bonaire, and Venezuela.Bonaire. Although we areFiesta is not actively franchising our Taco Cabana restaurants, weit had five Taco Cabana franchised restaurants atas of April 3, 20111, 2012 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 three months ended March 31, 2011 and 2010, we had total revenues of $197.2 million and $195.1 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 changes in comparable restaurant sales, menu price increases, new restaurant openings and closures of |
• | 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 for future periods up to one year. |
• | Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level |
• | Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of deferred 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 |
• | 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, including expenses in connection with the spin-off of Fiesta Restaurant Group and our pending acquisition of Burger King restaurants from Burger King Corporation (“BKC”) and (3) stock-based compensation expense. At the beginning of the first quarter of 2012, management reporting was modified to reflect the allocation of expenses associated with administrative support provided to the Company’s Pollo Tropical and Taco Cabana segments previously included in the Company’s Burger King segment. For comparability, we have reclassified prior year segment general and administrative expenses and Adjusted Segment EBITDA to reflect these changes. These reclassifications only affect the Company’s segment reporting, and do not change total consolidated general and administrative expenses, income from operations or net income (loss). |
• | 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 each of our |
• | 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. |
• | Impairment and other lease chargesare determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries. |
• | Interest expense consists primarily of borrowings under our senior secured credit facilities, interest associated with the issuance on August 5, 2011 of $200 million of Fiesta Restaurant Group’s 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”), interest expense associated with Carrols’ 9% Senior Subordinated Notes due 2013 (the |
Recent and Future Events Affecting our Results of Operations
Spin-offAcquisition of Hispanic BrandsBurger King Restaurants
On February 24, 2011March 26, 2012, we announcedand Carrols LLC, entered into a purchase agreement with BKC to purchase 278 of BKC’s company-owned restaurants located in Ohio, Indiana, Kentucky, Pennsylvania, North Carolina, South Carolina and Virginia. As consideration for this acquisition, we will (i) issue to BKC shares of our intentionSeries A Convertible Preferred Stock (ii) pay cash payments to pursue splittingBKC at the closing of the transaction of approximately $2.8 million (subject to adjustment) for cash on hand and inventory at restaurants to be acquired and (iii) pay other cash payments of approximately $13.3 million with approximately $9.6 million to be paid at closing of the transaction with the balance to be paid over five years by Carrols LLC to BKC. The cash payment of approximately $13.3 million is for refranchising fees and for BKC’s assignment of its right of first refusal on franchisee restaurant transfers in 20 states pursuant to an operating agreement to be entered into at the closing of the transaction. The Series A Convertible Preferred Stock issued to BKC will equal a 28.9% equity ownership interest in Carrols Restaurant Group, subject to restrictions limiting the conversion of the Series A Convertible Preferred Stock to an amount of shares not to exceed 19.9% of the outstanding shares of our businesscommon stock as of the date of issuance (the “Issuance Limitation”). Pursuant to the purchase agreement, the removal of the Issuance Limitation will be subject to obtaining the approval of our stockholders at our next annual meeting after the closing of the acquisition or at subsequent meetings, if necessary, until stockholder approval is obtained.
Carrols LLC will also enter into two separate, publicly-traded companies throughnew franchise agreements pursuant to the tax-freepurchase and operating agreements and enter into leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC’s underlying leases for those properties. Pursuant to the operating agreement, Carrols LLC will also agree to remodel 455 Burger King restaurants to BKC’s 20/20 restaurant image, including 57 restaurants in 2012, 154 restaurants in 2013, 154 restaurants in 2014 and 90 restaurants in 2015.
The consummation of the acquisition is subject to certain conditions, including, among other things, (a) the completion of a refinancing sufficient for Carrols LLC to repay its outstanding indebtedness under its senior secured credit facility, to pay amounts due to BKC pursuant to the purchase and operating agreements, and with cash generated from operations, to pay for our obligations in connection with an agreed upon remodeling plan, (b) the receipt of third party consents and (c) other customary closing conditions. We anticipate that the acquisition will be completed in the second quarter of 2012, although there can be no assurance that the acquisition will be completed within such period or at all.
Spin-off of Fiesta Restaurant Group, Inc.
On April 16, 2012, our board of directors approved the spin-off of our Hispanic Brands to our stockholders. The company to be spun off would operate ourFiesta Restaurant Group, which through its subsidiaries, owns and operates the Pollo Tropical and Taco Cabana businesses. Carrols Restaurant Group wouldrestaurant brands. We will continue to own and operate our franchised Burger King restaurants.restaurants through our subsidiaries Carrols and Carrols LLC. In connection with the spin-off, on April 24, 2012, we and Carrols entered into several agreements with Fiesta Restaurant Group that govern our post spin-off relationship with Fiesta Restaurant Group, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement.
We are developing detailed plans forFiesta Restaurant Group has filed with the proposedSecurities and Exchange Commission (the “SEC”) a Form 10 registration statement, File No. 001-35373, as amended (the “Registration Statement”), which includes as an exhibit an information statement which describes the spin-off. TheThis Registration Statement, which registered the common stock of Fiesta Restaurant Group under the Securities Exchange Act of 1934, as amended, was declared effective by the SEC on April 25, 2012.
On May 7, 2012, we completed the spin-off includingof Fiesta Restaurant Group in the separation plan transaction structure, timing, composition of senior management and the boards of directors, capital structure and other matters, will be subject to approval by our Board of Directors, customary regulatory and other approvals and the receiptform of a favorable IRS tax ruling, among other things.pro rata dividend of all of the issued and outstanding common stock of Fiesta Restaurant Group to Carrols Restaurant Group’s stockholders whereby each stockholder of Carrols Restaurant Group’s common stock of record on April 26, 2012 received one share of Fiesta Restaurant Group common stock for every one share of Carrols Restaurant Group common stock held. As a result of the spin-off, Fiesta Restaurant Group is now an independent company whose common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI.” Carrols Restaurant Group’s common stock will continue to trade on The NASDAQ Global Market under the symbol “TAST.”
We believe that the proposed spin-off will enable each company to better focus on its respective opportunities as well asand to pursue its own distinct operating plan and growth strategy including acquisition opportunitiesstrategy. Beginning in the Burger King system. We expectsecond quarter of 2012 the historical operating results of Fiesta Restaurant Group prior to complete the spin-off by the end of 2011; however there canwill be no assurance that we will complete the spin-off by then or at all.included in our operating results as earnings from discontinued operations.
Refinancing of Outstanding Indebtedness
We areOn August 5, 2011, we completed a refinancing of our existing indebtedness. Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceeds from these financings were used to repay all indebtedness
outstanding under Carrols senior credit facility and the Carrols Notes, as well as to pay all related fees and expenses. Excess cash proceeds from the financings were approximately $9.5 million, and in the processfirst quarter of refinancing our existing debt with2012 we transferred $2.5 million of these proceeds to Fiesta Restaurant Group.
