================================================================================
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
or
[_] Transition report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number
0-25629
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 August 7, 2000: 10 shares
================================================================================
================================================================================
PART I
ITEM 1 - FINANCIAL INFORMATION
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 2000 1999
- ------ ------------------- --------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 2,962,000 $ 1,901,000
Trade and other receivables 661,000 787,000
Inventories 4,250,000 4,211,000
Prepaid rent 2,123,000 1,829,000
Prepaid expenses and other current assets 1,782,000 1,629,000
Refundable income taxes 321,000 682,000
Deferred income taxes 6,475,000 6,475,000
------------------ -------------------
Total current assets 18,574,000 17,514,000
Property and equipment, at cost less accumulated
depreciation of $97,833,000 and $91,599,000,
respectively 129,967,000 122,813,000
Franchise rights, at cost less accumulated
amortization of $36,609,000 and $34,174,000,
respectively 99,921,000 101,927,000
Intangible assets, at cost less accumulated
amortization of $12,402,000 and $11,328,000
respectively 66,521,000 67,545,000
Other assets 9,672,000 10,228,000
------------------ ------------------
$ 324,655,000 $ 320,027,000
================== ==================
The accompanying notes are an integral part of these financial statements.
2
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
June 30, December 31,
LIABILITIES and STOCKHOLDER'S EQUITY 2000 1999
- ------------------------------------ --------------------- ----------------------
(unaudited)
Current liabilities:
Accounts payable $ 12,480,000 $ 19,345,000
Accrued interest 1,702,000 1,920,000
Accrued payroll, related taxes and benefits 7,197,000 7,267,000
Other liabilities 7,095,000 6,302,000
Current portion of long-term debt 4,500,000 4,120,000
Current portion of capital lease obligations 249,000 256,000
-------------------- --------------------
Total current liabilities 33,223,000 39,210,000
Long-term debt, net of current portion 245,963,000 247,661,000
Capital lease obligations, net of current portion 1,333,000 1,457,000
Deferred income - sale/leaseback of real estate 4,315,000 4,463,000
Accrued postretirement benefits 2,009,000 1,913,000
Deferred income taxes 2,708,000 1,208,000
Other liabilities and deferred income (Note 7) 17,430,000 9,064,000
-------------------- --------------------
Total liabilities 306,981,000 304,976,000
Stockholder's equity:
Common stock, par value $1; authorized 1,000 shares,
issued and outstanding - 10 shares 10 10
Additional paid-in capital 24,484,990 24,484,990
Accumulated deficit (6,811,000) (9,434,000)
-------------------- ---------------------
Total stockholder's equity 17,674,000 15,051,000
-------------------- ---------------------
$ 324,655,000 $ 320,027,000
==================== =====================
The accompanying notes are an integral part of these financial statements.
3
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
2000 1999
-------------------- --------------------
(13 Weeks) (13 Weeks)
(unaudited)
Revenues:
Restaurant sales $ 119,851,000 $ 115,745,000
Franchise fees and royalty revenues 228,000 217,000
------------------- --------------------
Total revenues 120,079,000 115,962,000
Costs and expenses:
Cost of sales 34,514,000 35,651,000
Restaurant wages and related expenses 34,027,000 33,471,000
Other restaurant operating expenses 22,397,000 21,804,000
Advertising expense 6,033,000 5,185,000
General and administrative 6,257,000 5,322,000
Depreciation and amortization 6,725,000 5,766,000
Other income (Note 5) (1,365,000) -
------------------ --------------------
Total operating expenses 108,588,000 107,199,000
------------------ --------------------
Income from operations 11,491,000 8,763,000
Interest expense 5,785,000 5,578,000
------------------ -------------------
Income before income taxes 5,706,000 3,185,000
Provision for income taxes 2,570,000 1,780,000
------------------ -------------------
Net income $ 3,136,000 $ 1,405,000
================== ===================
The accompanying notes are an integral part of these financial statements.
