FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1997
or
[ ]Transition report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission File Number
1-6553
CARROLS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-0958146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
968 JAMES STREET
SYRACUSE, NEW YORK 13203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (315) 424-0513
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Common stock, par value $1.00, outstanding at November 14, 1997
10 SHARES
Page 1 of 16
PART 1 - FINANCIAL INFORMATION
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Unaudited)
ASSETS September 30, December 31,
1997 1996
Current assets:
Cash and cash equivalents $ 2,109,000 $ 1,314,000
Trade and other receivables 753,000
793,000
Inventories 2,973,000
2,163,000
Prepaid real estate taxes 803,000
725,000
Prepaid expenses and other current assets 1,310,000
932,000
Deferred income taxes 3,264,000
3,264,000
Total current assets 11,212,000
9,191,000
Property and equipment, at cost:
Land 10,800,000
9,066,000
Buildings and improvements 18,671,000
16,175,000
Leasehold improvements 42,190,000
37,921,000
Equipment 60,037,000
46,834,000
Capital leases 14,548,000
14,548,000
Construction in progress 775,000
895,000
147,021,000
125,439,000
Less accumulated depreciation
and amortization (67,370,000)
(63,356,000)
Net property and equipment 79,651,000
62,083,000
Franchise rights, at cost (less accumulated
amortization of $24,174,000 at September 30,
1997 and $21,787,000 at December 107,506,000
31, 1996). 46,203,000
Beneficial leases, at cost (less accumulated
amortization
of $8,329,000 at September 30, 1997 and $7,748,000 6,326,000
6,907,000
at December 31, 1996).
Excess of cost over fair value of assets acquired
(less accumulated amortization of $621,000 at
September 30, 1997 and $578,000 at December 31, 1,690,000
1,733,000
1996).
Deferred income taxes 6,637,000
6,637,000
Other assets 7,948,000
5,834,000
$ 220,970,000
$138,588,000
2
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) September 30, December 31,
1997 1996
Current liabilities:
Accounts payable 7,804,000 9,319,000
Accrued liabilities:
Payroll and employee benefits 4,417,000 3,837,000
Taxes - income and other 1,287,000 2,334,000
Interest 1,804,000 4,741,000
Other 4,270,000 3,382,000
Current portion of long-term debt 3,834,000 8,000
Current portion of capital lease obligations 464,000 574,000
Total current liabilities 23,880,000 24,195,000
Long-term debt, net of current portion 170,765,000 118,180,000
Capital lease obligations, net of current portion 2,169,000 2,503,000
Deferred income - sale/leaseback of real estate 2,064,000 2,154,000
Accrued postretirement benefits 1,574,000 1,522,000
Other liabilities 2,459,000 1,696,000
Total liabilities 202,911,000 150,250,000
Stockholders' equity (deficit):
Common stock, par value $1; authorized
1,000 shares, issued and outstanding - 10 shares 10 10
Additional paid-in capital
1,411,990
30,411,990
Accumulated deficit (12,353,000)
(10,574,000)
Less: Note receivable - redemption of
warrants
- (2,500,000)
Total stockholders' equity (deficit)
(11,662,000)
18,059,000
$220,970,000
$138,588,000
3
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
September 30, September 30,
1997 1996
(13 weeks) (13 weeks)
Revenues:
Sales $ 76,589,000 $ 62,079,000
Costs and expenses:
Cost of sales 22,303,000 17,397,000
Restaurant wages and related expenses 23,283,000 18,013,000
Other restaurant operating expenses 15,965,000 12,378,000
Depreciation and amortization 3,741,000 2,819,000
Administrative expenses 3,667,000 2,408,000
Advertising expense 3,302,000 2,749,000
Total operating expenses 72,261,000 55,764,000
Operating income 4,328,000 6,315,000
Interest expense 3,978,000 3,580,000
Income before taxes 350,000 2,735,000
Provision (credit) for taxes (191,000) 1,260,000
Net income $ 541,000 $ 1,475,000
4
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
September 30, September 30,
1997 1996
(39 weeks) (39 weeks)
Revenues:
