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 August 11, 1997
-------------------------
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1200 North Harbor Boulevard, Anaheim, CA 92801
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (714) 774-5796
------------------
NOT APPLICABLE
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date:
41,927,570 shares of Common Stock, par value $.01 per share,
as of September 16, 1997
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CKE RESTAURANTS, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of August 11, 1997 and January 27, 1997.......... 2
Consolidated Statements of Income for the twelve and twenty-eight weeks
ended August 11, 1997 and August 12, 1996................................... 3
Consolidated Statements of Cash Flows for the twenty-eight weeks ended
August 11, 1997 and August 12, 1996......................................... 4-5
Notes to Consolidated Financial Statements...................................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 9-13
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders....................... 14
Item 6. Exhibits and Reports on Form 8-K..........................................14-15
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
August 11, January 27,
1997 1997
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 37,927 $ 46,330
Marketable securities 196 180
Accounts receivable 21,594 7,942
Related party receivables 1,264 2,088
Inventories 17,670 9,223
Deferred income taxes, net 7,214 7,214
Other current assets and prepaid expenses 11,699 7,220
-------- --------
Total current assets 97,564 80,197
Property and equipment, net 646,490 208,099
Property under capital leases, net 38,804 37,115
Long-term investments 47,246 33,268
Notes receivable 14,115 6,210
Related party receivables 7,185 9,325
Costs in excess of net assets acquired, net 52,953 25,560
Other assets 14,686 10,593
-------- --------
$919,043 $410,367
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 20,798 $ 735
Current portion of capital lease obligations 5,549 4,766
Accounts payable 60,560 41,515
Other current liabilities 89,416 36,108
-------- --------
Total current liabilities 176,323 83,124
-------- --------
Long-term debt 129,515 33,770
Capital lease obligations 50,947 48,141
Other long-term liabilities 103,571 30,528
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
41,850,606 and 33,218,751 shares 419 332
Additional paid-in capital 350,279 126,279
Retained earnings 107,989 88,193
-------- --------
Total stockholders' equity 458,687 214,804
-------- --------
$919,043 $410,367
======== ========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Twelve Weeks Ended Twenty-eight Weeks Ended
------------------------ --------------------------
August 11, August 12, August 11, August 12,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenues:
Company-operated restaurants:
Carl's Jr $ 112,953 $ 103,928 $ 257,780 $ 233,438
Hardee's 53,898 -- 53,898 --
Taco Bueno 17,690 -- 40,078 --
JB's Restaurants 15,166 2,531 35,856 2,531
HomeTown Buffet 9,082 1,480 22,252 1,480
Other 8,088 2,425 17,916 2,425
--------- --------- --------- ---------
216,877 110,364 427,780 239,874
--------- --------- --------- ---------
Franchised and licensed restaurants:
Carl's Jr 18,459 17,695 42,677 41,119
Hardee's 6,612 -- 6,612 --
JB's Restaurants 311 64 660 64
--------- --------- --------- ---------
25,382 17,759 49,949 41,183
--------- --------- --------- ---------
Total revenues 242,259 128,123 477,729 281,057
--------- --------- --------- ---------
Operating costs and expenses:
Restaurant operations:
Food and packaging 66,361 33,459 130,070 72,330
Payroll and other employee benefits 64,132 29,381 123,738 65,012
Occupancy and other operating expenses 44,765 22,197 87,951 48,736
--------- --------- --------- ---------
175,258 85,037 341,759 186,078
Franchised and licensed restaurants 18,960 16,979 41,456 39,155
Advertising expenses 12,719 6,652 24,857 15,107
General and administrative expenses 16,518 9,363 32,622 20,549
--------- --------- --------- ---------
Total operating costs and expenses 223,455 118,031 440,694 260,889
--------- --------- --------- ---------
Operating income 18,804 10,092 37,035 20,168
Interest expense (4,711) (2,149) (7,582) (4,744)
Other income, net 3,497 576 5,802 1,850
