1
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 May 20, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934.
for the transition period from to
Commission file number 1-13192
CKE RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
33-0602639
(I.R.S. Employer Identification No.)
1200 North Harbor Boulevard, Anaheim, CA 92801
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (714) 774-5796 2639
NOT APPLICABLE
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 - 18,658,289 shares as of June 20, 1996
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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 May 20, 1996 and January 29, 1996............... 3
Consolidated Statements of Income for the sixteen weeks ended
May 20, 1996 and May 22, 1995................................................. 4
Consolidated Statements of Cash Flows for the sixteen weeks ended
May 20, 1996 and May 22, 1995................................................. 5-6
Notes to Consolidated Financial Statements........................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 8-10
Part II. Other Information
Item 1. Legal Proceedings ....................................................... 11
Item 6. Exhibits and Reports on Form 8-K ........................................ 11-14
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
May 20, January 29,
1996 1996
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 16,712 $ 23,429
Marketable securities 2,507 2,510
Accounts receivable 5,427 8,009
Related party receivables 1,030 977
Inventories 7,208 6,132
Deferred income taxes, net 10,005 10,056
Other current assets and prepaid expenses 6,449 5,656
--------- ---------
Total current assets 49,338 56,769
Property and equipment, net 123,305 127,346
Property under capital leases, net 27,662 28,399
Long-term investments 31,386 19,814
Notes receivable 6,319 7,236
Related party notes receivable 900 969
Other assets 7,425 6,226
--------- ---------
$ 246,335 $ 246,759
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,387 $ 8,575
Current portion of capital lease obligations 3,806 3,745
Accounts payable 15,028 15,824
Other current liabilities 36,479 33,173
--------- ---------
Total current liabilities 62,700 61,317
--------- ---------
Long-term debt 23,066 30,321
Capital lease obligations 39,369 40,233
Other long-term liabilities 14,645 13,699
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
19,294,985 and 19,200,141 shares 193 192
Additional paid-in capital 39,421 38,713
Retained earnings 72,050 67,393
Treasury stock, at cost; 670,300
shares and 670,300 shares (5,109) (5,109)
--------- ---------
Total stockholders' equity 106,555 101,189
--------- ---------
$ 246,335 $ 246,759
========= =========
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Sixteen Weeks Ended
-------------------------
May 20, May 22,
1996 1995
--------- ---------
Revenues:
Company-operated restaurants $ 129,510 $ 116,032
Franchised and licensed restaurants 23,424 21,593
--------- ---------
Total revenues 152,934 137,625
--------- ---------
Operating costs and expenses:
Restaurant operations:
Food and packaging 39,755 35,889
Payroll and other employee benefits 35,631 33,813
Occupancy and other operating expenses 26,539 25,058
--------- ---------
101,925 94,760
Franchised and licensed restaurants 22,176 20,656
Advertising expenses 7,571 6,263
General and administrative expenses 11,186 10,682
--------- ---------
Total operating costs and expenses 142,858 132,361
--------- ---------
Operating income 10,076 5,264
Interest expense (2,595) (2,832)
Other income, net 1,274 707
--------- ---------
Income before income taxes 8,755 3,139
Income tax expense 3,422 1,224
--------- ---------
Net income $ 5,333 $ 1,915
========= =========
Net income per common and common equivalent share $ .28 $ .11
========= =========
Common and common equivalent shares used in
computing per share amounts 19,109 18,199
========= =========
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
------------------------
May 20, May 22,
1996 1995
--------- ---------
Net cash flow from operating activities:
Net income $ 5,333 $ 1,915
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Noncash franchise income (98) --
Depreciation and amortization 6,384 7,165
Loss on sale of property and equipment 237 32
Reversal of rent subsidy reserves -- (327)
Write-off of accounts and notes receivable 47 --
Net noncash investment and dividend income (232) (81)
Deferred income taxes 51 78
Noncash increase in reserves 297 --
Write-down of long-lived assets 1,250 --
Net change in receivables, inventories and other current assets (2,479) (2,545)
Net change in other assets (1,251) (381)
