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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, 1999
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 18, 1999: 10 shares
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PART 1 - FINANCIAL INFORMATION
CARROLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1999 1998
- ------ -------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,089,000 $ 6,777,000
Trade and other receivables 221,000 1,060,000
Inventories 3,563,000 3,431,000
Prepaid real estate taxes 1,317,000 796,000
Prepaid expenses and other current assets 3,128,000 2,768,000
Refundable income taxes 1,208,000 4,588,000
Deferred income taxes 2,337,000 3,956,000
------------- -------------
Total current assets 12,863,000 23,376,000
Property and equipment, at cost less accumulated
depreciation of $88,723,000 and $77,451,000,
respectively 111,940,000 107,669,000
Franchise rights, at cost less accumulated
amortization of $33,303,000 and $29,819,000,
respectively 100,651,000 106,041,000
Intangible assets, at cost less accumulated
amortization of $11,004,000 and $9,630,000
respectively 70,153,000 69,167,000
Other assets 9,990,000 10,367,000
Deferred income taxes 4,802,000 2,986,000
------------- -------------
$ 310,399,000 $ 319,606,000
============= =============
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 1999 1998
- ------------------------------------ ------------- ------------
(unaudited)
Current liabilities:
Accounts payable $ 15,367,000 $ 10,614,000
Accrued interest 5,895,000 2,012,000
Accrued payroll, related taxes and benefits 7,117,000 9,390,000
Other liabilities 8,048,000 9,431,000
Current portion of long-term debt 3,870,000 3,200,000
Current portion of capital lease obligations 238,000 296,000
------------- ------------
Total current liabilities 40,535,000 34,943,000
Long-term debt, net of current portion 239,161,000 256,285,000
Capital lease obligations, net of current portion 1,545,000 1,741,000
Deferred income - sale/leaseback of real estate 4,543,000 4,274,000
Accrued postretirement benefits 1,847,000 1,708,000
Other liabilities 8,263,000 6,657,000
------------- ------------
Total liabilities 295,894,000 305,608,000
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 (9,980,000) (10,487,000)
------------- ------------
Total stockholder's equity 14,505,000 13,998,000
------------- ------------
$310,399,000 $ 319,606,000
============= ============
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, 1999 AND 1998
1999 1998
---- ----
(13 Weeks) (13 Weeks)
(unaudited)
Revenues:
Restaurant sales $ 115,129,000 $ 112,608,000
Franchise fees and royalty revenues 343,000 161,000
------------- -------------
Total revenues 115,472,000 112,769,000
Costs and expenses:
Cost of sales 34,795,000 34,204,000
Restaurant wages and related expenses 33,354,000 32,259,000
Other restaurant operating expenses 22,781,000 21,982,000
Advertising expense 5,201,000 5,049,000
General and administrative 5,714,000 5,297,000
Depreciation and amortization 5,935,000 5,334,000
------------- -------------
Total operating expenses 107,780,000 104,125,000
------------- -------------
Income from operations 7,692,000 8,644,000
Refinancing expenses (Note 6) - 1,639,000
Interest expense 5,416,000 5,819,000
------------- -------------
Income before income taxes 2,276,000 1,186,000
Provision for income taxes 1,115,000 527,000
------------- -------------
Net income $ 1,161,000 $ 659,000
============= =============
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, 1999 AND 1998
1999 1998
---- ----
(39 Weeks) (40 Weeks)
(unaudited)
Revenues:
Restaurant sales $ 335,537,000 $ 305,866,000
Franchise fees and royalty revenues 832,000 161,000
------------- -------------
Total revenues 336,369,000 306,027,000
Costs and expenses:
Cost of sales 101,814,000 89,829,000
Restaurant wages and related expenses 99,117,000 89,014,000
Other restaurant operating expenses 66,219,000 60,685,000
Advertising expense 14,835,000 13,920,000
General and administrative 17,010,000 13,364,000
Depreciation and amortization 17,473,000 14,294,000
------------- -------------
Total operating expenses 316,468,000 281,106,000
------------- -------------
Income from operations 19,901,000 24,921,000
Refinancing expenses (Note 6) 1,639,000
-
Interest expense 16,707,000 14,716,000
------------- -------------
Income before income taxes and extraordinary loss 3,194,000 8,566,000
Provision for income taxes 1,747,000 3,850,000
------------- -------------
Income before extraordinary loss 1,447,000 4,716,000
Extraordinary loss on write-off of debt issue costs, net of taxes
(Note 5) 940,000 -
------------- -------------
Net income $ 507,000 $ 4,716,000
============= =============
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, 1999 AND 1998
1999 1998
---- ----
(39 Weeks) (40 Weeks)
(unaudited)
Cash flows from operating activities:
