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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 August 14, 1995
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 1-13192
CKE RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 North Harbor Boulevard, Anaheim, CA 92801
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(Address of principal executive offices) (zip Code)
Registrant's telephone number, including area code (714) 774-5796
NOT APPLICABLE
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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 ______
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
$.01 par value common-19,002,711 shares as of September 19, 1995
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CKE RESTAURANTS, INC.
INDEX
Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of August 14, 1995 and January 30, 1995 . . . . . . . . . . 3
Consolidated Statements of Income for the twelve and twenty-eight weeks
ended August 14, 1995 and August 15, 1994 . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the twenty-eight weeks ended
August 14, 1995 and August 15, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 9-11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
August 14, January 30,
1995 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 8,299 $ 15,174
Marketable securities 2,241 3,088
Accounts receivable 10,034 12,411
Related party receivables 1,629 1,509
Inventories 6,303 5,950
Deferred income taxes, net 12,034 12,254
Other current assets 4,937 6,438
-------- --------
Total current assets 45,477 56,824
Property and equipment, net 126,764 133,248
Property under capital leases, net 29,021 30,515
Notes receivable 10,555 13,139
Related party notes receivable 2,135 2,109
Other assets 26,256 8,526
-------- --------
$240,208 $244,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 12,662 $ 8,168
Current portion of capital lease obligations 3,647 3,581
Accounts payable 13,051 29,754
Other current liabilities 31,821 30,065
-------- --------
Total current liabilities 61,181 71,568
Long-term debt 32,021 27,178
Capital lease obligations 41,082 42,691
Other long-term liabilities 13,162 14,450
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding
18,942,491 and 18,845,138 shares 189 188
Additional paid-in capital 35,864 35,119
Retained earnings 61,818 57,725
Treasury stock, at cost; 670,300
shares and 590,000 shares (5,109) (4,558)
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Total stockholders' equity 92,762 88,474
-------- --------
$240,208 $244,361
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Twelve Weeks Ended Twenty-eight Weeks Ended
-------------------------- -------------------------------
August 14, August 15, August 14, August 15,
1995 1994 1995 1994
---------- --------- ---------- ----------
Revenues:
Retail sales $ 91,483 $ 87,279 $207,515 $198,584
Franchised and licensed restaurants 16,557 18,031 38,150 41,734
-------- -------- -------- --------
Total revenues 108,040 105,310 245,665 240,318
-------- -------- -------- --------
Operating costs and expenses:
Retail operations:
Food and packaging 27,291 26,451 63,180 60,189
Payroll and other employee benefits 25,459 26,301 59,272 61,829
Occupancy and other operating expenses 19,197 18,943 44,255 43,752
-------- -------- -------- --------
71,947 71,695 166,707 165,770
Franchised and licensed restaurants 16,033 17,137 36,689 39,649
Advertising expenses 4,556 5,177 10,819 11,034
General and administrative expenses 8,950 8,909 19,632 18,569
-------- -------- -------- --------
Total operating costs and expenses 101,486 102,918 233,847 235,022
-------- -------- -------- --------
Operating income 6,554 2,392 11,818 5,296
Interest expense (2,453) (2,307) (5,285) (4,948)
Other income, net 497 1,179 1,204 1,910
-------- -------- -------- --------
Income before income taxes 4,598 1,264 7,737 2,258
Income tax expense 1,790 400 3,014 738
-------- -------- -------- --------
Net income $ 2,808 $ 864 $ 4,723 $ 1,520
======== ======== ======== ========
Net income per common and common
equivalent share $ .15 $ .05 $ .26 $ .08
======== ======== ======== ========
Common and common equivalent shares used
in computing per share amounts 18,455 18,833 18,441 18,889
======== ======== ======== ========
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Twenty-eight Weeks Ended
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August 14, August 15,
1995 1994
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Net cash flow from operating activities:
Net income $ 4,723 $ 1,520
Adjustments to reconcile net income to net cash provided
by operating activities:
Noncash franchise revenues (242) 67
Depreciation and amortization 11,131 11,901
Loss on sale of property and equipment 1,954 1,789
Reversal of rent subsidy reserves (327) (2,680)
Write-down of long-term investment 1,459 --
Net noncash investment income (559) (5)
Deferred income taxes 220 --