Net change in accounts payable and other current liabilities 4,953 (11,698)
-------- --------
Net cash provided by (used in) operating activities 14,492 (5,842)
-------- --------
Cash flow from investing activities:
Purchases of:
Marketable securities (266) --
Property and equipment (7,599) (12,873)
Long-term investments (9,103) --
Proceeds from sales of:
Marketable securities 388 589
Property and equipment 2,478 21
Collections on leases receivable 46 39
Increases in notes receivable and related party notes receivable -- (70)
Collections on notes receivable and related party notes receivable 614 533
-------- --------
Net cash used in investing activities (13,442) (11,761)
-------- --------
Cash flow from financing activities:
Net change in bank overdraft 1,868 1,546
Short-term borrowings 600 19,460
Repayments of short-term debt (600) (19,210)
Long-term borrowings -- 10,937
Repayments of long-term debt (8,432) (1,230)
Repayments of capital lease obligations (803) (763)
Net change in other long-term liabilities (366) (703)
Purchase of treasury stock -- (551)
Payment of dividends (743) (728)
Exercise of stock options 709 --
-------- --------
Net cash provided by (used in) financing activities (7,767) 8,758
-------- --------
Net decrease in cash and cash equivalents $ (6,717) $ (8,845)
======== ========
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
---------------------
May 20, May 22,
1996 1995
------- -------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $ 2,499 $ 2,906
Income taxes 128 784
Noncash investing and financing activities:
Investing activities:
Sale of property and equipment 2,469 --
Increase in long-term investments (2,469) --
Franchise activities and reorganization:
Increase in property and equipment (441) --
Decrease in various liabilities (75) --
Decrease in notes receivable and accounts receivable 418 --
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 20, 1996 AND MAY 22, 1995
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" or "CKE") 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 Fiscal 1996 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.
NOTE (B) NEW ACCOUNTING PRONOUNCEMENT
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires the assessment of
certain long-lived assets for possible impairment when events or circumstances
indicate their carrying amounts may not be recoverable. The adoption of SFAS 121
resulted in a $1.3 million noncash pretax charge, equivalent to $0.04 per share,
to restaurant operations in the first quarter of fiscal 1997.
NOTE (C) 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 (D) 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 (E) RECLASSIFICATIONS
Certain prior year amounts in the accompanying financial statements
have been reclassified to conform to the fiscal 1997 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 the 16-week period ended May 20, 1996
increased $3.4 million to $5.3 million, or $.28 per share, as compared with the
corresponding period of the prior year. During the current period, the Company
adopted SFAS 121, resulting in a $1.3 million non-recurring charge to restaurant
operations. Net income would have been $6.1 million, or $.32 per share, the
highest quarterly net income reported by the Company in eight years, excluding
the effect of this adoption. The improved first quarter performance reflects the
continued sales growth resulting from the Company's innovative advertising,
dual-branding venture, and image enhancement program, as well as its continued
efforts to reduce operating costs through improved operating efficiencies.
The Company is continuing with the conversion of existing Carl's Jr.
locations into Carl's Jr./Green Burrito dual-brand restaurants, pursuant to an
agreement with GB Foods Corporation. As of May 20, 1996, there were 33
dual-brand restaurants operating, with sales tracking approximately 25% over
year ago same-store sales.
As of the quarter end, 27 of the Company-operated Carl's Jr.
restaurants have been revitalized with a fresh, contemporary exterior and
interior look as part of the Company's image enhancement program. Early sales
results in these remodeled restaurants continue to be encouraging. Currently,
the Company is remodeling three restaurants per week and anticipates that a
total of 160 restaurants will be remodeled this fiscal year.
In the current quarter, the Company purchased from Giant Group Ltd.
("Giant"), in settlement of certain litigation, a 15% stake in Rally's
Hamburgers, Inc. ("Rally's") for approximately $4.1 million in cash and has
options to buy another 7.5% of Rally's stock from Giant over the next two years.
