ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2005, we owned or leased the following restaurant properties:
(1) Includes 23 restaurants located in mall shopping centers.
(2) Excludes restaurants operated by our franchisees. In addition, as of December 31, 2005, we had three restaurants under construction, eleven properties leased to third parties and three properties available for sale or lease.
As of December 31, 2005, we leased 94% of our Taco Cabana restaurants, 93% of our Pollo Tropical restaurants and 96% of our Burger King restaurants. We typically enter into leases (including options to renew) ranging from 20 to 40 years. The average remaining term for all leases, including options, is approximately 24 years. Generally, we have been able to renew leases, upon or prior to their expiration, at the prevailing market rates.
Most of our Burger King restaurant leases are coterminous with the related franchise agreements. We believe that we generally will be able to renew, at commercially reasonable rates, the leases whose terms expire prior to the expiration of that location’s Burger King franchise agreement.
Most leases require us, as lessee, to pay utility and water charges and real estate taxes. Certain leases also require contingent rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some of our mall locations, we are also required to pay certain other charges such as a pro rata share of the mall’s common area maintenance costs, insurance and security costs.
In addition to the restaurant locations set forth under “Restaurant Locations,” we own a building with approximately 25,300 square feet at 968 James Street, Syracuse, New York, which houses our executive offices and most of our administrative operations for our Burger King restaurants. We lease five small regional offices that support the management of our Burger King restaurants. We also lease approximately 13,500 square feet at 7300 North Kendall Drive, 8th Floor, Miami, Florida, which houses most of our administrative operations for our Pollo Tropical restaurants. In addition, we lease approximately 17,700 square feet of office space at 8918 Tesoro Drive, Suite 200, San Antonio, Texas, which houses most of our administrative operations for our Taco Cabana restaurants.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On November 30, 2002, four former hourly employees commenced a lawsuit against the Company in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that the Company violated certain minimum wage laws under the federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. The Company has since filed a Motion for Summary Judgment as to the existing Plaintiffs that the Court has under consideration. The Plaintiffs have indicated they will re-file a Motion to certify and for National Discovery and the Company will oppose such Motion. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Consequently, it is not possible to predict what adverse impact, if any, this case could have on our consolidated financial condition or results of operations and cash flows. We intend to continue to contest this case vigorously.
We are a party to various other litigation matters incidental to the conduct of our business. We do not believe that the outcome of any of these matters will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established trading market for our capital stock. Carrols Holdings owns 10 shares of our common stock (representing 100% of our capital stock).
On December 22, 2004, our Board of Directors approved a one-time cash dividend of $116.8 million to our sole stockholder, Carrols Holdings (which Carrols Holdings, in turn, paid to its stockholders as a dividend), from the net proceeds of the sale of $180 million of the notes, and the entering into a new senior credit facility with a new syndicate of lenders led by JP Morgan Chase Bank, N.A., which provided for $220 million of term loan B borrowings and a $50 million five-year revolving credit facility. The special cash dividend was paid on December 28, 2004.
We did not pay any cash dividends during fiscal 2005 and 2003. We have no present intention to declare or pay any cash dividends on shares in the foreseeable future. Certain restrictive covenants contained in agreements governing our long-term indebtedness currently limit our ability to make dividend payments and certain other payments.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
December 2004 Refinancing
On December 15, 2004, we completed the private placement of $180.0 million of our 9% Senior Subordinated Notes due 2013, which we refer to as the “notes.” Concurrently, we repaid all outstanding borrowings under our prior senior secured credit facility and amended and restated such senior credit facility with a new syndicate of lenders, which we refer to as the “new senior credit facility.” We received $400.0 million in total proceeds that included the issuance of the 9% senior subordinated notes and term loan B borrowings of $220.0 million under the new senior credit facility. The proceeds were primarily utilized to repay borrowings outstanding under the prior senior credit facility of $74.4 million, to retire all of our 9 1/2% senior subordinated notes due 2008 (including redemption premiums) in the amount of $175.9 million, to pay a dividend to Holdings, our sole stockholder, in the amount of $116.8 million (and Holdings concurrently paid a dividend to its stockholders in the aggregate amount of $116.8 million), to pay fees and expenses related to the refinancing of $8.8 million, and to pay a bonus to employees (including management) and a director, who owned options to purchase common stock of Holdings, totaling $20.9 million, which includes $0.6 million of payroll taxes. We also recorded an $8.9 million loss on early extinguishment of debt primarily from the write-off of previously deferred financing costs and premiums in conjunction with the retirement of the 9 1/2% senior subordinated notes.
The following table sets forth our selected consolidated financial data derived from our audited consolidated financial statements for each of the fiscal years ended December 31, 2001, 2002, 2003, 2004 and 2005. The information in the following table should be read together with our consolidated financial statements and accompanying notes as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7
ITEM 7. M ANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following Management’s Discussion and Analysis (“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 Annual Report on Form 10-K for the year ended December 31, 2005. The overview provides our perspective on the individual sections of MD&A, which include the following:
Executive Summary-an executive review of our performance for the years ended December 31, 2005 and 2004.
Company Overview-a general description of our three restaurant concepts and the markets in which they operate.
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.
Results of Operations-an analysis of our results of operations for the years ended December 31, 2005 and 2004, including a review of the material items and known trends and uncertainties.
Application of Critical Accounting Policies-an overview of accounting policies that require critical judgments and estimates.
Effects of New Accounting Standards-a discussion of new accounting standards and any implications related to our financial statements.
Executive Summary
Total revenues for 2005 increased to $706.9 million in 2005 from $697.9 million in 2004.
Revenues from our Hispanic restaurant brands increased by approximately $18.8 million from $328.0 million in 2004 to $346.8 million in 2005. Sales due to the extra week in 2004 for our Hispanic restaurant brands was $6.1 million. We have continued to expand our Hispanic restaurant brands, and at the end of 2005, we were operating a total of 204 restaurants under the Pollo Tropical and Taco Cabana brand names. During 2005, we opened six new Pollo Tropical restaurants, six new Taco Cabana restaurants and we also acquired four Taco Cabana restaurants from a franchisee in Texas. Comparable restaurant sales for 2005 increased 4.7% over 2004 at Pollo Tropical and 1.2% at Taco Cabana.
Segment EBITDA (earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt) for our Hispanic Brands was $60.6 million in 2005 compared to $58.0 million in the prior year. Segment EBITDA for our Hispanic Brands in 2004 included $2.3 million attributable to the extra week in 2004.
During October of 2005 our Pollo Tropical restaurants were negatively impacted by hurricanes Katrina and Wilma, and our Taco Cabana restaurants in the Houston market were negatively impacted by hurricane Rita. Although the restaurants collectively suffered only minimal property damage, our estimate of lost revenues from restaurants temporarily closed were, in the aggregate, approximately $1.8 million. Consequently, comparable restaurant sales decreased 3.3% at Pollo Tropical and increased .9% at Taco Cabana during the fourth quarter of 2005 compared to the fourth quarter of 2004.
Revenues from our Burger King restaurants decreased to $360.1 million in 2005 from $369.8 million in 2004 due in part to one less week in 2005 compared to 2004 ($6.9 million effect) and from the closing of thirteen underperforming Burger King restaurants during the year. At the end of 2005, the Company was operating a total of 336 Burger King restaurants. Comparable restaurant sales for the Company’s Burger King restaurants increased 1.0% in 2005 over 2004. Segment EBITDA decreased from $36.6 million in 2004, which included $2.1 million of Segment EBITDA from the extra week in 2004, to $31.8 million in 2005. This change mostly reflected higher utility costs, higher audit fees and incremental transaction fees due to the rollout of credit cards at the Company’s Burger King restaurants.
Operating results for all three brands were negatively impacted by higher utility costs, which as a percentage of total revenues, increased approximately 0.6% in 2005 and 1.5% in the fourth quarter of 2005, representing the primary change in its operating margins. Higher commodity costs also impacted margins, particularly at Pollo Tropical.
Our capital expenditures totaled $38.8 million in 2005 including $20.6 million for the construction of new restaurants, $4.2 million for the acquisition of four franchised Taco Cabana restaurants, $4.0 million for remodeling, and $10.0 million for maintenance and other capital expenditures. For 2006, the Company anticipates total capital expenditures of approximately $40 million including approximately $24 million related to its plans to open 7 to 8 new Pollo Tropical restaurants and 8 to 10 new Taco Cabana restaurants in 2006.
During 2005 we have lowered our outstanding borrowings under our senior credit facility. The total principal amount outstanding under our senior credit facility decreased from $220.0 million at December 31, 2004 to $211.8 million at December 31, 2005 including a voluntary prepayment during 2005 of $6.0 million principal amount of our term loan borrowings. As a result of our growth in new units during 2005 and anticipated growth in new units in 2006, we anticipate sale-leaseback proceeds to increase from approximately $5 million in 2005 to in excess of $20 million in 2006.
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 540 company owned and operated restaurants in 17 states as of December 31, 2005. We own, operate and franchise two Hispanic restaurant brands, Taco Cabana® and Pollo Tropical® operating primarily in Texas and Florida, respectively. We are also the largest Burger King® franchisee and have operated Burger King restaurants since 1976. We believe that the diversification of our restaurant concepts and geographic dispersion of our restaurants provide us with balance and stability.
Hispanic Brands
We acquired Pollo Tropical, Inc. in July 1998 and acquired Taco Cabana, Inc. in December 2000. Our Hispanic Brands combine the convenience of quick-service restaurants with the menu variety, use of fresh ingredients, upscale decor and food quality of casual dining. As of December 31, 2005, our Hispanic Brands were comprised of 204 company-owned restaurants and 29 franchised restaurants and accounted for 49.1% of our total revenues for fiscal 2005 and 65.6% of our total segment EBITDA.
Taco Cabana. Taco Cabana restaurants combine fresh, high-quality Tex-Mex and traditional Mexican style food in a festive setting with the convenience and value of quick-service restaurants. Menu items include sizzling fajitas, quesadillas, enchiladas, other Tex-Mex dishes, fresh-made flour tortillas, frozen margaritas and beer. Most menu items are made fresh daily in each of our Taco Cabana restaurants. Taco Cabana pioneered the Mexican patio café concept with its first restaurant in San Antonio, Texas in 1978. As of December 31, 2005, we owned and operated 135 Taco Cabana restaurants located in Texas, Oklahoma and New Mexico and franchised three Taco Cabana restaurants in New Mexico and Georgia. For the year ended December 31, 2005, our company-owned Taco Cabana restaurants generated total revenues of $209.5 million and segment EBITDA of $31.9 million.
Pollo Tropical. Pollo Tropical restaurants combine high quality distinctive menu items and an inviting tropical setting with the convenience and value of quick-service restaurants. Our Pollo Tropical restaurants feature fresh grilled chicken marinated in a proprietary blend of tropical fruit juices and spices and authentic “made from scratch” side dishes. Most menu items are made fresh daily in each of our Pollo Tropical restaurants. Pollo Tropical opened its first company-owned restaurant in 1988 in Miami. As of December 31, 2005, we owned and operated a total of 69 Pollo Tropical restaurants, 59 of which were located in south Florida and ten of which were located in central Florida. We also franchised 26 Pollo Tropical restaurants as of December 31, 2005, 22 of which were located in Puerto Rico, two in Ecuador and two in Florida. Since our acquisition of Pollo Tropical, we have expanded the brand by over 90% by opening 33 new restaurants. For the year ended December 31, 2005, our company-owned Pollo Tropical restaurants generated total revenues of $135.8 million and segment EBITDA of $28.7 million.
Burger King. Burger King is one of the largest hamburger restaurant chains in the world and we are the largest Burger King franchisee. Burger King restaurants feature the popular flame-broiled WHOPPER® sandwich as well as hamburgers and other sandwiches, fries, salads, breakfast items and other offerings typically found in quick-service hamburger restaurants. As of December 31, 2005, we operated 336 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. For the year ended December 31, 2005, our Burger King restaurants generated total revenues of $360.1 million and segment EBITDA of $31.8 million.
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.
Historically, our cash requirements have arisen from:
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servicing our debt;
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ongoing capital reinvestment in our existing restaurants; and
•
financing the opening and equipping of new restaurants.
Interest payments under our debt obligations represent significant liquidity requirements for us. We believe cash generated from our operations and availability under our revolving credit facility will provide sufficient cash availability to cover our working capital needs, capital expenditures (which represent a major investment of cash for us), planned development and debt service requirements for the next twelve months.
December 2004 Refinancing. On December 15, 2004, we completed the private placement of $180.0 million of our 9% Senior Subordinated Notes due 2013, which we refer to as the “senior subordinated notes.” Concurrently, we repaid all outstanding borrowings under our prior senior secured credit facility and amended and restated such senior credit facility with a new syndicate of lenders, which we refer to as the “senior credit facility.” We received $400.0 million in total proceeds that included the issuance of the notes and the term loan B borrowings of $220.0 million under the new senior credit facility. The proceeds were primarily utilized to repay borrowings outstanding under the prior senior credit facility of $74.4 million, to retire all of our 9 1/2% senior subordinated notes due 2008 (including redemption premiums) in the amount of $175.9 million, to pay a dividend to Holdings, our sole stockholder, in the amount of $116.8 million (and Holdings concurrently paid a dividend to its stockholders in the aggregate amount of $116.8 million), to pay fees and expenses related to the refinancing of $8.8 million, and to pay a bonus to employees (including management) and a director, who owned options to purchase common stock of Holdings, totaling $20.9 million, which includes $0.6 million of payroll taxes.
Stock-based Compensation Charge. We recorded a pretax compensation charge, including applicable payroll taxes, of $16.4 million in 2005 relative to stock awards issued in the second quarter of 2005. Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings’ common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings’ common stock. As a consequence of the exchange, all outstanding stock options were cancelled and terminated. All shares were issued pursuant to stock award agreements, effective May 3, 2005, which provide that such shares are fully vested and non-forfeitable upon issuance, but may not be sold or otherwise disposed of for a period of two years from the date of issuance. Such agreements also provide that up to an aggregate of 16% of each recipients’ shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Carrols Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such shares may be subject to repurchase by Carrols Holdings (at its option) in the event of a termination of employment before the occurrence of certain events.
Operating activities. Net cash provided by operating activities for the years ended December 31, 2005, 2004 and 2003 was $22.0 million, $59.2 million and $46.3 million, respectively. At December 31, 2005, we had $9.3 million in cash. At December 31, 2004 we had $31.5 million in cash due to the timing of payments associated with the December 2004 refinancing. In the first quarter of 2005, we paid the $20.3 million bonus to employees (including management) and a director and the applicable taxes of $0.6 million, as well as $5.5 million of tax withholdings related to the dividend payment in late December of 2004. These payments reduced net cash provided from operating activities in the aggregate $26.4 million in 2005. Our income tax payments included in operating activities have been historically reduced due to the utilization of net operating loss carryforwards. For tax years after 2005 we have Federal alternative minimum tax credit carryforwards of $2.9 million with no expiration date and Federal employment tax credit carryforwards of $2.5 million that begin to expire in 2021.
