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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 September 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 November 6, 2000: 10 shares
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PART I
ITEM 1 - FINANCIAL INFORMATION
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2000 1999
- ------ ------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,495,000 $ 1,901,000
Trade and other receivables 698,000 787,000
Inventories 4,991,000 4,211,000
Prepaid rent 2,070,000 1,829,000
Prepaid expenses and other current assets 1,814,000 1,629,000
Refundable income taxes 562,000 682,000
Deferred income taxes 5,266,000 6,475,000
------------- -------------
Total current assets 16,896,000 17,514,000
Property and equipment, at cost less accumulated
depreciation of $99,244,000 and $91,599,000
respectively 133,178,000 122,813,000
Franchise rights, at cost less accumulated
amortization of $37,264,000 and $34,174,000
respectively 100,118,000 101,927,000
Intangible assets, at cost less accumulated
amortization of $12,940,000 and $11,328,000
respectively 65,998,000 67,545,000
Other assets 9,610,000 10,228,000
------------- -------------
$ 325,800,000 $ 320,027,000
============= =============
The accompanying notes are an integral part of these financial statements.
2
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
September 30, December 31,
LIABILITIES and STOCKHOLDER'S EQUITY 2000 1999
- ------------------------------------ --------------- ----------------
(unaudited)
Current liabilities:
Accounts payable $ 10,099,000 $ 19,345,000
Accrued interest 5,669,000 1,920,000
Accrued payroll, related taxes and benefits 7,979,000 7,267,000
Other liabilities 8,047,000 6,302,000
Current portion of long-term debt 4,750,000 4,120,000
Current portion of capital lease obligations 249,000 256,000
------------- -------------
Total current liabilities 36,793,000 39,210,000
Long-term debt, net of current portion 234,653,000 247,661,000
Capital lease obligations, net of current portion 1,270,000 1,457,000
Deferred income -- sale/leaseback of real estate 4,243,000 4,463,000
Accrued postretirement benefits 2,069,000 1,913,000
Deferred income taxes 2,997,000 1,208,000
Other liabilities and deferred income (Note 7) 24,824,000 9,064,000
------------- -------------
Total liabilities 306,849,000 304,976,000
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 (5,534,000) (9,434,000)
------------- -------------
Total stockholder's equity 18,951,000 15,051,000
------------- -------------
$ 325,800,000 $ 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 SEPTEMBER 30, 2000 and 1999
2000 1999
------------ ------------
(13 Weeks) (13 Weeks)
(unaudited)
Revenues:
Restaurant sales $115,920,000 $115,129,000
Franchise fees and royalty revenues 255,000 343,000
------------ ------------
Total revenues 116,175,000 115,472,000
Costs and expenses:
Cost of sales 32,793,000 34,795,000
Restaurant wages and related expenses 33,605,000 33,354,000
Other restaurant operating expenses 23,152,000 22,781,000
Advertising expense 4,540,000 5,201,000
General and administrative 6,417,000 5,714,000
Depreciation and amortization 6,949,000 5,935,000
------------ ------------
Total operating expenses 107,456,000 107,780,000
------------ ------------
Income from operations 8,719,000 7,692,000
Interest expense 5,770,000 5,416,000
------------ ------------
Income before income taxes 2,949,000 2,276,000
Provision for income taxes 1,672,000 1,115,000
------------ ------------
Net income $ 1,277,000 $ 1,161,000
============ ============
The accompanying notes are an integral part of these financial statements.
4
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2000 1999
------------- -------------
(39 Weeks) (39 Weeks)
(unaudited)
Revenues:
Restaurant sales $ 345,293,000 $ 335,537,000
Franchise fees and royalty revenues 711,000 832,000
------------- -------------
Total revenues 346,004,000 336,369,000
Costs and expenses:
Cost of sales 98,719,000 101,814,000
Restaurant wages and related expenses 100,368,000 99,117,000
Other restaurant operating expenses 68,030,000 66,219,000
Advertising expense 15,928,000 14,835,000
General and administrative 18,849,000 17,010,000
Depreciation and amortization 20,356,000 17,473,000
Other income (Note 5) (1,365,000) -
------------- -------------
Total operating expenses 320,885,000 316,468,000
------------- -------------
Income from operations 25,119,000 19,901,000
Interest expense 17,395,000 16,707,000
------------- -------------
Income before income taxes and extraordinary loss 7,724,000 3,194,000
Provision for income taxes 3,824,000 1,747,000
------------- -------------
Income before extraordinary loss 3,900,000 1,447,000
Extraordinary loss on write-off of debt issue costs, net of taxes
(Note 6) - 940,000
------------- -------------
Net income $ 3,900,000 $ 507,000
============= =============
The accompanying notes are an integral part of these financial statements.
