1
EXHIBIT 99.7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Hardee's Food Systems, Inc.
We have audited the accompanying combined balance sheets as of December 31,
1996 and 1995 of Hardee's Food Systems, Inc. (the "Company"), as defined in Note
1, consisting of the Restaurant and Equipment Divisions, to be acquired by CKE
Restaurants, Inc. ("CKE"), and the related combined statements of operations,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1996. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared to present the
financial position and related results of operations and cash flows of the
Company, which is to be acquired by CKE, and may not necessarily reflect the
financial position, results of operations and cash flows of the Company that
might have resulted had they operated as a stand-alone company.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
as of December 31, 1996 and 1995 and its results of operations and cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 121 in 1996.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
January 17, 1997, except for Note 20,
as to which the date is April 27, 1997
F-29
2
HARDEE'S FOOD SYSTEMS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
ASSETS
1995 1996
-------- --------
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 26,112 $ --
Receivables......................................................................... 27,897 22,277
Federal and state income taxes receivable........................................... 18,225 11,237
Inventories......................................................................... 13,936 10,906
Prepaid expenses and other current assets........................................... 2,957 3,016
Deferred income taxes............................................................... 18,561 --
-------- --------
Total current assets......................................................... 107,688 47,436
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land................................................................................ 118,067 93,065
Buildings, including improvements to leased properties.............................. 402,915 388,757
Equipment, vehicles and fixtures.................................................... 239,415 240,145
Construction in progress............................................................ 2,828 1,722
Leased property under capital leases................................................ 12,615 10,518
-------- --------
775,840 734,207
Less accumulated depreciation and amortization...................................... 345,729 336,883
-------- --------
Total property, plant and equipment, net..................................... 430,111 397,324
-------- --------
OTHER ASSETS:
Notes receivable due after one year................................................. 13,412 10,607
Intangible assets................................................................... 323 299
Deferred charges.................................................................... 1,138 627
Deferred income taxes............................................................... 23,511 34,306
Other............................................................................... 486 21
-------- --------
Total other assets........................................................... 38,870 45,860
-------- --------
TOTAL ASSETS.......................................................................... $576,669 $490,620
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Bank overdraft...................................................................... $ -- $ 5,359
Short-term borrowings............................................................... -- 10,000
Trade accounts payable.............................................................. 7,778 10,317
Trade accounts payable -- affiliate................................................. 6,708 5,851
Other accounts payable and accrued expenses......................................... 90,909 75,956
Deferred income..................................................................... 2,448 1,569
Current maturities of long-term debt................................................ 114 46
Current maturities of obligations under capital leases.............................. 730 606
Deferred income taxes............................................................... -- 1,166
-------- --------
Total current liabilities.................................................... 108,687 110,870
-------- --------
POSTRETIREMENT BENEFITS............................................................... 16,910 20,440
-------- --------
ESTIMATED FUTURE COST OF EXCESS PROPERTIES............................................ 14,738 21,403
-------- --------
LONG-TERM DEBT TO PARENT.............................................................. 131,777 --
-------- --------
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES.......................................... 1,690 1,709
-------- --------
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT MATURITIES........................ 7,006 6,124
-------- --------
DEFERRED CREDITS -- OTHER............................................................. 6,959 6,018
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock of no par value.
Authorized 10,000,000 shares;
155 and 225 shares issued at stated value of $.50 per share in 1995 and 1996,
respectively...................................................................... 1 1
Additional paid-in capital.......................................................... 253,583 316,596
Retained earnings................................................................... 35,318 7,459
-------- --------
Total Shareholder's Equity................................................... 288,902 324,056
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................................ $576,669 $490,620
======== ========
See Accompanying Notes to Combined Financial Statements.
F-30
3
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
-------- -------- --------
REVENUES:
Company-operated restaurants............................. $711,979 $702,693 $706,391
Franchised and licensed restaurants and other............ 126,662 118,137 99,653
-------- -------- --------
Total revenues........................................ 838,641 820,830 806,044
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging.................................... 234,251 240,074 238,359
Payroll and other employee benefits................... 234,596 255,942 264,195
Occupancy and other operating expenses................ 174,982 185,829 175,892
-------- -------- --------
643,829 681,845 678,446
Franchised and licensed restaurants and other............ 34,010 35,451 34,174
Advertising expenses..................................... 35,744 43,734 44,075
General and administrative expenses...................... 56,766 74,912 79,735
-------- -------- --------
Total operating costs and expenses............... 770,349 835,942 836,430
-------- -------- --------
OPERATING INCOME (LOSS).................................... 68,292 (15,112) (30,386)
INTEREST EXPENSE........................................... 12,155 13,985 6,981
OTHER EXPENSES (INCOME), NET............................... 500 500 (9,508)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS... 55,637 (29,597) (27,859)
INCOME TAX EXPENSE (BENEFIT)............................... 22,255 (11,839) --
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................... 33,382 (17,758) (27,859)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF
INCOME TAX BENEFIT OF $4,097............................. (6,146) -- --
-------- -------- --------
NET INCOME (LOSS).......................................... $ 27,236 $(17,758) $(27,859)
======== ======== ========
See Accompanying Notes to Combined Financial Statements.
F-31
4
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
-------- -------- --------
COMMON STOCK AT BEGINNING AND END OF YEAR.................. $ 1 $ 1 $ 1
ADDITIONAL PAID-IN CAPITAL:
Amount at beginning of year.............................. 142,074 153,583 253,583
Capital contributions.................................... 11,509 100,000 63,013
-------- -------- --------
Amount at end of year............................ 153,583 253,583 316,596
-------- -------- --------
RETAINED EARNINGS:
Amount at beginning of year.............................. 56,009 63,076 35,318
Net income (loss)........................................ 27,236 (17,758) (27,859)
Dividends paid........................................... (20,169) (10,000) --
-------- -------- --------
Amount at end of year............................ 63,076 35,318 7,459
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY................................. $216,660 $288,902 $324,056
======== ======== ========
See Accompanying Notes to Combined Financial Statements.