Investing activities including capital expenditures and sale-leaseback transactions. Net cash used for investing activities for the years ended December 31, 2005 and 2004 was $33.9 million and $8.5 million, respectively. Net cash provided from investing activities for the year ended December 31, 2003 was $14.6 million. Capital expenditures represent a major investment of cash for us, and, excluding acquisitions, for the years ended December 31, 2005, 2004 and 2003, were $34.6 million, $19.1 million and $30.4 million, respectively. In addition, we purchased four Taco Cabana restaurants from a franchisee for a cash purchase price of $4.2 million in 2005. We sold other properties, primarily non-operating restaurant properties, in 2005, 2004 and 2003 for net proceeds of $0.8 million, $1.2 million and $3.9 million, respectively. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility.
In 2005, we sold four restaurant properties in sale-leaseback transactions for net proceeds of $5.2 million. In 2004, we sold eight restaurant properties in sale-leaseback transactions for net proceeds of $11.0 million and in 2003 we sold 31 restaurant properties in sale-leaseback transactions for net proceeds of $44.2 million. The net proceeds from these sales were used to reduce outstanding debt under our senior credit facility. Purchases of properties to be sold in sale-leaseback transactions were $1.1 million, $1.6 million and $3.1 million in 2005, 2004 and 2003, respectively.
Our capital expenditures primarily include (1) capital restaurant maintenance expenditures, (2) restaurant remodeling and (3) new restaurant development. Capital restaurant maintenance expenditures include capital expenditures for the ongoing reinvestment and enhancement of our restaurants. Remodeling expenditures include capital expenditures for renovating and in some cases rebuilding the interior and exterior of our existing restaurants, including expenditures associated with franchise renewals with respect to our Burger King restaurants. Capital expenditures for new restaurant development are associated with developing new restaurants including the purchase of related real estate.
The following table sets forth our capital expenditures for the periods presented:
(1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the years ended December 31, 2005, 2004 and 2003, these restaurant repair and maintenance expenses were approximately $18.1 million, $15.7 million and $15.3 million, respectively.
In 2006, we anticipate that total capital expenditures will be approximately $37 million to $44 million. These capital expenditures include approximately $20 million to $25 million for the development of new restaurants and purchase of related real estate applicable to our Taco Cabana and Pollo Tropical restaurant concepts. In 2006 we anticipate opening approximately six to eight new Pollo Tropical restaurants and eight to ten new Taco Cabana restaurants. Capital expenditures in 2006 also include expenditures of approximately $15 million to $17 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures and approximately $2.0 million in other capital expenditures.
Financing activities. Net cash used for financing activities for the year ended December 31, 2005, 2004 and 2003 as $10.2 million, $21.7 million and $61.1 million, respectively. Financing activities in these periods consisted of repayments under our debt arrangements and the sale of restaurants in sale-leaseback transactions accounted for as lease financing obligations with proceeds of $4.5 million and $3.6 million for the years ended December 31, 2004 and 2003, respectively. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility.
In 2005 and 2004 we also made voluntary principal repayments on borrowings under our senior credit facility of $6.0 million and $39.0 million, respectively. In addition, in 2005 we purchased one restaurant property subject to a lease financing obligation for $1.1 million under our right of first refusal included in the subject lease. This purchase is shown as a principal payment in the statement of cash flows as it relates to a previously recorded lease financing obligation.
Indebtedness. At December 31,2005 we had total debt outstanding of $504.6 million comprised of $180.0 million of notes, borrowings under our term loan B facility of $211.8 million under the senior credit facility, lease financing obligations of $110.9 million and capital lease obligations of $1.9 million.
Senior Credit Facility. Our senior credit facility provides for a revolving credit facility under which we may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline loans), a $220.0 million term loan B facility and incremental facilities (as defined in the new senior credit facility), at our option, of up to $100.0 million, subject to the satisfaction of certain conditions. At December 31, 2005 $211.8 million was outstanding under the term loan B facility and no amounts were outstanding under our revolving credit facility. After reserving $11.1 million for letters of credit guaranteed by the facility, $38.9 million was available for borrowings under our revolving credit facility at December 31, 2005.
As a result of the restatement of our financial statements as discussed in Note 2 to our interim financial statements for the third quarter of 2005 contained in our Quarterly Report on Form 10Q, the Company was in default under its senior credit facility by failing to timely furnish its quarterly consolidated financial statements for the third quarter of 2005 to its lenders. On December 6, 2005, the Company obtained a Consent and Waiver from its lenders under the senior credit facility that permitted the Company to extend the time to deliver its consolidated financial statements for the third quarter of 2005 to February 15, 2006.On February 15, 2006, the Company obtained a waiver of such default from its lenders that extended the period of time to deliver its consolidated financial statements for the third quarter of 2005 to June 30, 2006. The waiver also extended the period of time to deliver its annual audited consolidated financial statements for 2005 and its consolidated financial statements for the first fiscal quarter of 2006 to June 30, 2006. While the Company currently anticipates delivering these financial statements by June 30, 2006, its failure to do so would constitute an event of default under the new senior credit facility. If such an event of default occurs under the senior credit facility that is not waived, the lenders could cause all amounts outstanding with respect to the borrowings to be due and payable immediately which in turn would result in cross defaults under the Indenture governing the senior subordinated notes. The Company’s assets and cash flow may not be sufficient to fully repay outstanding debt if accelerated upon an event of default and there can be no assurance that such outstanding debt could be refinanced in such an event on acceptable terms or if at all. See “Item 1A. Risk Factors”.
Senior Subordinated Notes. In connection with the sale of $180 million of 9% senior subordinated notes due 2013, we and certain of our subsidiaries, which we refer to as the “guarantors”, entered into a Registration Rights Agreement dated as of December 15, 2004, with J.P. Morgan Securities Inc., Banc of America Securities LLC, Lehman Brothers Inc., Wachovia Capital Markets, LLC and SunTrust Capital Markets, Inc. In general, the Registration Rights Agreement provided that we and the guarantors agreed to file, and cause to become effective, a registration statement with the Securities Exchange Commission in which we offer the holders of the senior subordinated notes the opportunity to exchange such senior subordinated notes for newly issued notes that have terms which are identical to the senior subordinated notes that are registered under the Securities Act of 1933, as amended, which we refer to as the “exchange offer”.
Pursuant to the Registration Rights Agreement, because we did not complete the exchange offer on or prior to June 13, 2005, the interest rate on our senior subordinated notes was increased by 0.25% per annum for the 90-day period immediately following June 13, 2005 and increased by an additional 0.25% per annum in each of the subsequent 90-day periods immediately following September 11,2005. On December 14, 2005 the exchange offer was completed which eliminated this additional interest expense after such date. This resulted in additional interest expense of $0.4 million during 2005.
Results of Operations
The following table sets forth, for fiscal years 2003, 2004 and 2005, selected operating results of Carrols as a percentage of total restaurant sales:
Fiscal 2005 Compared to Fiscal 2004
In 2005, we opened six new Taco Cabana restaurants, six new Pollo Tropical restaurants and one new Burger King restaurant. We also acquired four Taco Cabana restaurants from a former franchisee, closed thirteen Burger King restaurants and one Taco Cabana restaurant. Fiscal 2005 included 52 weeks compared to 53 weeks in fiscal 2004.
Restaurant Sales. Total restaurant sales in 2005 increased by $9.1 million, to $705.4 million due to comparable sales increases at all three of our restaurant concepts and the net addition of three restaurants. The extra week in fiscal 2004 contributed consolidated sales of $13.0 million in 2004 attributable to our three restaurant concepts as follows: Taco Cabana-$3.8 million; Pollo Tropical-$2.3 million; and Burger King-$6.9 million. The changes in comparable restaurant sales noted below are calculated using only those restaurants open since the beginning of the earliest period being compared (12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants).
Taco Cabana restaurant sales increased $7.0 million, excluding the impact of the extra week in 2004 of $3.8 million to $209.5 million in 2005 due primarily to the net addition of nine restaurants since the beginning of 2004 and the acquisition of four restaurants from a franchisee in the third quarter of 2005. These thirteen restaurants contributed $8.6 million of additional sales in 2005. To a lesser extent, sales also increased from a 1.2% sales increase at our comparable Taco Cabana restaurants resulting from an increase in the average sales transaction compared to 2004.
Pollo Tropical restaurant sales increased $11.8 million, excluding the effect of the extra week in 2004 of $2.3 million, to $135.8 million in 2005 due in part to a 4.7% sales increase at our comparable Pollo Tropical restaurants. This increase was from an increase in the average sales transaction due in part to menu price increases of approximately 4% near the end of the second quarter of 2005. The addition of nine restaurants since the beginning of 2004 contributed $7.9 million of additional sales in 2005.
During October of 2005 our Pollo Tropical restaurants were negatively impacted by hurricanes Katrina and Wilma, and our Taco Cabana restaurants in the Houston market were negatively impacted by hurricane Rita. Although the restaurants collectively suffered only minimal property damage, our estimate of lost revenues from restaurants temporarily closed were, in the aggregate, approximately $1.8 million. Consequently, comparable restaurant sales decreased 3.3% at Pollo Tropical and increased .9% at Taco Cabana during the fourth quarter of 2005 compared to the fourth quarter of 2004.
Burger King restaurant sales were $360.1 million in 2005, and excluding the effect of the extra week in 2004 of $6.9 million, decreased $2.8 million due primarily to the closing of thirteen underperforming Burger King restaurants during the year. Comparable restaurant sales at our Burger King restaurants increased 1.0% in 2005 over 2004 from an increase in the average sales transaction due to menu price increases.
Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased slightly to 29.0% in 2005 from 29.1% in 2004. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, decreased to 28.8% in 2005 from 29.8% in 2004 due to improvements in restaurant-level food controls (0.8% of Taco Cabana sales) and higher rebates (0.2% of Taco Cabana sales). The effect of menu price increases in early 2005 substantially offset increases in commodity costs. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased 1.9% to 33.3% in 2005 from 31.4% in 2004 due to significant increases in chicken commodity costs (1.5% of Pollo Tropical sales) and increases in other commodity costs (0.6% of Pollo Tropical sales) partially offset by menu price increases in 2005. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 27.5% in 2005 from 27.9% in 2004 due to the effect of menu price increases in 2005 (1.0% of Burger King sales) offset in part by an increase in beef commodity prices (0.2% of Burger King sales), higher promotional sales discounts (0.2% of Burger King sales) and lower rebates (0.1% of Burger King sales).
Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.0% in 2005 from 29.7% in 2004. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.1% in 2005 from 28.5% in 2004 due primarily to the effect of menu price increases in 2005. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased 1.5% to 23.8% in 2005 from 25.3% in 2004 due primarily to the effect on fixed labor costs of higher comparable restaurant sales volumes (0.5% of Pollo Tropical sales), the effect of menu price increases in 2005 (0.5% of Pollo Tropical sales) and lower medical insurance costs (0.3% of Pollo Tropical sales). Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 31.5% in 2005 from 31.8% in 2004 due to lower medical insurance costs (0.2% of Burger King sales) and lower restaurant level bonuses (0.1% of Burger King sales).
Restaurant rent expense, as a percentage of total restaurant sales, decreased to 4.9% in 2005 from 5.0% in 2004 due primarily to the effect of comparable restaurant sales increases on fixed rental costs.
Other restaurant operating expenses, as a percentage of total restaurant sales, increased to 14.6% in 2005 from 13.3% in 2004. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 14.6% in 2005 from 13.2% in 2004 due primarily to higher utility costs from higher natural gas prices and increased electricity usage (0.7% of Taco Cabana sales) and higher maintenance costs associated with initiatives to enhance the appearance of our Taco Cabana restaurants (0.5% of Taco Cabana sales). Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.4% in 2005 from 10.9% in 2004 due primarily to higher utility costs resulting from higher natural gas and electricity prices (0.4% of Pollo Tropical sales), higher general liability claim costs (0.2% of Pollo Tropical sales) and increased fees due to increased levels of credit card sales (0.2% of Pollo Tropical sales). Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased to 15.4% in 2005 from 14.3% in 2004 due higher utility costs due to higher natural gas rates and for summer months also electricity usage (0.5% of Burger King sales), and fees associated with the acceptance of credit cards (0.2% of Burger King sales) and higher repair and maintenance expense to enhance the appearance of our Burger King restaurants (0.3% of Burger King sales).
Advertising expense, as a percentage of total restaurant sales, increased slightly to 3.6% in 2005 from 3.5% in 2004. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased slightly to 4.2% in 2005 from 4.1% in 2004. Taco Cabana advertising expenditures in 2006 are anticipated to be comparable to 2005, as a percentage of Taco Cabana sales. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, increased to 1.9% in 2005 from 1.6% in 2004 due to higher television and radio advertising expenditures in 2005. Advertising expenditures for our Pollo Tropical restaurants in 2006 are
anticipated to be 1.3% to 1.7% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, were 3.9% in both 2005 and 2004.
General and administrative expenses, including stock-based compensation expense, as a percentage of total restaurant sales, increased to 8.3% in 2005 from 6.3% in 2004. Stock-based compensation expense was $16.4 million and $1.8 million in 2005 and 2004, respectively, or as a percentage of total restaurant sales, 2.3% and 0.3%, respectively. Stock-based compensation expense in 2005 was substantially from the issuance of stock in exchange for stock options in the second quarter of 2005. General and administrative expenses increased in total $15.0 million due primarily to the $14.6 million increase in stock-based compensation expense. General and administrative expenses further increased $0.4 million in 2005 compared to 2004 due primarily to increased legal and professional fees, including audit fees, of $1.8 million, higher administrative salaries of $0.6 million, and higher Company 401(k) contributions of $0.3 million, substantially offset by lower administrative bonus expense of $2.3 million.
Segment EBITDA. Segment EBITDA is a measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt. Our fiscal year 2004 included 53 weeks. The effect of the additional week in 2004 increased segment EBITDA in 2004 by $1.4 million for our Taco Cabana restaurants, $0.9 million for our Pollo Tropical restaurants and $2.1 million for our Burger King restaurants. Excluding the impact of the extra week in 2004, Segment EBITDA for our Taco Cabana restaurant segment increased to $31.9 million in 2005 from $30.1 million in 2004, Segment EBITDA for our Pollo Tropical restaurant segment increased to $28.7 million in 2005 from $27.9 million in 2004 and Segment EBITDA for our Burger King restaurant segment decreased from $36.6 million in 2004 to $31.8 million in 2005.
Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $33.1 million in 2005 from $38.5 million in 2004 due primarily to lower depreciation of restaurant equipment related to our Burger King restaurants of $2.3 million, lower depreciation due to the closure of Burger King restaurants since the beginning of 2004 of $0.7 million, lower depreciation of corporate information systems of $0.7 million, lower leasehold improvement amortization depreciation for our Taco Cabana restaurants of $1.4 million and lower depreciation due to the sale/leaseback of properties in the second half of 2004.
Impairment losses were $1.5 million in 2005 and were comprised of $0.3 million related to Burger King franchise rights and $1.1 million related to property and equipment of certain underperforming Burger King restaurants and planned future closures of Burger King restaurants and $0.1 million related to property and equipment of certain underperforming Taco Cabana restaurants. Impairment losses were $1.5 million in 2004 and were comprised of $0.3 million related to Burger King franchise rights and $1.2 million related to property and equipment of certain underperforming Burger King restaurants and planned future closures of Burger King restaurants.