Net income $ 507,000 $4,716,000
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 17,473,000 14,294,000
Deferred income taxes (197,000) (445,000)
Loss (gain) on sale of property and equipment 100,000 (119,000)
Extraordinary loss on write-off of debt issue costs, net of tax 940,000 -
Change in operating assets and liabilities 10,539,000 3,308,000
------------- -------------
Net cash provided by operating activities 29,362,000 21,754,000
------------- -------------
Cash flows from investing activities:
Capital expenditures:
Purchase of Pollo Tropical, Inc., net of cash acquired - (94,632,000)
New restaurant development (8,717,000) (7,595,000)
Remodels and other capital expenditures (23,116,000) (14,368,000)
Acquisitions of restaurants (544,000) (629,000)
Proceeds from sales of property and equipment 121,000 1,337,000
------------- -------------
Net cash used for investing activities (32,256,000) (115,887,000)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt - 83,800,000
Principal payments on long-term debt (16,454,000) (2,196,000)
Financing costs associated with issuance of debt (886,000) (1,575,000)
Principal payments on capital leases (254,000) (364,000)
Proceeds from sale-leaseback transactions 14,800,000 18,536,000
Dividends paid - (3,878,000)
------------- -------------
Net cash (used for) provided by financing activities (2,794,000) 94,323,000
------------- -------------
Increase (decrease) in cash and cash equivalents (5,688,000) 190,000
Cash and cash equivalents, beginning of period 6,777,000 2,252,000
------------- -------------
Cash and cash equivalents, end of period $ 1,089,000 $ 2,442,000
============= =============
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 have been prepared
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and do not include all of the information and
the footnotes required by generally accepted accounting principles for
complete statements. In the opinion of management, all normal and
recurring adjustments necessary for a fair presentation of such
financial statements have been included.
The Company uses a 52-53 week fiscal year ending on the Sunday closest
to December 31. Fiscal 1998 contained 53 weeks and the Company has
historically included the extra week in its second fiscal quarter.
Accordingly, the nine months results of operations and cash flows
ending September 30, 1999 and 1998 include 39 weeks and 40 weeks,
respectively.
The results of operations for the three and nine months ended September
30, 1999 and 1998 are not necessarily indicative of the results to be
expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the
year ended December 31, 1998 contained in our 1998 Annual Report on
Form 10-K. The December 31, 1998 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, 1999
and 1998 was comprised of the following:
1999 1998
----------- -----------
Current $ 1,944,000 $ 4,295,000
Deferred (197,000) (445,000)
----------- -----------
$ 1,747,000 $ 3,850,000
=========== ===========
7
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
For 1999 and 1998 the difference between the expected tax provision
resulting from application of the federal statutory income tax rate to
pre-tax income and the reported income tax provision result principally
from state taxes and non-deductible amortization of franchise rights
and certain other intangibles.
3. Summarized Financial Information of Certain Subsidiaries
--------------------------------------------------------
The following table presents summarized combined financial information
for the following wholly-owned subsidiaries, whom unconditionally
guarantee the $170.0 million senior subordinated notes of the Company:
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,
1999 1998
------------- ------------
Balance Sheet:
Current assets $ 2,021,000 $ 910,000
Non-current assets 88,505,000 89,922,000
Current liabilities 5,965,000 7,401,000
Non-current liabilities 1,829,000 1,845,000
Nine Months Ended
September 30,
1999 1998
------------- ------------
Statement of Operations:
Revenues $63,285,000 $16,802,000
Operating expenses 53,401,000 14,182,000
Income from operations 9,884,000 2,620,000
Net income 4,079,000 1,070,000
8
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
4. Business Segment Information
----------------------------
The Company is engaged in the quick-service restaurant industry, with
two restaurant concepts: Burger King, operating as a franchisee, and
Pollo Tropical, a Company owned concept which was acquired in July
1998. The Company's Burger King restaurants are all located in the
United States, primarily in the Northeast, Southeast and Midwest. Pollo
Tropical is a regional quick-service restaurant chain featuring grilled
marinated chicken and authentic "made from scratch" side dishes. Pollo
Tropical's core markets are located in south and central Florida.