F-32
5
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)............................................... $ 27,236 $ (17,758) $ (27,859)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation (including amortization of leased property under
capital leases)............................................. 43,044 43,939 49,400
Amortization of intangible assets............................ 200 251 180
Loss (gain) on disposition of property, plant and
equipment................................................... 1,939 4,376 (222)
Provision for postretirement benefits........................ 642 1,331 3,530
Amortization of gain on sale of real estate.................. (1,995) (886) (941)
Provision (benefit) for (from) excess properties expense..... (2,018) (3,204) 6,665
Provision (benefit) for (from) deferred income taxes......... (1,867) 7,172 8,932
Provision for bad debts...................................... 6,986 16,575 6,800
Loss on early extinguishment of debt......................... 10,243 -- --
Changes in assets and liabilities:
Receivables................................................ 4,124 (17,573) 4,266
Inventories................................................ 1,381 1,167 3,030
Prepaid expenses and other current assets.................. 215 230 (59)
Trade accounts payable..................................... (6,418) (2,531) 1,682
Other accounts payable and accrued expenses................ 1,300 7,456 (2,790)
Federal and state income taxes............................. 8,479 (19,276) 6,988
Deferred income............................................ 237 (1,632) (879)
--------- --------- ---------
Net cash provided by operating activities.................... 93,728 19,637 58,723
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment...................... (32,720) (83,550) (68,262)
Proceeds from disposition of property, plant and equipment...... 42,093 2,177 42,019
Decrease in intangibles and other assets........................ 127 335 820
Issuance of notes receivable.................................... (24,479) (932) (7,298)
Collection on notes receivable and direct financing leases...... 14,987 2,597 2,346
Purchase of investment.......................................... (4,000) -- --
Purchase of joint venture, net of cash acquired................. (20,400) -- --
--------- --------- ---------
Net cash used in investing activities........................ (24,392) (79,373) (30,375)
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Repayment of long-term debt..................................... (6,978) (3) (49)
Proceeds from short-term borrowings............................. 5,934 -- 10,000
Repayment of short-term borrowings.............................. -- (5,934) --
Proceeds (repayment) of notes payable to parent................. 95,213 24,144 (181,777)
Bank overdrafts................................................. -- -- 5,359
Repayment of obligations under capital leases................... (928) (1,515) (1,006)
Repurchase of long-term debt.................................... (155,161) -- --
Net transfers from (to) parent.................................. (20,169) 40,000 113,013
--------- --------- ---------
Net cash provided by (used in) financing activities.......... (82,089) 56,692 (54,460)
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS......................... (12,753) (3,044) (26,112)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.................... 41,909 29,156 26,112
--------- --------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR.......................... $ 29,156 $ 26,112 $ --
========= ========= =========
See Accompanying Notes to Combined Financial Statements
F-33
6
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS (CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of capitalized amount)......................... $ 16,919 $ 18,479 $ 13,657
Income taxes................................................. 10,274 10,440 2,938
Purchase of joint venture, net of cash acquired:
Working capital, other than cash............................. $ (712) $ -- $ --
Property, plant and equipment................................ (101,541) -- --
Long-term debt............................................... 80,855 -- --
Noncurrent liabilities....................................... 998 -- --
--------- --------- ---------
Net cash used to acquire joint venture.................. $ (20,400) $ -- $ --
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Exchange of accounts receivable for notes receivable............ $ -- $ -- $ 377
Property, plant and equipment, net has been written down against
a provision for impairment of long-lived assets.............. $ -- $ -- $ 12,163
In conjunction with the acquisition/sale of restaurants to
franchisees, the Company exchanged notes receivable in the
amount of.................................................... $ 1,717 $ 151 $ 2,311
In conjunction with the sale of restaurants to a third party,
the Company recorded the following losses against a reserve
in other accounts payable:
Property, plant and equipment................................ $ 16,831 $ -- $ --
Intangible assets............................................ 2,054 -- --
In conjunction with the contribution of joint venture interest
by the parent company, the Company received or reclassed the
following assets and liabilities:
Working capital.............................................. $ (1,328) $ -- $ --
Property, plant and equipment................................ (82,432) -- --
Investment in joint venture.................................. 250 -- --
Other assets................................................. (1,066) -- --
Long-term debt............................................... 72,337 -- --
Noncurrent liabilities....................................... 730 -- --
Additional paid-in capital................................... 11,509 -- --
In conjunction with the sale of 20 shares of Hardee's common
stock to Imasco Holdings, the Company received a note which
is included as a reduction in long-term debt in the amount
of........................................................... $ -- $ 50,000 $ --
The following amounts have been recorded against a reserve in
other accounts payable:
Receivables.................................................. $ -- $ 18,489 $ --
Inventories.................................................. -- (377) --
Prepaid expenses and other current assets.................... -- (49) --
Property, plant and equipment, net........................... -- (9,442) --
Equity investment............................................ -- 4,000 --
Other accounts payable and accrued expenses.................. -- 14,053 --
The Company reduced the basis in the fixed assets acquired
through a sale and leaseback real estate transaction by the
related unamortized deferred gain............................ $ 45,472 $ -- $ --
See Accompanying Notes to Combined Financial Statements.
F-34
7
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of Hardee's Food
Systems, Inc. (the "Company") a North Carolina Corporation and wholly-owned
subsidiary of Imasco Holdings, Inc. ("Imasco Holdings"), a Delaware Corporation.
Imasco Holdings is a wholly-owned subsidiary of Imasco Limited, a Canadian
Corporation.
The accounts of Hardee's Food Systems, Inc. include the Restaurant and
Equipment Divisions, however, they do not include the accounts of Fast Food
Merchandisers, Inc. ("FFM") and MRO Mid-Atlantic ("MRO"), two directly owned
subsidiaries.
The common stock of Hardee's Food Systems, Inc. will be sold to CKE
Restaurants, Inc. under a stock purchase agreement dated April 27, 1997. See
Note 20. FMM and MRO will be spun off to Imasco Holdings or one of its
affiliates.
The Restaurant Division operates a system of approximately 3,200 company
and franchise quick-service restaurants under the Hardee's trademark in 37
states and 10 foreign countries. The Equipment Division is engaged in the
business of selling equipment and small wares to Hardee's and other restaurant
businesses.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories. Inventories are carried at the lower of cost (first-in,
first-out) or replacement market.
Property, Plant and Equipment. Property, plant and equipment ("PP&E") are
stated at cost, except for PP&E that have been impaired, for which the carrying
amount is reduced to estimated fair value. For financial reporting purposes,
depreciation is provided on a straight-line basis. Various accelerated methods
are used for income tax reporting. Estimated useful lives are as follows:
Restaurant buildings.......................... 25 years primarily
Building upgrades and leasehold
improvements................................ 3 to 10 years
Restaurant equipment and signs................ 3 to 7 years
Furniture, fixtures and other equipment....... 3 to 7 years
Office and warehouse buildings................ 20 to 40 years
Leased property under capital leases and
leasehold improvements...................... Lesser of useful life of
asset or term of lease
Interest costs for construction projects are capitalized during the
construction period by applying current interest rates paid by the Company to
the amount of funds expended on a daily basis until the project is completed.
Expenses incurred in locating sites for new restaurants and supervising
construction of new and remodeled restaurant buildings are capitalized and
included in the cost of the related assets.
Leases. Leases which meet certain criteria are designated as capital leases
and are recorded as if the Company had acquired the related assets through debt
financing. The assets are classified on the balance sheets as "Leased property
under capital leases" and the related liabilities as "Obligations under capital
leases." This accounting method results in the recording of interest expense and
depreciation rather than rental expense for such leases for financial reporting
purposes. This accounting method is not utilized for income tax purposes. The
land element of the Company's capital leases and other leases which do not meet
the criteria of capital leases are classified as operating leases; accordingly,
the rental expense related to the land element and other leases is recorded in
the period in which such rental expense occurs.
