SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934.
For the quarterly period ended November 5, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934.
for the transition period from to
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Commission file number 1-11313
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CKE RESTAURANTS, INC.
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3916 State Street, Ste. 300, Santa Barbara, CA 93105
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (805) 898-4200
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401 W. Carl Karcher Way, Anaheim, CA 92801
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Former Name, Former Address and Former Fiscal Year,
if changed since last report.
Indicate by checkmark 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
--- ---
As of December 3, 2001, 50,532,056 shares of the Registrant's Common Stock
were outstanding.
CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of November 5, 2001 and January 31, 2001 1
Consolidated Statements of Operations for the twelve and forty weeks
ended November 5, 2001 and November 6, 2000 ........................ 2
Consolidated Statements of Cash Flows for the forty weeks ended
November 5, 2001 and November 6, 2000 .............................. 3
Notes to Consolidated Financial Statements ............................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 21
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................................. 22
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( Dollars in thousands)
(Unaudited)
November 5, January 31,
2001 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 14,179 $ 16,860
Accounts receivable, net 39,445 73,956
Related party receivables 2,840 2,505
Inventories 17,924 17,694
Prepaid expenses 6,782 10,212
Other current assets 2,288 2,534
Property held for sale -- 66,912
----------- -----------
Total current assets 83,458 190,673
Property and equipment, net 551,529 656,214
Property under capital leases, net 66,835 73,617
Long-term investments 3,442 3,461
Notes receivable 14,707 14,098
Costs in excess of assets acquired, net 190,658 203,900
Other assets 38,035 65,574
----------- -----------
Total assets $ 948,664 $ 1,207,537
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt and bank
indebtedness $ 7,055 $ 67,332
Current portion of capital lease obligations 10,284 9,845
Accounts payable 40,985 53,759
Other current liabilities 91,262 83,045
----------- -----------
Total current liabilities 149,586 213,981
Long-term debt and bank indebtedness 4,882 106,760
Capital lease obligations 73,073 81,173
Convertible subordinated notes 159,225 159,225
Senior subordinated notes 200,000 200,000
Other long-term liabilities 87,878 96,841
----------- -----------
Total liabilities 674,644 857,980
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued or
outstanding -- --
Common stock, $.01 par value; authorized
100,000,000 shares; issued and
outstanding 52,113,425
shares and 52,086,421 shares 521 521
Additional paid-in capital 383,126 383,016
Accumulated deficit (99,221) (23,574)
Treasury stock at cost, 1,585,000 shares (10,406) (10,406)
----------- -----------
Total stockholders' equity 274,020 349,557
----------- -----------
Total liabilities and stockholders'
equity $ 948,664 $ 1,207,537
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
1
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Twelve Weeks Ended Forty Weeks Ended
-------------------------- --------------------------
November 5, November 6, November 5, November 6,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenue:
Company-operated restaurants $ 259,612 $ 356,254 $ 931,943 $1,270,478
Franchised and licensed
restaurants and other 67,016 51,295 205,845 159,895
---------- ---------- ---------- ----------
Total revenue 326,628 407,549 1,137,788 1,430,373
---------- ---------- ---------- ----------
Operating costs and expenses:
Restaurant operations:
Food and packaging 79,629 110,563 284,392 393,906
Payroll and other employee
benefits 82,389 118,728 303,545 407,990
Occupancy and other operating
expenses 59,266 86,508 212,226 294,410
---------- ---------- ---------- ----------
221,284 315,799 800,163 1,096,306
Franchised and licensed
restaurants and other 49,613 36,082 158,028 115,650
Advertising expenses 15,696 22,305 59,022 79,340
General and administrative expenses 27,089 30,847 86,770 109,476
Facility action charges, net 2,121 34,343 60,827 51,310
---------- ---------- ---------- ----------
Total operating costs and
expenses 315,803 439,376 1,164,810 1,452,082
---------- ---------- ---------- ----------
Operating income (loss) 10,825 (31,827) (27,022) (21,709)
Interest expense (11,752) (16,265) (46,783) (53,510)
Other income (expense), net (467) (1,494) 362 (1,084)
---------- ---------- ---------- ----------
Loss before income taxes (1,394) (49,586) (73,443) (76,303)
Income tax expense (benefit) 337 (20,157) 2,204 (30,493)
---------- ---------- ---------- ----------
Net loss $ (1,731) $ (29,429) $ (75,647) $ (45,810)
========== ========== ========== ==========
Basic and diluted loss per share $ (0.03) $ (0.58) $ (1.50) $ (0.91)
---------- ---------- ---------- ----------
Weighted average shares
outstanding-basic and diluted 50,507 50,501 50,505 50,501
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
2
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Forty Weeks Ended
-------------------------
November 5, November 6,
2001 2000
---------- ----------
Net cash flow from operating activities:
Net loss $ (75,647) $ (45,810)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 61,367 86,255
Provision for losses on accounts and notes
receivable 3,970 --
Loss on sale of property and equipment (1,659) (4,490)
Facility action charges, net 60,827 51,310
Other (1,849) (71)
Net change in receivables, inventories, prepaid
expenses and other current assets, exclusive
of assets disposed of 39,634 (30,224)
Net change in accounts payable and other
current liabilities, exclusive of assets
disposed of (3,790) (51,314)
--------- ---------
Net cash provided by operating activities 82,853 5,656
--------- ---------
Cash flow from investing activities:
Purchase of:
Property and equipment (16,012) (62,969)
Long-term investments -- (2,952)
Proceeds from sale of:
Property and equipment 63,708 104,587
Long-term investments 1,871 1,948
Increase in notes receivable and related party
receivables (4,666) (11,039)
Collections on notes receivable and related
party receivables 2,251 13,725
Net change in other assets (7,544) 2,831
Dispositions of brand, net of cash surrendered 61,224 --
--------- ---------
Net cash provided by investing activities 100,832 46,131
--------- ---------
Cash flow from financing activities:
Net change in bank overdraft (618) (223)
Long-term borrowings 92,289 207,500
Repayments of long-term debt (254,443) (258,307)
Repayments of capital lease principal (7,750) (7,888)
Payment of deferred financing costs (1,602) (904)
Net change in other long-term liabilities (14,353) (612)
Payment of dividends -- (2,084)
Exercise of stock options 111 --
--------- ---------
Net cash used in financing activities (186,366) (62,518)
--------- ---------
Net decrease in cash and cash equivalents (2,681) (10,731)
Cash and cash equivalents at beginning of
period 16,860 36,505
--------- ---------
Cash and cash equivalents at end of period $ 14,179 $ 25,774
========= =========
Supplemental disclosures of cash flow information:
Cash (paid)/received during the period for:
Interest $ (16,901) $ (59,054)
========= =========
Income tax refund $ 32,313 $ --
========= =========
Non-cash transactions:
Restaurants acquired from franchisees $ 486 $ --
========= =========
See Accompanying Notes to Consolidated Financial Statements
3
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of CKE Restaurants, Inc. and its consolidated wholly-owned subsidiaries
(the "Company" or "CKE") and have been prepared in accordance with accounting
principles generally accepted in the United States of America, the instructions
to Form 10-Q, and Article 10 of Regulation S-X. These statements should be read
in conjunction with the audited consolidated financial statements presented in
the Company's Annual Report on Form 10-K for the fiscal year ended January 31,
2001. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of financial position and
results of operations for the interim periods presented have been reflected
herein. The results of operations for such interim periods are not necessarily
indicative of results to be expected for the full year or for any other future
periods. Certain reclassifications have been made to the fiscal 2001
consolidated financial statements to conform to the fiscal 2002 presentation.