Interest Expense. Interest expense increased $7.6 million to $43.0 million in 2005 from $35.4 million in 2004 due primarily to higher average outstanding debt balances resulting from the December 2004 refinancing and higher effective interest rates on our floating rate borrowings under our senior credit facility. However, the weighted average interest rate on our long-term debt, excluding lease financing obligations, for the year ended December 31, 2005 decreased to 7.3% from 7.8% in 2004. This decrease was due to increased borrowings under our senior credit facility in 2005 (as a result of the December 2004 refinancing), which are at a lower rate than our borrowings under our senior subordinated notes, and which also comprised a higher percentage of our total outstanding long-term debt in 2005 compared to 2004.
Provision (Benefit) for Income Taxes. Although we had a pretax loss of $1.6 million in 2005 we have a tax provision of $2.8 million for the year ended December 31, 2005 due to the non-deductible portion of stock-based compensation expense related to stock awards in the second quarter of 2005. The Federal tax provision for 2005 includes $3.3 million for the non-deductible portion of stock-based compensation expense and $0.5 million of income tax expense associated with Ohio state tax legislation enacted in the second quarter of 2005.
During the fourth quarter of 2005, we established a valuation allowance of $ 1.1 million against net deferred tax assets due to state net operating loss carryforwards where realization of related deferred tax asset amounts was not likely. The estimation of future taxable income for federal and state purposes and the Company’s resulting ability to realize deferred tax assets pertaining to state net operating loss carryforwards and tax credit carryforwards can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to material future changes.
Net Income (Loss). As a result of the foregoing, we incurred a net loss of $4.3 million in 2005 compared to a net loss of $8.1 million in 2004.
Fiscal 2004 Compared to Fiscal 2003
In 2004, we opened five new Taco Cabana restaurants, three new Pollo Tropical restaurants and one new Burger King restaurant and closed four Burger King restaurants. Fiscal 2004 included 53 weeks compared to 52 weeks in fiscal 2003.
On June 22, 2004, Carrols Holdings filed a registration statement on Form S-1 for an offering of Enhanced Yield Securities comprised of common stock and senior subordinated notes. On October 25, 2004, Carrols Holdings withdrew its registration statement on Form S-1 with respect to the aforementioned securities. We recorded the incurred costs related to this offering of $2.3 million in other expense in the third quarter of 2004.
Restaurant Sales. Total restaurant sales for 2004 increased by $52.7 million, or 8.2%, to $696.3 million from $643.6 million in 2003 due to sales increases at all three of our restaurant concepts. The extra week in fiscal 2004 resulted in an increase in total consolidated sales of $13.0 million attributable to our three restaurant concepts as follows: Taco Cabana-$3.8 million; Pollo Tropical-$2.3 million; and Burger King-$6.9 million.
Taco Cabana restaurant sales were $202.5 million in 2004, and excluding the effect of the extra week in 2004 of $3.8 million, increased $17.6 million due in part to a 4.8% sales increase at our comparable Taco Cabana restaurants and the net addition of ten restaurants since the beginning of 2003. Such increase in Taco Cabana’s comparable restaurant sales in 2004 resulted from higher customer traffic, an increase in the average sales transaction compared to 2003 and, to a lesser extent, modest menu price increases of approximately 1% which occurred early in the first quarter of 2004.
Pollo Tropical restaurant sales were $124.0 million in 2004, and excluding the effect of the extra week in 2004 of $2.3 million, increased $12.5 million due primarily to a 10.6% sales increase at our comparable Pollo Tropical restaurants that resulted from an increase in customer traffic, and to a much lesser extent the addition of five restaurants since the beginning of 2003. There were no significant menu price increases affecting 2004 results of our Pollo Tropical restaurants.
Burger King restaurant sales were $369.8 million in 2004, and excluding the effect of the extra week in 2004 of $6.9 million, increased $9.6 million due primarily to an increase in comparable restaurant sales of 2.9% from increases in the average sales transaction at our Burger King restaurants and from sales of new premium sandwiches introduced in 2004. These increases were partially offset by reduced customer traffic, most notably in the first quarter of 2004. Our Burger King restaurants had menu price increases of approximately 1.5% in August 2004.
Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to 29.1% in 2004 from 28.2% in 2003. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.8% in 2004 from 29.6% in 2003 due to higher beef commodity prices in 2004, offset partially by a modest price increase of 1.0% early in the first quarter of 2004 and improvements in restaurant food controls. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased to 31.4% in 2004 from 30.5% in 2003 due to increases in chicken commodity costs (0.6% of Pollo sales) and lower vendor rebates (0.6% of Pollo sales), partially offset by improvements in restaurant food controls. Burger
King cost of sales, as a percentage of Burger King restaurant sales, increased significantly to 27.9% in 2004 from 26.7% in 2003 due to an increase in beef commodity prices of approximately 13% (0.6% of Burger King sales), increases in other commodity costs including cheese and produce, (0.9% of Burger King sales) and sales of new menu items which have higher selling prices but lower margins as a percentage of their selling prices (0.4% of Burger King sales). These increases were offset in part by the effect of menu price increases (0.5% of Burger King sales) and lower promotional sales discounts (0.2% of Burger King sales) in 2004.
Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.7% in 2004 from 30.2% in 2003. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.5% in 2004 from 28.8% in 2003 due to the effect on fixed labor costs of higher comparable restaurant sales volumes and to the price increase in the first quarter of 2004, offset in part by higher medical insurance costs (0.2% of Taco Cabana sales). Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 25.3% in 2004 from 25.7% in 2003 due to the effect on fixed labor costs of higher comparable restaurant sales volumes and restaurant productive labor efficiencies. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 31.8% in 2004 from 32.3% in 2003 due primarily to the effect on fixed labor costs of higher comparable restaurant sales volumes (0.4% of Burger King sales) and lower restaurant incentive bonuses (0.2% of Burger King sales), offset in part by higher medical insurance costs (0.1% of Burger King sales).
Restaurant rent expense, as a percentage of total restaurant sales, increased to 5.0% in 2004 from 4.8% in 2003 due to sale-leaseback transactions that were completed in 2003 and 2004.
Other restaurant operating expenses, as a percentage of total restaurant sales, decreased to 13.3% in 2004 from 14.0% in 2003. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 13.2% in 2004 from 13.6% in 2003 due to the effect on fixed operating costs of higher comparable restaurant sales volumes and lower utility costs. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 10.9% in 2004 from 11.8% in 2003 due to lower general liability insurance costs (0.4% of Pollo Tropical sales), lower utility costs (0.3% of Pollo Tropical sales) and the effect of higher comparable restaurant sales volumes on fixed operating costs. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 14.3% in 2004 from 14.8% in 2003 due primarily to lower repair and maintenance expenses (0.2% of Burger King sales) and lower discretionary restaurant operating expenses (0.3% of Burger King sales).
Advertising expense, as a percentage of total restaurant sales, decreased to 3.5% in 2004 from 4.2% in 2003. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased to 4.1% in 2004 from 4.7% in 2003 due to the timing of promotions in 2004 compared to the prior year. Our Taco Cabana advertising expenditures in 2005 (as a percentage of sales) are anticipated to be comparable to 2004. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 1.6% in 2004 from 3.6% in 2003 due to lower television and radio advertising expenditures. Our Pollo Tropical advertising expenditures in 2005 are anticipated to range from 2.0% to 2.5% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, decreased to 3.9% in 2004 from 4.2% in 2003 due to lower local advertising expenditures in 2004.
General and administrative expenses, as a percentage of total restaurant sales, increased to 6.3% in 2004 from 5.8% in 2003. General and administrative expenses increased $6.2 million to $43.6 million due primarily to increased administrative bonus levels in 2004 of $4.7 million and an increase in stock-based compensation expense of $1.6 million.
Segment EBITDA. Segment EBITDA is a measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt. Segment EBITDA for our Taco Cabana restaurant segment increased to $30.1 million in 2004 from
$24.2 million in 2003. Segment EBITDA for our Pollo Tropical restaurant segment increased to $27.9 million in 2004 from $22.5 million in 2003. Segment EBITDA for our Burger King restaurant segment decreased to $36.6 million in 2004 from $37.4 million in 2003. Our fiscal year 2004 included 53 weeks. The effect of the additional week in 2004 increased segment EBITDA by $1.4 million for our Taco Cabana restaurants, $0.9 million for our Pollo Tropical restaurants and $2.1 million for our Burger King restaurants.
Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $38.5 million in 2004 from $40.2 million in 2003 due primarily to lower equipment depreciation at our Burger King restaurants. Impairment losses were $1.5 million in 2004 and were related to certain underperforming Burger King restaurants. Impairment losses were $4.2 million in 2003; $3.5 million of which were related to certain underperforming Taco Cabana restaurants and $0.7 million of which were related to certain underperforming Burger King restaurants.
Bonus to Employees and Director. In conjunction with our December 2004 refinancing, we approved a compensatory bonus payment of approximately $20.3 million to a number of employees (including management) and a director who owned options to purchase common stock on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of options owned by such persons. The bonus payment was made in January 2005 and including applicable payroll taxes totaled $20.9 million.
Interest Expense. Interest expense decreased $2.0 million to $35.4 million in 2004 from $37.3 million in 2003 due primarily to lower average outstanding debt balances in 2004, offset slightly by higher effective interest rates on our floating rate debt. The average effective interest rate on all debt, excluding lease financing obligations, increased to 7.8% in 2004 from 7.2% in 2003. This increase was primarily from our senior subordinated notes comprising a greater percentage of our total outstanding debt, as a result of our principal prepayments on borrowings under our prior senior credit facility.
Provision (Benefit) for Income Taxes. The effective income tax rate for 2004 was 45.4%. This rate is higher than the Federal statutory tax rate of 34% due primarily to state franchise taxes.
Net Income (Loss). As a result of the foregoing, we incurred a net loss of $8.1 million in 2004 compared to net income of $1.3 million in 2003.
Application of Critical Accounting Policies
Our 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. 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.
Sales recognition at company-operated restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls, and generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes, the evaluation of goodwill and intangible assets for impairment and assessing impairment of long-lived assets and Burger King franchise rights and lease accounting. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.
Accrued occupancy costs. We make estimates of accrued occupancy costs pertaining to closed restaurant locations on an ongoing basis. These estimates require assessment and continuous evaluation of a number of factors such as the remaining contractual period under our lease obligations, the amount of sublease income we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future events and prior estimates could result in adjustments to these accrued costs. At December 31, 2005, we had three non-operating restaurant properties.
Insurance liabilities. We are self-insured for most workers’ compensation, general liability and medical insurance claims. At December 31, 2005, we had $8.2 million accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.
Legal obligations. In the normal course of business, we must make estimates of potential future legal obligations and liabilities, which require the use of management’s judgment. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates and adjustments to income could be required.
Income taxes. We record income tax liabilities utilizing known obligations and estimates of potential obligations. We are required to record a valuation allowance if it is more likely than not that the value of estimated deferred tax assets are different from those recorded. This would include making estimates and judgments on future taxable income, the consideration of feasible tax planning strategies and existing facts and circumstances. When the amount of deferred tax assets to be realized is expected to be different from that recorded, the asset balance and income statement would reflect any change in valuation in the period such determination is made.
Evaluation of Goodwill and Intangible Assets. We must evaluate our recorded indefinite-lived intangible assets for impairment under Statement of Financial Accounting Standards (SFAS) 142 “Goodwill and Other Intangible Assets” on an ongoing basis. We have elected to conduct our annual impairment review of goodwill and other indefinite-lived intangible assets at December 31. Our reviews at December 31, 2005 and 2004 indicated there had been no impairment as of those dates. This annual evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting units including projections regarding future operating results of each restaurant over its remaining lease term and market values. These estimates may differ from actual future events and if these estimates or related projections change in the future, we may be required to record impairment charges for these assets. Goodwill included in our consolidated balance sheet was $124.9 million at December 31, 2005.
Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets with their respective carrying values. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.
Impairment of Burger King Franchise Rights. We assess the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment by comparing the aggregate undiscounted future cash flows from those acquired restaurants with the respective carrying value of franchise rights for each Burger King acquisition. In determining
future cash flows, significant estimates are made by us with respect to future operating results of each group of acquired restaurants over their remaining franchise life. If acquired franchise rights are determined to be impaired, the impairment charge is measured by calculating the amount by which the franchise rights carrying amount exceeds its fair value. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.
Lease Accounting. Judgments made by management for its lease obligations include the lease term including the determination of renewal options that are reasonably assured which can affect the classification of a lease as capital or operating for accounting purposes, the term over which related leasehold improvements for each restaurant are amortized, and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
We also must evaluate under SFAS No. 98, “Accounting for Leases” (“SFAS 98”), sales of our restaurants which occur in sale-leaseback transactions to determine the proper accounting for the proceeds of such sales either as a sale or a financing. This evaluation requires certain judgments in determining whether or not clauses in the lease or any related agreements constitute continuing involvement under SFAS 98. These judgments must also consider the various interpretations of SFAS 98 since its issuance in 1989. For those sale-leasebacks that are accounted for as financing transactions, we must estimate our incremental borrowing rate, or an alternative rate in cases where the incremental borrowing rate is not appropriate to utilize, for purposes of determining interest expense and the resulting amortization of the lease financing obligation. Changes in the determination of the incremental borrowing rates or other rates utilized in connection with the accounting for lease financing transactions could have a significant effect on the interest expense and underlying balance of the lease financing obligations.
In addition, if a purchase option exists for any properties subject to a lease financing obligation, the purchase option is evaluated for its probability of exercise on an ongoing basis. This evaluation considers many factors including, without limitation, our intentions, the fair value of the underlying properties, our ability to acquire the property, economic circumstances and other available alternatives to us for the continued use of the property. These factors may change and be considered differently in future assessments of probability.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of December 31, 2005 (in thousands):
(1) Our long-term debt obligations include $180 million of notes and $211.8 million of borrowings outstanding under the term loan B facility of our new senior credit facility. Interest payments on our notes of $121,500 for all years presented are included at the coupon rate of 9%. Interest payments included above totaling $66,873 for all years presented on our term loan B facility are variable in nature and have been calculated using an interest rate of 7.0% for each year (See Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
We are exposed to market risk associated with fluctuations in interest rates, primarily limited to our senior credit facility. There were no borrowings outstanding under the revolving credit facility at December 31, 2005 and $211.8 million of borrowings outstanding under the term loan B facility. Revolving loans under our senior credit facility bear interest at a per annum rate, at our option of either:
1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .50% to 1.50% based on the Company’s total leverage ratio (as defined in the senior credit facility); or
2) LIBOR plus a margin ranging from 2.0% to 3.0% based on the Company’s total leverage ratio.
Borrowings under the term loan B facility bear interest at a per annum rate, at the Company’s option, of either:
1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .75% to 1.0% based on the Company’s total leverage ratio; or
2) LIBOR plus a margin ranging from 2.25% to 2.50% based on the Company’s total leverage ratio.
A 1% change in interest rates would have resulted in an increase or decrease in interest expense of approximately $2.4 million for the year ended December 31, 2005.
Commodity Price Risk
We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements attached hereto is set forth in Item 15.
I TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Restatement. As discussed in Note 2 to Amendment No. 1 to our 2004 Annual Report on Form 10-K/A we restated our consolidated financial statements for the 2004, 2003 and 2002 fiscal years. Refer to Note 2 to the consolidated financial statements included in the 2004 10-K/A for a complete discussion of the restatement.
