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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 May 18, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
for the transition period from __________ to __________
Commission file number 1-13192
CKE RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
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(State or Other Jurisdiction (I.R.S. Employer
of 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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
46,682,698 shares of Common Stock, par value $.01 per share, as of June 19, 1998
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CKE RESTAURANTS, INC.
INDEX
Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of May 18, 1998 and January 26, 1998.... 2
Consolidated Statements of Income for the sixteen weeks ended
May 18, 1998 and May 19, 1997....................................... 3
Consolidated Statements of Cash Flows for the sixteen weeks ended
May 18, 1998 and May 19, 1997....................................... 4
Notes to Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................... 14
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
May 18, January 26,
1998 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 51,718 $ 30,382
Accounts receivable 22,031 27,317
Related party receivables 1,175 1,171
Inventories 23,063 17,024
Prepaid expenses 10,955 13,045
Other current assets 3,196 3,217
---------- ----------
Total current assets 112,138 92,156
Property and equipment, net 949,367 627,026
Property under capital leases, net 77,261 47,528
Long-term investments 47,856 48,089
Notes receivable 8,936 11,162
Related party receivables 7,726 7,626
Costs in excess of net assets acquired, net 200,430 95,744
Other assets 43,954 28,037
---------- ----------
$1,447,668 $ 957,368
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 43,643 $ 15,812
Current portion of capital lease obligations 8,897 5,499
Accounts payable 83,510 60,303
Deferred income taxes, net 5,675 5,675
Other current liabilities 111,465 89,195
---------- ----------
Total current liabilities 253,190 176,484
---------- ----------
Long-term debt 282,680 138,793
Convertible subordinated notes 197,225 --
Capital lease obligations 95,919 56,801
Other long-term liabilities 98,589 86,778
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
46,610,560 and 46,523,179 shares 466 465
Additional paid-in capital 366,795 366,110
Retained earnings 152,804 131,937
---------- ----------
Total stockholders' equity 520,065 498,512
---------- ----------
$1,447,668 $ 957,368
========== ==========
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)
Sixteen Weeks Ended
-----------------------------
May 18, May 19,
1998 1997
---------- ----------
Revenues:
Company-operated restaurants:
Carl's Jr $ 161,922 $ 144,827
Hardee's 267,927 --
Taco Bueno 24,579 22,388
JB's Restaurants 18,515 20,690
HomeTown Buffet -- 13,170
Other 5,664 9,828
---------- ----------
478,607 210,903
---------- ----------
Franchised and licensed restaurants:
Carl's Jr 28,310 24,100
Hardee's 20,861 --
Other 433 353
---------- ----------
49,604 24,453
---------- ----------
Total Revenues 528,211 235,356
---------- ----------
Operating costs and expenses:
Restaurant operations:
Food and packaging 144,850 63,390
Payroll and other employee benefits 148,703 59,606
Occupancy and other operating expenses 90,890 43,077
---------- ----------
384,443 166,073
Franchised and licensed restaurants 33,301 23,066
Advertising expenses 27,449 12,456
General and administrative expenses 37,384 15,355
---------- ----------
Total operating costs and expenses 482,577 216,950
---------- ----------
Operating income 45,634 18,406
Interest expense (9,237) (2,871)
Other income, net 1,396 2,130
---------- ----------
Income before income taxes 37,793 17,665
Income tax expense 15,061 7,079
---------- ----------
Net income $ 22,732 $ 10,586
========== ==========
Net income per share - basic $ 0.49 $ 0.29
========== ==========
Weighted average shares outstanding - basic 46,572 36,649
========== ==========
Net income per share - diluted $ 0.47 $ 0.28
========== ==========
Common and common equivalent shares used in
computing per share amounts - diluted 50,528 37,623
========== ==========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
-----------------------------
May 18, May 19,
1998 1997
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Net cash flow from operating activities:
Net income $ 22,732 $ 10,586
Adjustments to reconcile net income to net cash provided by
operating activities, excluding the effect of acquisitions
