<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 JUNE 30, 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 July 31, 1996: 8,057,949 shares of common stock,
par value $.01.
Page 1 of 15
<PAGE> 2
POLLO TROPICAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Page
Part I - Financial Information
<S> <C>
Condensed Consolidated Balance Sheets
December 31, 1995 and June 30, 1996................................................................. 3
Condensed Consolidated Statements of Income
Three Months and Six Months Ended July 2, 1995 and June 30, 1996 .................................. 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended July 2, 1995 and June 30, 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 4. Submission of Matters to a Vote of Security Holders.......................................... 14
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, June 30,
1995 1996
------------ --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 691,324 $ 1,063,160
Inventories............................................................... 331,969 357,623
Prepaid expenses.......................................................... 470,605 607,843
Prepaid income taxes..................................................... 152,680 52,568
Other current assets...................................................... 245,656 173,979
----------- -----------
Total current assets..................................................... 1,892,234 2,255,173
PROPERTY AND EQUIPMENT, net................................................ 41,731,694 43,680,003
DEFERRED RESTAURANT PRE-OPENING COSTS, net................................. 406,442 372,519
INTANGIBLE ASSETS, net..................................................... 369,899 366,869
LEASEHOLD ACQUISITION COSTS, net........................................... 1,519,262 1,472,378
DEPOSITS AND DEFERRED COSTS ON FUTURE
RESTAURANT LOCATIONS...................................................... 127,340 24,008
OTHER ASSETS............................................................... 777,711 700,970
----------- -----------
$46,824,582 $48,871,920
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 3,526,265 $ 4,264,179
Accrued liabilities....................................................... 1,295,899 1,393,602
Current maturities of long-term debt...................................... 77,352 81,035
Accrued restaurant closure expenses....................................... 1,399,516 1,296,292
----------- -----------
Total current liabilities................................................ 6,299,032 7,035,108
----------- -----------
LONG-TERM DEBT, net of current maturities.................................. 11,971,648 12,381,136
----------- -----------
DEFERRED RENT.............................................................. 1,192,909 1,291,166
----------- -----------
DEFERRED FRANCHISE FEE INCOME.............................................. 597,500 422,500
----------- -----------
DEFERRED INCOME TAXES...................................................... 804,238 948,563
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock........................................................... -- --
Common stock.............................................................. 80,479 80,829
Additional paid-in capital................................................ 21,545,990 21,604,605
Retained earnings......................................................... 4,332,786 5,108,013
----------- -----------
Total shareholders' equity............................................... 25,959,255 26,793,447
----------- -----------
$46,824,582 $48,871,920
=========== ===========
</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 Six Months Ended
-------------------------------- ----------------------------------
July 2, June 30, July 2, June 30,
1995 1996 1995 1996
--------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $14,450,356 $16,247,877 $28,589,414 $30,744,245
Franchise revenues 117,570 194,026 177,577 291,987
----------- ----------- ----------- -----------
14,567,926 16,441,903 28,766,991 31,036,232
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 5,160,402 6,151,006 10,172,280 11,374,410
Restaurant payroll 3,454,333 4,027,719 6,823,518 7,722,126
Other restaurant operating expenses 2,350,171 3,344,200 4,590,345 6,136,182
General and administrative 1,384,985 1,316,737 2,587,884 2,679,791
Depreciation and amortization of property
and equipment 499,627 556,367 970,095 1,084,409
Amortization of deferred restaurant
pre-opening costs 359,239 131,787 740,225 260,514
Other amortization 28,259 28,507 55,184 56,530
----------- ----------- ----------- -----------
13,237,016 15,556,323 25,939,531 29,313,962
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,330,910 885,580 2,827,460 1,722,270
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest, net (219,368) (247,764) (432,358) (494,756)
Other, net 8,199 11,550 (150,678) 22,651
----------- ----------- ----------- -----------
(211,169) (236,214) (583,036) (472,105)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,119,741 649,366 2,244,424 1,250,165
PROVISION FOR INCOME TAXES 421,023 246,694 843,904 474,938
----------- ----------- ----------- -----------
NET INCOME $ 698,718 $ 402,672 $ 1,400,520 $ 775,227
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ 0.09 $ 0.05 $ 0.17 $ 0.10