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934 (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.
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 the Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. In the evaluation, we considered the restatement of our financial statements as discussed in the 2004 10-K/A. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of January 1, 2006.
Material Weaknesses in Internal Control Over Financial Reporting A material weakness is a control deficiency (within the meaning of PCAOB Auditing Standard No. 2), or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management identified the following material weaknesses in its internal control over financial reporting as of January 1, 2006:
Personnel
In conjunction with filing the 2004 Form 10-K/A, which included the restatements discussed in Note 2 to the consolidated financial statements of that filing, management concluded that the Company did not have
sufficient personnel with the appropriate knowledge and expertise to identify and resolve certain complex accounting and tax matters. In addition, the Company did not perform the appropriate level of review commensurate with the Company’s financial reporting requirements to ensure the consistent execution of its responsibility in the areas of monitoring of controls, the application of U.S. generally accepted accounting policies and disclosures to support its accounting, tax and reporting functions. This material weakness contributed to certain of the material weaknesses discussed below.
Controls over Applying the Lease Financing Method, SFAS No. 98 and Lease Accounting Policies
(a) Controls over the application of the financing method required under SFAS No. 98, with respect to the depreciation of assets subject to lease financing obligations and the selection of the appropriate interest rate to apply to such financing obligations, were ineffective resulting in the failure to identify misstatements in property and equipment, lease financing obligations, deferred income-sale/leaseback transactions, depreciation expense, interest expense and rent expense.
(b) Controls to identify leases that contained provisions which constitute forms of continuing involvement requiring real estate transactions to be accounted for as financing transactions rather than as sale/leaseback transactions were ineffective. This resulted in the Company’s failure to identify misstatements in property and equipment, lease financing obligations, deferred income-sale/leaseback transactions, depreciation expense, interest expense and rent expense.
(c) Controls over the selection and application of lease accounting policies were not effective in determining lease terms for leasehold amortization periods and recording acquisitions of leases with non-level or above-market rentals which failed to identify misstatements in property and equipment, goodwill, deferred lease liability, depreciation expense, amortization expense and rent expense.
Controls Related to Acquired Intangibles and Deferred Taxes in Conjunction with Acquisitions
(a) Controls over the application of SFAS No. 142 “Accounting for Goodwill and Other Intangible Assets” (“SFAS 142”) were not effective in the evaluation of the amortization lives of franchise rights and the recording of deferred income tax liabilities related to franchise rights at the acquisition date resulting in misstatements of franchise rights, deferred income tax liabilities, income tax expense, and amortization expense.
(b) Controls related to the preparation, periodic analysis and recording of deferred taxes resulting from differences in financial reporting and tax bases of acquired assets and liabilities were not effective resulting in misstatements of deferred income tax assets and liabilities, goodwill and goodwill amortization expense as well as the related footnotes.
Controls Over Certain Financial Statement Disclosures
(a) Controls over the preparation of the guarantor footnote disclosures were not effective resulting in the improper allocation of corporate general and administrative and income tax expenses from the “parent company only” to the “guarantor subsidiaries” in accordance with generally accepted accounting principles.
(b) Controls over the preparation of the statements of cash flows were not effective resulting in (i) the improper classification of the proceeds from qualifying sale leaseback transactions as financing cash flows versus investing cash flows and (ii) the improper recording of the amount of capital expenditures and changes in accounts payable which did not exclude non-cash expenditures. These weaknesses resulted in the misstatements of the amount of net cash provided from (used for) operating activities, investing activities, financing activities and the amount of cash capital expenditures and in the changes in accounts payable.
Controls Over Stock Option Accounting
Controls over the application of variable accounting for stock option agreements that contained several dividend provisions were not effective which failed to identify a misstatement in stock-based compensation expense.
The control deficiencies described above resulted in the restatement of the Company’s consolidated financial statements for 2004, 2003 and 2002, and the unaudited quarterly financial information for 2004 and 2003, as well as audit adjustments to the 2004 consolidated financial statements. Additionally, each of these control deficiencies could result in the material misstatement of the aforementioned accounts that would result in material misstatements to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined at January 1, 2006 that each of these control deficiencies constituted material weaknesses.
Changes in Internal Control over Financial Reporting No change occurred in our internal control over financial reporting during the fourth quarter of 2005 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Material Weaknesses. Through the date of the filing of this Form 10-K, we have remediated the following material weaknesses: item (c) under Controls over Applying the Lease Financing Method, SFAS No. 98 and Lease Accounting Policies; item (a) under Controls Related to Acquired Intangibles and Deferred Taxes in Conjunction with Acquisitions; item (a) under Controls Over Certain Financial Statement Disclosures; and Controls Over Stock Option Accounting, as described above and have taken the following steps to improve our internal controls.
(a) We have made improvements with respect to the controls over leasing transactions in the application of lease accounting policies in determining lease terms, the assignment of appropriate lives for leasehold improvements and intangible assets related to leases, and recording the acquisitions of leases with non-level rents and, in that regard we have: (i) performed staff training and enhanced our management review over our procedures in determining the definition of lease term and the assignment of appropriate depreciable lives to leasehold improvements and intangible assets related to leases in accordance with U.S. generally accepted accounting principles, and; (ii) enhanced documentation procedures to ensure appropriate accounting for straight-line rent expense for any acquired businesses;
(b) We implemented procedures to appropriately apply variable accounting with regards to certain stock options. In addition, all stock options were cancelled and terminated during the quarter ended July 3, 2005;
(c) We improved our controls over the application of SFAS 142 in evaluating the amortization lives of franchise rights. We will continue to review any factors that would alter the remaining lives of our franchise rights as circumstances change;
(d) We developed procedures to ensure that corporate general and administrative expenses and income tax expenses are properly allocated between the “parent company only” and “guarantor subsidiaries”; and
(e) We have hired two senior-level finance professionals to augment the Company’s controls and procedures pertaining to financial reporting.
In addition, we plan to take the following steps to remediate the material weaknesses at January 1, 2006 identified as a result of our evaluation:
(a) establish procedures to properly depreciate assets subject to lease financing obligations and select the appropriate interest rate to apply under financing method required by SFAS No. 98;
(b) implement a more formalized review process including the involvement of both legal and accounting personnel to identify forms of continuing involvement in sale/leaseback transactions;
(c) further formalize, document and enhance the procedures and analysis around the reconciliation of deferred tax balances to the underlying financial reporting and tax bases; and
(d) hire additional accounting personnel with the appropriate expertise.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information about our current directors, executive officers and other named officers.
* Current member of audit committee
 Current member of compensation committee
Alan Vituli has been Chairman of the Board since 1986 and Chief Executive Officer since March 1992. Mr Vituli is also Chairman of the Board of Directors and Chief Executive Officer of Carrols Holdings. Between 1983 and 1985, Mr. Vituli was employed by Smith Barney, Harris Upham & Co., Inc. as a Senior Vice President responsible for real estate transactions. From 1966 until joining Smith Barney, Mr. Vituli was associated with the accounting firm of Coopers & Lybrand, first as an employee and for the last 10 years as a partner. Among the positions held by Mr. Vituli at Coopers & Lybrand was National Director of Mergers and Acquisitions. Before joining Coopers & Lybrand, Mr. Vituli was employed in a family-owned restaurant business. From 1993 through our acquisition of Pollo Tropical in 1998, Mr. Vituli served on the board of directors of Pollo Tropical. Mr. Vituli also serves on the board of directors of Ruth’s Chris Steak House, Inc.
Daniel T. Accordino has been President, Chief Operating Officer and a Director since February 1993. Before that, Mr. Accordino served as Executive Vice President-Operations from December 1986 and as Senior Vice President of Carrols from April 1984. From 1979 to April 1984, he was Vice President of Carrols responsible for restaurant operations, having previously served as our Assistant Director of Restaurant Operations. Mr. Accordino has been an employee of ours since 1972.
Paul R. Flanders has been Vice President, Chief Financial Officer, and Treasurer since April 1997. Before joining us, he was Vice President-Corporate Controller of Fay’s Incorporated, a retailing chain, from 1989 to 1997, and Vice President-Corporate Controller for Computer Consoles, Inc., a computer systems manufacturer, from 1982 to 1989. Mr. Flanders was also associated with the accounting firm of Touche Ross & Co. from 1977 to 1982.
Joseph A. Zirkman has been Vice President and General Counsel since January 1993. He was appointed Secretary in February 1993. Before joining us, Mr. Zirkman was an associate with the New York City law firm of Baer Marks & Upham beginning in 1986.
Timothy J. LaLonde has been Vice President, Controller since July 1997. Before joining us, he was a controller at Fay’s Incorporated, a retailing chain, from 1992 to 1997. Prior to that, he was a Senior Audit Manager with the accounting firm of Deloitte & Touche LLP, where he was employed since 1978.
Michael A. Biviano has been Executive Vice President of Taco Cabana since January 2002. Prior to that, he was Vice President-Regional Director of Operations for our Burger King restaurants since 1989, having served as a district supervisor since 1983. Mr. Biviano has been an employee of ours since 1973.
James E. Tunnessen has been Executive Vice President of Pollo Tropical since August 2003. Prior to that he was Vice President-Regional Director of Operations for our Burger King restaurants since 1989, having served as a district supervisor from 1979. Mr. Tunnessen has been an employee of ours since 1972.
Lewis S. Shaye has been Chief Concept Officer since January 2005. Prior to joining Carrols Corporation he was Senior Vice President of Brand and Product Development for Papa Gino’s Holding Corporation (PGH), which owned, operated and franchised the Papa Gino’s Pizza and D’Angelo Grilled Sandwich brands. Mr. Shaye joined PGH in 1992 as Vice President of Operations and was promoted to Senior Vice President of Brand and Product Development in September 1995. Prior to joining PGH in 1992, Mr. Shaye was Senior District Manager at Marriott Corporation where his responsibilities included operational accountability for premier Marriott contract foodservice locations.
Benjamin D. Chereskin has served as a Director since March 1997. Mr. Chereskin is a Managing Director of Madison Dearborn Partners, LLC (“Madison Dearborn”), a private equity firm, and co-founded the firm in 1993. Before that, Mr. Chereskin was with First Chicago Venture Capital for nine years. Mr. Chereskin also serves on the board of directors of Tuesday Morning Corporation and Cinemark, Inc.
Brian F. Gleason has served as a Director since October 2003. Mr. Gleason is a Managing Director and Executive Vice President of Phoenix Management Services, Inc., a national corporate revitalization advisory firm. Mr. Gleason has been affiliated with Phoenix Management Services since 1996 and serves on its board of directors. Prior to that, Mr. Gleason worked in Corporate Finance for Reliance Insurance Company since 1991. Mr. Gleason also serves on the board of directors of Thompson Products, Inc; and International Intimates, Inc. Mr. Gleason is serving on the Board of Directors as a designee of BIB Holdings. See “Certain Relationships and Related Transactions.”
Robin P. Selati has served as a Director since March 1997. Mr. Selati is a Managing Director of Madison Dearborn and joined the firm in 1993. Before 1993, Mr. Selati was associated with Alex Brown & Sons Incorporated in the consumer/retail investment banking group. Mr. Selati also serves on the board of directors of Tuesday Morning Corporation; Cinemark, Inc.; Ruth’s Chris Steak House, Inc.; and Pierre Foods, Inc.
Olaseni Adeyemi Sonuga has served as a Director since March 2004. Mr. Sonuga is the General Manager of Bahrain International Bank E.C., a Bahraini publicly quoted international investment bank that he joined in 2002 as Chief Financial Officer. The stockholders and creditors of Bahrain International Bank entered into an agreement in May of 2004, the Asset Realization Protocol, under which the Bank has been given time to liquidate its assets to meet its liabilities. Between 1999 and 2002, Mr. Sonuga served as Advisor to the Chairman of Oman Aviation Services Company SAOG, an Omani listed company that owns Oman Air and also provides airport services at all Omani airports. Prior to this, he was a Vice President at Taib Bank since 1997, a Bahraini listed company. In the period 1992 to 1997, he was the Business Services Manager of the National Drilling Company of Abu Dhabi, UAE. He began his career as a Chartered Accountant in the UK in 1979 when he joined the London office of Touche Ross. Mr. Sonuga is a Director on the board of several companies both in the USA and internationally, including Thompson Products, Inc., International Intimates, Inc. and Springfield Service Corp in the USA, BIB Holdings (Bermuda) Ltd., Crown Dilmun Holdings (CI) Ltd. and Ascot Dilmun Holdings, Ltd, internationally.
Clayton E. Wilhite has served as a Director since July 1997. Since January 1998, Mr. Wilhite has been with CFI Group Worldwide LLC, and has been Managing Partner of its North American Group from May 1998 to December 2004 and Managing Partner of CFI Worldwide LLC since January 2005. Mr. Wilhite has served since September 1998 on the board of directors of CFI Group Worldwide LLC, an international management consulting firm specializing in measuring customer satisfaction. Between 1996 and 1998, he was the Chairman of Thurloe Holdings, L.L.C. From August 1996 through our acquisition of Pollo Tropical, Mr. Wilhite served on the board of directors of Pollo Tropical, Inc. Before 1996, Mr. Wilhite was with the advertising firm of D’Arcy Masius Benton & Bowles, Inc. having served as its Vice Chairman from 1995 to 1996, as President of DMB&B/North America from 1988 to 1995, and as Chairman and Managing Director of DMB&B/St. Louis from 1985 to 1988.
All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. Our executive officers are chosen by the Board and serve at its discretion. All of our directors also serve as directors of Carrols Holdings.
Audit Committee Financial Expert
Our audit committee is comprised of Robin P. Selati, Clayton E. Wilhite and Brian F. Gleason. The Board of Directors has determined that we have at least one audit committee financial expert, Robin P. Selati, who serves as Chairman of the audit committee. Mr. Selati is serving on the Board of Directors as a designee of Madison Dearborn Capital Partners, L.P. and Madison Dearborn Capital Partners II, L.P., principal stockholders of Carrols Holdings, in accordance with Carrols Holdings’ stockholders agreement. Consequently Mr. Selati is not deemed to be an “independent” director as such term is used in the federal securities laws. Because our securities are not listed on any national securities exchange or Nasdaq, we are not required to have independent members of our Board of Directors or any committee thereof, including our audit committee.
Code of Ethics
We have adopted a Code of Ethics that applies to our chief executive officer, chief operating officer, chief financial officer, general counsel, controller and other principal financial accounting and executive employees. Our Code of Ethics is posted on our website at http://www.carrols.com. All amendments and waivers to the Code of Ethics will be disclosed through the website.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information for the fiscal years ended December 31, 2005, 2004 and 2003 for our Chief Executive Officer and our next five most highly compensated executive officers who served as executive officers of the Company during the year ended December 31, 2005 and whose annual compensation exceeded $100,000. Stock awards and option data refers to the common stock and options of Carrols Holdings.