and dispositions:
Depreciation and amortization 19,649 10,247
Loss on sale of property and equipment and capital leases 376 87
Net noncash investment and dividend income (387) (1,063)
Loss on non-current asset and liability transactions 233 350
Net change in receivables, inventories, prepaid expenses and
other current assets 9,474 (502)
Net change in accounts payable and other current liabilities 5,973 8,430
---------- ----------
Net cash provided by operating activities 58,050 28,135
---------- ----------
Cash flow from investing activities:
Purchases of:
Property and equipment (23,666) (16,235)
Long-term investments and marketable securities -- (14,661)
Proceeds from sale of:
Property and equipment 5,372 11
Increases in notes receivable and related party receivables (23) (100)
Collections on notes receivable, related party receivables
and leases receivable 2,332 4,212
Net change in other assets (1,213) (509)
Acquisitions, net of cash acquired (384,711) --
Dispositions, net of cash surrendered 4,328 --
---------- ----------
Net cash used in investing activities (397,581) (27,282)
---------- ----------
Cash flow from financing activities:
Net change in bank overdraft 2,450 (9,232)
Long-term borrowings 213,220 2,489
Convertible subordinated notes 197,225 --
Repayments of long-term debt (41,397) (2,180)
Repayments of capital lease obligations (1,404) (1,226)
Deferred financing costs (10,196) (553)
Net change in other long-term liabilities 2,192 (3,608)
Payment of dividends (1,895) (1,334)
Exercise of stock options 672 1,360
---------- ----------
Net cash provided by (used in) financing activities 360,867 (14,284)
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Net increase (decrease) in cash and cash equivalents $ 21,336 $ (13,431)
========== ==========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
-------------------------
May 18, May 19,
1998 1997
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $ 6,654 $ 2,543
Income taxes 7,244 1,770
FEI Acquisition:
Tangible assets acquired at fair value $361,905 $ --
Costs in excess of net assets acquired 99,843 --
Liabilities assumed at fair value (80,025) --
-------- --------
Total purchase price $381,723 $ --
======== ========
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 18, 1998 AND MAY 19, 1997
NOTE (A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of CKE Restaurants, Inc. and its consolidated wholly-owned subsidiaries
(the "Company" or "CKE") and have been prepared in accordance with generally
accepted accounting principles, the instructions to Form 10-Q, and Article 10 of
Regulation S-X. These statements should be read in conjunction with the audited
consolidated financial statements presented in the Company's 1998 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
1998 consolidated financial statements to conform to the fiscal 1999
presentation. Share and per share information has been retroactively adjusted to
reflect the ten percent stock dividend paid in February 1998.
NOTE (B) ACQUISITION OF FLAGSTAR ENTERPRISES, INC.
On April 1, 1998, the Company acquired Flagstar Enterprises, Inc. ("FEI"),
the largest franchisee in the Hardee's system, previously operating 557 Hardee's
restaurants located primarily in the Southeastern United States. In connection
with the acquisition, which was accounted for as a purchase, the Company
acquired all of the issued and outstanding shares of common stock of FEI from
Advantica Restaurant Group, Inc. ("Advantica") for cash consideration of $381.7
million (which includes miscellaneous expenses paid to Advantica) and the
assumption of approximately $45.6 million in capital lease obligations. The
purchase price remains subject to adjustment based on changes in FEI's working
capital.
On March 13, 1998, the Company completed a $197.2 million private placement
of convertible subordinated notes (see Note (D)), and on April 1, 1998, the
Company amended its existing credit facility, incurring an additional $213.2
million in indebtedness (see Note (C)). The net proceeds from the convertible
subordinated notes and borrowings under the Company's credit facility were used
primarily to finance the acquisition of FEI.
On July 15, 1997, the Company acquired Hardee's Food Systems, Inc.
("Hardee's"), 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. The Company used the net proceeds from the sale of
9,171,250 shares of the Company's common stock to the public for net proceeds of
$222.3 million in conjunction with borrowings of $133.9 million under the
Company's credit facility to finance the acquistion.