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,119,262 8,154,087 8,110,574 8,147,105
=========== =========== =========== ===========
</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 Six Months Ended
----------------------------
July 2, June 30,
1995 1996
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................................... $1,400,520 $ 775,227
---------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 1,765,504 1,401,453
Loss on disposal of property and equipment...................... -- 123,869
Deferred rent................................................... 133,803 98,257
Amortization of deferred compensation........................... -- 3,858
Deferred income taxes........................................... 495,930 144,325
Changes in operating assets and liabilities:
(Increase) decrease in-
Inventories.................................................... 36,759 (25,654)
Prepaid expenses............................................... 95,588 (137,238)
Prepaid income taxes........................................... -- 142,170
Other current assets........................................... (233,319) 71,677
Deferred restaurant pre-opening costs.......................... (300,575) (226,591)
Other assets................................................... 92,712 76,741
Increase (decrease) in-
Accounts payable and accrued liabilities........................ 115,492 835,617
Deferred franchise fee income................................... 122,500 (175,000)
Accrued restaurant closure expenses............................. -- (103,224)
Income taxes payable............................................ 92,977 --
---------- --------------
Total adjustments............................................... 2,417,371 2,230,260
---------- --------------
Net cash provided by operating activities....................... 3,817,891 3,005,487
---------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................. (3,703,066) (3,156,587)
Payment for intangible assets.................................... (111,820) (4,567)
Payment for leasehold acquisition costs.......................... (261,415) (2,049)
(Increase) decrease in deposits and deferred costs on future
restaurant locations............................................ (253,251) 103,332
---------- --------------
Net cash used in investing activities.......................... (4,329,552) (3,059,871)
---------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt......................... 972,801 187,272,000
Principal payments on long-term debt............................. (75,002) (186,858,829)
Proceeds from issuance of common stock........................... 18,259 13,049
---------- --------------
Net cash provided by financing activities...................... 916,058 426,220
---------- --------------
Net increase in cash and cash equivalents...................... 404,397 371,836
Cash and cash equivalents, beginning of period................... 688,964 691,324
---------- --------------
Cash and cash equivalents, end of period......................... 1,093,361 1,063,160
========== ==============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for-
Interest, net................................................... $ 540,580 $ $542,032
========== ==============
Income taxes.................................................... $ 256,000 $ $158,086
========== ==============
Tax benefit from stock options recorded to additional
paid-in capital................................................. $ 181,842 $ 42,058
========== ==============
</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
JUNE 30, 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 six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the year ending
December 29, 1996.
(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.
Page 6 of 15
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
During Fiscal 1995, the Company entered three expansion markets (Tampa,
Chicago, and New York), opening a total of five Company-owned restaurants. The
Company also closed two underperforming restaurants, incurring costs for
restaurant closure expenses in the third quarter of 1995. In the first quarter
ended March 31, 1996, the Company opened one additional restaurant in the
expansion markets. In the second quarter ended June 30, 1996, the Company
opened three restaurants in its core markets, bringing the total Company-owned
restaurants currently operating to 40. The Company's restaurants in the
expansion markets and Orlando operate under the name TropiGrill. The Company's
restaurants in South Florida operate under the name Pollo Tropical. The Company
does not anticipate further restaurant openings until the first half of 1997.
The Company experienced a same restaurant sales increase of 4% for the
quarter ended June 30, 1996. The Company believes that this improvement in same
restaurant sales trends is primarily due to the more effective implementation
of its marketing strategies including everyday value pricing on selected items,
new advertising campaigns and improved customer service in its core markets and
expects same restaurant sales to remain positive through the remainder of 1996.
Average unit sales volumes in some of the expansion markets have also improved
in the second quarter, however, they remain significantly lower than the
average unit sales volumes in the core markets.