NOTE (2) BANK INDEBTEDNESS
The Company's senior credit facility, as amended, consists of a $120.4
million revolving credit facility, which includes a $75.0 million letter of
credit sub-facility and has a maturity date of February 2002. As of November 5,
2001, the total amount of $6.8 million outstanding under the revolving credit
facility is classified as a current liability in the consolidated balance sheet.
NOTE (3) FACILITY ACTION CHARGES, NET
In late fiscal 2000, the Company embarked on a refranchising initiative to
reduce outstanding borrowings under its revolving credit facility, as well as
increase the number of franchise-operated stores. In addition, we identified and
closed under-performing stores. The results of these strategies have caused the
following transactions to be recorded in the financial statements as facility
action charges, net:
- gains (losses) on the sale of restaurants;
- store closure costs; and
- impairment of long-lived assets for restaurants the Company
plans to continue to operate and restaurants the Company
intends to close beyond the quarter in which the closure
decision is made.
During the first three quarters of fiscal 2002, the Company identified 31
restaurants that it believed it should continue operating, but whose cash flow
from operations did not support their related net asset values and, accordingly,
an impairment provision was recorded. The Company estimates the impairment
provision for these assets under the criteria described in the summary of
significant accounting policies in Note 1 of Notes to Consolidated Financial
Statements contained in its Annual Report on Form 10-K the fiscal year ended
January 31, 2001.
As described in the summary of significant accounting policies in Note 1
of Notes to Consolidated Financial Statements for the fiscal year ended January
31, 2001, the Company reviews the performance of company-operated restaurants
for the likelihood of future profitability. During the first two quarters of
fiscal 2002, the Company decided to close certain under-performing restaurants
that management believes are in locations where the population or demographics
have changed so significantly that there is minimal opportunity for improvement.
The Company provides store closure reserves for these assets under the criteria
described in Note 1 of Notes to Consolidated Financial Statements for the fiscal
year ended January 31, 2001. Additionally, the Company re-evaluates the adequacy
of the established reserves and modifies the assumptions used based on actual
results attained from selling surplus properties and terminating leases, as well
as utilizing estimated property values obtained from real estate brokers. The
Company closed 24 Carl's Jr. and 150 Hardee's company-operated restaurants
during the first three quarters of fiscal 2002.
4
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of these facility action charges for the third quarter and year
to date for fiscal 2002 and fiscal 2001 were as follows:
Twelve Weeks Ended Forty Weeks Ended
------------------------ ------------------------
November 5, November 6, November 5, November 6,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Dollars in thousands)
Hardee's
Store closure reserves
provided, net $ 1,331 2,400 $ 9,395 2,400
Impairment on stores closed,
to be closed or sold 1,018 -- 37,700 --
Impairment on stores that
will continue to be operated 193 -- 2,075 --
Losses on sales of
restaurants, net 540 34,843 6,239 53,984
-------- -------- -------- --------
3,082 37,243 55,409 56,384
-------- -------- -------- --------
Carl's Jr.
Store closure reserves
provided, net 107 -- 655 --
Impairment on stores closed,
to be closed or sold 483 -- 5,701 --
Impairment on stores that
will continue to be operated 183 -- 7,853 --
Gains on sales of
restaurants, net (1,734) (2,900) (13,498) (5,074)
-------- -------- -------- --------
(961) (2,900) 711 (5,074)
-------- -------- -------- --------
Rally's and Taco Bueno
Losses on sales of
restaurants, net -- -- 4,707 --
-------- -------- -------- --------
-- -- 4,707 --
-------- -------- -------- --------
Total
Store closure reserves
provided, net 1,438 2,400 10,050 2,400
Impairment on stores closed,
to be closed or sold 1,501 -- 43,401 --
Impairment on stores that
will continue to be operated 376 -- 9,928 --
Losses (gains) on sales of
restaurants, net (1,194) 31,943 (2,552) 48,910
-------- -------- -------- --------
$ 2,121 $ 34,343 $ 60,827 $ 51,310
======== ======== ======== ========
Included in the impairment on stores closed, to be closed or sold for the
40-weeks ended November 5, 2001 is $7,860,000 related to additional asset
impairment charges made on stores recognized as being impaired in previous
reporting periods.
5
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Impairment charges were recorded for the following accounts:
Twelve Weeks Ended Forty Weeks Ended
------------------------ ------------------------
November 5, November 6, November 5, November 6,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Dollars in thousands)
Property and equipment, net:
Hardee's $ 1,115 2,400 $ 29,997 2,400
Carl's Jr. 666 -- 13,553 --
-------- -------- -------- --------
1,781 2,400 43,550 2,400
-------- -------- -------- --------
Cost in excess of net assets
acquired, net
Hardee's 96 -- 9,780 --
Carl's Jr. -- -- -- --
-------- -------- -------- --------
96 -- 9,780 --
-------- -------- -------- --------
Total
Hardee's 1,211 2,400 39,777 2,400
Carl's Jr. 666 -- 13,553 --
-------- -------- -------- --------
$ 1,877 2,400 $ 53,330 2,400
======== ======== ======== ========
The following table is a roll forward of the activity in the store closure
reserve. The Company believes that the remaining carrying amounts are adequate
to complete its disposal actions.
(Dollars in Thousands)
Balance at January 31, 2001 $ 58,187
New decisions 24,260
Usage (14,315)
Reversal of reserves for stores that
will not be closed (6,440)
Favorable dispositions of surplus
properties (7,770)
Discount amortization (4,943)
--------
Balance at November 5, 2001 48,979
Less: current portion, included in other
current liabilities 11,097
--------
Long-term portion, included in other
long-term liabilities $ 37,882
--------
6
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (4) LOSS PER SHARE
The Company presents "basic" loss per share, which represents net loss,
divided by the weighted average shares outstanding excluding all potentially
dilutive common shares and "diluted" loss per share reflecting the effect of all
potentially dilutive common shares.
For the 12-week periods ended November 5, 2001 and November 6, 2000, 7.3
million shares and 6.9 million shares, respectively, relating to the possible
exercise of outstanding stock options, and 3.6 million shares issuable upon
conversion of convertible subordinated notes, were not included in the
computation of diluted loss per share as their effect would have been
anti-dilutive. For the 40-week periods ended November 5, 2001 and November 6,
2000, 7.4 million shares and 6.9 million shares, respectively, relating to the
possible exercise of outstanding stock options, and 3.6 million shares issuable
upon conversion of convertible subordinated notes were not included in the
computation of diluted loss per share as their effect would have been
anti-dilutive.
