UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2011April 1, 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
Indicate by check mark whether the registrant (1) has 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 was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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 registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting 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) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 7, 2011,May 8, 2012, Carrols Restaurant Group, Inc. had 22,102,20123,161,822 shares of its common stock, $.01 par value, outstanding.
CARROLS RESTAURANT GROUP, INC.
FORM 10-Q
QUARTER ENDED OCTOBER 2, 2011APRIL 1, 2012
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Item 1 | Interim Consolidated Financial Statements (Unaudited) - Carrols Restaurant Group, Inc.: | |||||
Consolidated Balance Sheets as of | 3 | |||||
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Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
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Item 4 | ||||||
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Item 6 |
ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CARROLS RESTAURANT GROUP, INC.
(In thousands of dollars, except share and per share amounts)
(Unaudited)
March 31, | December 31, | |||||||||||||||
September 30, 2011 | December 31, 2010 | 2012 | 2011 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 22,232 | $ | 3,144 | ||||||||||||
Cash | $ | 5,271 | $ | 24,661 | ||||||||||||
Trade and other receivables | 6,990 | 5,213 | 8,186 | 6,673 | ||||||||||||
Inventories | 5,081 | 5,203 | 5,784 | 5,601 | ||||||||||||
Prepaid rent | 4,081 | 4,018 | 4,027 | 4,077 | ||||||||||||
Prepaid expenses and other current assets | 6,375 | 5,349 | 6,143 | 5,522 | ||||||||||||
Refundable income taxes | — | 869 | 4,759 | 2,239 | ||||||||||||
Deferred income taxes | 4,441 | 4,609 | 4,542 | 3,484 | ||||||||||||
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Total current assets | 49,200 | 28,405 | 38,712 | 52,257 | ||||||||||||
Property and equipment, net | 189,117 | 186,850 | 196,894 | 190,310 | ||||||||||||
Franchise rights, net (Note 4) | 68,366 | 70,432 | 66,440 | 67,238 | ||||||||||||
Goodwill (Note 4) | 124,934 | 124,934 | 124,934 | 124,934 | ||||||||||||
Intangible assets, net | — | 419 | 272 | 301 | ||||||||||||
Franchise agreements, at cost less accumulated amortization of $6,447 and $6,102 respectively | 5,297 | 5,629 | ||||||||||||||
Deferred income taxes | — | 1,949 | ||||||||||||||
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 | 15,142 | 7,684 | 5,670 | 9,457 | ||||||||||||
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Total assets | $ | 452,056 | $ | 426,302 | $ | 446,259 | $ | 458,392 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt (Note 5) | $ | 6,552 | $ | 15,538 | $ | 6,554 | $ | 6,553 | ||||||||
Accounts payable | 15,496 | 13,944 | 13,988 | 14,759 | ||||||||||||
Accrued interest | 2,940 | 6,853 | 2,348 | 7,178 | ||||||||||||
Accrued payroll, related taxes and benefits | 20,228 | 19,504 | 18,566 | 21,796 | ||||||||||||
Accrued income taxes payable | 265 | — | ||||||||||||||
Accrued real estate taxes | 5,837 | 4,778 | 3,244 | 4,812 | ||||||||||||
Other liabilities | 9,855 | 7,434 | 11,698 | 8,779 | ||||||||||||
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Total current liabilities | 61,173 | 68,051 | 56,398 | 63,877 | ||||||||||||
Long-term debt, net of current portion (Note 5) | 259,605 | 237,914 | 257,227 | 261,966 | ||||||||||||
Lease financing obligations (Note 9) | 10,063 | 10,061 | ||||||||||||||
Lease financing obligations (Note 8) | 10,266 | 10,064 | ||||||||||||||
Deferred income—sale-leaseback of real estate | 38,290 | 40,472 | 36,556 | 37,372 | ||||||||||||
Accrued postretirement benefits (Note 8) | 1,611 | 1,845 | ||||||||||||||
Deferred income taxes | 1,347 | — | 3,391 | 2,234 | ||||||||||||
Accrued postretirement benefits | 1,943 | 2,055 | ||||||||||||||
Other liabilities (Note 7) | 21,509 | 23,052 | 22,458 | 21,667 | ||||||||||||
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Total liabilities | 393,598 | 381,395 | 388,239 | 399,235 | ||||||||||||
Commitments and contingencies (Note 11) | ||||||||||||||||
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 and outstanding—22,088,900 and 21,678,203 shares, respectively | 216 | 216 | ||||||||||||||
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 | 5,866 | 3,474 | 9,373 | 6,954 | ||||||||||||
Retained earnings | 50,982 | 39,823 | 47,514 | 51,041 | ||||||||||||
Accumulated other comprehensive income (Note 13) | 1,535 | 1,535 | ||||||||||||||
Accumulated other comprehensive income | 1,047 | 1,085 | ||||||||||||||
Treasury stock, at cost | (141 | ) | (141 | ) | (141 | ) | (141 | ) | ||||||||
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Total stockholders’ equity | 58,458 | 44,907 | 58,020 | 59,157 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 452,056 | $ | 426,302 | $ | 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 COMPREHENSIVE LOSS
THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2012 AND 2011 AND 2010
(In thousands of dollars, except share and per share amounts)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2012 | 2011 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Restaurant sales | $ | 211,380 | $ | 201,272 | $ | 617,596 | $ | 600,080 | $ | 211,016 | $ | 196,873 | ||||||||||||
Franchise royalty revenues and fees | 376 | 353 | 1,242 | 1,165 | 576 | 365 | ||||||||||||||||||
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Total revenues | 211,756 | 201,625 | 618,838 | 601,245 | 211,592 | 197,238 | ||||||||||||||||||
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Costs and expenses: | ||||||||||||||||||||||||
Cost of sales | 65,701 | 60,093 | 192,188 | 182,260 | 66,906 | 60,315 | ||||||||||||||||||
Restaurant wages and related expenses (including stock-based compensation expense of $6, $21, $27 and $49, respectively) | 60,163 | 59,027 | 178,963 | 177,772 | ||||||||||||||||||||
Restaurant wages and related expenses (including stock-based compensation expense of $7 and $10, respectively) | 61,696 | 58,568 | ||||||||||||||||||||||
Restaurant rent expense | 12,265 | 12,035 | 36,527 | 36,623 | 11,933 | 12,054 | ||||||||||||||||||
Other restaurant operating expenses | 30,290 | 29,649 | 87,253 | 86,986 | 29,472 | 27,924 | ||||||||||||||||||
Advertising expense | 8,270 | 8,856 | 23,245 | 23,460 | 6,991 | 7,503 | ||||||||||||||||||
General and administrative (including stock-based compensation expense of $714, $402, $2,091 and $1,183, respectively) | 13,702 | 12,022 | 41,307 | 37,196 | ||||||||||||||||||||
General and administrative (including stock-based compensation expense of $1,301 and $665, respectively) | 17,370 | 13,856 | ||||||||||||||||||||||
Depreciation and amortization | 8,246 | 8,080 | 24,743 | 24,315 | 9,014 | 8,108 | ||||||||||||||||||
Impairment and other lease charges (Note 3) | (11 | ) | 191 | 2,044 | 4,092 | 6,926 | 1,080 | |||||||||||||||||
Other expense (income) (Note 14) | 105 | (400 | ) | (343 | ) | (400 | ) | |||||||||||||||||
Other income (Note 12) | — | (106 | ) | |||||||||||||||||||||
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Total operating expenses | 198,731 | 189,553 | 585,927 | 572,304 | 210,308 | 189,302 | ||||||||||||||||||
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Income from operations | 13,025 | 12,072 | 32,911 | 28,941 | 1,284 | 7,936 | ||||||||||||||||||
Interest expense | 5,757 | 4,693 | 14,949 | 14,144 | 6,297 | 4,613 | ||||||||||||||||||
Loss on extinguishment of debt (Note 5) | 2,449 | — | 2,449 | — | ||||||||||||||||||||
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Income before income taxes | 4,819 | 7,379 | 15,513 | 14,797 | ||||||||||||||||||||
Provision for income taxes (Note 6) | 1,414 | 2,786 | 4,354 | 5,455 | ||||||||||||||||||||
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 | $ | 3,405 | $ | 4,593 | $ | 11,159 | $ | 9,342 | ||||||||||||||||
Net income (loss) | $ | (3,527 | ) | $ | 2,246 | |||||||||||||||||||
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Basic net income per share (Note 12) | $ | 0.16 | $ | 0.21 | $ | 0.52 | $ | 0.43 | ||||||||||||||||
Basic and diluted net income (loss) per share (Note 11) | $ | (0.16 | ) | $ | 0.10 | |||||||||||||||||||
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Diluted net income per share (Note 12) | $ | 0.15 | $ | 0.21 | $ | 0.50 | $ | 0.43 | ||||||||||||||||
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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Basic weighted average common shares outstanding (Note 12) | 21,690,753 | 21,623,221 | 21,665,551 | 21,618,624 | ||||||||||||||||||||
Diluted weighted average common shares outstanding (Note 12) | 22,232,539 | 21,777,325 | 22,153,603 | 21,819,696 | ||||||||||||||||||||
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
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2012 AND 2011 AND 2010
(In thousands of dollars)
(Unaudited)
2011 | 2010 | 2012 | 2011 | |||||||||||||
Cash flows provided from operating activities: | ||||||||||||||||
Net income | $ | 11,159 | $ | 9,342 | ||||||||||||
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 | 197 | 525 | 60 | 114 | ||||||||||||
Stock-based compensation expense | 2,118 | 1,232 | ||||||||||||||
Stock-based compensation | 1,308 | 675 | ||||||||||||||
Impairment and other lease charges | 2,044 | 4,092 | 6,926 | 1,080 | ||||||||||||
Depreciation and amortization | 24,743 | 24,315 | 9,014 | 8,108 | ||||||||||||
Amortization of deferred financing costs | 860 | 713 | 499 | 233 | ||||||||||||
Amortization of deferred gains from sale-leaseback transactions | (2,482 | ) | (2,510 | ) | (826 | ) | (839 | ) | ||||||||
Accretion of interest on lease financing obligations | 6 | 47 | 202 | — | ||||||||||||
Deferred income taxes | 3,464 | 248 | 99 | — | ||||||||||||
Accrued income taxes | 1,134 | 1,615 | ||||||||||||||
Loss on extinguishment of debt | 1,455 | — | ||||||||||||||
Change in refundable income taxes | (2,520 | ) | 2,396 | |||||||||||||
Changes in other operating assets and liabilities | (4,386 | ) | (8,985 | ) | (11,027 | ) | (9,413 | ) | ||||||||
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Net cash provided from operating activities | 40,312 | 30,634 | 208 | 4,600 | ||||||||||||
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Cash flows used for investing activities: | ||||||||||||||||
Capital expenditures: | ||||||||||||||||
New restaurant development | (11,626 | ) | (9,783 | ) | (5,365 | ) | (3,407 | ) | ||||||||
Restaurant remodeling | (9,685 | ) | (8,572 | ) | (3,285 | ) | (2,999 | ) | ||||||||
Other restaurant capital expenditures | (8,342 | ) | (6,995 | ) | (2,870 | ) | (1,485 | ) | ||||||||
Corporate and restaurant information systems | (3,214 | ) | (962 | ) | (4,460 | ) | (545 | ) | ||||||||
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Total capital expenditures | (32,867 | ) | (26,312 | ) | (15,980 | ) | (8,436 | ) | ||||||||
Properties purchased for sale-leaseback | (2,058 | ) | (3,695 | ) | ||||||||||||
Proceeds from sale-leaseback transactions | 7,783 | 5,891 | — | 1,861 | ||||||||||||
Proceeds from sales of properties | 572 | — | ||||||||||||||
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Net cash used for investing activities | (26,570 | ) | (24,116 | ) | (15,980 | ) | (6,575 | ) | ||||||||
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Cash flows provided from (used for) financing activities: | ||||||||||||||||
Borrowings on prior revolving credit facility | 32,700 | 96,300 | — | 25,800 | ||||||||||||
Repayments on prior revolving credit facility | (32,700 | ) | (94,000 | ) | — | (19,500 | ) | |||||||||
Term loan borrowings from new Carrols LLC credit facility | 65,000 | — | ||||||||||||||
Proceeds from issuance of Fiesta Restaurant Group senior secured second lien notes | 200,000 | — | ||||||||||||||
Repayments of term loans under prior credit facility | (80,214 | ) | — | |||||||||||||
Repayments of prior Carrols senior subordinated notes | (165,000 | ) | — | |||||||||||||
Principal pre-payments on term loans | — | (1,023 | ) | |||||||||||||
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 | (7,036 | ) | (8,912 | ) | — | (2,814 | ) | |||||||||
Scheduled principal payments on Carrols LLC term loans | (1,625 | ) | — | |||||||||||||
Principal payments on capital leases | (44 | ) | (61 | ) | (13 | ) | (20 | ) | ||||||||
Proceeds from lease financing obligations | 1,736 | — | ||||||||||||||
Financing costs associated with issuance of lease financing obligations | (89 | ) | — | |||||||||||||
Financing costs associated with issuance of debt | (9,278 | ) | — | — | (330 | ) | ||||||||||
Excess tax benefits from stock-based compensation | 825 | — | ||||||||||||||
Proceeds from stock option exercises | 271 | 33 | 295 | 87 | ||||||||||||
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Net cash provided from (used for) financing activities | 5,346 | (7,663 | ) | (3,618 | ) | 3,223 | ||||||||||
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Net increase (decrease) in cash and cash equivalents | 19,088 | (1,145 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 3,144 | 4,402 | ||||||||||||||