4
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
2000 1999
------------------- --------------------
(26 Weeks) (26 Weeks)
(unaudited)
Revenues:
Restaurant sales $ 229,373,000 $ 220,408,000
Franchise fees and royalty revenues 456,000 489,000
------------------ ------------------
Total revenues 229,829,000 220,897,000
Costs and expenses:
Cost of sales 65,926,000 67,020,000
Restaurant wages and related expenses 66,763,000 65,759,000
Other restaurant operating expenses 44,878,000 43,439,000
Advertising expense 11,388,000 9,635,000
General and administrative 12,432,000 11,297,000
Depreciation and amortization 13,407,000 11,538,000
Other income (Note 5) (1,365,000) -
------------------ ------------------
Total operating expenses 213,429,000 208,688,000
------------------ ------------------
Income from operations 16,400,000 12,209,000
Interest expense 11,625,000 11,291,000
------------------ ------------------
Income before income taxes 4,775,000 918,000
Provision for income taxes 2,152,000 632,000
------------------ ------------------
Income before extraordinary loss 2,623,000 286,000
Extraordinary loss on write-off of debt issue costs,
net of taxes (Note 6) - 940,000
------------------ ------------------
Net income (loss) $ 2,623,000 $ (654,000)
================== =================
The accompanying notes are an integral part of these financial statements.
5
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
2000 1999
------------------- -----------------
(26 Weeks) (26 Weeks)
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,623,000 $ (654,000)
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation and amortization 13,407,000 11,538,000
Deferred income taxes 1,500,000 123,000
Extraordinary loss on write-off of debt issue costs, net of taxes - 940,000
Change in operating assets and liabilities 2,726,000 5,609,000
---------------- ----------------
Net cash provided from operating activities 20,256,000 17,556,000
---------------- ----------------
Cash flows for investing activities:
Capital expenditures:
New restaurant development (4,136,000) (4,731,000)
Restaurant remodeling (5,659,000) (5,519,000)
Corporate and restaurant information systems (3,659,000) (4,197,000)
Other capital expenditures (4,298,000) (6,804,000)
Acquisition of restaurants - (544,000)
Proceeds from dispositions of property and equipment 6,000 -
---------------- ----------------
Net cash used for investing activities (17,746,000) (21,795,000)
---------------- ----------------
Cash flows for financing activities:
Proceeds from long-term debt 1,573,000 -
Principal payments on long-term debt, net (2,891,000) (15,012,000)
Financing costs associated with senior credit facility refinancing - (878,000)
Principal payments on capital leases (131,000) (158,000)
Proceeds from sale-leaseback transactions - 14,247,000
---------------- ---------------
Net cash used for financing activities (1,449,000) (1,801,000)
----------------- ---------------
Increase (decrease) in cash and cash equivalents 1,061,000 (6,040,000)
Cash and cash equivalents, beginning of period 1,901,000 6,777,000
----------------- ----------------
Cash and cash equivalents, end of period $ 2,962,000 $ 737,000
================== ================
The accompanying notes are an integral part of these financial statements.
6
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Accounting Policies
-------------------
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 accounting principles generally accepted in the
United States for complete statements. In the opinion of management, all
normal and recurring adjustments necessary for a fair presentation of such
financial statements have been included.
The results of operations for the three and six months ended June 30, 2000
and 1999 are not necessarily indicative of the results to be expected for
the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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, 1999 contained in our 1999 Annual Report on Form 10-K. The
December 31, 1999 balance sheet data is derived from these audited
financial statements.
Certain amounts for the prior year have been reclassified to conform to the
current year presentation.
2. Income Taxes
------------
The income tax provision for the six months ended June 30, 2000 and 1999
was comprised of the following:
2000 1999
---------- --------
Current $ 652,000 $509,000
Deferred 1,500,000 123,000
---------- --------
$2,152,000 $632,000
========== ========
For 2000 and 1999 the difference between the expected tax provision,
resulting from application of the federal statutory income tax rate to the
pre-tax income, and the reported income tax provision result principally
from state taxes and non-deductible amortization of franchise rights and
certain other intangibles.