The following table illustrates the computation of basic and diluted loss
per share:
(In thousands except per share amounts)
Twelve Weeks Ended Forty Weeks Ended
------------------------ ------------------------
November 5, November 6, November 5, November 6,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Basic and Diluted Loss Per Share
Net loss $ (1,731) $(29,429) $(75,647) $(45,810)
======== ======== ======== ========
Weighted average number of
common shares outstanding
during the period 50,507 50,501 50,505 50,501
======== ======== ======== ========
Loss per share - basic and
diluted $ (0.03) $ (0.58) $ (1.50) $ (0.91)
======== ======== ======== ========
NOTE (5) SEGMENT INFORMATION
The Company is engaged principally in developing, operating and
franchising its Carl's Jr. and Hardee's quick-service restaurants, each of which
is considered an operating segment that is managed and evaluated separately.
Additionally, during the first quarter of fiscal 2002, the Company operated one
chain that was held for sale, Taco Bueno, which was sold during the second
quarter. The activity of the Taco Bueno chain is included in the "Other"
segment. The Company considers it's Carl's Jr. and Hardee's chains to each be a
reportable segment. Management evaluates the performance of its segments and
allocates resources to them based on several factors, of which the primary
financial measure is segment operating income or loss. General and
administrative expenses are attributed to each segment based on management's
analysis of the resources applied to each segment. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in Note 1 of Notes to Consolidated Financial Statements
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 2001.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes corporate
related items, results of individually insignificant operations, Taco Bueno
operations until its disposal date, and general and administrative expenses not
allocated to reportable segments.
7
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE WEEKS ENDED
Carl's Jr. Hardee's Other Total
---------- -------- ----- -----
NOVEMBER 5, 2001:
Revenue $ 166,016 $ 160,612 $ -- $ 326,628
Segment operating income (loss) 16,748 (2,323) (3,600) 10,825
Capital expenditures 1,013 3,083 1,876 5,972
Depreciation and
amortization 4,645 9,456 5,880 19,981
NOVEMBER 6, 2000:
Revenue $ 173,100 $ 208,991 $ 25,458 $ 407,549
Segment operating income (loss) 10,392 (38,908) (3,311) (31,827)
Capital expenditures 1,452 2,069 1,401 4,922
Depreciation and
amortization 7,341 14,972 2,255 24,568
FORTY WEEKS ENDED
Carl's Jr. Hardee's Other Total
---------- -------- ----- -----
NOVEMBER 5, 2001:
Revenue $ 546,820 $ 547,873 $ 43,095 $1,137,788
Segment operating income (loss) 44,245 (58,686) (12,581) (27,022)
Capital expenditures 4,923 7,712 3,377 16,012
Depreciation and
amortization 15,266 33,449 12,652 61,367
Total assets 225,973 653,549 69,142 948,664
NOVEMBER 6, 2000:
Revenue $ 572,311 $ 772,658 $ 85,404 $1,430,373
Segment operating income (loss) 42,620 (58,825) (5,504) (21,709)
Capital expenditures 27,723 23,292 11,954 62,969
Depreciation and
amortization 21,847 52,375 12,033 86,255
Total assets (as of
January 31, 2001) 372,654 736,645 98,238 1,207,537
NOTE (6) SALE OF TACO BUENO
On June 10, 2001, the Company completed the sale of its Taco Bueno concept
to an affiliate of Jacobson Partners ("Jacobson") for net proceeds of
approximately $61.2 million. Taco Bueno was written down to its estimated sales
value at January 31, 2001, and another $4.5 million of loss was recorded in the
first quarter. The net proceeds from this sale were used to reduce indebtedness
under the Company's revolving credit facility. Taco Bueno's results included in
the Company's accompanying statements of operations are as follows:
Twelve Weeks Ended Forty Weeks Ended
------------------------ ------------------------
November 5, November 6, November 5, November 6,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenue $ -- $ 22,657 $ 37,538 $ 76,046
Operating income -- 965 3,693 4,721
8
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (7) RELATED PARTY TRANSACTIONS
In July 2001, the Company's Board of Directors approved the adoption of
CKE Restaurants, Inc. Employee Stock Purchase Loan Plan and the Non-Employee
Director Stock Purchase Loan Program (collectively the "Programs"). The purpose
of the Programs is to provide key employees and directors with further incentive
to maximize stockholder value. The Programs' funds must be used to make private
or open market purchases of Company common stock through a broker-dealer
designated by the Company. All loans are full recourse and unsecured, and have a
five-year term. Interest accrues on the loans at a rate of 6.0% per annum, due
at maturity. However, in the event that the stock is sold, transferred or
pledged, the interest rate is adjusted to the prime rate plus 4%. These loans
may be prepaid anytime without penalty. As of November 5, 2001, loans had been
made in the amount of $4.2 million to purchase 739,900 shares of Company common
stock at an average purchase price of $5.70 per share (which included 189,900
shares for $1.1 million from Santa Barbara Restaurant Group, Inc., whose
chairman is an affiliate of the Company, see Note (8)).
The Company entered into an agreement with an affiliate of Fidelity
National Financial, Inc. (whose Chairman of the Board is also the Chairman of
the Board of CKE) to assist in the disposition of surplus real estate properties
and negotiate the termination of leases for closed restaurants. The affiliate is
paid a fee of up to $75,000 and incentives up to $137,500, based on rental
savings. During the third quarter of fiscal year 2002, the rate paid to the
affiliate for the sale of fee-based properties was increased from 1.0% to 1.75%
of the selling price during the 40 weeks ended November 5, 2001.
The Company paid commissions to another affiliate of Fidelity National
Financial, Inc. in the amount of $77,500 for the sale of restaurants.
NOTE (8) SANTA BARBARA RESTAURANT GROUP, INC.
On November 19, 2001, the Company announced it had signed a letter of
intent to acquire Santa Barbara Restaurant Group, Inc. ("SBRG"). Under the terms
of the letter of intent, each outstanding share of SBRG stock will be converted
into 0.5 shares of Company common stock. The acquisition is expected to be
complete in March 2002. On the date the transaction was announced, the Company's
stock was trading at $7.85 per share and SBRG had 12.9 million shares of stock
outstanding and 6.4 million of options and warrants outstanding. For the forty
weeks ended October 1, 2001, SBRG reported revenue and net income of $67.8
million and $2.6 million, respectively.
NOTE (9) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141"), which supersedes Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations." SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method.
SFAS 141 also specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported separately from
goodwill. The elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS 141
will be effective for transactions accounted for using the purchase method that
are completed after June 30, 2001.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Intangible
Assets" ("SFAS 142"), which supersedes APB Opinion No. 17, "Intangible Assets."
SFAS 142 eliminates the current requirement to amortize goodwill and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and addresses the impairment testing and recognition
for goodwill and intangible assets. SFAS 142 will apply to goodwill and
intangible assets arising from transactions completed before and after the
effective date. SFAS 142 is effective for fiscal year 2002.
The Company's business combinations have historically consisted primarily
of acquiring the stock of restaurant companies and assets from our franchisees,
and have been accounted for using the purchase method of accounting. The primary
intangible asset that historically has been allocated value in these business
combinations is goodwill.
