1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934.
For the quarterly period ended November 3, 1997
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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
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
41,993,018 shares of Common Stock, par value $.01 per share, as of
December 12, 1997
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CKE RESTAURANTS, INC.
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INDEX
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Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of November 3, 1997 and January 27, 1997.......................... 2
Consolidated Statements of Income for the twelve and forty weeks
ended November 3, 1997 and November 4, 1996.................................................. 3
Consolidated Statements of Cash Flows for the forty weeks ended
November 3, 1997 and November 4, 1996........................................................ 4-5
Notes to Consolidated Financial Statements....................................................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 9-12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................ 13-14
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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CKE RESTAURANTS, INC.
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CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands)
(Unaudited)
November 3, January 27,
1997 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 37,963 $ 46,330
Accounts receivable 27,006 7,942
Related party receivables 1,159 2,088
Inventories 16,812 9,223
Deferred income taxes, net 912 7,214
Other current assets and prepaid expenses 14,454 7,400
-------- --------
Total current assets 98,306 80,197
Property and equipment, net 620,520 208,099
Property under capital leases, net 37,123 37,115
Long-term investments 48,073 33,268
Notes receivable 13,402 6,210
Related party receivables 7,414 9,325
Costs in excess of net assets acquired, net 72,046 25,560
Other assets 14,966 10,593
-------- --------
$911,850 $410,367
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 15,799 $ 735
Current portion of capital lease obligations 5,318 4,347
Accounts payable 73,556 41,515
Other current liabilities 77,486 36,527
-------- --------
Total current liabilities 172,159 83,124
-------- --------
Long-term debt 125,633 33,770
Capital lease obligations 48,544 48,141
Other long-term liabilities 93,923 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
41,988,018 and 33,218,751 shares 420 332
Additional paid-in capital 351,759 126,279
Retained earnings 119,412 88,193
-------- --------
Total stockholders' equity 471,591 214,804
-------- --------
$911,850 $410,367
======== ========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC.
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CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousands, except per share amounts)
(Unaudited)
Twelve Weeks Ended Forty Weeks Ended
-------------------------- ---------------------------
November 3, November 4, November 3, November 4,
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Company-operated restaurants:
Carl's Jr $ 117,352 $ 106,106 $ 375,132 $ 339,544
Hardee's 146,501 -- 200,399 --
Taco Bueno 17,211 6,784 57,289 6,784
JB's Restaurants 14,843 14,981 50,699 17,512
HomeTown Buffet 5,244 8,760 27,496 10,240
Other 5,725 6,825 23,641 9,250
--------- --------- --------- ---------
306,876 143,456 734,656 383,330
--------- --------- --------- ---------
Franchised and licensed restaurants:
Carl's Jr 18,687 18,248 61,089 58,973
Hardee's 21,628 -- 28,240 --
Other 264 389 928 452
--------- --------- --------- ---------
40,579 18,637 90,257 59,425
--------- --------- --------- ---------
Total revenues 347,455 162,093 824,913 442,755
--------- --------- --------- ---------
Operating costs and expenses:
Restaurant operations:
Food and packaging 95,530 44,998 225,591 117,328
Payroll and other employee benefits 96,838 40,225 220,576 105,237
Occupancy and other operating expenses 60,863 29,865 148,635 77,705
--------- --------- --------- ---------
253,231 115,088 594,802 300,270
Franchised and licensed restaurants 27,459 17,155 69,668 56,678
Advertising expenses 17,431 7,729 42,293 22,837
General and administrative expenses 24,240 10,618 55,759 30,148
--------- --------- --------- ---------
Total operating costs and expenses 322,361 150,590 762,522 409,933
--------- --------- --------- ---------
Operating income 25,094 11,503 62,391 32,822
Interest expense (4,444) (2,759) (12,027) (7,503)
Other income, net 1,192 514 6,733 1,213
--------- --------- --------- ---------
Income before income taxes 21,842 9,258 57,097 26,532
Income tax expense 8,740 3,670 22,864 10,419
--------- --------- --------- ---------
Net income $ 13,102 $ 5,588 $ 34,233 $ 16,113
========= ========= ========= =========
Net income per common and common
equivalent share $ .30 $ .19 $ .88 $ .55
========= ========= ========= =========
Common and common equivalent shares used