Selected unaudited pro forma combined results of operations for the 16-week
periods ended May 18, 1998 and May 19, 1997, assuming the acquisitions occurred
on January 28, 1997, using actual restaurant-level margins and general and
administrative expenses prior to the acquisitions, are presented as follows:
Sixteen Weeks Ended
----------------------------
May 18, 1998 May 19, 1997
------------ ------------
Total revenues $649,408 $671,671
Net income $ 21,949 $ 6,615
Net income per share - basic $ 0.47 $ 0.14
Net income per share - diluted $ 0.45 $ 0.14
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 18, 1998 AND MAY 19, 1997
(Continued)
NOTE (C) LONG TERM DEBT
On April 1, 1998, the Company amended its existing credit facility (the
"Senior Credit Facility") to increase the aggregate principal amounts of the
lenders' commitments under the term loan facility (the "Term Loan Facility") to
$250.0 million and under the revolving credit facility (the "Revolving Credit
Facility") to $250.0 million, which includes a $65.0 million letter of credit
subfacility, and to extend the final maturity date from July 2002 to April 2003.
The Company incurred borrowings of $213.2 million thereunder to finance a
portion of the purchase price of the FEI acquisition (see Note (B)). Principal
repayments under the Term Loan Facility are due in quarterly installments,
commencing in June 1998 and continuing thereafter until the final maturity of
the Senior Credit Facility in April 2003, resulting in annual reductions of
$20.0 million in the first year of the Term Loan Facility and annual reductions
thereafter ranging from $40.0 million to $70.0 million. 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 April 2003. The
Company will be required to repay borrowings under the Senior Credit Facility
with the proceeds from (i) certain asset sales (unless the net proceeds of such
sales are reinvested in the Company's business), (ii) the issuance of certain
equity securities or (iii) the issuance of additional indebtedness. Of the
various options the Company has regarding interest rates, it has selected LIBOR
plus a margin, with future margin adjustments dependent on certain financial
ratios from time to time.
Borrowings and other obligations of the Company under the Senior 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 guarantee such borrowings and other
obligations, and are secured by certain franchise rights, accounts receivable,
contract rights, general intangibles (including trademarks) and other assets of
the Company and such subsidiaries. The Senior Credit Facility 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
to comply with specified financial ratios and tests, including minimum EBITDA
requirements, minimum interest coverage and fixed charge coverage ratios,
minimum consolidated tangible net worth requirements and maximum leverage
ratios.
NOTE (D) CONVERTIBLE SUBORDINATED NOTES
On March 13, 1998, the Company completed a private placement of $197.2
million aggregate principal amount of convertible subordinated notes (the
"Notes"), in which the Company received net proceeds of approximately $192.3
million, of which $24.1 million was used to repay indebtedness under the Term
Loan Facility. The Notes, which represent unsecured general obligations of the
Company subordinate in right of payment to certain other obligations, including
obligations under the Senior Credit Facility, are due in 2004, are convertible
into the Company's common stock at an initial conversion price of $48.204 and
carry a 4.25% coupon rate. The remaining net proceeds from the Notes, together
with borrowings under the Senior Credit Facility, were used to fund the
acquisition of FEI on April 1, 1998 (see Note (B)).
NOTE (E) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 18, 1998 AND MAY 19, 1997
(Continued)
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. The Company did not have any additional items that were
required to be disclosed under SFAS 130.
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.
In December 1997, the American Institute of Certified Public Accountants
approved for issuance the Statement of Position ("SOP"), Reporting on the Costs
of Start-Up Activities. The SOP requires that costs incurred during a start-up
activity (including organization costs) be expensed as incurred. The SOP is
effective for fiscal years beginning after December 15, 1998. The Company
currently amortizes pre-opening costs over one year from the time they are
incurred. Management does not believe the impact of the adoption of this SOP on
the Company's consolidated financial position or results of operations will be
material.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Consolidated net income for the 16-week period ended May 18, 1998 increased
114.7% to $22.7 million or $0.47 per share on a diluted basis as compared with
$10.6 million or $0.28 per share on a diluted basis for the prior year quarter.
