<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 29, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- ---------
Commission file number: 0-22422
POLLO TROPICAL, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0100964
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
7300 N. KENDALL DRIVE, 8TH FLOOR, MIAMI, FLORIDA 33156
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 305/670-7696
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
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of November 4, 1996: 8,124,799 shares of
common stock, par value $.01.
1 Of 15
<PAGE> 2
POLLO TROPICAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 29, 1996
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Condensed Consolidated Balance Sheets
December 31, 1995 and September 29, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
Three Months and Nine Months Ended October 1, 1995 and September 29, 1996. . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended October 1, 1995 and September 29, 1996 . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
Page 2 of 15
<PAGE> 3
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 29,
1995 1996
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 691,324 $ 16,916
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 331,969 339,977
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 470,605 679,137
Prepaid income taxes . . . . . . . . . . . . . . . . . . . 152,680 130,169
Other current assets . . . . . . . . . . . . . . . . . . . 245,656 221,654
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . 1,892,234 1,387,853
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . 41,731,694 42,275,973
DEFERRED RESTAURANT PRE-OPENING COSTS, net . . . . . . . . . . 406,442 210,094
INTANGIBLE ASSETS, net . . . . . . . . . . . . . . . . . . . . 369,899 385,731
LEASEHOLD ACQUISITION COSTS, net . . . . . . . . . . . . . . . 1,519,262 1,447,856
DEPOSITS AND DEFERRED COSTS ON FUTURE
RESTAURANT LOCATIONS . . . . . . . . . . . . . . . . . . . 127,340 93,969
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 777,711 631,657
------------- -------------
$ 46,824,582 $ 46,433,133
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 3,526,265 $ 2,966,316
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 1,295,899 1,893,642
Current maturities of long-term debt . . . . . . . . . . . . 77,352 82,119
Accrued restaurant closure expenses . . . . . . . . . . . . . 1,399,516 --
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . 6,299,032 4,942,077
------------- -------------
LONG-TERM DEBT, net of current maturities . . . . . . . . . . 11,971,648 11,311,526
------------- -------------
DEFERRED RENT . . . . . . . . . . . . . . . . . . . . . . . . . 1,192,909 1,212,224
------------- -------------
DEFERRED FRANCHISE FEE INCOME . . . . . . . . . . . . . . . . 597,500 405,000
------------- -------------
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . 804,238 1,118,864
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock . . . . . . . . . . . . . . . . . . . . . . . . 80,479 81,498
Additional paid-in capital . . . . . . . . . . . . . . . . . 21,545,990 21,706,232
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 4,332,786 5,655,712
------------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . . . 25,959,255 27,443,442
------------- -------------
$ 46,824,582 $ 46,433,133
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 15
<PAGE> 4
POLLO TROPICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------------- ---------------------------------
October 1, September 29, October 1, September 29,
1995 1996 1995 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales . . . . . . . . . . . . $ 13,684,324 $ 17,238,169 $ 42,273,738 $ 47,982,414
Franchise revenues . . . . . . . . . . . 282,321 106,928 459,898 398,915
------------ ------------ ------------ ------------
13,966,645 17,345,097 42,733,636 48,381,329
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of sales . . . . . . . . . . . . . . 5,014,311 6,832,333 15,186,591 18,206,743
Restaurant payroll . . . . . . . . . . . 3,527,591 4,264,993 10,351,109 11,987,119
Other restaurant operating expenses . . . 2,463,250 3,193,958 7,053,595 9,330,140
General and administrative . . . . . . . 1,283,839 1,324,103 3,871,723 4,003,894
Depreciation and amortization of property
and equipment . . . . . . . . . . . . 504,371 584,579 1,474,466 1,668,988
Amortization of deferred restaurant
pre-opening costs . . . . . . . . . . 265,684 160,861 1,005,909 421,375
Other amortization . . . . . . . . . . . 30,053 28,566 85,237 85,096
Restaurant closure expense, net . . . . . 1,565,108 (174,047) 1,565,108 (174,047)
------------ ------------ ------------ ------------
14,654,207 16,215,346 40,593,738 45,529,308
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS . . . . . . . (687,562) 1,129,751 2,139,898 2,852,021
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest, net . . . . . . . . . . . . . . (192,047) (254,951) (624,405) (749,707)
Other, net . . . . . . . . . . . . . . . 10,860 8,442 (139,818) 31,093