Net increase (decrease) in cash | (19,390 | ) | 1,248 | |||||||||||||
Cash, beginning of period | 24,661 | 3,144 | ||||||||||||||
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Cash and cash equivalents, end of period | $ | 22,232 | $ | 3,257 | ||||||||||||
Cash, end of period | $ | 5,271 | $ | 4,392 | ||||||||||||
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Supplemental disclosures: | ||||||||||||||||
Interest paid on long-term debt | $ | 17,232 | $ | 16,419 | $ | 10,564 | $ | 7,848 | ||||||||
Interest paid on lease financing obligations | $ | 763 | $ | 685 | $ | 244 | $ | 245 | ||||||||
Accruals for capital expenditures | $ | 1,569 | $ | 530 | $ | 838 | $ | 980 | ||||||||
Income tax (refunds) payments, net | $ | (242 | ) | $ | 3,564 | |||||||||||
Capital lease obligations incurred | $ | — | $ | 123 | ||||||||||||
Non-cash reduction of lease financing obligations | $ | 1,740 | $ | — | | |||||||||||
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 October 2, 2011April 1, 2012 the Company operated, as franchisee, 302297 restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At October 2, 2011,April 1, 2012, the Company also owned and operated 9186 Pollo Tropical restaurants, of which 85 were located in Florida and one was located in Georgia, and five were located in New Jersey, and franchised a total of 3033 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad, onetwo in Venezuela, two in Costa Rica and three on college campuses in Florida, and 158owned and operated 157 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, two in Texas and one in Georgia.
Basis of Consolidation.Carrols Restaurant Group, Inc. (“Carrols Restaurant Group” or the “Company”) 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 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, 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“Taco Cabana”) to Fiesta Restaurant Group Inc. in exchange for all of the outstanding capital stock of Fiesta Restaurant Group. Any referenceOn 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 “Carrols LLC” refers to Carrols’ wholly-owned subsidiary,the stockholders of record on April 26, 2012 of Carrols LLC, a Delaware limited liability company. Restaurant 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 February 24, 2011,March 26, 2012, the Company announced its intention to split its business into two separate, publicly-traded companies through the tax-free spin-off of Fiesta Restaurant Group to its stockholders. If the spin-off is consummated, Fiesta Restaurant Group will own and operate the Pollo Tropical and Taco Cabana businesses and the Company, Carrols and Carrols LLC will continue to own and operate its franchisedentered into an agreement with Burger King restaurants. InCorporation (“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 spin-off, it is anticipated that all sharesCompany (subject to certain limitations), certain cash payments payable at the closing of Fiesta Restaurant Group common stock, which are currently heldthe 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 distributedcompleted in the formsecond quarter of 2012.
The consummation of the acquisition is subject to certain conditions, including, among other things (a) the completion of a pro rata dividendrefinancing sufficient for Carrols LLC to repay its outstanding indebtedness under its senior secured credit facility, to pay amounts due to BKC pursuant to the stockholderspurchase 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 Carrols Restaurant Group.third party consents and (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 and nine months ended October 2,April 1, 2012 and April 3, 2011 and October 3, 2010 will be referred to as the three and nine months ended September 30,March 31, 2012 and March 31, 2011, and September 30, 2010, respectively. The fiscal year ended December 31, 2010 contained 52 weeks. The three and nine months ended September 30,March 31, 2012 and 2011 and 2010 each contained thirteen and thirty-nine weeks, respectively.weeks.
Basis of Presentation.The accompanying unaudited consolidated financial statements for the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 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.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousands of dollars except share and per share amounts)
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 Secured Second Lien Notes due 2016. The fair value of outstanding Fiesta senior secured second lien notes is based on recent trading values, which are considered Level 2 and at |
• | Revolving and Term Loan Senior Credit Facilities. |
See Note 3 for a discussion of 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.
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 granted in the aggregate 360,200converted 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 its common stock. The non-vested shares will generally vest over the same period as the non-vested stock to certain employees.options. In general, these shares vest 25% per yearconnection with this conversion, the Company will record $1.0 million in incremental compensation cost, of which $0.7 million was recognized in the first quarter of 2012 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 and nine months ended September 30, 2011March 31, 2012 was $0.7$1.3 million and $2.2also 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 September 30, 2011,March 31, 2012, the total non-vested stock-based compensation expense relating to the options and non-vested shares was approximately $3.3$2.2 million and the Company expects to record an additional $0.7$0.8 million as compensation expense in the fourth quarterremainder of 2011.2012. At September 30, 2011,March 31, 2012, the remaining weighted average vesting period for stock options and non-vested shares was 2.5 years and 3.0 years, respectively.2.1 years.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(Continued)
(in thousands of dollars except share and per share amounts)
Stock OptionsOptions/Non-vested Shares
A summary of all option activity for the ninethree months ended September 30, 2011March 31, 2012 was as follows:
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 | (46,213 | ) | 5.86 | |||||||||||||
Forfeited | (34,134 | ) | 9.27 | |||||||||||||
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Options outstanding at September 30, 2011 | 2,507,670 | $ | 9.23 | 3.5 | $ | 4,734 | ||||||||||
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Vested or expected to vest at September 30, 2011 | 2,490,776 | $ | 9.25 | 3.5 | $ | 4,680 | ||||||||||
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Options exercisable at September 30, 2011 | 1,724,062 | $ | 10.66 | 3.0 | $ | 2,246 | ||||||||||
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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 shares activity for the ninethree months ended September 30, 2011March 31, 2012 was as follows:
Shares | Weighted Average Grant Date Price | |||||||
Nonvested at January 1, 2011 | 45,701 | $ | 6.16 | |||||
Granted | 368,534 | 7.68 | ||||||
Vested | (16,439 | ) | 6.01 | |||||
Forfeited | (3,950 | ) | 6.67 | |||||
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Nonvested at September 30, 2011 | 393,846 | $ | 7.59 | |||||
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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. 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, net of any estimated sublease recoveries.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions and 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 Level 3 assets measured at fair value associated with impairment charges recorded during the ninethree months ended September 30, 2011March 31, 2012 totaled $0.1$0.3 million.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(Continued)
(in thousands of dollars except share and per share amounts)
Impairment of long-lived assets and other lease charges (recoveries) for the Company’s segments were as follows:
Three Months Ended | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | March 31, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2012 | 2011 | |||||||||||||||||||
Burger King | $ | 57 | $ | 98 | $ | 1,028 | $ | 379 | $ | 26 | $ | 816 | ||||||||||||
Pollo Tropical | 70 | 86 | 706 | 2,069 | 5,879 | 272 | ||||||||||||||||||
Taco Cabana | (138 | ) | 7 | 310 | 1,644 | 1,021 | (8 | ) | ||||||||||||||||
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$ | (11 | ) | $ | 191 | $ | 2,044 | $ | 4,092 | $ | 6,926 | $ | 1,080 | ||||||||||||
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During the three months ended September 30, 2011,March 31, 2012, the Company recorded other lease charges of $0.1$1.8 million and impairment charges of $4.1 million associated with the closure of athe Company’s five Pollo Tropical restaurantrestaurants in New Jersey in the thirdfirst quarter and $0.1 million of income to reduce the Company’s future minimum lease payments and ancillary costs related to a non-operating Taco Cabana restaurant property. During the nine months ended September 30, 2011, the2012. The Company also recorded an impairment and other lease chargescharge of $1.0 million for underperforming Burger King restaurants, $0.6 million in other lease charges forrelated to two previously closed Pollo Tropical restaurants, $0.3 million of lease charges for a Taco Cabana restaurant that was closed in the second quarter of 2011, and $0.2 million in lease charges for two previously closed Taco Cabana restaurants.
During the ninethree months ended September 30, 2010,March 31, 2011, the Company recorded impairment and other lease charges of $4.1$1.1 million which included $1.4$0.8 million for anfive 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 $0.3 million to reduce the fair market value of awhose assets were previously impaired Pollo Tropical restaurant. In addition, the Company recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.4 million associated with three underperforming Burger King restaurants.in 2010.
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 during the ninethree months ended September 30, 2011March 31, 2012 or the year ended December 31, 2010.2011. Goodwill balances are summarized below:
Pollo Tropical | Taco Cabana | Burger King | Total | |||||||||||||
Balance, September 30, 2011 | $ | 56,307 | $ | 67,177 | $ | 1,450 | $ | 124,934 | ||||||||
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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 and nine months ended September 30, 2011March 31, 2012 and 2010.2011.
Amortization expense related to Burger King franchise rights was $799$798 for both the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively, and $2,398 for both the nine months ended September 30, 2011 and 2010, 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(Continued)
(in thousands of dollars except share and per share amounts)
5. Long-term Debt
Long-term debt at September 30, 2011March 31, 2012 and December 31, 20102011 consisted of the following:
September 30, 2011 | December 31, 2010 | |||||||
Collateralized: | ||||||||
Carrols LLC Credit Facility-Term loan | $ | 65,000 | $ | — | ||||
Prior Carrols Senior Credit Facility-Term loan | — | 87,250 | ||||||
Fiesta Restaurant Group 8.875% Senior Secured Second Lien Notes | 200,000 | — | ||||||
Unsecured: | ||||||||
Carrols 9% Senior Subordinated Notes | — | 165,000 | ||||||
Capital leases | 1,157 | 1,202 | ||||||
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266,157 | 253,452 | |||||||
Less: current portion | (6,552 | ) | (15,538 | ) | ||||
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$ | 259,605 | $ | 237,914 | |||||
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On August 5, 2011 Carrols LLC and Fiesta Restaurant Group each entered into a new and independent senior secured credit facility. The new Carrols LLC senior secured credit facility provides for aggregate term loan borrowings of $65.0 million and a revolving credit facility that provides for aggregate borrowings of up to $20.0 million. The new Fiesta Restaurant Group senior secured credit facility consists of a revolving credit facility that provides for aggregate borrowings of up to $25.0 million. Also on August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”). Carrols LLC used net proceeds from the term loan borrowings of $65.0 million under the Carrols LLC secured credit facility and Fiesta Restaurant Group used net proceeds from the sale of the Fiesta Notes to distribute funds to Carrols to enable Carrols to (i) repay all outstanding indebtedness under Carrols prior senior credit facility, (ii) repurchase its outstanding 9% Senior Subordinated Notes due 2013 (the “Carrols Notes”) pursuant to a cash tender offer and related consent solicitation and to pay the related tender premium and (iii) pay related fees and expenses. On October 2, 2011, there were no outstanding revolving credit borrowings under the new Carrols LLC senior secured credit facility or the new Fiesta Restaurant Group senior secured credit facility.