Additionally, in an effort to expand the Company's presence in the western
United States, the Company and Rally's announced, shortly after the quarter end,
that the two companies have entered into an operating agreement whereby 28
Rally's-owned restaurants located in California and Arizona will be operated by
the Company as of July 1, 1996. The Company currently is assessing the
possibility of converting several of these locations, which contain a double
drive-thru feature and generally do not have an interior dining area, into
Carl's Jr. restaurants which will offer selected menu items to its customers.
Stockholders of Summit Family Restaurants Inc. ("Summit"), will vote on
the previously announced proposed merger of Summit with and into the Company
(the "Merger") at a special meeting to be held on Friday, July 12, 1996. In the
event that Summit stockholders approve the Merger, the Company will acquire
Summit for a combination of cash and stock with an aggregate value of
approximately $30.9 million, of which $5.0 million was paid in April 1996 in
connection with the purchase of Summit's Series A Convertible Preferred Stock.
The number of shares of CKE stock to be issued will be determined pursuant to a
formula described in the Merger Agreement.
This Quarterly Report on Form 10-Q contains forward looking statements,
all of which are subject to risks and uncertainties. The Company's actual
results may differ significantly from results discussed in the forward looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the Company's Annual Report on Form 10-K for the
fiscal year ended January 29, 1996 and those described in the Company's other
filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Revenues from Company-operated restaurants, comprised mainly of sales
from Carl's Jr. restaurants, increased 11.6% for the 16-week period ended May
20, 1996 to $129.5 million as compared with the first quarter of fiscal 1996. On
a same-store sales basis, the Company's Carl's Jr. sales, which are calculated
using only restaurants open for the full periods being compared, increased 12.7%
for the current period as compared with a 0.6% decrease in the comparable prior
year period. This quarterly increase is the fourth consecutive quarterly
increase and the highest same-store sales increase reported by the Company since
the first quarter of fiscal 1990. The increase in revenues from Company-operated
restaurants in the current period is primarily the result of the continued
momentum in the
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Company's numerous sales enhancement programs which include the image
enhancement of its restaurants through a chain-wide remodeling program, the
continuation of its conversion of existing Carl's Jr. locations into Carl's
Jr./Green Burrito dual-brand restaurants and the continued focus on promoting
great tasting new and existing food products through innovative advertising.
Also contributing to the rise in revenues for the current period are higher
average sales and transaction counts per restaurant and an increase in the
weighted average number of Company restaurants operating in fiscal 1997 as
compared with fiscal 1996.
Revenues from franchised and licensed restaurants for all periods
presented include sales of food service products by the Company's distribution
centers, rental income, royalties and initial franchise fees. Revenues from
franchised and licensed restaurants increased 8.5% to $23.4 million over the
same prior year period largely due to increased food purchases and royalties
from franchisees as a result of increased franchisee sales, which were partially
offset by a decrease in the weighted average number of franchised restaurants in
operation as compared to the prior year period.
Restaurant-level margins of the Company's restaurant operations
increased approximately 3.0% to 21.3% for the current 16-week period as compared
with the same period a year ago. Excluding the adoption of SFAS 121 during the
current quarter, restaurant-level margins would have been 22.2%. These favorable
results in the Company's restaurant-level operating margins reflect the
Company's continued commitment to improve the cost structure of its Carl's Jr.
restaurants, particularly in the areas of improving labor productivity and
reducing workers' compensation costs. As a percentage of revenues from
Company-operated restaurants, food and packaging, payroll and other employee
benefits and occupancy and other operating expenses have all decreased in the
current period as compared with the same period of the prior year.
Restaurant-level margins in the prior year 16-week period were unfavorably
impacted by the start-up nature of the Company's Boston Market operations.
