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 November 4, 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
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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)
1200 North Harbor Boulevard, Anaheim, CA 92801
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (714) 774-5796
-------------------------
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:
22,143,445 shares of Common stock, par value $.01 per share as of
December 5, 1996
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CKE RESTAURANTS, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of November 4, 1996 and January 29, 1996.......................... 2
Consolidated Statements of Income for the twelve and forty weeks
ended November 4, 1996 and November 6, 1995.................................................. 3
Consolidated Statements of Cash Flows for the forty weeks ended
November 4, 1996 and November 6, 1995........................................................ 4-5
Notes to Consolidated Financial Statements....................................................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 9-12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................ 13-14
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
November 4, January 29,
1996 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 15,614 $ 23,429
Marketable securities 2,512 2,510
Accounts receivable 7,682 7,295
Related party receivables 1,096 977
Inventories 8,996 6,132
Deferred tax asset, net 10,154 10,056
Other current assets 7,149 5,656
-------- ---------
Total current assets 53,203 56,055
Property and equipment, net 215,402 119,128
Property under capital leases, net 33,836 28,399
Long-term investments 28,219 19,814
Notes receivable 6,501 7,801
Related party notes receivable 155 969
Other assets 26,371 14,593
-------- ---------
$363,687 $ 246,759
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 16,486 $ 8,575
Current portion of capital lease obligations 4,802 3,745
Accounts payable 27,720 15,824
Other current liabilities 51,864 31,756
-------- ---------
Total current liabilities 100,872 59,900
-------- ---------
Long-term debt 55,128 30,321
Capital lease obligations 48,042 40,233
Other long-term liabilities 26,113 15,116
Minority interest 4,100 --
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
19,267,611 and 19,200,141 shares 193 192
Additional paid-in capital 47,176 38,713
Retained earnings 82,063 67,393
Treasury stock, at cost; -0- and 670,300 shares -- (5,109)
-------- ---------
Total stockholders' equity 129,432 101,189
-------- ---------
$363,687 $ 246,759
======== =========
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Twelve Weeks Ended Forty Weeks Ended
------------------------------- -----------------------------
November 4, November 6, November 4, November 6,
1996 1995 1996 1995
------------- ------------- ------------- ------------
Revenues:
Company-operated restaurants:
Carl's Jr $ 106,106 $ 95,316 $ 339,544 $ 298,559
Taco Bueno 6,784 -- 6,784 --
JB's Restaurants 14,981 -- 17,512 --
HomeTown Buffet 8,760 -- 10,240 --
Other 6,825 -- 9,250 4,272
--------- --------- --------- ---------
143,456 95,316 383,330 302,831
--------- --------- --------- ---------
Franchised and licensed restaurants:
Carl's Jr 18,447 17,758 59,566 55,908
JB's Restaurants 388 -- 452 --
--------- --------- --------- ---------
18,835 17,758 60,018 55,908
--------- --------- --------- ---------
Total revenues 162,291 113,074 443,348 358,739
--------- --------- --------- ---------
Operating costs and expenses:
Restaurant operations:
Food and packaging 45,726 29,659 119,693 92,839
Payroll and other employee benefits 40,225 26,105 105,237 85,377
Occupancy and other operating expenses 30,488 19,364 79,224 63,619
--------- --------- --------- ---------
116,439 75,128 304,154 241,835
Franchised and licensed restaurants 16,951 16,695 56,106 53,384
Advertising expenses 7,003 4,498 20,473 15,317
General and administrative expenses 11,180 9,380 31,729 29,012
--------- --------- --------- ---------
Total operating costs and expenses 151,573 105,701 412,462 339,548
--------- --------- --------- ---------
Operating income 10,718 7,373 30,886 19,191
Interest expense (2,759) (2,300) (7,503) (7,585)
Other income, net 1,299 254 3,149 1,458
--------- --------- --------- ---------
Income before income taxes 9,258 5,327 26,532 13,064
Income tax expense 3,670 2,306 10,419 5,320