7
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
3. Summarized Financial Information of Certain Subsidiaries
--------------------------------------------------------
The following table presents summarized combined financial information for
the wholly-owned subsidiaries that unconditionally guarantee the $170
million Senior Subordinated Notes of the Company. These subsidiaries are
Carrols Realty Holdings, Carrols Realty I Corp., Carrols Realty II Corp.,
Carrols J.G. Corp., Quanta Advertising Corp., Pollo Franchise Inc. and
Pollo Operations, Inc.
June 30, 2000 December 31, 1999
-------------- --------------------
Balance Sheet:
Current assets $ 2,959,000 $ 2,657,000
Non-current assets 89,665,000 89,527,000
Current liabilities 5,145,000 5,734,000
Non-current liabilities 78,028,000 78,549,000
Six Months Ended
June 30,
2000 1999
------ -----
Statement of Operations:
Revenues $45,411,000 $42,266,000
Operating expenses 38,337,000 35,615,000
Income from operations 7,074,000 6,651,000
Net income 1,976,000 1,336,000
4. Business Segment Information
----------------------------
The Company is engaged in the quick-service restaurant industry, with two
restaurant concepts: Burger King, operating as a franchisee, and Pollo
Tropical, a Company owned concept. The Company's Burger King restaurants
are all located in the United States, primarily in the Northeast, Southeast
and Midwest. Pollo Tropical is a regional quick-service restaurant chain
featuring grilled marinated chicken and authentic "made from scratch" side
dishes. Pollo Tropical's core markets are located in south and central
Florida.
Segment information for Burger King restaurants and Pollo Tropical for the
three and six months ended June 30, 2000 and 1999 is shown in the following
table. The "Other" column includes corporate related items not allocated
to reportable segments and for income from operations, principally
corporate depreciation and amortization. Other identifiable assets consist
primarily of franchise rights and intangible assets. Non-operating
expenses, comprised of interest expense and the extraordinary loss, are
corporate related items and therefore have not been allocated to the
reportable segments.
8
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
Burger King Pollo
Three Months Ended: Restaurants Tropical Other Consolidated
------------------- ------------ ---------- ------ ------------
($ in 000's)
June 30, 2000:
Revenues $ 97,532 $22,547 $ $120,079
Cost of sales 27,037 7,477 34,514
Restaurant wages and related
expenses 28,746 5,281 34,027
Depreciation and amortization 3,877 506 2,342 6,725
Income from operations 10,111 3,722 (2,342) 11,491
Capital expenditures, excluding
acquisitions 8,609 860 182 9,651
June 30, 1999:
Revenues $ 95,408 $20,554 $ $115,962
Cost of sales 28,566 7,085 35,651
Restaurant wages and related
expenses 28,876 4,595 33,471
Depreciation and amortization 3,196 499 2,071 5,766
Income from operations 7,263 3,571 (2,071) 8,763
Capital expenditures, excluding
acquisitions 8,348 1,394 848 10,590
Burger King Pollo
Six Months Ended: Restaurants Tropical Other Consolidated
---------------- ------------ ---------- ------ ------------
($ in 000's)
June 30, 2000:
Revenues $184,569 $45,260 $ $229,829
Cost of sales 51,033 14,893 65,926
Restaurant wages and related
expenses 56,522 10,241 66,763
Depreciation and amortization 7,713 1,006 4,688 13,407
Income from operations 13,027 8,061 (4,688) 16,400
Capital expenditures, excluding
acquisitions 14,205 2,935 612 17,752
9
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
Burger King Pollo
Six Months Ended (continued): Restaurants Tropical Other Consolidated
----------------------------- ----------- -------- ------ ------------
($ in 000's)
June 30, 1999:
Revenues $178,965 $41,932 $ $220,897
Cost of sales 52,543 14,477 67,020
Restaurant wages and related
expenses 56,315 9,444 65,759
Depreciation and amortization 6,394 976 4,168 11,538
Income from operations 8,812 7,565 (4,168) 12,209
Capital expenditures, excluding
acquisitions 13,667 5,629 1,955 21,251
Identifiable Assets:
--------------------
At June 30, 2000 $210,323 $26,182 $88,150 $324,655
At December 31, 1999 206,500 25,208 88,319 320,027
5. Other Income
------------
During the second quarter of 2000, the Company ended its supply agreement
with Ameriserve Food Distribution, Inc. and recognized $1,365,000 in other
income representing the remaining unrecognized portion of contractual
payments previously received and deferred at the inception of the
agreement.
