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 March 31, 2002
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 13203
Syracuse, New York (Zip Code)
(Address of principal executive offices)
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 May 11, 2002: 10 shares
PART I
ITEM 1 - FINANCIAL INFORMATION
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
March 31, December 31,
ASSETS 2002 2001
- ------ ----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 2,551 $ 2,405
Trade and other receivables, net of reserves of
$128 at each date 1,568 1,741
Inventories 4,868 5,094
Prepaid rent 2,086 2,115
Prepaid expenses and other current assets 4,487 4,262
Refundable income taxes 1,509 1,133
Deferred income taxes 6,797 6,797
-------- --------
Total current assets 23,866 23,547
Property and equipment, at cost less accumulated
depreciation of $131,957 and $124,744,
respectively 213,710 213,346
Franchise rights, at cost less accumulated
amortization of $44,542 and $43,341,
respectively 93,644 94,844
Intangible assets, at cost less accumulated
Amortization of $10,031 and $10,056,
Respectively 122,420 122,433
Deferred income taxes 7,651 8,384
Other assets 11,052 11,449
-------- --------
Total assets $472,343 $474,003
======== ========
The accompanying notes are an integral part of these financial statements.
2
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands of dollars)
March 31, December 31,
LIABILITIES and STOCKHOLDER'S EQUITY 2002 2001
- ------------------------------------ ----------- ------------
(unaudited)
Current liabilities:
Accounts payable $ 12,165 $ 16,620
Accrued interest 5,535 1,518
Accrued payroll, related taxes and benefits 12,857 12,872
Other liabilities 15,011 15,706
Current portion of long-term debt 10,627 10,029
-------- --------
Total current liabilities 56,195 56,745
Long-term debt, net of current portion 362,411 363,615
Deferred income - sale/leaseback of real estate 4,091 3,881
Accrued postretirement benefits 2,388 2,310
Other liabilities 31,469 32,397
-------- --------
Total liabilities 456,554 458,948
Stockholder's equity:
Common stock, par value $1; authorized 1,000 shares,
issued and outstanding - 10 shares -- --
Additional paid-in capital 24,485 24,485
Accumulated deficit (8,696) (9,430)
-------- --------
Total stockholder's equity 15,789 15,055
-------- --------
Total liabilities and stockholder's equity $472,343 $474,003
======== ========
The accompanying notes are an integral part of these financial statements.
3
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,2002 AND 2001
(in thousands of dollars)
2002 2001
-------- --------
(unaudited)
Revenues:
Restaurant sales $157,437 $154,731
Franchise fees and royalty revenues 370 381
-------- --------
Total revenues 157,807 155,112
Costs and expenses:
Cost of sales 43,853 45,449
Restaurant wages and related expenses 47,588 46,230
Other restaurant operating expenses 31,736 31,224
Advertising expense 6,888 6,480
General and administrative 9,601 9,457
Depreciation and amortization 9,919 10,370
-------- --------
Total operating expenses 149,585 149,210
-------- --------
Income from operations 8,222 5,902
Interest expense 7,031 9,175
-------- --------
Income (loss) before income taxes 1,191 (3,273)
Provision (benefit) for income tax 455 (1,741)
-------- --------
Net income (loss) $ 736 $ (1,532)
======== ========
The accompanying notes are an integral part of these financial statements.
4
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(in thousands of dollars)
2002 2001
-------- --------
(unaudited)
Cash flows provided from operating activities:
Net income (loss) $ 736 $ (1,532)
Adjustments to reconcile net income (loss) to net cash
provided from operating activities:
Loss on disposal of property and equipment 32 --
Depreciation and amortization 9,919 10,370
Deferred income taxes 733 (1,687)
Change in operating assets and liabilities (2,502) (4,169)
-------- --------
Net cash provided from operating activities 8,918 2,982
-------- --------
Cash flows used for investing activities:
Capital expenditures:
New restaurant development (3,197) (3,816)
Restaurant remodeling (3,296) (3,229)
Other restaurant expenditures (1,586) (3,154)
Corporate and information systems (251) (519)
-------- --------
Total capital expenditures (8,330) (10,718)
Properties purchased for sale-leaseback (929) --
Proceeds from sales of property and equipment -- 10
-------- --------
Net cash used for investing activities (9,259) (10,708)
-------- --------
Cash flows provided from financing activities:
Proceeds from revolving credit facility, net 1,900 7,300
Proceeds (payments) on other notes payable, net (237) 787
Principal payments on term loans (2,125) (1,750)
Principal payments on capital leases
(144) (128)
Proceeds from sale-leaseback transactions 1,093 --
-------- --------
Net cash provided from financing activities 487 6,209
-------- --------
Increase (decrease) in cash and cash equivalents 146 (1,517)
Cash and cash equivalents, beginning of period 2,405 2,712
-------- --------
Cash and cash equivalents, end of period $ 2,551 $ 1,195
======== ========
The accompanying notes are an integral part of these financial statements.