The Company's restaurant level margins have been adversely affected
by several factors including higher food costs, higher advertising and
promotional activities associated with the expansion markets and expenditures
incurred in converting the five Orlando and Tampa Pollo Tropical restaurants
to the TropiGrill concept. Both the value pricing strategy implemented in the
first quarter and the five year high in the market price of chicken have
created a significant increase in overall food costs. The Company has
increased advertising expenditures substantially in the first half of 1996 in
re-establishing and enhancing the TropiGrill concept in the expansion markets
and Orlando. The Company does not anticipate further expansion of the
TropiGrill concept in the South Florida market. The Company anticipates higher
advertising and promotional expenditures through the remainder of 1996
relative to 1995 levels.
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.
In December 1994, the Company's first franchised restaurant opened, five
additional franchised restaurants were opened in 1995, and two additional
franchised restaurants were opened in the first quarter of 1996. In the second
quarter, one franchised restaurant closed, and one additional franchised
restaurant opened. After June 30, 1996, one additional franchised restaurant
opened bringing the total franchised restaurants to nine through the date of
this filing. The Company anticipates the opening of approximately three
additional franchised restaurants in the Puerto Rico market during the
remainder of Fiscal 1996. The Company continues to pursue new area development
agreements in Latin America, the Caribbean and the United States with qualified
franchisees 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 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.
Page 7 of 15
<PAGE> 8
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 expense, which is shown as a percentage of total revenues, and
certain restaurant data:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
----------------- ------------------
July 2, June 30, July 2, June 30,
1995 1996 1995 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating expenses:
Cost of sales.......................... 35.7% 37.9% 35.6% 37.0%
Restaurant payroll..................... 23.9 24.8 23.9 25.1
Other restaurant operating expenses.... 16.3 20.6 16.1 20.0
General and administrative expenses.... 9.5 8.0 9.0 8.6
Depreciation and amortization of
property and equipment................ 3.5 3.4 3.4 3.5
Amortization of deferred restaurant
pre-opening costs..................... 2.5 .8 2.6 .9
Other amortization..................... .2 .2 .2 .2
Income from operations.................. 9.2 5.4 9.9 5.6
Other expenses.......................... 1.5 1.5 2.0 1.5
Net income.............................. 4.8% 2.5% 4.9% 2.5%
RESTAURANT DATA:
Aggregate restaurant sales increase from
prior period........................... 58% 12% 65% 8%
Number of restaurants open at end of
period................................. 35 40 35 40
</TABLE>
Page 8 of 15
<PAGE> 9
QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JULY 2, 1995
Restaurant Sales. Restaurant sales for the quarter ended June 30, 1996
increased $1.8 million (12%) to $16.3 million from $14.5 million for the
comparable quarter of 1995. This increase was due to an increased number of
restaurants open during the quarter ended June 30, 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 current quarter 37 restaurants
operated for the full quarter, and three restaurant operated for part of the
quarter as compared to the prior year quarter when 34 restaurants operated for
the full quarter and one restaurant operated for only part of the quarter.
Same restaurant sales increased 4% for the quarter ended June 30, 1996 and
management expects same restaurant sales to remain positive for the remainder
of 1996.
Franchise Revenues. Franchise revenues for the quarter ended June 30,
1996 increased $76,000 from $118,000 for the quarter ended July 2, 1995 to
$194,000 for the quarter ended June 30, 1996. 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 substantial portion of franchise revenue for the quarter ended June 30, 1996
consisted of an exclusivity fee which was forfeited by a franchisee who
defaulted on an area development agreement. During the quarter ended June 30,
1996, one franchised restaurant closed, one franchised restaurant was opened in
Puerto Rico, and one area development agreement was terminated. One additional
franchised restaurant in Puerto Rico was opened after June 30, 1996 through the
date of this filing and the Company anticipates the opening of approximately
three 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 220 basis points to 37.9% for the quarter ended
June 30, 1996 from 35.7% for the comparable quarter of the prior year. This
change was due to an increase of 180 basis points in food costs as well as an
increase of 40 basis points in the cost of paper. The increase in food costs
results from higher market prices for chicken, from higher food cost in lower
volume restaurants in the expansion markets which experience greater waste and
from the value pricing strategy implemented during the first quarter of 1996.