The Company leases some restaurant locations and equipment to others and
treats those which meet the requirements for capitalization as direct financing
or sales-type leases.
F-35
8
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Amortization of Intangible Assets. Intangible assets are amortized
straight-line over forty years or less.
Pre-operating Expenses. Pre-operating expenses of new restaurants are
charged to expense as incurred.
Federal and State Income Taxes. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." This Statement requires the use of the asset and liability
approach for financial accounting and reporting for income taxes.
License Fee Income. The Company's current standard initial license fee for
license holders as of December 31, 1995 is $15,000. For first time license
holders subsequent to December 31, 1995, the current standard initial license
fee is $35,000 for the first restaurant and $30,000 thereafter. The license
agreement requires a monthly service fee equal to 3 1/2% of gross sales for the
first five years of operations and 4% thereafter. Licenses currently are granted
for initial terms of 20 years. Initial license fee income is recognized when the
licensed restaurant opens. The Company is generally obligated to provide site
selection counseling, building and equipment plans and specifications, training,
preopening and operating assistance, advertising and marketing assistance,
continual individual and group counseling, accounting forms and an operating
manual.
Excess Properties. At the time decisions are made to close restaurants,
earnings are charged and a provision is established, subject to periodic review
and adjustment, for asset disposal costs and for estimated future expenditures
for rents, real estate taxes and other occupancy costs, net of estimated
sublease income and other recoveries from the properties. Such amounts are
recorded at the present value of the future payments.
Retirement Plans. Prior to January 1, 1995, the Company and its
subsidiaries had defined benefit pension plans covering employees between the
ages of 21 and 70 with at least 1,000 hours of service annually. Employees were
eligible to participate in the plans after one year of service and became vested
after five years of service. There were no contributions by employees.
Effective December 31, 1994, the Company curtailed its qualified defined
benefit pension plans and implemented a 401(k) defined contribution plan on
January 1, 1995.
On January 1, 1995, the Company amended and restated its qualified
after-tax savings plan and implemented a 401(k) defined contribution Retirement
Savings Plan ("RSP"). The plan obtained its latest determination letter on
February 2, 1996, in which the Internal Revenue Service stated that the plan, as
then designed, was in compliance with the applicable requirements of the
Internal Revenue Code. The RSP covers non-highly compensated employees that have
reached age 21 with at least one year of service. Restaurant hourly employees
are not eligible to participate in the RSP.
Effective January 3, 1995, the Company also amended its non-qualified
savings plan and implemented the Management Savings Plan ("MSP"), a
non-qualified deferred annuity arrangement for its highly compensated employees.
Both the RSP and the MSP permit voluntary employee contributions and provide for
service-related matching and profit-sharing contributions by the Company.
The Company has a non-qualified defined benefit pension plan for officers.
The plan is unfunded. The officer must have five years of credited service and
five years as an officer to receive full benefits.
Postemployment Benefits. Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Post-employment Benefits," requires employers
who provide benefits to former or inactive employees after employment but before
retirement to recognize the liability for these benefits on an accrual basis
rather than as paid. Such benefits provided by the Company are immaterial and do
not require any additional accruals.
Postretirement Benefits Other Than Pensions. The Company provides an
unfunded retiree medical benefit plan for substantially all employees (except
restaurant hourly employees) who retire on or after age 55
F-36
9
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
with at least 5 years of service. The retiree pays the actual costs of the plan
with a Company subsidy provided for retirees with 10 or more years of credited
service. The dollar amount of this subsidy will be capped in 2003.
Accounting Changes. The Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" in the fourth quarter of
1996. SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment and written down to fair value whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Pervasiveness of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Statement of Cash Flows. For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Reclassifications. Certain prior year amounts have been reclassified to
conform with 1996 presentations.
NOTE 3 -- IMPAIRMENT OF LONG-LIVED ASSETS
As noted above, the Company adopted SFAS 121 in 1996 for purposes of
determining and measuring impairment of certain long-lived assets to be held and
used in the business. The Company deems an asset to be impaired if a forecast of
undiscounted future operating cash flows directly related to the asset,
including disposal value if any, is less than its carrying amount. SFAS 121
stipulates that when evaluating and measuring impairment, assets shall be
grouped at the lowest level for which there are identifiable, largely
independent cash flows. The Company has identified the appropriate grouping of
assets to be designated market areas for the restaurant division. Factors
leading to impairment were a combination of historical losses and anticipated
future losses. If an asset is determined to be impaired, the loss is measured as
the amount by which the carrying amount of the asset exceeds its fair value.
Fair value is based on quoted market prices in active markets, if available. If
quoted market prices are not available, an estimate of fair value is based on
the best information available, including prices for similar assets or the
results of valuation techniques.
Adoption of SFAS 121 resulted in a non-cash pre-tax charge of $12.2 million
related to restaurants located in designated market areas for which a forecast
of undiscounted future operating cash flows is less than their carrying value.
Considerable management judgment is necessary to estimate future cash flows.
Accordingly, actual results could vary significantly from such estimates.
NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
Notes Receivable
The fair value of notes receivable is estimated by discounting their future
cash flows using an interest rate being used in current transactions, reduced by
an estimate of doubtful accounts. The carrying value of notes receivable, net of
allowance for doubtful accounts, approximates the estimated fair market value.
F-37
10
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Long-Term Debt
The carrying amount approximates fair value because the debt is primarily
with related parties and rates paid are based on market rates negotiated
annually.
NOTE 5 -- RECEIVABLES
Receivables consist of the following at December 31, 1995 and 1996 (in
thousands):
1995 1996
------- -------
Trade accounts................................... $23,093 $28,539
Notes............................................ 26,918 23,183
Other accounts................................... 12,420 9,022
------- -------
Total.................................. 62,431 60,744
Less allowance for doubtful accounts............. 21,122 27,860
------- -------
Receivables, net....................... $41,309 $32,884
======= =======
The receivables are presented in the balance sheets as follows:
Current assets................................... $27,897 $22,277
======= =======
Other assets..................................... $13,412 $10,607
======= =======
NOTE 6 -- INVENTORIES
Inventories consist of the following at December 31, 1995 and 1996 (in
thousands):
1995 1996
------- -------
Restaurant inventories........................... $ 7,110 $ 6,182
Equipment for sale............................... 6,563 4,382
Supplies and promotional items................... 263 342
------- -------
Total inventories...................... $13,936 $10,906
======= =======
NOTE 7 -- DEFERRED CREDITS -- OTHER AND SALE AND LEASEBACK OF RESTAURANTS
In 1988, the Company entered into a real estate transaction in which the
commercial real property and improvements of 279 of its restaurants were
contributed to a joint venture formed by the Company and an unrelated third
party and subsequently leased back for a period of 15 years. In 1988, the
Company sold 98% of its 50% interest in the joint venture to an affiliated
company. On April 6, 1994, the Company exercised its buyout option pursuant to
the joint venture agreement and purchased 96% of the unrelated third party
interest in the joint venture for a cash consideration of approximately $19.6
million. On April 7, 1994, the joint venture liquidated the third party's
remaining 2% interest for approximately $817,000. Prior to the buyout on April
6, 1994, the Company accounted for its investment in the joint venture under the
equity method. Its share of joint venture earnings for the year ended December
31, 1994 was $9,000.