5
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Management
-----------------------
The accompanying unaudited consolidated financial statements for the three
months ended March 31, 2002 and 2001 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
of America 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 months ended March 31, 2002 and
2001 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 of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The condensed consolidated financial statements include the accounts of
Carrols Corporation and its majority owned subsidiaries ("Carrols" or the
"Company"). All material intercompany balances, transactions and profits
have been eliminated.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 2001 contained in our 2001 Annual Report on Form 10-K. The
December 31, 2001 balance sheet data is derived from these audited
financial statements.
2. Income Taxes
------------
The income tax provision for the three months ended March 31, 2002 and 2001
was comprised of the following (in thousands):
2002 2001
------ --------
Current $(278) $ (54)
Deferred 733 (1,687)
----- -------
$ 455 $(1,741)
===== =======
6
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For 2002, the difference between the expected tax benefit, resulting from
application of the federal statutory income tax rate to pretax income, and
the reported income tax provision results principally from state taxes and
non-deductible amortization of certain franchise rights. For 2001, this
difference is due to the same factors as well as the amortization of
non-deductible goodwill.
3. Business Segment Information
----------------------------
The Company is engaged in the quick-service restaurant industry, with three
restaurant concepts: Burger King operating as a franchisee, Pollo Tropical
and Taco Cabana, both Company owned concepts. The Company's Burger King
restaurants are all located in the United States, primarily in the
Northeast, Southeast and Midwest. Pollo Tropical is a regional
quick-service restaurant chain featuring grilled marinated chicken and
authentic "made from scratch" side dishes. Pollo Tropical's restaurants are
located in south and central Florida. Taco Cabana is a regional
quick-service restaurant chain featuring Mexican style food, including
flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex
dishes. Taco Cabana's restaurants are located in Texas and Oklahoma.
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 intangible assets.
7
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Burger Pollo Taco
King Tropical Cabana Other Consolidated
-------- -------- ------- -------- ------------
Three Months Ended (in thousands of dollars):
- ---------------------------------------------
March 31, 2002:
Revenues $ 90,509 $25,054 $42,244 $ -- $157,807
Cost of sales 23,914 7,623 12,316 -- 43,853
Restaurant wages and related expenses 28,978 6,144 12,466 -- 47,588
Depreciation and amortization 6,399 788 1,691 1,041 9,919
Income (loss) from operations 1,097 4,261 3,905 (1,041) 8,222
Capital expenditures, excluding acquisitions 4,773 707 2,599 251 8,330
March 31, 2001:
Revenues $ 88,239 $24,605 $42,268 $ -- $155,112
Cost of sales 25,573 7,816 12,060 -- 45,449
Restaurant wages and related expenses 28,266 5,745 12,219 -- 46,230
Depreciation and amortization 5,686 590 1,895 2,199 10,370
Income (loss) from operations 288 4,244 3,569 (2,199) 5,902
Capital expenditures, excluding acquisitions 5,614 1,591 3,040 519 10,718
Identifiable Assets:
At March 31, 2002 $214,197 $31,605 $61,606 $164,935 $472,343
At December 31, 2001 215,249 31,668 60,776 166,310 474,003
4. Other Expense
-------------
During the fourth quarter of 2001, management made the decision to close
seven Taco Cabana restaurants in the Phoenix, Arizona market and
discontinue restaurant development underway in that market. This decision
resulted in a charge to other expense of $8.8 million in the fourth quarter,
representing $7.1 million in asset impairments, primarily leasehold
improvements, and $1.7 million in future occupancy costs and other ongoing
exit activities estimated to be incurred over a two-year period. The
Company closed one restaurant in December 2001 and the remaining six
restaurants in February 2002. During the first quarter of 2002, the Company
paid $0.4 million in lease liabilities for the closed restaurants and the
remaining lease liability reserve balance at March 31, 2002 was $0.6 million.
An additional $0.1 million has been spent against the other exit costs
reserve balance resulting in a March 31, 2002 reserve balance of $0.6
million.