Fiesta Restaurant Group sold $200 million of Fiesta Notes and entered into a separate financing of the Burger King and Hispanic Brand businesses. We currently contemplate that the refinancing would be comprised of$25 million senior secured revolving credit facility which was undrawn at closing. Carrols LLC entered into an $85 million senior secured credit facility including term loan borrowings of $65 million and an undrawn $20 million revolving credit facility. Proceeds from these borrowings were used to repay approximately $80.2 million outstanding under a senior secured bank credit facility for our Burger King business and the issuance of senior secured notes for our Hispanic Brands. Our intent in bifurcating the financing is to facilitate the contemplated spin-off of our Hispanic Brands at a later date, and avoid having to alter or reconstitute the capital structure at that time. Presently, our plan is to complete this refinancing in the middle of 2011; however there can be no assurance that the refinancing will be completed within such time period, on favorable terms, or at all. Due to the interest rate terms in our existingCarrols’ senior credit facility, it is likely thatto repurchase or redeem $165.0 million of the refinancing will increase ourCarrols Notes and to pay accrued interest expense in the aggregate.and related fees and expenses.
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 2010, we closed seven Burger King restaurants, not including restaurants relocated within the same market area. In the first quarter of 20112012 we closed one Burger King restaurant and in 2011 we closed eight Burger King restaurants, not including aone restaurant relocated within the same market area. We currently anticipate that we will close anone additional six Burger King restaurant in 2012.
In the first quarter of 2012, we closed our five Pollo Tropical restaurants in 2011, excluding any relocations.
New Jersey and one underperforming Taco Cabana restaurant. Two of the five Pollo Tropical restaurant location’s assets were previously impaired as of January 1, 2012 and have a base lease term ending in 2012. We also closed two underperforming Pollo Tropical restaurants and one underperforming Taco Cabana restaurant in 2011. We currently do not anticipate closing any additional Pollo Tropical and Taco Cabana restaurants and two underperforming Pollo Tropical restaurants in 2010 and one underperforming Pollo Tropical restaurant in the first quarter of 2011. We do not currently anticipate the closing of additional Taco Cabana or Pollo Tropical restaurants in 2011.2012.
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.
Executive Summary—Operating Performance for the Three Months Ended March 31, 20112012
Total revenues for the three months ended March 31, 2011first quarter of 2012 increased 7.3% to $197.2$211.6 million from $195.1$197.2 million in the three months ended March 31, 2010.first quarter of 2011. Revenues from our Hispanic Brand restaurantsFiesta Restaurant Group increased 7.5%9.1% in the first quarter of 2012 to $115.6$126.1 million and revenues from our Burger King restaurants decreasedincreased 4.7% to $81.6$85.5 million from $87.6$81.6 million in the three months ended March 31, 2010.first quarter of 2011. Comparable restaurant sales in the first quarter of 20112012 increased 13.5%9.4% at our Pollo Tropical restaurants, increased 2.0%6.1% at our Taco Cabana restaurants and decreased 5.0%increased 5.9% at our Burger King restaurants. The comparable restaurant sales increaseincreases at our Pollo Tropical restaurants wasand Burger King were primarily a result of higher customer traffic although each brand’s average check also increased in the first quarter of 2012. The comparable sales increase at our Taco Cabana restaurants was primarily due both to an increase in average check whileand higher customer traffic.
Restaurant operating margins in the decreasefirst quarter of 2012 were negatively impacted by higher food commodity costs at each of our three restaurant brands as cost of sales, as a percentage of total restaurant sales, increased to 31.7% from 30.6%. These increases were partially offset by favorable sales mix changes at our Burger King restaurants, was due primarily to a decline in customer traffic partially offset by an increase in average check.
Restaurant operating margins at our Hispanic Brands were positively impactedas well as menu price increases taken in the first quarterlast twelve months at all three of 2011 by the effect of higher sales on fixed labor costs and lower medical claim costs.our brands. As a percentage of total restaurant sales, restaurant wages and related expenses decreased to 29.2% in the first quarter of 2012 from 29.7% in the first quarter of 2011 from 30.4% in the first quarter of 2010. Cost of sales increased 0.2%, as a percentage of total restaurant sales, compareddue to the first quartereffect of 2010, due to higher commodity pricessales volumes at all three of our restaurant brands. These increases were partially offset by favorable sales mix changes at our Burger King and Pollo Tropical restaurants as well as menu price increases taken in the last twelve months at our Burger King and Taco Cabana restaurants.brands on fixed labor costs. Advertising expense, as a percentage of total restaurant sales, increaseddecreased to 3.3% in the first quarter of 2012 from 3.8% in the first quarter of 2011 primarily from 3.5% in the first quarter of 2010 due primarily toadvertising credits received by our Burger King restaurants associated with BKC’s 2012 menu enhancement initiatives and higher advertising spending for our Taco Cabana restaurants due to the timing of promotions.sales from promotional activities at Pollo Tropical. Operating results were also favorably impacted by lower utility costs which, as a percentage of total restaurant sales, decreased to 3.1% in the first quarter of 2012 from 3.4% in the first quarter of 2011 from 3.6% in the first quarter of 2010.2011.
General and administrative expenses increased to $13.9$17.4 million in the first quarter of 20112012 from $12.5 million in the first quarter of 2010 due to higher legal and professional fees, administrative bonus accruals, stock-based compensation expense. Legal and professional fees the first quarter of 2011 included $0.3 million incurred in connection with the planned spin-off of our Hispanic Brands.
Interest expense decreased $0.1 million to $4.6$13.9 million in the first quarter of 2011 due primarily to a reductionexpenses of $1.4 million related to the conversion on March 5, 2012 of our outstanding stock options into either shares of our unrestricted common stock or restricted common stock in connection with the spin-off of Fiesta Restaurant Group, and the acceleration of vesting of restricted stock awards upon the departure of the former Chairman of Fiesta Restaurant Group’s board of directors and higher administrative bonus accruals of $0.6 million. General and administrative expenses in the first quarter of 2012 also included $1.5 million of legal and other costs incurred in connection with the spin-off of Fiesta Restaurant Group and the pending acquisition of Burger King restaurants from BKC.
Impairment and other lease charges in the first quarter of 2012 were $6.9 million compared to $1.1 million in the first quarter of 2011 and were due to the closure of our five Pollo Tropical restaurants in New Jersey and impairment charges for two Taco Cabana restaurants.
Total interest expense increased $1.7 million to $6.3 million in the first quarter of 2012 due to our refinancing activities in the third quarter of 2011, which increased our effective interest rates due to both the change in the composition of our total indebtedness and an increase in our total outstanding indebtedness since the beginning of 2010.LIBOR based borrowing margins in our senior credit facilities.
Our effective income tax rate in the first quarter of 2012, including discrete tax items, wasdecreased to 30.0% from 32.4% in the first quarter of 2011 compareddue primarily to 38.2%deductions related to the conversion of outstanding vested stock options to shares of our common stock in connection with the first quarterspin-off of 2010.Fiesta Restaurant Group.
As a result of the above, our net loss was $3.5 million in the first quarter of 2012 compared to net income decreased slightly toof $2.2 million in the first quarter of 2011 from $2.3 million in the first quarter of 2010.2011.