Segment information for Burger King restaurants and Pollo Tropical for
the nine months ended September 30, 1999 and 1998 is shown in the
following table. The "Other" column includes corporate related items
not allocated to reportable segments and for income from operations,
principally corporate depreciation and amortization. Other identifiable
assets consist primarily of franchise rights and intangible assets.
Non-operating expenses, comprised of interest expense and the
extraordinary loss, are corporate related items and therefore have not
been allocated to the reportable segments.
Burger
King Pollo
Restaurants Tropical Other Consolidated
----------- -------- ----- ------------
($ in 000's)
Nine Months Ended 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 from operations 14,938 11,314 (6,351) 19,901
Identifiable assets 192,198 22,772 95,429 310,399
Capital expenditures, excluding
acquisitions 22,001 7,914 1,918 31,833
9
CARROLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
Burger
King Pollo
Restaurants Tropical Other Consolidated
----------- -------- ----- ------------
($ in 000's)
Nine Months Ended September 30, 1998:
Revenues $ 289,393 $ 16,634 $ 306,027
Cost of sales 84,087 5,742 89,829
Restaurant wages and related
expenses 85,284 3,730 89,014
Depreciation and amortization 8,548 401 5,345 14,294
Income from operations 27,210 3,056 (5,345) 24,921
Identifiable assets 203,175 26,326 90,105 319,606
Capital expenditures, excluding
acquisitions 19,344 1,990 629 21,963
5. 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, in the first quarter of 1999. This
loss represents the write-off of unamortized debt issue costs related
to the previous senior credit facility.
6. Loss on Refinancing Expenses
----------------------------
The Company expensed all costs associated with its efforts to refinance
its existing debt in the third quarter of 1998 as the timing of any
future refinancing was uncertain at that time and efforts had ceased.
7. Acquisition
-----------
On July 9, 1998, the Company consummated the purchase of the
outstanding common stock of Pollo Tropical Inc. ("Pollo Tropical") for
an approximate cash purchase price of $94.6 million and on July 20,
1998 merged Pollo Tropical into the Company. Pollo Tropical operates
and franchises quick-service restaurants featuring fresh grilled
chicken marinated in a proprietary blend of tropical fruit juices and
spices and authentic "made from scratch" side dishes. The Pollo
Tropical acquisition has been accounted for by the purchase method of
accounting. The excess purchase price over net assets acquired is
included in intangible assets and is amortized over 40 years using the
straight-line method.
The following proforma results of operations for the nine months ended
September 30, 1998 assume this acquisition occurred as of the beginning
of the period:
Revenues $344,114,000
Income from operations $ 30,519,000
Net income $ 5,441,000
The preceeding proforma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisition been
consummated as of the beginning of the period, nor are they necessarily
indicative of future operating results.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Overview
- --------
As of September 30, 1999, we operated 345 Burger King restaurants located
in 13 Northeastern, Midwestern and Southeastern states and owned and
operated 42 Pollo Tropical restaurants in Florida. In addition, at
September 30, 1999, we franchised 23 Pollo Tropical restaurants in Puerto
Rico, Ecuador and Miami. In July 1998, the Company acquired Pollo Tropical,
Inc. which owned and operated 36 restaurants. Since September 30, 1998, the
Company has built five Pollo Tropical restaurants. Since September 30,
1998, the Company has built nine Burger King restaurants, acquired two
Burger King restaurants and closed four under-performing Burger King
restaurants. Comparable store sales data is for a comparable number of
weeks for each period discussed.