SUMMARY COMPENSATION TABLE
(1) We provide bonus compensation to our executive officers based on an individual’s achievement of certain specified objectives and our achievement of specified increases in stockholder value. In January 2005, we also made a compensatory bonus distribution of approximately $20.3 million to employee option holders (including our executive officers and a director), in conjunction with the December 2004 refinancing on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of options owned by such persons. Bonuses earned in 2004 (and paid in 2005) by Mr. Vituli, Mr. Accordino, Mr. Biviano, Mr. Flanders and Mr. Zirkman, included $8,662,481, $4,452,922, $492,377, $505,231 and $463,806, respectively, for amounts earned in conjunction with this special bonus distribution.
(2) Represents the estimated value of shares of Carrols Holdings common stock issued to the named individuals. On May 3, 2005, Carrols Holdings issued 260,600 shares of its common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings stock, and at the same time issued an additional 5,440 shares of stock in separate awards. The number of shares awarded to Mr. Vituli, Mr. Accordino, Mr. Biviano, Mr. Shaye, Mr. Flanders and Mr. Zirkman, were 111,875, 57,509, 6,359, 2,000, 6,525 and 5,990, respectively. With the exception of Mr. Shaye, each of the named officers had an identical number of stock options cancelled in exchange for the award of stock. The fair market value of a share of our common stock on the date of these awards was estimated to be $61.50. See “Description of Plans - 2005 Stock Awards”.
(3) Reflects stock option grants for shares of Carrols Holdings common stock in 2003 and 2004. These awards were cancelled in 2005 pursuant to (2) above.
(4) Represents the premiums paid by us prior to July 2003 for split-dollar life insurance policies whereby Mr. Vituli and Mr. Accordino have designated beneficiaries.
Compensation Committee Interlocks and Insider Participation
During the last fiscal year, no executive officer of ours served as a director of or member of a compensation committee of any entity for which any of the persons serving on our Board of Directors or on the Compensation Committee of the Board of Directors is an executive officer. The Compensation Committee is comprised of Messrs. Chereskin, Wilhite and Gleason.
Board of Directors
Directors’ Compensation. Directors who are our employees do not receive any additional compensation for serving as directors. Directors who are not our employees receive a fee of $15,000 per annum, and Mr. Wilhite also receives an additional fee of $500 for each special board or committee meeting attended by him. All directors are reimbursed for all reasonable expenses they incur while acting as directors, including as members of any committee of the Board of Directors. In addition, in January 2005, Mr. Wilhite received a cash payment of $309,720 as part of the $20.3 million distribution made to employees and Mr. Wilhite in conjunction with the December 2004 refinancing. Such payment was made on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of the options he owned. See “Item 1. Business - December 2004 Refinancing”.
Liability Limitation. As permitted under the Delaware General Corporation Law, our Restated Certificate of Incorporation provides that a director will not be personally liable to us or our stockholders for monetary damages for breach of a fiduciary duty owed to our stockholders or us. By its terms and in accordance with the laws of the State of Delaware, however, this provision does not eliminate or limit the liability of any of our directors:
•
for any breach of the director’s duty of loyalty to us or our stockholders;
•
for an act or omission not in good faith or involving intentional misconduct or a knowing violation of law;
•
for any transaction from which the director derived an improper personal benefit; or
•
for an improper declaration of dividends or purchase or redemption of our securities.
Indemnification. Our Restated Certificate of Incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law.
Agreements with Named Executive Officers
Vituli Employment Agreement. Effective as of May 3, 2005, Carrols entered into an extension of an employment agreement with Alan Vituli which extended the term of an employment agreement dated January 1, 1995, as amended April 3, 1996, as further amended and restated on March 27, 1997, as further amended and extended on April 1, 2002 and as further extended on November 11, 2004, between Carrols and Mr. Vituli upon the same terms and conditions as previously set forth in the employment agreement. Pursuant to the employment agreement, which will expire on December 31, 2006, Mr. Vituli will continue to serve as Chairman of the Board of Directors and Chief Executive Officer of Carrols. The employment agreement is subject to automatic renewals for successive one-year terms unless either Mr. Vituli or we elect not to renew by giving written notice to the other at least 90 days before a scheduled expiration date. The employment agreement provides that Mr. Vituli receive a base salary, which was $600,000 when the agreement was extended on May 3, 2005, and provides that such amount be increased annually by at least $25,000 on each January 1. Pursuant to the employment agreement, Mr. Vituli participates in Carrols’ Executive Bonus Plan and any of our stock option plans applicable to executive employees. The employment agreement also requires us to provide (or reimburse the insurance cost of) medical coverage for Mr. Vituli and his spouse for their respective lives and to maintain the premium payments on a split-dollar life insurance policy on the life of Mr. Vituli providing a death benefit of $1.5 million payable to an irrevocable trust designated by Mr. Vituli. The Company no longer provides for premium payments on this policy. The employment agreement also provides that if Mr. Vituli’s employment is terminated without cause (as defined in the employment agreement) within six months following a change of control (as defined in the employment agreement), Mr. Vituli will receive a cash lump sum equal to his salary during the previous 12 months. The employment agreement also provides that if Mr. Vituli’s employment is terminated by Carrols without cause (other than following a change in control as described above) or Mr. Vituli resigns with good reason (as defined in the employment agreement), Mr. Vituli will receive a cash payment in an amount equal to 2.99 times his average salary plus average annual bonus for the prior five years. The employment agreement includes non-competition and non-solicitation provisions effective during the term of the employment agreement and for two years following its termination.
Accordino Employment Agreement. Effective as May 3, 2005, Carrols entered into an extension of an employment agreement with Daniel T. Accordino which extended the term of an employment agreement dated January 1, 1995, as amended April 3, 1996, as further amended and restated on March 27, 1997, as further amended and extended on April 1, 2002 and as further extended on November 11, 2004, between Carrols and Mr. Accordino upon the same terms and conditions as previously set forth in the employment agreement. Pursuant to the employment agreement, which will expire on December 31, 2006, Mr. Accordino will continue to serve as President and Chief Operating Officer of Carrols. The employment agreement is subject to automatic renewals for successive one-year terms unless either Mr. Accordino or we elect not to renew by giving written notice to the other at least 90 days before a scheduled expiration date. The employment agreement provides that Mr. Accordino receive a base salary, which was $460,000 when the agreement was extended, and provides that such amount be increased annually by at least $20,000 on each January 1. Pursuant to the employment agreement, Mr. Accordino participates in Carrols’ Executive Bonus Plan and any of our stock option plans applicable to executive employees. The employment agreement also requires us to provide (or reimburse the insurance cost of) medical coverage for Mr. Accordino and his spouse for their respective lives and to maintain the premium payments on a split-dollar life insurance policy on the life of Mr. Accordino providing a death benefit of $1.0 million payable to an irrevocable trust designated by Mr. Accordino. The Company no longer provides for premium payments on this policy. The employment agreement also provides that if Mr. Accordino’s employment is terminated without cause (as defined in the employment agreement) within six months following a change of control (as defined in the employment agreement), Mr. Accordino will receive a cash lump sum equal to his salary during the previous 12 months. The employment agreement also provides that if Mr. Accordino’s employment is terminated by Carrols without cause (other than following a change in control as described above) or Mr. Accordino resigns with good reason (as defined in the employment agreement),
Mr. Accordino will receive a cash payment in an amount equal to 2.99 times his average salary plus average annual bonus for the prior five years. The employment agreement includes non-competition and non-solicitation provisions effective during the term of the employment agreement and for two years following its termination.
Change of Control Agreement. On December 27, 2002, we entered into a change of control agreement with each of Mr. Flanders, Mr. Zirkman, and four of our other officers. Each change of control agreement provides that if within one year following a change of control (as defined in the change of control agreement) of either Carrols Holdings or Carrols, an employee’s employment is terminated by us without cause (as defined in the change of control agreement) or by the employee for good reason (as defined in the change of control agreement), then such employee will be entitled to receive (a) a lump sum payment in the amount equal to one year’s salary at the then current rate, (b) a prorated bonus payment through the date of termination and in accordance with the Executive Bonus Plan then in effect and (c) continued coverage under our welfare and benefits plans for such employee and his dependents for a period of up to one year or sooner if such benefits are provided to the employee by a new employer. The payments and benefits due under each change of control agreement cannot be reduced by any compensation earned by the employee or any benefits provided to the employee as a result of employment by another employer or otherwise. The payments are also not subject to any set-off, counterclaim, recoupment, defense or other right that we may have against the employee.
2005 Stock Awards
Effective May 3, 2005, Carrols Holdings issued an aggregate of 260,600 shares of Carrols Holdings common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Carrols Holdings’ common stock. As a consequence of the exchange, all outstanding stock options were cancelled and terminated. All shares were issued pursuant to stock award agreements, effective May 3, 2005, which provide that such shares are fully vested and non-forfeitable upon issuance, but may not be sold or otherwise disposed of for a period of two years from the date of issuance. Such agreements also provide that up to an aggregate of 16% of each recipients’ shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Carrols Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such shares may be subject to repurchase by Carrols Holdings (at its option) in the event of a termination of employment before the occurrence of certain events.
Description of Plans
Employee Retirement Plan. We offer salaried employees the option to participate in the Carrols Corporation Retirement Savings Plan (“the Retirement Plan”). Under the Retirement Plan, our contributions begin to vest after one year and fully vest after five years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. We may elect to contribute on an annual basis to the Retirement Plan. Our contributions are equal to 50% of the employee’s contribution to a maximum contribution of $520 annually for any plan year that we participate in an employee match. The Retirement Plan includes a pre-tax savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post-tax savings option. Participating employees may contribute up to 18% of their salary annually to either of the savings options, subject to other limitations. The employees have various investment options available under a trust established by the Retirement Plan. The employee’s contributions may be withdrawn at any time, subject to restrictions on future contributions. Our matching contributions may be withdrawn by the employee under certain conditions of financial necessity or hardship as defined in the Retirement Plan. Our contributions to the Retirement totaled $403,000 and $432,000 for the years ended December 31, 2005 and 2003, respectively. For the 2004 plan year, we did not make any matching contributions.
Deferred Compensation Plan. We have a Deferred Compensation Plan which permits employees not eligible to participate in the Carrols Corporation Retirement Savings Plan because they have been excluded as “highly compensated” employees (as so defined in the Retirement Plan), to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds.
Bonus Plans. We have cash bonus plans designed to promote and reward excellent performance by providing employees with incentive compensation. Key senior management executives of each operating division can be eligible for bonuses equal to varying percentages of their respective annual salaries determined by our performance as well as the division’s performance.
Long-Term Incentive Plans. Carrols Holdings historically maintained several long-term incentive plans. As indicated above (See “2005 Stock Awards”) all outstanding stock options were cancelled and terminated effective May 3, 2005 in exchange for the issuance of an identical number of shares of common stock. At the same time, all stock option plans were terminated. The terminated plans included: (i) the Carrols Holdings Corporation 1996 Long-Term Incentive Plan; (ii)the Carrols Holdings Corporation 1998 Directors’ Stock Option Plan; (iii) the Carrols Holdings Corporation 1998 Pollo Tropical Long-Term Incentive Plan; and, (iv) the Carrols Holdings Corporation 2001 Taco Cabana Long-Term Incentive Plan.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number and percentage of shares of voting common stock of Carrols and of Carrols Holdings beneficially owned, as of May 31, 2006, by (i) each person who is known by us to own beneficially more than 5% of our common stock; (ii) each member of our current board of directors; (iii) each of our named executive officers; and (iv) all members of our board of directors and our executive officers as a group.
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated.
* Less than 1%
(1) The percentage of outstanding shares is based on 1,407,424 shares of common stock outstanding as of May 31, 2006. The number of shares of common stock shown in the table includes shares that were issued on May 3, 2005 to executive officers and a director in exchange for the cancellation and termination of all of their existing stock options. The number of shares issued to each person was identical to the number of stock options held (except for Mr. Shaye who held no options) and were as follows: 111,875 shares for Mr. Vituli; 57,509 shares for Mr. Accordino; 6,525 shares for Mr. Flanders; 5,990 shares for Mr. Zirkman; 2,022 shares for Mr. LaLonde; 6,359 shares for Mr. Biviano; 4,544 shares for Mr. Tunnessen; 2,000 shares for Mr. Shaye and 4,000 shares for Mr. Wilhite. See “Executive Compensation - 2005 Stock Awards”.
(2) The address of BIB Holdings (Bermuda) Ltd is c/o Dilmun Investments, Inc., 84 West Park Place, Stamford, CT 06901. The address of Madison Dearborn, each of the Madison Dearborn entities, Mr. Chereskin and Mr. Selati is Three First National Plaza, Suite 3800, Chicago, IL 60602. The address of the other directors and executive officers listed is c/o Carrols Corporation, 968 James Street, Syracuse, NY 13203.
(3) These 566,667 shares of common stock were previously owned by Atlantic Restaurants, Inc., which was formed to effect the acquisition of Carrols in 1996. Atlantic Restaurants, which was a wholly-owned subsidiary of BIB Holdings, was merged into BIB Holdings on February 10, 1999. BIB Holdings is a wholly-owned subsidiary of Bahrain International Bank. The stockholders and creditors of Bahrain International Bank agreed in May 2004 to an asset realization protocol under which Bahrain International Bank’s assets will be liquidated.
(4) Consists of 283,333 shares held by Madison Dearborn Capital Partners, L.P. (“MDCP”) and 283,334 shares held by Madison Dearborn Capital Partners II, L. P. (“MDCPII”). The shares held by MDCP and MDCPII may be deemed to be beneficially owned by entities affiliated with Madison Dearborn, including Madison Dearborn Partners, L.P. (“MDP”), the general partner of MDCP, Madison Dearborn Partners II, L.P. (“MDPII”), the general partner of MDCPII, and Madison Dearborn Partners, Inc., the general partner of MDP and MDPII.
(5) All shares are held by the Vituli Family Trust and deemed to be beneficially owned by Mr. Vituli.
(6) All of such shares are held by affiliates of Madison Dearborn as reported in footnote (4) above. Mr. Chereskin and Mr. Selati are each Managing Directors of Madison Dearborn, and therefore they each may be deemed to share voting and investment power over the shares owned by these entities, and therefore to beneficially own such shares. Both Mr. Chereskin and Mr. Selati disclaim beneficial ownership of all such shares.
Equity Compensation Plan Information
All outstanding stock option awards were cancelled and terminated effective May 3, 2005 in exchange for the issuance of an identical number of shares of common stock. See “2005 Stock Awards”. At the same time, all stock option plans were terminated. The terminated plans included: (i) the Carrols Holdings Corporation 1996 Long-Term Incentive Plan; (ii)the Carrols Holdings Corporation 1998 Directors’ Stock Option Plan; (iii) the Carrols Holdings Corporation 1998 Pollo Tropical Long-Term Incentive Plan; and, (iv) the Carrols Holdings Corporation 2001 Taco Cabana Long-Term Incentive Plan. We have 3,560 shares of Holdings’ common stock reserved for future issuance.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement. On March 27, 1997, in connection with the investment by MDCP and MDCPII, all holders of Carrols Holdings’ common stock entered into a Stockholders Agreement. In general, the agreement (as amended in October 2003) provides that all holders of Carrols Holdings’ common stock will vote their common stock in order to cause the following individuals to be elected to the Board of Directors of Carrols Holdings and each of its subsidiaries (including us):
(a) three representatives designated collectively by MDCP and MDCPII, provided that the third designee shall not be entitled to remain on the Board of Directors unless BIB Holdings has three designees serving on the Board of Directors at such time (so long as BIB Holdings is entitled to three Board designees at such time) subject to adjustment if the percentage holdings of MDCP and MDCPII collectively, decreases below a certain threshold;
(b) three representatives designated by BIB Holdings, provided that the third designee shall not be entitled to remain on the Board of Directors unless Madison Dearborn has three designees serving on the Board of Directors at such time (so long as Madison Dearborn is entitled to three Board designees at such time), subject to adjustment if the percentage holdings of BIB Holdings decreases below a certain threshold; and
(c) two representatives designated by Mr. Vituli as long as Mr. Vituli is our Chief Executive Officer.