Results of Operations
Three Months Ended March 31, 20112012 Compared to Three Months Ended March 31, 20102011
Consolidated Operating Results
The following table sets forth, for the three months ended March 31, 2012 and 2011, and 2010, selected consolidated operating results as a percentage of consolidated restaurant sales:
2011 | 2010 | 2012 | 2011 | |||||||||||||
Restaurant sales: | ||||||||||||||||
Pollo Tropical | 26.4 | % | 23.2 | % | 27.2 | % | 26.4 | % | ||||||||
Taco Cabana | 32.1 | % | 31.8 | % | 32.3 | % | 32.1 | % | ||||||||
Burger King | 41.5 | % | 45.0 | % | 40.5 | % | 41.5 | % | ||||||||
|
| |||||||||||||||
Total restaurant sales | 100.0 | % | 100.0 | % | ||||||||||||
Consolidated restaurant sales | 100.0 | % | 100.0 | % | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of sales | 30.6 | % | 30.4 | % | 31.7 | % | 30.6 | % | ||||||||
Restaurant wages and related expenses | 29.7 | % | 30.4 | % | 29.2 | % | 29.7 | % | ||||||||
Restaurant rent expense | 6.1 | % | 6.3 | % | 5.7 | % | 6.1 | % | ||||||||
Other restaurant operating expenses | 14.2 | % | 14.5 | % | 14.0 | % | 14.2 | % | ||||||||
Advertising expense | 3.8 | % | 3.5 | % | 3.3 | % | 3.8 | % | ||||||||
General and administrative | 7.0 | % | 6.4 | % | 8.2 | % | 7.0 | % |
Consolidated Restaurant Sales. Total restaurant sales in the first quarter of 2012 increased 7.2%, to $211.0 million from $196.9 million in the first quarter of 2011.
Consolidated General and Administrative Expenses. General and administrative expenses increased $3.5 million in the first quarter of 2012 to $17.4 million and, as a percentage of total restaurant sales, increased to 8.2% compared to 7.0% in the first quarter of 2011. This increase was due primarily to expenses of $1.4 million related to the conversion in the first quarter of 2012 of all our outstanding stock options into either shares of unrestricted common stock or restricted common stock in connection with the spin-off of Fiesta Restaurant Group and the acceleration of vesting of equity awards upon the departure of the former Chairman of Fiesta Restaurant Group’s board of directors and higher administrative bonus accruals of $0.6 million. General and administrative expenses in the first quarter of 2012 also included $1.1 million of legal and other costs incurred in connection with the spin-off of Fiesta Restaurant Group and $0.4 million of legal and other costs related to the acquisition of Burger King restaurants from BKC.
Consolidated Interest Expense. Consolidated interest expense increased $1.7 million to $6.3 million in the first quarter of 2012 due to rate increases on our senior secured credit facilities and a $35 million shift from senior term loan financing, which had a lower interest rate, to Fiesta Restaurant Group’s high-yield debt financing, all as a result of our refinancing activities in the third quarter of 2011. The weighted average interest rate on our long-term debt, excluding lease financing obligations, increased to 7.7% in the first quarter of 2012 from 6.2% in the first quarter of 2011. Interest expense on lease financing obligations increased to $0.5 million in the first quarter of 2012 from $0.2 million in the first quarter of 2011.
Consolidated Provision (Benefit) for Income Taxes. The benefit for income taxes for the first quarter of 2012 was derived using an estimated effective annual income tax rate for 2011 of 30.0%, which excluded discrete tax adjustments which were insignificant in the first quarter of 2012. The provision for income taxes for the first quarter of 2011 was derived using an estimated effective annual income tax rate for 2011 of 32.4%. There were no discrete tax adjustments in the first quarter of 2011.
Consolidated Net Income (Loss).The consolidated net loss was $3.5 million in the first quarter of 2012 compared to consolidated net income of $2.2 million in the first quarter of 2011.
Burger King Operating Results
The following table sets forth, for the three months ended March 31, 2012 and 2011, selected Burger King operating results as a percentage of Burger King restaurant sales:
2012 | 2011 | |||||||
Costs and expenses: | ||||||||
Cost of sales | 30.6 | % | 29.4 | % | ||||
Restaurant wages and related expenses | 32.6 | % | 33.0 | % | ||||
Restaurant rent expense | 6.7 | % | 7.0 | % | ||||
Other restaurant operating expenses | 16.0 | % | 16.1 | % | ||||
Advertising expense | 3.2 | % | 4.1 | % | ||||
Royalty expense | 4.0 | % | 4.0 | % | ||||
General and administrative | 7.4 | % | 6.1 | % |
Since the beginning of 2010the first quarter of 2011 through the end of the first quarter of 2011,2012, we have opened two new Pollo Tropical restaurants, two new Taco Cabana restaurants and two new Burger King restaurants. The two new Burger King restaurants, were relocationsone of which was a relocation of an existing restaurant within theirits market areas.area. During the same period we closed eightnine Burger King restaurants, excluding relocations.
Burger King restaurant sales in the first quarter of 2012 increased 4.7% to $85.5 million due to a 5.9% increase in comparable restaurant sales resulting from an increase in customer traffic of 4.3% and a 1.7% increase in average check resulting from a shift in sales mix and the effect of menu price increases taken in the last twelve months of 3.0%. This was offset by the closure, excluding relocations, threeof nine Burger King restaurants since the beginning of the first quarter of 2011.
Burger King Operating Costs and Expenses (percentages stated as a percentage of Burger King restaurant sales):
Burger King cost of sales increased to 30.6% in the first quarter of 2012 from 29.4% in the first quarter of 2011 due primarily to higher commodity prices (1.5%), including beef (0.7%), and higher promotional sales discounts (0.9%) offset in part by a favorable sales mix (0.8%) due to the discontinuation of the Buck Double in the first quarter of 2011 and the effect of menu price increases taken in the last twelve months of approximately 3.0%.
Burger King restaurant wages and related expenses decreased to 32.6% in the first quarter of 2012 from 33.0% in the first quarter of 2011 due to leveraging management costs from higher sales volumes and lower restaurant level bonus accruals.
Burger King other restaurant operating expenses decreased to 16.0% in the first quarter of 2012 from 16.1% in the first quarter of 2011 due primarily to lower utility costs (0.3%) and lower repairs and maintenance expense (0.3%) partially offset by higher credit card fees (0.2%) and higher general liability expenses (0.3%).
Burger King advertising expense decreased to 3.2% in the first quarter of 2012 from 4.1% in the first quarter of 2011 due primarily to advertising credits received from BKC that were associated with BKC’s 2012 menu enhancement initiatives. For all of 2012 we anticipate advertising expense to increase to 3.7% of Burger King restaurant sales due to a higher level of these credits being received in the first quarter than what will be received for the remainder of 2012.
Burger King restaurant rent expense decreased to 6.7% in the first quarter of 2012 from 7.0% in the first quarter of 2011 due primarily to the effect of higher sales volumes on fixed rental costs.
Adjusted Segment EBITDA.Due to the factors above Adjusted Segment EBITDA for our Burger King restaurants, which in the first quarter of 2012 included $0.9 million for legal and other costs incurred in connection with the spin-off of Fiesta Restaurant Group and the pending acquisition of Burger King restaurants from BKC, decreased to $3.4 million in the first quarter of 2012 from $3.8 million in the first quarter of 2011. General and administrative expenses for each segment includes general and administrative expenses related directly to the segment as well as allocated expenses associated with administrative support for executive management, information systems and certain accounting, legal and other administrative functions.