--------- --------- --------- ---------
Net income $ 5,588 $ 3,021 $ 16,113 $ 7,744
========= ========= ========= =========
Net income per common and common
equivalent share $ .28 $ .16 $ .83 $ .42
========= ========= ========= =========
Common and common equivalent shares used
in computing per share amounts 19,823 18,706 19,466 18,596
========= ========= ========= =========
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
------------------------
November 4, November 6,
1996 1995
-------- --------
Net cash flow from operating activities:
Net income $ 16,113 $ 7,744
Adjustments to reconcile net income to net
cash provided by operating activities,
excluding the effect of acquisitions:
Noncash franchise expense 19 131
Depreciation and amortization 18,158 16,058
Loss on sale of property and equipment and capital leases 848 1,600
Reversal of rent subsidy reserves -- (327)
Loss on equity investments -- 2,733
Write-off of accounts and notes receivable 171 --
Net noncash investment and dividend income (661) (803)
Deferred income taxes 547 --
Noncash decrease in reserves 297 --
Write-down of long-lived assets 1,250 --
Settlement of notes receivable -- (1,292)
Net change in receivables, inventories and other current assets (6,617) 1,261
Net change in other assets (2,299) (67)
Net change in accounts payable and other current liabilities 9,777 (1,996)
-------- --------
Net cash provided by operating activities 37,603 25,042
-------- --------
Cash flow from investing activities:
Purchases of:
Marketable securities (760) (686)
Property and equipment (31,469) (22,396)
Long-term investments (5,936) (1,670)
Proceeds from sales of:
Marketable securities 2,689 1,662
Property and equipment 3,779 21
Collections on leases receivable 139 122
Increase in notes receivable and related party notes receivable (120) (2,142)
Collections on notes receivable and related party notes receivable 2,707 1,281
Acquisitions, net of cash acquired and minority interest (52,646) --
-------- --------
Net cash used in investing activities (81,617) (23,808)
-------- --------
Cash flow from financing activities:
Net change in bank overdraft 8,513 (11,285)
Short-term borrowings 1,200 57,060
Repayments of short-term debt (1,200) (52,635)
Long-term borrowings 58,000 9,175
Repayments of long-term debt (27,090) (6,343)
Repayments of capital lease obligations (2,950) (2,326)
Net change in other long-term liabilities (920) (1,400)
Purchase of treasury stock -- (551)
Payment of dividends (1,514) (1,460)
Exercise of stock options 2,160 2,021
-------- --------
Net cash provided by (used in) financing activities 36,199 (7,744)
-------- --------
Net decrease in cash and cash equivalents $ (7,815) $ (6,510)
======== ========
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
------------------------
November 4, November 6,
1996 1995
----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 7,325 $ 7,691
Income taxes 5,000 2,476
Noncash investing and financing activities:
Investing activities:
Transfer of inventory, current assets and
property and equipment to other assets -- 20,877
Sale of property and equipment 2,469 --
Increase in long-term investments (2,469) --
Other investing activities:
Net change in dividends receivable (540) (714)
Stock issued in exchange for Summit Assets 11,412 --
Franchising and reorganization activities:
Increase in property and equipment (1,904) (2,853)
Decrease in various liabilities (75) --
Decrease in notes receivable and accounts receivable 547 2,683
Increase in debt 1,451 --
Summit Acquisition:
Tangible assets acquired at fair value 59,908 --
Cost in excess of net assets acquired 2,268 --
Liabilities assumed at fair value (33,120) --
-------- --------
Total purchase price $ 29,056 $ --
======== ========
Casa Bonita Acquisition:
Tangible assets acquired at fair value 45,090 --
Cost in excess of net assets acquired 4,967 --
Liabilities assumed at fair value (8,057) --
-------- --------
Total purchase price $ 42,000 $ --
======== ========
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 4, 1996 AND NOVEMBER 6, 1995
NOTE (A) 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
generally accepted accounting principles, 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
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 or for any other future periods. Certain reclassifications have been
made to the fiscal 1996 consolidated financial statements to conform to the
fiscal 1997 presentation.