8
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
142, Goodwill and Other Intangible Assets, which supercedes Accounting
Principles Board Opinion 17, Intangible Assets. Under SFAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized,
effective January 1, 2002, but are to be tested at least annually for
impairment. Separable intangible assets with defined lives will continue to
be amortized over their useful lives. Amortization expense of goodwill,
which is no longer amortized effective January 1, 2002, was $1,255,000 for
the quarter ended March 31, 2001.
SFAS 142 also requires the Company to complete Step 1 of a transitional
goodwill impairment test by June 30, 2002. Step 1 requires the comparison
of the fair value of a reporting unit to its carrying value at January 1,
2002 to determine whether there is an indicated transitional goodwill
impairment. If a reporting unit's fair value is below its carrying value,
the Company will need to complete Step 2 of the transitional goodwill
impairment test by the end of fiscal 2002 which requires the calculation of
an "implied" fair value for a reporting unit's goodwill. If the implied
fair value of the reporting unit's goodwill is less than its recorded
goodwill, a transitional goodwill impairment charge is recognized and
reported as a cumulative effect of a change in accounting principle. We are
currently evaluating impairment under Step 1 of the transitional goodwill
impairment test and the effect, if any, on our results of operations and
financial position.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. This new standard requires entities to recognize the fair
value of an asset retirement obligation in the period which it is incurred
if a reasonable estimate of fair value can be made. The provisions of SFAS
143 are effective for fiscal years beginning after June 15, 2002. We have
not yet determined the impact, if any, of the adoption of SFAS 143.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS 144 requires that all long-lived assets be measured at
the lower of the carrying amount or fair value less cost to sell. The
provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 144 had no impact on our results of
operations or our financial position.
9
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Guarantor Financial Statements
------------------------------
The $170 million senior subordinated notes of the Company are guaranteed by
certain of the Company's subsidiaries ("Guarantor Subsidiaries"), all of
which are wholly-owned by 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.
Pollo Operations, Inc.
Taco Cabana, Inc.
TP Acquisition Corp.
T.C. Management, Inc.
Taco Cabana Management, Inc.
Get Real, Inc.
Texas Taco Cabana, L.P.
The following supplemental financial information sets forth on a condensed
consolidating basis, consolidating balance sheets, statements of operations
and statements of cash flows for the Parent Company only, Guarantor
Subsidiaries and for the Company as of March 31, 2002 and December 31, 2001
and for the three-month periods ended March 31, 2002 and 2001. Debt and
goodwill allocated to subsidiaries are presented on an accounting
"push-down" basis.
10
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING BALANCE SHEET
March 31, 2002
(in thousands of dollars)
(unaudited)
Parent
Company Guarantor Combined
Only Subsidiaries Total
-------- ------------ --------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,614 $ 937 $ 2,551
Trade and other receivables, net 195 1,373 1,568
Inventories 3,401 1,467 4,868
Prepaid rent 1,262 824 2,086
Prepaid expenses and other current assets 1,466 3,021 4,487
Refundable income taxes 1,509 -- 1,509
Deferred income taxes 6,797 -- 6,797
-------- --------- --------
Total current assets 16,244 7,622 23,866
-------- --------- --------
Property and equipment, net 116,912 96,798 213,710
Franchise rights, net 93,644 -- 93,644
Intangible assets, net 1,559 120,861 122,420
Intercompany receivable (payable) 181,018 (181,018) --
Deferred income taxes 7,651 -- 7,651
Other assets 8,594 2,458 11,052
-------- --------- --------
Total assets $425,622 $ 46,721 $472,343
======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 7,028 $ 5,137 $ 12,165
Accrued interest 5,535 -- 5,535
Accrued payroll, related taxes and benefits 7,979 4,878 12,857
Other liabilities 7,757 7,254 15,011
Current portion of long-term debt 10,351 276 10,627
-------- --------- --------
Total current liabilities 38,650 17,545 56,195
Long-term debt, net of current portion 361,295 1,116 362,411
Deferred income, sale/leaseback of real estate 4,091 -- 4,091