In connection with these transactions, on July 22, 2011 Carrols commenced a tender offer and consent solicitation for all of its outstanding Carrols Notes. On August 5, 2011, $118.4 million were accepted for payment and paid by Carrols. Carrols LLC distributed to Carrols net proceeds from the term loan borrowings of $65.0 million under the Carrols LLC senior secured credit facility and Fiesta Restaurant Group distributed to Carrols net proceeds from the sale of $200.0 million of Fiesta Notes to enable Carrols to redeem the balance of its outstanding Carrols Notes not tendered in the tender offer, which expired on August 18, 2011. On August 22, 2011, Carrols completed the cash tender offer and consent solicitation for all of its outstanding notes and called for the redemption of the $46.2 million of the Carrols Notes that were not tendered in the tender offer and irrevocably deposited with the trustee for the Carrols Notes an amount of funds sufficient to redeem the Carrols Notes. Consequently, on August 22, 2011, each of Carrols and the subsidiary guarantors terminated its obligations under the Carrols Notes and under the indenture governing the Carrols Notes.
As a result of these refinancing transactions, Carrols recorded a loss on extinguishment of debt in the third quarter of 2011 of $2.4 million consisting of the write-off of previously deferred financing fees of $1.5 million, the tender premium paid for redemption of the Carrols Notes and other professional fees associated with the tender offer.
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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New Senior Secured Credit Facilities.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 revolving 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 revolving 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 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 an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility), or
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousands of dollars except share and per share amounts)
2) the LIBOR Rate plus the applicable margin of 3.0% to 3.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility).
Fiesta Restaurant Group’s obligations under the Fiesta Restaurant Group senior secured credit facility are secured by a first priority lien on substantially all of the assets of Fiesta Restaurant Group 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 senior 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 October 2, 2011, Fiesta Restaurant Group was in compliance with the covenants under its senior secured credit facility. After reserving $7.6 million for letters of credit guaranteed by the facility, $17.4 million was available for borrowing at October 2, 2011.
On August 5, 2011 Carrols LLC entered into a new senior secured credit facility, which provides for $65.0 million aggregate term loan borrowings and a revolving credit facility which provides for aggregate borrowings of up to $20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC senior secured credit facility also provides for incremental borrowing increases of up to $25 million, in the aggregate, to the revolving credit facility and term loan borrowings available under the facility. Borrowings under the term loan and revolving credit borrowings under the facility bear interest at a per annum rate, at Carrols LLC’s option, of either (all terms as defined in the Carrols LLC senior secured credit facility):
1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility), or
2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility).
Under the Carrols LLC senior secured credit facility, Carrols LLC will be required to make mandatory prepayments of principal on term loan borrowings (i) annually in an amount equal to 50% to 100% of Excess Cash Flow (as defined in the Carrols 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 (all subject to certain exceptions).
The term loan borrowings under the Carrols LLC senior secured credit facility are payable in consecutive quarterly principal payments of $1.625 million beginning on the last day of the fourth quarter of 2011 through the first quarter of 2016 with the remaining outstanding principal amount of $30.75 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 the assets of Carrols LLC 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, 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 Carrols LLC 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 October 2, 2011,April 1, 2012, Carrols LLC was in compliance with the covenants under its senior secured credit facility. After reserving $5.9$4.8 million for letters of credit for workers’ compensation and other insurance policies guaranteed by the facility, $19.1$14.3 million was available for borrowing at October 2, 2011.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(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 with the first interest payment due on February 15, 2012.15. 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, 2012 was derived using an estimated effective annual income tax rate for 2012 of 30.0%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the provision for income taxes by $9 in the three months ended March 31, 2012.
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 Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2012 and December 31, 2011, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.
The tax years 2008-2011 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.
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, 2012 and December 31, 2011 consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Accrued occupancy costs | $ | 15,114 | $ | 14,296 | ||||
Accrued workers’ compensation and general liability claims | 3,058 | 3,208 | ||||||
Deferred compensation | 990 | 965 | ||||||
Other | 3,296 | 3,198 | ||||||
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| |||||
$ | 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, 2012 and December 31, 2011, with the remainder in other current liabilities:
Three months ended | Year Ended | |||||||
March 31, 2012 | December 31, 2011 | |||||||
Balance, beginning of period | $ | 2,246 | $ | 1,665 | ||||
Provisions for restaurant closures | 1,796 | 800 | ||||||
Accruals (recoveries) of additional lease charges | (67 | ) | 649 | |||||
Payments, net | (241 | ) | (1,021 | ) | ||||
Other adjustments | 46 | 153 | ||||||
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| |||||
Balance, end of period | $ | 3,780 | $ | 2,246 | ||||
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8. Lease Financing Obligations
The Company entered into sale-leaseback transactions in 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 $0.2 million, respectively.
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 brand offering a wide selection of tropical and Caribbean-inspired food, featuring grilled chicken marinated in a proprietary blend of tropical fruit juices and spices. Taco Cabana is a quick-casual restaurant brand offering a wide selection of fresh Tex-Mex and traditional Mexican style food, including sizzling 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, 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 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 and consists primarily of cash, certain other assets, corporate property and equipment, 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.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)
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.
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 | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Adjusted Segment EBITDA: | ||||||||
Pollo Tropical | $ | 10,269 | $ | 8,924 | ||||
Taco Cabana | 4,860 | 5,004 | ||||||
Burger King | 3,403 | 3,765 | ||||||
Less: | ||||||||
Depreciation and amortization | 9,014 | 8,108 | ||||||
Impairment and other lease charges | 6,926 | 1,080 | ||||||
Interest expense | 6,297 | 4,613 | ||||||
Provision (benefit) for income taxes | (1,486 | ) | 1,077 | |||||
Stock-based compensation expense | 1,308 | 675 | ||||||
Other income | — | (106 | ) | |||||
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Net income (loss) | $ | (3,527 | ) | $ | 2,246 | |||
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10. Commitments and Contingencies
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.
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.
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, | ||||||||
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 periods presented. |
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)
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.
13. Recent Accounting Developments
In 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 issued 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 board of directors of the Company approved the spin-off of Fiesta Restaurant Group, which through its subsidiaries, owns and operates the Pollo Tropical and Taco Cabana restaurant brands. The Company will continue to own and operate its franchised Burger King restaurants through its subsidiaries Carrols and Carrols LLC. In connection with the spin-off, on April 24, 2012, the Company and Carrols entered into several agreements with Fiesta Restaurant Group that govern the Company’s post spin-off relationship with Fiesta Restaurant Group, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement.
Fiesta Restaurant Group has filed with the Securities 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. 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 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.”
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.
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 1, 2012 and January 2, 2011 will be referred to as the fiscal years ended December 31, 2011 and 2010, respectively. Similarly, all references herein to the three months ended April 1, 2012 and April 3, 2011 will be referred to as the three months ended March 31, 2012 and 2011, respectively. The fiscal years ended December 31, 2011 and 2010 each contained 52 weeks and the three months ended March 31, 2012 and 2011 each contained thirteen weeks.
Introduction
We are a holding company and conduct all of our operations through our direct and indirect subsidiaries and have no assets other than the shares of capital stock of Carrols, our direct wholly-owned subsidiary. 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 our Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 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, 2012.
Results of Operations—an analysis of our results of operations for the three months ended March 31, 2012 compared to the three months ended March 31, 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 projections.
Company Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 50 years. With 297 Burger King restaurants as of April 1, 2012, we are the largest Burger King franchisee, based on 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 1, 2012, Fiesta owned and operated restaurants included 86 Pollo Tropical restaurants and 157 Taco Cabana restaurants, and with our 297 Burger King restaurants we owned an operated a total of 540 restaurants in 17 states.
Fiesta is franchising Pollo Tropical restaurants primarily internationally and, as of April 1, 2012, had 33 franchised restaurants located in Puerto Rico, Ecuador, Honduras, the Bahamas, Trinidad, Venezuela, Costa Rica and on college campuses in Florida. Fiesta also has agreements for the future development of franchised Pollo Tropical restaurants in Panama, Tobago, Aruba, Curacao and Bonaire. Although Fiesta is not actively franchising Taco Cabana restaurants, it had five Taco Cabana franchised restaurants as of April 1, 2012 located in the United States.
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 restaurants. Restaurants are included in comparable restaurant sales after they have been open for 12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week year. |
• | 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 bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and state unemployment insurance. |
• | Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of 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 Pollo Tropical and Taco Cabana restaurants and advertising payments based on a percentage of sales as required under our franchise agreements for our Burger King restaurants. |
• | General and administrative expenses are comprised primarily of (1) salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, (2) legal, auditing and other professional fees, 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 segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal and other administrative functions. |
• | Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, depreciation of assets under lease financing obligations and the amortization of Burger King franchise rights and franchise fees. |
• | 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 “Carrols Notes”) which were repurchased in a tender offer or redeemed in the third quarter of 2011, the amortization of deferred financing costs, imputed interest expense on leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations and any gains and losses from the settlement of lease financing obligations. |
Recent and Future Events Affecting our Results of Operations
Acquisition of Burger King Restaurants
On March 26, 2012, we and 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 Series A Convertible Preferred Stock (ii) pay cash payments to BKC 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 common 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 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 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 Fiesta Restaurant Group, which through its subsidiaries, owns and operates the Pollo Tropical and Taco Cabana restaurant brands. We will continue to own and operate our franchised Burger King 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.
Fiesta Restaurant Group has filed with the Securities 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. 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, we completed the spin-off of Fiesta Restaurant Group in the form of a 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 spin-off will enable each company to better focus on its respective opportunities and to pursue its own distinct operating plan and growth strategy. Beginning in the second quarter of 2012 the historical operating results of Fiesta Restaurant Group prior to the spin-off will be included in our operating results as earnings from discontinued operations.
Refinancing of Outstanding Indebtedness
On 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 first quarter of 2012 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 $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 Carrols’ senior credit facility, to repurchase or redeem $165.0 million of the Carrols Notes and to pay accrued interest and related fees and expenses.
Future Restaurant Closures
We evaluate the performance of our 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 the first quarter of 2012 we closed one Burger King restaurant and in 2011 we closed eight Burger King restaurants, not including one restaurant relocated within the same market area. We currently anticipate that we will close one additional Burger King restaurant in 2012.
In the first quarter of 2012, we closed our five Pollo Tropical restaurants in 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 in 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, 2012
Total revenues for the first quarter of 2012 increased 7.3% to $211.6 million from $197.2 million in the first quarter of 2011. Revenues from Fiesta Restaurant Group increased 9.1% in the first quarter of 2012 to $126.1 million and revenues from our Burger King restaurants increased 4.7% to $85.5 million from $81.6 million in the first quarter of 2011. Comparable restaurant sales in the first quarter of 2012 increased 9.4% at our Pollo Tropical restaurants, increased 6.1% at our Taco Cabana restaurants and increased 5.9% at our Burger King restaurants. The comparable restaurant sales increases at Pollo Tropical and 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 due both to an increase in average check and higher customer traffic.