Depreciation and Amortization Expense.Burger King depreciation and amortization expense increased to $4.7 million in the first quarter of 2012 from $3.8 million in the first quarter of 2011 due primarily to expenditures for new point-of-sale systems installed in 2011 and the first quarter of 2012 and equipment to support BKC’s new menu enhancement initiatives.
Impairment and Other Lease Charges. Burger King impairment and other lease charges were negligible in the first quarter of 2012. Impairment and other lease charges were $0.8 million in the first quarter of 2011 which included the asset impairment of five underperforming Burger King restaurants.
Fiesta Restaurant Group Operating Results
Since the beginning of the first quarter of 2011 through the end of the first quarter of 2012, we have opened four new Pollo Tropical restaurants and four new Taco Cabana restaurants. During the same period we closed seven Pollo Tropical restaurants and two Taco Cabana restaurants.
Restaurant Sales.Total restaurant sales for Fiesta Restaurant Group increased 9.0% to $125.6 million in the first quarter of 2011 increased $2.2 million, or 1.1%, to $196.9 million due to a 7.7% increase in sales at our Hispanic Brand restaurants. Total restaurant sales at our Hispanic Brand restaurants were2012 from $115.3 million in the first quarter of 2011 compared to $107.0 million2011. Pollo Tropical restaurant sales in the first quarter of 2010.
Pollo Tropical restaurant sales2012 increased 15.2%10.4% to $51.9$57.3 million due primarily to an increase in comparable restaurant sales of 13.5% resulting from an9.4% due primarily to a 6.7% increase in customer traffic and a 2.4% increase in the first quarter of 2011 of 13.3%,average check, compared to the first quarter of 2010. Our average check at our Pollo Tropical2011. In addition, two restaurants was essentially flat, compared toopened since the beginning of the first quarter of 2010.2011 contributed $1.3 million in additional sales in the first quarter. The effect of menu price increases in the first quarter of 2011 was 0.2% due to a modest price increase taken in the first quarter of 2011. There were no menu price increases at our Pollo Tropical restaurants in 2010.the last twelve months was approximately 3.8%.
Taco Cabana restaurant sales in the first quarter of 2012 increased 2.2%7.8% to $63.3$68.2 million due primarily to an increase in comparable restaurant sales of 2.0%6.1% in the first quarter of 2011 due primarily to2012 resulting from a 1.6%3.9% increase in average check compared to the first quarter of 2010,from primarily menu price increases and a slight2.3% increase in customer traffic. The effect of menu price increases taken in the last twelve months was approximately 2.1%, compared to3.6%. In addition, four restaurants opened since the first quarterbeginning of 2010. The average check increase in 2011 also reflects the effect of menu mix changes from product promotions.
Burger King restaurant sales decreased $6.0 million to $81.6 million in the first quarter of 2011 due to a 5.0% decreaseand contributed $1.7 million in comparable restaurantadditional sales in the first quarter of 2011 due to lower customer traffic and from the closure, excluding relocated restaurants, of eight Burger King restaurants since the beginning of 2010. The effect of menu price increases taken in the second and third quarters of 2010 was approximately 4.2%, compared to the first quarter of 2010, however the average check at our Burger King restaurants increased 8.0% in the first quarter of 2011 compared to the first quarter of 2010 reflecting the effect of menu mix changes and product promotions.2012.
Pollo Tropical Operating Costs and Expenses (percentages stated as a percentage of Pollo Tropical restaurant sales).Pollo Tropical cost of sales increased to 33.4% in the first quarter of 2012 from 33.0% in the first quarter of 2011 from 32.6% in the first quarter of 2010 due primarily to higher chicken commodity prices (0.6%(1.0%), including chicken (0.4%) and increased costs related to new menu offerings, partially offset partially by favorablethe effect of menu item sales mix shifts.price increases. Pollo Tropical restaurant wages and related expenses decreased to 23.2% in the first quarter of 2012 from 23.7% in the first quarter of 2011 from 25.7% in the first quarter of 2010 due primarily to the effect of higher sales volumes on fixed labor costs lower workers compensation claim costs (0.8%(0.7%) and lowerpartially offset by higher medical claim costs (0.4%).insurance claims. Pollo Tropical other restaurant operating expenses were 12.2% in both the first quarter of 2012 and 2011 as the effect of lower utility costs (0.3%) was offset by higher repairs and maintenance expense. Pollo Tropical advertising expense decreased to 12.2%2.2% in the first quarter of 2012 from 2.5% in the first quarter of 2011 due to higher sales volumes from 13.1%promotional activities. For all of 2012 we anticipate advertising expense to be range between 2.8% to 3.0% of Pollo Tropical restaurant sales. Pollo Tropical restaurant rent expense decreased to 3.7% in the first quarter of 20102012 from 4.5% in the first quarter of 2011 due primarily to lower real estate taxes (0.4%), lower utility costs (0.2%) and the effect of higher sales volumes on fixed operatingrental costs. Pollo Tropical advertising expense decreased to 2.5% in the first quarter of 2011 from 2.9% in the first quarter of 2010 due to the timing of promotions. For all of 2011 our Pollo Tropical advertising expenses are expected to be approximately 2.6% to 2.8% of Pollo Tropical restaurant sales.
Taco Cabana Operating Costs and Expenses (percentages stated as a percentage of Taco Cabana restaurant sales).Taco Cabana cost of sales increased to 31.7% in the first quarter of 2012 from 30.3% in the first quarter of 2011 from 29.9% in the first quarter of 2010 due primarily to higher commodity prices (0.8%(2.4%) including beef fajita meat (1.2%) partially offset by the effect of menu price increases taken in 2010.the last twelve months. Taco Cabana restaurant wages and related expenses decreased to 30.1% in the first quarter of 2012 from 30.5%% in the first quarter of 2011 from 31.2% in the first quarter of 2010 due primarily to lower medical claim costs (0.6%) and, to a lesser extent, the effect of menu price increases and higher sales volumes on fixed labor costs. Taco Cabana other restaurant operating expenses decreased to 13.0% in the first quarter of 2012 from 13.3% in the first quarter of 2011 from 14.1% in the first quarter of 2010 due primarily to lower utility costs (0.5%(0.4%) partially offset by higher repair and the reduction of operating supply costsmaintenance expenses (0.2%). Taco Cabana advertising expense increased towas 4.4% in both the first quarter of 2011 from 3.2% in2012 and the fourthfirst quarter of 2010 due to the timing of promotions.2011. For all of 2011 our Taco Cabana2012 we anticipate advertising expenses are expectedexpense to be approximatelyrange between 4.0% to 4.2% of Taco Cabana restaurant sales.