--------- --------- --------- ---------
Income before income taxes 17,590 8,519 35,255 17,274
Income tax expense 7,045 3,327 14,124 6,749
--------- --------- --------- ---------
Net income $ 10,545 $ 5,192 $ 21,131 $ 10,525
========= ========= ========= =========
Net income per common and common
equivalent share $ .28 $ .18 $ .58 $ .37
========= ========= ========= =========
Common and common equivalent shares used
in computing per share amounts 37,940 28,997 36,218 28,830
========= ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Twenty-eight Weeks Ended
---------- ----------
August 11, August 12,
1997 1996
---------- ----------
Net cash flow from operating activities:
Net income $ 21,131 $ 10,525
Adjustments to reconcile net income to net
cash provided by operating activities,
excluding the effect of acquisitions:
Depreciation and amortization 20,753 11,520
Loss on sale of property and equipment and capital leases 2,126 481
Write-down of long-lived assets -- 1,250
Net noncash investment and dividend income (1,899) (78)
Deferred income taxes -- 582
(Gain) loss on noncurrent asset and liability transactions (481) 309
Net change in receivables, inventories and other
current assets and prepaid expenses (2,623) (4,785)
Net change in accounts payable and other current liabilities (176) 12,925
--------- --------
Net cash provided by operating activities 38,831 32,729
--------- --------
Cash flow from investing activities:
Purchases of:
Marketable securities (393) (760)
Property and equipment (39,266) (19,694)
Long-term investments (14,199) (4,130)
Proceeds from sale of:
Marketable securities and long-term investments 393 793
Property and equipment 36 3,254
Collections on leases receivable 87 91
Increase in notes receivable and related party receivables (382) (120)
Collections on notes receivable and related party receivables 4,544 991
Net change in other assets 867 69
Acquisitions, net of cash acquired (323,878) (15,358)
--------- --------
Net cash used in investing activities (372,191) (34,864)
--------- --------
Cash flow from financing activities:
Net proceeds from common stock offering 222,141 --
Net change in bank overdraft (2,671) 2,630
Short-term borrowings 5,000 1,200
Repayments of short-term debt -- (1,200)
Long-term borrowings 129,389 20,000
Repayments of long-term debt (20,287) (27,049)
Repayments of capital lease obligations (2,407) (1,623)
Deferred financing costs (4,278) --
Net change in other long-term liabilities (2,541) (714)
Payment of dividends (1,335) (743)
Exercise of stock options 1,946 1,023
--------- --------
Net cash provided by (used in) financing activities 324,957 (6,476)
--------- --------
Net decrease in cash and cash equivalents $ (8,403) $ (8,611)
========= ========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Twenty-eight Weeks Ended
---------------------------
August 11, August 12,
1997 1996
--------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 5,135 $ 4,730
Income taxes 4,483 1,969
Noncash investing and financing activities:
Investing activities:
Sale of property and equipment -- 2,469
Increase in long-term investments -- (2,469)
Stock issued in exchange for Summit Assets -- 11,412
Summit Acquisition:
Tangible assets acquired at fair value $ -- $ 59,772
Cost in excess of net assets acquired -- --
Liabilities assumed at fair value -- (30,716)
--------- --------
Total purchase price $ -- $ 29,056
========= ========
Hardee's Acquisition:
Tangible assets acquired at fair value $ 461,978 $ --
Cost in excess of net assets acquired 24,848 --
Liabilities assumed at fair value (159,826) --
--------- --------
Total purchase price $ 327,000 $ --
========= ========
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 11, 1997 AND AUGUST 12, 1996
NOTE (A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of CKE Restaurants, Inc. and its wholly-owned subsidiaries (the
"Company" or "CKE") and have been prepared in accordance with 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 1997 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
1997 consolidated financial statements to conform to the fiscal 1998
presentation. Share and per share information has been retroactively adjusted to
reflect the three-for-two stock split which occurred in January 1997.
NOTE (B) LONG-TERM INVESTMENT IN CHECKERS DRIVE-IN RESTAURANTS, INC.