Settlement of notes receivable (1,292) --
Payment of arbitration settlement -- (3,000)
Net change in receivables, inventories and other current assets (608) 2,193
Net change in other assets (266) (726)
Net change in accounts payable and other current liabilities (2,183) (107)
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Net cash provided by operating activities 14,010 10,952
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Cash flow from investing activities:
Purchases of:
Marketable securities -- (2,279)
Property and equipment (16,932) (13,673)
Long-term investment (715) --
Proceeds from sales of:
Marketable securities 879 8,890
Property and equipment 21 30
Collections on leases receivable 80 72
Increase in notes receivable and related party notes receivable (70) (999)
Collections on notes receivable and related party notes receivable 935 1,545
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Net cash used in investing activities (15,802) (6,414)
---------- ---------
Cash flow from financing activities:
Net change in bank overdraft (11,265) (286)
Short-term borrowings 38,460 3,900
Repayments of short-term borrowings (33,910) (3,900)
Long-term borrowings 9,175 --
Repayments of long-term borrowings (4,529) (9,000)
Repayments of capital lease obligations (1,543) (1,414)
Net change in other long-term liabilities (939) (1,663)
Purchase of treasury stock (551) (98)
Exercise of stock options 746 727
Payment of dividends (727) (749)
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Net cash used in financing activities (5,083) (12,483)
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Net decrease in cash and cash equivalents $ (6,875) $ (7,945)
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Twenty-eight Weeks Ended
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August 14, August 15,
1995 1994
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 5,382 $ 4,837
Income taxes 1,611 302
Noncash investing and financing activities:
Investing activities:
Transfer of other current assets to marketable securities -- 6,776
Transfer of inventory, current assets and
property and equipment to other assets 20,877 --
Other leasing activities:
Reversal of certain lease subsidy reserves -- 2,680
Franchising and reorganization activities:
Increase in property and equipment (3,418) (1,289)
Assumption of various liabilities (296) --
Decrease in notes receivable 3,714 1,356
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 14, 1995 AND AUGUST 15, 1994
NOTE (A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of CKE Restaurants, Inc. and its wholly owned subsidiaries (the
"Company") and have been prepared in accordance with the requirements of Form
10-Q and, therefore, do not include all information and footnotes which would
be presented were such consolidated financial statements prepared in accordance
with generally accepted accounting principles. These statements should be read
in conjunction with the audited financial statements presented in the Company's
1995 Annual Report to Stockholders. 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.
In April 1995, the Company entered into a transaction that resulted in
the formation of a new privately owned company, Boston West, L.L.C. ("Boston
West"). This new entity assumed the operations of all of the Company's 25
Boston Chicken and Boston Market stores and agreed to fulfill the Company's
remaining obligation to develop an additional 175 Boston Market stores under
its January 1994 area development agreement with Boston Chicken, Inc. ("BCI").
In connection with this transaction, the Company received preferred units and
all the outstanding common equity units in Boston West, valued at approximately
$23.0 million and $620,000, respectively, in exchange for a majority of its
existing Boston Chicken/Boston Market restaurant assets. In addition, this
transaction provides for the leasing of approximately $12.0 million of
equipment and real property retained by the Company to Boston West at current
market rates. An affiliate of BCI has an option to purchase all the equipment
and real property leased by the Company to Boston West. BCI agreed to lend
Boston West, over time, up to $63.8 million as part of this transaction. This
loan is convertible to equity in Boston West, at BCI's option, at 115% of the
original equity price. In addition, pursuant to this agreement, the Company
has an option to co-fund, along with BCI loan proceeds, the capital
requirements of Boston West up to a maximum of $15.0 million, of which the
Company has funded approximately $1.7 million to date. The $15.0 million may
be funded, in part, by proceeds of the purchase option in the equipment and
real property leases when and if they are exercised. Upon exercise of this co-
funding option and upon conversion of the preferred units, the Company's
minority interest in Boston West may be increased to up to approximately 35%.