in computing per share amounts 43,367 29,735 38,780 29,199
========= ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
---------------------------
November 3, November 4,
1997 1996
--------- ---------
Net cash flow from operating activities:
Net income $ 34,233 $ 16,113
Adjustments to reconcile net income to net cash provided by
operating activities, excluding the effect of acquisitions:
Depreciation and amortization 34,583 18,846
Loss on sale of property and equipment and capital leases 2,172 848
Net noncash investment and dividend income (2,734) (661)
Deferred income taxes 6,266 547
Loss on noncurrent asset and liability transactions 716 487
Write-down of long-lived assets -- 1,250
Net change in receivables, inventories and other current assets and prepaid expenses (4,110) (6,056)
Net change in accounts payable and other current liabilities (18,773) 8,016
--------- ---------
Net cash provided by operating activities 52,353 39,390
--------- ---------
Cash flow from investing activities:
Purchases of:
Marketable securities (393) (760)
Property and equipment (70,499) (32,795)
Long-term investments (14,054) (5,986)
Proceeds from sales of:
Marketable securities and long-term investments 393 2,689
Property and equipment 2,918 3,779
Collections on leases receivable 140 139
Increase in notes receivable and related party receivables (464) (120)
Collections on notes receivable and related party receivables 5,672 2,706
Net change in other assets (388) (1,938)
Acquisitions, net of cash acquired (321,132) (52,123)
Dispositions, net of cash surrendered 16,286 --
--------- ---------
Net cash used in investing activities (381,521) (84,409)
--------- ---------
Cash flow from financing activities:
Net proceeds from common stock offering 222,343 --
Net change in bank overdraft 1,803 9,334
Short-term borrowings 20,000 1,200
Repayments of short-term borrowings (8,750) (1,200)
Long-term borrowings 114,389 58,000
Repayments of long-term borrowings (20,418) (27,090)
Repayments of capital lease obligations (3,728) (2,949)
Deferred financing costs (4,118) --
Net change in other long-term liabilities (933) (1,181)
Payment of dividends (3,012) (1,514)
Exercise of stock options 3,225 2,160
--------- ---------
Net cash provided by financing activities 320,801 36,760
--------- ---------
Net decrease in cash and cash equivalents $ (8,367) $ (8,259)
========= =========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
---------------------------
November 3, November 4,
1997 1996
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 9,559 $ 7,325
Income taxes 15,433 5,000
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
========= =========
Casa Bonita Acquisition:
Tangible assets acquired at fair value $ -- $ 40,672
Cost in excess of net assets acquired -- 9,860
Liabilities assumed at fair value -- (8,532)
--------- ---------
Total purchase price $ -- $ 42,000
========= =========
Hardee's Acquisition:
Tangible assets acquired at fair value $ 439,908 $ --
Cost in excess of net assets acquired 47,338 --
Liabilities assumed at fair value (160,246) --
--------- ---------
Total purchase price $ 327,000 $ --
========= =========
Disposition of Assets:
Tangible assets disposed at book value $ 18,832 $ --
Liabilities relieved at book value (8,410) --
--------- ---------
Total cash proceeds $ 10,422 $ --
========= =========
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CKE RESTAURANTS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOVEMBER 3, 1997 AND NOVEMBER 4, 1996
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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.
Operating results for fiscal 1998 include 16 weeks of operations for
Hardee's Food Systems, Inc. ("Hardee's"), which was acquired on July 15, 1997
(see Note (B)) and 35 weeks of operations for the 16 HomeTown Buffet franchised
restaurants and two Casa Bonita theme restaurants that were disposed of in
connection with the initial public offering of Star Buffet, Inc. ("Star Buffet")
on September 30, 1997 (see Note (C)). Fiscal 1997 results include 14 weeks of
Summit Family Restaurants Inc., 18 weeks of the 26 Rally's restaurants operated
by the Company, and five weeks of Taco Bueno Incorporated, formerly known as
Casa Bonita Incorporated.
NOTE (B) 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. 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 $222.3
million and (ii) entered into a new bank credit facility and incurred borrowings
of $133.9 million thereunder (see Note (D)) of which $125.2 million remained
outstanding as of November 3, 1997. 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
40-week periods ended November 3, 1997 and November 4, 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:
Forty Weeks Ended
---------------------------
November 3, November 4,
1997 1996
---------- ----------
Total revenues $1,166,194 $1,052,091
Net income (loss) $ 36,388 $ (4,541)
Net income (loss) per common
and common equivalent share $ 0.84 $ (0.12)
NOTE (C) INITIAL PUBLIC OFFERING OF STAR BUFFET, INC.