Restaurant operating margins in the first 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, as well as menu price increases taken in the last twelve months at all three of 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 due to the effect of higher sales volumes at all three of our restaurant brands on fixed labor costs. Advertising expense, as a percentage of total restaurant sales, decreased to 3.3% in the first quarter of 2012 from 3.8% in the first quarter of 2011 primarily from advertising credits received by our Burger King restaurants associated with BKC’s 2012 menu enhancement initiatives and higher 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.
General and administrative expenses increased to $17.4 million in the first quarter of 2012 from $13.9 million in the first quarter of 2011 due primarily to expenses 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 LIBOR based borrowing margins in our senior credit facilities.
Our effective income tax rate in the first quarter of 2012, including discrete tax items, decreased to 30.0% from 32.4% in the first quarter of 2011 due primarily to deductions related to the conversion of outstanding vested stock options to shares of our common stock in connection with the spin-off of 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 of $2.2 million in the first quarter of 2011.
Results of Operations
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Consolidated Operating Results
The following table sets forth, for the three months ended March 31, 2012 and 2011, selected consolidated operating results as a percentage of consolidated restaurant sales:
2012 | 2011 | |||||||
Restaurant sales: | ||||||||
Pollo Tropical | 27.2 | % | 26.4 | % | ||||
Taco Cabana | 32.3 | % | 32.1 | % | ||||
Burger King | 40.5 | % | 41.5 | % | ||||
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Consolidated restaurant sales | 100.0 | % | 100.0 | % | ||||
Costs and expenses: | ||||||||
Cost of sales | 31.7 | % | 30.6 | % | ||||
Restaurant wages and related expenses | 29.2 | % | 29.7 | % | ||||
Restaurant rent expense | 5.7 | % | 6.1 | % | ||||
Other restaurant operating expenses | 14.0 | % | 14.2 | % | ||||
Advertising expense | 3.3 | % | 3.8 | % | ||||
General and administrative | 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 the first quarter of 2011 through the end of the first quarter of 2012, we have opened two Burger King restaurants, one of which was a relocation of an existing restaurant within its market area. During the same period we closed nine 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, of 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.
Total restaurant sales for Fiesta Restaurant Group increased 9.0% to $125.6 million in the first quarter of 2012 from $115.3 million in the first quarter of 2011. Pollo Tropical restaurant sales in the first quarter of 2012 increased 10.4% to $57.3 million due primarily to an increase in comparable restaurant sales of 9.4% due primarily to a 6.7% increase in customer traffic and a 2.4% increase in average check, compared to the first quarter of 2011. In addition, two restaurants opened since the beginning of the first quarter of 2011 contributed $1.3 million in additional sales in the first quarter. The effect of menu price increases taken at our Pollo Tropical restaurants in the last twelve months was approximately 3.8%.
Taco Cabana restaurant sales in the first quarter of 2012 increased 7.8% to $68.2 million due primarily to an increase in comparable restaurant sales of 6.1% in the first quarter of 2012 resulting from a 3.9% increase in average check from primarily menu price increases and a 2.3% increase in customer traffic. The effect of menu price increases taken in the last twelve months was approximately 3.6%. In addition, four restaurants opened since the beginning of the first quarter of 2011 and contributed $1.7 million in additional sales in the first quarter of 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 due primarily to higher commodity prices (1.0%), including chicken (0.4%) and increased costs related to new menu offerings, partially offset by the effect of menu 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 due primarily to the effect of higher sales volumes on fixed labor costs (0.7%) partially offset by higher medical 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 2.2% in the first quarter of 2012 from 2.5% in the first quarter of 2011 due to higher sales volumes from 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 2012 from 4.5% in the first quarter of 2011 due primarily to the effect of higher sales volumes on fixed rental costs.
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 due primarily to higher commodity prices (2.4%) including beef fajita meat (1.2%) partially offset by the effect of menu price increases taken in 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 due primarily to the effect of 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 due primarily to lower utility costs (0.4%) partially offset by higher repair and maintenance expenses (0.2%). Taco Cabana advertising expense was 4.4% in both the first quarter of 2012 and the first quarter of 2011. For all of 2012 we anticipate advertising expense to range between 4.0% to 4.2% of Taco Cabana restaurant sales. Taco Cabana restaurant rent expense decreased to 6.0% in the first quarter of 2012 from 6.4% 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 Pollo Tropical restaurants increased to $10.3 million in the first quarter of 2012 from $8.9 million in the first quarter of 2011. Adjusted Segment EBITDA for our Taco Cabana restaurants decreased to $4.9 million in the first quarter of 2012 from $5.0 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.
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 previously impaired in 2011. Impairment and other lease charges were $0.3 million in the first quarter of 2011 which included $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.
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.
On 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 amounts outstanding under Carrols’ senior credit facility and the Carrols Notes, as well as to pay accrued interest and all related fees and expenses. Excess cash generated from the 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 facilities and proceeds from any 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, 2012 decreased $4.4 million to $0.2 million, compared to the first quarter of 2011, due to a increase in the components of net working capital of $6.5 million partially 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 of $1.6 million.
Investing Activities. Net cash used for investing activities in the first quarter of 2012 and 2011 was $16.0 million and $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 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 | — | — | — | — | ||||||||||||||||
Three months ended March 31, 2011: | ||||||||||||||||||||
New restaurant development | $ | 98 | $ | 2,445 | $ | 864 | $ | — | $ | 3,407 | ||||||||||
Restaurant remodeling | 748 | 769 | 1,482 | — | 2,999 | |||||||||||||||
Other restaurant capital expenditures (1) | 346 | 627 | 512 | — | 1,485 | |||||||||||||||
Corporate and restaurant information systems | — | — | — | 545 | 545 | |||||||||||||||
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Total capital expenditures | $ | 1,192 | $ | 3,841 | $ | 2,858 | $ | 545 | $ | 8,436 | ||||||||||
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Number of new restaurant openings (2) | — | 1 | 1 | 2 |
1) | Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the three months end March 31, 2012 and 2011, total restaurant repair and maintenance expenses were approximately $5.2 million and $4.8 million, respectively. |
2) | Includes a Burger King restaurant which was relocated within the same market area under a new franchise agreement. |
In 2012, we anticipate that total capital expenditures for our Burger King restaurants will range from $30 million to $35 million, although the actual amount of capital expenditures may differ from these estimates. Capital expenditures in 2012 for our Burger King restaurants are expected to include approximately $19 million to $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 for the opening of ten to twelve new Pollo Tropical or Taco Cabana restaurants. Capital expenditures in 2012 for Fiesta Restaurant Group also are expected to include expenditures of approximately $16 million to $17 million for the ongoing reinvestment in our Pollo Tropical and Taco Cabana restaurants for remodeling costs and capital maintenance expenditures and approximately $1 million of other expenditures.
Investing activities also include sale-leaseback transactions related to our restaurant properties, the net proceeds from which were $1.9 million in the 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 Carrols’ prior senior credit facility.
Financing Activities.Net cash used for financing activities in the first quarter of 2012, 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 common stock in the first quarter of 2012, were $1.1 million.
Net cash provided from financing activities in the three months ended March 31, 2011 was $3.2 million, due to net revolver borrowings under Carrols’ prior senior credit facility of $6.3 million and principal payments on our term loan under Carrols’ prior senior credit facility of $2.8 million in the first quarter of 2011. We also deferred $0.3 million of financing costs in the first quarter of 2011 pertaining to our refinancing that occurred in August 2011.
Carrols LLC Senior Credit Facility.On August 5, 2011 Carrols LLC entered into a senior secured credit facility, which provides for $65.0 million aggregate term loan borrowings and a revolving credit facility which provides for aggregate borrowings of up to $20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC senior secured credit facility also provides for incremental borrowing increases of up to $25 million, in the aggregate. Term loan and revolving credit borrowings under the facility bear interest at a per annum rate, at Carrols LLC’s option, of either (all terms as defined in the Carrols LLC senior secured credit facility):
1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with a margin of 2.75% at April 1, 2012 ), or
2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with a margin of 3.75% at April 1, 2012).
Under the Carrols LLC senior secured credit facility, Carrols LLC is required to make mandatory prepayments of principal on term loan borrowings (i) annually in an amount equal to 50% to 100% of Excess Cash Flow (as defined in the Carrols 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 (all subject to certain exceptions).
The term loan borrowings under its senior secured credit facility are payable in consecutive quarterly principal payments of $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, 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 Carrols LLC 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, 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 Note 1.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 groupGroup was in compliance as of October 2, 2011April 1, 2012 with the restrictive covenants of the indenture governing the Fiesta Notes.
Carrols Prior Senior Credit Facility.Contractual ObligationsCarrols’ prior senior credit facility totaled $185 million, originally consisting
A table of $120 million principal amountour contractual obligations as of term loan A borrowings 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.Carrols’ prior senior subordinated notes consisted of issued $180 million of 9% Senior Subordinated Notes due 2013 that bore interest at a rate of 9% payable semi-annually on January 15 and July 15 and matured on January 15, 2013.
6. Income Taxes
The provision for income taxes for the three and nine months ended September 30, 2011 and 2010 was comprised of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Current | $ | 956 | $ | 2,620 | $ | 890 | $ | 5,207 | ||||||||
Deferred | 458 | 166 | 3,464 | 248 | ||||||||||||
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$ | 1,414 | $ | 2,786 | $ | 4,354 | $ | 5,455 | |||||||||
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The provision for income taxes for the three and nine months ended September 30,December 31, 2011 was derived using an estimated effective annual income tax rate for 2011 of 30.1%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the provision for income taxes by $95 and $336 in the three and nine months ended September 30, 2011, respectively.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousands of dollars except share and per share amounts)
The provision for income taxes for the three and nine months ended September 30, 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.6%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $108 and $38 in the three and nine months ended September 30, 2010, respectively.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2011 and December 31, 2010, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.
The tax years 2008-2010 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.
7. Other Liabilities, Long-Term
Other liabilities, long-term, at September 30, 2011 and December 31, 2010 consisted of the following:
September 30, 2011 | December 31, 2010 | |||||||
Accrued occupancy costs | $ | 13,861 | $ | 13,250 | ||||
Accrued workers’ compensation costs | 3,583 | 3,423 | ||||||
Deferred compensation | 901 | 2,937 | ||||||
Other | 3,164 | 3,442 | ||||||
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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 closed-store reserve included in accrued occupancy costs at September 30, 2011Item 7, “Management’s Discussion and December 31, 2010:
Nine months ended September 30, 2011 | Year ended December 31, 2010 | |||||||
Balance, beginning of period | $ | 1,665 | $ | 862 | ||||
Accruals for additional lease charges | 987 | 1,279 | ||||||
Payments, net | (753 | ) | (632 | ) | ||||
Other adjustments | 117 | 156 | ||||||
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Balance, end of period | $ | 2,016 | $ | 1,665 | ||||
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8. Postretirement Benefits
The Company provides postretirement medical benefits covering substantially all Burger King administrativeAnalysis of Financial Condition and restaurant management salaried employees who retire or terminate after qualifying for such benefits. A December 31 measurement date is used for postretirement benefits.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousandsResults of dollars except share and per share amounts)
The following summarizes the componentsOperations” of net periodic postretirement benefit income:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost | $ | 7 | $ | 8 | $ | 21 | $ | 23 | ||||||||
Interest cost | 24 | 27 | 73 | 81 | ||||||||||||
Amortization of net gains and losses | 25 | 24 | 74 | 73 | ||||||||||||
Amortization of prior service credit | (90 | ) | (90 | ) | (269 | ) | (270 | ) | ||||||||
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Net periodic postretirement benefit income | $ | (34 | ) | $ | (31 | ) | $ | (101 | ) | $ | (93 | ) | ||||
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During the nine months ended September 30, 2011, the Company made contributions of $130 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.