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 the Private Securities Litigation Reform
Act of 1995. 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations
- ---------------------
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998.
The following table sets forth, for the three months ended September 30, 1999
and 1998, selected operating results as a percentage of restaurant sales:
1999 1998
---- ----
Restaurant sales:
Burger King restaurants 82.1% 85.4%
Pollo Tropical 17.9 14.6%
----- -----
100.0 100.0
Costs and expenses:
Cost of sales 30.2 30.4
Restaurant wages and related expenses 29.0 28.6
Other restaurant expenses including advertising 24.3 24.0
General and administrative 5.0 4.7
Depreciation and amortization 5.2 4.7
----- -----
Income from restaurant operations 6.7% 7.7%
===== =====
Restaurant Sales
- ----------------
Restaurant sales for the three months ended September 30, 1999, increased 2.2%
to $115.1 million from $112.6 million in the third quarter of 1998. The increase
in sales was primarily the result of a $4.1 million increase in Pollo Tropical
sales, whose total restaurant sales were $20.6 million in the third quarter of
1999. This increase was due to a full quarter of Pollo Tropical sales being
included in the third quarter of 1999 and due to the opening of five new Pollo
Tropical restaurants in the past twelve months. Sales at our comparable Burger
King restaurants (those units operating for the entirety of the compared
periods) decreased 3.8% for the third quarter of 1999 as compared to an increase
of 7.9% for the third quarter of 1998. This sales decrease was offset by the
opening of nine new Burger King restaurants in the past twelve months.
Operating Costs and Expenses
- ----------------------------
Cost of sales (food and paper costs), as a percentage of restaurant sales, were
30.2% for the third quarter of 1999 compared to 30.4% for the third quarter of
1998. The decrease in the third quarter of 1999 was due to lower discounting of
food, related to promotional activities at our Burger King restaurants. Cost of
sales at our Burger King restaurants decreased from 29.6% in the third quarter
of 1998 to 29.2%. This decrease was partially offset by the effect of Pollo
Tropical's higher food and paper cost relationships on the increase in Pollo
Tropical sales to total Company sales in the third quarter of 1999. Pollo
Tropical's cost of sales were 35.1% for the third quarter of 1999 compared to
34.9% for the third quarter of 1998. This increase was due primarily to higher
commodity costs for chicken.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Restaurant wages and related expenses increased, as a percentage of sales,
during the third quarter to 29.0% in 1999 from 28.6% in 1998. This increase was
due primarily to a 3.5% increase in our average hourly labor rate in the third
quarter of 1999 at our Burger King restaurants and the effect of lower sales
volumes on fixed labor costs. This increase was partially offset by the effect
of Pollo Tropical's lower restaurant wages, as a percentage of sales, due to the
increase in Pollo Tropical sales to total Company sales in the third quarter of
1999. Pollo Tropical's restaurant wages and related expenses were 23.1% and
22.7% of restaurant sales in the third quarter of 1999 and 1998, respectively.
This increase was due primarily to an increase in average hourly labor rates.
Burger King restaurant wages and related expenses increased from 29.7% in the
third quarter of 1998 to 30.3% in the third quarter of 1999, due to the factors
discussed above.
Other restaurant operating expenses, including advertising, increased from 24.0%
of restaurant sales in the third quarter of 1998 to 24.3% in the third quarter
of 1999 due to an increase in occupancy costs associated with the sale/leaseback
of 18 Pollo Tropical restaurant properties in 1998 and 1999 and the effect of
fixed costs, particularly occupancy costs, on lower sales volumes in the third
quarter of 1999 at our Burger King restaurants.
Administrative expenses increased, as a percentage of sales, from 4.7% in the
third quarter of 1998 to 5.0% in the third quarter of 1999. This increase is due
to lower sales volumes at our Burger King restaurants in the third quarter of
1999.
Earnings before interest, taxes, depreciation and amortization and non-cash
extraordinary items ("EBITDA") was $13.6 million in the third quarter of 1999
compared to $14.0 million in the third quarter of 1998. As a percentage of total
revenues, EBITDA decreased from 12.4% in the third quarter of 1998 to 11.8% in
the third quarter of 1999 as a result of the factors discussed above.