Accrued postretirement benefits 2,388 -- 2,388
Other liabilities 16,539 14,930 31,469
-------- --------- --------
Total liabilities 422,963 33,591 456,554
Stockholder's equity 2,659 13,130 15,789
-------- --------- --------
Total liabilities and stockholder's equity $425,622 $ 46,721 $472,343
======== ========= ========
11
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING BALANCE SHEET
December 31, 2001
(in thousands of dollars)
Parent
Company Guarantor Combined
Only Subsidiaries Total
-------- ------------ --------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 921 $ 1,484 $ 2,405
Trade and other receivables, net 423 1,318 1,741
Inventories 3,572 1,522 5,094
Prepaid rent 1,260 855 2,115
Prepaid expenses and other current assets 1,435 2,827 4,262
Refundable income taxes 1,133 -- 1,133
Deferred income taxes 6,797 -- 6,797
-------- --------- --------
Total current assets 15,541 8,006 23,547
-------- --------- --------
Property and equipment, net 117,186 96,160 213,346
Franchise rights, net 94,844 -- 94,844
Intangible assets, net 1,568 120,865 122,433
Intercompany receivable (payable) 181,226 (181,226) --
Deferred income taxes 8,384 -- 8,384
Other assets 8,849 2,600 11,449
-------- --------- --------
Total assets $427,598 $ 46,405 $474,003
======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 10,118 $ 6,502 $ 16,620
Accrued interest 1,518 -- 1,518
Accrued payroll, related taxes and benefits 8,278 4,594 12,872
Other liabilities 6,791 8,915 15,706
Current portion of long-term debt 9,762 267 10,029
-------- --------- --------
Total current liabilities 36,467 20,278 56,745
Long-term debt, net of current portion 362,426 1,189 363,615
Deferred income, sale/leaseback of real estate 3,881 -- 3,881
Accrued postretirement benefits 2,310 -- 2,310
Other liabilities 16,705 15,692 32,397
-------- --------- --------
Total liabilities 421,789 37,159 458,948
Stockholder's equity 5,809 9,246 15,055
-------- --------- --------
Total liabilities and stockholder's equity $427,598 $ 46,405 $474,003
======== ========= ========
12
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2002
(in thousands of dollars)
(unaudited)
Parent
Company Guarantor Combined
Only Subsidiaries Total
------- ------------ --------
Revenues:
Restaurant sales $90,509 $66,928 $157,437
Franchise fees and royalty revenues -- 370 370
------- ------- --------
Total revenues 90,509 67,298 157,807
------- ------- --------
Costs and expenses:
Cost of sales 23,914 19,939 43,853
Restaurant wages and related expenses 28,978 18,610 47,588
Other restaurant operating expenses 20,159 11,577 31,736
Advertising expense 4,001 2,887 6,888
General and administrative 5,961 3,640 9,601
Depreciation and amortization 7,188 2,731 9,919
------- ------- --------
Total operating expenses 90,201 59,384 149,585
------- ------- --------
Income from operations 308 7,914 8,222
Interest expense 6,946 85 7,031
Intercompany allocations (1,736) 1,736 --
------- ------- --------
Income (loss) before income taxes (4,902) 6,093 1,191
Provision (benefit) for income taxes (1,754) 2,209 455
------- ------- --------
Net income (loss) $(3,148) $ 3,884 $ 736
======= ======= ========
13
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2001
(in thousands of dollars)
(unaudited)
Parent
Company Guarantor Combined
Only Subsidiaries Total
------- ------------ --------
Revenues:
Restaurant sales $88,239 $66,492 $154,731
Franchise fees and royalty revenues -- 381 381
------- ------- --------
Total revenues 88,239 66,873 155,112
------- ------- --------
Costs and expenses:
Cost of sales 25,573 19,876 45,449
Restaurant wages and related expenses 28,266 17,964 46,230
Other restaurant operating expenses 19,779 11,445 31,224
Advertising expense 3,458 3,022 6,480
General and administrative 5,187 4,270 9,457
Depreciation and amortization 6,444 3,926 10,370
------- ------- --------
Total operating expenses 88,707 60,503 149,210
------- ------- --------
Income (loss) from operations (468) 6,370 5,902
Interest expense 8,997 178 9,175
Intercompany allocations (1,737) 1,737 --
------- ------- --------
Income (loss) before income taxes (7,728) 4,455 (3,273)
Provision (benefit) for income taxes (3,668) 1,927 (1,741)
------- ------- --------
Net income (loss) $(4,060) $ 2,528 $ (1,532)
======= ======= ========
14
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2002
(in thousands of dollars)
(unaudited)
Parent
Company Guarantor Combined
Only Subsidiaries Total
------- ------------ --------
Cash flows provided from operating activities:
Net income (loss) $(3,148) $ 3,884 $ 736
Adjustments to reconcile net income (loss) to net cash
provided from operating activities:
Loss on disposal of property and equipment 8 24 32
Depreciation and amortization 7,188 2,731 9,919
Deferred income taxes 733 -- 733
Changes in operating assets and liabilities 1,174 (3,676) (2,502)
------- ------- -------
Net cash provided from operating activities 5,955 2,963 8,918
------- ------- -------
Cash flow used for investing activities:
Capital expenditures:
New restaurant development (1,179) (2,018) (3,197)
Restaurant remodeling (2,941) (355) (3,296)
Other restaurant expenditures (653) (933) (1,586)
Corporate and information systems (111) (140) (251)
------- ------- -------
Total capital expenditures (4,884) (3,446) (8,330)
Purchased properties for sale/leaseback (929) -- (929)
------- ------- -------
Net cash used for investing activities (5,813) (3,446) (9,259)
------- ------- -------
Cash flows provided from (used for) financing activities:
Proceeds from revolving credit facility, net 1,900 -- 1,900
Principal payments on term loans (2,125) -- (2,125)
Payments on other notes payable, net (237) -- (237)
Principal payments on capital leases (80) (64) (144)
Proceeds from sale/leaseback transactions 1,093 -- 1,093
------- ------- -------
Net cash provided from (used for) financing activities 551 (64) 487
------- ------- -------
Net increase (decrease) in cash and cash equivalents 693 (547) 146
Cash and cash equivalents, beginning of year 921 1,484 2,405
------- ------- -------
Cash and cash equivalents, end of year $ 1,614 $ 937 $ 2,551
======= ======= =======
15
CONSOLIDATING STATEMENT OF CASH FLOWS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Three Months Ended March 31, 2001
(in thousands of dollars)
(unaudited)
Parent
Company Guarantor Combined
Only Subsidiaries Total
------- ------------ --------
Cash flows provided from (used for) operating activities:
Net income (loss) $(4,060) $ 2,528 $ (1,532)
Adjustments to reconcile net income (loss) to net cash
provided from (used for) operating activities:
Depreciation and amortization 6,444 3,926 10,370
Deferred income taxes (2,689) 1,002 (1,687)
Changes in operating assets and liabilities (300) (3,869) (4,169)
------- ------- --------
Net cash provided from (used for) operating activities (605) 3,587 2,982
------- ------- --------
Cash flow used for investing activities:
Capital expenditures:
New restaurant development (212) (3,604) (3,816)
Restaurant remodeling (3,229) -- (3,229)
Other restaurant expenditures (2,117) (1,027) (3,144)
Corporate and information systems (262) (257) (519)
------- ------- --------
Total capital expenditures (5,820) (4,888) (10,708)
------- ------- --------
Net cash used for investing activities (5,820) (4,888) (10,708)
------- ------- --------
Cash flows provided from (used for) financing activities:
Proceeds from on revolving credit facility, net 7,300 -- 7,300
Proceeds from other notes payable, net 787 -- 787
Principal payments on term loans (1,750) -- (1,750)
Principal payments on capital leases (70) (58) (128)
------- ------- --------
Net cash provided from (used for) financing activities 6,267 (58) 6,209
------- ------- --------
Net decrease in cash and cash equivalents (158) (1,359) (1,517)
Cash and cash equivalents, beginning of year 785 1,927 2,712
------- ------- --------
Cash and cash equivalents, end of year $ 627 $ 568 $ 1,195
======= ======= ========
16
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; and labor and
employee benefit costs.
Overview
- --------
We are one of the largest restaurant companies in the U. S. operating 528
restaurants in 16 states at March 31, 2002. We are the second largest Burger
King franchisee in the world, and have operated Burger King restaurants since
1976. We also operate two regional Hispanic restaurant chains, Taco Cabana and
Pollo Tropical, which operate or franchise more than 200 restaurants.
As of March 31, 2002, we operated 361 Burger King restaurants located in 13
Northeastern, Midwestern and Southeastern states. Since March 31, 2001 we have
opened four new Burger King restaurants and acquired three Burger King
restaurants.
We have expanded our operations during the past four years through the
acquisition of two regional quick-casual Hispanic restaurant chains. In 1998, we
acquired Pollo Tropical Inc., a restaurant chain featuring grilled marinated
chicken and authentic "made from scratch" side dishes. Since the acquisition we
have opened 18 new Pollo Tropical restaurants and at March 31, 2002 we had 54
company owned Pollo Tropical restaurants in Florida and 26 franchised Pollo
Tropical restaurants, 18 of which are in Puerto Rico. Since March 31, 2001 we
opened four new Pollo Tropical restaurants.