Franchised and licensed restaurant costs have followed a similar
pattern during the current quarter as the revenues from franchised and licensed
restaurants. These costs have increased in absolute dollars by 7.4% to $22.2
million for the current period as compared with the same period of the prior
year, but decreased as a percentage of revenues for franchised and licensed
restaurants. The increase is primarily attributable to the increase in food
purchases from franchisees offset, in part, by a decrease in the weighted
average number of franchised restaurants in operation in the current period as
compared with the prior year period.
Advertising expenses, as a percentage of Company-operated restaurant
revenues, were 5.9% and 5.4% for the first quarter of fiscal 1997 and fiscal
1996, respectively. Advertising expenses have become increasingly important in
the current competitive environment and have therefore grown as a percentage of
revenues in fiscal 1997. Since the Company started its innovative advertising in
May 1995, same-store sales have increased in each consecutive fiscal quarter
thereafter.
General and administrative expenses for the 16-week period ended May
20, 1996 increased $0.5 million to $11.2 million. These expenses as a percentage
of total revenues, however, have decreased 0.5% to 7.3% in the current period as
compared with the same period of the prior year. General and administrative
expenses in the prior year period were unfavorably impacted by the inclusion of
approximately $1.6 million of expenses associated with the Company's Boston
Market operations. The increase in general and administrative expenses in the
current period is primarily the result of recording incentive compensation
accruals for regional restaurant management and selected corporate employees in
support of higher revenues from Company-operated restaurants and improved
restaurant operating performance, increased amortization expense and increased
reserves provided for the Company's accounts and notes receivable.
Interest expense for the first quarter of fiscal 1997 decreased 8.4% to
$2.6 million as compared with the first quarter of fiscal 1996 as a result of
lower levels of borrowings outstanding, the prepayment of certain indebtedness
and lower interest rates.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other income, net, in the first quarter of both fiscal 1997 and fiscal
1996 was primarily comprised of investment income, interest on notes and leases
receivable, gains and losses on sales of restaurants, and other non-recurring
income. Other income, increased $0.6 million from the first quarter of fiscal
1996 primarily due to lease income generated from the leasing of certain
equipment and real property to Boston West, L.L.C. ("Boston West"), which began
in April 1995 when Boston West was formed.
FINANCIAL CONDITION
For the 16-week period ended May 20, 1996, the Company generated cash
flows from operating activities of $14.5 million, compared with the use of $5.8
million in cash for the same period of the prior year. Cash and cash equivalents
in the current period decreased $6.7 million from January 29, 1996, as the
Company used cash flows from operations to fund purchases of property and
equipment of approximately $7.6 million and to repay long-term debt and capital
lease obligations of approximately $9.2 million, of which $6.5 million
represented the early repayment of certain indebtedness. Also contributing to
the decrease in cash and cash equivalents was the purchase of long-term
investments in Rally's and Summit of approximately $4.1 million and $5.0
million, respectively. The decrease in cash and cash equivalents was partially
offset by the proceeds from the sale of real property of $2.5 million,
collections on notes and related party receivables of $0.6 million and the
exercise of stock options of $0.7 million. Total cash available to the Company
as of May 20, 1996 was $19.2 million, which included $2.5 million of holdings in
marketable securities.
The Company's primary source of liquidity is its revenues from
Company-operated restaurants, which are generated in cash. Future capital needs
will arise, principally for the construction of new Carl's Jr. restaurants, the
remodeling of existing restaurants, the conversion of certain restaurants to the
Carl's Jr./Green Burrito dual-brand concept, the conversion of selected Rally's
restaurants to Carl's Jr. restaurants, the payment of lease obligations, the
repayment of debt and the anticipated closing of the acquisition of Summit.
During fiscal 1997, the Company expects to open 15 new restaurants, to remodel
as many as 160 existing restaurants under the Company's image enhancement
program and to complete a minimum of 40 dual-brand conversions. In addition, in
the current quarter, the Company's Board of Directors elected not to co-fund any
future capital requirements of Boston West.