------------ ------------ ------------ ------------
(181,187) (246,509) (764,223) (718,614)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE . . . . . . . . . . . (868,749) 883,242 1,375,675 2,133,407
PROVISION FOR (BENEFIT FROM) INCOME TAXES . (326,650) 335,543 517,254 810,481
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE . (542,099) 547,699 858,421 1,322,926
EXTRAORDINARY CHARGE FOR EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME TAX
BENEFIT OF $37,942 . . . . . . . . . . . 62,967 -- 62,967 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) . . . . . . . . . . . . . $ (605,066) $ 547,699 $ 795,454 $ 1,322,926
============ ============ ============ ============
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY CHARGE . . . . . . . . . . . $ (.07) $ .07 $ .11 $ .16
EXTRAORDINARY CHARGE . . . . . . . . . . . (.01) -- (.01) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE . . . . . . . . $ (.08) $ .07 $ .10 $ .16
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . . . . . . . . . 8,007,952 8,165,144 8,076,367 8,153,118
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 15
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------------------
October 1, September 29,
1995 1996
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 795,454 $ 1,322,926
---------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 2,565,612 2,175,459
Loss on disposal of property and equipment . . . . . . . . . 4,295 167,019
Restaurant closure expenses, net . . . . . . . . . . . . . . 1,565,108 (174,047)
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . 202,544 147,386
Amortization of deferred compensation . . . . . . . . . . . . -- 5,787
Deferred income taxes . . . . . . . . . . . . . . . . . . . (273,742) 314,626
Extraordinary charge net of taxes . . . . . . . . . . . . . . 62,967 --
Changes in operating assets and liabilities:
(Increase) decrease in-
Inventories . . . . . . . . . . . . . . . . . . . . . . 29,092 (8,008)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . 94,753 (208,532)
Prepaid income taxes . . . . . . . . . . . . . . . . . . -- 145,550
Other current assets . . . . . . . . . . . . . . . . . . (244,716) 24,002
Deferred restaurant pre-opening costs . . . . . . . . . . (465,187) (225,027)
Other assets . . . . . . . . . . . . . . . . . . . . . . 5,908 186,054
Increase (decrease) in-
Accounts payable and accrued liabilities . . . . . . . . 1,416,970 37,794
Deferred franchise fee income . . . . . . . . . . . . . . (113,971) (192,500)
Accrued income taxes . . . . . . . . . . . . . . . . . . 135,996 --
Accrued restaurant closure expenses . . . . . . . . . . . -- (98,810)
---------------- --------------
Total adjustments . . . . . . . . . . . . . . . . . . . 4,985,629 2,296,753
---------------- --------------
Net cash provided by operating activities . . . . . . . 5,781,083 3,619,679
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment. . . . . . . . . . 2,575,737 --
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (4,858,682) (3,675,016)
Payment for intangible assets . . . . . . . . . . . . . . . . (216,005) (27,473)
Payment for leasehold acquisition costs . . . . . . . . . . . . (261,828) (2,049)
(Increase) decrease in deposits and deferred costs on future
restaurant locations . . . . . . . . . . . . . . . . . . . . (288,416) 33,371
---------------- --------------
Net cash used in investing activities . . . . . . . . . . (3,049,194) (3,671,167)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . 16,356,647 191,369,000
Principal payments on long-term debt . . . . . . . . . . . . . (19,094,842) (192,024,355)
Proceeds from issuance of common stock . . . . . . . . . . . . 18,259 32,435
---------------- --------------
Net cash used in financing activities . . . . . . . . . . (2,719,936) (622,920)
---------------- --------------
Net increase in cash and cash equivalents . . . . . . . . 11,953 (674,408)
Cash and cash equivalents, beginning of period . . . . . . . . 688,964 691,324
---------------- --------------
Cash and cash equivalents, end of period . . . . . . . . . . . $ 700,917 $ 16,916
================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for-
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . $ 649,084 $ 762,603
================ ==============
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 655,000 $ 298,285
================ ==============
Tax benefit from stock options recorded to additional
paid-in capital . . . . . . . . . . . . . . . . . . . . . . . $ 181,842 $ 123,039
================ ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5 of 15
<PAGE> 6
POLLO TROPICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 1995, which has
been derived from audited financial statements, and the unaudited interim
condensed financial statements included herein, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made herein are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K (File
No. 0-22422) for the year ended December 31, 1995.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company and the results of operations and cash flows for the periods indicated.