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) LONG-TERM DEBT
Effective August 12, 1996, the Company entered into a Credit Agreement
(the "Credit Agreement") with a group of financial institutions. Under the terms
of the Credit Agreement, the Company borrowed the principal amount of $20.0
million pursuant to a five-year, fully amortizing term loan, the proceeds of
which were used to repay existing indebtedness.
The Credit Agreement also provides the Company with (i) a revolving
credit facility for working capital and other general corporate purposes, under
the terms of which the Company may borrow from time to time up to $30.0 million
(including a letter of credit subfacility of up to $20.0 million), and (ii) a
revolving credit facility for the purpose of financing investments in and
acquisitions of other companies, under the terms of which the Company may borrow
from time to time up to $25.0 million. The Company borrowed $25.0 million under
this revolving credit facility in connection with the acquisition of Casa Bonita
on October 1, 1996, a portion of which amount, together with the outstanding
principal amount of the term loan, was repaid subsequent to November 4, 1996,
with the net proceeds of the Company's common stock offering (see Note F). The
amounts advanced, if any, to the Company and remaining outstanding under the
revolving acquisition facility will convert after two years into a three-year
fully amortizing term loan. Both of the foregoing revolving credit facilities
will mature on July 31, 2001. The existing credit facility, which this new
facility replaced, would have expired on August 31, 1996.
Subsequent to the quarter end, on November 8, 1996, the Company used
$36.0 million of the net proceeds from its common stock offering (see Note F) to
pay $20.0 million in borrowings outstanding under the term loan and $16.0
million in revolving credit line borrowings. The Company currently has an
aggregate of $46.0 million in borrowings available to it under its credit
facility, of which $30.0 million is available for working capital and other
general corporate purposes and $16.0 million is available for permitted
acquisitions of, or investments in, other companies.
The Credit Agreement also includes customary affirmative and negative
covenants which, among other things, restrict the Company's ability to (i) incur
or create liens on or with respect to its properties, (ii) incur additional
indebtedness, (iii) merge or consolidate with other entities, (iv) sell assets,
and (v) declare or pay dividends or repurchase shares of capital stock, subject
in each of the foregoing cases to certain exceptions. In addition, the Credit
Agreement requires the Company to maintain certain specified financial ratios
and operating results.
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 4, 1996 AND NOVEMBER 6, 1995
(Continued)
NOTE (D) ACQUISITIONS
On July 15, 1996, the Company completed its acquisition of Summit
Family Restaurants Inc. ("Summit"). Summit has restaurant operations in nine
western states, including 73 Company-operated and 24 franchised JB's
Restaurants, 16 HomeTown Buffet restaurants and six Galaxy Diner restaurants.
In connection with the acquisition, each of the 4,809,446 outstanding
shares of Summit common stock was converted into the right to receive 0.1043
shares of the Company's common stock (and cash in lieu of fractional shares) and
cash in the amount of $2.63. Accordingly, the aggregate number of shares of
common stock of the Company issued in the acquisition was 501,388. The source of
funds for the cash portion of the consideration was cash on hand and borrowings
under the Company's then existing revolving credit facilities.
On October 1, 1996, the Company acquired Casa Bonita Incorporated
("Casa Bonita"). Casa Bonita currently operates 108 Taco Bueno restaurants
located in Texas and Oklahoma in addition to two Casa Bonita Restaurants and
three Crystal's Pizza and Spaghetti Restaurants.
The acquisition was completed by CBI Restaurants, Inc. ("CBI"), a
newly-formed corporation in which the Company originally held an 80.0% equity
interest. CBI paid $42.0 million in cash, which was financed by short-term loans
of $9.0 million from the Company, $8.0 million from Fidelity National Financial,
Inc. ("Fidelity"), and $5.0 million from Giant Group, Ltd. ("Giant"). The
balance of the purchase price, $20.0 million, was financed through the Company's
investment of $16.0 million in cash for an 80.0% equity interest in CBI, and
Fidelity's investment of $4.0 million in cash for the remaining 20.0% equity
interest in CBI. The Company's investment in CBI was funded out of borrowings
under the Company's revolving acquisition facility.