Depreciation and amortization increased $0.6 million in the third quarter of
1999 from the third quarter of 1998 due to the Company's capital expenditures of
$44.2 million since the end of the third quarter of 1998.
Interest expense was $5.4 million in the third quarter of 1999 compared to $5.8
million in the third quarter of 1998 and decreased as a result of the favorable
effect on average interest rates from the Company's 1998 refinancing activities.
The provision for income taxes in the third quarter of 1999 was derived on an
estimated effective income tax rate for 1999 of 54.7%. This rate is higher than
the Federal statutory tax rate due to state franchise taxes and non-deductible
amortization of franchise rights and certain other intangible assets.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
The following table sets forth, for the nine months ended September 30, 1999 and
1998, selected operating results as a percentage of restaurant sales:
1999 1998
---- ----
Restaurant sales:
Burger King restaurants 81.5% 94.6%
Pollo Tropical 18.5 5.4
----- -----
100.0 100.0
Costs and expenses:
Cost of sales 30.3 29.4
Restaurant wages and related expenses 29.5 29.1
Other restaurant expenses including advertising 24.2 24.4
General and administrative 5.1 4.4
Depreciation and amortization 5.2 4.7
----- -----
Income from restaurant operations 5.9% 8.1%
===== =====
Restaurant Sales
- ----------------
Restaurant sales for the nine months ended September 30, 1999, increased 9.7% to
$335.5 million from $305.9 million in the first nine months of 1998. The
increase in sales was primarily the result of the acquisition of Pollo Tropical
in July 1998, whose total restaurant sales were $62.0 million in the first nine
months of 1999 compared to $16.5 million in the first nine months of 1998. Sales
at our comparable Burger King restaurants (those units operating for the
entirety of the compared periods) decreased 5.0% for the first nine months of
1999 as compared to an increase of 7.2% for the first nine months of 1998, using
a comparable number of weeks in each period. The second quarter of 1998
contained an additional week which had $7.3 million in restaurant sales.
Operating Costs and Expenses
- ----------------------------
Cost of sales (food and paper costs), as a percentage of restaurant sales, were
30.3% for the first nine months of 1999 compared to 29.4% for the first nine
months of 1998. The increase was due to the increase in Pollo Tropical sales to
total Company sales in the first nine months of 1999 compared to 1998. Pollo
Tropical's cost of sales were 35.0% for the first nine months of 1999 compared
to 29.3% for our Burger King restaurants. This caused total cost of sales to
increase by 1.0% . Cost of sales at our Burger King restaurants increased from
29.1% in 1998 and was primarily due to higher discounting of food related to
increased promotional activities. In addition, the second quarter of 1998
included a cost rebate of approximately $815,000, linked to the adverse impact
of a recall of beef in the third quarter of 1997.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
Restaurant wages and related expenses increased, as a percentage of sales,
during the first nine months to 29.5% in 1999 from 29.1% in 1998. This increase
was due to the effect of lower sales volumes in the first nine months of 1999 on
fixed labor costs and a 3.6% increase in our average hourly labor rate for the
first nine months of 1999 at our Burger King restaurants. Collectively, these
factors caused, as a percentage of total sales, a 1.3% increase in restaurant
wages and related expenses. This increase was substantially offset by Pollo
Tropical's lower restaurant wages, as a percentage of sales, due to Pollo's
higher unit sales volumes and the increase in Pollo Tropical's sales to total
Company sales in the first nine months of 1999 compared to 1998. Pollo
Tropical's restaurant wages and related expenses were 22.6% of restaurant sales
in the first nine months of 1999, and decreased total restaurant wages by 0.8%
compared to the first nine months of 1998.
Other restaurant operating expenses, including advertising, decreased from 24.4%
of restaurant sales in the first nine months of 1998 to 24.2% in the first nine
months of 1999, due to Pollo Tropical's other restaurant operating expenses
being 17.1% of restaurant sales in the first nine months of 1999. This caused an
0.8% decrease, as a percentage of sales, in total other restaurant operating
expenses. This decrease was offset by the effect of lower sales volumes on fixed
costs in the first nine months of 1999 for our Burger King restaurants,
particularly utility and occupancy costs. Other operating expenses, including
advertising, increased to 25.8% of restaurant sales for our Burger King
restaurants in the first nine months of 1999 from 24.9% in 1998.