5
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2000 1999
------------ --------------
(39 Weeks) (39 Weeks)
(unaudited)
Cash flows from operating activities:
Net income $ 3,900,000 $ 507,000
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 20,356,000 17,473,000
Deferred income taxes 2,998,000 (197,000)
Extraordinary loss on write off of debt issue costs, net of tax - 940,000
Change in operating assets and liabilities 12,261,000 10,639,000
------------ ------------
Net cash provided by operating activities 39,515,000 29,362,000
------------ ------------
Cash flows for investing activities:
Capital expenditures:
New restaurant development (8,519,000) (8,717,000)
Restaurant remodeling (8,034,000) (7,865,000)
Corporate and restaurant information systems (5,158,000) (6,775,000)
Other capital expenditures (5,645,000) (8,476,000)
Acquisitions of restaurants - (544,000)
Proceeds from disposition of property and equipment 7,000 121,000
------------ ------------
Net cash used for investing activities (27,349,000) (32,256,000)
------------ ------------
Cash flows for financing activities:
Proceeds from long term debt 1,609,000 -
Principal payments on long term debt, net (13,987,000) (16,454,000)
Financing costs associated with senior credit facility refinancing - (886,000)
Principal payments on capital leases (194,000) (254,000)
Proceeds from sale-leaseback transactions - 14,800,000
------------ ------------
Net cash used for financing activities (12,572,000) (2,794,000)
------------ ------------
Decrease in cash and cash equivalents (406,000) (5,688,000)
Cash and cash equivalents, beginning of period 1,901,000 6,777,000
------------ ------------
Cash and cash equivalents, end of period $ 1,495,000 $ 1,089,000
============ ============
The accompanying notes are an integral part of these financial statements.
6
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Statement of Management
-----------------------
The accompanying consolidated financial statements for the three and nine
months ended September 30, 2000 and 1999 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 nine months ended September 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 nine months ended September 30, 2000 and
1999 was comprised of the following:
2000 1999
------------ ------------
Current $ 826,000 $ 1,944,000
Deferred 2,998,000 (197,000)
----------- -----------
$ 3,824,000 $ 1,747,000
=========== ===========
For 2000 and 1999 the difference between the expected tax provision,
resulting from application of the federal statutory income tax rate to
pretax income, and the reported income tax provision result principally
from state taxes and non deductible amortization of certain 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 Company's
$170.0 million principal amount of 9 1/2% Senior Subordinated Notes due
2008. 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.
September 30, December 31,
2000 1999
--------------- ---------------
Balance Sheet:
Current assets $ 3,002,000 $ 2,657,000
Non current assets 91,834,000 89,527,000
Current liabilities 5,383,000 5,734,000
Non current liabilities 79,086,000 78,549,000
Nine Months Ended
September 30,
2000 1999
--------------- --------------
Statement of Operations:
Revenues $ 67,595,000 $ 63,285,000
Operating expenses 56,639,000 53,401,000
Income from operations 10,956,000 9,884,000
Net income 2,895,000 2,149,000
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.
8
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
4. Business Segment Information (continued):
-----------------------------------------
Segment information for the Company's Burger King and Pollo Tropical
restaurants for the three and nine months ended September 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 (loss)
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
extraordinary loss, are corporate related items and therefore have not been
allocated to the reportable segments.