On May 30, 1995, Boston West issued an additional $2.5 million of common
equity units to an independent investor group in return for cash and certain
notes receivable, due January 15, 1996, which are secured by $1.2 million of
Boston West common equity units. As of this date, the Company ceased
consolidating the operations of Boston West into its financial statements and
commenced realizing a pro-rata share of the losses of its minority interest in
Boston West.
On September 12, 1995, Boston West formally agreed to repurchase one half
of the Company's outstanding common equity units in Boston West, at a purchase
price of $10.00 per unit, or $310,000. As of this date, the Company will
account for its minority interest in Boston West using the cost method of
accounting for investments. The Company has an option, expiring January 15,
1997, to repurchase from Boston West the common equity units at an option price
of $10.00 per unit.
Since the start-up of the Company's Boston Chicken/Boston Market
operations began in February 1994 and its first retail store did not open until
July 1994, most of the prior year results of operations and other prior year
financial performance presented in this Form 10-Q were comprised solely of the
Company's Carl's Jr. operations, unless otherwise indicated.
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 14, 1995 AND AUGUST 15, 1994
(Continued)
NOTE (B) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to various
claims, lawsuits and other disputes with third parties incidental to its
operations. While certain of these matters involve claims for substantial
amounts, the Company intends to defend these actions vigorously and it is the
opinion of the Company's management, in consultation with its attorneys, that
their ultimate resolution will not have a material adverse affect on the
Company's consolidated financial statements.
NOTE (C) EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common shares outstanding during the period, after consideration of the
dilutive effect of outstanding options. For all periods presented, primary
earnings per share approximate fully diluted earnings per share.
NOTE (D) RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 1996 presentation.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Consolidated net income for both the 12 and 28-week periods ended August
14, 1995 more than tripled to $2.8 million and $4.7 million, or $.15 and $.26
per share, respectively, as compared with the corresponding periods of the
prior year. These positive results were primarily due to increased sales
growth and continued improvements in operating efficiencies in the Company's
Carl's Jr. restaurants. The Company believes that this trend of improved
operating margins will be further enhanced by the extensive remodeling program
of its existing Carl's Jr. restaurants and the continued roll out of its
Carl's Jr./Green Burrito dual-brand restaurants.
A new advertising agency was appointed in February 1995 to assist the
Company in redirecting its Carl's Jr. marketing programs and restoring its
reputation of offering superior quality products. An aggressive new
advertising campaign was introduced in the beginning of May 1995 and management
is encouraged by its results. Both customer transactions and the average guest
check have increased in the second quarter of fiscal 1996, as compared with the
immediately preceding quarter and the second quarter of the prior year.
In May 1995, the Company entered into a five-year agreement with GB Foods
Corporation, operator of The Green Burrito concept, under which the Company
and, in some cases, its franchisees, will convert up to 200 restaurants to
Carl's Jr./Green Burrito dual-brand restaurants. The roll out of these
dual-brand restaurants will be done in conjunction with the Company's
remodeling program. To date, the Company is currently operating nine Carl's
Jr./Green Burrito dual concept restaurants and plans to convert ten additional
restaurants by January 1996. Early results indicate that sales in these nine
restaurants are averaging approximately 130% of pre-conversion average sales.
As part of the Company's plans to offer Carl's Jr. products from smaller,
non-traditional sites, the Company entered into an agreement in May 1995 with
Unocal 76 Products Company ("Unocal") to jointly test the offering of Carl's
Jr. products from Unocal Fast Break convenience stores and gasoline stations in
California. Under this agreement, ten such sites will be opened by Unocal at
their expense during the next 12 months, with two sites expected to open by
November 1995.
In another dual-brand test, the Company converted three California Carl's
Jr. locations to Carl's Jr./Long John Silver restaurants. The Company is
encouraged by the preliminary test results in these restaurants, which show
improvements in same-store sales.