During the second quarter of 2011, the Company entered into a sale-leaseback transaction for a restaurant property that did not qualify for sale-leaseback accounting and the net proceeds of $1.7 million were recorded as a lease financing obligation. In the third quarter of 2011, the condition that precluded sale-leaseback accounting was cured. As a result, the Company reduced its lease financing obligations by $1.7 million and recorded a loss of $0.1 million which is included in other income (expense) on the consolidated statement of operations.
Interest expense associated with lease financing obligations for the three months ended September 30, 2011 and 2010 was $0.3 million and $0.2 million, respectively, and was $0.8 million and $0.7 million for the nine months ended September 30, 2011 and 2010, 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 brand offering a wide selection of tropical and Caribbean-inspired food, featuring grilled chicken marinated in a proprietary blend of tropical fruit juices and spices. Taco Cabana is a quick-casual restaurant brand offering a wide selection of fresh Tex-Mex and traditional Mexican style food, including sizzling 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. 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 and consists primarily of cash, certain other assets, corporate property and equipment, goodwill and deferred income taxes.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousands of dollars except share and per share amounts)
Three Months Ended | Pollo Tropical | Taco Cabana | Burger King | Other | Consolidated | |||||||||||||||
September 30, 2011: | ||||||||||||||||||||
Total revenues | $ | 52,675 | $ | 68,482 | $ | 90,599 | $ | — | $ | 211,756 | ||||||||||
Cost of sales | 17,499 | 21,334 | 26,868 | — | 65,701 | |||||||||||||||
Restaurant wages and related expenses | 12,114 | 20,430 | 27,619 | — | 60,163 | |||||||||||||||
Restaurant rent expenses | 2,505 | 4,011 | 5,749 | — | 12,265 | |||||||||||||||
General and administrative expenses (1) | 3,271 | 3,429 | 7,002 | — | 13,702 | |||||||||||||||
Depreciation and amortization | 2,034 | 2,288 | 3,506 | 418 | 8,246 | |||||||||||||||
Adjusted Segment EBITDA | 8,582 | 7,353 | 6,150 | |||||||||||||||||
Capital expenditures, including acquisitions | 3,187 | 2,508 | 6,120 | 381 | 12,196 | |||||||||||||||
September 30, 2010: | ||||||||||||||||||||
Total revenues | $ | 47,567 | $ | 63,702 | $ | 90,356 | $ | — | $ | 201,625 | ||||||||||
Cost of sales | 15,020 | 18,939 | 26,134 | — | 60,093 | |||||||||||||||
Restaurant wages and related expenses | 11,419 | 19,394 | 28,214 | — | 59,027 | |||||||||||||||
Restaurant rent expenses | | 2,428 | | 3,908 | | 5,699 | | — | 12,035 | |||||||||||
General and administrative expenses (1) | 3,306 | 2,424 | 6,292 | — | 12,022 | |||||||||||||||
Depreciation and amortization | 2,004 | 2,226 | 3,394 | 456 | 8,080 | |||||||||||||||
Adjusted Segment EBITDA | 7,489 | 6,483 | 6,394 | |||||||||||||||||
Capital expenditures, including acquisitions | 3,842 | 3,395 | 2,658 | 252 | 10,147 | |||||||||||||||
Nine Months Ended | ||||||||||||||||||||
September 30, 2011: | ||||||||||||||||||||
Total revenues | $ | 157,553 | $ | 200,469 | $ | 260,816 | $ | — | $ | 618,838 | ||||||||||
Cost of sales | 52,062 | 62,790 | 77,336 | — | 192,188 | |||||||||||||||
Restaurant wages and related expenses | 36,721 | 60,228 | 82,014 | — | 178,963 | |||||||||||||||
Restaurant rent expenses | 7,255 | 12,121 | 17,151 | — | 36,527 | |||||||||||||||
General and administrative expenses (1) | 9,735 | 9,885 | 21,687 | — | 41,307 | |||||||||||||||
Depreciation and amortization | 6,117 | 6,912 | 10,503 | 1,211 | 24,743 | |||||||||||||||
Adjusted Segment EBITDA | 28,222 | 20,849 | 12,402 | |||||||||||||||||
Capital expenditures, including acquisitions | 7,344 | 10,353 | 13,942 | 1,228 | 32,867 | |||||||||||||||
September 30, 2010: | ||||||||||||||||||||
Total revenues | $ | 139,873 | $ | 189,941 | $ | 271,431 | $ | — | $ | 601,245 | ||||||||||
Cost of sales | 44,880 | 56,644 | 80,736 | — | 182,260 | |||||||||||||||
Restaurant wages and related expenses | 34,249 | 58,055 | 85,468 | — | 177,772 | |||||||||||||||
Restaurant rent expenses | 7,314 | 11,743 | 17,566 | — | 36,623 | |||||||||||||||
General and administrative expenses (1) | 9,184 | 8,277 | 19,735 | — | 37,196 | |||||||||||||||
Depreciation and amortization | 5,876 | 6,744 | 10,344 | 1,351 | 24,315 | |||||||||||||||
Adjusted Segment EBITDA | 22,361 | 20,117 | 15,702 | |||||||||||||||||
Capital expenditures, including acquisitions | 7,719 | 8,314 | 9,422 | 857 | 26,312 | |||||||||||||||
Identifiable Assets: | ||||||||||||||||||||
At September 30, 2011 | $ | 50,173 | $ | 59,893 | $ | 146,779 | $ | 195,211 | $ | 452,056 | ||||||||||
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At December 31, 2010 | 51,125 | 63,061 | 142,922 | 169,194 | 426,302 |
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CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousands of dollars except share and per share amounts)
A reconciliation of Adjusted Segment EBITDA to consolidated net income is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Adjusted Segment EBITDA: | ||||||||||||||||
Pollo Tropical | $ | 8,582 | $ | 7,489 | $ | 28,222 | $ | 22,361 | ||||||||
Taco Cabana | 7,353 | 6,483 | 20,849 | 20,117 | ||||||||||||
Burger King | 6,150 | 6,394 | 12,402 | 15,702 | ||||||||||||
Less: | ||||||||||||||||
Depreciation and amortization | 8,246 | 8,080 | 24,743 | 24,315 | ||||||||||||
Impairment and other lease charges | (11 | ) | 191 | 2,044 | 4,092 | |||||||||||
Interest expense | 5,757 | 4,693 | 14,949 | 14,144 | ||||||||||||
Provision for income taxes | 1,414 | 2,786 | 4,354 | 5,455 | ||||||||||||
Stock-based compensation expense | 720 | 423 | 2,118 | 1,232 | ||||||||||||
Loss on extinguishment of debt | 2,449 | — | 2,449 | — | ||||||||||||
Other expense (income) | 105 | (400 | ) | (343 | ) | (400 | ) | |||||||||
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Net income | $ | 3,405 | $ | 4,593 | $ | 11,159 | $ | 9,342 | ||||||||
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11. Commitments and Contingencies
On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against Carrols. The complaint alleged that Carrols engaged in a pattern 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 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 effect on its consolidated financial statements.
12. Net Income per Share
Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options using the treasury stock method. To the extent such outstanding stock options are antidilutive they are excluded from the calculation of diluted net income per share.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousands of dollars except share and per share amounts)
The following table is a reconciliation of the net income and share amounts used in the calculation of basic net income per share and diluted net income per share:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic net income per share: | ||||||||||||||||
Net income | $ | 3,405 | $ | 4,593 | $ | 11,159 | $ | 9,342 | ||||||||
Weighted average common shares outstanding | 21,690,753 | 21,623,221 | 21,665,551 | 21,618,624 | ||||||||||||
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Basic net income per share | $ | 0.16 | $ | 0.21 | $ | 0.52 | $ | 0.43 | ||||||||
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Diluted net income per share: | ||||||||||||||||
Net income for diluted net income per share | $ | 3,405 | $ | 4,593 | $ | 11,159 | $ | 9,342 | ||||||||
Shares used in computed basic net income per share | 21,690,753 | 21,623,221 | 21,665,551 | 21,618,624 | ||||||||||||
Dilutive effect of non-vested shares and stock options | 541,786 | 154,104 | 488,052 | 201,072 | ||||||||||||
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Shares used in computed diluted net income per share | 22,232,539 | 21,777,325 | 22,153,603 | 21,819,696 | ||||||||||||
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Diluted net income per share | $ | 0.15 | $ | 0.21 | $ | 0.50 | $ | 0.43 | ||||||||
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Shares excluded from diluted net income per share computation (1) | 1,027,616 | 2,137,039 | 1,328,002 | 2,109,818 | ||||||||||||
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13. Other Comprehensive Income
The items that currently impact the Company’s other comprehensive income are changes in postretirement benefit obligations, net of tax.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income | $ | 3,405 | $ | 4,593 | $ | 11,159 | $ | 9,342 | ||||||||
Change in postretirement benefit obligation, net of tax | — | — | — | 10 | ||||||||||||
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Comprehensive income | $ | 3,405 | $ | 4,593 | $ | 11,159 | $ | 9,352 | ||||||||
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14. Other Expense(Income)
In the nine months ended September 30, 2011, the Company recorded a gain of $0.3 million related to the sale of a non-operating Burger King property and a gain of $0.1 million related to a property insurance recovery from a fire at a Burger King restaurant and a loss of $0.1 million from the sale of a Taco Cabana property in a sale-leaseback transaction. During the three months ended September 30, 2010, the Company recorded a gain of $0.4 million related to a property insurance recovery from a fire at a Burger King restaurant.
15. Recent Accounting Developments
In 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 issued its financial statements. The Company is evaluating the impact of this guidance on its annual testing for goodwill impairment.
In September 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives: (1) to present items of net income and other comprehensive income in one continuous statement; or
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued
(in thousands of dollars except share and per share amounts)
(2) in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. Early adoption is permitted, but full retrospective application is required. The Company is in the process of deciding which alternative it will choose upon adoption.
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.
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, 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 and nine months ended October 2, 2011 and October 3, 2010 will be referred to as the three and nine months ended September 30, 2011 and 2010, respectively. The fiscal years ended December 31, 2010 and 2009 contained 52 weeks and 53 weeks, respectively, and the three and nine months ended September 30, 2011 and 2010 each contained thirteen and thirty nine weeks, respectively.
Introduction
We are a holding company and conduct all of our operations through our direct and indirect subsidiaries and have no assets other than the shares of capital stock of Carrols, our direct wholly-owned subsidiary. 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 our Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The overview provides2011, as amended. There have been no significant changes to 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 forcontractual obligations during the three months ended September 30, 2011.
Results of Operations—an analysis of our results of operations for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, 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 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 551 restaurants located in 17 states as of October 2, 2011. We have been operating restaurants for more than 50 years. Through our indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc., we own and operate two restaurant brands, Pollo Tropical and Taco Cabana, which we acquired in 1998 and 2000, respectively (collectively “Fiesta Restaurant Group”). We are also the largest Burger King franchisee, based on the number of restaurants, and have operated Burger King restaurants since 1976. As of October 2, 2011, our company-owned restaurants included 91 Pollo Tropical restaurants and 158 Taco Cabana restaurants, and we operated 302 Burger King restaurants under franchise agreements.