In December 2000 we acquired Taco Cabana Inc., a restaurant chain featuring
Tex-Mex style food including flame-grilled beef and chicken fajitas,
quesadillas, and fresh flour tortillas. As of March 31, 2002 we had 113 company
owned Taco Cabana restaurants located primarily in Texas and 10 franchised Taco
Cabana restaurants.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
In the fourth quarter of 2001, we decided to close seven restaurants in the
Phoenix, Arizona market and discontinue restaurant development underway in that
market. One Taco Cabana restaurant in Phoenix was closed in December 2001 and
the six remaining Taco Cabana restaurants in the Phoenix, Arizona market were
closed in the first quarter of 2002. Since March 31, 2001, we have opened three
new Taco Cabana restaurants and closed three under-performing Taco Cabana
restaurants.
We use a 52-53 week fiscal year ending on the Sunday closest to December 31.
Significant Accounting Policies
- -------------------------------
Financial Reporting Release No. 60, which was released by the Securities and
Exchange Commission in December 2001, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by the Company.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
assumptions and estimates that can have a material impact on our results of
operations. Sales recognition at company operated restaurants is straightforward
as customers pay for products at the time of sale and inventory turns over very
quickly. Payments to vendors for products sold in the restaurants are generally
settled within 30 days. The earnings reporting process is covered by our system
of internal controls, and generally does not require significant management
estimates and judgments. However, estimates and judgments are inherent in the
assessment and recording of insurance liabilities, accrued occupancy costs,
legal obligations and income taxes. While we apply our judgment based on
assumptions believed to be reasonable under the circumstances, actual results
could vary from these assumptions. It is possible that materially different
amounts would be reported using different assumptions.
We make estimates of accrued occupancy costs pertaining to closed restaurant
locations on an ongoing basis. These estimates require assessment and continuous
evaluation of a number of factors such as the remaining contractual period under
our lease obligations, the amount of sublease income, if any, we are able to
realize on a particular property and estimates of other costs such as property
taxes. Differences between actual future events and prior estimates could result
in adjustments to these accrued costs.
We are essentially self-insured, subject to certain loss aggregates, for most
workers' compensation, general liability and medical insurance claims. We record
insurance liabilities based on historical and industry trends, which are
continually monitored, and adjust accruals as warranted by changing
circumstances. Since there are many estimates and assumptions involved in
recording these insurance liabilities, differences between actual future events
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
and prior estimates and assumptions could result in adjustments to these
liabilities.
In the normal course of business, we must make estimates of potential future
legal obligations and liabilities, which require the use of management's
judgment. Management may also use outside legal advice to assist in the
estimating process. However, the ultimate outcome of various legal issues could
be different than management estimates, and adjustments to income could be
required.
We record income tax liabilities utilizing known obligations and estimates of
potential obligations. We are required to record a valuation allowance if the
value of estimated deferred tax assets are different from those recorded. This
would include making estimates and judgments on future taxable income, the
consideration of feasible tax planning strategies and existing facts and
circumstances. When the amount of deferred tax assets to be realized is
different from that recorded, the asset balance and income statement would
reflect the change in the period such determination is made.
Results of Operations
- ---------------------
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
The following table sets forth, for the three months ended March 31,
2002 and 2001, selected operating results as a percentage of restaurant sales:
2002 2001
---- ----
Restaurant sales:
Burger King 57.5% 57.0%
Pollo Tropical 15.7% 15.7%
Taco Cabana 26.8% 27.3%
----- -----
100% 100%
Costs and expenses:
Cost of sales 27.9% 29.3%
Restaurant wages and related expenses 30.2% 29.9%
Other restaurant expenses including advertising 24.5% 24.4%
General and administrative 6.1% 6.1%
Depreciation and amortization 6.3% 6.7%
---- ----
Income from restaurant operations 5.0% 3.6%
==== ====
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Restaurant Sales
- ----------------
Total restaurant sales for first quarter of 2002 increased to $157.4 million
from $154.7 million in the first quarter of 2001. Burger King restaurant sales
increased $2.3 million, or 2.6%, to $90.5 million in the first quarter of 2002
due to the net addition of seven Burger King restaurants in the twelve months
ended March 31, 2002 and an increase in comparable restaurant sales of 0.4% in
the first quarter of 2002. Pollo Tropical restaurant sales increased $0.5
million, or 2.0%, in the first quarter of 2002 to $24.8 million due primarily to
the opening of four Pollo Tropical restaurants in the twelve months ended March
31, 2002. Sales at our comparable Pollo Tropical restaurants however declined
5.8% for the first quarter of 2002 due to the decline in tourism in our Florida
markets since the September 11 tragedy. Taco Cabana restaurant sales were $42.1
million in the first quarter of 2002 compared to $42.2 million in 2001. Sales at
our comparable Taco Cabana restaurants increased 1.5% in the first quarter of
2002, however were offset in part by the closure of six restaurants in the
Phoenix, Arizona market in February 2002.