Burger
King Pollo
Three Months Ended: Restaurants Tropical Other Consolidated
------------------- ----------- -------- ----- ------------
($ in 000's)
September 30, 2000:
Revenues $ 94,066 $ 22,109 $ - $ 116,175
Cost of sales 25,536 7,257 - 32,793
Restaurant wages and related
expenses 28,522 5,083 - 33,605
Depreciation and amortization 4,098 523 2,328 6,949
Income (loss) from operations 6,686 4,361 (2,328) 8,719
Capital expenditures, excluding
acquisitions 6,097 3,081 426 9,604
September 30, 1999:
Revenues $ 94,529 $ 20,943 $ - $ 115,472
Cost of sales 27,555 7,240 - 34,795
Restaurant wages and related
expenses 28,605 4,749 - 33,354
Depreciation and amortization 3,264 488 2,183 5,935
Income (loss) from operations 6,126 3,749 (2,183) 7,692
Capital expenditures, excluding
acquisitions 7,934 2,029 619 10,582
9
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
4. Business Segment Information (continued):
-----------------------------------------
Burger
King Pollo
Restaurants Tropical Other Consolidated
----------- -------- ----- ------------
Nine Months Ended:
------------------
($ in 000's)
September 30, 2000:
Revenues $ 278,635 $ 67,369 $ - $ 346,004
Cost of sales 76,569 22,150 - 98,719
Restaurant wages and related
expenses 85,044 15,324 - 100,368
Depreciation and amortization 11,811 1,529 7,016 20,356
Income (loss) from operations 19,713 12,422 (7,016) 25,119
Capital expenditures, excluding
acquisitions 20,302 6,016 1,038 27,356
September 30, 1999:
Revenues $ 273,494 $ 62,875 $ - $ 336,369
Cost of sales 80,097 21,717 - 101,814
Restaurant wages and related
expenses 84,924 14,193 - 99,117
Depreciation and amortization 9,658 1,464 6,351 17,473
Income (loss) from operations 14,938 11,314 (6,351) 19,901
Capital expenditures, excluding
acquisitions 21,601 7,658 2,574 31,833
Identifiable Assets:
--------------------
At September 30, 2000 $ 210,716 $ 28,835 $ 86,249 $ 325,800
At December 31, 1999 206,500 25,208 88,319 320,027
10
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
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.
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. The Company has received
approximately $19.8 million in 2000 under this arrangement. 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 has
included these supplier rebates in deferred income and is amortizing these
rebates 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
amortized in the three and nine months ended September 30, 2000 was $655,000
and $1,310,000, respectively.
8. Agreement to Acquire Taco Cabana, Inc.
--------------------------------------
On October 6, 2000, the Company entered into a definitive Agreement and Plan
of Merger to acquire Taco Cabana, Inc., a regional operator of 116 Mexican
quick-casual restaurants located primarily in the state of Texas, and
franchisor of an additional 10 restaurants. Pursuant to this agreement among
Taco Cabana, Inc., the Company and Spur Acquisition Corp., a wholly owned
subsidiary of the Company, Spur Acquisition Corp. will be merged with and
into Taco Cabana, Inc. which will continue as the surviving corporation and
as a wholly owned subsidiary of the Company. Pursuant to the merger, each of
the common shares of Taco Cabana, Inc. outstanding immediately prior to the
effective time of the merger will be converted into the right to receive
$9.04 per share, to be paid by the Company in cash for a total purchase price
of approximately $105 million for the 11.6 million common shares outstanding.
The total transaction is valued at approximately $152 million (excluding fees
and expenses) for the purchase of the outstanding shares, employee stock
options and the assumption of Taco Cabana's outstanding debt which was
approximately $42 million at September 30, 2000.
11
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
8. Subsequent Event - Acquisition of Taco Cabana, Inc. (continued)
---------------------------------------------------------------
Completion of the transaction is subject to certain customary conditions
including approval of the merger by Taco Cabana's stockholders at a
shareholders' meeting scheduled for December 18, 2000 and the Company
obtaining the necessary financing to complete the merger. The Company has
entered into a binding commitment letter with The Chase Manhattan Bank, the
Company's current lead senior lender, and Chase Securities, Inc., pursuant to
which Chase has agreed to lend up to $250 million to the Company to finance
the merger, pay related fees and expenses, to replace or repay Taco Cabana's
outstanding bank indebtedness, to refinance the Company's existing bank
indebtedness, and to be used for the Company's working capital, new store
development, permitted acquisitions and other general corporate purposes.