9
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continuation)
In connection with SFAS 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption of the SFAS. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
NOTE (10) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Because of the extensive effort needed to comply with adopting SFAS 141
and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements at the date of this
report, including whether it will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle,
except that the Company will no longer amortize goodwill. Goodwill amortization
is charged to general and administration expenses and amounted to $1.3 million
and $1.5 million for the 12 week periods ended November 5, 2001 and November 6,
2000, respectively, and $4.5 million and $4.7 million for the corresponding
year-to-date periods.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which will be effective for the Company
beginning fiscal year 2004. SFAS 143 addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. In October 2001, the FASB
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144") which supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121") and the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business. SFAS 144
retains many of the fundamental provisions of SFAS 121, but resolves certain
implementation issues associated with that statement. SFAS 144 will be effective
for the Company for the fiscal year 2003. We have not yet determined the impact
of adopting SFAS 143 or SFAS 144 on the Company's Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION AND SAFE HARBOR DISCLOSURE
CKE Restaurants, Inc. and Subsidiaries (collectively referred to as the
"Company") is comprised of the worldwide operations of Carl's Jr. and Hardee's.
The following Management's Discussion and Analysis should be read in conjunction
with the unaudited Condensed Consolidated Financial Statements contained herein,
and our Annual Report on Form 10-K for the fiscal year ended January 31, 2001
(collectively, the "2001 Financial Statements"). All Note references herein
refer to the accompanying notes to the Condensed Consolidated Financial
Statements ("Financial Statements").
10
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
Matters discussed in this Form 10-Q contain certain forward-looking
statements that are based on management's beliefs and assumptions derived from
information currently known to the Company's management. Forward-looking
statements may include, but are not limited to, descriptions of plans or
objectives of the Company's management for future or past operations, products
or services, earnings or other measures of economic performance including
statements of profitability of business segments and subsidiaries, estimates of
recoverability of long-lived assets, current bank relationships, and current
repositioning activities including anticipated store closures. Such statements
reflect the view of the Company's management with respect to future events and
are subject to risks and uncertainties, such as changes in the fast food
industry and changes to the Company's plans, objectives, expectations and
intentions. Should one or more of these risks materialize or should underlying
beliefs or assumptions prove incorrect, the Company's actual results could
differ materially from those discussed in this Form 10-Q. Factors that could
cause or contribute to such differences are consumers' concerns or adverse
publicity regarding the Company's products, effectiveness of operating
initiatives and advertising and promotional efforts, changes in economic
conditions, changes in commodity prices, availability and cost of energy,
workers' compensation and general liability claim experience, the impact of
competitive products and pricing, changes in the Company's suppliers' ability to
provide quality and timely products to the Company, delays in opening new
restaurants or completing remodels, the operational success of the Company's
franchisees, availability of financing for the Company and its franchisees,
unfavorable outcomes on litigation, changes in accounting policies and
practices, new legislation or government regulation and other factors as
discussed in the Company's filings with the Securities and Exchange Commission.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
See NOTE (9) of Notes to Consolidated Financial Statements.
SIGNIFICANT KNOWN EVENTS, TRENDS, OR UNCERTAINTIES EXPECTED TO IMPACT FISCAL
2002 COMPARISONS WITH FISCAL 2001
The following factors impacted comparability of operating performance for
the quarter and year-to-date ended November 5, 2001 to the quarter and
year-to-date ended November 6, 2000, or could impact comparisons for the
remainder of 2001.
RESTAURANT PORTFOLIO STRATEGY
In late fiscal 2000, we embarked on a refranchising initiative to reduce
outstanding borrowings on our senior credit facility, as well as increase the
number of franchise-operated stores. Additionally, as sales trends for the
Hardee's restaurants and certain Carl's Jr. restaurants (primarily in the
Oklahoma area) continued to decline in fiscal 2000 through fiscal 2001, we
determined that it was necessary to close restaurants for which a return to
profitability was not likely. As such, through November 5, 2001, we identified
40 Carl's Jr. and 296 Hardee's restaurants for closure. These actions or
repositioning activities resulted in the charges generally reflected in our
financial statements as facility action charges. As the number of company
operated restaurants declined, we made reductions to operating expenses.
During the third quarter of fiscal 2002, we recorded repositioning charges
of $2.1 million. These charges, which were primarily non-cash in nature,
consisted of (a) an impairment charge of $400,000 for restaurants that we plan
to continue to operate, but for which the net book value is not supported by
current estimated future cash flows, (b) an impairment charge and store closure
expense of $2.2 million for 22 Hardee's restaurants that we have closed or plan
to close, consisting of asset impairments of $1.5 million and $500,000 for
additional store closure expense reserves, (c) net gains on restaurants sold to
franchisees and surplus properties during the quarter of $1.2 million, and (d)
office closure expense of $900,000 related to Hardee's closure of regional
offices. During the third quarter of fiscal 2001, we recorded facility action
charges of $34.3 million relating to net losses on the sale of certain Carl's
Jr. and Hardee's restaurants.
11
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
For the 40-week period ended November 5, 2001, we recorded repositioning
charges of $65.9 million which consisted of (a) net facility action charges of
$60.8 million, (b) a charge of $4.1 million recorded as interest expense
reflecting the write-off of deferred loan costs primarily as a result of the
modification of our senior credit facility, and (c) $1.0 million relating to
severance. During the 40-week period ended November 5, 2000, we recorded
facility action charges of $51.3 million relating to net losses on the sale of
certain Carl's Jr. and Hardee's restaurants.
We believe we have substantially completed our repositioning activities
and are now able to focus on the operations of our core brands, Carl's Jr. and
Hardee's. We are finalizing the closure of the under-performing restaurants
identified previously and have a restaurant sale transaction scheduled to close
in December 2001 (those stores have sales of $25.8 and operating income of
$2.5). However, there can be no guarantee that we will not determine in the
future that additional repositioning activities will be necessary or that we
would not take advantage of opportunities to further improve our financial
position through additional sales which could result in losses, which may be
material. Revitalizing Hardee's continues to be a primary focus for our
management team. Even though Hardee's has experienced a same-store-sales
increase for the first time in many years (see discussion below), Hardee's is
still an underperforming brand. Through mid fiscal 2001, we tried various
strategies to turn around Hardee's that met with limited success, if any. Then,
in June 2001, while continuing to identify and close unprofitable restaurants as
well as execute our refranchising program, we took a more basic approach to
addressing the issues in the Hardee's restaurants and launched a program
focusing on quality, service, and cleanliness. This is a program that focuses on
the fundamentals: hiring good people, focusing them on the guests, serving hot
quality food to the guests, and keeping the restaurants clean for the guests. We
have gone back to salaried managers running the stores, which adds an extra
manager to hire, train and manage our workforce. We reduced the span of control
for District Managers from 10 restaurants to eight so that they can focus better
on hiring, training and executing. We changed incentive plans to reward
operators for building sales, providing great service to our guests and reducing
accidents. Additionally, we realized that we have to acknowledge and respect
regional differences. We adjusted product promotions and advertising to a
regional scope. Our success will depend on the successful execution of our
operational plans as well as the following items that are discussed in detail in
our Annual Report on Form 10-K for the fiscal year ended January 31, 2001:
- implementation of our strategies by our franchisees,
- opening additional company-operated and franchised restaurants,
- remodeling our restaurants,
- our ability to compete with our major competitors, many of which
have substantially greater financial, marketing and other resources
than we have, which may give competitive advantages,
- changes in consumer tastes,
- adverse weather conditions,
- changes in national, regional and local economic conditions, and
- management's ability to anticipate, identify and respond to changing
conditions.