Sales $207,113,000 $177,638,000
Costs and expenses:
Cost of sales 59,600,000 50,333,000
Restaurant wages and related expenses 63,539,000 52,310,000
Other restaurant operating expenses 43,005,000 36,524,000
Depreciation and amortization 10,578,000 8,178,000
Administrative expenses 9,337,000 7,566,000
Advertising expense 9,093,000 7,903,000
Costs associated with change in control - 449,000
Total operating expenses 195,152,000 163,263,000
Operating income 11,961,000 14,375,000
Interest expense 11,059,000 10,605,000
Income before taxes 902,000 3,770,000
Provision for taxes 181,000 1,900,000
Net income $ 721,000 $ 1,870,000
5
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
September 30, September 30,
1997 1996
(39 weeks) (39 weeks)
Cash flows from operating activities:
Net income $ 721,000 $ 1,870,000
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 10,578,000 8,178,000
Change in assets and liabilities (4,248,000) (3,339,000)
Cash provided by operating activities 7,051,000 6,709,000
Cash flows from investing activities:
Capital expenditures:
Property and equipment (4,561,000) (5,699,000)
Construction of new restaurants (6,391,000) (1,981,000)
Acquisitions of restaurants (78,056,000) (8,597,000)
Proceeds from sale of property, equipment and
franchise rights 1,092,000 2,338,000
Other (3,000) 572,000
Net cash used for investing activities $ (87,919,000) $ (13,367,000)
Cash flows from financing activities:
Proceeds from long-term debt $ 66,300,000 $ 7,514,000
Financing costs associated with long-term debt (2,397,000) -
Principal payments on long-term debt (200,000) (152,000)
Principal payments on capital leases (444,000) (463,000)
Purchase of senior notes (25,000) (838,000)
Retirement of long-term debt (9,669,000) (450,000)
Proceeds from issuing stock 30,442,000 -
Proceeds from sale-leaseback transactions 1,659,000
Dividends paid (2,349,000) (618,000)
Other 5,000 -
Net cash provided by financing activities 81,663,000 6,652,000
Increase (decrease) in cash and cash equivalents 795,000 (6,000)
Cash and cash equivalents,
beginning of period 1,314,000 1,463,000
Cash and cash equivalents,
end of period $ 2,109,000 $ 1,457,000
6
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. STATEMENT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and do not include all of the information and the footnotes
required by generally accepted accounting principles for complete statements.
In the opinion of management, all normal and recurring adjustments necessary
for a fair presentation of such financial consolidated statements have been
included.
The results of operations for the three and nine months ended September
30, 1997, are not necessarily indicative of the results to be expected for the
full year.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1996 contained in the Company's 1996 Annual Report on Form 10-K.
The December 31, 1996 balance sheet data is derived from audited financial
statements.
Certain amounts for prior periods have been reclassified to conform to the
current period presentation.
2. INVENTORIES
Inventories at September 30, 1997 and December 31, 1996, consisted of:
September 30, December 31,
1997 1996
Raw materials (food and
paper products) $ 2,014,000 $ 1,386,000
Supplies 959,000 777,000
$ 2,973,000 $ 2,163,000
7
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
3. INCOME TAXES
The income tax provision was comprised of the following:
September 30, September 30,
1997 1996
Current $ 181,000 $ 300,000
Deferred _- _ 1,600,000
$ 181,000 $ 1,900,000
For 1997 and 1996 the difference between the expected tax provision
resulting from application of the federal statutory income tax rate to
pre-tax income and the reported income tax provision result principally
from state taxes and the deferred disposition of stock options.
A tax benefit of $907,000 resulting from the deferred disposition of stock
options associated with the 1996 change in control transaction previously
reported on Form 10-K was credited directly to paid in capital.