The market price for chicken was 14% higher in the second quarter of 1996 as
compared to the same quarter of the prior year. Management expects that
continued higher costs for chicken will adversely affect the relationship of
cost of sales to restaurant sales during the remainder of Fiscal 1996.
Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers'
compensation insurance and group health insurance, increased 90 basis points to
24.8% for the quarter ended June 30, 1996 from 23.9% for the same period of
the prior year. This is primarily the result of worker's compensation
insurance being higher for the quarter ended June 30, 1996 compared to the same
quarter of the prior year which benefited from rebates.
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 430 basis points to 20.6% for the quarter ended June 30, 1996, from
16.3% for the same period of the prior year. The largest component of this
change was advertising expense, which increased from $481,000 to $925,000 and
increased as a percentage of restaurant sales to 5.7% from 3.3% during the same
period of the prior year. The increase was primarily a result of increased
promotional activities in the expansion markets. Other restaurant operating
expenses also reflect $150,000 incurred in the conversion of the five Pollo
Tropical restaurants to the TropiGrill concept in the Tampa and Orlando markets
during the quarter ended June 30, 1996. These conversion costs include the
painting costs associated with a new color scheme, new uniforms and the
write-off of existing signage. Also, during the 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
Page 9 of 15
<PAGE> 10
the write-off of the old menu boards. The next largest component of the change
in other restaurant operating expenses was occupancy costs, which includes rent
expense and real and personal property taxes, which in the aggregate increased
$131,000 to 4.7% for the quarter ended June 30, 1996 from 4.4% for the same
period of the prior year. This increase in occupancy costs was due to a
larger portion of Company-owned restaurants being leased at the quarter ended
June 30, 1996 as compared to the same period of the prior year, as well as
higher real and personal property taxes and lower average sales volumes in the
Company's restaurants in the expansion markets. At the quarter ended July 2,
1995 the Company had 19 leased restaurants as compared to 24 leased
restaurants at the quarter ended June 30, 1996. Another component of the
increase in other restaurant operating expenses as a percentage of restaurant
sales was an increase in utilities expense which increased as a percentage of
restaurant sales volume to 4.8% for the quarter ended June 30, 1996 from 4.6%
for the same period of the prior year. This increase was attributable to the
higher costs of natural gas.
General and Administrative Expenses. General and administrative ("G & A")
expenses for the quarter ended June 30, 1996 decreased 150 basis points to 8.0%
from 9.5% for the same period of the prior year. The decrease is primarily
due to the fixed nature of several general and administrative expenditure
categories relative to the higher sales volume. The Company does not
anticipate general and administrative costs to grow as a percent of sales for
the remainder of 1996.
Depreciation and Amortization of Property and Equipment. Depreciation and
amortization of property and equipment remained level as a percentage of
restaurant sales for the quarter ended June 30, 1996 as compared to the same
period of the prior year.
Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred restaurant pre-opening costs decreased by 170 basis points to .8% from
2.5% as a percentage of restaurant sales for the quarter ended June 30, 1996 as
compared to the same period of the prior year. During the quarter ended July
2, 1995, 17 restaurants were incurring amortization of deferred restaurant
pre-opening costs compared to eight restaurants for the quarter ended June 30,
1996. This decrease was the result of fewer new restaurants being opened during
the latest 12 months as compared to the 12 month period ended July 2, 1995.
The Company anticipates that amortization of deferred restaurant pre-opening
costs as a percentage of restaurant sales will decline during the remainder of
Fiscal 1996 as compared to Fiscal 1995 due to the factors described above.
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 June 30, 1996 as compared
to the same quarter of the prior year.
Other Income (Expenses). The Company incurred interest costs of $271,878
during the quarter ended June 30, 1996 of which $17,805 was capitalized as
construction cost in accordance with the provisions of Financial Accounting
Standards Board Statement No. 34. Such interest cost was further offset by
$6,309 in interest income. During the same quarter of the prior year, the
Company incurred interest costs of $274,600 of which, $42,731 was capitalized
as construction cost. Such interest cost was further offset by $12,501 in
interest income.