Results of operations for the quarter and nine months ended September 29, 1996
are not necessarily indicative of the results to be expected for the year
ending December 29, 1996, especially considering the anticipated fourth quarter
charge for the closing of stores discussed further in this filing.
(2) ACCOUNTING POLICIES
During interim periods the Company follows the accounting policies set forth
in its consolidated financial statements included in its Annual Report on Form
10-K (File No. 0-22422). Reference should be made to such financial statements
for information on such accounting policies and further financial details.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute "Forward
Looking Statements" within the meaning of the Private Securities Litigation
Reform Act of 1955. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance, or achievements of Pollo Tropical, Inc. stores to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: competition; success of operating initiatives;
advertising and promotional efforts; adverse publicity; acceptance of new
product offerings; availability, locations, and terms of sites for store
development and the real estate market conditions in general; changes in
business strategy or development plans; availability and terms of capital;
food, labor, and employee benefit costs; changes in government regulations;
regional weather conditions; and other factors referenced in this Form 10-Q or
in the Company's Form 10-K for its 1995 fiscal year.
Page 6 of 15
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company pursued an expansion strategy during Fiscal 1995 through the
first quarter of 1996 opening a total of six stores in three new markets
(Tampa, Chicago, and New York). The Company also closed two underperforming
restaurants in St. Petersburg, Florida, incurring costs for restaurant closure
expenses in the third quarter of 1995. In the second quarter ended June 30,
1996 the Company opened three restaurants in its core markets, and no
restaurants were opened during the third quarter ended September 29, 1996
bringing the total Company-owned restaurants operating through the end of the
quarter to 40. Since the end of the third quarter the Company changed its
strategy to focus future expansion of Company-owned restaurants on sites in its
core markets of South and Central Florida. As a result of this realignment of
its growth plans, and unsatisfactory sales performance of the restaurants in
the expansion markets (Tampa, Chicago and New York), the Company plans to
close the six restaurants in the expansion markets, and anticipates recording
an after-tax charge in the fourth quarter of approximately $4.0 million, or
$0.50 per share, as a provision for expenses related to the closing of these
six restaurants. As of the date of this filing five of the restaurants have
been closed. The Company plans to continue a moderate expansion in the core
Florida markets with four additional planned Company-owned restaurants in 1997.
The Company experienced an increase of 15% in same restaurant sales
for the quarter ended September 29, 1996. The Company believes that the trend
of improvement in same restaurant sales is primarily due to the more effective
implementation in its core markets of its marketing strategies including
everyday value pricing on selected menu items, separate advertising campaigns
aimed toward its dual-target audiences, a successful new product launch and
improved customer service. The Company anticipates that same restaurant sales
should continue to remain positive through the remainder of 1996. Although
these marketing strategies and other initiatives were also implemented in the
expansion markets, the average unit sales volumes in these markets remained
significantly lower than the average unit sales volumes in the core markets
during the quarter.
The Company's restaurant level margins continue to be adversely
affected by higher food costs, which during the quarter was partially offset by
lower relative payroll costs. The five year high in the market price of
chicken, and the higher cost associated with a new product introduction in the
third quarter have contributed to the significant increase in overall food
costs. The value pricing strategy implemented in the first quarter have
also contributed to the Company's lower restaurant level margins.