On December 3, 1996, the Company purchased Fidelity's 20.0% equity
interest in CBI for $4.5 million, giving the Company 100.0% ownership of CBI and
Casa Bonita. CBI also repaid the short-term loans of $8.0 million to Fidelity
and $5.0 million to Giant. The purchase of Fidelity's equity interest and the
repayment of short-term loans was provided by the net proceeds of the Company's
common stock offering (see Note F).
Selected unaudited pro forma combined results of operations for the
40-week periods ended November 4, 1996 and November 6, 1995, assuming the
acquisitions occurred on January 31, 1995, are presented as follows:
Forty Weeks Ended
-----------------------
November 4, November 6,
1996 1995
----------- ----------
Total revenues $576,854 $515,344
Net income $ 16,184 $ 6,710
Net income per common
and common equivalent share $ 0.82 $ 0.35
NOTE (E) RETIREMENT OF TREASURY STOCK
On October 28, 1996, the Board of Directors of the Company retired
670,300 shares of the Company's common stock which were previously held as
treasury stock. These shares had been repurchased by the Company during the two
fiscal years ended January 29, 1996 at an aggregate cost of $5.1 million.
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 4, 1996 AND NOVEMBER 6, 1995
(Continued)
NOTE (F) COMMON STOCK OFFERING
Subsequent to the quarter end, on November 8, 1996, the Company issued
2,500,000 shares of its common stock at a public offering price of $28.625 per
share. Proceeds from the offering, net of underwriting discounts and commissions
and other related expenses estimated at $4.2 million, were $67.4 million. On
December 4, 1996, the Underwriters elected to purchase an additional 375,000
shares of common stock pursuant to an over-allotment option granted in
connection with the offering, generating an additional $10.2 million in net
proceeds. The net proceeds were used to reduce the Company's existing
indebtedness and for working capital and other general corporate purposes,
including the Company's investments in Checkers Drive-In Restaurants, Inc. (see
Note G) and additional investments in Rally's Hamburgers, Inc. (see Note H).
NOTE (G) ACQUISITION OF DEBT
On November 14, 1996, a group of investors including the Company
purchased $35.8 million of aggregate principal amount of Checkers Drive-In
Restaurants, Inc. ("Checkers") 13.75% senior secured debt, due on July 31, 1998,
from certain current debt holders who retained approximately $6.0 million. The
purchase price for this senior secured debt was $35.1 million. In addition to
the Company, the investors included KCC Delaware, a wholly-owned subsidiary of
Giant, Fidelity, The Travelers Indemnity Company ("Travelers") and certain
affiliated individual investors. The Company paid $12.9 million for a 35.75%
share of the debt.
On November 22, 1996, the investors completed the restructuring of
$35.8 million aggregate principal amount of indebtedness of Checkers under its
existing credit agreement. Pursuant to the restructuring, the term of the credit
agreement has been extended by one year until July 31, 1999 and the fixed
interest rate on such indebtedness has been reduced to 13.0%. The investors
agreed to modify certain financial covenants and the timing and amount of
principal payments due under the credit agreement. The Company, KCC Delaware and
Travelers also agreed to provide a short-term revolving line of credit of up to
$2.5 million to Checkers, which is fully utilized.
In connection with the restructuring, Checkers issued to the investors
warrants to purchase an aggregate of 20.0 million shares of common stock of
Checkers at an exercise price of $.75 per share. Further, in the event that up
to three monthly extensions of the revolving line of credit are requested and
extended, the Company, KCC Delaware and Travelers will receive 333,333
additional warrants per each month of extension provided.
NOTE (H) LONG-TERM INVESTMENT IN RALLY'S HAMBURGERS, INC.