- -----------------------------------------------------
On September 30, 1997, the Company participated in an initial public
offering of its buffet-style restaurant operations. Prior to the offering, the
Company formed Star Buffet to continue to operate its 16 HomeTown Buffet
franchised restaurants and two Casa Bonita theme restaurants. Star Buffet then
completed an initial public offering of 3,450,000 shares of its common stock, of
which 600,000 shares were sold by the Company as a selling shareholder. The
Company received net proceeds of $6.7 million in connection with such sale, and
retained an approximate 37% interest in Star Buffet. The Company also received
dividend income of $9.3
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CKE RESTAURANTS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOVEMBER 3, 1997 AND NOVEMBER 4, 1996
-------------------------------------
(continued)
million in the transaction, and sold the net assets of two Casa Bonita
restaurants to Star Buffet for their net book value of $1.1 million. The Company
continues to own and operate the JB's Restaurants and Galaxy Diner restaurant
concepts in its new subsidiary, JB's Restaurants, Inc. Operating results for
fiscal 1998 include 35 weeks of operations for the 16 HomeTown Buffet franchised
restaurants and two Casa Bonita restaurants.
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 $55.0 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,
of which $71.3 million and $53.9 million, respectively, remain outstanding as of
November 3, 1997. 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, 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 amount of capital expenditures and certain restricted payments (including
dividends and repurchases of stock) the Company and its subsidiaries may make,
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
reporting of its consolidated 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
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CKE RESTAURANTS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOVEMBER 3, 1997 AND NOVEMBER 4, 1996
-------------------------------------
(continued)
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 reporting of its consolidated financial position or results of
operations.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
OVERVIEW
Consolidated net income for the 12-week period ended November 3, 1997
increased 134.5% to $13.1 million, or $0.30 per share as compared with net
income of $5.6 million, or $0.19 per share for the prior year quarter. Net
income for the 40-week period ended November 3, 1997 increased 112.5% to $34.2
million, or $0.88 per share as compared with net income of $16.1 million, or
$0.55 per share for the comparable prior year period. These positive results
were primarily due to the additional operations of the Company's recently
acquired concepts, including the Company-operated Hardee's restaurants and the
Hardee's franchise system, all of which were profitable during the third quarter
of fiscal 1998, the 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. and Hardee's restaurants.
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 November 3,
1997, there were 97 Company-operated and 11 franchised dual-brand restaurants
operating. In addition, the Company has remodeled substantially all of its
Carl's Jr. restaurants as of the end of the third quarter. The Company expects
to complete its image enhancement program for its Carl's Jr. units by the end of
fiscal 1998.
During the 12 weeks ended November 3, 1997, the Company converted 47
Hardee's restaurants in the Oklahoma City area to the first Carl's Jr./Hardee's
dual-brand restaurants, which are serving Hardee's breakfast and Carl's Jr.
charbroiled burgers and chicken sandwiches. Same-store sales increases in the
first full four-week reporting period after conversion were 19.6% over the
comparable prior year period. Conversion also began in the second test market,
Peoria, Illinois, where 29 Hardee's restaurants are scheduled to be converted by
the end of December.
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 from the Company's current and future
remodeling and dual-branding of restaurants and other operating strategies can
be sustained at the current levels experienced.
RESULTS OF OPERATIONS
Revenues from Company-operated restaurants increased $163.4 million or
113.9% and $351.3 million or 91.7% for the 12- and 40-week periods ended
November 3, 1997 to $306.9 million and $734.7 million, respectively. Carl's Jr.
Company-operated revenues for the 12- and 40-week periods accounted for sales
increases of $11.2 million and $35.6 million, respectively. Additionally, the
Company's Hardee's and Taco Bueno restaurants contributed $146.5 million and
$10.4 million of the increase in revenues for the 12-week period, respectively,
and $200.4 million and $50.5 million for the 40-week period, respectively.
Offsetting these increases is the loss of revenues from the Company's HomeTown
Buffet and Casa Bonita restaurants which were disposed of in connection with the
initial public offering of Star Buffet during the current quarter (see Note (C)
of Notes to the Company's consolidated financial statements as of and for the
period ended November 3, 1997). 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 2.1% in the 12-week
period ended November 3, 1997 on top of an 8.4% increase in the third quarter of
fiscal 1997. Same-store sales for Company-operated Taco Bueno restaurants
increased 4.5% in the 12-week period ended November 3, 1997 over the comparable
prior year period, while same-store sales in Company-operated Hardee's
restaurants decreased 6.7% in the current quarter over the prior year quarter.