These improved results were primarily due to the additional operations of
Hardee's Food Systems, Inc. ("Hardee's"), which was acquired on July 15, 1997,
and Flagstar Enterprises, Inc. ("FEI"), a former franchisee with 557 Hardee's
restaurants, which was acquired from Advantica Restaurant Group, Inc. on April
1, 1998. Also contributing to the increase in net income was improved operating
performance of the Company's Carl's Jr. and Taco Bueno chains due to continued
sales growth resulting from the Company's dual-branding and image enhancement
programs at its Carl's Jr. restaurants and increased advertising and continued
improvements in operating efficiencies in its Carl's Jr. and Taco Bueno
restaurants. Operating results for the first quarter of fiscal 1999 include 16
weeks of operations of Hardee's and seven weeks of operations of FEI. The first
quarter of the prior fiscal year does not include the results of operations of
any of the Hardee's restaurants acquired.
The Company is continuing with the conversion of certain of its existing
Carl's Jr. restaurants into Carl's Jr./Green Burrito dual-brand restaurants,
pursuant to an amended agreement with GB Foods Corporation. During the quarter,
the Company opened an additional 12 dual-brand Company-operated restaurants and
its franchisees opened five dual-brand restaurants. As of May 18, 1998, a total
of 120 Company-operated and 17 franchised dual-brand restaurants were operating.
During the 16 weeks ended May 18, 1998, the Company made a significant step
toward balancing the number of Hardee's franchised and Company-operated stores
with the acquisition of FEI. (See Note (B) of Notes to the Company's
consolidated financial statements as of and for the period ended May 18, 1998).
As of May 18, 1998, the Company operates approximately 49 percent of the
Hardee's system. The acquisition was financed in part by $192.3 million in net
cash proceeds the Company raised from a private placement of convertible
subordinated notes and in part by borrowings under the Company's increased
credit facility.
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
and FEI, 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 for the 16-week period ended May
18, 1998 increased $267.7 million, or 126.9%, to $478.6 million. Carl's Jr.,
Hardee's and Taco Bueno Company-operated revenues contributed $17.1 million,
$267.9 million and $2.2 million, respectively, to the increase. Offsetting these
increases was the decrease in revenues derived from the Company's HomeTown
Buffet and Casa Bonita restaurants, which were transferred to Star Buffet, Inc.
in connection with its initial public offering in September 1997. On a
same-store sales basis (calculated using only restaurants that were in operation
for the full periods being compared), revenues from Company-operated Carl's Jr.
restaurants increased 5.2% in the 16-week period ended May 18, 1998, on top of a
6.1% same-store sales increase in the first quarter of fiscal 1998, marking the
12th consecutive quarter of same-store sales
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
growth for the chain. Same-store sales for Taco Bueno increased 6.9% in the
first quarter of fiscal 1999, while same-store sales in Hardee's
Company-operated restaurants decreased 10.8%.
The increase in revenues for the Company's Carl's Jr. restaurants is
primarily attributable to the continued focus on promoting great-tasting new and
existing food products through increased advertising, the conversion of existing
Carl's Jr. locations to Carl's Jr./Green Burrito dual-brand restaurants, and the
image enhancement of its restaurants, which was completed in December 1997. The
increase in revenues for the Taco Bueno chain is due in part to a new
advertising campaign, which began in the fourth quarter of fiscal 1998.
Additionally, the Company has been focusing on more prime real estate than
previously targeted for its new restaurants. The three Taco Bueno restaurants
that have opened since October 1997 have generated average unit volumes
substantially higher than the rest of the Taco Bueno system. Much of the
decrease in same-store sales at Hardee's can be attributed to menu deletions
made since the acquisition, as well as the discontinuation of promotional
discounting and monthly new product introductions. Average unit volumes at
Company-operated Carl's Jr. and Taco Bueno restaurants continued to increase and
reached $1,172,900 and $704,300 on a rolling 13-period basis, respectively, at
the end of the first quarter. Average unit volumes for Company-operated Hardee's
restaurants ended the quarter at $841,200.