RESULTS OF OPERATIONS
Retail sales, comprised mainly of sales from Carl's Jr. restaurants,
increased 4.8% and 4.5% in the 12 and 28-week periods ended August 14, 1995 to
$91.5 million and $207.5 million, respectively. Same-store sales increased
approximately 3% in the second quarter of this year. The quarterly increase in
the current period is the first experienced by the Company in the last five
years. This increase is a marked improvement as compared with the 1% decline
in same-store sales experienced in the second quarter of the prior fiscal year.
Same-store sales, as measured by the Company, are calculated using only
restaurants open for the full periods being compared. Retail sales in the
current year were positively impacted as a result of the Company's continued
focus on promoting great tasting new and existing food products. This
strategy, which was implemented in the latter part of the prior fiscal year, is
further reinforced by the introduction in May 1995 of the Company's new
advertising campaign. Also contributing to the rise in retail sales for the
current periods presented are efficiencies made in the Carl's Jr. restaurants
in the area of speed of service and the increase in the weighted-average number
of Company restaurants operating in fiscal 1996 as compared with fiscal 1995.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
Revenues from franchised and licensed restaurants for the 12 and 28-week
periods ended August 14, 1995, decreased $1.5 million, or 8.2%, and $3.6
million, or 8.6%, respectively, as compared with the corresponding periods of
the prior year. The decline in revenues for both periods reflects fewer sales
of food service products to Carl's Jr. franchisees and licensees by the
Company's distribution centers. Distribution center sales to the Company's
Carl's Jr. franchisees, which account for nearly 75% of total revenues from
franchised and licensed restaurants for both periods presented, decreased in
fiscal 1996 as a result of a decrease in the weighted-average number of
franchised restaurants operating in the current year. Distribution center
sales to the Company's Carl's Jr. licensees, which account for approximately 3%
of total revenues from franchised and licensed restaurants for both periods
presented, were lower in the current year because many of the food products
purchased by the Company's Mexican licensees are now being sold to these
licensees directly from third-party Mexican distributors.
Gross margins of the Company's retail operations increased approximately
3.5% and 3.2% to 21.4% and 19.7% for the 12 and 28-week periods ended August
14, 1995, respectively, as compared with the corresponding periods of the prior
fiscal year. The improvements in gross margins were primarily attributable to
notable declines in the payroll and other benefit costs of the Carl's Jr.
operations as a result of the Company's continuous efforts to improve labor
productivity and decrease its workers' compensation costs. Furthermore,
occupancy and other operating expenses, as a percentage of retail sales,
decreased for the both periods presented in the current year, while food and
packaging cost, as a percentage of retail sales, decreased in the current
quarter and remained relatively flat on a year-to-date basis, as compared with
the same periods of the prior fiscal year. These favorable results reflect the
Company's continued commitment to improve the cost structure of its Carl's Jr.
restaurants. Gross margins for the current 28-week period were unfavorably
impacted during the first 16 weeks by the start-up nature of the Company's
Boston Chicken/Boston Market operations.
General and administrative expenses were $1.1 million, or 5.7%, higher
for the 28-week period of the current year as compared with the same period of
the prior year largely due to the Company's Boston Chicken/Boston Market
operations. Current year-to-date general and administrative expenses compares
favorably considering prior year amounts were reduced by approximately $1.7
million as a result of several nonrecurring items, primarily including the
reduction of certain previously established lease subsidy reserves. General
and administrative expenses, as a percentage of total revenues, decreased in
the second quarter of fiscal 1996 as compared with the second quarter of fiscal
1995.
Interest expense for the 12 and 28-week periods of the current year
increased 6.3% and 6.8% to $2.5 million and $5.3 million, respectively, as
compared with the 12 and 28-week periods of fiscal 1995, as a result of higher
levels of borrowings outstanding in the current year.