Also in 1988, the Company entered into a real estate transaction in which
it sold commercial real property and improvements of 101 restaurant locations to
an unaffiliated third party and leased the properties back for a period of
fifteen and one-half years. The lease is being accounted for as an operating
lease.
The gain that the Company realized on both of the above real estate
transactions was deferred and classified in the accompanying balance sheets as
Deferred Credits -- Other. At the date of the joint venture buyout, the basis in
the fixed assets acquired was reduced by the related unamortized deferred gain
of
F-38
11
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
$45,472,000. The gain on the sale of the 101 restaurant locations is being
amortized over the life of the lease which expires in June 2004.
The remaining lease transaction contains certain covenants which requires
maintenance of a minimum amount of shareholder's equity and a minimum amount of
combined shareholder's equity and affiliated indebtedness. The Company is in
compliance with these covenants as of December 31, 1996.
NOTE 8 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment, at cost, consist of the following at
December 31, 1995 and 1996 (in thousands):
1995 1996
-------- --------
Land............................................. $116,188 $ 92,171
Buildings and leasehold improvements............. 394,156 381,291
Restaurant equipment............................. 119,178 122,662
Other equipment and signs........................ 93,011 89,386
Automotive and aircraft.......................... 3,493 3,493
Furniture, fixtures and other.................... 23,493 24,471
Construction in progress......................... 2,828 1,722
Capital leases................................... 12,615 10,518
Leased to licensees and others:
Land........................................... 1,879 894
Buildings and leasehold improvements........... 8,759 7,466
Equipment and signs............................ 240 133
-------- --------
Total.................................. $775,840 $734,207
======== ========
NOTE 9 -- INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges are stated at cost, net of
accumulated amortization of $816,000 and $3,149,000 at December 31, 1995 and
1996, respectively.
NOTE 10 -- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Other accounts payable and accrued expenses consist of the following at
December 31, 1995 and 1996 (in thousands):
1995 1996
------- -------
Salaries and wages............................... $ 8,459 $ 5,630
Rent............................................. 12,220 12,447
Taxes, other than income......................... 12,184 11,439
Insurance........................................ 28,273 28,604
Savings plan contributions....................... 5,516 4,332
Utilities........................................ 2,048 2,167
Other............................................ 22,209 11,337
------- -------
Total.................................. $90,909 $75,956
======= =======
F-39
12
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE 11 -- LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996 (in
thousands):
1995 1996
-------- ------
Unsecured credit facility with Imasco Finance LLC
(formerly Imasco B.V.)................................. $221,162 $ --
Advances to Imasco Holdings.............................. (58,126) --
Advances from ITL........................................ 4,132 --
Advances to Genstar Land................................. (8,680) --
Advances to Fast Food Merchandisers, Inc................. (26,711) --
Other.................................................... 1,804 1,755
-------- ------
133,581 1,755
Less current maturities.................................. 114 46
-------- ------
Portion payable after one year........................... $133,467 $1,709
======== ======
The aggregate principal maturities of other long-term debt are as follows
(in thousands):
1997.............................................. $ 46
1998.............................................. 176
1999.............................................. 30
2000.............................................. 30
2001 and thereafter............................... 1,473
At December 31, 1996, the Company had an unsecured credit facility with
Imasco Finance, LLC for an amount of $750 million. The ten-year facility expires
December 31, 2004, and is to be used by the Company as needed. Interest is
negotiated annually with the average rates being 8.4%, 8.5%, and 8.5% for the
years ended December 31, 1994, 1995, and 1996, respectively.
In 1994, the Company had various credit facilities with Imasco B.V.
(Amsterdam and Luxembourg Branches), a Netherlands corporation and wholly-owned
subsidiary of Imasco Limited. On January 2, 1995, Imasco B.V. sold the Company's
existing outstanding credit facility (in the aggregate amount of $511 million)
to Imasco Finance, LLC.
The Company advances and borrows funds to and from Imasco Holdings and
subsidiaries of Imasco Limited at negotiated rates. The Company considers Imasco
Limited's subsidiaries as one group for financing purposes.
In 1994, the Company purchased at a premium $138.3 million of its 10.5%
mortgage notes. The purchase resulted in an extraordinary charge of $9.8
million. On January 5, 1995, the Company purchased at a premium its remaining
10.5% mortgage notes. The purchase resulted in an extraordinary charge of
approximately $350,000 for which a reserve was established in December 1994.
The Company has a line of credit with a commercial bank for an amount of
$15 million of which $0 and $10 million was utilized at December 31, 1995 and
1996, respectively.
NOTE 12 -- LEASES
The Company is a party to a number of noncancelable lease agreements
primarily involving restaurant land and buildings expiring on various dates
through 2018. The leases generally have initial terms of 10 to 25 years with
renewal options ranging from one five-year period to four five-year periods and
provide for
F-40
13
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
minimum rents or a rent based on a percentage of sales, whichever is greater.
The Company is also responsible for executory costs.
The following is a schedule of future minimum payments under capital leases
and operating leases and obligations under capital leases (present value of
future minimum rentals) as of December 31, 1996 (in thousands):
CAPITAL OPERATING
------- -----------
REAL REAL
PERIODS ESTATE ESTATE TOTAL
---------------------------------------- ------- ----------- --------
1997.................................... $ 1,617 $ 41,723 $ 43,340
1998.................................... 1,524 37,454 38,978
1999.................................... 1,468 32,851 34,319
2000.................................... 1,434 27,560 28,994
2001.................................... 1,406 24,177 25,583
2002 and thereafter..................... 5,355 77,852 83,207
------- -------- --------
Total minimum lease payments............ 12,804 $ 241,617 $254,421
======== ========
Less amount representing interest....... 6,074
-------
Total obligations under capital
leases................................ 6,730
Less current maturities of obligations
under capital leases.................. 606
-------
Obligations under capital leases payable
after one year........................ $ 6,124
=======
The Company is contingently liable on leases which have been assigned to
unaffiliated companies with aggregate minimum annual rentals of $1,072,000
expiring in various years through 2011.