Burger King Operating Costs and Expenses (percentages stated as a percentage of Burger King Taco Cabana restaurant sales).Burger King cost of salesrent expense decreased to 29.4%6.0% in the first quarter of 2012 from 6.4% in the first quarter of 2011 from 29.6% in the first quarter of 2010 due to a favorable sales mix compared to the first quarter of 2010 from lower sales of the discounted double cheeseburger (2.1%) and the effect of menu price increases taken in the last twelve months (1.4%), substantially offset by higher commodity prices (2.4%), including beef, and higher sales discounts. Burger King restaurant wages and related expenses increased to 33.0% in the first quarter of 2011 from 32.2% in the first quarter of 2010 due primarily to the effect of lowerhigher sales volumes on fixed labor costs and higher medical and workers compensation claim costs (0.4%). Burger King other restaurant operating expenses increased to 16.1% in the first quarter of 2011 from 15.5% in the first quarter of 2010 due primarily to the effect of lower sales volumes on fixed operating costs and higher real estate tax expense (0.2%). Burger King advertising expense was 4.1% in both the first quarter of 2011 and the first quarter of 2010. For all of 2011 our Burger King advertising expenses are expected to be approximately 4.0% to 4.2% of Burger King restaurant sales.
Consolidated Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.1% in the first quarter of 2011 from 6.3% in the first quarter of 2010 due primarily to the effect of significant sales increases in the first quarter of 2011 at our Pollo Tropical restaurants on fixed rental costs.
Consolidated General and Administrative Expenses. General and administrative expenses increased $1.4 million in the first quarter of 2011 to $13.9 million and, as a percentage of total restaurant sales, increased to 7.0% compared to 6.4% in the first quarter of 2010. The increase in the first quarter of 2011 was due to higher legal and professional fees of $0.7 million, which included $0.3 million incurred in connection with the planned spin-off of our Hispanic Brands, an increase of $0.5 million in performance-based administrative bonuses compared to the first quarter of 2010 and higher stock-based compensation expense of $0.3 million.
Adjusted Segment EBITDA.As a result ofDue to the factors set forth above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $10.1$10.3 million in the first quarter of 20112012 from $6.7$8.9 million in the first quarter of 2010.2011. Adjusted Segment EBITDA for our Taco Cabana restaurants decreased to $6.5$4.9 million in the first quarter of 20112012 from $6.8$5.0 million in the first quarter of 2010. Adjusted Segment EBITDA2011. General and administrative expenses for our Burger King restaurants decreased to $1.1 million in the first quarter of 2011 from $3.8 million in the first quarter of 2010.
Adjusted Segment EBITDA for our Burger Kingeach segment includes general and administrative expenses related directly to the Burger King segment as well as allocated expenses associated with administrative support to the Company’s Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative functions of $1.4 million and $1.9 million, respectively, for the three months ended March 31, 2011 and $1.1 million and $1.4 million, respectively, for the three months ended March 31, 2010.
Depreciation and Amortization Expense.Depreciation and amortization expense was $8.1 million in both the first quarter of 2011 and the first quarter of 2010.functions.
Impairment and Other Lease Charges. Impairment and other lease charges of $6.9 million in the first quarter of 2012 consisted of asset impairment charges of $4.1 million and lease charges of $1.8 million associated with the closure of our five Pollo Tropical restaurants in New Jersey in the first quarter of 2012 and $1.0 million of asset impairment charges for two Taco Cabana restaurants. Two of the five closed Pollo Tropical restaurants’ assets were $1.1previously impaired in 2011. Impairment and other lease charges were $0.3 million in the first quarter of 2011 compared to $0.3 million in the first quarter of 2010. In the first quarter of 2011 impairment and other lease chargeswhich included $0.8 million for the impairment of five underperforming Burger King restaurants and $0.2 million in lease charges for a Pollo Tropical restaurant that was closed in the first quarter of 2011 and whose assets were previously impaired in 2010. In the first quarter of 2010 impairment and other lease charges included a lease charge of $0.2 million related to a non-operating Taco Cabana property due to a reduction of estimated cost recoveries from subletting the property through the end of the remaining lease term.
Interest Expense. Total interest expense decreased $0.1 million to $4.6 million in the first quarter of 2011 due to a reduction in our LIBOR based borrowings of $16.1 million since the beginning of 2010. The weighted average interest rate on our long-term debt, excluding lease financing obligations, increased to 6.2% in the first quarter of 2011 from 5.9% in the first quarter of 2010. Interest expense on lease financing obligations decreased to $0.2 million in the first quarter of 2011 from $0.3 million in the first quarter of 2010.
Provision for Income Taxes. The provision for income taxes for the first quarter of 2011 was derived using an estimated effective annual income tax rate for 2011 of 32.4%, which excludes any discrete tax adjustments. There were no discrete tax adjustments in the first quarter of 2011. The provision for income taxes for the first quarter of 2010 was derived using an estimated effective annual income tax rate for 2010 of 37.0%, which excluded any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $46,000 in the first quarter of 2010 and resulted in an overall tax rate of 38.2%. The decrease in our effective tax rate compared to that used in the first quarter of 2010 was due to primarily to a lower projected Federal income tax rate of 34% in 2011 compared to 35% in 2010 and higher Work Opportunity tax credits.
Net Income.As a result of the foregoing, net income was $2.2 million in the first quarter of 2011 compared to $2.3 million in the first quarter of 2010.
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 conditionsOn August 5, 2011, we have and will continue to focus on reducing our debt balances and our financial leverage, particularly in the near term. We limited our spending on new restaurant development in 2009 and 2010 which allowed us to utilize our free cash flow to reduce our outstanding indebtedness. We are continuing to moderate new restaurant growth in 2011.
We currently plan to refinancecompleted a refinancing of our existing debtindebtedness. Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceeds from these financings were used to separately finance the Burger King and Hispanic Brand businesses to facilitate the contemplated spin-off. We currently contemplate that the refinancing would be comprised of term loan borrowingsrepay amounts outstanding under a senior secured bank credit facility for our Burger King business and the issuance of senior secured notes for our Hispanic Brands. Presently, our plan is to complete this refinancing in the middle of 2011; however there can be no assurance that the refinancing will be completed by then, on favorable terms, or at all. Due to the interest rate terms in our existingCarrols’ senior credit facility it is likely thatand the refinancing will increase ourCarrols Notes, as well as to pay accrued interest expense inand all related fees and expenses. Excess cash generated from the aggregate.financings was approximately $9.5 million, including the disbursement of funds prior to the spin-off to Fiesta Restaurant Group and Carrols LLC. In the first quarter of 2012, Carrols transferred $2.5 million of the excess cash from the financings to Fiesta Restaurant Group and the balance to Carrols LLC.
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 facilityfacilities and proceeds from anticipatedany sale-leaseback transactions that we may choose to do 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 three months ended March 31, 2011 increased $4.72012 decreased $4.4 million to $4.6$0.2 million, compared to the first quarter of 2010,2011, due to a reductionincrease in the components of net working capital of $3.7$6.5 million andpartially offset by an increase in net income, adjusted for non-cash items including depreciation and amortization, impairment and other lease charges and stock-based compensation expense.expense of $1.6 million.
Investing Activities. Net cash used for investing activities in the three months ended March 31,first quarter of 2012 and 2011 and 2010 was $6.6$16.0 million and $4.6$6.6 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;restaurants including expenditures in 2011 and 2012 to support BKC’s new menu enhancement initiatives; and (4) corporate and restaurant information systems, including expenditures of $9.0 million in latter part of 2011 and $3.8 million in the first quarter of 2012 for new point-of-sale systems for our Burger King restaurants.