Operating Costs and Expenses
- ----------------------------
Cost of sales (food and paper costs), as a percentage of total restaurant sales,
decreased to 27.9% in the first quarter of 2002 from 29.3% in the first quarter
of 2001. Burger King cost of sales, as a percentage of Burger King restaurant
sales, decreased to 26.4% in the first quarter of 2002 from 29.0% in the first
quarter of 2001 due primarily to significantly lower promotional sales discounts
in the first quarter of 2002 compared to 2001 and, to a lesser extent, the
effects of menu price increases in the second and fourth quarter of 2001. A 3%
increase in beef commodity prices in the first quarter of 2002 was partially
offset by a slight reduction in the size of the Burger King regular hamburger
patty. Pollo Tropical cost of sales, as a percentage of Pollo Tropical
restaurant sales, decreased to 30.8% in the first quarter of 2002 from 32.2% in
the first quarter of 2001 due to lower chicken costs in the first quarter of
2002 and the effect of menu price increases at the beginning of 2002. Taco
Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased
to 29.2% in the first quarter of 2002 from 28.6% in the first quarter of 2001
due to higher beef and produce commodity prices and slightly higher promotional
sales discounts in the first quarter of 2002.
Restaurant wages and related expenses, as a percentage of total restaurant
sales, increased to 30.2% in the first quarter of 2002 from 29.9% in the first
quarter of 2001. Burger King restaurant wages and related expenses, as a
percentage of Burger King restaurant sales, was 32.0% in both in the first
quarter of 2002 and 2001. Pollo Tropical restaurant wages and related expenses,
as a percentage of Pollo Tropical restaurant sales, increased to 24.8% in the
first quarter of 2002 from 23.6% in the first quarter of 2001 due to the effect
of lower sales volumes on fixed labor costs. Taco
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Cabana restaurant wages and related expenses, as a percentage of Taco Cabana
restaurant sales increased to 29.6% in the first quarter of 2002 from 29.0% in
the first quarter of 2001 due primarily to a 3.6% increase in productive labor
rates in the first quarter of 2002.
Other restaurant operating expenses, including advertising, as a percentage of
total restaurant sales, increased slightly to 24.5% in the first quarter of 2002
from 24.4% in the first quarter of 2001. Burger King other restaurant operating
expenses, including advertising, as a percentage of Burger King restaurant
sales, increased to 26.7% in the first quarter of 2002 from 26.3% in the first
quarter of 2001 due to increases in local advertising expenditures in 2002
offset in part by lower utility costs. Pollo Tropical other restaurant operating
expenses, including advertising, as a percentage of Pollo Tropical restaurant
sales, decreased to 19.7% in the first quarter of 2002 from 20.2% in the first
quarter of 2001 due to higher advertising costs in 2001 related to the timing of
promotions and decreased utility costs in 2002. These factors were partially
offset by the effect of lower sales volumes on fixed costs. Taco Cabana other
restaurant operating expenses, including advertising, as a percentage of Taco
Cabana restaurant sales decreased to 22.7% in the first quarter of 2002 from
22.9% in the first quarter of 2001 due to lower utility costs partially offset
by higher advertising expenditures in 2002.
As a percentage of total restaurant sales, general and administrative expenses
were 6.1% in both the first quarter of 2002 and 2001. General and administrative
expenses increased $0.1 million to $9.6 million in the first quarter of 2002 due
primarily to increased administrative bonus levels.
Earnings before interest, taxes, depreciation and amortization and non-cash
extraordinary items ("EBITDA") increased to $18.1 million in the first quarter
of 2002 from $16.3 million in the first quarter of 2001. As a percentage of
total revenues, EBITDA margins increased to 11.5% in the first quarter of 2002
from 10.5% in the first quarter of 2001 as a result of the factors discussed
above.