The Company incurs pre-opening costs in connection with the opening of
each restaurant. Pre-opening costs, which include payroll, hiring and
training expenses, advertising and all other direct operating costs that are
incurred prior to the opening of a new restaurant, are amortized over the first
12 months of a restaurant's operation and have decreased as a percentage of
restaurant sales as a result of the Company's moderation in its level of
expansion.
The Company pursued a franchise growth strategy on new area
development agreements in both domestic and foreign markets and in December
1994, the Company's first franchised restaurant opened. In 1995, five
additional franchised restaurants were opened, and then in the first half of
1996 three additional franchised restaurants were opened and one franchised
restaurant closed. In the third quarter of 1996, three franchised restaurants
closed, and two additional franchised restaurants opened. After September 29,
1996, one additional franchised restaurant opened in Puerto Rico and one
additional domestic franchised restaurant closed bringing the total franchised
restaurants to seven through the date of this filing of which six are in
Puerto Rico and one is a non-traditional restaurant in the Company's core
market. The Company anticipates the opening of approximately two additional
franchised restaurants in the Puerto Rico market during the remainder of
Fiscal 1996. The Company has also changed its franchise growth strategy by
focusing primarily on new area development agreements with qualified
franchisees in Latin America and the Caribbean and anticipates continued
growth in franchise revenues. The Company receives exclusivity fees upon
signing of area development agreements. Such fees are recognized as revenue
when franchised restaurants open or when such agreements terminate.
Additionally, when franchised restaurants become operational the Company
receives continuing royalties based on sales. As the Company does not
control the timing of
Page 7 of 15
<PAGE> 8
franchise openings and/or terminations of agreements, the recognition of
franchise revenues cannot be accurately predicted and, therefore, may fluctuate
significantly on a quarter to quarter basis.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
selected income statement data as a percentage of restaurant sales, except
general and administrative expenses, which is shown as a percentage of total
revenues, and certain restaurant data:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------------------------- -------------------------------
October 1, September 29, October 1, September 29,
1995 1996 1995 1996
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating expenses:
Cost of sales . . . . . . . . . . . . . . 36.6% 39.6% 35.9% 37.9%
Restaurant payroll . . . . . . . . . . . . 25.8 24.7 24.5 25.0
Other restaurant operating expenses . . . 18.0 18.5 16.7 19.4
General and administrative expenses . . . 9.2 7.6 9.1 8.3
Depreciation and amortization of
property and equipment . . . . . . . . 3.7 3.4 3.5 3.5
Amortization of deferred restaurant
pre-opening costs . . . . . . . . . . . 1.9 .9 2.4 .9
Other amortization . . . . . . . . . . . . .2 .2 .2 .2
Restaurant closure expense, net . . . . . . 11.4 (1.0) 3.7 (.4)
Income (loss) from operations . . . . . . . . (5.0) 6.6 5.1 5.9
Other expenses . . . . . . . . . . . . . . . 1.3 1.4 1.8 1.5
Net income (loss) . . . . . . . . . . . . . . (4.4)% 3.2% 1.9% 2.8%
RESTAURANT DATA:
Aggregate restaurant sales increase from
prior period . . . . . . . . . . . . . . . 23% 26% 49% 14%
Number of restaurants open at end of
period . . . . . . . . . . . . . . . . . . 35 40 35 40
</TABLE>
Page 8 of 15
<PAGE> 9
QUARTER ENDED SEPTEMBER 29, 1996 COMPARED TO QUARTER ENDED OCTOBER 1,1995
Restaurant Sales. Restaurant sales for the quarter ended September 29,
1996 increased $3.5 million (26%) to $17.2 million from $13.7 million for the
comparable quarter of 1995. This increase was due to an increased number of
restaurants being open during the quarter ended September 29, 1996 as compared
to the same quarter of the prior year and to a sales increase in restaurants
open for the entire quarter for both years. During the quarter 40 restaurants
operated for the full quarter compared to 35 operated for full quarter in the
prior year. Of the 35 restaurants that were opened for the full quarter in
1995, two have since been closed. Same restaurant sales for the quarter
ended September 29, 1996 increased $2.0 million (15.0%) to $15.0 million from
$13.0 million for the comparable quarter of 1995. This increase is due to the
continued growth from the new advertising campaigns, the value pricing
strategy, improved customer service and the substantial success of the
introduction of the new pork product line.