Administrative expenses increased, as a percentage of sales, from 4.4% in the
first nine months of 1998 to 5.1% in the first nine months of 1999. This
increase is due to lower sales volumes in our Burger King restaurants in the
first nine months of 1999 and administrative functions acquired in the July 1998
acquisition of Pollo Tropical.
Earnings before interest, taxes, depreciation and amortization and non-cash
extraordinary items ("EBITDA") was $37.4 million in the first nine months of
1999 compared to $39.2 million in the first nine months of 1998. As a percentage
of total revenues, EBITDA decreased from 12.8% in the first nine months of 1998
to 11.1% in the first nine months of 1999 as a result of the factors discussed
above.
Depreciation and amortization increased $3.2 million in the first nine months of
1999 due primarily to the increase in property and equipment, goodwill and
purchased intangibles from the purchase of Pollo Tropical in July 1998 and
capital expenditures of $44.2 million since the end of the third quarter of
1998.
Interest expense was $16.7 million in the first nine months of 1999 compared to
$14.7 million in the first nine months of 1998 and increased as a result of the
higher average debt balances from the funding of the acquisition of Pollo
Tropical in July 1998. This was offset somewhat by the favorable effect on
average interest rates due to the Company's 1998 refinancing activities.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
The income tax provision of $1,747,000 for the first nine months of 1999 is
based on an estimated effective income tax rate for 1999 of 54.7%. This rate is
higher than the Federal statutory tax rate due to state franchise taxes and non-
deductible amortization of franchise rights and certain other intangible assets.
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 (i)
restaurant operations are conducted on a cash basis (ii) rapid turnover allows a
limited investment in inventories, and (iii) cash from sales is usually received
before related accounts for food, supplies and payroll become due. Our cash
requirements arise primarily from the need to finance the opening and equipping
of new restaurants, ongoing capital reinvestment in our existing restaurants,
the acquisition of existing Burger King restaurants, and for servicing our debt.
The Company's operations in the first nine months generated approximately $29.4
million in cash in 1999, compared with $21.8 million in 1998.
Capital expenditures represent a major investment of cash for the Company, and
totaled, excluding acquisitions, $31.8 million in the first nine months of 1999
and $22.0 million in the first nine months of 1998. Capital expenditures in 1999
included $3.3 million for the purchase of the land and building for two Pollo
Tropical restaurants that were previously leased. Capital expenditures included
$0.5 million and $0.6 million for the acquisition of two Burger King restaurants
in each of the nine months ended September 30, 1999 and 1998, respectively.
The sale and leaseback of eight Burger King restaurant properties and five Pollo
Tropical restaurant properties in June 1999 generated proceeds of $14.8 million
which were used to reduce outstanding debt.
Under our senior credit facility, which was amended on May 17, 1999 to increase
our revolving credit facility by $5 million, Chase Bank of Texas, National
Association, as agent, along with a syndicate of six other lenders, have
provided a term loan facility of $50.0 million, of which $47.8 million is
outstanding at September 30, 1999 and a revolving credit facility under which we
may borrow up to $105.0 million, $79.2 million of which is available at
September 30, 1999 after reserving for a $1.2 million letter of credit
guaranteed by the facility. At September 30, 1999, we had total indebtedness of
$244.8 million comprised of $170.0 million of unsecured 9.5% senior subordinated
notes, total borrowings under our senior credit facility of $72.4 million and
other debt of $2.5 million.
In 1999, we anticipate total capital expenditures to approximate $42 million,
excluding the cost of any acquisitions. This amount includes approximately $9.5
million for construction of new Burger King restaurants, including real estate;
$5 million for construction of new Pollo Tropical restaurants; and $16 million
for ongoing reinvestment and remodeling of our existing restaurants. We are also
in the process
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
of upgrading our restaurant point-of-sale systems, our in-restaurant support
systems and our corporate information systems. We have remaining commitments at
September 30, 1999 to purchase approximately $3.2 million of restaurant
point-of-sale systems.