Other income, net, in both fiscal 1996 and fiscal 1995 was comprised of
investment income, interest on notes and leases receivables, gains and losses
on sales of restaurants, and other non-recurring income. Other income, net,
decreased $682,000 and $706,000 from the 12 and 28-week periods of fiscal 1995,
respectively, primarily due to lower average investment portfolios and lower
average notes receivable balances during fiscal 1996 as compared with the prior
year periods.
The current year effective tax rate is higher than fiscal 1995 and
approximates statutory levels. This increase is largely due to the elimination
in December 1994 of federal tax credits related to the hiring of certain
qualified employees.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
FINANCIAL CONDITION
For the 28-week period ended August 14, 1995, the Company generated cash
flows from operating activities of $14.0 million, compared with $11.0 million
for the same period of the prior year. Prior to the sale of the common equity
units in Boston West on May 30, 1995, the development of the Company's Boston
Chicken/Boston Market operations unfavorably impacted the Company's financial
results. Total cash and cash equivalents decreased $6.9 million from January
30, 1995, as the Company used cash flows from operations to fund capital
additions of approximately $16.9 million and increased total bank borrowings by
$9.2 million, a majority of which was attributable to the seven Boston Market
stores opened and the eleven additional stores that were under development
during the first quarter of fiscal 1996. Total cash available to the Company
as of August 14, 1995 was $10.5 million, which includes $2.2 million of
holdings in a diversified, highly liquid investment portfolio with minimal
interest rate risk.
Following the formation of Boston West, the Company's loan agreement with
its bank was amended such that borrowings totaling $28.0 million drawn against
a former revolving credit line primarily to fund the development of the
Company's Boston Chicken/Boston Market operations were converted to a term
loan, payable in quarterly installments through September 1998. In addition, a
new $15.0 million unsecured revolving credit line that expires in June 1996 was
established for use in the Company's ongoing Carl's Jr. operations. As of
August 14, 1995, a total of $10.5 million was available to the Company under
this new credit line.
The Company's primary sources of liquidity are its retail sales, which
are generated in cash. As the Company is no longer the exclusive provider of
capital for Boston West, future capital needs will arise, principally, for the
construction of new Carl's Jr. restaurants, the remodeling of existing
restaurants, the payment of lease obligations, the repayment of debt and the
possible exercise of the option to increase the Company's existing equity
interest in Boston West.
The Company believes that cash generated from its Carl's Jr. operations,
along with the cash and marketable securities on hand as of August 14, 1995,
and a combination of proceeds from its new revolving credit line and borrowings
from other banks or financial institutions will generate cash flows sufficient
to fund all of the Company's capital requirements and other obligations
described above.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: None
ITEM 2. CHANGES IN SECURITIES: None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Stockholders of CKE Restaurants, Inc. was held on
June 21, 1995, for the purpose of electing certain members of the board of
directors, and to consider and approve the Company's 1994 Employee Stock
Purchase Plan.
Management's nominees for directors were elected by the following vote:
Shares Voted Authority To Vote
"FOR" "WITHHELD"
------------- ------------------
Carl L. Karcher 15,379,227 806,927
Frank P. Willey 15,434,931 751,223
The proposal to approve the Company's 1994 Employee Stock Purchase Plan
was approved by the following vote:
Shares Voted Shares Voted Shares Voted
"FOR" "AGAINST" "ABSTAINING"
------------- ------------- ------------
14,997,696 1,021,411 167,047
ITEM 5. OTHER INFORMATION: None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 11 - Calculation of Earnings per Share
(b) Exhibit 27 - Financial Data Schedule
(c) A report on Form 8-K was filed on June 12, 1995 which provides pro
forma financial information, giving effect to the sale of certain
Boston West L.L.C. membership units to third party investors as if
the sale had occurred on January 30, 1995 and May 22, 1995,
respectively.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CKE RESTAURANTS, INC.
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(Registrant)
September 27, 1995 /s/ Joseph N. Stein
- ------------------------- -----------------------------------------------
Date Senior Vice President,
Chief Financial Officer and
Duly Authorized Officer
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