Franchise Revenues. Franchise revenues generally consists of initial
franchise fees which are recognized when a restaurant opens, continuing
royalties and fees from operating franchised restaurants, and forfeiture of
exclusivity fees when area development agreements are terminated. Franchise
revenues for the quarter ended September 29, 1996, decreased to $175,000 from
$282,000. No franchise revenue was recognized from the realization of
exclusivity fees for the quarter ended September 29, 1996 compared to $197,000
of exclusivity fees recognized for the quarter ended October 1, 1995 which
were forfeited by a franchisee who defaulted on an area development agreement.
Franchise royalties for the quarter ended September 29, 1996 increased $22,000
to $107,000 from $85,000 for the comparable quarter of 1995.
During the quarter ended September 29, 1996, three franchised
restaurants were closed, one franchise restaurant was opened in Puerto Rico,
and one domestic franchise restaurant opened in a non-traditional site in
South Florida. Between September 29, 1996 and the date of this filing, one
additional franchise restaurant opened in Puerto Rico and one additional
franchise restaurant closed which brings the total franchise restaurants in
operation to seven.
Cost of Sales. Cost of sales which consists of food, beverage, and
paper and supply costs, increased 300 basis points to 39.6% for the quarter
ended September 29, 1996 from 36.6% for the comparable quarter of the prior
year. This increase was due to higher relative food cost resulting from
several factors including the continued higher market prices for chicken, the
value pricing strategy implemented in the first quarter, the successful launch
of the new pork product line in the core market at introductory pricing, and
the lower volume restaurants in the expansion markets which experienced greater
waste. The market price for chicken was 13% higher in the third quarter of
1996 as compared to the same quarter of the prior year. Management expects
continued higher prices for chicken, however, in an effort to relieve the
lower margins experienced for the last several quarters, the Company has
implemented several cost savings programs as well as selective price increases
on several menu items while maintaining its value pricing strategy on its core
items.
Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers'
compensation insurance and group health insurance, decreased 110 basis points
to 24.7% for the quarter ended September 29, 1996 from 25.8% for the same
period of the prior year. This decrease was due to higher sales volumes as
well as increased controls placed on labor scheduling at the unit level.
Other Restaurant Operating Expenses. Other restaurant operating
expenses consist of all restaurant operating costs other than payroll expenses
and include occupancy costs, utilities and advertising expenses. These expenses
increased 50 basis points to 18.5% for the quarter ended September 29, 1996
from 18.0% for the same period of the prior year. The largest component of
this change was repairs and maintenance expenses, which increased from $245,000
to $379,000 and increased as a percentage of restaurant sales to 2.2% from 1.8%
during the same period of the prior year. This increase was primarily a
result of remodeling certain company-owned restaurants.
Page 9 of 15
<PAGE> 10
General and Administrative Expenses. General and administrative ("G &
A") expenses for the quarter ended September 29, 1996 decreased 160 basis
points to 7.6% from 9.2% for the same period of the prior year. This decrease
is primarily due to the fixed cost nature of the general and administrative
expenses relative to the higher sales volumes experienced during the quarter.
Management expects that the general and administrative cost should remain lower
as a percentage of sales when compared to the same period of the prior year
throughout the remainder of 1996.
Depreciation and Amortization of Property and Equipment. Depreciation
and amortization of property and equipment decreased 30 basis points to 3.4%
for the quarter ended September 29, 1996 from 3.7% for the same period of the
prior year. This was a result of the fixed cost nature of depreciation and
amortization of property and equipment relative to the higher sales volumes
experienced during the quarter.
Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred pre-opening costs decreased 100 basis points to .9% for the quarter
ended September 29, 1996 as compared to the same period of the prior year from
1.9% as a percentage of restaurant sales. During the quarter ended September
29, 1996, seven restaurants were incurring amortization of deferred pre-opening
restaurant costs compared to 16 restaurants for the quarter ended October 1,
1995. This decrease was the result of fewer new restaurants being opened
during the latest 12 months as compared to the 12 month period ended October 1,
1995. The Company anticipates restaurant pre-opening costs as a percentage of
restaurant sales will decline during the remainder of Fiscal 1996 as compared
to modest growth in Fiscal 1995.