Effective August 31, 1996, the Company participated in Rally's
Hamburgers, Inc. ("Rally's") Rights Offering, pursuant to which the Company
received one Right for each share of the 2.4 million shares of Rally's common
stock the Company already owned. In accordance with the terms of the Rights
Offering, holders of Rights were entitled to purchase one Unit for each 3.25
Rights surrendered for a cash payment of $2.25 per Unit. Each Unit consists of
one share of Rally's common stock and one Warrant to purchase an additional
share of Rally's common stock upon payment of a $2.25 exercise price. The
Company contributed approximately $1.7 million in cash and acquired 775,488
shares of Rally's common stock in connection with the Rights Offering, with
Warrants to acquire another 775,488 shares. As of November 4, 1996, the
Company's long-term investment in Rally's was $5.9 million and during the third
quarter the Company began using the equity method of accounting for its
investment in Rally's.
Additionally, subsequent to quarter end, on November 29, 1996, the
Company elected to exercise the first series of 587,607 options to purchase
common stock of Rally's from Giant at $3.00 per share for a total of
approximately $1.8 million.
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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 third fiscal quarter increased 85.0% to
$5.6 million, or $.28 per share compared with net income of $3.0 million, or
$.16 per share, for the prior year. Net income for the 40-week period ended
November 4, 1996 more than doubled to $16.1 million, or $.83 per share, from
$7.7 million, or $.42 per share, for the same period last year. During the first
quarter of the current year, the Company adopted SFAS 121, resulting in a $1.3
million non-recurring charge to restaurant operations; net income for the
40-week period would have been $16.9 million, or $.87 per share, excluding the
effect of this adoption. These positive results were primarily due to increased
sales growth resulting from the Company's dual-branding and image enhancement
programs in its Carl's Jr. restaurants, increased advertising and continued
improvements in operating efficiencies in the Company's Carl's Jr. restaurants,
and the additional operations of the recently acquired concepts which were all
profitable during the quarter. The operating results for the current 40-week
period reflect 18 weeks of operations for the 27 Rally's restaurants that the
Company commenced operating on July 2, 1996, 14 weeks of operations of Summit
which was acquired on July 15, 1996 and five weeks of operations of Casa Bonita,
which was acquired on October 1, 1996.
The Company is continuing with the conversion of several of its
existing Carl's Jr. locations into Carl's Jr./Green Burrito dual-brand
restaurants, pursuant to an agreement with GB Foods Corporation. As of November
4, 1996, there were 54 Company-operated and five franchised dual-brand
restaurants operating. Post-conversion revenues in the 54 Company-operated
restaurants converted to the Carl's Jr./Green Burrito dual-brand restaurants
(including restaurants converted during the period) were approximately 25%
higher than same-store sales in the comparable prior year period. In December
1996, the Company will introduce its first new Green Burrito product, the
"Burrito Bowl", to the existing menu in these dual-brand locations.
As part of the Company's chain-wide Carl's Jr. restaurant remodeling
program, approximately 166 remodels (including dual-brand conversion remodels)
have been completed as of the end of the third quarter. The Company is
continuing to experience increased sales in these remodeled restaurants.
Currently, the Company is remodeling four restaurants per week, which consist of
three standard image enhancement remodels and one dual-brand remodel. The
Company expects to have half of all Company-operated Carl's Jrs. remodeled by
year-end and the remainder completed by the end of fiscal 1998.
This Quarterly Report on Form 10-Q contains forward looking statements,
which are subject to known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; the
impact of competitive products and pricing; success of operating initiatives;
advertising and promotional efforts; adverse publicity; availability, changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; the results of financing efforts; food, labor,
and employee benefit costs; changes in, or the failure to comply with,
government regulations; weather conditions; construction schedules; and risks
that sales growth resulting from the Company's current and future remodeling and
dual-branding of restaurants and other operating strategies can be sustained at
the current levels experienced.