Currently, Messrs. Chereskin and Selati are serving on the Board of Directors as designees of Madison Dearborn, Messrs. Gleason, Sonuga and Wilhite are serving on the Board of Directors as designees of BIB Holdings and Messrs. Vituli and Accordino are serving on the Board of Directors as designees of Mr. Vituli.
Pursuant to the stockholders agreement as currently in effect, Madison Dearborn has the right, at any time, to either cause a third designee to be elected to the Board of Directors or cause the removal of a third BIB Holdings designee from the Board of Directors.
In addition, the agreement provides for certain limitations on the ability of holders of Carrols Holdings’ common stock to sell, transfer, assign, pledge or otherwise dispose of their common stock. The agreement contains covenants requiring us to obtain the prior consent of MDCP, MDCPII and, in certain circumstances, BIB Holdings before taking certain actions including the redemption, purchase or other acquisition of Carrols Holdings’ capital stock, changing the capital budget approved by Carrols Holdings’ Board of Directors for that year or the entry into the ownership, active management or operation of any business other than Burger King franchise restaurants.
Registration Rights Agreement. On March 27, 1997, in connection with the investment by MDCP and MDCPII, those entities, BIB Holdings, Alan Vituli, Daniel T. Accordino and Joseph A. Zirkman entered into a registration agreement with Carrols Holdings. The registration agreement provides for demand and piggyback registration rights with respect to Carrols Holdings’ common stock. MDCP, MDCPII or BIB Holdings may demand registration under the Securities Act of all or any portion of their shares of Carrols Holdings’ common stock or options for shares of Carrols Holdings’ common stock (the “Registrable Securities”), provided that:
(1) in the case of the first demand registration, MDCP, MDCPII and BIB Holdings must consent to a demand registration unless Carrols Holdings has completed a registered public offering of the Carrols Holdings’ common stock; and
(2) all demand registrations on Form S-1 must be underwritten.
MDCP and MDCPII, collectively, and BIB Holdings are each entitled to request:
(1) three demand registrations on Form S-1 in which Carrols Holdings will pay all registration expenses, provided that the offering value of the Registrable Securities is at least $15 million; and
(2) an unlimited number of demand registrations on Form S-3 in which Carrols Holdings will pay all registration expenses, provided that the offering value of the Registrable Securities is at least $5 million with an underwritten offering equal to at least $10 million.
Whenever Carrols Holdings proposes to register any of its securities (other than pursuant to a demand registration) and the registration form may be used for the registration of Registrable Securities, Carrols Holdings shall give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and shall include in such registration all Registrable Securities to which Carrols Holdings has received written requests for inclusion in such registration within 20 days after receipt of Carrols Holdings’ notice. Carrols Holdings shall pay the registration expenses of the holders of Registrable Securities in all such piggyback registrations. The Registration Agreement contains typical “cut back” provisions in connection with both demand registrations and piggyback registrations. Carrols Holdings will provide the holders of the Registrable Securities with typical indemnification in the event of certain misstatements or omissions made in connection with both demand registrations and piggyback registrations.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On September 27, 2005, the Company engaged Deloitte & Touche LLP as its Independent Registered Public Accounting Firm. In the discussions that follow, figures related to the 2005 fiscal year reflect the billings of Deloitte & Touche LLP and the figures related to the 2004 fiscal year reflect billings of PricewaterhouseCoopers LLP.
The following table summarizes the aggregate fees billed to us by our principal independent registered public accounting firms, Deloitte & Touche LLP in 2005 and PricewaterhouseCoopers LLP in 2004:
(a) Audit fees include services related to the audit of the Company’s annual consolidated financial statements and review of the interim quarterly consolidated financial statements.
(b) Audit-related fees for 2004 were substantially in connection with our refinancing transactions during 2004 and $5,000 for employee benefit plan audits.
(c) Fees for tax services billed in 2004 and 2005 consisted of $10,000 and $20,000 for tax compliance, respectively, and $104,000 and 45,000 respectively, for tax planning and advice, which included an earnings and profits study in 2004.
In considering the nature of the services provided by the independent registered public accountants, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with the independent auditor and Company management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the Securities and Exchange Commission in connection with the Sarbanes-Oxley Act of 2002.
Pre-Approval Policy
The services performed by the independent auditor in 2004 were pre-approved in accordance with the pre-approval procedures adopted by the Audit Committee. All requests for audit, audit-related, tax, and other services must be submitted to the Audit Committee for specific pre-approval and cannot commence until such pre-approval has been granted.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
Page
CARROLS CORPORATION AND SUBSIDIARIES
Reports of Independent Registered Public Accounting Firms
,
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholder’s Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
to
(a) (2) Financial Statement Schedules
Schedule
Description
Page
II
Valuation and Qualifying Accounts
Schedules other than those listed are omitted for the reason that they are not required, not applicable, or the required information is shown in the financial statements or notes thereto.
Separate financial statements of the Company are not filed for the reasons that (1) consolidated statements of the Company and its consolidated subsidiaries are filed and (2) the Company is primarily an operating Company and all subsidiaries included in the consolidated financial statements filed are wholly-owned.
(a) (3) Exhibits
EXHIBIT INDEX
(1) Management contract or compensatory plan or arrangement identified pursuant to this report.
(2) Filed herewith.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Carrols Corporation
Syracuse, New York
We have audited the accompanying consolidated balance sheet of Carrols Corporation and subsidiaries (the “Company”) as of January 1, 2006, and the related consolidated statements of operations, changes in stockholder’s equity (deficit), and cash flows for the year then ended. Our audit also included the 2005 financial statement schedule listed in the Index at Item 15 (a)(2). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Carrols Corporation and subsidiaries at January 1, 2006, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2005 financial statement schedule, when considered in relation to the basic 2005 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche
Rochester, New York
June 30, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder
of Carrols Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Carrols Corporation and its subsidiaries at December 31, 2004 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements included in the 2004 Form 10K/A (not separately presented herein), the consolidated financial statements as of December 31, 2004 and for the years ended December 31, 2004 and 2003 have been restated.
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
July 27, 2005, except for the current restatement section of Note 2 to the consolidated financial statements included in the 2004 Form 10K/A (not separately presented herein) as to which the date is June 29, 2006
CA RROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(in thousands of dollars except share and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars)
The accompanying notes are an integral part of these consolidated financial statements.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY (DEFICIT)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars)
The accompanying notes are an integral part of these consolidated financial statements.
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars)
The accompanying notes are an integral part of these consolidated financial statements.
CARROLS C ORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
1. Summary of Significant Accounting Policies
Basis of Consolidation. The consolidated financial statements include the accounts of Carrols Corporation and its subsidiaries (the “Company”). All intercompany transactions have been eliminated in consolidation. The Company is a wholly-owned subsidiary of Carrols Holdings Corporation (“Holdings”).
Business Description. At December 31, 2005, the Company operated, as franchisee, 336 quick-service restaurants under the trade name “Burger King” in thirteen Northeastern, Midwestern and Southeastern states. At December 31, 2005, the Company also owned and operated 69 Pollo Tropical restaurants located in Florida and franchised a total of 26 Pollo Tropical restaurants in Puerto Rico, Ecuador and Florida. At December 31, 2005, the Company owned and operated 135 Taco Cabana restaurants located primarily in Texas and franchised three restaurants in New Mexico and Georgia.
Use of Estimates. The preparation of the consolidated 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. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation of goodwill, impairment of long-lived assets and impairment of Burger King franchise rights. Actual results could differ from those estimates.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to fiscal years ended December 28, 2003, January 2, 2005 and January 1, 2006 will be referred to as fiscal years ended December 31, 2003, 2004 and 2005, respectively. The fiscal years ended December 31, 2005 and 2003 each contained 52 weeks. The fiscal year ended December 31, 2004 contained 53 weeks.
Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At December 31, 2005 and 2004 the Company had $2.0 million and $28.0 million, respectively, invested in money market funds.
Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are primarily comprised of food and paper.
Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed in service. Property and equipment are recorded at cost. Repair and maintenance activities are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
Leasehold improvements are being depreciated over the shorter of their useful lives or the underlying lease term. In circumstances where an economic penalty, as defined under Statement of Financial Accounting Standards No. 13, “Accounting for Leases”, (“SFAS 13”) would be presumed by not exercising one or more renewal options under the lease, the Company includes those renewal option periods when determining the lease term. For significant leasehold improvements made during the latter part of the lease term, the Company
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
amortizes those improvements over the shorter of their useful life or an extended lease term. The extended lease term would consider the exercise of renewal options if the value of the improvements would cause a penalty to be incurred without the renewal of the option. Building costs incurred for new restaurants on leased land are depreciated over the lease term, which is generally a 20-year period.
Burger King Franchise Rights. For its Burger King restaurant acquisitions prior to January 1, 2002, the Company has generally allocated to franchise rights, an intangible asset, the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets acquired. The Company made an assessment of remaining life of its intangible assets as part of its implementation of SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”). As of January 1, 2002, amounts allocated to franchise rights for each acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty year renewal period. The average remaining life of all franchise rights at January 1, 2002 was approximately 31 years.
Burger King Franchise Agreements. Fees for initial franchises and renewals are amortized using the straight-line method over the term of the agreement, which is generally twenty years.
Goodwill. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with SFAS 142, goodwill is not subject to amortization but is tested at least annually for impairment. The Company performs its impairment evaluation annually at December 31.
Long-Lived Assets. The Company assesses the recoverability of property and equipment, franchise rights and intangible assets by determining whether the carrying value of these assets, over their respective remaining lives, can be recovered through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate the carrying amounts of these assets may not be fully recoverable.
Deferred Financing Costs. Financing costs, that are included in other assets and were incurred in obtaining long-term debt and lease financing obligations, are capitalized and amortized over the life of the related obligation as interest expense using the effective interest method.
Leases. Leases are accounted for in accordance with SFAS 13 and other related authoritative guidance. Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term, including any option period included in the determination of the lease term. Contingent rentals are generally based upon a percentage of sales or a percentage of sales in excess of stipulated amounts and are generally not considered minimum rent payments but are recognized as rent expense when incurred.
Lease Financing Obligations. Lease financing obligations pertain to real estate transactions required by SFAS No. 98 “Accounting for Leases” to be accounted for under the financing method. The assets (land and building) subject to these obligations remain on the consolidated balance sheet at their historical costs and such assets (excluding land) continue to be depreciated over their remaining useful lives, the proceeds received by the Company from these transactions are recorded as lease financing obligations and the lease payments are applied as payments of principal and interest. The selection of the interest rate on lease financing obligations is evaluated based on the Company’s incremental borrowing rate adjusted to the rate required to prevent recognition of a non-cash loss or negative amortization of the obligation through the end of the primary lease term. In addition, if a purchase option exists for any properties subject to a lease financing obligation, the purchase option is evaluated for its probability of exercise on an ongoing basis. This evaluation considers many factors including,
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
without limitation, our intentions, the fair value of the underlying properties, our ability to acquire the property, economic circumstances and other available alternatives to us for the continued use of the property. At December 31, 2005 and 2004 no purchase options were considered probable of exercise by the Company.
Revenue Recognition. Revenues from Company owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues associated with Pollo Tropical and Taco Cabana restaurants are based on a percent of gross sales and are recorded as income when earned.
Income Taxes. The Company provides for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the liability method specified by SFAS 109, deferred tax assets and liabilities are based on the difference between the financial statement and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when these differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities during the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts for which realization is more likely than not. The Company also records a reserve for uncertain tax positions when it is probable and estimable. The Company and its subsidiaries file a consolidated federal income tax return with Holdings.
Advertising Costs. All advertising costs are expensed as incurred.
Cost of Sales. The Company includes the cost of food, beverage and paper, less purchase discounts, in cost of sales.
Self Insurance. The Company is generally self-insured for workers compensation, general liability and medical insurance. The Company maintains stop loss coverage for both individual and aggregate claim amounts. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims based on Company experience and certain actuarial methods used to measure such estimates. The Company does not discount any of its self-insurance obligations.
Fair Value of Financial Instruments. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
•
Current Assets and Liabilities. The carrying value of cash and cash equivalents and accrued liabilities approximates fair value because of the short maturity of those instruments.
•
Senior Subordinated Notes. The fair values of outstanding senior subordinated notes are based on quoted market prices. The fair values at December 31, 2005 and 2004 were approximately $174.6 million and $186.3 million, respectively.
•
Revolving and Term Loan Facilities. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value. The recorded amounts, as of December 31, 2005 and 2004, approximated fair value.
Stock-Based Compensation. Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings common stock. During the second quarter of 2005 Holdings issued an additional 5,440 shares of Holdings common stock in separate awards. As a consequence of the exchange, all outstanding stock options were cancelled and terminated. The Company recorded a pre-tax compensation charge, including applicable payroll taxes, of $16.4 million in the second quarter of 2005 due to these stock awards. See Note 12 for a complete discussion of the stock award.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) permits entities to recognize as an expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB 25”) and provide pro forma net income disclosures for employee stock option grants as if the fair-value-based method defined in SFAS 123 has been applied. The Company did not elect to change to the fair value-based-method of accounting for stock-based compensation and has continued to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123 in fiscal 2005, 2004 and 2003. Certain provisions of the Company’s option plans caused the Company to account for stock options using a variable accounting treatment. Under variable accounting, compensation expense must be remeasured each balance sheet date based on the difference between the current market price of the Company’s stock and the option’s exercise price. An accrual for compensation expense is determined based on the proportionate vested amount of each option as prescribed by Financial Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” Each period, adjustments to the accrual are recognized in the income statement. Stock-based compensation expense for the Company’s options was $75 in 2005, $1,818 in 2004 and $253 in 2003.
The following table presents the Company’s pro forma net income (loss) had compensation cost been determined based upon the fair value of the stock options at the grant date consistent with the fair-value based method of SFAS 123:
(1) The amount of stock-based compensation expense included in reported net income (loss) includes certain stock options requiring variable accounting (see Note 12) and for the year ended December 31, 2005, includes $13.1 million of expense related to stock awards granted in the second quarter of 2005, net of tax. This expense, net of tax, has also been included in the determination of compensation expense determined under the fair-value based method for the year ended December 31, 2005.