6. Extraordinary Loss
------------------
On February 12, 1999, the Company entered into a new senior credit facility
with Chase Bank of Texas, National Association, as agent and lender, and
other lenders as parties thereto. In connection with this transaction, the
Company recognized an extraordinary loss of $940,000, net of $885,000 in
income taxes. This loss represents the write-off of unamortized debt issue
costs related to the previous senior credit facility.
10
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
7. Deferred Income - Burger King Transformation Activities
-------------------------------------------------------
Burger King Corporation has arranged for the Coca-Cola Company and Dr.
Pepper/Seven-Up, Inc. to make funds available to franchisees in connection
with Burger King's transformation initiatives. In order to receive these
funds, the Company has agreed to reinvest a portion of the funds in certain
capital investments for its restaurants. The Company will receive
approximately $20.0 million in 2000 under this arrangement and at June 30,
2000 had received $9.9 million. The Company has included these supplier
rebates in deferred income and is amortizing as a reduction of cost of
sales over a ten year period in order to recognize income over the life of
the related supplier contracts. The amount of income recognized in the
second quarter of 2000 totaled $655,000.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Certain statements included in this "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and elsewhere in this Quarterly
Report on Form 10-Q which are not statements of historical fact are intended to
be, and are hereby identified as, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Without limiting the
foregoing, the words "believe," "anticipate," "plan," "expect," "estimate,"
"intend," and other similar expressions are intended to identify forward-looking
statements. The Company cautions readers that forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievement expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: the success or failure of the Company in implementing its
current business and operational strategies; availability, terms and access to
capital and customary trade credit; general economic and business conditions;
competition; changes in the Company's business strategy; labor relations; the
outcome of pending or yet-to-be instituted legal proceedings; labor and employee
benefit costs; and availability and terms of necessary or desirable financing or
refinancing.
Overview
- --------
As of June 30, 2000, we operated 354 Burger King restaurants located in 13
Northeastern, Midwestern and Southeastern states and owned and operated 45 Pollo
Tropical restaurants in Florida. In addition, at June 30, 2000, we franchised 23
Pollo Tropical restaurants primarily in Puerto Rico. Since June 30, 1999, we
have built four Pollo Tropical restaurants, built nine Burger King restaurants,
acquired four Burger King restaurants and closed five under-performing Burger
King restaurants. At June 30, 2000, one Pollo Tropical restaurant was closed due
to a fire in the first quarter of 2000. Comparable store sales data is for a
comparable number of weeks for each period discussed.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations
- ---------------------
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999.
The following table sets forth, for the three months ended June 30, 2000 and
1999, selected operating results as a percentage of restaurant sales:
2000 1999
---- ----
Restaurant sales:
Burger King restaurants 81.4% 82.4%
Pollo Tropical 18.6 17.6
----- -----
100.0 100.0
Costs and expenses:
Cost of sales 28.8 30.8
Restaurant wages and related expenses 28.4 28.9
Other restaurant expenses including advertising 23.7 23.3
General and administrative 5.2 4.6
Depreciation and amortization 5.6 5.0
Other income (1.1) -
----- -----
Income from restaurant operations 9.4% 7.4%
===== =====
Restaurant Sales
- ----------------
Restaurant sales for the three months ended June 30, 2000 increased 3.6% to
$119.9 million from $115.7 million in the second quarter of 1999. Burger King
restaurant sales increased $2.2 million, or 2.2%, over 1999 due to the net
addition of eight restaurants since the end of the second quarter of 1999.