On February 19, 1997, the Company purchased 6,162,299 shares of
Checkers Drive-In Restaurants, Inc. ("Checkers") common stock at $1.14 per share
and 61,636 shares of Checkers Series A preferred stock at $114.00 per share for
an aggregate purchase price of $14.1 million in connection with a private
placement of Checkers' securities to the Company and other investors, including
certain related parties. Registration rights with respect to the common stock
will commence one year from the date of purchase. The shares of Series A
preferred stock acquired by the Company were converted into 6,592,586 additional
shares of Checkers common stock. Assuming full exercise of warrants to purchase
7,350,428 additional shares of Checkers common stock owned by the Company, the
Company would beneficially own approximately 26.0% of Checkers' outstanding
shares.
NOTE (C) ACQUISITION OF HARDEE'S FOOD SYSTEMS, INC.
On July 15, 1997, the Company acquired Hardee's Food Systems, Inc., the
operator and franchisor of the Hardee's(R) quick-service hamburger restaurant
concept ("Hardee's"). In connection with the acquisition, which was accounted
for as a purchase, the Company acquired all of the issued and outstanding shares
of Hardee's, for cash consideration of $327.0 million. The purchase price
remains subject to adjustment to an amount to be agreed upon by the Company and
Imasco Holdings, Inc. which represents the net asset value of Hardee's as of
July 15, 1997.
On July 15, 1997, the Company also (i) completed the sale of 8,337,500
shares of the Company's Common Stock to the public for net proceeds of $222.1
million, and (ii) entered into a new bank credit facility and incurred
borrowings of $133.9 million thereunder (see Note (D)). The net proceeds of the
public offering and such borrowings were primarily used to finance the
acquisition of Hardee's.
Selected unaudited pro forma combined results of operations for the
28-week periods ended August 11, 1997 and August 12, 1996, assuming the
acquisition occurred on January 30, 1996, using actual restaurant-level margins
and general and administrative expenses prior to the acquisition are presented
as follows:
Twenty-eight Weeks Ended
---------------------------
August 11, August 12,
1997 1996
-------- ----------
Total revenues $819,010 $680,004
Net income (loss) $ 25,102 $ (3,177)
Net income (loss) per common
and common equivalent share $ .58 $ (.09)
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 11, 1997 AND AUGUST 12, 1996
(Continued)
NOTE (D) LONG-TERM DEBT
Effective July 15, 1997, the Company entered into a new bank credit
facility (the "New Credit Facility"), which replaced the unsecured bank credit
facility entered into by the Company in July 1996. The New Credit Facility
consists of a $75.0 million term loan facility and a $225.0 million revolving
credit facility (which includes a $40.0 million letter of credit subfacility).
On July 15, 1997, the Company incurred $75.0 million of borrowings under the
term loan facility and $58.9 million of borrowings under the revolving credit
facility to finance a portion of the consideration required to acquire Hardee's.
Principal repayments under the term loan facility are due in equal quarterly
installments of $3.75 million, commencing on October 15, 1997 and continuing
thereafter until the final maturity of the New Credit Facility in July 2002.
Additional borrowings under the revolving credit facility may be used for
working capital and other general corporate purposes, including permitted
investments and acquisitions, and any outstanding amounts thereunder will become
due in July 2002. The Company is required to repay borrowings under the New
Credit Facility with the proceeds from certain asset sales (unless the net
proceeds of such sales are reinvested in the Company's business), from the
issuance of certain equity securities or from the issuance of additional
indebtedness. Of the various options the Company has regarding interest rates,
it has selected LIBOR plus a margin (1.375% initially), with margin adjustments
dependent on certain financial ratios from time to time.
Borrowings and other obligations of the Company under the New Credit
Facility are general unsubordinated obligations of the Company and are secured
by a pledge of the capital stock of certain of the Company's present and future
subsidiaries, which subsidiaries have also guaranteed such borrowings and other
obligations, and are also secured by certain franchise rights, accounts
receivable, contract rights, general intangibles (including trademarks) and
other assets of the Company and such subsidiaries. The New Credit Facility also
contains a number of significant covenants that, among other things, (i)
restrict the ability of the Company and its subsidiaries to incur additional
indebtedness and incur liens on their assets, in each case subject to specified
exceptions, (ii) impose specified financial tests as a precondition to the
Company's and its subsidiaries' acquisition of other businesses and (iii) limit
the Company and its subsidiaries from making capital expenditures and certain
restricted payments (including dividends and repurchases of stock), subject in
certain circumstances to specified financial tests. In addition, the Company is
required by the New Credit Facility to comply with specified financial ratios
and tests.