If we are unable to further improve Hardee's sales and operating margins,
it would significantly effect our future profitability and cash flows, which, in
turn, would effect our ability to access financing in the future, both in terms
of the amount of financing available to us and the terms of such financing. See
additional discussion regarding defaults under our debt agreements in the
"Financial Condition and Liquidity" section below.
12
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
The asset sales arising from our repositioning activities have resulted,
and will continue to result, in a decline in restaurant revenue and costs simply
because we operate fewer stores. Additionally, the closure of unprofitable
stores should improve our overall profit margin. The following table summarizes
the historical operating results of stores that we sold, closed or identified to
be closed through November 5, 2001:
(Dollars in $000's) Twelve Weeks Ended Forty Weeks Ended
------------------ -----------------
November 5, 2001 November 6, 2000 November 5, 2001 November 6, 2000
-------------------- -------------------- -------------------- --------------------
Oper. Oper. Oper. Oper.
Income/ Income/ Income/ Income/
Revenue (Loss) Revenue (Loss) Revenue (Loss) Revenue (Loss)
-------- -------- -------- -------- -------- -------- -------- --------
Carl's Jr.
Stores sold $ 587 $ 131 $ 28,441 $ 3,836 $ 685 $ (335) $ 12,141 $ 883
Stores closed or
to be closed -- (61) 3,218 (1,026) 5,154 (1,207) 105,556 11,086
-------- -------- -------- -------- -------- -------- -------- --------
Total 587 70 31,659 2,810 5,839 (1,542) 117,697 11,969
-------- -------- -------- -------- -------- -------- -------- --------
Hardee's
Stores sold 711 (1,198) 24,890 (1,989) 8,926 (3,329) 156,564 1,831
Stores closed or
to be closed 152 (735) 26,320 (8,380) 23,613 (8,894) 94,951 (18,485)
-------- -------- -------- -------- -------- -------- -------- --------
Total 863 (1,933) 51,210 (10,369) 32,539 (12,223) 251,515 (16,654)
-------- -------- -------- -------- -------- -------- -------- --------
Taco Bueno
Stores sold -- -- 22,657 965 37,538 3,693 76,046 4,721
-------- -------- -------- -------- -------- -------- -------- --------
Total
Stores sold 1,298 (1,067) 75,988 2,812 47,149 29 244,751 7,435
Stores closed or
to be closed 152 (796) 29,538 (9,406) 28,767 (10,101) 200,507 (7,399)
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 1,450 $ (1,863) $105,526 $ (6,594) $ 75,916 $(10,072) $445,258 $ 36
======== ======== ======== ======== ======== ======== ======== ========
As a result of these circumstances, we have reduced costs, principally
general and administrative expenses, which reflects a reduction in headcount as
well as other expenses.
13
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
Franchisees' Operations
Like others in the quick-service restaurant industry, from time to time,
some of our franchise operators experience financial difficulties with respect
to their franchise operations. At present, certain franchise operators,
principally in the Hardee's system, are experiencing varying degrees of
financial problems. We intend to continue to proactively work with financially
troubled franchise operators in an attempt to positively resolve their issues.
Depending upon the facts and circumstances of each situation, and in the absence
of an improvement in business trends, there are a number of potential
resolutions of these financial issues. These include, but are not limited to, a
sale of some or all of the operator's restaurants to us or another Hardee's
franchisee, a restructuring of the operator's business and/or finances, or, if
necessary, a termination of the operators franchise. In the first and second
quarters of this fiscal year, we recorded a $3.5 million provision related to
allowances for doubtful franchise accounts and notes receivables. These costs
were reported as franchised and licensed restaurant operating costs and expenses
and other income, net. In the first half of the year, these charges increased
the already substantial allowance for doubtful accounts at Hardee's from 38% of
the gross balance of accounts and notes receivable at the beginning of the year
to 49% at the end of the third quarter. During the third quarter, we did not
make substantial increases to the total allowance as we had not had the adverse
trends we noted previously. On a quarterly basis, we assess our exposure from
franchise-related risks, which include estimated uncollectibility of accounts
receivable related to franchise and license fees, contingent lease liabilities,
guarantees to support certain third party financial arrangements with
franchisees and potential claims by franchisees. Although the ultimate impact of
these franchise financial issues cannot be predicted with certainty at this
time, we have provided for the current estimate of our probable loss as of
November 5, 2001. However, there can be no assurance that the number of
franchise operators or restaurants experiencing financial difficulties will not
change from our current estimates, nor can there be any assurance that we will
be successful in resolving financial issues relating to any specific franchise
operator.
14
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
OPERATING REVIEW
The following tables are presented to facilitate Management's Discussion and
Analysis of the third quarter and year-to date results. The term "EBITDA" refers
to earnings/(loss) before interest, income taxes and depreciation and
amortization.