Other Amortization. Other amortization consists of amortization of
intangibles such as trademarks, prepaid loan costs, organization costs and
leasehold acquisition costs. Other amortization remained level at .2% as a
percentage of restaurant sales for the quarter ended September 29, 1996 as
compared to the same quarter of the prior year.
Restaurant Closure Expense. During the quarter ended October 1, 1995,
the Company accrued estimated expenses in the amount of $1,565,108 associated
with the closing of two restaurants which occurred on October 22, 1995. The
estimated expenses consisted of $1,243,626 in net losses on disposal of fixed
assets and $321,482 in estimated liabilities associated with termination of
leases. During the quarter ended September 29, 1996 the Company finalized the
disposition of the leases of the restaurants closed during the same quarter of
the prior year resulting in a gain of $174,047. Prior to the date of this
filing and in conjunction with a change in the strategic focus, the Company
developed a plan to close the six stores in the expansion markets of Tampa,
Chicago, and New York. The Company anticipates an after-tax fourth quarter
charge of approximately $4.0 million, or $0.50 per share, as a result of
these closures.
Other Income (Expenses). The Company incurred interest costs of
$258,232 during the quarter ended September 29, 1996 which was offset by
$3,281 in interest income. During the same quarter of the prior year, the
Company incurred interest costs of $244,370 of which $47,213 was capitalized
as construction cost. Such interest costs was further offset by $5,110 in
interest income.
Page 10 of 15
<PAGE> 11
NINE MONTHS ENDED SEPTEMBER 29, 1996 COMPARED TO NINE MONTHS ENDED
OCTOBER 1, 1995
Restaurant Sales. Restaurant sales for the nine months ended
September 29, 1996 increased $5.7 million (14%) to $48.0 million from $42.3
million for the comparable quarter of 1995. This increase was due to an
increased number of restaurants being open during the nine months ended
September 29, 1996 as compared to the same period of the prior year and to a
sales increase in restaurants open for the entire nine months for both years.
During the nine months, 36 restaurants operated for the full nine months and 33
operated for the full nine months in the prior year. Of the 33 restaurants
that were opened for the full nine months in 1995, two have since been closed.
Same restaurant sales for the nine months ended September 29, 1996 increased
$1.7 million (6.0%) to $30.3 million from $28.6 million for the comparable
quarter of 1995. This increase is due to the continued growth from the new
advertising campaigns, the value pricing strategy, improved customer service
and the substantial success of the introduction of the new pork product line
in the third quarter.
Franchise Revenues. Franchise revenues for the nine months ended
September 29, 1996 decreased $61,000 to $399,000 from $460,000 for the nine
months ended October 1, 1995. Franchise revenues generally consists of
initial franchise fees which are recognized when a restaurant opens,
continuing royalties and fees from operating franchised restaurants, and
forfeiture of exclusivity fees when area development agreements are
terminated. A significant portion of franchise revenue for the nine months
ended September 29, 1996, as well as for the nine months ended October 1, 1995
consisted of exclusivity fees which were forfeited by franchisees who
defaulted on area development agreements. During the nine months ended
September 29, 1996 the Company recognized $112,500 of exclusivity fees which
were forfeited by a franchisee that defaulted on an area development agreement
as compared $197,000 for the same period of the prior year. Franchise
royalties for the nine months ended September 29, 1996 increased $23,000 to
$286,000 from $263,000 for the comparable nine months of 1995.
During the nine months ended September 29, 1996, four domestic
franchised restaurants were closed, four franchised restaurants were opened in
Puerto Rico, one domestic franchise restaurant opened in a non-traditional site
and three area development agreements were terminated. One additional franchise
restaurant in Puerto Rico was opened and one domestic franchise restaurant was
closed through the date of this filing bringing the total franchise restaurants
in operation to seven. The Company anticipates the opening of approximately
two additional franchised restaurants in Puerto Rico during the remainder
of Fiscal 1996.