Sales at our comparable Burger King restaurants decreased 0.8% in the second
quarter of 2000. Pollo Tropical sales increased $2.0 million in the second
quarter of 2000 or 9.7%, compared to 1999. This increase was due to the opening
of four new restaurants in the twelve months ended June 30, 2000 and a 2.3%
increase in sales at comparable Pollo Tropical restaurants in the second quarter
of 2000.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Operating Costs and Expenses
- ----------------------------
Cost of sales (food and paper costs), as a percentage of restaurant sales, were
28.8% for the second quarter of 2000 compared to 30.8% for the second quarter of
1999. Burger King restaurant cost of sales were 27.7% in 2000 compared to 29.9%
in 1999 and Pollo Tropical restaurant cost of sales were 33.5% in 2000 compared
to 34.8% in 1999. These decreases, in part, are due to menu price increases of
approximately 1% in the third quarter of 1999 and approximately 1.5% early in
the second quarter of 2000 at our Burger King restaurants and menu price
increases in the first quarter of 2000 of approximately 1% at our Pollo Tropical
restaurants. These decreases are also due to lower discounting of food
associated with promotional activities at our Burger King restaurants in the
second quarter of 2000, higher supplier rebates for both of our restaurant
concepts, and favorable sales mix changes at our Burger King restaurants. These
factors were offset, in part by an 11.4% increase in beef costs at our Burger
King restaurants in the second quarter of 2000 compared to the second quarter of
1999.
Restaurant wages and related expenses, as a percentage of sales, decreased from
28.9% in the second quarter of 1999 to 28.4% in the second quarter of 2000.
Burger King restaurant wages and related expenses were 29.5% in 2000 compared to
30.3% in 1999 and Pollo Tropical restaurant wages and related expenses were
23.7% in 2000 compared to 22.6% in 1999. The decrease at our Burger King
restaurants was due primarily to labor efficiencies, and to a lesser extent due
to the effects of menu price increases since the end of the second quarter of
1999. Labor efficiencies at our Burger King restaurants reflected a 9.9%
decrease in average restaurant labor hours due to operating improvements,
partially offset by a 3.2% increase in the hourly labor rate. The increase for
Pollo Tropical in the second quarter of 2000 is due to $300,000 of costs
associated with the transition to a new medical plan carrier, offset in part by
labor efficiencies and menu price increases since the end of the second quarter
of 1999.
Other restaurant operating expenses, including advertising, increased from 23.3%
of restaurant sales in the second quarter of 1999 to 23.7% in the second quarter
of 2000. Other restaurant operating expenses increased from 24.5% of sales
in 1999 to 24.8% in 2000 at our Burger King restaurants and from 17.8% of sales
in 1999 to 18.9% in 2000 at our Pollo Tropical restaurants. These increases
were due to an increase in advertising expenditures of $0.8 million, or 0.5% as
a percentage of sales. This increase reflected a difference in the timing of
advertising at our Pollo Tropical restaurants from the prior year and increased
advertising contributions at our Burger King restaurants due to increased
spending on local advertising and promotions. Occupancy costs also increased
0.3% as a percentage of sales in the second quarter of 2000 due primarily to the
sale/leaseback of eight Burger King and five Pollo Tropical restaurant
properties at the end of the second quarter of 1999, however, the effect of this
was offset by reductions in other costs.
Other income of $1,365,000 in the second quarter of 2000 was a result of the
Company ending its supply agreement with Ameriserve Food Distribution, Inc.