The following is a schedule of future minimum rentals receivable under
operating leases and subleases at December 31, 1996 (in thousands):
PERIODS
---------------------------------------------------
1997............................................... $ 6,597
1998............................................... 6,264
1999............................................... 5,666
2000............................................... 4,914
2001............................................... 4,260
2002 and thereafter................................ 29,463
-------
Total minimum rentals receivable................... $57,164
=======
Rent expense entering into the determination of net earnings follows (in
thousands):
YEAR ENDED DECEMBER 31
----------------------------
1994 1995 1996
------- -------- -------
Minimum rent on operating leases......................... $37,101 $ 29,821 $30,225
Contingent rent based on sales for:
Capital leases......................................... 309 265 142
Operating leases....................................... 4,579 3,629 3,862
Rent income from subleases............................... (13,972) (12,288) (8,901)
Transportation equipment rent............................ 2,021 1,866 1,980
------- -------- -------
Net rent expense......................................... $30,038 $ 23,293 $27,308
======= ======== =======
F-41
14
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE 13 -- RESTAURANTS IN OPERATION
The following table sets forth the total number of restaurants in operation
at December 31, 1994, 1995, and 1996:
1994 1995 1996
----- ----- -----
Hardee's Company............................................ 805 864 808
Hardee's Franchise.......................................... 2,711 2,600 2,417
----- ----- -----
Total..................................................... 3,516 3,464 3,225
===== ===== =====
NOTE 14 -- RETIREMENT AND SAVINGS PLANS
Effective December 31, 1994, the Company curtailed its qualified defined
benefit pension plans and implemented a qualified defined contribution plan
beginning January 1, 1995. As a result of the curtailment of the defined benefit
plan, the Company realized a gain of $7.0 million.
The Company's funding policy for its qualified defined benefit plans is to
contribute amounts determined in accordance with the minimum contribution
requirements of the Internal Revenue Service regulations. The Company made a
cash contribution of $712,000 for the plan year ended December 31, 1994 and
$984,000 for the plan year ended December 31, 1995, and will make no cash
contributions for the plan year ended December 31, 1996.
Additionally, the Company funds non-qualified defined benefit plan benefits
on a current basis. These cash contributions were $1,048,000 in 1994, $1,029,000
in 1995 and $1,077,000 in 1996.
The net periodic pension (benefit) cost for 1994, 1995, and 1996 includes
the following components (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
------- ------- -------
Curtailment gain...................................... $(7,046) $ -- $ --
Service cost -- benefits earned during the period..... 2,622 192 386
Interest cost on projected benefit obligation......... 4,310 3,694 3,885
Actual return on assets............................... (3,414) (3,646) (3,179)
Amortization of prior service cost.................... 129 157 157
Amortization of (gains) losses........................ 86 (516) 162
Amortization of unrecognized net asset at January 1,
1985................................................ (407) (407) (407)
------- ------- -------
Net periodic pension (benefit) cost................... $(3,720) $ (526) $ 1,004
======= ======= =======
The net periodic pension (benefit) cost was determined for the Company's
fiscal year using the pension plan year of January 1 through December 31. The
plans' funded status was determined as of December 31, 1995 and 1996 using the
following assumptions:
1995 1996
---- ----
Discount rates....................................................... 7.75% 7.75%
Rates of increase in compensation levels............................. 4.75% 4.75%
Expected long-term rate of return on assets.......................... 7.75% 7.75%
The discount rates are interest rates at which it is estimated that the
obligations of the plans could be settled through purchase of annuities as of
the dates shown.
F-42
15
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
The following table sets forth the plans' funded status and the amounts
recognized in the Company's combined balance sheets at December 31, 1995 and
1996 (in thousands).
1995 1996
----------------------------- -----------------------------
NON-QUALIFIED NON-QUALIFIED
QUALIFIED UNFUNDED QUALIFIED UNFUNDED
PLANS PLANS PLANS PLANS
---------- -------------- ---------- --------------
Actuarial present value of benefit
obligations:
Vested benefit obligation............... $ (34,439) $(11,738) $ (37,922) $(11,622)
======== ======== ======== ========
Accumulated benefit obligation.......... $ (35,472) $(11,797) $ (38,936) $(11,699)
======== ======== ======== ========
Projected benefit obligation.............. $ (35,472) $(14,053) $ (38,936) $(13,404)
Plan assets at fair value................. 44,848 -- 48,199 --
-------- -------- -------- --------
Projected benefit obligation less plan
assets.................................. 9,376 (14,053) 9,263 (13,404)
Unrecognized net (gain) loss.............. (2,998) 1,124 (3,900) (46)
Prior service (benefit) cost not yet
recognized in net periodic pension
cost.................................... 12 1,408 11 1,272
Unrecognized net (asset) obligation at
January 1, 1985......................... (2,019) 357 (1,544) 289
Additional minimum liability.............. -- (633) -- --
-------- -------- -------- --------
Pension asset (liability) recognized in
the combined balance sheets............. $ 4,371 $(11,797) $ 3,830 $(11,889)
======== ======== ======== ========
Prior to January 1, 1995, the Company had a qualified savings plan which
provided for basic and supplemental employee contributions and for the Company
to match up to 25% of the employee's basic contributions not to exceed 6% of the
employee's earnings. Prior to January 3, 1995, the Company had a non-qualified
savings plan in which it matched up to 30% of the employee's basic
contributions. The expense to the Company for the savings plans was
approximately $1,686,000 for the year ended December 31, 1994.
The RSP permits voluntary employee contributions on a pre-tax or after-tax
basis, and provides for the Company to match from 25%-60%, depending upon years
of service, of the first 6% of the employee's contributions. The MSP permits
voluntary employee contributions on an after-tax basis and provides for the
Company to match from 31.25%-75% of the first 6% of the employee's
contributions. The RSP and MSP provide for profit-sharing contributions from
2%-6% and 2.5%-7.5%, respectively, of the employee's earnings, based on years of
service. The expense to the Company for the RSP and MSP was approximately
$6,162,000 and $4,224,000 for the years ended December 31, 1995 and 1996,
respectively.
NOTE 15 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides an unfunded retiree medical benefit plan for
substantially all employees (except restaurant hourly employees) who retire on
or after age 55 with at least 5 years of service. The retiree pays the actual
costs of the plan with a Company subsidy provided for retirees with 10 or more
years of credited service. The dollar amount of this subsidy will be capped in
2003.