Page 10 of 15
<PAGE> 11
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JULY 2, 1995
Restaurant Sales. Restaurant sales for the six months ended June 30, 1996
increased 8% to $30.7 million from $28.6 million for the comparable six months
of 1995. This increase was attributable to three new restaurants which were
open for the full six months of 1996 but were not open during the comparable
period of 1995, to two new restaurants which were open for the full six months
of 1996 but were open for only part of the six-month period of 1995, and to
four new restaurants opened during the six month period of 1996, and to a sales
increase in restaurants open for the full six months for both years. These
increases were slightly offset by a sales decrease from two stores open for the
full six months in 1995 but were closed for the full six months of 1996. Same
restaurant sales increased 1% for the six months ended June 30, 1996 and
management expects the same restaurant sales to remain positive for the
remainder of 1996.
Franchise Revenues. Franchise revenues for the six months ended June 30,
1996 increased $114,000 to $292,000 for the six months ended June 30, 1996 from
$178,000 for the six months ended July 2, 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 six months ended June 30,
1996 consisted of exclusivity fees which were forfeited by a franchisee who
defaulted on an area development agreement. During the six months ended June
30, 1996, one franchised restaurant was closed, three franchised restaurant
were opened in Puerto Rico, and one area development agreement was terminated.
One additional franchised restaurant in Puerto Rico was opened after June 30,
1996 through the date of this filing and the Company anticipates the opening of
approximately three 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 140 basis points to 37.0% for the six months ended
June 30, 1996 from 35.6% for the comparable six months of the prior year. This
change was primarily due to an increase in food cost of approximately 130
basis points to 31.4% from 30.1% for the same period of the prior year.
Management attributes the increase in food costs to higher market prices for
chicken, to lower volume restaurants in the expansion markets which experience
greater waste and to lower margins resulting from the value pricing strategy
implemented in the first quarter of 1996. The market price for chicken was 12%
higher for the six months ended June 30, 1996 compared to the same quarter of
the prior year. This change in food costs was further increased by a 10 basis
points increase in paper costs as a percentage of restaurant sales.
Restaurant Payroll. Restaurant payroll expense, which consists of
restaurant management and hourly employee wages, payroll taxes, workers'
compensation insurance and group health insurance, increased 120 basis points
to 25.1% for the six months ended June 30, 1996 from 23.9% for the same period
of the prior year. This increase was primarily due to increased hourly payroll
resulting from four new store openings for the six months ended June 30, 1996
compared to two new store openings during the comparable period in 1995, and to
lower average sales volumes in the expansion market restaurants. The Company
expects its restaurant payroll expense as a percentage of restaurant sales to
be higher during periods in which a significant number of new restaurants are
opened.
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 390 basis points to 20.0% for the six months ended June 30, 1996,
from 16.1% 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 5.5% from 3.7% 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 in
the Tampa and Orlando markets during the quarter ended June 30, 1996. These
conversion costs include the painting costs associated with a new color scheme,
new uniforms and the disposal of existing signage. Also, during the
Page 11 of 15
<PAGE> 12
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 rent expense of 60 basis points to 2.9% from
2.3% 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
six months ended June 30, 1996 as compared to the same period of the prior
year, as well as higher real and personal property taxes and lower average
sales volumes in the Company's restaurants in the expansion markets.
General and Administrative Expenses. General and administrative ("G & A")
expense for the six months ended June 30, 1996 decreased 40 basis points to
8.6% from 9.0% for the same period of the prior year. The dollar amount of G
& A expense increased to $2,679,791 for the six months ended June 30, 1996 from
$2,587,884 for the same period of the prior year primarily as the result of
additional costs associated with the Company's franchise program. As the
Company increases the number of current and planned restaurants and
develops its franchise program, G & A expense will continue to grow but is
expected to decline as a percentage of restaurant sales over the long term as
the Company's revenue base grows.
Depreciation and Amortization of Property and Equipment. Depreciation and
amortization of property and equipment increased by 10 basis points for the six
months ended June 30, 1996 as compared to the same period of the prior year.