Revenues from franchised and licensed restaurants increased $25.2 million,
or 102.9%, to $49.6 million for the first quarter of fiscal 1999 over the prior
year 16-week period. This revenue increase was mainly due to royalties from the
Hardee's franchise system and to increased royalties from, and food purchases
by, Carl's Jr. franchisees as a result of higher sales volume at Carl's Jr.
franchised restaurants.
The Company's consolidated restaurant-level margins of its Company-operated
restaurants decreased in the 16-week period ended May 18, 1998 by 1.6% as
compared with the same period of the prior year, primarily reflecting the impact
of higher operating costs at the Company's Hardee's restaurants as compared to
the rest of the system. Although Hardee's restaurant-level margins are
substantially lower than the rest of the Company's quick-service restaurant
concepts, the Company has successfully increased these margins in the first
quarter of fiscal 1999 to 16.3% of revenues from Company-operated Hardee's
restaurants (including seven weeks of operations from the 557 restaurants
purchased from FEI) from 8.5% of revenues for the comparable period in the prior
year under different ownership. The Company has accomplished this increase in
margins through many of the same cost-saving measures it has executed at its
Carl's Jr. restaurants over the past several years, including the introduction
of the Carl's Jr. labor matrix to improve labor usage, a focus on safety and
accident prevention as a method of lowering workers' compensations costs, a
reduction of food waste and theft tolerance levels, and a decrease in food and
paper costs through the realization of certain purchasing synergies.
While the Company's overall restaurant-level margins decreased during the
first quarter of fiscal 1999, restaurant-level margins for Company-operated
Carl's Jr. and Taco Bueno restaurants increased 1.6% and 3.4%, to 25.9% and
27.2%, respectively, over the first quarter of fiscal 1998. The improved results
in operating margins reflect the Company's continued commitment to improving the
cost structure at its Carl's Jr. and Taco Bueno restaurants, principally in the
areas of increased purchasing savings in food and paper, improving labor
productivity and decreasing workers' compensation costs. As a percentage of
revenues for Carl's Jr. Company-operated restaurants, food and paper have
decreased 0.5% to 29.1% from the prior year quarter despite 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 restaurants, Carl's Jr.
payroll and other employee benefits have decreased 0.2% to 25.8% for the 16-week
period ended May 18, 1998 as compared with the comparable period in the prior
year, notwithstanding the recent federal and California minimum wage increases.
Occupancy and other operating expenses as a percentage of revenues from Carl's
Jr. Company-operated restaurants have decreased 0.9% to 19.3% for the first
quarter of fiscal 1999 over the prior year quarter. These costs are generally
fixed in nature and, as such, decrease as a percentage of revenues from
Company-operated restaurants as sales increase.
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, the California state minimum wage was
increased effective
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
March 1998 to rates above the federal minimum wage. The Company anticipates that
any future increases in minimum wage levels can 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 44.4% for the
16-week period ended May 18, 1998 over the same period of the prior year. The
increase is primarily due to increased purchases of food and other products from
the Company by Carl's Jr. franchisees, as well as the costs associated with the
Hardee's franchise system. As a percentage of revenues from franchised and
licensed restaurants, these costs have decreased 27.2% from the prior year
period. While Carl's Jr. earns its income from both royalties paid and food
purchases by franchisees, Hardee's earns the majority of its income from
royalties paid by its franchisees, who purchase food, supplies and other
products from independent vendors and distributors. Accordingly, the cost
structure associated with the Hardee's royalty stream of income is substantially
lower than that associated with the Carl's Jr. franchise and license operations.
Advertising expenses increased by $15.0 million in the 16 weeks ended May
18, 1998 over the prior year quarter, mainly due to the additional advertising
support at Hardee's. 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 1999 as compared with fiscal 1998,
while remaining relatively consistent as a percentage of revenues from
Company-operated restaurants. The Company has seen same-store sales growth in
its Carl's Jr. restaurants in each quarter since the Company began its current
advertising campaign in May 1995. During the fourth quarter of fiscal 1998, the
creators of the successful Carl's Jr. commercials launched a new, humorous
advertising campaign for Taco Bueno, which has contributed in driving the
same-store sales increase in the first quarter. In addition, the Company also
hired a new advertising firm for its Hardee's chain. New television commercials
began airing in April 1998, which focus on Hardee's rich, satisfying food.