The total postretirement benefit cost for 1994, 1995, and 1996 includes the
following components (in thousands):
1994 1995 1996
---- ---- ----
Service cost -- benefits attributed to service during the
period...................................................... $170 $114 $112
Interest cost on accumulated postretirement benefit
obligation.................................................. 258 222 208
Amortization of (gains) losses................................ 2 (42) (49)
---- ---- ----
Net periodic postretirement benefit cost...................... $430 $294 $271
==== ==== ====
F-43
16
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
The following sets forth the components of the accumulated postretirement
benefit obligation of the plan and the amounts recognized in the Company's
combined balance sheets at December 31, 1995 and 1996 (in thousands):
1995 1996
------- -------
Accumulated postretirement benefit obligation:
Fully eligible active plan participants........................ $ (96) $ (82)
Other active participants...................................... (1,794) (1,608)
Retirees....................................................... (1,425) (1,249)
------- -------
Total.................................................. (3,315) (2,939)
Unrecognized net gain............................................ (831) (1,477)
------- -------
Postretirement benefit obligation recognized in the combined
balance sheets................................................. $(4,146) $(4,416)
======= =======
The assumed health care cost trend rates used to measure the expected cost
of benefits was 12.5% for the current year decreasing 0.5% per year to an
ultimate rate of 7% due to capping the Company subsidy at that time.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996, by $540,000 and would
increase the service and cost components of net periodic postretirement benefit
cost for 1996 by $53,000.
The weighted-average assumed discount rate used to measure the accumulated
postretirement benefit obligation for the years 1995 and 1996 was 7.75%.
NOTE 16 -- FEDERAL AND STATE INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended December 31, 1994, 1995, and 1996 (in thousands):
1994 1995 1996
------- -------- -------
Current:
Federal............................................ $22,382 $(18,311) $(9,478)
State and local.................................... 1,740 (700) 546
------- -------- -------
Total........................................... 24,122 (19,011) (8,932)
------- -------- -------
Deferred:
Federal............................................ (1,634) 6,275 7,816
State and local.................................... (233) 897 1,116
------- -------- -------
Total........................................... (1,867) 7,172 8,932
------- -------- -------
Provision (benefit) before extraordinary item........ 22,255 (11,839) --
Benefit of extraordinary item........................ (4,097) -- --
------- -------- -------
Provision (benefit) for income taxes................. $18,158 $(11,839) $ --
======= ======== =======
F-44
17
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Significant components of the Company's deferred income tax assets and
liabilities at December 31, 1995 and 1996 are as follows (in thousands):
1995 1996
-------- --------
Current deferred tax assets (liabilities):
Receivables.................................................. $ 4,486 $ 7,141
Inventories.................................................. 180 255
Accrued expenses............................................. 9,301 12,449
Closed store reserve......................................... 12,906 16,945
Other........................................................ 652 (16,610)
Valuation allowance.......................................... (8,964) (21,346)
-------- --------
Total current deferred tax assets.................... 18,561 (1,166)
-------- --------
Noncurrent deferred tax assets (liabilities):
Depreciation................................................. 18,246 15,273
Receivables.................................................. 3,930 3,810
Deferred gain -- real estate................................. (12,115) (12,538)
Estimated future cost of excess properties................... 10,756 --
Postretirement benefits...................................... 7,599 7,754
Credit carryforward.......................................... -- 9,858
AMT carryforward............................................. -- 6,539
Other........................................................ (141) 20,135
Valuation allowance.......................................... (4,764) (16,525)
-------- --------
Total noncurrent deferred tax assets................. 23,511 34,306
-------- --------
Net deferred tax assets........................................ $ 42,072 $ 33,140
======== ========
The credit carryforwards are principally comprised of targeted jobs tax
credits and other credits of $9.9 million which expire from 2005 through 2007
and alternative minimum tax credits of $6.5 million which have indefinite
carryover periods.
A valuation allowance has been recognized, based on the weight of available
evidence, as it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
A reconciliation of the provision for income taxes to income tax expense
(benefit) computed by applying the statutory federal income tax rate to pre-tax
earnings, is as follows:
1994 1995 1996
--------------- ---------------- ---------------
Statutory federal income tax.............. $ 19,473 35.0% $(10,359) 35.0% $(9,751) 35.0%
Creditable minimum tax.................... -- -- -- -- 1,583 (5.7)
State and local income taxes, net of
federal income tax benefits............. 2,782 5.0 (1,480) 5.0 (1,393) 5.0
Valuation reserve......................... -- -- 13,728 (46.3) 24,143 (86.6)
Other permanent differences and
miscellaneous........................... -- -- (13,728) 46.3 (14,582) 52.3
----
-
-------- -------- ----- ------- ----
Provision (benefit) before extraordinary
item and accounting change.............. $ 22,255 40.0% $(11,839) 40.0% $ -- --%
======== ===== ======== ===== ======= ====
The Company is a wholly-owned subsidiary of Imasco Holdings and is included
in its consolidated federal income tax returns. Imasco Holdings allocates income
tax expense or benefit as if the Company were filing separate federal income tax
returns. The amount of federal income taxes due to (from) Imasco Holdings for
1994, 1995, and 1996 was $6,177,000, ($12,614,000), and ($14,188,000),
respectively.
F-45
18
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
The Internal Revenue Service is currently examining Imasco Holdings' 1993
and 1994 income tax returns. As of December 31, 1996, no adjustments have been
assessed. The Company believes that it has made adequate provision for income
taxes that may become payable with respect to this examination.
NOTE 17 -- LITIGATION
In the ordinary course of its business the Company is a party to a number
of legal proceedings as a plaintiff or defendant; however, management does not
believe that the ultimate disposition of any or all of these proceedings will
have a material effect on the financial statements of the Company.
NOTE 18 -- COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company had outstanding capital commitments of
approximately $23,720,000.
NOTE 19 -- RELATED PARTY TRANSACTIONS
In addition to the Company, the following companies are controlled directly
or indirectly by Imasco Limited:
Imasco Finance, LLC ("Imasco LLC")
ITL (USA) Limited ("ITL")
Genstar Land Company ("Genstar Land")
During the years ended December 31, 1994, 1995, and 1996, the Company had
the following transactions with affiliates (in thousands):
1994 1995 1996
------- ------- --------
Payment of management fee to Imasco
Holdings................................... $ 500 $ 500 $ 860
Receipt of management fee from FFM........... -- -- (10,368)
Payment of interest to Imasco Holdings....... 112 389 205
Payment of interest to Imasco LLC............ 13,902 15,757 11,337
Payment of interest to ITL................... 729 839 515
Receipt of interest from Genstar Land........ (931) (840) (2,619)
Receipt of interest from FFM................. (4,332) (3,654) (2,725)
On December 18, 1995, the Company issued 20 shares of its no par value,
$.50 per share stated value common stock to Imasco Holdings in exchange for
$50,000,000 cash and a $50,000,000 note. The note was paid on March 1, 1996. On
April 19, 1996, the Company issued 30 shares of its no par value, $.50 per share
stated value common stock to Imasco Holdings in exchange for $100,000,000. On
October 16, 1996, the Company issued an additional 40 shares of its no par
value, $.50 per share stated value common stock to Imasco Holdings in exchange
for $100,000,000. A return of capital of $136,987 has been offset against the
1996 capital contributions.