We are franchising our Pollo Tropical restaurants primarily internationally and, as of October 2, 2011, we had 30 franchised restaurants located in Puerto Rico, Ecuador, Honduras, the Bahamas, Trinidad, Venezuela and on college campuses in Florida. We also have agreements for the future development of franchised Pollo Tropical restaurants in Panama, Tobago, Aruba, Curacao, Bonaire and Costa Rica. Although we are not actively franchising our Taco Cabana restaurants, we had five Taco Cabana franchised restaurants at October 2, 2011 located in the United States.
The following is an overview of the key financial measures discussed in our results of operations:
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Recent and Future Events Affecting our Results of Operations
Spin-off of Fiesta Restaurant Group, Inc.
On February 24, 2011 we announced our intention to split our business into two separate, publicly-traded companies through the tax-free spin-off of Fiesta Restaurant Group, Inc. to our stockholders. If the spin-off is consummated, the common stock of Fiesta Restaurant Group will be distributed in the form of a pro rata dividend to our stockholders. Fiesta Restaurant Group would continue to operate our Pollo Tropical and Taco Cabana businesses and we would continue to own and operate our franchised Burger King restaurants through our subsidiaries Carrols and Carrols LLC.
We are implementing detailed plans for the proposed spin-off, including the separation plan, transaction structure and timing, composition of senior management and the boards of directors, capital structure and other matters. The spin-off will be subject to approval by our Board of Directors, customary regulatory and other approvals and the receipt of a favorable IRS tax ruling, among other things.
We believe that the proposed spin-off will enable each company to better focus on its respective opportunities as well as to pursue its own distinct operating plan and growth strategy including acquisition opportunities in the Burger King system. We expect to complete the spin-off in the first quarter of 2012; however there can be no assurance that we will complete the spin-off by then or at all.
Refinancing of Outstanding Indebtedness
On 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 from the financings was approximately $9.5 million and is available to us for general corporate purposes.
Fiesta Restaurant Group sold $200 million of 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”)and entered into a $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 Carrols’ senior credit facility, to repurchase or redeem $165.0 million of the Carrols Notes, to pay accrued interest and related fees and expenses. Total interest expense is anticipated to increase approximately $2.0 million to $2.5 million in the second half of 2011 as a result of these transactions.
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 nine months of 2011 we have closed four Burger King restaurants, not including one restaurant relocated within the same market area. We currently anticipate that we will close one or two additional Burger King restaurants in 2011, excluding any relocations.
We also closed two underperforming Taco Cabana restaurants and two underperforming Pollo Tropical restaurants in 2010 and two underperforming Pollo Tropical restaurants and one underperforming Taco Cabana restaurant in the first nine months of 2011. We currently do not anticipate closing any additional Pollo Tropical or Taco Cabana restaurants in 2011.
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 September 30, 2011
Total revenues for the third quarter of 2011 increased 5.0% to $211.8 million from $201.6 million in the third quarter of 2010. Revenues from Fiesta Restaurant Group increased 8.9% in the third quarter of 2011 to $121.2 million and revenues from our Burger King restaurants increased 0.3% to $90.6 million from $90.4 million in the third quarter of 2010. Comparable restaurant sales in the third quarter of 2011 increased 7.9% at our Pollo Tropical restaurants, increased 5.3% at our Taco Cabana restaurants and
increased 1.6% at our Burger King restaurants. The comparable restaurant sales increase at our Pollo Tropical restaurants was primarily a result of higher customer traffic while the comparable sales increases at our Taco Cabana and Burger King restaurants was due primarily to an increase in average check.
Restaurant operating margins in the third quarter of 2011 were negatively impacted by higher food costs at each of our three restaurant brands as cost of sales, as a percentage of total restaurant sales, increased to 31.1% from 29.9%. These increases were partially offset by favorable sales mix changes at our Burger King restaurants, and, to a lesser extent, at Pollo Tropical as well as menu price increases taken in the last twelve months. As a percentage of total restaurant sales, restaurant wages and related expenses decreased to 28.5% in the third quarter of 2011 from 29.3% in the third quarter of 2010 due to the effect of higher sales volumes at our Pollo Tropical and Taco Cabana restaurants on fixed labor costs and productive labor efficiencies at our Burger King restaurants. Advertising expense, as a percentage of total restaurant sales, decreased to 3.9% in the third quarter of 2011 from 4.4% in the third quarter of 2010 as a result of lower advertising spending for our Taco Cabana restaurants due to timing. Operating results were favorably impacted by lower utility costs which, as a percentage of total restaurant sales, decreased to 3.7% in the third quarter of 2011 from 3.9% in the third quarter of 2010.
General and administrative expenses increased to $13.7 million in the third quarter of 2011 from $12.0 million in the third quarter of 2010 due to higher administrative bonus accruals of $1.1 million and higher stock-based compensation expense of $0.3 million. General and administrative expenses in the third quarter of 2011 also included $0.2 million of costs incurred in connection with the planned spin-off of Fiesta Restaurant Group.
Total interest expense increased $1.1 million to $5.8 million in the third quarter of 2011 due to our refinancing activities in the third quarter, which increased our effective interest rates due to both the change in the composition of our total indebtedness and an increase in our LIBOR based borrowing margins in our new credit facilities.
Our effective income tax rate in the third quarter of 2011, including discrete tax items which reduced income tax expense $0.1 million, decreased to 29.3% compared to 37.8% in the third quarter of 2010 due primarily to higher employment related tax credits.
As a result of the above, our net income decreased to $3.4 million in the third quarter of 2011 from $4.6 million in the third quarter of 2010.
Results of Operations
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
The following table sets forth, for the three months ended September 30, 2011 and 2010, selected operating results as a percentage of consolidated restaurant sales:
2011 | 2010 | |||||||
Restaurant sales: | ||||||||
Pollo Tropical | 24.8 | % | 23.5 | % | ||||
Taco Cabana | 32.3 | % | 31.6 | % | ||||
Burger King | 42.9 | % | 44.9 | % | ||||
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Total restaurant sales | 100.0 | % | 100.0 | % | ||||
Costs and expenses: | ||||||||
Cost of sales | 31.1 | % | 29.9 | % | ||||
Restaurant wages and related expenses | 28.5 | % | 29.3 | % | ||||
Restaurant rent expense | 5.8 | % | 6.0 | % | ||||
Other restaurant operating expenses | 14.3 | % | 14.7 | % | ||||
Advertising expense | 3.9 | % | 4.4 | % | ||||
General and administrative | 6.5 | % | 6.0 | % |
Since the beginning of the third quarter of 2010 through the end of the third quarter of 2011, we have opened four new Pollo Tropical restaurants, five new Taco Cabana restaurants and two new Burger King restaurants. One of the new Burger King restaurants was relocated within its market area. During the same period we closed eight Burger King restaurants, excluding relocations, three Pollo Tropical restaurants and two Taco Cabana restaurants.
Restaurant Sales. Total restaurant sales in the third quarter of 2011 increased 5.0%, to $211.4 million from $201.3 million in the third quarter of 2010. Total restaurant sales for Fiesta Restaurant Group increased 8.9% to $120.8 million in the third quarter of 2011 compared to $110.9 million in the third quarter of 2010.
Pollo Tropical restaurant sales in the third quarter of 2011 increased 10.8% to $52.4 million due primarily to an increase in comparable restaurant sales of 7.9% resulting from a 5.8% increase in customer traffic and a 2.1% increase in average check, compared to the third quarter of 2010. In addition, four restaurants opened since the beginning of the third quarter of 2010 contributed $1.9 million in additional sales in the third quarter. The effect of menu price increases taken in the last twelve months was approximately 2.0% due to price increases taken primarily in the second quarter of 2011. There were no menu price increases at our Pollo Tropical restaurants in 2010.
Taco Cabana restaurant sales in the third quarter of 2011 increased 7.5% to $68.4 million due primarily to an increase in comparable restaurant sales of 5.3% in the third quarter of 2011 resulting from a 6.4% increase in average check from menu prices increases and a shift in sales mix partially offset by a 1.1% decrease in customer traffic. The effect of menu price increases taken in the last twelve months was approximately 3.7%, including price increases taken in the second quarter of 2011 to partially offset recent increases in commodity costs. In addition, five restaurants opened since the beginning of the third quarter of 2010 contributed $1.9 million in additional sales in the third quarter.
Burger King restaurant sales in the third quarter increased 0.3% to $90.6 million due to a 1.6% increase in comparable restaurant sales resulting from an increase in average check of 7.8% from a shift in sales mix and the effect of menu price increases taken in the last twelve months of 4.8%. This was offset by lower customer traffic of 5.8% and the closure, excluding relocations, of eight Burger King restaurants since the beginning of the third quarter of 2010.
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 third quarter of 2011 from 31.8% in the third quarter of 2010 due primarily to higher commodity prices (1.9%), including chicken (0.8%) and fuel surcharges, partially offset by the effect of menu price increases. Pollo Tropical restaurant wages and related expenses decreased to 23.1% in the third quarter of 2011 from 24.1% in the third quarter of 2010 due primarily to the effect of higher sales volumes on fixed labor costs and lower restaurant-level bonus accruals (0.4%). Pollo Tropical other restaurant operating expenses were 13.3% in both the third quarter of 2011 and 2010 as the effect of higher sales volumes on fixed operating costs was offset by higher repairs and maintenance expense and higher store opening costs. Pollo Tropical advertising expense increased slightly to 3.7% in the third quarter of 2011 from 3.6% in the third quarter of 2010.
Taco Cabana Operating Costs and Expenses (percentages stated as a percentage of Taco Cabana restaurant sales).Taco Cabana cost of sales increased to 31.2% in the third quarter of 2011 from 29.8% in the third quarter of 2010 due primarily to higher commodity prices including beef fajita meat (2.4%) partially offset by the effect of menu price increases taken in the last twelve months and favorable sales mix changes. Taco Cabana restaurant wages and related expenses decreased to 29.9% in the third quarter of 2011 from 30.5% in the third quarter of 2010 due primarily to the effect of higher sales volumes on fixed labor costs. Taco Cabana other restaurant operating expenses decreased to 14.1% in the third quarter of 2011 from 14.7% in the third quarter of 2010 due primarily to lower utility costs (0.2%), lower operating supply costs and the effect of higher sales volumes on other fixed operating costs. Taco Cabana advertising expense decreased to 3.7% in the third quarter of 2011 from 5.2% in the third quarter of 2010 due to the timing of promotions in the prior year.
Burger King Operating Costs and Expenses (percentages stated as a percentage of Burger King restaurant sales).Burger King cost of sales increased to 29.7% in the third quarter of 2011 from 28.9% in the third quarter of 2010 due to higher commodity prices (2.7%), including beef, and higher sales discounts (0.7%). These factors were partially offset by a favorable sales mix compared to the third quarter of 2010 (1.1%), primarily from the discontinuation of the Buck Double, and the effect of menu price increases taken in the last twelve months. Burger King restaurant wages and related expenses decreased to 30.5% in the third quarter of 2011 from 31.2% in the third quarter of 2010 due to leveraging management and productive labor efficiencies (0.9%) and lower restaurant level bonus accruals, partially offset by higher workers compensation claim costs (0.4%). Burger King other restaurant operating expenses decreased to 15.1% in the third quarter of 2011 from 15.5% in the third quarter of 2010 due primarily to lower utility costs (0.3%). Burger King advertising expense was 4.2% in the both the third quarter of 2011 and of 2010.
Consolidated Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 5.8% in the third quarter of 2011 from 6.0% in the third quarter of 2010 due primarily to the effect of sales increases in the third quarter of 2011 at our Pollo Tropical and Taco Cabana restaurants on fixed rental costs.