NOTE (E) NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), effective for fiscal years ending after December 15, 1997. SFAS 128
introduces and requires the presentation of "basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding
excluding all common stock equivalents. Dual presentation of "diluted" earnings
per share, reflecting the dilutive effects of all common stock equivalents, will
also be required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share. Management has not determined
whether the adoption of SFAS 128 will have a material impact on the Company's
combined financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period covered by that financial statement. SFAS 130 requires an enterprise to
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. Management has not determined whether
the adoption of SFAS 130 will have a material impact on the Company's combined
financial position or results of operations.
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 11, 1997 AND AUGUST 12, 1996
(Continued)
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
products or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's segment reporting.
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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 12-week period ended August 11, 1997
increased 103.1% to $10.5 million, or $0.28 per share as compared with net
income of $5.2 million, or $0.18 per share for the prior year quarter. Net
income for the 28-week period ended August 11, 1997, increased 100.8% to $21.1
million, or $0.58 per share as compared with net income of $10.5 million, or
$0.37 per share for the comparable prior year period. These positive results
were primarily due to continued 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-operated Carl's Jr. restaurants, and the additional operations of
the Company's recently acquired subsidiaries, all of which were profitable
during the second quarter of fiscal 1998.
The Company is continuing with the conversion of certain of its
existing Carl's Jr. locations into Carl's Jr./Green Burrito dual-brand
restaurants, pursuant to an amended agreement with GB Foods Corporation. As of
August 11, 1997, there were 82 Company-operated and 10 franchised Carl's
Jr./Green Burrito dual-brand restaurants operating. Post-conversion revenues in
the second quarter of fiscal 1998 for the 38 Company-operated Carl's Jr./Green
Burrito dual-brand restaurants were approximately 23.5% higher than
pre-conversion same-store sales in the comparable prior year period.
As part of the Company's chain-wide Carl's Jr. restaurant remodeling
program, over 300 remodels have been completed as of the end of the second
quarter, representing over 70% of the Company-operated Carl's Jr. restaurants.
The Company expects to have substantially all Company-operated Carl's Jr. units
remodeled by December 1997.
During the 12 weeks ended August 11, 1997, the Company acquired all of
the issued and outstanding shares of Hardee's Food Systems, Inc., the operator
and franchisor of the Hardee's(R) quick-service hamburger restaurant concept.
See Notes (C) and (D) of Notes to the Company's consolidated financial
statements as of and for the periods ended August 11, 1997. As of July 15, 1997,
the Hardee's system included 3,119 restaurants of which 782 were operated by
Hardee's and 2,337 were operated by Hardee's franchisees and licensees. In order
to facilitate the integration of Hardee's, the Company named Rory J. Murphy,
formerly Executive Vice President, Restaurant Operations of the Company, as
President and Chief Operating Officer of Hardee's. The Company's results of
operations as of and for the 12 weeks ended August 11, 1997 include the results
of operations of the acquired Hardee's restaurants and franchise operations for
four weeks and the effects of the related financing transactions, including the
issuance of 8,337,500 shares of Common Stock in a public offering and a
significant increase in long-term indebtedness.