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
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CKE RESTAURANTS, INC.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
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. Average unit volumes in
Company-operated Carl's Jr. restaurants continue to increase and reached
$1,142,400 on a 13-period rolling basis, while average unit volumes at
Company-operated Hardee's and Taco Bueno restaurants ended the third quarter at
$816,000 and $685,000, respectively, on a 13-period rolling basis. The decrease
in same-store sales for Hardee's can be attributed to several factors, including
the paring down of their oversized menu and the discontinuation of monthly new
product introductions.
Revenues from franchised and licensed restaurants for the 12- and
40-week periods ended November 3, 1997 increased 117.7% to $40.6 million and
51.9% to $90.3 million, respectively, over the same prior year periods. The
increase is primarily due to the royalties earned by the 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.
Restaurant-level margins of the Company's consolidated restaurant
operations decreased in the 12- and 40-week periods ended November 3, 1997 by
2.3% and 2.6%, respectively, as compared with the prior year periods, primarily
reflecting the impact of higher operating costs at Summit's family-style
restaurants 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 second quarter of fiscal 1998. 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. Although Hardee's restaurant-level margins are substantially lower than
the Company's other quick-service restaurant concepts, the Company increased
Hardee's restaurant-level margins in the third quarter of fiscal 1998 to 13.6%
of sales from 5.2% for restaurants open and operating as of December 31, 1996,
primarily from cost reductions. The Company has accomplished this reduction of
costs through many of the same cost saving measures it has implemented at its
Carl's Jr. restaurants over the past three to four years, including the
introduction of the Carl's Jr. labor matrix to refine labor usage, a focus on
safety and accident prevention as a way to reduce workers' compensation costs, a
reduction of food waste and theft tolerance levels, and a decrease in food and
paper costs through the realization of selected purchasing synergies.
While the Company's consolidated restaurant-level margins decreased
during the first three quarters of fiscal 1998, restaurant-level margins for the
Company's Carl's Jr. restaurant chain continued to increase, reaching 23.6% and
24.1% for the 12- and 40-week periods ended November 3, 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 0.8% to 30.0%, and 0.5% to
29.8%, respectively, for the 12- and 40-week periods ended November 3, 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 0.3% to 25.7%, and 0.9% to 25.7%, respectively, for the 12- and
40-week periods ended November 3, 1997, as compared with the same periods a year
ago, notwithstanding the October 1996 and September 1997 increases 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 Carl's Jr. restaurants have increased 0.5% to
20.7% and 0.4% to 20.4%, respectively, for the 12- and 40-week periods as
compared with the same periods in the prior year primarily due to increased
equipment costs as the Company implements updated data technology at its
restaurants and increased utility and depreciation expenses in connection with
the image enhancement of the Company's Carl's Jr. restaurants.
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 in October 1996 and September 1997 has resulted in higher labor costs to
the Company and its franchisees. 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.
10
12
CKE RESTAURANTS, INC.
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
Franchised and licensed restaurant costs have increased 60.1% and 22.9%
for the 12- and 40-week periods ended November 3, 1997, respectively, over the
same periods of the prior year. The increase is primarily due to the additional
costs associated with the Hardee's franchise operations as well as increased
food purchases by Carl's Jr. franchisees. As a percentage of franchised and
licensed revenues, these costs have decreased 24.4% and 18.9% for the 12- and
40-week periods ended November 3, 1997, respectively, over the same prior year
periods. Hardee's earns the majority of its income from franchised and licensed
restaurants through royalties paid by its franchisees, whereas Carl's Jr. earns
its income from both royalties paid and 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 the Carl's
Jr. franchise operations.
Advertising expenses increased $9.7 million and $19.5 million,
respectively, from the 12- and 40-week periods ended November 4, 1996, primarily
due to the advertising support added for the newly acquired concepts.
Advertising has become increasingly important in the current competitive
environment and, as a result, advertising expenses have increased in terms of
dollars spent in fiscal 1998, as compared with fiscal 1997, while remaining
relatively consistent as a percentage of revenues from Company-operated
restaurants. The Company has seen positive same-store sales growth in its Carl's
Jr. restaurants in each quarter since the Company began its innovative
advertising campaign in May 1995.
General and administrative expenses increased $13.6 million and $25.6
million to $24.2 million and $55.8 million, respectively, for the 12- and
40-week periods ended November 3, 1997 over the comparable prior year periods.