(Dollars in thousands,
except average check data) THIRD QUARTER FY 2002
---------------------
Carl's Hardee's Other Total
--------- --------- --------- ---------
Number of restaurants (end of period):
Company-operated 441 751 1,192
Franchised domestic 490 1,564 2,054
Licensed international 40 142 182
--------- --------- ---------
Total 971 2,457 3,428
========= ========= =========
Company-operated sales
$ 120,644 $ 138,968 $ 259,612
Company-operated average unit volumes
(trailing 13-periods) $ 1,175 $ 741
Average check $ 5.13 $ 3.74
Company-operated same-store sales
increase (decrease) 6.1% 1.0%
Franchise-operated same-store sales
increase (decrease) 5.5% (1.2)%
Co-oper. same-store sales increase
(decrease) excluding stores sold,
closed or to be closed 6.2% 1.0%
Company operated average unit volumes,
excluding stores sold, closed or to
be closed 1,131 756
Operating costs (as a % of co.-
operated sales):
Food and paper 28.76% 32.34%
Payroll and other employee benefits 28.47% 34.57%
Occupancy and other operating costs 21.77% 23.73%
--------- ---------
Gross margin 21.00% 9.36%
Franchising revenue:
Royalties $ 4,872 $ 8,932 $ 13,804
Distribution center 33,543 3,754 37,297
Other 6,957 8,958 15,915
--------- --------- ---------
Total $ 45,372 $ 21,644 $ 67,016
========= ========= =========
Net franchising income $ 4,593 $ 12,810 $ 17,403
========= ========= =========
Oper. income (loss) excluding facility
action charges $ 15,787 $ 759 $ (3,600) $ 12,946
Facility action charges (gains), net (961) 3,082 -- 2,121
--------- --------- --------- ---------
Operating income (loss) $ 16,748 $ (2,323) $ (3,600) $ 10,825
========= ========= ========= =========
EBITDA $ 21,534 $ 6,262 $ (1,597) $ 26,199
Facility action charges (gains), net (961) 3,082 -- 2,121
--------- --------- --------- ---------
EBITDA excluding facility action charges $ 20,573 $ 9,344 $ (1,597) $ 28,320
========= ========= ========= =========
EBITDA excluding stores sold, closed or to
be closed and facility actions charges $ 20,516 $ 10,593 $ (1,597) $ 29,512
========= ========= ========= =========
15
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
THIRD QUARTER FY 2001
---------------------
Carl's Hardee's Other Total
--------- --------- --------- ---------
Number of restaurants (end of period):
Company-operated 554 1,027 146 1,727
Franchised domestic 389 1,566 -- 1,955
Licensed international 30 131 -- 161
--------- --------- --------- ---------
Total 973 2,724 146 3,843
========= ========= ========= =========
Company-operated restaurant sales $ 142,686 $ 188,110 $ 25,458 $ 356,254
Company-operated average unit volumes
(trailing 13-periods) $ 1,150 $ 732
Average check $ 4.77 $ 4.08
Company-operated same-store sales increase
(decrease) 1.1% (6.3)%
Franchise-operated same-store sales increase
(decrease) 5.1% (3.1)%
Co-oper. Same-store sales increase (decrease)
excluding stores sold, closed or to be closed 1.4% (4.3)%
Company operated average unit volumes, excluding
stores sold, closed or to be closed 1,129 788
Operating costs (as a % of co.-operated sales):
Food and paper 29.58% 32.49%
Payroll and other employee benefits 30.10% 35.70%
Occupancy and other operating costs 22.77% 26.10%
--------- ---------
Gross margin 17.55% 5.71%
Franchising revenue:
Royalties $ 3,173 $ 10,292 $ 13,465
Distribution center 21,673 5,931 27,604
Other 5,568 4,658 10,226
--------- --------- ---------
Total $ 30,414 $ 20,881 $ 51,295
========= ========= =========
Net franchising income $ 3,491 $ 11,722 $ 15,213
========= ========= =========
Oper. income (loss) excluding facility action
charges $ 8,294 $ (2,467) $ (3,311) $ 2,516
Facility action charges (gains), net (2,098) 36,441 -- 34,343
--------- --------- --------- ---------
Operating income (loss) $ 10,392 $ (38,908) $ (3,311) $ (31,827)
========= ========= ========= =========
EBITDA $ 17,632 $ (24,991) $ (1,321) $ (8,680)
Facility action charges (gains), net (2,098) 36,441 -- 34,343
--------- --------- --------- ---------
EBITDA excluding facility action charges $ 15,534 $ 11,450 $ (1,321) $ 25,663
========= ========= ========= =========
EBITDA excluding stores sold, closed or to be
closed and facility actions charges $ 11,363 $ 14,922 $ (3,339) $ 22,946
========= ========= ========= =========
16
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
YEAR-TO-DATE FY 2002
--------------------
Carl's Hardee's Other Total
--------- --------- --------- ---------
Company-operated restaurant sales $ 402,619 $ 486,229 $ 43,095 $ 931,943
========= ========= ========= =========
Operating costs (as a % of co.-operated sales):
Food and paper 29.06% 31.79%
Payroll and other employee benefits 29.39% 35.20%
Occupancy and other operating costs 22.00% 23.76%
--------- ---------
Gross margin 19.55% 9.25%
Franchising revenue:
Royalties $ 15,281 $ 33,631 $ 48,912
Distribution center 105,065 11,184 116,249
Other 23,855 16,829 40,684
--------- --------- ---------
Total $ 144,201 $ 61,644 $ 205,845
========= ========= =========
Net franchising income $ 16,602 $ 31,215 $ 47,817
========= ========= =========
Oper. income (loss) excluding facility action
charges $ 44,955 $ (3,276) $ (7,874) $ 33,805
Facility action charges (gains), net 710 55,410 4,707 60 827
--------- --------- --------- ---------
Operating income (loss) $ 44,245 $ (58,686) $ (12,581) $ (27,022)
========= ========= ========= =========
EBITDA $ 60,866 $ (26,221) $ (4,075) $ 30,570
Facility action charges (gains), net 710 55,410 4,707 60,827
--------- --------- --------- ---------
EBITDA excluding facility action charges $ 61,576 $ 29,189 $ 632 $ 91,397
========= ========= ========= =========
EBITDA excluding stores sold, closed or to be
closed and facility action charges $ 61,022 $ 37,003 $ (3,061) $ 94,964
========= ========= ========= =========
YEAR-TO-DATE FY 2001
--------------------
Carl's Hardee's Other Total
--------- --------- --------- ----------
Company-operated restaurant sales $ 476,655 $ 708,419 $ 85,404 $1,270,478
========= ========= ========= ==========
Operating costs (as a % of co.-operated sales):
Food and paper 29.54% 32.23%
Payroll and other employee benefits 28.39% 34.59%
Occupancy and other operating costs 21.86% 24.64%
--------- ---------
Gross margin 20.21% 8.54%
Franchising revenue:
Royalties $ 10,083 $ 32,388 $ 42,471
Distribution center 69,002 18,776 87,778
Other 16,571 13,075 29,646
--------- --------- ----------
Total $ 95,656 $ 64,239 $ 159,895
========= ========= ==========
Net franchising income $ 8,524 $ 35,721 $ 44,245
========= ========= ==========
Operating income (loss) excluding facility
action charges $ 38,348 $ (3,243) $ (5,504) $ 29,601
Facility action charges (gains), net (4,272) 55,582 0 51,310
--------- --------- --------- ----------
Oper. income (loss) $ 42,620 $ (58,825) $ (5,504) $ (21,709)
========= ========= ========= ==========
EBITDA $ 65,517 $ (5,797) $ 4,028 $ 63,748
Facility action charges (gains), net (4,272) 55,582 0 51,310
--------- --------- --------- ----------
EBITDA excluding facility action charges $ 61,245 $ 49,785 $ 4,028 $ 115,058
========= ========= ========= ==========
EBITDA excluding stores sold, closed or to be
closed and facility charges $ 46,159 $ 47,116 $ (4,165) $ 89,110
========= ========= ========= ==========
17
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
CARL'S JR.
During the current third quarter, we sold four restaurants to franchisees
and opened one. Carl's Jr. franchisees and licensees opened four new
restaurants, acquired four from us and closed two. As of November 5, 2001, the
Carl's Jr. system consisted of 441 company-operated restaurants, 490 franchised
restaurants and 40 international restaurants, for a system total of 971 Carl's
Jr. restaurants.
Revenue from company-operated Carl's Jr. restaurants decreased $22.0
million, or 15.5%, to $120.6 million for the 12-week period ended November 5,
2001, and decreased $74.0 million, or 15.5%, to $402.6 million for the 40-week
period ended November 5, 2001, when compared to the prior year comparable
periods. The decrease in revenue for both time periods is due primarily to the
sale of company-operated restaurants to franchisees, as well as the closure of
company-operated restaurants. See the table above for the number of
company-operated restaurants at the end of the third quarter of each fiscal
year. While revenue from company-operated restaurants are down, net franchising
income in both the 12- and 40-week periods has increased approximately 50% in
the current fiscal year for Carl's Jr. This is attributable primarily to an
increase in the number of franchisee-operated restaurants. Same-store sales for
company-operated Carl's Jr. restaurants increased 6.1% in the current quarter
and Carl's Jr. company-operated restaurant average unit volumes were $1.175
million for the trailing thirteen periods ended November 5, 2001, and the
average check for the third quarter was $5.13 as compared to $4.77 in the
comparable period of the prior fiscal year.