Consolidated General and Administrative Expenses. General and administrative expenses increased $1.7 million in the third quarter of 2011 to $13.7 million and, as a percentage of total restaurant sales, increased to 6.5% compared to 6.0% in the third quarter of 2010 due primarily to an increase of $1.1 million in performance-based administrative bonus accruals, higher stock-based
compensation expense of $0.3 million and $0.2 million of legal and professional fees incurred in connection with the planned spin-off of Fiesta Restaurant Group.
Adjusted Segment EBITDA.As a result of the factors set forth above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $8.6 million in the third quarter of 2011 from $7.5 million in the third quarter of 2010. Adjusted Segment EBITDA for our Taco Cabana restaurants increased to $7.4 million in the third quarter of 2011 from $6.5 million in the third quarter of 2010. Adjusted Segment EBITDA for our Burger King restaurants decreased to $6.2 million in the third quarter of 2011 from $6.4 million in the third quarter of 2010.
Adjusted Segment EBITDA for our Burger King segment includes general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to our Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative functions. For the third quarter of 2011, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $1.1 million and the administrative support expenses provided to Taco Cabana were $1.4 million. For the third quarter of 2010, these administrative support expenses included in the Burger King segment were $0.8 million for Pollo Tropical and $1.1 million for Taco Cabana.
Depreciation and Amortization Expense.Depreciation and amortization expense increased to $8.2 million in the third quarter of 2011 from $8.1 million in the third quarter of 2010.
Impairment and Other Lease Charges. Impairment and other lease charges in the third quarter consisted of lease charges of $0.1 million associated with the closure of a Pollo Tropical restaurant in the third quarter of 2011 and $0.1 million of sublease income to reduce our future minimum lease payments and ancillary costs related to a non-operating Taco Cabana restaurant property.
Interest Expense. Total interest expense increased $1.1 million to $5.8 million in the third quarter of 2011 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 7.4% in the third quarter of 2011 from 6.1% in the third quarter of 2010. Interest expense on lease financing obligations was $0.3 million in the third quarter of 2011 and $0.2 million in the third quarter of 2010.
Provision for Income Taxes. The provision for income taxes for the third quarter of 2011 was derived using an estimated effective annual income tax rate for 2011 of 30.1%, which excludes any discrete tax adjustments. Discrete tax adjustments in the third quarter of 2011 decreased the provision for income taxes by $0.1 million and resulted in an overall tax rate of 29.3%. The provision for income taxes for the third quarter of 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.6%, which excluded any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $0.1 million in the third quarter of 2010 and resulted in an overall tax rate of 37.8%.
Net Income.As a result of the foregoing, net income was $3.4 million in the third quarter of 2011 compared to $4.6 million in the third quarter of 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
The following table sets forth, for the nine months ended September 30, 2011 and 2010, selected operating results as a percentage of consolidated restaurant sales:
2011 | 2010 | |||||||
Restaurant sales: | ||||||||
Pollo Tropical | 25.4 | % | 23.2 | % | ||||
Taco Cabana | 32.4 | % | 31.6 | % | ||||
Burger King | 42.2 | % | 45.2 | % | ||||
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Total restaurant sales | 100.0 | % | 100.0 | % | ||||
Costs and expenses: | ||||||||
Cost of sales | 31.1 | % | 30.4 | % | ||||
Restaurant wages and related expenses | 29.0 | % | 29.6 | % | ||||
Restaurant rent expense | 5.9 | % | 6.1 | % | ||||
Other restaurant operating expenses | 14.1 | % | 14.5 | % | ||||
Advertising expense | 3.8 | % | 3.9 | % | ||||
General and administrative | 6.7 | % | 6.2 | % |
Since the beginning of 2010 through the third quarter of 2011, we have opened four new Pollo Tropical restaurants, five new Taco Cabana restaurants and three new Burger King restaurants. Two of the new Burger King restaurants were relocations within their market areas. During the same period we closed four Pollo Tropical restaurants, three Taco Cabana restaurants and eleven Burger King restaurants, excluding relocations,
Restaurant Sales. Total restaurant sales in the first nine months of 2011 increased 2.9% to $617.6 million from $600.1 million in the first nine months of 2010. Restaurant sales for Fiesta Restaurant Group increased 8.6% to $356.8 million from $328.7 million in the first nine months of 2010.
Pollo Tropical restaurant sales in the first nine months of 2011 increased 12.7% to $156.5 million due primarily to an increase in comparable restaurant sales of 10.6% resulting from a 9.3% increase in customer traffic and a 1.3% increase in average check, compared to the first nine months of 2010. The effect of menu price increases in 2011 was 1.1%. In addition, four restaurants opened since the beginning of 2010 contributed $4.5 million in additional sales in the first nine months of 2011.
Taco Cabana restaurant sales in the first nine months of 2011 increased 5.5% to $200.2 million due primarily to a 4.0% increase in comparable restaurant sales resulting from an increase in average check of 3.8% and an increase in customer traffic of 0.2%, compared to the first nine months of 2010. The effect of menu price increases in 2011 was 2.8%. In addition, five restaurants opened since the beginning of 2010 contributed $3.9 million in additional sales in the first nine months of 2011.
Burger King restaurant sales in the first nine months of 2011 decreased 3.9% to $260.8 million due to a decrease in comparable restaurant sales of 2.3% from lower customer traffic and the closure, excluding relocations, of eleven Burger King restaurants since the beginning of 2010. In the first nine months of 2011, customer traffic decreased 9.1% and was partially offset by an increase in average check from sales mix changes and the effect of menu price increases in 2011 of 4.8%.
Pollo Tropical Operating Costs and Expenses (percentages stated as a percentage of Pollo Tropical restaurant sales).Pollo Tropical cost of sales increased to 33.3% in the first nine months of 2011 from 32.3% in the first nine months of 2010 due primarily to higher commodity prices (1.4%), including chicken (0.8%) and fuel surcharges, partially offset by favorable menu item sales mix shifts and the effect of menu price increases. Pollo Tropical restaurant wages and related expenses decreased to 23.5% in the first nine months of 2011 from 24.6% in the first nine months of 2010 due primarily to the effect of higher sales volumes on fixed labor costs and lower workers compensation claim costs (0.3%). Pollo Tropical other restaurant operating expenses decreased to 12.7% in the first nine months of 2011 from 13.2% in the first nine months of 2010 due primarily to lower real estate taxes (0.4%) and the effect of higher sales volumes on other fixed operating costs. Pollo Tropical advertising expense decreased slightly to 2.7% in the first nine months of 2011 from 2.8% in the first nine months of 2010. 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 31.4% in the first nine months of 2011 from 29.9% in the first nine months of 2010 due primarily to higher commodity prices including beef fajita cost increases (2.0%) partially offset by the effect of menu price increases taken since the beginning of 2010. Taco Cabana restaurant wages and related expenses decreased to 30.1% in the first nine months of 2011 from 30.6% in the first nine months of 2010 due primarily to the effect of higher sales volumes on fixed labor costs and lower medical claim costs (0.2%). Taco Cabana other restaurant operating expenses decreased to 13.6% in the first nine months of 2011 from 14.4% in the first nine months of 2010 due primarily to lower utility costs (0.4%), the reduction of operating supply costs and the effect of higher sales volumes on other fixed operating costs. Taco Cabana advertising expense decreased to 4.1% in the first nine months of 2011 from 4.3% in the first nine months of 2010 due to the timing of promotions. For all of 2011 our Taco Cabana advertising expenses are expected to be approximately 3.9% to 4.1% of Taco Cabana restaurant sales.
Burger King Operating Costs and Expenses (percentages stated as a percentage of Burger King restaurant sales).Burger King cost of sales was 29.7% in the both the first nine months of 2011 and 2010 as increases in commodity costs and higher promotional discounting were offset by the effect of menu price increases and a favorable sales mix as discussed above. Burger King restaurant wages and related expenses decreased to 31.4% in the first nine months of 2011 from 31.5% in the first nine months of 2010 due to the leveraging of productive labor efficiencies being substantially offset by the effect of lower sales volumes on fixed labor costs and higher workers compensation and medical claim costs (0.4%). Burger King other restaurant operating expenses increased to 15.4% in the first nine months of 2011 from 15.2% in the first nine months of 2010 due primarily to the effect of lower sales volumes on fixed operating costs. Burger King advertising expense was 4.2% in both the first nine months of 2011 and 2010. For all of 2011 our Burger King advertising expenses are expected to be approximately 4.1% to 4.3% of Burger King restaurant sales.
Consolidated Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 5.9% in the first nine months of 2011 from 6.1% in the first nine months of 2010 due primarily to the effect of sales increases at our Pollo Tropical and Taco Cabana restaurants on fixed rental costs.
Consolidated General and Administrative Expenses. General and administrative expenses increased $4.1 million in the first nine months of 2011 to $41.3 million and, as a percentage of total restaurant sales, increased to 6.7% from 6.2% in the first nine months of 2010 due primarily to an increase of $2.1 million in performance-based administrative bonus accruals, higher stock-based compensation expense of $0.9 million, higher legal and professional fees of $0.9 million including $0.7 million incurred in connection with the planned spin-off of Fiesta Restaurant Group.
Adjusted Segment EBITDA.As a result of the factors above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $28.2 million in the first nine months of 2011 from $22.4 million in the first nine months of 2010. Adjusted Segment EBITDA for our Taco Cabana restaurants increased to $20.8 million in the first nine months of 2011 from $20.1 million in the first nine months of 2010. Adjusted Segment EBITDA for our Burger King restaurants decreased to $12.4 million in the first nine months of 2011 from $15.7 million in the first nine months of 2010.
Adjusted Segment EBITDA for our Burger King segment includes general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to our Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative functions. For the first nine months of 2011, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $3.3 million and the administrative support expenses provided to Taco Cabana were $4.2 million. For the first nine months of 2010, these administrative support expenses included in the Burger King segment were $2.8 million for Pollo Tropical and $3.6 million for Taco Cabana.
Depreciation and Amortization.Depreciation and amortization expense increased to $24.7 million in the first nine months of 2011 from $24.3 million in the first nine months of 2010.
Impairment and Other Lease Charges. Impairment and other lease charges in the first nine months of 2011, in addition to the third quarter items discussed above, consisted of $1.0 million of impairment charges for underperforming Burger King restaurants, $0.6 million in other lease charges for two previously closed Pollo Tropical restaurants, $0.3 million of lease charges for a Taco Cabana restaurant that was closed in the second quarter of 2011, and $0.2 million in lease charges for two previously closed Taco Cabana restaurants.
Impairment and other lease charges in the first nine months of 2010 consisted of $1.4 million for an underperforming Pollo Tropical restaurant, $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant, impairment charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.4 million of impairment charges associated with three underperforming Burger King restaurants.
Interest Expense. Total interest expense increased $0.8 million to $14.9 million in the first nine months of 2011 due to refinancing our indebtedness in the third quarter of 2011. The weighted average interest rate on our long-term debt, excluding lease financing obligations, for the first nine months of 2011 was 6.7% compared to 6.0% in the first nine months of 2010. Interest expense on lease financing obligations was $0.8 million in the first nine months of 2011 and $0.7 in the first nine months of 2010.
Provision for Income Taxes. The provision for income taxes for the first nine months of 2011 was derived using an estimated effective annual income tax rate of for the year ending DecemberMarch 31, 2011 of 30.1%. Discrete tax adjustments reduced the provision for income taxes by $0.3 million in the first nine months of 2011 and resulted in an overall tax rate of 28.1%. The provision for income taxes for the first nine months of 2010 was derived using an estimated effective annual income tax rate for the year ending December 31, 2010 of 36.6%. Including discrete tax adjustments in the first nine months of 2010, the overall tax rate was 36.9%.2012.