General and administrative expenses as a percentage of total revenues increased
0.4% in the 12-week period ended November 3, 1997 over the prior year period,
although on a year-to-date basis, these expenses as a percentage of total
revenues remained relatively unchanged. The increase in general and
administrative expenses in the 12-and 40-week periods ended November 3, 1997 is
primarily the result of adding the expenses associated with support of the
Hardee's operations. Hardee's general and administrative expenses as a
percentage of revenues were approximately 8.0% in the third quarter of fiscal
1998, as compared with 10.7% of total revenues at the end of calendar year 1996
under previous ownership. General and administrative expenses have also
increased due to recording incentive compensation accruals for regional
restaurant management and selected corporate employees as a result of improved
restaurant operating performance.
Interest expense for the 12- and 40-week periods ended November 3, 1997
increased $1.7 million and $4.5 million, respectively, as compared with the
prior year periods, primarily as a result of additional borrowings required to
complete the Hardee's acquisition in the second quarter of fiscal 1998 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 receivable, gains and losses on sales of restaurants, income and loss
on long-term investments, and other non-recurring income. Other income, net,
increased $0.7 million and $5.5 million, respectively, for the 12- and 40-week
periods ended November 3, 1997, over the comparable prior year periods,
generally resulting from interest income earned on the Company's note receivable
from Checkers Drive-In Restaurants, Inc. ("Checkers") and amortization of the
related discount, in addition to lease income recorded from the Company's
long-term investment in Boston West, LLC.
FINANCIAL CONDITION
For the 40-week period ended November 3, 1997, the Company generated
cash flows from operating activities of $52.4 million, compared with $39.4
million for the same period of the prior year. This increase was mainly 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 40-week period ended November 3, 1997 decreased $8.4 million from January
27, 1997, as the Company used cash flows from operations to fund capital
additions of approximately $70.5 million, to fund the Company's investment in
Checkers of $14.1 million, to repay capital lease obligations of $3.7 million,
and to pay dividends to its stockholders of approximately $3.0 million. The
increase in new long-term and short-term borrowings of $114.4 million and $20.0
million, respectively, combined with the net proceeds from the common stock
offering of $222.3 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 $16.3 million (net of cash surrendered) generated from the
sale of shares by the Company and the disposition of its HomeTown Buffet and
Casa Bonita restaurants in connection with the initial public offering of Star
Buffet, collections on notes receivable and related party receivables of
approximately $5.7 million and the exercise of stock options which generated
approximately $3.2 million. Total cash and cash equivalents available to the
Company as of November 3, 1997 was $38.0 million.
13
CKE RESTAURANTS, INC.
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
Effective July 15, 1997, the Company entered into a new bank credit
facility (the "New Credit Facility"), which replaced the unsecured bank credit
facility arranged for the Company in July 1996. (See Note (D) of Notes to the
Company's consolidated financial statements as of and for the period ended
November 3, 1997). The New Credit Facility consists of a $75.0 million term loan
facility and a $225.0 million revolving credit facility (which includes a $55.0
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, of which $71.3 million and $53.9
million, respectively, remain outstanding as of November 3, 1997. 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, 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 amount of capital expenditures and certain restricted payments (including
dividends and repurchases of stock) the Company and its subsidiaries may make,
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. Future capital needs
will arise primarily for the construction of new restaurants, the remodeling of
existing restaurants, the repurchase of certain Hardee's restaurants from
franchisees, the conversion of certain restaurants to the Carl's Jr./Green
Burrito and Carl's Jr./serving Hardee's breakfast dual-brand concepts and
capital expenditures to be incurred in connection with the Company's integration
of Hardee's. The Company is in the process of converting 29 Hardee's restaurants
in Peoria, Illinois to the Carl's Jr./serving Hardee's breakfast and is
evaluating further test markets for conversion. The Company also expects to
continue with its schedule to remodel 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.
The Company believes that cash generated from its various restaurant
operations, along with cash and cash equivalents on hand as of November 3, 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
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
---------------------------------
(a) Exhibits:
10.47 First Amendment to Credit Agreement and Limited Waiver
dated September 29, 1997, by and among CKE Restaurants,
Inc., Banque Paribas, as Agent, and the lenders party
thereto.
11 Calculation of Earnings per Share
27 Financial Data Schedule (included in electronic filing
only).
(b) Current Reports on Form 8-K:
None.
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.
December 17, 1997 By: /s/ CARL A. STRUNK
----------------------------
Carl A. Strunk
Executive Vice President and
Chief Financial Officer
14