Chase's obligation to provide the financing pursuant to the commitment letter
is subject to the preparation and execution of a definitive loan agreement
and related documents and certain other customary conditions, including the
following: (i) there not occurring or becoming known to Chase any material
adverse condition or material adverse change in or affecting the business,
operations, property, condition (financial or otherwise) or prospects of the
Company, its subsidiaries and Taco Cabana taken as a whole; (ii) there not
having occurred a material disruption of or a material adverse change in
financing, banking or capital market conditions that, in Chase's reasonable
judgment, could materially impair the syndication of the loan facility; and
(iii) the execution on or before March 31, 2001 of definitive documentation
with respect to the loan facility satisfactory to Chase and its counsel.
12
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; failure by the Company
or other entities with which it does business to achieve compliance; 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 September 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 September 30, 2000, we
franchised 22 Pollo Tropical restaurants primarily located in Puerto Rico. Since
September 30, 1999, the Company has built nine, acquired four and closed four
Burger King restaurants, and has built four Pollo Tropical restaurants. At
September 30, 2000, one Pollo Tropical restaurant was closed due to a fire in
the first quarter of 2000.
Agreement to Acquire Taco Cabana, Inc.
- -------------------------------------
On October 6, 2000, the Company entered into a definitive Agreement and Plan of
Merger to acquire Taco Cabana, Inc., a regional operator of 116 Mexican quick-
casual restaurants located primarily in the state of Texas, and franchisor of an
additional 10 restaurants. Pursuant to this agreement among Taco Cabana, Inc.,
the Company and Spur Acquisition Corp., a wholly owned subsidiary of the
Company, Spur Acquisition Corp. will be merged with and into Taco Cabana, Inc.
which will continue as the surviving corporation and as a wholly owned
subsidiary of the Company. Pursuant to the merger, each of the common shares of
Taco Cabana, Inc. outstanding immediately prior to the effective time of the
merger will be converted into the right to receive $9.04 per share, to be paid
by the Company in cash for a total purchase price of approximately $105 million
for the 11.6 million common shares outstanding. The total transaction is valued
at approximately $152 million (excluding fees and expenses) for the purchase of
the outstanding shares, employee stock options and the assumption of
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Taco Cabana's outstanding debt which was approximately $42 million at
September 30, 2000. The Taco Cabana acquisition will initially be financed with
borrowings under a senior credit facility, however, we anticipate to
subsequently reduce such borrowings with a sale/leaseback of real estate
including a portion of Taco Cabana's 42 owned restaurant properties.
Completion of the transaction is subject to certain customary conditions
including approval of the merger by Taco Cabana's stockholders at a
shareholders' meeting scheduled for December 18, 2000 and the Company obtaining
the necessary financing to complete the merger. The Company has entered into a
binding commitment letter with The Chase Manhattan Bank, the Company's current
lead senior lender, and Chase Securities, Inc., pursuant to which Chase has
agreed to lend up to $250 million to the Company to finance the merger, pay
related fees and expenses, to replace or repay Taco Cabana's outstanding bank
indebtedness, to refinance the Company's existing bank indebtedness, and to be
used for the Company's working capital, new store development, permitted
acquisitions and other general corporate purposes. Chase's obligation to provide
the financing pursuant to the commitment letter is subject to the preparation
and execution of a definitive loan agreement and related documents and certain
other customary conditions, including the following: (i) there not occurring or
becoming known to Chase any material adverse condition or material adverse
change in or affecting the business, operations, property, condition (financial
or otherwise) or prospects of the Company, its subsidiaries and Taco Cabana
taken as a whole; (ii) there not having occurred a material disruption of or a
material adverse change in financing, banking or capital market conditions that,
in Chase's reasonable judgment, could materially impair the syndication of the
loan facility; and (iii) the execution on or before March 31, 2001 of definitive
documentation with respect to the loan facility satisfactory to Chase and its
counsel.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations
- ---------------------
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999.