RESULTS OF OPERATIONS
Revenues from Company-operated restaurants, comprised mainly of sales
from Carl's Jr. restaurants, increased $48.1 million, or 50.5% and $80.5
million, or 26.6% in the 12- and 40-week periods ended November 4, 1996 to
$143.5 million and $383.3 million, respectively. Carl's Jr. revenues for the 12-
and 40-week periods ended November 4, 1996 accounted for sales increases of
$10.8 million and $41.0 million, respectively. Rally's, Summit and Casa Bonita
accounted for $4.2 million, $25.2 million and $7.9 million, respectively, of
revenues for the 12-week period ended November 4, 1996, and $6.3 million, $29.5
million and $7.9 million, respectively, of revenues for the 40-week period ended
November 4, 1996. On a same-store sales basis (calculated using only restaurants
in operation for the full periods being compared), revenues from
Company-operated Carl's Jr. restaurants increased 8.4% in the 12-week period
ended November 4, 1996 as compared with a 9.0% increase in the comparable prior
year period. Same-store sales for the 40-week period ended November 4, 1996
increased 10.7% compared with a 3.2% increase a year ago. Per store averages in
Company-operated Carl's Jr. restaurants continue to increase and reached
9
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
$1,089,000 on a 13-period rolling basis. The increase in revenues from
Company-operated Carl's Jr. restaurants is primarily the result of the continued
momentum in the Company's various 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 increased advertising.
Higher average sales and transaction counts per restaurant and an increase in
the number of Company-operated restaurants operating in fiscal 1997 as compared
with the prior year also contributed to the increase in revenues from
Company-operated Carl's Jr. restaurants.
Revenues from franchised and licensed restaurants for the 12- and
40-week periods ended November 4, 1996 increased 6.1% and 7.4% to $18.8 million
and $60.0 million, respectively, over the same prior year periods. This increase
is largely due to increased royalties from, and food purchases by, franchisees
as a result of higher sales volume at franchised Carl's Jr. restaurants,
partially offset by a decrease in the number of franchised and licensed Carl's
Jr. restaurants operating as compared with the prior year. Carl's Jr. franchises
are experiencing same-store sale increases of approximately 9.5% on a
year-to-date basis.
While restaurant-level margins of the Company restaurant operations
decreased in the 12-week period ended November 4, 1996 by 2.4% as compared with
the prior year period, restaurant-level margins increased 0.5% to 20.7% for the
40-week period ended November 4, 1996 over the prior year period. The margins in
the 12-week period ended November 4, 1996 reflect the impact of higher costs
from Summit's family-style restaurant operations. The family-style restaurant
segment of the restaurant industry typically has lower margins than the
quick-service segment of the industry, due primarily to increased labor and food
costs. Excluding the effect of the adoption of SFAS 121 during the first quarter
of the current year, restaurant-level margins would have been 21.0% for the
40-week period ended November 4, 1996.
Restaurant-level margins of the Company-operated Carl's Jr. restaurant
operations increased approximately 0.5% and 1.7% to 21.7% and 22.0% for the 12-
and 40-week periods ended November 4, 1996, respectively, as compared with the
corresponding periods of the prior year. These improved results in the Company's
Carl's Jr. 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 Carl's Jr.
restaurants, payroll and other employee benefits and occupancy and other
operating expenses have decreased 1.5% in the 40-week period ended November 4,
1996 as compared with the same period a year ago, despite the October 1, 1996
increase in the federal minimum wage. Food and packaging costs have increased as
a percentage of revenues from Company-operated restaurants due to increased
pressure from commodity prices and the promotion of larger, more expensive
sandwiches. Restaurant-level margins in the first quarter of the prior year were
unfavorably impacted by the start-up nature of the Company's Boston Market
operations.
Many of the Company's employees are paid hourly rates related to the
federal and state minimum wage laws. Recent legislation increasing the federal
minimum wage as of October 1, 1996 has resulted in higher labor costs to the
Company and its franchisees. An additional increase in the federal minimum wage
will become effective in September 1997. Further, as a result of recent
California state law legislation, there will be an increase in the state minimum
wage in California effective in March 1997. The Company anticipates that
increases in the minimum wage may be offset through pricing and other cost
control efforts; however, there can be no assurance that the Company or its
franchisees will be able to pass such additional costs on to customers in whole
or in part.