SFAS No. 142, Goodwill and Other Intangible Assets, was adopted in 2002. SFAS
No. 142 eliminated the amortization of goodwill beginning January 1, 2002.
Goodwill amortization expense was $1.3 million for the quarter ended March 31,
2001. Excluding the effect of SFAS No. 142, depreciation and amortization
increased $0.8 million due to our capital expenditures, excluding acquisitions,
of $45.2 million since the end of the first quarter of 2001.
Interest expense decreased $2.2 million to $7.0 million in the first quarter of
2002 from $9.2 million in the first quarter of 2001 due to lower effective
interest rates on our debt. The average weighted interest rates on all debt for
the quarters ended March 31, 2002 and 2001 were 7.3% and 9.5%, respectively.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
The provision for income taxes in the first quarter of 2002 was derived using an
estimated effective annual income tax rate for 2002 of 38.2%. This rate is
higher than the Federal statutory tax rate of 35% due to state franchise taxes
and non-deductible amortization of certain franchise rights. This rate is lower
than our effective annual income tax rate for 2001 due to the elimination of the
amortization of non-deductible goodwill under SFAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002.
As a result of the foregoing, net income for the first quarter of 2002 was
$736,000 as compared to a net loss of $1,532,000 in the first quarter of 2001.
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 substantially conducted on a cash basis;
... rapid turnover results in a limited investment in inventories; and
... cash from sales is usually received before related liabilities for food,
supplies and payroll become due.
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 restaurants; and
... servicing our debt.
Our operations in the first quarter of 2002 generated $8.9 million in cash,
compared with $3.0 million in the first quarter of 2001.
Capital expenditures represent a major investment of cash for us and were $8.3
million and $10.7 million in the first quarter of 2002 and 2001, respectively.
Expenditures for new restaurant development were $3.2 million and $3.8 million
in the first quarter of 2002 and 2001, respectively. Our capital expenditures
also include remodeling costs and capital maintenance projects for the ongoing
reinvestment and enhancement of our restaurants which totaled $4.9 million and
$6.4 million in the first quarter of 2002 and 2001, respectively.
We also completed the sale and leaseback of one Burger King property which was
purchased in the first quarter of 2002.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
In 2002, we anticipate total capital expenditures of approximately $58 million
to $62 million, excluding the cost of any acquisitions that we may make. These
expenditures include approximately $21 million to $25 million for the
construction of new restaurants and related real estate applicable to our three
restaurant concepts as follows: $4 million to $5 million for Burger King; $10
million to $12 million for Taco Cabana and $7 million to $8 million for Pollo
Tropical. Also included in 2002 capital expenditures is approximately $18
million for remodeling existing Burger King restaurants and approximately $5
million for expenditures related to Burger King transformation initiatives,
which include new signage, drive-thru improvements and kitches initiatives.
Other anticipated restaurant level capital expenditures in 2002 for ongoing
reinvestment in our three concepts total approximately $13 million; with
approximately $4 million applicable to our Burger King restaurants, $7.5 million
for Taco Cabana and $1.5 million for Pollo Tropical. Taco Cabana 2002
expenditures include approximately $4 million of expenditures pertaining to the
installation of additional grills in our Taco Cabana restaurants to facilitate
the introduction of grilled chicken.
At March 31, 2002, we had total indebtedness of $373.0 million comprised of
$170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, total
borrowings under our senior credit facility of $198.3 million and other debt of
$4.7 million. Our senior credit facility provides for a $70 million term loan A
facility, a $80 million term loan B facility and a $100 million revolving credit
facility. At March 31, 2002, $140.9 million was outstanding under the term loan
A and B facilities and $35.2 was available for borrowings under our revolving
credit facility, after reserving $7.4 million for letters of credit guaranteed
by 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.
Inflation
- ---------
The inflationary factors that 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 cost of labor. 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.
23
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.
-----------
10.26 Carrols Corporation and Subsidiaries Deferred Compensation
Plan dated January 1, 2002.
b. There were no reports on Form 8-K filed during the reported quarter.
24
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: May 15, 2002 /s/
----------------------------------------
(Signature)
Alan Vituli
Chairman and Chief Executive Officer
Date: May 15, 2002
/s/
----------------------------------------
(Signature)
Paul R. Flanders
Vice President-Finance (Principal Financial
Officer and Principal Accounting Officer)
25