Cost of Sales. Cost of sales which consists of food, beverage, and
paper and supply costs, increased 200 basis points to 37.9% for the nine months
ended September 29, 1996 from 35.9% for the comparable nine months of the prior
year. This increase was due to higher relative food cost resulting from several
factors including the continued higher market prices for chicken, the value
pricing strategy implemented in the first quarter, the successful launch of the
new pork product line in the core market at introductory pricing, and the lower
volume restaurants in the expansion markets which experienced greater waste.
The market price for chicken was 12% higher during the nine months of 1996 as
compared to the same period of the prior year. Management expects continued
higher prices for chicken, however, in an effort to relieve the lower margins
experienced for the last several quarters, the Company has implemented several
cost savings programs as well as selective price increases on several menu
items while maintaining its value pricing strategy on its core items.
Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers'
compensation insurance and group health insurance, increased 50 basis points to
25.0% for the nine months ended September 29, 1996 from 24.5% for the same
period of the prior year. This increase was due primarily to workers'
compensation insurance being higher for the nine months ended September 29,
1996 as compared to the same period of the prior year which benefited from
favorable claim experience.
Page 11 of 15
<PAGE> 12
Other Restaurant Operating Expenses. Other restaurant operating
expenses consist of all restaurant operating costs other than payroll expenses
and include occupancy costs, utilities and advertising expenses. These expenses
increased 270 basis points to 19.4% for the nine months ended September 29,
1996, from 16.7% for the same period of the prior year. The largest component
of this change was advertising expense which increased as a percentage of
restaurant sales to 5.0% from 3.8% during the same period of the prior year.
Other restaurant operating expenses also reflect $150,000 incurred in the
conversion of the five Pollo Tropical restaurants to the TropiGrill concept
during the second quarter of 1996. Also, during the second quarter, the Company
replaced menu boards in all of the restaurants to simplify and clarify the
ordering process. The Company incurred $60,000 of expense for the write-off of
the old menu boards. The increase in operating expenses was also a result of
an increase in occupancy costs of 20 basis points to 4.7% from 4.5% for the
same period of the prior year. This increase in occupancy cost was due to a
larger portion of Company-owned restaurants being leased for the nine months
ended September 29, 1996 as compared to the same period of the prior year. The
increase in other restaurant operating expenses was also a result of an increase
in repairs and maintenance of 20 basis points from the remodeling of certain
company-owned restaurants.
General and Administrative Expenses. General and administrative
("G & A") expenses for the nine months ended September 29, 1996 decreased 80
basis points to 8.3% from 9.1% for the same period of the prior year. This
decrease is primarily due to the fixed cost nature of the general and
administrative expenses relative to the higher sales volumes experienced during
the nine months. Management expects the general and administrative cost to
remain lower as a percentage of sales when compared to the same period of the
prior year throughout the remainder of 1996.
Depreciation and Amortization of Property and Equipment. Depreciation
and amortization of property and equipment remained level at 3.5% as a
percentage of restaurant sales for the nine months ended September 29, 1996 as
compared to the same nine months of the prior year.
Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred pre-opening costs decreased 150 basis points to .9% for the nine months
ended September 29, 1996 as compared to the same period of the prior year from
2.4% as a percentage of restaurant sales. This decrease was the result of fewer
new restaurants being opened during the latest 12 months as compared to the 12
month period ended October 1, 1995. The company anticipates restaurant pre-
opening costs as a percentage of restaurant sales will decline during the
remainder of Fiscal 1996 as compared to modest growth in Fiscal 1995.
Other Amortization. Other amortization consists of amortization of
intangibles such as trademarks, prepaid loan costs, organization costs and
leasehold acquisition costs. Other amortization remained level at .2% as a
percentage of restaurant sales for the nine months ended September 29, 1996 as
compared to the same nine months of the prior year.