Restaurant-level margins for our company-operated Carl's Jr. restaurants
increased 3.4% in the 12-week period ended November 5, 2001 from 17.6% in the
prior-year quarter to 21.0% in the current quarter, when measured as a
percentage of company-operated restaurant revenue. The increase in margins is
due to (i) a decrease in food and packaging, which decreased 0.8% in the current
year quarter as compared to the prior year quarter, from 29.6% to 28.8% as a
percentage of company-operated restaurant revenue, (ii) a decrease in payroll
and other employee benefits, which decreased 1.6% in the current year quarter as
compared to the prior year quarter, from 30.1% to 28.5% as a percentage of
company-operated restaurant revenue, (iii) a decrease in occupancy and other
expense, which decreased 1.0% in the current year quarter as compared to the
prior year quarter, from 22.8% from 21.8% as a percentage of company-operated
revenue. The decrease in food and packaging is primarily due to a supplier
rebate received in the current quarter relating to prior period purchases. The
decrease in payroll and other employee benefits is due to the fact that the
current quarter did not require an increase in self-insurance reserves, as did
the previous fiscal year third quarter. Occupancy and other operating expenses
decreased due to reduced depreciation levels due to cumulative asset impairment
charges reducing the depreciable base of stores this quarter and a reduction in
restaurant operating costs due to renegotiated service contracts, offset by
higher repair and maintenance costs.
Restaurant-level margins for our company-operated Carl's Jr. restaurants
decreased slightly in the 40-week period ended November 5, 2001 from 20.2% in
the prior year period to 19.6% in the current year period, when measured as a
percentage of company-operated restaurant revenue. Food and packaging expenses
decreased 0.5% as a percentage of sales from company-operated restaurants.
Payroll and other employee benefits increased in the current year 40-week period
as compared to the prior year from 28.4% to 29.4% as a percentage of
company-operated restaurant revenue. This fluctuation is due to the adverse
development associated with our workers' compensation reserves, discussed in our
second quarter report on Form 10-Q. Occupancy and other operating expenses for
the year-to-date period increased only slightly.
A majority of our Carl's Jr. restaurants have a contract with Enron Corp.
("Enron") to purchase electricity at a fixed cost through 2003. Enron filed for
bankruptcy in December, 2001. While we have not yet been notified by Enron that
the contract will be rejected, we do believe our costs will rise, possibly by as
much as $3.0 million per year.
18
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
HARDEE'S
During the current quarter, we acquired four restaurants from franchisees,
sold 11 to franchisees and closed two restaurants. Hardee's franchisees and
licensees opened four new restaurants, acquired 11 restaurants from us and
closed 37. As of November 5, 2001, the Hardee's system consisted of 751
company-operated restaurants, 1,564 franchised restaurants and 142 international
restaurants, for a system total of 2,457 Hardee's restaurants.
Revenue from company-operated Hardee's restaurants decreased $49.1 million,
or 26.2%, to $139.0 million for the 12-week period ended November 5, 2001, and
$222.2 million, or 31.3%, to $486.2 million for the 40-week period ended
November 5, 2001, when compared to the prior year comparable periods. The
decrease in revenue for both time periods is due primarily to the sale of
company-operated restaurants to franchisees, as well as the closure of
company-operated restaurants. See the table above for the number of
company-operated restaurants at the end of the third quarter of each fiscal
year. Net franchising income increased $1.1 million or 9.3% during the third
quarter 2002, as compared to the prior fiscal year. This increase is due
primarily to a settlement fee received as a result of the early termination of a
franchise agreement. For the 40-week period, net franchising income decreased
$4.5 million or 12.6% as compared to the prior fiscal year. This decrease is due
primarily to the decreased revenue at Hardee's equipment division as a result of
the slowdown in remodel activity by the franchisees. Same-store sales for
company-operated Hardee's restaurants increased 0.9% in the current quarter and
Hardee's company-operated restaurant average unit volumes were $741,000 for the
trailing thirteen periods ended November 5, 2001, and the average check for the
third quarter was $3.74 as compared to $4.08 in the comparable period of the
prior fiscal year.
Restaurant-level margins for company-operated Hardee's restaurants increased
3.7% in the 12-week period ended November 5, 2001 from 5.7% in the prior year
quarter to 9.4% in the current quarter, when measured as a percentage of
company-operated restaurant revenue. Food and packaging costs decreased 0.2%.
Payroll and other employee benefits decreased 1.1% in the current year quarter
as compared to the prior year quarter, because in the prior fiscal year third
quarter we increased our self-insurance reserves and were not required to so in
the current year third quarter. Occupancy and other operating expenses decreased
2.4% in the current year quarter, also as a result of no required increase in
the self-insurance reserves in the current quarter and favorably renegotiated
service contracts, offset by higher repair and maintenance service contract
costs.
Restaurant-level margins for company-operated Hardee's restaurants increased
0.7% in the 40-week period ended November 5, 2001 from 8.5% in the prior year to
9.2% in the current year, when measured as a percentage of company-operated
restaurant revenue. Food and packaging costs decreased 0.4% from 32.2% to 31.8%
as a percentage of company-operated restaurant revenue. Occupancy and other
operating expenses decreased 0.9% as a percentage of company-operated restaurant
revenue as a result of reduced repair and maintenance costs compared to the
prior year. These favorable variances were partially offset by an unfavorable
variance in payroll and other employee benefits of 0.6%. These costs, which were
34.6% in the prior year, increased to 35.2% in the current year. This increase
was mainly due to a deliberate decision to continue to increase labor in our
restaurants in an effort to maintain quality guest service and increase to
workers' compensation reserves due to adverse development in the second quarter
of fiscal year 2002.
OTHER CONSOLIDATED EXPENSES
Advertising expenses decreased $6.6 million, or 29.6%, to $15.7 million for
the 12-week period ended November 5, 2001, as compared to the comparable period
in the prior year. However, as a percentage of total revenue, advertising
expenses has increased 0.7% as a percent of revenue due to the introduction of
new products in the third quarter. Advertising decreased $20.3 million or 25.6%
to $59.0 million for the 40-week period ended November 5, 2001 and remained
relatively constant as a percent of total revenue during the current year period
as compared to the prior year period.
19
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
General and administrative expenses decreased $2.8 million to $27.1 million
and $22.7 million or 20.7%, for the 12-week and 40-week periods ended November
5, 2001, respectively, as compared to the prior year. These decreases are
attributable not only to a decrease in headcount, but also due to curtailing
other discretionary expenses such as contracted labor and professional services.
This decline from the prior year is consistent with our goal to have general and
administrative expenses be commensurate with our mix of company-operated and
franchisee-operated restaurants.
Other income (expense) improved by $1.0 million during the 12-week period
ended November 5, 2001, primarily due to decreased bad debt expense for notes
receivable and increased other income, which were partially offset by decreased
interest income. For the 40-week period ended November 5, 2001, other income
(expense) improved by $1.4 million due to decreased bad debt expense, as
compared to the prior year, and increased miscellaneous income, which were
partially offset by lower interest income and increases in property management
costs.