This income represented the remaining unrecognized portion of contractual
payments previously received and deferred at the inception of the agreement.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Administrative expenses increased to $6.3 million in the second quarter of 2000
from $5.3 million in the second quarter of 1999 and increased, as a percentage
of sales, from 4.6% in 1999 to 5.2% in 2000. The increase in administrative
expense over 1999 is due to higher bonus expense in the second quarter of 2000,
increased investments in information systems including staffing to support the
installation of new restaurant point-of-sale systems which began in the third
quarter of 1999, and the timing of certain other expenses between the second
quarter of 2000 compared to the second quarter of 1999.
Earnings before interest, taxes, depreciation and amortization and non-cash
extraordinary items ("EBITDA") increased to $18.2 million in the second quarter
from $14.5 million in the second quarter of 1999. As a percentage of total
revenues, EBITDA margins increased from 12.5% in the second quarter of 1999 to
15.2% in the second quarter of 2000 as a result of the factors discussed above.
Depreciation and amortization increased $1.0 million in the second quarter of
2000 from the second quarter of 1999 due to the Company's capital expenditures
of $45.7 million since the end of the second quarter of 1999.
Interest expense was $5.8 million in the first quarter of 2000 compared to $5.6
million in the second quarter of 1999 due to higher effective interest rates in
the second quarter of 2000, offset slightly by lower average debt balances in
the second quarter of 2000.
The provision for income taxes in the second quarter of 2000 was derived on an
estimated effective income tax rate for 2000 of 45.0%. This rate is higher than
the Federal statutory tax rate due to state franchise taxes and non-deductible
amortization of franchise rights and certain other intangible assets.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999.
The following table sets forth, for the six months ended June 30, 2000 and
1999, selected operating results as a percentage of restaurant sales:
2000 1999
---- ----
Restaurant sales:
Burger King restaurants 80.5% 81.2%
Pollo Tropical 19.5 18.8
----- -----
100.0 100.0
Costs and expenses:
Cost of sales 28.7 30.4
Restaurant wages and related expenses 29.1 29.8
Other restaurant expenses including advertising 24.5 24.1
General and administrative 5.4 5.1
Depreciation and amortization 5.8 5.2
Other income (.6) -
----- -----
Income from restaurant operations 7.1% 5.4%
===== =====
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Restaurant Sales
- ----------------
Restaurant sales for the six months ended June 30, 2000 increased 4.1% to $229.4
million from $220.4 million in the first six months of 1999. Burger King
restaurant sales increased $5.6 million, or $3.1%, over 1999 due to the net
addition of eight restaurants since the end of the second quarter of 1999.
Sales at our comparable Burger King restaurants in the first six months of 2000
were approximately equal to the first six months of 1999. Pollo Tropical sales
increased $3.4 million in the first six months of 2000 or 8.1%, compared to
1999. This increase was due to the opening of four new restaurants in the twelve
months ended June 30, 2000 and a 3.7% increase in sales at comparable Pollo
Tropical restaurants in the first six months of 2000.
Operating Costs and Expenses
- ----------------------------
Cost of sales (food and paper costs), as a percentage of restaurant sales, were
28.7% for the first six months in 2000 compared to 30.4% for the first six
months of 1999. Burger King restaurant cost of sales were 27.6% in 2000
compared to 29.4% in 1999 and Pollo Tropical restaurant cost of sales were 33.2%
in 2000 compared to 34.9% in 1999. These decreases, in part, are due to menu
price increases of approximately 1% in the third quarter of 1999 and
approximately 1.5% early in the second quarter of 2000 at our Burger King
restaurants and menu price increases in the first quarter of 2000 of
approximately 1% at our Pollo Tropical restaurants. These decreases are also
due to lower discounting of food associated with promotional activities at our
Burger King restaurants in 2000, higher supplier rebates for both our restaurant
concepts in 2000 and favorable sales mix changes at our Burger King restaurants.
These factors were offset, in part by a 12.2% increase in beef costs at our
Burger King restaurants in the first six months of 2000 compared to 1999.
Restaurant wages and related expenses, as a percentage of sales, decreased from
29.8% in the first six months of 1999 to 29.1% in the first six months of 2000.