The following table sets forth our capital expenditures for the periods presented (in thousands):
Pollo Tropical | Taco Cabana | Burger King | Other | Consolidated | ||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2012 | ||||||||||||||||||||||||||||||||||||||||
New restaurant development | $ | 3,701 | $ | 1,664 | $ | — | $ | — | $ | 5,365 | ||||||||||||||||||||||||||||||
Restaurant remodeling | — | 1,273 | 2,012 | — | 3,285 | |||||||||||||||||||||||||||||||||||
Other restaurant capital expenditures (1) | 824 | 868 | 1,178 | — | 2,870 | |||||||||||||||||||||||||||||||||||
Corporate and restaurant information systems | 25 | 95 | 3,851 | 489 | 4,460 | |||||||||||||||||||||||||||||||||||
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Total capital expenditures | $ | 4,550 | $ | 3,900 | $ | 7,041 | $ | 489 | $ | 15,980 | ||||||||||||||||||||||||||||||
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Number of new restaurant openings | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Pollo Tropical | Taco Cabana | Burger King | Other | Consolidated | ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2011: | ||||||||||||||||||||||||||||||||||||||||
New restaurant development | $ | 98 | $ | 2,445 | $ | 864 | $ | — | $ | 3,407 | $ | 98 | $ | 2,445 | $ | 864 | $ | — | $ | 3,407 | ||||||||||||||||||||
Restaurant remodeling | 748 | 769 | 1,482 | — | 2,999 | 748 | 769 | 1,482 | — | 2,999 | ||||||||||||||||||||||||||||||
Other restaurant capital expenditures (1) | 346 | 627 | 512 | — | 1,485 | 346 | 627 | 512 | — | 1,485 | ||||||||||||||||||||||||||||||
Corporate and restaurant information systems | — | — | — | 545 | 545 | — | — | — | 545 | 545 | ||||||||||||||||||||||||||||||
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Total capital expenditures | $ | 1,192 | $ | 3,841 | $ | 2,858 | $ | 545 | $ | 8,436 | $ | 1,192 | $ | 3,841 | $ | 2,858 | $ | 545 | $ | 8,436 | ||||||||||||||||||||
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Number of new restaurant openings | — | 1 | 1 | 2 | — | 1 | 1 | 2 | ||||||||||||||||||||||||||||||||
Three months ended March 31, 2010: | ||||||||||||||||||||||||||||||||||||||||
New restaurant development | $ | — | $ | 89 | $ | 1,103 | $ | — | $ | 1,192 | ||||||||||||||||||||||||||||||
Restaurant remodeling | 243 | 514 | 1,236 | — | 1,993 | |||||||||||||||||||||||||||||||||||
Other restaurant capital expenditures (1) | 558 | 687 | 958 | — | 2,203 | |||||||||||||||||||||||||||||||||||
Corporate and restaurant information systems | — | — | — | 392 | 392 | |||||||||||||||||||||||||||||||||||
Total capital expenditures | $ | 801 | $ | 1,290 | $ | 3,297 | $ | 392 | $ | 5,780 | ||||||||||||||||||||||||||||||
Number of new restaurant openings | — | — | — | — |
1) | Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the three months |
2) | Includes a Burger King restaurant which was relocated within the same market area under a new franchise agreement. |
In 2011,2012, we anticipate that total capital expenditures for our Burger King restaurants will range from $45$30 million to $55$35 million, although the actual amount of capital expenditures may differ from these estimates. In 2011 we plan to open five to seven new Hispanic Brand restaurants and to relocate one Burger King restaurant. Capital expenditures in 20112012 for our Burger King restaurants are expected to include approximately $10$19 million to $15$24 million for remodeling our Burger King restaurants to the BKC 20/20 image standard, capital maintenance expenditures of approximately $3 million and approximately $8 million of other expenditures, including $7.0 million for new point-of-sale systems. These estimates reflect our plans to accelerate our 2012 remodeling initiatives following the expected closing of the pending BKC acquisition and related financing, and could differ based on the outcome of those transactions.
In 2012, we anticipate that total capital expenditures for Fiesta Restaurant Group will range from $42 million to $46 million, although the actual amount of capital expenditures may differ from these estimates. Capital expenditures in 2012 are expected to include $25 million to $28 million for Fiesta Restaurant Group’s development of new restaurants and purchase of related real estate.estate for the opening of ten to twelve new Pollo Tropical or Taco Cabana restaurants. Capital expenditures in 20112012 for Fiesta Restaurant Group also are expected to include expenditures of approximately $25$16 million to $30$17 million for the ongoing reinvestment in our three restaurant conceptsPollo Tropical and Taco Cabana restaurants for remodeling costs and capital maintenance expenditures and approximately $10$1 million of other expenditures, including approximately $6.0 million for new point-of-sale systems at our Burger King restaurants.expenditures.
Investing activities also include sale-leaseback transactions related to our restaurant properties, the net proceeds from which were $1.9 million and $2.3 million in the three months ended March 31, 2011 and 2010, respectively.first quarter of 2011. There were no sale-leaseback transactions in the first quarter of 2012. The net proceeds from these sales were used to reduce outstanding borrowings under ourCarrols’ prior senior credit facility. In
Financing Activities.Net cash used for financing activities in the first quarter of 2010 we also purchased one2012, was $3.6 million and included Carrols LLC net revolver repayments of $3.1 million and Carrols LLC scheduled term loan principal payments of $1.6 million. Proceeds from stock option exercises and related income tax benefits, including tax benefits from the conversion of vested stock options to shares of our restaurant properties forcommon stock in the first quarter of 2012, were $1.1 million for a future sale-leaseback transaction.million.
Financing Activities.Net cash provided from financing activities in the three months ended March 31, 2011 and 2010 was $3.2 million, and $4.3 million, respectively, due to net revolver borrowings under Carrols’ prior senior credit facility of $6.3 million and $8.3principal payments on our term loan under Carrols’ prior senior credit facility of $2.8 million in the first quarter of 2011 and 2010, respectively. Principal payments on our term loan under our senior credit facility were $2.8 million and $4.0 million in the first quarter of 2011 and 2010, respectively. During the three months ended March 31, 2011 we2011. We also deferred $0.3 million of financing costs in the first quarter of 2011 pertaining to our planned 2011 refinancing activities.that occurred in August 2011.
Carrols LLC Senior Credit Facility. TheOn August 5, 2011 Carrols LLC entered into a senior secured credit facility, consists ofwhich provides for $65.0 million aggregate 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 limitwhich provides for aggregate borrowings of up to $25.0$20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC senior secured credit andfacility also provides for incremental borrowing increases of up to $5.0$25 million, for swingline loans) maturing on March 8, 2012.