NOTE 20 -- SUBSEQUENT EVENTS
On March 19, 1997, Flagstar Enterprises, Inc. ("Flagstar"), which operates
approximately 580 Hardee's restaurants, commenced an arbitration proceeding
against Hardee's pursuant to provisions of its license agreements. The Demand
for Arbitration, which contains six claims, (i) alleges that Hardee's has
breached certain contractual, fiduciary, and statutory duties allegedly owed to
Flagstar, (ii) seeks a declaration relieving Flagstar from its obligations under
the post-termination covenants against competition contained in its license
agreements, and (iii) seeks an award of monetary damages in excess of $500
million (subject to trebling
F-46
19
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
pursuant to the statutory claim). The proceeding is in its early stages. Based
on currently available information, Hardee's believes that these claims are
without merit and intends to defend against them vigorously. Therefore, no
estimate of any possible loss to Hardee's can be made at this time.
On April 27, 1997, an agreement was reached for the sale of the Company to
CKE Restaurants, Inc. ("CKE"). FFM, a wholly owned subsidiary of the Company
engaged in the food processing and distribution business and MRO, are not
included in the transaction. The purchase price is $327 million, subject to
post-closing adjustments. Up to $50 million of the consideration may be in the
form of a CKE convertible note. The transaction is subject to certain
conditions, including the completion of an equity issue by CKE and is expected
to close within the third quarter of 1997.
NOTE 21 -- SUPPLEMENTAL INFORMATION
The following results of operations for the three years ended December 31,
1996 represent the continuing operations of Hardee's Food Systems, Inc. after
the sale to CKE Restaurants, Inc. as discussed in Note 1. Included are the
results for the 808 restaurants open and operating as of December 31, 1996, the
franchising operations and the Equipment Division.
(THOUSANDS)
----------------------------------
1994 1995 1996
-------- -------- --------
REVENUES:
Company-operated restaurants............................. $593,391 $596,593 $645,409
Franchised and licensed restaurant and other............. 126,757 118,137 99,653
-------- -------- --------
Total revenues................................... 720,148 714,730 745,062
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging.................................... 192,971 204,125 219,559
Payroll and other employee benefits................... 190,907 213,302 237,604
Occupancy and other operating expenses................ 124,934 134,241 154,415
-------- -------- --------
508,812 551,668 611,578
Franchised and licensed restaurants and other............ 34,010 35,451 35,175
Advertising expenses..................................... 28,985 33,121 36,396
General and administrative expenses...................... 56,766 74,912 79,735
-------- -------- --------
Total operating costs and expenses............... 628,573 695,152 762,884
-------- -------- --------
OPERATING INCOME (LOSS).................................... $ 91,575 $ 19,578 $(17,822)
======== ======== ========
Number of Units............................................ 692 733 808
Total general and administrative expenses for each year have been included
in operating results with no allocation to non-operating units.
F-47
20
HARDEE'S FOOD SYSTEMS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
1996 1997
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ -- $ 2,867
Receivables....................................................................... 22,277 18,406
Federal and state income taxes receivable......................................... 11,237 12,472
Inventories....................................................................... 10,906 12,101
Prepaid expenses and other current assets......................................... 3,016 3,058
--------- ---------
Total current assets............................................................ 47,436 48,904
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land.............................................................................. 93,065 92,035
Buildings, including improvements to leased properties............................ 388,757 393,281
Equipment, vehicles and fixtures.................................................. 240,145 246,496
Construction in progress.......................................................... 1,722 1,629
Leased property under capital leases.............................................. 10,518 10,645
--------- ---------
734,207 744,086
Less accumulated depreciation and amortization.................................... (336,883) (344,208)
--------- ---------
Total property, plant and equipment, net........................................ 397,324 399,878
--------- ---------
OTHER ASSETS:
Notes receivable due after one year............................................... 10,607 8,733
Intangible assets................................................................. 299 294
Deferred charges.................................................................. 627 595
Deferred income taxes............................................................. 34,306 34,306
Other............................................................................. 21 493
--------- ---------
Total other assets.............................................................. 45,860 44,421
--------- ---------
TOTAL ASSETS........................................................................ $ 490,620 $ 493,203
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Bank overdrafts................................................................... $ 5,359 $ --
Short-term borrowings............................................................. 10,000 9,000
Trade accounts payable............................................................ 10,317 10,281
Trade accounts payable -- affiliate............................................... 5,851 6,318
Other accounts payable and accrued expenses....................................... 75,956 71,759
Deferred income................................................................... 1,569 1,586
Current maturities of long-term debt.............................................. 46 66
Current maturities of obligations under capital leases............................ 606 561
Deferred income taxes............................................................. 1,166 1,166
--------- ---------
Total current liabilities......................................................... 110,870 100,737
--------- ---------
POSTRETIREMENT BENEFITS............................................................. 20,440 22,641
--------- ---------
ESTIMATED FUTURE COST OF EXCESS PROPERTIES.......................................... 21,403 21,403
--------- ---------
LONG-TERM DEBT TO PARENT............................................................ -- 19,721
--------- ---------
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES........................................ 1,709 1,684
--------- ---------
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT MATURITIES...................... 6,124 6,008
--------- ---------
DEFERRED CREDITS -- OTHER........................................................... 6,018 5,975
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock of no par value...................................................... -- --
Authorized 10,000,000 shares; 155 and 225 shares issued at stated value of $.50
per share in 1996 and 1997, respectively........................................ 1 1
Additional paid-in capital........................................................ 316,596 316,596
(Accumulated deficit) Retained earnings........................................... 7,459 (1,563)
--------- ---------
Total shareholder's equity...................................................... 324,056 315,034
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.......................................... $ 490,620 $ 493,203
========= =========
See Accompanying Notes to Combined Financial Statements.
F-48
21
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS)
1996 1997
-------- --------
REVENUES:
Company-operated restaurants......................................... $168,976 $151,019
Franchised and licensed restaurants and other........................ 23,712 22,070
-------- --------
Total revenues............................................... 192,688 173,089
-------- --------
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging................................................ 58,779 50,308
Payroll and other employee benefits............................... 66,081 59,657
Occupancy and other operating expenses............................ 43,739 38,700
-------- --------
168,599 148,665
Franchised and licensed restaurants and other........................ 7,495 6,218
Advertising expenses................................................. 10,215 9,095
General and administrative expenses.................................. 17,923 19,450
-------- --------
Total operating costs and expenses........................... 204,232 183,428
-------- --------
OPERATING LOSS......................................................... (11,544) (10,339)
INTEREST EXPENSE....................................................... 2,932 823
OTHER EXPENSES (INCOME), NET........................................... 215 (2,140)
-------- --------
LOSS BEFORE INCOME TAXES............................................... (14,691) (9,022)
INCOME TAX............................................................. -- --
-------- --------
NET LOSS............................................................... $(14,691) $ (9,022)
======== ========
See Accompanying Notes to Combined Financial Statements.