(2) For the year ended December 31, 2004, the equity value of the Company was reduced as a result of the December 2004 refinancing (See Note 7) in which a non-recurring dividend of $116.8 million was paid to Holdings. In conjunction with this, the Company also approved a compensatory bonus payment of approximately $20.3 million to a number of employees (including management) and a director who owned stock options, on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of the options owned by such persons. The Company did not modify its outstanding stock options to reflect the reduction in equity value. Therefore for the year ended December 31, 2004, this reduction has been offset against the $20.3 million bonus payment recorded for the determination of compensation expense under SFAS 123. The $20.3 million bonus payment, net of tax, has also been included in stock-based employee compensation expense included in reported net loss for the year ended December 31, 2004 in the above table.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
The Company did not grant any options in 2005. The fair value of each option grant in 2004 and 2003 was estimated using the minimum value option-pricing model with the following weighted-average assumptions:
Earnings Per Share Presentation. The guidance of SFAS No. 128, “Earnings Per Share,” requires presentation of earnings per share by all entities that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange (domestic of foreign) or in the over-the-counter market. The Company’s common stock is not publicly traded and therefore, earnings per share amounts are not presented.
Recent Accounting Developments.
In December 2004, the Financial Accounting Standards Board (“FASB’) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB No. 25. SFAS 123R requires the measurement of all employee share-based payments, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 “Share-Based Payments” (“SAB 107”) which expresses views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements. SFAS 123R is effective for awards that are granted, modified, or settled in cash for the first annual reporting period beginning after June 15, 2005. The Company plans to adopt the provisions of SFAS 123R using the modified prospective method of adoption at January 1, 2006. However, as all shares of stock issued in the stock award in the second quarter of 2005 were fully vested (see Note 12) and the Company does not have any stock options outstanding at December 31, 2005, the Company will not record any stock-based compensation expense related to SFAS 123R upon adoption on January 1, 2006. Compensation cost for any share-based awards granted after December 31, 2005 will be recorded upon issuance at their fair value over their service period.
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (“FIN 47”). FIN 47 clarifies that the term “conditional” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” which refers to a legal obligation to perform an asset retirement activity even if the timing and/or settlement are conditional on a future event that may or may not be within the control of an entity. Accordingly, the entity must record a liability for the conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 is effective for periods no later than fiscal years ending after December 15, 2005. The Company performed an evaluation and determined that the adoption of FIN 47 had no effect on the Company’s 2005 consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). This Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
made in fiscal years beginning after December 15, 2005. The Company will apply this literature in the event of changes in accounting principle and error corrections for periods beginning on January 1, 2006.
In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” This Issue discussed how entities are to adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the amounts of taxes. The guidance is effective for periods beginning after December 15, 2006. The Company presents restaurant sales net of sales taxes and therefore Issue 06-3 will not impact the method for recording these sales taxes in our consolidated financial statements.
2. Property and Equipment
Property and equipment at December 31 consisted of the following:
Assets subject to capital leases pertain to buildings leased for certain restaurant locations and had accumulated amortization at December 31, 2005 and 2004 of $6,872 and $11,864, respectively. At December 31, 2005 and 2004, land of $45,077 and $45,551, respectively, and owned buildings of $56,580 and $57,186, respectively, were subject to lease financing obligations accounted for under the financing method (See Note 8). Accumulated depreciation pertaining to owned buildings subject to lease financing obligations at December 31, 2005 and 2004 was $24,416 and $21,877, respectively.
Depreciation expense for all property and equipment for the years ended December 31, 2005, 2004 and 2003 was $29,110, $34,462 and $36,024, respectively.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
3. Goodwill, Franchise Rights and Intangible Assets
Goodwill. In accordance with SFAS No. 142, the Company reviews goodwill for impairment annually, or more frequently when events and circumstances indicate that the carrying amounts may be impaired. The Company performs its annual impairment assessment as of December 31 and has determined its reporting units to be at the operating segment level: its Burger King restaurants, operating as a franchisee; Pollo Tropical and Taco Cabana at the brand level. No impairment losses have been recognized as a result of these tests since January 1, 2002. The Company recorded $2.7 million of goodwill associated with the acquisition of four Taco Cabana restaurants in July of 2005. Changes in goodwill for the year ended December 31, 2005 and 2004 are summarized below:
Burger King Franchise Rights. Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty-year renewal period. Following is a summary of the Company’s franchise rights as of the respective balance sheet dates:
Amortization expense related to Burger King franchise rights for the years ended December 31, 2005, 2004 and 2003 was $3,215, $3,233 and $3,233, respectively. Estimated annual amortization is $3,215 for each of the years ending 2006 through 2010.
Intangible Assets. In July 2005, the Company completed the acquisition of four Taco Cabana restaurants from a franchisee for a cash purchase price of approximately $4.2 million. Under Emerging Issues Task Force Issue No. 04 -1 “Accounting for Preexisting Relationships between the Parties to a Business Combination (“EITF 04-1”), certain reacquired rights, including the right to the acquirer’s trade name, are required to be recognized as intangible assets apart from goodwill. The Company has allocated $1.6 million of the purchase price to this intangible asset and determined its weighted average life to be approximately seven years, based on the remaining terms of the acquired franchise agreements. The Company recorded amortization expense relating to the intangible asset of approximately $145 for the year ended December 31, 2005 and expects the annual expense for each of the next five years ending 2006 through 2010 to be $289, $289, $211, $133 and $125, respectively.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
4. Impairment of Long-Lived Assets
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of the assets, an estimate of undiscounted future cash flows produced by 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. 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.
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. The Company recorded impairment charges related to its Burger King franchise rights of $316 and $283 for the years ended December 31, 2005 and 2004, respectively. No impairment charges were recorded related to the Company’s Burger King franchise rights for the year ended December 31, 2003.
The Company recorded impairment losses on long-lived assets, including Burger King franchise rights, for its segments as follows:
5. Other Liabilities, Long-Term
Other liabilities, long-term, at December 31, consisted of the following:
Unearned purchase discounts are amortized as a reduction of cost of sales either over the life of the supplier contract or the estimated purchase commitment period. In 2000, Burger King Corporation arranged for the Coca-Cola Company and Dr. Pepper/Seven-Up, Inc. to provide funding to franchisees in connection with certain initiatives to upgrade restaurants. The Company received approximately $19.8 million in 2000 and $1.6 million in 2001 under this arrangement with these suppliers. The total amount of these purchase discounts amortized for each of the years ended December 31, 2005, 2004 and 2003 was $2.2 million.
Accrued occupancy costs include obligations pertaining to closed restaurant locations, contingent rent, accruals to expense operating lease rental payments on a straight-line basis over the lease term, and acquired leases with above market rentals.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
In 2001, management made the decision to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At December 31, 2005 and 2004, the Company had $1.1 million and $0.6 million in lease liability reserves, respectively, and $0 and $0.1 million, respectively, in other exit cost reserves related to these restaurants that are included in accrued occupancy costs. The following table presents the activity in the exit cost reserve included in accrued occupancy costs:
In 2005, lease liability reserves were increased due a change in circumstances affecting the Company’s estimates of future sub-lease revenue for one restaurant property.
6. Leases
The Company utilizes land and buildings in operation under various lease agreements. We do not consider any of these individual leases material to the Company’s operations. Initial lease terms are generally for twenty years and, in many cases, provide for renewal options and in some cases rent escalations. Certain leases require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy costs including payment of property taxes, insurance and utilities.
In the years ended December 31, 2005, 2004 and 2003, the Company sold four, eight and thirty-one restaurant properties in sale-leaseback transactions for net proceeds of $5,237, $10,984 and $44,180, respectively. Deferred gains of $2,556, $2,391 and $5,399 for the years ended December 31, 2005, 2004 and 2003, respectively, have been recorded as a result of these sale-leaseback transactions and are being amortized over the lives of the related leases. These related leases have been classified as operating leases and generally contain a twenty-year initial term with renewal options. The amortization of deferred gains related to these sale-leaseback transactions was $481, $458 and $180 for the years ended December 31, 2005, 2004 and 2003, respectively.
Minimum rent commitments under capital and non-cancelable operating leases at December 31, 2005 were as follows:
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
Total rent expense on operating leases, including percentage rent on both operating and capital leases, for the past three fiscal years was as follows:
7. Long-Term Debt
Long-term debt at December 31 consisted of the following:
December 2004 Refinancing
On December 15, 2004, the Company completed the private placement of $180.0 million of 9% Senior Subordinated Notes due 2013. Concurrently, the Company repaid all outstanding borrowings under its prior senior secured credit facility and amended and restated that credit facility with a new syndicate of lenders. The Company received $400.0 million in total proceeds that included the issuance of the 9% senior subordinated notes and $220.0 million principal amount of term loan B borrowings under the senior credit facility. Those proceeds were primarily utilized to repay borrowings outstanding under the prior senior credit facility of $74.4 million, to retire all unsecured 9 1/2% senior subordinated notes due 2008 outstanding in the amount, including redemption premiums, of $175.9 million, to pay a dividend to Holdings (which Holdings in turn paid to its stockholders) in the amount of $116.8 million, to pay fees and expenses related to the refinancing of $8.8 million, and to pay a bonus to employees and a director totaling $20.9 million including payroll taxes of $0.6 million. See discussion of these payments in Note 11. The Company also recorded an $8.9 million loss on early extinguishment of debt from the write-off of previously deferred financing costs and premiums in conjunction with the retirement of the 9 1/2% senior subordinated notes.
Senior Secured Credit Facility:
On December 15, 2004, the Company entered into a new senior secured credit facility with a syndicate of lenders. The senior secured credit facility provides for a revolving credit facility under which the Company may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline loans), a term loan B facility of $220.0 million and incremental borrowing facilities, at the Company’s option, of up to $100.0 million, subject to the satisfaction of certain conditions.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
There were no borrowings outstanding on the revolving credit facility at December 31, 2005 or 2004. After reserving $11.1 million for letters of credit guaranteed by the facility, $38.9 million was available for borrowings under the revolving credit facility at December 31, 2005.
Borrowings under the revolving credit facility bear interest at a per annum rate, at the Company’s option, of either:
1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .50% to 1.50% based on the Company’s total leverage ratio (as defined in the senior credit facility); or
2) LIBOR plus a margin ranging from 2.0% to 3.0% based on the Company’s total leverage ratio.
Borrowings under the term loan B bear interest at a per annum rate, at the Company’s option, of either:
1) the sum of (a) the greater of (i) the prime rate or (ii) the federal funds rate plus .50%, plus (b) a margin ranging from .75% to 1.0% based on the Company’s total leverage ratio; or
2) LIBOR plus a margin ranging from 2.25% to 2.50% based on the Company’s total leverage ratio.
The revolving credit facility expires on December 31, 2009 and the term loan B facility matures on December 31, 2010.
Amounts under the term loan B facility are repayable as follows:
1) twenty quarterly installments of $0.55 million beginning on the last day of the first fiscal quarter in 2005; and
2) four quarterly installments of $52.25 million beginning with last day of the first fiscal quarter in 2010. The fourth and final installment of $46.25 million is due and payable on the term loan B maturity date.
Under the senior credit facility, the Company is also required to make mandatory prepayments of principal on term loan B facility borrowings (a) annually in an initial amount equal to 50% of Excess Cash Flow (as defined in the senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by us therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt.
In general, the Company’s obligations under the senior credit facility are guaranteed by Holdings and all of the Company’s material subsidiaries and are collateralized by all of the Company’s and its subsidiaries assets, a pledge of the Company’s common stock and the stock of each of the Company’s subsidiaries. The senior credit facility contains certain covenants, including, without limitation, those limiting the Company and its subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Company is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the senior credit facility). At December 31, 2005, the Company was in compliance with these covenants in its senior credit facility.
As a result of the restatement of the Company’s financial statements as previously reported in the Company’s 2004 Form 10-K/A, the Company was in default under its senior credit facility by failing to timely furnish its interim consolidated financial statements for the third quarter of 2005 to its lenders. On December 6, 2005, the Company obtained a Consent and Waiver from its lenders under the senior credit facility that permitted
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
the Company to extend the time to deliver its consolidated financial statements for the third quarter of 2005 to February 15, 2006. On February 15, 2006, the Company obtained a Consent and Waiver from its lenders under the senior credit facility that permitted the Company to extend the time period to deliver its consolidated financial statements for the third quarter of 2005 to June 30, 2006. This waiver also permitted the Company to extend the time period to deliver its annual audited consolidated financial statements for 2005 and its consolidated financial statements for the first fiscal quarter of 2006 to June 30, 2006. While the Company currently anticipates delivering these financial statements by June 30, 2006, its failure to do so would constitute an event of default under the new senior credit facility. If such an event of default occurs under the senior credit facility that is not waived, the lenders could cause all amounts outstanding with respect to the borrowings to be due and payable immediately which in turn would result in cross defaults under the Indenture governing the 9% senior subordinated notes. The Company’s assets and cash flow may not be sufficient to fully repay outstanding debt if accelerated upon an event of default and there can be no assurance that such outstanding debt could be refinanced in such an event on acceptable terms or if at all.
Senior Subordinated Notes:
On December 15, 2004, the Company issued $180.0 million of 9% Senior Subordinated Notes due 2013. The senior subordinated notes bear interest at a rate of 9% payable semi-annually on January 15 and July 15 (commencing July 15, 2005) and mature on January 15, 2013. The notes are redeemable at the option of the Company in whole or in part on or after January 15, 2009 at a price of 104.5% of the principal amount if redeemed before January 15, 2010, 102.25% of the principal amount if redeemed after January 15, 2010 but before January 15, 2011 and at 100% of the principal amount after January 15, 2011.
In connection with the terms of the senior subordinated notes, because we did not complete an exchange offer of the senior subordinated notes for identical senior subordinated notes registered under the Securities Act of 1933 on or prior to June 13, 2005, the interest rate on the Company’s 9% Senior Subordinated Notes was increased by 0.25% per annum for the 90-day period immediately following June 13, 2005 and was increased by an additional 0.25% per annum in each of the subsequent 90-day periods immediately following September 11, 2005. On December 14, 2005, the exchange offer was completed which eliminated this additional interest expense after such date. This resulted in additional interest expense of $356 during 2005.
Restrictive covenants under the 9% senior subordinated notes include limitations with respect to the Company’s ability to incur additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Except for the Company’s obligation to timely furnish and file its Form 10-Q for the third quarter of 2005, the Company was in compliance at December 31, 2005 with the restrictive covenants in the indenture governing the senior subordinated notes. The Company subsequently has furnished and filed the Form 10-Q for the third quarter of 2005.
At December 31, 2005, principal payments required on all long-term debt are as follows:
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
The weighted average interest rate on all debt, excluding lease financing obligations, for the years ended December 31, 2005, 2004 and 2003 was 7.3%, 7.8% and 7.2%, respectively. Interest expense on the Company’s long-term debt was as $31,728, $24,122 and $26,689 for the years ended December 31, 2005, 2004 and 2003, respectively.
8. Lease Financing Obligations
The Company entered into sale-leaseback transactions in various years involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result have been classified as financing transactions under SFAS No. 98, “Accounting For Leases”. 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.
These leases generally provide for an initial term of twenty years plus renewal options. The rent payable under such leases includes a minimum rent provision and in some cases, includes rent based on a percentage of sales provision. These leases also require payment of property taxes, insurance and utilities.
Purchase options related to certain properties sold in real estate transactions accounted for under the financing method are held by an entity wholly-owned by the nephew of the Chairman and Chief Executive Officer of the Company and such entity is deemed a related party.