4. ACQUISITIONS
On March 28, 1997, the Company purchased certain assets and franchise
rights of twenty-three Burger King restaurants in North and South Carolina
for a cash price of approximately $21 million.
On August 20, 1997, the Company purchased certain assets and franchise
rights of sixty-three Burger King restaurants, primarily in Western New
York State, Indiana and Kentucky for a cash price of approximately $52
million.
The following proforma results of operations assume these acquisitions
occurred as of the beginning of the respective periods:
Nine Months Ended September 30,
1997 1996
Revenues $ 253,566,000 $ 243,860,000
Operating income $ 15,584,000 $ 20,794,000
Net income $ 1,297,000 $ 3,815,000
8
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
4. ACQUISITIONS - continued
The preceeding proforma financial information is not necessarily
indicative of the operating results that would have occurred had either
acquisition been consummated as of the beginning of the respective
periods, nor are they necessarily indicative of future operating results.
5. LONG-TERM DEBT
On March 27, 1997, the Company entered into a loan agreement (the "Loan
Agreement") among the Company, Texas Commerce Bank National Association,
as Agent, and other lenders (collectively the "Lender") who are parties
thereto. The Loan Agreement provides for: (i) a $127,000,000 Advance Loan
Facility under which the Company may borrow, through December 31, 1999, up
to 75% of the purchase costs incurred in connection with the acquisition
and; (ii) a $25,000,000 Revolving Loan Facility which replaced the
Company's revolving credit facility with Heller Financial, Inc. The
Revolving Loan Facility is available to finance restaurant acquisitions
and new restaurant development by the Company, and for other working
capital and general corporate purposes.
The Loan Agreement provides for interest rate options of: (i) the greater
of the prime rate (or the Federal Funds Rate plus .50%) plus a variable
margin between 0.00% and 1.00% (.50% at September 30, 1997); or (ii) the
London Interbank offering rate plus a variable margin between 1.50% and
2.50% (2.00% of September 30, 1997), based upon debt to cash flow ratios.
Commitment fees on the unused balances of the Advance Loan Facility and
the Revolving Loan Facility are payable quarterly at the annual rates of
0.25% and 0.375%, respectively.
The Revolving Loan Facility has a maturity date of December 31, 2001 while
the Advance Loan Facility requires quarterly principal repayments at an
annual rate of 6% beginning with the end of the second quarter after each
advance loan and increasing 2% per year through the sixth year with the
remainder repayable on June 30, 2003.
At September 30, 1997, $62.5 million was outstanding under the Advance
Loan Facility and $3.6 million was outstanding under the Revolving Loan
Facility. Substantially all assets of the Company are or will be pledged
to the Lender as collateral security under the loans made pursuant to the
Loan Agreement.
9
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
6. CHANGE IN STOCKHOLDERS' EQUITY
As reported in the Company's 1996 Annual report on Form 10-K and in a Form
8-K dated March 27, 1997, the change in control of the Company's parent
company, Carrols Holdings Corporation ("Holdings"), occurred on March 27,
1997. In connection with this, the Company received additional capital of
approximately $30.4 million.
Holdings has exercised its option to purchase certain warrants to acquire
its common stock by cancellation of a note receivable from the holder of
the warrants. The note receivable was previously reflected as an increase
to the December 31, 1996 stockholders deficit.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
________________________
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996.
SALES. Sales increased $14.5 million, or 23.4%, as compared to the three
months ended September 30, 1996. The Company operated an average of 293 Burger
King restaurants for the third quarter of 1997 as compared to 228 in 1996.
Average restaurant unit sales decreased 4.0% when comparing 1997 to 1996.
Sales at comparable restaurants, the 216 units operating for the entirety of
the compared periods, decreased $1.6 million, or 2.7%. Sales were negatively
impacted for two weeks in August due to negative publicity surrounding events
at Hudson Foods, a Burger King beef supplier. The differential in the decrease
of average restaurant sales and comparable restaurant sales is primarily
attributable to the acquisition of restaurants in 1997 which had lower average
sales volumes than the Company's existing restaurants.