Restaurant Closure Expense. During the quarter ended October 1, 1995,
the Company accrued estimated expenses in the amount of $1,565,108 associated
with the closing of two restaurants which occurred on October 22, 1995. The
estimated expenses consisted of $1,243,626 in net losses on disposal of fixed
assets and $321,482 in estimated liabilities associated with termination of
leases. During the quarter ended September 29, 1996 the Company finalized the
disposition of the leases of the restaurants closed during the same quarter of
the prior year resulting in a gain of $174,047. Prior to the date of this
filing and in conjunction with a change in the strategic focus, the Company
developed a plan to close the six stores in the expansion markets of Tampa,
Chicago, and New York. The Company anticipates an after-tax fourth quarter
charge of approximately $4.0 million, or $0.50 per share, as a result of these
closures.
Other Income (Expenses). The Company incurred interest costs of
$800,264 during the nine months ended September 29, 1996 of which $37,661 was
capitalized as construction cost. Such interest cost was further offset by
$12,896 in interest income. During the same nine month period of the prior year
the Company incurred interest costs of $784,950 of which $135,866 was
capitalized as construction cost, and was offset by interest income of $24,680.
Other expense for the nine months ended October 1, 1995 included the write-off
of approximately $166,000 of deferred costs associated with the Company's
efforts in obtaining certain private financing.
Page 12 of 15
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
As is customary in the restaurant industry, the Company is able to
operate with a working capital deficit because its restaurant sales are in cash,
it receives trade credit from its vendors and its operations do not require
significant investment in receivables or inventories. Historically, the Company
has used the majority of its available capital for the development of new
restaurants. Consequently, prior to the Initial Public Offering and since the
quarter ended April 3, 1994, the Company has operated with working capital
deficits.
During the nine months ended September 29, 1996, the Company generated
an aggregate of $3,619,679 of cash flow from operations. The Company's
principal capital requirement will continue to be funding the development of new
restaurants. The Company does not anticipate further openings until the first
half of 1997. The Company may either purchase or lease real estate for these
planned restaurants. The Company may also need capital in 1997 to finalize its
lease and other obligations for the six stores to be closed. Such amounts can
not be determined at the time of this filing.
The Company has a line of credit facility from a commercial bank which
provides for advances of up to $25,000,000; however, the lender has no
obligation to make further advances after July 13, 1998. The Company has
reduced its amount of cash held in order to reduce interest expense on the
outstanding portion of the credit facility. As of September 29, 1996, there was
an additional borrowing capacity under the credit line of $13,849,000, and as
of November 4, 1996 the available borrowing capacity under the line was
$14,200,000.
The Company anticipates that the funds under its existing credit
facility combined with cash flow from operations will be sufficient to fund its
new restaurant openings and the settlement of obligations for the closing of
restaurants throughout 1997.
Page 13 of 15
<PAGE> 14
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
27.1 Article 5 of Regulation S-X
Financial Data Schedule for
3rd Quarter 10-Q (for SEC use only)
(b) During the quarter ended September 29, 1996, the Company did
not file any reports on Form 8-K.
All other items under Part II are not applicable.
Page 14 of 15
<PAGE> 15
SIGNATURES
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.
POLLO TROPICAL, INC.
\s\ Larry J. Harris
--------------------
LARRY J. HARRIS
Chief Executive Officer
\s\ William Carl Drew
---------------------
WILLIAM CARL DREW
Chief Financial Officer
DATE: November 13, 1996
Page 15 of 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<EXCHANGE-RATE> 1
<CASH> 16,916
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 339,977
<CURRENT-ASSETS> 1,387,853
<PP&E> 42,275,973
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,433,133
<CURRENT-LIABILITIES> 4,942,077
<BONDS> 0
0
0
<COMMON> 81,498
<OTHER-SE> 27,361,944
<TOTAL-LIABILITY-AND-EQUITY> 46,433,133
<SALES> 47,982,414
<TOTAL-REVENUES> 48,381,329
<CGS> 18,206,743
<TOTAL-COSTS> 45,529,308
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 749,707
<INCOME-PRETAX> 2,133,407
<INCOME-TAX> 810,481
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,322,926
<EPS-PRIMARY> .16
<EPS-DILUTED> 0
</TABLE>