Burger King restaurant wages and related expenses were 30.6% in 2000 compared to
31.5% in 1999. This decrease was due primarily to labor efficiencies and to a
lesser extent to the effects of menu price increases since the end of the second
quarter of 1999. Labor efficiencies at our Burger King restaurants reflected an
8.5% decrease in average restaurant labor hours due to operating improvements,
partially offset by a 3.5% increase in the hourly labor rate. Pollo Tropical
restaurant wages and related expenses were 22.9% in 2000 compared to 22.8% in
1999. Additional costs in 2000 associated with the transition to a new medical
plan carrier were substantially offset by labor efficiences and menu price
increases since the end of the second quarter of 1999.
Other restaurant operating expenses, including advertising, increased from 24.1%
of restaurant sales in the first six months of 1999 to 24.5% in the first six
months of 2000. Other restaurant operating expenses increased from 25.8% of
sales in 1999 to 25.9% in 2000 at our Burger King restaurants and from 16.8% of
sales in 1999 to 18.8% in 2000 at our Pollo Tropical restaurants. These
increases were due to an increase in advertising expenditures of $1.8 million or
0.6%, as a percentage of sales. This increase reflected a difference
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
in the timing of advertising at our Pollo Tropical restaurants from the prior
year and increased advertising contributions at our Burger King restaurants due
to increased spending on local advertising and promotions. Occupancy costs also
increased 0.5% as a percentage of sales in the first six months of 2000 due
primarily to the sale/leaseback of eight Burger King and five Pollo Tropical
restaurant properties at the end of the second quarter of 1999, however, the
effect of this was offset by reductions in utility expense at our Burger King
restaurants and other costs.
Other income of $1,365,000 in the first six months of 2000 was a result of the
Company ending its supply agreement with Ameriserve Food Distribution, Inc.
This income represented the remaining unrecognized portion of contractual
payments previously received and deferred at the inception of the agreement.
Administrative expenses increased to $12.4 million in the first six months from
$11.3 million in the first six months of 1999 and increased, as a percentage of
sales, from 5.1% in 1999 to 5.4% in 2000. The increase in administrative
expense over 1999 is due to increased investments in information systems
including staffing to support the installation of new restaurant point-of-sale
systems which began in the third quarter of 1999 and higher bonus expense levels
in 2000.
Earnings before interest, taxes, depreciation and amortization and non-cash
extraordinary items ("EBITDA") increased to $29.8 million in the first six
months of 2000 from $23.8 million in the first six months of 1999. As a
percentage of total revenues, EBITDA margins increased from 10.8% in the first
six months of 1999 to 13.0% in 2000 as a result of the factors discussed above.
Depreciation and amortization increased $1.9 million in the first six months of
2000 from the first six months of 1999 due to the Company's capital expenditures
of $45.7 million since the end of the second quarter of 1999.
Interest expense was $11.6 million in the first six months of 2000 compared to
$11.3 million in the first six months of 1999 due to higher effective interest
rates in 2000, offset slightly by lower average debt balances in 2000.
The provision for income taxes in the second quarter of 2000 was derived on an
estimated effective income tax rate for 2000 of 45.0%. This rate is higher than
the Federal statutory tax rate due to state franchise taxes and non-deductible
amortization of franchise rights and certain other intangible assets.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
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 conducted on a cash basis;
. rapid turnover allows a limited investment in inventories; and
. cash from sales is usually received before related accounts for food,
supplies and payroll become due.
Our cash requirements arise primarily from:
. the need to finance the opening and equipping of new restaurants;
. ongoing capital reinvestment in our existing restaurants;
. the acquisition of existing Burger King restaurants;
. and for servicing our debt.
Our operations in the first six months of 2000 generated approximately $20.3
million in cash, compared with $17.6 million in the first six months of 1999.