Franchised and licensed restaurant costs have followed a comparable
pattern during the 12- and 40-week periods ended November 4, 1996 to the
revenues from franchised and licensed restaurants. These costs have increased
1.5% and 5.1% for the 12- and 40-week periods ended November 4, 1996,
respectively, over the same periods of the prior year. The increase is primarily
due to increased food purchases by Carl's Jr. franchisees, partially offset by a
decrease in the number of franchised and licensed Carl's Jr. restaurants in
operation in the current periods as compared with the same periods in the prior
year.
Advertising expenses increased $2.5 million and $5.2 million for the
12- and 40-week periods ended November 4, 1996, respectively, over the same
prior year periods. Advertising expenses have become increasingly important in
the current competitive environment and, as a result, have increased in terms of
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
dollars spent in fiscal 1997 as compared with the prior year. Since the Company
began its innovative advertising campaign in May 1995, the Company has seen
positive same-store sales increases in each subsequent quarter.
General and administrative expenses increased $1.8 million and $2.7
million to $11.2 million and $31.7 million for the 12- and 40-week periods ended
November 4,1996, respectively, over the applicable prior year periods. However,
as a percentage of total revenues, these expenses decreased 1.4% and 0.9%,
respectively, as compared with the same prior year periods. The increase in
general and administrative expenses in the 12 and 40-week periods ended November
4, 1996 is primarily the result of recording incentive compensation accruals for
regional restaurant management and selected corporate employees as a result of
improved restaurant operating performance. Also contributing to the increase
were increased amortization expense and various corporate legal expenses.
General and administrative expenses were unfavorably impacted in the prior year
by the inclusion of approximately $1.9 million of expenses associated with the
Company's Boston Market operations.
Interest expense for the 12-week period ended November 4, 1996
increased 20.0% to $2.8 million as compared with the prior period, primarily due
to new borrowings in connection with the Summit and Casa Bonita acquisitions
(see Notes C and D of Notes to the Consolidated Financial Statements). Interest
expense for the year-to-date period decreased 1.1% to $7.5 million, as compared
with the same periods in the prior year as a result of lower levels of
borrowings outstanding in the first two quarters of the fiscal year, the
prepayment of certain indebtedness earlier in the year and lower interest rates.
After the end of the quarter ended November 4, 1996, $49.0 million aggregate
principal amount of indebtedness was repaid by the Company.
Other income, net, in the 12- and 40-week periods of fiscal 1996 and
fiscal 1997 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, net, increased $1.0 million and $1.7 million
from the 12 and 40-week periods of fiscal 1996, respectively, primarily due to
lease income generated from the leasing of certain equipment and real property
following the formation of Boston West, L.L.C. ("Boston West"), in April 1995,
which contains the Company's former Boston Market operations.
FINANCIAL CONDITION
For the 40-week period ended November 4, 1996, the Company generated
cash flows from operating activities of $37.6 million, compared with $25.0
million for the same period of the prior year. Cash and cash equivalents in the
current period decreased $7.8 million from January 29, 1996, as the Company used
cash flows from operations to fund capital additions of approximately $31.5
million, to complete the acquisitions of Summit for $14.7 million (net of cash
acquired) and of Casa Bonita for $37.9 million (net of cash acquired and
minority interest), and to pay dividends to its shareholders of approximately
$1.5 million. The increase in new borrowings of $58.0 million was primarily used
to fund the acquisition of Casa Bonita and to replace an existing credit
facility of $20.0 million. The repayments of long-term debt include the $20.0
million repayment for the existing credit facility and $6.5 million of early
repayment of indebtedness. Also contributing to the decrease in cash and cash
equivalents was the purchase of the long-term investment in Rally's for
approximately $5.9 million. The decrease in cash and cash equivalents was
partially offset by cash generated from the sale of property and equipment of
approximately $3.8 million, the sale of marketable securities of approximately
$2.7 million, collections on notes receivable and related party notes receivable
of approximately $2.7 million, and the exercise of stock options which generated
approximately $2.2 million. Total cash and cash equivalents available to the
Company as of November 4, 1996 was $18.1 million, which included $2.5 million
invested in marketable securities.