COST OF SALES. Cost of sales (food and paper costs) as a percentage of
sales, increased from 28.0% in 1996 to 29.1% in 1997 due primarily to a 5.6%
increase in beef commodity costs for the quarter and increased discounts due to
the introductory promotion of the Big King sandwich in September 1997.
RESTAURANT WAGES AND RELATED EXPENSES. Restaurant wages and related
expenses as a percentage of sales increased from 29.0% in 1996 to 30.4% in 1997
due mainly to increased wage rates (including the increases in the minimum wage
rate effective October 1, 1996 and September 1, 1997) and related payroll tax
costs.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses
increased as a percentage of sales from 19.9% in 1996 to 20.8% in 1997 due
primarily to the fixed portion of occupancy and related costs associated with
lower comparable store sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
from 4.5% of sales in 1996 to 4.9% of sales in 1997 due to the fixed nature of
restaurant level depreciation and amortization compared to lower comparable
store sales.
ADMINISTRATIVE EXPENSES. Administrative expenses, as a percentage of
sales increased from 3.9% in 1996 to 4.8% in 1997 due in part to costs
associated with the assimilation of acquired restaurants, the decline in
comparable restaurant sales, and a gain of $.3 million in the third quarter of
1996 relative to the sale of a parcel of land.
ADVERTISING EXPENSE. Advertising expenses are comparable as a percentage
of sales due to no significant changes in Company directed promotional
activities.
INTEREST EXPENSE. Interest expense increased approximately $.4 million
due to borrowings associated with 1997 restaurant acquisitions, offset by a
lower average borrowing rate (10.6% in 1997 compared to 11.1% in 1996).
PROVISION FOR TAXES. The provision for income taxes for the three months
ended September 30, 1997 reflects adjustments to the Company's expected annual
effective income tax rate.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
________________________
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
SALES. Sales for the nine months ended September 30, 1997 increased $29.5
million, or 16.6% as compared to the nine months ended September 30, 1996. The
Company operated an average of 260 Burger King restaurants in the first nine
months of 1997 as compared to an average of 222 in the first nine months of
1996. Average restaurant unit sales decreased 1.6% in the first nine months of
1997 as compared to 1996. Sales at comparable restaurants, the 214 restaurants
operating for the entirety of the compared periods, decreased $2.0 million, or
1.2%. Sales were negatively impacted in August 1997 due to negative publicity
surrounding events at Hudson Foods.
COST OF SALES. Cost of sales (food and paper costs) as a percentage of
sales increased from 28.3% in 1996 to 28.8% in 1997 primarily due to a 5%
increase in beef commodity costs.
RESTAURANT WAGES AND RELATED EXPENSES. Restaurant wages and related
expenses increased from 29.4% of sales in 1996 to 30.7% of sales in 1997 due
mainly to increased minimum wage rates and related payroll taxes.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses
increased as a percentage of sales from 20.6% in 1996 to 20.8% in 1997 due to
occupancy costs associated with lower comparable store sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
from 4.6% of sales in 1996 to 5.1% of sales in 1997 due to similar average
restaurant depreciation and amortization amounts compared to lower comparable
store sales.
ADMINISTRATIVE EXPENSES. Administrative expenses increased from 4.3% of
sales in 1996 to 4.5% of sales in 1997 due to increased assimilation costs of
acquired restaurants.
ADVERTISING EXPENSE. Advertising expense remained constant from 1996 to
1997 at 4.4% of sales.
INTEREST EXPENSE. Interest expense increased approximately $.5 million
due to increased borrowings associated with 1997 restaurant acquisitions,
offset by a lower average borrowing rate (10.7% in 1997 compared to 11.1% in
1996).
PROVISION FOR TAXES. The provision for income taxes reflected during the
nine months ended September 30, 1996 and 1997 reflects taxes at the expected
annual effective income tax rate.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
________________________
LIQUIDITY AND CAPITAL RESOURCES
The operating activities of the Company provided $7.1 million of cash for
the nine months ended September 30, 1997.