The following table sets forth, for the three months ended September 30, 2000
and 1999, selected operating results as a percentage of restaurant sales:
2000 1999
------ ------
Restaurant sales:
Burger King 81.1% 82.1%
Pollo Tropical 18.9 17.9
----- -----
100.0 100.0
Costs and expenses:
Cost of sales 28.3 30.2
Restaurant wages and related expenses 29.0 29.0
Other restaurant expenses including advertising 23.9 24.3
General and administrative 5.5 5.0
Depreciation and amortization 6.0 5.1
----- -----
Income from restaurant operations 7.3% 6.4%
===== =====
Restaurant Sales
- ----------------
Restaurant sales for the three months ended September 30, 2000, increased 0.7%
to $115.9 million from $115.1 million in the third quarter of 1999. Burger King
restaurant sales in the third quarter were $94.1 million in 2000 compared to
$94.5 million in 1999. Sales at our comparable Burger King restaurants (those
units operating for the entirety of the compared periods) decreased 2.8% for the
third quarter of 2000 however this sales decrease was substantially offset by
the net addition of nine Burger King restaurants in the past twelve months.
Pollo Tropical sales increased $1.3 million to $21.9 million in the third
quarter of 2000 or 6.1%, compared to 1999. This increase was due primarily to
the opening of four new restaurants in the twelve months ended September 30,
2000. Sales at comparable Pollo Tropical restaurants increased 0.2% in the third
quarter of 2000.
15
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 total restaurant sales,
were 28.3% for the third quarter of 2000 compared to 30.2% for the third quarter
of 1999. Cost of sales at our Burger King restaurants, as a percentage of Burger
King restaurant sales, decreased in the third quarter from 29.1% in 1999 to
27.1% in 2000. Cost of sales at our Pollo Tropical restaurants, as a percentage
of Pollo Tropical restaurant sales, decreased in the third quarter from 35.1% in
1999 to 33.2% in 2000. These decreases, in part, are due to menu price increases
since the third quarter of 1999 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 also are due to higher supplier rebates for both of
our restaurant concepts, including amortization of funds received in 2000 from
our soft drink suppliers, and due to favorable commodity costs, particularly
chicken, for Pollo Tropical. These factors were offset, in part, by a 4.1%
increase in beef costs and a higher level of promotional activity at our Burger
King restaurants.
Restaurant wages and related expenses, as a percentage of total restaurant
sales, in the third quarter of 2000 were 29.0% which was the same as the third
quarter of 1999. Burger King restaurant wages and related expenses, were 30.3%
in the third quarter of both years and Pollo Tropical restaurant wages and
related expenses, were 23.3% in the third quarter of 2000 compared to
23.1% in 1999. The impact of lower sales volumes at our Burger King restaurants
on fixed labor costs in the third quarter of 2000 and a 3.5% increase in hourly
labor rates were offset by labor efficiencies and the impact of menu price
increases since the third quarter of 1999. Labor efficiencies at our Burger King
restaurants included an 8% decrease in average restaurant labor hours due to
operating improvements. The increase for Pollo Tropical in the third quarter of
2000 is due to labor rate increases of approximately 2% and lower management
vacancy rates, offset in part by labor efficiencies and the impact of menu price
increases earlier in the year.
Other restaurant operating expenses, including advertising, decreased from 24.3%
of total restaurant sales in the third quarter of 1999 to 23.9% in the third
quarter of 2000. Other restaurant operating expenses in the third quarter at our
Burger King restaurants decreased from 25.8% in 1999 to 25.5% in 2000 and
decreased at our Pollo Tropical restaurants, from 17.6% in 1999 to 16.9% in
2000. The decrease at our Burger King restaurants is attributable to a decrease
in local advertising expenses in 2000 offset, in part, by increases in utility
costs as well as maintenance expenses related to Burger King image
transformation activities. The decrease at our Pollo Tropical restaurants is
primarily due to the leveraging of fixed costs, particularly occupancy expenses,
offset in part by higher utility costs.
Administrative expenses for the quarter increased $0.7 million to $6.4 million
in the third quarter of 2000 due primarily to additional investments in
information systems, including staffing to support new restaurant point-of-sale
systems, the installation of which was completed in the third quarter of 2000,
and higher incentive bonus levels in 2000. As a percentage of total restaurant
sales, administrative expenses increased from 5.0% in 1999 to 5.5% in 2000 due
primarily to lower sales volumes in 2000 at our Burger King restuarants.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Earnings before interest, income taxes, depreciation and amortization, non-cash
extraordinary items and other income ("EBITDA") was $15.7 million in the third
quarter of 2000 compared to $13.6 million in the third quarter of 1999. As a
percentage of total revenues, EBITDA increased from 11.8% in the third quarter
of 1999 to 13.5% in the third quarter of 2000 as a result of the factors
discussed above.