Net Income.As a result of the foregoing, net income was $11.2 million in the first nine months of 2011 compared to $9.3 million in the first nine months 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.
Since 2009, we have limited our spending on new restaurant development in order to utilize our free cash flow to reduce our outstanding indebtedness and our financial leverage. We have continued to moderate new restaurant growth in 2011.
On 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 amounts outstanding under Carrols’ senior credit facility and the Carrols Notes, as well as to pay accrued interest and all related fees and expenses. Excess cash generated from the financings was approximately $9.5 million.
Fiesta Restaurant Group sold $200 million of 8.875% Senior Secured Second Lien Notes due 2016 and entered into a $25 million senior secured revolving credit facility which was undrawn at closing. Carrols LLC entered into an $85 million 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 Carrols’ senior credit facility, to repurchase $118.4 million of the Carrols Notes tendered pursuant to a cash tender offer (which ended August 18, 2011), and to pay accrued interest and related fees and expenses. In addition, the $46.6 million of Carrols Notes not tendered were repurchased upon completion of the cash tender offer or redeemed subsequent to its expiration along with payment for accrued interest and fees related to the tender offer.
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 facilities and proceeds from anticipated sale-leaseback transactions will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.
Operating Activities. Net cash provided from operating activities for the first nine months of 2011 increased $9.7 million to $40.3 million from $30.6 million in the first nine months of 2010, due primarily to a reduction in the changes in the components of net working capital, including deferred income taxes, of $7.3 million, and an increase in net income, adjusted for non-cash items including depreciation and amortization, impairment and other lease charges, loss on extinguishment of debt and stock-based compensation expense.
Investing Activities. Net cash used for investing activities in the first nine months of 2011 and 2010 was $26.6 million and $24.1 million, respectively. Capital expenditures are the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants, including expenditures associated with Burger King franchise renewals; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems, including expenditures in 2011 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 | ||||||||||||||||
Nine Months Ended September 30, 2011 | ||||||||||||||||||||
New restaurant development | $ | 3,075 | $ | 6,932 | $ | 1,619 | $ | — | $ | 11,626 | ||||||||||
Restaurant remodeling | 2,281 | 1,211 | 6,193 | — | 9,685 | |||||||||||||||
Other restaurant capital expenditures (1) | 1,567 | 2,117 | 4,658 | — | 8,342 | |||||||||||||||
Corporate and restaurant information systems | 421 | 93 | 1,472 | 1,228 | 3,214 | |||||||||||||||
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Total capital expenditures | $ | 7,344 | $ | 10,353 | $ | 13,942 | $ | 1,228 | $ | 32,867 | ||||||||||
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Number of new restaurant openings (2) | 2 | 4 | 2 | 8 | ||||||||||||||||
Nine Months Ended September 30, 2010 | ||||||||||||||||||||
New restaurant development | $ | 4,331 | $ | 3,183 | $ | 2,269 | $ | — | $ | 9,783 | ||||||||||
Restaurant remodeling | 1,573 | 2,819 | 4,180 | — | 8,572 | |||||||||||||||
Other restaurant capital expenditures (1) | 1,763 | 2,259 | 2,973 | — | 6,995 | |||||||||||||||
Corporate and restaurant information systems | 52 | 53 | — | 857 | 962 | |||||||||||||||
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Total capital expenditures | $ | 7,719 | $ | 8,314 | $ | 9,422 | $ | 857 | $ | 26,312 | ||||||||||
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Number of new restaurant openings (2) | — | 1 | 1 | 2 |
For 2011 we anticipate that total capital expenditures will range from $49 million to $51 million, although the actual amount of capital expenditures may differ from these estimates. In 2011 we plan to have opened a total of six new Pollo Tropical and Taco Cabana restaurants, one new Burger King restaurant and a relocation of one Burger King restaurant, all of which were open at the end of the third quarter. Capital expenditures for all of 2011 are expected to include approximately $12 million to $13 million for the development of new restaurants and purchase of related real estate. Capital expenditures in 2011 also are expected to include expenditures of approximately $32 million to $33 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures and approximately $5 million of other expenditures, including expenditures for new point-of-sale systems at our Burger King restaurants.
Investing activities also include sale-leaseback transactions related to our restaurant properties, the net proceeds from which were $7.8 million and $5.9 million in the first nine months of 2011 and 2010, respectively. The net proceeds from these sales in the first and second quarter of 2011 were used to reduce outstanding borrowings under Carrols’ prior senior credit facility. In the first nine months of 2011 we purchased one restaurant property for $2.1 million for future sale in a sale-leaseback transaction. In the first nine months of 2010 we also purchased three of our restaurant properties for $3.7 million for future sales in sale-leaseback transactions.
Financing Activities. Net cash provided by financing activities in the third quarter of 2011, including our refinancing activities previously discussed above, was $5.3 million. Prior to the refinancing, in the first nine months of 2011 we made scheduled principal payments under Carrols’ prior senior credit facility of $7.0 million. During the second quarter of 2011, we entered into a sale-leaseback transaction for a restaurant property that did not qualify for sale-leaseback accounting and the net proceeds of $1.7 million were recorded as a lease financing obligation. During the third quarter of 2011 the condition that precluded sale-leaseback accounting was cured. In 2011 we also deferred $9.3 million of financing costs pertaining to our refinancing discussed above.
Net cash used for financing activities in the first nine months of 2010 was $7.7 million, including total principal payments on our term loan under Carrols’ prior senior credit facility of $9.9 million. We also had net revolver borrowings of $2.3 million in the first nine months of 2010.
New Senior Secured Credit Facilities.On August 5, 2011 Fiesta Restaurant Group entered into a new 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 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 revolving 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 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 an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility), 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 an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility).
Fiesta Restaurant Group’s obligations under the Fiesta Restaurant Group secured credit facility are secured by a first priority lien on substantially all of the assets of Fiesta Restaurant Group 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 senior 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 October 2, 2011, Fiesta Restaurant Group was in compliance with the covenants under its senior secured credit facility. After reserving $7.6 million for letters of credit guaranteed by the facility, $17.4 million was available for borrowing at October 2, 2011.
On August 5, 2011 Carrols LLC entered into a new senior secured credit facility, which provides for $65.0 million aggregate principal amount of term loan borrowings and a revolving credit facility which provides for aggregate borrowings of up to $20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC secured credit facility also provides for incremental borrowing increases of up to $25 million, in the aggregate, to the revolving credit facility and term loan borrowings available under facility. Borrowings under the term loan and revolving credit borrowings under the facility bear interest at a per annum rate, at Carrols LLC’s option, of either (all terms as defined in the Carrols LLC senior secured credit facility):
1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility), or
2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility).
Under the Carrols LLC senior secured credit facility, Carrols LLC will be required to make mandatory prepayments of revolving credit facility borrowings and principal on term loan borrowings (i) annually in an amount equal to 50% to 100% of Excess Cash Flow (as defined in the Carrols 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 (all subject to certain exceptions). The term loan borrowings under the Carrols LLC senior secured credit facility are payable in consecutive quarterly principal payments of $1.625 million beginning on the last day of the fourth quarter of 2011 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 the assets of Carrols LLC and by a pledge by Carrols of all of the outstanding equity interests of Carrols LLC.
The Carrols LLC secured senior 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 Carrols LLC 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 October 2, 2011, Carrols LLC was in compliance with the covenants under its senior secured credit facility. After reserving $5.9 million for letters of credit guaranteed by the facility, $19.1 million was available for borrowing at October 2, 2011.
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 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 with the first interest payment due on February 15, 2012. The Fiesta Notes are secured by second-priority liens on substantially all of Fiesta Restaurant Group’s and its material subsidiaries’ assets.
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 Note 1.
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. At October 2, 2011 Fiesta Restaurant Group was in compliance with the covenants contained in the indenture governing the Fiesta Notes.
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 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.Carrols’ prior senior subordinated notes consisted of issued $180 million of 9% Senior Subordinated Notes due 2013 that bore interest at a rate of 9% payable semi-annually on January 15 and July 15 and matured on January 15, 2013.
Indebtedness. At October 2, 2011, we had total debt outstanding (including current portion) of 200.0 million of the Fiesta Notes, $65.0 million of outstanding term loan borrowings under Carrols LLC senior secured credit facility, $10.1 million of lease financing obligations and $1.2 million of capital lease obligations.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of September 30, 2011 (in thousands):
Payments due by period | ||||||||||||||||||||
Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | ||||||||||||||||
Contractual Obligations | ||||||||||||||||||||
Long-term debt obligations, including interest (1) | $ | 362,072 | $ | 26,503 | $ | 52,225 | $ | 283,344 | $ | — | ||||||||||
Capital lease obligations, including interest (2) | 2,044 | 131 | 297 | 271 | 1,345 | |||||||||||||||
Operating lease obligations (3) | 537,601 | 50,110 | 94,982 | 86,962 | 305,547 | |||||||||||||||
Lease financing obligations, including interest (4) | 19,906 | 966 | 1,961 | 2,027 | 14,952 | |||||||||||||||
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Total contractual obligations | $ | 921,623 | $ | 77,710 | $ | 149,465 | $ | 372,604 | $ | 321,844 | ||||||||||
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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 ninethree months ended September 30, 2011.March 31, 2012.
Effects of New Accounting Standards
In 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 issued its financial statements. We are evaluating the impact of this guidance on itsour annual testing for goodwill impairment.impairment at December 31, 2012.
In September 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives: (1) to present items of net income and other comprehensive income in one continuous statement; or (2) in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. Early adoption is permitted, but full retrospective application is required. We are in the process of deciding which alternative we will choose upon adoption.
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 QuarterlyAnnual Report on Form 10-Q10-K for the quarterfiscal year ended July 3, 2011:December 31, 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 and other related risks and uncertainties; |
• | The risk of an act of terrorism or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity; and |
• | Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if |
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
We are exposedThere 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, 2011, as amended, with respect to the Company’s market risk associated with fluctuations in interest rates, primarily limited to our senior secured credit facilities. At September 30, 2011, there were $65.0 million of Carrols LLC term loan borrowings outstanding under its senior secured credit facility. Borrowings under the term loan and revolving credit borrowings under the Carrols LLC senior secured credit facility bear interest at a per annum rate, at Carrols LLC’s option, of either (all terms as defined in the Carrols LLC senior secured credit facility):
1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility), or
2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility).
Borrowings under the Fiesta Restaurant Group senior secured credit facility bear interest at a per annum rate, at our option, of either (all terms as defined in the Fiesta Restaurant 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 an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility), 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 an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility).sensitive instruments.
A 1% change in interest rates would have resulted in an increase or decrease in interest expense of approximately $0.6$0.7 million for the ninethree months ended September 30, 2011.March 31, 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 October 2, 2011.April 1, 2012.
No change occurred in our internal control over financial reporting during the thirdfirst 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 II-ItemI-Item 1A of our QuarterlyAnnual Report on Form 10-Q10-K for the quarterfiscal year ended July 3,December 31, 2011, as amended, describes important factors that could materially adversely affectcause our business, consolidated financial condition or results of operations or cause ouractual 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 QuarterlyAnnual Report on Form 10-Q10-K for the quarterfiscal year ended July 3, 2011.December 31, 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. | ||
| Form of | |
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.INS | XBRL Instance Document | |
*101.SCH | XBRL Taxonomy Extension Schema Document | |
*101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
*101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
*101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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*101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | As provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. |
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) | ||||||
Paul R. Flanders Vice President – Chief Financial Officer and Treasurer |
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