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; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; changes in prevailing interest rates and the availability
of financing; food, labor, and employee benefit costs; changes in, or the
failure to comply with, government regulations; weather conditions; construction
schedules; demands placed on management and capital resources by the substantial
increase in the size of the Company resulting from the acquisition of Hardee's;
changes in the Company's integration plans for Hardee's and its expansion plans;
and risks that sales growth resulting for 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 $106.5 million or 96.5% and $187.9
million or 78.3% for the 12- and 28-week periods ended August 11, 1997 to $216.9
million and $427.8 million, respectively. Carl's Jr. revenues for the 12- and
28-week periods accounted for sales increases of $9.0 million and $24.3 million,
respectively. Also
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
contributing to the overall increase were the operations of Summit and Rally's
which were added in the second quarter of fiscal 1997. Revenues from
Company-operated restaurants for these two operations increased $21.3 million
and $1.0 million for the 12-week period ended August 11, 1997, respectively, and
$56.9 million and $5.5 million for the 28-week period ended August 11, 1997,
respectively. Additionally, Hardee's Company-operated restaurants added another
$53.9 million to revenues and Casa Bonita Incorporated contributed $21.3 million
and $47.3 million for the 12- and 28-week periods ended August 11, 1997,
respectively. 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 4% in the 12-week period ended August 11, 1997
on top of an 10% increase in the second quarter of fiscal 1997. Per store
averages in Company-operated Carl's Jr. restaurants continue to increase and
reached $1,140,300 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
continuation of its conversion of existing Carl's Jr. locations into Carl's
Jr./Green Burrito dual-brand restaurants, the continued focus on promoting great
tasting new and existing food products through increased innovative advertising,
and the image enhancement of its restaurants through a chain-wide remodeling
program. Higher average sales and transaction counts per restaurant and an
increase in the number of Company-operated restaurants operating in the current
year 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
28-week periods ended August 11, 1997 increased 42.9% to $25.4 million and 21.3%
to $49.9 million, respectively, over the same prior year periods. The increase
is due to the royalties earned by Hardee's franchise system and to increased
royalties from, and food purchases by, franchisees of Carl's Jr. 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.
Restaurant-level margins of the Company's consolidated restaurant
operations decreased in the 12- and 28-week periods ended August 11, 1997 by
3.8% and 2.3%, respectively, as compared with the prior year periods, primarily
reflecting the impact of higher operating costs at Summit's family-style
restaurant concepts, which were acquired in the latter half of the second
quarter of fiscal 1997, and at the Hardee's quick-service hamburger restaurants,
which were acquired in the current quarter. The family-style segment of the
restaurant industry typically has lower margins than the quick-service segment
of the industry, mainly due to increased labor and food costs. With only four
weeks of operations included in the Company's second quarter results, Hardee's
is beginning to see improvements in its restaurant-level margins, which are
generally lower than the Company's other quick-service restaurant concepts. The
Company anticipates improving Hardee's margins through many of the same cost
saving measures it has implemented at its Carl's Jr. restaurants over the past
three to four years. While the Company's consolidated restaurant-level margins
decreased during the first two quarters of fiscal 1998, restaurant-level margins
for the Company's Carl's Jr. restaurants chain continued to increase, reaching
24.6% and 24.2% for the 12- and 28-week periods ended August 11, 1997,
respectively. 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 increased purchasing efficiencies for food and paper, improving labor
productivity and reducing workers' compensation costs. As a percentage of
revenues from Company-operated Carl's Jr. restaurants, food and paper have
decreased 0.4% to 29.7%, and 0.3% to 29.8%, respectively, for the 12- and
28-week periods ended August 11, 1997 as compared with the same periods a year
ago, despite increased pressure from commodity prices and a change in the
product mix as a result of the promotion of larger, more expensive sandwiches.
As a percentage of revenues from Company-operated Carl's Jr. restaurants,
payroll and other employee benefits have decreased 0.8% to 25.3%, and 1.2% to
25.7%, respectively, for the 12- and 28-week periods ended August 11, 1997 as
compared with the same periods a year ago, notwithstanding the October 1, 1996
increase in the federal minimum wage and the additional March 1997 increase in
California state minimum wage level. Occupancy and other operating expenses as a
percentage of revenues from Company-operated restaurants have increased 0.6% to
20.4% and 0.1% to 20.3%, respectively, for the 12- and 28-week periods as
compared with the same periods in the prior year, mainly due to increased
equipment costs as the Company implements updated data technology at its
restaurants.
10
12
CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Many of the Company's employees are paid hourly rates related to the
federal and state minimum wage laws. 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 became
effective in September 1997. Moreover, as a result of recent legislation in
California, the California state minimum wage was increased effective 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 increased 11.7% and 5.9%
for the 12- and 28-week periods ended August 11, 1997, respectively, over the
same periods of the prior year. The increase is primarily due to additional
costs from Hardee's franchise operations. As a percentage of franchised and
licensed revenues, these costs have decreased 20.9% and 12.1% for the 12- and
28-week periods ended August 11, 1997, respectively, over the same prior year
periods. Hardee's earns the majority of its income from franchised and licensed
restaurants through royalties, whereas Carl's Jr. earns the majority of its
income from food purchases by franchisees. As a result, the cost structure
associated with Hardee's revenue from franchised and licensed restaurants is
significantly lower than that associated with Carl's Jr. franchise operations.