Both termin the aggregate. Term loan and revolving credit borrowings under the senior credit facility bear interest at a per annum rate, at Carrols’Carrols LLC’s option, of either:either (all terms as defined in the Carrols LLC senior secured credit facility):
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 LIBORAlternate Base Rate plus the applicable margin percentage in effect ranging from 1.0%of 2.25% to 1.5%4.0% based on our senior leverage ratio. AtCarrols LLC’s Adjusted Leverage Ratio (with a margin of 2.75% at April 3, 20111, 2012 ), or
2) the LIBOR Rate plus the applicable margin percentage was 1.0%.
Atof 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with a margin of 3.75% at April 3, 2011, outstanding term loan A borrowings were $84.4 million with the remaining balance due and payable as follows:
1) Four quarterly installments of approximately $4.2 million beginning on June 30, 2011; and
2) Four quarterly installments of approximately $16.9 million beginning on June 30, 2012.1, 2012).
Under the Carrols LLC senior secured credit facility, Carrols LLC is also required to make mandatory prepayments of principal on term loan A facility borrowings (a)(i) 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 equal50% to 100% of Excess Cash Flow (as defined in the netCarrols LLC senior secured credit facility) based on Carrols LLC’s Adjusted Leverage Ratio and (ii) in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds from any subsequent issuance(all subject to certain exceptions).
The term loan borrowings under its senior secured credit facility are payable in consecutive quarterly principal payments of debt.$1.625 million through the first quarter of 2016 with the remaining outstanding principal amount of $35.75 million due on the maturity date of August 5, 2016.
Carrols LLC’s obligations under the Carrols LLC senior secured credit facility are secured by a first priority lien on substantially all of its assets and by a pledge by Carrols of all of the outstanding equity interests of Carrols LLC. The Carrols LLC senior secured 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 creditthis 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 Carrols’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of Carrols 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 as of April 3, 2011 with the covenants in the senior credit facility. At April 3, 2011, Carrols fixed charge coverage ratio was 1.40 to 1.00 compared to the minimum required fixed charge ratio of 1.20 to 1.00, Carrols senior leverage ratio was 1.29 to 1.00 compared to the allowed senior leverage ratio of 2.00 to 1.00, and Carrols total leverage ratio was 3.37 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 that 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 currently redeemable at the option of Carrols in whole or in part at a price equal to the principal amount plus accrued interest to the date of redemption.
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 LLC having an outstanding principal amount of $20$2.5 million or more (which would include the senior credit facility) if such defaultwhich results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of April 1, 2012, Carrols LLC was in compliance with the covenants under its senior secured credit facility. After reserving $4.8 million for letters of credit for workers’ compensation and other insurance policies guaranteed by the facility, $14.3 million was available for borrowing at April 1, 2012.
Carrols LLC Interest Rate Swap Agreement.As required by the Carrols LLC senior secured credit facility, in November of 2011, Carrols LLC entered into an interest rate swap agreement with its lenders to mitigate the risk of increases in the variable interest rate related to term loan borrowings under the Carrols LLC senior secured credit facility. The interest rate swap has been designated as a cash flow hedge.
The interest rate swap fixes the interest rate on 50% of the outstanding term loan borrowings under the Carrols LLC senior secured credit facility at 0.77% plus the credit margin on the debt. The agreement matures on November 28, 2014 and has a notional amount of $30.9 million at April 1, 2012. The differences between the variable LIBOR rate and the interest rate swap rate of 0.77% are settled monthly. The interest rate swap agreement is recorded at fair value and a liability of $0.2 million as of March 31, 2012 is included in long-term other liabilities in our consolidated balance sheets. Changes in the valuation of the interest rate swap are included as a component of other comprehensive income.
Carrols Prior Senior Credit Facility.Carrols’ prior senior credit facility totaled $185 million, originally consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 2013 and a $65.0 million revolving credit facility (including a sub-limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans) maturing on March 8, 2012.
Carrols Prior Senior Subordinated Notes.On December 15, 2004, Carrols issued $180.0 million of Carrols Notes that bore interest at a rate of 9% payable semi-annually on January 15 and July 15 and were scheduled to mature on January 15, 2013.
Fiesta Restaurant Group Senior Secured Credit Facility.On August 5, 2011, Fiesta Restaurant Group entered into a senior secured credit facility providing for aggregate revolving credit borrowings of up to $25.0 million (including $10.0 million available for letters of credit). The senior secured credit facility also provides for incremental increases of up to $5.0 million, in the aggregate, to the revolving credit borrowings available under the facility, and matures on February 5, 2016. Borrowings under the senior secured credit facility bear interest at a per annum rate, at Fiesta Restaurant Group’s option, of either (all terms as defined in the Fiesta Restaurant Group senior secured credit facility):
1) the Alternate Base Rate plus the applicable margin of 2.0% to 2.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with a margin of 2.50% at April 1, 2012 ), or
2) the LIBOR Rate plus the applicable margin of 3.0% to 3.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with a margin of 3.50% at April 1, 2012).
Fiesta Restaurant Group’s obligations under its senior secured credit facility are secured by a first priority lien on substantially all of its assets and its material subsidiaries, as guarantors, (including a pledge of all of the capital stock and equity interests of its material subsidiaries).
The Fiesta Restaurant Group senior secured credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of April 1, 2012, Fiesta Restaurant Group was in compliance with the covenants under its senior secured credit facility. After reserving $9.4 million for letters of credit for workers’ compensation and other insurance policies guaranteed by the facility, $15.6 million was available for borrowing at April 1, 2012.
Fiesta Restaurant Group Senior Secured Second Lien Notes.On August 5, 2011, Fiesta Restaurant Group issued $200.0 million of Fiesta Notes pursuant to an indenture dated as of August 5, 2011 governing such notes. The Fiesta Notes mature and are payable on August 15, 2016. Interest is payable semi-annually on February 15 and August 15. The Fiesta Notes are guaranteed by Fiesta Restaurant Group’s material subsidiaries and are secured by second-priority liens on substantially all of Fiesta Restaurant Group’s and its material subsidiaries’ assets (including a pledge of all of the capital stock and equity interests of its material subsidiaries).
The Fiesta Notes are redeemable at the option of Fiesta Restaurant Group in whole or in part at any time after February 15, 2014 at a price of 104.438% of the principal amount plus accrued and unpaid interest, if any, if redeemed before February 15, 2015, 102.219% of the principal amount plus accrued and unpaid interest, if any, if redeemed after February 15, 2015 but before February 15, 2016 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after February 15, 2016. Prior to February 14, 2014, Fiesta Restaurant Group may redeem some or all of the Fiesta Notes at a redemption price of 100% of the principal amount of each note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, at any time prior to February 15, 2014, Fiesta Restaurant Group may redeem up to 35% of the Fiesta Notes with the net cash proceeds from specified equity offerings at a redemption price equal to 108.875% of the principal amount of each note to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
The indenture governing the Fiesta Notes includes certain covenants, including limitations and restrictions on Fiesta Restaurant Group and its material subsidiaries who are guarantors under such indenture to incur additional debt, issue preferred stock, pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments, incur liens, sell assets, enter into transactions with affiliates, agree to payment restrictions affecting certain of its material subsidiaries and enter into mergers, consolidations or sales of all or substantially all of Fiesta Restaurant Group’s or its material subsidiaries’ assets. These covenants are subject to certain exceptions and qualifications including, without limitation, permitting the spin-off transaction discussed in Notes 1 and 15.