Capital spending of $89.0 million included $78.1 million for the
acquisition of twenty-four restaurants in North Carolina and South Carolina,
three restaurants in Michigan, two restaurants in Pennsylvania, and sixty-three
restaurants in Western New York, Kentucky and Indiana. Also included were
construction costs for seven new restaurants that opened during the period,
various remodels and other capital maintenance projects. One restaurant was
sold during the first quarter which resulted in cash proceeds of $1.1 million.
As discussed in Note 5, the Company entered into a new loan agreement on
March 27, 1997 whereby a $127.0 million Advance Loan Facility was established
for the Company to borrow up to 75% of the purchase costs of acquisitions. A
$25.0 million Revolving Loan Facility ("Loan Agreement") was also established
as part of this agreement to refinance the Company's previous revolving credit
facility with Heller Financial, Inc., to finance restaurant acquisitions and
new store development, and for other working capital and general corporate
purposes.
During the nine months ended September 30, 1997, net borrowings under the
Advance Loan Facility with Texas Commerce Bank were $66.3 million, $5.0 million
of which represented the refinancing of an existing term loan with Heller
Financial, Inc. and $4.6 million of which was used to retire the previous
balance of the revolver with Heller Financial, Inc. The remainder was used to
finance acquisitions of restaurants.
As reported in the Company's 1996 Annual report on Form 10-K and in a Form
8-K dated March 27, 1997, the change in control of the Company's parent,
Carrols Holdings Corporation, occurred on March 27, 1997. In connection with
this change of control, the Company received net proceeds from new common
equity of approximately $30.4 million. Under the 1993 Indenture governing the
Company's Senior Notes,(the "Indenture") the change in control gave each holder
of Senior Notes the right to require the Company to repurchase all or any part
of such holder's Senior Notes at a repurchase price equal to 101% of the
principal amount of the Senior Notes being repurchased plus accrued and unpaid
interest. A total of $25,000 in Senior Notes were presented for redemption.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(continued)
________________________
LIQUIDITY AND CAPITAL RESOURCES - continued
While interest is accrued monthly, payments of approximately $6.2 million
for interest on the Senior Notes are made each February 15{th} and August
15{th} thus creating semi-annual cash needs. The Company believes that future
cash flow from operations together with funds available under the Loan
Agreement will be sufficient to meet all interest and principal payments under
its indebtedness, fund the maintenance of property and equipment, fund
restaurant remodeling required under the Burger King franchise agreements and
meet required payments in respect of Holdings' Preferred Stock (subject to the
terms of the Indenture and the Loan Agreement) for at least the next twelve
months. The balance will provide funds for future acquisitions.
INFLATION
The Company has historically been able to minimize the effect of inflation
on its costs, such as minimum wage increases, through periodic menu price
increases. However, due to the current competitive pricing environment, the
Company has had limited increases in its menu prices in 1997.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material legal proceedings commenced by or initiated against
the Company during the reported quarter, or material developments in any
previously reported litigation.
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
(a) The following exhibit is filed as part of this report.
EXHIBIT NO.
27 Financial Data Schedule
(b) During the quarter the Company filed the following current reports on
Form 8-K:
. The Company filed Form 8-K dated August 15, 1997, reporting a
change in the Company's certifying accountant under Item 4.
. The Company filed Form 8-K and a related 8-K/A dated August 20,
1997, reporting the acquisition of sixty-three Burger King
restaurants under Item 2 and the financial statements and
proforma financial information required by Item 7.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARROLS CORPORATION
968 James Street
Syracuse, New York 13203
(Registrant)
November 14, 1997 /S/ ALAN VITULI
Date (Signature)
Alan Vituli
Chairman and Chief Executive
Officer
November 14, 1997 /S/ PAUL R. FLANDERS
Date (Signature)
Paul R. Flanders
Vice President - Finance
16