Advertising expenses increased $6.1 million and $9.8 million for the
12- and 28-week periods ended August 11, 1997, 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
dollars spent in fiscal 1998 as compared with fiscal 1997 while remaining
relatively consistent as a percentage of Company-operated revenues. The Company
has seen positive same-store sales growth in its Carl's Jr. restaurants in each
subsequent quarter since the Company began its innovative advertising campaign
in May 1995.
General and administrative expenses increased $7.2 million and $12.1
million to $16.5 million and $32.6 million, respectively, for the 12- and
28-week periods ended August 11, 1997 over the comparable prior year periods.
However, as a percentage of total revenues, these expenses decreased 0.5% as
compared with the same prior year periods, reflecting the economies of scale the
Company is realizing by absorbing certain costs from acquired businesses into
the Company's existing infrastructure. The increase in general and
administrative expenses in the 12-and 28-week periods ended August 11, 1997 is
primarily the result of adding the expenses associated with support of the
operations of the newly acquired concepts, recording incentive compensation
accruals for regional restaurant management and selected corporate employees as
a result of improved restaurant operating performance, and increased goodwill
amortization expense.
Interest expense for the 12- and 28-week periods ended August 11, 1997
increased $2.6 million and $2.8 million, respectively, as compared with the
prior year periods, primarily as a result of additional borrowings required to
complete the acquisition of Hardee's and the write-off of certain loan fees
associated with the termination or repayment of certain of the Company's
previous credit agreements.
Other income, net, is primarily comprised of investment income,
interest on notes and leases receivable, gains and losses on sales of
restaurants, income and loss on long-term investments, and other non-recurring
income. Other income, net, increased $2.9 million and $4.0 million,
respectively, from the 12- and 28-week periods ended August 12, 1996, generally
from interest income earned on the Company's note receivable from Checkers and
amortization of the related discount in addition to dividend and lease income
recorded from the Company's long-term investment in Boston West, L.L.C.
FINANCIAL CONDITION
For the 28-week period ended August 11, 1997, the Company generated
cash flows from operating activities of $38.8 million, compared with $32.7
million for the same period of the prior year. This increase was primarily due
to increased sales levels from the newly acquired concepts and increased
operating margins in the Company's Carl's Jr. restaurants. Cash and cash
equivalents in the current period
11
13
CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
decreased $8.4 million from January 27, 1997, as the Company used cash flows
from operations to fund capital additions of approximately $39.3 million, to
fund the Company's long-term investment in Checkers of $14.1 million, to pay
dividends to its stockholders of approximately $1.3 million, and to reduce the
Company's bank overdraft by $2.7 million. The increase in new long-term and
short-term borrowings of $129.4 million and $5.0 million, respectively, combined
with the net proceeds from the common stock offering of $222.1 million were
primarily used to fund the acquisition of Hardee's for $320.6 million (net of
cash acquired) and to replace existing long-term debt of $20.0 million. The
decrease in cash and cash equivalents was partially offset by cash generated
from collections on notes receivable and related party receivables of
approximately $4.5 million and the exercise of stock options which generated
approximately $1.9 million. Total cash and cash equivalents available to the
Company as of August 11, 1997 was $37.9 million.
Effective July 15, 1997, the Company entered into a new bank credit
facility (the "New Credit Facility"), which replaced the unsecured bank credit
facility entered into by the Company in July 1996. The New Credit Facility
consists of a $75.0 million term loan facility and a $225.0 million revolving
credit facility (which includes a $40.0 million letter of credit subfacility).
On July 15, 1997, the Company incurred $75.0 million of borrowings under the
term loan facility and $58.9 million of borrowings under the revolving credit
facility to finance a portion of the consideration required to acquire Hardee's.