General and administrative expenses increased $22.0 million to $37.4 million
for the 16-week period ended May 18, 1998 over the same period of the prior
year. As a percentage of revenues, these expenses have increased 0.6% in the
first quarter or fiscal 1999 over the prior year quarter. The increase in
general and administrative expenses is mainly due to adding the expenses
associated with the support of the Hardee's operations. General and
administrative expenses have also increased due to recording higher incentive
compensation accruals for regional restaurant management and selected corporate
employees as a result of improved operating performance.
Interest expense for the 16-week period ended May 18, 1998 increased $6.4
million principally as a result of higher levels of borrowings outstanding and
the assumption of capital leases as a result of the acquisition of Hardee's in
July 1997 and the acquisition of FEI in April 1998.
Other income, net, is mainly comprised of interest income, lease income,
gains and losses on sales of restaurants, income and loss on long-term
investments, property management expenses and other non-recurring income and
expenses. Other income, net, decreased $0.7 million for the first quarter of
fiscal 1999 as compared with the first quarter of fiscal 1998, generally
resulting from increased expenses from the Company's property management
activities offset in part by interest earned on the Company's notes receivable
from franchisees.
FINANCIAL CONDITION
For the 16 weeks ended May 18, 1998, the Company generated cash flows from
operating activities of $58.1 million, compared with $28.1 million for the same
period of the prior year. This increase was mainly due to the added operations
of the Company's Hardee's restaurants and increased revenues and improved
operating margins at the Company's Carl's Jr. and Taco Bueno restaurants. Cash
and cash equivalents in the current quarter increased $21.3 million as the
Company generated $4.3 million (net of cash surrendered) from the sale of 12
JB's Restaurants to Star Buffet, Inc., $2.3 million from collections on notes
receivable, related party receivables and leases
11
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
receivable, and $0.7 million from the exercise of stock options in addition to
the increase in cash flow from operations. The Company used excess cash flow
from operations to fund capital additions of approximately $23.7 million, to
repay capital lease obligations of $1.4 million, to repay long-term borrowings
of $41.4 million, to pay $10.2 million of deferred financing costs associated
with the FEI acquisition and to pay dividends to its stockholders of $1.9
million. A portion of the $197.2 million convertible subordinated notes,
combined with the increase in long-term borrowings of $213.2 million, was used
to purchase FEI for $381.7 million. Total cash and cash equivalents available to
the Company as of May 18, 1998 was $51.7 million. Subsequent to the quarter end,
the Company used its available cash on hand to repay $23.0 million of borrowings
under its revolving credit facility.
On April 1, 1998, the Company amended its existing credit facility (the
"Senior Credit Facility") to increase the aggregate principal amounts of the
lenders' commitments under the term loan facility (the "Term Loan Facility") to
$250.0 million and under the revolving credit facility (the "Revolving Credit
Facility") to $250.0 million, which includes a $65.0 million letter of credit
subfacility, and to extend the final maturity date from July 2002 to April 2003.
The Company incurred borrowings of $213.2 million thereunder to finance a
portion of the purchase price of the FEI acquisition (see Note (B) of Notes to
the Company's consolidated financial statements as of and for the period ended
May 18, 1998). Principal repayments under the Term Loan Facility are due in
quarterly installments, commencing in June 1998 and continuing thereafter until
the final maturity of the Senior Credit Facility in April 2003, resulting in
annual reductions of $20.0 million in the first year of the Term Loan Facility
and annual reductions thereafter ranging from $40.0 million to $70.0 million.
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 April 2003. The Company will be required to repay borrowings under the
Senior Credit Facility with the proceeds from (i) certain asset sales (unless
the net proceeds of such sales are reinvested in the Company's business), (ii)
the issuance of certain equity securities or (iii) the issuance of additional
indebtedness. Of the various options the Company has regarding interest rates,
it has selected LIBOR plus a margin, with future margin adjustments dependent on
certain financial ratios from time to time.