Depreciation and amortization increased $1.0 million in the third quarter of
2000 from the third quarter of 1999 due to the Company's capital expenditures of
$44.1 million since the end of the third quarter of 1999.
Interest expense was $5.8 million in the third quarter of 2000 compared to $5.4
million in the third quarter of 1999 due to higher effective interest rates,
offset slightly by lower average debt balances in 2000.
The provision for income taxes in the third quarter of 2000 was derived on an
estimated annual effective income tax rate for 2000 of 49.5%. This rate is
higher than the Federal statutory tax rate due to state franchise taxes and
non deductible amortization of certain franchise rights and certain other
intangible assets including goodwill.
As a result of the foregoing, net income in the third quarter of 2000 was
$1,277,000 as compared to $1,161,000 in the third quarter of 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
The following table sets forth, for the nine months ended September 30, 2000 and
1999, selected operating results as a percentage of restaurant sales:
2000 1999
------ ------
Restaurant sales:
Burger King 80.7% 81.5%
Pollo Tropical 19.3 18.5
------ ------
100.0 100.0
Costs and expenses:
Cost of sales 28.6 30.3
Restaurant wages and related expenses 29.1 29.5
Other restaurant expenses including advertising 24.3 24.2
General and administrative 5.4 5.1
Depreciation and amortization 5.9 5.2
Other income (.4) -
------ ------
Income from restaurant operations 7.1% 5.7%
====== ======
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Restaurant Sales
- ----------------
Restaurant sales for the nine months ended September 30, 2000 increased 2.9% to
$345.3 million from $335.5 million in the first nine months of 1999. Burger King
restaurant sales increased $5.1 million, or $1.9%, over 1999 due to the net
addition of nine restaurants since the end of the third quarter of 1999. Sales
at our comparable Burger King restaurants in the first nine months of 2000
decreased 0.9%. Pollo Tropical sales increased $4.5 million in the first nine
months of 2000 or 7.1%, compared to 1999. This increase was due to the opening
of four new restaurants in the twelve months ended September 30, 2000 and a 2.4%
increase in sales at comparable Pollo Tropical restaurants in the first nine
months of 2000.
Operating Costs and Expenses
- ----------------------------
Cost of sales (food and paper costs), as a percentage of total restaurant sales,
were 28.6% for the first nine months in 2000 compared to 30.3% for the first
nine months of 1999. Burger King restaurant cost of sales were 27.5%, as a
percentage of Burger King restaurant sales, in 2000 compared to 29.3% in 1999
and Pollo Tropical restaurant cost of sales were 33.2%, as a percentage of Pollo
Tropical restaurant sales, in 2000 compared to 35.0% in 1999. These decreases,
in part, are due to menu price increases since the third quarter of 1999 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 also reflect
higher supplier rebates for both our restaurant concepts including amortization
of funds received in 2000 from our soft drink suppliers and lower chicken costs
at our Pollo Tropical restaurants. These factors were offset, in part, by an
increase in beef costs at our Burger King restarants in the first nine months of
2000 compared to 1999.
Restaurant wages and related expenses, as a percentage of total restaurant
sales, decreased from 29.5% in the first nine months of 1999 to 29.1% in the
first nine months of 2000. Burger King restaurant wages and related expenses
were 30.5% in 2000 compared to 31.1% in 1999. This decrease was due primarily to
labor efficiencies and to the effects of menu price increases since the third
quarter of 1999. Labor efficiencies at our Burger King restaurants reflected an
8.3% 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 increased slightly to 23.0% in 2000 from
22.9% in 1999.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Other restaurant operating expenses, including advertising, increased slightly
from 24.2% of total restaurant sales in the first nine months of 1999 to 24.3%
in the first nine months of 2000. Other restaurant operating expenses at our
Burger King restaurants were 25.8% in both years. Other restaurant operating
expenses at Pollo Tropical increased from 17.1% in 1999 to 18.1% in 2000. The
increase at Pollo Tropical was due to an increase in advertising expenditures of
$0.7 million, or 0.7% as a percentage of Pollo Tropical restaurant sales, due to
the timing of advertising expenditures compared to the prior year and increased
occupancy and utility costs. Occupancy costs increased 0.2% as a percentage of
Pollo Tropical restaurant sales in the first nine months of 2000 compared to
1999 due in part to the sale/leaseback of five Pollo Tropical restaurant
properties at the end of the second quarter of 1999.