Principal repayments under the term loan facility are due in equal quarterly
installments of $3.75 million, commencing on October 15, 1997 and continuing
thereunder until the final maturity of the New Credit Facility in July 2002.
Additional borrowings under the revolving credit facility may be used for
working capital and other general corporate purposes, including permitted
investments and acquisitions, and any outstanding amounts thereunder will become
due in July 2002. The Company is required to repay borrowings under the New
Credit Facility with the proceeds from certain asset sales (unless the net
proceeds of such sales are reinvested in the Company's business), from the
issuance of certain equity securities or from the issuance of additional
indebtedness. Of the various options the Company has regarding interest rates,
it has selected LIBOR plus a margin (1.375% initially), with margin adjustments
dependent on certain financial ratios from time to time.
Borrowings and other obligations of the Company under the New Credit
Facility are general unsubordinated obligations of the Company and are secured
by a pledge of the capital stock of certain of the Company's present and future
subsidiaries, which subsidiaries have also guaranteed such borrowings and other
obligations, and are also secured by certain franchise rights, accounts
receivable, contract rights, general intangibles (including trademarks) and
other assets of the Company and such subsidiaries. The New Credit Facility also
contains a number of significant covenants that, among other things, (i)
restrict the ability of the Company and its subsidiaries to incur additional
indebtedness and incur liens on their assets, in each case subject to specified
exceptions, (ii) impose specified financial tests as a precondition to the
Company's and its subsidiaries' acquisition of other businesses and (iii) limit
the Company and its subsidiaries from making capital expenditures and certain
restricted payments (including dividends and repurchases of stock), subject in
certain circumstances to specified financial tests. In addition, the Company is
required by the New Credit Facility to comply with specified financial ratios
and tests.
The Company's primary source of liquidity is its revenues from
Company-operated restaurants, which are generated in cash and which are usually
received well before related accounts payable for food, beverages and supplies
become due. Future capital needs will arise primarily for the acquisition or
construction of new restaurants, the remodeling of existing restaurants, the
conversion of certain restaurants to the Carl's Jr./Green Burrito dual-brand
concept and capital expenditures to be incurred in connection with the Company's
integration of Hardee's. The Company plans to open up to 33 new Company-operated
Carl's Jr. restaurants and 22 franchised Carl's Jr. restaurants and up to four
new Taco Bueno restaurants in fiscal 1998. The Company also expects to continue
with its schedule to remodel substantially all of the remaining Company-operated
Carl's Jr. restaurants, and to convert up to 60 Carl's Jr. locations into Carl's
Jr./Green Burrito dual-brand restaurants each year during the extended term of
the Company's agreement with GB Foods Corporation.
12
14
CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company believes that cash generated from its various restaurants
operations, along with cash and cash equivalents on hand as of August 11, 1997
and amounts available under the New Credit Facility, will provide the Company
with the funds necessary to meet all of its 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 debt securities could result in
additional dilution to the Company's stockholders.
13
15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Stockholders of CKE Restaurants, Inc. was held on
June 18, 1997, for the purpose of electing certain members of the board of
directors.
Management's nominees for directors were elected by the following vote:
Shares Voted Authority To Vote
"FOR" "WITHHELD"
------------ -----------------
William P. Foley II 30,294,591 103,046
Carl N. Karcher 30,281,241 116,396
W. Howard Lester 30,016,087 381,550
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
10.46 Employment agreement dated July 15, 1997, by and between
Hardee's Food Systems, Inc. and Rory J. Murphy.
11 Calculation of Earnings per Share.
27 Financial Data Schedule (included in electronic filing
only).
(b) Current Reports on Form 8-K:
A Current Report on Form 8-K dated July 15, 1997 was filed during
the second quarter of the fiscal year to report the Company's
acquisition of Hardee's.
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.
Date: September 24, 1997 By: /s/ Carl A. Strunk
-------------------------------------
Executive Vice President, and
Chief Financial Officer
14
16
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.46 Employment agreement dated July 15, 1997, by and between
Hardee's Food Systems, Inc. and Rory J. Murphy.
11 Calculation of Earnings per Share.
27 Financial Data Schedule (included in electronic filing
only).