The indenture governing the Fiesta Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these notes and the indenture if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $15.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. Fiesta Restaurant Group was in compliance as of April 3, 20111, 2012 with the restrictive covenants inof the indenture governing the Fiesta Notes.
Indebtedness. At April 3, 2011, we had total debt outstanding of $267.0 million comprised of $165.0 million of Notes, term loan borrowings of $84.4 million under the senior credit facility, revolving credit borrowings of $6.3 million under the senior credit facility, lease financing obligations of $10.1 million and capital lease obligations of $1.2 million. After reserving $13.5 million for letters of credit guaranteed by our senior credit facility, $45.2 million was available for revolving credit borrowings under the senior credit facility at April 3, 2011.
Contractual Obligations
A table of our contractual obligations as of December 31, 20102011 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, 2010.2011, as amended. There have been no significant changes to our contractual obligations during the three months ended March 31, 2011.2012.
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, 2010.2011, as amended. 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, 20102011, as amended, during the three months ended March 31, 2011.2012.
Effects of New Accounting Standards
ThereIn September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on testing goodwill for impairment. The guidance provides entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We are currently no recent accounting pronouncements that which had, or are expected to have, a materialevaluating the impact of this guidance on our consolidated financial statements as of the date of this report.annual testing for goodwill impairment at December 31, 2012.
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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the “Exchange Act”). 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, 2010:2011, as amended:
• | The effect of the |
• | The potential tax liability associated with the |
• | Increases in food costs and other commodity costs; |
• | Competitive conditions; |
• | Regulatory factors; |
• | Environmental conditions and regulations; |
• | General economic conditions, particularly in the retail sector; |
• | Weather conditions; |
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Fuel prices; |
• | 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 |
• | Our ability to manage our growth and successfully implement our business |
• |
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• | 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 |
• | 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 |
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, including Federal and state unemployment 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, 20102011, as amended, 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 $0.2$0.7 million for the three months ended March 31, 2011.2012.
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 April 3, 2011.1, 2012.
No change occurred in our internal control over financial reporting during the first quarter of 20112012 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings |
None
Part I — ItemI-Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20102011, as amended, 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, 2010.2011, as amended, other than the following risks associated with our pending acquisition of Burger King restaurants from BKC (the “Acquired Restaurants”):
Any failure to complete the pending acquisition could materially adversely impact the market price of our common stock as well as our business, financial condition and results of operations.
Consummation of the acquisition is subject to our and BKC’s performance under the purchase agreement and a number of closing conditions. If the acquisition is not completed for any reason, the price of our common stock will likely decline to the extent that the market price of our common stock reflects market assumptions that the acquisition will be completed. We may also be subject to additional risks, including:
the occurrence of any event, change or other circumstances that could give rise to the termination of the purchase agreement, or the failure of the acquisition to close for any other reason;
our management having spent a significant amount of their time and efforts directed toward the acquisition and the related transactions which time and efforts otherwise would have been spent on our business and other opportunities that could have been beneficial to us;
costs relating to the acquisition and related transactions, such as legal, accounting and filing fees, much of which must be paid regardless of whether the acquisition is completed; and
uncertainties relating to the acquisition and related transactions may adversely affect our relationships with our employees, vendors and customers.
Accordingly, investors should not place undue reliance on the occurrence of the acquisition. In addition, if the acquisition does not occur, there can be no assurance that a comparable transaction will be consummated. The realization of any of these risks may materially adversely affect our business, financial condition, results of operations or the market price of our common stock.
We will incur substantial acquisition related costs in connection with the acquisition.
We expect to incur a number of non-recurring costs associated with completing the acquisition. These costs will be substantial and could have an adverse effect on our reported results.
We will be required to make substantial capital expenditures in connection with the acquisition of the Acquired Restaurants.
The remodeling of our existing Burger King restaurants and the Acquired Restaurants pursuant to the agreed upon remodel plan set forth in the operating agreement to be entered into by us in connection with the acquisition may be substantially costlier than we currently anticipate. In addition, we may incur substantial capital expenditures as a result of exercising our right of first refusal obtained in the acquisition. If we are required to make greater than anticipated capital expenditures in connection with either or both of these activities, our business, financial condition and cash flows could be adversely effected.
We may experience difficulties in integrating the Acquired Restaurants with our existing business.
The acquisition involves the integration of the Acquired Restaurants with our existing business. The difficulties of integration include:
coordinating and consolidating geographically separated systems and facilities;
integrating the management and personnel of the acquired restaurants, maintaining employee morale and retaining key employees;
implementing our management information systems; and
implementing operational procedures and disciplines to control costs and increase profitability.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the acquisition and the integration of the Acquired Restaurants’ operations could have an adverse effect on our business, results of operations and financial condition after the acquisition.
Achieving the anticipated benefits of the acquisition will depend in part upon whether we can integrate the Acquired Restaurants in an efficient and effective manner. We may not accomplish this integration process smoothly or successfully. If management is unable to successfully integrate the acquired restaurants, the anticipated benefits of the acquisition may not be realized.
We will be subject to business uncertainties while the acquisition is pending.
The preparation required to complete the acquisition may place a significant burden on management and internal resources. The additional demands on management and any difficulties encountered in completing the acquisition and with the transition and integration process could adversely affect our financial results.
Our strategy includes pursuing acquisitions of additional Burger King restaurants and we may not find Burger King restaurants that are suitable acquisition candidates or successfully operate or integrate any Burger King restaurants we may acquire.
As part of our strategy, we intend to seek to acquire additional Burger King restaurants. Pursuant to the operating agreement to be entered into by us in connection with the acquisition, BKC will assign to us its right of first refusal under its franchise agreements with its franchisees to purchase all of the assets of a restaurant or all or substantially all of the voting stock of the franchisee, whether direct or indirect, on the same terms proposed between such franchisee and a third party purchaser in 20 states. In addition, pursuant to the operating agreement, BKC will grant us, on a non-exclusive basis, franchise pre-approval to, among other things, acquire restaurants from Burger King franchisees in 20 states until the date that we operate 1,000 Burger King restaurants. As part of the franchise pre-approval, BKC will grant us pre-approval for acquisitions of restaurants from franchisees in the 20 states where we then have an existing Burger King restaurant, subject to and in accordance with the terms of the operating agreement. Although we believe that opportunities for future acquisitions may be available from time to time, competition for acquisition
candidates may exist or increase in the future. Consequently, there may be fewer acquisition opportunities available to us as well as higher acquisition prices. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate additional restaurants without substantial costs, delays or operational or financial problems. In the event we are able to acquire additional restaurants, the integration and operation of the Acquired Restaurants may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing on acceptable terms or at all.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Default Upon Senior Securities |
None
Item 4. |
Not applicable
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. | |
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. | |
*101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
*101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
*101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
*101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | As |
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: May | 10, 2012 | /s/ D | ||||
(Signature) | ||||||
Chief Executive Officer | ||||||
Date: May | 10, 2012 | / | ||||
(Signature) | ||||||
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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.
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Paul R. Flanders Vice President – Chief Financial Officer and Treasurer |
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