Effective August 12, 1996, the Company entered into a new Credit
Agreement with a group of financial institutions. Under the terms of the Credit
Agreement, the Company borrowed the principal amount of $20.0 million under a
five-year, fully amortizing term loan, the proceeds of which were used to repay
existing indebtedness. The Credit Agreement also provides the Company with (i) a
revolving credit facility for working capital and other general corporate
purposes, under the terms of which the Company may borrow from time to time up
to $30.0 million (including a letter of credit subfacility of up to $20.0
million), and (ii) a revolving
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13
CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
credit facility for the purpose of financing investments in and acquisitions of
other companies, under the terms of which the Company may borrow from time to
time up to $25.0 million. The amounts advanced to the Company and remaining
outstanding under the revolving acquisition facility will convert after two
years into a three-year, fully amortizing loan. The Company's revolving credit
facility matures on July 31, 2001.
The Credit Agreement also includes customary affirmative and negative
covenants which, among other things, restrict the Company's ability to (i) incur
or create indebtedness on or with respect to its properties, (ii) incur
additional indebtedness, (iii) merge or consolidate with other entities, (iv)
sell assets and (v) declare or pay dividends or repurchase shares of capital
stock, subject in each of the foregoing cases to certain exceptions. In
addition, the Credit Agreement requires the Company to maintain certain
specified financial ratios and operating results.
Subsequent to quarter-end, on November 8, 1996, the Company issued
2,500,000 shares of its common stock at a public offering price of $28.625 per
share. Proceeds from the offering, net of underwriting discounts and commissions
and other related expenses estimated at $4.2 million, were $67.4 million. On
December 4, 1996, the Underwriters elected to purchase an additional 375,000
shares of common stock pursuant to an over-allotment option granted in
connection with the offering, generating an additional $10.2 million in net
proceeds.
The Company's primary source of liquidity is its revenues from
Company-operated restaurants, which are generated in cash. Future capital needs
will arise primarily for the construction of new Carl's Jr. restaurants, the
remodeling of existing restaurants, and the conversion of certain restaurants to
the Carl's Jr./Green Burrito dual-brand concept. The Company plans to open up to
ten new Carl's Jr. restaurants during the fourth quarter of fiscal 1997 and up
to 30 new restaurants in fiscal 1998. The Company also intends to open up to
seven new Taco Bueno restaurants in fiscal 1998. During the remainder of fiscal
1997, the Company also expects to continue with its schedule to remodel four
Carl's Jr. restaurants per week, including three image enhancement remodels and
one dual-concept conversion.
The Company believes that the net cash proceeds from the common stock
offering, together with cash generated from its various restaurants concept
operations, cash and marketable securities on hand as of November 4, 1996 and
amounts available under the Company's revolving credit facilities, will be
sufficient to satisfy the Company's capital spending and working capital
requirements for at least the next 12 months. If those sources of capital are
insufficient to satisfy the Company's capital spending and working capital
requirements, or if the Company determines to make any significant acquisitions
of or investments in other businesses, the Company may be required to sell
additional equity or debt securities or obtain additional credit facilities. The
sales, if any, of additional equity or convertible debt securities could result
in additional dilution to the Company's stockholders.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
10.42 First Amendment to Credit Agreement dated September 30,
1996 by and between CKE Restaurants, Inc.; NationsBank of
Texas, N.A.; and other parties.
11 Calculation of Earnings per Share
27 Financial Data Schedule (included in electronic filing only).
(b) Current Reports on Form 8-K:
Current Reports on Form 8-K dated August 20, 1996, August 27,
1996 and October 1, 1996 were filed during the third quarter
of the fiscal year to report the Credit Agreement entered into
with NationsBank of Texas, N.A. and a group of financial
institutions, to report the stock purchase agreement entered
into with Casa Bonita Holdings, Inc. relating to the
acquisition of Casa Bonita Incorporated, and to report the
closing of the acquisition of Casa Bonita Incorporated and
file the related financial statements of Casa Bonita
Incorporated and proforma financial information, respectively.
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 18, 1996 /s/ Joseph N. Stein
- ----------------- ---------------------------
Date Senior Vice President and
Chief Financial Officer
13