During the first three-quarters of fiscal 2001, we recorded a deferred tax
asset for the tax benefit of operating losses, which served to reduce the net
loss reflected in the statement of operations. Commencing with the fourth
quarter of last fiscal year, we ceased to record a deferred tax asset because of
our recurring operating losses. As such, the current quarter's statement of
operations does not reflect a tax benefit from the operating loss, as was the
case in the comparable period of the prior fiscal year.
FINANCIAL CONDITION AND LIQUIDITY
Free cash flow - cash provided by operations less capital expenditures - for
the 40-week period ended November 5, 2001 was $66.8 million. Free cash flow,
together with proceeds from asset sales, was used primarily to pay back
borrowings on our revolving credit facility. During the 40 weeks, we generated
cash flows from operations of $82.9 million, as compared to $5.7 million in the
corresponding period of the prior fiscal year. This increase was due to improved
operations as well as the receipt of an income tax refund of approximately $34.2
million during the current period. Investing activities generated $100.8 million
primarily from asset sales. Financing activities used $186.4 million primarily
to paydown our senior credit facility. Earnings were insufficient to cover fixed
charges by $73.4 million and $76.3 million for the 40-week periods ended
November 5, 2001 and November 6, 2000, respectively. Excluding the effect of the
repositioning charges discussed above, earnings would be insufficient to cover
fixed charges by $12.6 million and $25.0 million for the 40-week periods ended
November 5, 2001 and November 6, 2000, respectively. (See Exhibit 12.1).
As discussed above, in fiscal year 2000, we embarked on an asset sale
program designed to generate cash to reduce indebtedness under our senior credit
facility. During the first three quarters of fiscal 2002, we made a net
repayment on our revolving credit facility of approximately $162.0 million, of
which approximately $126.5 million was provided by cash proceeds from assets
sales ($61.2 million from the sale of Taco Bueno). The balance of the repayment
was generated from operations.
Under our revolving credit facility, borrowings may be used for working
capital and other general corporate purposes, including permitted investments
and acquisitions, as defined. We are required to repay borrowings under the
senior credit facility with the proceeds from (i) certain asset sales, (ii) the
issuance of certain equity securities, and (iii) the issuance of additional
indebtedness. The facility contains restrictions on our ability to incur
additional indebtedness, repurchase stock or subordinated debt, pay dividends
and incur liens on our assets, subject to specified exceptions and requirements
that we satisfy specified financial tests as a precondition to acquisition of
other businesses. We have amended our senior credit facility, effective January
31, 2000, August 14, 2000, January 31, 2001 and April 13, 2001, primarily to
modify certain of the covenants contained therein. The amended revolving credit
facility provides that the revolving commitments thereunder shall be reduced by
the entire net proceeds from the sale of any of our restaurants. The senior
credit facility, as amended, also prohibits us from purchasing shares of our
common stock, repurchasing any of our senior subordinated notes or convertible
notes, from prepaying subordinated indebtedness and from paying cash dividends.
In addition, capital expenditure limits were reduced and construction of new
restaurants was limited to construction already begun or committed to begin and
we are required to comply with minimum EBITDA requirements.
20
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
As a result of the amendments, the final maturity date of the senior credit
facility was changed to February 1, 2002, and the interest rate payable on
outstanding borrowings was increased. Commencing June 30, 2001, we can only
borrow at a rate of interest equal to the prime rate plus the applicable margin
on all outstanding borrowings. At November 5, 2001, the applicable margin was 4%
and our interest rate was 9%. As of November 5, 2001, the outstanding commitment
was $120.4 million.
In the event the revolving credit facility is declared accelerated by the
lenders (which can occur only if we are in default under the facility), our 9
1/8% senior subordinated notes due 2009 and our 4.25% convertible subordinated
notes due 2004 may also become accelerated under certain circumstances and after
all cure periods have expired. As a result of the shortening of the maturity
date, the total amount outstanding under the senior credit facility of $6.8
million as of November 5, 2001 has been classified as a current liability in the
consolidated balance sheet.
The availability of capital sources will depend upon prevailing market
conditions, interest rates and our then-existing financial position. We believe
that cash generated from our various restaurant concept operations, the sale of
company-operated restaurants to new and existing franchisees and the sale of
existing surplus properties along with cash and cash equivalents on hand as of
November 5, 2001, and amounts available under our senior credit facility, will
provide the funds necessary to meet all of our capital spending and working
capital requirements for the near future. As of November 5, 2001, we had $65
million of borrowings available to us under our revolving credit facility.
We are actively pursuing an amendment to our existing credit facility for a
longer term by fiscal year end. However, there can be no assurance that this
refinancing or any other will be completed. If we do not obtain an amended
credit facility, or a new credit facility, then the Company, in order to meet
it's outstanding obligations, will be required to (1) generate sufficient cash
flow from operations; (2) further reduce general administrative and/or other
expenses; (3) limit its capital expenditures; and/or (4) sell assets, possibly
at a significant loss. The Company's ability to accomplish the foregoing may be
subject to general economic, financial, competitive, legislative, regulatory or
other factors that may be beyond the Company's control. Therefore, while the
Company currently anticipates that either it will refinance its senior credit
facility or generate sufficient cash flow by one or all of the means described
above, there is no guarantee that such will occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Substantially all of our business is transacted in U.S. dollars.
Accordingly, foreign exchange rate fluctuations have never had a significant
impact on us and are not expected to in the foreseeable future. Our principal
exposure to financial market risks is the impact that interest rate changes
could have on our $120.4 million senior credit facility, of which $6.8 million
remained outstanding as of November 5, 2001. Borrowings under our senior credit
facility now bear interest at the prime rate plus an applicable margin. A
hypothetical increase of 100 basis points in short-term interest rates would
result in a reduction of approximately $68,000 in annual pre-tax earnings. The
estimated reduction is based upon the outstanding balance of our senior credit
facility and assumes no change in the volume, index or composition of debt as in
effect November 5, 2001.
Commodity Price Risk
We purchase certain products which are affected by commodity prices and are,
therefore, subject to price volatility caused by weather, market conditions and
other factors which are not predictable or within our control. In many cases, we
believe we will be able to address commodity cost increases, which are
significant and appear to be long-term in nature by adjusting our menu pricing
or changing our product delivery strategy. However, increases in commodity
prices could result in lower restaurant-level operating margins for our
restaurant concepts.
Seasonality
Our restaurant sales and profitability are subject to seasonal fluctuations
and are traditionally higher during the spring and summer months because of
factors such as increased travel and improved weather conditions, which affect
the public's dining habits.
21
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit # Description
--------- -----------
12.1 Computation of Ratios
(b) Current Reports on Form 8-K:
None.
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.
CKE RESTAURANTS, INC.
---------------------
(Registrant)
December 14, 2001 /s/ Dennis J. Lacey
----------------- -------------------------
Date Executive Vice President
Chief Financial Officer
22
EXHIBIT INDEX
Exhibit # Description
--------- -----------
12.1 Computation of Ratios
23