Interest payments under our outstanding indebtedness will represent significant
liquidity requirements for us. We believe cash generated from our operations and
availability under our senior credit facility will provide sufficient cash
availability to cover our working capital needs, capital expenditures, planned
development and debt service requirements for the next 12 months.
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. Accordingly, changes in the Federal or state
minimum hourly wage rate 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.
Year 2000
- ---------
We recognize the need to ensure our operations will not be adversely impacted by
Year 2000 software failures. We have addressed this risk to the availability and
integrity of financial systems and the reliability of operating systems. We are
currently installing new point-of-sale (POS) systems in our restaurants, and
have completed installation of these systems in approximately 100 restaurants
thus far including all restaurants that had Year 2000 non-compliant Systems.
We have substantially completed our implementation of new corporate financial
and decision support applications including general ledger, accounts payable,
asset management, payroll and human resource systems. The remaining corporate
support systems to be implemented include implementation of new sales and
inventory accounting systems which will be completed in the fourth quarter of
1999. The implementation of corporate financial software applications began in
1998 and is estimated to cost, $4.7 million, of which $.5 million remains to be
expended in the fourth quarter of 1999. We believe that all of our computer
systems will be Year 2000 compliant in the fourth quarter of 1999.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
In addition to our internal efforts, we are also monitoring certain initiatives
of Burger King Corporation ("BKC") as they evaluate Year 2000 readiness of food
and equipment suppliers, utility companies and other key suppliers to the Burger
King system. Although BKC has not made any representations or warranties with
respect to such activities, they are providing us the results of third party
validations of the readiness of existing equipment used in the restaurants,
summarized responses from shared vendors and domestic contingency plans. We have
also been closely monitoring the remediation progress of our major food supplier
and working closely with it to successfully interface our ordering and delivery
systems as transitions are made to new systems.
We are evaluating our implementation progress on an ongoing basis and are
currently developing a contingency plan which will address upgrading certain
existing systems, should our scheduled implementation dates be modified or if
the Burger King results warrant enhanced contingency planning. While we are
monitoring the progress of our key suppliers, we cannot be assured that their
remediation efforts will be successful, in which case we could be adversely
impacted by our ability to obtain food supplies for our restaurants. In the
event that the remediation efforts of our suppliers are not successful, we
believe that we could alternatively process orders to obtain food supplies for
our restaurants manually. Should we be unable to process orders, we believe that
the time required by our key suppliers to implement corrective actions, when
combined with our inventory levels, would not result in a material disruption to
our restaurant operations.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 16, 1998, the Equal Employment Opportunity Commission
("EEOC") filed suit in the United States District Court for the
Northern District of New York, under Title VII of the Civil Rights Act
of 1964, as amended, against the Company, on behalf of "Wendy McFarlan
and other similarly situated individuals affected by sexual harassment
by Carrols Corporation".
The case is in the early phase of discovery, written discovery is
required to be completed by February 21, 2000, at which time the
parties may file motions for summary judgment. The Company is
currently considering filing such a motion at the close of written
discovery. The Company intends to contest the case vigorously and
believes it is without merit. It is too early to make an evaluation of
the likelihood of an unfavorable outcome and/or an estimate of the
amount or range of potential loss.
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
19
PART II - OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8K
a. The following exhibits are filed as part of this report.
Exhibit No.
-----------
3.1 Certificate of Amendment to the Restated Certificate of
Incorporation of Carrols Holdings Corporation.
10.1 Carrols Holdings Corporation 1998 Pollo Tropical Long-Term
Incentive Plan.
27 Financial Data Schedule
b. There were no reports on Form 8-K filed during the reported
quarter.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARROLS CORPORATION
968 James Street
Syracuse, New York 13203
(Registrant)
Date: November 17, 1999 /s/ Alan Vituli
----------------------------------------
(Signature)
Alan Vituli
Chairman and Chief Executive Officer
Date: November 17, 1999 /s/ Paul R. Flanders
----------------------------------------
(Signature)
Paul R. Flanders
Vice President - Finance (Principal
Financial Officer and Principal
Accounting Officer)
21