The Company believes that cash generated from its Carl's Jr.
operations, along with cash and marketable securities on hand as of May 20,
1996, and a combination of proceeds from its revolving credit line and
borrowings from other banks or financial institutions will provide the Company
the funds necessary to meet all of its obligations, including the payment of
maturing indebtedness and capital leases, the further development of its Carl's
Jr. operations and other obligations described above.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 19, 1995, Giant Group, Ltd. ("Giant"), filed an action in
the U.S. District court for the Central District of California against the
Company, Fidelity National Financial, Inc., William P. Foley II, and certain
other individuals. Mr. Foley is the Company's Chairman of the Board and Chief
Executive Officer and is also the Chairman of the Board and Chief Executive
Officer of Fidelity National Financial, Inc. In its complaint, Giant alleged
violations of Section 13(d) of the Exchange Act, fraud, breach of fiduciary
duty, conspiracy and breach of contract in connection with purchases of
securities of Giant by Fidelity National Financial, Inc. and Mr. Foley. On
January 16, 1996, Mr. Foley and Fidelity National Financial, Inc. denied Giant's
material allegations and asserted counterclaims against Giant, its directors and
certain other individuals for defamation and breaches of fiduciary duty with
respect to certain actions taken by Giant, including Giant's adoption of a
shareholder rights plan and certain other transactions taken or proposed by
Giant. On April 26, 1996, the parties entered into a Settlement Agreement and
Release, in which they agreed to settle this litigation and to irrevocably
release their respective claims.
Under the terms of the Settlement Agreement, the Company acquired from
Giant 2,350,432 shares of Rally's common stock (representing approximately 15%
of Rally's then outstanding shares) for a cash purchase price of $1.75 per
share, and has the option to purchase an additional 7.5% of Rally's stock from
Giant over the next two years. Finally, pursuant to the Settlement Agreement,
Mr. Foley and Tom Thompson, President and Chief Operating Officer of the
Company, were appointed to Rally's Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.42 Settlement Agreement and Release dated as of April
26, 1996, by and between Giant Group, Ltd.; William
P. Foley II; CKE Restaurants, Inc.; Fidelity National
Financial, Inc.; and other parties.
10.43 Operating Agreement by and between Rally's
Hamburgers, Inc. and Carl Karcher Enterprises, Inc.
dated May 22, 1996. The schedules to the Operating
Agreement are omitted. The Registrant agrees to
furnish supplementally any omitted schedule to the
Securities and Exchange Commission on request.
10.44 First Amendment to Employment Agreement dated March
31, 1996, by and between Carl Karcher Enterprises,
Inc. and C. Thomas Thompson.
10.45 Employment Agreement dated January 24, 1996, by and
between CKE Restaurants Inc. and Robert E. Wheaton.
11 Calculation of Earnings Per Share.
27 Financial Data Schedule (included in electronic
filing only).
(b) Current Reports on Form 8-K:
A Current Report on Form 8-K dated April 3, 1996 was filed
during the first quarter of the fiscal year to report matters
relating to the Company's proposed acquisition of Summit.
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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)
July 3, 1996 /s/ Joseph N. Stein
- ------------ ---------------------
Date Senior Vice President,
Chief Financial Officer
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EXHIBIT INDEX
Exhibit # Description
- --------- -----------
10.42 Settlement Agreement and Release dated as of April 26, 1996, by
and between Giant Group, Ltd.; William P. Foley II; CKE
Restaurants, Inc.; Fidelity National Financial, Inc.; and other
parties.
10.43 Operating Agreement by and between Rally's Hamburgers, Inc. and
Carl Karcher Enterprises, Inc. dated May 22, 1996. The schedules
to the Operating Agreement are omitted. The Registrant agrees to
furnish supplementally any omitted schedule to the Securities and
Exchange Commission on request.
10.44 First Amendment to Employment Agreement dated March 31, 1996, by
and between Carl Karcher Enterprises, Inc. and C. Thomas Thompson.
10.45 Employment Agreement dated January 24, 1996, by and between CKE
Restaurants, Inc. and Robert E. Wheaton.
11 Calculation of Earnings Per Share.
27 Financial Data Schedule (included in electronic filing only).
13