Capital expenditures represent a major investment of cash for the Company, and
totaled, excluding acquisitions, $17.8 million and $21.3 million in the first
six months of 2000 and 1999, respectively. Expenditures for new restaurant
development were $4.1 million and $4.7 million in the first six months of 2000
and 1999, respectively. Capital expenditures in 1999 included $3.3 million for
the purchase of the land and building for two Pollo Tropical restaurants that
were previously leased.
In 2000, we anticipate total capital expenditures of approximately $36 million
to $38 million, excluding the cost of any acquisitions that we may make. These
amounts include approximately $8 million to $10 million for construction of new
Burger King restaurants, including certain real estate; $4 million for
construction of new Pollo Tropical restaurants; approximately $8 million to $9
million for remodeling existing Burger King restaurants; and approximately $3
million to $4 million for expenditures related to Burger King transformation
initiatives, which include new signage and other facility improvements.
Remodeling activities in 2000 include approximately $5 million to $6 million of
expenditures related to the Burger King Early Successor Incentive Program.
Other anticipated Burger King restaurant capital expenditures in 2000 for
ongoing reinvestment are approximately $4 million to $5 million. We also
completed the rollout of new restaurant point-of-sale systems in August 2000 and
completed installation of new frozen beverage machines in all of our Burger King
restaurants. We anticipate that total expenditures associated with these
projects will be approximately $4 million in 2000.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
At June 30, 2000, we had total indebtedness of $252.0 million comprised of
$170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, total
borrowings under our senior credit facility of $78.4 million and other debt of
$3.6 million. Our senior credit facility provides for a term loan facility of
$50 million and a revolving credit facility under which we may borrow up to
$105.0 million (including a standby letter of credit facility for up to $5
million). At June 30, 2000, $45.0 million was outstanding under the term loan
facility and $68.0 million was available for borrowings under our revolving
credit facility, after reserving $3.6 million for letter of credit agreements
issued under the facility.
Interest payments under our senior subordinated notes and other existing 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, planned development and debt service requirements
for the next twelve months.
Burger King Transformation Activities
- -------------------------------------
Burger King Corporation has arranged for the Coca-Cola Company and Dr.
Pepper/Seven-Up, Inc. to make funds available to franchisees to be used in
connection with the transformation initiatives. By agreeing to make the
investments associated with these initiatives, we will be entitled to receive
$56,000 per restaurant, or approximately $20.0 million in the aggregate, from
the fund established by Coca-Cola and Dr. Pepper. We received the first
installment, which totaled $9.9 million, in March 2000 and expect to receive the
balance of the funds in the third quarter of 2000.
Distributor Transition Activities
- ---------------------------------
Restaurants Services, Inc., the purchasing cooperative for the Burger King
system, has entered into new long-term supply agreements with distributors from
which we will obtain substantially all of our food and paper products (other
than bread products) for our Burger King restaurants. We previously obtained
our food and paper products for our Burger King restaurants from Ameriserve Food
Distribution, Inc. under a supply agreement which expired on May 15, 2000. The
transition to our new suppliers was completed in June 2000. We estimate that
our supply costs will increase by approximately .2% as a percentage of sales due
to this change in distributors.
Inflation
- ---------
The inflationary factors which have historically affected our results of
operations include increases in food and paper costs, labor and other operating
expenses. Wages paid in our restaurants are impacted by changes in the Federal
or state minimum hourly wage rates, and accordingly, changes in those rates
directly affect our labor cost. We and the restaurant industry typically
attempt to offset the effect of inflation, at least in part, through periodic
menu price increases and various cost reduction programs. However, no assurance
can be given that we will be able to offset such inflationary cost increases in
the future.
19
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 exhibits are filed as part of this report.
Exhibit No.
-----------
27 Financial Data Schedule
b. There were no reports on Form 8-K filed during the reported
quarter.
20
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)
Date: August 7, 2000 /s/_______________________________________
(Signature)
Alan Vituli
Chairman and Chief Executive Officer
Date: August 7, 2000 /s/________________________________________
(Signature)
Paul R. Flanders
Vice President - Finance (Principal
Financial Officer and Principal
Accounting Officer)
21