Amortization of Deferred Restaurant Pre-Opening Costs. Amortization of
deferred restaurant pre-opening costs decreased by 170 basis points to .9%
from 2.6% as a percentage of restaurant sales for the six months ended June 30,
1996 as compared to the same period of the prior year. During the six months
ended June 30, 1996, nine restaurants were incurring amortization of deferred
restaurant pre-opening costs compared to 20 restaurants for the six months
ended July 2, 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
July 2, 1995. The Company anticipates that amortization of deferred restaurant
pre-opening costs as a percentage of restaurant sales will decline during the
remainder of Fiscal 1996 as compared to Fiscal 1995 due to the factors
described above.
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 0.2% as a
percentage of restaurant sales for the six months ended June 30, 1996 as
compared to the same quarter of the prior year.
Other Income (Expenses). The Company incurred interest costs of $542,032
during the six months ended June 30, 1996 of which $37,661 was capitalized as
construction cost. Such interest cost was further offset by $9,615 in interest
income. During the same six month period of the prior year the Company
incurred interest costs of $540,580 of which $88,653 was capitalized as
construction cost, and was offset by interest income of $19,570. Other
expense for the six months ended July 2, 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 six months ended June 30, 1996, the Company generated an
aggregate of $3,005,487 of cash flow from operations. During such period, the
Company opened four new restaurants. Capital expenditures for these
restaurants totaled $2.7 million during the six months.
The Company's principal capital requirement will continue to be funding
the development of new restaurants. Due to the accelerated openings of four
restaurants during the first half of 1996 compared to the two restaurants open
during the first half of 1995, the Company does not anticipate further openings
until the first half of 1997. The estimated cost of capital needed to develop
the two restaurants anticipated to be open by June 30, 1997, is approximately
$1.8 million to $2.0 million. This estimate is based upon an anticipated
average per restaurant investment, which includes furniture, fixtures,
equipment, improvements and pre-opening expenses and is exclusive of the cost
of acquiring or leasing real estate. The Company may either purchase or lease
real estate for these planned restaurants.
The Company has a $25 million line of credit facility from a commercial
bank, which provides for advances of up to $20,000,000 until June 30, 1996, and
thereafter, up to $25,000,000; however, the lender has no obligation to make
further advances after July 13, 1998. Borrowing capacity under the Loan can
also be used to secure letters of credit, $700,000 of which were outstanding as
of June 30, 1996 and $0 was outstanding as of the date of this filing. As of
June 30, 1996, there was an additional borrowing capacity under the credit line
of $7,100,000, and as of August 8, 1996 the available borrowing capacity under
the line was $12,900,000.
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 throughout the first half of 1997.
Page 13 of 15
<PAGE> 14
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 31, 1996.
At such meeting the shareholders (i) elected two members to the
Company's Board of Directors (Messers. Larry J. Harris and Nicholas
Castaldo) (5,879,762 shares voted for, no shares voted against and
37,513 shares abstained), (ii) approved and adopted the Company's 1995
Restricted Stock Award Plan (5,341,469 shares voted for, 419,962
shares voted against and 8,625 shares abstained), (iii) approved and
adopted the Company's 1995 Directors' Stock Option Plan (5,318,377
shares voted for, 560,773 shares voted against and 11,625 shares
abstained), and (iv) ratified the reappointment of Arthur Andersen LLP
as the Company's independent public accountants (5,885,486 shares
voted for, 25,171 shares voted against and 6,618 shares abstained).
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
2nd Quarter 10-Q (for SEC use only)
(b) During the quarter ended June 30, 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: August 14, 1996
Page 15 of 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,063,160
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 357,623
<CURRENT-ASSETS> 2,255,173
<PP&E> 43,680,003
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,871,920
<CURRENT-LIABILITIES> 7,035,108
<BONDS> 0
0
0
<COMMON> 80,829
<OTHER-SE> 26,712,618
<TOTAL-LIABILITY-AND-EQUITY> 48,871,920
<SALES> 30,744,245
<TOTAL-REVENUES> 31,036,232
<CGS> 11,374,410
<TOTAL-COSTS> 29,313,962
<OTHER-EXPENSES> 22,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 494,756
<INCOME-PRETAX> 1,250,165
<INCOME-TAX> 474,938
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 775,227
<EPS-PRIMARY> .10
<EPS-DILUTED> 0
</TABLE>