Borrowings and other obligations of the Company under the Senior 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 guarantee such borrowings and other
obligations, and are secured by certain franchise rights, accounts receivable,
contract rights, general intangibles (including trademarks) and other assets of
the Company and such subsidiaries. The Senior Credit Facility 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
to comply with specified financial ratios and tests, including minimum EBITDA
requirements, minimum interest coverage and fixed charge coverage ratios,
minimum consolidated tangible net worth requirements and maximum leverage
ratios.
On March 13, 1998, the Company completed a private placement of $197.2
million aggregate principal amount of convertible subordinated notes (the
"Notes"), in which the Company received net proceeds of approximately $192.3
million, of which $24.1 million was used to prepay indebtedness under the Term
Loan Facility. The Notes, which represent unsecured general obligations of the
Company subordinate in right of payment to certain other obligations, including
obligations under the Senior Credit Facility, are due in 2004, are convertible
into the Company's common stock at an initial conversion price of $48.204 and
carry a 4.25% coupon rate. The remaining net proceeds from the Notes, together
with borrowings under the Senior Credit Facility, were used to fund the
acquisition of FEI on April 1, 1998.
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
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14
CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
existing Taco Bueno and Hardee's 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 and FEI. The Company opened six
Company-operated Carl's Jr. restaurants in the first quarter of fiscal 1999 and
plans to open up to 40 new Company-operated Carl's Jr. restaurants and up to
seven new Taco Bueno restaurants in the remainder of fiscal 1999. In addition,
the Company and Imasco Holdings continue to discuss certain post-closing
purchase price adjustments arising from the Hardee's acquisition. The Company
believes that any payments required or to be received as a result of such
purchase price adjustments would not materially affect the Company's financial
condition.
The Company typically maintains current liabilities in excess of current
assets because the quick-service restaurant business generally receives
immediate payment for sales, while inventories and current liabilities normally
carry longer payment terms (usually 15 to 30 days).
The Company believes that cash generated from its various restaurant concept
operations, along with cash and cash equivalents on hand as of May 18, 1998 and
amounts available under the Senior Credit Facility, will provide the Company
with the funds necessary to meet all of its capital spending and working capital
requirements for the foreseeable future. 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. In
addition, substantially all of the real properties owned by the Company and used
for its restaurant operations are unencumbered and could be used by the Company
as collateral for additional debt financing; however, there can be no assurance
that real estate financing or other financing could be obtained on terms
acceptable to the Company. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Calculation of Earnings Per Share.
27-1 Financial Data Schedule (included in electronic filing
only).
27-2 Financial Data Schedule restated for the quarterly period
ending May 19, 1997 (included only with electronic filing).
27-3 Financial Data Schedule restated for the quarterly period
ending May 20, 1996 (included only with electronic filing).
(b) Current Reports on Form 8-K:
Current Reports on Form 8-K dated January 15, 1998, February 19,
1998 and April 1, 1998 were filed during the first quarter of the
fiscal year to report matters relating to the Company's
acquisition of Flagstar Enterprises, Inc.
A Current Report on Form 8-K dated February 19, 1998 was filed
during the first quarter of the fiscal year to report matters
relating to the Company's proposed disposition of JB's
Restaurants, Inc.
Current Reports on Form 8-K dated March 2, 1998, March 10, 1998,
and March 16, 1998 were filed during the first quarter of the
fiscal year to report matters relating to the Company's private
placement of convertible subordinated notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CKE RESTAURANTS, INC.
(Registrant)
July 1, 1998 /s/ Carl A. Strunk
- ------------ -----------------------------------------
Date Executive Vice President,
Chief Financial Officer
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16
EXHIBIT INDEX
Exhibit # Description
- --------- -----------
11 Calculation of Earnings Per Share.
27-1 Financial Data Schedule (included in electronic filing only).
27-2 Financial Data Schedule restated for the quarterly period
ending May 19, 1997 (included only with electronic filing).
27-3 Financial Data Schedule restated for the quarterly period
ending May 20, 1996 (included only with electronic filing).
15