At December 31, 2005, payments required on lease financing obligations are as follows:
The interest rates on lease financing obligations range from 8.5% to 12.4%. Imputed interest expense on lease financing obligations totaled $11,244, $11,261 and $10,645 for the years ended December 31, 2005, 2004 and 2003, respectively.
9. Other Expense
During 2004, the Company’s parent company, Holdings, filed a registration statement on Form S-1 to register an initial public offering of Enhanced Yield Securities (EYSs) comprised of common stock and senior subordinated notes. On October 25, 2004 Holdings withdrew and terminated its registration of such securities. The Company expensed the costs incurred for this offering of $2.3 million in 2004.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
10. Income Taxes
The income tax provision (benefit) was comprised of the following for the years ended December 31:
The components of deferred income tax assets and liabilities at December 31, are as follows:
The Company’s state net operating loss carryforwards expire in varying amounts beginning in 2006 through 2025. In addition, the Company has available Federal alternative minimum tax credit carryforwards of $2.9 million with no expiration date and Federal employment tax credit carryforwards of $2.5 million that begin to expire in 2021.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
The Company establishes a valuation allowance to reduce the carrying amount of deferred tax assets when it is more likely than not that it will not realize some portion or all of the tax benefit of its deferred tax assets. The Company evaluates whether its deferred tax assets are probable of realization on a quarterly basis. In performing this analysis, the Company considers all available evidence, both positive and negative, including historical operating results, the estimated timing of future reversals of existing taxable temporary differences and estimated future taxable income exclusive of reversing temporary differences and carryforwards. As of December 31, 2005, the Company has a valuation allowance of $1,119 against net deferred tax assets due to state net operating loss carryforwards where realization of related deferred tax asset amounts was not more likely than not. The estimation of future taxable income for federal and state purposes and the Company’s resulting ability to realize deferred tax assets pertaining to state net operating loss carryforwards and tax credit carryforwards can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to material future changes that could be material.
A reconciliation of the statutory federal income tax provision (benefit) to the effective tax provision for the years ended December 31 is as follows:
11. Dividend and Bonus Payments
On December 22, 2004, the Board of Directors of the Company approved the payment of a cash dividend of $116.8 million to Holdings from the net proceeds of the December 2004 refinancing. The cash dividend was paid on December 28, 2004 and concurrently distributed by Holdings in a dividend to the stockholders of Holdings.
In conjunction with the December 2004 refinancing, the Company also approved a compensatory bonus payment of approximately $20.3 million to a number of employees (including management) and a director who owned stock options based on a pro rata basis in proportion to the number of shares of common stock issuable upon exercise of the options owned by such persons. The bonus payment was made in January 2005, and including applicable payroll taxes of $0.6 million, totaled $20.9 million.
12. Stockholder’s Equity
The Company. The Company, which is 100% owned by Holdings, has 1,000 shares of common stock authorized of which 10 shares are issued and outstanding. Dividends on the Company’s common stock are restricted to amounts permitted by the senior secured credit facility and the indenture governing the 9% senior subordinated notes.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
Holdings. Holdings’ Restated Certificate of Incorporation authorizes 7,000,000 shares of common stock and 100,000 shares of Preferred Stock, par value $0.01. Of the 7,000,000 common shares authorized, 1,410,109 shares of Holdings’ common stock and no shares of preferred stock were issued and outstanding at December 31, 2005.
Stock Awards. Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings’ common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings’ common stock. As a consequence of the exchange, all outstanding stock options were cancelled and terminated, and the option plans (described below) were subsequently terminated. The Board of Directors of Holdings also authorized and reserved the issuance of 9,000 shares of Holdings’ common stock under stock award agreements to employees of which 5,440 shares were issued in the second quarter of 2005. The Company has 3,560 shares of Holdings’ common stock reserved for future issuance.
All shares were issued pursuant to stock award agreements, which provide that such shares are fully vested and non-forfeitable upon issuance, but may not be sold or otherwise disposed of for a period of two years from the date of issuance. Such agreements also provide that up to an aggregate of 16% of each recipients’ shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such shares may be subject to repurchase by Holdings (at its option) in the event of a termination of employment before the occurrence of certain events. The fair market value of a share of Holdings’ common stock on the date of these awards was estimated to be $61.50. The Company recorded a compensation charge of $16.4 million in 2005 relative to these stock awards.
Prior to October 27, 2004, Holdings’ authorized common stock consisted of three series comprised of 3,000,000 shares of Carrols Stock, par value $0.01 per share, 2,000,000 shares of Pollo Tropical Stock, par value $0.01 per share, and 2,000,000 shares of Taco Cabana Stock, par value $0.01 per share. The Pollo Tropical and Taco Cabana classes of Holdings’ stock were considered tracking stocks, a class of stock which tracked the separate performance of Pollo Tropical and Taco Cabana, respectively. On October 27, 2004, Holdings eliminated this tracking stock by combining all of its authorized series of common stock into one series of common stock. Holdings’ Pollo Tropical class of common stock and Holdings’ Taco Cabana class of common stock were each converted into the series of common stock known as Carrols Stock, which at the time of the combination, was renamed and is now referred to as common stock.
Prior to October 27, 2004, no shares of Holdings’ Pollo Tropical or Taco Cabana classes of common stock were outstanding. However, as a result of the combination, each outstanding option to purchase a share of Holdings’ Pollo Tropical class of common stock pursuant to the 1998 Pollo Tropical Long-Term Incentive Plan was converted on October 27, 2004 into an option to purchase 0.4144 shares of Holdings’ common stock. Similarly, each outstanding option to purchase a share of Holdings’ Taco Cabana class of common stock pursuant to the 2001 Taco Cabana Long-Term Incentive Plan was converted on October 27, 2004 into an option to purchase 0.0522 shares of Holdings’ common stock.
Stock Options. In 1996, Holdings adopted a stock option plan entitled the 1996 Long-Term Incentive Plan (“1996 Plan”) and reserved and authorized a total of 106,250 shares of Holdings’ common stock for grant thereunder. The number of shares reserved and authorized under this plan was increased to 111,250 in 2001 and to 189,325 in 2002. Options under this plan generally vested over a four-year period. In 1998, Holdings adopted the 1998 Directors’ Stock Option Plan (“1998 Directors’ Plan”) authorizing the grant of up to 10,000 options to non-employee directors. Options under this plan were exercisable over four years. Also, options for 32,427 shares of Holdings common stock not covered under any plan (“Non Plan Options”) were granted in 1997 at a
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
price of $101.76 with vesting over a five-year period. On February 26, 2002, the Compensation Committee of Holdings extended the expiration date for the Non Plan Options and the 1996 Plan options granted prior to March 1, 2002 to February 29, 2012 for all executive officers and certain other officers of the Company.
Holdings also adopted the 1998 Pollo Tropical Long-Term Incentive Plan (“1998 Pollo Plan”) authorizing to grant up to 41,440 shares of Holdings’ common stock (100,000 shares of Holdings’ Pollo Tropical class of common stock prior to the conversion). Holdings also adopted the 2001 Taco Cabana Long-Term Incentive Plan (“2001 Taco Plan”) authorizing to grant up to 26,100 shares of Holdings’ common stock (500,000 shares of Holdings’ Taco Cabana class of common stock prior to the conversion). Options under both of these plans generally vested over a five-year period.
A summary of all option activity under Holdings’ stock option plans for the years ended December 31, 2005, 2004 and 2003 was as follows:
13. 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, Pollo Tropical and Taco Cabana, both Company owned concepts. The Company’s Burger King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a regional quick-casual restaurant chain featuring grilled marinated chicken and authentic “made from scratch” side dishes. Pollo Tropical’s core markets are located in south and
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
central Florida. Taco Cabana is a regional quick-casual restaurant chain featuring Mexican style food, including, flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabana’s core markets are primarily located in Texas.
The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The following table includes Segment EBITDA which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and director, other expense and loss on extinguishment of debt.
The “Other” column includes corporate related items not allocated to reportable segments. Other identifiable assets consist primarily of cash, certain other assets, corporate property and equipment, goodwill and deferred income taxes.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
A reconciliation of segment EBITDA to consolidated net income (loss) is as follows:
14. Commitments and Contingencies
On November 30, 2002, four former hourly employees commenced a lawsuit against the Company in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that the Company violated certain minimum wage laws under the federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. The Company has since filed a Motion for Summary Judgment as to the existing Plaintiffs that the Court has under consideration. The Plaintiffs have indicated they will re-file a Motion to certify and for National Discovery and the Company will oppose such Motion. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Consequently, it is not possible to predict what adverse impact, if any, this case could have on the Company’s consolidated financial condition or results of operations and cash flows. The Company intends to continue to contest this case vigorously.
The Company is a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material adverse effect on its consolidated financial condition or results of operations and cash flows.
15. Retirement Plans
The Company offers its salaried employees the option to participate in the Carrols Corporation Retirement Savings Plan (“the Retirement Plan”). The Retirement Plan includes a savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post tax savings option. The Company may elect to contribute to
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
the Retirement Plan on an annual basis. The Company’s contributions are equal to 50% of the employee’s contribution to a maximum Company contribution of $520 annually for any plan year that the Company participates in an employee match. Under the Retirement Plan the Company’s contributions begin to vest after one year and fully vest after five years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. Participating employees may contribute up to 18% of their salary annually to either of the savings options, subject to other limitations. The employees have various investment options available under a trust established by the Retirement Plan. Contributions to the Retirement Plan were $403 and $432 for the years ended December 31, 2005 and 2003, respectively. For the 2004 plan year, the Company did not make any matching contributions.
The Company also has a Deferred Compensation Plan which permits employees not eligible to participate in the Carrols Corporation Plan because they have been excluded as “highly compensated” employees (as so defined in the Plan), to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds. At December 31, 2005 there was a total of $870 deferred under this plan, including accrued interest.
16. Postretirement Benefits
The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management salaried employees. A December 31 measurement date is used for the postretirement benefits. The following is the plan status and accumulated postretirement benefit obligation (APBO) at December 31, 2005 and 2004:
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
The discount rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical and life insurance benefits. The Company has typically used the corporate AA/Aa bond rate for this assumption.
Assumed health care cost trend rates at December 31:
During 2006, the Company expects to contribute approximately $91 to its postretirement benefit plan. The benefits expected to be paid in each year from 2006 through 2010 are $102, $110, $118, $136 and $158, respectively, and for the years 2011-2015 the aggregate amount of $1,318.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the health care cost trend rates would have the following effects:
17. Guarantor Financial Statements
The Company’s obligation under the $180.0 million 9% senior subordinated notes are, and the $170.0 million 9 1/2% senior subordinated notes of the Company were, jointly and severally guaranteed in full on an unsecured senior subordinated basis by certain of the Company’s subsidiaries (“Guarantor Subsidiaries”), all of which are directly or indirectly wholly-owned by the Company. These subsidiaries are:
Cabana Beverages, Inc.
Cabana Bevco LLC
Carrols Realty Holdings
Carrols Realty I Corp.
Carrols Realty II Corp.
Carrols J.G. Corp.
Quanta Advertising Corp.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
Pollo Franchise, Inc.
Pollo Operations, Inc.
Taco Cabana, Inc.
TP Acquisition Corp.
TC Bevco LLC
T.C. Management, Inc.
TC Lease Holdings III, V and VI, Inc.
Get Real, Inc.
Texas Taco Cabana, L.P.
The following supplemental financial information sets forth on a condensed consolidating basis, consolidating balance sheets, statements of operations and statements of cash flows for the Parent Company only, Guarantor Subsidiaries and for the Company as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003.
For certain of the Company’s sale-leaseback transactions, the Parent Company has guaranteed on an unsecured basis the rental payments of its subsidiaries. In accordance with Emerging Issues Task Force Issue No. 90-14, “Unsecured Guarantee by Parent of Subsidiary’s Lease Payments in a Sale-Leaseback Transaction”, the Company has included in the following Guarantor Financial Statements amounts pertaining to these leases as if they were accounted for as financing transactions of the Guarantor subsidiaries. These adjustments are eliminated in consolidation.
For purposes of the guarantor financial statements, the Company and its subsidiaries determine the applicable tax provision for each entity generally using the separate return method. Under this method, current and deferred taxes are allocated to each reporting entity as if it were to file a separate tax return. The rules followed by the reporting entity in computing its tax obligation or refund, including the effects of the alternative minimum tax, would be the same as those followed in filing a separate return with the Internal Revenue Service. However, for purposes of evaluating an entity’s ability to realize its tax attributes, the Company assesses whether it is more likely than not that those assets will be realized at the consolidated level. Any differences in the total of the income tax provision (benefit) for the Parent Company Only and the Guarantor Subsidiaries, as calculated on the separate return method, and the consolidated income tax provision (benefit) are eliminated in consolidation.
The Company provides some administrative support to its subsidiaries related to executive management, information systems and certain accounting, legal and other administrative functions. For purposes of the guarantor financial statements, the Company allocates such corporate costs on a specific identification basis, where applicable, or based on revenues or the number of restaurants for each subsidiary. Management believes that these allocations are reasonable based on the nature of costs incurred.
During 2003, the Parent Company entered into an intercompany agreement, retroactive to January 1, 2002, to charge interest to the Guarantor Subsidiaries. The retroactive interest recorded in 2003 was $11,277. The Company has corrected the 2003 provision (benefit) for income taxes between the Parent Company only and the Guarantor Subsidiaries’ financial statements to reflect the tax consequences of the retroactive interest charge in the year recorded for financial reporting purposes. The amount of this adjustment was a tax benefit of $3,834 included in the Guarantor Subsidiaries’ 2003 statement of operations.
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATING BALANCE SHEET
December 31, 2005
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATING BALANCE SHEET
December 31, 2004
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Year Ended December 31, 2004
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Year Ended December 31, 2003
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2005
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2004
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2003
(in thousands of dollars)
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars, except share amounts)
Note 18. Selected Quarterly Financial Data (Unaudited)
(1) As reported in Amendment No. 1 to the Company’s 2004 Annual Report on Form 10-K/A, restatements that affect the net income in the second quarter of 2005 are to: (i) correct our accounting for the depreciation of assets and recording of interest expense associated with sale-leaseback transactions accounted for under the financing method and; (ii) record twelve real estate transactions as financing transactions as required under SFAS No. 98 rather than as sale-leaseback transactions as previously reported.
(2) Gross profit is defined as total revenues less cost of sales, restaurant wages and related expenses, restaurant rent expense, other restaurant operating expenses and advertising expenses.
(3) In the second quarter of 2005, the Company recorded stock-based compensation expense of $16.4 million in connection with stock awards issued in the second quarter of 2005 (See Note 12).
(4) In the fourth quarter of 2004, the Company recorded a $20.9 million non-recurring bonus payment including taxes (See Note 11) and incurred an $8.9 million loss on early extinguishment of debt associated with the December 2004 refinancing (See Note 7).
CARROLS CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2005, 2004 and 2003
(in thousands of dollars)
(a) Represents write-offs of accounts.
(b) Represents the establishment of a reserve for the total amount of a note receivable at the date of its issuance.
(c) Represents payments received on this fully reserved note.
(d) Represents the establishment of a valuation allowance on certain deferred tax assets.
Pursuant to the requirements of Section 13 or 15 (d) 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 on the 30th day of June 2006.
CARROLS CORPORATION
By:
/s/ ALAN VITULI
Alan Vituli,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.