F-49
22
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
1996 1997
-------- --------
COMMON STOCK AT BEGINNING AND END OF PERIOD............................ $ 1 $ 1
-------- --------
ADDITIONAL PAID-IN CAPITAL:
Amount at beginning of period........................................ 253,583 316,596
Capital contributions................................................ 63,013 --
-------- --------
Amount at end of period........................................... 316,596 316,596
-------- --------
(ACCUMULATED DEFICIT) RETAINED EARNINGS:
Amount at beginning of period........................................ 35,318 7,459
Net loss............................................................. (27,859) (9,022)
-------- --------
Amount at end of period........................................... 7,459 (1,563)
-------- --------
TOTAL SHAREHOLDER'S EQUITY............................................. $324,056 $315,034
======== ========
See Accompanying Notes to Combined Financial Statements.
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23
HARDEE'S FOOD SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
1996 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $(14,691) $ (9,022)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation (including amortization of leased property under capital
leases)..................................................................... 12,094 11,947
Amortization of intangible assets............................................ 61 37
Loss (gain) on disposition of property, plant and equipment.................. (83) 1,867
Provision for postretirement benefits........................................ 4,241 2,201
Amortization of gain on sale of real estate.................................. (288) (43)
Provision for excess properties expense...................................... 3,002 --
Provision for deferred income taxes.......................................... 666 --
Provision for bad debts...................................................... 272 1,704
Changes in assets and liabilities:
Receivables................................................................ (307) 3,890
Inventories................................................................ 1,151 (1,195)
Prepaid expenses and other current assets.................................. 428 (42)
Trade accounts payable..................................................... 3,530 431
Other accounts payable and accrued expenses................................ 2,852 (4,197)
Federal and state income taxes............................................. (1,238) (1,235)
Deferred income............................................................ 1,132 17
--------- ---------
Net cash provided by (used in) operating activities.......................... 12,822 6,360
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (13,918) (20,807)
Proceeds from disposition of property, plant and equipment..................... 3,655 4,778
Increase in intangibles and other assets....................................... (972) (472)
Issuance of notes receivable................................................... -- (893)
Collection on notes receivable and direct financing leases..................... 2,247 705
--------- ---------
Net cash used in investing activities........................................ (8,988) (16,689)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Repayment of long-term debt.................................................... (13) (5)
Repayment of short-term borrowings............................................. -- (1,000)
Proceeds from notes payable to parent.......................................... 17,919 19,721
Bank overdrafts................................................................ -- (5,359)
Repayment of obligations under capital leases.................................. (185) (161)
--------- ---------
Net cash provided by financing activities.................................... 17,721 13,196
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 21,555 2,867
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 26,112 --
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 47,667 $ 2,867
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of capitalized amount)......................................... $ (14) $ 326
Income taxes (net of refunds)................................................ (6,094) 1,701
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In conjunction with the acquisition/sale of restaurants to franchisees, the
Company exchanged notes receivable in the amount of......................... $ -- $ 339
--------- ---------
See Accompanying Notes to Combined Financial Statements.
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24
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of Hardee's Food
Systems, Inc. (the "Company") a North Carolina Corporation and wholly-owned
subsidiary of Imasco Holdings, Inc. ("Imasco Holdings"), a Delaware corporation.
Imasco Holdings is a wholly-owned subsidiary of Imasco Limited, a Canadian
Corporation.
The accounts of Hardee's Food Systems, Inc. include the Restaurant and
Equipment Divisions, however, they do not include the accounts of Fast Food
Merchandisers, Inc. ("FFM") and MRO Mid-Atlantic, ("MRO") two directly owned
subsidiaries.
The common stock of Hardee's Food Systems, Inc. will be sold to CKE
Restaurants, Inc. under a stock purchase agreement dated April 27, 1997 (See
Note 3). FFM and MRO will be spun off to Imasco Holdings or one of its
affiliates.
The Restaurant Division operates a system of approximately 3,200 company
and franchise quick service restaurants under the Hardee's trademark in 37
states and 10 foreign countries. The Equipment Division is engaged in the
business of selling equipment and small wares to Hardee's and other restaurant
businesses.
NOTE 2 -- COMMITMENTS AND CONTINGENCIES
On March 19, 1997, Flagstar Enterprises, Inc. ("Flagstar"), which operates
approximately 580 Hardee's restaurants, commenced an arbitration proceeding
against Hardee's pursuant to provisions of its license agreements. The Demand
for Arbitration, which contains six claims, (i) alleges that Hardee's has
breached certain contractual, fiduciary and statutory duties allegedly owed to
Flagstar, (ii) seeks a declaration relieving Flagstar from its obligations under
the post-termination covenants against competition contained in its license
agreements, and (iii) seeks an award of monetary damages in excess of $500
million (subject to trebling pursuant to the statutory claim). The proceeding is
in its early stages. Based on currently available information, Hardee's believes
that these claims are without merit and intends to defend against them
vigorously. Therefore, no estimate of any possible loss to Hardee's can be made
at this time.
NOTE 3 -- SUBSEQUENT EVENTS
On April 27, 1997, an agreement was reached for the sale of the Company to
CKE Restaurants, Inc. ("CKE"). FFM, a wholly owned subsidiary of the Company
engaged in the food processing and distribution business, and MRO are not
included in the transaction. The purchase price is $327 million, subject to
post-closing adjustments. Up to $50 million of the consideration may be in the
form of a CKE convertible note. The transaction is subject to certain
conditions, including the completion of an equity issue by CKE and is expected
to close within the third quarter of 1997.
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25
HARDEE'S FOOD SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
NOTE 4 - SUPPLEMENTAL INFORMATION
The following results of operations for the three months ended March 31,
1996 and 1997 represent the continuing operations of Hardee's Food Systems, Inc.
after the sale to CKE Restaurants, Inc. as discussed in Note 1. Included are the
results for the 788 restaurants open and operating as of March 31, 1997, the
franchising operations and the Equipment Division.
(THOUSANDS)
---------------------
1996 1997
-------- --------
REVENUES:
Company-operated restaurants................................. $141,208 $150,075
Franchised and licensed restaurants and other................ 23,712 22,070
-------- --------
Total revenues....................................... 164,920 172,145
-------- --------
OPERATING COSTS AND EXPENSES:
Restaurant operations:
Food and packaging........................................ 49,061 50,440
Payroll and other employee benefits....................... 54,193 58,810
Occupancy and other operating expenses.................... 33,812 37,367
-------- --------
137,066 146,617
Franchised and licensed restaurants and other................ 7,495 6,218
Advertising expenses......................................... 8,070 8,142
General and administrative expenses.......................... 17,923 19,450
-------- --------
Total operating costs and expenses................... 170,554 180,427
-------- --------
OPERATING LOSS................................................. $ (5,634) $ (8,282)
======== ========
Number of Units................................................ 730 788
Total general and administrative expenses for each period have been
included in operating results with no allocation to non-operating units.
F-53