Other income of $1,365,000 was a result of terminating our supply agreement with
Ameriserve Food Distribution, Inc. in the second quarter. This income
represented the remaining unrecognized portion of contractual payments
previously received and deferred at the inception of the agreement.
Administrative expenses increased to $18.8 million in the first nine months of
2000 from $17.0 million in the first nine months of 1999 and increased, as a
percentage of total restaurant 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 new restaurant point of sale
systems, the installation of which was completed in the third quarter of 2000,
and higher bonus expense levels in 2000.
Earnings before interest, income taxes, depreciation and amortization, and
non cash extraordinary items and other income ("EBITDA") increased to $44.1
million in the first nine months of 2000 from $37.4 million in the first nine
months of 1999. As a percentage of total revenues, EBITDA margins increased from
11.1% in 1999 to 12.7% in 2000 as a result of the factors discussed above.
Depreciation and amortization increased $2.9 million in the first nine months of
2000 from the first nine months of 1999 due to our capital expenditures since
the beginning of 1999.
Interest expense was $17.4 million in the first nine months of 2000 compared to
$16.7 million in the first nine 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 for the nine months ended September 30, 2000 was
derived on an estimated effective income tax rate for 2000 of 49.5%. This rate
is higher than the Federal statutory tax rate due to state franchise taxes and
non deductible amortization of certain franchise rights and certain other
intangible assets including goodwill.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Net income for the nine months ended September 30, 2000 and 1999 was $3,900,000
and $507,000, respectively.
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
. servicing our debt.
Our operations in the first nine months of 2000 generated approximately $39.5
million in cash, compared with $29.4 million in the first nine months of 1999.
Capital expenditures represent a major investment of cash and, excluding
acquisitions, totaled $27.4 million and $31.8 million in the first nine months
of 2000 and 1999, respectively. Expenditures for new restaurant development were
$8.5 million and $8.7 million in the first nine months of 2000 and 1999,
respectively. Capital expenditures in 1999 also 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 $35 million,
excluding the cost of any acquisitions. These amounts include approximately
$4 million for construction of new Burger King restaurants, including certain
real estate; $6 million for construction of new Pollo Tropical restaurants,
including certain real estate; approximately $12 million for remodeling existing
Burger King restaurants; and approximately $1 million to $2 million for
expenditures related to Burger King transformation initiatives, which include
new signage and other facility improvements. Estimated remodeling activities in
2000 include approximately $6.5 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 $5
million. We also completed the rollout of new restaurant point of sale systems
in August 2000 which resulted in expenditures of approximately $4 million in
2000.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
At September 30, 2000, we had total indebtedness of $240.9 million comprised of
$170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, total
borrowings under our senior credit facility of $67.4 million and other debt of
$3.5 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
million (including a standby letter of credit facility for up to $5 million). At
September 30, 2000, $44.0 million was outstanding under the term loan facility
and $78.0 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 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 in connection with
the 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. We have received $56,000 per restaurant, or approximately $19.8
million in the aggregate, from the fund established by Coca Cola and Dr. Pepper.
The first installment of $9.9 million was received in March 2000 and the second
installment of $9.9 million was received in August 2000.
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.
21
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. The Company filed a Form 8-K dated October 6, 2000
reporting the Agreement and Plan of Merger among Carrols
Corporation, Spur Acquisition Corp. and Taco Cabana, Inc. under
Item 5.
22
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
(Registrant)
Date: November 13, 2000 /s/_____________________________________
(Signature)
Alan Vituli
Chairman and Chief Executive Officer
Date: November 13, 2000 /s/_____________________________________
(Signature)
Paul R. Flanders
Vice President - Finance (Principal
Financial Officer and Principal
Accounting Officer)
23